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Flurotech NextGen Cannabis Testing Device

|Includes: FluroTech Ltd. (FLURF)
Summary

Flurotech offers a product called Completest that can test MJ potency in CBD/THC and heavy metals.

Sales have started in Canada and US expansion is coming this year.

Razor-Razor blades revenu model.

I want to discuss Flurotech which is a Canadian company listed on the TSX ($TEST.V) Venture and the OTC ($FLURF) because I’m a rational person and I’m puzzled why investors are just blindly ignoring it right now. So maybe someone can help me understand why it’s that way.

About Flurotech

I’ll just shamelessly copy paste the about section on the flurotech website (www.flurotech.com) to give a basic answer of what is Flurotech doing/selling, where they’re coming from and also dd that they began trading on the Venture on June 12 2018 through a reverse merger with a company named “Snow Eagle Resource”. IPO was at 0.45$ CAD

Translation for non-scientific people like myself: They sell a device named Completest that can measure many things with great precision like THC/CBD % and the presence of heavy metals in marijuana within 30 minutes which is unheard of in the industry.

The model shown here (because there will be other versions for different needs) is the one the Licensed Producers will use to measure and optimize their crop production. Although it is a scientific piece of equipment, it doesn’t take highly skilled people to operate.

Why the LPs should take notice

It’s fast, like real fast (less than 30 minutes) which is very important because the only only options to get information about their crop is either own some very expensive (1M$+) lab equipment (HLPC, Mass Spectometry) and pay highly skilled employees to run the tests or collect some samples and send it to a remote 3rd party lab and wait anywhere between a couple days to a couple weeks depending on the current workload of the lab. You can see the huge size of the HLPC lab equipment vs the Completest in the following slide from the Flurotech presentation deck.

It’s cheaper. Flurotech aims to cut the price for testing by about 50% ( ~70$CAD/test instead of ~150 on avg for 3rd party lab).

It’s early detection. It’s notifying the producers to remove contaminated crop ASAP. If I’m a producer, I sure do not want to wait 50-60 days to know that I need to start over my batch. Health Canada has a low tolerance for contaminants that will be smoked, because it is not possible to rid the human body of them, whereas vegetables are allowed much higher contamination levels because they are eaten which causes far less absorption issues. Completest will prevent them from losing more time and expense growing a product that can`t be sold.

More testing means optimization of their crop. Why would the growers care? According to Flurotech, each 1% increase in THC potency give the producer an additional 8.3% additional extract revenue so if we look at the slide down there, if you grow “Cold Creek Krush” and you know that max THC potency is 17%, you can lose 8-16% of revenues if you harvest it 2-3 days sooner or too late. With Completest you can start measuring near peak time to see the potency and harvest at the exact right moment where THC % is the highest.

It’s accurate. Cross Lab variability is a thing. Problem is due to human errors, not the equipment itself. There can be a variation up to 10-20% between independent labs which is a problem because if you expect X% of THC and the lab gives you a (X-20)% THC measure of your sample then you just know that you’re selling it on the cheap. No one wants to do that. Because of that, growers usually sends multiple samples from the same batch to many labs and picks whichever lab returns the highest % value. Health Canada only cares that you have a valid independent lab result before MJ goes into sales. With Complete you don’t have that variability. In fact, variability is under 1%. Another benefit from this accuracy is that you can also modify some parameters like lights intensity and measure the effect on the plant potency. I can’t find the reference but it seems one of the beta tester of the Completest greatly increased plant potency by varying how lighting was setup.

Why investors should take notice

1. Many revenues streams:

• Flurotech has a lot of potential revenue streams and I think it’s one of the things that can make new investors lose the big picture so I’ll try to broadly categorize their slide of “Future Revenue Streams”

o Growers market (See LP section earlier in this article)

o Enterprise and Law Enforcement are both interested in having a precise drug detection device. Impaired driving should be punished but testing isn’t as clear and easy as an alcohol test right now. Canada has allocated $161 million over the next five years (New roadside test to detect marijuana coming to Canada to the acquisition of devices and training of roadside tests to measure MJ. Draeger 5000 has been already approved but they intend to have multiple device providers. Not only will Flurotech`s device detect and measure MJ but also cocaine and meth!

Flurotech also has 3 (!) lobbyists registered and already at work helping the Canadian government to get a better grasp of the Flurotech products. There isn’t any communications showing on the website but I’ve followed the lobbyist’s registry for a couple months now and they are far from up to date regarding communications between companies and gov.

o Government and Law Enforcement market. Beside drug testing the authorities needs to be able to track MJ from “seed to sale”. This is something that isn’t available as we speak. Flurotech is currently developing biomarking which allow the producers to add a biomarker in the water which is then absorbed by the plant to give it a unique signature that can be decoded back by the Completest device to identify the product origin. In my opinion that feature is disruptive because it solves a problem that couldn’t be addressed before. MJ testing can be done by labs (at a higher price and slower pace), drug testing can still be found and police officers do have other techniques to identify intoxicated people but identifying which grower have produced a specific MJ sample? It’s unheard of and it’s the kryptonite the government need to fight black market and counterfeit products. Once a police car has the biomarket testing equipment, it is only $6k more to get a breathalyzer tester t o attach to it, so there are economies of scale for police forces to buy it all from Flurotech.

2. According to Flurotech, the market scope is large and growing exponentially

o In Canada alone, there are about ~135 LP

o USA (thanks to the US Farm Bill) supposedly 100 000 growers

o Worldwide is even crazier.

3. Their pricing model is similar to the razor-razor blades model as they’ll get recurring yearly (~20K$/year/unit estimated) but they also get a good profit on the device itself which they sell for around 31k$. The great thing about that, is it’s still a good deal for producers and also most growers don’t already own any existing piece of equipment for that need (well beside the majors who already owns 1M$+ lab equipment). Lastly since it’s a new industry, most growers have cash on hand.

4. Things are heating up in Q1 and Q2

• 2018 has been kind of a dull year and the hype has pretty much died down when we reached the end of the year. News releases were sparse and nothing was feeling like a major breakthrough but it was a crucial period as they were beta testing the Completest device with 15-20 producers, integrating feedback and making improvements to the device while developing roadside testing and biomarker in background. CSA told them they had to wait until MJ was legal before they would start to look at their application to get the certification. They finally got it on February 5th and announced start of the sales at the same time. The table below retraces the public news/events/articles/videos that happened since their beginning classified into broad categories of lesser and great. Take this lightly:

Most of the news in 2018 has been uneventful science and hires updates but there are 3 things I want to highlight:

• There was a trading Halt on the stock because of some clerical error caused by the reverse-merger regarding the end of the financial year. It happens sometimes but it did look bad at the time. Everything was filed again correctly in the following days so it I don’t see any reason to discuss more about that.

• Hiring of Trevor Macmillan, Aurora’s former Chief Scientist the 10B$ cannabis company on the Toronto Stock Exchange. This move might have been seen as another lateral career move by a scientific in the industry but Flurotech in my opinion gained a lot of credibility by hiring this guy. He might not be the greatest gifted speaker as we can see in the latest Midas video and the 1 hour webinar on youtube but it doesn’t matter because the scientific and cannabis communities listens when he speaks. I’m very pleased to see him on the Flurotech payroll as he leads the biomarking project right now.

• One tidbit I noted in the Nov 28th MD&A was that Flurotech was building more Completests for their first batch (seems now like they will keep 10 for testing) which is a sign that demand is there for the product.

2019 mindset is completely different.

• CSA and UL certifications are now officially over and they started the sales. I expect them to have an easy 15-20 devices to beta testers from 2018 and after that who knows?

• Flurotech is now in full PR mode. Because of the official start of the sales, they seem to be ready to tell their story to the world which wasn’t necessarily the case when they were beta-testing it and waiting for CSA approval. When you regroup news and updates by month it’s becoming even clearer that things are heating up and they want the investors to notice and they actually do because volume has been steadily increasing since January and at march 8 the volume is already at 72% of what it was for the complete month of February according to Yahoo Finance volume stats

• A private placement will happen down the road. They don’t hide that they’ll eventually get back to the market to fund an expansion in other juridictions (US). It won’t be cheap because if the market potential is really 100k growers requiring the device as much as they say, then they’ll need to have a decent inventory before starting to sell. I’ve made a small table, just to have a feel on what to expect considering what I know and what I think should happen. It’s a guesstimate, overly optimistic and only there to make the point of why they need to go back to the market someday so don’t take it too seriously - I don’t have any inside info.

o Notes

  • They have around 5M$ in the bank at the start of Feb
  •  They have 3 salespeople so at 30 unit sold it’s about 1 unit/2business day/salesman. It’s optimistic, I know.
  •  The headcount is 35 employees at the end of Feb. I didn’t include any new hiring which is also not realistic.
  •  They have a 500k$ monthly burn rate. It’ll raise over time but for the exercice, I’ve put it as a constant capex
  •  All units are sold with the 2 scopes for 31k$ (will probably not be the case in real life)
  •  Recurring revenues are at their expected maximum usage which is 20K$/unit/year so 1.6K$/unit/month
  • As I remember, putting a unit together is about 10K$
  • I included a Private Placement (PP) of 20M$ to finance growth (10M$ to build a 1000 Completests inventory and the other 10M$ is for staff and general expense). These numbers are purely guesses from me.
  • July is the month where they would enter US (and keep selling in Canada) in this fictive scenario

I guess what I see is that they’ll need a decent inventory when hitting the US and build a thousand Completest means around 10M$ cash up-front. 20M$ might be a bit high for a PP and 1000 Completest might be high when considering they do have for ~10M$ in warrants at an avg 0.57$ if all converted but there will be a point in time this spring where a placement will occur. I doubt that anyone will complain if they can raise money over 1.50$ because after that the float would be around 100M shares fully diluted so it isn’t that bad but I think they are aiming for higher and they have the cash right now to be patient about it and see where the share price is heading.

What about competitors?

Frankly there’s not much competition. I had to dig into an old pre-Flurotech (Cannatest) presentation to get some companies that might be called competitors. FYI before it was called Completest, the name was OptiQ.

• Cannalyzer (http://www.cannalyzer.ca/)

o Website doesn’t give us much details but they state that potency results can be obtained in less than 48 hours so it’s still slow

• TRIQoptiq (http://www.triqsystems.com)

o Only reference I could find is a facebook post dating from 2013 and their website looks down

• Lightlab (https://www.orangephotonics.com/)

o This one might be the most direct competitor to Flurotech. At first sight their device looks somewhat similar (and cost less) although they can’t test for heavy metals, pesticides and others contaminants. That means that a grower would still send samples to a lab to know about heavy metals. Consumables and services (calibration, warranty) seems more expensives than Flurotech so long term I’m not sure it’s a better deal because you’ll still need to test contaminants (and rely to a slow and costly alternative) and if your goal is to test as much as you can then Completest is a cheaper long term option and you won’t be able to add new scopes Flurotech will develop to check other things like mould or Aflatoxin.

• Cannalytics (https://www.cannalyticssupply.com/)

o 99USD/test and sensitivity look very low as the slide says

• Steep Hill Lab and Analytical 360 are labs so I won’t even bother.

Other interesting notes (at least for me) and speculation

• Insiders have not sold a single share yet. In fact CEO converted 250k warrants in February

• Once GMP certification is obtained, independent 3rd party could basically buy and use a Completest device to the testing instead of using HLPC equipment. Health Canada only requires that tests are made by an independent lab with GMP equipment.

• Right now shorts have left the building (www.shortdata.ca)so I do feel that selling pressure is less oppressive

• CEO Dan Dalla Long is an ex politician. He was elected to the Legislative Assembly of Alberta. I think it’ll serve the company well because they’ll need to interact a lot with the government on different level. The fact that they have 3 registered lobbyists for a 30M$ market cap company is telling me they are doing it the right way.

• There is around ~17M warrants (avg ~0.57$) which isn’t that bad plus there is the following acceleration clause(from Sedar Interim Audited Financial report):

“If the volume weighted average closing price of the Common Shares is $1.00 or more for 10 consecutive trading days at any time after six months from the date of issuance of the Warrants the Corporation will earn the right, by providing notice (the "Acceleration Notice") to the Warrant holders, to accelerate the expiry date of the Warrants to that date which is 30 days from the date of the Acceleration Notice “

• DEA put out a request to find manufacturer of a Hemp Testing kit and a week later Flurotech issue a News release about the US and finishing their Hemp testing kit. I don’t believe much in coincidence so I’m going to speculate that they must be well aware of this opportunity.

Why I feel this company is undervalued

• I’ll concede that they were very low key during last half of 2018. They were in beta mode, anything could have happened and sometimes it’s just better to fine tune and improve your product instead of going on an empty promise PR campaign.

• I also think they came late to the MJ sector. Once legalization was made on October 17th most MJ stock tanked until late January of this year so they didn’t enjoyed the free ride many other MJ stocks had in the market.

• Most investors are overestimating the Roadside testing revenues potential and underestimating the LPs need for testing. To me it’s pretty obvious that LPs will be the bulk of the revenues for years to come.

LPs testing > Biomarking > Enterprise Testing > Roadside testing.

It just blow my mind away that a company like Cannabix technology can have and sustain a 130M$+ market cap with zero product commercially ready while Flurotech is sitting at 30M$ market cap with an actual product when they are expecting to sell hundreds and even thousands (with the US and Rest of the World). I don’t get it and it’s not a shot a people who believe in Cannabix, it might be justified but if that’s the case then I don’t see how Flurotech can trade for less than a 100M$ market cap at the moment. Either Cannabix is grossly overvalued or Flurotech is extremely undervalued (which I believe it is).

• It’s a new company: they have money, 0 debt, filled with credible management and scientists in one of the hottest sector on the market.

In conclusion

I hope I helped some investors to get a better understanding of the company and hopefully you’ll find this company interesting enough to follow it. I think they have set the stage and media outlet to get their story and message to the investors in 2019.

Disclosure: I am/we are long FLURF.