Finalization of a master services agreement with Aurora Cannabis (TSE:ACB) is a milestone event for Radient Technologies Inc. (CVE:RTI)
SmallCapPower | November 28, 2017: Radient Technologies Inc. (TSXV:RTI), based in Edmonton, Canada, leverages its innovative MAP extraction technology to manufacture high-quality natural ingredients for global customers in the Food and Beverage, Nutrition and Supplements, Pharmaceuticals and Active Care industries. In late 2016, Radient entered into the fast-growing cannabis market by signing an MOU with Aurora Cannabis Inc. (TSX:ACB) to process and extract CBD/THC from cannabinoid biomass and, subsequently on November 16, 2017, finalized the agreement with Aurora. Post the receipt of dealer/producer licenses expected shortly, Radient Technologies would commence production of cannabis extracts from products, which could drive revenues as Radient could get sizable contract once Aurora’s 800,000 Aurora Sky begins production in mid-2018. Additionally, Radient Technologies will likely be a potential acquisition target for Aurora, which already holds a ~17% stake in the Company.
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Investment Thesis
- Patented extraction technology MAP provides competitive advantage over conventional methods
- Agreement with Aurora Cannabis – a milestone event for Radient Technologies
- Potential acquisition target
MAP – Patented extraction technology
Radient Technologies uses a proprietary, patented method of extraction technology called Microwave Assisted Processing (MAP) that creates high-quality natural ingredients at a significantly lower cost compared to traditional methods. Unlike conventional extraction methods that involve soaking, washing or contacting the solid material with hot solvent to extract the target compounds, MAP uses microwave energy to selectively heat moisture present in all natural materials, which results in a rapid buildup of pressure within cells leading to a pressure-driven enhanced mass transfer of target compounds out of the source material. The unique mechanism of MAP results in faster extraction rates and high extraction yield, whilst benefitting from energy efficiency and reduced heat degradation of sensitive products.
The MAP technology can be used in a variety of natural products from lipids and alkaloids to proteins. Currently, Radient Technologies operates an ISO/GMP-compliant 1,800 square meter MAP manufacturing Facility located in Edmonton, Alberta, which can process up to five metric tons of biomass per day.
Diverse revenue models
Radient Technologies can use MAP for a variety of purposes, including creating proprietary products that replace incumbents, contract manufacturing, and technology and joint ventures. At this time, Radient primarily generates revenues from contract manufacturing and has recently finalized a JV with Aurora Cannabis that would generate additional contracting revenues.
Cannabis presents a large opportunity with recent JV with Aurora Cannabis
The overall market opportunity for extracting ingredients from natural sources is estimated at $250 billion, with pharmaceuticals accounting for nearly $220 billion, followed by personal care at $34 billion, and food & nutritional as well as cannabinoids each estimated at $10.0 billion each. Radient Technologies can find increased acceptance of its patented technology that outperforms conventional methods in terms of cost, speed and purity.
Agreement with Aurora Cannabis marks entry into the fast-growing cannabis market: In late 2016, Radient Technologies decided to pursue cannabinoids as a secondary line of business. As part of this, the Company entered into an MOU with Aurora Cannabis in December 2016, for the joint development and commercialization of high-quality and standardized cannabinoid extracts. Research began in January 2017, with positive results reported in June 2017, and both companies finalized a master services agreement on November 11, 2017. As per the agreement, Radient Technologies will work as an independent contractor for the production of extracts from cannabis and hemp supplied by Aurora. Initial term of the contract is five years, extendible for another five years by Aurora Cannabis.
The agreement will initially cover Canada, Australia, and the European Union, including Germany where Aurora’s subsidiary Pedanios is the largest medical cannabis distributor in Europe. Aurora Cannabis, however, can negotiate on an exclusive basis with Radient Technologies to expand the jurisdictions covered. The master services agreement also includes an Investor Rights Agreement, allowing Aurora to participate in future offerings and expand its ownership in Radient up to 19.99%. Aurora Cannabis will also have the right to appoint one director to the Radient Board. Radient is yet to receive licensed dealer and producer status and hence will be able to commence production of cannabis extracts from products supplied by Aurora post the receipt of licenses. Radient Technologies applied for Licensed Dealer status in December 2016, and for Licensed Producer status in February 2017.
The agreement with Aurora is a key turning point for Radient Technologies as it could get sizable contract once Aurora’s 800,000 sq.ft. Aurora Sky commences production in mid-2018. Additionally, the Company will also be benefitting from additional investments by Aurora Cannabis.
Well positioned to capture the growing cannabis opportunity: According to Health Canada, quarterly sales of dry cannabis products rose 45% sequentially to 5.8 tonnes for the quarter ended June 30, 2016, while cannabis oil sales grew 278% to 5.7 tonnes for the same period. The market size for recreational use is expected to catapult the market size multi-fold when legalized in mid-2018.
A key concern of the cannabis industry is the lack of industrial-scale production of cannabinoid extracts. With current producers building much larger facilities, the current CO2 equipment will be challenged to meet these increased production levels. Current “state of the art” extraction units (typically 80-120L) can handle only 40kg of dry biomass and take ~6 hours to run a batch followed by a lengthy refining process. Hence, a company requiring higher extract levels will require several of these units to be able to produce at industrial scale. Radient’s industrial-scale GMP extraction facility with the ability to handle 5,000 kg of material per day will be able to extract cannabinoids with higher efficiency and at a high purity level from both marijuana and hemp, whilst meeting the strict Quality Assurance standards of the industry as the regulatory environment changes.
A potential acquisition target – Aurora Cannabis could be the first and most likely acquirer
Aurora Cannabis, one of the largest cannabis producers in Canada and Radient’s joint venture partner and investor, could be the most likely acquirer of Radient Technologies. Currently among the top three cannabis producers with an annual capacity of 5,400 kgs, Aurora is building the world’s largest 800,000 sq.ft. Aurora Sky cannabis facility that would catapult the Company’s production capacity to exceed 100,000 kgs per annum, which would require significant industry-scale extraction capabilities. Thus Radient, in which Aurora already holds a nearly 17% interest, would be an ideal target for Aurora. The acquisition will also help Aurora to further improve its cost leadership position ($1.9 per gram produced). As the top cannabis producers try to compete with each other for supremacy, consolidation would pick up in the coming months heading into the recreational legalization in mid-2018.
Outlook
Finalization of a master services agreement with Aurora Cannabis on November 11, 2017, is a milestone event for Radient Technologies. Once Radient receives licensed dealer and producer status, and consequently commences production of cannabis extracts from products supplied by Aurora, the Company’s revenues could increase substantially as Radient Technologies could get a sizable contract once Aurora’s 800,000 sq.ft. Aurora Sky commences production in mid-2018. Additionally, Radient will likely be a potential acquisition target for Aurora, which already holds a ~17% stake in the Company.
Disclosure: Neither the author nor any of the principals at SmallCapPower, or their family members, own units in any of the companies mentioned above.
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