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HUGE.CN: FSD Pharma Undergoes Share Consolidation in Management’s Effort to Uplist in the U.S.

By Steven Ralston, CFA

CSE:HUGE.CN | OTC:FSDDD

READ THE FULL HUGE.CN RESEARCH REPORT

FSD Pharma Inc. (CSE:HUGE.CN) (OTC:FSDDD) is a cannabis-platform company which is targeting many verticals that compose the legal cannabis industry. The platform can be bifurcated into two components. One, management is concentrating on the cultivation, processing and distribution of high quality, pharmaceutical-grade cannabis, along with the extraction of cannabinoids (such as CBD and THC) and the manufacture of cannabis-related products.

Share Consolidation

On October 16, 2019, FSD Pharma’s class A and class B shares underwent a reverse split on a 1 to 201 basis. Fractional shares were not issued. As part of the process, the company's Class B Shares trading on the OTCQB will trade temporarily under the ticker symbol FSDDD from October 17th through November 12th, after which the OTCQB ticker symbol will revert to FSDDF. After the share consolidation, the Class A shares will continue to represent approximately 72% of the voting rights.

Management foresees that the share consolidation will help advance management’s strategic plan of increasing the company’s visibility among U.S. investors by helping achieve an uplisting to a major U.S. stock exchange.

New Agreement with World-Class Extractions

On September 25, 2019, a letter of intent (LOI) was signed between FSD Pharma and World-Class Extractions Inc. for the establishment of a 50/50 joint venture the development, management and operation of cannabis extraction and processing operations at the company’s facility in Cobourg, Ontario. The LOI replaces the Collaboration and License Agreement of November 23, 2018 between World-Class and FV Pharma. Under the LOI, World-Class Extractions is expected to establish a processing center for the purpose of extracting cannabidiol and other elements from cannabis and hemp plants at the facility in Cobourg.

World-Class Extractions is expected to provide and install three Boss CO2 Extraction systems (worth approximately $250,000 each), and FSD Pharma will manage and operate the equipment under FV Pharma's processing license once it becomes operational. FSD Pharma will allocate up to 5,000 square feet of licensed indoor space for equipment. A five-year lease is expected to begin on December 1, 2019. The LOI contains provisions for subsequent expansion. In the future, it is expected that that a Beast Ethanol Hemp Extraction system will be installed at additional allocated space.

The JV should provide additional revenue and partnership opportunities since this processing center would be capable of extracting CBD oil and other phytochemicals on a toll basis for third-party Licensed Producers.

Launch of Online Ordering System

On August 21, 2019, FSD Pharma announced that its online ordering system for the direct fulfillment of prescriptions of dried medicinal cannabis was operative on FVPharma.com. Clients are required to have a prescription from a medical practitioner or a registration number with Health Canada.

The first commercial crop of pharmaceutical-grade cannabis has been harvested at the company’s Cobourg facility and is being offered for direct sale through the company’s website via the fulfillment of prescriptions.

Recent Financings

To date, FSD Pharma has been successful in raising capital so that management has been able to continue advancing its strategy of creating a cannabis-platform company that cultivates, processes and distributes high quality pharmaceutical-grade cannabis as well as advances the development of pharmaceutical and synthetic cannabinoids for an array of medical applications.

During the first half of 2019, FSD Pharma received net proceeds of $629,464 from the exercise of options and warrants. Subsequently, on August 30, 2019, FSD Pharma announced the launch of a private placement of up to US$5 million of Class B subordinate voting shares at a price of CDN$0.10 per share. The initial tranche, consisting of 45,830,850 shares, closed on September 30, 2019, and provided gross proceeds of CAD $4,583,085. Founders, management and Directors accounted for approximately CND$1.165 million of the first tranche. The remaining portion of the private placement has been extended to October 31, 2019. Net proceeds are primarily targeted towards the advancement of the Biosciences Division, including R&D for PP-101.

FSD Pharma’s In-house Cultivation Strategy

Management’s primary fundamental tenet is that all the company’s cannabis endeavors (both internally and through relationships) produce and/or market the highest quality medicinal-grade cannabis. Internally, the company’s lead cultivation project is the development of an indoor hydroponic cannabis facility located in Cobourg, Ontario, approximately 120 km (73 miles) east of Toronto on Highway 401.

The cultivation and processing of cannabis is conducted by FV Pharma Inc., FSD Pharma’s wholly-owned subsidiary. FV Pharma is a licensed producer (LP) under the Cannabis Act of Canada, having received an ACMPR (Access to Cannabis for Medical Purposes Regulation) Cultivation License in the Province of Ontario on October 13, 2017, and on February 19, 2019, FV Pharma received a Standard Processing License, which permits the processing of over 600 kg of dried flowers per year. In addition, FV Pharma received a Sale for Medical Purposes License (seed and plant) from Health Canada on April 18, 2019 and a Full Sale for Medical Purposes License (added dried and fresh cannabis) that became effective on June 21, 2019.

Valuation

Valuation analysis of cannabis companies is a very challenging exercise, since many are pre-revenue entities in the development stage. In addition, almost all public cannabis companies are reporting negative EBITDA and net income. However, the legalization of cannabis in Canada and other places around the world has created a unique opportunity to invest in an embryonic industry with immense potential.

Empirically, there appears to be a select subset of more advanced cannabis companies that can be defined by two quantitative factors: first, a market capitalization over $50 million, indicating investor interest and support, and second, positive and growing revenues, identifying that the company has been licensed by Health Canada and is generating cannabis-related sales. Generally, these leading companies are ramping up cultivation, increasing production capacity and pursuing opportunities in complementary cannabis verticals as well as through collaborative ventures, both of which include post-cultivation processing operations, distribution networks (including Canadian retail stores and international export/import opportunities), consumables (beverages and edibles), CBD-infused wellness products, cannabis-based medicinal therapeutics and pharmaceutical efforts (including clinical research programs), among others. These more advanced companies have also secured first mover advantage. Currently, the P/B valuation range for this subset of more advanced cannabis companies is between 0.68 and 2.50. With the expectation that FSD Pharma’s stock will attain a mid-second quartile P/B ratio of 1.9, indicating a price target of $17.65.

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