Beleave Inc. (CSE: BE / OTCQX: BLEVF) – Deals to Enable … · 2019. 1. 2. · the intent of...

Siddharth Rajeev, B.Tech, MBA, CFA

Anthony de Ruijter, BA. Econ

December 24, 2018

2018 Fundamental Research Corp. “15+Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com

PLEASE READ THE IMPORTANT DISCLOSURES AT THE BACK OF THIS REPORT

Beleave Inc. (CSE: BE / OTCQX: BLEVF) – Deals to Enable International Sales, Private Retailing /

Lowering FY2018 Revenue Forecast

Sector/Industry: Cannabis www.beleave.com

Market Data (as of December 24, 2018)

Current Price $0.08

Fair Value $0.60

Rating* BUY

Risk* 4

52 Week Range $0.08 - $0.48

Shares O/S 477,552,386

Market Cap $35.82 M

Current Yield N/A

P/E (forward) N/A

P/B 1.96x

YoY Return -77.78%

YoY CSE -57.59% *see back of report for rating and risk definitions

Highlights Beleave Inc, (“Beleave”, “company”) signed multiple agreements

since our last update on October 23, 2018. The company has entered into an agreement with Rollins Group Inc.,

to advise on the opening of a chain of cannabis retailing stores. As part of the deal, Rollins has agreed to purchase up to 1,000 kg of dried cannabis per retail location.

The company has also entered into an agreement with Canymed GmbH, a prospective German cannabis cultivation and processing license applicant. Potential revenues from the deal could amount to $53.20 million per annum for the company, if Canymed is successful in their application, and also, have the capacity to pay Beleave the agreed upon amounts.

The company has developed water-soluble cannabis products, with the intent of preparing these for sale upon legalization of cannabis-infused edibles and beverages, which is expected in late 2019.

The company’s sales grew in Q2-FY2019 to $0.32 million, reflecting QoQ growth of 51.27%.

The company has forecasted sales of $1.20 million in Q3-FY2019 and $2 million in Q4-FY2019. As a result, we have revised our

FY2019 revenue forecast from $4.80 million to $3.72 million. Our forecasts for FY2019, and beyond, remain unchanged.

On November 5, 2018, the company announced a seven-for-one share split.

We are revising our fair value per share estimate of $0.67 to

$0.60. Note that our previous fair value of $0.67 was $4.62 prior to the share split.

2018 Fundamental Research Corp. “15+ Years of Bringing Undiscovered Investment Opportunities to the Forefront” www.researchfrc.com


Water-Soluble

Cannabis

Products

Enters Into

Agreement

With

Prospective

Cannabis

Retailer

Supply

Agreement to

Ship Cannabis

to Germany

On November 15, 2018, the company announced that it developed water-soluble cannabinoid-infused powder and sugar products in preparation for the legalization of cannabis-infused edible and beverage products, which is expected in Canada in late 2019. Manufacturing, which will initially take place at the company’s existing Hamilton facility, is expected to be moved to the London facility upon completion. Cannabis has traditionally been thought to be only soluble in lipids (fats) and oils, which results in low bioavailability and bioabsorption, as well as long time to onset and offset (or the time taken to feel psychoactive effects and subsequently for those effects to fade). A long time to off-set can be a deterrent to some potential users of cannabis, who prefer not to devote long periods of time to feeling under the influence, but also, do not want to consume cannabis via smoking. However, the discovery of a process which infuses products with water-soluble cannabinoids is likely to improve an infused product’s bioavailability and bioabsorption, whilst also reducing times to onset and offset. We believe that this will make for a superior edible/ beverage offering, as we feel that many consumers who are interested in cannabis neglect to consume it through edible or beverage products, due to fears regarding the period of time under the influence of psychoactive effects as well as imprecise dosing. Furthermore, against a backdrop of increased external interest in the cannabis sector from companies such as Constellation Brands Inc. (NYSE: STZ), as well as other major beverage companies, players with innovative infusion processes are likely to stand out against the competition as prospects for investment/ acquisition. On November 9, 2018, the company announced that it had entered into a supply and consulting agreement with Rollins Group Inc. (“Rollins”). Rollins is an unrelated entity to the company. Details of the agreement include (subject to change due to the early stage of the agreement):

Rollins plans to open its first nine locations in Ontario, with an additional 31

locations planned in the province, pending approval.

Rollins to purchase up to 1,000 kg of dried cannabis per location per annum. We

believe that this will begin upon Rollins securing a cannabis retailing license.

Should Rollins develop an established chain of cannabis retailers, Beleave will benefit from an additional sales channel for their cannabis production. It is unclear at what prices the cannabis will be sold to Rollins, but with a potential 40,000 kg per annum in secured sales (assuming that Rollins sets up 40 stores as per the first clause above), the agreement may result in significant revenues to the company. However, as an early applicant without any existing retail location, we believe significant development and investment will be required before Rollins will grow into a retailer of the scale required to sell up to 40,000 kg worth of cannabis. Furthermore, we are uncertain regarding Rollins’ ability to fund the purchase of up to 1,000 kg of cannabis per retail location. On October 29, 2018, the company announced that it had entered into a supply agreement with Canymed GmbH (“Canymed”), to supply the German market with medical cannabis. Cannabis is legal in Germany for medical use, for those who are registered patients. Details of the supply agreement include:



Financials

Canymed to import 5,000 kg of dried flower per annum for Beleave.

Canymed to pay €7.00 per gram to Beleave in a take or pay agreement structure.

Beleave will receive 10% ownership (without any need for investment) and first right

of refusal to purchase an additional 20% of Canymed’s equity in exchange for

providing expertise and support. The valuation of Canymed and further details is not

provided by the company.

If this deal materializes, it will represent €35 million in annual revenues in addition to the company’s Canadian revenues. Based on today’s EUR/CAD exchange rate of $1.52, that suggests $53.20 million in international sales per annum. This is compared to our revenue forecast of $46.70 million for FY2020, which only considered Canadian sales. However, due to Canymed’s status as an early applicant, and uncertainty regarding Canymed’s ability to successfully pay Beleave for their product, we do not include the Canymed deal into our valuation models at this time. Canymed is a German medical cannabis company that is an applicant under the German medical cannabis regime. It is an unrelated entity to the company. If successful in their application, which we estimate will be decided upon by German authorities in January 2019, the company intends to position as both a cultivator and processor of medical cannabis. Based on comments by management during the company’s most recent earning’s call, we do not believe that Canymed currently owns or operates any existing production facilities/ infrastructure. However, management did disclose that the Canymed team comprises of doctors, practitioners, and other professional personnel, with experience in the medicinal and cannabis spaces. The Canymed deal demonstrates that the company does not intend to keep operations purely domestic and have made plans to extend the scope of their business to include other potentially large markets. The company announced on December 13, 2018, that they had received the Good Manufacturing Practices (“GMP”) certification, a necessary step in becoming a major exporter of pharmaceutical/ controlled substances such as cannabis. As Europe continues to open up to continued pro-cannabis legislation, early acquisition of the GMP certification, as well as the establishment of agreements with local cannabis-focused companies will be key to becoming an international supplier. The company reported sales of $0.32 million in Q2-FY2018, up 51.3% QoQ from Q1-FY2018’s sales of $0.21 million. Revenue for the first six months of FY2018 was $0.52 million. The normalized gross profit of the company in Q2-FY2018, after excluding fair value adjustments on biological assets, was $0.30 million. The gross margin of 96.16% is due to insignificant COGS, and management have disclosed that COGS was low due to relatively small sales of medical cannabis. Most of the company’s revenue up to this point has been from the Medi-Green clinic network and patient referral commissions.



Source: FRC, Financial Statements

Based on the company’s commentary during their most recent earnings call, we are revising our FY2018 revenue forecasts to match management’s guidance. According to the company, revenue is expected to reach $1.20 million in Q3-FY2018, before growing to approximately $2 million in Q4-FY2018. Based on this guidance, we are revising our previous FY2018 full-year revenue forecast of $4.80 million to $3.72 million. We are not revising our revenue projections past FY2018, and as a result, our FY2019 revenue projections remain unchanged at $46.70 million. Short-term income statement projections are provided below:



Source: FRC

Selling General & Administrative (“SG&A”) expenses increased 343.53% YoY to $3.44 million in Q2-FY2018, versus $0.78 million in Q2-FY2017. SG&A expenses for the first six months of FY2018 were $14.19 million. The significant increase was due to substantial growth in office expenses, salaries/ wages, as well as professional expenses related to growing Beleave’s business. Share-based compensation also grew significantly (2579.34% YoY), which was due to the majority of management’s and director’s compensation being paid in shares. The company reported a net loss of $4.80 million (EPS: -$0.01) in Q2-FY2018. This compares to a net loss of $1.03 million (EPS: -$0.00) in Q2-FY2017. For the first six months of FY2018, the company reported a net loss of $22.61 million (EPS: -$0.06). This is as compared to a net loss of $4.45 million (EPS: -$0.02) during the first six months of FY2018. Based on the company’s current performance, we are revising our net loss estimate for FY2018 from $32.89 million (EPS: -$0.08, adjusted for share split) to $35.09 million (EPS: -$0.07). Our FY2019 net loss estimate is only slightly changed from $8.241 million (EPS: -$0.02, adjusted for share split) to $8.236 million (EPS: -$0.02). The following table provides a summary of Beleave’s cashflows. Operating cashflows decreased substantially YoY due to the significant increase in operating expenses. Cash used in investing activities also rose significantly YoY, reflecting capital outlays for property, plant and equipment (“PPE”) and acquisition-related expenditures. As a result of the



Valuation

deepening net loss and increased cash used in investing activities, the company’s free cash flows (“FCF”) diminished significantly YoY.


At the end of Q2-FY2019, the company had a cash position of $3.58 million and working capital of $1.29 million, as well as a current ratio of 1.17x. The debt held on the company’s balance sheet is the D.O.P.E. note forwarded to the company by Auxly Cannabis Group (TSXV: XLY), which we had discussed in our initiating report, as well as a small debt carried over from the Medi-Green acquisition.


Stock Options and Warrants: We estimate that the company has 33.08 million stock options (weighted average exercise price of $0.23) and 62.57 million warrants (weighted average exercise price of $0.31) outstanding. 13.69 million options and none of the warrants are currently in the money. The company will be able to raise up to $0.96 million if all these in the money options are exercised. DCF Valuation

Our updated DCF valuation on Beleave’s shares is $0.60 per share. Our previous DCF valuation was $0.67. The reason for the decrease in fair value was due to the increase in shares outstanding since our last update report, which was slightly offset by the increased present value of future cash flows. Note that the below model also takes into account future financings from parties outlined in our previous report. Our models are summarized below:

Summary of Cash Flows

($, mm) 2018 (6M) 2019 (6M)

Operating -$1.71 -$15.21

Investing -$0.12 -$4.51

Financing $0.55 $11.29

Effects of Exchange Rate $0.00 $0.00

Net -$1.28 -$8.42

Free Cash Flows to Firm (FCF) -$1.83 -$19.72

(in C$) - YE Mar 31st

Liquidity & Capital Structure Q2-2019

Cash 3,578,996$

Working Capital 1,289,285$

Current Ratio 1.17

LT Debt 187,481$

Total Debt 6,073,805$

LT Debt / Capital 0.01

Total Debt / Capital 0.25

Total Invested Capital 20,799,491$



Risks

Source: FRC

As a result, we are revising our fair value per share estimate from $0.67 to $0.60 and

maintaining our BUY rating on the company. We believe the company is exposed to the following risks (list is non-exhaustive):

The company operates in an industry that is highly regulated and subject to material change from governmental intervention.

There is no guarantee that the company will be granted Health Canada licenses for its future production facilities, or future facility expansions. Failure to secure licensing will materially impact the company’s valuation

No guarantee that the company will be able to sell the cannabis produced at their facilities, nor successfully secure further long-term supply contracts.

Contamination risk and other risks associated with biological/ agricultural production.

Access to capital and share dilution. Liquidity risk.

We are maintaining our risk rating of 4 (Speculative).



Appendix



Fundamental Research Corp. Equity Rating Scale:

Buy – Annual expected rate of return exceeds 12% or the expected return is commensurate with risk Hold – Annual expected rate of return is between 5% and 12% Sell – Annual expected rate of return is below 5% or the expected return is not commensurate with risk Suspended or Rating N/A— Coverage and ratings suspended until more information can be obtained from the company regarding recent events. Fundamental Research Corp. Risk Rating Scale:

1 (Low Risk) - The company operates in an industry where it has a strong position (for example a monopoly, high market share etc.) or operates in a regulated industry. The future outlook is stable or positive for the industry. The company generates positive free cash flow and has a history of profitability. The capital structure is conservative with little or no debt. 2 (Below Average Risk) - The company operates in an industry where the fundamentals and outlook are positive. The industry and company are relatively less sensitive to systematic risk than companies with a Risk Rating of 3. The company has a history of profitability and has demonstrated its ability to generate positive free cash flows (though current free cash flow may be negative due to capital investment). The company’s capital structure is conservative with little to modest use of debt. 3 (Average Risk) - The company operates in an industry that has average sensitivity to systematic risk. The industry may be cyclical. Profits and cash flow are sensitive to economic factors although the company has demonstrated its ability to generate positive earnings and cash flow. Debt use is in line with industry averages, and coverage ratios are sufficient. 4 (Speculative) - The company has little or no history of generating earnings or cash flow. Debt use is higher. These companies may be in start-up mode or in a turnaround situation. These companies should be considered speculative. 5 (Highly Speculative) - The company has no history of generating earnings or cash flow. They may operate in a new industry with new, and unproven products. Products may be at the development stage, testing, or seeking regulatory approval. These companies may run into liquidity issues, and may rely on external funding. These stocks are considered highly speculative.

Disclaimers and Disclosure

The opinions expressed in this report are the true opinions of the analyst about this company and industry. Any “forward looking statements” are our best estimates and opinions based upon information that is publicly available and that we believe to be correct, but we have not independently verified with respect to truth or correctness. There is no guarantee that our forecasts will materialize. Actual results will likely vary. The Analyst and FRC do not own shares of the subject company. Fees were paid by BE to FRC. The purpose of the fee is to subsidize the high costs of research and monitoring. FRC takes steps to ensure independence including setting fees in advance and utilizing analysts who must abide by CFA Institute Code of Ethics and Standards of Professional Conduct. Additionally, analysts may not trade in any security under coverage. Our full editorial control of all research, timing of release of the reports, and release of liability for negative reports are protected contractually. To further ensure independence, BE has agreed to a minimum coverage term including an initial report and three updates. Coverage cannot be unilaterally terminated. Distribution procedure: our reports are distributed first to our web-based subscribers on the date shown on this report then made available to delayed access users through various other channels for a limited time. The distribution of FRC’s ratings are as follows: BUY (73%), HOLD (7%), SELL / SUSPEND (20%). To subscribe for real-time access to research, visit http://www.researchfrc.com/subscribe.php for subscription options. This report contains "forward looking" statements. Forward-looking statements regarding the Company and/or stock’s performance inherently involve risks and uncertainties that could cause actual results to differ from such forward-looking statements. Factors that would cause or contribute to such differences include, but are not limited to, continued acceptance of the Company's products/services in the marketplace; acceptance in the marketplace of the Company's new product lines/services; competitive factors; new product/service introductions by others; technological changes; dependence on suppliers; systematic market risks and other risks discussed in the Company's periodic report filings, including interim reports, annual reports, and annual information forms filed with the various securities regulators. By making these forward looking statements, Fundamental Research Corp. and the analyst/author of this report undertakes no obligation to update these statements for revisions or changes after the date of this report. A report initiating coverage will most often be updated quarterly while a report issuing a rating may have no further or less frequent updates because the subject company is likely to be in earlier stages where nothing material may occur quarter to quarter. Fundamental Research Corp DOES NOT MAKE ANY WARRANTIES, EXPRESSED OR IMPLIED, AS TO RESULTS TO BE OBTAINED FROM USING THIS INFORMATION AND MAKES NO EXPRESS OR IMPLIED WARRANTIES OR FITNESS FOR A PARTICULAR USE. ANYONE USING THIS REPORT ASSUMES FULL RESPONSIBILITY FOR WHATEVER RESULTS THEY OBTAIN FROM WHATEVER USE THE INFORMATION WAS PUT TO. ALWAYS TALK TO YOUR FINANCIAL ADVISOR BEFORE YOU INVEST. WHETHER A STOCK SHOULD BE INCLUDED IN A PORTFOLIO DEPENDS ON ONE’S RISK TOLERANCE, OBJECTIVES, SITUATION, RETURN ON OTHER ASSETS, ETC. ONLY YOUR INVESTMENT ADVISOR WHO KNOWS YOUR UNIQUE CIRCUMSTANCES CAN MAKE A PROPER RECOMMENDATION AS TO THE MERIT OF ANY PARTICULAR SECURITY FOR INCLUSION IN YOUR PORTFOLIO. This REPORT is solely for informative purposes and is not a solicitation or an offer to buy or sell any security. It is not intended as being a complete description of the company, industry, securities or developments referred to in the material. Any forecasts contained in this report were independently prepared unless otherwise stated, and HAVE NOT BEEN endorsed by the Management of the company which is the subject of this report. Additional information is available upon request. THIS REPORT IS COPYRIGHT. YOU MAY NOT REDISTRIBUTE THIS REPORT WITHOUT OUR PERMISSION. Please give proper credit, including citing Fundamental Research Corp and/or the analyst, when quoting information from this report. The information contained in this report is intended to be viewed only in jurisdictions where it may be legally viewed and is not intended for use by any person or entity in any jurisdiction where such use would be contrary to local regulations or which would require any registration requirement within such jurisdiction

Beleave Inc. (CSE: BE / OTCQX: BLEVF) – Deals to Enable … · 2019. 1. 2. · the intent of...

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