(cnsx:psyc) psyched wellness ltd 14 april 2021

PSYCHED WELLNESS LTD(CNSX:PSYC)

14 April 2021

www.proactiveinvestors.co.uk | PSYC | 14.04.2021 | Important: disclaimers can be found on the last page of this report 1

Healthcare

52-WEEK HIGH C$0.8

52-WEEK LOW C$0.1

PRICE C$0.3

MARKET CAP MLN $ C$34.03

Share Price0.7

0.6

0.5

0.4

0.3

0.2

0.1

Nov Dec Jan Feb Mar AprCreated by BlueMatrix

Major Shareholders

Shares in issue 128,589,495Avg Three-month tradingvolume

896,445

Primary IndexNext Key Announcement May 2021

Company Information

Address: 3000, 77 King St. West, Toronto ONM5K 1A2

Website: www.psyched-wellness.com

Analyst Details

Ed [email protected]

Psyched Wellness - The drink of the gods

A unique position in psychedelic health products

Psyched Wellness is a health supplements company focussed on theproduction and distribution of products from medicinal mushrooms, includingpsychedelic mushrooms, to promote a healthier body and mind. Thefunctional mushrooms market is a large and growing segment in consumerhealth, currently running at around US$30bn per year globally.

Within the sector, many companies are looking at ways to work withpsychedelic mushrooms, which are believed to offer physical and mentalhealth benefits when consumed at low doses. There are significant obstacles,however, as varieties such as psilocybe mushrooms (magic mushrooms) areillegal in most jurisdictions.

Psyched Wellness is developing products using a mushroom called AmanitaMuscaria, which has psychedelic properties but which has never been ascheduled substance in the USA or Canada. Amanita Muscaria has been usedsince ancient times for medicinal or spiritual purposes in many differentcultures, and formed the basis of the ritual beverage soma — ‘the drink ofthe gods’.

Business plan:

The company is developing a range of dietary supplements, starting witha tincture. The products will require regulatory approval only as novelfoods, rather than a more time-consuming pharmaceutical trial process thatwould be required if Psyched Wellness wanted to market Amanita Muscariaproducts as medicines rather than wellness products. On p8 we examine theapproval roadmap.

The company has plans in place for a rapid ramp-up of manufacturingvia a contract manufacturing organisation, and distribution through bricksand mortar retailers and e-commerce channels. We expect first commercialrevenues in Q4 2021 and scaling up during 2022.

Investment catalysts, and conclusion

We argue that Psyched Wellness offers shareholders a compelling investmentproposition, with key points including:

• A unique product offering based on a mushroom that has psychedelicproperties but which is not a controlled substance.

• An executive team with a breadth of experience to execute on the mainelements of Psyched’s business plan — product development, extraction andproduction processes, marketing, and finance (details p6-7).

• A strong financial position, with about C$7.5mln of cash on the balancesheet providing comfortable headroom to fund activities through to revenuegeneration (details p8-9).

The share price has gained 49% since the company listed in October 2020.We believe this is a result of increased investor awareness of the company,reflected for example in the inclusion of Psyched in the Horizons PsychedelicsETF (exchange-traded fund). Other potential catalysts for the share price in 2021include:

• Potential inclusion of Psyched in other indices or ETFs.• Regulatory approvals, and milestones in the approvals process.• Details to be announced on the retail strategy, including retail partners.

We argue that these catalysts offer potential upside during the remainder of2021.

www.proactiveinvestors.co.uk

PSYCHED WELLNESS LTD


Jeff Stevens, chief executive

Stevens has over 20 years of capital marketsexperience and has been an officer and directorwith several public companies. He has takenthree companies public, built teams andstructured multiple mergers & acquisitions(M&A) transactions while building successfulbusinesses.

Michael Nederhoff, chairman

Currently acts as president of JUUL Labs inCanada overseeing Canadian operations.Previously served as GM for CytoSport, Inc.overseeing the Canadian launch of Muscle Milk,and also held senior sales roles at Red BullCanada.

The functional mushrooms market

Functional mushrooms are among the fastest-growing segments in the consumerwellness and neutraceuticals space. We estimate that demand in North Americahas grown by more than 10% annually over the period 2018-2020.

Consumers use functional mushrooms to achieve a variety of health benefits —immune system support, digestive health, antioxidant, mood enhancement, andmany others. A number of the more popular mushroom varieties have origins inAsian tradition medicine — varieties such as Cordyceps, Turkey Tail, and Reishi.Mushrooms and extracts are sold in a wide variety of different formats —tinctures, dried mushrooms, mushroom jerky, mushroom coffee, and skincare andbeauty products.

The following table outlines some types of functional mushrooms:

A wide range of functional mushrooms aresought by consumers as a wellness product

Functional mushroom categories

Source: Proactive Research

We have made a distinction here between psychedelic and non-psychedelicmushrooms, as this is crucial to Psyched Wellness’ business case.

Psychedelic mushrooms

Psychedelic mushrooms have significantpotential benefits for health and mentalhealth, but usage of most varieties ishighly restricted

Several market-listed companies are now working with psychedelics, usuallyvarieties of psilocybe mushrooms, also known as ‘magic mushrooms’. Researchhas been conducted going back to the 1950s regarding potential therapeuticapplications of psilocybin from these mushrooms, but much of this wasdiscontinued in the late 1960s amid public concerns about recreational drug use.More recent research has provided good evidence that psilocybin could be ofvalue in treating mental health conditions and substance addictions; however,there are significant regulatory hurdles for these therapies as magic mushroomsand psilocybin remain scheduled substances and therefore illegal for sale in theUSA or Canada.

Psyched Wellness is working with a mushroom variety called Amanita Muscaria.This occupies a select category within the functional mushroom space —mushrooms that contain psychedelic compounds but which have never been acontrolled substance or scheduled substance in the USA or Canada.




The overall market for functional mushrooms is now approaching US$30bn peryear. We estimate that 25% of this market is in North America. The following chartillustrates the growth in the global market for functional mushrooms.

The functional mushroom market isgrowing at 8.5% annually

Global market for functional mushrooms

0

5

10

15

20

25

30

35

40

2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e

$U

S -

bn

Source: HAVN Life Sciences

Psyched Wellness can target a significant share of this market due to the uniquepositioning of the company’s product but also, the Psyched Wellness productrange is likely to appeal to consumers who are currently using supplements suchas cannabidiol (CBD) or melatonin, and this extends the target market for Psychedbeyond only the functional mushroom consumer.

Psyched Wellness focus product - Amanita Muscaria

Amanita Muscaria, also known as the fly agaric mushroom, is a mushroomspecies that is widespread across temperate and boreal regions of the northernhemisphere, growing symbiotically with pine, spruce or birch forests. The flyagaric is notable for its iconic fairy tale toadstool appearance with a bold red capand white spots.

Amanita Muscaria, or Fly Agaric

Source: Psyched Wellness

A.Muscaria has a rich history of usage as aritual and medicinal ingredient

Amanita Muscaria has been used for medicinal and ritualistic purposes for manycenturies. The earliest known reference is in a Hindu text called the Rig Vedadating from 1,000 B.C.




“We have drunk Soma [a brew from A.Muscaria] and become immortal; We haveattained the light, the Gods discovered. Now, what harm may foeman’s malice do tous? What, O immortal, mortal man’s deception?”

The Amanita Muscaria mushroom appears in the folklore and literature ofnumerous cultures, from Viking elixirs of invincibility to the size-changingmushroom in Alice in Wonderland.

The history of the use of Amanita Muscaria in ritualistic practices is rooted in theneurochemical effects of the mushroom’s main active compounds.

Psychedelic properties - muscimol

Amanita Muscaria contains three main active compounds — Muscimol, IbotenicAcid, and Muscarine. Of these Muscimol is of the most interest from PsychedWellness’ perspective.

Muscimol produces mood-enhancingeffects by binding to the GABA receptor

Muscimol and the GABA neurotransmitter


Muscimol has chemical similarities to the neurotransmitter gamma-aminobutyricacid (GABA). This allows muscimol to act as a GABA agonist, binding to the GABAreceptors in the brain and leading to an altered state of consciousness if ingestedin a sufficiently high dose.

Toxicity

A.Muscaria is often falsely perceived as being a poisonous variety of mushroom.Consuming the mushroom raw will indeed lead to a person feeling unwell.Nonetheless, it has been consumed for centuries, with toxic compounds firstbeing broken down by processes such as sun drying or boiling in brine.

Psyched has developed a proprietaryextract called AME-1

Psyched Wellness has developed a proprietary method for producing an extractfrom Amanita Muscaria, to be called AME-1, which contains muscimol buteliminates all toxicity.

Psyched product strategy

Psyched Wellness will use its proprietary extraction methodology to produce anAmanita Muscaria extract called AME-1, which will be used initially in tinctures,with plans for capsule and tea products to follow. The company has filed patentapplications for the extraction process. The initial tincture product will containmuscimol at below hallucinogenic doses, effectively offering a micro-dosingformulation for muscimol.




Psychedelic microdosing is becoming amainstream concept

Microdosing is a popular concept within the emerging psychedelics industry,with companies evaluating the benefits of microdosing with LSD, psilocybin,and DMT. The potential benefits of microdosing are being widely reported inmainstream media:

https://www.theguardian.com/science/2019/may/03/psychedelic-drugs-women-taking-tiny-doses-hattie-garlick

The major regulatory hurdle for companies developing psychedelic microdosingtherapies is that compounds such as LSD and psilocybin remain illegal in the USAand Canada even in small doses. Because muscimol has never been a scheduledsubstance, Psyched Wellness will only need to navigate the ordinary novel foodsapprovals.

Psyched has engaged the services of KGK Science to guide the company throughthe dietary supplement and NHP regulatory processes with the Federal DrugAdministration (FDA) and Health Canada, respectively. KGK Science is a full-service contract research organisation (CRO) based in London, Ontario witha focus on the nutraceuticals industry, and will assist Psyched Wellness withprocesses including: Generally Recognized As Safe (GRAS) conclusions, NewDietary Ingredient Notifications (NDIN), master file applications, product licenceapplications, FDA citizen petitions, label claims, guidance on regulatory matters,and federally-compliant marketing for health and wellness products.

To bring the product to market, the company will need to secure approvalof Amanita Muscaria as an NHP in Canada, by submitting a product licenceapplication with the NNHPD. To secure approval in the United States, thecompany must submit an NDIN dossier on identity and safety with the FDA. Weinclude a projected timeline showing some of the key milestones in this processon p8.

A well-defined pathway to manufacturingand distributing the product

Once the product is approved, Psyched intends to purchase mushrooms frominternational suppliers, and then to manufacture the end product using theservices of a contract manufacturing organisation (CMO). The company hasexchanged letters of intent (LOIs) with a CMO based in Ontario, with the intentionof entering into a contract of service closer to the product launch later in 2021.The CMO that Psyched is working with holds ISO 9001 Quality Management, ISO22716 Cosmetic cGMP and ISO 17025 Accredited Lab Facility (Testing and QualityInspections) certifications, and an NHP Site Licence with NNHPD, which satisfiesthe regulatory requirements to manufacture the company’s products.

The company’s products will be distributed in the USA and Canada through bricks-and-mortar retailers and e-commerce platforms. Psyched has exchanged LOIswith a company called Coldhaus based in Ontario which offers complete logisticssolutions including managing route to market, delivery fleets, warehousefacilities, inventory management, customer delivery, batch tracking on theinvoice, marketing material delivery, and order collections.

We believe that two different types of retailer will represent the biggest bricks-and-mortar retail channels – health stores, and smart shops/head shops. Thefollowing illustrates the routes to market.






Route to market


Potential to use different branding andpricing for different customer verticals

We believe that the company could potentially opt for different branding totarget the different retail markets. We believe that competing with CBD couldpotentially allow a higher pricing point for Psyched’s products, while traditionalhealth products may offer a larger volume market. We believe that both channelswould offer a high gross margin for Psyched. We expect more details of themarketing strategy later in 2021.

Psyched also has an additional revenue driver in the shape of a joint venture (JV)with another company that will use AME-1 in a new formulation that will be usedin a separate product line to be marketed by the partner. This JV further broadensthe route to market.

Key people

Delivering on Psyched’s ambitious business plan requires the company to executemany strategic objectives — completing product development and regulatoryapproval, delivering on the production ramp-up, and maximising the impact ofthe marketing strategy. The company has assembled an executive team with verystrong credentials across the necessary disciplines.

Jeff Stevens, chief executive

Stevens has over 20 years of capital markets experience and has been an officerand director with several public companies. He has taken three companies public,built teams and structured multiple M&A transactions while building successfulbusinesses.

Michael Nederhoff, chairman

Currently acts as president of JUUL Labs in Canada overseeing Canadianoperations including product launches, organisational structure and profit &loss responsibility. Previously served as GM for CytoSport, Inc. overseeing theCanadian launch of Muscle Milk and was one of the first 10 employees at Red BullCanada where he held senior sales roles.




Terry Booth, director

Booth is a global cannabis industry pioneer and founder of Aurora Cannabis(TSX:ACB). He has served as president/CEO of six other highly successfulbusinesses, including several of Canada’s top 50 fastest-growing companies.

Professor David Nutt, director

David Nutt is a psychiatrist and the Edmond J. Safra Professor ofNeuropsychopharmacology in the division of brain science at Imperial CollegeLondon. He was previously president of the European Brain Council, BritishAssociation of Psychopharmacology, British Neuroscience Association andEuropean College of Neuropsychopharmacology. Professor Nutt currently sits asthe chair of the Scientific Advisory Board for COMPASS Pathways and chair of theScientific Advisory Board for AWAKN Life Sciences. He is also a member of theMedical Advisory Board of Opiant and sits on the board of Lundbeck InstituteCampus

Peers

There are a number of stock market listed companies within the functionalmushroom space, some of which also have exposure to psychedelics. Thefollowing table gives an overview of some of these peers.

Psyched is the only listed companyworking with a non-scheduled psychedelicmushroom

Peers


We have listed Pure Extracts Technologies (PULL) as a peer stock although itactually is not competing directly in any class of mushrooms. This is because PULLis focussed on extraction technologies and could potentially address any of thecategories, as a service provider.

For the rest of the peers, they compete within two market segments:

1. Psychedelics (controlled substance). Over time, we believe thatpsilocybe mushrooms could become very big business but there aresignificant regulatory hurdles whether companies are looking atconsumer wellness applications, pharmaceuticals, or recreational use.This segment will take time.

2. Non-psychedelics. This is a fast-growing market, but there is a significantexisting competitor base.




By contrast, Psyched Wellness will be the only player offering a microdoseproduct based on a psychedelic mushroom that is already legal, which canbe brought to market relatively quickly assuming that Psyched can obtain thenecessary novel foods approvals. We believe that competitors would then belikely to start trying to produce products with Amanita Muscaria, but this couldstill leave Psyched Wellness with a 1-2 year head start.

Timeline and financing

Psyched Wellness continues to make steady progress on the path to certifying itsfirst Amanita Muscaria product as a food supplement with the FDA and HealthCanada. We believe that the company remains on track for a 2021 product launch.The following diagram illustrates some key points on the time line.

Timeline


In addition to regulatory milestones, during the coming months we expectPsyched Wellness to sign contracts for CMO and distributor agreements, andduring the remainder of 2021 to announce retail partners and details of thee-commerce strategy. We believe that each of these milestones represents apotential catalyst for the share price.

A strong balance sheet position, with norequirement for further financing

Financing

Psyched Wellness has a strong balance sheet position, and we believe thecompany can finance its activities through to the revenue generation stage. Thecompany has cash balances of around C$7.5mln (est.), compared with monthlycash utilisation of around C$50,000.




Capital position, March 2021 est.

Capital position, CA$

Cash balance at Nov 30th 2020 2,059,776

Capital raising, closed February 17th 2021 6,603,000

Capital utilised since Nov 30th 2020, est. 1,100,000

Cash balance March 20th 2021, est. 7,562,776

Ongoing monthly utilization rate, est. 50,000

Warrants and options outstanding (between CA$0.10-

0.15 strike price) 11,181,200

Warrant and option money potentially arising, est. 1,350,000


Conclusion

We assert that Psyched Wellness offers shareholders a compelling investmentproposition, with key points including:

• A unique product offering based on a mushroom that has psychedelicproperties but which is not a controlled substance.

• An executive team with a breadth of experience to execute on the mainelements of Psyched’s business plan — product development, extraction andproduction processes, marketing, and finance.

• A strong financial position, with approximately C$7.5mln of cash on thebalance sheet providing comfortable headroom to fund activities through torevenue generation.

We believe that 2021 is a pivotal year in the development of the company, withthe potential for significant upside to the share price as the strategy movesforward.




General Disclaimer and copyrightLEGAL NOTICE – IMPORTANT – PLEASE READ

Proactive Research is a trading name of Proactive Investors Limited which is regulated and authorised by the Financial ConductAuthority (FCA) under firm registration number 559082. This document is published by Proactive Research and its contents have notbeen approved as a financial promotion by Proactive Investors Limited or any other FCA authorised person. This communication ismade on the basis of the 'journalist exemption' provide for in Article 20 of The Financial Services and Markets Act 2000 (FinancialPromotion) Order 2005 and having regard to the FCA Rules, and in particular PERG 8.12.

This communication has been commissioned and paid for by the company and prepared and issued by Proactive Research forpublication. All information used in the preparation of this communication has been compiled from publicly available sources thatwe believe to be reliable, however, we cannot, and do not, guarantee the accuracy or completeness of this communication.

The information and opinions expressed in this communication were produced by Proactive Research as at the date of writing andare subject to change without notice. This communication is intended for information purposes only and does not constitute anoffer, recommendation, solicitation, inducement or an invitation by, or on behalf of, Proactive Research to make any investmentswhatsoever. Opinions of and commentary by the authors reflect their current views, but not necessarily of other affiliates ofProactive Research or any other third party. Services and/or products mentioned in this communication may not be suitable for allrecipients and may not be available in all countries.

This communication has been prepared without taking account of the objectives, financial situation or needs of any particularinvestor. Before entering into any transaction, investors should consider the suitability of the transaction to their individualcircumstance and objectives. Any investment or other decision should only be made by an investor after a thorough reading of therelevant product term sheet, subscription agreement, information memorandum, prospectus or other offering document relating tothe issue of securities or other financial instruments.

Nothing in this communication constitutes investment, legal accounting or tax advice, or a representation that any investment orstrategy is suitable or appropriate for individual circumstances or otherwise constitutes a personal recommendation for any specificinvestor. Proactive Research recommends that investors independently assess with an appropriately qualified professional adviser,the specific financial risks as well as legal, regulatory, credit, tax and accounting consequences.

Past performance is not a reliable indicator of future results. Performance forecasts are not a reliable indicator of futureperformance. The investor may not get back the amount invested or may be required to pay more.

Although the information and date in this communication are obtained from sources believed to be reliable, no representation ismade that such information is accurate or complete. Proactive Research, its affiliates and subsidiaries do not accept liability for lossarising from the use of this communication. This communication is not directed to any person in any jurisdiction where, by reason ofthat person's nationality, residence or otherwise, such communications are prohibited.

This communication may contain information obtained from third parties, including ratings from rating agencies such as Standard& Poor's, Moody's, Fitch and other similar rating agencies. Reproduction and distribution of third-party content in any form isprohibited except with the prior written consent of the related third-party. Credit ratings are statements of opinion and are notstatements of fact or recommendations to purchase, hold or sell securities. Such credit ratings do not address the market value ofsecurities or the suitability of securities for investment purposes, and should not be relied upon as investment advice.

Persons dealing with Proactive Research or members of the Proactive Investors Limited group outside the UK are not covered by therules and regulations made for the protection of investors in the UK.

Notwithstanding the foregoing, where this communication constitutes a financial promotion issued in the UK that is not exemptunder the Financial Services and Markets Act 2000 or the Orders made thereunder or the rules of the FCA, it is issued or approvedfor distribution in the UK by Proactive Investors Limited.

London

+44 207 989 0813

The Business Centre

6 Wool House

74 Back Church Lane

London E1 1AF

New York

+1 347 449 0879

767 Third Avenue

Floor 17

New York

NY 10017

Vancouver

+1 604-688-8158

Suite 965

1055 West Georgia Street

Vancouver, B.C. Canada

V6E 3P3

Sydney

+61 (0) 2 9280 0700

Suite 102

55 Mountain Street

Ultimo, NSW 2007


(cnsx:psyc) psyched wellness ltd 14 april 2021

Documents