Research from Water Tower Research, Water Tower Research

Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Research from Water Tower Research

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Equity Bottom-Up

<h3>KEY POINTS</h3>
<ul>
<li>1QFY23 delivers impressive follow-up results.&nbsp;Numinus’ fiscal first quarter ended November 30, 2022, delivered a strong follow-up to the preceding quarter, which had been robustly affected by a first-time contribution from Novamind. 1QFY23 recorded sequential revenue growth of ~36% to C$5.67 million from C$4.18 million in 4QFY22. Gross profit increased 80% to C$2.38 million from C$1.32 million, with gross margin expanding sequentially by 1,040 bps to 41.9% from the previous quarter’s 31.5%. Run-rate revenues are C$22.68 million, with gross profit ~C$9.52 million.</li>
<li>Strong clinic appointment growth drives revenue expansion.&nbsp;Numinus’ network of 12 wellness clinics delivered a 35% sequential increase in revenue to C$5 million from C$3.7 million as demand for mental health services on both sides of the US/Canada border remained robust. In 1QFY23, the clinic network completed ~19.8K client appointments, up 13.7% from ~17.4K in the preceding quarter, with almost 10% of the 1Q total made up by new clients. US network appointments grew 11% sequentially, while Canadian appointments rose by 26% off a lower base and 21% on a same-store basis. Almost a quarter of these appointments were Ketamine- or Spravato-assisted therapy related. Appointments for these services more than doubled over 4QFY22 to ~4.7K, while TMS therapy continued to show strong demand, with 1,863 appointments, up ~19% sequentially.</li>
<li>Wellness clinics are becoming more profitable.&nbsp;Along with the growth, the continuing shift in revenue mix toward higher-value services such as KAT and TMS significantly boosted gross margin contribution from the clinics to ~38% from 27% in the previous quarter. The seven US clinics generated margins of ~40%, up from 29% in 4QFY22, while the five clinics in Canada saw an improvement from ~5% to ~26%. The momentum in Canada is supported by the rollout of a new financing option for clinic patients that will increase the accessibility of traditional therapy and Ketamine-assisted therapy to a wider population.</li>
<li>High-margin CRO business has room to expand.&nbsp;Numinus reported a near 40% sequential increase in revenue to $0.68 million from the management of third-party clinical trials that are conducted in the two clinical research sites that came with the Novamind acquisition. These generated a gross margin of ~71%, up 530 bps from the preceding quarter. The company can leverage more of the space within existing sites to grow this highly profitable business further.</li>
<li>Stable cash burn.&nbsp;While expanding the necessary infrastructure to meet the growing demand for its services, notably adding 16 qualified practitioners over the quarter to a total of 138 across its clinic network (which has since increased by an additional 17, for a total of 155 practitioners), cash burn in the quarter was relatively flat at C$6.6 billion versus C$6.7 billion in 4QFY22. This stability has been supported by Numinus’ fast-expanding revenue base along with effective cost management, resulting in a 17% sequential drop in recurring opex. There is confidence that cash burn will trend down in the coming quarters. Numinus holds C$26 million of cash on its balance sheet.</li>
<li>Operating profitability in line of sight.&nbsp;There is plenty to get excited about on Numinus, not least is the company’s confidence that it can achieve operating profitability in the next 18 to 24 months or mid-FY24 to early FY25.</li>
</ul>
<h2>NUMINUS PERFORMANCE METRICS</h2>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/320/645/original/image_388444576361673996219529.png?1673996226" class="editor-image img-responsive" data-smartkarma-image-id="320645"></figure>
<div class="content-remarks">
<p>Source: Numinus filings, WTR</p>
</div>
<h2>COMPANY OVERVIEW</h2>
<p>Established in 2019, Canada-based Numinus Wellness (TSX:NUMI/OTCQX:NUMIF) is an integrated mental health company offering a wide range of mental health treatments. Its operations also embrace the entire psychedelic ecosystem from psychedelic production, the discovery and development of proprietary psychedelic-based therapeutic products utilizing its own research capabilities, partnerships, and capacity as a contract research organization (CRO) service provider, and a network of 12 client-facing wellness clinics in North America that offer a wide range of psychiatric services and treatment modalities, including psychedelic-assisted therapies for patients with a variety of mental disorders.</p>
<p>Stewarded by an accomplished leadership team comprising highly experienced medical and business professionals, led by Payton Nyquvest, the company has expanded rapidly over the past three years largely through acquisition, with the recently completed acquisition of Novamind being transformative for Numinus both strategically and financially. Numinus offers a unique and relatively low-risk way to gain exposure to the emergent psychedelic space.</p>
<h2>OUR INSIGHTS</h2>
<h2>The Opportunities</h2>
<p>Numinus is positioning itself as a leading provider of much-needed infrastructure to enable the industry to develop by providing accessibility to and support for ongoing research in psychedelics as well as accessibility to patient-facing sites into which resultant psychedelic-assisted psychotherapies can be funneled to treat patients. Numinus is effectively tapping into a multibillion-dollar opportunity (please refer to our industry report, “The Psychedelics Renaissance”). Among the ~50 publicly traded psychedelic companies, most are focused on drug discovery and development. Numinus’ end-to-end service capabilities with current and growing revenue streams offer a more unique and relatively low-risk way to gain exposure to the emergent psychedelic space.</p>
<h2>The Obstacles</h2>
<p>As with any nascent industry and early-stage company, there are significant uncertainties and development risks. Outside of ketamine, psychedelics for therapeutic use are highly restricted. While we are confident about the direction in which psychedelics are going with respect to gaining wider acceptance, more uncertain is the time it will take to complete that journey.</p>
<h3>DISCLOSURES</h3>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare &amp; Healthcare Services sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.<br><br>WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY POINTS

1QFY23 delivers impressive follow-up results.&nbsp;Numinus’ fiscal first quarter ended November 30, 2022, delivered a strong follow-up to the preceding quarter, which had been robustly affected by a first-time contribution from Novamind. 1QFY23 recorded sequential revenue growth of ~36% to C$5.67 million from C$4.18 million in 4QFY22. Gross profit increased 80% to C$2.38 million from C$1.32 million, with gross margin expanding sequentially by 1,040 bps to 41.9% from the previous quarter’s 31.5%. Run-rate revenues are C$22.68 million, with gross profit ~C$9.52 million.
Strong clinic appointment growth drives revenue expansion.&nbsp;Numinus’ network of 12 wellness clinics delivered a 35% sequential increase in revenue to C$5 million from C$3.7 million as demand for mental health services on both sides of the US/Canada border remained robust. In 1QFY23, the clinic network completed ~19.8K client appointments, up 13.7% from ~17.4K in the preceding quarter, with almost 10% of the 1Q total made up by new clients. US network appointments grew 11% sequentially, while Canadian appointments rose by 26% off a lower base and 21% on a same-store basis. Almost a quarter of these appointments were Ketamine- or Spravato-assisted therapy related. Appointments for these services more than doubled over 4QFY22 to ~4.7K, while TMS therapy continued to show strong demand, with 1,863 appointments, up ~19% sequentially.
Wellness clinics are becoming more profitable.&nbsp;Along with the growth, the continuing shift in revenue mix toward higher-value services such as KAT and TMS significantly boosted gross margin contribution from the clinics to ~38% from 27% in the previous quarter. The seven US clinics generated margins of ~40%, up from 29% in 4QFY22, while the five clinics in Canada saw an improvement from ~5% to ~26%. The momentum in Canada is supported by the rollout of a new financing option for clinic patients that will increase the accessibility of traditional therapy and Ketamine-assisted therapy to a wider population.
High-margin CRO business has room to expand.&nbsp;Numinus reported a near 40% sequential increase in revenue to $0.68 million from the management of third-party clinical trials that are conducted in the two clinical research sites that came with the Novamind acquisition. These generated a gross margin of ~71%, up 530 bps from the preceding quarter. The company can leverage more of the space within existing sites to grow this highly profitable business further.
Stable cash burn.&nbsp;While expanding the necessary infrastructure to meet the growing demand for its services, notably adding 16 qualified practitioners over the quarter to a total of 138 across its clinic network (which has since increased by an additional 17, for a total of 155 practitioners), cash burn in the quarter was relatively flat at C$6.6 billion versus C$6.7 billion in 4QFY22. This stability has been supported by Numinus’ fast-expanding revenue base along with effective cost management, resulting in a 17% sequential drop in recurring opex. There is confidence that cash burn will trend down in the coming quarters. Numinus holds C$26 million of cash on its balance sheet.
Operating profitability in line of sight.&nbsp;There is plenty to get excited about on Numinus, not least is the company’s confidence that it can achieve operating profitability in the next 18 to 24 months or mid-FY24 to early FY25.

NUMINUS PERFORMANCE METRICS


Source: Numinus filings, WTR

COMPANY OVERVIEW
Established in 2019, Canada-based Numinus Wellness (TSX:NUMI/OTCQX:NUMIF) is an integrated mental health company offering a wide range of mental health treatments. Its operations also embrace the entire psychedelic ecosystem from psychedelic production, the discovery and development of proprietary psychedelic-based therapeutic products utilizing its own research capabilities, partnerships, and capacity as a contract research organization (CRO) service provider, and a network of 12 client-facing wellness clinics in North America that offer a wide range of psychiatric services and treatment modalities, including psychedelic-assisted therapies for patients with a variety of mental disorders.
Stewarded by an accomplished leadership team comprising highly experienced medical and business professionals, led by Payton Nyquvest, the company has expanded rapidly over the past three years largely through acquisition, with the recently completed acquisition of Novamind being transformative for Numinus both strategically and financially. Numinus offers a unique and relatively low-risk way to gain exposure to the emergent psychedelic space.
OUR INSIGHTS
The Opportunities
Numinus is positioning itself as a leading provider of much-needed infrastructure to enable the industry to develop by providing accessibility to and support for ongoing research in psychedelics as well as accessibility to patient-facing sites into which resultant psychedelic-assisted psychotherapies can be funneled to treat patients. Numinus is effectively tapping into a multibillion-dollar opportunity (please refer to our industry report, “The Psychedelics Renaissance”). Among the ~50 publicly traded psychedelic companies, most are focused on drug discovery and development. Numinus’ end-to-end service capabilities with current and growing revenue streams offer a more unique and relatively low-risk way to gain exposure to the emergent psychedelic space.
The Obstacles
As with any nascent industry and early-stage company, there are significant uncertainties and development risks. Outside of ketamine, psychedelics for therapeutic use are highly restricted. While we are confident about the direction in which psychedelics are going with respect to gaining wider acceptance, more uncertain is the time it will take to complete that journey.
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations and Healthcare &amp; Healthcare Services sectors for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  WTR is being compensated for its research by the company which is the subject of this report. WTR receives no more than a maximum of $10,500 per month from a given client and is required to have at least a 6-month commitment. None of the earned fees are contingent on, and WTR’s client agreements are not cancellable for the content of its reports. WTR does not accept any compensation in the form of warrants or stock options or other equity instruments that could increase in value based on positive coverage in its reports.  WTR or an affiliate may seek to receive compensation for non-research services to covered companies, such as charges for presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services that WTR or an affiliate might offer to clients.  The manner of WTR’s research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly-written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors, agents or affiliate shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

Blowout 1QFY23 Results; Profitability in Line of Sight