Business description
Australis Capital is focused on US cannabis assets and is acquiring a range of low-valuation cannabis assets that it believes will have staying power in the rapidly developing cannabis market. The company’s goal is to form these assets into a fully operational and integrated US cannabis business.
The first annual report
The company filed its first annual report as a public company at the end of July 2019, which provided the most comprehensive accounting of the company’s acquisitions and operations to date. The report was for the period ending 31 March 2019.
The company reported revenue of C$129,759 for the fiscal year, with C$101,625 of this attributable to consulting fees paid by BaM. The company’s operational expenses for the year were C$4.4m, mostly due to the last two quarters (C$2.0m and C$1.6m for Q3 and Q4, respectively), which we will now use as a base in our forecasts. We expect operational costs to further increase as the company shifts from a focus on acquisition to operational details. The company has a definitive agreement to purchase Green Therapeutics and its existing 8,000 square foot facility, in a deal that is expected to close in 2019. Australis will be breaking ground on its new 55,000 square foot facility in Clark County, Nevada, in the coming year (and guided toward completion in mid-2020). We have included C$20m in capex associated with the new facility in our forecasts at this time, but we have not forecast revenue from the operation yet. Once we have more operational visibility we expect to add this revenue to our models. The company previously stated that it expects US$10–12m in EBITDA from the new facility in the first year it is operational.
The report gave more detail for the first time regarding the operations of rthm, including its previous revenue and losses. Australis announced that the rthm unit had revenue of C$28,133 and losses of C$155,052 in the fiscal year since its incorporation on 2 November. Australis provided additional detail that it would have recorded estimated revenue of C$142,373 and a loss of C$384,008 if it reported the full year of activity. It is unclear why revenue was so much lower in the period following November than prior to it, but we suspect that it was because rthm shifted gears toward the development of the Coil app at that time and reduced other efforts. The company also released additional details regarding the royalties and milestones payable to rthm and Mr. Natural (Exhibit 1).
BaM continues the Cali buildout
Australis recently consolidated its stake in BaM. We previously reported on the May exercise of BaM warrants, and the company followed this in July with the announcement that it had signed an agreement to convert the C$1.6m debenture it issued to BaM. The conversion price is C$0.55 and the conversion is scheduled to occur in June 2020. This would bring the total number of shares in BaM held by Australis to 37.8m, or roughly 38%.
This comes at a time when BaM is significantly expanding its operations by establishing a presence in California. Australis originally issued C$5.34m in debt to the company to finance this expansion through the purchase of the ShowGrow dispensaries. BaM reported in July that it reached a definitive agreement with ShowGrow to purchase 100% of one of its dispensaries in Long Beach, and 60% of another in San Diego. This is an important development for the company because California is currently the single largest US cannabis market. The company already has manufacturing up and running in the state.
BaM reported sales of US$1.24m for its Q319 ending 30 April, which is roughly in line with Q2 (US$1.20m). The company has substantially reduced its net loss to US$43,871, from US$1.76m in Q219, although this can largely be attributed to lower stock -based payments (US$10,836 from US$870,808) and US$433,380 in interest payable to BaM associated with the acquisition vehicle Green Light District Holdings, set up by it and Australis.
Regulatory update
Progress continues to be made with cannabis legalization across the country. The newest state to legalize recreational cannabis is Illinois, with the law taking effect in January 2020. New York and New Jersey failed to pass their recreational cannabis bills, although not due to lack of support for legalization, but largely due to disagreements regarding how the industry should be regulated. However, in late July 2019 New York did pass a bill to end penalties on amounts less than two ounces.
In regulatory news important to Australis, authorities in Las Vegas voted to allow recreational cannabis lounges. This would shift the model at least to some degree away from the dispensary model where individuals purchase cannabis to smoke elsewhere, to something closer to the coffeehouse model seen in Amsterdam. This is an important decision because although cannabis has only been available in Nevada for a short time (legalized in 2016, available since 2017), there are early indications that it may be a destination for cannabis tourism. Nevada had over US$500m in recreational sales alone in its first fiscal year following legalization (ending June 2018). This compares to peak market estimates of US$800m based on Colorado per capita data. The most recent recreational use data is from March 2019, which was the biggest recreational use month to date with US$41m attributable to recreational use alone. Moreover, under the current legal regime, it is legal to own cannabis, but not smoke it in public, and cannabis lounges would alleviate this catch 22 for tourists visiting the city.
Valuation
BaM has been trading lower than when our previous report was published (31 May 2019), which has lowered our adjusted nominal value for Australis (to C$88.98m from C$144.37). The lower share prices for both BaM and Australis are consistent with the market, which has trended lower for cannabis stocks. The Horizons Marijuana Life Science ETF (HMMJ) is down 28% from its high in March. At current market prices, Australis is trading with a 2.2x premium to this adjusted value, which is still within the realm of what we consider reasonable. For example, even at this lower share price, the Australis stake in BaM has a market value of C$34.0m compared with the C$17.0m Australis paid for the investment, or a roughly 2x premium. We estimate that Australis has net cash of approximately C$24.2m (as of FY19 plus subsequent transactions), which we believe should be sufficient for it to finance its near-term operational goals.
Australis Capital Inc (OTC:AUSAF) recently reported financial results for its first year of operations. The year was characterized by a vigorous pace of deals to rapidly construct a major cannabis operator. The company now has multiple brands, access to retail spaces and supporting technology, and multiple industry partnerships and is close to completing its acquisition of Green Therapeutics (by the end of 2019), which will provide Australis with additional brands and the production it needs to launch.
Big plans coming to fruition
Australis reported operational costs of C$4.4m for FY19, driven by the two most recent quarters (Q3 C$2.0m, Q4 C$1.6m), which we are basing our future estimates on. We expect these costs to increase in FY20 with the incorporation of Green Therapeutics, although we currently do not have any additional data on the acquiree’s operations.
BaM sets up its California presence
Australis recently announced it would convert the C$1.6m debenture it previously issued to Body and Mind (BaM). The conversion is scheduled for June 2020 and would bring Australis’s total interest in the company to 38%. BaM is continuing to expand and recently completed its transaction to purchase a stake in the ShowGrow dispensaries in southern California. This transaction was financed by Australis for C$5.34m. BaM reported revenue of US$1.24m for the quarter ending 30 April 2019 and is getting close to break-even with a loss of US$43,871.
The march of progress: Illinois legalizes
The most recent territory to legalize recreational cannabis is Illinois, which will begin sales in January 2020. This brings the total number of states with legalized recreational cannabis to 11. Legalization efforts in New York and New Jersey were stymied in their recent congressional sessions due to disagreements regarding how to regulate the industry, but with both states generally in favor of reform.
Valuation: Trading at a 2.2x premium
Australis is currently trading at a 2.2x premium to our adjusted nominal value of its assets, which implies roughly the same return the company has already seen with its investment in BaM, even after the latter’s share price pulled back by over 50% since our last report. The cannabis sector has similarly pulled back over recent months (HMMJ is down 28% from March highs). We estimate net cash of C$24.2m (as of FY19 plus subsequent transactions), which should be sufficient to finance the company’s near-term development plans.