👀 Australis Capital (AUSAF): Investors are buying into the turnaround story

The CEO (Terry Booth) + CFO (John Paul) appointments over the past week caught my attention so I decided to go down the rabbit hole here. The company is up +149% this past week.

Summary

Cannabis Stocks (U.S. and Canadian) had quite a run this week (with Jushi, Curaleaf, and Columbia Care using this momentum to raise via equity offerings), but none caught my attention more than Australis (+149% in 3-days) with the only news being a new CEO, CFO and two small acquisitions (a greenhouse design company and NV-based flower brand). Although the new CEO appointment is notable, I didn’t expect the stock to run this much. It seems investors are buying the turnaround/redemption story for both Australis and Terry Booth.

I believe this is more of a trade than fundamentally sound long-term investment.

Overview

Australis Capital (OTC: AUSAF, CSE: AUSA) recently hired a new CFO, acqui-hired its CEO (ALPS), and acquired its interim CEO’s (Duke Fu) Company (Green Therapeutics). (1) Australis will spend $13.7M ($2M cash, $10M stock, $1.7M indemnity holdback) to acquire 51% of ALPS (with an option on the remaining 49% based on federal legalization) and install its Principal, Terry Booth, ex-Aurora CEO, as its CEO. Concurrent with that acquisition, they will also acquire Green Therapeutics for ~$7.9M ($6.3M upfront, $1.6M earn-out), which helped to settle a legal dispute between the two companies. Duke Fu will take the COO role at the Company.

ALPS (Aurora Larssen Projects), is a global leader in facility design, construction management and (post) commissioning services to the horticultural sector across a wide variety of commercial crops. ALPS’ business model includes both project-based fees and recurring service revenues. AUSA intends to collaborate with AUSA's existing relationships and ALPS’ current and future clients to secure low-cost cultivation and offtake agreements.

Green Therapeutics (GT), is a NV-based cannabis company with a brand portfolio of high-end dried flower and designer/luxury derivative products. GT operates an 8,000 square foot facility in Nevada and its brands are carried by 52% of NV-based dispensaries. GT also has a manufacturing license in Oklahoma and a 25% interest in an extraction and processing license in Missouri.

(1) Includes earn-out of up to $24M payable upon ALPS achieving cumulative revenues of $108.7M with cumulative EBITDA of $48.9M over the period July 2021 to June 2024 (with separate revenue and EBITDA thresholds for each 12- month period).

Background

Aurora (ACB) acquired ALPS (design, construction management and post-commissioning services for horticultural facilities (greenhouses, indoor, hoop house and outdoor facilities) back in November 2017 when it generated ~$6M revenue w/ 30% EBITDA margin, which, given the anticipated launch of Canada’s recreational market and international opportunities, at the time, this was considered a “strategic acquisition” in order to keep the 30-year old Greenhouse designer exclusive to them.

Australis was spun off from Aurora in 2018 after TMX Group, the largest exchange operator in Canada, warned that publicly traded cannabis firms with holdings south of the border could be delisted. Aurora does not maintain direct ownership in Australis. But the company holds warrants that would allow it to acquire an ownership interest if Australis’ business operations in the United States become legal under federal laws within 10 years.

Financials

Events

November 2017 Aurora acquires Larssen Ltd. and renames it ALPS (Aurora Larssen Projects Inc.). For fiscal 2018 (9/30/18), Larssen was expecting ~$6M in revenues, with an EBITDA margin exceeding 40%

June 2018 — Aurora spins off Australis Capital, its U.S. subsidiary focused exclusively on U.S. investment opportunities “primarily in the cannabis and real estate sectors”

September 2018Australis raises $17M private placement, selling 85,000,000 Shares at an offering price of $0.20 per Share. Commences trading on the CSE immediately following the completion of the distribution of Units by Aurora to its shareholders. Eligible Aurora shareholders were paid one Unit (one common share and one share purchase warrant at an exercise price of $0.25/share) of Australis for every 34 Aurora shares outstanding as at August 24, 2018.

AUSA closed at $3.16 on its first trading day (9/16/18)

September 2018 — acquires Wagner Dimas stake (2.2M shares) from CannaRoyalty for C$3M, representing a ~182% ROI for CannaRoyalty.

October 2018 — raises $30M private placement, selling 14,778,325 Units at $2.03 per Unit (one common share and one-half of a common share purchase warrant)

November 2018 — invests $6.4M in exchange for ~25% of Body & Mind and lends $1.6M to BaM at 8% APR for 2-years.

November 2018 — provides BaM a 2-year, $4M at 15% APR to fund its acquisition of Green Light District Holdings (GLDH), owners of ShowGrow (Long Beach, SD). Agreed to exercise $1.2M in warrants out of the 16M warrants they already hold in BaM at C$0.50, ~3.2M shares. BaM also agreed to increase the monthly services fee to Australis to $16,500/month for 5 years unless ownership held by Australis drops below 10% in which the fee will cease. An exorbitant fee for a venture investor to charge, usually associated with Private Equity firms that charge transaction and monitoring fees.

December 2018 — invested $2M in Quality Green in connection with Quality Green's proposed going public transaction.

February 2019 — acquired Mr. Natural (which it has disposed of), the life story right of Robert Luciano (A 100% disabled veteran with PTS who has been a strong advocate for the medical use of cannabis for Veterans) and all related IP, including proprietary processes for $1.3M and royalty payments based on future performance incentives.

February 2019 — Purchased 1,768,545 Common Shares of Body & Mind at a price of C$0.585 per Common Share for an aggregate purchase price of $777,894.

April 2019 — Launches pilot launch of COIL™, an iOS and Android loyalty application based on a decentralized, international network of dispensaries, in NV and CA. Developed by Rthm Technologies, a wholly-owned subsidiary of Australis, COIL's loyalty program enables dispensaries to engage, reward and retain customers while attracting new customers through geolocation-based incentives. Australis acquired Rthm Technologies for ~C$3.5M (C$800K cash, C$200K cash payable upon certain patents being granted, 1,250,000 shares of Australis, C$1M at the next equity financing, C$1.25M based on milestones) in October 2018, it had raised $2.8M in funding. Rthm was a direct-to-consumer health and genetic testing platform; with 3M users globally. Australis wanted to leverage its proprietary biometric technologies to develop a cannabis curation, delivery, and loyalty platform

May 2019 — Original GT acquisition announced. AUSA entered into an asset purchase agreement with the undertaking to develop these assets, which was not executed upon by AUSA

January 2020 — CFO Mike Carlotti departs for same role at Curaleaf.

February 2020 — Terry Both “retires” from his role as Aurora CEO

February 2020 — Australis terminates Folium merger (announced 12/11/19). AUSA discovered new relevant information with regard to Folium and, on that basis, AUSA has decided to not proceed with the merger. The Company had $38.2M in cash & cash equivalents at the time.

May 2020 Aurora divested its wholly owned subsidiary, ALPS, back to founding owner for a nominal amount. and the Company recognized a $2.8M loss on disposal during the year ended June 30, 2020. Recent commentary from AUSA suggests that 2020 revenues were impacted by its restricted ability to conduct business development while it was under previous ownership (in addition to COVID-19 pandemic).

June 2020 — Terry Both “retires” from his role as Aurora Director

November 2020The pivot that pissed off shareholders. A collection of disgruntled investors (including Terry Booth) formed Concerned Shareholders of Australis Capital to protect shareholder value after the Company planned to acquire a fintech Company, Passport Technology for C$31.4M (C$12.2M stock, C$9.6M cash, C$3M payable fee from AUSA’s holdings in Body and Mind, C$6.6M payable fee by way of an undisclosed property). Scott Dowty, CEO and Director of AUSA at the time, was also Passport’s majority shareholder. As such, the company deemed the acquisition a “related-party transaction” that would require special minority shareholder approval to go forward. AUSA’s had a partnership with the fintech Company to develop its CocoonPod self-service cannabis kiosks. The companies agreed to a 10 year exclusive partnership, with AUSA issuing a payment of $4.2M ($375,000 cash, 5M shares of Body and Mind, 1.9M shares of AUSA).

The Concerned Shareholders had questions about the acquisition (and pivot to fintech). The group went public for the first time with a statement on July 21, calling out the origin, strategy, and payout of the deal. However, just over a week later Passport called off the deal.

December 2020 — GT and its affiliates commenced litigation with AUSA, forming a special committee to deal with this issue. In conjunction with the transaction, the companies reach a resolution, consisting of the following:

  • GT principals will return for cancellation all AUSA stock issued in the original transaction being 11,417,376 AUSA shares

  • AUSA shall return all of the purchased cannabis assets (licenses and brands) to GT. The brands will be part of the new transaction whereby AUSA is acquiring 100% of the membership interests of GT; the non-operational grow and processing licenses are expected to be sold by GT to third parties

  • Land in North Las Vegas purchased from an affiliate company of GT (Meridian) will be sold and the proceeds will be divided between Meridian and AUSA whereby $2.9M will be paid to Meridian, $1M will be paid to AUSA, and any remaining proceeds will be split 55% for AUSA and 45% for Meridian

January 2021 — Australis Capital acquires ALPS and Green Therapeutics. Recruits Plus Product’s former CFO as CFO and acqui-hires Terry Booth via ALPS.

Playbook

  1. Bring on “capital markets legend” (Duke Fu in a statement) Terry Booth (similar to what Bruce Linton did for Vireo Health and currently for GAGE Cannabis)

  2. Roll-up assets while providing a strategic rationale (capital-light, aggressive growth) and tell investors the company will be focused on aggressive growth and will be able to generate free cash flow soon

  3. Get investors excited again, the stock increased 149% this week! (+37.2% the day following announcement, +45.3% Day 2, +13.0% Day 3)

  4. Show a few quarters of performance

  5. Become positioned as a Tier 2 or Tier 3 MSO via M&A

  6. Exit to an MSO or LP depending on timing

Company Outlook — What does the Company currently look like today?

According to its website, AUSA looks to acquire and operates U.S. cannabis businesses and brands. AUSA focuses on investments that are accretive, have growing revenues, positive EBITDA with a management team that is committed to disciplined execution.

I imagine the company will try to merge/acquire Body & Mind (and make Terry Booth CEO of the combined company) or divest its ownership and re-invest the cash into furthering its ambitions as an MSO.

Investments

Body & Mind (BMMJ): NV-based Cannabis brand & retailer with retail in CA (San Diego, Long Beach), retail in OH (production pending), and AR (cultivation & production pending). As of September 10, 2020, AUSA owned ~18% of BaM’s (stake worth ~$9.1M given BaM’s $50.1M Market Cap (as of 1/8/21).

ALPS: Pipeline of projects with total anticipated client CapEx spending exceeding $2.5B, which includes traditional crops and newly popular crops. Long-term play is to own massive-scale, centralized cultivation facilities once U.S. Federal legalization happens. 51% stake w/ option for remaining 49%.

Quality Green: Licensed Producer based in Canfield, Ontario. Doesn’t seem to be active.

Wholly-owned

Green Therapeutics: NV — Manufacturing + provisional dispensary license in South Lake Tahoe (Douglas County). Negotiating the acquisition of a 23-acre plot of land in Clark County for development into one of the largest cannabis developments in Las Vegas. MO — 25% stake in a 8,727 sq ft manufacturing facility is largely complete with minimal additional investment required to launch the Company's brands. OK — Manufacturing license expected to be operationalized in late 2021.

Strategy — Does not seem differentiated

Terry Booth sees opportunity on the East Coast.

“The big prize here is the large facilities that are going to come out of legalization on the East (Coast) are going to be needed, and we feel that ALPS are in an excellent position to win a lot of those contracts because of their experience in the space. There are so many small facilities in the states.”

“The motto of that is for Australis to build facilities for others. We’re not doing an Aurora 2.0 here.” Terry Booth in conversation with MJBizDaily

  • Collaborate with AUSA's existing relationships and ALPS' current and future clients to secure low-cost cultivation and offtake agreements

  • Capital-light access to high-quality, low-cost biomass inputs to scale the Company's brands and introduce genetics and products in new markets

  • Disruptive technologies with immediate commercial applications

  • Capital-light vertical integration

  • Brand awareness, Brand building and Brand quality w/ Mr. Natural and Green Therapeutics

  • Expansion into new markets

  • De-risked supply chain by entering into multiple supply agreements with ALPS' customers

  • Partnerships w/ with tier 2 & 3 MSOs

  • Revenue diversification w/ ALPS continuing work with Commercial Crops

👋 Analysis by Dai Truong, who leads 🌿brand and 🏪retail acquisitions at Left Coast Ventures, a CA-based Cannabis holding company.