Australis to reverse merge with Folium

Australis Capital 13 December 2019 Update
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Australis Capital

Australis to reverse merge with Folium

Business update

Pharma & biotech

13 December 2019

Price

C$0.45

Market cap

C$76m

C$1.32/US$

Net cash (C$m) at September 2019

22.2

Shares in issue

169.9m

Free float

96.02%

Code

AUSA

Primary exchange

CSE

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(23.3)

(51.4)

(42.4)

Rel (local)

(25.1)

(53.9)

(51.8)

52-week high/low

C$1.0

C$0.3

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. However, the company currently has an open reverse merger offer with Folium Biosciences, which would shift it to a CBD-focused company.

Next events

Folium merger materials published

Upcoming

Analyst

Nathaniel Calloway

+1 646 653 7036

Australis Capital is a research client of Edison Investment Research Limited

Australis Capital announced on 11 December 2019 that it has entered into an agreement with Folium Biosciences to merge into a combined company focused on non-psychoactive cannabinoid products. Existing Australis shareholders will own approximately 11% of the resulting company, but the plan is for Australis management to be involved in running the combined entity. We expect the company to divest its assets based in THC, with the goal of making the company fully federally legal in the US, and to list on a US stock exchange.

Year end

Revenue (C$m)

PBT*
(C$m)

EPS*
(C$)

DPS
(C$)

P/E
(x)

Yield
(%)

03/19

0.1

(3.5)

(0.04)

0.0

N/A

N/A

03/20e

0.2

(9.5)

(0.06)

0.0

N/A

N/A

03/21e

0.2

(10.4)

(0.06)

0.0

N/A

N/A

Note: *PBT and EPS are normalised, excluding amortization of acquired intangibles, exceptional items and share-based payments.

Folium: Aiming to be the biggest US CBD producer

Folium is a producer of full spectrum CBD products based in Colorado. Australis previously invested a small amount (US$3m) in early 2019. Folium is currently in the process of building what it reports to be the largest cannabinoid processing facility in the US, which is expected to expand its production capacity by tenfold and to be complete in 2020. The CBD produced by the company is for wholesale and is used in a range of third-party products. Following the merger, the combined company will take the Folium name and predominantly focus on Folium operations.

A significant change in direction; divestments needed

Despite all the efforts made by Australis to build itself into a diversified cannabis company, we expect it to divest all of its current assets that are tied to the THC cannabis industry. This includes its stake in Body and Mind, Mr. Natural and Wagner Dimas, and the purchase agreement for Green Therapeutics. Once these assets have been divested, the new company will be able to list on US stock exchanges and potentially have greatly expanded access to capital.

More details forthcoming

We have limited information on the merger at this time, including the details of Folium financials, but expect this to be provided in the short term with the company publication of a management information circular. The stock is halted until the prospectus is published, and the transaction is subject to shareholder approval.

Valuation: Suspended until there are more details

We are currently suspending our valuation analysis until such time as we have further details on the merger and on Folium. Australis most recently traded with a market cap of C$76m, which would imply a value for the combined company of C$695m, although this might change once trading resumes.

A major change toward THC free

The announcement that Folium would reverse merge with Australis came as somewhat of a surprise, considering that it marks a major pivot from Australis’s previous business strategy. Australis has been focused on building through acquisition a diversified but operationally focused THC cannabis company and is currently in the midst of a major brand acquisition and expansion (with Green Therapeutics). Now the stated purpose of the combined company (if the merger is approved) will be squarely focused on non-psychoactive cannabinoids. The goal, as expressed to us by Australis management, is to become fully compliant with US federal law and attempt to up-list the company to a major US exchange. This would provide substantially greater access to capital for Folium, but would necessitate the divestment of all of the THC-related Australis assets at a minimum. These include Body and Mind, Mr. Natural and Wagner Dimas, which are directly involved in the THC cannabis industry. Quality Green would be exempt because it is a Canadian operation. The asset purchase agreement with Green Therapeutics was still pending as of the last report from the company (guidance towards it closing in Q419), and it is unclear at this time if the deal will be completed and what the ramifications will be if it is not. The company also previously had a development plan for a 400,000 square foot production facility in North Las Vegas, which we assume will not go forward at this point. Cocoon can be retained, and although it would be a small part of the combined business, the company has been enthusiastic regarding its potential. Cocoon signed its first client in early December 2019 with Thrive, which currently operates four dispensaries in Nevada and has announced plans to open at least three more.

Folium: A CBD player with big goals

The primary purpose for the reverse merger and the potential up-listing to a US exchange is to improve the access to capital for Folium. The company’s current business is the production of wholesale CBD products for other brands. These include both pure extracts as well as formulated products such as ointments and water-soluble CBD. The company currently has 242 employees and is reported to be profitable.

However, the company has major expansion plans. It is currently building what it reports is the largest US cannabinoid extraction facility at 100,000 square feet, which will increase its production capacity tenfold and employ 150 to 200 people. Additionally, it has broken ground on a Canadian production facility reported to be 170,000 square feet. In October, the company took a major step toward entering the pharmaceutical cannabinoid market and acquired an active pharmaceutical ingredient (API) license, which will allow the company to supply CBD for inclusion in drugs such as Epidiolex. Finally, the company announced in April 2019 that it would be launching Folium Finance, which would provide its CBD customers with a range of financial services ranging from merchant services to banking and insurance. Folium has undoubtedly committed a large amount of capital to these development programs already, but listing on a US exchange would substantially increase its access to capital.

Valuation

We are currently suspending our valuation analysis of Australis until we have more information regarding the merger. We can say that the current market valuation of Australis at C$76m would imply a valuation of the combined company of C$695m (based on Australis shareholders retaining 11% of the combined entity), but we should note that at this time, Australis has been halted since before the announcement and may trade differently once trading resumes. For comparison, the major US CBD producer Charlotte’s Web (TSX:CWEB) currently has a market valuation of C$1.11bn, albeit with consumer CBD products.

It is also worth noting that if the company executes its plan to become fully federally legal in the US, this will trigger the provisions of the Aurora back-in warrants. These include warrants for 22.6m shares exercisable at C$0.20 (which would be substantially diluted by the agreement) and a warrant for 20% of outstanding shares exercisable at the market.

Financials

We are providing updated financials following the company’s FQ220 report for the period ending 30 September 2019, but they should be viewed as for illustrative purposes only, as we do not expect them to be representative of the business going forward if the company executes the Folium merger.

Exhibit 1: Financial summary

C$'000s

2019

2020e

2021e

Year end 31 March

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

129.8

226.4

226.4

Cost of Sales

0.0

0.0

0.0

Gross Profit

129.8

226.4

226.4

EBITDA

 

 

(3,606.8)

(10,112.7)

(10,112.7)

Normalised operating profit

 

 

(3,616.8)

(10,323.1)

(10,323.1)

Amortization of acquired intangibles

0.0

0.0

0.0

Exceptionals

0.0

0.0

0.0

Share-based payments

(677.5)

(4,336.0)

(4,336.0)

Reported operating profit

(4,294.4)

(14,659.1)

(14,659.1)

Net Interest and financial income

284.9

801.5

(45.1)

Joint ventures & associates (post tax)

0.0

0.0

0.0

Exceptionals

(161.7)

0.0

0.0

Profit Before Tax (norm)

 

 

(3,493.7)

(9,521.6)

(10,368.2)

Profit Before Tax (reported)

 

 

(4,171.2)

(13,857.6)

(14,704.2)

Reported tax

0.0

0.0

0.0

Profit After Tax (norm)

(3,493.7)

(9,521.6)

(10,368.2)

Profit After Tax (reported)

(4,171.2)

(13,857.6)

(14,704.2)

Minority interests

0.0

0.0

0.0

Discontinued operations

0.0

0.0

0.0

Net income (normalised)

(3,493.7)

(9,521.6)

(10,368.2)

Net income (reported)

(4,171.2)

(13,857.6)

(14,704.2)

Basic average number of shares outstanding (m)

94

170

178

EPS - basic normalised ($)

 

 

(0.04)

(0.06)

(0.06)

EPS - diluted normalised ($)

 

 

(0.04)

(0.06)

(0.06)

EPS - basic reported ($)

 

 

(0.04)

(0.08)

(0.08)

Dividend ($)

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

36,939.9

51,619.3

50,897.0

Intangible Assets

4,048.0

3,536.5

3,024.6

Tangible Assets

120.5

4,528.2

4,317.8

Investments & other

32,771.4

43,554.6

43,554.6

Current Assets

 

 

28,111.5

20,667.6

11,021.6

Stocks

0.0

0.0

0.0

Debtors

273.7

331.1

331.1

Cash & cash equivalents

24,515.5

16,783.3

7,137.4

Other

3,322.3

3,553.2

3,553.2

Current Liabilities

 

 

(1,864.5)

(2,640.9)

(2,640.9)

Creditors

(1,864.5)

(2,514.5)

(2,514.5)

Tax and social security

0.0

0.0

0.0

Short term borrowings

0.0

0.0

0.0

Other

0.0

(126.4)

(126.4)

Long Term Liabilities

 

 

(2,512.6)

(3,463.4)

(3,463.4)

Long term borrowings

0.0

0.0

0.0

Other long term liabilities

(2,512.6)

(3,463.4)

(3,463.4)

Net Assets

 

 

60,674.3

66,182.5

55,814.3

Minority interests

0.0

0.0

0.0

Shareholders' equity

 

 

60,674.3

66,182.5

55,814.3

CASH FLOW

Op Cash Flow before WC and tax

(3,606.8)

(10,112.7)

(10,112.7)

Working capital

833.9

3,964.4

0.0

Exceptional & other

(33.1)

1,313.3

466.8

Tax

0.0

0.0

0.0

Net operating cash flow

 

 

(2,806.0)

(4,835.0)

(9,646.0)

Capex

(130.6)

(382.5)

0.0

Acquisitions/disposals

(15,789.3)

(24,489.8)

0.0

Net interest

0.0

0.0

0.0

Equity financing

52,386.7

12,822.8

0.0

Dividends

0.0

0.0

0.0

Other

(9,438.5)

5,340.0

0.0

Net Cash Flow

24,222.3

(11,544.5)

(9,646.0)

Opening net debt/(cash)

 

 

0.0

(24,515.5)

(16,783.5)

FX

293.2

(143.5)

0.0

Other non-cash movements

0.0

3,956.0

0.0

Closing net debt/(cash)

 

 

(24,515.5)

(16,783.5)

(7,137.6)

Source: Australis Capital reports, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Australis Capital and prepared and issued by Edison, in consideration of a fee payable by Australis Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Australis Capital and prepared and issued by Edison, in consideration of a fee payable by Australis Capital. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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