Australis Capital — Folium merger cancelled

Australis Capital — Folium merger cancelled

Australis Capital announced on 18 February 2020 that the proposed merger with Folium Biosciences would be called off following the discovery of ‘new relevant information with regard to Folium.’ Further details have not been disclosed. Australis previously planned on divesting its THC associated assets, which we now assume will not proceed following the termination of the merger agreement.

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Australis Capital

Folium merger cancelled

Business development update

Pharma & biotech

24 February 2020

Price

C$0.3

Market cap

C$51m

C$1.35/US$

Net cash (C$m) at September 2019

22.2

Shares in issue

169.9m

Free float

94.59%

Code

AUSA

Primary exchange

CSE

Secondary exchange

OTCQX

Share price performance

%

1m

3m

12m

Abs

(39.9)

(53.3)

(74.6)

Rel (local)

(40.2)

(56.6)

(78.9)

52-week high/low

US$1.0

US$0.3

Business description

Australis Capital is focused on US 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 business in this highly regulated industry.

Next events

Business update call

26 February 2020

Analyst

Nathaniel Calloway

+1 646 653 7036

Australis Capital is a research client of Edison Investment Research Limited

Australis Capital announced on 18 February 2020 that the proposed merger with Folium Biosciences would be called off following the discovery of ‘new relevant information with regard to Folium.’ Further details have not been disclosed. Australis previously planned on divesting its THC associated assets, which we now assume will not proceed following the termination of the merger agreement.

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.

Reverse merger plans are off

Australis previously announced in December 2019 that it had proposed a reverse merger agreement with Folium in which Australis shareholders would own 11% of the resulting company. Folium has been self-described as the largest wholesale CBD producer in the US. In accordance with a plan to shift away from THC products, Australis previously said that it would (if the merger occurred) divest its THC brands and related assets, which we now assume will not happen. Australis plans to provide a corporate update on a conference call on 26 February 2020.

Reason for termination elusive

We can only speculate as to the reasons behind the termination of the merger agreement. Folium has been engaged in a series of lawsuits with employees alleging mismanagement of funds among other claims. Another potentially important factor could be that the price of CBD has been steadily dropping as more product enters the market

Paytron acquired for Cocoon payment services

In other news, the company continues to lean into its new Cocoon business with a letter of intent to acquire Paytron Merchant Services, a provider of credit card services and point-of-sale hardware. This acquisition is intended to dove-tail with the company’s Cocoon fulfilment technology and support its payment services. Additionally, the company hired one of the founders of Paytron to the team. This acquisition is indicative to us of an increased focus on the Cocoon platform.

Valuation: Market value below nominal asset value

The company’s most recent market valuation (C$46.72m) is below our nominal valuation (C$73.06m) of its assets (using the cash paid for these assets as the benchmark). This implies that any value at all in these assets over what Australis deployed to acquire them represents upside on the stock.

Folium deal gets the kibosh

The initial announcement on 11 December 2019 that Australis would pursue a reverse merger with Folium was a dramatic gear shift away from its previous plans of acquiring assets and building the company into a Nevada based recreational cannabis producer. The company previously had announced that with this merger that it would divest its assets directly related to the THC containing cannabis industry (although some assets not tied to that space such as Cocoon would be retained).

As quickly as it shifted gears before, it has apparently changed course again and abandoned its plans to merge with Folium. The announcement comes with little explanation outside the details that in its due diligence process it ‘discovered new relevant information with regard to Folium and, on that basis, AUSA has decided to not proceed with the merger.’ The company has scheduled a corporate update conference call for 26 February 2020, which we expect to shed more light on what happened.

Relatively little is known about the internal workings of Folium, but it previously called itself the largest vertically integrated CBD producer in the US. There have been reports of internal strife at the company including multiple lawsuits filed by former employees, generally regarding the conduct of the company’s CEO Kashif Shan, including mismanagement of company funds. The plaintiffs in these cases could file an injunction to stop the merger, although this (or the threat of an injunction) is just one possible explanation.

Another factor to keep in mind regarding the failed merger is that the economics of CBD have been rapidly changing. An increase in supply has outstripped demand leading to dramatic reductions in price for both hemp biomass and extracts. One report from Cannabis Business Times found a drop in price for crude CBD oil from US$4,661 per kg in April 2019 to US$1,737 per kg in September 2019. One hemp commodity trading platform, PanXchange, reported a drop in the median price of Colorado Winterized Crude CBD extract from US$6,250 to US$550 between January 2019 and January 2020.

Paytron augments Cocoon

In the midst of its due diligence on Folium (between the merger announcement and its termination), Australis announced that it would be signing a letter of intent to acquire Paytron Merchant Services. Concurrent with the announcement of the acquisition, Australis noted that it would be hiring a payment specialist to join the team, Marc Ruben, founder of Paytron. The terms of the merger have not been announced, presumably because its size is too small to be material. But we consider this an important development because it marks the increased focus of the company on developing and expanding the Cocoon platform, which we expect to be a major part of the business going forward.

Paytron is provider of both credit card clearing services as well as the physical hardware needed for credit card transactions. The acquisition is intended to further build out the Cocoon technology platform with the inclusion of merchant services for the kiosks. As a reminder Cocoon is the company’s new self-service platform for dispensary operations, and the inclusion of a payment platform seems a natural addition to its functionality. Australis’s press release notes that Paytron was founded in 2015, and although little information regarding its operations is public, management has confirmed for us that it is revenue generating.

Valuation

We previously suspended our valuation of Australis pending the merger agreement with Folium, but in light of the termination of that agreement we are reinstating our previous valuation assumptions. Australis has a current market value (C$46.72m) below the nominal value of its assets, which we estimate at C$73.06m (using the prices paid for the assets). The market valuation of Body & Mind has pulled back sufficiently that its market value is slightly below its nominal value. Additionally, Australis has liquidated some of its holdings in Body & Mind (10m shares at an average price of C$0.75), the proceeds of which we include in cash for investing.

Exhibit 1: Australis market valuation

Shares outstanding (m)

169.91

Share price (C$)

0.28

Market cap (C$m)

46.72

 

 

Dilutive warrants and options (m)

29.54

Weighted average exercise price (C$)

0.20

Diluted shares (m)

199.45

Diluted market cap (C$m)

54.85

Source: Australis reports, Edison Investment Research

Exhibit 2: Australis portfolio

Asset

Nominal value (C$m)

Adjusted value (C$m)

rthm

3.86

 

Body & Mind

12.52

11.81

Wagner Dimas

3.00

 

Quality Green

2.00

 

Folium Biosciences

3.99

 

Mr. Natural

1.21

 

Green Therapeutics *

12.50

 

 

 

Core portfolio value

39.09

38.37

Legacy portfolio (Australis holdings & SubTerra)

4.23

4.23

Cash for investing (including sale of Body & Mind shares)

20.15

20.15

Other Cash

9.59

9.59

Total value

73.06

72.34

Source: Australis Capital reports, Edison Investment Research. Note: *Definitive agreement signed.

Financials

We have not updated our financial forecasts at this time, although we plan to update them following the corporate update conference call on 26 February 2020, assuming the company provides additional clarity on its future plans.

Exhibit 3: 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 accounts, 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.

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New Zealand

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United Kingdom

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1,185 Avenue of the Americas

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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 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “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.

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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

McBride — Awaiting the new strategy

McBride’s H1 results revealed a mixed picture by geography. Household revenues were down 1.4% at constant currency and group revenues were down 4.4%. Adjusted operating profit was down c 30%, and there was a marked slowdown in the business during November and December. However, January saw an improvement. FY guidance has been maintained, implying a better H2 helped by easier comps and a relatively benign raw material outlook, although we note that distribution costs were higher during H1, and management highlights that markets remain challenging. The new CEO, Ludwig de Mot, has initiated a comprehensive review of the business, on which he expects to report at the FY results in September. Following a series of disappointments, the valuation fairly reflects the balance of risk and opportunity.

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