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.
Written by
Australis Capital |
Folium merger cancelled |
Business development update |
Pharma & biotech |
24 February 2020 |
Share price performance
Business description
Next events
Analyst
Australis Capital is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
|
|
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.