The marijuana sector just got a little more crowded and a little more interesting. On September 19, 2018, Australis Capital (CSE:AUSA) began trading on the Canadian Securities Exchange (CSE).
Australis Capital is the investment arm of Aurora Cannabis Inc (OTCMKTS:ACBFF, TSE:ACB) that invests in the U.S. cannabis market and cannabis real estate. As expected, there is a lot of interest in this newly minted stock. But does that mean investors should flock to Australis Capital?
Australis Capital has been around for a number of years, but it operated as a subsidiary in the shadows of Aurora Cannabis. This was mainly for political reasons.
Back in 2015, Aurora Cannabis held some U.S. assets that it hoped would help it enter the U.S. marijuana market. But since marijuana remains a controlled Schedule 1 Drug, they mothballed the idea and the assets were put up for sale.
In the fall of 2017, the operator of Canada’s biggest exchange, the TMX Group Ltd (TSE:X), announced that federal law takes precedence over state laws and that Canadian marijuana companies with exposure to the U.S. could end up getting delisted.
Before this announcement, a lot of marijuana companies were focused on markets outside the U.S. or were listed in Canada. Since then, some Canadian cannabis companies have either reduced their exposure to the U.S. or opted to be listed on exchanges other than the TSE.
Aurora Spins Off Australis Capital
In an effort to gain legitimate access to the U.S. marijuana market, Aurora announced in June that it was going to spin off its Australis Capital subsidiary, allowing it to focus on investing in the U.S. cannabis and real estate sectors.
With Australis Capital trading on the CSE, Aurora said it would issue 75 million shares at $0.20 each through a private placement for gross proceeds of $15.0 million. Australis also received $500,000 from Aurora, for warrants to buy Australis stock for up to 10 years.
“Recent changes in U.S. federal positioning with respect to cannabis have positively impacted the perception of risk to invest in U.S. cannabis assets,” the company said in a statement.
“This has further incentivized capital market participants to seek opportunities to fund U.S. based operations.” (Source: “Aurora Cannabis Provides Update on Australis Capital Public Listing,” Australis Capital, September 14, 2018.)
Especially at arm’s length.
Aurora shareholders who reside in Canada received one unit of Australis for every 34 Aurora common shares at no cost. Non-resident shareholders of Aurora received cash instead of equity in Australis.
Massive Demand for Capital in U.S. Cannabis Industry
“There is massive demand for additional capital to fuel the growth of the U.S. cannabis industry, as well as intense interest among investors to gain access to the American market. We are very pleased to have created this opportunity for Aurora’s shareholders,” said Terry Booth, CEO of Aurora Cannabis.
“The unparalleled access to numerous compelling business opportunities in the U.S., positions Australis well to generate significant shareholder value.”
Scott Dowty, CEO of Australis Capital, went on to say that “the undercapitalized and fragmented nature of the U.S. cannabis industry creates ample opportunities for Australis to leverage its access to capital and secure attractively valued assets.” (Source: “Aurora Cannabis Sets Record Date of Australis Capital Distribution,” Cision, August 20, 2018.)
Booth also said that Australis provides its shareholders with access to the U.S. market where “many successful operators have struggled to access growth capital in an opportunity rich market.” (Source: “Aurora Cannabis Obtains Receipt of Australis Capital Final Prospectus and Provides Update With Respect to Australis Distribution to Aurora Shareholders,” Cision, August 17, 2018.)
The U.S. Cannabis Market
The U.S. marijuana industry is extremely fragmented. Medical marijuana is legal in 31 states, the District of Columbia, Guam, and Puerto Rico. Recreational marijuana use is legal in nine states, plus the District of Columbia.
Momentum for the legalization of recreational marijuana continues to grow at the state level, but it has stagnated at the federal level. This has created the perfect opportunity for well-capitalized Canadian companies to invest in U.S. assets, especially when you consider the anticipated market growth. Over 50% of the U.S. population lives in states that have already legalized medical and recreational marijuana.
Australis Capital Partnerships
Enter Australis Capital. Australis Capital is a wealthy company with a fabulous management team. Will Australis Capital grow as quickly as Aurora Cannabis? Time will tell. It’s cut from the same cloth.
Australis Signs Letter of Intent for Rthm App
Case in point. On September 18, the day before it began trading on the CSE, Australis announced that it entered into a non-binding letter of intent to acquire 100% of the outstanding shares of Rthm Technologies Inc., the No. 1 health app in 26 countries, for up to CA$3.46 million in cash and Australis stock. (Source: “Australis Enters Letter of Intent to Acquire Rthm Technologies Inc.,” Australis Capital, September 18, 2018.)
Rthm is the world’s first mobile genetics and circadian rhythm mapping platform with over two million downloads and an above-industry-average retention rate of 45.5%.
Why would Australis buy a health app?
“…Rthm addresses the chief shortcoming of the existing cannabis industry, namely the burden placed on consumers and patients to navigate a variety of cannabis products with divergent biological effects,” said Alexander Mosa, Chief Executive Officer of Rthm.
“Rthm is uniquely positioned to leverage its proprietary biometric technologies to develop the world’s most advanced cannabis curation, delivery, and loyalty platform,” added Dowty.
In November 2017, Rthm Technologies raised an undisclosed sum from Arlene Dickinson’s venture capital fund, District Ventures Capital. Dickinson is a director on Aurora’s board. Rthm Technologies also received funding from MaRS Investment Accelerator Fund.
Australis Signs Letter of Intent to Buy 15% Equity in Wagner Dimas Inc.
On September 17, Australis announced it entered into a non-binding letter of intent to purchase a 15% equity interest in the capital of Wagner Dimas Inc.
The company expects to pay CA$3.0 million for the 15% stake in either cash or common shares. It’s up to Australis to decide. (Source: “Australis enters letter of intent to purchase shares in Wagner Dimas Inc.,” Australis Capital, September 17, 2018.)
Wagner Dimas is a Nevada-based company that develops technology for big manufacturers in varied applications including production scale rolling machines to mass manufacture hemp and cannabis pre-rolls and cones.
“Wagner Dimas proprietary processes and patented technologies are scaling to a new facility on pace to produce 50 million pre-rolls annually in the California market alone,” said Dowty.
“Our investment in Wagner Dimas with their expertise in traditional cannabis delivery systems, expanding business to business vertical, geographic expansion and significant branding opportunities serve as key growth vectors to our diverse investment strategy in the United States.” (Source: Ibid.)
Should You Invest in Australis Capital?
That said, Australis Capital is still in its infancy, has few tangible assets, and, as a result, has little cash flow.
On the other hand, the company already has a market cap of around CA$341.0 million and nothing but room to grow. After all, Australis Capital is the independent investing arm of Aurora, one of the biggest marijuana firms in the fastest-growing industry in the world.
Keep in mind, Aurora holds two warrants, which allow the company to acquire an ownership in Australis Capital within the next 10 years. What that percentage of ownership will look like is anyone’s guess. Australis Capital will look a lot different in 10 years’ time. At the very least, Aurora will be a strategic partner. That certainly wouldn’t be a bad thing.
For right now though, Australis is an independent arm of Aurora. Does that merit jumping on the cannabis bandwagon and snapping up Australis Capital? The company has only been trading for a few days, so you can’t really use a technical analysis to make any real artful judgment.
There is lots of volume, and the price has been making measured gains, meaning investors are interested and are not willing to send the company’s share price into the stratosphere for any unfounded reason.
And investors will have to wait a few months until the company releases its first quarterly results to get a real look at the company’s financials.
Otherwise, for direction, investors can only look at the company’s recent partnerships; two in the last week. Will Australis Capital be as aggressive in the coming weeks with new partnerships? Will investors be patient enough to wait, or will they be too afraid to miss out on the next big thing?
Again, only time will tell.
Until the dust settles, what we do know is that Australis Capital is uniquely positioned to be an early leader in the burgeoning and lucrative U.S. marijuana sector, which clearly has a high barrier to entry.