After being a part of the team that introduced legal cannabis legislation earlier this month, Democratic Senator Cory Booker (New Jersey) came out and said that any cannabis legislation that didn’t fix America’s failed “war on drugs” wouldn’t be significant enough.
At a press conference, Senator Booker stated that he would do everything he could to stop cannabis reform bills that lack social reforms but offer ways for “corporations to make a lot more money off of this”.
Following his statement, the cannabis sector came under heavy pressure and the market seemed to become less confident on the prospects for legalization in the near-term. Senator Booker re-clarified his stance on the legislation as well as his support of the bipartisan SAFE Banking Act and said that he supports the SAFE Banking Act and believes that a good bipartisan bill like the banking bill is a necessary sweetener.
2021 has been a banner year for the US cannabis industry as new state medical and recreational markets have reported strong growth. We believe the US cannabis industry is in the early innings of a major growth cycle and considers changes to banking regulations and the removal of the 280E tax code to be future event-driven catalysts for the industry.
During the last month, we have been working on identifying cannabis companies that were levered to the US cannabis industry and that were flying under the radar. Specifically, we look for operators that are executing on a multi-state expansion strategy and have the capital (human and money) that is needed to advance the operation.
One of the major barriers to enter certain state markets for smaller-scale operators is capital and these companies simply don’t have enough resources to execute on a national expansion strategy. As a result, we look to identify operators that have been able to expand in a way that is profitable and cost efficient.
Australis Capital Inc., operating as Audacious (CSE: AUSA) (OTC: AUSAF) is one of the few companies that is executing on a low-cost expansion strategy. One of the most attractive aspects of Audacious’ business is its 51% ownership interest of ALPS. Earlier this year, Audacious entered into a milestone weighted agreement that provides it with the option to acquire the remaining 49% of ALPS and we are favorable on this asset.
What ALPS gives Audacious is the ability to execute on a strategy that is both de-risked and difficult (if not impossible) to replicate. In return for project fees and ALPS’ IP to deliver high-quality, low Opex facilities, Audacious, with certain partners, will be able to secure a supply arrangement whereby a certain percentage of canopy will be dedicated to growing Audacious’ cultivars. Audacious buys these back under a cost plus arrangement. This provides a number of major advantages:
- In essence, Audacious is paid to enter new markets. This is not a model we see anyone else able to execute on.
- The Company secures, long-term, high-quality raw material to fuel the scale up of its award-winning brands across the nation.
- High quality input material (flower) is difficult to get in many states, or only available at uncompetitively high wholesale prices (compared to, for instance, cost + 5% in case of the arrangement Audacious has with Belle Fleur). Audacious will not have this issue.
- Compared to vertically integrated companies, Audacious is not carrying the cost of capital and is not sinking precious funds into facility development.
ALPS has a proven track record of success and provides state-of-the-art customized facility designs as well as a variety of services to help operators maximize yield and quality, while minimizing inputs and resources, including labor. Currently, ALPS is actively working on cannabis and traditional horticulture projects across the globe. The markets it is working in include the US, Canada, Denmark Finland, Iceland, Germany, Netherlands, Bahrein, United Arab Emirates, Southeast Asia, Australia, and more.
A key theme in the market is related to environmental, social, governance (ESG) types of initiatives and Audacious is highly focused on this trend. Concurrent with the announcement, the company announced that ALPS is highly focused on projects that have an ESG component, and we find this to be significant.
Some of the most important ESG themes are reduced use of water, increased energy efficiency and an overall reduced carbon footprint through vertical farming in high density urban settings (produced by locals for locals). ALPS-designed projects are known for their economic efficiencies and ultra-low operating costs, while yielding the highest quality products. We are favorable on how the business will help Audacious expand into new markets.
An Under-appreciated Execution Story
Last year, Aurora Cannabis Inc. (TSX: ACB) (NYSE: ACB) divested ALPS and Audacious was quick to capitalize on this decision. Several former executives from Aurora Cannabis are working at Audacious, and we are favorable on the insight they have because of this. Audacious reported that the total amount of capital expenditures that are committed by ALPS’ clients is approximately $1 billion. Over the next two years, the company expects this number to increase towards $4 billion because of its rapidly growing business development pipeline.
Based on Audacious’ market capitalization, the company is valued at around C$75 million, we believe it has a favorable risk-reward profile and a compelling valuation. During the last quarter, the company has reported impressive advancements and we are bullish on the potential catalysts it has for growth.
From entering burgeoning US markets through strategic partnerships to acquiring edible brands, Audacious has been executing on a multi-faceted low-cost expansion strategy. We are favorable on the approach the management team is taking to advance the operation and believe that the market is discounting its growth prospects.
Over the next year, we expect Audacious to report strong growth an expect to see the market become more aware of the opportunity after it reports a few strong quarters. Through the ownership of ALPS and Green Therapeutics (GT), the company is well positioned to execute on high-impact growth initiatives.
If you are interested in learning more about Audacious’ expansion strategy, please send an email to firstname.lastname@example.org with the subject “Audacious” to be added to our distribution list.
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