Australis Capital Inc (CNSX:AUSA) is a US-based cannabis investment platform and spinoff of Aurora Cannabis Inc (TSE:ACB) (NYSE:ACB) (FRA:21P). CFO Mike Carlotti explains that Australis is able to fill a funding gap for American cannabis companies limited by federal prohibition. Australis has signed a definitive agreement to own 22 percent of Wagner Dimas, a California-based pre-roll company, which Australis hopes to grow into other states. Carlotti believes federal de-prohibition is coming and that the upcoming midterms in November will decide how quickly de-prohibition proceeds. If federal law changes, Aurora has the right to acquire a 20 percent share of Australis at a reasonable valuation.
James West: Hey, welcome back! My next guest is Mike Carlotti. He’s the CFO of Australis Capital Inc., trading on the CSE under the symbol AUSA. Mike, welcome to our show.
Mike Carlotti: Thank you.
James West: Mike, let’s start with an overview: what is Australis’ business model?
Mike Carlotti: Sure. So Australis Capital was formed by Aurora – we were a spinoff of Aurora back in September of this year. Prior to that spinoff, a private placement was raised, about $17 million Canadian. Some assets that Aurora had owned in the US were dropped into Australis, and we started trading on the CSE on September 21st.
So our business model is pretty straightforward: you know, we’re more aligned with venture capital than owning and operating. So we will be looking to make investments in the value chain within cannabis from grow-ops to dispensaries and everything in between, which would include technology brands, IP, things that are scalable. We’re looking to build a portfolio of assets over time, such that we can utilize investments in different businesses to help other businesses that we’ve invested in over time to build a strong and diversified portfolio within the United States.
James West: Very cool. So you’re not looking to acquire owner-operators in their entirety and become the owner-operators, you prefer to be a passive investor?
Mike Carlotti: In more cases than not, we will be a passive investor within the grow-op and distribution businesses. That being said, we will look to take control stakes in other businesses. So one transaction that we’ve signed and LOI with, Rhythm Technologies, which is an app that can be used for cannabis; if that deal closes, we would control 100 percent of that business. But in general, we’ll be passive investors in the growth and dispensary businesses, for the most part.
James West: I see. Is your model likely going to be influenced at all by Federal de-Prohibition in the United States?
Mike Carlotti: Well, at some point, absolutely it will. And we believe it’s a question of when and not if the federal legislation changes; there’s a lot of activity already in Washington. I think the mid-term elections will have meaningful impact on the course of federal law changing within the US. In the meantime, we’re really set to take advantage of the dislocation that currently exists in the US market. Currently, they’re a very highly fragmented industry, state to state, business to business. Lot of good businesses out there that have, you know, raised capital to get going, but turns out they either, you know, missed the mark on how much they would need; maybe they underestimated how long it would take for them to get operational. Those create opportunities where we can come in and, as an investor, at a reasonable valuation, give them the capital that they need such that they can complete their business goals and continue to grow.
So while the dislocation exists in the US with banks not wanting to lend to US cannabis companies, and it’s difficult, obviously, for US cannabis companies to trade on the US indexes, that lack of access to capital is something that we can bring to these companies to help them grow their businesses.
James West: Okay. So you’ve made a couple of investments so far; you finalized a definitive agreement to purchase shares in Wagner Dimas. Is that the transaction you were talking about earlier?
Mike Carlotti: No, the one I was talking about earlier was Rhythm Technologies.
James West: Right.
Mike Carlotti: So Wagner Dimas is a pre-roll company based out of California that we will own 22 percent of. So we’ve signed a definitive agreement; it will fund and close when we complete our private placement that we’re working on right now. We’ll own, like I said, about 22 percent of that business, and that’s a business that we do believe is scalable. Their technology is very strong; right now they’re limited to California, but we hope to help them grow their business into other states and potentially internationally, as well.
James West: So is it, from an investor’s perspective, is it best to think of Australis as a sort of an investment issuer that is going to sort of create a portfolio of assets by which they’ll be valued on NAV, or is it more likely to think of it as a sort of incubator/consolidator that goes out and finds these sustainable, growable segments and then takes minority interests until, perhaps – I mean, I’m just comparing this to what Aphria’s done with Liberty Health, and what some of the other LPs have done. Will it then become eligible for takeover by Aurora, the mother ship, at some point, and become owner-operated?
Mike Carlotti: Yeah, I think the way to think about Australis is, we are really a publicly traded venture capital fund, and so, you know, we have pretty loose requirements as to what we can invest in. so anything US-related, that’s not saying we can’t go out of the US; the US is clearly our focus. You know, like I said, we’ll probably more focus on taking minority investments in certain businesses and majority in others, but that’s not to say that we can’t take control stakes in a lot of the businesses that we invest in, either upfront or over time.
With respect to Aurora, they do have the right to acquire up to 20 percent of our business at a reasonable valuation when federal law changes, and from there, you know, who knows what happens next?
James West: Right. 20 percent is not necessarily a control position, then.
Mike Carlotti: No, it’s not.
James West: Interesting. So then, you started this business in partnership with Aurora, I guess, more so than they – I mean, they sort of were the impetus to create it, but you made it such that you are autonomous to the mother ship, so to speak. It’s not so much a mother ship as a partnership?
Mike Carlotti: Yeah. So we have no official affiliation with Aurora; they’re not on our Board, they don’t have a direct say in what we do at Australis. That being said, it was a spinoff. So their shareholders, for every 34 Aurora shares you owned, you received one share in Australis.
So their shareholders are our shareholders. They were looking at lots of different investments in the United States; the Toronto Stock Exchange really doesn’t want Canadian companies investing in US businesses at this point in time, given the federal legislation, so Australis very creatively – sorry, Aurora very creatively formed Australis to become a US investment vehicle and, like I said, they do have the right to purchase up to 20 percent of our company when federal law changes.
And I think when federal law does change, the big Canadian companies like Aurora, clearly have a head start on the US companies, given the lack of access to capital, such that I think you will see these big Canadian companies making significant investments in the US when they are able to do so.
James West: Mm-hmm. Yesterday in the Wall Street Journal, some cannabis investment group published a full-page ad imploring Donald Trump and his government to seize the opportunity economically for the United States through federal de-prohibition that the ad expressed they felt was being lost to Canadians. And so to what extent do you think that’s actually a good point, that because of federal de-prohibition, the USA is missing out on the economic opportunity inherent in the cannabis revolution?
Mike Carlotti: Sure, absolutely. I mean, I do think, you know, it’s a question of when they have – I do think, from what I’ve read, Donald Trump is supportive of medical cannabis being legal in the US. Of course, we already have 31 states that have voted in medical and nine states that have voted in recreational. If you look at the statistics, the population of the US, whether it’s Democrat or Republican, Millennial or Baby Boomers, the majority of those folks all believe that cannabis should be legalized in the US.
There have been some naysayers within the government, some people that have really done a great job of slowing down the progress of that legislation happening. The mid-term elections will be interesting, because there will be a couple more states that have various forms of cannabis legislation on their ballots, but there’s some key people within the US government that are also up for re-election that have been anti-cannabis; notably, Jeff Sessions and Pete Sessions, probably the two folks that, at least from what I’ve read, have been people that have really kind of slowed the progress. So we’ll see what happens on November 6th; I think over time, as more medical studies come out and the medical benefits of cannabis are proven beyond a doubt, it’s a question of when, not if, just given all the benefits that cannabis can offer, whether it’s post-traumatic stress disorder, people that have epilepsy, particularly children. You know, there’s a whole list of benefits, as you well know, from cannabis.
And so we’re a little bit behind in the US, but I think we’ll catch up, and I think it’ll create a tremendous opportunity for those of us who are involved in, you know, what I would consider maybe we’re in the fourth or fifth inning, where there’s cannabis now finished the ball game, it seems.
James West: I was also interested to see that Australis holds an interest in SubTerra, which was Brent Zettl’s holdings, I understood, in CanniMed. And I guess this is just how some of the non-core assets to CanniMed shook out of the transaction?
Mike Carlotti: Yes. Exactly.
James West: Okay, so what is the upside in the SubTerra interest that investors might get excited about?
Mike Carlotti: You know, for now, it’s just a small royalty stream. There could be further upside down the road, if they are able to produce product. But it’s a small investment for us. We’re looking at much larger investments throughout the US. We’ve been a public company for about four weeks, now; we’re raising a private placement that we launched on October 1st to bolster our balance sheet even further, and we’ll be looking to make much larger investments in SubTerra over time, throughout key states.
So you know, because we have kind of a blank sheet of paper, if you will, we can be very selective in which states we look at entering, what type of technologies we look at investing in and/or acquiring, brands, and so forth. And so we will be selective in our process, but we obviously want to be fast-acting as well, and make smart, prudent acquisitions on a timely basis.
James West: So I guess it’s safe to say that you’re looking for kind of best-in-breed solutions that you can acquire a significant interest while it’s still private, more so than public? You don’t invest in public entities?
Mike Carlotti: There are definitely going to be opportunities for us to invest in small, public companies. I think you’ll see more investments in private companies, but it’ll be a mix.
James West: Okay, well, that’s a great introductory conversation about the company; I understand it much better, now, Mike. We’ll just leave it there and come back to you in a quarter’s time and thanks for joining me today.
Mike Carlotti: Great, well, thank you very much for your time.