Earlier this week, Australis Capital Inc. (CSE: AUSA) (OTC: AUSAF) issued a corporate update and reported several major developments and changed its name to Audacious Brands to better reflect its focus on the US recreational cannabis opportunity.
The day after Audacious issued big news. The US cannabis company announced a supply agreement (through its majority owned subsidiary ALPS) with Belle Fleur Holdings LLC that includes a facility contract (design, construction management and (post) commissioning services), as well as ongoing APIS Compliance and Maintenance services. This is an important announcement for a variety of reasons, topmost as it completely validates the Company’s unique strategy of low-cost expansion across the U.S. and shows how Audacious continues to execute rapidly at a high level.
Under the supply arrangement, Belle Fleur will dedicate a certain percentage of its canopy space for the cultivation of Audacious’ proprietary cultivars under a cost +5% agreement (subject to local licensing requirements). This is key as it sets the Company apart from its peers in a couple of important ways. Firstly, the Company is not sinking any capital into cultivation infrastructure, so does not have to carry the cost of capital, while at the same time having secured long-term access to a stably priced source of high-quality cannabis. The cost + 5% arrangement also ensures that costs for Audacious will be very low compared to companies that rely on third-party white-label supply. While these companies may get some discount for longer term arrangements, they still will be paying close to wholesale prices. Audacious will pay well below these levels. We have seen that availability of high-quality cannabis is an issue, especially in emerging markets like Massachusetts. This has resulted in high prices, making the white label strategy less attractive due to high and strongly fluctuating raw material costs. Again, Audacious, with its unique model, the execution of which is possible through its ownership of ALPS (the core element that makes this strategy hard to near impossible to emulate), is not subject to these high costs, input scarcity and fluctuating prices. These are key competitive advantages that we believe the market has not recognized yet. This being the first deal of its kind being announced, we believe that Audacious is creating very significant shareholder value that is not recognized by the market, creating a clear investment opportunity.
The companies also agreed to jointly explore opportunities for brand collaboration and further expansion in the US. Turning to Belle Fleur, and in particular the Rapper Weed brand, the Company’s partner, here too we see a number of important catalysts for Audacious. Rapper Weed is a successful high-end lifestyle brand in California that has an impressive following among influencers. Rapper Weed is not a corporate entity trying hard to appear cool by paying big endorsement fees to a single or a few artists. The founders are part of the music industry themselves, and on the back of their legacy contacts and high-quality products, have been able to create a brand that resonates with influencers organically. People recognize the authenticity of the brand, a key element in launching a successful brand.
Belle Fleur owns a license that allows for the development of a Tier 11 high-tech indoor cultivation facility in Massachusetts, and this is a market that we are bullish on. The type of license is significant since it is the largest cultivation license tier available in Massachusetts and allows for up to 100,000 sq. ft. of canopy space.
We are favorable on what each operator brings to the relationship and consider this to be a core pillar of the story. Belle Fleur has access to ultra-premium genetics that are not currently available in Massachusetts, and we expect to see strong consumer demand for its product lines. Audacious also has premium genetics and award-winning brands that it will introduce to the Massachusetts market. The importance of brands has been spoken about e4xtensively in the industry, and here we have a partnership between two companies that have proven their ability to launch product lines that resonate with the market and sell. Remember, AUSA’s recent acquisition of GT, a brand that is carried by over 50% of Nevada dispensaries and that sells out consistently. On top of that, they have the Mr. Naturals brand, one of the OG brands in the California medical market. With Belle Fleur’s access to and resonance with a broad roster of influencers, unique genetics and high-end designer products lines, we believe this partnership is set up to succeed, and we don’t see this reflected in today’s share price.
As part of the agreement, the companies plan to jointly explore additional opportunities to expand into other jurisdictions. The supply agreement will allow Audacious to continue to expand its footprint, which now includes Nevada, Arizona, Oklahoma, Missouri, Washington and Massachusetts. Over the coming weeks, Audacious plans to continue to execute on its strategy and expects to enter additional US markets.
A Partnership that Includes Several Revenue Streams
According to the facility agreement between Belle Fleur and Audacious, ALPS will provide facility design, construction management, and (post) commissioning services. The companies have been executing on the design phase and construction is expected to commence in the next 30 days.
The facility will benefit from ALPS’ intellectual property (IP), which includes its proprietary APIS service suite which covers compliance and maintenance. The high-tech nature of the facility will result in the cultivation of cannabis that complies with good manufacturing practices (GMP) and good agricultural and collecting practices (GACP) standards.
Operating costs are expected to be among the lowest in the industry, as ALPS has an impressive track record of over three decades in establishing high-quality, low-cost facilities. This trck record is reflected by the bankability of the ALPS name, enabling its clients to obtain financing. Without the support from ALPS, many companies have faced challenges with accessing capital and we believe that ALPS significantly de-risks the operation and find this to be of significance.
Under the supply agreement, Belle Fleur will dedicate a percentage of its canopy space to Audacious cultivars. The arrangement provides Belle Fleur with a solid anchor customer, while providing Audacious with long-term access to low-cost premium cannabis. The arrangement between the companies also includes a provision for marketing and delivery of the company’s products by Belle Fleur and we are favorable on the amount of revenue that can be generated through this.
Massachusetts is an Attractive Cannabis Market
Through ALPS, Belle Fleur will be able to develop a facility that could prove to be the benchmark for cannabis production in Massachusetts. This is a market that we have been bullish on and believe that Audacious will be able to capitalize on the state’s medical and recreational cannabis market.
Going forward, we expect Audacious and Belle Fleur to report important developments in regard the Massachusetts market and will monitor how the story advances from here. With an estimated demand in Massachusetts of approximately $1.1 billion by 2024, we are bullish on the potential for Audacious and believe the market underappreciates this aspect of the story.
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