Let’s look at AYRs fundamental financial metrics for their September 30, 2020 earnings release, financial statements and MDA.
This will be our first Q taking a look at AYR Strategies, some readers may well be better versed at the nuances of AYR as we play a little catch up. Molly has already laid out “Structure and Current State” and “Financing AYR” on the recently closed debt financing.
The best way to categorize AYR is as a “roll up” of several acquisitions with many more on the way. The latest announcement included Liberty Health Sciences, whom we have been following since our inception. We have been very critical of LHS financial reporting which have been rife with errors and unanswered questions. Liberty, to be acquired at price of USD 290 million, adds an EBITDA accretive asset of CAD 5.0 million/Q that will be by and far their biggest cultivation facility at 300,000 sq feet and dispensary count at 28.
MDA does not have QoQ narrative.
Open the fins and MDA and let us dive in.
Income Statement Drivers & Breakeven Sales: Trend
AYR operates in
- Massachusetts with 1 retail (expanding to 3) and 50,000 sq ft of cultivation and processing
- Nevada with 5 retail (expanding to 7) and 70,000 sq ft of cultivation and processing
Has purchased or is in process of purchasing:
- Pennsylvania with 1 retail and 226,400 sq ft of cultivation and processing
- Ohio with 0 retail and 67,000 sq ft of cultivation and processing
- Arizona with 3 retail and 90,000 sq ft of cultivation and processing
- Florida with 28 retail and 300,000 sq ft of cultivation and processing
- New Jersey with 3 retail and 30,000 sq ft of cultivation and processing
A summary of AYR by State:
These acquisitions have come with significant increase in Goodwill and Intangible assets. Given the Contingent Obligations they will have further top off payments.
AYR provides no segmentation of sales by retail and wholesale. But we did what we do… and figured out some.
Sales increased $17 million +40% in the Q to $45 million after decreasing -16% last Q as NV was impacted by COVID in Q2. Unfortunately, their disclosure in the pressers is uneven QoQ. They do not indicate daily sales of retail nor wholesale for Q2, but I can piece together Q1 and Q3.
They indicate in presser for Q3 that MA had $11 million in wholesale and they are silent about NV. They indicate NV and MA did an aggregate $360K per day in the Q which would equate to $33 million (versus Q1 F2020 of $24 million). If we add the $11 million W/S in MA (versus Q1 F2020 of $7.5 million) to retail, that will leave NV with W/S of $1.4 million (versus $2.4 million in Q1 F2020).
We get a 73-27 Retail to W/S split in Q3 versus 70-30 in Q1F2020. Q2 F2020 was silent on daily revenue, so we were unable to do a split or QoQ growth.
Retail revenue in MA is lower in Q3 than Q1 by -$0.3 million, whereas NV is up 50% from Q1 to Q3 +$10 million. I cannot tell if this is due to store openings
W/S for MA has increased +$3.5 million Q1 to Q3, whereas NV has decreased -$1 million.
MA has aggregate sales of $16 million in Q3 (35% overall sales) versus $13 million in Q1, and NV is $29 million Q3 (65% overall sales) versus $21 million in Q1.
MA is looking to open 2 more dispos, getting to 3. NV they indicate same store YoY sales are +34% and they will be opening two more.
Annualized Sales $ per (PPE + Goodwill/Intangibles)
What I have done above is annualize the last Q’s sales and divided it by the aggerate of PPE and G/I to see how much sales are being generated and what the trend is. I added PPE and G/I to try to normalize the companies that have gone an organic path (TRUL and CWEB until their new acquisition) versus the more acquisitive (Cura, CL and GTII)
As per acquisitions listed above, AYR is a roll up styled company. At $0.60 for this metric, an increase from last Q $0.37, they rank 4th in this peer set. THIS METRIC WILL CHANGE significantly with the AZ, PA and OH acquisitions, and will change again on the NJ and FLA acquisitions. This will be a metric, along with the GM equivalent, that I will keep an eye on.
Income Statement Drivers & Breakeven Sales: Peer
AYR is 7th in this peer group in Sales at $45 million between HARV at $61 million and TER’s CAD $51 million (approx. USD 40 million).
Gross Margin: Trend & Peer
GM% held stable at 60%, good for 4th in peer group. The increase from Q1 F2020 is reported in presser to be the addition of cultivation capacity in May 2020 and June 2020 in MA and NV. This extra cultivation is likely flowing to their retail stores, improving margin versus selling third party product, and more efficiencies.
GM was $27 million a +$10 million increase QoQ. The increase was all sales driven, as GM% held stable.
Segmentation certainly would be nice here.
Interesting disclosure in Q1 MDA that has since stopped. In Q1 AYR provided Retail flower prices in MA of $9.28/gram and oil of $120/gram, whereas NV is $4.64/gram and $50/gram, respectively. MA cost per gram flower $1.59/gram (GM 83%) and oil $19/gram (GM 84%) versus NV $1.19/gram (GM 74%) and $15/gram (GM 70%), respectively. MA is undersupplied and generates GM +10% better than NV, or at least they did when disclosed.
Nevada is clearly driving results on the top line versus MA. I cannot tell if NV is growing because of new store fronts, as I cannot find store counts very easily in MDA and pressers.
They add a net $13 million credit for IFRS voodoo versus $6 million last Q: $18 million unrealized Fair Value on Bio Assets (an increase QoQ of $2 million) offset by -$5 million (a decrease of $5 million QoQ) Realized Fair Value on inventory sold.
Annualized Gross Margin $ per (PPE + Goodwill/Intangibles)
This is our attempt to normalize the companies growing organically from the roll ups. We have annualized the gross margin and divided that by aggregate of PPE + G&I.
AYR recorded a $0.36, an increase from $0.22 last Q, and are 4th in this metric in the Peer group. This will likely change dramatically with incoming acquisitions. Where this shakes out post acquisition will give investors a good idea of the value per $1 in acquisitions compared to peers.
Gross Margin: USA Peer
AYR is 4th highest in this peer group. There is certainly a cluster forming around 60%. Margins in some US states are certainly benefiting from supply much less than demand.
SGA & SBC as % of Sales: Trend
NOTE: I have moved acquistion costs to Other Expenses to maintian peer comparisons with other US MSOs.
Selling expense is low at $0.6 million, a $0.2 million increase QoQ.
G&A come in at $9.3 million, or 20% of sales, a small increase from $9 million QoQ. No notable changes in the line items making up G&A QoQ.
SBC decreased to 10% of sales at $4.7 million a decrease of $4.4 million from last Q.
Depreciation and amortization of $2.5 million, a decrease from $2.6 million last Q, rounds out Opex.
Opex decreased by $4 million to $18 million and decreased to 40% of sales from 78% last Q. The entirety of the change was a decrease in SBC.
SGA & SBC as % of Sales: Peer
AYR is second lowest in SGA with GTII lowest. And 4th lowest in SGA and SBC. Expect this to change as they add multiple jurisdictions, and they add associated costs.
+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer
At present GM% and OPEX$’s AYR requires sales of 66% of this Q to remain +NOP. They rank tied for 3rd in this peer metric.
Net Operating Profit before IFRS voodoo was positive $9 million versus $5 million last Q. The increase in absolute GM by $10 million and a decrease in Opex by $4 million are the drivers.
Other Income (Expenses) and Taxes:
Other Income for the Q was negative $40 million versus negative $4 million last Q. This consisted of notable changes in:
- Acquisition costs $0.6 million versus $0.4 million last Q
- Interest expense was steady at $0.7 million
- Unrealized Fair Value loss on financial liabilities of $38 million versus $3 million QoQ was the big driver. I will defer to Molly’s Structure and Current State
Taxes were a $9.7 million versus $5 million last Q. That 280e tax is a killer, given NOP was $9.2 million.
F/X translation was a negative $1.36 million from negative $0.8 million last Q.
Net Income before IFRS Voodoo was negative $42 million versus negative $15 million last Q. The increase in loss in FV of Financial Liabilities, the increase in GM and decrease in SBC are the three main drivers.
+EBITDA: Trend & Peer
AYR recorded a +EBITDA of $18 million a +$10 million improvement in EBITDA wholly attributable to the GM from the sales increase. EBITDA of 38% of sales is second highest in peer group.
My calculation is very close to theirs.
- Cash Flow from Operations generated +$13 million,
- -$4.7 million generated by investing activities, and
- -$1 million in financing activities.
+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer
At +EBITDA, with current GM% and cash OPEX, AYR requires 36% of existing sales to achieve +EBITDA. AYR ranks second in this peer group.
No substantial debt that needs to be serviced, yet.
Balance Sheet Items of Note:
Cash position $23 million an increase of $7 million QoQ from operations. They have raised additional capital post Q both in debt and warrants.
Inventory is $33 million +$13 million QoQ. They did manage to increase FG by $1.4 million. FG is $8 million.
They will need more inventory to fuel sales. They appear to have more Bio Assets in process. They harvested 4,964 KGs last Q as compared to 2,664 KGs the Q prior and 1,716 KGs in Q1 F2020.
AYR’s $33 million in inventory is the fourth lowest in the peer group.
Other notable balance sheet items:
- PPE stable at $39 million.
- Intangibles and Goodwill are $264 million a small $3 million reduction QoQ. Expect these numbers to increase substantially with new acquisitions. Of LT Assets G/I are a staggering 83% or 673% PPE.
- Corp tax payable increase by $6 million to $19 million.
- Warrant liability increased by $39 million to $65 million. Molly covered that.
- Contingent consideration for top offs of previous acquisitions aggregated $29 million stable QoQ. This will increase with acquisitions.
- Debts Payable of $41 million of which $38 million is owed to Related Parties. This is a function of the shareholders to acquired companies becoming shareholders to AYR. The LivFree acquisition carries $20 million of the total.
- Sales increase was impressive as Nevada and Massachusetts operations are maturing and covid issues from earl 2020 have somewhat abated. Nevada is driving the sales increases.
- GM% is comparable to top peers.
- SGA were held stable and are only trailing GTII as a % of sales.
This company is going to dramatically change over the next three Q’s with OH, PA and AZ coming into the fold and then FLA and NJ thereafter.
I think with the scope of change in operations extrapolating the Q3 results from F2020 would be folly. It is good to see the GM%, sales growth and expense control, however, the size of incoming assets and “asset quality” versus purchase price will not be easily determinable at this point in time. As an example, they are increasing cultivation from 554,000 sq feet to 1,027,000 sq feet with the acquisitions, and dispensary count from 6 to 64 (the bulk are LHS) by year end 2021.
I am familiar with LHS assets and I do think they received a very good deal resulting from shenanigans at LHS which has depressed share price. The other assets being acquired I am unfamiliar with.
The preceding is the opinion of the author and is in no way intended to be a recommendation to buy or sell any security or derivative. The author does not have a position in AYR, but does in a LHS which is being acquired, and will not start one in the next five days.