Ayr Strategies ($AYR.A) has been on our ‘to do’ list. It’s been around for awhile, but like some other ‘multi-state-operators’ – its’ operational scale and scope hadn’t been much in comparison. We had planned it for release next week (it’s been requested by a couple of subscribers) – but given they just up and bought Liberty Health Sciences ($LHS), no time like the present.

The good news for existing $LHS shareholders – if they had ever dreamt of holding actual MSO exposure – now, they have it. In Nevada and Massachusetts and Florida. Pennsylvania and Ohio. Arizona too. Given current appetite for MSO’s, the timing is also good for longs. I’ve held $LHS for awhile, having acquired shares during previous CEO George Scorsis’ tenure. My specific intent entering the position was to gain regional (FLA) US cannabis exposure. I pared half of my exposure when George Scorsis left $LHS, and maintained a ‘hold’ with remaining position. What I retained was held solely in anticipation of future sector catalysts.

And thus, $AYR.A.

Readers will know TheCannalysts have expressed consternation with $LHS’ financials over the past year. We’ve covered the company extensively, and are relatively ‘intimate’ with the business in that respect. The bottom of it? The company doesn’t look bad. Really, it was looking pretty good relative to sector (moreso 4 quarters ago). Which, is why we were puzzled by sloppy financial statements. The cannabis sector fervour of late had passed them by, often at a fast clip.

But this structure is on $AYR.A. And nobody is going to be worrying about $LHS other than it being a division from here.

Prior to the announcement with $LHS, $AYR.A claimed to be a ‘vertically integrated multi-state operator’…….and now….that claim is greatly strengthened. Their MD&A refers to current assets being in Massachusetts and Nevada…..all the others are in build. Looks like they hold a total of maybe a dozen retail stores right now.

This is also the first time TheCannalysts have had a look at them…. and is virgin earth.

To the financials!

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• 15 dispensaries in operation, total revenue of $45MM. The report a 60% margin on that.
• $18MM in operational expenses, SG&A at $10MM.
• Not EBITDA positive. Wonder of wonders,
• Cash at $24MM. They’re going to need a whack of it.
• SBC rocking at $5MM last quarter ($15.5MM YTD). Looks consistent. Given the share price advance of the past year, Xmas could be stellar. Something to watch, it’s a view into the mind of management.
• Yet in the Statement of Cash Flows, YTD SBC is listed at $26MM. Hmm. Need to dig into that.
• Share capital consists of subordinates, multiples, exchange-ables. It’s an MSO, thus standard issue. More below.
• Note 14 details part of a $38MM USD hit they’ve taken thus far on earn-out calculations (they refer to it as a ‘make whole’ provision. You’re gonna hear that phrase a lot around $AYR.A) related to Sira. It’s a cumulative YTD number, and represents the liability they have for remaining obligations from initial acquisition.
• The possibility is that $AYR.A’s price advance here is making prior purchases (much, much) more expensive. This will be the subject of another post, more below.
• Goodwill and Intangibles (G&I) at 67% of total assets (an economic feature of US MSO’s) A strong declaration at the end of Note 4, in that no amortization of Goodwill is contemplated, but it will be subjected to testing annually (so there’s that).
• Intangibles are being amortized over 15 years for licenses, 5 years on the brand. Good disclosure here.
• All-in, $270MM paid for $283MM in G&I. Umm, yeah. In the world of MSO’s, standard issue. Of some $400MM reported in total assets, there’s about $115MM of them are tangible.
• They save on compensation using ‘management fees’ to pay the executive, not uncommon. $1.2MM per month.

Their price chart of the last 5 days is fun. It reflects MSO fervour, Robin-hood attention spans, and a disregard for anything economically fundamental. Hey, when one can get access to trading on margin for $5/mo, another might suspect volatility will not be far behind:

A ‘feature’ of MSOs: it can be irritating when looking for segmented information (only time I’ll probably ever think of iAnthus positively though…..their segmentation was best in-sector. Also a reason why we knew how hard they were actually sucking). Readers will be aware of inconsistencies across various companies’ reporting, and TheCannalysts have witnessed a trend of less disclosure over time. The reasons aren’t mysterious: commercial information is highly valuable, and just like poker players do, companies like to keep their cards to themselves. With that, it can be problematic to get a good feel for operations, and $AYR.A is no different here as a company. For now, they only have one segment (sigh).

I take issue with companies that talk up segment and business line performance with narratives, but don’t put up numbers. Mentioned because AYR.A’s CEO likes to make statements on pay-to-play platforms around wholesale and regional penetration. (Warning: that external content messaging is more massaged than the Bulgarian Olympic power lifting team during training. Included it because it’s the first look I’ve ever had at their CEO). We’ll perhaps be seeing segmentation in financials emerge, it’d be good:

Looking at some of the numbers above, the thought that come to mind is ‘how have I been missing these guys?’ In MASS, they’re only medical at the moment, but express intent to get in recreational.

Their asset base is around 4 acquisitions: they’re focused in Massachusetts (‘Sira’), and Nevada (Washoe, Canopy, LivFree), and a brand used in both (CannaPunch).

The LivFree name is familiar, it was one of the dispensaries I was toured through on a trip to a MJBiz Conference a while back. Peter Horvath did a presentation hunting cash, built upon claims of $75k/day in revenue, from shops the size of a single-wide mobile home. I mention this, because Nevada’s regulatory moratorium has become a temporary moat for existing entrants. Despite being litigated, the judge that issued a ruling in the fall fully expected new legal action to begin. So……. stores open prior to the moratorium are enjoying continued limits on competition, and, could for some time to come. As we’ve physically seen reported by C21 Investments ($CXXI), a known dispensary in a prime location will bring in revenues north of $20MM per year. That’s a good number. Nevada’s just getting their regulatory feet under themselves, but have thus far indicated that their enforcement actions will be fulsome.

I mention this, due to the nature of the LivFree acquisition. For a total cost of $150MM, $AYR.A got 3 operating dispensaries, and total tangible assets that were worth minus <$22MM>. LivFree is said to have cultivation and processing licences within the state as well, but are currently un-deployed. The other 2 Nevada assets (Canopy & Washoe) are held similarly by Ayr – like LivFree – they’re not ‘owned’ – but operated under service agreements. This is due to a state moratorium on licence issue and transfers. One *shouldn’t* see changes in margin or ops upon transfer, a base assumption in markets seems to be that it shouldn’t. Simply pointing it out…but earn-outs are where I’m going with this.

The theme emergent in $AYR.A is their frequent use of a ‘make whole provision’ in acquisitions, which infers a sort of trailing upside profit sharing. At the least, it claims to offer downside protection. It’s use is ubiquitous enough that $AYR.A even offers one to $LHS shareholders should $AYR.A’s share price hit a ditch between now, and close of the acquisition:

Let’s run through their assets, and see what kinds of ‘whole’ attached to the acquisitions. Like most MSO’s, $AYR.A’s formation has been built through (relatively) recent acquisition. Fortunately, their shopping spree was a tidy affair, with all of their deals on formation coming in under a special purpose vehicle during exchange listing. Unlike the article though, I have $214MM as an ‘all-in’ value, and there’s no calculation of those ‘make-whole’ provisions:

Let’s look at the make-whole provisions offered to acquirees.

TheCanopy NV – Purchase price: $24MM, and another 450k in shares is possible. No terms provided:

Sira – Purchase price: ~=$155MM. I’m gonna need a couple of days with this deal. Whoever sold it to $AYR.A knew exactly what they had, the deal was locked down hard by the vendor.

Washoe – Purchase Price $24MM. Another 580k shares possible to be issued. Again, no terms provided.

LivFree – $150MM, looking for origin documents has been frustrating to say the least.

CannaPunch – Purchase price: $25MM. God, I’ve no line of sight on this gem. I call it that due to having a quick look at their website, and getting a pretty good belly laugh. I mean, stroopwafels? Great idea, wrong continent. Despite that laugh, the reality is that brands in the states don’t necessarily translate to Canada, and maybe something is there. I’ve yet to see the uplift that many brands and MSO’s (and expensive prices paid for them) promise. Perhaps they take time to develop. They have ported this particular brand for use in Nevada and Colorado. Sounds like it might be heading into MASS as well.

We’ll get a look into final prices paid, and hopefully some info about the subsidiaries.

Operationally, all looks somewhat tidy. How many ‘MSO’s’ run $45MM in quarterly sales at a 60% margin – and have salaries and benefits under $4MM? The topside from the MD&A looks pretty good:

And….enter Note 14 (Derivative Liabilities). It drops a $50MM CAD increase in derivative liabilities during the quarter into expense right below operations. Overall, $AYR.A reports a loss of $28.2MM USD (~=$35MM CAD) this quarter. On that $45MM USD in sales. And at a 60% margin.

These ‘derivative liabilities’ stem from inital formation. $AYR.A went through a qualifying transaction to achieve their exchange listing, and I’ve not come across this mechanism in any other pot company. There’s 16MM warrants at $11.50 from the initial offering, and a schedule on contingent consideration/make whole provisions that somehow aggregate to $50MM. That’s gonna take some time though, I will detail this in another post. In theory, if I can fix up a model, I can see what’s going on. Best case scenario is that we’re able to provide a predictive formula.

And, $AYR.A has been active in attempting to expand in existing markets. MASS currently has both medical and recreational regimes, but medical exists as a parallel system administratively, and a separate sales channel physically. Operators in the state must declare a storefront one or the other. $AYR.A has 4 applications for recreational in the hopper (one is actually proposed to be co-located beside one of their existing medical shops). In NEV, LivFree recently picked up 2 additional dispensaries (August) in Vegas and Henderson (a nearby bedroom community). These may have come from the licenses confiscated from CWNevada. It’s interesting to read between the lines, especially state to state. NEV offers towns discretion around permitting, and Henderson has a moratorium on ‘new’ dispensaries, so, it’s just a piece of paper for now.

In PENN, they’ve bought ‘rights’ to operate 6 dispensaries and 170k ft² of grow-op (Canntech and DocHouse. Deals done in August and September). Nothing operational in-state at the moment.

In OHIO, they bought a licensed processing space from VIREO ($VREO) and a grow-op from some $25MM CAD (August).

In Arizona, they recently (October) bought a small outfit called ‘Blue Camo’ – licenses for three storefronts and a tiny grow. Another grow is under construction. Total price? $125MM. Woot.

$AYR.A’s formation took a while to get into place, but man, they’re really moving.

Disclosure over all is pretty good. I need to get into initial source documents, and will drill into contingent liabilities and other optionality that’s laying about.

This one’s been tough – first cuts and orientation typically are. I’m very interested in these guys, because presumably, I’m going to be owning a piece of it if I do nothing.

More to come.

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 holds position in only $LHS.