NOTE: We have received word back from CFO at AYR on our inquiry and have added to analysis where noted. We will leave the balance stand as it was taken from the published documents.

Let’s look at AYRs fundamental financial metrics for their December 31, 2020 earnings release, financial statements and MDA.

This will be our second 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”.

The best way to categorize AYR is as a “roll up” of several acquisitions with many more on the way. Their ability to scale cultivation and expand from two to seven states will be interesting to watch. iAnthus, another MSO that was run by bankers, did not fare well in this endeavor.

AYR claims to be very proficient in cultivation, and they expected to be able to turn around their Liberty Health Science acquisition’s (completed March 2021) cultivation issues.  That is why a certain number has me concerned and I have reached out to AYR IR to address.  Should they address it I will update this comment.

AYR provides in their Biological Asset note to financial statements the following.

• During the years ended December 31, 2020 and 2019, the Corporation’s biological assets produced 10,896,631 and 3,360,263 grams of dried cannabis, respectively.

When I do a QoQ analysis to determine what was produced in the Q, AYR Q4 is 1,552,625 grams.  This is a 69% reduction from the previous Q of 4,964,098 grams. Q4 was the lowest cultivation quarter in F2020.  Their bio assets have an 18-week growing cycle (longer than a Q) and they are 71% complete in Q4 versus 57% complete this Q.  Further, their unrealized air value on bio assets plunged from $18 to $4 million, while Realized FV on inventory sold changed noticeably from -$5 million last Q to -$13 million this Q.  Something odd is going on here.

Is this timing related or did they have a cultivation issue?

EDIT BEGIN:

From CFO of AYR:

“Great questions and year-end is where we tend to have true ups in some of these categories based on feedback from the auditors as their methodology tends to shift in real time given how nascent the industry is.

Since we were the first large MSO to file our year-end financials, you may start to see similar adjustments with other MSO’s as they start to finalize their 20’ audits. … The unrealized/realized shift in fair value was the result of a change in classification from our auditor and not indicative of any change in the business, operations or cash flow. This was simply a “reclass” from a financial statement classification point of view.

In terms of grams harvested, this is also a product of a shift in methodology from our auditors ie. whether or not to include drying cannabis as well as the timing of harvests.

In terms of actual harvest data for the period, our harvested weight increased 6% from Q3-20 to Q4-20 on an absolute basis (same asset base), driven by continuous improvements in grow techniques.”

So, it appears to be true-ups and timing. I would have preferred to see the details of what was trued-up so I could track it through.  What likely happened is YTDQ3 was overstated and they had tack out Q1-Q3 changes in Q4.

The above issue arose because their MDA does not have QoQ narrative. And I have to say, for a company looking to transform so much in F2021 not having QoQ narrative makes it difficult for investors and analysts to see any breaks from narrative in the financials.  We are left to speculate by filling in the gaps which should be addressed in QoQ narrative.  And when you are transforming a business it is best not to let analysts speculate. 

Further, the earnings release does have a standalone Q4.  Without explaining “true-ups” in the MDA we are now left uncertain what the actual Q4 looks like and was Q1-Q3 materially accurate.  Are the SGA figures plugs to make the annual statements correct if Q4 is added to YTD Q3?

We are looking to have a call with AYR in the next few weeks to express where they can improve disclosure.

EDIT ENDS.

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 three states:

• Massachusetts with 1 retail (expanding to 3) and 50,000 sq ft of cultivation and processing
• Nevada with 5 retail (expanding to 7 at 6 post Q) and 70,000 sq ft of cultivation and processing
• Pennsylvania with 1 retail license (not yet contributing to results) and 226,400 sq ft of cultivation and processing

Has purchased or is in process of purchasing in four states:

• 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

These acquisitions have come with significant increase in Goodwill and Intangible assets.  Given the Contingent Obligations they will have further top off payments. LHS will hit G/I pretty hard once consolidated.  The announced purchase price was at approx. $1.00 a share and it closed north of $1.40 share.  That extra $0.40/share is going straight into Goodwill.

AYR provides no segmentation of sales by retail and wholesale in MDA. But we did what we do… and figured out some.

Sales increased $2 million +5% in the Q to $48 million after increasing +61% 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, Q3 and Q4.

They indicate in presser for Q4 that MA had $13 million in wholesale and they are silent about NV. They indicate NV and MA did an aggregate $354K per day in the Q which would equate to $32.6 million versus Q3 of $33.1 million, or -2% QoQ.   By deduction we get wholesale of $15.1 million versus $12.4 million last Q for a 23% increase.

We get a 68-32 Retail to W/S split in Q4 versus 73-27 in Q3. 

Retail revenue in MA is $5.9 million +16% for the Q, whereas NV is $26.7 million down from Q3 $28.1 million -5% QoQ.

W/S for MA has increased +$2.4 million Q4 to Q3, whereas NV has $1.8 million versus $1.4 million last Q.

MA has aggregate sales of $19 million in Q4 (40% overall sales) versus $16 million in Q3, and NV is $28 million Q4 (60% overall sales) versus $29 million in Q3.

MA is looking to open 2 more dispos, getting to 3.  NV they indicate same store YoY sales are +21% and they will be opening two more.

Given they claim to be a strong operator, the decrease QoQ in Nevada operations QoQ and net decrease in Retail revenue should be addressed.  It is not.

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 $0.46 for this metric, a decrease from last Q $0.60 as they loaded PA assets without revenue, they rank 8^th in this peer set. THIS METRIC WILL CHANGE significantly with the AZ 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.

LHS will be added late in Q1 F2021, so expect this metric to take a hit next Q. We will not see this normalize until a full Q of operations from acquisitions are loaded. 

Income Statement Drivers & Breakeven Sales: Peer

AYR is 7^th 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% decreased by 2% to 58%, good for 4^th place tie in peer group.  There is no explanation for the QoQ decrease. There is zero narrative on “Gross Profit” in presser despite them showing a decrease from 42.4% to 40.5% in their table. Again, for a company that prides itself on being a good cultivator and operator they need to address these items.

GM was $27.5 million versus $27.4 million QoQ. GM% decreased and increased sales only generated a modest uptick in absolute GM.  Segmentation certainly would be nice here.

Nevada is bigger driver than MA for AYR.    

As mentioned above in preamble… Unrealized Fair Value on bio assets was $4 million after being $18 million last Q. This could be their cultivation capacity topping out and now reducing to what should be anormal amount. 

But what worries me is the Realized Fair Value on inventory sold went from -$5 million last Q to -$13 million this Q. If sales only increased 5% why did this amount almost triple?

I have also asked IR about this.  I will add to the analysis if they answer.

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 $0.27, an decrease from $0.36 last Q, and are 7th in this metric in the Peer group.  The decrease is related to the PA acquisition and lack of revenue and GM generated in the Q.

This will likely change dramatically with incoming acquisitions. Where this shakes out post acquisitions will give investors a good idea of the value per $1 in acquisitions compared to peers.

Gross Margin: USA Peer

AYR is 5th 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, no change QoQ.

G&A come in at $9.3 million, or 19% of sales, no meaningful change in $ amount QoQ   No notable changes in the line items making up G&A QoQ other than management fees dropping $0.5 million QoQ to $0.6 million

SBC increased to 11% of sales at $5.2 million an increase from $4.7 million from last Q. Expect this to move higher with the higher stock price for Q1 F2021.

Depreciation and amortization of $3.7 million, an increase from $2.5 million last Q, rounds out Opex.  The increase is likely due to adding PA.

Opex increased by $0.6 million to $18.8 million and decreased to 39% of sales from 40% last Q.

SGA & SBC as % of Sales: Peer

AYR is second lowest in SGA with GTII lowest. And 4^th 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 68% of this Q to remain +NOP. They rank tied for 4th in this peer metric.

Net Operating Profit before IFRS voodoo was positive $8.7 million versus $9.2 million last Q.  The increase in absolute GM was offset by an increase in Opex.

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 $1.9 million versus $0.6 million last Q
• Interest expense increased to $1.9 million from $0.7 million as debt was added in the Q.
• Unrealized Fair Value loss on financial liabilities of $135 million versus $38 million QoQ. I will defer to Molly’s Structure and Current State

Taxes were a $5.0 million versus $9.7 million last Q. That 280e tax is a killer, given NOP was $8.7 million.

F/X translation was a negative $8.6 million from negative $1.4 million last Q.

Net Income before IFRS Voodoo was negative $143 million versus negative $41 million last Q.  The increase in loss in FV of Financial Liabilities is the driver.

+EBITDA: Trend & Peer

AYR recorded a +EBITDA of $19 million a +$0.4 million improvement in EBITDA. My calculation is very close to theirs.

QoQ Cash Flow

• Cash Flow from Operations generated +$7 million,
• -$52 million generated by investing activities, and
• $149 million in financing activities. 

+EBITDA Sales Breakeven divided by Current Q Sales: USA Peer

At +EBITDA, with current GM% and cash OPEX, AYR requires 31% of existing sales to achieve +EBITDA. AYR ranks first in this peer group.

$103 million in Senior Secured debt was added in the Q at 12.5% interest rate paid semi annually and December 2024 maturity.  This will add approx. $3.2 million quarterly to interest.  EBITDA adequately covers same.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: $ Thousands of Dollars

This is our newly added metric to help keep in focus the amount of cash the operations generate less Interest and taxes.

AYR improved on this metric due to a decrease in taxes for the Q of $4 million.

Net Operating Profit + Non-Cash Expense – Interest – Taxes: % of Sales

AYR compares favorably to the peer base with only TER and TRUL surpassing as a % of sales.  This will likely compress as AYR adds more states.

Balance Sheet Items of Note:

Cash position $127 million an increase of $104 million QoQ from debt raise.   They had a post Q equity raise of C$157 million.

“Waterfall” Trend

Inventory is $28 million -$5 million QoQ.   They did manage to increase FG by $1.0 million. FG is $9 million.

They will need more inventory to fuel sales. They harvested 4,964 KGs Q3 as compared to 1,553 KGs this Q.  Q1 and Q2 harvest appear to be 1,716 KGs and 2,664 KGs.

I am concerned they had a crop issue. Bio Assets on the balance sheet were decreased 5% $’s QoQ to $12.1 million from $12.7 million in Q3, but they should have increased more as the crop was 71% complete versus 57% last Q.  Which explains the income Statement decrease to an extent. But the tripling of the reversal of previous bio assets on inventory sold indicates something has happened.

“Waterfall” Peer

AYR’s $33 million in inventory is the 9th in the peer group.

Other notable balance sheet items:

• PPE increased $30 million to $69 million as PA assets were added.

• Intangibles and Goodwill are $344 million an increase of $80 million reduction QoQ with PA added.  Of LT Assets G/I are a staggering 78% or 498% PPE.

• Right of Use Assets increased $11 million as did non-current leases against same.

• Warrant liability increased by $87 million to $152 million. Molly covered that.

• Debts payable and Sr secured debt increase $125 million QoQ to $158 million.  The debts payable side was $15 million in vendor take back from the PA acquisition to the sellers and $103 million in Sr Secured was the new debt facility. 

• Debts Payable of $55 million of which $27 million is owed to Related Parties. This is a function of the shareholders to acquired companies becoming shareholders to AYR. 

What I said Last Q:

• 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.

This Q:

When a business is in formation and they have high expectations that will take awhile to manifest, we are looking to read tea leaves.  AYR not mentioning QoQ decrease in revenue in Nevada and in Retail revenue QoQ, not addressing gross margin decline QoQ, and the very peculiar issues that I have identified with cultivation leaves me with a concern.   

Even if it is a small issue, if you are trumpeting how good an operator you are, you best address the issues in the MDA or presser versus letting an analyst speculate why they are not addressed.

Disclosure sets you free.  We will see if IR addresses these issues.  They did say they would get back to me quickly on Saturday.

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 via LHS which recently was acquired, and will not start a new one in the next five days.