Let’s look at AYRs fundamental financial metrics for their June 30, 2021 earnings release, financial statements and MDA.

Guidance from presser:

• Based on the results to date, management is targeting 3Q21 revenue of approximately $100 million, which reflects growth of over 10% quarter-over-quarter and 211% year-over-year. Adjusted EBITDA on a US GAAP basis is expected to be in line with the second quarter, following accelerated investments in branding, new markets and growth projects.   

• The Company is increasing its target for 2022 revenue to $800 million, up from $725 million, and is reiterating guidance for 2022 Adjusted EBITDA of $300 million reflecting substantial investments in growth.

The best way to categorize AYR is as a “roll up” of several acquisitions with one more (New Jersey and Illinois) on the way. Their ability to scale cultivation and expand from two to eight states between 2020 and 2021 will be interesting to watch. iAnthus, another MSO that was run by bankers, did not fare well in this endeavor.

The success of this company will be defined by how they integrate and remediate LHS and the rest of their acquisitions.

MDA does not have QoQ narrative. They dropped the useful nuggets in the presser.  The disclosure needs work. 

Open the fins and MDA and let us dive in.

Income Statement Drivers & Breakeven Sales: Trend

AYR operates in six states with NJ and Illinois pending:

• Massachusetts with 2 retail (expanding to 4 by year end) and 50,000 sq ft of cultivation and processing to expand to 140,000 by year end F2022
• Nevada with 6 retail and 72,000 sq ft of cultivation and processing
• Pennsylvania (acquired in Q4 F2021) with 3 retail (+1 QoQ) and 83,000 sq ft of cultivation and processing to expand to 253,000 by year end. 45,000 sq ft online in Q2F21, 38,000 sq ft online in Q3F21.
• Ohio with 0 retail (acquired in Q4 F2021) and 10,000 sq ft cultivation and processing expanding to 67,000 by year end F2022
• Florida with 39 retail (acquired in Q1F21 and +4 QoQ) and 300,000 sq ft of cultivation.  Adding 20 acres outdoor hoop houses by Q3 F2021
• Arizona with 3 retail (acquired in Q1F21) and 10,000 sq ft cultivation and processing expanding to 90,000 by year end in Q4F21

In process of purchasing in:

• To be closed in Q3F2021 at purchase price of $101 million. New Jersey with 3 retail and 30,000 sq ft of cultivation and processing expanding to 105,000 by year end F2022.
• Illinois: two retail dispensaries for $30 million at reported 5x 2021 EBITDA.

AYR sales increased +56% QoQ by $32 million to $91 million.  AYR does not provide retail wholesale splits in financials or MDA. They even stopped providing what little retail and wholesale narrative in the presser that allowed me to recreate the streams.

LHS closed February 25, 2021, and contributed a full Q of sales in this Q. Arizona closed March 23, 2021 and had a weeks’ worth of contribution last Q, and also provided a full Q this Q.

PA commenced sales in Q1F21, they are looking to provide more wholesale in Q3 as new facility had first harvest last Q.

This is quite hard to get a lock on simply because disclosure is so week. I would welcome Retail and wholesale segmentations.  They are gunning for “best flower at scale” to drive wholesale, it would be nice to have some metrics to show progress on wholesale.

Retail stores were increased by 8 in the Q to 56. That is likely a partial driver as is their reported (on CC) increase in wholesale in Massachusetts (where they report they are the industry leader).

Annualized Sales $ per (PPE + ROU + Goodwill/Intangibles)

What I have done above is annualize the last Q’s sales and divided it by the aggerate of PPE + ROU 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 (AYR, Cura, CL and GTII)

Last Q was distorted as LHS was and Oasis were acquired in the Q, loading the denominator without a full Q for the numerator.  With a full Q in sales from prior Q acquisitions we see the number increase to $0.31 from $0.20 but below the $0.44 in Q4F20 without the sizeable acquisitions. AYR is the lowest in this metric.

Income Statement Drivers & Breakeven Sales: Peer

AYR is 7th in this peer group in Sales at $91 million between HARV at $102 million and TER’s $53 million (report Q2 Thursday).

Gross Margin: Trend & Peer

GM was negatively impacted by the fair value of the acquired inventory at LHS and AZ to the tune of 27 million of FV acquired less actual costs ($5.8 million last Q).  They acquired $63 million in fair value inventory.  They have $9 million left to sell through.

GM% decreased by -17% to 25%, good for last place in the peer group.  Without the $27 million inventory step up the GM would have been 54% versus 52% last Q.  Still down from Q4F20 58% but they expect the GM to soften as they launch new assets that take a Q or two to generate revenue. 

GM was $22 million versus $24 million QoQ and $27.4 million in Q4F20. Without the step up on inventory it would have been $49 million.

A first for me was Adjusted EBITDA $25 million being greater than actual GM of $22 million (because of step up).  It really screws with some of our metrics.

Annualized Gross Margin $ per (PPE + ROU + 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.

And this is a metric that gets distorted by the inventory step up.  Check our new EBITDA metric below to see what happened.

We will revisit this metric next Q.

Gross Margin: USA Peer

AYR remains last in large part to inventory step up.  Without same they are at 54%, in the middle of the peer group.   Margins in some US states are certainly benefiting from supply being 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 $1.8 million, +$1.0 million change QoQ as the Liberty assets and dispensary expenses are on for a full Q.

G&A come in at $26 million an increase of $10 million, or 28% of sales versus 27% last Q.  The big increases QoQ were +$4.7 million in compensation and +$1.2 million in rent and utilities, both stemming from LHS acquisition and adding their store count for a full Q. Compensation edged up to +1% to 12% of sales, while rent was up less than 1% to 2.8% of sales.  Management fees increased $0.8 million QoQ to $2.6 million versus $4.1 million for the entire F2020 year. 

They are guiding for SGA to climb $ wise but remain sub 30% as percentage of sales.

SBC decreased to 8% of sales at $7.2 million an increase from $8.2 million and 14% from last Q. Lower stock price the driver.

Between SBC and compensation, the c-suite does well from AYR.

Depreciation and amortization of $11 million, an increase from $5 million last Q, rounds out Opex.  Adding LHS and AZ assets for a full Q are the reasons.

Opex increased by $16 million to $46 million and decreased to 50% of sales from 51% last Q.

SGA & SBC as % of Sales: Peer

AYR went second lowest in SGA to 6th lowest as they start to slide from top of the group as they load new assets and dispensaries that have SGA. And 8^th lowest in SGA and SBC.

+Net Operating Profit Sales Breakeven divided by Current Q Sales: USA Peer

Net Operating Profit was negative -$24 million versus -$5 million last Q, a swing of $19 million.  A decrease in absolute GM and increase in Opex are the reasons.

At present GM% and OPEX$’s AYR requires 106% in incremental sales to restore +NOP. They rank tied for 10th in this peer metric.  Inventory step up is still impacting this metric and will, but to a lesser degree, next Q as the remaining inventory is sold through.

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $7.5 million versus negative $6.4 million last Q. This consisted of notable changes in:

• Acquisition costs $1.3 million versus $3.1 million last Q
• Interest expense increased to $3.8 million from $2.8 million as debt/leases was added during the Q.
• Unrealized Fair Value gain on financial liabilities of +$12 million versus -$0.5 million loss QoQ. The warrant and derivatives reversed as stock price relaxed in Q.

Taxes were a $4.7 million versus $5.0 million last Q.

Net Income this Q registered at -$21 million versus -$17 million.

EBITDA: Trend & Peer

AYR recorded a +EBITDA of $25 million a +$9 million increase in EBITDA, reversing last Q decrease.  Their Adjusted EBITDA was $3 million higher than mine.  They include add backs of set up costs and Other, which I did not include.  If they plan on opening more stores (natch) this will be a persistent expense, as such I will not add back.

QoQ Cash Flow

• Cash Flow from Operations was a Use of funds of $2.5 million,
• -$39 million was used in investing activities with PPE using $17 million, and
• +$88 million raised in financing activities. 

If you strip changes in Working Capital items from Cash Flow from Operations (largely resulting from inventory ramp) you are left with an Opex Source of funds of $8.1 million.

Annualized Adjusted EBITDA to (PPE + ROU + Goodwill and Intangibles)

We have added this new metric to now look at who is being the most efficient with PPE + ROU + G/I based on Annualized EBITDA.

This removes the inventory step up… We see this metric increase to $0.08 from $0.06 QoQ. This metric will take time to get the value from the acquisitions to roll down to EBITDA. They are only ahead of VRNO and MMEN this Q.

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

And here is where GM < than Adj EBITDA screws with the graph.  I have removed AYR for this Q.

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 rebounded on this metric due to the increase in Adj EBITDA of $9 million and interest and taxes remaining rather flat at $8.5 million versus $7.7 million last Q. they generated $16 million in cash from operations, good for 4^th spot in the peer group.

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

AYR reverses last Q drop and jumps into third place in the peer group. 

Balance Sheet Items of Note:

Cash position $124 million a decrease of $72 million QoQ. Cash is adequate so long as they do not start buying companies with it.  They did indicate they have $200 million in unencumbered assets.  Looks like they will go debt/lease route unless stock price increases.

“Waterfall” Trend

Switch to US GAAP two Q’s ago.

Inventory is $70 million, a $19 million decrease QoQ, versus CoGS of $69 million.   That is very tight.  They acquired $63 million in inventory with Q1 acquisitions. They still have $9 million left, which can be partially offset against the FG decline of $13 million.  They have 1.0 Q’s of inventory on hand versus 2.6 Q’s last Q.  they will need the increase in yields reported in FLA to hold up, or they might be tight for sales in Q.

“Waterfall” Peer

Only 2 non-GAAP holdovers above: Cura and TER.

Other notable balance sheet items:

• PPE increased $16 million to $174 million. I note, $34 million in PPE is assets under construction.

• Contingent consideration $129 million from $142 million.  This is contingent payments on AZ Oasis acquisition. How they pay for this will be interesting, as on our Ask Me Anything they reiterated they are “fully funded” for all acquisitions. They did include projected EBITDA as part of that formula. 

What I said Last Q:

Without the acquisitions this would have been a VERY bland Q based on organic growth in MA and NV.

They have started to chew on their recent acquisitions and how they execute on these assets will be the story for AYR for the balance of F2021.  They are calling this their “transformative” year.  They have entered three very hot markets in FLA, PA and AZ which went adult use in Q1F21.

Q2F21 they are expecting a sizeable increase in sales as LHS and AZ are onboard for the full Q, covid abates and NV returns to the promised growth trajectory, and PA has had a full harvest and started selling flower in May 2021 after $0.7 million sales in April 2021.

They will need to improve LHS operations to restore being able to provide flower inventory 7 days a week.  I would not be surprised if they rebrand LHS once they have stabilized retail operations. They believe the value of LHS alone will one day eclipse the market value of AYR presently.  They have their work cut out to achieve that.

In Q3F21 they look to add NJ via acquisition and the three dispos and the anticipation of adult use late this year or early next.

As both MA and NV seemingly stalled on them, it will be incumbent on the new acquisitions to bear fruit as guided. 

As we have said in the past, AYR success is all about execution.  It is interesting to see folks on social media pointing out the gap between AYR market cap and projected 2022 EBITDA and other peers.  Well folks, that is because they have not shown execution at the level they are trying to achieve, whereas the peers they cite have shown execution in the past.  We will see if they pull it off.

This Q:

Sales increased as anticipated from the full Q’s of acquisitions.  They estimate $100 million in sales next Q. 

New Jersey will be added, as well as Tahoe Hydro in NV, and the two dispos they bought in Illinois (which are located in a small border town). 

GM should bounce back after the last of the step up is sold through.  But we likely won’t have a clean Q on GM until Q4.

SGA has crept up but guidance of under 30% is welcome.

I am frustrated with the lack of segmentation, as it makes this difficult to see what is working and what is not, and it makes it difficult to determine breaks in management narrative.

This was my 5-6th earnings call for MSOs in the past week and half, and not ONE has mentioned the draft CAOA and the restriction on retail ownership.  I believe they do not want any oxygen getting to the story, even though it is a draft. Alcohol regulations at federal level are likely the end point, but color me suspicious when something this material to operations does not get discussed at all.

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 and will not start a new one in the next five days.