Let’s look at AYRs fundamental financial metrics for their March 31, 2021 earnings release, financial statements and MDA.

Guidance from presser:

• Based on the results to date, management is expecting 2Q21 revenue of approximately $90 million, which reflects growth of over 54% quarter-over-quarter and 218% year-over-year. The Adjusted EBITDA margin on a US GAAP basis is expected to remain in the 30% range in Q2, reflecting the investment in new markets and growth projects that are expected to generate more meaningful revenue in the second half of 2021 and in 2022.

• The Company is reiterating its target for 2022 revenue of at least $725 million. On a US GAAP-adjusted basis, it is also reiterating its guidance for 2022 Adjusted EBITDA of $300 million, which is comparable to $325 million on an IFRS basisⁱ.

The best way to categorize AYR is as a “roll up” of several acquisitions with one more (New Jersey) on the way. Their ability to scale cultivation and expand from two to seven 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.

Q4 F2020 Additions

F2021 Additions

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

The combined purchase prices of the above $782 million with $696 million on LHS and Oasis alone.  Goodwill and Intangibles aggregate $716 million or 92% of purchase price.

MDA does not have QoQ narrative. They do have some interesting nuggets in presser. I really wish they would provide retail and wholesale segmentation.

Open the fins and MDA and let us dive in.

Income Statement Drivers & Breakeven Sales: Trend

AYR operates in six states (+2 QoQ FLA and AZ):

• Massachusetts with 2 retail (+1 QoQ 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 (+1 QoQ) and 72,000 sq ft of cultivation and processing
• Pennsylvania (acquired in Q4 F2021) with 2 retail (+2 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 35 retail (acquired in Q1F21) and 300,000 sq ft of cultivation.  Adding 10 acres outdoors by Q3 F2021
• Arizona with 3 retail (acquired in Q1F21) and 10,000 sq ft cultivation and processing expanding to 96,000 by year end in Q4F21

In process of purchasing in one state:

• 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.

AYR sales increased +22% QoQ by $10.6 million to $58 million.  AYR does not provide retail wholesale splits in financials or MDA. They do provide some detail in presser but not enough to disaggregate sales.

LHS closed February 25, 2021 and contributed to sales in the Q. Arizona closed March 23, 2021 and had a weeks’ worth of contribution. Full contributions will be evidenced next Q.

PA commenced sales in Q1F21, but they only provide a glimpse into what next Q looks like in the presser.

Retail revenue in MA is $5.8 million -2% or -$0.1 million for the Q, whereas retail revenue in NV is $27.5 million an increase from Q4 $26.7 million but below Q3 $28 million.

W/S for MA has increased +$0.4 million to $13.8 million Q1F21 from Q4F2021. I can no longer net out to determine NV wholesale, but Q4F20 it was $1.8 million.

MA has aggregate sales of $19.6 million in Q1 +2% QoQ (33% overall sales) versus $19.3 million in Q4F20.

LHS, AZ, PA, and NV wholesale-only contributed $11.3 million for the Q, whereas in Q4F20 NV wholesale was $1.8 million. Again, I cannot disaggregate the revenue based on what has been provided.

It would appear their organic growth was VERY minimal QoQ in MA and NV in the $1.2 million range, after an increase of only 5% or +$2.3 million the prior Q.  They did open a dispo in NV in the Q.  Not sure the date it came online.  With covid abating, NV should regain some lost tourism during F21.

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 (AYR, Cura, CL and GTII)

This Q is very distorted as sales from LHS were onboarded on Feb 25, 2021 and AZ March 23, 2021.  So, they did not get a whole Q of Sales or Gross Margin, yet the increased PPE of $88 million and G/I of $597 million landed on the balance sheet.

We will revisit this metric next Q as we will have a full Q contribution from acquisitions.

Income Statement Drivers & Breakeven Sales: Peer

AYR is 6^th in this peer group in Sales at $58 million between HARV at $88 million and TER’s $53 million.

Gross Margin: Trend & Peer

GM was negatively impacted by the fair value of the acquired inventory at LHS and AZ to the tune of $5.8 million of FV acquired less actual costs.  They acquired $63 million in fair value inventory.  This may take a few quarters to work through.

GM% decreased by -16% to 42%, good for last place in the peer group.  Without the $5.8 million inventory step up the GM would have been 52%.  Still down from last Q 58%.  The prior Q LHS had a 58% GM but we have long questioned their accounting treatments and the veracity of their figures.

GM was $24.5 million versus $27.5 million QoQ and $27.4 million in Q3F20. Without the step up on inventory it would have been $30 million.

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.

This Q is very distorted as sales from LHS were onboarded on Feb 25, 2021 and AZ March 23, 2021.  So, they did not get a whole Q of Sales or Gross Margin, yet the increased PPE of $88 million and G/I of $597 million landed on the balance sheet.

We will revisit this metric next Q as we will have a full Q contribution from acquisitions.

Gross Margin: USA Peer

AYR dropped from 5th highest in this peer group to last due in large part to inventory step up.  Without same they are at 52%, in the lower half 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 $0.7 million, +$0.2 million change QoQ.

G&A come in at $15.8 million an increase of $6.6 million, or 27% of sales versus 19% last Q.  The big increases QoQ were +$2.5 million in compensation and +$1.2 million in rent and utilities, both stemming from LHS acquisition and adding their store count. Expect a full Q of sales to show an absolute increase next Q, but where it lands as % of sales may tell us how integration is going.  Management fees increased $1.1 million QoQ to $1.8 million versus $4.1 million for the entire F2020 year.

SBC increased to 14% of sales at $8.2 million an increase from $5.2 million and 11% from last Q. Higher stock price and adding LHS are likely the drivers.

Depreciation and amortization of $5 million, an increase from $3.7 million last Q, rounds out Opex.  Adding LHS assets and a full Q from PA are the reasons.

Opex increased by $11 million to $30 million and increased to 51% of sales from 39% last Q.

SGA & SBC as % of Sales: Peer

AYR went second lowest in SGA to 3^rd lowest. And 7^th lowest in SGA and SBC from 4^th.

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

Net Operating Profit went negative -$5.2 million versus +$8.7 million last Q a swing of $13.9 million.  A decrease in absolute GM and increase in Opex are the reasons.

At present GM% and OPEX$’s AYR requires 21% in incremental sales to restore +NOP. They rank tied for 7th in this peer metric.  With 54% increase in sales projected next Q this should return to + territory. If it doesn’t…

Other Income (Expenses) and Taxes:

Other Income for the Q was negative $6 million versus negative $138 million last Q. This consisted of notable changes in:

• Acquisition costs $3.1 million versus $1.9 million last Q
• Interest expense increased to $2.8 million from $1.9 million as debt was added during the prior Q.
• Unrealized Fair Value loss on financial liabilities of $0.5 million versus $135 million QoQ. The warrant and derivatives were lit up with increasing stock price in prior Q.

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

Net Income this Q registered at -$16.6 million versus -$143 million net of IFRS voodoo.

+EBITDA: Trend & Peer

AYR recorded a +EBITDA of $16 million a -$3 million decrease in EBITDA.  Their Adjusted EBITDA was $18 million.  They include add backs of $1.6 million in location set up costs and $0.3 million in 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 $19 million,
• -$31 million generated by investing activities, and
• +$199 million in financing activities. 

If you strip changes in Working Capital items from Cash Flow from Operations (largely resulting from acquisitions) you are left with an Opex Source of funds of $7.5 million.

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

At +Adjusted EBITDA, with current GM% and cash OPEX, AYR requires 34% of existing sales to achieve +EBITDA. AYR ranks first in this peer group. This should change/slide as they add more Opex for the full Q in Q2F21.

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 slid on this metric due to the decrease in Adj EBITDA and a +$0.8 million in taxes and interest to an aggregate $7.7 million.

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

Despite a drop in the Q, AYR compares favorably to the peer base with only GTII and TRUL surpassing as a % of sales. 

Balance Sheet Items of Note:

Cash position $196 million an increase of $68 million QoQ from equity raise.   They raised $118 million in equity during the Q and spent $30 million on the acquisitions in the way of PPE, asset acquisition and working capital.

“Waterfall” Trend

Switch to US GAAP.

Inventory is $89 million QoQ versus CoGS of $34 million.   They acquired $63 million in inventory with Q1 acquisitions.  They have 2.6 Q’s of inventory on hand and $32 million (a full Q, albeit abbreviated due to late Q acquisitions) in Finished Goods.

“Waterfall” Peer

Only 3 non-GAAP holdovers above: Cresco (awaiting published Q1F21 which will be GAAP), Cura and TER.

Other notable balance sheet items:

• PPE increased $88 million to $157 million as $74 million in assets were added via acquisitions. I note, $39 million in PPE is assets under construction.

• Intangibles and Goodwill are $942 million an increase of $598 million QoQ. Of Long Term Assets, 81% is G/I.

• Right of Use Assets increased $44 million as did leases against same.

• Income tax payable declined $11 million to $10 million, as they remitted taxes.

• Contingent consideration $118 million to $142 million.  This increase 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. 

• Debts payable increase $29 million QoQ to $83 million.  They assumed $25 million in debt with Oasis AZ acquisition.

What I said Last Q:

When a business is in formation and they have high expectations that will take a while 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) They did say they would get back to me quickly on Saturday.

This 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.

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.