In our last look at AYR Wellness ($AYR.B), we noted that execution risk is a big component of investing here. I also spent <ugh> a full day on their ‘Derivative Liabilities’ Note. I’m remiss in not having extended that look – but in hindsight……I honestly don’t think it’ll bring much incremental utility.

One of the challenges is that much of ‘contingent consideration’ reported vaporizes when subsequent financial statements are issued. Sure, the obligation is still there, but, accounting guidance under ASC 450 (it’s lengthy, arcane, and provides accounting firms with a reason to exist) rolls the notional liability into equity:

As it is, $AYR.B is a relatively complex beast, and I think rapid expansion will be a real test of operational ability. There’s word of continuing production/sales issues at their Liberty Health division in Florida (which would be unsurprising. One can’t turn an outfit’s operations on a dime). In these financials, we’ll only get a chance to see one month of run rate, and given an MSO default of not reporting segments by performance, it’ll be hard to tease out what’s going on. At a cost of some $400MM, one would expect a positive contribution pretty fast.

Blue Camo/Oasis (ARIZ) will be in these financials. It’s been overshadowed by the $LHS buy despite coming in at $280MM. For that, $AYR.B got 3 dispensaries and 10k ft² grow op (an additional 80k ft² cultivation facility is ‘under development’).

I see GoBlue’s already done a timely ‘Quarter in Pictures’ on $AYR.B. His rundowns are superlative on the nuts and bolts of a shop.

All values in USD unless otherwise noted.

To the financials!

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• Cash just under $200MM. Operations ate $3MM in cash during the quarter, it’ll be a few to stabilize after their acquisition binge.
• Share count has nearly doubled (from 28.9MM to 47.6MM) in this quarter. 787k warrants were struck at an average price of $5.44.
• 9.5MM of them remaining, listed at a notional price of $11.50. 5MM RSU’s at $18. SBC during the quarter was a steep $8MM. These guys have one of the most expensive front offices in the entire sector. Looking shameless at this point.
• And….as I mentioned in that post on Note 14, I can’t back into either their warrant calculation nor the derivative liabilities, which are reported this quarter at $141MM. Despite share prices advancing $6.75 during the period.
• I’m suggesting nothing. I am stating that I don’t recall being unable to price derivatives in this sector. The values reported make no sense to me. Perhaps a call to IR – if one cared – might clarify.

• They’ve been on an acquisition rampage for the past year, which, brought together 4 new outfits in these financials. These are added to $86MM spent for acquisitions in the quarter previous <(CannTech PA – permits for up to 6 storefronts and a cultivation site), and DocHouse (grow op in PA)>. More below.

Ok. I’m kind of stalling out here. There isn’t much to do but wait and see.

Regarding operations that came online this quarter – $AYR.B is kind enough to list them out. I see Blue noted the Intangible to total cost ratio. If one adds in Goodwill, those 2 items comprise 91% of the total cost of the acquisitions:

Except, this schedule doesn’t include $117MM of contingent consideration for Oasis, due to ASC 450 mentioned above. There’s another $27MM of it in equity (that I can find in the last 2 statements).

And, the actual cash component of the contingent consideration – $141MM liability – isn’t attached here either. Straightforward accounting stuff, but the complexity obscures the total cost of the assets. The flux in Shareholders Equity QoQ underlines this:

I’ll reiterate – these financials are complex. There’s also good disclosure – but – I’ll caveat that by saying its’ not present everywhere in the statements

As it stands, the loading of G&I here is in excess of $CURA’s and $GTII’s formation. They’ve got an extremely high bar set with 2022 revenue guidance. And while they’re a little cute around 2021’s….. only going as far a one quarter ahead (they’re guiding to $90MM in sales for Q2). Even so, that means they expect full year revenue to double between 2021 and 2022. I’m a little sceptical about maintaining that trajectory in an increasingly competitive marketplace.

$AYR.B has been really effective in levering equity to get into position. For now, all there is to do is wait.

I’m gonna cut this one short….it’s my birthday, and I’m gonna go work on a patio sunburn with some old colleagues.

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 no position in $AYR.B