NYC is an amazing place. The energy and pace are high, and New Yorkers are (in)famous for their directness. Regarding finance and capital markets, its’ the centre of the Western world.

We’ve kept a close eye on AYR Wellness ($AYR.A) for some time now, most recently regarding their share buyback and warrant acceleration. GoBlue – in his latest “Quarter in Pictures” – presented their current ‘state of affairs’.

From a capital structure standpoint, I’m reflexively turned off by being presented with numbers I can’t back into. I mean, I came within 0.5% of estimating Jushi’s contingent liability. Even in the far more complex optionality held by Constellation ($STZ) on Canopy Growth ($WEED), estimates were within $78MM (~=5%) of what was ultimately reported ($1.583B v $1.505B).

Anyhow.

To the financials!

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• SBC a brisk $15.3MM YTD. Note 16 detail the number. Pricy for performance in my opinion.
• I have little visibility into warrants and options. This is because Note 12 (Shareholder Capital) is an amalgam of all LTD transactions. It provides no schedules, tenors have to be calculated, and cross referencing is required. I’ll echo Blue’s comments: $AYR.A’s disclosure needs work.
• One of the things about SBC here is that of that YTD value, shareholders paid withholding taxes of the recipients. There’s a line item for 989k shares withheld, having an attributed value of $28.4MM (~=$28.70/share). This is applied directly against paid in-capital. Yeesh.
• That said, we can see that 900k in warrants have been exercised so far this year, bringing in $5.9MM. Equivalent to a strike price of $6.64USD. Which, is absolutely nowhere to be found in Note 12.
• You may think me pedantic here given materiality (I’ve gone off about valuing $AYR.A’s optionality at length), but I’ve seen this exact sort of thing trip up many an investor, as most retail ignores overhang in asset valuation. I can assure you the professionals don’t.
• 4MM multiple voting shares exist – with 25 votes per share. These came about as previous Class B shares – granted to the ‘Sponsor’ (presumeably Sandelman) – were converted into multiples post qualifying transaction. Out of 58MM fully diluted shares in the float, that sponsor holds 100MM votes.
• Exchangeable shares had been dwindling. These appear to be issued solely via acquisitions – where the sellers are granted them. Their only feature is that they can be exchanged at any time into a subordinate, so no inherent optionality (outside of some being in escrow). Negligible.
• ‘Contingent Consideration is down from $141MM last quarter to $129MM in this one. As to backing into it, crack a beer and pass the joint. I’ve tried.
• Derivative Liabilities are a component of this total ($24MM), and relate to whether or not previous sellers of the assets will hit milestones. It’s a great proxy to see if things are rolling along, or if there’s some potential issues in-system. It accreted by $1.5MM QoQ, and has been pretty flat for 3 Q’s. Given some share price softness, it indicates that the probability of milestones being hit is steady, and there’s a fixed value attached to the earnout (rather than share price). And that’s true (see Q3 F2020 structure).
• The decay in Contingent Liability ($12MM) *should* mainly attributable to share price decay. Trouble is, share price was only off $1 between the dates of the financials, which I can’t tie to the underlying gross value of the liability.
• Virtually all of the amount stems from the Oasis (LivFree acquisition) (NV) – which has already had $50MM shot through expenses in Q3 F2020’s financials. The initial buy – from what I can see – which initially came online at a $123MM purchase price.
• With the $164MM in contingent liabilities that popped up at year end, its’ purchase price is now at $275MM.
• If there’s considerable optionality nested within a deal, be wary of listening to someone give you a purchase price who doesn’t mention it.

Ok. Man, these financials are a slog. Honestly, I don’t think I can add much that I haven’t written.

$AYR.A’s share price has been showing increasing levels of volatility, sales ramp notwithstanding:

However you see what the drivers are – there *should* be less flux in contingent consideration go-forward. I believe $AYR.A got burned by dropping such a large liability on their year end, and have seen their deals since Oasis/LivFree put far more on exchangeable shares for earn-outs, and significantly less in warrant optionality and upside sharing of share price thresholds.

This one is relatively ‘easy’ – inasmuch as while I dislike $AYR.A’s capital structure (in a word: overhang) – their operations and profitability simply aren’t borne out. They’ve taken a whack of assets on, and integrating/optimizing them is going to be the primary challenge for awhile.

It’s a ‘wait and see’ for myself, which is somewhat charitable. In terms of overall risk – all I’ve seen over the past couple of quarters is that its’ increasing. A flip to profitability……. combined with showing they are capable of being an operator at scale……is all that concerns me for the present.

The warrant acceleration does clean up the capital structure somewhat. It’s far from being a ‘clean house’ though.

I stopped by the ‘Charging Bull’ today to get a snap, it was surrounded by tourists patiently waiting to get a solo shot. Very civil. There was a bigger line up to rub the balls than the head (there’s some serious metaphors in there), and I couldn’t be bothered to wait for clearance. I did go by the NYSE (security is crazy), but ended the tour by spending a couple of few good hours in the Bowery chasing several things. I love the City.

If you’ve an ask of anyone, let me know.

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.A