Unlike the press releases of $CURA and $ACRG, we finally have something to look at today with Ayr Wellness ($AYR.A). Newer subscribers (Welcome!) might not know, but TheCannalysts (mostly) don’t do analysis on press releases. Unlike financial statements (which are actionable), press released financial numbers are selective.
It’s bad enough that disclosure is as poor as it is, but selective disclosure is worse. Press releasing earnings (in my opinion) is intended to create a false front. Sort of like how a grifter uses a shiny bauble to distract the gullible. I’ve never known an ethical corporation that would do it – and to myself – an ethical C-Suite never would. I could see it in cases of needing to squash a running rumour, or other exceptional moment. The key word is exceptional. In $CURA’s and $ACRG’s case – it’s normal course.
And I believe its’ a greasy and needless practice.
Nevertheless, this is about $AYR.A’s fourth and final quarter of fiscal 2020. You can find our last Structure on them here, and a separate piece on their leverage. All amounts in USD unless otherwise noted.
To the financials!
- Sitting on a pretty good chunk of cash at $127MM. Buying assets with paper (in Liberty Health) keeps it in the bank. Speaking of $LHS, the acquisition closed February 26th, so we won’t see any of their numbers in here, and will have to wait until the 2nd quarter of 2021 is released (likely late August). More below.
- Inventory down $5MM (from $33MM to $28MM). Orderly given sales of $47MM for the quarter.
- Sales are up QoQ by $2MM. Gross margin down 3% (from 60% to 57%). No colour provided in the MD&A either, only YoY comparisons.
- Expenses are up $2MM QoQ. G&A flat (~=9.2MM), Sales and Marketing as well (~=$700k), so is SBC. Which is really hot, running around $6MM/Q, and $31MM for the year. These guys like a vintage Barolo with their steak apparently.
- Considering share price was sub $20CAD until last November, they haven’t been shy about paying themselves well.
- A lump appeared in liabilities during the final quarter of the year. Note 14 (noted last time) blew out, adding $135MM to an existing YTD liability of $29MM. Yeeouch. Total reported Net Income for 2020, on $155MM in sales with a ~=60% margin……drum roll…..a <$176MM> loss.
- Some of you will have read my piece on contingent liabilities, which stemmed directly from our $AYR.A Structure. That AMA with AYR.A saw COO Jen Drake iterate that they are ‘fully financed’, and have $4MM in free cash flow per month. More below.
- $7.7MM loss in forex over the year. Sloppy as heck from my perspective, and needless expense. No professional business would wear that kind of currency exposure. Might be on translation – because the parent CO is in CAD, subsidiaries are in USD.
- Despite using lots of paper for their acquisitions, they began the year with $8MM in cash, raised a net of $145MM, yet ended it with $127MM – implying a burn rate of 50% of monthly free cash flow. Most of it was used in purchases of PP&E.
- This is interesting, in that their expansion has been largely on turnkey operations. More below.
- Goodwill and Intangibles solid. Like, rock hard. Of $186MM in net assets bought through acquisition, $AYR.A booked $283MM in G&I. Boom. Table below.
- LivFree and Sira also came with $40MM in deferred tax liabilities. Man, $ARY.A really got lit up. Related party transactions too.
Ok. Enough for now. I need another day on this, and it’s been a full one so far.
I mention Liberty Health, because operationally, they were having issues with production and yields. $AYR.A addressed this in their AMA with us, and Liberty had hired a new master grower to try and right the ship. It’ll probably take a couple of turns to see the results. I also think $AYR.A presents the shareholder with a level of execution risk: they haven’t demonstrated they can run at scale. They’ve got a dandy (and expensive) asset in Nevada (LivFree) and in MASS (Sira). Both are cash cows, and both are relatively buckled in terms of operations. To a risk person, there is a chance of them being unable to manage a significantly larger system. That’s mitigated by Liberty already being up and planing. But, the risk to a potential investor is having to wait 6 months to find out how it’s going, and longer to find out if/how the Liberty grow is improving. We’ll only see that via segmentation, and, I suspect Liberty will disappear into summary lines.
We’ll definitely see their margins take a hit, and Q1 numbers will only reflect one month of run rates with Florida included. So, again, we come back to late August to see a full quarter of Florida included. Should $AYR.A be active in improving (or trying to improve) operations at Liberty – we won’t see results from that until November.
Blue Camo (operated as ‘Oasis’) was a $75MM buy into Arizona. There’s another $80MM in contingent consideration coming too. Again though, we won’t see this come online until Q1’s financials.
Nothing more than musing here – but I’m a risk guy at heart, and wanted to surface the risk of them being unable to quickly digest what they’ve eaten. Integration can take time, and they’ve had a couple of pretty big meals. I also see $AYR.A as relatively unproven operationally (outside of milking a couple of cash cows). Time will tell.
About that contingent liability (or as $AYR.A calls it – ‘contingent consideration’). Cute that. Some folks will go off on me about ‘non-cash’ charges. Well hey, since accountants should only worry about cash, we can nuke most of the profession, save a bundle, and just put together financial statements from cash register receipts, right?
That ‘non cash’ charge is dispensed in equity, which, will directly hit the aggregate cost of capital. Unlike Terrascend ($TER) – who actually had to execute a raise to pay for a prior acquisition – $AYR.A likely won’t. But. Both accounting entries see equity being spent to either extinguish a liability, or to book cash against.
Regarding Note 14 – the wellspring of the contingent consideration, it’s a complete beast.
Starting with warrants, they actually use a straight line (# of warrants x share price) to ascribe a ‘fair value’ for the warrants. They’re currently reported as a liability of $151MM. I don’t know what the hell that is. I’ve never seen a derivative valued on an absolute number before. Using [(Strike – Market) x (# of warrants)] would be a more accurate ‘fair value’. This is the oddest thing I can recall coming across in financials around derivatives.
It’s also led me to (ugh) to running around IFRS, which, looks like share-based payments are governed under IFRS 2, with guidance on valuation coming from IAS 32. Be right back. And….back. That took an hour. And….now I have a headache. I cannot literally see how there’d be a fair value determination of (Market Price x Quantity) within any of it. There’s an exercise price of $11 (it used to be $11.50, but they gave themselves a bonus of $.50 in SBC during the year, and dropped the strike by $0.50). There’s also requirements around valuation if the derivatives are not denominated in the native currency of the balance sheet. Natch.
I’m going to ask a couple of accountants I know, see if I can’t get a response to this. Their treatment implies that the holders have an option to do a straight cash settlement with the company for $0. That implies that the $11 strike price doesn’t exist. Yet, it stands proudly in Note 14.
Ok. Due to that – and that Note 14 is probably one of the more complex notes that I’ve come across, I’m tapping out for now. I’ll return to Note 14 in a separate post.
That Goodwill and Intangibles number is epic. It’s a 105% of the total consideration paid, and it looks like Goodwill was a plug to make up for net negative assets. That’s really something. For that $270MM paid, they got $40MM in PP&E and inventory. Wow. Here’s the table that shows the net assets of acquisitions during 2020. It’s quite the picture:
Ok. This has been a slog, and there’s much yet to explore.
When we first started looking at these guys, GoBlue made a crack to me about them looking like bankers. Looking at these financials, I tend to agree. They’ve got leverage absolutely everywhere, and their structuring is way heavy. I lingered on forex – its’ because it’s a wheelhouse for me. And, AYR.A had to restate their 2018 financials due to the qualifying transaction that brought them into existence. It’s just a translation value between CAD/USD that was brought forward b/c of the restatement.
The CEO was granted 1MM shares as ‘incentive compensation’, which implies a payment of some $35MM +/-. This is David Klein level salary – for a guy who had $160MM/yr in sales. Even doubling sales this year….really?
I don’t know. I don’t get the warm and fuzzies looking at these. These guys are packing about $220MM in cash (as of writing) – and sport good cash flow. They also have a fair amount of overhang, a crap ton of G&I relative to assets, and about another $130MM in contingent consideration to be yet booked. These financials are extremely complex, yet they value the warrant optionality in crayon.
I know ‘warm and fuzzies’ isn’t exactly a term used frequently by financial analysts. I think these guys are packing a ton of business risk, both in margin generation and in execution. To be more specific, they have a strong ‘iAnthus ($iAN) feel’ to them in my eyes. We have a ton of research available on $iAN.
I’d encourage the interested reader to peruse some of our work on them for parallels in $AYR.A.
My first look at $iAN was in late 2017, and I concluded it by saying I thought $iAN was: “…a business built on excel spreadsheets by bankers for bankers. So many contingencies to revenue combined with jurisdictional uncertainty, this is simply a hedge fund. Short and mid-term operational exposure is extreme.”
I’ll return to Note 14 another day.
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