Ayr Wellness: Will multi-year investments in growth pay off? (AYRWF)


Jonathan Kitchen


When I first wrote about Ayr Wellness (OTCQX:AYRWF) in July 2020, cannabis in the United States was just starting to pick up steam. Most of the companies were part of one big scrum and it was hard to see which one eventually stand out. There just wasn’t enough data. I didn’t give Ayr a buy rating, saying they looked promising, but with only three quarters as a public company, the best approach was to wait and see. That didn’t stop Ayr from climbing 325% from $8 to $34 in seven months during the great cannabis boom, and here we are now at $3.22. What a journey! Ayr has changed a lot, and with ten more quarters of results on the books, it’s time to see him again. This article will undertake a review of Ayr in light of the recent Third Quarter 2022 Earnings Report.

Ayr background

Ayr was formed from an early SPAC. They entered the cannabis business by acquiring five private companies in Massachusetts and Nevada on May 24, 2019. The total consideration for all five was $270 million. In their first public quarter, revenue was $32.1 million. Today they have growing, processing and retail operations in seven states and third quarter revenue was $119 million.

Ayr has been one of the most aggressive names in the industry when it comes to growth strategy. They have funded a number of acquisitions with a combination of cash, equity and seller’s notes (debt), with additional cash if performance targets are met. This hybrid technique is one of the reasons they were able to grow so quickly. It is less dependent on a single source of financing, and the seller even finances part of the sale. It should also be noted that much of the equity and cash was raised during the boom, when stock prices were higher and raising capital was easier.

This efficient acquisition record is right in Ayr’s wheelhouse. Management believes that part of what gives them an “edge” is their experience of successful careers in senior positions in finance, mergers and acquisitions and asset management. They are confident that they can identify companies that offer value and growth and apply the most advantageous financing techniques.

Ayr Wellness third quarter results

Ayr has been an acquisition machine, but how is the company doing? In the last quarter, the response is quite good. The table below shows the third quarter results in the context of the previous six quarters, which corresponds to Ayr’s period of rapid growth, and the Q/Q and Y/Y comparisons. All figures are in millions of USD except EPS.

March 2021 June 2021 Sep 2021 Dec 2021 March 2022 June 2022 Sep 2022 Q/Q Y/Y
Revenue 58.4 91.3 96.2 111.8 111.2 110.1 119.6 +9.5 +28.3
Gross profit 30.3 48.9 49.1 53.7 48.0 43.5 50.0 +6.5 +0.9
Oper. Revenue 0.6 3.0 0.9 -7.6 -17.2 -20.9 -17.4 +3.5 -18.3
Gains: continuous operations. -16.6 -20.7 -3.4 23.8 -9.2 -40.2 -37.4 +2.8 -34.0
Net revenue -16.6 -20.7 -3.4 23.8 -7.6 -38.4 -36.1 +2.3 -32.7
PES -0.4 -0.4 -0.1 0.4 -0.1 -0.6 -0.5 +0.1 -0.4
EBITDA 8.0 17.4 16.9 12.3 4.1 -0.1 8.1 +8.2 -8.8
Adj. Gross profit 34.2 53.1 56.6 63.3 57.9 57.2 62.8 +5.6 +6.2
Adj. EBITDA 18.4 27.4 26.0 26.1 19.5 19.6 21.7 +2.1 -4.3

The numbers moved in a positive direction sequentially and revenue posted a 9th consecutive quarter of growth. Revenues were helped by the first full quarter of sales in New Jersey and Illinois, the launch of adult use in Massachusetts and expansion in Florida. Ayr now has 52 outlets in Florida, just 20 months after launching the acquisition of Liberty and its 28 outlets.

As Ayr reminded us again on the conference call, expansion requires a high level of spending before results show up on the top or bottom line. There are countless tasks to complete to open a new establishment, and each has a cost. As Ayr nears the end of a two-year investment program, the effects of the expansion are paying off. They expect further sequential revenue growth in the fourth quarter and into 2023, along with improvements in cash flow and earnings. The expansion is not yet complete, however. Among other things, they will open 15 additional stores in Florida in 2023 and expand their facilities in New Jersey.

Capital position

Ayr ended the quarter with $100 million in cash and expects to reduce investments in 2023 to less than $30 million. For comparison, they’ve spent $89.7 million on growth so far this year (or $58.3 million net of $31.4 million from asset sales.

Growth doesn’t come cheap. This $255 million market cap company has $455 million in debt using Seeking Alpha data, up from $208 million in Q3 2021 and $157 million in Q3 2020. They also widely accessed in the stock market. There are currently 69 million shares outstanding, compared to 60 million in Q3 2021 and 30 million in Q3 2020.

It’s instructive to see how Ayr stacks up against other leveraged cannabis companies, most of which are also implementing growth strategies. The chart below compares Ayr to five companies with similar market caps: Village Farms (VFF), OrganiGram (OGI), TerrAscend (OTCQX:TRSSF), Sundial (SNDL) and Aurora (ACB). The Y charts lag the most recent data, but the chart is clear. Ayr has significantly more debt than its market cap peers.

Ayr Wellness long-term debt
Data by YCharts

The chart below shows long-term debt for companies with a similar amount of debt to Ayr. These are Green Thumb (OTCQX:GTBIF), Trulieve (OTCQX:TCNNF), Curaleaf (OTCPK:CURLF), Verano (OTCQX:VRNOF) and Cresco (OTCQX:CRLBF). Again, the Y charts do not contain the most recent data. These companies are much larger than Ayr, with an average market capitalization of $2.408 billion compared to Ayr’s $234 million.

Ayr Wellness against the debt of its peers
Data by YCharts

Businesses use a variety of financing methods. There are many aspects of debt, such as current and non-current leases, capitalized leases, net to gross, debt ratio, etc. Ayr uses sale-leasebacks to a large extent, whereas a company like Verano does not. Then there’s the income tax factor, where Ayr is current but a company like Green Thumb owes over $200 million. My view is that tax deferral is a smart form of “borrowing”, but that’s another story. Suffice it to say that the comparisons here are good representations of debt positions.

The SPAC Factor

Ayr was founded through a SPAC in 2019, before most people knew what a SPAC was. Since then, SPACs have earned a reputation as an arrangement that often enriches founders and insiders while average shareholders are left behind. Ayr went public at $10 per share and now sits at $3.22. Admittedly, the cannabis industry did not perform well in the years that followed, but one has to wonder if the SPAC structure played a role. I remember applying to Ayr IR in 2020 for a 1,700,000 restricted stock grant to COO Jennifer Drake, which at the time was worth around $40 million CAD. He replied that it was to align Drake’s compensation with that of other executives. I didn’t delve into it, but I wondered what could make these frames worth so much money.

Summarize Ayr Wellness

Ayr’s investments have resulted in impressive revenue growth and business expansion. According to CEO Jon Sandelman, the company is now at the point where it will reap the rewards of the investments of the past two years. Sandelman and his team have demonstrated a marvelous ability to raise capital, which is not surprising given their long experience in capital markets. Sandelman said Ayr’s goal is to be one of the top five cannabis companies, and they’ve come a long way. But if there’s one lesson the broader investment community has learned over the past few years, it’s that the ability to raise funds and grow revenue is no guarantee of anything. that is. In many cases, this has only caused businesses and investors grief. We are obligated to look at any emerging high-growth company and consider where its strategy might lead. This becomes especially important in adverse economic conditions.


In the third quarter of 2022, financial stocks evolved positively. Before this quarter, the balance sheet is uneven on important financial data such as operating profit, net profit and earnings per share; GAAP EBITDA is also not consistently trending in a positive direction. Management maintains that the company is now in a position where that will change, and investors will want to watch the coming quarters closely.

There are several aspects of the business that might give investors pause. The rapid expansion took a toll on the balance sheet, putting debt levels at the upper end of the industry. Investors will also want to keep an eye on the stock count, which has doubled in two years. We also need to remember Ayr’s origin as SPAC. Although they converted almost three years ago, it may still have lingering consequences on the capital structure and the way the business is run.

Investment recommendation

My recommendation is in two parts:

First, for those who own stocks, Ayr is a HOLD. If we take management at its word, financials should recover thanks to multi-year investments in growth. This should show up over the next few quarters, and the downside during this period is minimal given most investors’ cost base. Additionally, there is the prospect of SAFE banking passing through Congress before January, which will be a big boost for the entire industry.

Second, for those who don’t own stocks, the recommendation is to wait. Ayr has above average risk elements. Ayr could be suitable for anyone with an above average tolerance for risk and could be a perfect choice for these people. For the average investor, however, there are few downsides to watch and wait. There will be plenty of time to buy if we see management’s strategy unfolding as expected – it won’t be an overnight phenomenon. In the meantime, there are other companies with equal potential that I believe are on sounder footing and pose less risk. I recently wrote about several such companies: Green Thumb, Trulieve and InterCure (INCR).


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