AYRSF - AYR Strategies

[spartansaver]

Why is everyone saying this is profitable? I'm seeing losses and a bunch of adjustments just to get this thing to AEBITDA positive.

 

How does the biological asset line in COGS work? I keep re-reading it and my brain can't understand it.

 

In addition, the base rate for Success with SPAC vehicles is terrible.

 

A large part of the premise seems to be that a cannabis roll up makes a lot of sense. The other side of the coin is that a SPAC is predicated on making lots of acquisitions. Are cannabis company owners really the best people to be buying businesses from? If the average acquisition is value destructive, then you factor in the average cannabis store owner/grower as lower quality than your typical business owner, it could be a much riskier area to be buying businesses.

 

I don't mean to be rude to any tokers out there, but it seems like a reasonable assumption. Nothing wrong with lighting one up.  8^)

[Gregmal]

All of AYR's acquired businesses were profitable in 2018 on a pro forma basis....

 

Further, wholesale buildout requires spending a bit(not a ton IMO) of money that then balloons later out. The Sira wholesale ops will go from 10% or so of total revenue to almost 40% in less than two years. This is helped twofold by the additional Capex, plus increasing recreational usage+licenses. Massachusetts is a very unique revenue source and will likely be the main driver of growth as these guys already have about 65% of the licensed businesses and are the only ones capable of keeping up with demand.

 

Channel checks today further indicated that Massechsuets statewide vaping ban is just pushing people into other products which is good for AYR. This is also pushing the price per pound higher, now in many areas north of $3000...They already had about 45% margins at $2700.

 

Something being "something" really isn't a good reason to invest or not invest. Just something(in this case) to heed. Stupid retail investors roll the dice on spacs(I originally said garbage spacs but then decided to just say spac because I agree, there is an implicit understanding that they are typically inherent garbage) and then typically throw in the towels when it appears they won't get rich quick; informed investors almost universally dismiss them without even giving a look. Is it possible that somewhere there is an opportunity here? Maybe. But it's an "xyz" to me so I won't invest is just classic laziness. In this case, and because of both legal and financing logistics, one could easily argue that the SPAC is the perfect vehicle for a marijuana rollup.

[Gregmal]

Why is everyone saying this is profitable? I'm seeing losses and a bunch of adjustments just to get this thing to AEBITDA positive.

 

How does the biological asset line in COGS work? I keep re-reading it and my brain can't understand it.

 

In addition, the base rate for Success with SPAC vehicles is terrible.

 

A large part of the premise seems to be that a cannabis roll up makes a lot of sense. The other side of the coin is that a SPAC is predicated on making lots of acquisitions. Are cannabis company owners really the best people to be buying businesses from? If the average acquisition is value destructive, then you factor in the average cannabis store owner/grower as lower quality than your typical business owner, it could be a much riskier area to be buying businesses.

 

I don't mean to be rude to any tokers out there, but it seems like a reasonable assumption. Nothing wrong with lighting one up.  8^)

 

So selling weed to dopers is a bad business? Wholesale will be the main driver. They've got recreational licenses pending and should be going live maybe Q2-3 2020, but in the meantime these small business are being fast tracked and need to have product. AYR holds one of the 3 wholesale licenses in MA and easily has the funding to continue capacity increases. Right now they are only pumping out less than 20% of their permitted capacity.... do the math.

 

It seems people are forgetting that legalized marijuana is in its infancy. This shit literally just became legal so there is a development cycle and period of time in which one would expect things to ramp. Its not just, boom, legal, now we're going to 10,000 lbs a month from zero...Regulatory burdens still exist. Permitting and whatnot still takes time. Having experienced and financially savvy operators handling this certainly seems more desirable than tapping Harold and Kumar...

[spartansaver]

Why is everyone saying this is profitable? I'm seeing losses and a bunch of adjustments just to get this thing to AEBITDA positive.

 

How does the biological asset line in COGS work? I keep re-reading it and my brain can't understand it.

 

In addition, the base rate for Success with SPAC vehicles is terrible.

 

A large part of the premise seems to be that a cannabis roll up makes a lot of sense. The other side of the coin is that a SPAC is predicated on making lots of acquisitions. Are cannabis company owners really the best people to be buying businesses from? If the average acquisition is value destructive, then you factor in the average cannabis store owner/grower as lower quality than your typical business owner, it could be a much riskier area to be buying businesses.

 

I don't mean to be rude to any tokers out there, but it seems like a reasonable assumption. Nothing wrong with lighting one up.  8^)

 

So selling weed to dopers is a bad business? Wholesale will be the main driver. They've got recreational licenses pending and should be going live maybe Q2-3 2020, but in the meantime these small business are being fast tracked and need to have product. AYR holds one of the 3 wholesale licenses in MA and easily has the funding to continue capacity increases. Right now they are only pumping out less than 20% of their permitted capacity.... do the math.

 

It seems people are forgetting that legalized marijuana is in its infancy. This shit literally just became legal so there is a development cycle and period of time in which one would expect things to ramp. Its not just, boom, legal, now we're going to 10,000 lbs a month from zero...Regulatory burdens still exist. Permitting and whatnot still takes time. Having experienced and financially savvy operators handling this certainly seems more desirable than tapping Harold and Kumar...

 

Not a bad business in an economic sense. A bad business in that it may attract shadier individuals. It reminds me of the public stripclub business that has been running into issues (RICK). I'm guessing that Cheech and Chong may know a few risks in running these businesses that Sandelmen may not have a clue about.

[cameronfen]

This might turn out well I don't know, but why are people selling there cannabis based business for 5x EBITDA to AYR given all the hype?  People have to be looking at Tilray and saying I want that.  It seems to me the people that do sell at 5x EBITDA are probably hiding something which is like the story with all SPACs: the valuation is good but usually the seller is better informed then the buyer. 

[Spekulatius]

This might turn out well I don't know, but why are people selling there cannabis based business for 5x EBITDA to AYR given all the hype?  People have to be looking at Tilray and saying I want that.  It seems to me the people that do sell at 5x EBITDA are probably hiding something which is like the story with all SPACs: the valuation is good but usually the seller is better informed then the buyer.

 

Time pressure to invest in something is also a big factor with SPACS. I never got a decent deal when I had to buy something and the seller knows it. These things attract a certain promoters who are better at storytelling than at running a business.

[Gregmal]

I don’t disagree with all the points raised; there is certainly an element of risk here. But I think this setup is inherently different from say, acquiring an oil company with stated reserves or a tech company with certain billings. They’ve basically acquired conpanies on a strategic basis and regardless of the operatings, have ONE OF THREE licenses to wholesale cultivate in one of the states with the highest per pound rates. Give this opportunity to people who know how to operate a business and put them up against what are at best mom and pop, and at worst, a bunch of dopers...and I think they do well.

[villainx]

SPAC also means there's a lot of cash on sidelines that would make it more difficult for AYR's acquisition strategy?  That's also a way to think about it, right? 

 

I'm trying to get up to speed on things.

[Gregmal]

SPAC also means there's a lot of cash on sidelines that would make it more difficult for AYR's acquisition strategy?  That's also a way to think about it, right? 

 

I'm trying to get up to speed on things.

 

What do you mean?

 

There is a Cannabis SPAC 2 that I believe is also sponsored by Sandelman Partners.

 

But the referent to SPAC here doesn't "mean" anything anymore and they do not have cash on the sidelines that has to be spent. I "" mean because as Ive said I think anything who s looking at this does need to understand SPAC's and kind of feel out their tolerance for basically betting against some very stacked odds if you look at things in the context of a vacuum and that almost all SPAC's post deal, are junk.

 

These guys have a nice chunk of cash, maybe $30M or so(Im lazy and not checking right now) on the balance sheet. But the big thing is the the go forward guidance and executing. You can be fearful of where the bones are buried but I view this as much safer for the simple reason that they didn't just buy one business, they bought 5 that all kind of have synergies. Additionally, much like a liquor license, just having it is where the value is. Shady, sketchy shit with the previous owners or not, they have 1/3 of the MA licenses for wholesale...Thats big.

[villainx]

I meant there are a lot of cannabis SPAC's out there. 

[movys]

The points made about the success rates of SPACs are well-documented.  However, structural idiosyncrasies of the cannabis sector make SPACs the ideal vehicle for these companies.

 

Private companies in the space would love to cash out, but they are skeptical of the volatility and crazy valuations of most cannabis stocks.  Most cannabis companies are money losers and don’t have cash to spend, so a SPAC with $100-150 million in cash can secure what looks like great private companies at attractive valuations due to having this bankroll.  These dynamics have only intensified over the past few months.  This would not be possible if it weren’t for the hurdles the industry has to go through to be public these days.  While the regulatory burdens are so high, SPACs make a lot of sense for this industry.

 

Next, I think Gregmal’s point about AYR’s position in the MA wholesale market can’t be overstated.  Unlike most states, where wholesale licenses come with no limits on the amount that can be grown under canopy, MA has a cap of 100,000 sqft per license, which drastically limits supply.  This is why prices in MA are so much higher than they are in NV, for example.  That AYR has one of only three wholesale licenses puts them in an extremely attractive competitive position for at least the next 2-3 years.  The other two companies holding these licenses are not MSOs and will likely bleed share to AYR.

 

The vaping ban is frustrating but it is only 4 months and likely to be reversed, especially given the recent rhetoric out of municipal authorities who are determined to give local entrepreneurs a chance.

 

As for the buyback, keep in mind that Sandelman has a background in asset management.  His north star is not M&A or return of capital — it’s ROIC.  When your stock price becomes ludicrously cheap, sophisticated capital allocators become opportunistic or at least create the flexibility for themselves to do so.  I love this move.  I don’t have a window into AYR’s M&A pipeline, but it’s not hard to imagine the deals they’re looking at don’t meet the ROIC hurdle AYR gets by repurchasing shares at today’s prices.  Finally, I don’t think the two approaches to capital allocation are mutually exclusive because any deal is likely to be financed with stock.

 

Gregmal, any further color on your channel checks is greatly appreciated.

[Gregmal]

From personal experience, I'll give the following example. I smoked in high school and college. Since then I've stopped completely, with occasional exceptions. I'd often pick up a pack of Marlboro's with a 6 pack before heading out on a fishing trip for instance. At one point I switched to vaping products which worked for a while. But I never really cared for it and once we started seeing all the noise about unknown issues with vaping, it's straight back to Marlboro's. Maybe the occasional tin as well. But that's my point and what I've noticed people saying at the various dispensaries. People need a fix. The delivery method of that can change. But its not like eating a cookie vs inhaling where there is a noted difference that may cross lines for some folks. Vaping is smoking and a ban on one just switches people over the the next category. Ironically for AYR, its highest margin product. This further vibes with Bobby Burleson's latest notes as well(an analyst who covers the space).

[spartansaver]

The points made about the success rates of SPACs are well-documented.  However, structural idiosyncrasies of the cannabis sector make SPACs the ideal vehicle for these companies.

 

Private companies in the space would love to cash out, but they are skeptical of the volatility and crazy valuations of most cannabis stocks.  Most cannabis companies are money losers and don’t have cash to spend, so a SPAC with $100-150 million in cash can secure what looks like great private companies at attractive valuations due to having this bankroll.  These dynamics have only intensified over the past few months.  This would not be possible if it weren’t for the hurdles the industry has to go through to be public these days.  While the regulatory burdens are so high, SPACs make a lot of sense for this industry.

 

Next, I think Gregmal’s point about AYR’s position in the MA wholesale market can’t be overstated.  Unlike most states, where wholesale licenses come with no limits on the amount that can be grown under canopy, MA has a cap of 100,000 sqft per license, which drastically limits supply.  This is why prices in MA are so much higher than they are in NV, for example.  That AYR has one of only three wholesale licenses puts them in an extremely attractive competitive position for at least the next 2-3 years.  The other two companies holding these licenses are not MSOs and will likely bleed share to AYR.

 

The vaping ban is frustrating but it is only 4 months and likely to be reversed, especially given the recent rhetoric out of municipal authorities who are determined to give local entrepreneurs a chance.

 

As for the buyback, keep in mind that Sandelman has a background in asset management.  His north star is not M&A or return of capital — it’s ROIC.  When your stock price becomes ludicrously cheap, sophisticated capital allocators become opportunistic or at least create the flexibility for themselves to do so.  I love this move.  I don’t have a window into AYR’s M&A pipeline, but it’s not hard to imagine the deals they’re looking at don’t meet the ROIC hurdle AYR gets by repurchasing shares at today’s prices.  Finally, I don’t think the two approaches to capital allocation are mutually exclusive because any deal is likely to be financed with stock.

 

Gregmal, any further color on your channel checks is greatly appreciated.

 

Could you point me towards some evidence that private companies in this space would love to cash out? It seems like a nice hypothesis, and a common story in the SPAC space. 

[villainx]

Private companies in the space would love to cash out, but they are skeptical of the volatility and crazy valuations of most cannabis stocks.  Most cannabis companies are money losers and don’t have cash to spend, so a SPAC with $100-150 million in cash can secure what looks like great private companies at attractive valuations due to having this bankroll.  These dynamics have only intensified over the past few months.  This would not be possible if it weren’t for the hurdles the industry has to go through to be public these days.  While the regulatory burdens are so high, SPACs make a lot of sense for this industry.

 

Maybe I'm not clear, for AYR to expand in and to neighboring states, doesn't SPAC means there are lots of other SPAC's and the associated sidelined cash that would make expansion difficult/costly? 

 

In this case, I'm looking more at what Softbank's vision fund did for venture tech investing.  Or am I wrong, or would AYR have some advantage regardless? 

 

It's not technically a margin of safety, but how well AYR can expand would be helpful.

 

I guess I might not be asking the right questions or looking at this correctly, cause it's not a industry/space I'm familiar with.

[Spekulatius]

If Pot is more expensive in MA than in neighboring states I would bet that there will be arbitragers taking care of this illegally and that will that. It’s really not hard moving this stuff through uncontrolled state borders.

[movys]

The points made about the success rates of SPACs are well-documented.  However, structural idiosyncrasies of the cannabis sector make SPACs the ideal vehicle for these companies.

 

Private companies in the space would love to cash out, but they are skeptical of the volatility and crazy valuations of most cannabis stocks.  Most cannabis companies are money losers and don’t have cash to spend, so a SPAC with $100-150 million in cash can secure what looks like great private companies at attractive valuations due to having this bankroll.  These dynamics have only intensified over the past few months.  This would not be possible if it weren’t for the hurdles the industry has to go through to be public these days.  While the regulatory burdens are so high, SPACs make a lot of sense for this industry.

 

Next, I think Gregmal’s point about AYR’s position in the MA wholesale market can’t be overstated.  Unlike most states, where wholesale licenses come with no limits on the amount that can be grown under canopy, MA has a cap of 100,000 sqft per license, which drastically limits supply.  This is why prices in MA are so much higher than they are in NV, for example.  That AYR has one of only three wholesale licenses puts them in an extremely attractive competitive position for at least the next 2-3 years.  The other two companies holding these licenses are not MSOs and will likely bleed share to AYR.

 

The vaping ban is frustrating but it is only 4 months and likely to be reversed, especially given the recent rhetoric out of municipal authorities who are determined to give local entrepreneurs a chance.

 

As for the buyback, keep in mind that Sandelman has a background in asset management.  His north star is not M&A or return of capital — it’s ROIC.  When your stock price becomes ludicrously cheap, sophisticated capital allocators become opportunistic or at least create the flexibility for themselves to do so.  I love this move.  I don’t have a window into AYR’s M&A pipeline, but it’s not hard to imagine the deals they’re looking at don’t meet the ROIC hurdle AYR gets by repurchasing shares at today’s prices.  Finally, I don’t think the two approaches to capital allocation are mutually exclusive because any deal is likely to be financed with stock.

 

Gregmal, any further color on your channel checks is greatly appreciated.

 

Could you point me towards some evidence that private companies in this space would love to cash out? It seems like a nice hypothesis, and a common story in the SPAC space. 

 

See the long list of Cannabis SPACs that have acquired their targets for MSD EBITDA multiples, including AYR.

[movys]

If Pot is more expensive in MA than in neighboring states I would bet that there will be arbitragers taking care of this illegally and that will that. It’s really not hard moving this stuff through uncontrolled state borders.

 

It's the opposite of what you're implying. MA is surrounded by 4 states where recreational use is still illegal.  Purchasing illegally is much more difficult than transporting illegally via ground transport.

Hence, a lot of people from the neighboring states drive to MA to make their purchases where they can get high-quality flower without the stress of worrying about getting ripped off or arrested.  The value proposition is quite strong, especially for the power users.

[Gregmal]

If Pot is more expensive in MA than in neighboring states I would bet that there will be arbitragers taking care of this illegally and that will that. It’s really not hard moving this stuff through uncontrolled state borders.

 

It's the opposite of what you're implying. MA is surrounded by 4 states where recreational use is still illegal.  Purchasing illegally is much more difficult than transporting illegally via ground transport.

Hence, a lot of people from the neighboring states drive to MA to make their purchases where they can get high-quality flower without the stress of worrying about getting ripped off or arrested.  The value proposition is quite strong, especially for the power users.

 

To this note, I'd add that the closest dispensary to NY is a company called Theory Wellness. As of September roughly 40% of their customers are from out of state with almost 3/4 of those being from NY. Granted this place is 20 minutes from the border, but it supports the idea that people will travel for a better product. The shit sold illegally is not nearly the same quality.

 

As for legalization, once those states become fair game for recreational....where do you think they source their product from? Most likely existing facilities while local ones start a build out. Given the Herculean task permitting and approvals can be, it is likely an opportunity for an existing operation, with knowledge of this process, to jump on in.

[JRM]

Is my math correct here? I'm getting almost 8 million shares used to acquire the various businesses, and about 14.5 million shares outstanding currently?  It looks like the implied value of the shares used to purchase the various businesses was around $15-$17 per share.  Any chance some of these insiders have been selling to Cannacord or somebody at a steep discount prior to the lockup expiration?

 

I'm trying to figure out who is selling here.

[movys]

Is my math correct here? I'm getting almost 8 million shares used to acquire the various businesses, and about 14.5 million shares outstanding currently?  It looks like the implied value of the shares used to purchase the various businesses was around $15-$17 per share.  Any chance some of these insiders have been selling to Cannacord or somebody at a steep discount prior to the lockup expiration?

 

I'm trying to figure out who is selling here.

 

At the current price, the share count you should use is ~27m.  See page 26 of their current investors presentation for a breakout of how this changes as the stock price changes.  They use the treasury method to account for the warrants.

 

Most lock-ups expire periodically over the next 6 months.  There are currently a de minimus amount of currently issuable shares with no lock-up.  We will see what insiders do post lock-up, but I doubt you'll see a wave of selling.  The founders of the various businesses sold at implied prices significantly higher than the current quote, and intrinsic value has only increased since then.  The company is repurchasing shares and C-suite execs are buying on the open market.  Nobody thinks this is overvalued.

 

The stock is just illiquid and caught up in the current cannabis bear market, but the results over time will speak for themselves and the rerating is inevitable.  The vaping ban will work itself out and in the meantime cash on the balance sheet will continue to build.

 

Liquidity in the warrants has dried up but they remain remarkably mispriced, in our view.

[Gregmal]

https://ir.ayrstrategies.com/news-events/press-releases/detail/25/ayr-strategies-reports-record-third-quarter-2019-financial

 

A few bumps due to the regulatory stuff which is obviously out of their control, but otherwise they are still significantly ahead of where they need to be to justify $12 per share.

[Gregmal]

https://ir.ayrstrategies.com/news-events/press-releases/detail/26/ayr-strategies-granted-final-license-approvals-for

 

Wholesale gets the green light to expand production ~250%

 

"Additionally, Ayr will be the first licensed cannabis company in the state to resume vape cartridge sales for its dispensaries and at the wholesale level beginning today, December 19, 2019."

 

Full steam ahead. Probably one of my top 2020 ideas

[Gregmal]

One of the few bright spots today.

 

https://ir.ayrstrategies.com/news-events/press-releases/detail/28/ayr-strategies-reports-record-fourth-quarter-and-full-year

 

Getting nearly $4k a pound in MA just as production begins to ramp!

[Spekulatius]

One of the few bright spots today.

 

https://ir.ayrstrategies.com/news-events/press-releases/detail/28/ayr-strategies-reports-record-fourth-quarter-and-full-year

 

Getting nearly $4k a pound in MA just as production begins to ramp!

 

I should probably go and get some before they sell out. My wife went to Costco during the day and there was a run on toilet paper, groceries and what not. If we go into lockdown, the demand for weed might skyrocket. My SDI also did better than expected, but I sold the remainder.

[Gregmal]

Yea a few contacts of mine with the labor Unions repeated similar stuff. Ironically they are having hold ups because no Home Depot in town has face masks. Granted, they really need them, they do commercial drywall jobs.