It wasn't that long ago that many cannabis companies were expanding their empires and competing with each other over who was the biggest. The most states! The most licenses! The biggest greenhouse square footage! Then as capital tried up, the reverse took over and those same companies began a race to contract.
The phrases "targeted approach" and "focus on profitability" are the new rallying cries for these once-expanding businesses. Now, the setup is for a classic pioneer vs. settlers environment. Ayr Strategies (AYRSF) is coming in hot as a settler. The description is based on the business thesis that pioneers explore undeveloped concepts and go into uncharted territory. They make future success possible, but fail a lot. The settlers can take an idea and turn it into a product. They can take something not well thought through and finesse it into a profitable creation. The settlers can learn and build on the pioneer's mistakes.
Relative newcomer Ayr Strategies is doing just that. As companies like MedMen (MMNFF) , Canopy Growth (CGC) and Acreage Holdings (ACRHF) are scaling back and selling off assets, Ayr is making numerous acquisitions with more planned. Last week the company announced it was buying two operations in Ohio and Pennsylvania. Both markets are medical marijuana only, currently with Pennsylvania hitting $420 million in sales last year, while Ohio was clocking in at $58 million.
"We believe both represent potential high growth markets and/or transition to recreational sales given each state's large population," Canaccord Genuity analyst Bobby Burleson wrote. "We anticipate a significant land grab among operators in the near term trying to enter populous markets with limited existing business (already being seen in Pennsylvania) and believe assets in potential expansion markets will become more expensive in the near term."
Burleson thinks that Ayr's early entry to both markets will give them a significant advantage relative to later-arriving entrants. He has a about $18.85 market price on the CSE trading stock, which was lately selling at $13.75. Ayr, which is also in Massachusetts and Nevada, is hinting at more expansion news to come.
In Ohio, Ayr has signed a definitive purchase agreement for an operational processing facility and has an agreed non-binding term sheet regarding exclusive management rights over a "level 1" cultivation license -- the largest canopy license in the state. The deal is valued at $18.2 million and consists of $10.2 million in cash and $8 million in convertible notes. These are the first steps toward establishing a vertically integrated operation in the state.
The cultivation facility, which is approximately 58,000 square-feet, is under construction and the roughly 9,000 square-foot processing facility is fully operational. Following the closing and completion of the initial phase of the level 1 cultivation facility build-out, Ayr has the flexibility to further expand canopy subject to the approval of the Ohio Department of Commerce. Prior to the pandemic, momentum was building for adult-use legislation heading to Ohio voters. Vireo Health also agreed to sell its affiliated company, Ohio Medical Solutions, LLC for $4.85 million to Ayr.
Ayr was already in the state of Pennsylvania, so this latest move is more of an expansion. The company is buying a grower-processor with a 38,400 ft cultivation and extraction facility that is approved as operational and has the capacity to expand to 74,000 square feet. The company is paying $20.8 million which includes $16.7 million of cash, $2.1 million in stock and $2.0 million in seller notes. This follows an August announcement of the purchase of a vertical facility that has the right to open six dispensaries (three planned for early 2021). These two deals will make Ayr one of the largest operators in the state.
Cash On Hand
Burleson did note that Ayr has now committed $54 million in cash for these acquisitions and as of July only had $17 million in cash with third quarter cash estimated to rise to $27 million, meaning the company will probably need to raise more capital. Ayr Strategies stock was the product of a special purpose acquisition company, and began publicly trading last year in May. Its market cap is currently $329 million.
This May, the company reported that its revenue increased 4% sequentially in the first quarter ending in March to $33.6 million. The company did note that sales began to decline in March due to the Covid-19 related closures. The company also reported a net income of $3.3 million after a foreign currency translation. The earnings per share were $0.06 basic and $0.05 diluted.
Ayr also made improvements on its loss from operations as it trimmed that number from a loss of $16.9 million in the fourth quarter to a loss of $4.9 million in the first quarter. The adjusted earnings before interest, taxes, depreciation, and amortization was $8.4 million, which dropped from the fourth quarter's $9.2 million due to the Covid closures.
