This is the fourth in a series of articles on cannabis companies that have demonstrated the ability to make a profit. In the cannabis sector, this has special importance, as deficiencies in the components that make up income have put the survival of many companies at risk. Earnings and positive cash flow in this difficult and challenging environment offer some clarity about the future, indicate a company is on the right path, and are a strong endorsement of the quality of management. Not all companies in this series are currently profitable, but they all have enough good quarters in their history to set them apart.

A question for cannabis investors

Would you like to own a company that:

  1. is overstretched geographically, has committed capex to a market that may fail to develop, issues debt and equity to fund operations, and owns a number of money-losing businesses? (that is to say, many well-known cannabis companies)? or

  2. is very conservative with capital expenditures, funds operations with cash flow, and owns money-making businesses?

If you picked #2, you may be interested in Ayr Strategies (OTCQX:AYRSF).

Ayr Strategies Inc.

Unlike many better-known companies, Ayr Strategies did not develop its cannabis business from scratch. It started as a special purpose acquisitions company (SPAC), raising capital to buy established cannabis businesses. By targeting existing companies with profitability and strong cash flow, Ayr avoided what has gotten many others into trouble: big capex, execution risk, funding operations with equity or debt, and risking capital on markets that don't materialize.

Investors who have been burned by cannabis companies with oceans of red ink (that is, all cannabis investors, if we're honest) will recognize that the type of businesses targeted by Ayr sell at a premium. Company management believes part of what gives them an “edge” is their background of successful senior-level careers in finance, M&A, and asset management both in and outside the world of cannabis. They are confident they can identify companies that offer value and growth in support of Ayr's long-term objective, to wit:

Ayr seeks to create high-quality brands you can trust in core geographies for future expansion while pursuing strong organic growth within its existing portfolio.

After considering over 50 companies, Ayr entered into the cannabis business by acquiring five private companies on May 24, 2019. Those five operate in Massachusetts and Nevada, which classifies Ayr as a multistate operator, or MSO. Total consideration was (in millions $$):











When queried about the geographic choices on the Cannabis Investing Podcast, CEO John Sandelman said the focus was on limited-license states with the high cannabis potential. He also said that his long-term goal for Ayr is to be a top-five cannabis company with operations in other states. This careful, deliberate approach is not one investors are likely to argue with. Geographic dispersion has been a major problem at the more aggressive MSOs, severely stretching and stressing resources in a now resource-constrained industry. Sandelman has also observed that, concerning human resources, the talent pool in a new industry like cannabis is simply not yet deep enough to support rapid expansion.

Further expansion could come from either the private or public domain. In my phone interview with the Ayr IR team, they indicated that purchases could be made with a combination of cash, equity and vendor financing (debt), as with the original five. A meaningful amount of cash consideration will require a capital raise. Although multiples for good private companies have remained somewhat sticky, the prices of many public companies are way down. With Ayr's stringent requirements, the universe of possible acquisitions is not large. The characteristic of being EBITDA positive or close to it eliminates many companies from consideration.

How is the company doing so far?

Only three full quarters of operations so far (and preliminary results of a fourth) are available.


Q3 2019

Q4 2019

Q1 2020

Q2 2020 prelim.

Net Income (EPS)





Oper. Income





Cash Flow Fr. Oper.




















* in million $$ except net income

With such a short history, the significance of any trends in financial metrics is limited. However, they do suggest that Ayr acquired a group of healthy companies that have been producing substantial revenue, adjusted EBITDA [AEBITDA] and cash flow. It's notable that for Q2 2020, even though COVID-19 caused a 15% revenue drop, operating income and AEBITDA both increased. According to the preliminary Q2 2020 report, 55% of Q2 EBITDA was in June, after the company adapted to the virus-related retail environment.

Note: Adjusted EBITDA removes non-cash items, such as biological adjustments, stock-based compensation and acquisitions costs, to give a more accurate view of cash-based performance.

Stock Price

The chart above shows the price of Ayr since 1/1/2019 along with cannabis fund ETFMG Alternative Harvest ETF (MJ) as a proxy for the industry as a whole. Ayr was affected by the cannabis bear market but less than half as much as MJ. The price of Ayr as of 7/21/2020 was $8.08.

In its May 2020 investor presentation, Ayr enumerates several drivers it believes will soon lead to an upward revaluation of the company. Being so young, it has had very little analyst or press coverage. This will change as Ayr gets larger and its operational superiority are recognized. The path to getting larger is facilitated by the very favorable current market for acquisitions. Further, as cannabis returns to favor in the investing community, Ayr will benefit from the accompanying industry-wide revaluation.

Some things Ayr wants you to know

  • Low-risk growth is the byword for Ayr. The focus is on established, best-in-class operators in limited-license, high-growth states. This has made the company number one in Massachusetts wholesale and Nevada recreational sales, and according to BDS Analytics, number one in store productivity among public MSOs.

  • The company's focus is on profitability and cash flow. These are what drives success and what drives its acquisitions and organic growth. The company will not be making acquisitions unless the path is clearly visible.

  • Ayr's strategy is driven by protecting and increasing shareholder value. It has relatively little debt and no external funding needs. The share count is about 27 million and has not changed since the original acquisitions. In contrast to most cannabis companies, Ayr does not have a hugely dilutive overhang of shares, options and warrants held by founders. Its Class A founders shares convert to common on a 1-to-1 basis, not 10-to-1, and its warrants are exercisable at $11.50 rather than a low “sweetheart” price. With $4 million of family office money invested in Ayr, the CEO has ample motivation to protect shareholder interests.

Ayr Strategies goes on the watchlist

Ayr Strategies' approach is to buy great companies in high-growth areas. When asked in a phone call why investors should buy shares in Ayr, the IR representative highlighted operational excellence, high margins and cash flow, and the company's commitment to being a good steward of capital. It will not risk capital on weak businesses, difficult regulatory regimes or markets with unfavorable competitive characteristics. The company has not deviated from this strategy, and the financial results so far are backing it up. The key phrase is “so far.” Four quarters of operations is not enough to prove the success of any company. The amount of risk inherent in a small company with limited history in a new industry and a faltering economy will be beyond the tolerance of many investors. However, Ayr Strategies is an ideal candidate for the watchlist. Investors will want to keep Ayr on their radar, buying shares in 3-6 months if financial metrics continue to support the story. Ayr could be a company that cannabis investors will be pleased to have in their portfolio as the industry resumes its phenomenal growth.

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