2023-07-22 04:49:32 ET
Summary
- David Goubert's strategy for Ayr Wellness focuses on preserving cash and achieving operationally positive cash flow throughout 2023 and free cash flow positive in 2024 and beyond.
- Despite a large amount of debt, the company reported its 3rd consecutive quarter of positive cash flows from operations, while also successfully delaying its debt for 2024-2026.
- The company plans to capitalize on a burgeoning cannabis market in Florida, opening 11 new locations in Florida in 2023.
Everyone knows the cannabis industry has been in shambles the past 2 years as they have and continue to contend with ski-high taxes and illegal federal status. About a month ago, I wrote about the ETFMG Alternative Harvest ETF (MJ), and I clearly expressed my concerns and doubts surrounding small and micro-cap cannabis stocks. Despite the marijuana mania that captivated many retail investors in 2020 and 2021, the industry has been reeling from a crash since February 2021. The downturn appears to have continued its course, and there has been no external event or catalyst that would have potentially reversed this industry decline. However, investors in this space today are more cautious and calculated and are looking for step by step improvements in individual companies to guide their investment decisions. As such, I write this specifically for those who already hold positions in Ayr Wellness (AYRWF). For new investors, my recommendation is to wait and closely monitor this company's performance in the next year or so. An optimal time to enter would be after the company achieves positive operating cash flow in 2023 and positive free cash flow by 2024, with a strong likelihood of maintaining positive free cash flow thereafter.
New CEO Plans Moving Forward
Back in February of this year, David Goubert assumed the role of President and Chief Executive Officer of Ayr Wellness. In order to combat the company's enormous amount of debt, Goubert has stressed the importance of preserving cash and being operationally cash flow positive in 2023 and free cash flow positive in 2024. Earlier this year, he has implemented the 2023 Optimization Plan, with the goal of expanding its retail footprint in Florida. In this way, the company aims to increasing sales from these new locations while improving operational margins. Alongside a focus on cash preservation, the company is also working towards improving its balance sheet through more efficient inventory management. The company has seen early progress in this plan and has seen positive improvements in performance across states like Nevada and Pennsylvania. Despite the lack of significant revenue growth in these states, Ayr has implemented strategies to effectively lower operational costs. They've also put a greater emphasis on product quality enhancement product marketing efforts. According to the company's Q1 press release , "Our operational initiatives led to a quarter-over-quarter improvement of 8% in adjusted gross profit and 29% in adjusted EBITDA in Nevada, and a 20% quarter-over-quarter increase in adjusted EBITDA in Pennsylvania." Moreover, Ayr has introduced and started implementing its Grow Forward Plan, which aims to drive revenue growth in the 2nd half of 2023 and beyond.
Q1 Results
One of Ayr's key strengths as of late is that it has reported positive operational cash flows in the past 3 consecutive quarters. On top of this, the company also became cash flow positive on its investing, and financing fronts. Cash flow from operations increased from $538,000 to $8.64 million, cash flow from investing grew from a negative of $8.2 million to $4.7 million, and cash flow from financing grew from a negative of $12.5 million to $924,000. Moreover, revenue and adjusted EBITDA each grew quarter over quarter by 3% and 9%, respectively. Revenue was up by 18% year-over-year and adjusted EBITDA was up 60% year-over-year with significantly larger adjusted EBITDA margin of 22.4%. Ayr experienced an operating loss of $21.7 million, which is a significant reduction from the operating loss of $142.9 million in Q4 2022.
In the past 3 months, Ayr reported a price return of over 60%, compared to -0.47% of the sector median.
In the last month, Ayr's price has been up 6%, which serves as a testament to the effectiveness of the strategies implemented by David Goubert.
Moreover, Ayr has spent considerably less on capital expenditures in the past 3 quarters of operationally cash flow positive, allowing them to hold onto even more cash. The company spent a total of $7.2 million on the purchase of property, plant, and equipment in Q1. Similarly, the company spent $3.6 million and $7.9 million in Q4 and Q3 of 2022, respectively, which is considerably less than the $20+ million spent on capital expenditures in the previous 4 quarters.
Debt Landscape
Aside from a bearish cannabis market, everyone knows that Ayr's large debt burden of over $581 million continues to be the largest risk for the company. Nearly $58 million of this debt is current and the remaining $523 million stands as long term debt. This is a slight improvement from the $657 million of total debt at the end of the fourth quarter with cash and cash equivalents increasing from $80 million to $96 million in the first quarter. While this may be a minor improvement, Ayr is taking strides to stabilize the company's financial footing in the long run. This can be seen through the company's decision to engage Moelis & Company LLC as its financial advisor to help the company improve their capital structure to further prolong debt maturities. Ayr has recently modified the terms of payment related to its acquisition of GSD NJ, LLC where the company was able to delay a cash payment of $27.5 million originally due May 2024 to May 2026, accumulating interest at 6% per year. Ayr also made significant changes to its debt payments in late June of this year. They've negotiated agreements with various parties to defer a total debt amount, including vendor notes and promissory notes, of $69 million for two years. However, these payments will be subject to a 0.5% higher interest rate as well as $400 million. Altogether, these changes will successfully delay a total of $96.9 million debt obligations. Moving forward, the company is continuously aiming to push its debt back. The picture below showcases Ayr's debt maturity schedules as of Q1 2023, with majority of its debt is due in the earlier years.
Attractive Florida Position
Ayr has recently been making major moves in expanding its Florida footprint. The company currently operates in 7 states with 86 retail locations throughout these states. The company operates 60 Ayr stores in Florida which is substantially more than that in any of the other 7 states, excluding Nevada. In the first quarter alone, Ayr opened 6 new locations in Florida, 4 in late March and 2 in early January. In the second quarter, the company opened 5 new locations in the state, with 3 more locations opened just 4 days ago. The company is taking advantage of the future growth and revenue opportunities in Florida as the state makes key strides towards recreational legalization. In June, a proposed ballot initiative collected enough signatures to put it in the ballot for Florida voters to decide on its legalization in November 2024. A poll conducted by the University of North Florida back in March founded that 70% of 1452 people surveyed would "strongly" or "somewhat" support the recreational legalization of marijuana. While this is a huge milestone, it still faces review from the Florida Supreme Court. The company is already gearing up for legalization and is attempting to capture a majority of the market share in the state. Among all non-recreational states, Florida exhibits the most momentum towards its legalization, and should this succeed, it should be very profitable for the company.
Risks
While the company experienced a surge in cash from operations from Q4 2022, this large increase in operating cash flow is mainly attributed to the sale of the company's Arizona business. In other words, the company has not demonstrated that it can generate increasing cash flows that will be sustainable in future quarters. While its continuous expansion in Florida and Ohio and its focus on product quality and marketing may increase margins and generate more revenue in its best case scenario, the CEO has not yet announced a comprehensive plan on tackling its debt predicament besides focusing on preserving cash and generating free cash flow. The company delaying its debt repayments is not only a sign of its lack of confidence in its financial health, but it also underscores its lack of a plan to generate enough cash in the future to pay off its debt on time. Interestingly, their lack of confidence in its financial health directly contradicts its optimism surrounding expanding its market share. If this proves to not be as profitable as expected, it can backfire and significantly exacerbate the company's debt burden.
Final Opinion
While the cannabis industry does not show any sign of progress, Ayr Wellness stands out as one of the few companies potentially capitalizing on this bearish market. The company is making strong efforts to manage its substantial amount of debt, and has hired Moelis to assist in extending its debt maturities. Simultaneously, the company is continuously expanding amid its struggling balance sheet, taking the initiative to leverage the emerging market in Florida. Considering the stock price has plummeted 80% in the past 12 months, I believe a shift in strategy embracing a higher risk profile may be necessary. Goubert seems to have made the right moves so far in 2023, causing a crucial, yet modest, turnaround in Q1. I am eagerly awaiting the company's Q2 results and earnings report due on August 15th, and I will definitely be monitoring on the company's performance in the upcoming quarters. Overall, my investment recommendation is Hold for investors that already hold positions in this company, and I do not recommend new investors to open positions yet. However, if the company continues to perform as expected, and the CEO's plan of operationally cash flow positive throughout 2023 and free cash flow positive in 2024 falls through, I will change my recommendation to Buy. Moreover, any external event, such as a passing of the SAFE Banking Act, should also likely sway recommendation to a speculative Buy.
For further details see:
Ayr Wellness: A Potential Turnaround On The Horizon