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By Rena Sherbill
What does it take to succeed and lead in the cannabis industry, primarily the US MSO space? Jon Sandelman, AYR Strategies’ (OTCQX:AYRSF) CEO returns to the show (listen to his earlier appearance here) to give us deeper insights into what it takes to make it in this field and how AYR Strategies has been and is positioning itself to be a Top 5 player.
- 8:00 – Given Jon’s financial background he knew to be EBITDA and cash flow positive, which wasn’t the focus of most cannabis companies. AYR had to essentially rebuild its business when Covid hit and the 2 states they were in were virtually closed. Jon said last time he was on in May that if they could recover from that, their shared vision would be their greatest asset. April was basically a transition month – when no one could come into their stores, and they switched to curbside and delivery. For Q2, cash flow was up 16% QOQ and EBITDA was up 8%, a giant achievement. These shared experiences make a company even more successful. July’s numbers – EBITDA up 127% over avg monthly EBITDA. With only 2 states, AYR is top 5 EBITDA company and from a profit margin perspective, second in the industry.
- 13:00 – Business is about the controls that you put in. AYR’s dashboard model that they’ve built to measure their business are industry-leading. If you’re a good corporate citizen and respect the regulators, if a mistake happens, regulators are more likely to work with you if they trust your process. When 5 MSOs were going into 16 different states, AYR realized you can’t build an army of that size without a viable supply chain. AYR paused for a year – no acquisitions – because they saw the great correction coming.
- 17:00 – AYR gets 80% of their profit from 20% of their client base (the 80/20 rule). They’ve identified 10-12 states that will represent 80% of the cannabis consumer wallet. There’s no one way to be successful, but have to focus on a business model that leverages your core competency and experiences. Were buying best in class assets in states they want to be in, but capital is now much tighter so instead of buying MSOs, they now focus on single state operators in those 10-12 states that no longer have access to capital. Will announce by the end of the quarter what their funding looks like, but they have access to capital and business sense and buying at a cheap multiple will immediately be accretive.
- 24:00 – Issuing stock vs debt – outside the cannabis industry the general principle is selling stocks when it’s rich and when it’s cheap you want to sell debt. There is debt capital available for a handful of companies, but if that’s not available, you’re massively diluting your current shareholders so they better be using that capital wisely and showing what the forward return looks like, otherwise it’s just a death spiral.
- 29:00 – AYR doesn’t pay for lobbying and isn’t focused on it, because so many other people are, but of course want 280E removed as it’s an absurd drain on companies. Assume it will get rationalized over time, but because of Covid, not sure anyone is looking to give anyone a tax break. Maybe they get rid of that and add a federal tax on cannabis – rational but revenue neutral.
- 32:00 – AYR’s Massachusetts medical stores almost 100% YoY better because AYR’s medical stores look just like Rec stores. Planning on 3 more possible Rec stores, but still don’t know for certain – waiting to hear from the state. Wholesale business booming, now planning phase 3, they’re number one in wholesale in Mass. Need to add capacity so they can supply their stores at better margins and still sell into Wholesale – a 67% gross margin business. Massachusetts’ August numbers – 78.6M for the month – the most ever. Quickly approaching a billion dollar market.
- 40:00 – Excited about the industry going forward – not necessarily the politics of it, but the fundamentals of it. A few other companies also driving to be top 5 in the industry, but very few have AYR’s cash flow, gross margins, operating skill or EBITDA.