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spk00: Good morning, ladies and gentlemen. Thank you for joining today's Anchorage Holdings First Quarter 2022 Earnings Call. My name is Tia, and I will be your moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you would like to ask a question, please press star one on your telephone keypad. I will now like to pass the conference over to your host, Steve Gertz, Chief Financial Officer with Anchorage. Please go ahead, sir.
spk04: Good morning, everyone, and welcome to the Acreage Holdings First Quarter Conference Call. Joining me today is Peter Caldini, our Chief Executive Officer. Today's call will be archived on our Investor Relations website at investors.acreageholdings.com. Before we begin, I would like to remind listeners that today's call contains forward-looking statements subject to various risks, uncertainties, and other factors that could cause actual results to differ materially from those forward-looking statements. Any such information and statements should be taken in conjunction with cautionary statements in our press releases and risk factor discussions in our public filings found on CDAR and EDGAR, as well as our investor website. Any forward-looking statements reflect management's expectations as of today's date, and we assume no obligation to update them other than as may be required by applicable securities law i will now turn the call over to peter thank you steve and good morning everyone in 2021 a significant amount of time and resources was spent on transforming our business into the much stronger company you see today that focused effort has generated very positive results acreage has changed in a number of ways For example, in the past, we were unprofitable, but in 2021, Acres achieved four consecutive quarters of positive adjusted EBITDA. Today, we have new leadership with extensive commercial experience to navigate through a complex regulatory environment and capitalize on the significant market opportunities ahead. In the past, we pursued over expansion without achieving sufficient scale. But now we have a focused strategy behind our highly attractive core market footprint. In the past, we had an undisciplined operational approach. While today we have a strong operational and financial discipline. And lastly, in the past, we had liquidity issues. While today we have a very strong balance sheet. Now that we've established a strong foundation for acreage, we are carrying that positive momentum into 2022. as we look to capture the significant growth opportunities ahead of us. We will achieve this by continuing to focus on our three strategic priorities, accelerating growth in our core markets, driving profitability, and strengthening our balance sheet. The first quarter of 2022 was a difficult quarter for most of the cannabis industry. Pandemic-related challenges, inflation reducing the disposable income of customers and patients, and continued pricing pressure in competitive markets all contributed to a challenging revenue environment. Given these conditions, we are pleased to report strong year-over-year revenue growth of 48%. The year-over-year growth was primarily driven by the acquisitions of Ohio, California, and Maine operations over the past 12 months and was somewhat offset by revenue declines due to the divestiture of Florida operations in April 2021 and the declines within the company's operations that are being held for sale. Additionally, total revenue for the first quarter of 2022 declined sequentially by 1.2 million, or 2%, compared to the fourth quarter of 2021. Excluding companies California and Oregon operations, however, which are not considered core, revenue for the three months ending March 31, 2022, increased slightly by 0.5%, on a sequential basis. During the first quarter of the year, we delivered our fifth consecutive quarter of positive adjusted EBITDA despite challenging market conditions. Adjusted EBITDA for the first quarter of 2022 was $8.6 million, increasing from the $1.6 million reported in the first quarter of 2021 and a slight improvement sequentially from the $8.5 million reported in the fourth quarter of 2021. In the first quarter of 2022, we also made significant progress on the development of our brand portfolio. A key part of accelerating growth in our core markets is our focus on further developing our house of brands to deliver innovative and differentiated products to our customers. During the quarter, we executed on several product line extensions and introduced our premium cannabis brand, Superflux, in Illinois, Ohio, and Massachusetts. Superflex is a premium brand focused on honoring the cannabis craft with each step of the development process designed to preserve the essence of cannabis in all product forms, flour, live resin, and cured and dried concentrates. We also launched several new edible products during the quarter, including our new edible format in the Ohio market, the Botanist Fruit Chews. In Maine, we launched the botanist gummies, which are vegan and gluten-free and crafted from natural ingredients. We also launched the botanist gummies in Illinois and Massachusetts. In the vape category, we launched the botanist distillate vape cartridges in Massachusetts. These new cartridges include high THC oil with strain-specific, freshly extracted terpenes. In New York, we introduced the Botanist 85 live vape cartridges, which include bread, in-house exclusive strains, and live terpenes. The Botanist 85 live vape cartridges are one of the only products of their kind in the New York market. In addition to our new market-specific products, we also announced a license agreement with Botanica, the producers of Mr. Moxie's THC and CBD products, to manufacture and distribute their award-winning mints across our core footprint in Ohio, New Jersey, Pennsylvania, New York, Illinois, and Maine as regulations allow. This agreement will effectively double Mr. Moxie's consumer reach and further diversifies our product selection by bringing these popular products to our core markets. Developing a differentiated and scalable product portfolio is integral to the growth in our core states as it unlocks new wholesale and retail revenue streams and attracts new customers across our footprint. We intend to further accelerate this growth throughout 2022 with new dispensary openings, new product launches, and cultivation expansion projects to continue to expand our wholesale business. We will also continue to explore potential partnership and creative acquisitions where we see strong opportunities. Looking ahead in New Jersey, we will now begin to see the impact of adult use sales, which we officially launched in this market on April 21st. We were well prepared for this launch, having previously completed a cultivation expansion project at our Egg Harbor location in 2021 that increased our production capacity fourfold. Our two adult use dispensary locations in Williamstown and Egg Harbor Township saw a significant increase in foot traffic and revenue the acreage team in new jersey did a tremendous job preparing in very short notice for the successful launch of adult sales although we are only weeks into the launch of adult use in new jersey we are encouraged by what we're seeing during the remainder of the year we will focus on further solidifying our position in the state as a top tier retailer and wholesaler including exploring the opportunity to expand our cultivation further as demand ramps up in the rapidly growing market. In New York, we are preparing to capitalize on pending adult use sales. Leveraging our positive experience in New Jersey, we are expanding our cultivation facility in Syracuse, which we expect to be completed at the end of the second quarter of this year. We are also currently looking at our network of retail dispensaries in New York to ensure that we have a solid footprint the anticipated increase in business that will come with the development of this pending adult use market turning to connecticut we continue to prepare for adult use in that state and are exploring opportunities to further increase our leadership position including the potential for social equity partnerships we will continue to focus on the consolidation of our operations in maine we recently announced the consolidation and conversion to adult use of our last retail location operating under a managed service agreement following completion of that conversion we will turn towards consolidation and conversion of the cultivation facility in massachusetts we are looking at possible increases in cultivation capacity as well as adding an additional retail location to serve that more mature market next in illinois we completed a cultivation expansion in 2021 and are ramping up our wholesale operation, leveraging our significant cultivation and wholesale expertise. In Pennsylvania, we completed a cultivation expansion in 2021 and our focus on maintaining our position in the market as a producer of premium cannabis products that are very much in demand in the wholesale market. Finally, in our most recent acquired operations in Ohio, We are continuing to increase the quantity of products we produce in the state to further ramp up our wholesale operations. Innovation will also be an important drive for growth in this market. Having recently introduced edible formats including botanist brand fruit chews, we are excited to see the meaningful contribution this market will make to our business in the first year of full ownership by Acres. During the quarter, we also welcome new members to our senior management team with the appointment of Dennis Kern as our chief operating officer and the addition of Steve Strom to our board of directors. Both have become instrumental members of our team and we are excited to have them on board to help us deliver the growth we expect to achieve during the year. Additionally, last month we welcomed Corey Sheehan as our new general counsel. Before I turn the call over to Steve for a detailed look at our financials for the first quarter of 2022, I want to finish as always by thanking our team whose work this quarter has been fantastic. This has been a solid start to what is we believe will be a very exciting year for acreage. We are in an enviable position to capitalize on the tremendous market opportunities ahead of us. The New Jersey market just went live with adult use sales. New York and Connecticut both have pending adult use sales, and we are growing our premium wholesale operations in several states across our footprint. I am incredibly excited for all that we will accomplish together in 2022. I will now turn the call over to Steve to discuss the financial results for the quarter in more detail before we open the call to questions. Thank you, Peter, and good morning to everyone again. As Peter indicated, Revenue for the first quarter of 2022 was $56.9 million, a 48% increase compared to the first quarter of 2021. Year-over-year growth was primarily due to the acquisitions of Ohio, California, and Maine operations over the past 12 months and was somewhat offset by revenue declines due to the divestitures of Florida in April 2021, declines within the company's operations that are being held for sale, and the non-recurrence of previously unrecognized management fees in New Hampshire that were reported in the first quarter of 2021. Excluding these acquisitions and divestitures, the impact of total revenue decline in the company's Oregon operations, and the increased management fees earned in a comparable period, total revenue increased by 4.7 million, or 14%, for the three months ended March 31, 2022, as compared to fiscal 2021. Additional revenue available from completion of expansions at several of our cultivation facilities, coupled with increased demand and production across various states, drove this revenue increase. Additionally, total revenue for the first quarter of 2022 declined sequentially by 1.2 million, or 2%, compared to the fourth quarter of 2021. Again, however, Excluding the company's California and Oregon operations, which are not considered core, revenue for the first quarter of 2022 increased slightly by 0.5% on a sequential basis, as the company was able to overcome challenges associated with the pandemic and industry pricing pressures, which negatively impacted revenues. Retail revenue increased 60% for the quarter compared to the first quarter of 2021, and was driven primarily by the acquisition of Ohio on October 1st, 2021. Excluding the impact of acquisitions and divestitures and the revenue performance of our Oregon operations, which are being held for sale, retail revenue increased by 6%. This organic growth is primarily a result of increased demand and production across various states. Wholesale revenue improved by 51%, versus the comparable period in 2021. This was due to our increased capacity, as well as our maturing operations in Pennsylvania and Illinois, which resulted in higher yields and better product mixes in both markets, as well as the impact of recent acquisitions. Excluding the impact of acquisitions and divestitures, wholesale revenue increased by 33%. Gross profit continued to benefit from the vertical integration of our operations as a greater portion of the products sold in our retail dispensaries was sourced internally from our own production and processing operations. Gross profit generated from this internally produced product includes both the wholesale and retail margins. Excluding other income, which is earned from management fees and has no associated cost of goods sold, Gross margin during the quarter was up 200 basis points to 52% compared to 50% in the first quarter of 2021. Gross margin additionally was up sequentially from 48% in the fourth quarter of 2021. Total operating expenses for the quarter were 32.2 million, an increase of 13.4 million or 71% from the first quarter of 2021. Excluding equity-based compensation expenses, losses, write-downs and recoveries, impairments, and depreciation and amortization expenses, all of which are non-cash in nature, total operating expenses for the three months ended March 31, 2022 increased $3.6 million, or 19%, compared to the corresponding period of fiscal 2021. The rate of increase in operating expenditures was significantly lower than the rate of increase in revenue and is due to acreage's expanded operations through growth and acquisitions. Adjusted EBITDA, which excludes impairments, equity-based compensation expense, and unusual items that are not expected to recur in future periods, was $8.6 million for the first quarter of 2022, increasing 440%, compared to the adjusted EBITDA of $1.6 million in the first quarter of 2021, and a small sequential improvement from adjusted EBITDA of $8.5 million in the fourth quarter of 2021. Adjusted EBITDA from core operations, which excludes markets where the company has entered into definitive agreements to exit, and startup ventures such as beverages and CBD, was $9.3 million for the current quarter. indicating that the company's core markets are still being negatively impacted by its non-core operations. Consolidated EBITDA during the quarter was $1.3 million compared to a consolidated EBITDA of $1.6 million in the previous year's comparable period. Lastly, net loss attributable to acreage for the quarter was $12.7 million compared to a loss of $7.8 million in the first quarter of 2021. Revenue growth and gross margin improvements combined with reductions in equity-based compensation expenses were more than offset by increased compensation expense due to the company's expanded operations and recoveries of prior impairments during the first quarter of the prior year. After the quarter, we completed the sale of our cultivation and processing facility in Medford, Oregon, and closed the dispensary in Powell, Oregon. Total consideration for the sale of the Medford Cultivation and Processing Facility was $2 million, including $750,000 paid to acreage in February 2021, $500,000 due August 1, 2022, and the remaining balance of $750,000 due May 1, 2023. We also completed the consolidation and conversion of a dispensary in Brewer, Maine to adult use. Closing with our balance sheet, we ended the quarter with $32.6 million in cash and restricted cash on hand. This cash, together with undrawn amounts under the current debt facility that was arranged in the fourth quarter of 2021, provides funding of $57.6 million until December 31st, 2022, at which time the company expects the additional $50 million committed accordion to be available as well. With that, I will now have the operator open the line for questions. Operator, please go ahead.
spk00: Absolutely. We will now begin the QA session. If you would like to ask a question, please press star followed by one on your touchtone keypad. If for any reason you would like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you are using a speakerphone, please remember to pick up your handset before asking your questions. We will pause here briefly to allow questions to generate the queue. The first question is from the line of Matt Bottomley, but it cannot curb down on fee. You may proceed.
spk02: Good morning, everyone. Thanks for taking the questions. Just wanted to touch on the profitability profile a little bit more. So clearly over the last, you know, four or five quarters, there's been improvement on the adjusted EBITDA line. And, you know, understandably, there's some headwinds in Q1. But Can you speak a little bit more to maybe cash flow from operations or something a little more in terms of a cash flow metric to how things have been trending over the last, you know, number of quarters since you've been adjusted even a positive.
spk04: Yeah. Good morning, Matt. Cash flow is getting close to break even from operations during the quarter. And if you look at the balance sheet, you'll see there was a significant build of inventory. I think about $6 to $7 million increase in inventory. That was really on the cultivation on the wholesale side, building up inventory in a few select markets like Ohio and most specifically New Jersey in anticipation of adult use. If it hadn't been for that item, we were pretty close to a cash flow break even for the quarter. The timing of tax payments obviously has the ability to move that quite a bit. So in periods where we've got annual tax payments due, it's going to be a negative cash flow. But based on the results for the last couple of quarters, the company is pretty close to operating on a break-even basis for cash flow from at least operating activities.
spk02: Okay, understood. And then just to follow up below that line, when you look at the CapEx that has been spent historically, particularly in New Jersey, You guys up for the launch there? Not just specifically on that market, but maybe just speaking to your what you consider core, just your current cash position and credit facility in relation to the initiatives you think you'll need to invest in in the next year or so.
spk04: Yeah, if we look at it, you know, we 2020 and 2021 were big years of capital, particularly on the cultivation side. You know, we built out Illinois, we expanded Pennsylvania, we expanded Ohio, We completed the expansion in New Jersey and we started the expansion in Syracuse. So as I look out to 2022, we've got to complete the expansion in Syracuse. We're looking at opportunities in Connecticut, taking advantage of the social equity programs that may involve retail and or cultivation to be determined in the next little while. We've got Potential capital expenditures in New Jersey to expand our cultivation footprint. Again, we're looking at some options that are available to us and see some big opportunities there. And lastly, we're looking at potential dispensaries in New York to get us ready for adult use sometime in 2023. Our cash forecasts say that with the cash generated by the business as well as the availability under our lines, we have sufficient cash to meet those capital requirements through the balance of this year.
spk02: Okay, thanks. I'll get back to you.
spk00: Thank you. The next question is from the line of Vivian Azar with Calvin and Company. You may proceed.
spk03: Hi. Good morning, guys. This is actually Victor Ma on for Vivian Azar, and thank you for taking my questions. So first, gross margins showed a nice sequential improvement. Gross margins showed a nice sequential improvement of about 4,400 pips. Can you please talk a little more about some of the drivers behind this expansion, both the wholesale and the retail level? Thank you.
spk04: Yeah, we were fortunate. We're not getting impacted as much by price compression that we're seeing some of our competitors face. Markets like Pennsylvania, where we offer a premium product, even though that entire market has seen some significant price compression, we haven't experienced nearly the same impact. Other markets like Ohio, where we have both a strong retail and wholesale presence, we produce a premium product that's in high demand, so we're able to maintain pricing stability there. And as we improve our production efficiencies and get more volume on our facilities, that's leading to margin improvements. But overall, it was a combination of trying to be diligent about pricing, not taking discounts unless absolutely necessary to maintain market share, and then getting further efficiencies out of our production facilities so that we can capture both the retail and a wholesale margin. A greater portion of our product that we're selling at our retail establishments is now coming from internally produced sources. So that's leading to margin improvements because we're able to capture both the retail and wholesale margin, whereas in the past, a larger portion of our retail sales were generated from products that were purchased from third parties. So really the big reason for the margin improvement is some production efficiencies that we're getting, but it's also more of the product we sell is now being made by ourselves.
spk03: Got it. Thanks for the caller. And then just, I guess, to touch upon New Jersey, you know, understanding that it's still early days, it looks like, you know, adult use product assortment is still limited across the board. Can you offer some line of sight on when we should expect to see additional core factors like edibles in your stores? Thank you.
spk04: Yeah, thank you, Victor. I mean, so obviously for us, New Jersey is a priority market. We're very well positioned in that state. You know, as was mentioned previously, we built out our cultivation facility. And, you know, off to early days has been very positive in terms of revenue and foot traffic. You know, as it relates to the foreign factors, we continue to look at Expanding it, we had some delays in terms of it from a packaging standpoint. We expect to have more forms on the shelf in the coming weeks. But some of that was just because we didn't really have a lot of time, as you know, in terms of when the final regulations came through. And we had about seven days, so it was a lot of work.
spk03: But a lot of those form factors should be on shelf very soon. Great, appreciate the caller. I'll jump back into the queue.
spk00: Thank you. The next question is from the line of Glenn Madison with Lindenburg. You may proceed.
spk01: Hi, thanks for taking the question. So, nice to see the gross margin gain sequentially, kind of somewhat bucking some of the trends out there, but can you just give a sense of how you expect that number to play out over the course of the rest of the year?
spk04: Yeah, you know, we've continued to say we expect, given the pricing compression in some markets, but our premium products in other markets, we expect our margin to be somewhere around the 50% mark. You know, it's a little bit higher now. As I said, we've been insulated somewhat from price competition. I don't think that's going to remain. I think, you know, we're seeing it across all of the different categories. So eventually it's going to trickle down to us a little bit. So we were satisfied with, you know, the overall gross margin of 52%. Long-term, we expect that to come down a little bit, but we expect to stay north of that 50% mark.
spk01: Great. In thinking of New Jersey, can you give us a sense of the, you know, how operations ran at the stores in terms of, you know, how smooth it was and the lines and stuff like that and just your general sense of, you know, what kind of throughput those stores could handle and maybe, you know, just generally speaking, some other people have commented to like what New Jersey could mean for them. Uh, you know, if all goes well in the state, which it seems like it's going pretty good. So, um, you know, I guess I'm just kind of getting a sense of like, what kind of capacity do you have? What kind of revenue could you support this year in a, in a reasonably good case scenario, but you know, a New Jersey launch.
spk04: Yeah, so, I mean, we've been extremely pleased with the initial start in New Jersey. You know, as I mentioned before, I think the team did a tremendous job just to prepare for the opening. I think that, you know, we were very satisfied in terms of our throughput. You know, obviously in all the dispensaries throughout New Jersey, You know, there was long lines, and, you know, I think that was a good indication of the pent-up demand and, you know, really the opportunity that a lot of patients and consumers have been waiting for this day. I think we have been very successful in expanding our capabilities to enhance the throughput. We've reduced the line significantly, and I think we'll continue to expand that. um and i think there's going to be also a little bit more consistency in terms of the demand um you know obviously this was a watershed moment for new jersey so you know the first couple days there's a lot of interest but i think that's going to be kind of stabilized over time but we're working internally to really maximize that and also working with the uh the local authorities in terms of hours you know expanding those hours so We've been very happy with that. And I think, listen, in terms of the market opportunity, over the last 18 months, we've really focused on putting ourselves in a position with the turnaround to really capitalize on these market opportunities like New Jersey. And so we expect this business to continue to expand. Right now, it's primarily a retail market with only 13 retail dispensaries. So there's not much of a wholesale opportunity. We have opened up that a little bit more this month. But, you know, over time, I think we expect New Jersey to be a very large market and a critical driver for our growth moving forward.
spk01: Great. Thanks, Peter. And another one just on the – On the balance sheet, just the accordion feature for that debt facility that you expect to be available beginning next year, can you say what kind of hurdles you need to cross to make that available? If you were operating at the rate you are now, would that be available under those circumstances, or is there anything kind of Herculean that you need to do to get that open up?
spk04: No, there's some financial covenants, but we think those are achievable. The biggest factor is going to be the underlying assets supporting the deadline. You know, our credit facilities provided by a couple of REITs. So they're focused on the real estate and hard asset backing of it. So in order to get the next 50 million, we've got to show increases in value of the portfolio of assets that we own. Either that's because they've increased in value given the operations or we've invested more in capital dollars. So with the capital that we've got planned over the course of the year, as well as the improvements and earnings, we expect both of those things to occur, which should give us sufficient asset backing to support the larger draws against the facility.
spk01: Great. Thank you. That's it for me.
spk00: Thank you. Again, to ask a question, please press star 1. There are no additional questions at this time. I will pass it back to the management team for closing remarks.
spk04: Yeah, thank you everybody for joining and really appreciate the continued support. As we mentioned in the opening remarks, Acreage has undertaken a significant transformation and a lot of hard work has really put us in a great position for where we are today to accelerate growth in our core markets and capitalizing some of these opportunities. So I'd like to close by really thanking everybody on the call and also, most importantly, our team. I think this has been a tremendous journey. And, you know, I really appreciate a lot of the support and hard work to get us to this point and looking forward to what we think is going to be an outstanding 2022. So thank you very much.
spk00: That concludes today's conference call. Thank you. You may now disconnect your line.
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