Ayr Wellness Inc

Welcome to the AIR Wellness first quarter 2021 earnings call. Joining us today are AIR's CEO, Jonathan Sandelman, the company's CFO, Brad Asher, and the company's co-chief operating officer, Jennifer Drake. The company will discuss forward-looking matters on this call, including targets for revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risks as described in the company's management discussion and analysis for the quarter ended March 31st, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and other disclosures concerning non-GAAP measures contained in AIR's management discussion and analysis for the quarter ended March 31st, 2021. I will now turn the call over to AIR's CEO, Jonathan Sandelman.

Thank you, and good afternoon, everyone. The first quarter was truly a transformative quarter for our business. Our strategic name change at the beginning of this year serves to better reflect our mission to deliver the highest quality cannabis, the best customer experience, and to be a force for good in our communities. We're happy to report our strong Q1 results today and even more excited for the progress anticipated for the remainder of 2021. Our revenue in the first quarter grew 74% year over year and our adjusted EBITDA more than doubled. This growth was mostly organic as our acquisitions closed too late in Q1 to contribute much to this quarter. But that will change as we move through the rest of the year. In total, we closed three major acquisitions in Q1, beginning in February with our acquisition of Liberty Health Science, adding the fourth largest retail footprint in Florida to our portfolio. We also closed on our Arizona acquisition at the end of March, adding three new dispensaries and a large cultivation expansion in one of the latest adult-use markets to emerge in the West. In March, we also closed our acquisition in Ohio, and we were able to harvest our first flower in Pennsylvania called Rebel, which hit the shelves in our stores earlier this month. We also opened our sixth store in Nevada, the closest dispensary to the Las Vegas airport, just in time for the return of tourism to the state. The results of our successful execution are beginning to show in our numbers, and substantial progress can be seen in our April monthly revenue. We told you all about the amazing record for 420 we had, but the entire month was incredibly strong, with total revenues nearly doubling since January. You will see this continue to build through the year as we close our New Jersey acquisition As Florida continues to improve and our next cultivation projects come online, we have always been committed to building strong foundations for the future of our business. In 2021, as we expand in our seven states, that investment will increasingly focus on building our brands. We are putting significant resources into elevating and evolving the air wellness ramp. As part of this, we've partnered with a premier branding company to build the foundations for a national branding strategy to be cultivators of wellness and creators of wonder. To bring this to life, we are developing iconic branding, including reimagining the dispensary design and consumer experience. This retail concept will be introduced first in our Air Wellness Pennsylvania stores and showcased in the new Greater Boston adult use stores, and then rolled out across Florida and the rest of our footprint when the time is right. Our national and regional marketing efforts are growing to support this consumer-focused strategy and will be aligned around our core belief that everything starts with the plant. And with AIR uniquely positioned as the premier cultivator of high-quality cannabis at scale. You can expect to see us focus our national portfolio on a narrower select group of core power brands sold at air retail and wholesale across our footprint. For example, June 1st, we'll introduce the Origin extracts to the Florida market. Origin has done phenomenally well in Massachusetts since its debut late last year and sold over 2.2 million in retail in March according to BDS, more than doubling its fourth quarter revenue, and has over 20 percent of the concentrate markets, according to BDS. Wicked sour gummies, which have become a huge success with the consumers en masse in Nevada, will follow in Florida and Arizona. To further support our branding investments, we are developing a best-of-breed marketing technology stack and integrating the consumer-facing digital ecosystem across the entire air wellness customer journey. You will see these brand investments drive additional revenue in the second half of 2021 and into 2022 and beyond. Jen will walk you through the details of the remaining milestones in 2021 in 2022 to reach the target we have set for 2022. We still have work to do, but so far we've accomplished what we said we would on time and on budget. Our team works tirelessly to make that happen. I am very proud of the hard work everyone here at AIR puts in every day to reach the goals we have set for ourselves and our shareholders. With that, I'll pass the call to our CFO, Brad Asher, to walk through the financial results.

Brad Asher Good afternoon, everyone. As John mentioned, we are proud of the substantial growth in Q1. As a reminder, Q1 included only 34 days of contribution from the Liberty acquisition and eight days of contribution from the Arizona acquisition. Now we'll be walking through actual results of the business without any pro forma adjustments. Q1 also presented our first quarter reported under U.S. GAAP. We signaled to this change on our previous call, and I want to reiterate a few of the key differences you will see in our Q1 results and going forward. It's important to note these differences are all in line with industry norms and not unique to AIR in any way. Warrants and biological assets are two of the areas that show the greatest differences between IFRS and GAAP in our industry. Under GAAP, our warrants were treated as equity as opposed to liabilities. And we no longer have the biological asset fair value requirement. Therefore, all fair value is removed from inventory. However, one exception is the fair value requirement for acquisitions whereby the inventory is marked to fair value on the purchase date, which is consistent with previous IFRS treatment. In Q1, this applies to the inventory from our Florida, Arizona, and Ohio acquisitions. As this inventory is subsequently sold, the fair value cost basis has a downward impact on gross margins. Throughout our financial statements, we've identified this as incremental costs to acquire cannabis inventory in a business combination. And you will see these amounts itemized within the inventory footnote, cost of goods sold presentation, and adjusted EBITDA reconciliation. In addition, under U.S. GAAP, the majority of our leases are now considered operating leases and treated as rent expense through cost of goods sold or G&A. Whereas under previous IFRS reporting, All capitalized leases were considered financing leases, and expense is part of depreciation and interest. While this change in classification doesn't impact cash flow in any way, it does have an impact on reported adjusted EBITDA, with $1.6 million of lease expense in Q1. Lease expense will continue to build from this number as our footprint expands consistently throughout the year, particularly as we open more stores in Florida. Based on our current expectations of the annual impact of this GAAP-related lease expense reclassification on adjusted EBITDA, we are adjusting our 2022 adjusted EBITDA target to 300 million from 325 million under IFRS. I'll now provide a brief summary of the key financial metrics and results for the first quarter. In Q1, sales increased to 58.4 million representing an increase of 74% over prior year and 22% over prior quarter. To exit the quarter in March, there was an exponential jump of 72% in monthly sales relative to January sales, driven by our first full month of sales from the Liberty acquisition and eight days of sales from the Arizona acquisition. Our adjusted EBITDA for the quarter was 18.4 million, representing a 136% increase over prior year on an apples-to-apples gap basis and in line with prior quarter. With the prior IFRS treatment of leases, the first quarter represents a 3 percent increase in adjusted EBITDA from $19.4 million to $20 million on an apples-to-apples IFRS basis. Adjusted gross margins of 54 percent represents an 8 percent increase and 6 percent decrease from prior year and prior quarter, respectively. The sequential decrease was anticipated as we continue to ramp retail operations in new supply-constrained markets, ahead of our substantial cultivation facilities coming online and the higher margins that come with vertical integration. Our SG&A expense of $16.6 million represents 28 percent of sales, which was consistent with prior year as a percentage of sales, while representing a sequential increase from Q4 of approximately 22 percent on a percentage of sales basis. This increase was largely due to our continued investment in branding, talent, and infrastructure, the strong foundations of our business, as well as startup costs associated with preparing locations for their intended use. For example, we hired 110 people just in Florida in the one month we owned the business. In total in Q1, we adjusted for $1.6 million of startup costs and adjusted EBITDA as we believe these expenses are not indicative of ongoing operations and quantifying this amount only enhances comparability to prior and future periods. Lastly, we ended the quarter with $195.7 million of cash on hand compared to $127.2 million to end the year, demonstrating a strong capital position to propel our growth initiatives. The increase in cash from year-end was primarily driven by an equity raise in January, with total gross proceeds of $118 million USD. This was partially offset by $31 million paid for a combination of CapEx and acquisitions, as well as $21.9 million paid in federal taxes subsequent to year-end. With that, I'll hand it over to our co-COO, Jennifer Drake.