Ayr Wellness Inc

welcome to the air wellness second quarter 2021 earnings call joining us today our air 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 June 30, 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 Disclosure Concerning Non-GAAP Measures Contained in Errors Management, Discussion and Analysis for the Quarter ended June 30, 2021. I will now turn the call over to AIR CEO, Jonathan Sandelman. Please go ahead.

Thank you and good morning, everyone. We continue to go through our transformative time in our business. Those of you who have heard me speak over the last past quarters have heard me say again and again that our goal is to be the largest producer of high-quality flour in the United States. Everything we have done as a company throughout Q2 has focused on investing in our operations to ensure that our goal becomes reality, and it is working. In Florida, because of the improvement of our cultivation and our biomass output, we have moved from number seven at the time of closing to number four today in total flower output and increased our streams from two to 12. This has allowed us to open new stores at a rapid clip and greatly expanded our presence in what is quickly becoming a massive market. I told you on our last earnings call that we expect the value of our Florida operations soon to be larger than our entire market cap today. And I feel even more confident in that statement given our recent success. Our quality offerings and brands are resonating with the consumers in each of the markets we operate. Our wholesale presence has increased by three times, and our flour and other products can be found in over 280 retail locations, including 57 of our own stores. Just one year ago, our products were available in less than 100 stores, and we had only seven of our own. That is tremendous growth in one year alone, and we have announced a handful of exciting planned acquisitions, including the top-selling cannabis-infused beverage, Levia. As a premier U.S. cannabis company, we believe that everything starts with the plant. Everything we do at AIR starts with the plant because in all DPG businesses, everything starts with the quality of the product being sold. And every product we produce starts with the quality of the plant we grow. That is why we've made it our mission to be the largest scale producer of high quality cannabis flower in the United States. Why is that important? The cannabis industry is only going to get more competitive. We believe the cannabis consumer is discerning and will increasingly recognize quality. You may be able to fool this consumer once with a pretty box, but they'll learn quickly. and it's not the box that counts, it's what's inside the box. Success in the cannabis industry will increasingly be determined by what's inside the box. Being the largest scale producer of high quality cannabis in the United States uniquely positions Ayr to be the leading cannabis CPG company in the United States. As we build out our national brand footprint, We're building our brands around what's inside the box. We're delivering quality to consumers with great value. We're delivering affordable luxury. This is what many of the best non-cannabis CPG brands are built on, the brands that have real staying power. The focus of the AIR brand going forward will be KineFlower, Origin Extracts, and Levia, our newest proposed acquisitions. We are putting significant investments and marketing talent behind these brands nationally while continuing to complement them with our regional offerings. I've always said when the time was right, we would unify our retail brands. And now that we have moved from two states in 2020 to eight states, it is time. It aligns with our vision and our mission and our belief that everything starts with a plan. and that the commitment to the plant has to be the foundation of the leading cannabis CPG company. It doesn't happen overnight, and it's incredibly important to think big and to get it right. I've been talking more and more about our plans here recently, and we will begin rebranding all of our retail stores to air during the second half of the year. We will continue to think big in terms of footprint, and products and branding, and we will continue to deliver on those big plans. With that, I'll pass the call over to our CFO, Brad Asher, to walk through our financial results.

Good morning. As John mentioned, we are proud of the record results and significant growth in Q2, where sales increased to 91.3 million, representing an increase of 222% over prior year and 56% over prior quarter. This was driven by contributions from recent acquisitions as well as organic growth. The contribution from M&A expansion included 204% growth in Florida, driven by a full quarter of contribution relative to the 34 days in Q1. During this quarter, both the store count and daily average sales grew by roughly 20%. 825% growth in Arizona, driven by a full quarter of contribution relative to the eight days in Q1. and 307% growth in Pennsylvania, driven by the launch of the Rebel Flower brand, along with the commencement of our wholesale business in June. That resulted in 1.5 million of wholesale revenue in the first month of sales. We also achieved 158% growth in retail revenue, almost entirely from the same store growth with our newest store in Gibsonia, contributing just nine days of sale in the period. In addition, total sales from our original footprint in Massachusetts and Nevada increased 8% quarter-over-quarter. Adjusted EBITDA for the quarter was $27.4 million, representing a 225% increase over prior year on an apples-to-apples basis and a 49% increase over prior quarter. Adjusted gross profit increased to $53.1 million for the quarter compared to $18.1 million in prior year and $34.2 million in prior quarter. We believe adjusted gross profit, a non-GAAP measure, provides valuable insight into our performance by excluding depreciation and amortization, interest, and startup costs, as well as the fair value step-up of inventory from acquisitions. Justly gross profit margins of 58% represents a 40 basis point sequential decrease from the prior quarter. This trend is expected as we enter new markets and make an investment in acquiring customers. During this period, we expect gross margins to persist in the mid-50% range, as we wait for capacity expanding capital projects to come online. SG&A expenses in the quarter represented 30 percent of sales, a sequential increase of 200 basis points from prior quarter. The increase was largely due to our continued investment in building out infrastructure, including the addition of over 400 employees, representing an approximate increase of 35 percent of our workforce during the quarter. While we expect operating expenses to increase on a dollar basis, As we continue to expand our footprint, we expect SG&A as a percentage of sales to be consistent over the next few quarters until ultimately declining in 22 as we build more leverage throughout the year. Lastly, we ended the quarter with $123.8 million of cash on hand, demonstrating a strong capital position to fund our growth initiatives. We continue to invest in the future earnings power of the business by building up inventory and investing in CapEx in the amounts of $22 million and $32 million, respectively, year-to-date. This is in addition to the $38 million paid year-to-date in the form of cash consideration, deposits, and bridge financing relating to the M&A activities. Throughout this period of investment, we are maintaining a healthy balance sheet with positive working capital of $153 million when adjusted to remove any fair value markups of acquired inventory. This is relative to a negative working capital balance when performing the same calculation from the prior year period. Based on these Q2 results and the progress we see to date in Q3, we are targeting an estimated $100 million in revenue in Q3, with adjusted EBITDA flat sequentially over Q2. We remind you that these projections are subject to the assumptions and risks outlined in our Q2 MD&A. In closing, I will end by saying that I am proud of this milestone quarter and all that we've accomplished to date. The Accounting and Finance Department has gotten the onboarding of acquisitions down to a science. with both the speed and precision of a pit stop, only without the luxury of stopping. By quickly implementing our tech stack and methodology, it allows us to provide key insights and analytics in the business early in the process. In addition, we continue to make enhancements to expand compliance, including the buildup of our Sarbanes-Oxley program, which will be a requirement as an SEC filer. As a reminder, last quarter was our first reporting in US GAAP as a US filer. As such, we would like to announce that we've released a notice of change of auditor from M&P to the U.S.-based firm Markham, a top-tier firm with a substantial cannabis practice. We've enjoyed working with M&P, have no disagreements for unresolved issues, and would like to thank them for all their efforts. In addition, we look forward to working with Markham, starting with our Q3 financials. With that, I'll hand it over to our co-COO, Jennifer Drake.