Ayr Wellness Inc

Welcome to the AIR Wellness 4th 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 and revenues and adjusted EBITDA. This forward-looking information is subject to the assumptions and risk as described in the company's management discussion and analysis for the quarter ended December 31, 2021. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer you to the reconciliation to GAAP measures and the other disclosure concerning non-GAAP measures contained in AIRS management discussion and analysis for the quarter ended December 31, 2021. I will now turn the call over to AIR CEO, Jonathan Sandelman. Please go ahead.

Good morning, and thank you for joining us. 2021 was a transformational year for our footprint, talent, and processes, as well as culture, all contributing to our mission to become the largest cultivator of high-quality cannabis in the United States. In the last year alone, we grew revenue 130% over prior year, from $155 million to $357 million. We grew adjusted EBITDA 83% over prior year, from $52 million to $98 million. We deployed $123 million in capex, closed eight M&A transactions, added five states to our footprint, added 62 dispensaries, added eight cultivation facilities, and welcome 1,600 talented people to our organization. 2022 will be a transformative year for AIR's earning power, but it will come later than we expected. When engaged in the scale of transformation that we are undergoing, there are three primary areas of risk, build-out, regulatory, and market conditions. Thankfully, our build-out phase is nearly complete, with 95 percent of our current CapEx cycle fully constructed. Building the number and scale of facilities that we have in a pandemic and global supply chain crisis was challenging. While it took longer than we would have liked, we are essentially past the build-out risk stage. We currently find ourselves in the second bucket, the regulatory risk phase. Our facilities are essentially built, and now we're waiting for approval to open them. Looking back at the assumptions we made in 2021 when setting our 22 guidance, we recognized that we were wrong about how long approvals would take. COVID had a significant impact on the ability of state and local regulators to conduct in-person inspections. which has lengthened the timeline beyond the cushion we accounted for. For example, our new 80,000 square foot Arizona cultivation facility, which we expected to be producing revenue for us already, opened months later than forecasted due to a slow inspection process. And now Massachusetts adult use retail, New Jersey adult use retail, and our 75,000-square-foot cultivation facility in New Jersey are all waiting for approval to open. In Illinois, our acquisitions are waiting for regulatory approval to close. We have no doubt that these approvals will come. It's just a matter of when. The last bucket of risk is market conditions, which we currently see as a combination of supply and demand imbalance and share of consumer wallet. It makes sense for AIR and other operators to build cultivation capacity ahead of expected demand growth. And that capacity, coming online, has caused a temporary imbalance in supply and demand, which has resulted in price compression. We see this in Pennsylvania and Massachusetts in particular. We believe Massachusetts will right itself as adult use stores finally open in the Boston area. But in some states like Pennsylvania, this imbalance may persist longer. Looking at the consumer wallet, it's clear that due to the ongoing inflation, consumers need to spend more money on other necessities, which leaves less money to spend on cannabis, which in addition to the pricing pressure previously mentioned, is why we believe the industry has recently seen declines in market size. This situation is especially impactful to cannabis because there's no consumer financing or credit cards available in our industry. Though passage of safe banking could change that if it were to occur. Though the market has been declining, our retail market share continues to either grow or remain flat in the states where we operate. And our updated CPG brand portfolio that we reintroduced to the market last quarter has been designed with the products that span premium to value. We are ready to meet our customers wherever they are in their cannabis journey. We are confident that the heirs' earning power will be as strong as ever. Although delayed on the factors that we discussed, I will now turn the call over to our Chief Financial Officer, Brad Asher.

Brad Asher Thanks, John, and good morning, everyone. Full-year sales of $358 million represents an increase of $202 million, or 130 percent, from the prior year of $155 million. Our original markets of Massachusetts and Nevada increased $50 million year-over-year representing growth of 32% and making up approximately one-fourth of the total increase. The remaining increase of $152 million was driven by M&A during the year, including expanding our operations from two states to seven states. Fourth quarter sales increased $16 million, or 16% sequentially, from $96 million to $112 million. Same-store retail sales increased 5% sequentially during a down quarter for our markets according to third-party available data. The balance of the sequential growth was driven by M&A, primarily the acquisitions of PA Natural and GSD New Jersey, and partly offset by lower wholesale revenue, which we mitigated by increasing the amount of internal products sold through our stores. Full-year adjusted EBITDA of $98 million represents an increase of $45 million, or 83%, from prior year. And fourth-quarter adjusted EBITDA of $26 million is in line with prior quarter. U.S. GAAP loss from operations was $14 million and $56 million for the fourth quarter and full year, respectively. To counter the pricing ebbs and flows the industry has experienced, we have been hyper-focused on operational efficiency metrics, including optimizing headcount and tightening our cost structure across the board. As a result of this effort, we anticipate any future increases to SG&A to be highly correlated with significant milestones of sales growth, such as adult use in Massachusetts and New Jersey. 2021 finished with adjusted EBITDA margins of 27.4% for the year. We anticipate margin expansion this year to be closely linked to the increased biomass production throughout 22, which is still anticipated to grow over 140% year-over-year. Full-year adjusted gross profit of $207 million represents an increase of $116 million, or 126%, from the prior year of $92 million. Adjusted gross margins of 58 percent for the year and 57 percent for the quarter were in line with trends and on pace with 59 percent in prior year. The slight decrease was a result of pricing fluctuation in certain markets. U.S. GAAP gross profit was $51 million and $138 million for the fourth quarter and full year, respectively. Moving on to our balance sheet and cash flow, we ended the quarter with $154 million of cash on hand, During the year, we invested $123 million for CapEx, including bridge financing and $97 million of cash consideration for M&A. Ahead of the upcoming growth opportunities, we continue to build inventory with $51 million of operating cash flow invested in inventory over the course of the year. Our ability to monetize this investment alongside the milestone growth events for the company will be the driver of positive operating cash flow in the second half of the year. In the fourth quarter, $148 million was received through debt financing, further increasing our capital position. Additionally, subsequent to year-end, we closed on $26 million of real estate-backed financing with an industry-leading 4.625 percent annual interest rate. The transformation in 21 shaped not only our footprint, but our identity as an organization. 22 is set to continue this momentum with a comparable level of growth, but unlike 21, this is only partly driven by M&A. The real transformation this year will occur with our existing states as the $200 million in CapEx invested in 21 and 22 comes online, paired with the catalyst of adult use for both Massachusetts and New Jersey. Our team is poised for the challenge, ready to capitalize on this next stage of AIRS growth. With that, I'll hand it over to our co-COO, Jen Drake.