Ayr Wellness Inc

Welcome to the AIR Wellness first quarter 2022 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 31, 2022. 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 AIRS management discussion and analysis for the quarter ended March 31, 2022. I will now turn the call over to AIR's CEO, Jonathan Sandelman.

Jonathan Sandelman Thank you all for joining us. When we last spoke, AIR was in the midst of completing a major cycle of CapEx and working its way through the regulatory process in a number of key states. We are pleased to say that we've made significant progress on these fronts and are now just beginning to unlock the revenue stream that these investments will provide. We are very pleased to be approved for adult use sales in New Jersey at all three of our stores. And in Massachusetts, our long-awaited Back Bay store was approved on May 12th for a June open. We are optimistic that our Greater Boston Watertown location will follow quickly in its steps. Our team has worked hard and made great strides to get us to this point. These investments along with our four cultivation facilities, represent significant expenses front-loaded by AIR, and we'll begin to see the revenue benefits from those investments now that the facilities are built and approved. Though these assets will have very little impact on sales and margins in Q2, we anticipate a significant ramp in AIR's revenue and profitability beginning in Q3 and Q4, as we outlined on our last earnings call. Beyond these specific assets, we've made great progress throughout our business. AIR has experienced 90 percent year-over-year revenue growth, doing so in the face of macro headwinds and without the aid of stimulus checks. The company has consistently gained or maintained share in most of the major markets in which we operate. Since we introduced our refreshed brand portfolio in November, we've completed 20-plus launches of our 10 national brands across our markets, and we'll launch 50 more brands, rebrands, and new product releases over the next 90 days, such as Road Tripper in Nevada. an exciting reformulation rebrand of Entourage Vapes in Massachusetts, and Levia's ViaDrain drops in Florida. Our flower brands are number one in our established adult use markets of Nevada and Massachusetts per BDSA because we focus on great products grown exceptionally, and while it's still early days for our brand portfolio, We are building it with data-driven, consumer-centric insights that resonate with our customers across different price points and product categories. On the cultivation side, while we've always aimed to be the largest producer of a high-quality flower at scale, we understood that it was always going to be a process. We are currently bringing online some of the best cultivation facilities in the country across our footprint. and we are pleased to say that the quality of our flour is the best it's ever been. We're combining this with an approach to genetics, which includes building a bank of unique and cutting-edge strains and consistently rotating genetics through our operations to keep our offerings fresh and our customers coming back for more. This is what our flour customers want, and we will provide flour brands like Kind and Lit with the genetic platform they deserve to consistently delight our customers and build a loyal following. We will continue to invest in our quality and invest in our brands. I will now hand the call over to our Chief Financial Officer, Brad Asher.

Thanks, John. Q1 sales of 111.2 million represents an increase of 52.8 million, or 90% year-over-year, and flat quarter over quarter. As discussed by our peers and corroborated with third-party data, many of our markets continue to experience pricing pressure during the quarter, resulting in a decrease in overall market size. For these states, we had a sequential decrease in sales, but at a lesser rate than the market, meaning we were able to hold or gain market share in each of these states. In Nevada, for example, our market share, according to BDSA, is at an all-time high. In Florida, which continues to see growth in their expanding patient base, our same-store sales increased 5% quarter over quarter. On the wholesale side, we increased sales 5% sequentially, driven by an increase in nearly every market, despite the competitive environment during the quarter. Q1 adjusted EBITDA of $19.5 million represents an increase of 6% year over year. The sequential decrease in adjusted EBITDA of $6.7 million was largely driven by a decrease in adjusted gross profit of $5.4 million. The adjusted gross margins in Q1 of 52.1%, down from 56.7% in Q4. As indicated in our last earnings call, we started Q1 with lower base pricing due to the compounding effect of Q4 price compression. Adjusted gross margins still remain north 50%, which is in line with our peers, we expect a similar level of gross margin next quarter with opportunity for upside in the second half driven by increased internal sourcing and economies of scale from our cultivation facilities coming online. This lower gross margin phase, we have largely been able to offset increases to wages and supplies by recognizing improvements to our yields as well as closely managing labor utilization by leveraging database KPIs. After adjusting for non-cash charges, such as stock-based compensation, depreciation, and amortization, operating expenses decreased by $2 million or roughly 4.5 percent sequentially on a dollar's basis. This is the result of optimizing headcount and realizing efficiencies across the board as we continue to fine-tune the integration of our recent acquisitions. In Q1, headcount decreased sequentially from 2,380 to 2,240 employees. which is inclusive of the acquisition of Levia and Tahoe during the quarter. As referenced on our last call, we anticipate any further increases in SG&A to be highly correlated with significant milestones of sales growth, such as adult use retail in Massachusetts and New Jersey. Moving on to the balance sheet, we ended the quarter with a cash balance of $78.7 million, with $33.2 million spent on CapEx over Q1. This represents payment of roughly half the outstanding CapEx for remaining projects, all of which are either operational or near completion, leaving approximately $37 million of remaining CapEx to be paid over the course of the year. $21 million of cash used in operating activities during the quarter was largely driven by the $23.5 million of tax payments, leaving just $7 million relating to our 21 tax obligations, which was subsequently paid in early April. Other uses of cash flow during the quarter include $22.7 million paid for M&A, including Tahoe Hydro, Levia, and the PA Naturals final earn-out. The next earn-outs are estimated to be payable in Q2 of 23, and the cash portion of these is roughly $20 million. Included in financing sources of cash are the proceeds from the $26.2 million mortgage loan at 4.625 percent, which closed during the quarter. After self-funding our CapEx investments to date, Our real estate portfolio represents a significant opportunity for liquidity to further strengthen our capital position. This loan represents the first monetization of our real estate portfolio, which totals approximately $180 million of owned properties. And subsequent to quarter end, we closed the financing on another property with principal of $25.8 million and interest based on prime rate plus 1.5 percent, currently at 5.5 percent, demonstrating the strong financing options for AIR's high-quality assets. Year-to-date, this represents the second financing linked to our real estate portfolio, which in the aggregate has unlocked $52 million of valuable capital in our business, with an industry-leading blended interest rate of 5.06%. Our board and management team regularly evaluate ways to optimize our balance sheet, and we see these financings as excellent sources of value to our company and our shareholders. Particularly given the recent geopolitical uncertainties and the volatility in the broader capital markets with cannabis equity valuations impacted, we remain focused on financial discipline and maintaining a significant cash position. We will continue to focus on optimizing our balance sheet, including efficiency in our cost structure and capital deployment. I'll now pass the call over to Jennifer Drake, our Co-Chief Operating Officer.