Ayr Wellness Inc

Welcome to the AERA Wellness second quarter 2022 earnings call. Joining us today are AERA 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 assumptions and risks as described in the company's management discussion and analysis for the quarter ended June 30th, 2022. As well, we remind you that adjusted EBITDA is a non-GAAP measure. We refer to the reconciliation to GAAP measures and other disclosures concerning non-GAAP measures contained in error management discussion and analysis for the quarter ended June 30th, 2022. I will now turn the call over to AIR's CEO, Jonathan Sandelman. You may begin.

Good morning, everyone, and thank you for joining our Q2 2022 conference call. As many of you have likely noticed, AIR has been busy over the past few months, completing nearly all of our CapEx cycle and opening key revenue generating projects. In the second quarter, and thus far in the third quarter, we've completed the first sale of flour from our 80,000 square foot Arizona cultivation expansion, the conversion of our three New Jersey dispensaries to adult use, the first harvest from our new Ocean County, New Jersey cultivation facility, the opening of two greater Boston adult use stores in Back Bay and Watertown, State regulatory approval to open our Somerville, Massachusetts location for adult use, pending local approvals, and approval to begin the phase planting of our Massachusetts cultivation expansion. Continued store openings in Florida, including our 50th Florida dispensary and the opening of our 9th Pennsylvania dispensary in Indiana County, an underserved region of the state. These project completions represent significant milestones for AIR, particularly our first adult-use dispensaries in the East Coast, a region we believe is poised for significant growth over the coming years and a continued commitment to investing in our cultivation operations to grow high-quality cannabis at scale, which we believe will further improve our market share and revenue growth. The phase of building and operationalizing our assets has been both a challenging and exciting time for AIR. And now that these are mostly complete, we're excited to focus once again on the optimizing of our business now that they've come online. Looking back after we acquired the businesses that became our initial operating footprint in Nevada and Massachusetts, we put our heads down for a year and a half and focused on improving our operations. We're now doing that again in our expanded footprint. Though we recognize that we are bringing these assets online and ramping them in a more difficult environment than existed when we started this journey of expansion from two states to eight states in late 2020. In these days of our new assets coming online, some have been slower to ramp than we anticipated. This low ramp is due to four primary factors. The inflationary macro environment that has impacted the consumer wallet. State-by-state supply and demand imbalances, which have resulted in price depreciation, both in wholesale and retail over the last year. Softness in the wholesale business. And some areas where we can improve our execution. An improvement in the macro environment can have a meaningful impact on the first three factors. Despite everything that's going on in the external environment, we believe there are opportunities to improve our growth profile in the coming quarters through our own improvements. Last quarter, we brought on board a new head of wholesale with extensive experience, both at large best-in-class CPG and scrappy startups, having spent nearly 20 years at Anheuser-Busch and the last five years scaling independent beverage operators. The team changes and update process that have been implemented are showing encouraging results as we believe they will put us in a position to realize the true potential in our wholesale business. In our newly converted New Jersey stores, we will expand our Eatontown store to add more POS stations and drive further transactional growth. Additionally, we believe menu improvements at our New Jersey stores, enabled by our own New Jersey cultivation and production facilities coming online and expanding offerings from third-party providers, will drive even greater traffic and sales to our stores. Our Massachusetts stores opened during Boston's slower summer months. We anticipate pickup at these locations as more Boston residents returned to the city full-time after Labor Day. Nationwide, we intend to continue to improve the experience at our stores, led by our National Head of Retail, who joined us in the second quarter, a seasoned multi-door retail executive with nearly 20 years at Luxottica, and the last seven years scaling and optimizing retail locations for a startup in and out of cannabis. On the grow and make side of the business, we have updated our business planning process and found areas where minor operational tweaks can unlock further growth and efficiencies in our production. We continue to invest in our operational talent, enabling our organization to efficiently make the products that feed our retail and wholesale operations. The slower ramp resulting from the four outlined factors is expected to impact our financial results in the second half of 2022. We've adapted and taken swift concrete steps designed to address this and continue to strengthen the performance of our organization. One area where we see opportunity is in Growing Air's branded CPG portfolio across our footprint. Our portfolio was developed to offer a range of value propositions across form factors with distinct branded offerings from premium to value across categories and segments. We believe that this well-constructed brand portfolio can help cushion the impact of customers trading down during tough economic times by enabling shifts in purchasing patterns up and down the value spectrum with our brand portfolio. This brand portfolio is enabled by investments that we've made in cultivation, where our mission is to lead the industry in producing quality cannabis at scale. The combination of new and upgraded cultivation facilities and enhanced genetics has produced some of the best flower we have ever grown, with efficient yields and variety for our customers. We are particularly excited about what we've accomplished in genetics, an area that is quickly becoming a competitive edge for AIR, one that we believe will emerge as a key differentiator in the next phase of choice for more discerning customers. We've placed significant emphasis on the ability to develop and deploy strains with unique terpene profiles to address gaps in the market where we operate and keep our customers excited by new and novel offerings. This has most recently been demonstrated by the launches of Kind and Lit Flower across our portfolio, both of which have received strong reviews from customers, media, and influencers. We've begun to deploy this program across our market, and are actively planning to leverage these capabilities to further establish our stores as a destination of choice for consumers and to grow our wholesale network. I'll now pass the call over to our CFO, Brad Asher, who will walk us through our second quarter financials.

Thanks, John. Q2 sales of 110.1 million represents an increase of 18.8 million, or 21%, year over year, and a decrease of 1% quarter over quarter, which is in line with our guidance to be flat in the first half of the year. As a reminder, our three New Jersey retail stores converted to adult use on June 15th, and our two Massachusetts adult use stores opened in the month of July. This resulted in a total of 16 days of contributions, from our New Jersey adult use stores in Q2 and no contribution from our Massachusetts adult use stores during the quarter. In addition, we had just over one month of contribution from our recently acquired Illinois stores during the quarter. Overall, retail sales increased 1% sequentially, offset by an 11% decrease in wholesale revenue driven by pricing compression and a drop in wholesale unit volumes as we shifted more of our products through our retail channel. Our internal product retail sales increased by approximately $4 million sequentially as a result of this effort, along with a shift in market mix. This shift in retail, along with improvements on yields and productivity, allowed us to maintain 52% adjusted gross margins, which is consistent with prior quarter. Q2 adjusted EBITDA of $19.6 million represents a decrease of 28% year-over-year and flat quarter-over-quarter. Net loss from operations totaled $24.8 million and is consistent with the annual and quarterly comparative periods. Adjusted EBITDA increased slightly from prior quarter on both the dollars and the percentage of sales basis, driven by a further reduction in core SG&A expenses due to our ongoing efforts around cost optimization. We are committed to cost management and will stay the course to offset any further macro-driven increases to our cost basis. Moving to the balance sheet, we ended the quarter with a cash balance of $116.7 million, which is an approximate 50% increase from prior quarter. The increase was driven by $81 million of proceeds relating to real estate financing transactions, bringing our year-to-date total capital raise to $107 million with an annualized blended cost of capital of approximately 7.8%. Based on market conditions, we determined this to be favorable timing to strengthen our capital position. The increase in cash from the real estate financing transactions was partially offset by further CapEx investment during the quarter of $18 million, which represents approximately 50% of prior quarter's CapEx, as our large-scale expansion projects are nearly completed. We also paid $25.6 million of cumulative interest and taxes during the quarter. It's worth noting our 2021 federal and state income taxes are fully paid up, These payments were the main drivers of the $17 million of cash used in operating activities during the quarter, which was also impacted by an investment in inventory of $7 million relating to cultivation facilities coming online, as well as the addition of new retail stores and the improvements in our cultivation yields. We will continue to focus on optimizing our balance sheet, including driving efficiency in our cost structure, working capital levels, and capital deployment strategy. I'll now pass the call over to Jennifer Drake, co-COL.