Ayr Wellness Inc.

Thanks, operator, and good morning, everyone. The first 2.5 months of 2020 showed excellent results.

We were on track to have our best quarter ever. Our revenue was pacing to $37 million for Q1, 16% above Q4.

And our adjusted EBITDA was pacing to $10 million, 10% above Q4. In Nevada, retail sales were hitting records of $8 million per month in revenue.

In Massachusetts, Q1 revenues were pacing at 30% above Q4, with more than $2.5 million per month wholesale sales in January and February. Then we were hit with the external shock of COVID-19.

Although cannabis has been deemed an essential business through COVID, the regulators in Massachusetts and Nevada were among the few in the country to seriously limit the way we could deliver cannabis to our patients and customers. In Nevada, regulators forced the closure of all brick-and-mortar dispensaries and forced the delivery-only model on March 20.

In Massachusetts, medical marijuana sales were allowed, but all adult-use recreational sales were suspended from March 24 onward. So unlike many cannabis companies in the U.S., our business faced headwinds.

But through this COVID period, consumer demand for cannabis did not wink. Over the weeks following COVID closures, we improved our business, and we expect to come out of COVID even stronger.

Our organization rallied together to make decisive changes to improve our omnichannel capabilities and put in the appropriate safety measures for our employees and customers. We are pleased that we generated positive adjusted EBITDA and cash flow from operations in April despite the COVID headwinds.

And so far in May, the parts of our business that are open are pacing to do even better than they did in January and February, pace of Q1, which, again, were our best months ever. In Nevada, adjusted EBITDA is tracking 3% above the record months of January and February of 2020.

Our volumes have grown from nothing at the end of March to 2,800 transactions per day with average tickets of $85 in May, which is up 35% from our quarter one average ticket. Because in Q2, internally sourced products make up approximately 40% of our sales and expected to be 50% of our sales in June with Nevada cultivation expansion, we see gross margins moving from 45% in Q1 to approximately 60% in Q2 and beyond.

Now pre-COVID. Growth in Nevada was limited by our capacity for the number of transactions, but because we are now doing more adjusted EBITDA with fewer transactions, we have more growth potential.

We estimate 35% more EBITDA capacity in the state, assuming we reach the same revenue at these margin levels. In Massachusetts, our retail business has been on fire.

Our average ticket per transaction is $190 in Q2, an incredible result. Transaction volumes have been growing 14% in Q2 over Q1.

And Q1 had our best per store transaction volumes on record to that point. Together, these had put Q2 average daily retail revenue up 47% to Q1 and April, up 33% and May pacing even stronger at 80% over Q1, with May currently pacing to $1.8 million of revenue.

In wholesale, although we can't sell to our high demand adult-use customers, while adult-use is closed and is opening next week, we've had excellent results from our Massachusetts cultivation expansion, which is stockpiling to feed the adult-use market when it opens on May 25, and when we expect material pent-up demand. The expansion doubles our capacity of $2.5 million per month in Q1, where we were selling anything we made and could have sold more and improved gross margins to 70% from the low 60s.

We're coming out of COVID a much stronger business. Now let me be clear about this.

COVID has been tough, tough on our families and our country. But the foundation of our business and our culture at Ayr have become much stronger.

We are ready to build on the strength and take this show on the road with an expanded footprint. But before we get into that, I'll pass the call to our CFO, Brad Asher, to walk through our Q1 results.

Thanks, Jon, and good morning, everyone. As Jon mentioned, in Q1, we were on track for strong growth from our existing asset base.

When considering the localized headwinds we faced in our two states at the end of March, it is a remarkable accomplishment that we still finished the quarter with a sequential increase to revenue. Revenue increased 4% to $33.6 million in the first quarter compared to $32.3 million from prior quarter.

Adjusted gross profit increased 10% quarter-over-quarter to $16.6 million compared to $15.1 million. And adjusted EBITDA for the quarter was $8.4 million in Q1 compared to $9.2 million in the prior quarter.

This decrease was primarily driven by the headwinds in the second half of March, where COVID decreased our revenue substantially overnight while we continue to incur or recurring SG&A expenses. In terms of our balance sheet, it continues to strengthen as we accumulate cash from our operations, grow inventory from our expansions and continue to pay down our debt, which is among the lowest levels in the industry, with some of the most attractive terms.

At a time when balance sheet impairment is being scrutinized in our industry, primarily around goodwill, we feel more confident than ever with our future earnings power. The analysis we performed as part of our 2019 audited financial statements reinforces the revenue and EBITDA multiples paid at the time of the closing of our initial acquisitions.

Almost exactly one-year ago from today on May 24, 2019. Our team's vision of acquiring companies that were cash flow positive on day one has never been more important in this climate and has put us in a position of strength relative to our peers.

Moving on to sources and uses of cash. Cash flow from operations increased 85% quarter-over-quarter to $7.4 million compared to $4 million in Q4.

This was driven by disciplined management of working capital. At the end of Q1, cash and cash equivalents increased to $9.9 million compared to $8.4 million at year-end.

We increased cash by 18% quarter-over-quarter despite paying $4.4 million to complete our cultivation expansions as well as $1.4 million used for financing activities. As Jon mentioned, the solidarity and cohesiveness of our company is stronger than ever before.

And in my career, I have never been so proud to be a part of a company with this culture and drive. We adjusted our business overnight, anticipated regulatory changes before they happened and seamlessly leveraged best practices across the organization.

And with this team effort, we've been able to continue building cash through April and so far in May as well. I'll now pass the call over to our COO, Jennifer Drake, to talk about some of our operational highlights.

Thanks, Brad. We really have the opportunity to reshape and improve our businesses with COVID.

We now have three points of contact with the consumer, in-store, curbside and delivery. So however the consumer wants to access their cannabis, we can provide it.

We had no real e-commerce revenue to speak of prior to COVID. But now after retooling our technology, rapidly implementing software and launching digital marketing campaigns, the majority of our business starts with an online order.

In Massachusetts, our new cultivation facility, which came online in March, is producing fabulous results. It's producing excellent yields at 65 grams per square foot and excellent THC levels of 30%, which means we're producing some of the best flower we've ever grown and some of the best that has grown in the state.

This is a direct result of sharing of best practices between our talented teams in Nevada and Massachusetts. And the economies of scale from the cultivation expansion are also impressive, where we expect to decrease our flower costs by 20%, driving an expected gross margin increase from approximately 60% gross margins prior to coming online with the new cultivation facility to 70% gross margins in the states.

Now regarding our adult-use dispensary plans in Massachusetts, we entered 2020 expecting to open one adult-use retail store in May and two more adult-use retail stores in September. And as a reminder, in February, we announced that we had secured an additional adult-use license in a very favorable Greater Boston town.

However, COVID has closed local governments in Massachusetts and delayed the approvals required for these adult-use retail stores to open by several months, if not more. Now given these delays, and the disruption to our business over Q2 and the uncertainty around COVID, the COVID pandemic's ultimate impact on our markets and the regulatory environment, our prior revenue and adjusted EBITDA guidance for 2020 can no longer apply until we have better visibility.

Even though COVID has delayed some of our initiatives though, the changes we have made over COVID have made our business materially better with greater growth potential. And we are confident that we will continue to generate positive cash flow in each of our markets and that 2020 will deliver strong revenue and adjusted EBITDA growth over 2019.

With that, I'll hand it back to Jon for some final words.

Thanks, Jen. First, I want to highlight how impressively the men and women in our team have pulled together to reshape our company through COVID.

Looking forward, it is this strong culture that will differentiate us from our competitors. It's almost exactly a year since we closed our qualifying transaction and became Ayr.

Over these 12 months, M&A has been key to our strategy. The M&A market has essentially been closed since March because of COVID, but it's opening back up.

It was never our intention to operate only in two states. We are committed to expanding our footprint by the end of 2020.

As a management team, we work tirelessly to exceed expectations on what that we can control and to mitigate what we can't. We continue to execute on our strategy and operate at the highest levels.

And the strong foundation we've created will pay dividends as we further expand our footprint. With that, I'd like to open it up to questions.

Hey, guys. Congratulations on the strong execution.

So I guess my first question is just on the M&A comment, somebody else in the sector announced that they are closing a deal in California. And it looks like it was at a substantially lower price than the original kind of terms.

I'm wondering what you're seeing in terms of the potential targets and what kind of valuations people have come around to now that everyone's gone through this tough period. And I imagine there's maybe a little bit of desperation.

I know you guys are looking for good operators, but do you have any color on kind of the direction of multiples that you're seeing out there?

Hey, Bobby, it's Jon. Thanks for the question.

So Bobby, I think you're well aware of that we've been talking over the last number of years that there would be a catalyst for a change in multiple in valuations in the industry, but we could never imagine that catalyst would have been a pandemic, yet we knew it was coming because of the actions we had seen others take with their balance sheet. At this point, Bobby, there is more distress, as you can imagine, than we have ever seen.

For a long while, the public market had adjusted its values, but the private market had stayed quite sticky. So that was frustrating.

But that's no longer true. And so the answer – the simple answer to your question, these are the best values we have seen since we entered the industry.

Okay, great. Thanks for that.

And then just one more for me, Massachusetts, I know is talking about reopening adult-use. And I believe that they've reopened curbside pickup at least at this point or it's about to reopen.

You guys saw a nice uptick, I believe, in Nevada when curbside pickup came online, kind of obviously enhancing what you've already done with delivery in terms of getting that EBITDA up. Any color on what you think curbside pickup could do in the interim in Massachusetts to kind of bring that adult-use back online?

So when we look at our experience in Nevada, what we didn't know because delivery was going so well and the customers was really enjoying having the product delivered to their house. So when curbside was announced, we had been preparing for the previous 10 days, but we didn't know what the consumer – what their behavior would be.

Did they become used to home delivery? Did they really want to get back, we didn't know what the consumer – what their behavior would be – their car, do they really want to come to the store?

It was an unknown. I would say to you, our experience has been that delivery today is down to 10% of our business.

I would say curbside is about 60% of our business. And the in-store purchase, which started extremely slow, as you could imagine, the consumer was hesitant to walk in to a retail store and potentially, a crowded retail store.

We're now doing about between 900,000 retail transactions a day, if you look at the last seven to [10] days. It continues to get smaller and smaller.

The last thing I would say is the pent-up demand was enormous. And so if that translates to Massachusetts, which we would expect, we could see that turning out to be a very active market.

Great. Thank you.

Good morning, and thank you for taking my questions. Maybe if I could, just following up on your comments around M&A and expanding the footprint as a priority.

I'm understanding a number of potential vendors are now feeling pain. I'm just wondering some of that pain might be most intense in a market like Nevada.

So just wanted to gauge your view is the priority to diversify outside of those two states or would you consider looking at something in Nevada, given that, that might be where the pain is most acute?

So I think, Russ, you understand we're an opportunist group, right, opportunistic group. So we see value for our investors, but our priority is to expand our footprint.

There are transactions in Nevada because most of our competitors weren't able to adapt as quickly as we were. Within approximately a week, within days, we had 25 cars for delivery on the road.

Within a week or so, 10 days, we have 50 cars on the road to do home delivery. And so those that couldn't adopt fast enough, they didn't make the changes in their technology quick enough because their systems were very cumbersome, they weren't really set up in Nevada to do delivery in size or for sale.

And we are looking at those deals, and most of the deals we're looking at require very little cash and basically an assumption of business with a payout. But our priority to be clear is to expand our footprint and those are the deals that we're focused on.

Excellent. That's great color.

I appreciate that. Just wondering around your CapEx for the rest of 2020, I think pre-COVID we understood that Q1 would see the bulk and then expect that number to decline for the rest of 2020.

Is that still the case? Or what kind of spend did you have to incur in Q2 in order to pivot in these markets?

Brad, do you want to take that?

Yes, for sure. And so you're absolutely right.

Q1 definitely had the bulk of it with about $4.4 million of CapEx. And that was really just required to complete our cultivation expansions.

We had very little in terms of completion costs left for Q2 for those expansions, less than 5% of the overall cost. And aside from that, it's really just maintenance CapEx and nothing material in terms of pivoting the business post-COVID.

Excellent. Thank you very much for the color.

I’ll get back in the queue.

Congratulations and very impressive flexibility to continue to operate and execute on profitability and a very high level performance. It's nice to see that you're able to use what you're learning from Nevada to move that to Massachusetts.

Real quick on the cultivation in Massachusetts as far as inventory now that you're double capacity, kind of with the delays, any more timing on the rec store approval throughout Massachusetts? How does your inventory build kind of is expected to sell-through?

Just kind of step us through as you look out as Massachusetts comes back online here from an inventory level?

Again, this is all a learning experience, which we and like the rest of the world have never seen an environment like this, but we do have data points. And so again, what I referred to, the pent-up demand we saw in Nevada, the consumer loves their medicine.

The consumer loves this product. That's the good news.

The pent-up demand was enormous. Do we believe that will translate and will eat through our inventory?

Yes. The other thing is about our inventory that Jen touched on, our product has never been better.

The TAC levels are the highest ever for this company. So to meet demand, we've the best quality flower, we think, in the state, certainly the best we've ever produced.

We think will be in high, high demand. But we just have to see, again, this is not a playbook that we can refer to.

We can only reference what we just recently experienced in terms of consumer demand in Nevada.

Okay. Thank you for that color.

And then just want to speak on kind of – have you seen a product shift during COVID away from inhalation or vape from that standpoint? And I know you said the last seven days, you did 2,800 transactions because of pent-up demand.

Do you see a product shift in those transactions as far as the business that's benefiting margins from that standpoint, too?

So in Nevada, flower was a larger percentage of the overall sales versus historical other than that – by a few points. Other than that, we didn't see major shifts.

Brad, do you see it any differently than I do?

No, it's – yes, that's spot on. I'm seeing a 2%, 3% difference.

So pretty consistent, I'd say.

Okay. And then just real quick follow-up.

On those 2,800 transactions, what were you doing in January as far as transactions? Obviously, it's more in-store, but now you're more diversified delivery, curbside.

What was the average as we look back in January and February as far as transactions?

So this is what Jen was referring to. We traditionally did 4,500 transactions a day in Nevada.

We are now with 2,800 transactions producing more EBITDA than we did prior to the virus. And when Jen refers to the fact that with 2,800 transactions, we're producing 3% more EBITDA than we did in the first quarter, January and February, we now have more capacity.

One of the issues we had prior to the virus was, can we get more throughput? We had already started building, I think we said this on the last call, more POS station to handle the volume.

Some of our stores have 1,500 people a day coming through. So we had already built out more capacity.

Because we're a leaner, more efficient business today and a much better business. And because preordering on the website speeds the transaction time, curbside is way faster and more efficient than the in-store experience.

That allows for us to be able to produce 35% more volume in our stores. And that just makes us a better business going forward.

Great. Thank you, guys.

Hi. Good morning, everyone, and thanks for taking my questions, and congrats on the quarter.

Just wondering if you have any early indications of demand from adult-use retailers in Massachusetts beginning to get more active in the wholesale market ahead of stores reopening for curbside pickup next week?

So we've had early conversations with our best customers. They're starting to indicate what their demand will be.

I think because they – most of them didn't have the same experience that we had in Nevada. They're playing it slightly cautious to see what happens on the 25.

Again, we have a very different experience because we just lived that life two weeks prior. So I think cautious on the 25, I think the demand will be sizable and I think then they'll be into us.

I'll tell you one thing they are excited about is what we referred to is the much higher quality of our product, and again some of the highest quality in the state. As a company that sells consumer product, having the most competitive product or amongst the most competitive product in any one market, certainly speaks to the volumes you'll be able to sell.

So I think the 25 will be a learning experience for those that don't have operations in Nevada.

Thanks. That's a good detail there.

Just on Nevada, are you beginning to see any shift back towards more third-party product in the sales mix, just given curbside pickup sales have resumed and in-store transactions have resumed as well?

So what Brad referred to is our – the percentage of our own product in our mix. So that keeps increasing, that will increase further in June and July as we continue to harvest our new cultivation facility there and added capacity.

We've also ramped our manufacturing capacity in the market. But with demand as strong as it is, of course, we have to go into the market to buy product.

Now, we kept the price of our quarter is exactly the same, we didn't want to raise prices to our customers. And we said to ourselves in a world where everything is changing, at least they can depend on our dispensaries to maintain pricing on their quarter ounce of flower.

The reality was that pre-COVID, wholesale prices per third-party flower was $1,800 to $2,100. We had bought it pre-packed.

So the actual price is lower than this because as we used to package it at $1,300. And so the input cost to us have gone down dramatically while our selling costs have remained the same.

Great. Thanks for answering that.

Good morning, Jon, Jen, and Brad. Thanks for taking the questions and appreciate all the transparency over the last couple months and very nice to hear that you've pivoted the business pretty well during this pandemic.

As we think about some of the near-term wholesale dynamics in Q2, can you talk about maybe how wholesale revenue has been impacted by the onset of COVID? Maybe from the higher demand on the medical side for dispensaries in Massachusetts, despite some of the lower impact of contributions from the rec stores that have been shut down?

Brad, do you want to take that?

Sure. Yes, so we have seen increased purchasing from our medical customers similar to our medical stores, which have had phenomenal increases in sales.

Now we're pacing at $1.8 million for the month of May. A lot of our other medical customers have seen similar increases.

But to be honest, the majority of our customers are adult-use. And so that has decreased over the last two months, and we're expecting to see increases very quickly with May 25, that's Monday.

These stores are reopening. We've already had over $500,000 in purchases within 24 hours of that announcement from the governor.

So we're expecting to see that ramp up pretty quickly with pent-up demand.

Hey, guys. That's helpful, Brad.

And then regarding that adult-use license that you acquired in February, kind of as an alternate, how should we think about when that location would maybe open up as an adult-use dispensary once they open up, on Monday, like you said?

So the town that it's in is meeting with us shortly because they're now conducting their meetings virtually that have been closed also. When that exact date, I'll hear it soon, but I don't have an exact date, so I can't answer that question because everyone is just getting back up to speed.

And so I don't have a definitive answer on that. But I'm hearing it soon, but without a date.

Got it. I look forward to it…

The state is just opening up, right. So I'm sure in the next week or two, we'll have a better answer on that.

It's opening up slowly, but I know there's been conversations about when and I'll know that better in the next week.

Got it. Thanks, Jon.

Hi, good morning. Thanks for the question.

I was just curious, over the course of kind of this COVID crisis, have you noticed any shift in terms of the composition of your basket, either in the Nevada or Massachusetts? Thanks.

Yes. We talked about the Vivien.

So in Nevada, flower win up as a percentage of the total basket, about two to three points, which is our most profitable item. So we're very happy with that.

But I wouldn't call it a major shift. I thought at one point early on with COVID and when the scientists were on television and the doctors focused on it as of lung disease, maybe people would switch to edibles, Vivien.

But I don't think we observed that at all.

Got it. And just in terms of the size of your basket in Massachusetts, certainly very impressive in terms of the absolute ring.

Do you think that's being offset at all by perhaps lower velocity in terms of visits?

So we've seen enormous pickup in transactions and average baskets. In the beginning, people were like – I don't want to come in a lot.

I'll buy $600 worth, okay. And so I'll do it as one-experience visit to the stores.

That's moderated because of all the precautions we take in and around our stores to protect our – both our employees and our customers, people feel much more comfortable. And so it's settled in.

And it's been very sticky, Vivien, in and around the number that we talked about.

That's great. Thanks for the color.