Ayr Wellness Inc.

Thank you. And good afternoon, everyone.

Q3 was a transformative quarter for our business, and that transformation continues into the fourth quarter. We're excited to report record results in the third quarter, growing revenues 61% sequentially and more than doubling our adjusted EBITDA.

Our revenue and EBITDA run rate of $182 million and $77 million respectively is industry leading in terms of productivity and profitability. We are very proud of that.

But we also expect a step function increase in 2021. First, in Nevada, we expect to be opening an additional store in Las Vegas next month.

Second, we are incredibly excited to be rolling out recreational sales at our retail dispensary in Greater Boston, throughout 2021, adding significantly to our Massachusetts retail revenues. The team in Massachusetts has done an incredible job receiving an unprecedented three hosts agreements in the fourth quarter.

These include one co-located with our existing medical store in Somerville, and new locations in Watertown and on Boylston street right next to the Apple store in Boston. We believe we will have the best retail footprint in Massachusetts and look forward to being able to better serve the greater Boston area, which has long been underserved in the recreational cannabis market with only 5 of the 88 licensed recreational stores, but over 60% of the population.

We've posted a new investor deck on our investor website today. And now on page eight, you can see this footprint and why we're so excited.

In addition to the organic growth opportunities for Massachusetts and Nevada, we expect to see significant growth in 2021 from M&A as well. After patiently waiting for the right opportunities at the right price, we recently announced five transactions adding Arizona, Pennsylvania, and Ohio to our footprint, and nearly tripling our addressable market.

We are working towards closing the Pennsylvania transaction shortly, Ohio and Arizona are expected to close in the first quarter of 2021. Again, I'll refer you to the new investor deck page 11 for the summary of these transactions.

Before I hand the call over to Brad to cover the Q3 financials, I just wanted to thank the incredible team at AYR, which is now over 650 people strong. You've heard me say over and over again, that this business depends on its people.

And we've seen that this year more than ever, from implementing a prompt and efficient COVID response to receiving three HCA approvals in Massachusetts, to growing the highest quality flower to finding the right partners as we expand our footprint. I'm extremely proud of the work they've done in an unbelievably challenging time.

Our acquisitions in Pennsylvania, Arizona, and Ohio will bring many more great people on board. And we look forward to welcoming them to the AYR family.

With that, I’ll pass the call over to CFO, Brad Asher, to walk through our financial results.

Thanks, Jon. As Jon mentioned, we are excited to report record results across the board for the quarter, more than doubling our previous records for quarterly EBITDA.

As a reminder, this is the first period of apples-to-apples with a full quarter of operations for the year-over-year comparison. Revenue increased 61% sequentially, and 42% year-over-year to $45.5 million driven by consistent operational improvements to the business.

The sequential increase was primarily driven by sales growth at 150% in Massachusetts wholesale, and 54% in Nevada retail. Our adjusted EBITDA for the third quarter was $19.3 million, which represents an increase of 110% from Q2, and 123% year-over-year with an EBITDA margin of over 42%.

The increase in adjusted EBITDA quarter-over-quarter and year-over-year was primarily driven by our robust sales across our markets, while maintaining an improved gross margin before fair value adjustments of 60%. Our SG&A cost for Q3 had a modest increase sequentially in a dollar basis, to remain among the lowest in the industry as a percentage of revenue at just 22%, compared to prior quarter of 33%, and prior year of 29%, demonstrating the positive impact of operating leverage as revenue continues to grow faster than expenses as the business scales.

As expected these trends have continued into Q4 as we consistently deliver high margins and strong results, some of the strongest among the MSOs. Our Q3 performance and continued momentum truly highlight the benefits of our vertical integration and operational discipline in this industry.

Moving on to balance sheet and cash flow. Our balance sheet continues to strengthen as we generated over $13 million in cash from operations during the quarter with $23 million of cash on our balance sheet as of September 30th.

This is inclusive of approximately $3 million of bridge financing we paid to our acquisition target in Pennsylvania to accelerate the cultivation and dispensary build-outs. As a strong indication of the market outlook for our stock, since the end of the quarter, we have seen our warrants regularly exercised in the open market for cash, yielding proceeds of approximately $10 million and further strengthening our balance sheet during Q4.

I will end by saying that we are all excited about the acquisitions to come and look forward to onboarding these businesses with our strong foundation of SOPs, controls and systems, which have all been built for us to scale. I'll now pass the call over to our COO, Jennifer Drake.

Thanks Brad. Across our businesses, we've been reaping the benefits of these scalable systems and operational controls we've put in place over the past year.

We've implemented a single accounting platform across the business, single internal reporting and seed to sale system, as well as a uniform HR system and automated AP system and centralized purchasing just as a few examples. Our systems are integrated seamlessly via APIs, and by doing as much with software as we can, we are more efficient make fewer errors and give our people greater bandwidth to do what they do best, provide high quality service to our customers and cultivate and process incredible cannabis.

I know I've mentioned our platform of systems and controls many times in the past, but it is critically important, especially as we move into new States. As we begin to close our most recent acquisitions and launch new operations in Pennsylvania, Arizona, and Ohio, the strength of these systems and operational controls will help us move with ease into these new markets, adding teams to our protocols with a simple onboarding process in mitigating integration and execution risk.

Yet another reason why we are - the acquirer of choice in this next phase of U.S. cannabis consolidation.

Now onto a few operational highlights from the quarter. In Nevada, our revenue improvements have been driven by exceptional retail growth.

Dispensary sales are up 55% from the second quarter, and up over 34% year-over-year. I want to emphasize these are same-store sales growth rates from an already substantial base.

Throughput at our stores is increasing with total transactions averaging over 4,500 per day. Gross margins in Nevada have also continued to improve as a result of our expanded cultivation capacity.

Our brands continue to draw strong demand and I'm pleased to report that Highly Edibles was once again voted the best gummy at the Las Vegas Cannabis Awards for the second year in a row. CannaPunch and Nordic Goddess also joined the awards this year with second place showings in each of their respective categories, beverages and topicals.

In Massachusetts, well, I want to emphasize how incredibly excited we are to be on track to open recreational stores in greater Boston in 2021, we can't lose sight of the strength of our existing business in the state. Wholesale revenue is up 63% year-over-year and revenue at our two medical dispensaries is up 140% year-over-year.

Our wholesale business continues to benefit from expanded cultivation capacity and strong demand resulting from new recreational dispensaries coming online every month. Since March Massachusetts has approved over 46 new adult use dispensaries for operations bringing the total to 88.

Meaning that half of the Massachusetts recreational dispensaries are new since COVID and not surprisingly we continue to see demand in wholesale that far outstrips our supply. According to BDS, Sira Naturals is the number one brand in the state in flower vapes and concentrates and we are now carried in 76% of the state's adult use dispensaries.

The recent launch of our newest brands, Entourage, Wicked Sour and Origin Extracts is off to a great start and we're looking forward to building on the success of the Sira brand with these new additional brands. Our business continues to generate substantial operating cash flow, which puts us in an enviable position amongst other MSOs to continue investing in our business and actively seeking new opportunities.

We have been working diligently with strong institutional financing partners to seek to ensure that our expansion is fully funded. We are in the process of finalizing debt financing documents at terms that have only improved over the last several months, given the election and our financial results.

And when these are definitive, we'll announce the terms to the market. This financing is above and beyond the warrant proceeds and cash flow from operations that we generate every month.

With that, I'll hand it back to Jon.

Thanks, Jen. We're excited to take our proven strategy for operating the industry's most productive assets into new markets.

We built a robust platform and superb team and culture to help make this entry into new markets seamless. So far, you've seen us make moves into Pennsylvania, Arizona, and Ohio.

As the election clearly proved yet again cannabis is here to stay and even more opportunities are expected to arise for us to continue growing our footprint. Regulatory changes should benefit our industry in the coming months and years.

We have built our business for success, regardless of the regulatory outcomes. Our discipline will not change.

As we've always said, we only want to be in about a dozen States that we've identified as attractive, and we continue to see excellent opportunities in those States. We have a line of sight on transactions in several that meet our criteria with best-in-class assets and people.

We continue to believe that this is the right time to buy the right assets at the right price. Our patience and discipline have allowed us to take advantage of the sea change in capital availability for cannabis companies and to buy great assets accretively with limited competition.

On average, we paid less than three times forward adjusted EBITDA for these assets, allowing us to expand our footprint with excellent returns to our shareholders and continue to position AYR as a premier MSO through the fourth quarter and into 2021, which we believe will be an amazing year for our business. Operator, we'll now open it up for questions.

Thank you. On your wholesale business in Massachusetts, you had a nice step up after the cultivation expansion.

Should I think about that $11 million revenue as a run rate going forward and that you're selling all that you can make? Or does this build higher as more dispensaries carry your product in the state?

I guess secondarily to that will you need more cultivation to serve the adult use stores in the state when those three open up at some point over 2021?

Jon, I'm happy to take that or if you want to jump in and let me follow up.

Sure, you can take it.

Thank you. So thanks so much, Matt, for your question.

We are very proud of our wholesale business and it has ramped up materially both since we bought the businesses back in 2019 and since we spearheaded the expansion of our capacity. We are actively looking to grow that business.

We do source external product regularly whenever we can in order to try to meet exceptional demands that we have in our wholesale business in Massachusetts. To give you a sense this month alone, we were just discussing earlier today, we have about 2.5 times the demand that we can supply into the market and we expect that robust demand to just increase.

So absolutely, we think that's a great business. It's a business that we're looking to continue to remain in after we open our recreational dispensaries over the course of 2021.

We do think that the capacity currently that comes from our cultivation and production can fill our existing stores, but we also want to keep that wholesale business.

Got it. And on the CapEx, you've been - I assume you're spending it like at maintenance level right now.

It's been, I think, averaging about $1 million or so in CapEx per quarter, but you noted that you need to spend I think around $39 million over the course of - I assume over 2021 on Pennsylvania and Ohio. Is that $39 million in spend front end loaded?

Or is that kind of spread out over the year? And is that $1 million kind of the right number to work with in terms of maintenance planning into next year?

Yes, I think that maintenance number is a pretty good number. Our facilities are generally very new, they don't require a lot of maintenance CapEx and you've got mixed in there smaller projects that we acted - that we complete in Nevada or Massachusetts to improve our efficiency.

In terms of Pennsylvania and Ohio, so that number, let's call it just under $40 million, is a little bit back ended. It really probably has its highest point in the third quarter and then tapers off a little bit into the fourth, but less so in Q1 and more in Q2 with its peak in Q3.

Okay, great. Thank you very much.

Hi, guys. I guess this one is for you, Jen.

I know you keep a close eye on these things. Curious with the Pennsylvania acquisitions, you have this New Castle dispensary that just opened.

Curious how the progress is there? How well that store is doing?

Thanks, Bobby. So for New Castle, we - that New Castle store is open from the standpoint of we have our regulatory approvals for it, and we have a little bit of throughput, but we are waiting until we take more, more active control of that business from an M&A standpoint and as you know that transaction is not closed.

We do expect it to close in the next kind of 30, 45 days, so before year end. But that's when you really will expect us to put this spend behind the store to really make it in line with our expectations for medical stores broadly.

Our medical stores in Massachusetts, as you know, do about $10 million a year in revenue. We think it'd be great if we can get the Pennsylvania stores to that level.

We'll keep you guys well-informed as to how that ramp-up process goes, but the real push for that will be once we have signed on the dotted line and take over that business.

Okay, great. Thanks for that.

And then just curious with the Host Community Agreement, it sounds like you guys are pretty confident about your Greater Boston opportunity. Do you have a sense kind of for timing once again, similar to the CapEx question front-end loaded, backend loaded as we start looking at 2021 when these stores could start opening for you, maybe when the licenses could activate for Somerville in particular.

Yes. I mean, look, and I know Jon may want to jump in on this question.

I would say that just briefly The Street is littered with bodies that have tried to predict timing of things in Massachusetts, including I think I might have a few appendages line on The Street.

I might have lost a limb.

Exactly, exactly. So it's difficult to say.

I think that we're broadly kind of hopeful that we can maybe do a store a quarter, might be back-ended at the - like kind of later parts of the quarter, but we don't know for sure. And like everything we promise to keep everyone well-informed as we have more of those milestones and I think we've done that historically, including this morning.

So we'll keep people abreast of what we're thinking and timing. And we can go into a little bit more detail, I think, offline when we speak in kind of in the coming days.

Okay, great. Thanks.

I'll jump back into the queue.

Good afternoon and thanks for the questions. We'll focus on Nevada daily transactions there a little bit, but just kind of where can we go from here?

The adjusted EBITDA margins normalize there or where is the upside? I know you're bringing on a Las Vegas store, but what's - and then also what's the cultivation capacity for serving more Nevada stores going forward?

Well, so our Nevada stores are really amazing stores as you know. The average revenue for our Nevada stores is $23 million annual sales.

That's just an incredible number. So our most productive stores are in the South in the greater Las Vegas area.

So we are cautiously optimistic that this newest store is going to be a great store as well. So that's definitely upside for the state.

It takes us from five very good stores to six very good stores we hope. In terms of capacity to feed those stores, we have been actively pushing R&D in terms of our cultivation over the course of 2020 so far, including double stacking and under-lighting and various different things to optimize and increase our cultivation output without necessarily changing our footprint.

Now, we're always opportunistic and considering looking at a good way to expand our footprint in terms of cultivation in Nevada, but for right now we expect to increase - we expect or are hoping to get additional output in the form of higher yield. And we certainly have great experience in Massachusetts with some of those techniques and we're bringing those to Nevada.

Okay, I appreciate the color. And the follow-up on the neighboring state of Arizona, kind of timeline you guys are seeing to legally begin sales there and the timeframe ramp for AYR once that comes on board in the first quarter to drive that that vertically integrated sales to that state.

Yes, we expect the closing of that transaction to probably be around the time that you can start selling recreationally, which we think is going to be, let's call it, beginning of Q2, April-ish timeframe, so March, April, for both closing and the start of recreation. We have a great business there.

We're acquiring an existing operation with over a hundred people, I think, 110 plus people there. They're right next to our Nevada folks.

So it's really a great kind of geographic and cultural fit for us. And we currently have about 10,000 square feet of cultivation, which is not a ton.

And that's why we have 80,000 square feet of cultivation coming online at the beginning, in our estimate currently at the beginning of Q4 of next year. So, we'd love to make that happen faster.

We're always in the market to see how we can speed things up. If it can't, our current expectation is beginning of Q4.

We'll get that additional 80,000 square feet of cultivation to come online.

Okay. I appreciate it.

I'll jump back in the queue.

Thanks, Scott.

Good evening and congrats on the excellent Q3 results.

Thanks, Andrew.

My first question, I just wanted to touch on the warrants. I know that's another tool in your toolbox you could potentially use to support the balance sheet and add cash.

Just wondering what's holding you back from pursuing the forced exercise there and what your concerns may be?

Well, look, we - as I think maybe people on the phone are well aware, like any stack, we have warrants issued as part of our initial capital raise, and those warrants can be accelerated if we meet certain trading thresholds, price specials, which is trading above CAD18 for 20 or 30 trading days. That's happened.

And what we - that gives us more flexibility in life, but we also want to be thoughtful and want to - certainly in the past, you have to be really careful about how you exercise warrants and making sure that you have the right kind of support for stock, et cetera, and trading volumes to make sure that your stock continues to have very healthy trading dynamics. And the healthy trading dynamics of our stock are incredibly important to us.

As you know, Andrew, we've talked about this many times, increasing the volumes of the average daily trading volume in our stock is a goal for us because I think it's an important part of broader acceptance of AYR as a top tier and multi-state operator in the U.S. - amongst investors.

So we're very focused on making sure that that we continue that March to being clearly a top MSO.

Great and thank you for your comments there. I just also want to touch upon some of the comments you made in the prepared remarks on M&A and the pipeline.

I'm just curious to get your thoughts on whether you think that you currently have enough on your plate or do you think that there's actually the potential to add more to your M&A pipeline in the coming months or in the coming years?

One thing on the warrants before I jump to the M&A pipeline and actually Jon may want to address that as I know it's his favorite topic. But the other thing about the warrants is they're actively being exercised without us doing anything.

Without anything on our side, we've gotten over US$10 million of exercise over the fourth quarter. So that's kind of a nice thing for us to see as well.

Jon, do you want to jump in on the M&A question?

On the M&A question, in my part of the discussion today, I think I'll just reiterate what I said that we've always talked about a very focused approach to our MSO strategy. We talked about 12 states that we think will represent 70% to 80% of the share of wallet of the consumer.

Our strategy is always to be much more concentrated and much more pervasive in the markets that we're in. In Nevada, we're the number one retail person.

In Massachusetts, we're the number one wholesaler. So we have identified those states that represent that 70% to 80%.

What I also said that each transaction has to meet the set of criteria that we've enunciated previously, we talked about it again today. And additionally, I would repeat what I said earlier that I have a line of sight on completing that portfolio.

And so I don't have anything more to add today, but I think what I said should be perfectly clear to the market. We have done exactly what we wanted to do in the previous M&A transactions that we have announced, and we'll continue to do deals exactly the way we've done them previously with the same discipline and care, but in a very concentrated 12-State approach.

Thanks for taking my questions and appreciate the color. Congrats again.

Hello, and thanks for taking my question. First with respect to Pennsylvania, it looks like you're well on track for the first three dispensaries opened in Q1.

And I hate to be greedy, but I'm wondering what your thoughts are on opening numbers four through six and what the timeline on that might be?

Yes, thanks Russ. We'll have those next three dispensaries opened over Q2 and Q3.

We believe pretty straightforward.

Okay. That's great.

And second question just on the cash flow front, congrats, continue to outperform the peers on this front. We saw a number of the peers have to make a number of cash tax payments in Q3, and it doesn't look like you encounter the same sort of cash drain from paying taxes from prior quarters with various holidays having ended, just wondering - can you provide any color on how you've managed to limit that, and should we be expecting anything on this front in the next quarter or two?

Well, look, we don't want to give away our secret sauce with respect to maximizing our working capital. But we do expect, we do have about four and a half, a little bit maybe $4.6 million, Brad 4.6?

4.5.

4.5, so $4.5 million of taxes payable. We do expect to be in a position to pay those over the next couple of months, but all within the rules of what you need to do with the IRS.

Excellent. Thank you for the color.

Hi, Jon, Jen, and Brad. Thanks for taking the questions and congrats on the strong results, and upcoming market rollout plans.

If I could follow-up on Arizona, the announced expansion there, just wondering if you could give us a sense of the revenue run rate from the operations in that space, given they're currently operational, and then maybe the degree to which you'd expect them to inflect once rec sales do go live?

Yes, the revenue from Arizona is actually really pretty good. These dispensaries there or above average for Arizona dispensaries - I believe - I'm going to say $10 million that I'm having, I just want to make sure about right there.

I think it's about $10 million a year, but Brad, tell me a little North of that.

A little bit north of that. So that’s 12.

So on average. So that's $12 million per dispensary per year, which is a little bit above the average, which I think is in the 8 to 10 range.

So there are good dispensaries already, and we're hoping to even make them better.

Okay, great. Appreciate that.

And then, expecting I guess would you expect any additional lockdown measures to impact performance in Massachusetts particularly wholesale market if there is maybe lower rec dispensary demand, and I guess along those lines for that matter, any regulations that might be put in place, do you expect them to impact markets or near term business?

I love that. That's really, it's really tough to say, it's really tough to predict, right.

I mean, I think what we can do is look backwards and see what people have done in the past, which is – we have been deemed essential, and we would expect to be deemed essential again. We haven't had indications that Massachusetts is going to close rec dispensaries again.

But you never know, right. We simply can't predict all we can do is plan our business appropriately.

And what we'd like, I think…

Right. Thank you for that color.

Yes, what I would say is what we really do like in Massachusetts is our dispensaries basically doubled their sales during COVID, back in April kind of May time, and then held on to those new customers and those higher sales levels as we come through to today. So we feel like we're in a very good position with our existing medical dispensaries should we have a reversion to what happened back in the second quarter, even though we're not necessarily expecting it?

Sure. Okay.

Thanks Jen.

Thanks for taking my question. Just wanted to get a little bit more color on the wholesale market in Massachusetts.

It's very, very impressive growth there. Can you detail the increase in wholesale customers on a quarter-over-quarter or year-over-year basis, and then as well just the amount of spend per customer if you could?

So with respect to wholesale, we first expanded the number of customers, so expanded the breadth, and we have also increased the overall size of orders. Diversity is super important to us in every part of our business including our Massachusetts wholesale business.

But if you think about where we are today, we're selling into about 75, and then just over 75% of the adult use dispensaries in the state. And that's up from around 50 or a little bit higher than that earlier this year.

So we've definitely increased the breadth of our client base. And we're by far the number one brand according to BDS, across the state.

So if you talk to, it's funny, I was speaking to what a service provider totally unrelated to any of this earlier today. And he said, yes, when I go into Dorchester to one of the few adult use one of those five adult use stores that's opened in Greater Boston, I buy a Sira Naturals product.

So we are well represented across the vast majority of whole of rec dispensaries in Massachusetts.

Okay, great. Just shifting over to Nevada.

Can you talk about the growth in terms of internally sourced products? And also you mentioned a couple of new product brand launches, sort of what is sort of the ideal mix on a go forward basis?

Well, that's really determined by our customer, right? I mean, we would love to have as much own source product as we can in our stores, but ultimately our customers are the ones who are going to decide what products they want to buy.

And that's why product development and investment in brand is very important to us. And that's why growing exceptionally high quality flower is very, very, very important to us.

So people will come especially in Nevada, people will come for a good product at a good price and they really love their flower. So it's important for us to be able to grow and source excellent flower and to reproducing those manufactured products, whether its vapes or concentrates or topicals or edibles or beverages that people really want to buy.

And ultimately to your question, we'd love it to be well above 50%. We will work to keep those levels, but ultimately the customer will decide.

Okay, great. Thanks.