Ascend Wellness Holdings, Inc.

Ascend Wellness Holdings, Inc. 2023 Annual Review: Navigating Growth and Capital in a Dynamic Market

Ascend Wellness Holdings (AWH) made significant strategic moves in 2023, strengthening its market position and expanding its reach. This summary of their latest 10-K filing offers investors a clear look at AWH's financial performance, operational developments, capital strategy, and the unique risks of the cannabis industry.

1. Business Overview Ascend Wellness Holdings, Inc. is a cannabis company that manages the entire process from growing and manufacturing cannabis products to selling them in its own retail dispensaries. The company aims to build a strong presence in key U.S. adult-use and medical cannabis markets. By controlling its supply chain, AWH ensures product quality and efficiency while strategically expanding its retail footprint in important states.

As of year-end 2023, AWH operated 28 retail locations across the Midwest, with new developments underway in the Northeast. It also established a fully integrated presence in Maryland, meaning it handles cultivation, manufacturing, and retail there. AWH uses special operating structures, known as Variable Interest Entities (VIEs), to comply with complex state-specific ownership rules.

2. Financial Performance (Year Ended December 31, 2023)

• Revenue: AWH generated $420 million in net revenue, a 12% increase from the previous year. This growth came from opening new stores and boosting sales at existing locations.
• Gross Profit: The company reported $185 million in gross profit, representing a 44% gross margin.
• Net Loss: AWH recorded a net loss of $65 million. While still a loss, this marks an improvement from the prior year's $90 million net loss, showing progress toward profitability even as the company invests in growth.
• Adjusted EBITDA: A key measure of core operational performance for cannabis companies, Adjusted EBITDA reached $78 million, up 25% from the previous year.

3. Risk Factors Investing in Ascend Wellness Holdings involves several risks specific to the cannabis industry and the company's operations:

• Regulatory Uncertainty: Cannabis remains illegal at the federal level in the U.S., creating significant operational and financial hurdles. These include limited access to traditional banking and capital markets. Changes in state regulations, licensing delays, or policy shifts could also impact AWH's business.
• Intense Competition: The cannabis market is highly competitive, with many established and new players. This competition could lead to price drops and market saturation, affecting AWH's revenue and profitability.
• Cash Flow & Profitability: Despite improved Adjusted EBITDA, AWH continues to report net losses. This indicates the company still relies on outside funding for growth and operations, making sustained profitability a key challenge.
• Significant Debt Burden: The company carries substantial debt, which could limit its financial flexibility, increase interest expenses, and pose refinancing risks.
• Litigation Risk: Ongoing arbitration with Green Thumb Industries and other potential legal disputes could result in significant financial costs or operational disruptions. A resolution for the Green Thumb arbitration is expected in late 2024, with a potential financial impact estimated between $5 million and $15 million.
• Supply Chain & Operational Risks: Risks related to cultivation (e.g., crop failure, pest control), manufacturing, and inventory management could affect product availability and quality.

4. Management's Discussion and Analysis (MD&A) Highlights Management's discussion covers key operational developments, how the company manages its capital, and significant events that shaped its performance and future prospects.

Operational Developments: AWH continued its aggressive expansion, focusing on high-growth adult-use markets and controlling its entire supply chain.

• The company opened 3 new dispensaries in Illinois and Ohio, bringing its total to 28 retail locations across the Midwest.
• AWH is actively developing 2 new retail projects in Massachusetts and New Jersey, anticipating an adult-use license for New Jersey by the third quarter of 2024.
• Its cultivation and manufacturing facility in Massachusetts is now fully operational.
• AWH acquired Devi Holdings Inc.'s cultivation, processing, and dispensary licenses in Maryland for approximately $15 million, establishing a fully integrated presence in the state.
• In Detroit, AWH operates 4 dispensaries through a Variable Interest Entity (VIE), which generated $25 million in revenue for the year.

Capital Structure and Liquidity: To fund growth and manage existing financial obligations, AWH undertook several financing activities:

• In July 2024, AWH issued $125 million in 8.5% Senior Notes (a type of corporate bond or loan from investors) due July 2029. The company primarily used these funds to refinance existing debt, provide working capital, and support strategic expansion.
• AWH successfully refinanced $50 million of its January 2025 Term Notes and $30 million of its May 2025 Term Notes, extending their maturity dates and optimizing its debt profile.
• The company has $45 million in outstanding Sellers Notes, which are primarily deferred payments owed from past acquisitions.
• To support strategic alliances, AWH extended a $10 million loan to a key retail partner in Maryland.

Significant Events and Contingencies:

• AWH continues arbitration with Green Thumb Industries regarding a terminated acquisition agreement, with a potential financial impact estimated between $5 million and $15 million. A resolution is expected in late 2024.
• The company reported a $15 million prepaid deposit related to the now-terminated acquisition of MedMen NY Inc. assets and is evaluating options for its recovery or utilization.
• AWH maintains a robust employee incentive program, including stock options, Restricted Stock Units (RSUs – shares given to employees as compensation), and performance shares, noting the potential for share dilution.

5. Financial Health As of December 31, 2023, AWH held $35 million in cash and cash equivalents. The company's total outstanding debt amounted to $380 million, reflecting ongoing capital needs for expansion. Management has actively managed its debt profile by refinancing, extending maturities, and issuing new senior notes to enhance liquidity and support strategic initiatives. While AWH generates positive Adjusted EBITDA, it still reports a net loss. This indicates operational cash flow, but the company continues to rely on external financing for growth and managing its significant debt burden, which remains a key aspect of its financial health.

6. Future Outlook Ascend Wellness Holdings is focused on achieving sustained profitability, optimizing its current assets, and strategically expanding into new adult-use markets. The company aims to leverage its strong regional presence and integrated operations to capture market share and enhance shareholder value. This involves carefully managing its capital structure and navigating the complex regulatory landscape. Management anticipates continued growth through new store openings, entry into emerging adult-use states, and improved operational efficiencies across its cultivation and manufacturing facilities.

7. Competitive Position Ascend Wellness Holdings operates in a highly competitive and fragmented cannabis industry across various state-regulated markets. The company's competitive strengths include:

• Integrated Operations: Controlling cultivation, manufacturing, and retail allows for greater control over product quality, supply chain efficiency, and profit margins.
• Strategic Geographic Focus: AWH targets limited-license, high-growth adult-use markets, aiming to gain early advantages and significant market share in key states.
• Brand Portfolio: The company develops and markets a diverse range of cannabis brands to cater to various consumer preferences.
• Operational Expertise: AWH has experience navigating complex state-specific regulatory frameworks and scaling operations across multiple jurisdictions.
• Retail Presence: A growing network of dispensaries provides direct access to consumers, helping build brand recognition and customer loyalty.

AWH competes with other multi-state operators (MSOs), single-state operators, and smaller craft cultivators and retailers. Competition centers on factors such as product quality, price, brand recognition, dispensary location, customer service, and product innovation.