Ascend Wellness Holdings, Inc.

We are referring to non-GAAP financial measures such as adjusted EBITDA. Reconciliations to the most directly comparable GAAP measures are in the appendix to the presentation and in our earnings release. On today's call, I'm pleased to introduce ASCEND's management team, starting with Sam Brill, Director and Chief Executive Officer. Sam will outline our key financial priorities and provide early insights into the next stage of ASCEND's journey. Also on the call is Frank Perullo, our co-founder, director, and president. Frank will share updates on our operational plans and highlights from the quarter. Lastly, Roman Nemchenko, Chief Financial Officer, will review our financial performance for the quarter and present our outlook for Q4. With that, I'll hand it over to Sam to talk more about the next chapter in the Ascend journey.

Thank you, Rebecca. I'd like to take a moment to thank the board for the confidence they've placed in me. I'm fortunate that Ascend already has a seasoned and highly capable team in place to help me guide the company through this next chapter. For those of you who may not know me, I led one of the early lending rounds in Ascend and have remained a steadfast investor and supporter ever since. Prior to joining Ascend, I spent the last seven years running a private equity fund where I focused on enhancing the performance and success of my portfolio companies through strategic planning and driving operational efficiencies. My firm at the time invested hundreds of millions of dollars in the cannabis sector, which has given me a deep understanding of this ecosystem and fully aligns me with our investors' interests. Since Ascend was founded in 2018, it's been in hyper growth mode. We were building a plane while flying it, so to speak. Our key facilities are now complete, so it's time to take a step back and focus on optimizing those assets for sustainable and meaningful cash generation. Strengthening our foundation and building resiliency is especially important given the current market dynamic. As part of these efforts, we launched a series of cost savings initiatives and are committed to reducing expenditures by $30 million in 2025. While we anticipate some of these savings would be offset by pricing headwinds and increasing competition, we are pleased with the progress we've already made. We have three key financial objectives. First, improve margins and profitability. We must bridge the gap between our margins and those of our MSO peers. We have great assets, but we have yet to generate the margins we're capable of. We must now shift our focus to utilizing those assets more efficiently by optimizing our production and product development to meet new minimum margin thresholds, while preserving a robust selection of attractive products for our customers. Second, drive vertical sales through continued densification. We achieve the highest return on our manufactured goods by selling them through our retail channel, and we have some of the best brands. Therefore, we must continue our densification strategy to build internal demand for our products and improve verticality. Densifying and achieving scale in our key markets will continue to be a core tenet of our strategy. We must continue to pursue these opportunities to achieve better margins from our production. We plan to open at least 20 new doors in the midterm. We have six dispensaries in development, including our eighth in Michigan, sixth in Pennsylvania, three additional in Ohio, and our first partnership dispensary in New Jersey. In Illinois, we support two partnership dispensaries, and we plan to expand to support eight more. In New Jersey, we completed our first partnership arrangement, and we plan to add up to six additional partners in the state. This model is mutually beneficial for us and our social equity partners, and we will continue to explore ways to duplicate it in other markets. Third, deliver sustainable cash flow generation. We have made meaningful progress in cash generation over the past two years, but we must be more agile to create a financially resilient organization. To that end, we've already taken significant cost-cutting steps, targeting at least $30 million in redoubts. As we move forward, the team will be hyper-focused on driving results in these three categories. Let us move to slide five to discuss the key highlights from Q3. The end of Q3 was a time for rolling up our sleeves and focusing on our new financial objectives, particularly the cost and transformation initiatives. Some of the work we are doing will not translate into financials for a couple of quarters. Specifically, costs incurred in production and cultivation that will help reduce the cost per unit in future sales. And we plan to rationalize inventory levels in certain markets. Despite the cleanup work, there were several highlights in the quarter. Adult use sales started in Ohio, and we outperformed the market with retail revenue up over three times. We also opened our fifth dispensary in Pennsylvania. The success in Ohio contributed to modest sequential gross margin improvement in the quarter, despite some noise, which Roman will detail. We completed the leadership transition management to a tactical lead team focused on controlling costs, and we realigned our workforce throughout the organization. Lastly, the room-linking process to formally reschedule cannabis from Schedule 1 in the Controlled Substance Act to Schedule 3 remains underway. Despite frustrating delays, a formal hearing is expected to occur in Q1 of 2025. It is clear what the majority of Americans want, and we continue to be optimistic about the ultimate outcome. Moving on to the David Boies lawsuit, for which we are a supporter. We are very pleased that the First Circuit Appellate Court took the unusual step in this case to hear oral arguments. The case will be heard on December 5th, six months ahead of plan. Regardless of rescheduling, we are looking forward to seeing this case through to the end. A favorable resolution could have meaningful implications, particularly around historical tax obligations. As I've gotten into the weeds over my first few weeks, I remain a strong believer in the industry and specifically the Fed. The industry holds promise. Projected compound annual revenue growth rate for the industry are forecasted at over 10%. About 75% of Americans are living in states that have legalized medical programs, and cannabis consumption has officially begun to outpace alcohol. Ascend stands out with several core strengths, including superior footprint. Our industry-leading revenue per dispensary demonstrates our ability to identify great locations in premier markets. Experience. Our strong net promoter score indicates that our customers not only choose our products, but also enjoy their experience with us. Strong brands. We are proud to be a top three brand house by sales in our three biggest markets. Our ozone brand holds the number one spot by units in New Jersey, Massachusetts, and Illinois combined. And SimpliUr brings number one in Massachusetts by sales. Production capabilities. We have over 255,000 square feet of primarily indoor cultivation, and we produce a wide range of quality products. This is exemplified by our cultivation team in Illinois, as they delivered a 44% THC potency level for our butter sub-strain last quarter. Distribution. We have amassed a comprehensive distribution network. SEND has over 80% door share in each of our primary wholesale markets. We believe there's an opportunity to further leverage our impressive distribution capabilities. Each of these key trades positions a SEND for its success. Yet Ascend trades at a noticeable discount to its peers, representing a compelling opportunity, which keeps me excited as we refine our focus and prioritize cash generation. I will now turn it over to Frank Perullo, president and co-founder. He has remained with the business, leading various functions, and has led many of our successes since day one. Frank leads Ascend's day-to-day operations and has hit the ground running in his new role. He will detail some of our key operational initiatives and the performance of the business beginning on slide seven. Thank you, Sam.

Good morning, Rob. I am pleased to be here to report on many of the initiatives that we have begun to institute to optimize our operations and strengthen our business. As Sam highlighted, we're entering a new chapter focused on the fundamentals. caring for the customer first and driving operational excellence while sustaining steady, purposeful growth, albeit at a more moderate pace. To achieve this, we're directing our efforts into three operational categories. The first is run. We must run our base business, but better. We will achieve this in a variety of ways, much of which we have already begun to implement. To start, we reviewed and right-sized our labor force. As an example, at our retail stores, we implemented a dynamic labor model. This dynamic model also automated scheduling to align staffing levels with business demand, ensuring we maximize efficiency by dynamically staffing our stores, avoiding unnecessary costs during slower periods, while ensuring the best experience for our customers. Next, we ensured we realigned incentive structures to better match our business goals. If you recall, last quarter we had a meaningful gross margin sequential decline partially due to excessive discounting in Massachusetts. Aligning incentives combined with robust but necessary controls are part of the efforts to run our base business but better. Another manner by which we are working to run our base business but better prioritizing product supply for sales channels with the highest profitability. Ensuring that inventory is congruent with demand and that each product is right according to the highest profitability profile will enable us to run a more efficient and predictable business. Moving to transform. Our concentration here is on meaningful change to reinvent the ways we serve our customers by identifying opportunities to modernize and find new efficiencies we'll be able to elevate the customer experience and meet their needs with agility. We have begun efforts to launch an enhanced e-commerce platform with a new vendor that will cater to the customer experience. In addition to this, we are revamping our loyalty program and focusing on in-store experience to transform the customer journey and further incentivize them to shop with Ascent. We also intend to transform the way we produce products. We are investing in automation, controls, and better equipment to reduce production and yield variability, enhance consistency, and unlock lower cost of goods. Lastly, we are transforming our product offering, ensuring we rationalize low-margin SKUs and brands to increase production capacity for the highest margin of SEND branded supply. We still intend to rely on our brand partners to enhance our offering in many phases, but we don't need to be fully reliant. As Sam mentioned, we need to put our best foot forward and prioritize the highest value propositions. Lastly, the grow bucket. We continue to set the stage for sustainable growth by leveraging our existing infrastructure and strengths. By carefully balancing growth with our reinvestment in our core capabilities, we're positioning a SEM to capture emerging opportunities and scale a site as well. A clear example of this is our densification strategy. Lastly, we will grow by way of expanding our product offering to where it makes sense. Just last month, we launched Hefin, our first edibles-only brand formulated with blends of minor cannabinoids including THC-B, CBN, and CDG, among others, designed to give customers targeted experiences. This three-prong approach enables us to sharpen our focus, streamline operations, and unlock new avenues for growth, all while keeping our customers at the center of our mission. These operational drivers, combined with the Ohio adult use flip, potential Pennsylvania flip, further densification, and increased verticalization keeps me excited about the path forward and possibilities at ascent. As we transition to the performance of the business in the quarter, it's important to remember that each state business has its own market dynamics at play. As is the case with these markets, they are often supply constrained at the outset of adult use and then take a leveling off period once supply catches up to demand as new entrants enter the field. Right now, this is translating into market tailwinds in Ohio, but headwinds in Illinois, New Jersey, and Massachusetts. We are also focused on building a leaner and more cost-conscious organization to help us weather the storm when market dynamics are not in our favor. Resiliency is key in emerging markets, and we are repositioning ourselves to be highly resilient and a nimble company. Let's move on to slide eight to discuss retail updates from the quarter. During the quarter, we maintained flat retail revenue at $94 million. Despite facing intensified competition in New Jersey, Illinois, and Massachusetts, we celebrated the opening of our fifth dispensary in Pennsylvania in Whitehall, while also continuing to ramp our operations in recently opened Menaca in Cranberry, Pennsylvania. A major highlight this quarter was the transition of five Ohio dispensaries to adult use. Although the broader Ohio market has slightly underperformed expectations of sand stores, has significantly outpaced with retail sales across Ohio, tripling on average post-transition, and the Cincinnati location seeing as much as a 12-fold increase. I wanted to highlight our AWH penetration percentage for the quarter. Increasing asset efficiency and driving a larger share of our revenue from in-house products remain key priorities. We're focused on achieving this growth thoughtfully, ensuring our customers continue to enjoy a range of brand choices. In alignment with our strategy, we are actively refining our purchasing to meet evolving customer demand. This quarter, we've begun to make significant strides in enhancing our vertical integration, reaching 52% AWH penetration for the full quarter, with even stronger results in the initial month following the quarter. Overall, while there's still work ahead, I'm optimistic about our industry-leading retail store performance and the strong pipeline of locations in development. We're aggressively pursuing the partner approach and expect to announce several additional partner stores in the next quarter. Let's move to slide nine to discuss the wholesale business in the quarter. Over the past six quarters, we've achieved consistent growth in wholesale revenue, This quarter, however, we made a deliberate shift to prioritize profitability over growth. While there's still progress to be made, we've begun to reduce the margin pressure in Massachusetts wholesale, where we have migrated the portfolio to higher-valuing products. Third-party wholesale revenues are a modest sequential decline impacted by reduced revenue from New Jersey and Massachusetts. We recognize there's more work ahead, especially as we continue to address margin challenges and work through our inventory of lower-value products. Even with a more measured growth approach this quarter, we achieved a 73% year-over-year increase in third-party wholesale accounts as increased retail competition drives demand for our products through wholesale channels. Our brand penetration remains robust across our key states, and our next priority is to expand shelf space within these established doors to strengthen our market presence. Further, despite increased competition, we either held or gained market share. This quarter, we've shifted marketing and production to emphasize products and brands with the strongest margin profiles. As part of this strategy, we're refining our product lineups trimming some offerings, and launching new, high-potential products. For instance, Essent Edibles, which launched just after the quarter, as previously mentioned, has seen strong early success, debuting as the number one edible brand in our retail network in Illinois and Massachusetts during its first week. Alongside these brand adjustments, we're also investing modest capital in improvements to enhance yields and reduce variability. which supports our goal of generating consistent, high-quality product offerings that align with customer demand and margin objectives. To achieve our long-term goals, it is essential to minimize disruptions and address any operational challenges at our production facilities proactively. We are deeply focused on this. Implementing safeguards designed to mitigate impact and maintain steady production as issues arise. I will now turn it over to Roman Nemchenko, who was appointed Chief Financial Officer. Roman will discuss our Q3 financial performance and near-term expectations. Roman has been with the company since the early days as our Chief Accounting Officer, building out the company's accounting and financial operations from the ground up. Roman played a critical role in leading us through its initial public offering, navigating numerous M&A transactions, and ensuring our compliance with tax regulations and U.S. Securities and Exchange Commission requirements. I am pleased to work with Rowan as our Chief Financial Officer.