Ascend Wellness Holdings: A Vertical MSO with an East Coast State of Mind

Ascend Wellness Holdings Inc. (AWH) (CSE: AAWH.U, OTCQX: AAWH) is a vertically integrated MSO with retail operations in five  states – Illinois, Michigan, Massachusetts, New Jersey, and Ohio – and eyes firmly set on New York. Founded in 2018 by CEO Abner Kurtin and Chief Strategy Officer Frank Perullo, who recently was promoted to president, AWH has amassed a robust portfolio of cannabis assets in targeted states consistent with a strategy devised by the company founders when they began their journey four years ago.

As he explained to CBE during a recent interview, Perullo first encountered cannabis as a legal business via The Novus Group, a consulting company he led that offers “the typical public affairs and government affairs practice. We do mostly Massachusetts, New England, and some federal, and after Massachusetts passed medical in 2012 we started getting incoming inquiries about working for medical cannabis companies performing our typical work, lobbying locally and at the state level as well as permitting and site selection.

“In Massachusetts,” he added, “it’s a very local, intense permitting and licensing process, so where you’re locating the site is exactly what matters throughout the whole process. We were doing site selection, local permitting, and state licensing, and we got pretty well versed in the state. I’m also a longtime user of cannabis, and so it was something that was a passion for me. It was exciting, brand new, and we developed a great business practice area around it.

“We became one of the go-to companies working for other MSOs,” he continued. “At the time, we had clients like Acreage, GTI, and Tilt, etcetera. Along my travels in the few years, I was doing work as a consultant, I met Abner Kurten, who was investing in the space. Abner comes from the hedge fund world and finance. We met while he was doing due diligence on an investment and decided that we could build a better mousetrap. So, that’s what led me to Abner, and here we are. We started AWS four years ago in March.”

AWH quickly became the priority and Perullo stepped away from Novus to focus on the MSO full time. I asked if the original business model involved acquiring licenses by application or by M&A, and if the particular strategy had remained consistent over time.

“As we went into it,” said Perullo, “Abner had a thesis of really staying east of the Mississippi River, the Rockies, and sticking to limited licensing [states], and we have certainly stuck to that. If you look at our capital allocation – which Abner focuses on – it is in those attractive markets where you have the ability to get a business up to scale and really perform. So, we have stuck to that for sure, and that was the thesis of the company. For me – and my experience with my clients – was really [about] the execution; it was how quickly can you permit, how quickly can you license, how quickly can you build, construct, and get doors open. I saw opportunity on the execution side, where I think a lot of companies were not necessarily hitting their stride.

“Other than Massachusetts, we have acquired our licenses,” he clarified. “We started getting operational asset in the tail end of 2018 with our first dispensaries, two medical dispensaries in Illinois, as well as a grow, which I believe closed in January of 2019. Those were our first two acquisitions, and we’ve since acquired every one of our assets other than Massachusetts, where we found sites, got an application together, and went through the permitting and licensing process. But we are a company built mostly by M&A.”

Will that acquisition strategy continue into the foreseeable future? “I think there is certainly the opportunity over the next year or two and probably beyond as consolidation and the M&A markets are going to continue to be hot,” replied Perullo. “There are a lot of first- and second-generation owners, people who won these licenses, who are going to get to the finish line at some point and their investments have been large, their work has been their passion, and it’s taken them only so far. This business is capital intensive, it’s time intensive, and at some point, those businesses look to get acquired. And then you add in the consolidation that’s happening between small single-state operators, regional operators, and the larger MSOs, and I think M&A is going to be something that we’re very well positioned for in the year or two to come.”

The Price of Pot

Trading around $4 USD, with a market cap just under $700 million, AWH says it has plenty of cash on hand. “I think if you look at the year-end financials, we ended the year with between $150 and $200 million on the balance sheet, we closed a debt facility last year that allows for expansion, and we are well positioned to be opportunistic in the right market and for the right opportunity,” said Perullo.

For AWH, the right markets emphatically exclude the American West. “The markets out west are highly competitive, so what we’re looking to do is enter markets where we can achieve a significant market share, be a top three player, and do it in a not-as-competitive environment,” said Perullo. “Trying to enter a state like Colorado, California, or Oregon, you’re doing it through acquisition at this point, and at that point you’re just buying revenue and EBITDA, which, while a strategy for some, we prefer to focus on the most attractive markets where we can be a top three player.”

While that makes a lot of sense, I noted that AWH has in fact partnered with an established California preroll brand, Lowell Smokes. “I think your point is valid,” said Perullo. “We talk about this all the time. We love to say that we want to bring West Coast cannabis east. Lowell is a perfect example of that. California and all of the states west of the Rockies have more mature markets in terms of the form factors, brands, and retail experience. And consumers for sure. We love to bring those brands east with us, and a partnership with Lowell was that exact match where we partner with them, they teach us how to do what they do, we grow cannabis to their specifications with their strains that they make, including their specific effects-based pre rolls, and we deliver that West Coast brand and experience to our customers on the East Coast.”

I asked Perullo if the investment involved in a deal like the one with Lowell makes it more than just a partnership in the sense that ending it would be detrimental to both parties. It was not a scenario he cared to indulge. “We want to perform for our partnership. We want to provide their product that has been successful on the West Coast – one of the top selling pre-roll brands in California, a highly competitive state – and we want to bring it to the U.S., and we want to do it successfully. So that means we have to work with them very closely to ensure that the standards and quality meet what they expect. The packaging comes from Lowell, and everything about how we build and assemble those products are done to their specifications. It’s a great partnership, the product is excellent, and we have a hard time keeping it on the shelves.”

Lowell is just one of the flower brands AWH is offering people in its target states. Two others complete its current complement, suggesting a strategy to address different segments and price points.

“We are following the good, better, best product category,” explained Perullo. “What we want to do is segment out to consumers the way that a lot of CPG products do, and we like to play with good, better, and best. Our Ozone and Ozone Reserve brands are playing exactly that; better and best. Those are our two flower brands. We are very focused on producing high quality cannabis flower. That’s where everything comes from, so we really have focused very hard over the last 12 to 18 months in getting all of our cultivation facilities to be as consistent and dialed-in as we can to produce that high-quality flower that goes into a jar, a pre-roll, or to produce some of the extracts that you’re seeing on the market, including the oils that go into vape pens, and the butters and shatters and sugars that go into concentrates, which are one of the best representations of the flower in an extract form.” Other brands carried by AWH include Flower by Edie Parker, edibles brand 1906, and Airo Vapor.

A Curated Experience

Perullo added that while AWH is a vertical operator in all of the jurisdiction in which it operates, it does not want to be perceived as a top-down company. “We want to be vertical, and we are, but at the same time, if you go into one of our retail shops, we don’t want to be a company store,” he said. “We want to provide the customer with the best products, not just our own, at the best value with the best experience. I think that is something that’s slightly different than some of the others, where you see a company that produces in their vertical and you go into their store and it looks like a company store, and 50 to 75 percent of the selection is their own product. That’s not what we aim to do. We want to give the best product in each of our markets – whether that’s Incredibles, or Mindy’s, or our own edibles in Illinois, or the same in Massachusetts, or Choice Labs in Michigan – we curate the retail experience to have the best products available.”

What percentage of its own branded products does AWH carry on its shelves? How much is too much? What is the best ratio of other brands to owned brands? “I think if you look at successful retailers – let me use Target or Nordstrom’s as good examples – you can go into their store, you can shop, and when you get to the cash register, when you look in your basket you may have 50 percent products that are Target-produced vertical products, and the other 50 percent are every other provider. Same thing in Nordstrom’s.

“Our goal is to give the customer the best assortment, whatever that may be market-to-market,” he added. “In California, it might be Kiva edibles along with Lowell Smokes and flower from Connected, but I want to make sure you get what you want consistently every week, and I want to make sure that our products have great shelf-space in our own stores, and that we are pushing our customers there when it makes the most sense for the value proposition. 50 percent is probably a good number. It does change market to market depending on what form factors we have available, but I think the goal for the company is around a 50-50 mix.”

Does that include products from local cultivators? “Of course,” said Perullo. “In Massachusetts, where I am, it’s a market that I know really well, and there are some fantastic local cultivators producing craft cannabis that we want to carry. We want to carry the best products available in each of our markets and showcase them in our stores. Coast Cannabis is an edibles provider here in Massachusetts; we carry them; really great products and a great local company. We do that market to market, and we do it because they’re producing really great products that customers want, and because we feel like it’s the right thing to do to support the companies.“

The AWH website currently lists 20 Ascend- and Ascend Cannabis-branded dispensaries, with most of the stores in Illinois at eight, Michigan next with six, and Massachusetts, New Jersey, and Ohio with two each. More are on the way. “It looks like you have 21 stores on your site. Are you going to open any more stores this year? “We’re opening East Lansing, Michigan in about four weeks,” said Perullo. “We’re opening New Bedford, Massachusetts, in about four months, and we’re opening Fort Lee, New Jersey in around the same time-frame, late Q2.”

I asked if Florida also is on their wish list. “Florida is an extremely expensive capital-intensive state to enter,” said Perullo. “You have to be completely vertical, and you then have to go and do battle with Trulieve, which has a massive amount of market share and stores on every corner. I think they have 110 stores right now or more. As much as I love the market – it’s a massive market with lots of upside and adult use coming – it’s just really too capital intensive to enter that market and go up against some of the people that are down there, including Trulieve.”

New York, New York

Almost exactly a year ago, on Feb. 25, 2021, AWH and cannabis retailer MedMen co-issued a statement announcing an agreement whereby “subject to approval from the New York State Department of Health and other applicable regulatory bodies, AWH will complete an investment totaling up to approximately $73 million in MedMen NY Inc. (MMNY), MedMen’s subsidiary in the state of New York.” As explained in the statement subhead, “Investment enables MedMen to deleverage balance sheet in accordance with turnaround plan.”

The statement included the following Agreement Terms: “Under the terms of the Investment, at closing, MMNY will assume up to approximately $73 million of MedMen’s existing secured debt, AWH will invest $35 million in cash in MMNY, and AWH New York, LLC will issue a senior secured promissory note in favor of MMNY’s senior secured lender in the principal amount of $28 million, guaranteed by AWH, which cash investment and note will be used to reduce the amounts owed to MMNY’s senior secured lender,” they wrote. “Following its investment, AWH will hold a controlling interest in MMNY equal to approximately 86.7% of the equity in MMNY and be provided with an option to acquire MedMen’s remaining interest in MMNY in the future. AWH must also make an additional investment of $10 million in exchange for additional equity in MMNY, which investment will also be used to repay MMNY’s senior secured lender if adult-use cannabis sales commence in MMNY’s dispensaries.”

Early this year, the deal officially went south for reasons that still need to be clarified, but at the time AWH CFO Dan Neville, in a Times Union article, “speculated that other significant capital and contextual changes influenced [MedMen’s] decision to renege on its prior commitment. Neville said Ascend Wellness struck an initial deal with MedMen’s interim leadership when the company was cash-strapped in December 2020; but the current license holder has since attracted new investors, and when adult-use cannabis was legalized in New York, the value of their assets here also grew.”

The dispute resulted in litigation between the companies that included accusations by MedMen that AWH had unfairly influenced New York officials to fast-track state approval of the deal, allegations the company now says it will rescind after they were proven by AWH to be “demonstrably wrong.” I had a question or two, but the company declined to comment on the subject during my interview with Perullo.

Our time up, I saved a must-ask question for last. What keeps Perullo up at night? “In this business, everything,” he replied. “I mean, we’re growing a plant that has a shelf life, we have to staff manufacturing facilities to get it on the trucks every week, and we have to provide a consistent retail experience in markets that treat cannabis shoppers completely differently. For instance, if you’re in California, you can have open doors and you don’t need to worry about blacking out the windows. If you come to Massachusetts, it’s not like that at all. It’s awful. So, I would say it’s all those details and all of the differences in each state that keep me up at night, along with the fact that we’re trying to scale multiple businesses. It’s agriculture, retail, manufacturing, construction, permitting, government affairs. It’s a very complicated  business, but I love it.”

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