John Hartmann took the helm of New York-based Ascend Wellness Holdings Inc. (CSE: AAWH.U) (OTCQX: AAWH) last May to help lead the company into a “new phase of growth.” Indeed, his hiring came not long after the company posted a loss of $19 million for the first quarter of 2023 and nearly $81 million in 2022.
John Hartmann
After Hartmann’s entrance, the company posted an $800,000 profit in the second quarter, but then it lost $11.2 million in the third quarter.
In the lead up to the company’s fourth-quarter earnings on March 12, Hartmann sat down with Green Market Report to talk about the business strategy for the company’s oldest recreational market, Massachusetts, and elsewhere, as well as the longer-term path to profitability for Ascend and other cannabis companies.
The following interview has been edited for length and clarity.
A lot of the word from Massachusetts in recent years is struggle and contraction. What have you seen as far as market dynamics there?
What we’ve seen is a number of situations where companies were pulling back on their investments in the state. In this case, we were able to acquire a new cultivation license in Amesbury, and it will allow us to expand both our plant cultivation but also our product production.
We enjoy an exceptionally strong business in the state of Massachusetts, it’s grounded in our existing cultivation and production facility in Athol. And, and we have three dispensaries that are that are currently operating the state.
What’s the reasoning for Ascend’s doubling down on Massachusetts with the acquisition?
The decision was largely just based on the growth in our business. We’ve been enjoying steady growth through each of our three dispensaries.
More importantly, our wholesale business has also been growing. And we’ve developed great relationships with large and small operators in the state, and we’re selling our products.
We reached the point where we don’t have enough product to sell to feed our own stores and to feed this growing and healthy wholesale business. So that was the that’s really the impetus for the for the acquisition.
Is the context here that Massachusetts has become overly saturated and too competitive for a lot of brands?
I honestly can’t speak for the reasons why others are reducing their investments in the state.
I do think Massachusetts is a highly competitive state, and we’ve been fortunate to be able to differentiate ourselves with some of the products we offer. For example, we introduced (our product brand line) Simply Herb vape to the to the market a year and a half or so ago. And we’ve attained the number one spot with that product in the state.
So we think that introducing great products, not only for our own stores and customers, but also for our wholesale customers, has been a reason why we’ve been constrained from a capacity standpoint, and made the investment in the new cultivation facility.
Does Ascend have any other expansion plans, or is the company perhaps going to enter any other U.S. state cannabis markets this year beyond the current seven?
Our overall strategy has been to focus on late-stage medical markets and early-stage adult-use markets. We are living that strategy right now.
Maryland is the most recent state that we added to the portfolio, it was our seventh state. We rebranded those stores very quickly. I joined in May, and it was like one of our first operational tasks together as a team, rebranding the stores, adding new technology, turn them into Ascend dispensaries and opening up July 1 for adult-use. That’s the strategy we continue to work off.
We’ve got Illinois, Michigan, New Jersey, together with Massachusetts and Maryland, as the adult-use markets. And then Ohio and Pennsylvania are our two current medical markets.
We all know that Ohio later this year will make the flip to adult use. We’ve had a good presence in Ohio. Then in the second week of January this year, we opened our fifth dispensary in Ohio.
Our remaining medical-only market is Pennsylvania, and we’re cautiously optimistic. We’ve heard the governor of Pennsylvania talking about his desire to accelerate the state’s recreational-use laws. He wants his share of the taxes, and he’s tired of watching all the other states around him take advantage of it.
So we’re very bullish on Pennsylvania. We have two great dispensaries in the state now, and we have four planned dispensaries that are in various stages of becoming operational in the state.
What do you think it’s going to take for Ascend and other MSO’s to start regularly posting net income instead of net losses?
There’s different ways to measure the financial success of a business, and certainly, the profit and loss line is an important one. But when you’re massively investing in growth, sustained investment of tens and hundreds of millions of dollars over a very short period of time, which this company has been doing, you’re going to continue to see a loss.
But what I would say … you can see, year-over-year, consecutive conceptual decreases in that loss, and I think that’s something you should pay attention to.
The other three things that I would ask you to pay attention to are the revenue growth, the EBITDA growth and percentage, and the cash flow. And Ascend has, quarter-over-quarter, year-over-year, seen double-digit growth on the revenue line and growing very substantially consecutively on the EBITDA line.
Those are also very important signals of the health of an organization.
Finally, I would draw your attention to cash flow. The third quarter was our first full quarter of free cash flow positive. It was our third consecutive quarter of operating cash positive from operations. A company that can stand on its own two feet, that can generate its own cash to make investments like we just did in Massachusetts – we didn’t take out a loan, we didn’t raise additional capital, we didn’t have an equity raise to acquire this cultivation and production facility.
This is a very important signal of the health of a business: when it’s growing top line, it’s growing profitability at the EBITDA line and the percentage of profitability at the EBITDA margin, as well as consecutively generating free cash flow. I’d say those are things that are really important.
What do you see as the primary hurdles to profitability for Ascend?
For us, we are entering a really critical point. We’re actually entering a period where we can leverage and harvest the benefit of those investments.
We’re densifying our markets, like we just added our 10th dispensary in Illinois, we’re at the current cap, we’re now able to leverage that very cultivation and production facility to the maximum and also support our wholesale business in the state. So I think that’s a really critical point, that you’ll see us leveraging our assets in the next few years.
What do you tell shareholders about your expectations for this year, or when the company is going to be regularly posting net income?
I’m in a blackout period right now, so that’s a great question for March 12.
Anything you’ve heard as far as a possible rescheduling announcement from the DEA?
What’s the old expression? Everyone has an opinion … I’ll leave it at that.
I just think that there’s a few things are lined up right now that actually make common sense. And it seems like, the reality of the situation is the DEA has never historically gone against an HHS recommendation, and the executive in the White House has said that this is something that they’re passionate about and, and wants to see happen.
I would be surprised if we don’t see the rescheduling (announcement by DEA) happen sometime in the next 60-90 days. If they’re hopeful that it’s going to have some type of impact before the election in the fall, then that’s the kind of timeline they have to be thinking about.
The flip side is that this is the federal government. So I don’t know that my crystal ball is any better than anyone else’s. We believe that change is coming. And we believe that change is the right thing for the government to for the action the government should take.
But we’re not sitting around waiting for it. We’ve got a great playbook. We’re opening new dispensaries, we’ve got a bunch in the pipeline. We’re acquiring smart assets that we’re getting at a very fair, very reasonable price and allow us to immediately leverage those investments and be accretive for our shareholders.
We’re bullish that 280E relief is coming, that reclassification is coming. And at some point, we’ll get (the) SAFE (Banking Act) past as well. But the headline is, we’re running our playbook. And we’re excited about earnings in a couple of weeks.
You don’t come from the cannabis industry; you’ve had a lot of other C-suite jobs at mainstream companies like Home Depot, and you began your career as a special agent at the FBI. What it’s been like transitioning from more “ordinary” industries into the marijuana trade?
I’m super excited about it. And I’m probably actually more excited today than I was on day one.
I’m at a point in my career where I was very fortunate to have a few different things to consider. And candidly, cannabis wasn’t the first thing that I thought of, but when I got to know the business, when I got to know the leaders of this business, and I really got to understand the strategy of Ascend … and clearly the focus on late-stage medical markets and early-stage adult use has been one that the board of directors of this company has been very adamant about.
Others have kind of taken that shotgun approach. And a very small number of them have been successful at that. But most haven’t. And the dedicated focus this company has shown really intrigued me.
What’s important to me is being able to have a real meaningful impact on the business. And I felt at the time that it was a good match. And 10 months in, I feel even better about that, seeing what we together as a team have accomplished over the last year.
And more importantly, is what’s to come over the next few years for this business. So to me, it’s been been fantastic.
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