Jushi Holdings Inc.
Q2 2021 Earnings Call Transcript

Published: 25 Aug 2021

[Operator:]

Good morning. My name is Donna, and I will be your conference operator today. At this time, I would like to welcome everyone to Jushi Holdings Second Quarter 2021 Earnings Conference Call. Today's call is being recorded. I will now turn the call over to Michael Perlman, Executive Vice President of Investor Relations and Treasury. Thank you, sir. Please go ahead.

[Michael Perlman:]

Good morning. Thank you for joining us today for Jushi Holdings' Inc second quarter 2021 earnings conference call. Joining me on today's call are Jim Cacioppo, Chief Executive Officer, Chairman and Founder; and Kimberly Bambach, Chief Financial Officer. This morning we issued a press release announcing our second quarter 2021 financial results. The press release along with unaudited financial statements are available on our website under the Investor Relations section and are filed on SEDAR. Before we begin, I would like to remind listeners that certain matters discussed in today's presentation or answers that may be given to questions asked could constitute forward-looking statements within the meaning of Canadian and United States Securities laws, which by their nature involve estimates, projections, plans, goals, forecasts, and assumptions. Actual results could differ materially from those anticipated in these forward-looking statements. The risk factors that may affect actual results are detailed in Jushi's annual information form and other periodic filings and registration statements. These documents may be accessed via the SEDAR database. These forward-looking statements speak only as of the date of this call and should not be relied upon as predictions of future events. With that, I'd now like to turn the call over to Jim Cacioppo, Chief Executive Officer, Chairman and Founder. Jim?

[Jim Cacioppo:]

Thank you, Michael, and thank you, everyone, for joining our call today. I would like to take a few minutes to review the significant progress we've made so far this year, provide an update on our second quarter performance and review key developments within our operational footprint. I'll then turn it over to Kim to review our financials, and then we'll open it up to questions. To start, let's review our second quarter 2021 results. As previously announced, I am pleased to report that our revenue increased 14.6% to $47.7 million as compared to the first quarter of 2021 and increased approximately 220% year-over-year. Our second quarter sequential revenue growth was driven by higher revenues at the company's BEYOND/HELLO stores in Pennsylvania, Illinois, California and Virginia and increased operating activity at our Pennsylvania and Nevada grower-processor facilities. In addition, we have continued to report sustained positive adjusted EBITDA in the second quarter of 2021. This was achieved as a result of continued revenue growth across the portfolio supported by higher gross profit. Adjusted EBITDA was partially offset by an increase in staffing and expansion-related expenses as we invested in our growth in advance of new store openings, the opening of Ohio cultivation and manufacturing facilities and the build-out of our Pennsylvania and Virginia grower-processor assets. I'd also like to highlight some of the operational achievements and progress we've made across the organization. We continue to execute on our strategy to strategically expand our footprint, including opening our 19th and 20th BEYOND/HELLO retail stores, optimizing and expanding our cultivation assets at Pennsylvania and Virginia and entering new markets with our planned acquisition of Nature's Remedy of Massachusetts. In just a minute, we'll address each strategy in more detail in our state level operations update. But first I would like to note that I'm very proud that we have been able to establish a deep and talented management team, which includes some key hires we have recently made. During the quarter, we welcome Leo Garcia-Berg as Chief Operations Officer. Leo will be responsible for driving growth strategies and efficiencies as well as coaching and developing team members across our grower-processor facilities. Leo has already hit the ground running and has begun to introduce what we call Jushi Production Systems or JPS, which is based on lean manufacturing principles and has the objective of producing our products in the most efficient way and with the highest standards of quality. Under the JPS routine, our teams will focus on eliminating waste, reducing variability of results and adding flexibility to our production systems to match our customers' needs. We are also very pleased to welcome Marina Hahn to our Board of Directors. Marina joins Jushi's Board as an experienced consumer products and marketing industry leader. She has a strong track record of building culturally relevant consumer brands and disruptive new product categories as well as driving value creation across startups, turnarounds and Fortune 500 corporations. Subsequent to quarter end, we appointed Brendon Lynch as our Executive Vice President of Retail Operations. Brendon brings decades of retail experience to Jushi that he refined and developed while working with companies such as Anthropologie, Rudy's Barbershop, TOMS, David Yurman and The Gap. He will be responsible for leading Jushi's retail strategies, including overseeing our retail footprint in core markets as well as introducing and expanding in-house delivery services. Now let's take a closer look at our U.S. operations state by state. Let's begin with Pennsylvania. During the second quarter, we opened our 12th and 13th medical dispensaries in the Commonwealth of Pennsylvania. With the opening of these new locations, we have broadened access for more Pennsylvania patients as well as expanded the reach of our newly introduced suite of highly innovative branded products

[Kimberly Bambach:]

Thanks, Jim, and good morning, everyone. Before starting, as a reminder, the results we'll be going over today can be found in our financial statements and MD&A and are in U.S. dollars. Revenue in second quarter 2021 increased 14.6% to $47.7 million compared to $41.7 million in first quarter 2021. The increase in revenue was driven primarily by solid revenue growth with the company's BEYOND/HELLO stores in Pennsylvania, Illinois, California and Virginia and increased operating activity at our grower-processor facilities in Pennsylvania and Nevada. Gross profit in the second quarter increased 9.2% to $21.9 million compared to $20.1 million in first quarter 2021. The increase in gross profit was a result of higher revenue, partially offset by a decrease in net overall margin due to promotional activity within the quarter. Second quarter net income was $4.8 million or $0.03 per basic share with net loss per diluted share of $0.09 compared to a net loss of $26.8 million or negative $0.18 per basic and diluted share in the first quarter of 2021. The $31.6 million improvement in net income in the second quarter was primarily driven by the gain on the fair value derivative liabilities of $21.1 million. The net loss of $0.09 per diluted share in second quarter was due to the dilutive effect from derivative warrants as accounted for under IFRS. The fair value gain on the derivative warrants is removed from basic earnings to calculate dilutive loss, which is then divided by the diluted weighted average number of shares. Adjusted EBITDA in the second quarter of 2021 was $4.6 million compared to adjusted EBITDA of $4.5 million in first quarter 2021 as updated for current period presentation. The increase in adjusted EBITDA was driven by higher revenues and gross profit. As a reminder, we have defined adjusted EBITDA, a non-IFRS measure as EBITDA before fair value changes included inventory sold and biological assets, share-based compensation expense, fair value changes in derivatives, the gain/loss on debt and warrant modification, gain/loss on investments and financial assets, acquisition and deal costs, severance costs, start-up costs and gain/loss on legal settlements. More information regarding the company's use of non-IFRS financial measures can be found in the company's management discussion and analysis for the three and six months ended June 30, 2021. Turning to the balance sheet. As of June 30, we had $126.8 million of cash and short-term investments with total current assets of $164.3 million and current liabilities of $60.2 million. Net working capital at the end of this quarter was $104.1 million. Our reported cash balance does not include the proceeds we expect to receive pursuant to the approximately $14 million Interim Arbitration Award. The company incurred approximately $32.8 million in capital expenditures during the quarter and $41.5 million year-to-date. We expect to incur an additional $65 million to $85 million in capital expenditures for the remainder of the year, subject to market conditions and regulatory changes, of which a portion will be funded through our Pennsylvania grower-processor sale leaseback facilities. As of June 30, the company had $85.1 million principal amount of total debt, excluding leases and property, plant and equipment financing obligations. We are in discussions with several potential financing partners to secure funding for retail locations in Virginia as well as our Manassas facility, which we purchased for $22 million in cash earlier in the second quarter. In addition, we are also considering further options in the debt facility to fund the cash portion of acquisitions. Lastly, on August 9, the company announced that all issued and outstanding Super Voting Shares and Multiple Voting Shares of Jushi were converted into Subordinate Voting Shares of Jushi in accordance with the term Super Voting Shares and Multiple Voting Shares. The outstanding warrants to acquire Super Voting Shares and Multiple Voting Shares were also converted into warrants to acquire Subordinate Voting Shares without any amendment to the other terms. Following these conversions, there are no Super Voting Shares or Multiple Voting Shares or warrants issued and outstanding. As of August 20, 2021, the company had 172.4 million Subordinate Voting Shares. I would like to turn the call back over to Jim to discuss our outlook.

[Jim Cacioppo:]

Thank you, Kim. Looking ahead to the remainder of the year, we expect to open an additional seven BEYOND/HELLO dispensaries, add two additional dispensaries and the grower-processor facility in Massachusetts through the acquisition of Nature’s Remedy of Massachusetts and continue to build out our Pennsylvania and Virginia grower-processor facilities, which will fuel our business as we head into 2022. Assuming our Massachusetts acquisition closes late in the third quarter, we are revising our full year 2021 revenue guidance range from $205 million to $255 million to $220 million to $230 million, and our 2021 adjusted EBITDA guidance range from approximately $40 million to $50 million to $32 million to $37 million. The reduction of adjusted EBITDA guidance relates to

[Operator:]

Thank you. Ladies and gentlemen, the floor is now open for questions. Our first question is coming from Russell Stanley of Beacon Securities. Please go ahead.

[Russell Stanley:]

Good morning, and thank you for taking my question. Maybe the first question just around the introduction of 2022 revenue and EBITDA guidance. I think when you originally introduced your 2021 guidance, you provided a bit of a breakdown around how you expect the individual state contributions to contribute. I’m wondering maybe not exact numbers, but if you can provide, I guess, a bit of similar help around 2022 and how you expect that to look?

[Jim Cacioppo:]

Hi, Russell. Thanks for the question. So in terms of the detail in 2020 that we provided last year in October, I note that we did that guidance in October 1. Last year, we – the growth rates were just so tremendous, and we just felt we needed to give people sort of a base of where the company was growing market by market. This year, you sort of have our base – we're doing almost $200 million of revenues annualized in the second quarter. So we feel like there's enough information out there now. And people are – feel free to call Michael Perlman, but we don't want to issue guidance at that level of detail. Some of our competitors don't even issue any guidance, and we feel like one of the more disclosures of the large $1 billion-plus companies. So this is our policy. And I think last year was the exception because of the ramp-up was so severe. So you could talk to Michael, he could try to provide you with more color on different things.

[Russell Stanley:]

Got it. I appreciate that. And just my second question around the CapEx outlook for H2. Understand part of that is to be covered by the sale leaseback that you made $30 million available back in April. I guess just wondering what you think your net out-of-pocket CapEx would be in H2? And if you have preliminary thoughts on 2022 at this point? Thanks.

[Jim Cacioppo:]

Yes. In terms of CapEx, for the rest of the year, the Pennsylvania facility was not fully drawn before we increased it. So we think potentially $35 million to $40 million could get drawn against that $35 million, $40 million. And we have many, many offers on our Virginia real estate. I will point this out, we bought the real estate – the underlying real estate for $22 million. We had about $15 million of CapEx already in that facility when we purchased it, and we're putting more in. So if you look at the loan-to-value of that, it could be quite high. So we haven't done the Virginia financing yet not because it's not available, but because we've been – well, we have a robust balance sheet to start and the rates are coming down. The credit markets are quite robust. So we have multiple – almost a half dozen sale leaseback proposals with very high loan-to-value ratios with very competitive interest rates relative to what we've had in the past. And we have term loans from institutions, and we have some banks interested or have had some banks interested. So it's a process of us really getting the best long-term financing in place, where you're keeping in mind the fact that with federal legalization, maybe on horizon in the next 12 months, your cost of credit come way down. So we're really trying to do that as we should to get the best cost of capital for shareholders in Virginia. So when you look at that, most of that capital is in the grower-processors. And almost all of that will be financed at this point because we already have the equity capital in both Pennsylvania and Virginia because we've already put that capital out in both places. So most of that will be financed. The only part that will not be financed over time will be the stores.

[Russell Stanley:]

Got it. Thanks for the color. I’ll get back in the queue.

[Operator:]

Thank you. Our next question is coming from Bobby Burleson of Canaccord Genuity. Please go ahead.

[Bobby Burleson:]

Hey, guys. Thanks for taking my questions. So I guess the first one is just back to the revised 2021 guidance. It sounded like you had some buffer originally in there that you thought be made up for – with acquisitions that you ended up not pursuing curious in 2022, whether or not you've done something similar in terms of providing yourselves a buffer that might come from acquisitions and kind of what – how big that buffer is so we get some sense of what the organic is versus the inorganic.

[Jim Cacioppo:]

Great. Thanks, Bobby. Good question. Yes, we do have buffers in there. First of all, going back to 2021, I'm actually quite proud of our performance relative to what we have guided. Remember, we guided October 1, 2020. So it's almost a year ago and we just come in a touch lower on EBITDA, mostly for things under our control that we changed what we did, and we're kind of toward the middle of the range in revenue. And so I'm quite proud of what we did. And so Jushi's policy is to be conservative and lead our projections. We never have withdrawn projections. We've never had these huge changes in projections, which caused a lot of volatility to shareholders. And so yes, so there are buffers for acquisitions. We also – we were somewhat conservative on Virginia because it's a new market. So we have conservativeness built-in in several areas. So we feel good about the numbers, and we hope to do very well relative to our guidance.

[Bobby Burleson:]

Great. And then I know that it's hard to really predict this, but based on the cities that you guys are focused on in part of Northern Virginia. And what you've seen with stores and other high-performing markets, what's your sense of kind of how those stores might perform in terms of like – do you expect higher than average kind of store performance in terms of annual revenue in that market? Do you think it'd get there in 2022? Or is this something that really like we won't kind of get to that run rate in 2023? Like maybe comparing to what you're doing in Illinois and some other really strong markets that you're performing well in?

[Jim Cacioppo:]

Yes. So in Illinois, we have two stores in the Sauget area. And before the second store was open, we had a medical store, which was underinvested in, not a lot of POS, would rightly have lines between 30 minutes to 60 minutes. That store at peak before we opened the second store did about low 30 millions annualized in sales. And then we opened the second store, we purposely cannibalized that store and got customers to go to the second store, so there was less wait. And so those stores are doing mid-20s each. They're about the same. And by the way, we think they could do more once the clubs open up close to the new Sauget store, which we call Route 3. So I think that’s a good example of adult use high-performing store. I’ve seen stores that are very well positioned with limited competition in markets that were just opened up doing as much as $50 million. So I think these stores can do very, very well. I’m not projecting anything on a store-by-store basis. But I think that gives you – so that high end, what we’ve experienced in that I think a store that was doing way more than it should have because of the 5,000 square feet or 4,000 square feet and limited number of POS is set up around the whole thing. We inherited that in an acquisition. So when you look at that versus what we’re doing in Virginia, I don’t see why we wouldn’t be at the high end of that range.

[Bobby Burleson:]

Okay. Great. And I guess the 2021 guidance is predicated on the Massachusetts transaction closing. And is there – how would you handicap that transaction? Is it pretty much just going through red tape? Or are there any kind of real obstacles there.

[Jim Cacioppo:]

No. We’re at the tail end of the approval processes. And when for when you get the last approval, we have HSR, Hart­Scott­Rodino expire. We’ve got the Cannabis Control Commission, which are the two biggies. And then it’s just a matter of getting through the local stuff, and then there’s some waiting periods. And then once you say, oh, let’s go, there’s about a 10-day period for you to actually close it with the lawyers and our internal people wire money get all the paperwork finalized. So it’s just – I think we’re going through that very tail end process at the moment with minimal risk on the regulatory side.

[Bobby Burleson:]

Great. Thank you.

[Operator:]

Thank you. Our next question is coming from Kenric Tyghe of ATB Capital Markets. Please go ahead.

[Kenric Tyghe:]

Thank you and good morning. Jim, I’d like to just focus in a little more on Pennsylvania. We’ve seen both yourself and one of your major wholesale focused competitors in the state, either in the midst of an expansion taking down rooms or more rooms than were expected, can you sort of speak to supply-demand balance and dynamics in the Pennsylvania market today? Perhaps how much more disruptive you’re taking down of those rooms approved in quarter? And then I’ll circle back with a follow-up just understanding the Pennsylvania promotional market in the context of that supply-demand balance.

[Jim Cacioppo:]

Yes. Thanks for the question, Kenric. Good question. So yes, so basically, we inherited this facility through an acquisition, and then we went in there. Originally, we have planned a 130,000 square foot is what we announced that you go back to the announcement. We bought some parcels of land around it. So we were able to do another expansion to 190,000 square feet. So when you do that, the whole flow of the facility changes, one expansion is on the east side of the building, the other expansion is the west side of the building. So the middle of the building becomes the hub where people enter, employees enter. So that’s where you have your lockers and all those types of things. And then that’s where manufacturing is and that’s where the post-harvest trimming, bucking and all that other stuff that happens. So it was just a matter of taking down rooms to expand manufacturing and post-harvest activities, so we could scale those to what could be a 300,000 square foot facility and so getting the flow to be the most efficient flow, so we could be a low-cost provider for years to come. So that’s what happened. I don’t think it’s major. I think it’s minor change. Again, we just were under our EBITDA low end, and some of that was because we ramped up G&A because we see adult-use coming in January. So there’s multiple reasons. I don’t want to overplay that one. And so that’s why we did that. And by in process – in the process, we’ve also refurbished the grower rooms, some of the grower rooms which are coming back online, a couple are coming back online in the third and fourth quarters. So we’re seeing benefits that were through the, I would say, maybe the low point of that for sure. And so I think it’s a great long-term decision. And naturally, when we closed the acquisition, we didn’t have architects in there. We didn’t have this huge expansion sort of papered out. So it’s natural that something like that may happen. And it’s relatively minor relative to what we’re doing in terms of the expansion. So in terms of the demand in the market and supply/demand, a lot of supply has come on in Pennsylvania, but demand keeps picking up, stores were opening up. There’s quite a few more stores opening up. So for instance, Jushi has been sort of on average for the market. I think we caught up, we may be above average this year because we’ve gotten really good at it. And we reduced the time of opening stores quite dramatically from what we used to do last year. And we’re, by the way, typically on budget or below budget this year. And so you’re seeing stores open up. And the GPs open up in very large amounts, right, and stores come online in smaller amounts, right? Because the stores are much smaller than the GP. So I think you’re going to see some balancing in the market going into the first quarter of next year as more stores open. And people are rushing to open their stores to get set for adult use in Pennsylvania and just because there’s no value in a license and it’s a great market. A sale of license doesn’t create any cash flow for our company. So we think all that’s happening. And we think the best example for what probably happens in Pennsylvania is Illinois. And what you saw in Illinois is as we got closer – more closer to adult use, the big grower-processors, the wealth finance folks built up grower-processors in anticipation of adult use. And then you had a – the worst point was – of pricing was in the year before, it went adult use. It was in the first six months of that year because that’s when the most – these things were coming on. In the last six months of the year, you tended to see people hold back inventory for adult use because you have this 3x demand when it goes adult use. So I think the low point pricing will be the first six months of next year. It won’t be that bad, but who knows, we’ll see. And I don’t think it will be more like a 10% kind of thing but that’s a rough guess. That’s not like something we’re the world’s expert on supply/demand. In the second half of the year, we anticipate adult use by January 1, 2023, and the second half of the year, you will see people sort of holding back some inventory for the expected pop you'll get in the first quarter of 2023.

[Kenric Tyghe:]

That's very clear. Just one quick second question for me here. On Virginia, is the delay in sort of flower through to September from July, is that medicine that need to be taken and you think potentially net positive for the evolution of the market and the market have been able to actually support what is expected demand, and it's a case of taking the medicine now yield dividends for the market and existing players down the line while everybody gets their houses better in order than they were? Or how should we frame up and think about that the flower delay in Virginia and the readiness of the market in Virginia in that context?

[Jim Cacioppo:]

Yes. I would look at the flower delay, honestly, it's a bump in the road like a very small bump in the road. You don't have to go to the tire store to get a realignment of your tires if you hit the bump. This is a very small thing to sort of nail when regulators are going to do something within a three-month time frame, I'm actually pretty proud of getting it within three months. I mean the people who are – I know people predicting New Jersey beginning of last – beginning of this year or in the middle of this year and six, nine months off. And some folks who don't have the facilities up and going in New Jersey going to be 12, 15 months different from what they were saying. So I actually think we're pretty close. I'm pretty proud of that. And flower coming into a market in the medical market, I cannot stress how important that is for patient counts going up, and for the growth in the market. You saw it in Florida, patient counts went up. Revenues went up quite dramatically in the first nine months. We saw it in Pennsylvania. We had better statistics in Florida. So we actually talked about that in the prepared remarks. But in Pennsylvania, you saw the same thing. And it's – typically flowers, 50% of the market, 5-0. And ifyou're not offering flower in a medical program or then a lot of people are going to stay in the illicit market. That's the bottom line.

[Kenric Tyghe:]

Great. Thank you. I’ll leave with that.

[Operator:]

Thank you. Our next question is coming from Brian Kadey of Canaccord Genuity. Please go ahead.

[Brian Kadey:]

Hi Jim, I just wanted to sort of circle back to those numbers you mentioned the output in Pennsylvania, 70,000 pounds; and Virginia, 115,000 pounds. If I remember, in Illinois, retail prices was something like $10,000 a pound. So those are pretty big revenue numbers. Can you give us a little more detail on how that will impact EBITDA going forward?

[Jim Cacioppo:]

Yes. Thanks, Brian, yes, good question. So yes, I think we tried to be going back to what Russell – we tried to provide information so everybody could run their models for the out years, including 2023. And we're very positive on 2022 and very confident we're going to hit our projections, that we put out the guidance. I would note that our EBITDA is increasing in 2022 from 2021 at a multiple of 4.2x midpoint to midpoint, more or less 4.2x. So that's a huge multiple increase in 2022, super proud of the inflection there. And then in 2023, what we've shown the market is you can do the math there. You can take the 70,000 and 115,000, you should – I would look at Illinois as a stock analyst, I used to do that or in my early days. I would look at that. And if you do that math, you'll see that our EBIT because the profitability goes way up for a vertical business because just – I mean, I don't think most people on this call know this, when you're selling to your own retail, right? So let's say we're targeting about 30%, 35% to our own retail from our grower-processors, that's – we think that's very achievable. There might be upside to that. That doesn't – you don't get – that doesn't count as a sale. That just brings down your cost of goods sold and all that margins captured in retail. So your margins go way up. And I think our multiple, in 2023, the increase of EBITDA from 2023 – excuse me, the increase in EBITDA in 2023 will be lower than – what would happen between 2021 and 2022, but it won't be that much lower. It will be a huge uptick, assuming Virginia and Pennsylvania both go adult use on January – by January 1, 2023, which is our base case assumption in our out years.

[Brian Kadey:]

Great. That’s very useful. Thanks.

[Operator:]

Thank you. Our next question is coming from Jason Zandberg of PI Financial. Please go ahead.

[Jason Zandberg:]

Thanks for taking my questions. Just wanted to quickly talk about California, I know you only have a limited presence there in Santa Barbara and Palm Springs. But just wanted to get your take in terms of how those stores are performing either on an absolute basis or relative to your expectations?

[Jim Cacioppo:]

Thanks for the question on California. So California is a market we spent a lot of time in. And relative to time spent, we've done very little. So I would note from a shareholder perspective, there's a tendency for investors or corporate leaders to spend all this time and say, we spent so much time, let's just do the deals, just sell at sunk cost. So we've spent years in California. And I think we've gotten real dividends out of it in terms of our branding. If you look at Tasteology, our edibles they're on California quality. And of course, we looked at what's happening in California because they really have some of the best products in the country. And if you look at people who – across the country in the world who buy illicit products, they prefer California stuff, and they're very notable. So I think we've gotten dividends on understanding that market. I think Tasteology is the biggest example of that. But in terms of our view of the market, we've really gone slow, and we've gone slow because market is somewhat mature. And we feel like people – the price expectations for sellers has been too high because the growth is limited. And of course, I laid out the Jushi growth for the market in 2022, and I gave you some ways to analyze it for 2023. These are industry-leading growth rates on EBITDA and revenues. This is organic growth. This is an acquisition-led growth. So I have to give up that use super high growth for a fairly mature acquisition. So I have to get something for that. So the answer for you on California is we've gone slow. The stores were the most COVID-affected of all of our stores and continue to be, you see what's going on in the state. They're doing a recall. And early – it's very early. We don't have a lot of data because we just really have the Santa Barbara store. Palm Springs were doing – it was a great location. It is a great location, but it's a horrible store. We only paid $1.5 million upfront for it, and we have some seller notes that go on forever. So if you discount those back, we didn't pay much for it and we're doing a complete redo of it. So we're still in a beta stage of understanding California. Early reviews is it's a somewhat competitive market and prices are too high. So we're going to go slow in California, but we have a few deals in the pipeline with some great prospects, some great sellers, and we think they're going to fit right in it, and we have two more stores opening up. So if we have four by the second quarter of next year, and we do a couple more acquisitions. And then we have a pipeline with three or four earlier stage, we could get to 10 stores. And at that point, I'll have more data for you about what we think. It's pretty limited right now.

[Jason Zandberg:]

Okay. Fair enough. And then if I could switch over to Illinois. Just in terms of your retail inventory levels. I know the supply has been tight in that state. Just wanted to get your thoughts on what that retail inventory looked like in Q2 and then coming out of Q2 into Q3, if that's possible.

[Jim Cacioppo:]

Yes. supply, I don't think is tight anymore in Illinois. We're not finding it difficult to keep our vaults full. We have the highest amount of inventory. We measure that. We are aware of what we have. So we actually haven't had a ton of issues for inventory as a company even going back to last year because we have good relationships. We pay well. We have this great retail franchise in Pennsylvania. So a lot of those grower-processors want to get on our shelves in Pennsylvania. So we never really had a problem. Once we managed it correctly last year in the sort of April, May time frame, we really got more focused. And I would say that you're seeing prices come down a bit from the grower-processors. I would say that's – and the volumes – a lot more stores are coming on. So I think that's not – I would say that's not the highest growth portfolio we have in our portfolio. But we're doing really, really well, kind of the cash cow for us and growing at a decent pace.

[Jason Zandberg:]

That’s good to hear. Thanks for your answers.

[Operator:]

Thank you. Our next question is coming from Graeme Kreindler of Eight Capital. Please go ahead.

[Graeme Kreindler:]

Hi, good morning. And thank you for taking my questions here. Just wanted to follow up with respect to the guidance, the revised guidance in fiscal 2022. When looking at the implied EBITDA margin into fiscal 2022 from 2021, the margin is expected to double. And I know, Jim, you outlined a number of the different expansion initiatives across the various states. With a lot of those projects looking to be completed or phase of those projects looking to be completed middle of the year towards the end of the year. I'm just wondering what that scaling impact will have for the overall EBITDA margin and particularly thinking about the gross margin here. Just wondering if you could provide some color on the moving parts and why you're confident in the fact that the margin is going to increase substantially in 2022? Thank you very much.

[Jim Cacioppo:]

Yes. Thank you, Graeme. So I would say, we announced the delay in those projects of three months. I think it's coming in at two months because we were conservative. We don't like to – we like to get the bad news out fully in all at once. We were – that was not in our control. That was supply chain stuff, mostly the AC, the humidifiers, all those types of equipment. We've since – we were able to mitigate that delay by switching vendors and stuff like that. So we think those plants are coming on earlier than we had suspected. And I think we're going to – I think they'll be finished early in the year or late this year in Virginia, I think. And we'll be able to plant them and go through that cycle. So it's coming on actually in the beginning of the year, in the first half of the year. And I think you could start to see some of that in early Q2 as flower room sells. So we think it's well timed for adult use. If you remember, what I said about the first six months of next year, maybe the lower point in prices and the last six months being where medical prices go back up because people are holding on to some inventory. I think we're well timed for that. So we're very confident in our EBITDA margins. And I'd point out that if you remember what I said earlier, you don't – we plan to sell at the low end, between 30% to 35%, which may be our target, we may work it up over time through our own system. Those sales don't count as sales. It's just – so you're actually selling – you're actually putting that product into your stores at your cost, which is somewhat hundreds of dollars a pound and you're selling up at thousands of dollars a pound. So your gross margins go way up and your EBITDA margins go way up when you do that. And so that's why our margins are lower this year than if you look at the vertically integrated players, because we have retail margins, about 90% of our revenue this year is retail. Next year, we're getting vertical margins in Pennsylvania and Virginia and our third state is Illinois, which we don't have grower-processor in, but that would be the only state. But having said that, those are the highest retail margins in the businesses is in Illinois because prices are still very high. So having said that, we think our assumptions for next year are conservative, we stand by that.

[Graeme Kreindler:]

Okay. Understood. Thank you for that color. And just as a quick follow-up there. With respect to the amount of owned products and brands that are sold through with – or I guess, I should say, vertically integrated products sold through Jushi's network as of today. Can you give any indication of where that stands, just to get an idea of the bridge towards that 30% to 35% mark? Thank you.

[Jim Cacioppo:]

Yes. So I'll talk about Pennsylvania because Virginia, we're just getting approvals. You have to go through this regulatory approval process to get your products on the shelves. So we've gotten some on the shelves, they sold out. So Virginia is too early to have a meaningful data. So I would say that in the first half of the year, our sell-through compared to our competitors is quite low because we have very high retail sales versus what we had in grower-processor. And the grower-processor side, there was demand, we're in about 100 stores or so in Pennsylvania, and the demand for our product was good. So we wanted to get the product in other people's market. We also use it as a bargaining chip give them our product, we get more of their product to keep our shelves full because there was some – in Pennsylvania this year and the first part of the year, probably had more problems getting the right product on the shelves for the customers, the patients than Illinois did. So we were really in dealing and did a great job. The team did a fantastic job, our commercial team. And so now our focus is changing, and we're at about 25% right now, but that's the third quarter thing as opposed to the first half.

[Graeme Kreindler:]

Okay. Thank you very much for that. That's it for me.

[Operator:]

Thank you. Our next question is coming from Pablo Zuanic of Cantor Fitzgerald. Please go ahead.

[Pablo Zuanic:]

Good morning. Just one question on my side. Can you – in the case of Virginia, I know we talk about medical flower, but can you talk about conditions that are being allowed, the complexity of getting a medical card, the process to get a prescription, how often do you have to renew it? And just if you can contrast that with Pennsylvania right now? Because it's – and a reminder also where you are with patient counts in Virginia. I mean, we're all, of course, looking forward to flower being introduced and totally agree that will boost the market. But I'm just trying to understand in terms of the whole chain, how complex is Virginia and how that may impact the ramp-up in sales? Thanks.

[Jim Cacioppo:]

Yes. Thank you, Pablo. So we're at about 30,000 patients, which is not too bad and is actually quite good. Recently, we released to give you a sense of how this works, we released – gummies are very popular there. We released our own gummies, which in our market and the patients aren't happy with the inventory because quite frankly, there's only three of players producing. One of them got acquired by a large player who is completely redoing their plant. So their inventory disappeared because they basically shut it down, it seems to us, and they're completely redoing their grower-processor. Of course, they're very focused on adult use. And then the – so there's two of us producing. So inventory has been quite short and our gummies when we put them on the shelf sold out in two weeks. Similarly with the vape. So as we get products onto the market, it stimulates demand. The ticket goes up by the existing patients, more patients come in. So there's a good base of patients who feel like there are not enough product for them. So I think the market is more inventory constrained than anything else at the moment. So flower, yes, it will be a very good product. And we have good inventories of everything, and we just need to be able – in our factory, and we've just been able to get the regulatory approval and get them on the shelves, which we think is coming very, very shortly in a matter of days or weeks. But you never know with the regulators, right? You just don't know. In terms of what you're talking about in terms of patient access to the cards, in terms of qualifying conditions, Virginia, I would say, is a very good state. It's – that's not an issue. The issue in Virginia has been a manual process. They've recently opened up online registration. We're what...

[Michael Perlman:]

Looking at potential third parties to open up online and streamline the process for registration. It's taken about four or five weeks currently for each individual patient to get their card.

[Jim Cacioppo:]

Okay. So yes, Michael, corrected me. I thought we got there already. So it's a slow process, but we are working through improvements. We got about – a lot of improvements done in a medical cleanup in the second quarter, and some of this stuff just needs to get through a regulator who is a pharmaceutical regulator. So yes, I think that continues to be something we're working on and it will improve. But they're aware of the issue, politicians are aware of the issue. There's a lot of pressure on the regulator to get patients their cards.

[Pablo Zuanic:]

Jim, and one last one. I realize the Nature's Remedy deal has not closed yet, but what are you hearing in Massachusetts about delivery because it's not allowed at the moment for the retailers, right? And I think there's going to be social equity licenses being issued some retailers will partner, I guess, with these operators. But what are you hearing in that regard? And what are your plans for delivery in Massachusetts? Thanks.

[Jim Cacioppo:]

Yes. As you said, there's some of the social equity. It's not something that we spend a lot of time on to be quite frank with you because it's such a minimal part of the market. Once we're in the market, we'll begin our sort of government education and get a part of the effort and the industry effort to help the laws improve. I know that it required two people in the car, and that makes it quite a lot less economic. Delivery already has been more expensive. If you have two people in the car that makes it a lot more expensive. So, I think we're going to be hopefully a leader in the industry on delivery because of our Virginia experience. We're going to learn in Virginia, we're going to take it to California, we're going to learn in California, we're going take it to other markets. So we're going slow in delivery, because, we don't want to, in the beta stages and markets, you don't make a lot of money, and you're kind of learning more than anything else. And when it gets, bigger, we’ll have the skills in markets where you actually can deliver, in a cost efficient way. And, Virginia, obviously, we have the exclusive right to serve the patient population from six stores. So delivery is going to be key. In our projections, we assume will generate 30% of our revenues, or so from delivery in Massachusetts, it's just not something, that is going to be, profitable for us. So we haven't spent a lot of time on that, to be quite frank.

[Pablo Zuanic:]

Got it. Thank you.

[Jim Cacioppo:]

Great.

[Operator:]

Thank you. Our next question is coming from Glenn Mattson of Ladenburg Thalmann. Please go ahead.

[Glenn Mattson:]

Hi, just one quick one for me, too. It's been a extensive call. So thanks for all the information. Just a part of the guidance for the back half has always been kind of a return to more normal conditions in the Illinois facilities in Sauget and Bloomington normal and you guys have did stick by that today. But a lot of it, like you said, is college campuses, and big nightlife scene, can you just maybe give us some confidence in that, none of that has gotten derailed by the Delta variant? And, just from your guys view on the ground in that – in those very local markets.

[Jim Cacioppo:]

Yes, I mean, I would say, it's not like, we really ramped up Virginia in our model. So it's more of an upside for us, I think. So to start with but, I'm less concerned about in person learning, because you're not seeing that with vaccination rates. And I don't, Illinois has pretty good vaccination compliance and rules, relative to where we are in Florida. The fourth quarter for us, the third or fourth quarter for us are really based upon opening stores in PA, we have super confidence in our ability to get it done on the construction side. There could be some regulatory delays. But we haven't seen a lot of that we've only had one instance of that this year, we've opened up a lot of stores in Pennsylvania. And then I guess, I think the area, you're probably more, you asked about the Sauget nightclubs, I would think that's more at risk. Those opening up further due to the Delta variant. And so we know we'll have to see the Delta variants, it's going to do what it's going to do. And we're not the world's experts, I would note that, the Delta variant hit in the United Kingdom earlier than the U.S. and hit in China earlier than the U.S. in both cases, it has sort of the curves have come way, way down. So there's a lot of expectations for the Delta variant to receive in September. I'm not obviously an expert in that. I just looked at what's out there. But we're not being aggressive in Illinois, so I'm not too worried about that.

[Glenn Mattson:]

Just quick, a little bit more on the partner lottery process, just can you give us a reminder, like either how the economics work there just exactly the relationship between you and the partner in Illinois.

[Jim Cacioppo:]

So that's a pretty detailed question. I think you're best off the Michael will give you a call to talk about that, we've got over here, but it's a great win for us. We have great partner. And, and so, we anticipate this being a store that is going to, the ownership and stuff, everything is going to progress over time and very favorable for Jushi. And we're very happy about the win. And by the way, I would point out, I think the more significant part of that, yes we wanted this back to being fantastic. And we have some good economics there, we tend not to cut bad deals with Jushi. But, we have – that will put us at five dispensaries, we're getting calls like all the time from sellers to for us to go from five to 10, going to be like, so hard, so expensive anymore. I would point out that if you look at the top companies GTI, Verano, Cresco, CURA they can't buy anymore. There's very few of us that can buy and there's a lot more dispensary sellers than buyers. So we feel really good about growth there. I would point out that not in our numbers for 2022. So when we talk about M&A upside, there's a key area right there. And by the way, we expect craft grow we have an application in for craft grow, which we expect them to do at the end of the year to let us know who the winners are. There’s been delays there, but we'll see. you've ever depend on regulators for timing but we expect similar, to be able to acquire. We could acquire three of those, they may change the capacities of the craft growth, so you can grow more than it's initially done. I mean, I think there's expectation in the market for that. So, we anticipate being vertically integrated, whether we do a big deal or we do a accumulation of the smaller deals, the accumulation smaller deals could be a much better value. But the grower-processor obviously wouldn't be nearly as large if we did it that way. So I anticipate being vertically integrated in Illinois having the licenses in place at some point next year, and then building it out and all that kind of stuff, which by the way will be great. We have some of the highest performing stores. Keep in mind that 30% to 35% coming from our own facilities, that's going to boost our margins. So it's really exciting developments in Illinois for Jushi.

[Glenn Mattson:]

Great, thanks for color.

[Jim Cacioppo:]

Thanks, Glenn.

[Operator:]

Thank you. At this time, I would like to turn the floor back over to Mr. Perlman for closing comments.

[Michael Perlman:]

Thank you for participating on today's conference call. We look forward to keeping you updated on the advancement of our business on our next call. Have a great day.

[Operator:]

Ladies and gentlemen, thank you for your participation and interest in Jushi Holdings. You may disconnect your lines at this time or log off the webcast and have a wonderful day.