Jushi Hldgs Inc Cl B

conference operator today. At this time, I would like to welcome everyone to Jushi's Holding Incorporated second quarter 2022 earnings conference call. Today's call is being recorded. For the best sound quality, all participants have been placed in a listen-only mode. Later, we will conduct a question and answer session. To ask a question, please press 01 using your touchtone phone. I will now turn the call over to Michael Perlman, Executive Vice President of Investor Relations. Thank you, sir. Please go ahead.

Good morning. Thank you for joining us today for Jushi Holdings Inc. Second Quarter 2022 Earnings Conference Call. Joining me on today's call are Jim Casciobo, Chief Executive Officer, Chairman and Founder, and John Barrick, President, Interim Chief Financial Officer, and Founder of Jushi. This morning we issued a press release announcing our second quarter 2022 financial results. The press release, along with the presentation that accompanies this call, are available on our website under the Investor Relations section and filed on CDAR and EDGAR. On August 12th, Jushi became a U.S. reporting issuer under the United States Securities Laws and has converted its accounting standards from IFRS to U.S. GAAP, beginning with our second quarter 2022 results. Thus, All financial information has been prepared based on U.S. GAAP. Additionally, non-GAAP financial measures referenced on this call are reconciled to the most directly comparable U.S. GAAP measure in the company's earnings release and will be available in the company's MD&A for the quarter ended June 30, 2022, which will be filed on CDAR. Before we begin, I'd 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 S-1 registration statement and other periodic filings and registration statements. These documents may be accessed via EDGAR and CDAR. These forward-looking statements speak to only as of the date of this call and should not be relied upon as predictions of future events. With that, I would now like to turn the call over to Jim Cassioppo, Chief Executive Officer, Chairman, and Founder of Jushi.

Thank you, Michael, and thank you, everyone, for joining our call today. This morning, I would like to take a few minutes to provide an overview of our second quarter 2022 performance and review our recent operational achievements. I will then turn the call over to John to review our financials in more detail. Before I provide an update on our outlook for the remainder of 2022, a question and answer period will then follow. In a challenging macroeconomic environment, I'm pleased to report solid second quarter revenue growth and more initiatives to improve profitability. The company reported solid sequential and year-over-year top-line revenue growth for the second quarter. On a sequential basis, revenue increased 18% driven primarily by the acquisitions in Nevada in the first half of 2022, increased retail and wholesale activity in Massachusetts, and growth in retail stores in Illinois and Virginia. Year-over-year revenue grew 52% to $73 million, compared to $48 million in the second quarter of 2021. Driven by our acquisitions in Nevada and Massachusetts, and new Beyond Hello store openings in Pennsylvania and Virginia. On a GAAP basis, adjusted EBITDA for the second quarter was approximately $0.5 million as compared to a loss of $0.9 million in the first quarter of 2022. Let's move to slide six. It is important to note that increasing the sell-through rate of our Jushi branded products is one of our more important initiatives and a significant profitability driver for the company in the coming quarters. As of the second quarter, the sell-through rate of our own branded products improved by approximately 770 basis points to 21% of total retail revenue, as compared to approximately 14% in the first quarter of 2022, driven primarily by the acquisition of NuLeaf. Excluding the new leaf acquisition, our own brand penetration increased by approximately 270 basis points to 16%. This is an encouraging signal as we look to increase the penetration of our own branded products in the second half of the year, especially as we continue to diversify our offerings and add new strains. As a further data point, we've seen accelerating traction recently with our own branded sales of our flour and vape products in Pennsylvania, reaching levels as high as 40% plus of weekly units sold. Let's move to slide seven. Throughout the second quarter, we continue to aggressively execute on the cost savings measures we implemented at the beginning of the year, and I'm pleased to report that these efforts have led to another quarter of reduced operating expenses as a percentage of total overall revenue. I'd now like to provide a brief update on these initiatives. At retail, we continue to optimize our labor model to ensure we are allocating the appropriate amount of resources and staff across our footprint in alignment with market activity and demand. For instance, in Virginia, where the patient registration requirement was recently lifted, we are improving our staffing structure and zoning of pharmacists to ensure we are providing the best in store experience for the influx of new patients entering the medical program. Additionally, in late Q1, we brought on a labor analyst to support our retail team with the optimization of the labor model in our stores. Together, they standardized store headcount and staff schedules to ensure optimized labor while maintaining best-in-class customer care and continued operational excellence. Part of this newly established standard includes a greater emphasis on utilization of part-time store team members, which gives us the ability to be highly flexible and nimble in managing any fluctuation in store revenue. we are starting to see the positive impact this optimization is having and expect to continue to realize that impact in Q3 and beyond. Additionally, our vendor and product rationalization that we initiated in the first quarter gives us the ability to be more strategic with our pricing and frequency of promotions across our footprint, which has helped drive growth profit dollars and gives us a better understanding of the current purchasing habits and trends unique to each market. Similar to what many of our peers have reported, we have seen average spend per transaction decline in the second quarter with smaller basket sizes showing a focus on value products. However, it has been more than offset by an increase in the number of visits and the number of new customers shopping at our stores. While we believe the cannabis business is recession resistant, no business is completely recession proof. We will continue to improve our vendor purchasing processes to further increase retail gross margins across our footprint. Next, at our grower processor facilities, as our new grow rooms come online in the second half of this year, particularly in Virginia and Pennsylvania, we expect to see a meaningful improvement in the genetic diversity, quality, and yield of our harvest as we implement new processes and introduce new automation technologies. This should increase cost efficiencies over time and allow us to realize higher margins for our branded product as quality and diversity of product improves. We expect the facility's KPI to be on an improving trend for the next 12 months as these facilities scale up and move along the learning curve to our desired peak operating goals. In both Pennsylvania and Virginia, we will be feeding our own substantial retail sales and will not be overly reliant on the wholesale market. And at the corporate level, with the exception of recruiting our replacement chief financial officer, we have completed the build-out of our executive and senior management team with the addition of Shauna Patrick, who will oversee the growth of our wholesale sales as our new executive vice president of wholesale operations. We are also... in the final stages of hiring for our accounting and IT departments to support our transition to being a U.S. reporting issuer. I will now like to highlight our second quarter operational achievements over the next few slides. Let's begin with slide eight with an update on our state-level operations. In Nevada, we completed our acquisition of NuLeaf which significantly expanded our vertically integrated operations in the state. This was our third acquisition in Nevada and substantially increased our presence in the market with the addition of a 27,000 square foot cultivation facility, a 13,000 square foot processing facility, two operating retail dispensaries, and one licensed dispensary to be opened. Following the close of the acquisition, we opened the third New Leaf retail location on the Las Vegas Strip, bringing our total store count to four in the state. Let's move to slide nine and ten. In Pennsylvania, we expanded our Scranton facility from 81,000 square feet to approximately 123,000 square feet. We remain on track to more than double the total number of operational grow rooms from four to ten and increased canopy and annual biomass production to 36,000 square feet and 22,000 pounds, respectively, by the end of this year. In our new processing area of the facility, we have introduced various automation technologies, which we expect will drive efficiencies and improve quality in the coming quarters. Our new hydrocarbon and solventless extraction and processing capabilities at the facility allow us to provide a full breadth of vape and concentrate product formats to the Pennsylvania market, which as of August are fully introduced to the market and are getting great patient reviews. We expect to further diversify our offering in the second half of the year with new strains of flowers, varieties, which have just hit the market. Moving to slide 11. In Virginia, we have expanded our Manassas grower processor facility from 30,000 square feet to approximately 93,000 square feet. We went from only one flower room planted early in the second quarter to five by the end of June and are expecting these new rooms to generate revenue at the end of this quarter, which is a bit delayed from the last time we reported. Our target is to add two additional grow rooms for a total of seven and increase canopy and annual biomass production to 19,000 square feet and 12,000 pounds respectively by the end of this year. At the retail level in Virginia, both our Manassas and Sterling locations experienced a significant increase in revenue since July 1st, following the removal of the patient registration process requirement, which eliminated a significant barrier for patients waiting to enter into the medical cannabis program. As a point of reference, we saw approximately 1,950 new patients over the course of the whole second quarter before the change in the requirement. In only the first month following the change, we saw approximately 2,300 new patients. August looks equally as promising, even though the state has experienced some product shortages. Subsequent to the second quarter, we opened our third store in Alexandria, which was our most successful new store opening ever in terms of immediate sales in the weeks following the opening. And in just a couple of days, we expect to open our fourth store in Fairfax, which we believe is also well positioned for a strong opening. As a reminder, both Fairfax and Alexandria stores are designed to be among the highest volume stores in the country, which we expect when Virginia brings on adult use in the first quarter of 2024. And in Massachusetts, we have grown our wholesale business and expanded our offering of Juicy branded products we sell through our nature's remedy stores. We are now in 73 licensed dispensaries in Massachusetts, up from 62 as we previously reported in May of this year. Continuing to slide 12, in the second quarter we established our fifth vertically integrated state level operation in Ohio. with a provisional medical retail license awarded by the Ohio Medical Marijuana Control Program. Construction began this summer and the new location is expected to open in the fourth quarter of this year, subject to regulatory approval. Establishing a retail presence in Ohio and becoming vertically integrated is expected to accelerate our path to profitability and turn around a business that historically has not been profitable. Additionally, We have secured a parcel of land adjacent to our facility, which provides additional expansion opportunities as we look to triple our cultivation area from 3,000 square feet to 9,000 square feet over time, pending regulatory approval. With triple stacking, we should be able to adequately support a store base of five, which is the limit in the state. We continue to explore and assign LOIs to grow our store base. Moving to slide 13. We expanded our West Coast retail network in the second quarter with the opening of Beyond Hello Grover Beach, California. This door opening marks our third dispensary in the Golden State and is located in the thriving beach town that sees an annual tourist population of approximately 2.2 million. Additionally, after the quarter, we reopened our Beyond Hello Palm Springs, California location with the reimagined design and in-store experience. Let's move to slide 14 for a discussion of our branded products expansion. In the second and third quarters of 2022, we debuted two new innovative product lines in Pennsylvania under our brand, The Lab. The first line is comprised of solventless live rosin extract products, including live rosin vape cartridges and jarred concentrates, a first of its kind in Pennsylvania. The product is formulated using premium flour and extracted using proprietary processes to preserve the integrity of the plant. The second line is made up of live resin vape cartridges and concentrates produced using hydrocarbon extraction process, which uses high-quality fresh frozen cannabis. Throughout 2023, the lab solventless live rosin and hydrocarbon live resin lines are expected to be fully available across our footprint in Massachusetts, Nevada, Ohio, and Virginia, pending regulatory approvals. Looking ahead in Pennsylvania, we expect to increase our profitability by diversifying our branded product offering and increasing penetration of our own branded products throughout our large dispensary network of 18 dispensaries, including the addition of many new strains under our brand, The Bank. An historic lack of strain diversity due to historic regulatory constraints caused us too often to have to mark down pricing in the first half of the year. In addition, the very limited strain diversity and lack of hydrocarbon and solvents products limited the number of Jushi branded products and thereby negatively impacted our vertical margin during the quarter as we needed to carry much more third-party products to satisfy patient demand. Also, lost sales due to the vape recall and one-time discounting occurred following the reversal of the vape recall, where temporarily and unjustifiably recalled products were placed back onto our shelves as they approached their expiration date and subsequently needed to be moved at expedited rates. With the regulatory change in December of 2021, we are now producing many new strains, which has started to help drive SKU count and product diversity and ultimately expand vertical sell-through as well as wholesale potential. In Massachusetts, we will be debuting a new line of infused chocolates under our Tastology brand in September. These cannabis-infused chocolates are made of 100% premium French chocolate and developed by a five-star pastry chef. Additionally, Early in the fourth quarter, we expect to launch newly reformulated cannabis-fused chews that are 100% vegan, gluten-free, and contain real fruit. In California, through a capital-light strategic partnership, we expect to launch several new and innovative Juicy branded products to be exclusively sold at our Beyond Hello dispensaries in California. These products are expected to increase gross margins at our California stores as we expect these to be our lowest price, highest volume, and highest margin products. We have also introduced third-party branded flower products as our house brands, which also should achieve the same financial goals as the above-mentioned Jushi branded products. Before I hand over the line, I am pleased to announce that just a couple of weeks ago, we officially transitioned to reporting issuer status in the United States. As mentioned earlier with this transition, we have converted our financial reporting from IFRS to GAAP in accordance with SEC reporting requirements. With our new status as a U.S. reporting issuer, we are well positioned to take advantage of potential opportunities that could come with U.S. legislation changes surrounding cannabis, including the ability to uplist to a U.S. exchange. among other potential benefits related to capital funding and banking. In the meantime, we continue to focus on building a robust cannabis platform while simultaneously preparing to take advantage of these opportunities when they arise. With that, I'll now ask John to review our financial results before we discuss our 2022 outlook. John?

Thanks, Jim, and good morning, everyone. Before getting started, I would like to remind everyone that the results I will be going over today can be found in our filed financial statements for the quarter ended June 30, 2022. As a reminder, all results are stated in U.S. dollars and are now prepared under U.S. GAAP. I'll now begin on slide 16. As Jim previously mentioned, revenue in the second quarter of 2022 increased 52% to $73 million, compared to $48 million in the second quarter of 2021, and increased 18% from $62 million in the first quarter of 2022. Second quarter retail revenue increased 16% to $67 million, and wholesale revenue increased 42% to $5 million as compared to the first quarter of 2022. The year-over-year increase was primarily attributable to our acquisitions in Massachusetts and Nevada and new Beyond Hello store openings in Pennsylvania and Virginia. The quarter-over-quarter increase in revenue was driven primarily by our Nevada acquisitions in the first half of the year, an increase in wholesale and retail activity in Massachusetts, and retail sales growth in Illinois and Virginia. Moving to slide 17, our gross profit was approximately $27 million in the second quarter of 2022, or 37% of revenue, as compared to approximately $19 million, or 31% of revenue, in Q1 2022. On an adjusted basis, second quarter 2022 gross margin was 38% as compared to 40% in the first quarter of 2022. Adjusted gross margin was negatively impacted by the underabsorption of fixed costs at our GP facilities as we scale our wholesale business and increase promotional activity of Juicy branded products in Pennsylvania. As Jim mentioned earlier, we reduced prices of certain Juicy branded products in Pennsylvania due to limited genetics and the vape recall that was ultimately reversed. Operating expenses in Q2 2022 were approximately $39 million or 53% of revenue compared to approximately $37 million or 60% of revenue in Q1 2022. The approximate 700 basis point improvement in operating expenses as a percentage of revenue was primarily driven by managing labor and staffing expenses across the organization and lower share based compensation. For the second quarter of 2022, adjusted EBITDA was 0.5 million as compared to a loss of 0.9 million in the first quarter of 2022. As Jim mentioned earlier, adjusted EBITDA growth was negatively impacted by infrastructure and headcount investments that are grower processors that continue to have a transitional impact as we continue to scale and slower than expected growth of our wholesale operations. Second quarter net income was 12 million or a loss of 15 cents per diluted share. The net loss of 15 cents per diluted share in Q2 2022 was primarily due to the dilutive impact of the outstanding warrant derivative liability. Moving to the balance sheet on slide 18, we ended the second quarter with approximately 43 million of cash and cash equivalents on the balance sheet compared to approximately 76 million at the end of the first quarter. The change in our cash position was driven primarily by cash capex, which year-to-date totals approximately $41 million, reflecting investments related to the expansion and optimization of our grower processor facilities in Virginia, Pennsylvania, and Massachusetts, as well as the continued development of our retail store footprint. The company also made tax income tax payments totaling approximately $7 million in the quarter. For the balance of the year, we expect capex to be in the range of approximately $15 to $25 million, prior to any potential TI reimbursements or financings, for a total of $55 to $65 million for the full year 2022, subject to market conditions and regulatory changes. This will substantially complete our capital expenditure program to open new stores in Virginia and elsewhere, as well as to substantially grow our Pennsylvania and Virginia grower processor facilities. We ended the quarter with $45 million in inventory, representing a $5 million improvement from the prior quarter, driven by operational improvements in inventory turnover, As of June 30, 2022, we had approximately $200 million principal amount of total debt excluding leases and PP&E financing obligations. During the second quarter, we drew down $25 million from our acquisition facility for the two Nevada acquisitions, resulting in current availability under the facility of $35 million with the potential ability to increase the capacity of the facility by an incremental amount of up to $25 million. Regarding our January 2023 secured notes maturity, we are currently in discussions with multiple lenders and are in the process of collecting and reviewing term sheets for the refinancing. Given the recent volatility in the capital markets, we are looking at different sources of financing in order to get the lowest cost of capital we can, including traditional mortgage debt, sale-leaseback financing on our unencumbered Manassas facility, as well as corporate term debt or new secured notes. Additionally, and subject to lender approval, we could utilize available capacity under our acquisition facility to refinance debt. As of August 29, 2022, our issued and outstanding shares were approximately $196 million, and our fully diluted shares outstanding were approximately $291 million. As pertains to the disclosure on our press release regarding our Q1 financials, we are currently working with our auditors to restate the period ended March 31, 2022, as soon as practicable. While there is no impact on our year-to-date financials being discussed today, we believe there was a misclassification of cash flow items in our Q1 filing principally related to accrued capital expenditures in our large PAMS expansion project, though we believe it ultimately had no net effect on total change in cash during the period. We will obviously provide more detail when our auditors have finalized their procedures and the revised Q1 filing is completed. And with that, I will now turn the call back to Jim to discuss our outlook for the remainder of 2022. Thank you, John.

Let's take a look at our outlook on slide 20. We are revising our fourth quarter 2022 annualized revenue to be between $320 million to $350 million with the target exit margin percentage of low double-digit adjusted EBITDA. While we face some of the same industry headwinds as our competitors, including a weak macro backdrop and certain regulatory delays, We believe our near-term margin growth is more of an internal execution challenge as we scale two large-scale plants simultaneously in Pennsylvania and Virginia and seek to become a substantial vertical operator by the fourth quarter and rolling into 2023. In 2022, we will have transformed the company from a substantially retail-only company selling mostly third-party products to a fully vertical company with the exception of Illinois and California. At the retail level, we expect to open three additional Beyond Hello stores in the next four months, including two locations in Virginia and one in Ohio. We are also moving an underperforming store in Pennsylvania. Moreover, we will continue on adding additional operational grow rooms and expanding production at our grow processor facilities as we look to increase the sell-through rate of our own branded products through our network of retail stores, along with pursuing wholesale opportunities. By the end of 2022, we expect to have 40 retail licenses across seven markets, including approximately 37 operating retail locations and approximately 330,000 retail square feet of cultivation and processing capabilities, including 100,000 square feet of canopy. Jushi remains committed to long-term growth in 2023 and 2024. Besides M&A bolt-on opportunities in Ohio, retail, and Illinois, Jushi has significant organic growth opportunities as the Virginia medical market matures from about a 0.5% percent penetration rate to a readily achievable 3 percent rate that we have seen in other states. With adult use sales pending in 2024 in Virginia and a potential opportunity for adult use sales in Pennsylvania in the not too distant future, we see Jushi as leading the pack in organic sales growth well beyond 2023. The profitability growth story should also become well established as we become a more vertical company over the coming quarters and as we dial in our two large grower processor expansions in Virginia and Pennsylvania over the next 12 months. Additionally, we hope to expand our grower processor in Virginia for adult use sales and continue to move several underperforming stores in Pennsylvania. We believe we have created a solid foundation on which we can continue to execute against our core vision of creating a market-leading cannabis platform, and we will only work to strengthen this throughout the second half of the year and beyond. To reiterate, we remain committed to generating sustained long-term value for our shareholders, and I look forward to updating you all on the significant strides we expect to continue to make for the balance of the year. As always, I would like to thank our dedicated team for all of their hard work. I'm extremely proud of all we have accomplished so far this year, and I could not be more excited for what we will continue to achieve as a team. With that, I would like to pass it back to the operator to open it up for questions. Operator?

Thank you. We will now begin the question and answer session. If you have a question, please press 01 on your touchstone phone. If you wish to be removed from the question queue, please press 02. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press 01 on your touchstone phone. We have a question from Bobby Burleson from Canaccord Genuity. Please go ahead.

Yeah, good morning. Just wondering, now that you guys have a pretty broad footprint in terms of state markets, you have this lower basket size you alluded to. Can you walk us through maybe some of the places where you've seen the biggest negative impact to basket size in terms of state markets? maybe where basket size is kind of hanging in there?

Yeah. Thank you, Bobby. So basket size is hanging in there in Illinois, Pennsylvania, and Virginia. And we've seen some degradation in Nevada and Massachusetts.

Okay. Great. And then similarly, like just same store sales growth, you know, stripping out what you guys are doing in terms of expanding your footprint. If you look at, you know, just, you know, the static market statistics year on year, quarter on quarter, whatever you guys have handy, you know, where are you seeing the most growth and the weakest growth environments?

The organic growth, um, actually the Nevada acquisition was about 4%. Um, and that included same store sales growth, uh, in Virginia, especially a bit in Penn, Illinois, and then the wholesale business has grown as well.

Okay. And then just one last one. The bolt-on acquisition opportunities that might be out there in this capital markets environment are smaller operators that aren't as well capitalized. Are they starting to capitulate a little bit in terms of you know, what they think their worth is? Are you seeing, you know, more opportunities in that sense?

Yeah, I mean, absolutely. I mean, the valuations have come down quite dramatically in the private M&A market. There are single states where, you know, they've, with people, withdrawn selling assets because, you know, people like us, you know, are not even close to their expectations. They're substantially revised downward expectations. So, yeah, so I think the sort of bolt-on type stuff, you know, where you're bringing on states definitely has gone down in terms of most companies' priority list. When I say companies, I mean the sort of the public MSOs. But what you have seen is an uptick in strategic dialogues amongst multi-state, whether private or whatever it is, you know, over the last, you know, three to six months, and private you know, the level of strategic activity, you know, on that level, you know, has never been as high as it is today. Interesting. Okay, thank you.

Our next question comes from Russell Stanley from Beacon Security. Please go ahead.

Good morning, and thank you for taking my question. Thanks for the color on the pickup and activity in Virginia since the July 1st rule change, and just looking at Virginia over the last few years, you know, added flour and eliminated the medical card. What other notable bottlenecks to patient count growth are there now, if any, beyond the macro headwinds? Or is this otherwise a market that's just free to accelerate growth?

So listen, I think, thanks, Russell. Well, I would say there's shorter term headwinds, you know, so we have to, and we've done a really good job, the senior management, including myself, have really, you know, focused our team on getting Virginia right, knowing that that's a tremendous value opportunity in the near term. So our stores, we transformed our stores to handle this volume in July. So we saw substantial uptick in July, even though our stores, you know, got overwhelmed by customer traffic and there were lines. By August, We had much less of that. We had, and it wasn't necessarily adding a lot of employees as much as getting procedures in place to deal with higher volumes. So, that was the first. The second is, you know, product, we built product levels up in July to handle higher sales. We took a bet on that. We did some significant purchases in the wholesale market, you know, cleaning up anything that was out there. We took a point of view, and I'm a Wall Street guy. I'm used to taking points of view. And we took a point of view and we bought whatever inventory we could. And by August, we were in the highest volume products, which are vapes and flour, including pre-rolls. We were at a week of inventory or less. And in a market like Illinois or Pennsylvania, you're looking to carry about four weeks at sort of at a minimum. We try to get it below that, but in reality, you'll run into shortages in certain areas if you're much below four weeks right now in those markets. So inventory levels are low, but the good news is that our flower rooms now are coming down Remember I said on the prepared remarks how we had a few-week delay in our flower room. That's just part of opening up a large-scale plant. The good news is one of our flower rooms had a 100% passing rate on its product that came out of the flower room in terms of the testing, and the results were quite good in potency in the low to mid-20s. which is great. And by the way, that is some of the highest testing flour in the state. The only higher testing flour than that is our own flour, which we brought down a couple months ago, brought to the market a couple months ago. And so if we can continue to just take these grow rooms down and transform that product into commercial product, I believe, you know, that'll be the biggest bottleneck along with getting our stores open. Now, we're getting the Fairfax open in a couple days, Again, these store openings are tremendous. I'm going to give you an example. In Pennsylvania, our best-performing medical store took six months to get to sort of a $3.5 million run rate. But this is years ago, before there was much competition. That store eventually got to almost a $20 million run rate of sales, annual run rate, before other stores opened up a little bit closer to it. And in just a few weeks or a week or two, I don't know exactly, but we were at that $3.5 million level in Alexandria, Virginia, which is just tremendous if you think about that. And so, you know, if we can supply the stores... Get our stores opened on time. The next one after Fairfax would be Arlington, which is in the middle of a city, by the way. So, you know, it should be a tremendous store. I mean, it could be one of the best in the nation in an adult use format. But, you know, cities tend to have a little bit more, you know, oversight and maybe red tape and those types of things. So we hope to open that. It's scheduled to open in the fourth quarter. And then we have another store that probably slips to the first quarter because we found out our potential landlord had a refi to Bank of America who doesn't prefer cannabis lenders. The Bank of America seems to be kicking out cannabis customers on the verge of it getting to Safe Banking Plus, another great move by the Bank of America. So, but anyway, that being aside, that was a great location, but we have three more I'm flying to see this week to choose a store in the area we want to be. So those will be getting the product taken down, getting it into the system will be the biggest growth driver. And if we get all the product down, our sales projection, and we can sell it all, which I think we can because we can always sell in the wholesale markets, Our sales, what we have in our model, will be exceeded for the fourth quarter, I believe, in Virginia.

That's great, Culler. And maybe if I could, your comments around Arlington. You know, you talked about the health service area that you're in, I think, is home to five of the state's 10 most affluent neighborhoods. Just wondering what kind of demographic data you have on the patients coming through your stores, what you can say about them to the extent you can generalize.

So, this is John. I mean, I think just at a high level, I mean, the per capita income of Northern Virginia is about two to three times the average for other health service areas within the state. And I think the people who, the demographics, I mean, you know, there's certain things we can track and certain things we can track. But I think our medical population is indicative of that. you know, the people who live in that area. And we're excited about the growth potential there. And, you know, that our health service area also has 29% of the population of the state. So it's in excess of its, you know, pro rata share, quote unquote. And there are two and a half million people in that health service area. So from a a patient, you know, potential medical patient population standpoint, it's a very significant opportunity.

Yeah, I would point out, too, that if you measure it by basket sizes, the basket sizes in Virginia are extremely high. Yeah, we've seen them as high as 150 plus. Yeah, so, you know, I think that, I mean, that's the data we have, is that if you're walking in and dropping that much in a basket, then that must mean you have some, you know, spare cash.

Great, that's that's excellent. Maybe if I one more and I'll get back in the queue, just switching gears to Illinois, the states finally issued the additional 185 retail licenses. Just wondering how that informs your strategy going forward from a standpoint of adding more retail and or cultivation there to be vertically integrated.

Yeah, I would. I would say that we have Peoria. where we won a license. And so we're looking to open that up. And we have multiple LOIs and leases behind the LOIs. We've done the work to find the location, which is, you know, maybe even more tricky than getting the LOIs these days, by the way. So we've gotten, you know, given how prices have come down, there's a fair number of licenses to buy. But we've gotten some good real estate there. And in terms of getting vertical there, which if you think about Jushi, you know, it's a bit of nirvana because all of a sudden we look a lot like, you know, some of the larger, you know, MSOs where we have, you know, three tremendous states. you know, Pennsylvania, Virginia, and then Illinois that are big vertical states. So, obviously, that's something that we've been, you know, very focused on. I would say, you know, the expectations over the years were you know, highly inflated of people who owned Illinois assets, maybe for good reason. It's been a good performing state. And we chose not to play. Now we see multiple strategic combinations that include Illinois with some privates. And also we have won a craft grow license and we have a strategy, an alternative strategy to buy two more craft grows And we believe we can – we have a way to virtually stack those licenses where we could supply 10 stores on our – our 10 stores at a nice vertical story, 50, 60 percent of our own product or something in that neighborhood, and then have a small exposure to the – a very small exposure to the wholesale market. And if you think about that, that's a pretty nice strategy, right? Because I'm not sure you want to go big into vertical wholesale at this point if you're not there already. So we, you know, we're liking our patients there. And that opportunity is one of the sort of attractions, you know, for combinations that we, you know, from Jushi's standpoint.

Thank you. Our next question comes from Pablo Swannick from Cancer Fitzgerald. Please go ahead.

Hi, this is Matthew Baker on for Pablo. Thank you for taking our questions. Nice to see the pickup of new patients in Virginia in July, but how does the medical program now compare with other medical states in terms of the process of doctors getting registered and for new patients getting a prescription? We just want to understand how unique Virginia is after the change versus other states. And then also, do you know roughly what the number of patients is now in Virginia? Or is this something that we can't know if they're not getting registered? Thank you.

Yeah. So John could comment if he has more detail, but I'll start. So first of all, on the patient count, I mentioned in my prepared remarks that the penetration rate is 0.5%. You know, if you look at the 3% marker, you know, that's where penetration tends to get to at a pretty nice curve in places like Florida, you know, Arizona on its way to 4%, 4.5%. and Pennsylvania, which is a touch north of 3% now. So usually there's a pretty good march up to that level in a medical market. In my view, the timing of that march based upon what we see, in other words, going from 0.5 to 3%, We'll be quicker now probably in any market. If you look at what's happened in Missouri, for example, or Arkansas, these newer markets, they get to 3% pretty quickly. So now there's less stores in Virginia, but we think that the march to Virginia, especially in our MSA because we can deliver and we've set up our stores where we have a separate delivery vault. We have a third-party service coming in as we speak to do delivery for us, which we think will accelerate that at, by the way, a lower cost per transaction than we could do it ourselves. And so we believe we'll be able to get to that 3% in a more accelerated rate than you've seen in states like Pennsylvania, which we're in. And that has to do with, I think, a lot of things. One is the industry has gotten better. We've gotten better. But also, Also, it has to do with just the fact that cannabis, legal cannabis is so well publicized now and people are looking for it. In terms of, you know, getting a patient prescription so you don't require a card anymore in Pennsylvania, which is quite unique, excuse me, in Virginia, which is quite unique. So that's great, right? I mean, that reduces the cost of getting into the program. But in terms of conditions, qualified conditions, I think it's probably as good as any state.

Yeah, doctors can prescribe for anything that they see fit. There's no limitations on indications that qualify. And the way the program works now is patients see a doctor, the doctor prescribes it, fills out the form for the patient who takes it directly to the dispensary, and they can get dispensed that day. So there's no regulatory bottleneck, which had really been a holdup for the program, given an understaffed regulator, until this July 1st period. And people are still, as Jim mentioned, there was a huge influx in the beginning of July and through August. For people who knew about it, now it's just as we open more stores and expand the footprint, it's getting people more aware of really how seamless the process is getting medicine these days.

Yeah, I mean, and given our inventory levels, that's been such a big uptick for us. Our inventory levels are low, and there was a huge uptick coming into our stores. We haven't done any marketing at all. We've done nothing to stimulate demand. in terms of, you know, getting the word out. Now, we started a small-scale program with small dollars, again, given the product shortages, just to get it out there and build that backlog going into the, you know, going through the fourth quarter.

All right, thank you. And then just for a follow-up regarding Pennsylvania, both retail prices and wholesale prices are down, but are your retail gross margins up? Any color there would be helpful. And then I guess as another follow-up, if the MSOs are paying the $20 million fee in New York, do you think that that could set a precedent for other states? For example, you might have to pay that fee in a market like Virginia. Do you think that's something that could happen? Just any color there is helpful. Thank you.

Sure. So from Pennsylvania retail gross margin standpoint, we've been doing our best to hold the line there so that, you know, as a retailer, we don't get penalized for the what's been some margin compression and split that with our vendors who we buy from. Again, we are a grower as well, but our bigger issue from a gross margin standpoint from a grower has a lot more to do with unabsorbed fixed costs and underabsorbed fixed costs as we expand rather than anything specific to the prices that we sell for as we Bring our new grow rooms online. We'll have four to five times the product available and then be able to fully absorb our fixed costs and push the vertical margin through our own stores as we expand our shelf space with our private label brands.

As for New York, well, I'll get to that in a second. I just want one other comment on that. So in terms of the wholesale market, I'd like to point out that Jushi is a disruptor in Pennsylvania rather than a legacy exposure to wholesale. So if you sort of think of an MSO that's been there and benefited from very large prices, high prices, which are now coming down as their volumes remain somewhat flat, that's not great. From a Jushi standpoint, we haven't participated in that to any extent. great extent at all, I mean small. And we also are taking, I believe we're the largest buyer of wholesale product, both in Pennsylvania and Virginia, and by going, excuse me, Pennsylvania and Illinois, and likely Virginia too, by the way, but Pennsylvania and Illinois. And as we feed our system, you know, it appears to us after a lot of, you know, of knowledge in the industry and knowing people that people sell about 65% of their own products in their stores online. You know, we've been at, you know, pathetic numbers because we don't have the product and we had, you know, genetics. By the way, the genetic story is something that wasn't our story. We acquired this facility with this genetic pool. We got a great price, but we didn't realize it would take the regulator, you know, we had to beat the regulator over the head basically. to get the genetics in. So, so, so, so that's, that's something where we're, we're a benefit in terms of New York. Um, um, you know, uh, you know, I'd like to point out that I lived in New York for 30 years. I now live in Florida since 2014. I haven't been a late comer. So I've sort of, um, voted with my feet, so to speak, in two ways. In the cannabis way, Jushi owned almost 20% of a license called Valiac, which got sold to Cresco about when we went public in 2019. We were a bidder for that. We tapped out and turned into the seller. So those are two factoids about Jushi. New York happens to be, along with California, in terms of any business, uniquely positioned to dissuade anybody from doing business. Tesla moved out of California. They both happened to have gold mines buried in their state. One is in California, it's the technology industry, which generates huge amounts of revenue in terms of capital gains taxes. And then New York is obviously Wall Street historically. So they happen to, you know, New York dissuaded frackers from being in New York through regulatory. I've always thought New York to be not one of the worst regulators in the country as we do California. So I don't think anything like that will occur in other states, which are much more friendly to people who are trying to, you know, do legitimate businesses in their states. Thank you.

Thank you. Our next question comes from Glenn Manson from Lattenburg. Please go ahead.

Yeah, hi. Can you just elaborate further on the guidance and just thinking about the change from prior guidance? I guess top line reduces by, you know, not a significant amount as significant necessarily as the bottom line. So just with cost cutting measures underway and with you getting more vertical and just kind of think about what kind of pressures there are out there that are that are causing the reduction in the EBITDA guidance more so than the top line. Thanks.

Yeah, so yeah, as you pointed out, the top line we centered around the lower point of the range, which I think has been, you know, pretty similar to a lot of other reporting companies. In terms of the, you know, EBITDA margin, you know, what I said in my prepared remarks, you know, differ from other companies. You know, we are going from one grow room in Illinois, in Virginia, excuse me, to seven. And we're going from four grow rooms in Pennsylvania to 10. And that sounds like, okay, that's a lot of cultivation. But for everything you actually take down, then you need to process. So the volume in those facilities are going way up. And the good news for our shareholders is that capital will have been spent this year, substantially spent. Anything we're spending next year is just paying invoices off from this year. So that's capital expenditures of this year, and it's done, including our retail build-out, by the way. So our huge capital investment program to grow the company, increase margins in the company, it will be done substantially by the end of the year. But bringing those up and getting to peak, if you talk to the top MSOs, which I have, remember, we're one of the biggest customers out there, and we're friendly with them, it takes 12 months to dial in these plants. So for us, you know, I mean, that's a work in progress, and we will execute. The question is the timing of the execution. So that's just us getting sort of more sort of used to, you know, what it feels like to build out one of these facilities and then operate it and saying, you know what, let's be more conservative and maybe more realistic.

Great. That's very helpful. And then on the refinancing, can you just talk about the challenges there? Like is it more that the rates are above a level you're interested in paying or is it just difficult to get the whole thing, Don, and you talked about shifting to maybe using the acquisition facility or some other methods. Just a little more detail there.

Thanks. I'll turn it over to John to talk about this, but we've actually, in the dog days of the summer, July and August, we've had, you know, a tremendous, I think, response to what we're doing, you know, given market conditions, of course, right? So not, you know, so in that context, I think we have a lot of interest. And our the way we do things is to take things very, very seriously. So we obviously, you know, don't pretend like, you know, the capital markets necessarily will improve and there will be volatility in the sector. So what we do is we're looking at everything across, the spectrum across the capital structure. And response has been, you know, really, really good. And we had a deal in place, which got too expensive for us, you know, given the capital markets, you know, how pathetic they were, particularly, I think, if I remember correctly, it was May and June and, you know, into July. You know, July was the improvement. But yeah, May and June is when that sort of, we pushed off, pushed that off. And then, you know, remembering our $75 million investment which comes due was primarily, not primarily, almost, I think, 100 percent shareholder-based. So, in other words, everybody in that facility, it's a significant exposure to Jushi's equity. At that time, we did that, the capital markets were also constrained, so there was 75 percent warrant coverage. And my hedge fund and myself, we were the biggest lender, you know, at that time. And a lot of other shareholders stepped up, too. And then there were some newer folks who came in who have those warrant coverage. So it's a different kind of facility than others. And there's opportunity there in a sort of a worst-case scenario.

And just adding to what Jim said, you know, the markets kind of fell out from the term sheet we had early summer. And, you know, basically... Summers, it's slow to get people to do work, but we now have multiple term sheets have focused more on the unlevered Virginia asset as a source of levering at the lowest cost of capital and using that as the base for building the cash we need for the maturity.

I mean, you know, our Virginia facilities, we have $100 million in Virginia, including the license, and we haven't borrowed against that. And obviously, it's a, you know, a great state. We have a ton of strategic interest in that state. So, you know, it's obviously great. I think I've said this before, I think publicly many times, but it's the best collateral in the whole business.

Great. Thanks for the call.

Thank you. Our next question comes from Ty Collin from 8 Capital. Please go ahead.

Hi, thanks for taking my question and congrats on the strong revenue growth in the quarter. Jim, I appreciate your commentary earlier in the call surrounding some of the consumer trends you're seeing. You mentioned that you saw kind of smaller basket sizes being offset in part by new customers coming into your stores. I'm wondering if you could comment on where you're seeing those new customers coming from. Is that

Sort of illicit market capture share capture from some of your peers appreciate any incremental color there I Mean, I'll I mean I'll turn it over to John if he has more color, but yeah, we don't have clarity down to that We don't you know pull people they when they come in about but I would say that Pennsylvania medical market, you know continues to you know You know slowly grow, you know made slower than we'd like, you know when it hit the 3% level which seems to be the magic level where it slows down and And, you know, Illinois, you know, you continue to have, you know, a pretty, a very popular program, and we have some good stores. And, you know, prices have come down in those states, which stimulates purchasing and new customers. Because, you know, for them, it's, if you're coming into the market and you buy illicit, it's, you know, at some point you go to the dispensaries, And that point tends to be not breakeven, but I believe, you know, again, no data necessarily, but above breakeven purchase where you want to go in and get tested product, better product, and more variety. And so, you know, and get away from an illicit market transaction, which may not be the most comfortable thing for a lot of, you know, a lot of our customers.

And just to add to that, I'll say Massachusetts is interesting. I think we've seen some of our highest numbers of patients. So we're seeing incremental patients, even as the basket sizes have come down, which, as Jim said, could very well be people who were formerly participating in the illicit market who are now coming into the legal market as the pricing is you know, matches or is much closer to black market pricing. Yeah.

And I think, Ty, that the prices coming down, you know, that story being so negative, it does 100% stimulate demand. I mean, do we know exactly where that is? No, but I mean, it 100% does. So that story being negative is, is really, negative for the people who have legacy businesses with big wholesale exposure and big vertical sell-throughs, right? Because as their volume increases, their prices are coming down. So we don't have that. Again, we're more of a disruptor. We're later to the game on that. And once they get through that, I think people will see it's a very good business, but they just have to get through that themselves. And a lot of them have new states opening up and they will continue to have a flow in new states opening up like we have Virginia. So they'll have offsets to that. It'll get there eventually.

Got it. That's great, Culler. Thanks for that. And then just for my follow-up, hoping to get a little more color on the CapEx outlook. It looks like the full year guide did increase a little bit compared to what you put out last quarter. So I'm wondering if you could speak to what changed there. And then maybe you could also touch on what you sort of think the CapEx investment will be in 2023 compared to 22, given that it sounds like you've kind of got a lot of heavy lifting done this year.

Yeah, hey, this is John. You know, I think the guide is 15 to 25 for the rest of the year, and it really just has to do with the pace of the completion of the GP projects, you know, largely. which, as Jim said, will be substantially complete this year, but bits and pieces might fall into Q1, depending on the timing for regulatory approvals. Some of these projects are phased from a regulatory approval standpoint, so until the regulator passes one part, we don't complete the next part. And so that's part of the reason for the range, as well as the stores that we have, you know, the entitlements that we have in hand that we're building out, you know, how many do we get the sort of green light from the regulator to start working on this year? And in VA, you know, when do we get the lease signed for the sixth property? And then when do we get the building permit, you know, and the plans done and blah, blah, blah. So does that fall on Q4 or Q1 next year? So, you know, that's really the large reason, you know, for that range, which frankly isn't that big a range compared to the year to, you know, the total year spend. And then as far as 2023, I mean, we haven't guided to that yet, so I'm not going to give you a specific number, but what's really hanging out there are those extra couple of stores. And then to the extent that there are regulatory changes, improvements, et cetera, in other states, then the numbers, they'll evolve. And Ohio is an example of that. We have plans to expand there from our 3K canopy area.

But exactly the how much we're going to expand there could change depending on certain You know bills that are out there that could get passed that could really increase the size that canopy Yeah, I mean in 2023 it's really just a tale of a few stores and additionally we we have We've identified three more. We've already moving one in Pennsylvania underperforming stores that you know, we'd like to we'd like to move and especially anticipation of adult use likely in 2024, in my view. So that's something that we'll get to, but we don't have that lined up yet. In other words, we don't have the new leases. We don't have regulatory approval in those three cases. And then so it's pretty minor. We're really looking to take advantage of what we did in 2022 and 2021 and really sort of grow the company off of that. The one exception to that will be capital market dependent is we could have a secondary expansion in Virginia. You know, we're looking forward to the adult use market in the first quarter of 2024, which I'll remind people is already law. And there's a cannabis regulator for the adult use market being set up, which takes control of the program. in law July 1st of 2023, so six months before. And so we, as things go along in Virginia and we get used to what we're operating in capital markets, you know, we'll be there. You know, we'll look to do that. And we already submitted that for approval, but there's a process there that takes some time. So again, the three new stores and the VA, none of that is committed to or that close. and all of it somewhat capital market dependent.

Thank you. We have reached the end of the question and answer session. I would like to turn the call over to Mr. Perlman for final remarks.

Thank you for joining us today. If you have any follow-up questions, please reach out to me at investors at yushiko.com. Thank you very much. Have a great day.

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.