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spk01: Good day, ladies and gentlemen, and welcome to the Item 9 Labs Q3 Fiscal Year 2021 Earnings Results Conference Call. At this time, it's my pleasure to turn the floor over to Mr. Brian Loper. Sir, the floor is yours.
spk02: Thank you, Operator. Good morning, everyone, and welcome to the Item 9 Labs Third Quarter Fiscal Year 2021 for the three-month-ended June 30, 2021 Earnings Conference Call. By now, Everyone should have had access to the earnings press release, which was issued earlier today, before the markets opened at approximately 9 a.m. Eastern Time. This call is being webcast and will be available for replay. In our remarks today, we will include statements that are considered forward-looking within the meanings of securities laws, including forward-looking statements about future results of operations, business strategies and plans, our relationships with our customers, and market and potential growth opportunities. In addition, management may make additional forward-looking statements in response to your questions. Forward-looking statements are based on management's current knowledge and expectations as of today and are subject to certain risks and uncertainties that may cause the actual results to differ materially from the forward-looking statements. A detailed discussion of such risks and uncertainties are contained in our most recent Form 10-Q, Form 10-K, and in other reports filed with the SEC. The company undertakes no obligation to update any forward-looking statements. On this call, we will refer to certain non-GAAP measures that, when used in combination with GAAP results, provides us with additional analytical tools to understand our operations. We have provided reconciliations to the most directly comparable GAAP financial measures in our earnings press release, which will be posted on the investor relations section of our website at item9labcore.com. And with that, I'd like to introduce Item 9 Labs Chief Executive Officer, Andrew Bowden.
spk00: Thank you, Brian, and good morning, everyone. We greatly appreciate you taking the time to join us on today's call. We will discuss our operating highlights and financial results for the quarter and year to date, as well as provide an update on our expansion progress in Arizona, Nevada, and with our cannabis dispensary franchise, UnityRoad. After my opening, our CFO Bobby Michelson will give a summary of our third quarter fiscal year 2021 and year-to-date financial results. I will then provide insight into our growth and expansion initiatives. Following our prepared remarks, we will answer questions that were pre-submitted prior to the call during the Q&A portion. With that, I'd now like to walk through some of our recent highlights. We have had a very busy and productive past few months. Arizona is one of the most sought after markets in the U.S., with anticipated revenues reaching $2 billion by 2024 for both adult use and medicinal, up fourfold from 2019 as the state recently expanded to legalize adult use. We're seeing the strength of the Arizona market firsthand as we are the top brand in every dispensary we choose to sell through, According to LeafLink, currently we are in 60% of Arizona's dispensaries. We saw revenue growth of 203% to $6.7 million for the quarter, primarily due to higher market demand driving increased production. Gross margin slightly slid to 43.2% for the quarter as we focused on deeper market penetration in Arizona. Adjusted EBITDA fiscal year to date increased to $1.5 million. Operating loss for the quarter was less than $250,000 and operating loss year to date is less than $100,000. As we expand our facilities, we fully expect our margins and profitability to improve with increased revenues. We have 50 acres approved for cultivation operations on our site in Coolidge. It's one of the largest properties in the state that is zoned to grow, cultivate, and manufacture cannabis. Permitting is in place to expand 650,000 square feet of cultivation and production in the next three years. The first phase of expansion will increase our operational footprint by more than 300% and create 60 new jobs in the next 12 months. It's important to note that our sales performance from Item 9 Labs products is from our current 20,000 square feet of operation space. By the end of our master site expansion, we will have increased our operation space by 33 times. Now for updates on Unity Road, our dispensary franchise. Unity Road has multiple agreements signed with more than 15 entrepreneurial groups who are in various stages of development across seven different states. Recently we reached a major milestone with the opening of our first cannabis franchise shop under the Unity Road brand located in Boulder, Colorado. The first Unity Road is locally owned and operated by father and son team Bruce and Nate Wetzel. This is a prime example of how through Unity Road we're keeping dispensary ownership and the wealth that comes along with it local. which is a core vision that led to the launch of our local alliance program back in April. Additional developments of the cannabis franchise include signed agreements with three entrepreneurial groups for expansion into New Jersey. Each team is pursuing at least one dispensary license to open a Unity Road shop in the state. Our team is guiding the partners through the dispensary license process They've been busy meeting with local municipalities and looking at real estate as we await for New Jersey to establish rules and regulations governing the state's adult use cannabis industry on August 21st. We anticipate they will open dispensary license applications by the end of 2021. The Garden State is a key market for our franchise growth and is expected to generate as much as $950 million in in annual retail sales by 2024. We believe we are extremely well positioned in this market. UnityRoad also signed a multi-unit franchise agreement with entrepreneur Kevin Waltermeyer to open three UnityRoad shops. Due to the industry's unique business opportunities, Waltermeyer is seeking immediate entrance by purchasing an existing dispensary to convert into UnityRoad, as well as applying for dispensary licenses in Michigan and Ohio. Unity Road has also signed an agreement with a mother-son team out of Detroit. We are already helping them plan their strategic market entry, which includes applying for their dispensary license through the city's Legacy Detroiter program, which gives applicants priority review and 99% discounts on application fees. As I recently mentioned, earlier this year we launched a few new programs to accelerate national franchise expansion. Our corporate acquisition strategy and the local alliance program both keep dispensary ownership local and thriving with the backing of our franchise system. We are in process of securing financing to fund our corporate acquisition growth plan. Through this program, we are seeking corporate acquisitions of existing dispensaries throughout Colorado, primarily in Denver, in addition to Front Range and compelling mountain towns, as well as in Michigan, Ohio, and Oklahoma. Our plans are to convert the stores into Unity Road shops, operating them internally and sell them to an existing or future franchise partner. This offers a turnkey solution for entrepreneurs seeking immediate entry into cannabis. This strategy also eases hurdles for newcomers looking to acquire an existing dispensary and keeps ownership in the hands of local, independent entrepreneurs. We'll get the stores fully converted into the UnityRoad shop, train the team, and oversee operations so franchise partners have a seamless transition to ownership. Through our local alliance program, existing cannabis dispensary owners and dispensary license holders have the opportunity to join Unity Road to gain direct access to tools, expertise, and ongoing support necessary to compliantly and successfully operate a dispensary. They gain access to the buying power, resources, and supportive network normally reserved for multi-unit operators, all while maintaining full ownership of their cannabis business and license. What sets us apart is that the franchise model creates a capital efficient method for expanding retail through Unity Road and products through Item 9 Labs, allowing us to focus and cluster operations, which results in a network effect to launch brands into new markets. As the Unity Road dispensary footprint continues to expand nationally, we plan to develop and partner with cultivation facilities in states where retail shops open to bring Item 9 Labs products to the market. This gives Unity Road franchise partners first access to a consistent premium product supply chain and the Unity Road brand gains a national product consistency that consumers have come to expect from franchise concepts. This expansion strategy also eases new market product entry with a built-in distribution platform that will bring Item 9 Labs across the US. Now, I'd like to pass it off to Bobby for a summary of our third quarter fiscal year 2021 financial results.
spk03: Thank you, Andrew. For the three months ended June 30, 2021, revenue was $6.7 million, an increase of $4.5 million or 203% compared with $2.2 million for the three months ended June 30, 2020. This increase was primarily due to higher market demand driving increased production. For the three months ended June 30, 2021, gross profit was $2.9 million, an increase of $1.9 million or 212% compared with $1 million for the three months ended June 30, 2020. The resulting gross margin was 43.2% compared with 46.1% for the same quarter last year. The decreased margins were anticipated as we're deepening the market penetration of I-9 Labs brand in a competitive market. We'll continue pushing to increase our market share as we work towards decreasing costs through our expanded facilities. For the three months ended June 30, 2021, total operating expenses were $3.1 million, an increase of $1.9 million or 149% compared with $1.3 million for the same quarter last year. Operating expenses as a percentage of revenue decreased to 47% from 57% for the quarter just ended. reflecting the company's focus on increasing revenue, reducing expenses, and performing more efficiently. Management believes this ratio will decrease going forward as revenues continue to grow at a higher rate than operating expenses. Of note, $720,000 of the company's operating expenses for the three months ended June 30, 2021 were non-cash expenses, including depreciation, amortization, and stock-based compensations. For the three months ended June 30, 2021, operating loss was under $250,000, in line with an operating loss of $250,000 for the same quarter last year. After adding back non-cash operating expenses, depreciation and amortization, interest and stock-based compensation, adjusted EBITDA for the three months ended June 30, 2021 was $520,000, as compared with an adjusted EBITDA loss of $400,000 for the same quarter last year. For the three months ended June 30, 2021, net loss attributable to I-9 Labs was $800,000, or a penny per share, compared with a net loss of $1.6 million, or a net loss of $0.03 per share for the three months ended June 30, 2020. For the nine months ended June 30, 2021, revenue was $15.8 million, an increase of $10.2 million, or 183% compared with $5.6 million for the same period last year. For the nine months ended June 30, 2021, gross profit was $7.3 million, an increase of $5.2 million, or 250%, compared with $2.1 million for the same period last year. The resulting gross margin was 46.2% compared with 37.4% for the same period last year. For the nine months ended June 30, 2021, total operating expenses were $7.4 million, an increase of $3 million compared with $4.4 million for the same period last year. Operating expenses as a percentage of revenue decreased to 47% from 79% for the periods compared. Of note, $2.2 million of the company's operating expenses for the nine months ended June 30, 2021 were non-cash expenses, including depreciation, amortization, and stock-based compensation. For the nine months ended June 30, 2021, operating loss was $100,000, an improvement of $2.2 million compared with an operating loss of $2.3 million for the same period last year. After adding back non-cash operating expenses, depreciation and amortization, interest and stock-based compensation adjusted EBITDA for the nine months ended June 30, 2021 was positive $1.5 million as compared with a loss of $1.3 million for the same period last year. For the nine months ended June 30, 2021, net loss attributable to Item 9 Labs was $1.9 million, or $0.03 per share, compared with $5.1 million, or $0.08 per share, for the same period last year.
spk00: Thank you, Bobby. The combination of our premium award-winning Item 9 Labs products with the UnityRoad dispensary franchise puts us in a unique position financially and geographically to capitalize on opportunities in a dynamic and rapidly evolving regulatory environment. In order to support our expected growth, we have added multiple senior managers to the team. We are proud to welcome Tracy Tinco as Director of Franchise Support, Erica Tarnowski as Franchise Development Manager, Mike Kesky II as General Counsel, and Shabrina Glass as Executive Assistant to our growing company. Tracy Timko, Director of Franchise Support, fills a pivotal role at the heart of the business as one of the key links between the franchisor and franchise partners. Timko's track record spans several franchise companies across Kahala Brands, Portfolio, and beyond. She joins UnityRoads Director of Education and Training, Faye Powell, in ensuring franchise partners are set up for success. Erica Tarnowski, Franchise Development Manager, is a passionate, data-driven franchise professional with six years of franchise experience across franchise development and marketing roles at various companies in the franchise industry. Mike Kesky, General Counsel, also joins the company from the highly regarded major New York City-based law firm Skadden Arps, where he counseled companies on public and private mergers and acquisitions in industries including retail, financial services, pharmaceuticals, agriculture, and consumer products. Shabrina Glass, executive assistant, brings more than 25 years of executive level administrative experience working in law, nonprofit, and private businesses. Acting as the glue across the executive team, her role is essential to ensuring alignment across the company and continued movement on key initiatives. Additionally, we have added expertise to strengthen our board of directors with the appointments of law enforcement veteran Joe DiSalvo and Chief Franchise Officer Mike Weinberger to our board of directors. DiSalvo's appointment demonstrates our focus on strengthening our corporate governance through more independent directors. Seasoned law enforcement officer DiSalvo brings decades of experience in supporting cannabis legalization. He is currently serving his third term as Sheriff of Pitkin County Sheriff's Office, located in Aspen, Colorado, a position he has held since 2010. Upon arrival of Amendment 64 in Colorado, which made it the first state to legalize retail sale of adult-use cannabis, he founded the Valley Marijuana Council, VMC, to ensure there was education safe use as well as safe storage and sale of the new retail products. With the recent acquisition of OCG Inc., Weinberger was named Item 9 Labs Chief Franchise Officer at completion of the transaction and also recently joined the company's board. Weinberger leads all franchise-related growth areas of UnityRoad while overseeing day-to-day operations of the franchise. A culture creator and growth driver with around 20 years in franchising, his professional experience has been focused on growing emerging concepts into nationally recognized brands. He has been instilling his franchise knowledge into the cannabis space since 2018 and paved the path for bringing the franchise business model to cannabis, opening the doors to cannabis entrepreneurship through the Unity Road Franchise Opportunity. Previously, Weinberger was the CEO of Maui Waui, a global coffee and smoothie franchise with more than 500 units, and led its successful sale to Kahala Brand. We believe we have the right team in place to lead us into the next phase of our growth trajectory. Our third quarter fiscal year 2021 results bring us two consecutive quarters that reached north of $2 million in revenue per month. We're on our way to $3 million in revenue per month, we believe we are still in the early innings of a nine-inning baseball game. The recent legalization of adult use in Arizona and our ramp-up of Unity Road's franchise business will be key drivers for accelerated growth over the next 12 months. In closing, I want to thank all of our team members for their hard work and dedication, and our customers and partners for their trust and shared enthusiasm and commitment. I also want to thank our shareholders for their continued confidence in us to delivering long-term shareholder value. Now we will move on to questions that were previously submitted. I'll pass it over to you, Brian.
spk02: Thank you, Andrew. So a couple questions here that we have. First one, how has growth or expansion of the franchise business been impacted by government city restrictions from the pandemic? What do you think about the franchise business going forward in light of the current variant?
spk00: With cannabis being deemed essential in 2020, we've seen upward interest in the franchise opportunity, particularly among existing multi-unit restaurant, fast, casual, quick service franchisees who are seeking ways to diversify their portfolio. Outside of franchise sales, in the past year, we've seen several markets add delivery and express pickups, which is also being implemented in our Boulder shop. Moving forward, we anticipate seeing continued interest in the franchise opportunity as cannabis consumption continues normalizing and legalizing, continuing across the United States.
spk02: Wow. All right. All right. The next question we have here, how are the new franchisees performing? What is traffic at the new locations looking like? What's the average square foot of the locations? What are your expectations? for comp store sales at these locations?
spk00: Our Boulder franchise partner rebranded to Unity Road in June and has seen a steady increase in sales since then. Outside of the updated store design, the team has been working closely with them on adjusting the product offering, the promotions, marketing to continue building momentum. The University of Colorado Boulder is nearby. So we're anticipating an upward trend as students begin to return to campus in the weeks ahead.
spk02: All right. Good to hear. Another question here. What are your plans for scaling the franchise model across other states and cities in the U.S.?
spk00: We have a strong organic franchise sales lead flow through UnityRoad. with interest across the United States, as well as a multi-channel marketing campaign in place to drive traffic from our target ideal franchise partner group. To complement these efforts, we recently launched a few programs to accelerate expansion of the Unity Road footprint from coast to coast. Through our local alliance program, existing cannabis dispensary owners and dispensary license holders have the opportunity to join Unity Road to gain direct access to the tools, expertise, and the ongoing support necessary to compliantly and successfully operate a dispensary. They gain access to the buying power, resources, and supportive network normally reserved for multi-unit operators, all while maintaining full ownership of their cannabis business and license. And through our corporate acquisition strategy, we are seeking acquisitions of existing dispensaries throughout Colorado, primarily in Denver, in addition to Front Range and compelling mountain towns, as well as in Michigan, Ohio, and Oklahoma. Our plans are to convert these stores into Unity Road shops, operate them internally, and then sell them to an existing or a future Unity Road franchise partner, and then continue the process again. This offers a turnkey solution for the entrepreneurs seeking immediate entry into the cannabis industry and will accelerate our growth tremendously.
spk02: All right. Pretty exciting stuff. Okay. Just a couple more questions here. What is your strategy moving forward for dealing with competition? It seems like a few Canadian players might want to expand to the U.S. How will your business defend your competitive position in the U.S. market?
spk00: On the franchise side with Unity Road, there are no other national cannabis franchises, but we know that that won't always be the case. We have an aggressive marketing strategy in place to ensure that we remain a top choice among our targeted franchise sales audience.
spk02: All right, all right. Well positioned. This last question is probably good for Bobby. What is the status of analyst coverage for the stock? Any additional discussions or progress? Can you talk about your overall visibility with the investment community, status in that area, and any future steps you're taking to advance visibility?
spk03: Absolutely. We had one analyst initiate coverage in July, and so that was a good win for us as a company, and we're continuing the conversation. We have meetings regularly with analysts, with investment banks to increase exposure to the institutional investors. As far as what steps are we taking to advance visibility, that really answers that. We're constantly in discussions with people to increase visibility. And we're continually trying to push out press and current reports so the community sees us, so that our investors see what we have going on to increase transparency.
spk02: Yeah, very good. Thank you for that. Well, that's all the questions for today.
spk00: Thank you, everyone, for your support and for joining us today. We are very grateful for your interest in our business and look forward to sharing our continued progress in December. when we report on our fourth quarter 2021 and fiscal year end September 30, 2021 results. Operator, now back to you.
spk01: Thank you. And ladies and gentlemen, this does conclude today's conference. We appreciate your participation. You may disconnect at this time and have a great day.
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