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spk01: All right. Good afternoon, everyone, or good morning, depending on where you're calling in from. Appreciate you joining us today. Today is January 18th, 2022. Thank you for joining us again. So this is item nine labs core fiscal year 2021 annual results conference call for the 12 months ended September 30th, 2021. By now, everyone should have had access to the earnings results press release. which was issued earlier today before the markets opened around 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, 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 and 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 10Q, Form 10K, and in other reports filed at 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 Lab Court Chief Executive Officer, Andrew Bowden.
spk02: Thank you, Brian, and good afternoon, everyone. We greatly appreciate you taking the time to join us on today's call and for being our shareholder, as increasing shareholder value is our highest priority. We will discuss our operating highlights and financial results for our fiscal year ended September 30, 2021. as well as provide an update on our expansion progress on our Arizona and Nevada cultivation sites and the latest national development of our cannabis dispensary franchise, Unity Road. After my opening, our CFO, Bobby Michelson, will give a summary of our fiscal year 2021 financial results. I will then provide an update on our continued national expansion. Following our prepared remarks, we will move into a Q&A portion and answer questions that were pre-submitted prior to the call. With that, I would like to now walk you through some of our recent highlights. Our company has never been in a better position. With Arizona's adult use sales going live in January 2021, Our products and brand have been gaining tremendous traction. We have grown to $2 million in revenue per month and solidified our spot in Arizona as one of the top brands in every dispensary that we sell through, which is more than 50% of Arizona's dispensaries. The state's combined adult use and medical markets have continuously grown each month and surpassed $1 billion in annual sales in November. With expansion underway at our Arizona site, that will add 45,000 square feet, we will be in position to meet this increased demand in the second half of 2022 with our additional cultivation, production and processing space. Our cannabis dispensary franchise Unity Road is gaining strong traction and our team is executing a strategic initiative to expand the brand's footprint from coast to coast. We have a national acquisition plan to accelerate expansion and began executing a couple months ago with our first deal in Adams County, Colorado. We have a robust pipeline of opportunities across a wide range of appealing states and expect to make further announcements over the next few months. There are a tremendous amount of synergies we gained from the acquisition of UnityRoad's parent company, OCG Inc., including expanded business offerings and expertise, operational efficiencies, cost savings, and revenue upsides. Now I'd like to pass it off to Bobby for a summary of our fiscal year 2021 financial results.
spk03: Thank you, Andrew. With our 170% annual growth in revenue to $21.9 million, we have demonstrated the scalability of our business throughout fiscal year 2021 and saw growth and profitability in the second and third quarters. In the fourth quarter and through the end of December 2021, we have made additional hires, continued development of our Nevada site, and began construction on our site in Arizona, which has caused our expenses to rise. While we build out our capabilities and bolster our team for future growth, we are confident in the greater demand and believe we are strengthening our position for increased business in Arizona and into other markets. For the 12 months ended September 30, 2021, revenue was $21.9 million, an increase of $13.8 million or 170%. compared with $8.1 million for the 12 months ended September 30, 2020. This growth was primarily driven by our investment into increased production capacity to better meet the market demand for Adenine Labs products. For the 12 months ended September 30, 2021, gross profit was $8.6 million, an increase of $5.3 million, or 170%, compared with $3.3 million for the 12 months ended September 30, 2020. The resulting gross margin was 39% compared with 41% for the 12 months ended September 30, 2020. The company experienced lower gross profit margins in the fourth quarter of 2021 due to price reductions as competition rises in Arizona. Additionally, to deepen the market penetration of Item 9 Labs products, the company sourced plant and extract materials from third parties, the effect of which is higher gross profit but lower gross margins. For the 12 months ended September 30, 2021, total operating expenses were $14.2 million, an increase of $5.5 million, or 63%, compared with $8.7 million for the 12 months ended September 30, 2020. We have invested heavily into fiscal 21 and 22 to meet growing demand in Arizona, as well as funding the buildup of our cultivation and lab site within the state. We strongly believe this expansion will improve earnings and future cash position. Operating expenses as a percentage of revenue decreased to 65% from 107%, reflecting our focus on increasing revenue and scaling our platform more efficiently. We believe this ratio will decrease going forward as we scale the business. Of note, $7.8 million of our operating expenses for the 12 months ended September 30, 2021 were non-cash expenses, including depreciation, amortization, and stock-based compensation. Also of note, 3.9 million of interest expense in 2021 was non-cash amortization of debt discounts. For the 12 months ended September 30, 2021, operating loss was 5.6 million, in line with an operating loss of 5.4 million for the 12 months ended September 30, 2020. After adding back non-cash operating expenses, depreciation and amortization, interest in stock-based compensation, adjusted EBITDA for the 12 months ended September 30, 2021 was $1.7 million, as compared with an adjusted EBITDA loss of $2.5 million for the 12 months ended September 30, 2020. For the 12 months ended September 30, 2021, net loss attributable to the company was 10.9 million or net loss of 14 cents per share compared with the net loss of 12.3 million or 20 cents per share for the 12 months ended September 30, 2020. Cash and cash equivalents totaled 1.5 million as of September 30, 2021. And back to you, Andrew.
spk02: Now I'd like to provide an update on our growth initiatives, which are focused on Unity Road openings and footprint expansion, as well as our cultivation, production, and processing development in Arizona and Nevada. Here's a quick look at where our franchise partners are developing the Unity Road retail brand across the US. They are all in various stages of development. Some recently submitted licenses or will be soon. We believe our ramp and rollout will accelerate over the first half of 2022 as COVID-19 put a pause on most bureaucracies, as well as licensing and permitting at the state levels. To accelerate Unity Road expansion, we launched a national dispensary acquisition growth plan and executed an asset purchase agreement for a Colorado dispensary. This program includes acquiring and converting cannabis retail stores, training the local team, and selling the business to new and existing Unity Road franchise partners to keep businesses locally owned and operated. This growth strategy offers turnkey investment opportunities for prospective cannabis entrepreneurs. We executed the asset purchase agreement in October for an existing dispensary license and storefront in Adams County, Colorado. This will be the first corporate owned shop under the Unity Road brand. We are currently awaiting the regulatory approval by Colorado's Marijuana Enforcement Division and expect the shop to be operational in the first half of 2022. We plan to operate the store for six to 18 months and utilize it for franchise partners and team training, as well as tours with prospective franchise partners. We expanded the Unity Road footprint into New England with the signing of agreements with a couple entrepreneurial groups for development in New Jersey and Virginia. Our team is currently assisting the New Jersey groups in submitting their dispensary license applications this March. We also signed a lease in Maine for the state's first Unity Road shop and are awaiting license approval from the state. We kicked off retail expansion in South Dakota with our first agreement to bring Unity Road to the state. Our local partners plan to develop at least one Unity Road shop and are currently being guided by our team through the state's dispensary license process. We became the first cannabis dispensary franchise to become members of the International Franchise Association. Utilizing the franchise business model for national development, we continue to solidify Unity Road's position as an industry trailblazer by becoming the first brand of its kind to be named an IFA member. The organization's membership base includes more than 1,000 franchise brands across 300 industries And Unity Road is currently the sole franchise model to represent the plant touching cannabis space. Before jumping into expansion of our cultivation sites, I'd like to take a moment to highlight the awards of our team that our team has won in the past six months for product excellence. Our premium cannabis product brand, Item 9 Labs, secured its first cannabis cup this year. which is one of the most prestigious milestones that cannabis brands strive for worldwide. We also earned two first-place finishes, two second-place awards, and one third-place award for our high-quality vape and concentrate products at the 710 Degree Cup and three first-place awards at the Earl Cup, which are Arizona's largest and longest-running annual cannabis festivals and award events. All told, the Item 9 Labs brand has earned 23 awards in product competitions since our inception, including 14 first place finishes, seven of which were earned in 2021. onto our Arizona master cultivation site expansion. In November, we broke ground on the initial phase of the master expansion of our Coolidge, Arizona cultivation and lab site. 13.5 million of the proceeds from the Polaris loan will go to this initial build out, which more than doubles our current operation space. As part of the expansion, we recently acquired the neighboring 45 acres of the site, Now at 50 acres, the site is one of the largest properties in Arizona that is zoned to grow and cultivate flower. The initial development phase is estimated to be completed in summer of 2022 and includes the construction of three steel buildings and two greenhouses, adding 9,600 square feet for indoor cultivation, 9,600 square feet of lab and packaging, and 9,600 square feet for a head house to support the addition of the two 18,000 square foot greenhouses we're adding. With this initial expansion phase, we expect to increase output of cannabis plant material by 250 to 300%, with a per unit cost reduction of at least 30%. Further, the additional greenhouses will reduce our reliance on third-party source material for lab productions by 40 to 50%. This is key to drive our profit margins upwards. Also, expansion of our existing lab allows for the addition of more state-of-the-art equipment for all extraction processes, which will support product diversification. We also recently began our Nevada cultivation site expansion. The remaining proceeds from the Polaris loan are to complete our 20,000 square foot facility in Pahrump, Nevada, that is currently approximately 85% finished. The expansion includes 4,450 square feet for flower, 990 square feet of vegetation space, 400 square feet for clones, 300 square feet for dry curing, and 615 square feet of space for genetics. The facility also includes more than 2,500 square feet of post-processing and lab space, along with the opportunity for a joint venture with an 1,100 square foot commercial kitchen. The remainder of the building is ancillary rooms such as water rooms, offices, locker rooms, and break rooms. We anticipate the Nevada facility will be operational in spring of 2022. Now we'll move on to questions that were previously submitted. I'll pass it over to you, Brian.
spk01: All right. Thank you, Andrew. Thank you, Bobby. That's very informational. I wanted to address something. So, Bobby, you kind of glossed over this, but it seems pretty incredible numbers here. You mentioned revenue and gross profit increased by 170%. Can you just maybe add some color to that? That seems pretty astronomical. Is that industry standard? Kind of what can you attribute to such growth over the last year?
spk03: No, I mean, it's definitely not industry standard. Really the biggest thing is we invested in product operations. There's more demand for our product than what we could actually facilitate. So we invested in operations to be able to better meet the demands.
spk01: Wow. Excellent. All right. And we don't want to comment on forward looking, but that seems positive direction. All right. So moving on to the questions that were submitted beforehand. So 2021 Q4 revenues. You did mention that there was a lower gross profit margins. And then compared to 2021 Q3 revenues, why was that?
spk03: Well, there's a number of factors, of course, especially as the market matures. But over the last four quarters, our revenue here has risen from around $3 million to We've averaged over 6 million our last three quarters, and we did have a slight spike in fiscal Q3 2021. One thing to note is our Q4 revenues increased 142% in the same period a year ago. All that being said, the Arizona cannabis market experienced a down quarter in our fiscal Q4, and we also faced increased competition with other brands entering the market. which drove our per unit prices downward a little bit. Our unit sales in Q4 were actually in line with Q3, but we did see that competition. And probably the most important thing is that we continue to increase our market position as we have all year. Yeah.
spk01: And in regards to competition in Arizona, are they awarding additional licenses or Why is the increase in competition?
spk03: Brands from other markets, we'll call it California and other markets, are entering the Arizona markets usually through tolling or JV agreements because Arizona is a huge market. And it's expected to expand significantly over the over the course of the next two, three, four years. It didn't you know, it did not meet the initial expectations of some analysts two years ago. But the the switch from a medical to a adult use market did expand the market pretty substantially.
spk01: OK, so maybe that's a sign of growth as well or.
spk03: Yeah, it's normal with a maturing industry where you're going to face more competition as time goes on.
spk01: Yeah, so that's a good sign. The markets can sustain that here in Arizona, and I imagine that's similar to other states. All right. Another question that came in here is that INLB appears to have experienced a very significant loss in 2021 Q4, greater than the previous three quarters combined. Can you help us understand that?
spk03: Absolutely. In the fourth quarter and through the end of December 2021 and all the way to today, we've made additional hires. We're continuing development in Nevada. began construction in Arizona, and all these things have caused increases in our expenses where we are preparing ourselves for our next growth phase. As we continue to build out our capabilities and bolster our team for future growth, we are confident in increased demand and believe we are strengthening our position for increased business in Arizona and other markets.
spk01: Yeah, and earlier in the call, you did say as a part of that 170% increase in revenue and profit, was primarily because you invested in increased production capacity. That's correct. Okay. Imagine we're on the same trajectory. The more you make, it's a pretty simple concept, right?
spk03: Yeah. I mean, you have to invest in your operations, and sometimes there are some sunk costs up front before you see the increased revenue. So, absolutely. Okay.
spk01: Got it. So, yeah, it appears you've strengthened and broadened your team as you also expand your operations to grow, produce and process in Arizona. Once fully operational after your phase one expansion, how much monthly revenue would you expect just in Arizona?
spk02: We definitely had brought in our team for our national expansion. And the initial development phase is estimated to be complete in summer of 2022 and is expected to increase output of cannabis plant material by 250 to 300 percent with a per unit cost reduction of at least 30 percent. Further, the additional greenhouses will reduce reliance on third-party source material for lab productions by 40 to 50%. All in all, we do anticipate a substantial increase in monthly and annual revenues once fully operational. However, specific dollar amounts can fluctuate depending on the market.
spk01: Okay. Thank you for that, Andrew. And a question here for Unity Road. Maybe we could have Mike Weinberger address this one. But it seems Unity Road traction was slow in 2021. Do you expect more of the same or better traction this year?
spk00: Brian, thanks. Mike Weinberger, Chief Franchise Officer of Item 9 Labs, and I run the Unity Road brand. Actually, 2021 was a killer year. It was a banner year. We awarded over 10 franchises, including four in New Jersey. But what you're talking about was the lag from when the pandemic hit in March of 2020, right? a lot of the government facilities kind of shut down for a while and really put a slow timeframe on licensing for that first six months of 2020. And that has kind of rolled into development for an issues of license for 2021. So we, we don't anticipate any slowdown. We actually are picking up speed, including what Andrew was talking about with South Dakota and the New England area, and also being a member of IFA. We're very excited for this year.
spk01: Excellent. And can you just give us kind of a broad outlook, you know, from your position on states issuing dispensary licenses? I understand there was a holdup because of the pandemic. Government workers were at home. Zoom was a mess. We get that. But are states moving forward Are they, in general, still passing laws to legalize? Are things moving in a positive direction from your perspective?
spk00: Yeah, from my perspective, things are picking up pace very quickly. New Mexico came online, said they were going to give licenses, and we've got a franchisee there who just submitted for three. We've seen Ohio. just put their lottery system out and we've got seven in, in the system, um, in the lottery system for next, I believe it's next Thursday. Uh, New York is, is coming around a little bit slower than most would like, but I do see that happening at the tail end of 2022. As I said, New Jersey, um, will be announcing licenses this year. Their, their period is March 15th. They get submitted. So there is, there's a great deal of States coming online, uh, this year or already came online to issue a license, it's an exciting time to be in cannabis.
spk01: Yeah, and it has been over the past, say, decade or so. It's maybe been a slower rollout than anticipated, but we've learned a lot, seen a lot, and it's continuing kind of as it has over the last 10 years as more states implement these laws, kind of figure out the tax revenues, tweak it, and grow the industry.
spk00: Absolutely. I think a lot of the states, it's kind of a snowball effect from my perspective that each time a state comes online, another two or three start to follow. And especially with the pandemic, there's a lot of tax shortfalls in these states and cannabis is really helping bring the tax revenues up and put money back into infrastructure and schools. I believe Illinois' tax revenue in cannabis surpassed their alcohol sales. So if that's any indication of what's to come, it's pretty exciting times.
spk01: Wow. Yeah. Interesting. All right. Thank you for that. Another question for the team here. Is there anything management can or is doing to increase daily trading volume?
spk03: Yeah, I'll jump on that one, Brian. It's Bobby. So our public float has increased from about 2 to 3 million shares a year ago to about close to 10 million now. And our average daily volume has risen from 5,000 shares a day to around 15,000 shares a day over the same time period. With that being said, we're in the midst of hiring an IR firm, which will focus on increasing our visibility and awareness with prospective institutional and retail shareholders and launch a social media and digital marketing campaign. We've also initiated numerous calls with equity analysts over the last three to four months and do anticipate additional analyst coverage in the upcoming year to improve visibility, which in turn should translate to additional volume. As we continue to execute on our strategic and financial plan, we would anticipate positive market response as we continue to grow the business, which believe again, will translate into increased visibility and more volume.
spk01: Yeah, excellent, excellent. And, you know, one thing we've heard a lot about in the past is just the franchise concept. I mean, that's the entrepreneurial side of INLB, right? And as we've heard, that takes time to roll out and it's currently happening. And it's really the competitive advantage compared to a lot of other cannabis companies out there. So for the investors on the call, again, as Mike said, this is an exciting time. I think for this company, it's a great opportunity and we should continue to see excellent growth in this space. But yeah, back over to you, Andrew.
spk02: Thanks, Ryan. And thank you everyone for your support and joining us today. We are extremely grateful for your interest in our business and look forward to sharing our continued progress. We plan on having our next quarterly results call in mid-February. Have a great day.
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