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spk00: Hello, everyone, and welcome to the Item 9 Labs Corp Q1 Fiscal Year 2022 Quarterly Results Conference Call for the three months ended December 31st, 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 means of securities laws, including forward-looking statements about future results of operations, business strategies and plans, our relationships with customers, as well as 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 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, provide 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 item9labscorp.com. That's I-T-E-M, the numeral nine, L-A-B-S-C-O-R-P.com. And with that, I would like to introduce Item 9 Lab Corps CEO, Andrew Bowden.
spk01: Thank you, Jane. Good afternoon, 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 our first quarter ended December 31st, 2021, and our fiscal year 2022. Additionally, although we just had a conference call less than 30 days ago, we continue to advance on a number of growth initiatives. So we will provide further updates on our expansion progress at 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 first quarter ended December 31st, 2021 fiscal year 2022 financial results. Following our prepared remarks, we'll 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 through our recent highlights. We continue to make great progress on all fronts. Our cultivation, production, and processing expansion in Arizona and Nevada is advancing as expected. And our dispensary franchise, UnityRoad, is targeting a significant number of shop openings by the end of 2022. Demand remains strong for our award-winning I to Nine Labs cannabis products in Arizona, and we anticipate it will grow higher. Recent studies show the Arizona market generated 1.9 billion in sales from cannabis products in 2021. The state also drew in more demand than other states during its first year of recreational legalization which is an early sign of industry success for Arizona. We closed out the 2021 calendar year with tremendous movement in gaining market share, and reports from BDS Analytics show that Item 9 Labs was one of the top three preferred brands for cannabis vape products in Arizona. Our elevated mainstream brand is currently in more than 50% of the state's dispensaries, And we anticipate expansion into new markets in the year ahead through partnerships and acquisitions to bring our award-winning products to Unity Road shops nationwide. We also expect our product offerings will continue expanding in the year ahead to further meet the needs and interests of today's modern cannabis consumer. On the retail side, continued legalization and awareness of our dispensary franchise opportunity is keeping our development pipeline robust. Unity Road now has a franchise shop open in Boulder, Colorado, as well as agreements with close to 20 partners to open more than three dozen shops across nine states. A majority in development are in various stages of state licensing, and we also have a wide range of appealing markets in our acquisitions pipeline and expect to make further announcements over the next few months. In November, we broke ground on the expansion of our cultivation and lab site in Arizona. We have been cultivating, manufacturing, and processing Item 9 Labs products since 2017 from our existing 19,200 square foot facility, which sits on five acres in Coolidge, Arizona. As part of the master site expansion, we acquired the neighboring 45 acres and anticipate increasing our operation space up to 640,000 square feet. That's a 3,100% increase from current operations. 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 is expected to increase output of cannabis plant material by 250 to 300%, with a per unit cost reduction of at least 30%. Our 20,000 square foot facility in Pahrump, Nevada is approximately 95% complete. The team is starting to fit out the rooms with growing equipment, including lights and fans, and recently completed the water line connection. Once the meter is set up and it's finalized, the water can be turned on and the outdoor work, such as landscaping, and the parking lot can be completed. Flooring is also in process with 50% of the building's flooring finished. We expect to receive the temporary certificate of occupancy in February or March 2022. On the UnityRoad side of the business, we executed an 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. Currently, we are awaiting regulatory approval by Colorado's Marijuana Enforcement Division, the MED, and expect the shop to be operational in the first half of 2022. Our Adams County shop is the first in our national acquisition strategy that's intended to accelerate national expansion by creating turnkey investment opportunities for Unity Road franchise partners. We plan to convert acquired dispensaries into Unity Road shops, operate them internally, and sell them to an existing or future franchise partner. This offers an expedited solution for entrepreneurs seeking immediate entry into the cannabis industry. We also signed our first Unity Road agreement in South Dakota with local serial entrepreneur, BJ Olson, to develop at least one Unity Road shop Our team is currently guiding them through the state's dispensary license process. We also signed our first Unity Road partner through our local alliance program in January 2022 with an Oklahoma City dispensary called Ringside Medical, which will be rebranded as Unity Road in the next few months. We launched the local alliance program in 2021. to support existing dispensary owners and operators by providing them with direct access to the buying power, the resources, and supportive network that's normally reserved for multi-unit operators. These partners retain 100% ownership of their dispensary license and business and benefit from the tools, expertise, and ongoing support our team provides. Now I'd like to pass it off to Bobby for a summary of our first quarter ended December 31st, 2021 of our fiscal year 2022 financial results.
spk02: Thank you, Andrew. With our 104% growth in revenue to 6.2 million, we continue to demonstrate the demand for our products as well as our capabilities in cultivation, processing, production, franchising, and marketing. We are continuing to invest and build for the future with the addition of top talent and deployment of capital. We've been investing in our cultivation and lab site expansions in Arizona and Nevada, our Unity Road dispensary franchise, as well as the corporate systems and infrastructure. We know there is more demand in Arizona for our award-winning products than we can currently supply. While our revenue remains strong, we are sacrificing near-term profitability to strengthen our position for increased business in Arizona and ultimately accelerated revenue growth, increased profitability, and increased shareholder value. Of note, we held $12.8 million of escrow deposits as of December 31, 2021 that is set aside for expansion. Now, let's get into our financial results. Revenue. For the three months ended December 31, 2021, revenue was $6.2 million, an increase of $3.1 million, or 104%, compared with $3 million for the three months ended December 31, 2020. The increase in revenue was primarily due to a change in certain processes and procedures in our Arizona lab during the year ended September 30, 2021. We purchased equipment to automate certain manual processes, such as the filling of cartridges, which allowed for increased efficiency and output. Gross profit. For the three months ended December 31, 2021, gross profit was $2.4 million, an increase of $1 million, or 68%, compared with $1.4 million for the three months ended December 31, 2021. The resulting gross margin was 39% compared with 47% for the three months ended December 31st, 2020. We experienced lower gross profit margins in the first quarter of 2022 due to price reductions as competition rises in Arizona. Additionally, to deepen the market penetration of Item 9 Labs products, we sourced plant and extract materials from third parties, the effect of which is higher gross profit, but lower gross margin. Total operating expenses. For the three months ended December 31, 2021, total operating expenses were $4.5 million, an increase of $2.7 million, or 152%, compared with $1.8 million for the three months ended December 31, 2020. We have been investing heavily in the future of the company, with key additions in infrastructure, personnel, and systems, which will allow us to accelerate our future growth. We believe this will improve earnings and future cash positions. Operating expenses as a percentage of revenue increased to 73% from 59% as we have invested in infrastructure to support a much larger company and revenue base. We believe this ratio will decrease going forward as we scale the business. Of note, 0.9 million of our operating expenses for the three months ended December 31st, 2021 were non-cash expenses, including depreciation, amortization, and stock-based compensation. Also of note, 1 million of interest expense for the three months ended December 31st, 2021 is non-cash amortization of debt discounts. Operating loss. For the three months ended December 31st, 2021, operating loss was 2.1 million, an increase of 1.8 million or 483% compared with an operating loss of 0.4 million for the three months ended December 31st, 2020. Adjusted EBITDA. After adding back certain operating expenses such as depreciation, amortization, interest, acquisition-related costs, and stock-based compensation, adjusted EBITDA for the three months ended December 31, 2021 was a loss of $1.2 million as compared with an adjusted EBITDA profit of $0.4 million for the three months ended December 31, 2020. Net loss for the three months ended December 31st, 2021, net loss attributable to the company was 3.3 million or a net loss of 4 cents per share, an increase of 2.3 million or 211% compared with a net loss of 1.1 million or 2 cents per share for the three months ended December 31st, 2020. Cash and cash equivalents totaled 0.2 million as of December 31st, 2021. And we had 12.8 million in escrow deposits set aside for expansion. Back to you, Andrew.
spk01: Now we'll move on to questions that were previously submitted. I'll pass it over to you, Jane.
spk00: Thanks, Andrew. It looks like tremendous development across all fronts. I do have a few questions for you and Bobby. Here is the first one. So we have recently seen more volume and a higher price in the stock, which is great. Will you be attending any upcoming investor conferences?
spk01: Yes, we will be presenting at a few in March and April. The first is Roth Capital, which will be taking place March 14th and 15th in Southern California. Then we head to South Florida for the Noble Capital Markets and Benzinga Cannabis Capital Conference. Noble Con is on April 19th and 20th in Hollywood, Florida, and Benzinga is April 20 and 21 in Miami, Florida. If you're planning to attend any of those conferences or might be in the area, please email us at investors at item9labs.com to learn how you can attend the conferences or schedule a meeting with us.
spk00: That's great. And here's the next question I have. I see you filed a Reg A on February 2nd. What are the plans with that in regards to how much money you're planning to raise and how will you use the proceeds?
spk02: Hey, James, Bobby, I'll answer that. Yeah, we filed a Reg A plus a couple weeks ago and expect to launch the fundraise in the month ahead with the goal of raising up to $40 million over time. We intend to use these net proceeds for the acquisition of retail dispensary businesses, cultivation and production businesses, working capital and general corporate purposes. We intend to use a significant amount of the proceeds on the overarching retail acquisition strategy that Andrew mentioned earlier. This strategy allows us to provide turnkey investment opportunities for our current and future franchise partners, expediting franchisee entry into the industry while accelerating our national expansion. We do recommend reading the use of proceeds section in the offering circular for more details on our plans for the future and how those proceeds will be used.
spk00: Thanks, Bobby. Can't wait to see that campaign. Here's the next pre-submitted question that I have. It's pretty clear you have invested money in order to support further growth with both the I-9 labs expansion in Arizona and Unity Road. When do you expect to start seeing any incremental revenue come in from each, and when will that additional revenue become meaningful?
spk02: Okay. Well, the initial development phase of our Arizona cultivation and lab expansions We estimate completion to be summer of 2022, and we expect that to increase our output of plant material by 250 to 300%, with a cost reduction per unit cost reduction of around 30% or more. Additionally, the greenhouses will reduce our reliance on third-party source material for our lab productions by at least 50%. And we anticipate increased profits from that expansion in the fall of 2022. As for Unity Road, we anticipate incremental revenue growth beginning in Q3 as additional shops begin opening. All in all, we do anticipate a substantial increase in monthly and annual revenues, as well as increased profitability upon each of these becoming operational. As noted previously, we've invested in the future growth of the company to position Item 9 Labs Corp for national and international expansion, increased profitability, and increased shareholder value.
spk00: Thanks, Bobby. And then, Andrew, how many Unity Road locations are expected to open by the end of 2022? Also, on average, how much annual revenue would each location contribute?
spk01: We currently have a franchise shop open in Boulder, Colorado, and another in Oklahoma City that will be rebranded soon. And we anticipate that our corporate-owned shop in Adams County, Colorado, will be open in the next couple of months as well. We have several partners in various licensing stages as well as a robust franchise and acquisition pipeline and anticipate that we will have double digit shops opening by the end of the year. As far as annual revenue, it is dependent on the market and whether the shop is franchise partner or corporate owned. Our monthly royalty fee for our franchise partner owned shops is 5% of gross revenue with an additional 2% going to a marketing fund. Annual revenue of a dispensary can range from a couple hundred thousand dollars to tens of millions, depending on the market. So it's really difficult to make an accurate general statement on a per unit basis. The Adams County, Colorado shop that we're opening soon will be our first income revenue stream from a corporate owned shop.
spk00: Love that projected double digit growth. Here's the last question that I have for you guys. With item nine labs products being in more than 50% of all dispensaries in Arizona, is growth more likely to come from expanding that to 75% or so, or having more product and turnover at the existing dispensaries you are in?
spk01: We're focused on gaining market share in Arizona, but much of that will come through higher concentration and sell through at our existing dispensary partners. Our marketing team has done an amazing job over the past six months, completely reinventing our marketing and educational partnerships with Arizona dispensaries. To name a few examples, we did a promotional contest with local teams at Harvest. and gave custom Item 9 Labs branded vans to the team with the highest Item 9 Labs sales. The dispensary teams are one of the most important audiences to Target, and this campaign was a huge success. We also redid our product displays to make them more eye-catching and easy to update for future promotions. And our street teams are frequent faces at the dispensaries and local events throughout the Valley. It's been really exciting to watch our brand just take on new life in the Arizona market.
spk00: That's amazing and really great momentum with the thriving adult use market becoming more and more established in Arizona. Thanks for all the details, Bobby and Andrew. Andrew, it is now back to you to close us out.
spk01: All right. Thanks, 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. Look for upcoming episodes. announcements as we plan on being active over the next few months by visiting various cities for investor conferences and roadshows to meet existing and prospective shareholders. Stay tuned. We plan on having our next quarterly results call in mid-May. Have a great day.
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