Q4 2021 Item 9 Labs Corp Earnings Call

January 18, 2022

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You have joined the meeting as an attendee and will be muted throughout the meeting. Membership base includes more than 1000 franchise brands across 300 industries and Unity Road is currently the sole franchise model to represent the plant touching Canada space.

Before jumping into the 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, 2 second place Award and one third-place award for our high-quality base and concentrate products at the 710 degree Cup and three first-place awards at the URL Cup, which our Arizona's

largest and longest running annual canvass festivals and award events.

All told the Item 9 Labs brand has earned 23 awards in product competition since our inception, including 14 first-place finishes. Seven of which weren't 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 our florists alone 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 has 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 9600 square feet four head house to support the addition of the 218,000 square foot greenhouses way.

With this initial expansion phase, we expect to increase output of cannabis plant material by 250% to 300% with the 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 margin 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 [forest] loan.

Are to complete our 20000 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 2500 square feet of post-processing and lab space, along with the opportunity for a joint venture with a 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 I will move on to questions that were previously submitted. I'll pass it over to you, Brian.

Alright. 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 like pretty incredible numbers here. You mentioned revenue and gross profit increased by 170%.

Can you just maybe add some color to that? It seems pretty astronomical. I mean is that our industry-standard kind of what can you attribute to such growth over the last year.

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 products than what we could actually facilitate so we invested in operations.

To be able to better meet the demands.

Wow.

Excellent.

Alright, and we don't want to comment on forward looking but.

That seems.

A positive direction.

Alright, so moving on to the question that was submitted beforehand.

The 2021 Q4 revenues. You did mention there were lower gross profit margins.

And then compared to 2021 Q3 revenues, why was that?

Or is the number of factors of course.

Especially as the market matures, but over the last four quarters of revenue here has risen from around $3 million. So we've

averaged to over $6 million or last three quarters.

And we did have a slight spike in fiscal Q3 2021.

Our, one thing to note is our Q4 revenues increased 142% from the same period a year ago.

All that being said, the Arizona cannabis market experienced a down quarter.

In our fiscal Q4.

We also faced increased competition with other brands entry 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 that's the

competition and probably the most important thing is that

We will continue to increase our market position as we have all year.

Yeah, and in regards to competition in Arizona. Are they awarding additional licenses or what's, why is that increase in competition?

Competition.

[inaudible] brands from from other markets, we'll call it California.

In other markets are entering the Arizona markets, usually through tolling or JV agreements.

Because Arizona is a huge market.

Huge market.

And it is expected to expand significantly over the course of the next 2, 3, 4 years.

It didn't.

It did not meet the initial expectations.

Of some analysts two years ago, but the switch from a medical to adult use market did expand the market pretty substantially.

Adult use market did expand the market pretty substantially.

Okay. So maybe that's a sign of growth as well or?

Yes, it's normal with a maturing industry, where you're going to face more competition as time goes on.

Yeah. So that's a good sign.

The market can sustain that here in Arizona and I imagine that's similar to other states.

Alright. Another question that came in here so I'll be appears to have experienced a very

significant loss in 2021 in Q4, greater than the previous three quarters combined.

Can you help us understand that?

Absolutely.

In the fourth quarter and through the end of December 2021, and all the way through that.

We've made additional hires were.

Continuing development in Nevada, began construction in Arizona and all these things have caused the increases in our expenses, where we are preparing ourselves for our next growth phase.

As we can see to build out our capabilities and bolster our team for future growth. We are confident in increase demand and believe we are strengthening our position through increased business in Arizona and other markets.

<unk> business in Arizona and other markets.

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.

So. That's correct.

Okay. Imagine we're on the same trajectory. The more invest.

The more you make. It's a pretty simple concept, right?

Yes, I mean, you have to invest in your operations and sometimes there are some costs upfront before you see the increase revenue so absolutely.

Okay got it.

So yeah. It appears you've strengthen and broaden your team as you

Also expand your operations, grow, produce and process in Arizona.

Once fully operational after your phase one expansion, how much monthly revenue would you expect just in Arizona?

We definitely have broadened 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% with a per unit cost reduction of at least 30%.

<unk> broadened our 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% with a per unit cost reduction of at least 30%.

Further, the additional greenhouses will reduce reliance on third-party source material for lab production by 40%, 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.

Okay.

Thank you for that, Andrew.

I had a question here for Unity Rd.

Maybe we could have Mike Weinberger address this one.

But it seems Unity Rd. traction was slow in 2021.

Do you expect more of the same or better traction this year?

Brian, thanks, Mike Weinberger, Chief franchise officer of Item 9 Labs, and I run the Unity Rd. brand. Actually, 2021 was a killer year was a banner year, we awarded over 10 franchises, including

For New Jersey, but what you're talking about was the lag from when the

pandemic hit in March of 2020, 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 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.

Excellent. And can you just give us kind of a broad outlook?

From your position on states issuing dispensary licenses.

I understand there was a hold up because pandemic government workers were at home. Zoom with a mess, we get that. But our states moving forward are they in general still passing laws to legalize?

Are things are moving in a positive direction from your perspective? Yes from my perspective.

Things are picking up pace very quickly.

New Mexico came online offer, said they are going to give licenses and we've got a franchisee there who.

Just submitted for three. You can see in Ohio.

Just put their lottery system out and we've got 7 in the system, in the lottery system for next, I believe it's next Thursday.

New York 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.

We'll be announcing licenses this year. Their period is March 15th that gets submitted so there is great deal of states coming online.

This year or already came online to issue licenses, it's an exciting time to be in cannabis.

Yeah, and it has been over the past decade or so. It's maybe been a slower rollout than anticipated.

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.

Implement these laws kind of figure out the tax revenues.

We get and grow the industry.

Absolutely. Thanks.

Thanks.

A lot of the space, it's kind of a snowball effect from my perspective, the each time a state comes online, another two or three start to follow and especially with the pandemic, there is a lot of tax shortfalls in these states and in cannabis.

Cannabis is really helping.

The tax revenues up and put in money back into infrastructure and schools.

I believe Illinois.

Tax revenue in Canada surpassed their alcohol sales. So if that's any indication of what's to come. It's pretty exciting times.

Oh yeah.

Percent.

Alright, thank you for that.

I had a question for the team here. Is there anything management can or is doing to increase daily trading volume?

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 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.

Excellent excellent.

And. One thing.

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?

As we've heard that takes time to roll out and it is currently happening and it's really the competitive advantage compared to a lot of other cannabis companies out there.

So for any investors on the call, again, as Mike said this is an exciting time for this company.

It's a great opportunity and we should continue to see excellent growth in this space.

But yes, back over to you, Andrew.

Thanks, Brian and thank you, everyone, for your support and joining us today.

We're 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.

Goodbye.

Q4 2021 Item 9 Labs Corp Earnings Call

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