Q3 2022 Item 9 Labs Corp Earnings Call

Speaker 1: We've sourced plant and extract materials from third parties. Our Arizona expansion, which we anticipate completing by the end of this calendar year, will reduce our reliance on third-party materials, thus increasing profitability long term.

Type materials from third parties for Arizona expansion, which we anticipate completing by the end of this calendar year will reduce our reliance on third party materials, thus increasing profitability long term.

Speaker 1: For the three months ended June 30, 2022, total operating expenses were $5.4 million, an increase of $2.3 million, or 73%, compared with $3.1 million for the three months ended June 30, 2021. We invested heavily into fiscal 2021 and 2022 to meet growing demand in Arizona, as well as funding the build out of our cultivation and lab site within the state. We strongly believe this expansion will improve earnings and future cash positions.

For the three months ended June 32022, total operating expenses were $5 4 million, an increase of $2 3 million or <unk>, 73% compared with $3 1 million for the three months ended June 32021, we invested heavily into fiscal 2021, and 2022 to meet growing demand in Arizona as well as funding to build.

Out of our cultivation and lab site within the state. We strongly believe this expansion will improve earnings and future cash position.

Speaker 1: Of note, $1.6 million of our operating expenses for the three months ended June 30, 2022 were non-cash expenses, including depreciation, amortization, and stock-based compensation.

$1 $6 million of our operating expenses for the three months ended June 32022 were noncash expenses, including depreciation amortization and stock based compensation.

Speaker 1: Also of note, $0.6 million of interest expense for the three months ended June 30, 2022, was non-cash amortization of debt.

Also of note <unk>.

$6 million of interest expense for the three months ended June 32022 was noncash amortization of debt discounts.

Speaker 1: For the three months ended June 30, 2022, operating loss was 3.8 million, an increase of 3.6 million, compared with an operating loss of 0.2 million for the three months ended June 30, 2021.

For the three months ended June 32022, operating loss was $3 8 million, an increase of $3 6 million compared with an operating loss of <unk> 2 million for the three months ended June 32021, after adding back noncash operating expenses depreciation and amortization interest income tax expense acquisition related costs and stock based.

Speaker 1: After adding back non-cash operating expenses, depreciation and amortization, interest, income tax expense, acquisition related costs and stock based compensation, adjusted EBITDA for the three months ended June 30, 2022 was a loss of $1.8 million as compared with an adjusted EBITDA profit of $0.2 million for the three months ended June 30, 2021.

<unk> adjusted EBITDA for the three months ended June 32022 was a loss of $1 8 million as compared with an adjusted EBITDA profit of $1 2 million for the three months ended June 32021.

Speaker 1: It's important to note that approximately 2.4 million change from the prior year is due to the addition of the franchise business, as well as significant investments in human capital and infrastructure to prepare for anticipated growth.

It's important to note that approximately $2 4 million change from the prior year is due to the addition of the franchise business as well as significant investments in human capital and infrastructure to prepare for anticipated growth.

Speaker 1: For the three months ended June 30, 2022, net loss attributable to the company was 5.5 million, or a net loss of six cents per share, compared with a net loss of 0.8 million, or one cent per share, for the three months ended June 30, 2021.

For the three months ended June 32022, net loss attributable to the company was $5 5 million or a net loss of <unk> <unk> per share compared with a net loss of <unk> 8 million or <unk> <unk> per share for the three months ended June 32021.

Speaker 1: Cash and cash equivalents total $0.4 million as of June 30, 2022. In addition to cash and cash equivalents, the company has escrow deposits totaling $8.6 million reserved for its expansion projects. I'd now like to turn the call back over.

Cash and cash equivalents totaled <unk> 4 million as of June 32022. In addition to cash and cash equivalents. The company has escrow deposits totaling $8 6 million reserved for its expansion projects I'd now like to turn the call back over to you Andrew.

Speaker 2: 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.

Now I'd like to provide an update on our growth initiatives, which are focused on EBIT route openings and footprint expansion as well as our cultivation production and processing development in Arizona and Nevada.

Speaker 2: Unity Road is the first national cannabis dispensary franchise in the United States to offer entrepreneurs seeking to enter the complex $25 billion industry with a proven guidebook and ongoing support needed to successfully open and operate a compliant dispensary in their local community.

<unk> is the first national candidates dispensary franchise in the United States to offer entrepreneurs seeking to enter the complex $25 billion industry with a proven guide book and ongoing support needed to success, absolutely open and operate a compliant dispensary in their local community.

On a corporate level the highly scalable retail model allows us to expand our unity road dispensary footprint quicker and with low capital expenditures since franchisees own and operate their locations as the entity road retail.

Speaker 2: On a corporate level, the highly scalable retail model allows us to expand our Unity Road dispensary footprint quicker and with low capital expenditures since franchisees own and operate their locations. As the Unity Road retail footprint develops, we are building significant value for our shareholders with the addition of multiple ongoing revenue streams tied to monthly franchisee royalties.

Print develops we are building significant value for our shareholders with the addition of multiple ongoing revenue streams tied to monthly franchisee royalties.

Speaker 2: Our Unity Road retail brand footprint has continued to grow throughout this quarter. The first Unity Road franchise location opened in June 2021 with a father son entrepreneur duo in Boulder, Colorado.

You Didnt erode retail brand footprint has continued to grow throughout this quarter. The first unity Road franchise location opened in June 2021, with a father son entrepreneur duo in Boulder, Colorado.

Speaker 2: And we have since grown to four stores in operation, as well as development pipeline packed with more than 20 groups who are looking to expand the brand across as many as 10 states.

And we have since grown to four stores in operation as well as development pipeline tax with more than 20 groups, who are looking to expand the brand across as many as 10 states.

Speaker 2: The second Unity Road store is currently being rebranded to Unity Road in Oklahoma City, Oklahoma, and our third and fourth locations opened in July 2022 in North Denver and Hartford, South Dakota.

The second Unity Road store is currently being rebranded to Unity Route and Oklahoma City, Oklahoma, and our third and fourth locations opened in July 2022 in North Denver, and Hartford South Dakota.

Speaker 2: On the horizon for Unity Road is anticipated expansion into New Jersey, Maine, Virginia, Michigan, and New Mexico, among other states. Maine is continuing to progress towards the construction stage and in New Jersey, we have supported 4 of our local entrepreneurial groups in submitting dispensary license applications.

On the Horizon for Unity Road is anticipated expansion into New Jersey, Maine, Virginia, Michigan, and New Mexico. Among other states, Maine is continuing to progress towards the construction stage and in New Jersey, we have supported for of our local entrepreneurial groups in submitting dispensary license.

Applications.

Speaker 2: Recent momentum on the retail front exemplifies our strong depth of operational talent across the company. Over the past year, we have made it a focus to bring in top talent that can handle a fast-paced environment as well as the necessary skill set to achieve our projected growth plan. And our team has done a phenomenal job proving that they can execute.

Recent momentum on the retail front exemplifies our strong depth of operational talent across the company over the past year. We have made it a focus to bring in top talent that can handle a fast paced environment as well as the necessary skill set to achieve our projected growth plan and our team has done a phenomenal job proving.

That they can execute.

Speaker 2: Last month, our team assisted our South Dakota partners in the opening of the first and only non-tribal state-licensed medical cannabis dispensary in Hartford, which is a suburb of Sioux Falls.

Last month, our team assisted our South Dakota partners and the opening of the first and only non tribal state licensed medical cannabis dispensary in Hartford, which is a suburb of Sioux falls the.

Speaker 2: The community showed tremendous support, which is evident in the success of the store in its first weeks of open.

The community showed tremendous support which is evident in the success of the store in its first weeks of opening.

Speaker 2: On its first day alone, the location served more than 130 patients with an average transaction of $90 and continues to welcome steady traction.

On its first day alone at the location served more than 130 patients with an average transaction of $90 and continues to welcome steady traction.

Speaker 2: Our goal in Colorado and the Greater Denver area is to establish Unity Road as the market's go-to neighborhood store.

Our Golden Colorado, and the greater Denver area is to establish the entity road as the markets go to neighborhood store.

Speaker 2: We're inching closer to that goal and gaining market presence through a combination of acquisitions and new store openings. We currently have four locations, either open or in various stages of development, with the newest store in North Denver, which opened doors earlier last year.

We're inching closer to that goal and gaining market presence through a combination of acquisitions and new store openings. We currently have four locations either open or in various stages of development with the newest store in North Denver, which opened doors earlier last month.

Speaker 1: Continuing to pave the way in the Colorado market, we are able to help our local entrepreneur in securing license approval for the dispensary near the Cherry Creek neighborhood of Denver. We are still awaiting local approval on the license and in the meantime have built out plans for retail storefronts. We anticipate this location to be fully operational by the end of 2022.

Continuing to pave the way in the Colorado market, we are able to help our local entrepreneur in securing license approval for the dispensary near the Cherry Creek neighborhood of Denver, We are still awaiting local approval on the license.

And in the meantime have built out plans for retail storefront, we anticipate this location to be fully operational by the end of 2022.

Speaker 2: We have been making significant headway towards solidifying our spot as the leader in North America cannabis retail landscape, as exemplified by our recent US expansion and our pending acquisition of Sessions Cannabis, which is one of Canada's largest cannabis retail franchisors.

We have been making significant headway towards solidifying our spot as the leader in North America, Canada retail landscape as exemplified by our recent U S expansion and our pending acquisition of sessions candidates, which is one of Canada's largest cannabis retail franchise horse.

Speaker 2: We signed the definitive agreement in May and anticipate closing the acquisition by the end of the song.

We signed the definitive agreement in May and anticipate closing the acquisition by the end of the summer.

Speaker 1: This is a transformative opportunity for our company. The acquisition will fast track our entry into the world's second largest cannabis market. Industry experts expect Canadian cannabis sale to climb to $4.7 billion in Canadian dollars by the end of 2022. ¥24.

This is a transformative opportunity for our company.

The acquisition will fast track our entry into the world's second largest cannabis market <unk>.

Industry experts expect Canadian cannabis sales declined to $4 7 billion.

In Canadian dollars by the end of 2022.

Speaker 1: Sessions currently has 43 stores throughout the province of Ontario with multiple openings planned for the rest of 2022. The franchise or which generates approximately $70 million Canadian dollars in annual system wide sales has a franchise system comprised of 15 plus franchisees with session stores located in prime retail shopping.

<unk> currently has 43 stores throughout the province of Ontario, with multiple openings planned for the rest of 2022, the franchise or which generates approximately 70 million Canadian dollars in annual system wide sales has a franchise system comprised of 15, plus franchisees with session stores low.

<unk> and prime retail shopping centers.

Speaker 2: The future combined retail footprint will exponentially increase unity roads shop count across North America to nearly 50 locations.

The future combined retail footprint will exponentially increase unity road shop, count across North America to nearly 50 locations.

Speaker 1: Upon closing the acquisition, we will become the largest global and publicly traded cannabis franchise company and seventh largest cannabis retailer.

Closing the acquisition, we will become the largest global and publicly traded cannabis franchise company and seventh largest cannabis retailer.

Speaker 2: On the product side, our item 9 labs product brand is a top 10 cannabis brand in Arizona. With our products in more than 60% of the state's dispensaries, our item 9 labs brand has been holding strong as the fourth leading brand in the vape category with our Orion and Broad Spectrum Cartoon.

On the product side or item nine labs product brand is a top 10 cannabis brand in Arizona.

With our products and more than 60% of the state's dispensaries or item nine labs brand has been holding strong as the fourth leading brand in the vape category with our Orion and broad spectrum cartridges.

Speaker 1: Infused pre-rolls are an exciting product category in the Arizona market and has been maintaining triple digit growth. We recognize the market trending toward the product category in 2021 and have been testing limited runs of half-gram infused pre-roll packs throughout the year at the SENSRIES in the Phoenix and Tucson markets. The newest test product hit the SENSRIE shelves the first week of August with live crumble.

<unk> pre rolls are an exciting product category in the Arizona market and has been maintaining triple digit growth, we recognize the market trending toward the product category in 2021 and have been testing limited runs of half half Gram infuse pre roll packs throughout the year after centuries and.

Phoenix and Tucson markets.

The newest test products hit dispensary shelves. The first week of August with live crumbled.

Speaker 1: Each of our limited runs have received very positive feedback from dispensary teams and their customers alike, and we expect to introduce a mainstay to our product lineup this fall.

Each of our limited runs have received very positive feedback from dispensary teams and their customers alike, and we expect to introduce a mainstay to our product lineup. This fall.

Speaker 1: To build from this positive traction in the market and drive our profit margins upwards, we are focused on reducing our reliance on third-party source materials for lab production.

To build from this positive traction in the market and drive our profit margins upwards. We are focused on reducing our reliance on third party source materials for lab productions.

Speaker 1: With our initial expansion phase of our Kruja Arizona cultivation and lab site, we are set to increase output of cannabis plant material by 250 to 300%, which is expected to result in a per unit cost reduction of at least 30%. Further, the 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.

With our initial expansion phase of our <unk>, Arizona cultivation and lab site. We are set to increase output of cannabis plant material by 250% to 300%, which is expected to result in a per unit cost reduction of at least 30%.

Further the 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.

Speaker 1: This first round of development will bring us from our current 20,000 square feet of operations to more than 84,000 square feet and includes the construction of three steel buildings with 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 two 18,000 square foot greenhouses we are adding.

This first round of development will bring us from our current 20000 square feet of operations to more than 84000 square feet and includes the construction of three steel buildings with two greenhouses, adding 9600 square feet for indoor cultivation 9600 square feet of lab in packaging and 9600 square feet.

For our head house to support. The addition of $2 18000 square foot greenhouses, we are at.

Speaker 1: The building and greenhouse buildings are completed for vertical construction to begin in August and all underground utilities are ready to be connected to the buildings. We anticipate the initial expansion phase to be completed in spring 2023.

The building and greenhouse footings are completed for vertical construction to begin in August and all underground utilities are ready to be connected to the buildings. We anticipate the initial expansion phase to be completed in spring 2023.

Speaker 1: Beyond Arizona, we are nearing completion of the development of our 20,000 square foot facility in Perump, Nevada. Our team is working with Nye County and the City of Perump to finalize the certificate of occupancy.

Beyond Arizona, we are nearing completion of the development of our 20000 square foot facility in Pahrump, Nevada. Our team is working with Nye County, and the city of for Us to finalize the certificate of occupancy.

Speaker 1: The cultivation and lab facility will encompass 4,450 square feet for flour, 990 square feet of vegetation space, 400 square feet for clones, 300 square feet for dry curing, and 615 square feet.

The cultivation and lab facility will encompass 4450 square feet for flower 990 square feet of vegetation space 400 square feet for <unk> 300 square feet for drive hearings and 615 square feet.

Speaker 1: 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 a commercial kitchen space of 1,100 square feet. The remainder of the building is ancillary rooms such as water rooms, offices, locker rooms, and break rooms for our team. We anticipate the Nevada facility will be operational by the end of this year. This concludes my prepared remarks. We will now address some of the previously submitted questions.

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 commercial kitchen space of 1100 square feet. The remainder of the building is ancillary rooms, such as water rooms offices locker rooms, and break rooms for our team we anticipate the Nevada.

The facility will be operational by the end of this year. This.

This concludes my prepared remarks, we will now address some of the previously submitted questions.

Speaker 3: Thanks, Andrew. And thank you to those of you who submitted questions. Here's the first one. You've made some acquisition announcements over the past several months, such as Herbal Cure & Sessions Canada. Do you have an update to provide on when you might close these acquisitions?

Thanks, Andrew and thank you to those of you who submitted questions here the first one.

Some acquisition announcements over the past several months launch such an herbal cure instructions, Canada do you have an update to provide on when you might close these acquisitions.

We have what we believe are multiple opportunities to finance the acquisition and are in active discussions with multiple interested parties, we hope to be in a position to disclose the definitive agreement as soon as possible.

Speaker 1: We have what we believe are multiple opportunities to finance the acquisition and are in active discussions with multiple interested parties. We hope to be in a position to disclose the definitive agreement as soon as possible.

Speaker 3: Thank you regarding your recent opening in the first ever medical cannabis dispensary in South Dakota. How many unity road locations are open? And as an addition to that question, how many do you expect to open end of 2022 and say, 2023?

Thank you.

Regarding our recent opening in the first ever medical cannabis dispensary in South Dakota, How many unit road locations are open.

And as in addition to that question how many do you expect to open the end of 2022 and say 2023.

Speaker 1: We opened our first franchise location in June , 2021 in Boulder, Colorado, and had since grown to four stores in operation. Our second store is currently being rebranded to Unity Road and Oklahoma City, and our third location opened last month in North Denver in addition to the South Dakota opening.

We opened our first franchise location in June 2021 in Boulder, Colorado and have since grown to four stores in operation.

Our second store is currently being rebranded to unity round in Oklahoma City, and our third location opened last month in North Denver. In addition to the South Dakota opening.

Speaker 1: Our development pipeline is stacked with more than 20 groups who are expanding the Unity Road brand across the nation and are in various stages of licensing process or waiting for their market to open. We anticipate opening another couple of stores in the next 9-12 months, but it's important to note that our pending acquisition of Sessions Cannabis would bring our retail footprint to nearly 50 locations across North America this year.

Our development pipeline, a stack with more than 20 groups, who are expanding the empty road brand across the nation and are in various stages of licensing process or waiting for their market to open we anticipate opening another couple of stores in the next nine to 12 months, but important to note that our pending acquisition of sessions candidates would bring.

Our retail footprint to nearly 50 locations across North America. This year.

Speaker 3: Okay, thank you. Next one. There appears to be significant non-cash charges in the quarter. Can you provide some granularity to this?

Okay. Thank you.

Next one there appears to be significant noncash charges in the quarter can you provide some granularity to this.

Okay.

Speaker 3: Yeah, I'll take that one, Jason now, but 1.6 million of our operating expenses for the three months ended June 30, 2022, were non-cash expense.

Yes, I'll take that one Jason.

$1 6 million of our operating expenses for the three months ended June 32022 were noncash expenses.

Speaker 3: That's depreciation, amortization, and dock-based compensation.

Depreciation amortization and stock based compensation.

Speaker 3: Also to note, $0.6 million of our interest expense for the three months ended June 30, 2022 was non-cash amortization of debt discount.

Also to note.

$6 million of our interest expense for the three months ended June 32002 was noncash amortization of debt discounts.

Speaker 3: Additionally, 480,000 was included in operating expenses that are one time and charged for legal and other acquisition related fees.

Additionally, 480000 was included in operating expenses that are one time charges for legal and other acquisition related fees.

Thank you Bobby.

<unk>.

Speaker 3: Last question, access to capital. Do you have enough capital to finish your expansion plans in Arizona?

Last question.

Access to capital do you have enough capital to finish your expansion plans in Arizona.

Speaker 3: Yeah, we're set with 8.6 million and escrow deposits from the construction loan proceeds.

Yes.

$8 6 million in escrow deposits from the construction loan proceeds.

Yeah.

Speaker 3: Okay, thank you, Bobby. It looks like that wraps up all of our questions. Andrew, I'll pass it back to you and you can close up call.

Okay. Thank you Bobby.

It looks like that wraps up all of our questions Andrew I'll pass it back to you and you can close out the call.

Speaker 1: Thank you for joining us on our call today. We remain optimistic about the future of our company. As always, our main focus is value creation for our shareholders. As large equity holders ourselves, our goals remain very aligned with yours, and we will continue to strive to operate our company in our collective best interest.

Thank you for joining us on our call today, we remain optimistic about the future of our company as always our main focus is value creation for our shareholders as large equity holders ourselves our goals remain very aligned with yours, and we will continue to strive to operate our company in our collective best interest.

Speaker 2: If you haven't yet, we invite you to keep tabs on our company news via item9-labscorp.com. Thank you.

If you haven't yet we invite you to keep tabs on our company news via item nine labs Dot com. Thank you.

Yeah.