Item 9 Labs Corp. (OTCQX:INLB) Q3 2022 Earnings Conference Call August 16, 2022 8:30 AM ET
Company Participants
Jason Assad – Investor Relations
Andrew Bowden – Chief Executive Officer
Bobby Mikkelsen – Chief Financial Officer
Jason Assad
[Abrupt Start] Joining me on today’s call is our Chief Executive Officer, Andrew Bowden and our Chief Financial Officer, Bobby Mikkelson. Shortly before this call, we filed our Form 10-Q, a copy of which is available on the company’s website at item9labscorp.com.
I will start today by reading the Safe Harbor statement. The statement is made pursuant to the Safe Harbor for forward-looking statements described in the Private Securities Litigation Reform Act of 1995. All statements made in this call, with the exception of historic facts maybe considered forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. Although, we believe the expectations and assumptions reflected in these forward-looking statements are reasonable, we can make no assurance that such expectations will prove to be correct.
Actual results may differ materially from those expressed or implied in forward-looking statements due to various risks and uncertainties. For a discussion of such risks and uncertainties that could cause actual results to differ from those expressed or implied in the forward looking statements, please see risk factors detailed in our Annual Report on Form 10-K, those contained in the subsequently filed quarterly reports on Form 10-Q as well as other reports we file from time-to-time with the Securities and Exchange Commission. Any forward-looking statements included in this earnings call are made only as of the date of this call. We do not undertake any obligation to update, supplement any forward-looking statements to reflect subsequent knowledge, events or circumstances.
Lastly, please note that 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.
With that, I’d now like to introduce Item 9 Labs Corp.’s Chief Executive Officer, Andrew Bowden. Andrew?
Andrew Bowden
Thank you, Jason and good morning everyone. Thank you for joining us today for our fiscal Q3 2022 earnings conference call. On today’s call, I will highlight recent operational momentum 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. Following my remarks, our CFO, Bobby Mikkelson will provide an overview of our financial results.
Our team has made great strides in rolling out our retail franchise into additional markets as exemplified by our recent openings in North Denver and South Dakota as well as our pending acquisition in Canada. To maintain our growth momentum and continue gaining market share, we are focused on setting the bar for premium high-quality products across our core categories. Our Orion has done exceptionally well in the market and is a favorite among dispensary team members throughout Arizona. As we seek opportunities to expand our products nationwide, we anticipate this foundational success will prove well in our target growth markets.
At this point, I’d like to turn it over to CFO, Bobby Mikkelsen for a summary of our fiscal Q3 2022 financial results, following which I will provide additional details around our retail and product growth.
Bobby Mikkelsen
Thank you, Andrew. Despite industry headwinds, we have shown strong year-to-date revenue growth of $17.8 million continuing to demonstrate the scalability of our business through the first 9 months of fiscal 2022. For the three months ended June 30, 2022, revenue was $4.9 million, a decrease of $1.8 million or 26% compared with $6.7 million for the 3 months ended June 30, 2021. The decline was primarily due to supply chain delays.
For the 3 months ended June 30, 2022, gross profit was $1.6 million, a decrease of $0.5 million or 45% compared with $2.9 million for the 3 months ended June 30, 2021. For the 3 months ended June 30, 2022, gross profit was $1.6 million, a decrease of $1.3 million or 45% compared with $2.9 million for the 3 months ended June 30, 2021. The resulting gross margin was 32% compared with 43% for the 3 months ended June 30, 2021.
The company experienced lower gross profit margins in the third quarter of 2022 due to price reductions as competition continues to rise in Arizona. Item 9 Labs’ products remain as one of the top brands in the state. Additionally, to deepen the market penetration of Item 9 Labs’ products, the company has 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.
For the 3 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 3 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 position. Of note, $1.6 million of our operating expenses for the 3 months ended June 30, 2022 were non-cash expenses, including depreciation, amortization and stock-based compensation. Also of note, $0.6 million of interest expense for the 3 months ended June 30, 2022 was non-cash amortization of debt discounts.
For the 3 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 3 months ended June 30, 2021. 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 3 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 3 months ended June 30, 2021. 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.
For the 3 months ended June 30, 2022, net loss attributable to the company was $5.5 million or a net loss of $0.06 per share compared with a net loss of $0.8 million or $0.01 per share for the 3 months ended June 30, 2021. Cash and cash equivalents totaled $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 to you, Andrew.
Andrew Bowden
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. 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. On a corporate level, the highly scalable retail model allows us to expand our Unity Road dispensary footprint quicker and with low capital expenditure 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. 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. And we have since grown to 4 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. The second Unity Road store is currently being rebranded 2 Unity Road in Oklahoma City, Oklahoma. And our third and fourth locations opened in July 2022 in North Denver and Hartford, South Dakota.
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 four of our local entrepreneurial groups in submitting dispensary license applications. 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 pace 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.
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. The community showed tremendous support, which is evident in the success of the store in its first weeks of opening. On its first day alone, the location served more than 130 patients with an average transaction of $90 and continues to welcome steady traction. Our goal in Colorado and the Greater Denver area is to establish Unity Road as the markets go-to neighborhood store. We are 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. 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.
We had been making significant headway towards solidifying our spot as the leader in North America cannabis retail landscape as exemplified by our recent U.S. expansion and our pending acquisition of Sessions Cannabis, which is one of Canada’s largest cannabis retail franchisors. We signed the definitive agreement in May and anticipate closing the acquisition by the end of the summer. 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 sales to climb to CAD4.7 billion by the end of 2022. Sessions currently has 43 stores throughout the province of Ontario, with multiple openings planned for the rest of 2022. The franchisor, which generates approximately CAD70 million in annual system-wide sales, has a franchise system comprised of 15 plus franchisees, with Sessions stores located in prime retail shopping centers. The future combined retail footprint will exponentially increase Unity Road’s shop count across North America to nearly 50 locations. Upon closing the acquisition, we will become the largest global and publicly traded cannabis franchise company and seventh largest cannabis retailer.
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 cartridges. Infused pre-rolls are an exciting product category in the Arizona market and has been maintaining triple-digit growth. We recognized the market trending toward the product category in 2021 and have been testing limited runs of 0.5 gram infused pre-roll packs throughout the year at dispensaries in the Phoenix and Tucson markets.
The newest test products hit dispensary shelves the first week of August with live crumble. 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. 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. With our initial expansion phase of our Coolidge, 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. 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 3 steel buildings with 2 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 2 18,000 square foot greenhouses we are adding. 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.
Beyond Arizona, we are nearing completion of the development of our 20,000 square foot facility in Pahrump, Nevada. Our team is working with Nye County and the City of Pahrump to finalize the certificate of occupancy. The cultivation and lab facility will encompass 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 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.
Question-and-Answer Session
A – Jason Assad
Thanks, Andrew and thank you to those of you who submitted questions. Here is the first one. You made some acquisition announcements over the past several months such as Herbal Cure and Sessions Canada do you have an update to provide on when you might close these acquisitions?
Andrew Bowden
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. Thank you.
Jason Assad
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 of that question, how many do you expect to open end of 2022 and say 2023?
Andrew Bowden
We opened our first franchise location in June 2021 in Boulder, Colorado and have since grown to 4 stores in operation. Our second store is currently being rebranded to Unity Road in Oklahoma City and our third location opened last month in North Denver, in addition to the South Dakota opening. 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 are waiting for their market to open. We anticipate opening another couple of stores in the next 9 to 12 months, but important to note that our pending acquisition of Sessions Cannabis would bring our retail footprint to nearly 50 locations across North America this year.
Jason Assad
Okay, thank you. Next one, there appears to be significant non-cash charges in the quarter. Can you provide some granularity to this?
Bobby Mikkelsen
Yes, I will take that one Jason now. About $1.6 million of our operating expenses for the 3 months ended June 30, 2022 were non-cash expenses. That’s depreciation, amortization and stock-based compensation. Also, to note, $0.6 million of our interest expense for the 3 months ended June 30, ‘22 was non-cash, amortization of debt discounts. Additionally, $480,000 was included in operating expenses that are one-time charges for legal and other acquisition-related fees.
Jason Assad
Thank you, Bobby. Last question, access to capital, do you have enough capital to finish your expansion plans in Arizona?
Bobby Mikkelsen
Yes, we are set with $8.6 million in escrow deposits from the construction loan proceeds.
Jason Assad
Okay. Thank you, Bobby. It looks like that wraps up all of our questions. Andrew, I will pass it back to you and you can close out the call.
Andrew Bowden
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. If you haven’t yet, we invite you to keep tabs on our company news via item9labscorp.com. Thank you.
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