Earnings Transcript for INLB - Q2 Fiscal Year 2021

Operator: Good morning, ladies and gentlemen. And welcome to the Item 9 Labs Q2 FY 2021 Earnings Results Conference Call. At this time, all participants have been placed on a listen-only mode. It is now my pleasure to turn the floor over to your host, Brian Loper, Investor Relations from ClearThink. Sir, the floor is yours.

Brian Loper: Thank you, Operator. Good morning, everyone. And welcome to the Item 9 Labs second quarter fiscal year 2021 for the three months ended March 31, 2021 earnings conference call. By now everyone should have access to the earnings press release, which was issued earlier today before the markets open at approximately 8

Andrew Bowden: Thank you, Brian, and good morning, everyone. We greatly appreciate you taking the time to join us on today's call. This is our first ever earnings results conference call as a publicly-traded company. So in addition to discussing our operational highlights and financial results for the quarter, we will invest some time introducing our team and providing some background on how we got to where we are today and our strategy for accelerated growth over the next three years. After my opening remarks, our CFO, Bobby Mikkelsen will then give a summary of our second quarter fiscal year 2021 financial results. Then Mike Weinberger, Chief Franchise Officer of our Dispensary Franchise Brand Unity Rd. will discuss the franchises traction to-date and growth plans. I will then end with providing insights into some of our strategic growth initiatives and our outlook for continued growth and profitability for fiscal year 2021 and beyond, along with our plans to increase our shareholder awareness and visibility. We will then answer shareholder questions that were pre-submitted prior to the call. The commitment I've made to our company and the cannabis industry as a whole is both professional and personal. Anyone who has heard my story knows that my mother's battle with cancer. She's now four years cancer free and the cannabis plant helped tremendously through the treatment process. Item 9 Labs Corp. is a vertically integrated cannabis operator and dispensary franchise or delivering premium products from our large scale cultivation and production facilities in the United States. Our award winning Item 9 Labs brand specializes in best-in-class products and user experience across several cannabis categories. We also offer a unique dispensary franchise model through our national Unity Rd. retail brand easing barriers to entry. The franchise provides an opportunity for both new and existing dispensary owners to leverage the knowledge, resources and ongoing support needed to thrive in their state compliantly and successfully. Item 9 Labs brings the best industry practices to markets nationwide through distinctive retail experience, cultivation capabilities and production -- and product innovation. Our veteran management team combines a diverse skill set with deep experience in the cannabis sector, franchising and the capital markets to lead a new generation of public cannabis companies that provide transparency, consistency and wellbeing. I'd like to share with you several facts about Item 9 Labs and Unity Rd. that I find particularly compelling and essential for understanding the growth potential of our business. Item 9 Labs was founded back in 2017 and is headquartered in Phoenix, Arizona. We obtained OTCQX listing in August of 2020 and have reported 20% sequential quarter-over-quarter growth over the last five quarters. Since our inception, we've sold more than 1.3 million packaged goods sold. We have 50 acres approved cultivation operations and production on our site in Coolidge. It's one of the largest properties in the state that is zoned to grow, cultivate and manufacture cannabis. Arizona is one of the most sought after markets in the U.S. with anticipated revenues of $1.5 billion by 2024 as the state recently expanded to legalize adult use. Unity Rd. has multiple agreements signed with 10 -- over 10 entrepreneurial groups who are in various stages of development across seven different states. Our team has a combined 200 years of experience in legal cannabis and franchising. Throughout our careers, we've supported over 100 concepts for franchise development, one cannabis licenses in 15 states and earn 24 cannabis industry awards. I will now introduce key people of our team who have been instrumental in our growth today, and as importantly, for where we're going. Chief Strategy Officer, Jeffrey Rassás. Jeffrey is charged with guiding the company's strategic growth. Mr. Rassás is a 20-plus-year veteran of early to middle stage companies with extensive business management experience in strategic planning, funding, leading and performing pivotal turnarounds for private and public ventures across a variety of industries. He previously served as CEO of AirWare Holdings Inc., CEO at YCNG and YouChange, and CEO of Global Alerts, a holding company for Earth911.com and Pets911.com and building ImproveNet.com later selling to Interactive Commerce Corp. Chief Franchise Officer, Mike Weinberger. Mike leads all franchise related areas of Unity Rd., while overseeing day-to-day operations of the franchise. A culture, creator and growth driver with around 20 years in franchising his experience has been focused on growing emerging concepts into nationally recognized brands. Mr. Weinberger has been instilling his franchise knowledge into the cannabis industry since 2018 and paved the path for bringing the franchise business model to cannabis, offering creative solutions to something many thought couldn't be done. His tenacity has opened the doors to cannabis entrepreneurship through the Unity Rd. franchise opportunity. Mike Weinberger was previously the CEO of Maui Wowi, a Coffees and Smoothies franchise with 500 plus units worldwide. Most notably, in his eight years with the franchise, he led it successful sale to Kahala Brands. Upon acquisition, his role shifted to Brand President and VP of Franchise Development, overseeing Kahala Brands non-traditional portfolio and growth strategies. His comprehensive knowledge of franchising fuels Unity Rd.’s success in an emerging market, where agility is essential to entry in new markets and states. Chief Financial Officer, Bobby Mikkelsen. Before joining Item 9 Labs, Bobby was a certified public accounting in the State of Arizona and works with a client base that is diverse in both size and industry, including small non-profits, large government agencies and medium-sized businesses in healthcare, mental health and pharmaceutical industries. He most recently led his own accounting firm and had previously spent more than a decade as an auditor with Henry & Horne, LLP in Arizona. Now I'd like to pass it off to Bobby for a summary of our second quarter fiscal year 2021 financial results.

Bobby Mikkelsen: Thank you, Andrew. As you all will see, we have made great strides as we have expanded our operations to meet an increasing demand for our products, our profitability to demonstrate the scalability and efficiency of our operations, which we expect will continue to improve as we grow our business. Total revenues for the three months ended March 31, 2021, were $6.1 million, compared to $1.9 million a year ago, an increase of $4.2 million or 228%. Total revenues for the six months ended March 31, 2021, were $9.2 million, compared to $3.4 million a year ago, an increase of $5.7 million or 170%. The increase is due to management's focus of increasing production, as the market demand remains to be higher than our production capacity. Gross profit for the three months ended March 31, 2021, was $3 million or 49%, compared to $600,000 or 32% for the three months ended March 31, 2020. Gross profit for the six months ended March 31, 2021, was $4.4 million or 48%, compared to $1.1 million or 32% for the six months ended March 31, 2020. The increase in profit margin is due to the company operating more efficiently during its production expansion. The company has been able to lower costs since the first half of fiscal year 2020 and expects to see gross profit margins continue to increase in future periods. As the initial ramp up costs were significant in fiscal year 2020, the company has been able to increase efficiencies and production. Management believes these costs will continue to increase at a lower rate than revenue growth and production in future periods, which will lead to higher profit margins than these historical figures illustrate. Given the 16-week to 17-week growth cycle, efficiencies are not immediately realized in costs. Total operating expenses for the three months ended March 31, 2021, were $2.5 million and compared to $1.5 million for the three months ended March 31, 2020, an increase of $1 million dollars or 66%. As a percentage of revenue, operating expenses decreased to 40% from 80% going from 2020 to 2021. Total operating expenses for the six months ended March 31, 2021, were $4.3 million, an increase of $1.1 million or 35%, compared with $3.2 million for the same period last year. Operating expenses as a percentage of revenue decreased to 47% from 93% for the periods compared. Management believes this ratio will continue to decrease going forward, as the expectation is that revenues will continue to grow at a higher rate than operating expenses. The decrease in operating expenses as a percentage of revenues for the three months and six months ended March 31, 2021, was due to the company's focus on increasing revenue, reduce -- reducing expenses and performing more efficiently. Of note, $0.4 million of the company's operating expenses for the three months ended March 31, 2021, were non-cash expenses, including depreciation, amortization and stock-based compensation. For the three months ended March 31, 2021, operating income was $0.5 million, an increase of $1.4 million or 158%, compared with operating loss of $0.9 million for the same quarter last year. For the six months ended March 31, 2021, operating income was $151,000, an increase of $2.3 million, compared with the operating loss of $2.2 million for the same period last year. After adding back non-cash operating expenses, depreciation, amortization, interest and stock-based compensation adjusted EBITDA for the three months ended March 31, 2021, was positive $0.9 million, as compared with a loss of $0.9 million for the same quarter last year. After adding back non-cash operating expenses, depreciation and amortization, interest and stock-based compensation adjusted EBITDA for the six months ended March 31, 2021, was positive $1.3 million, as compared with the $1.2 million loss for the same period in the prior year. For the three months ended March 31, 2021, net income was nearly $50,000, an increase of $1.7 million, compared with a net loss of $1.6 million for the three months ended March 31, 2020. Earnings per share for the three months ending March 31, 2021, was $0.01 per share, compared with a $0.03 loss per share for the same quarter in the prior year. For the six months ended March 31, 2021, net loss was $1 million, a decrease of $2.5 million compared with a net loss of $3.5 million for the six months ended March 31, 2020. Loss per share for the six months ended March 31, 2021, was $0.01 per share, compared with the loss per share of $0.06 for the same period last year. As you can see, we've worked diligently in streamlining operations and increasing efficiency, which has resulted in Item 9 Labs becoming profitable. I would now like to introduce our real CFO, Mike Weinberger, our Chief Franchise Officer for insights into Unity Rd.’s business model and growth plan.

Mike Weinberger: Thanks, Bobby. Appreciate that. So what we're excited about is the combination of how Unity Rd.’s cannabis retail franchise model and the marriage with Item 9’s premium products makes us the first vertically integrated franchise cannabis concepts in the U.S. We truly believe that franchising is the vehicle for locally owned and operated dispensaries. It only -- it not only empowers local business owners with the business of cannabis, but it gives them the confidence, success and support to reach the overarching goals to inspire confidence and the benefits of cannabis for all. Through our retail franchise dispensary model, we also have created a capper -- a capital efficient model for expansion, focusing on clustering our operations would allow us to scale in other states with our premium products of Item 9. Unity Rd.’s franchise agreements are not only a 10-year agreement with $100,000 franchise fee up front, we also take 5% royalty and 2% marketing to help support and grow our stores across the country. But the beauty of the franchise fee and our franchise structure is that our corporation does not need the capital to invest in a licenses, this comes from our franchisees. So, low capital overhead allows us to scale quickly across the country, with a model of locally owned businesses. Currently, Unity Rd. has 17 entrepreneur groups across the country, primarily around seven to eight states, including the Northeast, which we're getting an exceptional amount of interest from as of late. I'm going to hand the call back over to Andrew Bowden, our CEO with some more insights into how we are – how our strategic initiatives are going to parlay the future.

Andrew Bowden: Thank you, Mike. The combination of our premium award winning Item 9 Labs product with the Unity Rd. dispensary franchise, through the acquisition of OCG Inc. in March puts us in a unique position financially and geographically to capitalize on opportunities in the dynamic and rapidly evolving regulatory environment. We're assisting Unity Rd. franchise partners in opening shops nationwide and continuing to grow the existing franchise pipeline, which has seen an influx in traffic due to increased legalization and lead flow from our dispensary permits and dispensary templates assets. As Mike mentioned, with national expansion of the Unity Rd. footprint expands, we will seek opportunities to bring Item 9 Labs branded premium product suite to the market. This gives our product immediate entry points through the Unity Rd. franchise network. Meanwhile, locally, we are approved in late 2020 to develop 650,000 square feet of operations space on our 50 acre cultivation site to meet existing Arizona demand with the new adult use market. We are projected to expand our operations space by more than 3000% and create more than 200 jobs by the conclusion of the development. The first phase of expansion will begin soon and we'll increase our operational footprint by more than 300% and create 60 jobs in the next 12 months. We're extremely proud of our second quarter fiscal year 2021 results, which mark our sixth consecutive quarter of at least 20% sequential quarter -- quarterly revenue growth. Despite our achievements to-date, we believe we are still in the early innings of a nine inning baseball game. The recent legalization of adult use in Arizona and our ramp up of Unity Rd.’s franchise business will be key drivers for the accelerated growth over the next 12 months. In closing, I want to thank all of our team members for their hard work and dedication, and our customers and partners for their trust and shared enthusiasm and commitment. I also want to thank our shareholders for their continued confidence in us to deliver long-term shareholder value. Thank you again for joining us on the call today. We look forward to communicating our continued progress and we are very grateful for your interest in our business.

A - Brian Loper: Congratulations, guys on such a strong quarter and achieving profitability. Are all your sales to-date in Arizona and in regards to medical cannabis? Now that Arizona has legalized adult use, do you need to expand production capabilities to meet what I would assume would be increased demand for your products, and if so, where are you in that process of expansion?

Andrew Bowden: To answer your first question. Yes. All sales are currently from Arizona operations. However, some of the sales are from the recreational passing of AZ Prop 207, as the State of Arizona was so properly prepared to handle the transition of medical-only into an advanced recreational market. We are expanding our current production by 10 times of the current footprint of the lab and over 3000 times -- or 3000% as a whole.

Brian Loper: All right.

Andrew Bowden: Does that answer the question?

Brian Loper: Yeah. Can you elaborate on how recently acquired Unity Rd. cannabis dispensary franchise business further enhances what you guys are doing? Like can you vertically integrate especially in Arizona and benefit from being able to supply directly to the franchise dispensary?

Andrew Bowden: Through the dispensary permits, the Dispensary Templates acquisition in 2018, we were targeting a licensing sector of our business, but quickly realized this was not the path into the future for us. The franchising model is the future of cannabis. Franchising gives us several opportunities, such as an increased probability of winning licensing application due to the local ownership and bridging states, social equity success to the forefront. And we're absolutely vertically integrating across the United States. Upon having clusters of franchises in states, we will enter into those states with our production and cultivation to bring Item 9 Labs premium products into those states and into our local franchises.

Brian Loper: So guys, obviously, Unity Rd. is another state outside of Arizona, but does Item 9 Labs plan to cultivate and replicate its product success it’s had an Arizona and other states? And if so, what states are next?

Mike Weinberger: Absolutely. Thanks for the question. Unity Rd. is the vehicle that brings Item 9’s premium products to the masses. So as we grow into other states in Ohio, Michigan, Colorado, our plan is -- once we get a little bit more market penetration and saturation, we'll be bringing our award winning product lines into those markets.

Brian Loper: Okay. Nice. And what do you look for when you're seeking new Unity Rd. franchise partners? Are you looking at geography, what your ideal franchisees look like?

Mike Weinberger: We start at the beginning, which we’re really looking for as good people. We look for good people that have the same moral compass and beliefs in the healing powers of the plant and that we do at Unity Rd. and Item 9. And then as we dive into the relationships, there's an extensive experience of education of learning about the pros – prospective franchisees and them learning about us, our friend -- our current franchisees and prospective franchisees, our current multi-unit operators for many big brands, including Subways and Planet Fitness. We have also taken exits in other businesses. But to make it simple, we want good people who are sophisticated and understand that they -- while they might understand business, cannabis is new to them and they need the support structure that the Unity Rd./Item 9 teams offer.

Brian Loper: So, Mike, are there other franchising, others franchising in cannabis, and if so, what's your guys differentiator?

Mike Weinberger: Yeah. So in the U.S., we are the only ones I know of that are currently franchising across the country. There are -- there were a few others that have decided to commence franchising this year, but I have not seen or heard of their franchise disclosure document or any franchise signings. We've been in business for five years and have successfully scaled. There are -- there is a few concepts in Canada that are a little farther along, but we are -- fortunate or unfortunate we are the only one in cannabis franchising in the United States.

Brian Loper: Got it. And then given there's such an emphasis right now on state social equity programs, can you explain how Unity Rd. franchise fits into this challenge?

Mike Weinberger: Absolutely. So, the vision for Unity Rd. as we are an inclusive company, we're an inclusive brand. And what that means is, we want everyone. We want everyone who believes in the healing powers of the plant. We want everyone who wants to enjoy cannabis responsibly and the right way. We also want business owners who may or may not have been disproportionately impacted by the war on drugs. So we have a great number of our franchisees who are socially -- social equity applicants and we help them through the application process, because we believe it is the vision of Unity Rd. that these businesses should all be locally owned and operated. I love the other MSOs are -- do not have that same contention. So, social equity is one of the pillars that we are built on at Unity Rd.

Brian Loper: Great. Great. Thank you for that, Mike. Let's switch over to Bobby. I have a finance question here. So, on a run rate of nearly $25 million annual revenue, $2 million of operating income and net income profitability, what are your guys plans to increase your visibility on Wall Street? Do you have analyst research coverage soon or some other things.

Bobby Mikkelsen: Yeah. I'll answer your second question first. We do anticipate analyst’s research coverage very soon. As far as our plans to increase visibility on Wall Street, it's a very loaded question. There's a lot to it. I mean, we were putting ourselves in front of dozens upon dozens of institutional investors day in and day out to increase visibility in the market. And really more than anything what we're doing is, is we are building a company that puts out great operating and financial results, so the market can see for itself. But we are doing those little things, talking to institutional, working on the analyst coverage, bringing in banks in order to increase the visibility and liquidity for our shareholders.

Brian Loper: That's great. Thank you, Bobby. So, Mike and Andrew, you guys have mentioned premium brand and this being a differentiator. It seems many cannabis companies claim premium brand. Can you explain why you believe Item 9 is really is one?

Andrew Bowden: Yeah. I can jump in there. This is Andrew.

Brian Loper: Yeah.

Andrew Bowden: In good times and good health, that's our motto and we are an experiential lifestyle brand, with community involvement, sponsorship, charity drives, innovative award winning, packaging and and products as well. Quality ingredients, indoor organic cultivation, innovation and we also have our own IP that we have as well and also rigorous testing and transparency. We also have a full education team on the franchise front but then also on the dispensary front where well they're also go out and educate all of the different bud tenders and dispensary workers and owners on our products and how they can be best utilized.

Brian Loper: Very good. All right. And given where you guys are today operationally and from current market value, as a shareholder, looking for a compelling reason to increase my position an ILP [ph], can you guys provide some insight?

Andrew Bowden: Absolutely. I want to hit kind of a couple key highlights. One of the biggest key highlights here are the different pillars that we have in our company. Pillar number one is, our premium product brand with Item 9 Labs. Pillar number two is our forward thinking dispensary storefront through our franchise model. And then pillar number three is our extremely advantageous, experienced and talented team with hundreds of years of experience in multiple different sectors. And also in addition to that, we've got our revenues and Unity Rd. franchise agreements that are in rapid acceleration. We've got our 650,000 square foot master site plan that's going to be starting under development here very soon to meet the growing demands. And hundreds of Unity Rd. shops anticipated over the next three years, with also our Item 9 Labs cultivation and production operations. We are an early mover and we did take advantage of that through this acquisition. And Bobby, if you have anything to add?

Bobby Mikkelsen: Yeah. I mean, I think, most notably, is we do see ourselves as a unique value proposition for investors. And that we're able to give the full vertical of the cannabis business but on a very asset like capital like way. So we're able to expand without the crazy capital costs that tend to come with operating in the cannabis sector.

Brian Loper: Great. Got it. Well, I think that's all the questions we have for today. Do you want to take us out, Andrew.

Andrew Bowden: Absolutely. Thanks everyone for your support and for joining us today. We look forward to sharing our progress in August when we report on our third quarter 2021 results.

Operator: Thank you, ladies and gentlemen. This does conclude today's event. You may disconnect at this time and have a wonderful day. Thank you for your participation.