The following discussion and analysis of our financial condition and results of
operations should be read in conjunction with our unaudited condensed
consolidated financial statements and related notes included in this Quarterly
Report on Form 10-Q and the audited financial statements and notes thereto as of
and for the year ended September 30, 2022 and the related Management's
Discussion and Analysis of Financial Condition and Results of Operations, both
of which are contained in the Company's Annual Report on Form 10-K for the year
ended September 30, 2022, filed with the Securities and Exchange Commission

(the
"SEC") on January 13, 2023.



Forward-Looking Statements




The information in this discussion contains forward-looking statements and
information within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the securities Exchange Act of 1934, as amended,
(the "Exchange Act"), which are subject to the "safe harbor" created by those
sections. The words "anticipated," "believes," "estimates," "expects,"
"intends," "may," "plans," "projects," "will," "should," "could," "predicts,"
"potential," "continue," "would," and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain these identifying words. We may not actually achieve the plans,
intentions, or expectations disclosed in our forward-looking statements that we
make. The forward-looking statements are applicable only as of the date on which
they are made, and we do not assume any obligation to update any forward-looking
statements. All forward-looking statements in this Form 10-Q are made based on
our current expectations, forecasts, estimates and assumptions, and involve
risks, uncertainties and other factors that could cause results or events to
differ materially from those expressed in the forward-looking statements. In
evaluating these statements, you should specifically consider various factors,
uncertainties and risks that could affect our future results or operations.
These factors, uncertainties and risks may cause our actual results to differ
materially from any forward-looking statement set forth in this quarterly report
on Form 10-Q. You should carefully consider these risks and uncertainties
described and other information contained in the reports we file with or furnish
to the SEC before making any investment decision with respect to our securities.
All forward-looking statements attributable to us or persons acting on our
behalf are expressly qualified in their entirety by this cautionary statement.



Overview



Item 9 Labs Corp. (OTCQX: INLB) is a vertically integrated cannabis operator and
dispensary franchisor delivering premium products from its large-scale
cultivation and production facilities in the United States. The award-winning
Item 9 Labs brand specializes in best-in-class products and user experience
across several cannabis categories. The company also offers a unique dispensary
franchise model through the 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 product innovation. The 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
well-being. Headquartered in Arizona, the company is currently expanding its
operations space by 640,000+ square feet on its 50-acre site, one of the largest
properties in Arizona zoned to grow and cultivate flower.



The award-winning Item Nine Labs brand seeks to offer best-in-class products and
user experience across several cannabis categories. The product catalogue
exceeds seventy-five (75) active cannabis strains and more than one hundred
fifty (150) differentiated cannabis vape products as well as premium
concentrates and Orion vape technologies. The highly regarded brand has received
twenty five (25) wins and podium placements in Arizona marijuana competitions,
including Cannabis Cup, Errl Cup and 710 Degree Cup, for its high-quality,
premium flower, concentrates and vape products. Item Nine Labs has delivered
over 3 million packaged goods in its history, and over 290,000 units during the
quarter ended December 31, 2022.



With its national Unity Rd. retail dispensary franchise brand, the Company
believes it offers a unique value proposition through both the sale of Item Nine
Labs products and its Unity Rd dispensary franchise model. Easing barriers to
entry, the franchise approach seeks to provide an opportunity for both new and
existing dispensary owners to leverage the knowledge, resources, and ongoing
support needed to compliantly thrive in their state. With many years of
experience in the legal cannabis industry and franchising, Unity Rd.'s standard
operating procedures guide franchise partners through every operational function
of the business. The dispensary franchise ranked in the top five (5) out of
seven hundred (700) submissions for MJBizDaily magazine's ranking of the top
cannabis retail leaders in the nation and has earned high placements in several
trade industry lists. Unity Rd has agreements with more than twenty (20)
entrepreneurial groups to open more than thirty (30) Unity Rd retail dispensary
locations in more than ten (10) states. The majority of the locations are in the
licensing process. The Company makes its best efforts to obtain these dispensary
licenses, though it can make no assurances that the licenses will be awarded. We
currently have two franchisees operating in Hartford, South Dakota and Boulder,
Colorado. Additionally, the Company has two (2) dispensaries owned and operated
by its wholly owned dispensaries, one in North Denver, CO, and another in
Oklahoma City, OK.

  23






On March 11, 2022, the Company entered into an Asset Purchase Agreement with The
Herbal Cure LLC, a Colorado limited liability company, pursuant to which the
Company is purchasing certain assets. Effective upon the completion of the sale,
which has not occurred as of the date of this filing, the licenses, contracts
and certain personal property to operate a licensed medicinal and recreational
cannabis dispensary will be delivered to the Company. The total purchase price
is $5,750,000, as to which $250,000 is to be paid upon execution of the Asset
Purchase Agreement, $3,700,000 payable at closing, $700,000 shall be financed by
seller pursuant to a Secured Promissory Note and the remainder of the purchase
prices shall be paid in shares of the Company's common stock on the closing
date. The Secured Promissory Note shall accrue interest at 5% per annum and have
a term of 18 months, commencing on the closing date, payable in even monthly
installments until paid in full. The shares of the Company's common stock to be
issued shall be in such an amount as is the quotient of $1,100,000 divided by
the product of the 10-day volume weighted average price of the shares as of the
closing date and 85%. The Company can provide no assurance that it will be
successful in finalizing this acquisition.



On May 18, 2022, Item 9 Labs Corp., a Delaware corporation ("Company"), and OCG
Management Ontario, Inc., a corporation formed under the laws of the Province of
Ontario ("Purchaser") and a wholly owned subsidiary of the Company incorporated
solely for the purpose of completing the transaction, entered into a Share
Purchase Agreement (the "Agreement") with Steven Fry, Najla Guthrie, Darryl
Allen, Louis Laskovski, each an individual residing in the Province of Ontario,
and 2628146 Ontario Ltd., a corporation formed under the laws of the Province of
Ontario, and 11949896 Canada Inc., a corporation formed under the federal laws
of Canada (together, the "Shareholders"), pursuant to which Purchaser is
purchasing all (but not less than all) of the issued and outstanding shares in
the capital of Wild Card Cannabis Incorporated, a corporation formed under the
laws of the Province of Ontario, ("Shares") free and clear of all Liens from the
Shareholders. The total purchase price for the Shares is $12,800,000 (the
"Purchase Price"), as adjusted, plus the Earnout Payment, if any (collectively,
the "Purchase Price") payable as follows: (i) The Company has delivered the
Exclusivity Deposit in the amount of $156,902 to the Escrow Agent on March 4,
2022; (ii) At the Closing, Purchaser shall pay to Shareholders the Estimated
Purchase Price of $12,800,000, as adjusted, in immediately available funds;
(iii)  $4,100,000, as adjusted, payable by the delivery of the Company's common
stock, the number of which will be calculated on the basis of a deemed price per
common share equal to the 10-Day VWAP of the trading price of the Company's
common stock on the stock exchange upon which the Company's common stock is
listed, with the last day of the First Earnout Period (the date that is 12
months following the Closing Date) as the measurement date less a 15% discount,
if actual Net Revenue is respect of the First Earnout Period is greater than or
equal to the Target Net Revenue for the First Earnout Period; and (iv)
$4,100,000, as adjusted, payable by the delivery of the Company's common stock,
the number of which will be calculated on the basis of a deemed price per common
share equal to the 10-Day VWAP of the trading price of the Company's common
stock on the stock exchange upon which the Company's common stock is listed,
with the last day of the Second Earnout Period (the date that is 24 months
following the Closing Date) as the measurement date less a 15% discount, if
actual Net Revenue is respect of the Second Earnout Period is greater than or
equal to the Target Net Revenue for the Second Earnout Period.



Results of Operations



                                        Three months ended December 31,
                                            2022                 2021           $ Change       % Change
Revenues, net                        $      5,003,879       $  6,186,011     $ (1,182,132 )         -19 %
Cost of revenues                            2,382,006          3,787,245       (1,405,239 )         -37 %
Gross profit                                2,621,873          2,398,766          223,107             9 %
Operating expenses
Professional fees and outside
services                                      855,660            657,445          198,215            30 %
Payroll and employee related
expenses                                    2,189,824          2,150,706           39,118             2 %
Sales and marketing                           287,949            439,436         (151,487 )         -34 %
Depreciation and amortization                 379,356            439,135          (59,779 )         -14 %
Other operating expenses                      494,549            846,668         (352,119 )         -42 %
Total operating expenses                    4,207,338          4,533,390   

     (326,052 )          -7 %
Loss from operations                       (1,585,465 )       (2,134,624 )        549,159           -26 %
Other expense, net                         (1,658,368 )       (1,210,390 )       (447,978 )          37 %
Net loss, before income tax
provision (benefit)                        (3,243,833 )       (3,345,014 )        101,181            -3 %
Income tax provision (benefit)                  3,740                 -             3,740             0 %
Net loss                                   (3,247,573 )       (3,345,014 )         97,441            -3 %
Less: Net loss attributable to
non-controlling interests                      10,111                 -            10,111           100 %
Net loss attributable to Item 9
Labs Corp.                           $     (3,257,684 )     $ (3,345,014 )   $     87,330            -3 %




  24




Revenues



The decrease in revenue for the three months ended December 31, 2022 was
primarily due to the effects of the Arizona cannabis market stabilizing, causing
price compression, as well as the Company's addition of product lines with lower
unit sales prices. The impact of the changing market conditions in Arizona was
countered by a significant increase in the number of units sold during the
quarter compared to the same quarter in the previous year.



Cost of Revenues



Cost of revenues consist primarily of labor, materials, supplies and utilities.
Cost of revenues as a percentage of revenues was 48% for the three months ended
December 31, 2022 compared to 61% for the three months ended December 31, 2021.
This is primarily the result of decreases in the unit costs the Company pays for
materials resulting from additional competition in material suppliers.
Management will remain focused on reducing costs through bulk purchasing,
implementing additional efficiencies in production and making additional
investments in property and equipment. The Company believes that it will reduce
the overall cost of revenues and cost of revenues will increase at a lower rate
than revenues in future periods, which will lead to increased profit margins.



Gross Profit



The increase in gross profit as a percentage of revenue for the three months
ended December 31, 2022 was due to decreases in cost of revenue being greater
than the decreases in revenue. As the Company experienced decreases in its unit
sales price due to increased competition, so too did the Company's suppliers,
though the decreased costs have proven to be greater than the decreased unit
sales prices. As a result, and given the production efficiencies achieved in
previous quarters, the Company has been able to increase gross profit on
decreased revenues. With the Company's continued efforts to increase capacity
and focus on efficiencies and reducing costs, management expects gross profit to
increase going forward.



Operating Expenses

Professional fees and outside services increased for the three months ended December 31, 2022 compared to the three months ended December 31, 2021 primarily due to the amount accrued for consulting services received related to the Company's employee retention credits and legal fees incurred on the pending Sessions acquisition. The increase in consulting services was offset by a decrease in stockholder administration services.

Payroll expenses were consistent when comparing the three months ended December 31, 2022 and the three months ended December 31, 2021. Payroll and employee related expenses increased as a result of an accrual for expenses incurred related to our change in Chief Executive Officer and an increase in stock compensation expense. These additional expenses were offset by the Employee Retention Credits ("ERCs") received during the current quarter.





Sales and marketing expenses decreased due to a decrease of promotional items
and a general decrease in spending on third party marketing vendors during the
quarter ended December 31, 2022.



The decrease in depreciation and amortization is due primarily to a decrease in
amortization expense as a result of the intangible asset impairment recorded
during the year ended September 30, 2022.



Other operating expenses decreased primarily due to the reversal of penalties
and interest on previously unpaid payroll taxes as a result of receiving the
ERCs during the three months ended December 31, 2022.



Total operating expenses as a percentage of gross profit decreased from 189% for
the three months ended December 31, 2021 to 160% for the three months ended
December 31, 2022. Management believes this ratio will decrease for profit
center segments going forward as the expectation is that revenues will grow at a
higher rate than operating expenses.



Other Expense, net




Other expenses consist primarily of interest expense of $1,661,853 for the three
months ended December 31, 2022 and $1,210,390 for the three months ended
December 31, 2021. The increase in interest expense was primarily the result of
the interest expense and amortization of discounts on the debt financing the
Nevada construction. The interest and discount amortization expense related to
the Nevada construction debt was capitalized into construction in progress
during the quarter ended December 31, 2021. As the Nevada expansion is
substantially complete, the related interest and discount amortization are
recorded to interest expense for the three months ended December 31, 2022.




  25




Adjusted EBITDA



Management uses the non-GAAP measurement of earnings before interest, taxes,
depreciation, amortization, stock-related compensation expense,
acquisition-related costs, employee retention credits and other adjustments, or
"Adjusted EBITDA," to evaluate the Company's performance. Adjusted EBITDA is a
non-GAAP measure that is also frequently used by analysts, investors and other
interested parties to evaluate the market value of companies considered to be in
similar businesses. The Company suggests that Adjusted EBITDA be viewed in
conjunction with its reported financial results or other financial information
prepared in accordance with accounting principles generally accepted in the
United States, or "US GAAP."

The following table reflects the reconciliation of net loss to Adjusted EBITDA for the three months ended December 31, 2022 and 2021:



                                   Three months ended December 31,
                                       2022                 2021
Net loss                        $     (3,247,573 )     $ (3,345,014 )
Depreciation and amortization            379,356            439,135
Interest expense                       1,661,853          1,210,390
Income tax expense                         3,740                 -
Stock-based expense                    1,053,190            507,294
Acquisition related costs                 91,239                 -
Employee retention credits              (952,805 )               -
Adjusted EBITDA                 $     (1,011,000 )     $ (1,188,195 )

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital Resources





The Company's primary need for liquidity is to fund working capital requirements
of its business, capital expenditures, acquisitions, debt service, and for
general corporate purposes. The Company's primary source of liquidity is funds
generated from revenues, financing activities and from private placements. The
Company's ability to fund its operations, to make planned capital expenditures,
to make planned acquisitions, to make scheduled debt payments, and to repay or
refinance indebtedness depends on its future operating performance and cash
flows, which are subject to prevailing economic conditions and financial,
business and other factors, some of which are beyond the Company's control.



The accompanying condensed consolidated financial statements have been prepared
in conformity with US GAAP, which contemplates continuation of the Company as a
going concern. The Company has not yet established an ongoing source of revenue
sufficient to cover its operating costs and has incurred net losses since its
inception. These losses, with the associated substantial accumulated deficit,
are a direct result of the Company's planned ramp up period as it is pursuing
market acceptance and geographic expansion. In view of these matters,
realization of a major portion of the assets in the accompanying condensed
consolidated balance sheets is dependent upon continued operations of the
Company which in turn is dependent upon the Company's ability to meet its
financing requirements, and the success of its future operations. The Company
operates in a new, developing industry with a variety of competitors. These
factors raise substantial doubt about the Company's ability to continue as

a
going concern.

In order to continue as a going concern, the Company will need to generate additional revenue and obtain additional capital to fund its operating losses and service its debt. Management's plans in regard to these matters are described as follows:





Sales and Marketing. Historically, the Company has generated the majority of its
revenues by providing the products it produces to dispensaries throughout the
state of Arizona. The Company's revenues have increased significantly since its
inception in May 2017. Management will continue its plans to increase revenues
in the Arizona market by providing superior products. Additionally, as capital
resources become available, the Company plans to expand into additional markets
outside of Arizona. The Company believes that it will continue reducing the
overall costs of revenues and costs of revenues will increase at a lower rate
than revenues in future periods, which is expected to lead to increased profit
margins.




Financing. To date, the Company has financed its operations primarily with loans
from third parties and shareholders, private placement financings and sales
revenue. Management believes that with continued production efficiencies,
production growth, and continued marketing efforts, sales revenue will grow,
thus enabling the Company to reverse its negative cash flow from operations and
raise additional capital as needed. However, there is no assurance that the
Company's overall efforts will be successful.



  26




If the Company is unable to generate additional sales growth in the near term
and raise additional capital, there is a risk that the Company could default on
additional obligations, and could be required to discontinue or significantly
reduce the scope of its operations if no other means of financing operations are
available. The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amount and classification of liabilities or any other adjustment
that might be necessary should the Company be unable to continue as a going
concern.



As of December 31, 2022, the Company had $21,781 of cash and cash equivalents
and negative working capital of ($43,728,770) (current assets minus current
liabilities), compared with $85,637 of cash and cash equivalents and negative
working capital of ($37,032,478) as of September 30, 2022. The decrease of
$6,696,292 in the Company's working capital is primarily due to increases in the
amount of the Company's debt maturing within the next 12 months. The decrease is
also due to decreases in the Company's inventory and prepaid balances and
increases in the Company's other operating liabilities. The $63,856 decrease in
cash and cash equivalents was primarily due to the net cash used in operating
activities offset by proceeds from the issuance of debt. The Company is an
early-stage growth company. It is generating cash from sales and is investing
its capital reserves in current operations and new acquisitions that are
expected to generate additional earnings in the long term. The Company expects
that its cash on hand and cash flows from operations, along with private and/or
public financing, will be adequate to meet its capital requirements and
operational needs for the next 12 months, although no assurance can be given
that private and/or public financing can be obtained on terms acceptable to

the
Company, or at all.



Cash Flows



The following table summarizes the sources and uses of cash for each of the
periods presented:



                                          Three months ended December 31,
                                              2022                 2021           $ Change       % Change
Net cash used in operating
activities                             $     (1,334,644 )     $   (267,694 )   $ (1,066,950 )         399 %
Net cash used in investing
activities                                       (6,825 )       (1,439,155 )      1,432,330          -100 %
Net cash provided by financing
activities                                    1,277,613            413,100          864,513           209 %
Net increase (decrease) in cash and
cash equivalents                       $        (63,856 )     $ (1,293,749 )   $  1,229,893           -95 %




Operating Activities




During the three months ended December 31, 2022, operating activities used
$1,334,644 of cash and cash equivalents, primarily resulting from a net loss of
$3,247,573 which was offset by net cash provided by operating assets and
liabilities of $833,984. There was significant non-cash activity that
contributed to the net loss totaling $1,078,945 including depreciation and
amortization of $443,107, amortization of debt discount of $504,501, and
stock-based compensation of $1,053,190. These non-cash expenses were offset by
the non-cash employee retention credits of $952,805.



During the three months ended December 31, 2021, operating activities used
$267,694 of cash and cash equivalent, primarily resulting from a net loss of
$3,345,041 which was offset by net cash provided by operating assets and
liabilities of $1,137,981. There was significant non-cash activity that
contributed to the net loss totaling $1,939,339 including depreciation and
amortization of $441,764, amortization of debt discount of $990,281, and stock
based compensation of $507,294.



Investing Activities

During the three months ended December 31, 2022, investing activities used $6,825 of cash and cash equivalents, consisting of $6,825 in purchases of property, equipment and construction in progress.

During the three months ended December 31, 2021, investing activities used $1,439,155 of cash and cash equivalents, consisting primarily of $2,492,445 in purchases of property, equipment and construction in progress, offset by $1,053,290 of cash received from the escrow deposit accounts.





Financing Activities



During the three months ended December 31, 2022, financing activities provided
$1,277,613, consisting of $1,597,500 in proceeds from the issuance of debt and
offset by $319,887 of debt payments made.



During the three months ended December 31, 2021, financing activities provided
$413,100, consisting of $1,500,000 in proceeds from the issuance of debt and
offset by $1,068,150 in debt payments made.



  27




Given that our cash needs are strongly driven by our growth requirements, we
also intend to maintain a cash reserve for other risk contingencies that may
arise.




We intend to meet our cash requirements for the next 12 months through the use
of the cash we have on hand and through business operations, future equity
financing, debt financing, or other sources, which may result in further
dilution in the equity ownership of our shares. We are also in discussions with
various potential capital partners to provide additional debt capital for
accretive acquisitions. We do not have any other arrangements in place to
complete any private placement financings of debt and equity. There is no
assurance that we will be successful in finding a capital partner to provide
additional debt capital or any other such financings on terms that will be
acceptable to us.

Off-Balance Sheet Arrangements

We are not currently a party to, or otherwise involved with, any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.





Critical Accounting Policies



Our discussion and analysis of our financial condition and results of operations
are based on our condensed consolidated financial statements, which have been
prepared in accordance with US GAAP. The preparation of our condensed
consolidated financial statements requires us to make estimates and judgements
that affect the reported amounts of assets, liabilities, revenue, expenses and
related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates, including those related to areas that require a
significant level of judgment or are otherwise subject to an inherent degree of
uncertainty. Critical accounting policies and estimates in these condensed
consolidated financial statements are those related to revenue recognition,
valuation of options, warrants and debt discounts, carrying value of intangible
assets subject to amortization, infinite life intangible assets and goodwill,
stock-based compensation, and income taxes. We base our estimates on historical
experience, our observance of trends in particular areas, and information or
valuations and various other assumptions that we believe to be reasonable under
the circumstances and which form the basis for making judgments about the
carrying value of assets and liabilities that may not be readily apparent from
other sources. Actual amounts could differ significantly from amounts previously
estimated. For a discussion of our critical accounting policies, refer to Part
I, item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" in our annual report on Form 10-K for the year ended
September 30, 2022. Management believes that there have been no material changes
in our critical accounting policies during the three months ended December

31,
2022.

Recently Issued Accounting Pronouncements

See Note 1 to our condensed consolidated financial statements, included in Part I, Item 1, Financial Information for this quarterly report on Form 10-Q.





Contractual Obligations



We are a smaller reporting company as defined by Rule 12b-2 of the Securities
Exchange Act of 1934 and are not required to provide the information under

this
item.





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