IM Cannabis Q3 2023 Earnings Call Transcript

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Provided by Quartr
November 13, 2023

There are 6 speakers on the call.

Operator

Good morning, and welcome to IAM Cannabis' Third Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference call over to Anna Turanko, Director of Investor and Public Relations. Anna?

Speaker 1

Good morning, and thank you, Joining me for today's call are I'm Canavas' Chief Executive Officer, Oren Schuster and Chief Financial Officer, Itay Wago. The earnings press release that accompanies this call is available on the Investor Relations section of our website at investors. Imcanavis.com. Today's call will include estimates and other forward looking information and statements, including statements concerning future results of operations, economic conditions and anticipated courses of actions and are based on assumptions, expectations, estimates and projections as of the date hereof. This information may involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied by such statements, factors that could cause or contribute to such differences are described in detail the company's most recent filings available on SEDAR Plus at www.sedarplus.

Speaker 1

Ca and EDGAR at Furthermore, certain non IFRS measures will be referred to during this call, and the term non IFRS adjusted EBITDA loss information or statements provided are accurate only as of the date of this call and the company undertakes no obligation to publicly update any forward looking information or statements Or supply new information regarding the circumstances after the date of this call. Please also note that all references on this call With that, it is my pleasure to turn the call over to Oren Sysztter, CEO of AIM Canabo. Oren, please go ahead.

Speaker 2

Thank you, Anna. Good morning, everyone, and thank you for joining us today. As a medical cannabis company, head I would like to start off today by briefly touching on the Hamas massacre of Israelis. As I had mentioned in the press release on October 12, there are no words to describe the scale of the overall and the impact it is on each and every Israel. We are a small country and every single one of us is directly impacted, Either personally or through our family and loved ones.

Speaker 2

IMC supports and stayed with all the Israelis that are affected by this war, And we also fully support the Israeli Defense Forces. Medical Economies is defined as a critical infrastructure sector in Israel, Just like all other pharmaceutical businesses, I am very proud of the team, how they are coming together to work through this horrific situation. While the assumption is that medical cannabis consumption We'll increase in the long term as a result of the war. It is too early to try to predict with any certainty exactly what the impact of the war will be on the medical cannabis In Israel, in the short term, and how it will impact the planned regulatory changes in the short term that were expected at the end of 2023. As I mentioned, during our last call in August, in June, the Health Committee of the Knesset, the Israeli Parliament, Pasture resolution facilitating access to medical cannabis for patients with medical indications, including metastatic cancer, Parkinson's and gastrointestinal disease such as Crohn's with regular prescription.

Speaker 2

Pain and PTSD, the 2 of the 3 most prevalent indications, will continue to require a medical cannabis license. We believe the new legislation will have the ability to accelerate market growth in Israel. However, in the absence of any We expect all new cannabis legalization We'll be put on hold for the near future because of the war. Also in August, the German government took the Next step forward in its Canada stabilization proposal with the final reading of the legislation to be held in Parliament during Q4. While the focus there is on non profit social clubs and home growth, medical cannabis is also expected to be rescheduled during Q1 2024.

Speaker 2

Medical cannabis will be moved from a tightly regulated narcotic to a simple prescription medication. This is a massive step forward for the medical Simplifying the prescription process for physicians and using storage and transport regulations for both producers as well as pharmacies. The prescription cost for self payers will also be reduced. Nocortiput 3's prescription As a core payment, which will no longer be applied under the new regulations, we anticipate that market growth will accelerate significantly As a result of the regulatory rescheduling. Before going into market details, As I've been doing for the last few quarters, I I'd like to give you an update on the transformation IMC has been going through since Q4 2022.

Speaker 2

We are singularly focused on reaching sustainable profitability, which is supported by 2 corner stores we focused on in our last calls. First, the strategic shift to focus on meeting patients' and pharmacies' needs. 2nd, rightsizing, Restructuring to put the necessary resources behind the strategic shift. We need to be a lean and agile business based Able to respond quickly to the changes within our dynamic market. For the last In the Q4, we focused on restructuring as well as accelerating the path to profitability Through active cost management and margin improvement in both the Israeli and Germany individually.

Speaker 2

When We take a look at results of the strategic shift. We can see revenue stays mostly stable, even taking into the account The negative currency effect of the Israeli shekel, which has declined 19.6% Since the beginning of the year versus the Canadian dollar. The cost of the revenue mirrors the revenue. This has not been easy. The majority of our supply comes from Canada, where we pay in Canadian dollars.

Speaker 2

We have lost 1 point 5% of our gross margin since Q3 2022. If it were not for the negative currency effect, We would have had an 11.5% improvement in our gross margin instead of the 10% improvement we are reporting this quarter. Where we see the clear impact of the restructuring and active cost management 2022 is in the operating expenses where we have managed to further reduce cost by 34% Since Q3 2022. But more importantly, in Q3, we kicked off a full integration project between Italy and Germany We believe that by combining our cannabis experience, we will be able to further our position within the cannabis market, We clearly see that the German market development is nearing the Israeli market development Over the last few years, the average price per gram of medical cannabis for the patient has fallen from around €12 or CAD17 per gram In 2022, to under €10 or €15 per gram in 2023. An average of 20 new cannabis flowers are launched per month, a number which we expect to continue increasing.

Speaker 2

There are currently over 350 medical cannabis flowers and over 155 different medical cannabis strains Available on the German market. The market is rapidly saturating. This is exactly the development the Israeli market Has been going through for the past 2 years, which is why we have a clear advantage in the German market. We are leveraging our proven Israeli strategy to drive results in the German market. Now I will give you an overview of both the Israeli and German markets before handing over to Ittai for the financials.

Speaker 2

In Israel, we made a cautious decision to focus on the premium and super premium segments over a year ago. By doing this, we created these 2 segments in Israel and are still by far the market leaders in premium and super premium medical cannabis. What drove this decision was 2 fold: premium pricing and better gross margins. Premium and Super Premium Cannabis are not subjected to the same price pressure as mid range cannabis allowing us to achieve higher gross margins. When we segment our portfolio accordingly, we can clearly see the results.

Speaker 2

Our average selling price for our ultra premium brands this Is shek 25 per gram or non Canadian dollars per gram, the highest in the Israeli market? In Q3, We reinforced our position as number 1 in the premium market through the launch of 2 new Lot 4 20 high THC strains, Gelato 33 and Zeno, As well as additional IMC product, ChemTU. Overall, our business in Israel was influenced by 3 factors this quarter. First, we further streamlined our patient delivery service to improve cost. In Israel, until August, we delivered medical cannabis directly to patients.

Speaker 2

As a result of our active cost management, we have been working For the last three quarters, we decided to outsource our delivery service to a 3rd party. While this move will result in approximately CAD 300,000 in savings per year, we had We also estimate that the transition period caused the short term interruption of sales. 2nd, currency fluctuations. As I mentioned earlier, the Israeli shekel fell significantly versus the Canadian dollar over the course of Q3, Declining 2.6% in average versus Q2, with an Because the majority of our sales are in checkers and we report in Canadian dollars, this had a significant impact on our Q3 revenue. Leading directly to C900000 dollars or 6.4% decrease In revenue versus Q3 2022, While our focus has been on growing the premium and super premiums business, we have had to adjust our portfolio and inventory accordingly.

Speaker 2

We cleaned our 1st set of slow moving stock in Q3 by reducing prices. While this helps drive incremental sales in volume, The lower prices impacted both our revenue and gross margin. The remainder of the slow moving stock will be cleaned out in Q4. In Germany, we launched our 1st premium ITHC strain leveraging the entire IMC Israel branding and collateral. By working closely with the Israeli team, we were able to ensure that this launch Was our strongest loss in Germany so far.

Speaker 2

In addition, the Tim further solidified 2 new high THC strengths that we launched in Q1 of this year. Taking a look at the overall results since we shifted our strategy, I'm convinced that it was the right decision. It has been a challenging journey, but we are moving toward sustainable profitability. This will continue to be our focus As we move into Q4. In Q4 in Germany, we expect the final readings of the cannabis legalization To take place in the German Parliament, we will also start to see the effect of the Israeli Hamas bureau As on the cannabis industry in Israel and on I'm Cannabis as well, since the start of the war in October, We have already seen an initial impact on our employees, suppliers, import sales and more.

Speaker 2

While it is too early to Assess the extent of the impact, we anticipate a negative impact in Q4 2023 I will now turn the call over to our Chief Financial Ittai Vago, who will review our Q3 2023 financial results. Ittai?

Speaker 3

Thank you, Aron. I will now provide an overview of Q3 2023 financial results for the Company's continuing operations. Revenues for the Q3 of 2023 were $12,400,000 compared to $14,200,000 in the Q3 of 2022, A decrease of 13%. Of this 13%, almost half 6.4 percent or $900,000 of the decrease is coming from negative currency fluctuations. Gross margin before fair value adjustments in the Q3 of 2023 was 22% compared to 20% in the Q3 of 2022, an increase of 10%.

Speaker 3

Adjusted EBITDA loss in the Q3 of 2023 was $1,300,000 compared to an Adjusted EBITDA loss of $3,700,000 in the Q3 of 2022, a decrease of 65%. The decrease is mainly attributed to improved performance of the company's gross margin and general and administrative expenses Total operating expenses in the Q3 of 2020 A decrease of 34%. Most of the decline can be attributed to the restructuring in Israel. Gross profit for the Q3 of 2022 was $2,600,000 compared to $2,000,000 in the Q3 of 2022, An increase of 30%. The increase attributed mainly to the increased higher margin sales of importent premium Cannabis Products and Reduction of Cost of Sales.

Speaker 3

Total dried flowers sold in the Q3 of 2023 was approximately 2,558 kilograms with an average selling price of $4.35 per gram Compared to approximately 1453 kilograms In the Q3 of 2022, with an average selling price of $9.08 per gram. The decrease in average selling price was General and administrative expenses in Q3 2023 were $2,100,000 compared to $4,300,000 in Q3 20 a decrease of 51%. The decrease in general and administrative expense is attributable mainly to salaries of the employees Derived from the restructuring plan in Israel and presented separately in the interim financial statements for the Q3. The main goal of the restructuring is to drive efficiencies and realize sustainable profitability. Selling and marketing expenses in Q3 2023 were $2,600,000 compared to 2 point €8,000,000 in Q3 2022, a decrease of 7%.

Speaker 3

Operating loss in the Q3 of 2023 was 2,300,000 compared to 5,500,000 in the Q3 of 2022, a decrease of 58%. Net loss from continuing operations in the Q3 of 2023 was $2,100,000 compared to a net loss of $4,500,000 in the Q3 of 2022, driven mostly by the higher gross margin and reduction in operating expenses and offset by finance income in the Q3 of 2022. Basic and diluted loss Per share from continuing operations in the Q3 of 2023 was $0.16 compared to a loss Cash and cash equivalents as of September 30, 2023 were $1,300,000 compared to $2,400,000 in December 31, 2022. Total assets as of September 30, 2023 were CAD 52,400,000 Compared to $60,700,000 in December 31, 2022, A decrease of 14%. The decrease is mainly attributed to cash and cash equivalents, inventory and to the effect of dollar rate increase of item denominated in Israeli Total liabilities as of September 30, 2023 We're $32,600,000 compared to $36,900,000 in December 31, 2022, a decrease of of approximately 12%.

Speaker 3

The decrease was mainly due to a reduction in trade payables, increase in fair value of warrants valuation And to the effect of dollar rate increase of items denominated in Israeli Shekels in the company's The company is planning to finance its operations from its existing and future working capital resources as well as from its available credit facilities and we continue to evaluate additional sources of capital and financing as needed. I would now like to turn the call back to Oren for closing remarks. Oren?

Speaker 2

Thank you, Itay. While our revenue and gross margin were impacted by the negative currency effect, Unfavorable exchange rates and the cleansing of the slow moving stock in Q3, we increased volumes And can see a clear progress towards our goal of sustainable profitability. We are in good position to take advantage of all the And we will see what the impact of the world will be on the Israeli Cannabis Industry and on I'm Cannabis. With that, I hand the call over to the operator to begin our question.

Operator

Thank you, Oren. Our first question is from Scott. Scott, go

Speaker 4

ahead. Yes, good morning. Thank you for the questions and thoughts with you, your Team, your employees and all those in Israel from a standpoint. Question, Oren, is as you navigate Can you kind of see kind of step through the supply chain a little bit? I know you mentioned inventory.

Speaker 4

You're working through your inventory. You said that will be cleared out through the Q4, but going into 'twenty four, that should be clean. But just kind of a sense of The supply chain issues, are you having issues getting importing or bringing cannabis from Canada, the premium side, just kind of step us through kind of how we should look at the supply chain here currently.

Speaker 2

Thank you for the question, Scott. So what we see is that clearly, if we About the impact of the war and what is happening, consumption of cannabis hasn't gone down. People are consuming cannabis. On the contrary, you see that people are consuming their amount faster than before the world. On the other hand, we have seen an impact of the on the logistics mainly, Actually, in the beginning, I think now everything is Streamlined and we are back to a world routine, I would say.

Speaker 2

And Now the input is open and everything is working, but it took time And I think that we see a bit the product everything takes longer And then it was before the war. But very quickly, we I think that everybody is adjusting To the new pace, but we don't see any decline in consumption,

Speaker 4

Switching to Germany, are you seeing preorders necessarily? Are you ramping up Tore kind of ahead of Germany, how should we look at this, obviously coming off in narcotics, opening up easier access To drive more demand and more growth in Germany, how should we be looking at kind of the cadence or the volume levels or the orders Moving through 2024 here, just kind of a little bit of a road ramp for opportunity for Germany would be great.

Speaker 2

So we are taking into account an evolution of the market and not a revolution. We think that the market will grow and will grow significantly, but It won't be in 1 minute. It will take some time. It's very difficult to estimate that, But what we learned is that things are taking slower, Okay. So we strongly believe in the market.

Speaker 2

We see that the market is growing constantly. We think that the changes will ease the access significantly. Once it won't be noncotic, Any pharmacy can have cannabis, you don't need to pay for that. You don't need a narcotic license. Pharmacies are not going through special audits.

Speaker 2

It's easier to prescribe, so it's a significant change in the market. And we are definitely getting ready

Speaker 4

Got it. I appreciate that. And last one, If I can include kind of just you've done a real good job of rightsizing, bringing down cost To the business you have in place here, are there further cost controls, further cost savings that we can look forward moving forward? Or you've pretty much streamlined this, kind of step us through kind of that opportunity to continue to build a sustainable

Speaker 2

We are managing the costs all the time, and we will continue to save wherever we can. I think the 2024 will be the focus will be more on growth. Once the company is more stable, it will We have a very responsible growth and I think that the markets will definitely support that, both the Israeli market and the German market.

Speaker 4

Got it. Thank you for the questions and be safe.

Speaker 2

Thank you very much, Scott.

Operator

Thank you. And our next question comes from Aaron. Aaron, please go ahead.

Speaker 5

Hi. Thanks for the questions. And again, just to echo that, start off thoughts with you, your employees, families and hope all are safe as they can be during these times. So just want to follow-up a bit on what Scott mentioned in terms of the pricing impact you had. You got rid of some of the low mid range stock.

Speaker 5

And just could you help kind of quantify maybe the impact that you saw both on the average sales price And gross margin in the quarter, just to think how we should be thinking about the company on a normalized basis once we get through 4Q? Thanks.

Speaker 2

Okay. I will start and I will then ask Ittai to help me with the numbers. So what we've done is, like we said, we cleaned all the inventory and slow moving stuff To focus more on the premium segment, which is going very well, and we don't see a price compression In this segment, the focus is the right focus, okay, that we see in this segment. The decline in the gross margin, Ittai, do you want to take

Speaker 3

Yes. So in respect of quantifying, we are talking about Approximately 100 kilos or a bit more of very specific strains that Are part of the low and average segments and we can say that The most impact the main impact was in Q3 and no material Following impact on price decreases in the next quarters In respect of in this segment, stock cleaning. And as mentioned, the average price was reduced Mainly due to these discounts to around $4.3 per Per gram, this is significantly significant reduction, but we expect this one time effect And will be offset in the next quarter.

Speaker 5

Okay, great. Right after you have some more flowing through More impact in 4Q and then it goes back to normal sounds like perfect. So just in terms of some of the change in regulations in Israel, right? So We have been looking towards these, the change for patients to be able to access medical cannabis written by any doctor for some more specific one prior. So just in terms of what you're saying in your prepared remarks, is that still set to go in place next month?

Speaker 5

You also referred to a Q1 2024. So I just wanted to get clarity on that specific catalyst, if there's still things that need to be finalized there or where we stand with that? Thank you.

Speaker 2

We believe that there will be a delay because of the situation around Israel. We don't know yet Anything officially, we don't know yet if there will be a delay. And if there will be a delay, how long it will take. I do think that even if there will be a delay next year, there will be a change and there will be a significant change in the market because The effects of the war is going to be very significant in this Hey, market, I have no doubt about that. How long it will take?

Speaker 2

It's still early to estimate that.

Speaker 5

Okay, great. Thank you for that color. Last one for me, turning to Germany where a lot of people have expectations for that market to increase Pretty meaningfully. You talked about it already getting a lot more competitive, 20 new Flowers launch per month. Do you feel like we're still in the early days of that saturation, which you seem to allude to, obviously, The catalyst still coming next year with that change potentially.

Speaker 5

And how do you feel like the competitive landscape We'll eventually evolve, having already seen in Israel where with that competition, some of the Canadian LPs and otherwise kind of backed away. Currently the market leaders in the German market today. So how do you feel like that competitive landscape will evolve as it gets continues to get saturated? Thank you.

Speaker 2

Okay. Thank you for the question. So I think that what we see in Germany is that the market It's growing constantly and the growth in the patients is mainly in the sales payer segment, Which is attributed to partially less medical, I would say. So this is the segment that we see that is growing. It's growing constantly, and that's before the change in the market.

Speaker 2

So I think that we will see only acceleration in the German market. And as I said, I believe that it will be an evolution, not a revolution in the short term. But we will see a constant increase in the number of patients. Regarding the competition, The market is competitive, and we see that some of the competition is going out of the market Because it's not a simple market as of now. So there might be more companies that would come into the competition, but I think that what we see in the German market is that [SPEAKER UNIDENTIFIED COMPANY REPRESENTATIVE:] It's a very specific and unique market.

Speaker 2

And you have to be expert in this market, and it's not a simple market. So I think that it would be very difficult for newcomers to succeed in the market and it will take them time And the players that are in the market for fewer years have a huge advantage in the German market. It's very similar to the Israeli market. And what we've seen in the Israeli market is that newcomers like Canadians Try to come to the market without understanding the fundamentals of the market and the business environment. It's not only the market, It's also the players and how to work with them.

Speaker 2

We haven't seen any success of foreign players. And I think that we will see it also in the German market.

Speaker 5

Okay, great. Thank you much for the color. I'll jump back in the queue and hope you guys stay safe.

Speaker 2

Thank you very much.

Operator

Are there any further questions?

Speaker 2

Okay. So thank you, operator, and thank you all for joining our call today. I look forward to speaking with you in the coming quarter reports.

Operator

And we have another

Speaker 2

Okay. Thank you, everybody.

Operator

Thank you.

Speaker 2

See you in the next quarterly reports.

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Key Takeaways

  • Q3 financials: Revenue was $12.4 M, down 13% year-over-year (6.4% due to currency headwinds and inventory clean-up), while gross margin rose to 22% and adjusted EBITDA loss narrowed 65% to $1.3 M.
  • Cost restructuring: Operating expenses fell 34% through workforce rightsizing and outsourcing patient delivery (saving ~CAD 300 k annually), driving progress toward sustainable profitability.
  • Premium segment strategy: A deliberate shift to premium and super-premium medical cannabis in Israel stabilized revenue and supported higher margins, even as mid-range stock was cleared out.
  • Regulatory catalysts: German medical cannabis is slated to be rescheduled as a prescription drug in Q1 2024—expected to accelerate market growth—while Israeli regulatory reforms may face delays amid the ongoing conflict.
  • War and integration impact: The Hamas-Israel conflict has disrupted logistics and operations in the near term, though consumption may rise, and IMC kicked off an Italy-Germany integration to leverage its Israeli market expertise.
AI Generated. May Contain Errors.
Earnings Conference Call
IM Cannabis Q3 2023
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