IM Cannabis Q2 2023 Earnings Call Transcript

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August 14, 2023

There are 6 speakers on the call.

Operator

Good day, and welcome to I'm Cannabis' Second Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Anna Taranko, Director of Investor and Public Relations.

Speaker 1

Thank you, operator. Joining me today are Iam Kanavis Chief Executive Officer, Oren Shuster and Chief Financial Officer, Itay Vago. The earnings press release that 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 Statements including statements concerning future revenues, results from operations, financial positions, markets, economic conditions, product releases, Partnerships and any other statements that may be construed as a prediction of future performance.

Speaker 1

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 sedarplus. Caandedgaratwww.sec.gov. Furthermore, Certain non IFRS measures will be referred to during this call and the term non IFRS adjusted EBITDA loss We'll hereafter be referred to as adjusted EBITDA loss. The company believes that the presentation of this non IFRS information provides useful supplementary data Concerning the company's ongoing operations and is provided for informational purposes only.

Speaker 1

Any estimates or forward looking 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 in this call reflect currency and Canadian dollars. With that, it is my pleasure to turn the call over to Oren Schuster, CEO of IAM Cannabis. Oren, please go ahead.

Speaker 2

Thank you, Anna. Good morning, everyone, and thank you for joining us today. Before going into the market details, I would like to start off today by taking you through the initial results of the transformation I and C have been going through since Q4 2022. We are singularly focusing on reaching sustainable profitability, which is supported by the 2 cornerstones We focused on in our last call in May. 1st, the strategic shift to focus on meeting patients' and pharmacies' needs.

Speaker 2

2nd, rightsizing, restructuring to put the necessary resources behind the strategic shift. In Israel, during Q2, we continued the rightsizing we started in Q1. We reviewed the entire business from the bottom up. We restructured to become a lean and agile business, Able to respond quickly to the changes within our dynamic market. In the process, we reduced our headcount by 36% during the first half of this year.

Speaker 2

In addition to the restructuring initiatives, We focused on accelerating the path to profitability through active cost management and margin improvement. Our goal was to optimize, to drive further efficiencies, while maintaining or even improving the services We currently give our patients. For example, we restructured our direct to patient delivery service, Improving delivery time for the majority of our patients, while reducing costs by about 30%. The transition period and restructure we kicked off in Israel in Q1 has been challenging time for the team. I'm very proud of the effort they made, turning challenges into opportunities, identifying And driving the various initiatives to manage our costs and margins while maintaining sales.

Speaker 2

This enabled us to reduce our operating expenses in Israel by 42% This is Q2 2022 during this quarter. Taking a look at Germany, The German team refocused and restructured in Q4 of last year, becoming a lean and agile. By refocusing and restructuring, the flower sales in Germany actually accelerated in the 6 months after the restructure, Growing significantly by about 35% in comparison to the 6 months before the restructure. We grew more than 4 times as fast as the market during this period. While the strategic shift And the associated rightsizing and restructuring in both Israel and Germany was not always easy.

Speaker 2

It enabled us to make significant progress toward our goal of sustainable profitability while maintaining sales. Our adjusted EBITDA loss was reduced by 83% versus Q2 of last year to $499,000 I've mentioned the importance of being lean and agile Within our dynamic market several times, and I would like to use an example to show you why this is so important. In June, the Health Committee of the Knesset, the Israeli Parliament, passed a resolution to broaden access to medical cannabis, Meeting the needs of the growing number of patients. Within the reforms framework, Patients suffering from the following indication, metastatic cancer, epilepsy, Crohn's, colitis, Dementia, autism from the age of 5, MS, AIDS, Parkinson's, Tourette Syndrome And palliative care will have access to medical cannabis with regular prescription. They will no longer be required to obtain a license in order to receive medical cannabis.

Speaker 2

Pending final approval from the Ministry of Health, cannabis will be also be able to be used as first line of treatment As opposed to last result based on medical discretion. In addition, the export process will be simplified By allowing the growers to separate the post harvest process from the growing process, we Tactiq will facilitate EU GMP certification. By easing the access to cannabis for more medical conditions In giving physicians the ability to use cannabis, a first line treatment, we believe the new legislation As the ability to accelerate market growth, which is extremely important in the Israeli market as the growth has been Slowing recently. IFC needs to be lean and agile to anticipate as well as to meet the needs of the new patient groups that will start to join the market on December 29, 2023. Additionally, we anticipate that the simplification of the export process will have the potential to accelerate the launch of our leading Israeli ground planes in the German market.

Speaker 2

In Germany, the first step Of the legal reform, which we discussed in May, decriminalization, not for profit clubs and private cultivation Was expected to be finalized before the summer recess. The legislation has been delayed and is now expected sometime later this year. Before moving on to the overview of the Israeli and German markets, I would like to underscore The rightsizing and refocusing we have been working through since Q4 of last year was led by the strategic decision To Essie the recreational Canadian market. This allowed us to fully lean into our heritage As one of the pioneers in the Israeli medical cannabis market, our extensive expertise within our highly regulated local market Gave us a clear advantage when expanding into Germany, another highly regulated medical market. The strategic pivot to focus on the 2 largest national medical markets is clearly reflected Within our organization post restructure, 24% of our employees are legal and pharmaceutical quality professionals, Well, sales and marketing also make up 24% of our employees.

Speaker 2

These percentages Miro, the pharmaceutical industry, underscoring our position in the medical cannabis markets. I believe this is the cornerstone for our success and stability within these two similar markets. Now I will give you an overview of both the Israeli and German markets before handing over to Itay for the financials. In Israel, we are number 1 in the premium sector. We sell INC branded premium cannabis As well as leading Canadian premium cannabis brands for which we have exclusive distribution rights in Israel.

Speaker 2

In Q2, We launched our 2nd super premium indoor grown Canadian brand, Lot 4 20, with 2 high THC strengths. These two launches further our market leadership within the premium segment. In addition, we launched the PICO collection With 4 high THC flowers, with this launch we are testing the resonance small but super premium flowers and within the mid range market segment. We also focused on integrating and optimizing our call center, 1 of the largest medical cannabis call centers in Israel. We are tracking and improving KPIs such as average price, Item per ticket, instant and future orders, on the job training, call simulations and mystery shopper program Round out our call center initiatives.

Speaker 2

In Germany, we have started to take advantage of our fully licensed EU GMP packing facility and our GDP Logistics Center to drive an additional revenue stream, Offering cannabis services to other players within the German cannabis market, from quality and EU GMP services to warehousing and logistics. We can offer end to end cannabis fulfillment services. We have started slowly offering warehousing and logistics services, onboarding 4 new customers within the 1st 2 quarters of 2020 3. The B2B services diversify our offering and income sources, While improving the overall gross margin of our German business. Turning to our INC Branded Flower Business in Germany, The team focused on solidifying the 2 new high-tech strains that we launched in Q1 of this year.

Speaker 2

Overall, while we were able to see the initial results of the shift in strategy in Q1, In Q2, we leaned further into our objectives of sustainable profitability. As Itay will explain while presenting the financial results, the associated restructure along with the active cost and margin management Substantial decrease of 83% in our adjusted EBITDA loss. I look forward to seeing the effect of the reform Of the medical cannabis regulation we'll have on the market in Israel, once physicians will be able to start writing cannabis prescriptions for the New Patient Group on December 29 this year. I will now turn the call over to our Chief Financial Officer, Itay Vago, We'll now review our Q2 2023 financial results. Ittai?

Speaker 3

Thank you, Aaron. I will now provide an overview of Q2 2023 financial results for the company's continuing operations. Revenues for the Q2 of 2023 were $13,200,000 compared to $12,700,000 In the Q2 of 2022, an increase of 4%. Gross margin before fair value adjustment in the Q2 of 2023 was 28% compared to 20% in the Q2 of 2022, An increase of 40%. Adjusted EBITDA loss in the Q2 of 2023 was 499,000 Compared to an adjusted EBITDA loss of $3,000,000 in the Q2 of 2022, a decrease of 83%.

Speaker 3

The decrease is mainly attributed to improved performance of the company's gross margin and general and administrative expenses such as cost reduction, cost efficiencies and other corporate expenses reduction. Total operating expenses in the Q2 of 2023 were $5,200,000 compared to $7,800,000 in the Q2 of 2022, A decrease of 33%. Most of the decline can be attributed to restructuring in Israel. Gross profit for the Q2 of 2023 was $3,500,000 compared to $2,200,000 in the Q2 of 2022, An increase of 57%. The increase attributed mainly to increased higher margin sales of imported premium cannabis products And reduction of cost of sales.

Speaker 3

Total dried flower sold in the Q2 of 2023 was approximately 2,000 128 kilos with an average selling price of 5.04 per gram compared to Approximately 1592 kilos in the Q2 of 2022 with an average selling price of 7.27 per gram. The decrease in average selling price was caused by increased competitive within the Retail segment. General and administrative expenses in Q2 2023 were $2,400,000 compared to 3 Administrative expenses is attributed mainly to salaries of the employees derived from the restructuring plan in Israel and presented Separately, in the interim financial statements for the Q2. The main goal of the restructuring is to drive efficiencies and realize sustainable profitability. Selling and marketing expenses in Q2 20 20 We were $2,600,000 compared to $3,100,000 in Q2 2022, a decrease of 16 Operating loss in the Q2 of 2023 was $1,800,000 compared to $5,600,000 In the Q2 of 2022, a decrease of 69%.

Speaker 3

Net loss from continuing Operations in the Q2 of 2023 was $3,700,000 compared to a net loss of $3,700,000 in the Q2 of 2022 driven mostly by higher gross margin and reduction in operating expenses and offset by finance income in the Q2 of 2023 was $0.26 compared to a loss of $0.49 per share in the Q2 of 2022. Diluted loss per share from continuing operations in the Q2 of 2023 was 0.26 compared to a loss of $0.89 per share in the Q2 of 2022. Cash and cash equivalents As of June 30, 2023, were $1,300,000 compared to $2,400,000 in December 31, 2022. Total assets as of June 2023 were $55,800,000 compared to 60 Total liabilities as of June 30, 2023 were 34 point $2,000,000 compared to $36,900,000 in December 31, 2022, a decrease of approximately 7%. The decrease was mainly due to the reduction in trade payables.

Speaker 3

I would like to mention that the quarterly figures provided in Q2 financial statements And the accompanying Q2 MD and A includes some immaterial updates and adjustments to the company's previously filed unaudited interim financial statements for the 3 months ended March 31, 2023. The updated figures provided in the Q2 financial statements and Q2 MD and A That cover the Q1 2023 period, supersede and replace the financial information for Q1 2023 filed on May 15, 2023. 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'll continue to additional sources of capital and financing as needed. In summary, the action we have taken since exiting the Canadian market last Here and the associated restructure have significantly reduced our total operating expenses and improved our margin, leading to a substantial decrease in adjusted EBITDA loss as well as the other key measures as I have just mentioned. I would like to turn the call back to Oren for closing remarks.

Speaker 3

Oren?

Speaker 2

Thank you, Isai. The strategic refocusing and rightsizing of the last few quarters has been a transition period for IMC as a whole. I'm very proud of the team for pulling through this challenging transitional period, while delivering on our objectives. With that, I hand the call over to the operator to begin our Q and A session. Operator?

Operator

Thank you, Oren. Now the Q and A is open. You can submit your questions in the Q and A or raise your hand. Our first question is from

Speaker 2

Scott. Please go ahead, Scott.

Speaker 4

Yes. Thank you for the questions and good morning. Positive news on Israel from that And that will start towards the end of the year in the patient base. But just want to get a little more color on the Israel market currently, And what you're seeing, obviously, the premium size holding up on the pricing side, but just a sense for the limited patient growth right now With inventory that's hitting the market and the pricing side, I think just a little bit of an update on the Israel market as you look Going to the new opportunity with the obviously with the new Regulation is being put in place. And then how that affects the premium side for all those new indications that are coming aboard?

Speaker 4

Just a little color there, that would be great.

Speaker 2

Okay. Thank you very much for the question. So what we have seen in the Israeli market is that The growth has been slowed significantly in the last year or so. And the new change in regulations, part of it is to open up the market. We see that the market today is highly competitive, especially in the retail side.

Speaker 2

Too many pharmacies, for example, for the number of patients and we see that there is access Product in the market as well. So we feel a price compression in the market. We don't feel it in our segment, in the premium segment. It's a very strong segment still. And there are a few reasons for that.

Speaker 2

We believe that The change in regulations will affect the market. It might affect the market significantly. However, it won't be immediate. The new regulations will start only in December 29. So I believe that we will feel the effect next year and it will take time for that to ramp up.

Speaker 2

So it's very difficult to We'll see the exact number of new patients or how long it will take. But we think that it's a significant change that will affect the market in the coming years. And the fact that new patients will be able to access the market with prescription only And that it won't be a last resort of treatment cannabis Might have a significant effect on the market. So I believe that this year and I don't know how long into next year the market will be will continue to be highly competitive with price compression. And we see that the price compression open up the market to a value real value segment in Israel.

Speaker 2

So we see we're starting to see a picture of companies that specialize in the value or in other segments. So The market the shape of the market is starting to build up, and I think that we will continue to see this

Speaker 4

Perfect. I appreciate that. And just Dan, you're kind of moving to Germany to obviously the changes in Israel, cannabis export process. But You mentioned you have onboarded 4 new clients to use your GMP facilities. How Can you have any color on those clients and kind of those expectations kind of diversifying or just continuing to build out Jeremy's side, what would be capacity you have there?

Speaker 4

That would be helpful. Yes. And the sense of obviously, we're going to see the pilot The program and the regulations come out here probably this week, but your sense of the removal from the narcotics side of things and how that Thanks, our time drives the business for you going forward.

Speaker 2

Okay. So We feel that the German market is evolving and we see increase mainly in the self Payor segment, not the reimbursed, the biggest growth in the German market. And we see that more companies want to go into the market And most of them don't have the facilities that require in order to access the market. We have EU GMP facility with GDP. We are very experienced in importing And delivery of cannabis products in the German market, so we started to offer services To other players in the German market, we have done it very responsibly And we started to onboard a few customers.

Speaker 2

We have 4 customers that we onboarded from the beginning of the year. And we can get actually all the services needed to a new player. We build pricing for that, catalog of pricing. And this is what we are doing now. We are going to expand it.

Speaker 2

We have the capacity. For us, it's another stream of revenue that don't require any more Investment for us. So it's going to continue and going to expand and It's a very nice source of revenue. It's not going to be the main focus of the company, but It gives us more exposure also to the market and better visibility as well as more revenues. Regarding the regulations in Germany, we are waiting to see what The German government will come up with, if and if it will go out of the narcotic, we think that it might have Significant effect on the market because any pharmacy will be able to start and to sell cannabis And the big online distributors will be able to access the market freely And Germany is a big market and with the ability to access To actually any pharmacy in Germany and the fact that it won't be narcotics or less hurdle For the physician to prescribe, we believe that it affect the market.

Speaker 2

I think that it's still early to say What will be the magnitude of the effect and how long it will take before we will fill it?

Operator

Okay. Thank you.

Speaker 2

Thank you.

Operator

Scott, did you have any further questions?

Speaker 4

No, thank you.

Operator

Okay. Thank you very much. And our next question will be from Aaron Grey. Aaron, please go ahead.

Speaker 5

Thanks for the questions. So first one for me, I just want to turn back to Israel. Just in terms of Due to some excess supply and pricing pressure, can you speak to what you believe is driving it more? Do you think it's more of the Israeli operators, the Canadian LPs? Who you think is driving more of the excess supply and pricing pressure?

Speaker 5

And do you feel like there's a need for shakeout and rationalization? And whether or not there are signs of that

Speaker 3

to help stabilize the marketplace? Thank you.

Speaker 2

Okay. Thank you for the question, Aaron. So it's a mix. It's a mix of import and local growers. We see that we have seen a change in the market, Many of the players are going out of the market, so the market is changing while we are speaking.

Speaker 2

And I believe that we will continue to see this change Even before we will see the effect of the new regulation. And like I said, we don't feel the price compression in our segment because there isn't any access product in our segment And the demand is there. So I believe that we like I said, we will continue to see that. And I'm sorry, Aaron, what was the second thought?

Speaker 5

I just wasn't that there's any Wanda, you believe Sheikha will

Speaker 3

be needed if there's any signs

Speaker 5

of that to help bring a more rationalized marketplace?

Speaker 2

Okay. So I think that what we will see I think that the changes that the Ministry of Health published will be very significant. And before we will see those changes, I don't think that we will see any change in the market, any significant change. The market is changing all the time, But I think that this will be the most significant effect on the market And it will enable, I believe, export from Israel and also growth in the number of patients. It's still early to evaluate the pace and the magnitude.

Speaker 2

They're very similar to the German market, but It has the potential to change the market significantly. So that will be the change I believe in the market That will change the dynamics as well.

Speaker 1

Okay. All right. Great. Thanks for that. And then just Helping us

Speaker 5

as we think about path to profitability, a lot of improvement in the quarter, getting close to breakeven there. So gross margins, you've now seen pretty stable the past two quarters now. Do you think this is a good mark for us kind of going forward kind of the high 20s maybe drifting to 30%. And then you just kind of potentially see some top line growth. It sounds like that might not come till 2024 given your expectations for Adro.

Speaker 5

But are those kind of the main drivers kind of get us to that EBITDA profitability? Or do you think there's some more SG and A cost savings you'll realize to help you get there? Thanks.

Speaker 2

So I think that I said that in the past, we will see the full effect of the restructuring that we've done only in Q3 Because we have done the restructuring actually most of it in Q2, So the saving most of the saving will be in Q3 and it will continue with us. So that effect will be there definitely. On the other hand, it's a highly competitive market, like I said. And in the near term, okay, this year, I don't think that we will see any change in the market growth Any significant change? So it's very difficult for me to speak about To give the forecast because the market is not stable enough to do that now.

Speaker 5

Okay. All right. Thanks very much

Speaker 2

for the color. I'll drop back in the queue. Thank you very much.

Operator

Thank you. Are there any further questions? Feel free to put them in the Q and A or raise your hands.

Speaker 2

Okay. Thank you, operator, and thank you all for joining our call today. Please follow along as we look to deliver on our goal of sustainable profitability. I look forward to speaking with you

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Key Takeaways

  • Iam Cannabis executed a major rightsizing and restructuring across Israel and Germany, cutting headcount by 36% and reducing Q2 operating expenses by 33%, which drove an 83% reduction in adjusted EBITDA loss.
  • Q2 revenues rose 4% to $13.2 M while gross margin improved from 20% to 28%, leading to a 57% increase in gross profit year-over-year.
  • The Israeli market remains highly competitive with price compression and slowed patient growth amid oversupply from both local and imported producers, though the premium segment has held up.
  • New Israeli regulations effective December 29, 2023 will broaden medical cannabis access, simplify exports and allow first-line treatment, potentially accelerating market expansion and export opportunities.
  • In Germany, IAM is leveraging its EU GMP-licensed facility and GDP logistics center to offer end-to-end B2B cannabis services, onboarding four new clients to diversify revenues without additional capital investment.
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Earnings Conference Call
IM Cannabis Q2 2023
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