IM Cannabis Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 28, 2024

Key Takeaways

  • With the German cannabis legalization now effective April 1 and social clubs opening July 1, IAM Cannabis is positioned to benefit from the newly regulated market.
  • After refocusing on private payers and flower in November 2022, the German team grew 180% in 2023 versus 20% market growth, securing a top-5 distributor position with EU GMP/GDP facilities and supply agreements in place.
  • Q4 revenues fell 26% (~3.2 M CAD) in Israel due to Hamas war supply disruptions, a nearly 100% rise in shipping costs, and adverse currency swings totaling ~5 M CAD downside.
  • For full‐year 2023, non-IFRS adjusted EBITDA loss narrowed to 8 M CAD from 11.5 M CAD in 2022, driven by a 49% reduction in G&A expenses despite a 10% revenue decline.
  • The proposed reverse merger with Kadimastem remains at the non-binding term-sheet stage and would separate the cannabis business while retaining a 12% stake in the clinical-stage cell therapy company.
AI Generated. May Contain Errors.
Earnings Conference Call
IM Cannabis Q4 2023
00:00 / 00:00

There are 6 speakers on the call.

Operator

Good morning, and welcome to IAM Cannabis' 4th Quarter 2023 and Full Year 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

Good morning and thank you, operator. Joining me for today's call are I am cannabis' Chief Executive Officer, Oren Schuster and Chief Financial Officer, Juri Bernberg. 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 action and are based on assumptions, expectations, estimates and projections as the date hereof.

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 cause or contribute to such differences are described in detail in the company's most recent filings available on cedarplus@www.sedarplus. Ca and edgar@www.sec.gov. Furthermore, certain non IFRS measures will be referred to during this call and the term non IFRS adjusted EBITDA loss will hereafter be referred to as adjusted EBITDA loss. Any estimates or forward looking information or statements provided are accurate only as of the date of this call 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.

Speaker 1

Please also note that all references on this call reflect currency and Canadian dollars. With that, it is my pleasure to turn the call over to Oren Shustar, CEO of IAM Cannabis. Oren, please go ahead.

Speaker 2

Thank you, Anna. Good morning, everyone, and thank you for joining us today. As you know, we are a medical cannabis company based in Israel and Germany, which is why we will focus the call today on the legalization in Germany, the impact of the Israeli Hamas war, and on our Q4 results and the potential reverse merger with Kadimosten, which we announced on February 28. When we take a look at Germany, 2023 was a roller coaster for the cannabis market. The year started out with extremely high expectations surrounding the proposed cannabis legalization.

Speaker 2

When the German Minister of Health unveiled its initial legalization proposal in April of 2023, It was a big step forward but still fell short of the initial legalization expectations. The general government spent the rest of the year reworking step 1 of the proposal focused on decriminalization, home growth, not for profit social clubs, and the rescheduling medical cannabis for Narcotic, the most tightly regulated medication to regular prescription medication. While the implementation of the legalization was delayed several times, it cleared the final hurdle last Friday, March 22nd. The new legislation will enter into effect on April 1st, with the opening of cannabis social clubs expected on July 1st. Obviously, our German team is extremely excited to have the relative freedom to operate within the the new regulatory structure.

Speaker 2

The size of the opportunity is massive. The general population is about 83,000,000 people, more than double the population of California. Until the non profit social clubs are up and running, the only legal way to buy cannabis in Germany will be in the pharmacy with a prescription. We believe key to medical market growth is the rescheduling of medical candidates from narcotic to regular prescription medication, which will lower the barriers to market entry for new patients. Currently, one of the biggest bottlenecks in market growth is the prescription process.

Speaker 2

When prescribing narcotic, German physicians are required to document each patient and are subject to regular narcotic audits, whereas the prescription process of a regular prescription medication is simplified removing this bottleneck. In addition, the rescheduling will ease the storage and transport regulations for both distributors as well as pharmacies. The prescription costs for self payers will also be reduced. Narcotic prescription and co payment, which will no longer be applied under the new regulations. When we put all the beneficial changes brought about by the rescheduling together, we anticipate that the medical cannabis market growth will accelerate significantly as more new patients are expected to start entering the market.

Speaker 2

In 2020, we started laying the framework to become a top cannabis company in Germany. Since 2021, we have been in the top ten. We have a fully licensed EU GMP cannabis processing facility, one of a handful in Germany licensed to repack bulk. We distribute our cannabis products through our EU GDP licensed logistics center to any pharmacy in Germany within 24 hours. Having all our facilities EU GMP and EU GDP certified is so important because these are the highest certifications the European Union has to guarantee the safety of medical products.

Speaker 2

The structure behind both the EU GMP and the EU GDP is lean, agile, and can be easily ramped up to meet the increasing market demand. By adding all these processes in house, it enables us to maximize our margins while having independent full end to end control. We can and have been providing cannabis services to other cannabis brands in Germany as well. In November of 2022, we restructured and pivoted our strategy to focus exclusively on private payers and flowers, the market segment with the highest growth rates. Although our objective was sustainable profitability, the result of this pivot was tremendous.

Speaker 2

When we take a look at December 2023 market data from InsightHealth, it shows that we grew 180% in 2023, while the market only grew 20%. The German team posted the highest market share growth in the category to close out the year as a strong number 5 within the German cannabis flower distributors. We are number 1 in sales per SKU within the German market and have the highest growth in the market. These results clearly show the potential of our strategic pivot, driving accelerated growth while reducing costs. With our in house EU GMP facility, EU GDP Logistics Facility to support the accelerated growth we already delivered in 2023, We have the supply agreements in place to deliver further accelerate growth in 2024.

Speaker 2

With the framework we have put in place and the experience we have gathered over the last 4 years, we believe that we are in an excellent position to take advantage of the momentous change in the cannabis category we'll go through in Germany. We have the infrastructure in place. We have the team. And the supply agreements we need to grow further. Moving to Israel.

Speaker 2

The Israel Hamas War started on October 7. While we can already see that it's leading to an increase in patient and license numbers, it's also played havoc with our business. For example, the decrease in our October sales plus the interaction of our supply chain caused a 26% or 3,200,000 CAD decrease in our Q4 revenues. Also, our shipping costs have increased by almost 100%. The currency fluctuations we talked about last quarter continue to affect our revenue.

Speaker 2

The total annual effect of the fluctuation is downside of approximately $5,000,000 CAD. In Q4, we continued cleaning our slow moving stock by reducing prices that we started in Q3. While this helped drive incremental sales and volume, the lower prices impacted both our revenue and gross margin. On a positive note, in Q4, we reinforced our position as the number 1 in the premium market by relaunching 2 black market strains, Jealousy and Butter Gelato, as well as 2 pickle strengths, Delicine No. 1 and Batya Gelato No.

Speaker 2

4, in addition to launching a new paired Pico strain, Absa and Dao No. 5. As in Germany, in 2023, the Israel Ministry of Health started working on a regulatory overhaul facilitating access to medical cannabis for patients with medical indications ranging from metastatic cancer to pain and PTSD. The proposal includes moving medical cannabis to first line treatment as opposed to last line treatment and touches on existing export regulations. Just yesterday, the Ministry of Health had a conference to disclose the expected timeline and implementation of the new legislation.

Speaker 2

I will go into detail during our Q1 2024 call as we anticipate that the regulatory change will drive substantial growth in the Israeli cannabis market. In summary, while the overall results did not meet our expectations, 2023 was a year of transformation. We are a lean and agile business, able to take advantage of the accelerated growth expected of the rapidly evolving cannabis market in both Germany and Israel in 2024. I would now like to take you through the proposed reverse merger with Kadimastem. When we started our year of transformation last year, we were focused on 2 goals: achieving sustainable profitability and maximizing shareholder value.

Speaker 2

We massively restructured the entire operation in 2023 to minimize costs and maximize our efficiency and agility. We made considerable progress in this direction throughout the year. While this process significantly improved our company's financial health, it does not translate into increasing shareholder value. This was front and center while we have been looking for a way to deliver maximum value for our shareholders in the current situation, keeping all possibilities open. It drove the decision to initiate the potential reverse merger with Kadimoste.

Speaker 2

It delivers on our promise of maximizing shareholder value while giving the legacy cannabis business the freedom to fully focus on just that. The cannabis business in Israel and Germany, 2 of the highest value medical markets, which are set to grow significantly this year. We expect that this process will accelerate the path to sustainable profitability of the cannabis business, which our shareholders will retain, in addition to participating with 12% in cadmium stem business, which we believe has tremendous potential. With a focus on clinical stage cell therapy, they were recently approved by the FDA to conduct Phase 2a clinical trial. The next steps in the reverse merger process involve initiating robust due diligence, commencing work on the definitive agreement, as well as investigating the conditions, precedent and requirements of the CAC and NASDAQ.

Speaker 2

It is still too early to assess how long it will take until we sign a definitive agreement. To sum up, 2023, we see that while the shift in strategy was not necessarily the easiest decision, the results in Germany undoubtedly show that it was the right one. Between the fluctuation in currency and the Israeli Hamas war in Q4, we did not see the results we had expected in Israel this year. When I look at overall results of 2023, I see that we are lean, agile and well positioned to take advantage not just of the growth expected by legalization in Germany, but in Israel as well. 2024 is the year we have been preparing for.

Speaker 2

In 2024, our focus will be clearly on Germany, where we are well positioned to deliver accelerated growth. We grew 180% in 2023. We are number 1 in sales per SKU. We have the infrastructure and the team we need for success, as well as the supply agreements in place to deliver. I believe this together with the 12% participation in Cadim then we deliver shareholder value.

Speaker 2

I will now turn the call over to our Chief Financial Officer, Urie Bierenger, who will review our Q4 2023 and full year financial results. Urie?

Speaker 3

Thank you, Oren. I will now provide an overview of Q4 2023 and the annual financial results for the company's continuing cannabis operations. As Oren already mentioned, Q4 was tremendously impacted by the Israeli Hamas war, which is apparent in our revenues as well as our expenses. Revenues for 2023 were $48,800,000 compared to $54,300,000 in 2022, a decrease of 10%. Revenues for the Q4 of 2023 were 10,700,000 compared to 14,500,000, a decrease of 26%.

Speaker 3

The main part of the decrease on the 4th quarter, about $3,200,000 was due to the interruption of the supply chain cost by the Israeli Hamas war and the slow moving stock that was moved out at a lower price. Total grid flower sold in 2023 was approximately 8,609 kilogram with an average selling price of $5.14 per gram compared to approximately 6,794 kilograms in 2022, with an average selling price of $7.12 per gram. The difference is mainly due to increased competition within the retail segment and mid rate stock discounts to move out low moving stock. Total dried flower sold in the Q4 of 2023 was about 2,082 kilogram with an average selling price of $4.52 per gram, compared to about 2,334 kilograms in the Q4 of 2022 with an average selling price of $5.19 per gram. The decrease in average selling price was caused by increased competition within the retail segment and mid rate stock discounts to move out slow moving stock.

Speaker 3

Gross profit for 2023 was $9,800,000 compared to $9,200,000 in 2022, an increase of 7.5 percent. Gross profit for the Q4 of 2023 was $800,000 compared to $2,600,000 in the Q4 of 2022, a decrease of 68%. The downside is mainly attributed to the decrease in revenue caused by the war and the slow moving stock that was moved out at a lower price and about $800,000 cost of sales hit due to inventory erase. Company fair value adjustment was about $1,000,000 versus $2,100,000 for the years ended 20232022. Gross margin before fair value adjustment in 2023 was 22% compared to 21% in 2022.

Speaker 3

Gross margin before share value adjustment in the Q4 of 2023 was 10% compared to 19% in the Q4 of 2022, a decrease of 46%. G and A expenses in 2023 were $11,000,000 compared to $21,500,000 in 2022, a decrease of 49%. G and A expenses in the Q4 of 2023 were $3,300,000 compared to $9,800,000 in the Q4 of 2022, a decrease of 66%. The decrease in the G and A expenses is attributed mainly to impairment on year 2022 and restructuring and headcount adjustment in 2023. Selling and marketing expenses in 2023 were $10,800,000 compared to $11,500,000 in 2022, a decrease of 6%.

Speaker 3

Selling and marketing expenses in the Q4 of 2023 were $2,800,000 compared to 3,100,000 in Q4 2022, a decrease of 10%, mainly due to decrease in shared based compensation and restructuring. Total operating expenses in 2023 were 22,600,000 compared to 40,000,000 in 2022. Total operating expenses in Q4 of 2023 were $6,000,000 compared to $13,300,000 in the Q4 of 2022, a decrease of 55%. Non IFRS adjusted EBITDA loss in 2023 was $8,000,000 compared to an adjusted EBITDA loss of $11,500,000 in 2022, a decrease of 31%. Adjusted EBITDA loss in the Q4 of 2023 was $4,200,000 compared to adjusted EBITDA loss of $1,900,000 in the Q4 of 2022, an increase of 127%.

Speaker 3

Net loss from continuing operations in 2023 was 10,200,000 compared to 24,900,000 in 2022. Net loss from continuing operations in the Q4 of 2023 was $3,500,000 compared to a net loss of $9,600,000 in the Q4 of 2022. Diluted loss per share in 2023 was $0.74 compared to a loss of $3.81 per share in 2022. Diluted loss per share in the Q4 of 2023 was $0.25 compared to a basic loss of $2.94 per share and a diluted loss of $3.55 per share in the Q4 of 2022. As of the balance sheet, cash and cash equivalents as of December 31, 2023 were $1,800,000 compared to $2,400,000 in December 31, 2022.

Speaker 3

Total assets as of December 31, 2023 were $48,800,000 compared to $60,700,000 in December 31, 2022, a decrease of about 20%. The decrease is mainly attributed to inventory reduction of about $6,600,000 a reduction in other assets of $1,800,000 and a reduction of non current assets of about 3,500,000 Total liabilities as of December 31, 2023 were €35,100,000 compared to €36,900,000 in December 31, 2022, a decrease of about 5%. The decrease was mainly due to the reduction in trade payables of about $6,100,000 The company is planning to finance its operations from an existing and future working capital resources as well as from available credit facilities and will continue to evaluate additional sources of capital and financing as needed. I would like to turn the call back to Oren for closing remarks. Oren?

Speaker 2

Thank you, Ui. While 2023 was a year of transition, the Israeli Hamas war had tremendous impact on our Q4 results from the revenue to the gross margin. The results were not those we expected. Looking forward to 2024, it is the year that we have been preparing for. In 2024, our focus will clearly be on Germany, where we are in an excellent position to deliver accelerated growth.

Speaker 2

We grew 180% in 2023. We are number 1 in sales per SKU. We have the infrastructure and the team we need to succeed as well as the supply agreements in place to deliver on our objectives in 2024. With that, I hand the call over to the operator to begin our question and answer session. Operator?

Operator

Thank you. We have our first question from Aaron Grey. Aaron, please go ahead.

Speaker 4

Hi, and thank you very much for the questions. And first off, continued well wishes and thoughts for all those within the company during these times. First question for me. So just in terms of, right, the potential spin off and reverse merger, just at a high level, remind us in terms of like how we can think about where we stand today as it's still like LOI or definitive agreement, right? In terms of the investments you're planning with the existing legacy Israeli and German businesses, especially with the potential in Germany.

Speaker 4

So how should we think about the operations and planned investments between that as you're looking to do this high level of potential reverse merger and spin out? Thank you.

Speaker 2

Okay. Hi. Thank you, Aaron, for the question. So as you said, we signed nonbinding term sheet with Kadima Stem, both them being public. And we haven't signed a definitive agreement.

Speaker 2

The idea is that all the assets that belongs today to IMC will be will still belong to the shareholders, existing shareholders of IMC. And it will be separated from the public vehicle. The structure is not final yet, so it's difficult for me to say exactly what will be the structure and how it will look like. But the general idea is that all the rights will be served will be with the current shareholders.

Speaker 4

Okay. All right. Great. Thanks for that clarification.

Speaker 2

I'm not sure that I answered the question, but

Speaker 4

No, yeah, that's fine there. So for Germany, if you talk about the strategy in terms of helping to build kind of patient and doctor awareness on your guys' side, as I understand that you need to prescribe this specific brand, which is a little bit different than some of the other cannabis markets. We just get a broad prescription and you can just go by the brand at the respective dispensary or pharmacy. So any plans there? And then also capacity and supply chain as you look to grow within Germany?

Speaker 4

Thank you.

Speaker 2

Okay. So Germany was one of our the main target market for us from the beginning, And, we invested in building the infrastructure so that Germany will be like a hub that we can bring significant quantity piece of product through this hub. We have in Germany the ability to get bulk of final product. And we have a very significant warehouse that we can store and distribute product. And the capacity in the warehouse, it depends on the packaging, but it's more than 4 tons at any moment.

Speaker 2

So it's very significant because the product is moving. So I don't think that we have any limitation of product, giving the market as it is. I think that I don't see in the near future fully that we have a problem of utilization. We have enough capacity for the market as I see it.

Speaker 4

Okay, great. Appreciate the color. And I'll go ahead and jump into it. Thank you.

Speaker 2

And sorry, you asked about supply. So we have already supply agreements in place to Germany. We are selling product in the German market for some time. We have been prepared for the legalization. We extended our supply agreements and our suppliers eager to supply product to Germany.

Speaker 4

Okay, great. Appreciate the color. I'll be back in the queue.

Operator

Thank you, Aaron. Our next question is from Scott Fortune. Scott, please go ahead.

Speaker 5

Hey, good morning. This is Nick on for Scott. I just want to echo Aaron's comments. I hope everybody is staying safe out there. First one for me, just on the sourcing side, with the geopolitical issues still

Speaker 4

kind of playing out here, I wanted to get an

Speaker 5

update on the supply chain and

Speaker 2

Thanks for the question. In Israel, we had significant issues of supply in q4 because when the war started, there was a mess here with the Ministry of Health. And so it created significant issues in the supply chain. And now everything is okay. The product is coming to Israel.

Speaker 2

It's working properly. And with Germany, there isn't any issues of supply beside the fact that you have to be EU GMP certified. And we have done few audits just lately to more suppliers to make sure that we won't have any supply issues.

Speaker 5

Got it. I appreciate that color. And then second one for me, just on the pricing side with with Germany now set to expand here and patients in Israel still growing, just wanted to get an update on the general pricing environment in both countries. Have you seen any notable changes in supply demand economics and just general pricing? Any color there would be helpful.

Speaker 2

So the Israeli market is highly competitive, and we can see it very clearly. There is a decline in prices in many segments of the market. We are more focused on the premium segment, so we feel it less. But definitely, everybody feel it in the market. And I don't think that we will see significant change in the near future.

Speaker 2

Regarding Germany, I think that the market will be my assumption is that the market will be highly competitive, very similar to other markets, and we will see also similar behavior, although there is a lot of supply is waiting for the opening of the German market. So it's a question in Germany, I think, of how fast the market will evolve and the quantities. But still, I believe that it will be highly competitive market.

Speaker 5

Got it. And then just last one for me on the inventory side. You called out moving stock, which impacted pricing. Where are we in terms of clearing that out fully and just your sense of the inventory and just the margin profile in 2024 as you kind of clear out the last bit of this lower cost inventory? Thank you.

Speaker 2

So I think that our margins I believe that our margins will improve. Obviously, there are many factors here. Okay? This year, we have been impacted also by the currency. Most of the product that we are bringing is from Canada.

Speaker 2

So obviously, it was a negative impact. So there are few external factors that I can't foresee, but I think that our focus on the premium segment will also leave us better margins. And regarding something that I missed about Germany, I have to I want to say, we already see products in Germany that are in very highly competitive prices and also below black market today in Germany. So I think that we will see significant down pressure in Germany as well, and it will be very quick.

Speaker 5

Got it. I appreciate the color, Warren. Thank you.

Speaker 2

Thank you.

Operator

Are there any further questions? And if you would like to ask a question, please raise your hand. Oren, I don't think there are any further questions.

Speaker 2

Okay. Thank you, operator, and thank you all for joining our call today.

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