IM Cannabis Q2 2024 Earnings Call Transcript

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August 14, 2024

There are 6 speakers on the call.

Operator

Good morning, and welcome to IAM Cannabis' Second Quarter 2024 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference call over to Anna Tarranco, Director of Investor and Public Relations. Anna?

Speaker 1

Good morning, and thank you, operator. Joining me for today's call are I am Canavas' Chief Executive Officer, Oren Shuster 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 SEDAR Plus at www.sedarplus. Ca and EDGAR at 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, 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.

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 I had already mentioned during our last call, the entire cannabis industry is changing. It is literally being pulled out of the shadows. In the U.

Speaker 2

S, a proposal is on the table to reschedule cannabis on a federal level. Israel reschedule cannabis to facilitate access to patients suffering from many new indications. But most importantly for us, Germany, the largest economy in the EU legalized cannabis on April 1, 2024. Since we are the 6th largest cannabis distributor in Germany, I would like to go into more detail on the impact the legalization had on the German cannabis industry. I don't think that many anticipated the tremendous impact the regularization would have, specifically the speed with which the regularization has affected the market.

Speaker 2

While there are many estimates of how the German market will develop, what they all agree on is that the German market is poised to deliver significant growth. As an example, Zaunik and Associates is projecting a market with a run rate of about $2,000,000,000 by the end of 2025. According to BDSA estimates, the German cannabis industry is expected to reach approximately US1.5 billion dollars in total sales in 2024 and is estimated to grow to about $3,700,000,000 by 2027. I would like to put this growth into perspective by taking you through the details of our internal sales in Germany over the last 5 months. In March, we sold C 30700.

Speaker 2

In April, we sold C830000, an increase of 170% versus March. In May, we sold CAD1120,000, an increase of 35% versus April. In June, we sold CAD 1,630,000, an increase of 46% versus mine. Overall, we sold 200% mail in Q2 than we did in Q1 2024 before legalization. While the numbers are still small, they speak for themselves.

Speaker 2

Without a doubt, the results of the legalization have had a tremendous impact on our business in Germany. It is clear that we will be focusing our resources where we expect to see the biggest growth opportunities and the best return on investment. At this point in time, this is the German market. To ensure our accelerated growth in Germany continues in future quarters, we need to make sure that we are set up to deliver this growth. To achieve this, we have 2 clear targets.

Speaker 2

1, we need to have the right team in place and 2, keep our focus in building a consistent, stable supply chain. As a result, we are actively looking at our overall business to make sure that we are allocating the resources to support the German business. For example, our Israeli team is now working on building new supply channel from Israel to Germany. At the same time, we're taking a good look at our Israeli business to see how we can maximize profitability. For our Israeli business, this translates into clear focus on the premium and ultra premium markets as well as active cost management to support sustainable profitability.

Speaker 2

Moving on to the operational side of our Israeli business. We strengthened our position in the premium segment by launching Flower and Avant brand with 2 strengths. We launched and re launched an additional 10 strains under the following premium and ultra premium brands, Black Market, Pico and IMC Craft. Our goal is to introduce our Israeli patients to a rotating portfolio with new and existing strengths. As in the previous quarters, we are continuing to clean our slow moving non premium stock, clearing out all inventory for $800,000 We also have an additional accrual of approximately $1,100,000 for slow moving inventory, which is a conservative estimate.

Speaker 2

The impact of this can be clearly seen in our cost of sales, gross margin and in the gross profit. Ori will go into further detail when he takes you through the numbers. I would like also to give you a short update on where we are with the reverse merger with Kadimostem. On May 28, 2024, the company announced the termination of the preliminary term sheet signed on February 18, 2024 with Kadimostim. Due to recent changes in the cannabis market, specifically in Germany, where the company operates in other consideration not related to Kadimostem, the company has decided to cancel the planned reverse merger and to remain an active public company with the current cannabis operations.

Speaker 2

Before turning the call over to our Chief Financial Officer, Uri Berenberg, I would like to put Q2 2024 into perspective. Q2 2024 was a game changer for us with the organization in Germany. I see tremendous potential for growth. We are actively looking at our entire business to make sure that we are allocating the necessary resources to the German market to support further accelerated growth. I will now hand the call over to Ori, who will review our Q2 2024 financial results.

Speaker 3

Ori? Thank you, Owen. Our Q2 results were mainly impacted by the following points. Our revenue in Q2 increased by 11.7 percent versus Q2 2023. This growth was driven in part by the 129% Germany grew in Q2 2024 versus Q2 2023.

Speaker 3

Our selling price per gram of dried flower also increased 21% in this time period to $6.09 per gram. In addition, as a result of last year restructuring, our operating expenses continued to decrease by 21% versus Q2 2023. On the other hand, we cleared all raw material and accrued for slower moving stock for about $1,900,000 and the mid April loanemic ribbon fabrication resulted in reduced revenue and expenses versus previous periods. I will now take you through the overview of the Q2 twenty twenty four financial results for the company's cannabis operations. Revenues for Q2 2024 were $14,800,000 compared to $13,200,000 in Q2 2023, an increase of $1,600,000 or 11.7%.

Speaker 3

The increase is mainly attributed to accelerated growth in Germany revenue of $2,000,000 net and decreased net revenue in Israel of $400,000 which consists of our NIMBY cancellation effect and decreased revenue of $2,400,000 Total Bright Flowers sold in Q2 2024 was approximately 2,333 kilograms with an average selling price of $6.09 per gram compared to approximately 2,128 kilograms in Q2 2023 with an average selling price of $5.04 per gram, which is an increase of 21%. Cost of revenue for Q2 2024 were $13,900,000 compared to $9,500,000 in Q2 2023, an increase of $4,400,000 or 46.6 percent, mainly due to the increase in company revenue related to costs of approximately $2,800,000 clearing of old raw materials of approximately $800,000 and accrued for slow inventory of approximately 1.1 $1,000,000 Gross profit for Q2 2024 was $800,000 compared to $3,500,000 in Q2 2023, a decrease of 75.6%. The downside is attributed mainly to the clearing of all the inventory, a call for slow moving inventory of approximately $1,900,000 and slow moving stock that was moved out at lower prices. Company fair value adjustment was $300,000 for the Q2 2024 and Q2 2023 respectively. Gross margin after fair value adjustment in Q2 2024 was 6% compared to 26% in Q2 2023.

Speaker 3

G and A expenses in Q2 2024 were $2,200,000 compared to $2,400,000 in Q2 2023, a decrease of $200,000 or 9.5 percent. The decrease in SG and A expenses is attributed mainly to the insurance of approximately 200,000 Selling and marketing expenses in Q2 2024 were $1,500,000 compared to $2,600,000 in Q2 2023, a decrease of $1,100,000 or 44 percent, mainly due to the revocation of our new agreement of $600,000 and decrease in salaries and professional services of $400,000 Total operating expenses in Q2 2024 were $3,700,000 compared to $5,200,000 in Q2 2023, a decrease of $1,500,000 or of 29 percent, mainly due to the decrease in salaries of approximately $400,000 insurance of $200,000 depreciation expenses of $300,000 and professional services of $200,000 Non IFRS adjusted EBITDA loss in Q2 2024 was $2,300,000 compared to adjusted EBITDA loss of $500,000 in Q2 2023, a decrease of 3 57 percent. Net loss in Q2 2024 was $3,500,000 compared to $3,700,000 in Q2 2023. Diluted loss per share in Q2 2024 was $0.23 compared to a loss of $0.26 per share in Q2 2023. As on the balance sheet.

Speaker 3

Cash and cash equivalents as of June 30, 2024 were $700,000 compared to $1,800,000 on December 31, 2023. Total assets as of June 30, 2024 were $40,200,000 compared to $428,800,000 on December 31, 2023, a decrease of $8,600,000 or 17.6 percent. The decrease is mainly attributed to the O'Neill agreement cancellation of $9,500,000 of which mainly attributed to goodwill $3,500,000 intangible assets $1,400,000 inventory $800,000 trade receivables $1,300,000 and property, plant and equipment $800,000 and reduction of cash and cash equivalents of $300,000 In addition to our non invocations agreement effect, there is a total asset increase of $900,000 mainly due to an increase of $5,800,000 in trade receivable, offset by $3,400,000 reduction in inventory. Reduction of cash and cash equivalent of $1,800,000 and reduction of $700,000 in intangible assets. Total liabilities as of June 30, 2024 were $34,700,000 compared to $35,100,000 on December 31, 2023, a decrease of $400,000 or 1.1 percent.

Speaker 3

The decrease was mainly due to the earnings agreement cancellation of $6,800,000 of which mainly attributed to a decrease in put option liability in the amount of $2,000,000 a decrease in purchase consideration payable in the amount of $2,200,000 a decrease of $1,600,000 in trade payables a decrease of $400,000 in lease liabilities and a decrease of $300,000 in deferred tax liability. In addition to our non rebocation agreement effect, there is a total liabilities increase of $6,400,000 mainly due to increase of $6,200,000 in credit payables, offset by a $1,700,000 reduction in other accounts payable. The Company is planning to finance its operation from an existing and future working capital resources as well as from its available credit facilities and will 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, Yuri. This quarter was impacted by the clearing of all drawer material and the accrual for slow moving stock. That said, we clearly see the impact the legalization has had on our German business. We were well positioned to take advantage of the growing market delivering 200% increase in sales in Q2 versus Q1. We are actively making sure that we are allocating the resources and support the German business needs to deliver further accelerated growth.

Speaker 2

I will now hand the call over to the operator to begin our question and answer session. Operator?

Speaker 4

Thank you,

Operator

Our first question is from Scott Fortune from ROTH.

Speaker 5

Yes. Thank you and thank you for the questions. Oren, just wanted to provide a little color on additional sourcing of supply for the Jumu market as that seems to be the bottleneck there. You're well positioned with infrastructure and allocated resources to support that. But Campus is being sold through the pharmacies.

Speaker 5

And what are you seeing as far as new pharmacies coming on board? There's 2,000 to 3,000 pharmacies that offer Campus of the 18,000. But just your keys to IMCC brands getting into the pharmacy and looking or the pharmacies looking for certain supply amounts, just kind of touch base on the supply bottleneck and how you guys addressing access and more sourcing of supply?

Speaker 2

Okay. Thank you for the question, Scott. I do agree with you. The supply is the key today in Germany. And luckily, we have our own sources of supply.

Speaker 2

And once the legalization have started, we increased the quantity that we are ordering to Germany. And I think that we can see that in our results in Q2. And we will get more supply from our current suppliers. Concurrently, we will come with more suppliers to the market. In Q3, we will start to have sales from Israel, product supply from Israel.

Speaker 2

We will start to sell it in Germany. And that's a complete new channel. And the Israeli market is our market. We're based here. It's very easy for us to come with the supply from Israel.

Speaker 2

There is access of supply today in the Israeli market. So we believe that it can be a very good and unique channel. We won't be alone, obviously, but we are the only Israeli with the operations today in Germany. And beside that, we are we will come also with premium and ultra premium. I think that we announced that we're going to launch black market in Germany.

Speaker 2

We have exclusive agreement with the German and the Swiss market. So we're working very hard on adding more supply, and we will start to see soon more supply in the German market. So it's something that is coming now to the market.

Speaker 5

Great. A follow-up on that. The supply that you're sending from Israel, is that going to take down different supply and selling opportunities in Israel or this additional supply? And just follow-up on that, as far as the German market is concerned, right, you have private payers now. You mentioned you're getting into the premium segment, but this has been more of a mid market kind of the supply agreements you've been selling agreeing to is kind of serving that mid market.

Speaker 5

Just kind of point us towards the trends in Germany and where the different categories that you're selling into in Germany side.

Speaker 2

Okay. Okay. Well, it's a good question. So there is a difference big difference between the markets. In Israel, we are focusing on the premium, ultra premium segment, and most of it we are importing from Canada today.

Speaker 2

In Germany, we believe that most of the market will be mid to low. So in Germany, our strategy is to focus on the mid market, but we're going to have the full spectrum of the products starting from ultra premium down to, I would say, mid low. And so it's different approach in the markets. When I spoke about the Israeli market, I meant mid market product from other Israeli growers that we are buying in Israel and selling in Germany.

Speaker 5

Got it. That's helpful. And then last question for me is, are you needed obviously, you're shifting a lot of resources, allocating that towards the German market and just kind of step us through the infrastructure in place, but additional cash outlays needed to kind of support that market, being in front of the prescribing doctors or working with the pharmacies, just kind of an an idea of where the resources are needed to continue to kind of grow pretty exponentially in the German market?

Speaker 2

So, I think that definitely supply is number one issue today in Germany. If we're speaking about the channels today, the channels is pharmacies, that's the main point of contact. And we see, like you said, increase in the number of pharmacies, more competition, more players. For us, the main focus, like I said, is the supply. We feel very comfortable with the market and with our ability to have market access.

Speaker 2

We're working in this market since 2019. So we are well established in the market. It's more about bringing the right products in the right pricing. And I think that we understand very well the market. We are very experienced in that.

Speaker 2

Regarding the ability to support the operation and the import with the cash flow, we have a projection. We see that we can support the import. It's much easier to do it now. We see the growth in the market. It's becoming a profitable business.

Speaker 2

So I don't think that, that will be what will hold us from growing and to keep the growth in the German market.

Speaker 5

Got it. I appreciate the color, and I'll jump back in the queue. Okay.

Operator

And our next question is from Aaron Grey from Alliance. Aaron, please go ahead.

Speaker 4

Hi, good morning and thank you for the questions here. So I want to piggyback off what Scott was speaking towards with Germany. So you guys seem to have outperformed in Germany certainly in terms of a percentage basis, but even on some potential absolute dollars versus some others that we've heard from the public markets. So what would you attribute being key to the success in your view, given that you're not vertical, right? Would it be more so your relationships with doctors, communications with patients, maybe some detail in terms of your go to market strategy to what drove such that strong growth quarter over quarter there?

Speaker 4

Thank you.

Speaker 2

Okay. Good morning, Aaron. Thank you for the question. So like I said, we are well established in the market. We have a familiar brand.

Speaker 2

In 2023, we had the number one selling SKU in the market. We are number 6 between the distributors and there are more than 60 distributors in Germany. So we are well positioned. And with the legalization, like I mentioned, we worked immediately on adding more supply. So we started to get more supply that we could sell.

Speaker 2

And that's one of the reasons that we grew more than the others. And that's from the beginning, it was a strategic target for us to get more supply, and that's the focus. And that's the main reason because we have a good reputation in the market. So for us, it's mainly, like I said, about the supply. Regarding the market presence and market access, I feel very comfortable.

Speaker 2

We have very good relationship with the pharmacies and we have the support from the cannabis community in Germany, which is very important because we work very tight with the influencers. We are well connected in the community. So I think that it's a result of a few years of hard working.

Speaker 4

Okay, great. I appreciate that color there, Oren. Second question for me, just on the gross margin. You guys had some call outs there in terms of some inventory clearance and some accrual for some moving inventory. It looks like ex those impacts would have been around 18%.

Speaker 4

Just want to get some color in terms of the go forward gross margin, how that's looking particularly if any of this change in having to source material for Germany might have some impact on the gross margins going forward depending on the cost of that? Thank you.

Speaker 2

Okay. So, thank you. It's true, our gross margin reduced significantly because the inventory rising. Clearance on the core, yes. Yes.

Speaker 2

So first of all, it happened in Israel, not in Germany. We don't have any access stock in Germany, whatever we are selling. It's part of it, it's connected or mainly connected to the change that we said that we are doing that we're focusing on the premium and ultra premium. We understand that the other segments of the market are not the right segments. So it's part of this process.

Speaker 2

And looking forward, we still have stock. We will continue and check the stock all the time to see what is sellable and what is not. I don't see a situation now with the premium products that we are bringing that we are stuck with product. We have more demand than what we are bringing. And in Germany, the situation is that whatever we can bring, we are selling.

Speaker 2

We know what we are bringing. So it's part of the change that the company is going through. And but I think that beside that, we have a healthy gross margin.

Speaker 3

Yes. We can look basically on the gross margin this quarter is that we cleaned some of the, let's call it, we acted in a conservative way. We accrue for inventory that we are not sure that we will be able to fully sell and we made everything right in order for our books, our financials to represent the current status of the company. And basically, after those cleanings and since we are monitoring it very closely on a quarterly basis, we believe that the gross margin in the upcoming quarters will not look the way it looks right now. This quarter is not a represented quarter that you can check the operation accordingly.

Speaker 4

Okay, got it. Thanks for the color there. I'll jump back in the queue.

Operator

Okay. We have the next question from Scott Fortune. Scott, please go ahead. Scott, can you unmute?

Speaker 5

Yes. Sorry about that. Just a follow-up on gross margins and how you're viewing the German market as far as the margin side of things, offset by obviously the Israel side. Just kind of a little bit color on the margin cadence that's going on in Germany for your business right now. So we

Speaker 2

have good gross margin in Germany today.

Speaker 4

Approximately 40%.

Speaker 2

We're about 40% this quarter in Germany. I think that it's very early to predict what will be in the German market regarding price pressure, when it will happen. If it will happen, it's still a very early stage in the market. I believe that at some stage, we will see a price compression in Germany. Anyway, we are getting ready for that because we've seen it in other markets, and I believe that everything will be faster in Germany.

Speaker 2

This is what we've seen until now. So we are getting ready for price compression. As of now, we have good gross margins in Germany. And like we said, in Israel, we think that the changes we are doing will be effect we will see the effect also in increased gross margin. How fast it will happen?

Speaker 2

If it will be next quarter, in good 2 quarters or 3 quarters, I don't want to say anything now, but that's the time frame, in

Speaker 5

my opinion. I appreciate the follow-up. Thanks.

Operator

Next question from Aaron Grey. Aaron, please go ahead.

Speaker 4

Yes, apologies. That was just a legacy from prior. I don't have any additional questions. Thank you.

Operator

Okay. I don't think we have any further questions. If anyone would like to ask a question, please raise your hand.

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Key Takeaways

  • German legalization impact: Since Germany legalized cannabis on April 1, IAM Cannabis saw a 200% Q2 vs Q1 sales increase and 129% year-over-year growth, driving the company to prioritize its German operations.
  • New supply chain initiative: The Israeli team is developing fresh import channels from Israel to Germany to secure more product for pharmacies and capitalize on unmet market demand.
  • Israeli business refocus: Management is concentrating on premium and ultra-premium brands at home—launching 10 new strains and clearing $1.9 million of slow-moving inventory—to improve profitability.
  • Q2 financials: Revenue rose 11.7% to C$14.8 million, but gross margin shrank to 6% (from 26%) after inventory write-downs, leading to an adjusted EBITDA loss of C$2.3 million and a net loss of C$3.5 million.
  • Corporate update: The previously announced reverse merger with Kadimostem was terminated, leaving IAM Cannabis as an independent public company focused on its core cannabis operations.
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Earnings Conference Call
IM Cannabis Q2 2024
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