IM Cannabis Corp. (IMCC) Earnings Call Transcript & Summary

Good day, and welcome to IM Cannabis' Third Quarter 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Maya Lustig, Director of Investor and Public Relations. Please go ahead.

Thank you, operator. Joining me today are IM Cannabis Chief Executive Officer, Oren Shuster; and Chief Financial Officer, Shai Shemesh. The earnings release that accompanies this call is available on the Investor Relations section of our website at investors.imcannabis.com. Today's call will include estimates and other forward-looking information and statements, including statements concerning future revenues, results from operations, financial position, markets, economic conditions, product releases, partnerships and any other statements that may be constructed as a prediction of future performance. The 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 at www.sedar.com, and EDGAR at www.sec.gov. Furthermore, certain non-IFRS measures will be referred to during this call. The company believes that the presentation of these non-IFRS information provides useful supplementary data concerning the company's ongoing operations and is provided for informational purposes only. Any estimate of 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 note that all references on this call reflect currency in Canadian dollars. With that, it is my pleasure to turn the call over to Oren Shuster, CEO of IM Cannabis. Oren, please go ahead.

Thank you, Maya. Good morning, everyone, and thank you for joining us today. The third quarter marked a pivotal point for us. As part of our Canadian restructuring efforts to achieve operational efficiencies, we commenced our exit from the Canadian market to move closer to our goal of growth and profitability. This route was chosen only after exhausting all the other options, including the exploration of potential sale of some or all of the Canadian operations. As part of this decision, we are not providing any funding to the Trichome group any longer. In parallel, we have been able to reduce the company's debt substantially. We believe that the decision eventually made by the Trichome group supports the long-term interest of our shareholders and the company. For those of you less familiar with the Canadian CCAA proceedings, allow me to provide a brief explanation. CCAA allows the Trichome Group to carry on its business in Canada under the protection of the Canadian court. The Trichome Group intends to use the CCAA proceedings to implement, sell and invest solicitation process for the sale of its assets or restructuring of its business. The Trichome Group continues to operate its business for the time being. I would like to make it clear that this process is limited only to Trichome Group, meaning none of our assets or subsidiaries in Israel or Germany are involved in the CCAA proceedings, as Shai will explain later in the call. Our financials include the company's results from continued operations. The activities of Trichome Group are collectively referred to as the discontinued operations. Let me state that there is no change to the company's U.S. and Canadian listings on the NASDAQ and the CSC. Unloading our Canadian division demonstrates our focus and commitment to profitability and growth. We believe we will be able to return value to our investors. We also anticipate that we will further optimize and synergize our existing international operations as well as concentrate our resources where we see the most potential. We are a new company today with a sharper focus, and we will use today's call to help our investors understand what we see on the horizon and what we are doing on the ground together. Imminently in front of us is a transition period, which may prove challenging, but it is designed to lead us to stronger results. I'm pleased to share that we will now direct more resources and efforts into where we believe will grow the fastest, namely Israel; and to grow where we see significant potential, namely Germany. The third quarter was successful in many respects. We signed an international trademark licensing agreement with Avant Brands, granting us the exclusive right to launch the black market rise in Israel. This agreement will allow us to introduce Israeli medical cannabis patients a new variety of quality ultra-premium brands. In addition, during the quarter, our partner, SNDL, completed its initial international export of approximately 167 kgs of premium dried flower from Canada to Israel. This was only one part of the total commitment with us, which is 1,000 kgs. I will now provide an overview of each of our market segments. After this overview, Shai will review our financial results before we open the call up to questions. In Israel, our reputation as the leading premium and ultra-premium provider is on the rise, bolstering our competitive power in the Israeli market. We were early movers in the premium and ultra-premium product categories in the Israeli medical cannabis markets, and we continue to lead this market segment. Our strong focus on the premium and ultra-premium segments allows us to increase our prices. As a matter of fact, there has been a 37% increase in the [indiscernible], currently selling at approximately $9.1 per gram compared to an average selling price of approximately $6.6 per gram last year. We believe that our average selling price is the highest in Israel. Shai will elaborate on this further. In August this year, our legacy strain, Roma, was voted as the February Strain of the Month by Cannabis, a leading cannabis block for the Israeli medical patients. Positive patient feedback is critical element in pharmacy's high interest in working with us. They look forward to IMC product news as our strengths performed strongly, offering pharmacies a quick inventory rotation at premium prices. In Israel, we continue to build strong brand portfolio and a superior product offering. In Q3, we introduced the Top-Shelf Collection, our newest addition to IMC's brand portfolio. We launched it in September 2022 as a premium product line with indoor-grown, high-THC cannabis flowers. The Top-Shelf Collection offers strains such as Lemon Rocket and Diesel Drift. This collection targets the growing recreational leading market segment of medical patients. In addition, as part of our craft collection, which is our ultra-premium, indoor-grown product line, we introduced the new strength, Watermelon Zkittlez, which has seen strong patient demand since it's launched. The future holds strong potential for us. With Avant Brandship agreement, we will also be introducing the BLKMKT brand in Israel, and we expect great results from this brand product offering. We also expect to potentially increase political and economic stability in Israel as the elections are behind us, and we are likely to have long-term government in office. In the third quarter, we continue to place a strong focus on efficiency and synergies in our Israel operations. In the second quarter, we merged 2 large call centers into the largest sector in Israel, which in the third quarter, started to create cost reductions as well as consistency and expertise in providing service to patients. To date, we established robust global supply infrastructure through our strong relationships with suppliers and partners. Our network of European and Canadian suppliers include world-leading names as Avant Brands, SNDL and others, giving us the key competitive advantage in Israel. We also source quality medical cannabis from local Israeli best cultivators and suppliers. Our sourcing network allow us to offer patients the premium and ultra-premium experience they have come to expect from IM Cannabis. Our success in Israel give us confidence, and we strongly believe that this success can be replicated in Germany. As we wait for the proposed legalization of recreational cannabis use in Germany. In the third quarter, we were pleased to see steady increase in staff bank patients, who can easily get prescription and access high-quality medical cannabis products. We also see a steady increase in the number of teleclinics and online pharmacies that are becoming available to medical cannabis patients. In October, the German government unveiled plans for the legalization of recreational cannabis for adults. Many details will need to be worked out locally and with the EU before legalization is passed. The German health minister has commented that if everything were to go well, legalization could be achieved as early as 2024. We strongly believe that German legalization will take the way for legalization in other European countries, such as Italy, Spain, French and the U.K. Our goal is to develop strong foothold in the EU market, create an early-mover advantage and grab significant market share. We are now much more focused and streamlined company. Israel and Germany have much in common, such as a strong and well organized medical cannabis sector the distribute cannabis through pharmacies operating under the relevant GMP and EU GMP standards. There is also a high consumer demand for premium and ultra-premium cannabis and robust commercial infrastructure in both markets. In our view, these common points grows our strong sourcing infrastructure give us the key competitive advantages in German. We will be allocating the needed capital and efforts to further establish our presence in Israel and Germany and to achieve profitability. I will now turn the call over to our Chief Financial Officer, Shai Shemesh, who will review our third quarter 2022 financial results. Shai?

Thank you, Oren. As mentioned at the beginning of the call, during September 2022, the company decided to commence its exit from Canada and is no longer providing any funding to the Trichome Group. The decision was based on an anticipated significant change in the competitive landscape in Canada as well as the company's reramped growth strategy. In Q3 '22 financials, the Trichome Group is classified as held-for-sale in the consolidated statement of financial position and as discontinued operations in the consolidated statement of comprehensive income and statement of cash flows for all periods presented. I will now provide an overview of our Q3 2022 financial results for the company's continuing operations. Revenues for Q3 2022 were $14.2 million compared to $8 million on Q3 2021, an increase of 78%, representing a 12% sequential organic growth. The increase in revenues is primarily attributed to the increase in the quantity of medical cannabis products sold as well as on the higher average selling price per gram the company realized from its portfolio of premium and ultra-premium branded cannabis products in Israel. The company sold 1,453 kilograms of dried flowers in Q3 2022 at an average selling price of $9.08 per gram compared to 1,175 kilograms for the same period in 2021 at an average selling price of $6.61 per gram. The change in our average selling price reflects a 37% increase. Gross profit before fair value adjustment in Q3 2022 was $2.8 million compared to $2 million in Q3 2021. Gross margin for Q3 2022 was 20% compared to 25% in Q3 2021. The decrease is mainly attributed to an expired local nonpremium inventory write-offs. General and administrative expenses in Q3 2022 were $4.3 million compared to $3.7 million in Q3 2021. The increase is mainly attributable to increase in professional and legal services. Sales and marketing expenses in Q3 2022 were $2.8 million compared to $1.7 million in Q3 2021. The increase is mainly attributed to the company's intensified marketing efforts in Israel, brand launch in Germany, higher distribution expenses and increased staffing from acquisition, all in line with our expectations. Total operating expenses in Q3 2022 were $7.5 million compared to $8 million in Q3 2021. Operating loss for Q3 2022 was $5.5 million compared to $8.1 million in Q3 2021. Non-IFRS adjusted EBITDA loss from continuing operations in Q3 2022 was $3.7 million compared to an adjusted EBITDA loss of $2.3 million in Q3 2021. The increase is mainly attributable to corporate expenses and related legal expenses in connection with the company's exit from the Canadian market. Net loss from continuing operations for Q3 2022 was $4.5 million compared with net income of [ $0.8 million ] in Q3 2021. Basic loss per share attributable to equity holders of the company from continuing operations was $0.6 compared to basic earnings per share of $0.03 in Q3 2021. Diluted loss per share attributable to equity holders of the company from continuing operations was $0.6 compared to diluted loss per share of $0.09 in Q3 2021. Net loss from discontinued operations for Q3 2022 was $123.6 million compared with a loss of $6.5 million in Q3 2021. The difference is mainly attributable to $115.1 million impairment related to the company's discontinued operations. Basic and diluted loss per share attributable to equity holders of the company from discontinued operations was $1.75 compared to basic diluted loss per share of $0.1 in Q3 2021. As of September 30, 2022, the company's cash position from continuing operations was $3.2 million and its working capital from continuing operation was $10.3 million. As Oren mentioned, by commencing the exit from the Canadian market, we have been able to reduce the company's debt level substantially. Debt from continuing operations for September 30, 2022 was $5.1 million, representing a decrease of approximately 57%. The company is planning to finance its operations from its existing and future working capital resources, use of available credit facilities and will continue to evaluate additional sources of capital and financing as needed. In addition to our financial results, the company also announced today that we plan to implement a 10:1 share consolidation of its common shares expected to be effective on or around November 17, 2022. The purpose of the consolidation is to regain compliance with the NASDAQ minimum bid price requirements. I would now like to turn the call back to Oren for closing remarks. Oren?

Thank you, Shai. We will continue to concentrate our efforts on our highest value markets, Israel and Germany, and accelerate our path to profitability. Today, we are seeking to maximize efficiency and create the right balance for future success. We are further strengthening our Israeli operations and preparing to bring our expertise to Europe to achieve market leadership in the medical cannabis market and to be fully ready to capitalize on the German recreational cannabis market upon legalization. With that, I hand the call over to the operator to begin our question-and-answer session. Operator?

[Operator Instructions] Our first question today comes from the line of Aaron Grey from Alliance Global Partners.

So first question for me, I want to talk a little bit more about Israel. First, also nice growth sequentially there. Could you talk about the split between retail and wholesale base? I know you've had a verticality initiative going on there? And then more broadly speaking, a number of competitors have called out, obviously, pricing pressure and a slow down in the market, even pulling back from exporting most of the Canadian LPs to the market, at least in the interim. You guys booked your premium positioning, so can you talk about how you're seeing the competitive environment? Maybe how you guys see yourself as differentiated versus some of the other? Competitors that might be seeing more pressure there, and how you see the market evolving going forward?

Okay. Thanks. Good morning, and hi, everybody. So IMC actually opened a new category in Israel, which is the premium and the ultra-premium, and we have been the first one to start with that. And I think that we have built a leading position in this segment in the Israeli market. I think that it's reflected very well in our average selling price that went up significantly to about $9.1 per gram in Israel on average, I think, in Israel and Germany, and I think that [indiscernible]. Last year in the same quarter, we have been at $6.6, and I think that the reflection of moving to the premium segment. And I think that it says a lot about the price pressure because we don't feel this price pressure in our segment -- in the premium segment.

Okay. That's helpful. And then about the verticality split between retail and wholesale for Israel?

So what do you [indiscernible]? You mean what is the split between them? This is what.

Yes. Like just progress in terms of what you were selling through your own stores, first of all, you're selling through third-party retailers. I mean you're going to start selling more of our product in your own stores with those acquisitions that have closed.

So most of the products that IMC sold wasn't in our pharmacies. We are improving all the time, and it's a process. It's a process I think that we are enlarging our portion in our pharmacies from quarter-to-quarter. We can't -- we have a network of partners. We don't want to focus only on our stores because the market is growing all the time, and we have to supply our partners as well.

Okay. Great. That's a powerful color. Next question for me. I want to talk a little more about Germany regarding some of the details that the Health Minister provided, particularly around keeping production domestic for IMC. What are your thoughts on them being able to cruise to domestically and being able to meet demand within Germany, especially with that 2024 potential target? And then how would IMC look to participate in the market, if they were to hold that excluding exports from the market? How would you guys then compete within the German [indiscernible] opportunity?