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

Good morning, and welcome to IM Cannabis' Fourth 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.

Good morning, and thank you, operator. Joining me for today's call are IM Cannabis, Chief Executive Officer Oren Shuster; and Chief Financial Officer, Uri Birenberg. The earnings press 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 results of operations, economic conditions and anticipated courses of action and are based on assumptions, expectations, estimates and projections as the date hereof. This information may involve known and unknown risk, 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.sedarplus.ca and EDGAR at www.sec.gov. Furthermore, certain non-IFRS measures will be referred to during this call and the non-IFRS adjusted EBITDA loss will hereafter we 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. Please also note that all references on this call reflect currency in Canadian dollars. With that, it's my pleasure to turn the call over to Oren Shuster, CEO of IM Cannabis. Oren, please go ahead.

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 regularization in Germany, the impact of the Israel Hamas war and Q4 results and the potential reverse-merger with Kadimastem, 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. 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 German government spent the rest of the year reworking step one of the proposal focused on decriminalization, home growth, not-for-profit social clubs, and the rescheduling medical cannabis from 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 22. The new legislation will enter into effect on April 1 with the opening of Cannabis social clubs expected on July 1. Obviously, our German team is extremely excited to have the relative freedom to operate within the new regulatory structure. The size of the opportunity is massive. The general population is about 83 million people, more than double the population of California. Until the nonprofit 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 medical market growth is the rescheduling of medical cannabis from narcotic to a 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. When prescribing narcotic, German physicians are required to document each patient and are subject to regular narcotic audits, whereas the prescription process of 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 copayment, which will no longer be applied under the new regulations. When we put on 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. In 2020, we started laying the framework to become a top cannabis company in Germany. Since 2021, we have been in the top 10. We have a fully licensed EU GMP cannabis processing facility, one of a handful in Germany, licensed repack bulk. We distribute our cannabis products through our EU GDP license 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. The structure behind both the EU GMP and 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 enable 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 results of this pivot was tremendous. When we take a look at December 2023 market data from InsideHealth, 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 #5 within the German cannabis flower distributors. We are #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 agreement in place to deliver further accelerated growth in 2024. 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 will 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, the Israel Hamas war started on October 7, while we can already see that its leading to an increase in patient and license number -- license numbers, it also played havoc with our business. For example, the decrease in our October sales plus the interruption of our supply chain caused a 26% or CAD 3.2 million decrease in our Q4 revenues. Also, our shipping costs have increased by almost 100%. The currency fluctuations we talked about last quarter continued to affect our revenues. The total annual effect of the fluctuation is downside of approximately CAD 2.5 million. In Q4, we continued cleaning out 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 #1 in the premium market by relaunching 2 black market strains, JEALOUSLY and BACIO GLTO, as well as 2 PICO strains, JEALOUSY #1 and BACIO GLTO #4 in addition to launching new PICO strain Upside Down #5. As in Germany, in 2023, the Israel Ministry of Health started working on a regulatory overall, 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 time line and implementation of the new legislation. 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 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. 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 did 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 shareholder in the current situation, keeping all possibilities open. It drove the decision to initiate the potential reverse merger with Kadimastem. 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 5% in Kadimastem 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 IIa clinical trial. The next steps in the reverse merger process involved initiating robust due diligence, commencing work on the definitive agreement, as well as investigating the conditions precedent and requirements of the CSC announcement. 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 expected in Israel this year. When I look at the overall results of 2023, I see that we are lean, agile and well positioned to take advantage, not just of the growth expected by the organization in Germany, but in Israel as well. 2024 is the year we have been preparing for. 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 #1 in sales this Q. We have the infrastructure and the team we need for success as well as the supply agreement in place with the leader. I believe this, together with a 12% participation in Kadimastem will deliver shareholder value. I will now turn the call over to our Chief Financial Officer, Uri Birenberg, who will review our fourth quarter 2023 and full year financial results. Uri?

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 $48.8 million, compared to $54.3 million in 2022, a decrease of 10%. Revenues for the fourth quarter of 2023 were $10.7 million compared to $14.5 million, a decrease of 26%. The main part of the decrease on the fourth quarter, about $3.2 million 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 dried flower sold in 2023 was approximately 8,609 kilograms 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-range stock discounts to move out slow-moving stock. Total dried flower sold in the fourth quarter 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 fourth quarter 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. Gross profit for 2023 was $9.8 million compared to $9.2 million in 2022, an increase of 7.5%. Gross profit for the fourth quarter of 2023 was $0.8 million compared to $2.6 million in the fourth quarter 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 $0.8 million cost of sales hit due to inventory raise. Company fair value adjustment was about $1 million versus $2.1 million for the years ended 2023 and 2022. Gross margin before fair value adjustment in 2023 was 22% compared to 21% in 2022. Gross margin before fair value adjustment in the fourth quarter of 2023 was 10% compared to 19% in the fourth quarter of 2022, a decrease of 46%. G&A expenses in 2023 were $11 million compared to $21.5 million in 2022, a decrease of 49%. G&A expenses in the fourth quarter of 2023 were $3.3 million compared to $9.8 million in the fourth quarter of 2022, a decrease of 66%. The decrease in the G&A expenses is attributed mainly to impairment on year 2022 and restructuring and head count adjustment in 2023. Selling and marketing expenses in 2023 were $10.8 million compared to $11.5 million in 2022, a decrease of 6%. Selling and marketing expenses in the fourth quarter of 2023 were $2.8 million compared to $3.1 million in Q4 2022, a decrease of 10% mainly due to a decrease in share-based compensation and restructuring. Total operating expenses in 2023 were $22.6 million compared to $40 million in 2022. Total operating expenses for the quarter of 2023 were $6 million compared to $13.3 million in the fourth quarter of 2022, a decrease of 65%. Non-IFRS adjusted EBITDA loss in 2023 was $8 million compared to an adjusted EBITDA loss of $11.5 million in 2022, a decrease of 31%. Adjusted EBITDA loss in the fourth quarter of 2023 was $4.2 million compared to adjusted EBITDA loss of $1.9 million in the fourth quarter of 2022, an increase of 127%. Net loss from continuing operations in 2023 was $10.2 million compared to $24.9 million in 2022. Net loss from continuing operations in the fourth quarter of 2023 was $3.5 million compared to a net loss of $9.6 million in the fourth quarter 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 fourth quarter 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 fourth quarter of 2022. As of the balance sheet, cash and cash equivalents as of December 31, 2023 were $1.8 million compared to $2.4 million in December 31, 2022. Total assets as of December 31, 2023 were $48.8 million compared to $60.7 million in December 31, 2022, a decrease of about 20%. The decrease is mainly attributed to inventory reduction of about $6.6 million, a reduction in other assets of $1.8 million and the reduction of noncurrent assets of about $3.5 million. Total liabilities as of December 31, 2023, were $35.1 million compared to $36.9 million in December 31, 2022, a decrease of about 5%. The decrease was mainly due to the reduction in trade payables of about $6.1 million. The company is planning to finance its operations from an existing and future working capital resources as well as from available credit facilities, and we'll 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?

Thank you, Uri. While 2023 was a year of transition, the Israeli Hamas war had a 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 excellent position to deliver accelerated growth. We grew 180% in 2023. We are #1 in sales per SKU. We have the infrastructure and the team we need to succeed as well as the supply agreement 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 Instructions] We have our first question from Aaron Grey. Aaron, please go ahead.

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 potential spin-off and reverse merger, just at a high level, remind us in terms of like how we could 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 business, especially with the potential in Germany. So how should we think about the operations and plan, investment between as you're looking to do this high level of potential reverse merger and spin out?

Thank you, Aaron for the question. So as we said, we signed a nonbinding term sheet with Kadimastem, both them being public and we haven't signed a definitive agreement. 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.

Thanks that clarification.

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

That's fine there. So for Germany there, can you talk about the strategy in terms of helping to build kind of patient and doctor awareness on your [Indiscernible], 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 buy 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.