IM Cannabis Corp (IMCC) 2021 Q4 法說會逐字稿

Good day and welcome to IM Cannabis fourth-quarter and fiscal year 2021 earnings conference call. Today's conference call is being recorded.

At this time, I would like to turn the conference over to Maya Lustig, Director of Investor and Public Relations.

Thank you, operator. Joining me today are IM Cannabis' Chief Executive Officer, Oren Shuster; and Chief Financial Officer, Shai Shemesh.

Earlier today, IM Cannabis released financial results for the fourth-quarter and full-year 2021. 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, 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.

These information may involve known and unknown risks, uncertainties, and other factors which 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.

Furthermore, certain non-IFRS measures will be referred to during this call. The company believes that the presentation of this non-IFRS information provides useful supplementary data concerning the company's ongoing operation and is provided for informational purposes only.

Any estimates or forward-looking information 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 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 is my pleasure to turn the call over to Oren Shuster, CEO of IM Cannabis. Oren, please go ahead.

Thank you, Maya. Hello, everyone, and thank you for joining us for our first earning call.

In just over two years since IM Cannabis become a public company, we have made a significant amount of headway in positioning our enterprise to become a leading producer of premium cannabis globally.

In 2019, we successfully went public on the Canadian Securities Exchange. And in March of 2021, we become the first Israeli cannabis operator to list on the NASDAQ.

Of the three rounds of financing, we successfully raised approximately CAD70 million, which was prudently deployed into the business.

In exchange for this capital, we have grown our annual revenue base nearly 10 times over the last three years. From just over CAD5 million in 2019 to record of over CAD54 million in 2021, representing revenue growth of over 240% in fiscal 2020.

Most notably, we grew revenue by 309% year over year to over CAD20 million in the fourth quarter, and exited the year at an approximate CAD[18] million revenue run rate, which showcases our accelerated growth.

The strategic steps we are taking to capitalize on the evolving global regulatory landscape and calculated approach towards building our global supply chain framework, if today, allowed us to become one of the leading distributors of medical cannabis, with an established presence in the Canadian and German cannabis market.

Ultimately, we see a pathway to capturing over 30% market share of the premium cannabis industry in Israel and over 10% share of the EU market within five years.

But going further, for those of you who may be new to our story, I would like to first provide an overview of IM Cannabis and the vision that our team has been working towards since inception.

Afterwards, I will provide some detail on our market segments that collectively position us for long-term growth, followed by a review of our financial results before we open the call up for your questions.

IM Cannabis, or IMC, is a leading global provider of premium cannabis for the medical and recreational markets and the only multi-country operator with the footprint in Israel, Canada, and Germany -- the three largest markets in which cannabis is legal at the federal level.

According to New Frontier Data, one of the cannabis industry's leading data analytics streams, global sales of legalized cannabis in 2020 were almost USD24 billion. Due to the ongoing globalization and commercialization of cannabis, this figure is expected to over double to USD51 billion by 2025, just under three years from today.

This emerging global economy is primed with opportunities, but to capitalize on them will require the mitigation of complex regulation, established infrastructure, and deep understanding of evolving market trends. All of which serve as the basis for IMC success.

Our vision is, and always has been, to become one of the world's largest premium cannabis producers. Leveraging our well-respected brand with super premium products and a loyal customer base has allowed us to become a market leader in the relatively short amount of time.

And while other operator may have aspiration to reach the dominant scale IMC is working towards, we are uniquely positioned to continue growth with the highest-quality products in the market, which is a key differentiator that will enable us to continue growing sustainably.

Our accumulation of knowledge and operating expertise dates back over a decade and informs every strategic and operational decisions that we make.

In 2010, I founded one of the eight medical cannabis producers that were initially licensed by the Israeli authorities. These entity, which become the initial cultivator and processor for IMC, provided the foundation of our operating platform. As regulatory reforms continue to develop, we replicated our success internationally.

Fast forward into today, we have completed seven strategic acquisitions and build a world-class network of pharmacies. Not only our operations vertically integrated, but we have hands-on premium cultivation capacity, sought-after brand, and top-tier infrastructure with extensive distribution reach. One of which has provided an early-mover advantage that positions IMC for significantly leadership opportunity as the market evolves.

Let me go into some more detail on some of the most important steps we have taken. In 2019, we acquired logistics hub in Germany that is EU GMP-certified, making IMC one of the few companies that can procure bulk products, repackage it in Germany, and sell it directly to pharmacies.

Leveraging the facility and a 13-year track record of successful distribution, we quickly developed IMC's brand presence in Germany and commenced sales into Europe in the fourth quarter of 2020.

Subsequently, we made key upgrades to this facility with state-of-the-art technology and completed an expansion that doubled IMC footprint in Germany to approximately 8,000 square feet.

Germany is an important market as we prepare for more significant entry to the broader European market. And today, IMC products are available at all relevant pharmacies that sell cannabis in Germany.

We also completed the landmark acquisition of Trichome in March 2021, which provided us with premium indoor cultivation facility that increased our capacity by over 15,000 pounds to serve the high demand for premium cannabis across our markets.

We further secured our foothold in the Canadian market through our acquisition of MYM, which provided coast-to-coast distribution in Canada, while accelerating our entrant strategy into new markets and bolster our export capabilities to serve our existing Israeli and German operations.

In Israel where patients are required to obtain medical cannabis through pharmacies, we closed four key acquisitions earlier this month. This initiative will have consolidated four Israeli-leading pharmacies under one ownership, immediately making IMC one of the leading retail medical cannabis providers in the country.

Importantly, we now operate Israeli's largest online pharmacy business, which supports the expansion of modern patient base as e-commerce is widely adopted as the preferred retail medium, leading the modernization of the industry, strengthens our direct links to consumers by allowing the agency to manage patient relationships end-to-end, and bolsters our in-house data for use across our platforms.

Finally, IMC also secured an IMC-GDP licensed trade center, which we will leverage to increase our purchasing power with suppliers and expand our range of products. This includes highly recognized brands, some of which we now have exclusive agreements to import.

We now have the resources needed to ensure the efficient movement of supplies across our platform, effectively serve some of the most rapidly growing consumer segments in Israel, and ultimately drive increased satisfaction and consumption of our products.

We have strategically entered each of the markets we are operating with, not only due to the size of the market, but due to the holistic nature of our platform and taking each segment into account.

As mentioned earlier, IMC story began in Israel where we have over a decade of experience in growing and selling premium cannabis. The study I referred earlier states Israel imported more cannabis in 2020 than any other country, while also having the world's highest cannabis usage rate per capita, outpacing the United States by nearly 10%.

Israel's long history of cannabis medical research has led to the country's becoming flourishing research and development hub, which is naturally aligned with IMC's core values.

Our commitment to quality is what originally led primary focus towards premium set. Our vertically integrated operations have enabled IMC to succeed in countries with stringently controlled regulatory environments, while allowing us to stay ahead of trends and generate operating efficiency.

In the near term, we believe that Israel will continue to be the highest growth segment for IMC as we realize the benefits from our expanded global platform.

Over the longer term, however, we expect to leverage our successful and reputation in Israel into German, which presents an even more substantial opportunity. Like Israel, Germany has a very active pharmaceutical market. And as a result, it's a science-based cannabis market supported by extensive medical studies.

Cannabis is distributed through pharmacies to approximately 100,000 patients in the country. And the German government employs a strong reimbursement program, which supports a high pricing structure.

As you might expect, this creates an environment that caters to premium product, thereby giving a distinct advantage to operators who are able to constantly meet the levels of associated standards.

Also similar to Israel, Germany has heavily regulated environment that requires a significant level of expertise to navigate. Our EU-GMP certification is an incredible asset in this regard and further position us to be a market leader in this sector.

Germany's economic success with its medical program, as in our opinion, made the legalization of adult-use recreational cannabis becoming a top government priority. Due to its position as the economic and logistical hub for the EU, Germany could potentially provide one of the greatest growth catalysts in the cannabis market, and we believe we are better positioned to than anyone to capture this market share.

As you may know, Canada was the first G7 country to federally legalize recreational cannabis and has the highest production capacity of premium products outside of the US.

Our strategy of developing a Canadian presence was rooted in the ability to have world-class manufacturing hub to serve all of our addressable markets that are high importers of premium products.

Based on recent sales figures, IMC's brands are popular with Canadian consumers and are leading the premium market. Notably, our Highlands and WAGNERS brands are ranked as number one and number six, respectively in Ontario, which generally reflects consumer preferences across Canada being its largest market.

We expect our indoor cultivation facilities in Canada to be operating at full capacity to meet the elevated demand for our products and brands on a global scale.

The synergies created by our specific operating footprint can be summarized in three points. We are leveraging our regulatory know-how and extensive database of medical patient data and insights from Israel to inform our operations in Germany and Canada.

Our indoor cultivation facility in Canada will support the export of premium product to markets like Israel and Germany, in which consumers are amenable to paying a higher price for premium products. Our German-certified facility serves as the Pan-European distribution hub.

As we prepare for future recreational demand in the EU, we stand to benefit from our unique infrastructure and early-mover advantage. Again, only two players in Germany can make this claim.

With that, I would like to turn the call over to our Chief Financial Officer, Shai Shemesh, who will review our fourth-quarter and fiscal year 2021 financial results. Shai?

Thank you, Oren. As mentioned, IMC is operating from a position of financial strength. Since inception, the capital we've raised has been strategically allocated across our business and created tremendous value in our business, most notably by looking at our compounded annual revenue growth rate of approximately 120% since 2018.

I will now provide an overview of our fourth-quarter and fiscal year 2021 financial and operational results.

Revenues increased 309% to CAD20 million in the fourth quarter of 2021 compared to CAD4.9 million in the fourth quarter of 2020.

Revenues increased 242% to CAD54.3 million in 2021 compared to CAD15.9 million in 2020. The increase in revenue is primarily attributed to an increase in the quantity of medical and recreational cannabis sold.

Gross profit before fair value adjustment for CAD3.8 million in the fourth quarter of 2021 compared to CAD2.8 million in the fourth quarter of 2020.

Gross profit before fair value adjustment was CAD11.9 million in 2021 compared to CAD8.8 million in 2020. Gross profit was temporarily impacted in the fourth quarter of 2021 by COVID-19 restrictions in Canada and Israel, which delayed third-party manufacturing, disrupted labor, and supply chain.

Total operating expenses were CAD16 million in the fourth quarter of 2021 compared to CAD6.9 million in the fourth quarter of 2020.

Total operating expenses were CAD48.7 million in 2021 compared to CAD18.7 million in 2020. The increase in total operating expenses include costs associated with seven acquisitions and expenses related to capital markets activities.

Net loss was CAD12.5 million in the fourth quarter of 2021 compared to a net loss of CAD20 million in the fourth quarter of 2020.

Net loss was CAD18.5 million in 2021 compared to a net loss of CAD28.7 million in 2020.

Basic and diluted loss per share in the fourth quarter of 2021 of CAD0.19 compared to basic and diluted loss per share of CAD0.13 in the fourth quarter of 2020.

Basic and diluted loss per share in 2021 were CAD0.31 and CAD0.66, respectively, compared to basic and diluted loss per share of CAD0.74 in 2020.

Non-IFRS adjusted EBITDA was negative CAD8.3 million in the fourth quarter of 2021 compared to an adjusted EBITDA loss of CAD2.4 million in the fourth quarter of 2020.

Adjusted EBITDA was negative CAD22 million in 2021 compared to a negative CAD4.9 million in 2020.

Excluding acquisition costs of CAD4.3 million in 2021, adjusted EBITDA would have been negative CAD7.7 million in 2021 compared to negative CAD4.9 million in 2020.

And finally, cash and cash equivalents totaled CAD13.9 million at December 31, 2021, compared to CAD8.9 million at December 31, 2020.

While we continue to take an opportunistic approach to our capital allocation strategy, we currently do not have any new acquisition plans. More importantly, we have already begun to realize the synergies of our consolidated operations.

As a result, in the first quarter of 2022, we expect revenues to accelerate on a year-over-year basis while continuing to grow sequentially.

We are also pleased to announce that we are rapidly approaching positive cash flow and positive adjusted EBITDA, which we expect to achieve in the second quarter of 2022.

I would like now to turn the call back to Oren for closing remarks. Oren?

Thank you, Shai. In 2022, we are launching our top Canadian brands in Israel and Germany while continuing to take the steps for alignment with the ongoing regulatory reforms.

As we look forward, our strategy is to unify our brands under the same high standards that we have always prioritized. We believe this will ultimately result in IMC becoming a leading international consumer-packaged goods company, serving the cannabis industry, not dissimilar to the brands you know and love.

Worth noting, the steps we've taken has positioned IMC to become one of the largest players in the European premium cannabis market. Given this positioning, we estimate that in five years IMC could have over 30% share of the market in Israel and over 10% share of the EU premium cannabis market if we execute well against our strategic growth plan.

Of course, this assumes that we do not encounter significant unforeseen events and that the regulatory environment in our key markets will continue to evolve as we expect.

While there are several developments that need to occur in order to achieve our vision, we feel our experienced team, regulatory expertise, and unique supply chain infrastructure has positioned us to excel in this dynamic environment.

With that, I hand the call over to the operator to begin our question-and-answer session. Operator?

Thank you. We will now begin the question-and-answer session. (Operator Instructions)

Aaron Grey, Alliance Global Partners.

Hi, good morning and thanks for the questions, and congrats on the first run during the fourth quarter.

So first question for me. Strong momentum in Canada for your guys' premium brands. As you guys now look potentially export some of those to Israel and otherwise, how do you guys think about allocation of products? To both maintain momentum in Canada while also capitalizing on the opportunities you have internationally in Israel and otherwise.

So just any color in terms of how you think about prioritizing between the two will be very helpful. Thank you.

Hi, it's Oren. Thank you for the question. It's a very good question. So in Canada, what we are doing is [gifting] actually our distribution center for Israel and for Germany and for the Canadian market.

And the allocation from Canada is being done according to the different brands. And what we are trying to do is to optimize the allocation according to the brand, to the market where we can get the higher -- the highest margins while taking into consideration not to lose market share in each of the markets.

To do so we also -- we will do more purchasing if needed from outsourced. And -- but all of the metrics will be held in Canada with this optimization.

Okay. Thank you. That's helpful color there. And second question for me, Shai, I think you mentioned profitability 2Q 2022.

Could you maybe break down a pathway of how you guys look to get there between gross margin and SG&A? This quarter, the CAD8 million EBITDA loss. So a pretty hefty improvement over the next two quarters. So if you could help that -- the pathway to that between gross margin and SG&A, that would be helpful. Thank you.

Yeah. Hi, Aaron. Well, first of all, as you well know, 2021 was a very hectic year for us, with all the acquisitions, the NASDAQ listing, and the financing plan that we did. So this basically -- we had lots of transaction costs related to that and all other costs related to the other items.

When you look at our balance sheet, you will see that we have a nice inventory levels that are going to be utilized during 2022.

Apart from full consolidation of all the subsidiaries that -- now we have started consolidating from day one and was partially, the increase in revenues due to the synergy and the integration, and what Oren mentioned before, as well as the reduction of the -- and one-time costs that we are not expecting to have at the moment, we believe that we will reach a positive adjusted EBITDA at Q2, as we said, and gross margins that were relatively low in Q4 were estimated to increase as well.

Okay. Thank you. And if you could just help to quantify how much of those one-time impacts were that were included in that EBITDA number just so we can get a better run rate on the go-forward there for SG&A. Thank you.

Yes. So I think it was inside the press release that was sent -- that was released. We had a total acquisition costs of CAD4.3 million for the -- in 2021. We had another CAD1.3 million that's related to our NASDAQ listing. And in general, we paid around CAD20 million in cash.

I'm switching to the cash. In cash, we paid more than CAD20 million for all -- CAD22 million for all the acquisition, NASDAQ listing, everything involved. So does this answer your question?

Okay. Yeah, I just want to make sure. I thought those have been shipped out of the adjusted EBITDA. But I'm going to ask some more questions on the back end, and I'll jump back into the queue for now. Thank you very much for the details.

Thank you.

Scott Fortune, ROTH Capital Partners.

Good morning or afternoon, and thanks for taking the questions. Real quick, you've done a nice job of acquiring; you've broaden your ecosystem and sales channel in Israel to become very more vertically integrated with pharmacies and online business platforms, Panaxia, and such.

Can you provide a little color on the synergies with some products, including WAGNERS and others, selling it to retail, delivery, and distribution to drive growth and margin expansion here? Kind of what type of margins and gross margins and EBITDA side are you kind of expected to reach once you get this fully integrated into your systems, into Israel going forward?

And then just a quick update on kind of continuing patient growth that's going on in Israel will be helpful.

Okay. So hi, it's Oren. First of all, regarding the synergies and the -- what we see is definitely that the strategy is working. And we're starting to see the benefits of the synergy, starting with the production in Canada. And we have started to get shipments from our own production facility as well as from other partners in Canada.

And also in Israel, we're starting to see -- we started the integration of, first of all, the home delivery distribution centers that we acquired, it starts from call centers, centralized delivery centers, and so on. So we are starting to recognize many of the efficiencies over there.

Also what we are doing is we are centralizing the purchasing, which give us the higher margins for the pharmacies. So with all of that and the fact that we are vertically integrated in selling our own products in our own pharmacies in Israel -- that the -- for our own products, the margins are well more than 50%. With the other products, it's a bit lower.

So it depends on which chain of the company we are talking about. But if we're talking about the vertically integrated parts, it can be 70% in them. And if you're speaking about pharmacies, for example, it can be even 25% to 30%.

We are working more and more to sell our own products and get higher gross margins.

The market in Israel is continuing to grow. We've seen this year that the growth pace is lower than it was last year, mainly because of regulatory issues and that tends to be more clear.

On the other hand, in Israel, we see that there is -- the process of legalization of medical cannabis has started. So I think that it will be more regularized and we will see significant increase in the Israeli market.

I'm not sure that I answered all the question. So we can do it --

No, that's perfect. That's -- you provided a lot of color and detail on that.

And then real quick, kind of shifting back to Canada here. Can you provide a production capacity update from your Canadian facilities? Kind of the yield improvement that you've seen in the on-take for dry flower from your export and the supply for the Canadian market.

You mentioned how to balance that out, but just kind of a sense for your own production capability and opportunity in Canada.

And then are you looking to add potentially more opportunities to add production to serve the premium Canadian market and their international markets going forward here? How are you looking at your production footprint to serve the high-value markets going forward?

So our production capacity is nearly 15,000 pounds annually in our main production facility in Canada. And I hope that we will be able to extend that.

Anyway, we are doing also B2B, especially before the Israeli market and the German market, that decentralized through Canada. So in the future, we're going to also continue with B2B purchases because there is overcapacity today in Canada. And for us, it's good.

And definitely in the future, if we need more capacity, we will extend the facility.

I appreciate the color. I will jump back in the queue.

Okay, thank you.

(Operator Instructions)

Adam Altberg, BMO.

Good morning, guys. And I just wanted to congratulate you on an unbelievably busy year, battling COVID, challenges, and all of the transactions that the team has done.

I know that they've worked and seen hours. And I just want to congratulate you guys and obviously, the entire IMC team, especially it's quite the accomplishment to exit the year at an CAD80 million annualized revenue run rate. And I know that we've got nowhere to go but up from here.

Shai, it was very good to hear as well, roughly what the total costs were that were incurred during 2021 to transact on all the various acquisitions and on the NASDAQ listing. And obviously, that -- with the team focused moving forward on getting the overall machine humming, that those one-time costs should come down.

And now the focus is on what's on the bottom line and running a smooth operation with no new acquisition plans currently in the pipeline. So very excited on how 2022 and the years ahead are looking.

I do have a couple of questions for you guys. Is there -- first off, is there any insight that you have into any updated political momentum changes towards recreational legalization in Israel?

So Israel -- now there is work on a new law for medical cannabis. Israel officially decriminalize the cannabis lately in the last month or so. So I think that the -- in general, the approach is very positive towards cannabis.

I believe that first of all, we will see the legalization of medical cannabis; that will happen very quickly. And after that, the process of legalization will be much easier once medical cannabis will be legalized.

So I -- it's very difficult for me now to give an estimation regarding timelines about legalization. We need more visibility that probably we'll have in hand during this year.

Okay, great. Can you maybe give a little bit more color around Germany and how the progress is going there and the status of the ease or restrictiveness, I'm not really sure, of the availability to import product from your Canadian operations and/or Israeli operations?

So in Germany, as we all know, it started -- announced officially that they are going to legalization.

First of all, we have -- we feel it and we see that in Germany the discussion about cannabis is much more open than it was in the past. And it's starting to become something very in the mainstream unlike it was before. And it's a very good sign.

And also what we see in Germany is a significant increase in the number of patient that are self-payers. I'm not going through the reimbursement program of the insurance.

So we see definitely increase in that segment, which is very similar to the recreational segment, which is aligned very well with our strategy of bringing premium products from Canada.

We are now selling products that we are importing from Canada, not from our own facility, but we are working extensively on building the best way to send our own products to Germany.

And I believe that later this year, we will start to manage that from our own facility, our own operation in Canada. We started to get product from Canada to Israel from our own facility. So the processes, it's progressing and moving, and I'm very optimistic about that.

Okay, great. And do you guys have any comparative data that shows how IMC is performing versus your competitors in Israel specifically? I know that you mentioned that you have a goal to obtain 30% of market share for premium product in Israel.

Can you maybe give everyone an idea of how IMC is doing versus competitors?

So the Israeli market -- in the Israeli market, we have few kinds of player in the medical cannabis. Some of them have the GMP facilities, some growing, some retail.

IMC is vertically integrated. We are also growing and also have the retail chain and the direct supply.

Today, we are one of the top players. I think that if we are speaking about the public companies, probably we are, today, number two, I think, in numbers in Israel.

And I think that 2022 will be way, way better for IMC in Israel than the 2021 was.

Okay, fantastic. And then just if you could touch on Germany/the EU markets because there have been a few companies, I believe, like a Curaleaf and Tilray that have touched on their aspirations to, you know, generate I would -- I believe -- I don't -- don't quote me on this, but CAD1 billion plus annualized within a certain time period that specifically relate to the EU.

So any comments you could make around IMC's market share and progress in Germany that you haven't already expanded on.

So we -- what we have done until now in Germany, we have built the infrastructure and the preparation for the mass market expansion. We have done that with our EU-GMP facility in Germany.

We've built a significant logistics center in Germany to be able to get a product to store it and to distribute it to the German market and also to the rest of the EU market directly from our logistics center.

And now we are making sure that we would have enough product and premium product to support all the infrastructure that we build and all the demand that will be generated in Germany.

So I think that we are putting all the foundations for this market that everybody is talking about. And I do wish the competitors those number because it means that the market is going to be huge, and we will have healthy competition.

Excellent answer. Thank you. That's all I have. And again, thanks very much to the entire team for all their hard work.

Thank you very much, Adam.

This concludes the question-and-answer session. I would like to turn the conference back over to Oren Shuster for any closing remarks.

Thank you, operator, and thank you all for joining us for our call today. Please continue to track our progress as we continue to execute on our growth strategy, and I look forward to speaking with you in the coming quarters.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.