IM Cannabis Corp (IMCC) 2024 Q1 法說會逐字稿

Good morning, and welcome to IM Cannabis' first-quarter 2024 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. Anna?

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 actions, and are based on assumptions, expectations, estimates and projections as the date hereof. 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+ 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. 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, Anna. Good morning, everyone, and thank you for joining us today. I would like to start off with a quick overview of the overall cannabis market. On April 1, the German government legalized Cannabis. On April 30, the Associated Press reported that there is an indication that the US Drug Enforcement Administration will reclassify cannabis as less dangerous drug, placing it at the same level as other medications. And obviously, Canada legalized cannabis several years ago.

Together, these regulatory changes in three G7 countries are affecting and will continue to affect the future of the entire cannabis industry, moving it out of the proverbial shadows towards the mainstream. With each new regulatory rescheduling, cannabis is becoming more legitimate. As a medical cannabis company based in Israel and Germany, the last 10 days of Q1 were game changers for us.

On March 22, the German government passed the final hurdle for legalizing cannabis. The new law went into effect on April 1. On March 28, the Israeli Ministry of Health announced that the first phase of anticipated regulatory reform, facilitating access to medical cannabis for many new patient groups, would take effect on April 1, as well. These regulatory changes were milestones for the entire cannabis industry, setting both the German, as well as the Israeli medical cannabis markets, up for significant accelerated growth, as more new patients are expected to start entering the markets.

I won't go through the details of the Germany legalization today since we covered it in our last call, but I would like to give you a sense of how legalization has affected the German market since April 1. Keep in mind that until the nonprofit social clubs and home grow legislation is implemented, as expected on July 1, the only legal way to purchase cannabis in Germany is in a pharmacy with a prescription.

As a result, the telemedicine providers specializing in cannabis have been overrun. New patients have been lucky if they managed to get an appointment within two to three weeks. The cannabis-focused pharmacies have been flooded, not only with new prescriptions, but also with people walking into pharmacies without a prescription trying to purchase cannabis.

Taking a look at our German business, the legislative changes directly impacted our March sales. Because of the uncertainty surrounding the legalization in March, pharmacies were hesitated to purchase their usual quantities, leading to a decrease in sales, which not only impacted the month of March, but the entire Q1 results in Germany.

Since April 1, however, we have seen continuous acceleration in our sales. In April, our monthly sales were just about double the monthly average of the last six months. While it is still too early to predict how the market will continue to develop, the first month was very promising. In line with the German market's accelerated growth, we are shifting our focus to ensure that we have the necessary resources in place for success.

Moving to Israel, I will now take you through the regulatory reform that occurred there. During our last call, I said that I would go into detail today. As we mentioned in our April 1 press release, the reform was initially announced by the Ministry of Health on August 7 of last year. It was then delayed by three months because of the Israeli-Hamas war.

On March 28, the initial phase of the reform was approved and announced by the Ministry of Health. The key aspects, which were implemented on April 1, are as follows: a change in the prescription process. Patients with a wide range of diseases and medical conditions from oncology to Parkinsons will no longer be required to obtain a license to receive medical cannabis. These patients will receive a prescription similar to those for other prescription medication. Pain and PTSD are not yet included in the reform.

Medical cannabis can now be prescribed through the HMO, Israeli's public healthcare system. Until the reform, cannabis could not be prescribed through the HMO, which cover the majority of the Israeli population.

The number of prescribing physicians is expected to increase. Before the reform, only about 100 physicians were able to issue cannabis licenses. Now the thousands of HMO physicians, who are duly trained and certified within their field of expertise, can prescribe medical cannabis as a first-line treatment, as opposed to last resort, based on medical discretion for the approved indications.

The cost for prescribing is anticipated to be reduced. The Ministry of Health has limited the cost of medical cannabis prescription. We believe that by facilitating the access to medical cannabis for many new patients, the new regulations will transform the medical cannabis market in Israel. By improving the accessibility, increasing the potential number of prescriber, and lowering the cost of obtaining a cannabis prescription, we anticipate an increase in the number of medical cannabis patients.

While the legalization in Germany had an immediate impact on our cannabis market, the impact of the regulatory reform in Israel started slowly. The only sign we have seen up to now are the first prescriptions from [HMO] physicians that have started to reach our pharmacies.

When we take a look at our Israeli business, in Q1, we continued cleaning the slow-moving stock by reducing prices that we started in Q3 of 2023. The lower prices clearly impacted both our revenue and gross margin.

As in Q4 2023, in Q1 2024, we further reenforced our position in the premium market, launching eight new strains. We launched Purple Rain T15, Ya Hemi and Bacio Gelato by BLKMKT, Super Sativa by Tenzo Avant, Gelato 33 by LOT420, and MOTOBRTH B F LMO, and FLO OG by SNDL.

Moving back over to Germany, as the market started ramp up for the anticipated accelerated growth, the German team has been working on sourcing robust supply chain that can meet the demands of the growing market. All cannabis flowers that are sold through pharmacies must come from EU GMP facility.

Of all the licensed cannabis producers, fewer than 20 of the Canadian cannabis producers are EU GMP-certified, making this one of the primary supply chain bottlenecks. IMC Germany not only has an EU GMP-certified packaging facility but is also capable of performing third-party audits for licensed Canadian cannabis producers, ensuring they meet the requirements to receive their EU GMP certification. This gives us an advantage when we are building our supply chain.

GlassHouse Botanics was the first Canadian licensed producers that received its EU GMP though our partnership. In return, we have the exclusivity and right of first refusal for their strains. Our team also audited further Canadian licensed producers during Q1 in preparation for the third-party audit with the German authorities later this year. We anticipate that these partnerships will form the basis of our supply chain in Germany.

As I had mentioned earlier, and also in our April 15 press release, we are shifting our focus to the German market, allocating our resources to where we see the biggest potential and the best return of our investment. Our new priorities have forced us to make difficult decision, the first of which was deciding not to make the remaining installment payments to complete the purchase of Oranim Pharmacy in Israel.

As such, the 51% of the shares we held will transfer back to the seller. Uri will go through the impact of this on our business later in the call.

I'd also like to give you a short update on where we are with the proposed reverse merger with Kadimastem. At this stage, the initiation of the reverse merger with Kadimastem is still in early phases, and its completion is uncertain. It is still too early to assess how long it will take until we sign a definitive agreement or establish whatever such an agreement will be executed.

Before turning the call over to the Chief Financial Officer, Uri Birenberg, I would like to put Q1 '24 into perspective. As you all know, 2023 was a year of transformation for us. We completely restructured, becoming a very lean and agile company. This process is reflecting in the numbers.

Our G&A decreased 28% vs Q1 2023. Where it is not for the decision not to complete the Oranim purchase, our total operating expenses would have decreased 29% vs Q1 2023. When I look ahead, with the regulatory changes in Israel and especially legalization in Germany, I see a tremendous potential for growth. We have the infrastructure and supply agreements to support accelerated growth in place. What we need now to do is to ensure that we have the necessary resources in place for success.

I will now hand the call over to Uri, who will review the first-quarter 2024 financial results. Uri?

Thank you, Oren. I will now provide an overview of Q1 2024 financial results for the company's cannabis operations. Our Q1 results were mainly impacted by the following points: price reductions and provisioning for slow-moving inventory, and as Oren mentioned, shifting our focus and resources to German market, which led to the decision not to complete with the Oranim purchase. Revenues for Q1 2024 were $12.1 million compared to $12.5 million in Q1 2023, a decrease of 3%. The decrease is mainly due an exchange rate effect of about $0.2 million and decrease in average price per sale due to increased competition.

Total dried flower sold in Q1 2024 was approximately 1,873 kilogram, with an average selling price of $5.68 per gram, compared to approximately 1,842 kilogram in Q1 2023, with an average selling price of $6.59 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.

Gross profit for Q1 2024 was $1.8 million, compared to $2.9 million in Q1 2023, a decrease of 39%. The downside is attributed mainly to the slow-moving stock that was moved out at lower prices and an exchange rate difference totaling $0.4 million, and $0.64 million cost of sales due to the inventory erase of the slow-moving stock.

Company fair value adjustment was $0 and $0.4 million for the Q1 2024 and Q1 2023, respectively. Gross margin after fair value adjustment in Q1 2024 was 15%, compared to 23% in Q1 2023.

G&A expenses in Q1 2024 were $2.3 million, compared to $3.2 million in Q1 2023, a decrease of 28%. The decrease in the G&A expense is attributable mainly to the salaries and professional services of $0.64 million. Selling and marketing expenses in Q1 2024 were $2.3 million, compared to $2.8 million in Q1 2023, a decrease of 18%, mainly due to a decrease in salaries and professional services of $0.5 million.

Total operating expenses in Q1 2024 were $7.4 million, compared to $6.5 million in Q1 2023. The increase is due to the other operating expenses related to Oranim deal revoke, with an expected losses of $2.8 million. Adjusting for this one-time losses, Q1 2024 operating expenses were $4.6 million, compared to $6.5 million in Q1 2023, a decrease of 29%.

Non-IFRS adjusted EBITDA loss in Q1 2024 was $2.1 million, compared to an adjusted EBITDA loss of $1.9 26 million in Q1 2023, an increase losses of 10%. Net loss from continuing operations in Q1 2024 was $6.0 million, compared to $0.9 million in Q1 2023. Diluted loss per share in Q1 2024 was $0.42, compared to a loss of $0.05 per share in Q1 2023.

As of the balance sheet, cash and cash equivalent as of March 31, 2024, were $1.0 million, compared to $1.8 million in December 31, 2023. Total assets as of March 31, 2024, were $41.1 million, compared to $48.8 million in December 31, 2023, a decrease of 16%. The decrease is mainly attributed to the goodwill reduction due to Oranim agreement cancelation of about $2.8 million, a reduction in inventory of $2.1 million, reduction of cash and cash equivalent of $0.8 million, and reduction in trade payables of $1.2 million. Total liabilities as of March 31, 2024, were $32.8 million, compared with $35.1 million in December 31, 2023, a decrease of about 7%. The decrease was mainly due to the reduction in the other accounts payable and accrued expenses of $1.8 million and reduction in the PUT option liability of $0.7 million. The company is planning to finance its operations from existing and future working capital resources, as well as from available credit facilities, and will continue to evaluate additional sources of capital and financing as needed.

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

Thank you, Uri. As in Q4 2023, in this quarter, we were still impacted by the price reduction of the slow-moving stock, while overall uncertainties about the proposed legalization affected our results in Germany. That said, we spent the quarter shifting our focus to Germany and preparing our business for accelerated growth after the April 1st legalization.

Looking back on the first month post-legalization in Germany, I see that we have the infrastructure and the supply agreements in place to continue delivering accelerated growth we have already seen in April. We will also ensure that we have the necessary resources in place for success.

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