IM Cannabis Corp. (IMCC) Q1 2023 Earnings Call Transcript

IM Cannabis Corp. (NASDAQ:IMCC) Q1 2023 Earnings Conference Call May 15, 2023 9:00 AM ET

Company Participants

Anna Taranko - Director, Investor and Public Relations

Oren Shuster - Chief Executive Officer

Itay Vago - Chief Financial Officer

Conference Call Participants

Scott Fortune - ROTH Capital Partners

Aaron Grey - Alliance Global Partners

Operator

Good day and welcome to IM Cannabis’ First Quarter 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.

Anna Taranko

Thank you, operator. Joining me today are IM Cannabis Chief Executive Officer, Oren Shuster; and Chief Financial Officer, Itay Vago. 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 revenues, results from operations, financial positions, markets, economic conditions, product releases, partnerships and any other statements that may be construed as a prediction of future performance. 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.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 this non-IFRS information provides useful supplementary data concerning the company’s ongoing operations and is provided for informational purposes only. 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 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.

Oren Shuster

Thank you, Anna. Good morning everyone and thank you for joining us today. In March, while presenting the fourth quarter and full year 2022 results, I told you that 2022 was a transformational year for us in our process towards sustainable profitability. We reworked our strategy, shifting to focus on meeting patients’ and pharmacies’ needs. In Q1 in this – of this year, we have continued this transition. IM Cannabis is becoming a lean and agile company with a clear focus on building brands that consumers love driven by consumer insights, the strategic shift is underpinned by two growth pillars we believe will drive accelerated growth.

Premium brands. We anticipate the growing demand for premium products and have further built our competitive advantage through sourcing and import capabilities fueled by strategic alliances with top-of-the-line Canadian suppliers. Israel and Germany, the two highest value markets, we are focusing our resources where they have maximum impact. Shifting our business model and priorities has made us more flexible, more able to adjust quickly to market dynamics. It also gave us a clear focus, driving further strategic choices. We are already seeing the results of our shift in strategy in our Q1 results. As Itay will explain, we are representing the financial results. Our gross profit increased 36% versus Q1 2022, while our revenue stayed stable. We expect our gross profit to continue to increase as we move into Q2 and Q3.

In Q1 2022, we announced the additional restructuring initiatives designed to drive sustainable profitability while reducing costs. We organized the company’s management and operation to better suit the current market environment and our short to midterm objectives. This allowed us to strengthen our focus on core activities as well as drive efficiencies to realize sustainable profitability. To achieve this goal, the company reduced its workforce in Israel by 21% across all functions, reducing annualized costs by $3.6 million from mid-2023 while maintaining our anticipated revenue. We expect to start seeing the results of the restructuring as Q2 progress into Q3, and the additional saving drive gross profit.

At the same time, we will be shifting our focus from transition to delivery and performance. We believe that the steps we have taken will return value to our investors. We also anticipate that we will further optimize driving synergies between our existing operations in Israel and Germany, concentrating our resources where we see the most potential.

Before going into an overview of each of our market segments, Israel and Germany, I would like to provide you with an update of the Canadian business. As you know, we commenced our exit of the Canadian market during Q4 2022 to focus on achieving profitability. Pursuant to an order of the court made on April 6, 2023, in the CCAA proceedings, the court approved to share purchase agreement with a party that is not related to the company. Following the transition – the transaction, the company has exited operations in Canada and considered these operations discontinued.

I will now provide an overview of each of our market segments. After this overview, Itay will review our financial results before we open the call for questions. Usually, I start with Israel. But this time, I will start with Germany and the steps it’s taking towards legalization. Mid-April, the German Health Minister unveiled what he described as two-pronged model to gradually legalize possession of cannabis in Germany. The first step for which the bill is expected to be presented before the summer recess allows full possession of up to 25 grams of cannabis that will be decriminalized, and thus will be allowed to form not-for-profit clubs for community cultivation with up to 500 members. Clubs can provide members up to 50 grams of cannabis per month and no more than 25 grams of cannabis at once. Private cultivation of up to 3 flowering plants will be allowed.

In the second step expected after the summer, sales through licensed specialty stores will be tested in pilot regions over the next 5 years. While this is a big step forward, it falls short of the initial utilization expectations. Until the final legislation is presented, it is too soon to predict with any certainty how the market will develop. Nonetheless, we believe it will drive market growth by reducing the stigma attached to cannabis and lowering the entry barriers to medical cannabis markets.

In addition to the political news, we launched two new high THC strains in Germany in Q1. In March, our extracts were listed by one of the largest German pharmaceutical wholesalers. We are now one of handful cannabis brands to be listed there. This step was important for us because the classic pharmaceutical wholesalers provide pharmacies with faster same-day delivery. Cannabis wholesalers cannot compete with the classic, established wholesalers when it comes to this type of service. As a result of this collaboration, we have already seen an increase in our number of customers. In Q2, we are looking to expand our listing to include our flowers as well. In Israel, our sales were driven by the four new high-THC strains we launched in Q1, further expanding our portfolio of premium brands.

Roma, our legacy high-THC strain, came back to stock during Q1. The BLKMKT launch in Q4 2022 was well received, which was seen in the sales generated in Q1. We also doubled down on our strategy to provide better service. In this case, we focused on our patients completely overhauling our delivery service from bottom-up. Our goal is not only to provide Israeli patients best-in-class delivery service but also to take advantage of synergies and efficiencies to generate savings.

Additionally, we fine-tuned our BI system to be more efficient in sales while providing better service to our customers. In our view, the Israel and German cannabis market has much in common, from patient or consumer demand for premium cannabis to the distribution through pharmacies. Both companies operate in countries with stringent GMP and EU GMP standards and regulatory hurdles. These common points, plus our strong sourcing infrastructure, give us key competitive advantage in Germany. We are confident that our success in Israel can be replicated in Germany. 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, Itay Vago, who will review our first quarter 2023 financial results. Itay?

Itay Vago

Thank you, Oren. I will now provide an overview of Q1 2023 financial results for the company’s continuing operations. Revenues for the first quarter of 2023 were $13.2 million compared to $13 million in the first quarter of 2022, an increase of 1%. Total dried flower sold in the first quarter of 2023 was approximately 1,842 kilograms with an average selling price of $6.59 per gram compared to approximately 1,415 kilograms in the first quarter of ‘22 with an average selling price of $8.13 per gram. The decrease in average selling price was caused by increased competitivity within the retail segment.

Gross profit for the first quarter of 2023 was $3.5 million compared to $2.4 million in the first quarter of 2022, an increase of 46%. The increase attributed mainly to the increased high-margin sales of imported premium cannabis products and reduction of cost of sales.

Gross margin before fair value adjustment in the first quarter of 2023 was 30% compared to 24% in the first quarter of 2022. General and administrative expenses in Q1 2023 were $3.2 million compared to $3.9 million in Q1 2022, a decrease of 18%. The decrease in general and administrative expenses is attributed mainly to salaries to employees derived from restructuring plan in Israel announced in Q1 2023 and presented separately in the interim financial statements for the first quarter. This restructuring main goal was drive efficiencies and realize sustainable profitability.

Selling and marketing expenses in Q1 2023 were $2.8 million compared to $2.5 million in Q1 2022, an increase of 12%. The increase was due mainly to the company’s increased marketing efforts in Israel, and to the increase in cost is attributed to the rising distribution cost of the company’s products.

Total operating expenses in the first quarter of 2023 were $6.5 million compared to $11.3 million in the first quarter of 2022, a decrease of 42%. Most of the decline can be attributed to the restructuring that took place in Q1 2022. Operating loss in the first quarter of 2023 was $3 million compared to $8.9 million in the first quarter of 2022, a decrease of 66%.

Non-IFRS adjusted EBITDA loss in the first quarter of 2023 was $1.3 million compared to an adjusted EBITDA loss of $2.9 million in the first quarter of 2022, a decrease of 55%. The decrease is mainly attributed to an improved performance of the company’s gross margin and general and administrative expenses, such as cost reduction, cost efficiencies and other corporate expenses reduction. Net gain from continuing operation in the first quarter of 2023 was $0.04 million compared to a net loss of $7.1 million in the first quarter of 2022, a decrease of 100%, driven mostly by the restructuring and the higher gross margin. Basic and diluted gain per share from continuing operation in the first quarter of 2023 was $0.03 compared to a loss per share of $0.08 per share in the first quarter of 2022.

Cash and cash equivalents as of March 31, 2023, were $1.4 million compared to $2.9 million in December 2022. Total assets as of March 31, 2023, were $56.8 million compared to $60.7 million in December 2022, a decrease of 6%. The decrease is mainly attributed to cash and cash equivalents and trade receivables. Total liabilities as of March 31, 2023, were $32.2 million compared to 36.9% in December 2022, a decrease of approximately 13%. The decrease was mainly due to the reduction in trade payables.

During January and February 2023, the company completed two private placements offering for aggregate gross proceeds of $6.5 million. The company is planning to finance its operations from its existing and future working capital resources as well as from its available credit facilities, and we will continue to evaluate additional sources of capital and financing as needed. As you can see, we improved several key parameters during Q1. We improved our gross margin by 46% and decreasing the operating expenses by 42%, leading to a 100% decrease in the net loss. We will continue to improve on these parameters along with others in the next quarters as the effect of the restructuring become apparent.

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

Oren Shuster

Thank you, Itay. As I have said, IMC is a new company with sharper focus, which can be clearly seen in the increase in gross margins. Q1 2023 marked the last big step in our strategic shift. We are currently still in the transition period designed to lead us to stronger results. As Q2 progresses into Q3, we will shift our focus from transition to delivery and performance. I would like also to take this opportunity to thank my team for delivering these results during this time of transition.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question from Scott. Go ahead Scott.

Scott Fortune

Yes. Good morning. Appreciate the color. Just Oren, maybe if you could expand a little bit on Germany. Obviously, we see this two-phase approach. But – and since it does open up the market for you, you have seen the medical market continue to expand less insurance reimbursement side, but more private pay going on board. But can you continue to expand upon the opportunity for Germany with these potential new rules in place and the continued to expand within the medical side? And then just is it going to be easier for patients now to be coming on to the medical cannabis side of things from the Germany level? Just kind of input on the prescription side from that standpoint, that would be great.

Oren Shuster

Okay. Thank you. So, I think that what is happening in Germany is, first of all, everybody speaks about cannabis and legalization. And today, in Germany, you can get prescription if you go to physician. But if you need, if you want to get reimbursement, you have to go also to a specialist. So, there is access to cannabis. And the more it’s in the news and becoming semi-legalized by the government, I think that more and more – we will see more and more people that accessing medical cannabis because they can find high-quality and regulated cannabis sold in pharmacies by EU GMP standards. So, I think that the lower the barrier of entry to new patients, and more than that, more physicians that will prescribe cannabis for patients. So, I think that in that aspect, it will support the medical market and will make it more accessible to new patients.

Operator

Thank you. We will move to the next question from Aaron Grey. Please go ahead.

Aaron Grey

Hi. Thank you for taking the questions. Yes. So, for me, just want to talk a little bit about Israel, now we have seen pacing growth continued to slow now. Obviously, it’s a market where you guys are keenly staying focused on there, along with Germany. So, just can you talk more about the dynamics that you are seeing in the marketplace in terms of overall patients and what you are seeing within there, some trade-down? I know you are focused on premium. So, what are you seeing within the consumer dynamics, potential trade-down and how your premium offerings have been going so far, so any color on the Israel market will be very helpful? Thanks.

Oren Shuster

Okay. Thank you, Aaron. So, we see that the Israeli market is a competitive market. What we have seen is that lately, we haven’t seen any significant growth in the number of patients. And we have seen that many players in the market are struggling. And there is a strong competition. On the other hand, our segment is strong and there is high demand. And we have seen it in Q1 by the increased margins that we had because of more focus on the premium. And I think that the market will be – unless there will be a change in the regulations, in the near future, we won’t see a significant increase in the market. And the market will keep and be very competitive in the near future. I just want to add about that, that I think that with that, there are many opportunities in the market because there are many companies that are in difficulties. And so there is an opportunity. And I think that our segment will stay strong, okay. So, I think that our strategy is in the right place.

Operator

Okay. Thank you. Our next question comes from Scott. Scott, go ahead please.

Scott Fortune

Sorry there, can you hear me now?

Operator

Yes, we can hear you. Thank you.

Scott Fortune

Perfect. Thank you for the additional question. I just want to focus on kind of your restructuring that you guys have implemented and completing there. Obviously, that helped to kind of move down the operation expenses overall, G&A inside. But kind of step us through this quarter and additional cost savings from this restructuring and kind of how we should look at kind of your – the OpEx kind of right-sized going forward from here. Just kind of some of the other new initiatives or other initiatives from the restructuring and the potential cost savings we can see further – going further forward from these levels? Thanks.

Oren Shuster

Okay. So, we have done the restructuring. And now in this quarter, I can say that a new team managed all the processes and the financial reports and everything. So, we had a very smooth transition. We see a great benefit by doing that. We think that we will see. We haven’t seen yet the savings. We will see it in the coming quarters. It’s a process. It’s an ongoing process. We are going to continue with – and work more on efficiencies and synergies in the next quarters and to continue with the improvement. I think that it’s doing very well for the company. We are very focused on the – in our brands and in sales and marketing. And I think that we are becoming better and better in that. So, we will continue and sharpen the organization as we go.

Operator

[Operator Instructions] Alright, Oren, I don’t believe there are any further questions.

Oren Shuster

Okay. Thank you, operator and thank you all for joining our call today. Please follow along with us as we shift our focus from transition to delivery and performance in the coming quarters. I look forward to speaking with you in the coming quarterly reports.