IM Cannabis - Q4 2023
March 28, 2024
Transcript
Operator (participant)
Good morning and welcome to IM Cannabis's 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.
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 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.
Oren Shuster (CEO)
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 legalization in Germany, the impact of the Israeli-Hamas war, and on our Q4 results and the potential reverse merger with Kadimastem, which we announced on February 28th. 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 his 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 grow, 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 22nd. The new legislation will enter into effect on April 1st, with the opening of cannabis social clubs expected on July 1st. 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 German population is about 83 million people, more than double the population of California. Until the non-profit 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 the key to medical market growth is the rescheduling of medical cannabis from narcotic to 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 for 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 cost for self-payers will also be reduced. Narcotic prescription adds copayment, which will no longer be applied under the new regulations.
When we put all 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 to 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 the EU GDP is lean, agile, and can be easily ramped up to meet the increasing market demand. By having all these processes in-house, it enables 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 result of this pivot was tremendous. When we take a look at December 2023 market data from Insight Health, 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 number 5 within the German cannabis flower distributors. We are number 1 in sales per skew 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 logistic facility to support the accelerated growth we already delivered in 2023, we have the supply agreements 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 we'll 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 7th. While we can already see that it's leading to an increase in patient and licensed numbers, it's 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 continue to affect our revenue. The total annual effect of the fluctuation is downside of approximately CAD 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 in volume, the lower prices impacted both our revenue and gross margin.
On a positive note, in Q4, we reinforced our position as the number one in the premium market by relaunching two black market strains, Jealousy and Bacio Gelato, as well as two Pico strains, Jealousy No. 1 and Bacio Gelato No. 4, in addition to launching a new Pico strain, Upside Down No. 5. As in Germany, in 2023, the Israel Ministry of Health started working on a regulatory overhaul 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 timeline 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 the 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 two 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 does 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, two 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 12% 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 II-A clinical trial. The next steps in the reverse merger process involve initiating robust due diligence, commencing work on the definitive agreement, as well as investigating the conditions precedent and requirements of the CSE and Nasdaq. 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 had 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 legalization 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 number one in sales per SKU. We have the infrastructure and the team we need for success, as well as the supply agreements in place to deliver. I believe this together with the 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.
Uri Birenberg (CFO)
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 Israel-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 caused by the Israel-Hamas war and the slow-moving stock that was moved out at a lower price.
Total bridged flower sold in 2023 was approximately 8,609 kilograms, with an average selling price of CAD 5.14 per gram, compared to approximately 6,794 kilograms in 2022, with an average selling price of CAD 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 kilograms, with an average selling price of CAD 4.52 per gram, compared to about 2,334 kilograms in the fourth quarter of 2022, with an average selling price of CAD 5.19 per gram. The decrease in average selling price was caused by increased competition within the retail segment and mid-range stock discounts to move out slow-moving stock. Gross profit for 2023 was CAD 9.8 million, compared to CAD 9.2 million in 2022, an increase of 7.5%.
Gross profit for the fourth quarter of 2023 was CAD 0.8 million, compared to CAD 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 CAD 0.8 million cost of sales hit due to inventory erase. Company fair value adjustment was about CAD 1 million versus CAD 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 CAD 11 million, compared to CAD 21.5 million in 2022, a decrease of 49%.
G&A expenses in the fourth quarter of 2023 were CAD 3.3 million, compared to CAD 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 headcount adjustment in 2023. Selling and marketing expenses in 2023 were CAD 10.8 million, compared to CAD 11.5 million in 2022, a decrease of 6%. Selling and marketing expenses in the fourth quarter of 2023 were CAD 2.8 million, compared to CAD 3.1 million in Q4 2022, a decrease of 10%, mainly due to decrease in share-based compensation and restructuring. Total operating expenses in 2023 were CAD 22.6 million, compared to CAD 40 million in 2022. Total operating expenses in the fourth quarter of 2023 were CAD 6 million, compared to CAD 13.3 million in the fourth quarter of 2022, a decrease of 55%.
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 the diluted loss of $3.55 per share in the fourth quarter of 2022. As of the balance sheet, cash and cash equivalent 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 a reduction of non-current 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 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 like to turn the call back to Oren for closing remarks. Oren.
Oren Shuster (CEO)
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 an excellent position to deliver accelerated growth. We grew 180% in 2023. We are number one in sales per skew. We have the infrastructure and the team we need to succeed, as well as the supply agreements 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.
Operator (participant)
Thank you. To ask a question, please raise your hand and wait for your name to be called. We have our first question from Aaron Grey. Aaron, please go ahead.
Speaker 4
Hi, and thank you very much for the questions. First, I'll continue to send wishes and thoughts for all those within the company during these times. First question for me, so just in terms of the potential spinoff and reverse merger, just at a high level, remind us in terms of how we can 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 businesses, especially with the potential in Germany. So how should we think about the operations and planned investments between that as you're looking to do this high-level potential reverse merger and spin-out? Thank you.
Oren Shuster (CEO)
Hi. Thank you, Aaron, for the question. So, as you said, we signed a non-binding term sheet with Kadimastem, about them being public. And we haven't signed a definitive agreement. The idea is that all the assets that belong today to IMC will still belong to the 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 with the current shareholders.
Speaker 4
Okay. All right. Great. Thanks for that clarification.
Oren Shuster (CEO)
I'm not sure that I answered the question, but.
Speaker 4
No, yeah, 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 guys' side? As I understand it, 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. Thank you.
Oren Shuster (CEO)
Okay. So Germany was one of the main target markets for us from the beginning. We invested in building the infrastructure so that Germany would be like a hub that we can bring significant quantities of product through this hub. We have in Germany the ability to get bulk or final products, and we have a very significant warehouse that we can store and distribute product. The capacity in the warehouse, it depends on the packaging, but it's more than 4 tons at any moment. So it's very significant because the product is moving. So I don't think that we have any limitation of product given the market as it is. I think that I don't see in the near future that we have a problem of utilization. We have enough capacity, or the market is as it is.
Speaker 4
Okay. Great. Appreciate the call there. I'll go ahead and jump into the queue.
Oren Shuster (CEO)
Sorry, you asked about supply. We have already supply agreements in place to Germany. We are selling product in the German market for some time. We've been prepared for the legalization. We extended our supply agreements, and our supplier is eager to supply product to Germany.
Speaker 4
Okay. Great. Appreciate the call. I'll jump back into the queue.
Operator (participant)
Thank you, Aaron. Our next question is from Scott Fortune. Scott, please go ahead.
Speaker 5
Hey, good morning. This is Nick on for Scott. I just want to echo Aaron's comments. I hope everybody's staying safe out there. First one for me, just on the sourcing side, with the geopolitical issues still kind of playing out here, wanted to get an update on the supply chain environment and if you've seen any discernible changes just on the sourcing side, either in Israel or Germany. Thank you.
Oren Shuster (CEO)
Thank you for the question. In Israel, we had significant issues of supply in Q4 because when the war started, there was a mess here with the Ministry of Health, and so it created significant issues in the supply chain. Now everything is okay. The product is coming to Israel, and it's working properly. And with Germany, there isn't any issues of supply besides the fact that you have to be EU GMP certified. And we have done a few audits just lately to more suppliers to make sure that we won't have any supply issues.
Speaker 5
Got it. I appreciate that call, Aaron. Second one for me, just on the pricing side, with Germany now set to expand here and patients in Israel still growing, just wanted to get an update on the general pricing environment in both countries. Have you seen any notable changes in supply-demand economics and just general pricing? Any color there would be helpful.
Oren Shuster (CEO)
The Israeli market is highly competitive, and we can see it very clearly. There is a decline in prices in many segments of the market. We are more focused on the premium segment, so we feel it less. Definitely, everybody feels it in the market. I don't think that we will see significant change in the near future. Regarding Germany, I think that the market will be. My assumption is that the market will be highly competitive, very similar to other markets, and we will see also similar behavior, although there is a lot of supply that is waiting for the opening of the German market. It's a question in Germany, I think, of how fast the market will evolve and the quantities. Still, I believe that it will be a highly competitive market.
Speaker 5
Got it. And then just last one for me on the inventory side. You called out moving stock, which impacted pricing. Where are we in terms of clearing that out fully and just your sense of the inventory and just the margin profile in 2024 as you kind of clear out the last bit of this lower-cost inventory? Thank you.
Oren Shuster (CEO)
So I think that our margins I believe that our margins will improve. Obviously, there are many factors here. Okay? This year, we've been impacted also by the currency. Most of the product that we are bringing is from Canada. So obviously, it was a negative impact. So there are a few external factors that I can't foresee. But I think that our focus on the premium segment will also leave us better margins. And regarding something that I missed about Germany, I want to say we already see products in Germany that are in very highly competitive prices and also below black market today in Germany. So I think that we will see significant down pressure in Germany as well, and it will be very quick.
Speaker 5
Got it. I appreciate the call, Aaron. Thank you.
Oren Shuster (CEO)
Thank you.
Operator (participant)
Okay. Are there any further questions? Again, if you would like to ask a question, please raise your hand. Okay. Oren, I don't think there are any further questions.
Oren Shuster (CEO)
Okay. Thank you, operator. Thank you all for joining our call today.