IM Cannabis Corp. (NASDAQ: NASDAQ:IMCC), a global leader in the medical and adult-use cannabis sectors, reported a decline in financial performance in the first quarter of 2024, as announced during its recent earnings call. Despite the decrease in revenue and gross profit, the company's CEO, Oren Shuster, expressed optimism about the future, particularly in the German market, where regulatory changes have recently made cannabis legal.
The company is shifting its focus and resources to Germany due to its growing market and clear regulations. However, the first quarter saw a 3% decrease in revenue year-over-year, attributed to exchange rates and increased competition, and a significant drop in gross profit. To counterbalance these challenges, the company has reduced general and administrative expenses as well as selling and marketing expenses.
Key Takeaways
- IM Cannabis reported a decrease in Q1 2024 revenue to $12.1 million and a drop in gross profit to $1.8 million.
- The company is pivoting to capitalize on the burgeoning German market following recent legalization.
- Regulatory changes in Germany and Israel are expected to have a positive impact on the industry.
- IM Cannabis is optimizing its supply chain in Germany and promoting its brand through online clinics and physician education.
- The company decided not to proceed with the acquisition of Oranim Pharmacy in Israel.
- IM Cannabis reported a net loss from continuing operations of $6.0 million and a non-IFRS Adjusted EBITDA loss of $2.1 million.
- Cash and cash equivalents stood at $1.0 million as of March 31, 2024.
Company Outlook
- IM Cannabis is focusing on the German market, expecting to leverage its infrastructure and supply agreements for growth.
- The company plans to finance future operations through working capital and available credit facilities.
- Efforts are being made to work with online clinics, physicians, and patient groups to drive prescription numbers and demand in Germany.
Bearish Highlights
- There has been a decrease in revenue and gross profit compared to the previous year.
- The company experienced price reductions and had to provision for slow-moving inventory.
- Cash and cash equivalents, as well as total assets, have decreased.
Bullish Highlights
- General and administrative expenses have been reduced by 28%.
- Selling and marketing expenses have decreased by 18%.
- The company has cleared most of its inventory and is actively managing stock based on expiration dates.
Misses
- The company missed its revenue target due to exchange rate effects and increased competition.
- There was a 39% decrease in gross profit compared to the same quarter in the previous year.
Q&A Highlights
- CEO Oren Shuster emphasized the potential for growth in Israel and Germany due to regulatory changes.
- The company is adapting to the evolving German market, where pharmacies are gaining influence in cannabis sales.
- The demand for cannabis in Germany is on the rise, and IM Cannabis is positioning itself to meet this demand.
IM Cannabis, with its strategic focus on the German market, is navigating through a transformative period in the cannabis industry. Despite current financial setbacks, the company is making calculated moves to establish a strong foothold in markets buoyed by favorable regulatory changes. The company's ability to adapt and streamline its operations in response to market dynamics will be crucial in achieving stability and growth in the upcoming quarters.
InvestingPro Insights
IM Cannabis Corp. (NASDAQ: IMCC) has been facing financial headwinds, as evidenced by their recent earnings report. The InvestingPro data provides additional context to the company’s current state. With a market capitalization of just $10.38 million, IMCC is a relatively small player in the cannabis industry. The company's revenue for the last twelve months as of Q1 2024 stands at $35.69 million, however, it's important to note that this represents an 11.32% decrease from the previous period. The gross profit margin during the same timeframe was 18.04%, but the company's operating income margin was negative, at -29.94%, indicating significant operational challenges.
The InvestingPro Tips highlight several critical issues for potential investors to consider. Firstly, IMCC is operating with a significant debt burden and is quickly burning through its cash reserves. Secondly, the stock has experienced high volatility, with a notable decrease over the last week. On a more positive note, the stock has shown a strong return over the last three months, with a 179.7% increase, and a 57.34% uptick over the last six months. However, analysts do not expect the company to be profitable this year and it has not been profitable over the last twelve months.
For readers looking for a deeper dive into IMCC's financials and strategic positioning, InvestingPro offers additional tips that could provide further insights into the company's performance and outlook. There are 11 more InvestingPro Tips available that can help investors make a more informed decision, including an analysis of the company's short-term obligations compared to its liquid assets and the lack of dividend payments to shareholders.
To access these valuable insights and tips, consider subscribing to InvestingPro. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With a comprehensive analysis of IMCC's financial health and market performance, InvestingPro can be an invaluable resource for those looking to invest in the volatile cannabis sector.
Full transcript - IM Cannabis NAQ (IMCC) Q1 2024:
Operator: 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 & Public Relation. Anna?
Anna Taranko: 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.
Oren Shuster: Thank you, Anna. Good morning, everyone, and thank you for joining us today. I’d like to start off with a quick overview of the overall cannabis market. On April 1st, the German government legalized Cannabis. On April 30th, the Associated Press reported that there is an indication that the US Drug Enforcement Administration will reclassify cannabis as a 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 in Germany, the last 10 days of Q1 were game-changers for us. On March 22nd, the German government passed the final hurdle for legalizing cannabis. The new law went into effect on April 1st. On March 28th, the Israeli Ministry of Health announced that the first phase of the anticipated regulatory reform, facilitating access to medical cannabis for many new patient groups, would take effect on April 1st 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 1st. Keep in mind that until the nonprofit social clubs and home grow legislation is implemented, as expected on July 1st, 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 have 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 hesitant 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 1st, however, we have seen a 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 1st press release, the reform was initially announced by the Ministry of Health on August 7th of last year. It was then delayed by three months because of the Israel-Hamas war. On March 28th, the initial phase of the reform was approved and announced by the Ministry of Health. The key aspects, which were implemented on April 1st, 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 medications. Pain and PTSD are not yet included in the reform. Medical cannabis can now be prescribed through the HMO, Israel’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 private physicians were able to issue cannabis licenses. Now, the thousands of HMO physicians, who are dully trained and certified within their field of expertise, can prescribe medical cannabis as a first line treatment, as opposed to a last resort, based on medical discretion for the approved indications. The cost for a prescription is anticipated to be reduced. The Ministry of Health has limited the cost for a 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 prescribers, 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 few 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 starts to ramp up for the anticipated accelerated growth, the German team has been working on sourcing a robust supply chain that can meet the demands of the growing market. All cannabis flowers that are sold through pharmacies must come from a EU GMP facility. Of all the licensed cannabis producers, fewer than 20 of the Canadian cannabis producers are EU GMP-certified1, 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 preforming 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 producer that received its EU GMP though our partnership. In return, we have 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 in the 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 15th 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 decisions, 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 on 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 whether such an agreement will be executed. Before turning the call over to our Chief Financial Officer, Uri Birenberg, I’d like to put Q1 2024 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 reflected in the numbers. Our G&A decreased 28% vs Q1 2023. Were it 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 now need 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 our first quarter 2024 financial results. Uri?
Uri Birenberg: 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 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 kg, with an average selling price of $5.68 per gram, compared to approximately 1,842kg 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 a lower price and an exchange rate difference totaling $0.4 million, and $0.64 million cost of sales loss 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 adjustments 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 salaries and professional services of $0.64 million. Selling and Marketing Expenses in Q1 2024 were $2.3 million, compared to $2.8 17 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 loss of 10%. Net Loss from continuing operations in Q1 2024 was $6.0 million, compared to $0.9 27 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 equivalents 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 $2.8M, a reduction in inventory of $2.1 million, reduction of cash and cash equivalents 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 to $35.1 million in December 31, 2023, a decrease of about 7%. The decrease was mainly due to the reduction in other accounts payables 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 its 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?
Oren Shuster: Thank you, Uri. As in Q4 2023, in this quarter, we were still impacted by the price reductions 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 the 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?
Operator: Thank you. [Operator Instructions] Our first question comes from Scott fortune from ROTH. Scott, please go ahead.
Scott fortune: Yes, and thank you for taking the questions. Want to put a little emphasis here as your shift your focus to Germany there, Oren, but some of the key initiatives kind of needed to be put in place to benefit from that stronger positioning there, and then we can focus on kind of accelerating the supply chain. But just kind of the key kind of initiatives or shifts in the focus to really benefit from Germany coming on board here with sales from that standpoint. A little color on that would be great.
Oren Shuster: Okay, thank you, Scott, for the question. So, in Germany, we have all the infrastructure needed to execute in the German market. We have an EU GMP facility that can get product and package it and release it in the German market. We have the distribution center in Germany supported by the GMP facility. We can do and we are doing audits to third parties so that they will be able to become EU GMP-compliant and to supply us to the German market. Usually, we're doing it with the agreements, exclusivity, or right of first refusal, and we build an infrastructure also for the supply chain. We have the infrastructure, and we are adding more suppliers to this infrastructure in order to support the growth in the market. We also are going to export from Israel to Germany. This channel is opening up, and we have significant infrastructure here in Israel that - of growing and we can able to supply also some of the needs from the Israeli market directly to Germany. And we have also a competitive advantage in that aspect because we have the operation, the knowhow, and the understanding here in Israel to support the German operation. And so, the main focus is on the supply channels because it's a huge channel in the German market to be able to get constant supply. Until now, the market was a very small market relatively. So, it wasn't an issue, but we have seen that scaling up is not simple, especially in highly regulated markets like the German market. We have seen that everything is difficult today in the German market, and the regulations haven't changed for the importation and the process of the GMP standards for the product, although the regulatory change from the patient and the prescriber side. So, that's the main focus for now because we see that that's the - what we feel in the market, that the need is there and it's growing, and it's more about the supply and the ability to guarantee this supply. So, that's the first focus that we are doing. We’re already selling in the market. Last year, we have been number one in the sales per SKU in the German market, so we know how to push product to the market. And I think that now with the high demand and the access to supply, we will see it also in the results.
Scott fortune: Yes, just to follow up on that, I appreciate that color. Just how - when do you think, or kind of the supply, you’re well positioned to add supply. You're giving them certified on there and you can distribute that to the pharmacies to really benefit from this accelerated pickup in Germany. Kind of step us through how - kind of the timing of supply being added into your infrastructure there in Germany, and is this more of a second half boost? And just kind of in perspective, how much supply? Are you looking to double the supply that you can sell into Germany for 2024 or into 2025? Just kind of quantify that a little bit, that'd be helpful.
Oren Shuster: Okay. So, we already started to add more suppliers. Just recently we added another supplier name named GlassHouse, a Canadian LP that we have done within the EU GMP for its facility. And now, we started to sell the products in in Germany. So, it's ongoing process. I think that in the second half, we'll see significant increase in the supply that we are getting into the German market. And I think that it'll be also aligned with the growth in the German market because although we see that the market is picking up, we will see, I think that the demand will continue to grow. And so, the second half will be much more significant, but it's an ongoing process and we haven't started that only now.
Scott fortune: Okay. And then last question for me, one follow-up. Can you provide a little more color on the inventory-clearing in Israel? Are you kind of completing that, or are you finishing up? Is this still kind of impacting this quarter, second quarter going forward? Just kind of a little more update on the inventory side that's still in Israel here.
Oren Shuster: So, we're checking the inventory all the time and do the adjustments that we have to do. We're going with conservative approach. I don't see for the near future significant changes over there, but this is something that we're monitoring all the time.
Scott fortune: How much - so have you worked - is this work through 50% of your inventory? Kind of, where are you at from completing the inventory clearing here?
Oren Shuster: I think that we cleared most of the inventory, but we are cleaning inventory according to expiry. We are working in the medical market, and we have expiration dates, and like I said, I don't see in the near future any significant clearance.
Scott fortune: Got it. I appreciate it. I will jump back in the queue. Thanks.
Operator: Thank you. Our next question will come from Aaron Gray from Alliance. Aaron, please go ahead.
Aaron Gray: Hi, thank you for that. First one for me, just wanted to follow up a bit on Germany. Helpful comments here on the supply chain. I guess just in terms of the patients, right? So, given for that market, it's one they're - a lot of times they have prescribed a specific brand as we understand it. So, can you speak to some of the efforts that you're making to get more on the front lines in front of physicians to make sure they're going to be pushing patients towards your brand and talking about that value. So, maybe in terms of telemedicine or physical physicians, some of those efforts to maybe push more sales velocity to the patient strides that you're making. Thanks.
Oren Shuster: Okay, thank you for the question, Aaron. So, currently, we're working with almost all the online clinics, let's say definitely all of the big online clinics in Germany. And also, we have done a lot of work with the physicians, education work in order to push prescriptions. And we see it also in the demand. We see also changes, some changes in the market. It's not clear yet. We've seen that pharmacies are changing prescriptions. So, I think that it's - the market is dynamic and there will be evolvement over there. And I think that some of the power is moving also to the pharmacies, and this is what we are seeing. But I think that we have a good presence with the main players in the market, which is a still the tele-clinics, and we - until now, we pushed our products significantly with the tele-clinics and the prescribers. And for example, we had the best - the number ones strain in Germany in 2023, and all of that is because we pushed it in the right channels. And we are keeping a close eye on the market with the changes. And like I said, I think that we will see changes in the market and we will adjust ourselves to the market because it's still very early stages. We also work with - the demand is not coming only from the physicians. It's coming from the patients themselves. We are working with patient groups and through other channels directly with the patients in Germany to drive the demand.
Aaron Gray: Okay, great. Thanks. That's really helpful color there. Just one quick thing you mentioned in terms of the pharmacies. Can you provide some more color in terms of the power kind of shifting there? Are you seeing more of the pharmacies starting to sell cannabis? I believe a lot of reports were saying about 2,000 or 3,000 of the 18,000 before of the pharmacies were prescribing or had cannabis to dispense. Have you seen that dramatically increase or are we still at the early stages there?
Oren Shuster: I think that it’s early stages. I think that we see new behavior every day of players in Germany. And I think that it's because there are also coming new players, and not all the time everything is clear. We've seen lately, for example, that the authorities closed one of the online pharmacies. So, I think that we will see dynamics a bit over there and that the borders will be checked by new players. But Germany is very organized. So, I think that we will understand exactly where the market and the regulations are very clear relatively in Germany. So, I think that we will see different behavior, but at some stage, it'll stable. But regarding stock, the demand is there, and I think that the companies are clearing stock now in Germany and also pharmacies. But there is growth in the number of patients, and I think that everybody in the market feels it.
Operator: [Operator instructions]. I think we have no further questions. Oren, we can close the call.
Oren Shuster: Thank you, Operator, and thank you all for joining our call today.
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