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Operator
Thank you for standing by. Our conference will begin shortly.
Shai
Good day, and welcome to I Am Cannabis' third quarter 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Maya Lustig, Director of Investor and Public Relations. Please go ahead.
Maya Lustig
Thank you, operator. Joining me today are IM Cannabis Chief Executive Officer Oren Schuster and Chief Financial Officer Shai Shemesh. 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 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 constructed as a prediction of future performance. The 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 CDAR at www.cdar.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 operation 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 Schuster, CEO of IM Cannabis. Oren, please go ahead.
Oren Schuster
Thank you, Maya. Good morning, everyone, and thank you for joining us today. The third quarter marked a pivotal point for us. As part of our Canadian restructuring efforts to achieve operational efficiencies, we commenced our exit from the Canadian market to move closer to our goals of growth and profitability. This route was chosen only after exhausting all other options, including the exploration of potential sale of some or all of the Canadian operations. As part of this decision, We are not providing any funding to the Tricom Group any longer. In parallel, we have been able to reduce the company's debt substantially. We believe that the CCAA decision eventually made by the Tricom Group supports the long-term interest of our shareholders and the company. For those of you less familiar with the Canadian CCAA proceedings, allow me to provide a brief explanation. CCAA allows the Tricom Group to carry on its business in Canada under the protection of the Canadian Port. The Tricom Group intends to use the CCAA proceedings to implement a sell and invest solicitation process for the sale of its assets or restructuring of its business. The Tricom Group continues to operate its business for the time being. I would like to make it clear that this process is limited only to Tricom Group, meaning none of our assets or subsidiaries in Israel or Germany are involved in the CCAA proceedings. As Shai will explain later in the call, our financials include the company's results from continued operations. The activities of Tricom Group are collectively referred to as the discontinued operations. Let me state that there is no change to the company's US and Canadian listings on the NASDAQ and the CSE. Unloading our Canadian division demonstrates our focus and commitment to profitability and growth. We believe we will be able to return value to our investors. We also anticipate that we will further optimize and synergize our existing international operations, as well as concentrate our resources where we see the most potential. We are a new company today with a sharper focus, and we will use today's call to help our investors understand what we see on the horizon and what we are doing on the ground together. Immediately in front of us is a transition period which may prove challenging. but it is designed to lead us to stronger results. I'm pleased to share that we will now direct more resources and efforts into what we believe will grow the fastest, namely Israel, and to grow where we see significant potential, namely Germany. The third quarter was successful in many respects. We signed an international trademark licensing agreement with Avant Brands, granting us the exclusive right to launch the black market brand in Israel. This agreement will allow us to introduce Israeli medical cannabis patients a new variety of quality, ultra-premium brands. In addition, during the quarter, our partner Sandal completed its initial international export of approximately 167 kgs of premium dried flour from Canada to Israel. This was only one part of the total commitment with us, which is 1,000 kgs. I will now provide an overview of each of our market segments. After this overview, Shari will review our financial results before we open the call up for questions. In Israel, our reputation as a leading premium and ultra-premium provider is on the rise, bolstering our competitive power in the Israeli market. We were early movers in the premium and ultra-premium product categories in the Israeli medical cannabis market, and we continue to lead this market segment. Our strong focus on the premium and ultra-premium segments allows us to increase our prices. As a matter of fact, there has been 37 increase in the price per gram, currently selling at approximately $9.1 per gram compared to an average selling price of approximately $6.6 per gram last year. We believe that our average selling price is the highest in Israel. Shai will elaborate on this further. In August this year, our legacy strain, Roma, was voted as the favorite strain of the month by Cannabis, a leading cannabis blog for the Israeli medical patients. Positive patient feedback is a critical element in pharmacies' high interest in working with us. They look forward to IMC product news as our strains perform strongly offering pharmacies a quick inventory rotation at premium prices. In Israel, we continue to build strong brand portfolio and a superior product offering. In Q3, we introduced the Top Shelf Collection, our newest addition to IOC's brand portfolio. We launched it in September 2022 as a premium product line with indoor grown high THC cannabis flowers The Top Chefs collection offers strains such as Lemon Rocket and Diesel Drift. This collection targets the growing recreational leaning market segment of medical patients. In addition, as part of our craft collection, which is our ultra-premium indoor grown product line, we introduced a new strain, Watermelon Skittles, which has seen strong patient demand since its launch. The future holds strong potential for us. With the Avant-Grant chip agreement, we will also be introducing the black market brand in Israel, and we expect great results from this brand's product offering. We also expect to generally see increased potential for political and economic stability in Israel, as the elections are behind us and we are likely to have long-term government in office. In the third quarter, we continue to place a strong focus on efficiency and synergies in our Israeli operations. In the second quarter, we merged two large call centers into the largest center in Israel, which in the third quarter started to create cost reductions as well as consistency and expertise in providing service to patients. To date, we established robust global supply infrastructure through our strong relationships with suppliers and partners. Our network of European and Canadian suppliers include world-leading names as Avant Brands, Sandel, and others, giving us a key competitive advantage in Israel. We also source quality medical cannabis from local Israeli-based cultivators and suppliers. Our sourcing network allows us to offer patients the premium and ultra-premium experience they have come to expect from IM Cannabis. Our success in Israel gives us confidence and we strongly believe that this success can be replicated in Germany. As we wait for the proposed legalization of recreational cannabis use in Germany, In the third quarter, we were pleased to see a steady increase in self-paying patients who can easily get prescription and access high-quality medical cannabis products. We also see a steady increase in the number of teleclinics and online pharmacies that are becoming available to medical cannabis patients. In October, the German government unveiled plans for legalization of recreational cannabis for adults. Many details will need to be worked out locally and with the EU before legalization is passed. The German Health Minister has commented that if everything were to go well, legalization could be achieved as early as 2024. We strongly believe that German legalization will pave the way for legalization in other European countries such as Italy, Spain, French, and the UK. Our goal is to develop strong foothold in the EU market, create an early mover advantage, and grab significant market share. We are now much more focused and streamlined company. Israel and Germany have much in common, such as a strong and well-organized medical cannabis sector, that distributes cannabis through pharmacies operating under the relevant GMP and EU GMP standards. There is also high consumer demand for premium and ultra-premium cannabis and robust commercial infrastructure in both markets. In our view, these common points plus our strong sourcing infrastructure give us key competitive advantages 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, Shai Shemesh, who will review our third quarter 2022 financial results. Shai?
Maya
Thank you, Oren. As mentioned at the beginning of the call, During September 2022, the company decided to commence its exit from Canada and is no longer providing any funding to the Tricom Group. The decision was based on an anticipated significant change in the competitive landscape in Canada, as well as the company's rear-ramp growth strategy. In Q3 2022 financials, the Tricom Group is classified as helpful selling the consolidated statement of financial position and has discontinued operations in the consolidated statement of comprehensive income and statement of cash flows for all periods presented. I will now provide an overview of our Q3 2022 financial results for the company's continuing operations. Revenues for Q3 2022 were $14.2 million compared to $8 million on Q3 2021, an increase of 78%, representing a 12% sequential organic growth. The increase in revenues is primarily attributed to the increase in the quantity of medical cannabis products sold, as well as from the higher average selling price per gram the company realized from its portfolio of premium and ultra-premium branded cannabis products in Israel. The company sold 1,453 kilograms of dried flowers in Q3 2022 at an average selling price of $9.08 per gram, compared to 1,175 kilograms for the same period in 2021 at an average selling price of $6.61 per gram. The change in our average selling price reflects a 37% increase. Gross profit before fair value adjustment in Q3 2022 was $2.8 million compared to $2 million in Q3 2021. Gross margin for Q3 2022 was 20% compared to 25% in Q3 2021. The decrease is mainly attributed to an expired local non-premium inventory write-offs. General and administrative expenses in Q3 2022 were $4.3 million compared to $3.7 million in Q3 2021. The increase is mainly attributable to increase in professional and legal services. Sales and marketing expenses in Q3 2022 were $2.8 million compared to $1.7 million in Q3 2021. The increase is mainly attributed to the company's intensified marketing efforts in Israel, brand launch in Germany, higher distribution expenses, and increased staffing from acquisition, all in line with our expectations. Total operating expenses in Q3 2022 were $7.5 million compared to $8 million in Q3 2021. Operating loss for Q3 2022 was $5.5 million compared to $8.1 million in Q3 2021. Non-IFRS adjusted EBITDA loss from continuing operations in Q3 2022 was $3.7 million, compared to an adjusted EBITDA loss of $2.3 million in Q3 2021. The increase is mainly attributable to corporate expenses and related legal expenses in connection with the company's exit from the Canadian market. Net loss from continuing operations for Q3 2022 was $4.5 million compared with net income of $0.8 million in Q3 2021. Basic loss per share attributable to equity holders of the company from continuing operations was $0.6 compared to basic earnings per share of $0.03 in Q3 2021. Diluted loss per share attributable to equity holders of the company from continuing operations was $0.6 compared to diluted loss per share of $0.09 in Q3 2021. Net loss from discontinued operations for Q3 2022 was $123.6 million compared with a loss of $6.5 million in Q3 2021. The difference is mainly attributable to $115.1 million in payment related to the company's discontinued operations. Basic and diluted loss per share attributable to equity holds of the company from discontinued operations was $1.75, compared to basic and diluted loss per share of $0.1 in Q3 2021. As of September 30, 2022, the company's cash position from continuing operations was $3.2 million, and its working capital from continuing operations was $10.3 million. As Owen mentioned, by commencing the exit from the Canadian market, we have been able to reduce the company's debt level substantially. Debt from continuing operations for September 30, 2022 was $5.1 million, representing a decrease of approximately 57%. The company is planning to finance its operations from its existing and future working capital resources, use of available credit facilities, and will continue to evaluate additional sources of capital and financing as needed. In addition to our financial results, the company also announced today that it plans to implement a 10-for-1 share consolidation of its common shares, expected to be effective on or around November 17, 2022. The purpose of the consolidation is to regain compliance with NASDAQ minimum bid price requirements. I would now like to turn the call back to Owen for closing remarks. Owen?
Oren Schuster
Thank you, Shai. We will continue to concentrate our efforts on our highest value markets, Israel and Germany, and accelerate our path to profitability. Today, we are seeking to maximize efficiency and create the right balance for future success. We are further strengthening our Israeli operations and preparing to bring our expertise to Europe to achieve market leadership in the medical cannabis market and to be fully ready to capitalize on the German recreational cannabis market upon legalization. With that, I hand the call over to the operator to begin our question and answer session. Operator?
Shai
Thank you. In order to ask a question, please raise your hand using your mobile or desktop application and wait for your name to be announced. Once again, please raise your hand using your mobile or desktop application and wait for your name to be announced. Our first question today comes from the line of Aaron Gray from Alliance Global Partners.
Operator
Please go ahead. Hi, good morning, and I thank you for the questions.
Aaron
Um, so first question for me, I want to talk a little bit more about Israel, you know, you know, first awesome, nice growth sequentially there. Could you talk about the split between retail and wholesale backs? I know you've had, you know, a verticality initiative going on there. And then more broadly speaking, um, you know, a number of competitors have called out obviously pricing pressure and a slowdown on the market, you know, um, even even pulling back from you know exporting mostly canadian lps to the market at least in the interim you guys spoke to your premium positioning so can you talk about how you're seeing the competitive environment maybe how you guys see yourself as differentiated versus some of the other you know competitors might be seeing more pressure there and how you see the market evolving going forward thanks okay thanks hi good morning and hi everybody um so imc actually opened
Oren Schuster
a new category in Israel, which is the premium and the ultra premium. And we have been the first one to start with that. And I think that we have built a leading position in this segment in the Israeli market. I think that it's reflected very well in our average selling price that went out significantly to about $9.1 per gram in Israel. on average in Israel and Germany. And I think that it means a lot. Last year in the same quarter, we've been in $6.6. And I think that's the reflection of moving to the premium segment. And I think that it says a lot about the price pressure because we don't feel this price pressure in our segment, in the premium segment.
Aaron
Okay, great. That's helpful. And then about the verticality split between retail and wholesale for Israel?
spk02
So when you speak, you mean what is the split between them?
Aaron
Yeah, like just progress in terms of what you were selling through your own stores versus what you're selling through third-party retailers. You're going to start selling more of your own product in your own stores with those acquisitions that are closed.
Oren Schuster
So Most of the product that IMC sold wasn't in our pharmacies. We are improving all the time. And it's a process. It's a process. I think that we are enlarging our portion in our pharmacies from quarter to quarter. We have a network of partners. We don't want to focus only on our stores because the market is growing all the time and we have to supply our partners as well.
Aaron
Okay, great. That's a powerful color. Next question for me, I want to talk a little more about Germany, regarding some of the details that the health minister provided, particularly around keeping production domestic. For IMC, what are your thoughts on them being able to produce it domestically and being able to meet demand within Germany, especially with that 2024 potential target? And then how would IMC look to participate in the market if they were to hold that, excluding exports from the market? How would you guys look to then compete within the German adult use opportunity? Thank you.
Oren Schuster
So I think that the German market is definitely the most interesting opportunity today. And on the other side, I think that it will take time before the market will be mature. Actually, a lot of time. And to grow a high quality cannabis, it's a process. It's not something that happens in one day. I think that it will take time to build the industry in Germany. And I think that the industry, that Germany will stay an import market for years, definitely well after the legalization will start because the industry there is the channel of the medical cannabis. And I think that the channel of medical cannabis will be the channel for high quality products still after legalization. And as of now, this is what we are focusing in. We will see the final regulations in Germany and then we will take decisions according to that. I think that it's very early and I think that the regulations are going to change significantly from the draft that was published.
Aaron
Okay. All right. Thanks so much. Last question for me, just, you talked about, you know, that path to profitability, you know, saw some improvements sequentially, especially when you look at it, you know, extremely discontinued operations. Any additional color you might be able to provide in terms of, you know, the timing to reach profitability and maybe how we look at the gross margin, you know, versus the SG&A in terms of how we look to model it out to reach that. Thank you. Okay, thank you.
Oren Schuster
So I will start and Shai will maybe add some more color. So we think that in Q1 we will reach a positive cash flow and definitely profitability. The business now is much simpler and definitely we are, I feel that we are in a better position with lower debt position, significantly lower debt position. And
spk02
And I will continue maybe the rest. Yeah.
Maya
Hi, Aaron. How are you? So about the gross margin, yes, we had around 20% gross margin in Q3. We definitely expected to increase in the coming quarters. In the past, I said that we are aiming more than the 30% gross margin. We are still talking about that. and that's it. This is the area we want to go around 35 at least. This is where we're aiming. We have a difference between the trade and the retail. We're talking about two different gross margins environment, but on average, we expect to be above the 30%. Great.
Aaron
Thank you very much for the call. I'll jump back in the queue.
Shai
Thank you. as a reminder if you wish to ask a question please raise your hand using your mobile or desktop application and wait for your name to be announced our next call will come from the line of scott fortune from roth capital please go ahead scott are you able to unmute
spk01
Yes, Sarah, sorry about that. Good morning or evening from wherever you are. Just want to get a sense for what you're seeing on the patient growth side in Israel. I know we saw some sort of stabilization, but your sense for the growth kind of continuing for Israel and the medical market going forward here.
Oren Schuster
So, Ice Code, good morning. Good morning. So we have seen that the market is growing constantly. There was a delay for a few months ago, but lately we've seen that we are coming back to about 2% on a monthly basis, growth pace. So that's the situation as of now before any change in the regulations. I don't see any reason that it will go down, this growth pace.
spk01
Got it. And just want to follow up a little bit more color. I know you put a lot of focus on the premium ultra side as you build that out in Israel. Can you kind of quantify or kind of quantify that for us as a percentage of the overall value? cannabis market in Israel, where do you think it can be at? And then as far as your market share, I know you're the kind of leader there, but kind of the market share from the overall premium side for IMC here.
Oren Schuster
So it's a very good question. And I think that in that sense, Israel is very different than other places because of the situation that the black market is more expensive than the medical market. So I think that the demand for premium products is higher than in other places because we're speaking about the medical market that actually there is a leakage to the black market, especially of high quality products. So I don't know exactly what is the size of the market, but what I know is that we are very far from exhausting the potential. We don't see any – what we see is whatever we are bringing, if it's premium, it doesn't matter the price, it's sold out immediately.
spk01
That's great. And then as far as your supply sources now that you've kind of shuttered the Canadian business – Will you be looking to continue to add supply? Kind of what levels of supply are you at to fulfill the business there? And then I'll jump back in the queue.
Oren Schuster
So we build a supply chain actually with a few partners that we're working with them very well. And next year we are going to increase this cooperation and to increase the quantities that we are bringing into the market. We have done it in a very responsible way. We started to build the category with smaller quantities and we have a plan. We are enlarging the quantities quarter over quarter. We don't want to flood the market and we have built it very responsibly, the segment. So what we will see is increasing quantities and we will do it responsibly. That's my forecast.
spk01
I appreciate the cover. Thank you.
Operator
Thank you. Thank you. You have no further questions.
Shai
Please proceed.
Oren Schuster
Thank you, operator. And thank you all for joining 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. I'm also happy to set a meeting with you. If you wish to talk, please send an email to IMC's IR director, Maya Lastig, and she will be happy to assist.
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