IM Cannabis Corp.

Good day and welcome to I Am Cannabis' second 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.

Thank you, Operator. Joining me today are IAM Cannabis Chief Executive Officer Oren Schuster 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.iamcannabis.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 CEDAR Plus at www.cedarplus.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. 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 also note that all references in this call reflect currency in Canadian dollars. With that, it is my pleasure to turn the call over to Oren Schuster, CEO of IAM Cannabis. Oren, please go ahead.

Thank you, Anna. Good morning, everyone, and thank you for joining us today. Before going into the market details, I would like to start off today by taking you through the initial results of the transformation IMC have been going through since Q4 2022. We are singularly focusing on reaching sustainable profitability, which is supported by the two cornerstones we focused on in our last call in May. First, the strategic shift to focus on meeting patients' and pharmacies' needs Second, right sizing, restructuring to put the necessary resources behind the strategic shift. In Israel, during Q2, we continued the right sizing we started in Q1. We reviewed the entire business from the bottom up. We restructured to become a lean and agile business, able to respond quickly to the changes within our dynamic market. In the process, we reduced our headcount by 36% during the first half of this year. In addition to the restructuring initiatives, we focused on accelerating the path to profitability through active cost management and margin improvement. Our goal was to optimize to drive further efficiencies while maintaining or even improving the services we currently give our patients. For example, we restructured our direct to patient delivery service, improving delivery time for the majority of our patients while reducing costs by about 30%. The transition period and restructure we kicked off in Israel in Q1 has been challenging time for the team. I'm very proud of the effort they made, turning challenges into opportunities. identifying and driving the various initiatives to manage our costs and margins while maintaining sales. This enabled us to reduce our operating expenses in Israel by 42% versus Q2 2022 during this quarter. Taking a look at Germany, the German team refocused and restructured in Q4 of last year. becoming a lean and agile. By refocusing and restructuring, the flower sales in Germany actually accelerated in the six months after the restructure, growing significantly by about 35% in comparison to the six months before the restructure. We grew more than four times as fast as the market during this period. While the strategic shift and the associated rightsizing and restructuring in both Israel and Germany was not always easy, it enabled us to make significant progress toward our goal of sustainable profitability while maintaining sales. Our adjusted EBITDA loss was reduced by 83% versus Q2 of last year to $499,000. I've mentioned the importance of being lean and agile within our dynamic market several times, and I would like to use an example to show you why this is so important. In June, the Health Committee of the Knesset, the Israeli Parliament, passed a resolution to broaden access to medical cannabis, meeting the needs of the growing number of patients. Within the reforms framework, patients suffering from the following indication, metastatic cancer, epilepsy, Crohn's, colitis, dementia, autism from the age of five, MS, AIDS, Parkinson's, Tourette's syndrome, and palliative care will have access to medical cannabis with regular prescription. they will no longer be required to obtain a license in order to receive medical cannabis. Pending for final approval from the Ministry of Health, cannabis will also be able to be used as first line of treatment as opposed to last resort based on medical discretion. In addition, the export process will be simplified. By allowing the growers to separate the post-Harvard process from the growing process, we expect it will facilitate EU GMP certification. By easing the access to cannabis for more medical conditions and giving physicians the ability to use cannabis as first-line treatment, we believe the new legislation has the ability to accelerate market growth which is extremely important in the Israeli market as the growth has been slowing recently. IMC needs to be lean and agile to anticipate as well as to meet the needs of the new patient groups that will start to join the market on December 29, 2023. Additionally, we anticipate that the simplification of the export process will have the potential to accelerate the launch of our leading Israeli ground strains in the German market. In Germany, the first step of the legal reform, which we discussed in May, decriminalization, not-for-profit clubs, and private cultivation, was expected to be finalized before the summer recess. The legislation has been delayed and is now expected sometime later this year. Before moving on to the overview of the Israeli and German markets, I would like to underscore that the rightsizing and refocusing we have been working through since Q4 of last year was led by the strategic decision to exit the recreational Canadian market. This allowed us to fully lean into our heritage as one of the pioneers in the Israeli medical cannabis market. Our extensive expertise within our highly regulated local market gave us a clear advantage when expanding into Germany, another highly regulated medical market. The strategic pivot to focus on the two largest national medical markets is clearly reflected within our organization post-restructure. 24% of our employees are legal and pharmaceutical quality professionals, while sales and marketing also make up 24% of our employees. These percentages mirror the pharmaceutical industry, underscoring our position in the medical cannabis markets. I believe this is the cornerstone for our success and stability within these two similar markets. Now I will give you an overview of both the Israeli and German markets before handing over to Itay for the financials. In Israel, we are number one in the premium sector. We sell IMC-branded premium cannabis, as well as leading Canadian premium cannabis brands, for which we have exclusive distribution rights in Israel. In Q2, we launched our second super-premium, indoor-grown Canadian brand, Blood for 20, with two high THC strengths. These two launches further our market leadership within the premium segment. In addition, we launched the Pico Collection with four high THC flowers. With this launch, we are testing the resonance small but super premium flowers have within the mid-range market segment. We also focused on integrating and optimizing our call center, one of the largest medical cannabis call centers in Israel. We are tracking and improving KPIs such as average price, item per ticket, instant and future orders, on-the-job training, call simulations, and mystery shopper program, round out our call center initiatives. In Germany, we have started to take advantage of our fully licensed EU GMP packing facility and our GDP Logistics Center to drive an additional revenue stream, offering cannabis services to other players within the German cannabis market, from quality and EU GMP services to packing, warehousing, and logistics. We can offer end-to-end cannabis fulfillment services We have started slowly offering warehousing and logistics services onboarding four new customers within the first two quarters of 2023. The B2B services diversify our offering and income sources while improving the overall gross margin of our German business. Turning to our IMC branded flower business in Germany, the team focused on solidifying the two new high THC strains that will launch in Q1 of this year. Overall, while we were able to see the initial results of the shifting strategy in Q1, in Q2 we leaned further into our objectives of sustainable profitability. As Etai will explain while presenting the financial results, the associated restructure along with the active cost and margin management improved our gross margin and overall operating costs while maintaining sales leading to a substantial decrease of 83% in our adjusted EBITDA loss. I look forward to seeing the effect of the reform of the medical cannabis regulation we'll have on the market in Israel once physicians will be able to start writing cannabis prescriptions for the new patient groups on December 29 of this year. I will now turn the call over to our Chief Financial Officer, Itay Vago, who will now review our second quarter 2023 financial results. Itay?

Thank you, Aaron. I will now provide an overview of Q2 2023 financial results for the company's continuing operations. Revenues for the second quarter of 2023 were $13.2 million compared to $12.7 million in the second quarter of 2022, an increase of 4%. Gross margin before fair value adjustment in the second quarter of 2023 was 28% compared to 20% in the second quarter of 2022, an increase of 40%. Adjusted EBITDA loss in the second quarter of 2023 was $499,000 compared to an adjusted EBITDA loss of $3 million in the second quarter of 2022, a decrease of 83%. The decrease is mainly attributed to improved performance of the company's gross margin and general and administrative expenses, such as cost reduction, cost efficiencies, and other corporate expenses reduction. Total operating expenses in the second quarter of 2023 were 5.2 million compared to 7.8 million in the second quarter of 2022, a decrease of 33%. Most of the decline can be attributed to restructuring in Israel. Gross profit for the second quarter of 2023 was 3.5 million compared to 2.2 million in the second quarter of 2022, an increase of 57%. The increase attributed mainly to increased higher margin sales of imported premium cannabis products and reduction of cost of sales. Total dried flour sold in the second quarter of 2023 was approximately 2,128 kilos with an average selling price of 5.04 per gram compared to approximately 1,592 kilos in the second quarter of 2022 with an average selling price of 7.27 per gram. The decrease in average selling price was caused by increased competitivity within the retail segment. General and administrative expenses in Q2 2023 were $2.4 million compared to $3.3 million in Q2 2022, a decrease of 28%. The decrease in the general and administrative expenses is attributed mainly to salaries of the employees derived from the restructuring plan in Israel and presented separately in the interim financial statements for the second quarter. The main goal of the restructuring is to drive efficiencies and realize sustainable profitability. Selling and marketing expenses in Q2 2023 were 2.6 million compared to 3.1 million in Q2 2022, a decrease of 16%. Operating loss in the second quarter of 2023 was 1.8 million compared to 5.6 million in the second quarter of 2022, a decrease of 69%. Net loss from continuing operations in the second quarter of 2023 was 3.7 million compared to a net loss of 3.7 million in the second quarter of 2022, driven mostly by higher gross margin and reduction in operating expenses and offset by finance income in the second quarter of 2022. Basic loss per share from continuing operation in the second quarter of 2023 was 0.26 compared to a loss of 0.49 per share in the second quarter of 2022. Diluted loss per share from continuing operation in the second quarter of 2023 was 0.26 compared to a loss of 0.89 per share in the second quarter of 2022. Cash and cash equivalents as of June 30, 2023 were $1.3 million compared to $2.4 million in December 31, 2022. Total assets as of June 2023 were $55.8 million compared to $60.7 million in December 31, 2022, a decrease of 8%. The decrease is mainly attributed to cash and cash equivalents and to inventory. Total liabilities as of June 30, 2023, were $34.2 million compared to $36.9 in December 31, 2022, a decrease of approximately 7%. The decrease was mainly due to the reduction in trade payables. I would like to mention that the quarterly figures provided in Q2 financial statements and the accompanying Q2 MD&A include some immaterial updates and adjustments to the companies previously filed unaudited interim financial statements for the three months ended March 31st, 2023. The updated figures provided in the Q2 financial statements and Q2 MD&A that covered the Q1 2023 period supersede and replace the financial information for Q1 2023 filed on May 15th, 2023. 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 will continue to evaluate additional sources of capital and financing as needed. In summary, the action we have taken since exiting the Canadian market last year and the associated restructure have significantly reduced our total operating expenses and improved our margin leading to a substantial decrease in adjusted EBITDA loss, as well as the other key measures as I have just mentioned. I would like to turn the call back to Oren for closing remarks. Oren?

Thank you, Itay. The strategic refocusing and right-sizing of the last few quarters has been a transition period for IMC as a whole. I am very proud of the team for pulling through this challenging transitional period while delivering on our objectives. With that, I hand the call over to the operator to begin our Q&A session. Operator?

Thank you, Oran. Now the Q&A is open. You can submit your questions in the Q&A or raise your hand. Our first question is from Scott. Please go ahead, Scott.

Yes, thank you for the questions and good morning. You know, positive news on Israel from that side that will start towards the end of the year and the patient base, but just want to get a little more color on the Israel market currently. Kind of what you're seeing, obviously, the premium side is holding up on the pricing side, but just a sense for the limited patient growth right now with inventory that's hitting the market and the pricing side. I think just a little bit of an update on the Israel market as you look forward going to the new market. opportunity with the, you know, obviously with the new regulations being put in place. And then how does that affect the premium side for all those new indications that are coming aboard? Just a little color there. That'd be great.

Okay. Thank you very much, Scott, for the question. So what we've seen in the Israeli market is that the growth has been slowed significantly in the last year or so. And the new change in regulations, part of it is to open up the market. We see that the market today is highly competitive, especially in the retail side. Too many pharmacies, for example, for the number of patients, and we see that there is access product in the market as well. So we feel price compression in the market. We don't feel it in our segment, in the premium segment. It's a very strong segment still. And there are a few reasons for that. We believe that the change in regulations will affect the market. It might affect the market significantly. However, it won't be immediate. The new regulations will start only in December 29. So I believe that we will feel the effect next year and it will take time for that to ramp up. So it's very difficult to foresee the exact number of new patients or how long it will take. But we think that it's a significant change that will affect the market in the coming years. And the fact that new patients will be able to access the market with prescription only and that it won't be a last resort of treatment cannabis might have a significant effect on the market. So I believe that this year and I don't know how long into next year, the market will continue to be highly competitive with the price compression. And we see that the price compression open up the market to a value, real value segment in Israel. So we see, we're starting to see a picture of companies that specialize in the value or in other segments. So the market, the shape of the market is starting to build up. And I think that we will continue to see this effect in the, at least two to three quarters.

No, perfect. I appreciate that. And just expanding, kind of moving to Germany to obviously the changes in Israel, kind of this export process. But you mentioned you have onboarded four new clients to use your GMP facilities. how kind of any color on those clients and kind of as expectations of kind of, you know, diversifying or just continuing to build out that Germany side with the capacity you have there, that'd be helpful. And the sense of, you know, obviously what we're going to see in the pilot program and the regulations come out here probably this week, but your sense of the removal from the narcotics side of things and how that affects or kind of drives the business for you going forward.

Okay. So we feel the German market is evolving and and we see an increase mainly in the self-payer segment, not the reimbursed, the biggest growth in the German market. And we see that more companies want to go into the market, and most of them don't have the facilities that are required in order to access the market. We have EU GMP facility with GDP. We are very experienced in importing and delivery of cannabis products in the German market. So we started to offer services to other players in the German market. We have done it very responsibly. And we started to onboard a few customers. We have four customers that we onboarded from the beginning of the year. And we can give actually all the services needed to a new player. We build a pricing for that, a catalog of pricing. And this is what we are doing now. We are going to expand it. We have the capacity. For us, it's another stream of revenue that don't require any more investment for us. So it's going to continue and going to expand. And it's a very nice source of revenue. it's not going to be the main focus of the company, but it gives us more exposure also to the market and better visibility as well as more revenues. Regarding the regulations in Germany, we are waiting to see what the German government will come up with. if it will go out of the narcotic, we think that it might have a significant effect on the market because any pharmacy will be able to start and to sell cannabis and the big online distributors will be able to access the market freely and Germany is a big market And with the ability to access to actually any pharmacy in Germany and the fact that it won't be narcotic, so less hurdle for the physician to prescribe, we believe that it affects the market. I think that it's still early to say what will be the magnitude of the effect and how long it will take before we will feel it.

Okay, thank you. Scott, did you have any further questions?

No, thank you.

Okay, thank you very much. And our next question will be from Aaron Gray. Aaron, please go ahead.

Thanks for the questions. So first one for me, I just want to turn back to Israel. Just in terms of some of the excess supply and pricing pressure, can you speak to what you believe is driving it more? Do you think it's more of the Israeli operators, the Canadian LPs? Who do you think is driving more of the excess supply and pricing pressure? And do you feel like there's a need for a shakeout and rationalization and whether or not there are signs of that to help stabilize the marketplace? Thank you. Okay.

Thank you for the question, Aaron. So it's a mixed, it's a mixed of important local growers. We see that we have seen a change in the market. Okay. Many of the players are going out of the market. So the market is changing while we're speaking. And I believe that we will continue to see this change. Even before we will see the effect of the new regulations. And like I said, we don't feel the price compression in our segment because there isn't any access product in our segment. And the demand is there. So I believe that, like I said, we will continue to see that. And I'm sorry, Aaron, what was the second part?

I just wanted to know if there's any... Wouldn't that you believe shakeout would be needed if there's any signs of that to help bring a more rationalized marketplace?

Okay, so I think that what we will see, I think that the changes that the Ministry of Health published will be very significant. And before we will see those changes, I don't think that we will see any change in the market, any significant change. The market is changing all the time. But I think that this will be the most significant effect on the market and it will enable, I believe, export from Israel and also growth in the number of patients. It's still early to evaluate the pace and the magnitude, very similar to the German market, but it has the potential to change the market significantly. So that will be the change, I believe, in the market that will change the dynamics as well.

Okay, all right, great. Thanks for that. And then just helping us as we think about know that path to profitability you know a lot of improvement in the quarter we're getting getting close to break even there so uh gross margins you've now seen you know pretty stable the past two quarters now do you think this is a good mark for us kind of going forward kind of the high 20s maybe uh drifting to 30 percent um and then you just kind of potentially see some top line growth it sounds like that might not come until 2024 given your expectations for asial But are those kind of the main drivers to kind of get us to that EBITDA profitability? Or do you think there's some more SG&A cost savings you'll realize to help you get there? Thanks.

So I think that they said that in the past, we will see the full effect of the restructuring that we've done only in Q3. Because we have done the restructuring, actually, most of it in Q2. So the saving, most of the saving we'll see in Q3. And it will continue with us. So that effect will be there definitely. On the other hand, it's a highly competitive market, like I said. And in the near term, this year, I don't think that we will see any change in the market growth or any significant change. So it's very difficult for me to speak about, to give a forecast because the market is not stable enough to do that now.

Okay. All right. Thank you very much for the call. I'll jump back in the queue.

Thank you very much.

Thank you. Are there any further questions? Feel free to put them in the Q&A or raise your hands.

Okay. Thank you, operator, and thank you all for joining our call today. Please follow along as we look to deliver on our goal of sustainable profitability. I look forward to speaking with you in the coming quarters reports. Thank you very much.