IM Cannabis : Script Q1 2023

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IM Cannabis (IMCC) First Quarter 2023 Earnings Call Script

Operator

Good day and welcome to IM Cannabis' First Quarter 2023 Earnings Conference Call. Today's conference call is being recorded. At this time, I would like to turn the conference over to Anna Taranko, Director of Investor & Public Relations

Anna Taranko

Thank you, Operator. Joining me today are IM Cannabis' Chief Executive Officer, Oren Shuster, and Chief Financial Officer, Itay Vago.

1. The earnings press release that accompanies this call is available on the
2. Investor Relations section of our website at investors.imcannabis.com.
3. Today's call will include estimates and other forward-looking information and
4. statements, including statements concerning future revenues, results from
5. operations, financial positions, markets, economic conditions, product releases,
6. partnerships and any other statements that may be construed as a prediction
7. of future performance.
8. This information may involve known and unknown risks, uncertainties and
9. other factors that may cause actual results to differ materially from those
10. expressed or implied by such statements. Factors that could cause or
11. contribute to such differences are described in detail in the company's most
12. recent filings available on SEDAR atwww.sedar.comand EDGAR at
13. www.sec.gov.
14. Furthermore, certain non-IFRS measures will be referred to during this call. The
15. Company believes that the presentation of this non-IFRS information provides
16. useful supplementary data concerning the Company's ongoing operations and
17. is provided for informational purposes only. Any estimates or forward-looking
18. information or statements provided are accurate only as of the date of this call
19. and the Company undertakes no obligation to publicly update any forward-
20. looking information or statements or supply new information regarding the
21. circumstances after the date of this call. Please also note that all references on
22. this call reflect currency in Canadian dollars.

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With that, it is my pleasure to turn the call over to Oren Shuster, CEO of IM Cannabis.

Oren, please go ahead.

Oren Shuster - Opening Remarks

Thank you, Anna. Good morning, everyone, and thank you for joining us today.

1. In March, while presenting the fourth quarter and full year 2022 results, I told
2. you that 2022 was a transformational year for us in our process towards
3. sustainable profitability. We reworked our strategy, shifting to focus on
4. meeting patients' and pharmacies' needs. In Q1 of this year, we have
5. continued this transition. IM Cannabis is becoming a lean and agile company
6. with a clear focus on building brands that consumers love, driven by consumer
7. insight.
8. The strategic shift is underpinned by the two growth pillars we believe will
9. drive accelerated growth.

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1. Premium brands: we anticipate the growing demand for premium products and have further built our competitive advantage through sourcing and import capabilities fueled by strategic alliances with top-of-the-line Canadian suppliers.
2. Israel and Germany: the two highest value markets. We are focusing our resources where they have maximum impact.

1. Shifting our business model and priorities has made us more flexible, more able
2. to adjust quickly to market dynamics. It also gave us a clear focus, driving
3. further strategic choices.
4. We are already seeing the results of our shift in strategy in our Q1 results. As
5. Itay will explain while presenting the financial results, our gross profit increased
6. 46% vs Q1 2022, while our revenue stayed stable. We expect our gross profit
7. to continue to increase as we move into Q2 and Q3.
8. In Q1 2023, we announced additional restructuring initiatives, designed to
9. drive sustainable profitability while reducing costs. We reorganized the
10. company's management and operations to better suit the current market

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environment and our short- to mid-term objectives. This allowed us to strengthen our focus on core activities as well as drive efficiencies to realize sustainable profitability. To achieve this goal, the Company reduced its workforce in Israel by 21% across all functions, reducing annualized costs by CAD$3.6 million from mid-2023, while maintaining our anticipated revenue. We expect to start seeing the results of the restructuring as Q2 progresses into Q3, as the additional savings drive gross profit. At the same time we will be shifting our focus from transition to delivery and performance.

1. We believe that the steps we have taken will return value to our investors. We
2. also anticipate that we will further optimize, driving synergies between our
3. existing operations in Israel and Germany, concentrating our resources where
4. we see the most potential.
5. Before going into an overview of each of our market segments, Israel and
6. Germany, I would like to provide you with an update on the Canadian business.
7. As you know we commenced our exit of the Canadian market during Q4 2022
8. to focus on achieving profitability. Pursuant to an order of the Court made on
9. April 6, 2023, in the CCAA Proceedings, the Court approved a share purchase
10. agreement with a party that is not related to the Company. Following the
11. transaction, the Company has exited operations in Canada and considers these
12. operations discontinued. I will now provide an overview of each of our market
13. segments. After this overview, Itay will review our financial results before we
14. open the call up for questions.
15. Usually I start with Israel, but this time I will start with Germany and the steps
16. it is taking toward legalization. Mid-April, the German Health Minister unveiled

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what he described as a "two-prong" model to gradually legalize possession of cannabis in Germany.

The first step, for which the bill is expected to be presented before the summer recess, allows for:

• Decriminalization: possession of up to 25 grams of cannabis will be decriminalized.
• Adults will be allowed to form not for profit clubs for community cultivation with up to 500 members. Clubs can provide members up to 50 grams of cannabis per month and no more than 25 grams at once.
• Private cultivation of up to three flowering plants will be allowed.

1. In the second step, expected after the summer, sales through licensed
2. specialist stores will be tested in pilot regions over the next five years.
3. While this is a big step forward, it falls short of the initial legalization
4. expectations. Until the final legislation is presented, it is too soon to predict
5. with any certainty how the market will develop. None the less, we believe it
6. will drive market growth, by reducing the stigma attached to cannabis and
7. lowering the entry barriers to medical cannabis market.
8. In addition to the political news, we launched two new high THC strains in
9. Germany in Q1.
10. In March, our extracts were listed by one of the largest German pharmaceutical
11. wholesalers. We are now one a handful of cannabis brands to be listed there.
12. This step was important for us, because the classic pharmaceutical wholesalers
13. provide pharmacies with faster, same day delivery. Cannabis wholesalers
14. cannot compete with the classic, established wholesalers when it comes to this
15. type of service. As a result of this collaboration, we have already seen an
16. increase in our number of customers. In Q2 we are looking to expand our listing
17. to include our flowers.
18. In Israel, our sales were driven by the four new high THC strains we launched in
19. Q1, further expanding our portfolio of premium brands. Roma, our legacy high
20. THC strain, came back in stock during Q1, to high patient and customer
21. demand. The BLKMKT launch in Q4 2022 was well received, which was seen in
22. the sales generated in Q1. We also doubled down on our strategy to provide
23. better service. In this case, we focused on our patients, completely overhauling
24. our delivery service from the bottom up. Our goal is not only to provide Israeli

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patients best in class delivery service but also to take advantage of synergies and efficiencies to generate savings. Additionally, we finetuned our BI system to be more efficient in sales while providing better service to our customers.

1. In our view, the Israeli and German cannabis markets have much in common,
2. from patient or consumer demand for premium cannabis to the distribution
3. through pharmacies. Both companies operate in countries with stringent GMP
4. and EU-GMP standards and regulatory hurdles. These common points, plus our
5. strong sourcing infrastructure, give us key competitive advantages in Germany.
6. We are confident that our success in Israel can be replicated in Germany. We
7. will be allocating the needed capital and efforts to further establish our
8. presence in Israel and Germany and to achieve profitability.
9. I will now turn the call over to our Chief Financial Officer, Itay Vago, who will
10. review our first quarter 2023 financial results.
11. Itay?
12. Itay Vago - Review of Financials
13. Thank you, Oren.
14. I will now provide an overview of Q1 2023 financial results for the Company's
15. continuing operations.
16. Revenues for the first quarter of 2023 were $13.2 million compared to $13
17. million in the first quarter of 2022, an increase of 1%.
18. Total Dried Flower sold in the first quarter of 2023 was approximately 1,842kg
19. with an average selling price of $6.59 per gram compared to approximately
20. 1,415kg in the first quarter of 2022 with an average selling price of $8.13 per
21. gram. The decrease in average selling price was caused by increased
22. competitivity within the retail segment.
23. Gross profit for the first quarter of 2023 was $3.5 million, compared to $2.4
24. million in the first quarter of 2022, an increase of 46%. The increase attributed
25. mainly to increased high margin sales of imported premium cannabis products,
26. and reduction of costs of sales.

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