Good day, and welcome to IM 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 IM Cannabis, Chief Executive Officer, Oren Shuster; 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.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 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 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. 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 Shuster, CEO of IM 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 has been going through since Q4 2022. We are singularly focusing on reaching sustainable profitability, which is supported by the 2 cornerstones we focused on in our last call in May. First, the strategic shift to focus on meeting the patients and pharmacies needs. Second, rightsizing, restructuring to put the necessary resources behind the strategic shift. In Israel, during Q2, we continued the rightsizing 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 cost by about 30%. The transition period and restructure we kicked off in Israel in Q1 has been a 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 lean and agile by…

Thank you, Oren. 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 flowers 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…

Thank you, Itay. The strategic refocusing and rightsizing of the last few quarters has been a transition period for IMC as a whole. I'm 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, Oren. Now the Q&A is open, you can submit your question 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. Positive news on Israel from that side, that will start towards the end of the year in your patient base. But I 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 sitting in the market and the pricing side of thing. Just a little bit of an update on the Israel market as you look forward going to the new opportunity with the -- 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 onboard? Just a little color there, that would be great.

Okay. Thank you very much, Scott for the question. So what we have seen in the Israeli market is that the growth has been slowed significantly in 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 on the retail side. Too many pharmacies, for example, for the number of patients, and we see that there is excess product in the market as well. So we feel price compression in the market, we don't feel it in the -- 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 be -- will continue to be highly competitive with 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 at least two to three quarters.

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

Okay. So we feel that the German market is evolving and we see increase mainly in the self-payer segment and 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 require in order to access the market. We have EU-GMP facility with GDP. We are very experienced in importing and the 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 pricing for that, 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 and -- 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.

Thank you.

Scott, do you have any further questions.

No, thank you.

Okay, thank you very much. And our next question will be from Aaron Grey. 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 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 of import and local growers. We see that -- we have seen a change in the market, okay? Many of the players going out of the market. So the market is changing, while we are 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 excess 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?

Just want to ask if there's any -- when that you believe shakeout will 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 effects 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 help me as we think about the path to profitability, a lot of improvement in the quarter, getting close to breakeven there. So gross margins, you've now seen 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 drifting to 30%? 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 Israel, but are those kind of the main drivers 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?

So I think that I said that in the past, we will see the full effect of the restructuring that we have done only in Q3. Because we have done the restructuring actually most of it in Q2. So the saving -- most of the savings we will 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, okay, 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, alright. Thanks very much for the color. I’ll get 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.