IM Cannabis Corp. — Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2022, including fourth-quarter results. The audited consolidated financial statements are prepared under IFRS and amounts are generally in Canadian dollars in thousands, unless otherwise noted. The company operates primarily in Israel and Germany and classified its Canadian operations as discontinued operations following the November 2022 CCAA proceedings and deconsolidation of Trichome.
Business context and reporting period
IM Cannabis focuses on premium medical cannabis products, retail and distribution in Israel, and medical cannabis distribution in Germany through Adjupharm. The company closed its Israeli cultivation facility in 2022 and shifted toward imported premium products and third-party cultivation suppliers. It also acquired or consolidated several Israeli pharmacies and distribution assets during 2022.
Key financial metrics
| Metric | 2022 | 2021 | Change |
|---|---|---|---|
| Continuing-operation revenue | $54,335 | $34,053 | +60% |
| Gross profit before fair-value adjustments | $11,291 | $8,595 | +31% |
| Gross margin before fair-value adjustments | 21% | 25% | Down 4 percentage points |
| Gross profit after fair-value adjustments | $9,162 | $6,333 | +45% |
| Operating loss from continuing operations | $(30,791) | $(23,035) | Loss increased |
| Net loss from continuing operations | $(24,922) | $(664) | Loss increased materially |
| Net loss from discontinued operations | $(166,379) | $(17,854) | Loss increased materially |
| Consolidated net loss | $(191,301) | $(18,518) | Loss increased materially |
| Cash flow used in operating activities | $(12,640) | $(34,372) | Improved, but remained negative |
| Cash and cash equivalents | $2,449 | $13,903 | Down 82% |
| Working capital | $(1,147) | Not clearly provided | Deficit |
| Total assets | $60,676 | $287,388 | Down 79% |
| Total liabilities | $36,879 | $82,443 | Down 55% |
Israel generated $50,500 of 2022 revenue, compared with $25,431 in 2021, while Germany generated $3,835, compared with $8,622. The company sold 6,794 kilograms of dried flower in 2022 at an average selling price of $7.12 per gram, compared with 4,278 kilograms at $6.18 per gram in 2021.
Fourth-quarter continuing-operation revenue was $14,461, up 46% from $9,912 in the prior-year quarter. Fourth-quarter operating loss was $10,707, compared with $8,741, and fourth-quarter net loss was $9,651, compared with $8,360.
Operating expenses from continuing operations included general and administrative expenses of $21,460, selling and marketing expenses of $11,473, restructuring expenses of $4,383 and share-based compensation of $2,637. Net finance income was $4,731, substantially lower than $22,871 in 2021, primarily because of smaller gains from warrant and financial-instrument revaluations.
At year-end, current liabilities were $33,819, including $15,312 of trade payables and $9,246 of bank loans and other current borrowings. Non-current liabilities were $3,060, including $399 of long-term loans and $1,075 of operating lease liabilities. Contractual payments due within one year for bank loans and lease liabilities totaled approximately $10,168.
Material changes versus the prior comparable period
- Revenue increased 60%, driven primarily by higher product volumes, premium pricing in Israel, pharmacy acquisitions and organic growth.
- Gross margin before fair-value adjustments declined to 21% from 25%, reflecting higher input, shipping, transportation, labor and other operating costs.
- Israel became the dominant revenue market, while Germany revenue declined year over year despite December being Adjupharm’s strongest sales month to date.
- The company closed the Sde Avraham cultivation facility and shifted toward imported Canadian cannabis and third-party cultivation arrangements.
- The company completed acquisitions or consolidations involving Pharm Yarok, Rosen High Way, Vironna, Oranim and Panaxia-related assets, expanding into Israeli retail, distribution and pharmacy operations.
- Canadian operations were discontinued and Trichome was deconsolidated following CCAA proceedings. The company recorded $115,112 of impairment in discontinued operations, including $107,854 of goodwill impairment, and recognized a $17,959 loss on deconsolidation.
- Total assets declined primarily because of Canadian deconsolidation, goodwill and other impairment charges, and the reduction of operating assets.
- The company completed a 10-for-1 share consolidation in November 2022 to regain Nasdaq minimum-bid-price compliance. Year-end shares outstanding were 7,569,526.
Guidance, outlook, commentary, risks and unusual items
Management stated that its strategy is to focus resources on Israel and Germany, exit Canadian cannabis operations and pursue profitability in 2023. The company expects additional cost reductions, including lower headcount, reduced management compensation, operational efficiencies and lower capital expenditures. In March 2023, management announced plans to reduce the Israeli workforce by approximately 20% to 25%, with implementation expected to be substantially complete by mid-2023.
The financial statements include a going-concern uncertainty. Management reported that projected 2023 cash flows may not be sufficient to meet obligations and that additional financing may be required. The company had negative operating cash flow, $2,449 of cash and a $1,147 working-capital deficit at December 31, 2022. Subsequent to year-end, the company raised gross proceeds of approximately US$6.431 million through the LIFE Offering and Concurrent Offering, but these financings included substantial share and warrant issuance and may dilute existing shareholders.
Focus had drawn $5,084 under a revolving facility with Bank Mizrahi and was not in compliance with certain covenants at year-end. The facility remained effective after a personal guarantee by the company’s CEO. IMC Holdings also entered into a NIS 10.5 million loan bearing 15% annual interest and secured by a second-ranking charge over Adjupharm’s logistics center.
The Trichome CCAA process remained unresolved after year-end. No qualified bids were received, the stalking-horse transaction was terminated, and the monitor continued to market the Canadian assets. Management indicated that the company will likely realize no return from the Trichome restructuring and that the DIP lender would fund only wind-down expenses.
Material risks include regulatory and licensing requirements in Israel and Germany, reliance on third-party suppliers and distributors, potential loss of de facto control over Focus under IFRS 10, covenant and debt-default risk, liquidity and going-concern risk, competition and cannabis-price pressure, inflation, foreign-exchange exposure, political and security conditions in Israel and Europe, product liability, litigation, cybersecurity and potential dilution from future equity or warrant issuances.
Outstanding legal matters include an Israeli medical-cannabis labeling class-action application with a claimed aggregate amount of NIS 685.740 million, Israeli construction-permitting proceedings, and German litigation involving COVID-19 test-kit transactions. Management stated that the outcomes could not reasonably be assessed at the reporting date and no provision was recorded for the Israeli class-action matter.
Important facts for investors to verify
- Reconcile continuing-operation cash flow disclosures, which contain differing figures in portions of the filing, against the audited statement of cash flows.
- Assess the company’s ability to fund operations after year-end, including cash burn, working-capital needs, debt maturities and the use of proceeds from the 2023 offerings.
- Review the terms, covenants, guarantees, collateral and maturity dates of the Bank Mizrahi and ADI facilities.
- Evaluate the final outcome and creditor priorities in the Trichome CCAA proceedings and the likelihood of any recovery.
- Separate recurring operating performance from the substantial impairment, restructuring, deconsolidation and fair-value items recorded in 2022.
- Monitor whether Focus retains its Israeli licenses and whether IMC continues to qualify for consolidation under IFRS 10 de facto-control requirements.
- Review the dilution impact of the 2023 units, warrants, options, RSUs and other potentially issuable securities.
- Track the status and potential exposure of the disclosed litigation and regulatory proceedings.
- Confirm the company’s progress toward its stated 2023 profitability objective and workforce-reduction plan.