IM Cannabis Corp. Form 20-F Summary
Business context and reporting period
IM Cannabis Corp. is a British Columbia company focused on premium medical cannabis products in Israel and Germany. The filing is an annual report for the fiscal year ended December 31, 2023, prepared under IFRS in Canadian dollars, with Q4 referring to the three months ended December 31, 2023. Canadian cannabis operations were exited and classified as discontinued operations; the continuing business consists primarily of Israeli medical cannabis, pharmacy and distribution activities and German medical cannabis operations.
Financial performance and position
| Metric | FY 2023 | FY 2022 | Q4 2023 | Q4 2022 |
|---|---|---|---|---|
| Revenue | $48.804 million | $54.335 million | $10.698 million | $14.461 million |
| Gross profit | $9.846 million | $9.162 million | $0.841 million | $2.603 million |
| Gross margin | 20.2% | 16.9% | 7.9% | 18.0% |
| Operating loss | $(12.792) million | $(30.791) million | $(5.165) million | $(10.707) million |
| Net loss from continuing operations | $(10.228) million | $(24.922) million | $(3.520) million | $(33.449) million |
| Loss per share from continuing operations | $(0.74) | $(3.13) | $(0.25) | $(2.94) |
Israel generated $43.316 million of 2023 revenue, down from $50.500 million, while Germany generated $5.488 million, up from $3.835 million. Medical cannabis products represented $44.246 million of revenue and other products represented $4.559 million. The Company sold 8,609 kilograms of dried flower at an average selling price of $5.14 per gram, versus 6,794 kilograms at $7.12 per gram in 2022.
FY 2023 gross profit increased 7% despite the revenue decline, primarily because the Company shifted from its own cultivation toward imported premium cannabis. Q4 gross profit declined 68%, reflecting the Israel-Hamas war, lower sales, slower imports and delays in regulatory approvals. The filing also identifies Canadian dollar/New Israeli shekel exchange-rate movements as a profitability factor.
General and administrative expense declined 49% to $11.008 million, selling and marketing expense declined 6% to $10.788 million, restructuring expense was $0.617 million, and share-based compensation declined 91% to $0.225 million. Net finance income was $3.335 million, including material fair-value gains related primarily to warrants and other financial instruments.
At December 31, 2023, cash and cash equivalents were $1.813 million, total assets were $48.813 million, total liabilities were $35.113 million and total equity was $13.700 million. Inventory declined to $9.976 million from $16.585 million. Bank and other credit obligations totaled $12.513 million, substantially payable within one year, and lease liabilities totaled $1.269 million. Working capital was negative $8.543 million.
Cash flow statements reported net cash used in operating activities of $8.075 million, net cash used in investing activities of $1.182 million and net cash provided by financing activities of $9.417 million. Cash decreased by $0.636 million during the year. The MD&A also refers to negative continuing operating cash flow of $5.075 million; investors should reconcile this difference to the audited cash-flow statement.
Material changes versus the prior comparable period
- Revenue declined 10% for the year and 26% in Q4, primarily due to the Israel-Hamas war and related supply, import and approval delays.
- Gross margin improved for the full year but deteriorated sharply in Q4 because of lower volumes, delayed inventory availability and market disruption.
- Operating loss improved by $17.999 million year over year, principally due to lower corporate costs, restructuring and the absence of significant 2022 impairment-related expenses.
- Net loss improved substantially from $191.301 million in 2022 to $10.228 million in 2023 because the prior year included $166.379 million of discontinued-operation losses associated with Canada, including impairment and deconsolidation effects.
- The Company reduced its workforce to 95 employees at year-end from 153 at year-end 2022 and continued cost-reduction measures.
- The Company completed a $0.839 million debt settlement with L5 Capital by issuing 492,492 units containing shares and warrants, and raised approximately US$6.432 million in 2023 LIFE and concurrent offerings.
- Focus Medical continued to be consolidated based on de facto control at year-end. IMC Holdings later exercised its option to acquire the 74% interest in Focus, with regulatory approval obtained in February 2024.
Guidance, outlook, risks and unusual items
Management stated an objective of achieving profitability in 2024, supported by cost savings, reduced headcount, lower compensation, discontinued loss-making activities, operational efficiencies and reduced capital expenditures. The filing does not provide a quantified 2024 revenue, earnings or cash-flow forecast.
Management and the auditors identified substantial doubt about the Company’s ability to continue as a going concern. The Company is managing cash daily and expects to seek additional equity or debt financing, but states that financing may not be available on acceptable terms or in sufficient amounts.
- Liquidity and debt: High liquidity risk, negative working capital, limited cash, covenant breaches on the New Mizrahi Facility and significant near-term contractual obligations. The New Mizrahi Facility had $3.227 million drawn and was classified as short-term.
- Oranim Pharmacy: Remaining acquisition installments were postponed to April 15, 2024 and accrue 15% interest. Failure to pay could result in the transfer of the 51% interest back to the seller and revocation of the transaction.
- Nasdaq listing: The Company received a deficiency notice for its share price and an extension to July 29, 2024 to regain compliance. A reverse stock split was identified as a possible measure.
- Potential Kadimastem transaction: A non-binding proposal contemplated a reverse merger into a biotechnology company, with Kadimastem shareholders expected to hold 88% of the resulting issuer and IMC shareholders 12%. The legacy cannabis business would be placed into a contingent value right structure. Completion remained subject to definitive agreements, shareholder, regulatory and other approvals.
- Regulatory exposure: Operations depend on maintaining Israeli and German cannabis, import, distribution and pharmacy licenses. Israel’s medical cannabis reform was delayed, while German legislative changes were expected to alter the medical and adult-use regulatory framework in 2024.
- Legal contingencies: The Company faces the MYM shareholder claim seeking approximately $15 million plus punitive damages, German COVID-19 test-kit litigation and other claims. Management could not assess the outcomes of several proceedings. Focus settled construction-related proceedings for a fine of approximately $0.129 million.
- Israel-Hamas war: The conflict affected employees, supplies, imports, sales and operating activity, with the full impact not yet determinable.
- Other risks: Intense competition, falling cannabis prices, supply interruptions, foreign-exchange exposure, cybersecurity and privacy risks, product liability, license renewals and reliance on third-party suppliers and distributors.
Most important facts for investors to verify
- Whether the Company can raise sufficient capital and generate positive operating cash flow before near-term obligations mature.
- The reconciliation of the MD&A operating cash-flow figure of $5.075 million negative to the audited cash-flow statement showing $8.075 million negative.
- Compliance with Nasdaq’s minimum bid-price requirement by July 29, 2024 and any resulting reverse stock split or dilution.
- Payment of the Oranim obligations and whether the Company retains its 51% ownership interest.
- The status, economics and shareholder approvals of the proposed Kadimastem transaction and the value recoverable through the legacy-business contingent value right.
- Renewal and continued validity of the Company’s Israeli and German licenses, including the effects of Israeli regulatory reform and German legislative changes.
- Potential cash exposure from the MYM shareholder claim, COVID-19 test-kit proceedings, tax assessments and other contingencies.
- Whether improved annual gross margin can be sustained despite lower selling prices, import delays, competition and geopolitical disruption.