Not all cannabis operations are created equal, which to the naked eye of an investor can be hard to spot. When looking for an opportunity to get into the sector or to increase a position or two, it can be easy to fall for what can be best termed as “mirages”. One potential example of this is none other than Israel-focused IM Cannabis (NASDAQ:IMCC) (CSE:IMCC), which upon a quick glance at their chart appears to be having quite a run.

Sitting at a current market cap of roughly $446 million CDN, IM Cannabis is currently being valued by the market roughly in the same league as established industry peers The Valens Company Inc. (OTC:VLNCF) with a market cap $410.77 Million CDN.

Both companies have significant deals signed with pharmacy chains in their respective jurisdictions, as Valens has already rolled out products to Shoppers Drug Mart in Canada, and IM Cannabis distributes IMC-branded products through a network of Israeli pharmacies, including Super Pharm—the country’s largest pharmacy chain.

For starters, don’t let the current price point of $7 per share on IMCC fool you into thinking that it’s somehow shot up over the past year, as this price is directly the result of a 4:1 share consolidation done in mid-February in order to meet Nasdaq minimum price requirements to list shares on the NASDAQ.

How has that transition gone so far? As of March 31^st 2021, not so good. Shares in the company have already dropped more than 56% since March 3^rd—dropping from CDN$13.00 down to CDN$7.15.

Since the company’s listing on the NASDAQ and share consolidation the stock has been spiraling downward – Down over 56% in the last month since March 3, 2021.

price April 15, 2021 = $7.15

WHAT’S GOING ON?
The one main factor why IMCC may be overvalued so much higher than its own financials demonstrate, may be the fact that insiders own almost 50% (49.63%) of the companies shares. Tightly held structures tend to be easier to overvalue in the short term.

That said, it’s beneficial to begin by viewing their valuation as a whole, and questioning how a company that last reported only C$39.7M in total assets, net income of only C$738,000 in the 3 months ended September 30, 2020, and a net loss per share of C$0.06 over nine months ended September 30, 2020. would have a market capitalization of $410.77 Million CDN?

IMCC is currently trading at 40 times Net Revenue. Obscene by any standard.

Thus this valuation appears very much to be a distortion of reality. It includes a brief 3-day period of trading that was above $11 per share, as it took that long to come back to earth. The stock hasn’t seen $10 per share since March 23^rd—and given the company’s public financial statements and valuation, this is unsurprising.

THE CASE FOR A “MIRAGE“

According to IMCC’s latest financials as of September 30, 2020, their total equity was only C$30.3M.

Therefore, with the information that’s currently publicly available, it appears that at just 30 million CDN total equity (as per page 7 of their latest condensed financials) that represents less than 7% of the current market cap of $410.77 Million CDN.

Perhaps more concerning are the risks mentioned within the company’s own Management’s Discussion and Analysis (MDA), in particular the potential for a problem with the company’s ownership structure over its Israeli cultivation arm Focus, which could be risk of being “in contravention of Israeli rules restricting the ownership of Israeli cannabis cultivators and thereby jeopardizing Focus’ cannabis cultivation license.”

IMCC reported total equity of US$24M represents less than 7% of the current market cap of US$355M.

Should it be determined that the company is in contravention of Israeli rules, IM Cannabis Corp itself describes a scenario that may adversely affect their ability to conduct sales and marketing activities, and ultimately have a material adverse effect on the company’s business, operating results or financial condition—Under the section labeled Ownership of Focus on page 30 of the MD&A.

Quote “There is a risk that regulatory authorities in Israel may view the Company as the deemed owner of more than 5% of Focus in contravention of Israeli rules restricting the ownership of Israeli cannabis cultivators and thereby jeopardizing Focus’ cannabis cultivation license.”

IMCC could be in contravention of Israeli rules restricting the foreign ownership of Israeli cannabis cultivators and therefore could lose their cannabis cultivation license. Effectively ending the company’s business in the Israeli marijuana sector.

IM Cannabis Corp. involved in Multiple Class Action Lawsuits

Further, we found that IM Cannabis Corp. has attracted many legal challenges. Not one, not two, but four lawsuits.

Lawsuit One: In March 2016 a motion was filed for approval of Class Action T.Z. 8394-11-16 (page 23) against Focus and seven other Israeli cannabis growers.

Lawsuit Two: Focus along with 16 other companies operating in the field of medical cannabis in Israel, in a class action lawsuit (Class Action T.Z. 35676-08-19)—prehearing is set for July 14, 2021. Per the MD&A on page 27

Lawsuit Three: On October 23, 2019, a lawsuit (T.K. 32304-10-19) was filed directly against Focus, alleging it had breached its obligation to provide medical cannabis to the claimant in accordance with the license “due to mismanagement” (page 25).

Lawsuit Four: On October 30, 2019, Focus was served with a Motion for approval of Class Action T.Z. 31805-10-19 against the Medical Cannabis Unit in Ministry of Health (MCU) and five other companies related to the cannabis market in Israel (page 25).

“These class action lawsuits have the potential to severely damage the company and it’s profitability.“

BUT IS IT OVERVALUED?

How then does IM Cannabis (NASDAQ:IMCC) (CSE:IMCC) compare to its peers in the US$100M to US$500M range? Take for instance, The Valens Company Inc. (OTC:VLNCF) which is the closest in market cap, at CDN$410.7M.

Compare now then IMCC’s meager gross revenue of C$5.89M and net income of C$738,000 during the 3 months ended September 30, 2020 (page 5) and a 9-month consolidated revenue of just C$11M to Valens’ net revenue of C$83.8M in 2020.

Where IMCC’s total equity was only C$30.3M, comparatively Valens has listed C$167.5M in equity.

Compare these two Marijuana companies financials and you will see IMCC is grossly overvalued

Going back to the equity vs market cap argument, IMCC’s last financial report only accounts for 7% of their current market value of $446 Million CDN, whereas at least Valens can account for 40.5% of its $410.77 Million CDN market cap.

Lets compare IMCC to other marijuana companies with others with even lower market capitalization’s and compare Revenues and EBITDA:

As you can see from the data above, IMCC’s market capitalization does not appear to be supported by its financials. IMMC looks like the industry 5 years ago when nothing was based in reality. Those days are long gone.

Even when considering the addition of value from the Trichome Financial merger earlier this year, the numbers just don’t add up.

Trichome’s Q3 2020 net income only gives a small boost of C$112,892 to the IMCC pot. As per its final interim financial report (still listed on SEDAR from November 27, 2020), Trichome’s total assets only amount to an additional C$46.56M (or ~US$37M).

So even when accounting for the additional assets of Trichome, the combined total of US$61M still only accounts for 17% of IMCC’s current market cap value.

After the market has already learned from the mistakes of the past, during the Wild West years of legalization, it’s surprising that similar mistakes are being made today.

Unlike Valens and many others, which have established its base in Canada where pot is legal, IM Cannabis is only established itself in Israel where recreational legality of the drug is still up in the air.

Very Real Election Risk

Even more troubling is the Deadlocked Israel elections. Near-complete results from Israel’s fourth snap election suggested yet another stalemate, with Benjamin Netanyahu scrambling to cobble together a coalition by partnering with extreme nationalist, hardline religious and far-right parties. This election deadlock will force Benjamin Netanyahu to make deals with these parties to hold on to control. Deals where marijuana is harshly opposed by some of these groups.

Now he’ll only be able to form a new government and return as Prime Minister if he’s able to cobble together a coalition — and that’s no sure thing. No one knows what the outcome of legalization will be with such election uncertainty. IM Cannabis (NASDAQ:IMCC) (CSE:IMCC) is at serious risk of this political instability, which could risk their business in Israel.

VERDICT: BEARISH – At best, the explanation of IM Cannabis (NASDAQ:IMCC) (CSE:IMCC) current market cap can be solely attributed to rose-colored glasses hoping for future launches and proposed expansions and hopes that the multiple lawsuits against it, all disappear — but it does not appear to show in the numbers and reality of the company’s present financial state.

IMCC is currently facing many risky variables including losing their license in Israel due to foreign ownership issues and facing real election risk in Israel.

The days of over valued marijuana companies and blue sky market capitalization’s are long gone. The correct and current metrics are based in reality only. The 30 day chart on IM Cannabis says it all, reality is coming fast and Savy investors should be prepared.

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