Management’s Discussion and Analysis

 

 

¹ Insight Health December 2023

² https://www.cannabisbusinesstimes.com/news/california-cannabis-market-sales-taxes-billion-2024/.

³ Insight Health. German Market Data. 2023 Full Year Results.

⁴ https://eudragmdp.ema.europa.eu/inspections/gmpc/searchGMPCompliance.do.

REVIEW OF FINANCIAL PERFORMANCE

 

FINANCIAL HIGHLIGHTS

 

Below is the analysis of the changes that occurred for the three and six months ended June 30, 2024, with further commentary provided below.

 

Notes:

 

The Overview of Financial Performance includes reference to “Gross Margin”, which is a non-IFRS financial measure that the Company defines as the difference between revenue and cost of revenues divided by revenue (expressed as a percentage), prior to the effect of a fair value adjustment for inventory and biological assets. For more information on non-IFRS financial measures, see the “Non-IFRS Financial Measures” and “Metrics and Non-IFRS Financial Measures” sections of the MD&A.

 

OPERATIONAL RESULTS

 

In each of the markets in which the Company operates, the Company must navigate evolving customer and patient trends in order to continue to be competitive with other suppliers of medical cannabis products.

 

The Company believes that there are several key factors creating tailwinds to facilitate further industry growth. In Israel, the number of licensed medical patients currently stands at 128,355 as of June 2024. This figure is expected to grow in the coming years and may further benefit from regulatory change liberalizing the cannabis market in Israel IM Cannabis is a large distributor of medical cannabis in Israel. As the Israeli cannabis market has become increasingly competitive, the ability to import premium cannabis from Canada is a key determinant of the Company’s success in Israel.

 

The German medical cannabis market has been slower over the past few years to develop mainly due to the difficulty in medical patients accessing prescriptions and insurance reimbursements. Starting Year 2024 after the legalization was officially approved by the Bundestag (Germany Parliament) on April 1^st, 2024, The Company which has already seen an increase in the number of patients paying out-of-pocket for medical cannabis products in Germany during the past few years, is expecting a change which will lead to increase in the market. Starting April 2024, the Company through its subsidiary Adjupharm is experiencing a significant increase in demands in Germany for its products. In Q2 2024 the Revenue in Germany increased by approximately 204% from $1,152 in Q1 2024 to $3,508.

 

REVENUES AND GROSS MARGINS

 

REVENUES

 

The revenues of the Group are primarily generated from sales of medical cannabis products to customers in Israel and Germany. The reportable geographical segments in which the Company operates are Israel and Germany.

 

For the six months ended June 30:

 

 

* See Note 1 under “Review of Financial Performance – Financial Highlights” section of the MD&A.

 

The consolidated revenues of the Group for the six months ended June 30, 2024, were attributed to the sale of medical cannabis products in Israel and Germany.

 

Total dried flower sold for the six months ended June 30, 2024, was 4,206kg at an average selling price of $5.90 per gram compared to 3,970kg for the same period in 2023 at an average selling price of $5.60 per gram, mainly attributed to the inventory life cycle, products diversity, discounts given and increased competition in the segment.

COST OF REVENUES

Cost of revenues is comprised of purchase of raw materials and finished goods, import costs, production costs, product laboratory testing, shipping and salary expenses. Inventory is later expensed to the cost of sales when sold. Direct production costs are expensed through the cost of sales.

 

The cost of revenues for the six months ended June 30, 2024 and 2023 were $24,165 and $18,759, respectively, representing an increase of $5,406 or 29%. This is mainly due to increased in total Company revenue related net costs of approximately $3,285, clearing of old raw materials of approximately $940, accrued for slow inventory of approximately $1,595 and decrease in other costs of approximately $414.

 

The cost of revenues for the three months ended June 30, 2024 and 2023 were $13,891 and $9,473, respectively, representing an increase of $4,418 or 47%. This is mainly due an increase in Company revenue related costs of approximately $2,570, clearing of old raw materials of approximately $800, accrued for slow inventory of approximately $1,095 and decrease in other costs of approximately $47.

 

GROSS PROFIT

 

Gross profit for the six months ended June 30, 2024, and 2023 was $2,623 and $6,360, respectively, representing a decrease of $3,737 or 59%. Gross profit for the three months ended June 30, 2024, and 2023 was $844 and $3,456, respectively, representing a decrease of $2,612 or 76%

 

Gross profit included losses from realized fair value adjustments on inventory sold of $(25) and $(617) for the six months ended June 30, 2024, and 2023, respectively.

 

EXPENSES

 

GENERAL AND ADMINISTRATIVE

 

General and administrative expenses for the six months ended June 30, 2024, and 2023 were $4,495 and $5,563, respectively, representing a decrease of $1,068 or 19%. General and administrative expenses for the three months ended June 30, 2024, and 2023 were $2,163 and $2,389, respectively, representing a decrease of $226 or 9%.

 

The decrease in the general and administrative expense is attributable mainly to the restructuring plan published March 8, 2023, which aimed for reorganization of the company's management and operations to strengthen its focus on core activities and drive efficiencies to realize sustainable profitability. The Company reduced its workforce in Israel across all functions. The general and administrative expenses are comprised mainly from salaries to employees in the amount of $1,092 and $520 for the six and three months ended June 30, 2024, professional fees in the amount of $1,424 and $725 for the six and three months ended June 30, 2024, depreciation and amortization in the amount of $260 and $139 for the six and three months ended June 30, 2024, insurance costs in the amount of $657 and $331 for the six and three months ended June 30, 2024 and Other expenses in the amounts of $1,062 and $448 for the six and three months ended June 30, 2024.

 

PROVISION FOR REVOKING ORANIM TRANSACTION

 

Due to the revocation of the Oranim agreement on April 15, 2024, the Company accrued $2,753 other operating expenses in Q1 2024 for losses expected on Q2 2024 due to the clearing of Oranim assets and liabilities from the consolidated balances. The total expense for the six months ended June 30, 2024 is $2,734.

 

SELLING AND MARKETING

 

Selling and marketing expenses for the six months ended June 30, 2024, and 2023 were $3,773 and $5,427, respectively, representing a decrease of $1,654 or 30%. Selling and marketing expenses for the three months ended June 30, 2024, and 2023 were $1,481 and $2,622, respectively, representing a decrease of $1,141 or 44%.

 

The decrease in the selling and marketing expenses for the six and three months ended June 30, 2024, is mainly attributed to Oranim revoke agreement of approximately $587 and $631, respectively, and decrease of $1,058 and $629, respectively, in Selling and marketing operations.

 

SHARE-BASED COMPENSATION

 

Share-based compensation expense for the six months ended June 30, 2024, and 2023 was $120 and $121, respectively, representing a decrease of $1 or 1%.

 

For the three months ended June 30, 2024, and 2023 share-based compensation income (expense) from continuing operations was $88 and ($137), respectively, representing a decrease of $225 or 164%.

 

FINANCING

 

Financing income (expense) net, for the six months ended June 30, 2024, and 2023 was $(1,927) and $621, respectively, representing a decrease of $2,548 or 410%. For the three months ended June 30, 2024, and 2023 financing income (expense), net, was $(1,426) and $(2,114), respectively, representing a decrease of $688 or 33%.

 

NET INCOME/LOSS

 

Net loss for the six months ended June 30, 2024, and 2023 was $9,476 and $4,572, respectively, representing a net loss increase of $4,904 or 107%. For the three months ended June 30, 2024, and 2023 net loss was $3,456 and $3,706, respectively, representing a net loss decrease of $250 or 7%. The net loss decreases related to factors impacting net income described above.

 

NET INCOME (LOSS) PER SHARE BASIC AND DILUTED

 

Basic loss per share is calculated by dividing the net profit attributable to holders of Common Shares by the weighted average number of Common Shares outstanding during the period. Diluted profit per Common Share is calculated by adjusting the earnings and number of Common Shares for the effects of dilutive warrants and other potentially dilutive securities. The weighted average number of Common Shares used as the denominator in calculating diluted profit per Common Share excludes unissued Common Shares related to Options as they are antidilutive.

 

Basic Income (Loss) per Common Share for the six months ended June 30, 2024, and 2023 were $(0.65) and $(0.33) per Common Share, respectively. For the three months ended June 30, 2024, and 2023 basic Loss per Common Share from continuing operations were $(0.23) and $(0.26) per Common Share, respectively.

 

Diluted net loss per share for the six months ended June 30, 2024, and 2023 is $(0.65) and $(0.33) respectively and $(0.23) and $(0.26) for the three months ended June 30, 2024, respectively.

 

TOTAL ASSETS

 

Total assets as of June 30, 2024 were $40,216, compared to $48,813 as at December 31, 2023, representing a decrease of $8,597 or 18%. The decrease is mainly attributed to the Oranim agreement cancelation at total amount of $9,494, of which mainly attributed to goodwill at total amount of $3,499, intangible asset in the amount of $1,414, Inventory in the amount of $837, Trade receivables in the amount of $1,324, Property plant and equipment in the amount of $783 and reduction of Cash and cash equivalents in the amount of $346. In addition to the Oranim revocation agreement affect, there is a total assets increase of $897 mainly due to an increase of $5,760 in trade receivables, offset by $3,420 reduction in Inventory, $767 reduction of Cash and cash equivalents and $711 reduction of intangible assets.

 

TOTAL LIABILITIES

 

Total liabilities at June 30, 2024, were $34,735 compared to $35,113 at December 31, 2023, representing a decrease of $378 or 1%. The decrease was mainly due to the Oranim agreement cancelation of $6,771 of which mainly attributed to a decrease in PUT option liability in the amount of $1,973 and a decrease in purchase consideration payable in the amount of $2,172, a decrease in trade payables in the amount of $1,597, a decrease of $176 in other accounts payable, a decrease of $372 in lease liabilities and a decrease of $326 in deferred tax liability.

 

In addition to the Oranim revocation agreement affect, there is a total liability increase of $6.4 million mainly due to increase of $6.2 million in trade payables offset by a $1.5 million reduction in other accounts payable.

 

LIQUIDITY AND CAPITAL RESOURCES

 

For the six months ended June 30, 2024, the Company recorded revenues of $26,813.

 

The Company can face liquidity fluctuations from time to time, resulting from delays in sales and slow inventory movements.

 

In January 2022, Focus entered into a revolving credit facility with an Israeli bank, Bank Mizrahi (the “Mizrahi Facility”). The Mizrahi Facility is guaranteed by Focus assets. Advances from the Mizrahi Facility is being used for working capital needs. The Mizrahi Facility has a total commitment of up to NIS 15 million (approximately $6,000) and has a one-year term for on-going needs and 6 months term for imports and purchases needs. The Mizrahi Facility is renewable upon mutual agreement by the parties. The borrowing base is available for draw at any time throughout the Mizrahi Facility and is subject to several covenants to be measured on a quarterly basis (the “Mizrahi Facility Covenants”).

 

The Mizrahi Facility bears interest at the Israeli Prime interest rate plus 1.5%.

 

On May 17, 2023, the Company and Bank Mizrahi entered to new credit facility with total commitment of up to NIS 10,000 (approximately $3,600) (the “New Mizrahi Facility”). The New Mizrahi Facility consists of NIS 5,000 credit line and NIS 5,000 loan to be settled with 24 monthly installments from May 17, 2023. This loan bears interest at the Israeli Prime interest rate plus 2.9%. As of June 30, 2024. Focus has drawn down $2,855 in respect of the new Mizrahi facility (comprised of approx. $1,826 credit line and $1,029 loan). The New Credit facility is also subject to several covenants to be measured on a quarterly basis which are not met as of June 30, 2024, therefore the loan is classified as short-term loan. On August 1, 2024, the credit line of approximately NIS 1,825 related to the New Mizrahi Facility was converted into a six-month short-term loan, bearing an annual variable interest rate of P+1.9% (with the Israel Prime interest rate as of the submission date being 6%)

 

The Company's CEO and Chairman, provided to the bank a personal guarantee in the amount of the outstanding borrowed amount, allowing the New Mizrahi Facility to remain effective.

 

As of June 30, 2024, the Group's cash and cash equivalents totaled $700 and the Group's working capital deficit (current assets less current liabilities) amounted to ($10,461). In the six months ended June 30, 2024, the Group had an operating loss of ($8,499) and cash flows of $368.

 

As of June 30, 2024, the Group’s financial liabilities consisted of accounts payable which have contractual maturity dates within one year. The Group manages its liquidity risk by reviewing its capital requirements on an ongoing basis. Based on the Group’s working capital position on June 30, 2024, management considers liquidity risk to be high.

 

As of June 30, 2024, the Group has identified the following liquidity risks related to financial liabilities (undiscounted):

 

		Less than one year				1 to 5 years				6 to 10 years				> 10 years
Contractual Obligations		$	13,232			$	1,095				-				-

 

The maturity profile of the Company’s other financial liabilities (trade payables, other account payable and accrued expenses, and warrants) as of June 30, 2024, are less than one year.

 

 

The Group’s current operating budget includes various assumptions concerning the level and timing of cash receipts from sales and cash outflows for operating expenses and capital expenditures, including cost saving plans. In 2023 The Company’s board of directors approved a cost saving plan, to allow the Company to continue its operations and meet its cash obligations. The cost saving plan entailed reducing costs through efficiencies and synergies primarily involving the following measures: discontinuing loss-making activities, reducing payroll and headcount, reduction in compensation paid to key management personnel (including layoffs of key executives), operational efficiencies and reduced capital expenditures. These actions are resulting in cost savings during 2024 and the company will continue its efforts for efficiency operations.

 

Despite the cost savings plan and restructuring as described above, the projected cash flows for 2024 indicates that it is uncertain that the Group will generate sufficient funds to continue its operations and meet its obligations as they become due. The Group continues to evaluate additional sources of capital and financing. However, there is no assurance that additional capital and or financing will be available to the Group, and even if available, whether it will be on terms acceptable to the Group or in amounts required.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or liabilities that might be necessary should the Company be unable to continue as a going concern. The Interim Financial Statements have been prepared on the basis of accounting principles applicable to a going concern, which assumes that the Company will continue in operation for the foreseeable future and will be able to realize its assets and discharge its liabilities in the normal course of operations. The Interim Financial Statements do not include any adjustments to the amounts and classification of assets and liabilities that would be necessary should the Company be unable to continue as a going concern. Such adjustments could be material.

 

SHARE CAPITAL

 

The Company’s authorized share capital as of June 30, 2024, consist of an unlimited number of Common shares without par value of 13,394,136. Following the July 12^th, 2024, Consolidation, it consists of an unlimited number of Common Shares without par value 2,232,359 (after rounding fractional Common Shares) of which were issued and outstanding as at the date hereof. The Common Shares confer upon their holders the right to participate in the general meeting with each Common Share carrying the right to one vote on all matters. The Common Shares also allow holders to receive dividends if declared and to participate in the distribution of surplus assets in the case of liquidation of the Company.

 

OTHER SECURITIES

 

As of June 30, 2024, the Company also has the following outstanding securities which are convertible into, or exercisable or exchangeable for, voting or equity securities of the Company: 270,452 Options, 18,261 from 2019 Broker Compensation Options (as defined below), 294,348 Offered Warrants (as defined below), 5,769,611 from 2023 LIFE Offering Warrants and 2,461,149 Debentures.

 

FINANCIAL BACKGROUND

 

On October 11, 2019, the Company completed the Reverse Takeover Transaction, effected by way of a “triangular merger” between the Company, IMC Holdings and a wholly owned subsidiary of the Company pursuant to Israeli statutory law.

 

In connection with the Reverse Takeover Transaction, the Company completed a private placement offering of 19,460,527 subscription receipts (each a “Subscription Receipt”) on a pre-2021 Share Consolidation basis (as defined below) of a wholly owned subsidiary of the Company at a price of $1.05 per Subscription Receipt for aggregate gross proceeds of $20,433. Upon completion of the Reverse Takeover Transaction, each Subscription Receipt was exchanged for one unit comprised of one (1) common share and one-half of one (1/2) warrant (each whole warrant, a “2019 Listed Warrant”). Each 2019 Listed Warrant was exercisable for one Common Share at an exercise price of $1.30 until October 11, 2021. A total of 9,730,258 2019 Listed Warrants were issued and listed for trading on the CSE under the ticker “IMCC.WT”. The 2019 Listed Warrants expired on October 11, 2021.

 

The Company also issued to the agent who acted on its behalf in connection with the Reverse Takeover Transaction, a total of 1,199,326 2019 Broker Compensation Options (the “2019 Broker Compensation Options”). Following the 2021 Share Consolidation, the 2019 Broker Compensation Options were adjusted to require four 2019 Broker Compensation Options to be exercised for one underlying unit at an adjusted exercise price of $4.20, with each unit exercisable into one Common Share and one-half of one Common Share purchase warrant (the “2019 Unlisted Warrants”). Following the 2021 Share Consolidation, the 2019 Unlisted Warrants were adjusted to require four 2019 Unlisted Warrants to be exercised for one Common Share at an adjusted exercise price of $5.20. The 2019 Broker Compensation Options and the 2019 Unlisted Warrants expired on August 2022.

 

On February 12, 2021, the Company consolidated all of its issued and outstanding Common Shares on the basis of one (1) post-consolidation Common Share for each four (4) pre-consolidation Common Shares (the “2021 Share Consolidation”) to meet the NASDAQ minimum share price requirement.

 

On November 17, 2022, the Company completed a second share consolidation (the “2022 Share Consolidation”) by consolidating all its issued and outstanding Common Shares based on one (1) post-Consolidation Common Share for each ten (10) pre-Consolidation Common Shares.

 

On May 7, 2021, the Company completed an offering (the “2021 Offering”) for a total of 6,086,956 Common Shares and 3,043,478 Common Share purchase warrants (the “2021 Offered Warrants”). Following the 2022 Share Consolidation, the 2021 Offered Warrant were adjusted to require the (10) 2021 Offered Warrant to be exercised for one (1) Common Share at an adjusted exercise price of US$72 for a term of 5 years from the date of closing of the 2021 Offering.

 

The Company also issued a total of 182,609 broker compensation options (the “2021 Broker Compensation Options”) to the agents who acted on its behalf in connection with the 2021 Offering. Following the 2022 Share Consolidation, the 2021 Broker Compensation Option were adjusted to require the (10) 2021 Broker Compensation Options for one (1) Common Share at an adjusted exercise price of US$66.1, at any time following November 5, 2021, until November 5, 2022. There are 182,609 2021 Broker Compensation Options outstanding.

 

In January and February of 2023, the Company issued an aggregate of 2,828,248 units of the Company (each a “Life Unit”) at a price of US$1.25 per Life Unit for aggregate gross proceeds of US$3,535 in a series of closings pursuant to a non-brokered private placement offering to purchasers resident in Canada (except the Province of Quebec) and/or other qualifying jurisdictions relying on the listed issuer financing exempt under Part 5A of National Instrument 45-106 – Prospectus Exemptions (the “LIFE Offering”). Each Life Unit consisted of one Common Share and one Common Share purchase warrant (each a “Life Warrant”), with each Life Warrant entitling the holder thereof to purchase one additional Common Share at an exercise price of US$1.50 for a period of 36 months from the date of issue.

 

In addition, a non-independent director of the Company subscribed for an aggregate of 131,700 Life Units under the LIFE Offering at an aggregate subscription price of US$165. The director’s subscription price was satisfied by the settlement of US$165 in debt owed by the Company to the director certain consulting services previously rendered by the director to the Company.

 

In connection with the LIFE Offering, the Company and Odyssey Trust Company entered into a series of warrant indentures on January 30, 2023 (the “First LIFE Warrant Indenture”), February 7, 2023 (the “Second LIFE Warrant Indenture”) and February 16, 2024 (the “Third LIFE Warrant Indenture”) to govern the terms and conditions of the Life Warrants.

 

Concurrent with the LIFE Offering, the Company issued an aggregate of 2,317,171 units on a non-brokered private placement basis at a price of US$1.25 per unit for aggregate gross proceeds of US$2,897 (the “Concurrent Offering”). The Concurrent Offering was led by insiders of the Company. The units offered under the Concurrent Offering were sold under similar terms as the Life Offering and were offered for sale to purchasers in all provinces and territories of Canada and jurisdictions outside Canada pursuant to available prospectus exemptions other than for the LIFE Offering exemption. All units issued under the Concurrent Offering were subject to a statutory hold period of four months and one day in accordance with applicable Canadian securities laws.

 

On July 12, 2024, the Company closed a non-brokered private placement (the “Offering”) of secured convertible debentures of the Company (each, a “Debenture”) for aggregate proceeds of $2,091,977. The Debentures were issued to holders of short-term loans and obligations owed by the Company or its wholly owned subsidiaries. The Debentures will mature on May 26, 2025, and will not incur interest except in the event of default. The Debentures may be converted into common shares of the Company (each, a “Share”) at a conversion price of $0.85 per Share. As of June 30, 2024, and December 31, 2023, there were 6,063,960 warrants outstanding, re-measured by the Company, using the Black-Scholes pricing model, in the amount of $57 and $38, respectively. For the six months ended June 30, 2024, and 2023, the Company recognized a revaluation gain (loss) in the consolidated statement of profit or loss and other comprehensive income, of $(20) and $(3,305), respectively, in which the unrealized gain is included in finance income (expense).

 

On July 12, 2024, the Company consolidated all its issued and outstanding Common Shares on the basis of one (1) post-consolidation Common Share for each Six (6) pre-consolidation Common Shares (the “2024 Share Consolidation”) to meet the NASDAQ minimum share price requirement.

 

OPERATING, FINANCING AND INVESTING ACTIVITIES

 

The following table highlights the Company’s cash flow activities for the three and six months ended June 30, 2024, and 2023:

 

 

Operating activities provided cash of $368 and used cash of $13,212 for the six months ended June 30, 2024, and 2023, respectively. Operating activities provided cash of $1,030 and used cash of $7,151 for the three months ended June 30, 2024, and 2023, respectively. This variance is primarily due to business activities of the Company including corporate expenses for salaries, professional fees, and marketing expenses in Israel and Germany out of which a $2,764 and $nil increase is attributed to Loss from deconsolidation of Oranim for the six months ended June 30, 2024, and 2023, respectively.

 

Investing activities used cash of $(398) and $(553) for the six months ended June 30, 2024, and 2023, respectively. Investing activities used cash of $(396) and $(86) for the three months ended June 30, 2024, and 2023, respectively, of which a decease of $(346) and $nil is attributed to Deconsolidation of Oranim for the six months ended June 30, 2024, and 2023, respectively.

 

Financing activities provided cash of $643 and $10,677 for the six months ended June 30, 2024, and 2023, respectively. Financing activities provided cash of $1,495 and $4,120 for the six months ended June 30, 2024, and 2023, respectively. The decrease for the six and three months is primarily due to the reduction of proceeds from issuance of warrants and share capital by $6,585 and $1,689 respectively, an increase of repayment of bank loan and credit facilities in the amount of $4,428 and set-off by an increase in proceeds from loans in the amount of $3,096.

 

SELECTED ANNUAL INFORMATION – CONTINUING OPERATIONS

 

SUMMARY OF INTERIM RESULTS

 

 

Note 1 - The figures disclosed here for the three months ended March 31, 2023, encompass updates and adjustments made during Q2 2023 to the Company’s previously filed unaudited interim financial statements. The adjustments and updates were immaterial.

 

METRICS AND NON-IFRS FINANCIAL MEASURES

 

This MD&A refers to “Gross Margin”, “EBITDA”, and “Adjusted EBITDA”. These financial measures are not recognized measures under IFRS and do not have a standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other companies. Rather, these measures are provided as additional information to complement those IFRS measures by providing further understanding of our results of operations from management’s perspective. Accordingly, these measures should neither be considered in isolation nor as a substitute for analysis of our financial information reported under IFRS.

 

Management defines Gross Margin as the difference between revenue and cost of goods sold divided by revenue (expressed as a percentage), prior to the effect of a fair value adjustment for inventory and biological assets. Management defines EBITDA as income earned or lost from operations, as reported, before interest, tax, depreciation and amortization.

 

 Adjusted EBITDA is defined as EBITDA, adjusted by removing other non-recurring or non-cash items, including the unrealized change in fair value of biological assets, realized fair value adjustments on inventory sold in the period, share-based compensation expenses, and revaluation adjustments of financial assets and liabilities measured on a fair value basis. Management believes that Adjusted EBITDA is a useful financial metric to assess its operating performance on a cash adjusted basis before the impact of non-recurring or non-cash items. The closest IFRS metric to EBITDA and Adjusted EBITDA is “operating loss”.

 

The non-IFRS financial measures can provide investors with supplemental measures of our operating performance and thus highlight trends in our core business that may not otherwise be apparent when relying solely on IFRS measures. We also believe that securities analysts, investors and other interested parties frequently use non-IFRS financial measures in the evaluation of issuers. These financial measures are metrics that have been adjusted from the IFRS statements in an effort to provide readers with a normalized metric in making comparisons more meaningful across the cannabis industry. However, other companies in our industry may calculate this measure differently, limiting their usefulness as comparative measures.

 

Our management also uses these non-IFRS financial measures to facilitate operating performance comparisons from period to period, to prepare annual operating budgets and forecasts and to determine components of management compensation. As required by Canadian securities laws, we reconcile these non-IFRS financial measures to the most comparable IFRS measures.

 

GROSS MARGIN

 

* See Note 1 under “Review of Financial Performance – Financial Highlights” section of the MD&A.

 

EBITDA AND ADJUSTED EBITDA

 

* See Note 1 under “Review of Financial Performance – Financial Highlights” section of the MD&A.

Notes:

 

The Company’s Adjusted EBITDA loss for the six months ended June 30, 2024, was increased, primarily due to revocation of the Oranim transaction.

 

CONTINGENT LIABILITIES AND COMMITMENTS

 

RENTAL LIABILITIES

 

The table below summarizes the maturity profile of the Group’s lease liabilities based on contractual undiscounted payments (including interest payments):

 

June 30, 2024:

 

December 31, 2023:

 

LITIGATION AND REGULATORY PROCEEDING

 

COVID-19 TEST KITS CLAIM, DISTRICT COURT OF STUTTGART

 

On November 19, 2021, Adjupharm filed a statement of claim (the “Claim”) to the District Court of Stuttgart (the “Stuttgart Court”) against Stroakmont & Atton Trading GmbH (“Stroakmont & Atton”), its shareholders and managing directors regarding a debt owed by Stroakmont & Atton to Adjupharm in an amount of approximately EUR 947,563 for COVID-19 test kits purchased by Stroakmont & Atton from Adjupharm at the end of March 2021. In January 2022, Stroakmont & Atton filed its statement of defence to the Stuttgart Court in which they mainly stated two arguments for their defense:

 

On March 22, 2022, Adjupharm filed a response to Stroakmont & Atton’s statement of defence and rejected both allegations with a variety of legal arguments and facts and also offered evidence to the contrary in the form of testimony from the witnesses in question.

 

The burden of proof for the allegation that the contract with Stroakmont & Atton was only concluded as a sham transaction lies with the opponents, and they offered evidences to the court in the form of testimony from certain witnesses.

 

A court hearing with witnesses was held on January 11, 2023, and on February 22, 2023, where witnesses testified.

 

According to the court the witnesses were not able to provide required evidence for the allegation regarding the sham transaction with Stroakmont & Atton. On April 5, 2023, Stuttgart Court announced its decision (the "Judgment") and sentenced Stroakmont & Atton to pay to Adjupharm EUR 947,563.68 plus interest in the amount of 5 percentage points above the German basis rate since May 8, 2021. In addition, Stroakmont & Atton was sentences to pay Adjupharm EUR 6,551.20 plus interest at 5 percentage points above the German basis rate since December 14, 2021.

 

The directors of Stroakmont, Mr. Simic and Mr. Lapeschi, were not sentenced and in this respect, the claim was dismissed against them regarding their personal liability. Adjupharm shall pay 2/3 of the Stuttgart Court expenses and the out-of-court expenses of Mr. Simic and Mr. Lapeschi. Stroakmont shall bear 1/3 of the Stuttgart Court expenses and 1/3 of the out-of-court expenses of Adjupharm. The remaining out-of-court expenses shall be borne by each party.

 

Furthermore, the court did not decide on the counterclaims from an alleged order by Adjupharm for 4.3 million Clongene tests due to a set-off prohibition. This set-off prohibition follows from a jurisdiction agreement concluded between Adjupharm and Uniclaro, which determined the courts in Hamburg to be the competent court to decide about such allegations.

 

The Judgment is not yet final and, therefore, cannot be enforced. On May 5, 2023, Adjupharm and Stroakmont & Atton, each submitted an appeal with the Stuttgart Court (the "Appeals") against the Judgment.

 

On June 23, 2023, Adjupharm filed its statement of grounds for appeal with the Higher Regional Court of Stuttgart. Adjupharm appeals against the fact that the directors of Stroakmont & Atton were not sentenced to pay jointly and severally together with Stroakmont & Atton as a result of fraud. Since they concluded the purchase agreement with Adjupharm in the name of Stroakmont & Atton and there is indication that they did not intend to pay the purchase price from the very beginning, this could be considered to be fraudulent inducement, for which they would be personally liable.

 

Stroakmont & Atton appeals against the judgement and request to reject the payment claim. Furthermore, they appeal against the prohibition of the set-off. Stroakmont & Atton are of the opinion that there is no such prohibition, and they want to include their alleged counterclaims in the proceedings and to receive a decision for their counterclaim by the court in Stuttgart.

 

So far, there have not been any instructions from the Court of Appeal and no oral hearing was held yet. It is not yet possible to estimate the outcome of the appeal proceedings at this early stage in the process.

 

At this stage, the Company management cannot assess its ability to collect the payment awarded in the Judgment and the chances of the claim advancing or the potential outcome of the Appeal.

 

UNICLARO GMBH VS. ADJUPHARM

On December 22, 2022, Uniclaro GmbH filed a statement of claim against Adjupharm with the district court in Hamburg. According to the statement of claim, Uniclaro GmbH is (“Uniclaro”) claiming the payment of the amount of EUR 1,046,010 (including VAT) in exchange for 300,000 Covid-19 rapid.

Uniclaro alleges in this lawsuit that Adjupharm purchased 4.3 million Covid-19 rapid tests of the brand "Clongene" from Uniclaro. Furthermore, Uniclaro claims that the order was placed verbally on 23.03.2021 and that Adjupharm has already paid for a portion of these tests and received them, but not yet the entire 4.3 million tests. They reserve the right to extend the lawsuit for a further amount (which they did not specify).

According to Uniclaro's statement of claim the lawsuit does not concern the same purchase price and the same Covid-19 rapid tests as in the Stroakmont & Atton Claim mentioned above. On 23 February 2023, the Company provided its statement of defense to the court. The statement of defense contains similar arguments to reject the allegations in this respect as in the court proceedings in Stuttgart about the counterclaims. Adjupharm rejected the claim stating that it did not purchase such an amount if Covid-19 rapid tests, but only small portions on a case-by-case-basis and according to the available cash flow.

On February 14, 2024, a court hearing took place before the district court of Hamburg, at which the court also took evidence. The court first heard the managing directors of Uniclaro and Adjupharm. They commented on the events of March 23, 2021, and the alleged purchase. The statements of all managing directors differed from each other. Afterwards, the witness Francesco Bisceglia, who holds the position of Sales Director at Adjupharm, was also heard. His statement also partially deviated from the statements of all managing directors, but overall, the witness basically testified that the company did not purchase 4.3 million Clungene Tests in the meeting of 23. March 2021. The transcript of the hearing is still pending.

The court provided the parties a deadline until March 27, 2024, to evaluate the statements of the managing directors and the testimony of the witness and to deliver to the court a summary of the factual and legal situation after the court hearing.

On April 24, 2024, the Regional Court of Hamburg announced its decision. The judgment is as follows:

The judgment is not yet final (rechtskräftig). The period for the appeal by each party is one month.

At this stage, the Company management cannot assess the chances of the potential outcome of this these proceedings.

 

PROCEEDINGS UNDER CCAA

 

See the Company’s Annual Report, available on the Company’s profile on SEDAR+ at www.sedarplus.ca and on EDGAR at www.sec.gov/edgarfor a summary of the CCAA Proceedings.

 

Court materials filed in connection with Trichome's CCAA Proceedings can be found at https://www.ksvadvisory.com/insolvency-cases/case/trichome.

 

THE REGIONAL LABOR COURT - TEL AVIV (BAT YAM) 17419-04-23

 

On May 10, 2023, IMC Holdings received a notice that a former employee has recently filed a claim with The Regional Labor Court - Tel Aviv (Bat Yam) (the "Court") against 3 companies, including IMC Holdings.

 

On April 4, 2024, IMC Holdings filed its Statement of defense.

 

A preliminary hearing held on May 6, 2024, before the esteemed Honorable Judge Karin Liber-Levin at The Court. Following the preliminary hearing an adjusted claim was filed with the Court.

 

The nature and details of the claim and the adjusted claim are still in the preliminary stages, and IMC Holdings is actively working to comprehend the full scope of the allegations. At this stage, the Company management cannot accurately assess the potential outcome of the claims or the likelihood of the claims progressing further.

 

ONTARIO SUPERIOR COURT OF JUSTICE IN CANADA – STATEMENT OF CLAIM

 

On November 17, 2023, the Company received a copy of a Statement of Claim that was filed in the Ontario Superior Court of Justice in Canada by 35 Oak Holdings Ltd., MW Investments Ltd., 35 Oak Street Developments Ltd., Michael Wiener, Kevin Weiner, William Weiner, Lily Ann Goldstein-Weiner, in their capacity as trustees of the Weiner Family Foundation (collectively the "MYM Shareholder Plaintiffs") against the Company and its board of directors, Board and officers, (collectively, the "MYM Defendants").

 

MYM Shareholder Plaintiffs claims that the MYM Defendants made misrepresentations in its disclosures prior to the Company's transaction with MYM in 2021. The MYM Shareholder Plaintiffs are claiming damages that amount to approximately $15,000 and aggravated, exemplary and punitive damages in the amount of $1,000.

 

The Company has reviewed the complaint and believes that the allegations are without merit.

 

The Company, together with some of the Defendants brought, on February 22, 2024, a preliminary motion to strike out several significant parts of the claim (the "Motion") The Motion has not been scheduled by the court.

 

At this time, the Company's management is of the view that the Motion has merit and is likely to succeed in at least narrowing the scope of the claim against the Company, and that it may also result in certain of the claims against individuals being dismissed altogether, and if not dismissed narrowed in scope and complexity.

 

On June 17, 2024, an Amended Statement of Claim was filed in the Ontario Superior Court of Justice in Canada by the MYM Shareholder Plaintiffs.

 

The Company plans to vigorously defend itself against the allegations. At this stage, the Company management cannot assess the chances of the claim advancing or the potential outcome of this these proceedings.

 

OFF-BALANCE SHEET ARRANGEMENTS

 

IM Cannabis had no off-balance sheet arrangements as of June 30, 2024.

 

TRANSACTIONS WITH RELATED PARTIES

 

Transactions with related parties mainly includes enterprises owned by directors or major shareholders and enterprises that have a member of key management in common with us. All of the transactions have been reviewed and approved by the Board or another independent committee of the board.

 

 

 

 

 

Other than the aforesaid transactions noted above, the Company had no other transactions with related parties outside of the Group except those pertaining to transactions with key management personnel and shareholders in the ordinary course of their employment or directorship.

 

PROPOSED TRANSACTIONS

 

There are no proposed transactions as at the date of this MD&A that have not been disclosed.

 

CRITICAL ACCOUNTING POLICIES

The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards ("IFRS"), as issued by the International Accounting Standards Board ("IASB"). The Group's financial statements have been prepared on a cost basis, except for:

 

-          Financial instruments which are presented at fair value through profit or loss.

 

-          Biological assets which are presented at fair value less cost to sell up to the point of harvest.

 

In the process of applying the significant accounting policies, the Group has made the following judgments which have the most significant effect on the amounts recognized in the financial statements:

 

Functional currency, presentation currency and foreign currency

 

The functional currency of the Company is the Canadian dollar ("CAD"). The Group determines the functional currency of each Group entity.

 

Assets, including fair value adjustments upon acquisition, and liabilities of an investee which is a foreign operation, and of each Group entity for which the functional currency is not the presentation currency are translated at the closing rate at each reporting date. Profit or loss items are translated at average exchange rates for all periods presented. The resulting translation differences are recognized in other comprehensive income (loss). Upon the full or partial disposal of a foreign operation resulting in loss of control in the foreign operation, the cumulative gain (loss) from the foreign operation which had been recognized in other comprehensive income is transferred to profit or loss. Upon the partial disposal of a foreign operation which results in the retention of control in the subsidiary, the relative portion of the amount recognized in other comprehensive income is reattributed to non-controlling interests.

 

Transactions denominated in foreign currency are recorded upon initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at each reporting date into the functional currency at the exchange rate at that date. Exchange rate differences, other than those capitalized to qualifying assets or accounted for as hedging transactions in equity, are recognized in profit or loss. Non-monetary assets and liabilities denominated in foreign currency and measured at cost are translated at the exchange rate at the date of the transaction. Non-monetary assets and liabilities denominated in foreign currency and measured at fair value are translated into the functional currency using the exchange rate prevailing at the date when the fair value was determined.

 

JUDGMENTS

 

 

The fair value of share-based payment transactions is determined upon initial recognition by an acceptable option pricing model. The inputs to the model include share price, exercise price and assumptions regarding expected volatility, expected life of share option and expected dividend yield.

 

 

On the commencement date, the Group uses the index rate prevailing on the commencement date to calculate the future lease payments. For leases in which the Group is the lessee, the aggregate changes in future lease payments resulting from a change in the index are discounted (without a change in the discount rate applicable to the lease liability) and recorded as an adjustment of the lease liability and the right-of-use asset, only when there is a change in the cash flows resulting from the change in the index (that is, when the adjustment to the lease payments takes effect).

 

ESTIMATES AND ASSUMPTIONS

 

The preparation of the financial statements requires management to make estimates and assumptions that influence the application of the accounting policies and on the reported amounts of assets, liabilities, revenues, and expenses. Changes in accounting estimates are reported in the period of the change in estimate.

 

The key assumptions made in the financial statements concerning uncertainties at the reporting date and the critical estimates computed by the Group that may result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.

 

ASSESSMENT OF GOING CONCERN

 

The use of the going concern basis of preparation of the financial statements. At each reporting period, management assesses the basis of preparation of the financial statements. The going concern basis of presentation assumes that the Company will continue its operations for the foreseeable future and be able to realize its assets and discharge its liabilities and commitments in the normal course of business.

 

The Group’s current operating budget includes various assumptions concerning the level and timing of cash receipts from sales and cash outlays for operating expenses and capital expenditures. Restructuring Plans and actions taken in 2022 and in 2023. The Company’s board of directors approved a cost saving plan, to allow the Company to continue its operations and meet its cash obligations. The cost saving plan consists of cost reduction due to efficiencies and synergies, which include mainly the following steps: discontinued operations of loss-making activities, reduction in payroll and headcount, reduction in compensation paid to key management personnel (including layoffs of key executives), operational efficiencies and reduced capital expenditures. In 2024, the company will work for fund and/or debt raising and will continue with cost savings effort as well as increased efficiency.

 

These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

 

BIOLOGICAL ASSETS

 

The Group’s biological assets consist of cannabis plants. The Group capitalizes the direct and indirect costs incurred related to the biological transformation of the biological assets between the point of initial recognition and the point of harvest. The direct and indirect costs of biological assets are determined using an approach similar to the capitalization criteria outlined in IAS 2, Inventory. These costs include the direct cost of planting and growing materials as well as other indirect costs such as utilities and supplies used in the cultivation process. Indirect labor for individuals involved in the cultivation and quality control process is also included, as well as depreciation on growing equipment and overhead costs such as rent to the extent it is associated with the growing space. All direct and indirect costs of biological assets are capitalized as they are incurred, and they are all subsequently recorded within the line-item cost of revenues on the Group’s statements of profit or loss and other comprehensive income in the period that the related product is sold. The Group then measures the biological assets at fair value less cost to sell up to the point of harvest, which becomes the basis for the cost of inventory after harvest. The fair value is determined using a model which estimates the expected harvest yield in grams for plants currently being cultivated, and then adjusts that amount for the expected selling price per gram and for any additional costs to be incurred (e.g., post-harvest costs). The net unrealized gains or losses arising from changes in fair value less cost to sell during the period are included in the gross profit for the related period and are recorded in a separate line on the face of the Group’s statements of profit or loss and other comprehensive income. Determination of the fair values of the biological assets requires the Group to make assumptions about how market participants assign fair values to these assets. These assumptions primarily relate to the level of effort required to bring the cannabis up to the point of harvest, costs to convert the harvested cannabis to finished goods, sales price, risk of loss, expected future yields from the cannabis plants and estimating values during the growth cycle. The Group accretes fair value on a straight-line basis according to stage of growth (e.g., a cannabis plant that is 50% through its growing cycle would be ascribed approximately 50% of its harvest date expected fair value, subject to wastage adjustments). The fair value of biological assets is categorized within Level 3 of the fair value hierarchy. For the inputs and assumptions used in determining the fair value of biological assets. The Group’s estimates are, by their nature, subject to change and differences from the anticipated yield will be reflected in the gain or loss on biological assets in future periods. As of June 30, 2024, and 2023, the Company does not hold biological assets.

 

BUSINESS COMBINATIONS AND GOODWILL

 

Business combinations are accounted for by applying the acquisition method. The cost of the acquisition is measured at the fair value of the consideration transferred on the acquisition date with the addition of non-controlling interests in the acquiree. In each business combination, the Company chooses whether to measure the non-controlling interests in the acquiree based on their fair value on the acquisition date or at their proportionate share in the fair value of the acquiree's net identifiable assets. Direct acquisition costs are carried to the statement of profit or loss as incurred.

 

In a business combination achieved in stages, equity interests in the acquiree that had been held by the acquirer prior to obtaining control are measured at the acquisition date fair value while recognizing a gain or loss resulting from the revaluation of the prior investment on the date of achieving control. Contingent consideration is recognized at fair value on the acquisition date and classified as a financial asset or liability in accordance with IFRS 9. Subsequent changes in the fair value of the contingent consideration are recognized in profit or loss. If the contingent consideration is classified as an equity instrument, it is measured at fair value on the acquisition date without subsequent remeasurement.

 

Goodwill is initially measured at cost which represents the excess of the acquisition consideration and the amount of non-controlling interests over the net identifiable assets acquired and liabilities assumed. If the resulting amount is negative, the acquirer recognizes the resulting gain on the acquisition date.

 

IMPAIRMENT OF FINANCIAL ASSETS

 

The Group evaluates at the end of each reporting period the loss allowance for financial debt instruments measured at amortized cost. The Group has short-term financial assets, principally trade receivables, in respect of which the Group applies a simplified approach and measures the loss allowance in an amount equal to the lifetime expected credit losses. The impairment loss, if any, is recognized in profit or loss with a corresponding allowance that is offset from the carrying amount of the assets.

 

IMPAIRMENT OF NON-FINANCIAL ASSETS

 

The Group evaluates the need to record an impairment of non-financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss. An impairment loss of an asset, other than goodwill, is reversed only if there have been changes in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognized. Reversal of an impairment loss, as above, shall not be increased above the lower of the carrying amount that would have been determined (net of depreciation or amortization) had no impairment loss been recognized for the asset in prior years and its recoverable amount. The reversal of impairment loss of an asset presented at cost is recognized in profit or loss.

 

The following criteria are applied in assessing impairment of these specific assets:

 

The Group reviews goodwill for impairment once a year, on December 31, or more frequently if events or changes in circumstances indicate that there is an impairment.

Goodwill is tested for impairment by assessing the recoverable amount of the cash-generating unit (or group of cash-generating units) to which the goodwill has been allocated. The Company identified the operations in Israel, Canada, and Europe as three separate cash-generating units.

 

An impairment loss is recognized if the recoverable amount of the cash-generating unit (or group of cash-generating units) to which goodwill has been allocated is less than the carrying amount of the cash-generating unit (or group of cash-generating units). Any impairment loss is allocated first to goodwill. Impairment losses recognized for goodwill cannot be reversed in subsequent periods.

 

LEGAL CLAIMS

 

A provision for claims is recognized when the Group has a present legal or constructive obligation because of a past event, it is more likely than not that an outflow of resources embodying economic benefits will be required by the Group to settle the obligation and a reliable estimate can be made of the amount of the obligation.

 

PUT OPTION GRANTED TO NON-CONTROLLING INTERESTS

 

When the Group grants non-controlling interests a put option, the non-controlling interests are classified as a financial liability and are not accorded their share in the subsidiary's earnings. At each reporting date, the financial liability is measured on the basis of the estimated present value of the consideration to be transferred upon the exercise of the put option / based on the fair value of the consideration. Changes in the amount of the liability are recorded in profit or loss.

 

DEFERRED TAX

 

Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes. Deferred taxes are measured at the tax rate that is expected to apply when the asset is realized or the liability is settled, based on tax laws that have been enacted or substantively enacted by the reporting date.

 

Deferred tax assets are reviewed at each reporting date and reduced to the extent that it is not probable that they will be utilized. Deductible carry forward losses and temporary differences for which deferred tax assets had not been recognized are reviewed at each reporting date and a respective deferred tax asset is recognized to the extent that their utilization is probable.

 

Deferred taxes in respect of investment property that is held with the objective of recovering substantially all of the economic benefits embedded in the investment property through sale and not through use are measured in accordance with the expected manner of recovery of the base asset, on the basis of sale rather than use.

 

When the Company owns an investment in a single property company and the manner in which the Company expects to dispose of the investment is by selling the shares of the property company rather than by selling the property itself, the Company recognizes deferred taxes for both inside temporary differences arising from the difference between the carrying amount of the property and its tax basis, and for outside temporary differences arising from the difference between the tax basis of the investment and the Company's carrying amount of the net assets of the investment in the consolidated financial statements. Taxes that would apply in the event of the disposal of investments in investees have not been considered in computing deferred taxes, if the disposal of the investments in investees is not probable in the foreseeable future. Also, deferred taxes that would apply in the event of distribution of earnings by investees as dividends have not been considered in computing deferred taxes, since the distribution of dividends does not involve an additional tax liability or since it is the Company's policy not to initiate distribution of dividends from a subsidiary that would trigger an additional tax liability. Taxes on income that relate to distributions of an equity instrument and to transaction costs of an equity transaction are accounted for pursuant to IAS 12. Deferred taxes are offset if there is a legally enforceable right to offset a current tax asset against a current tax liability and the deferred taxes relate to the same taxpayer and the same taxation authority.

 

SHARE-BASED PAYMENTS

 

The Company uses the Black-Scholes option pricing model in determining the fair value of Options issued to employees. In estimating fair value, the Company is required to make certain assumptions and estimates such as the expected life of the options, volatility of the Company’s future share price, the risk-free rate, future dividend yields and estimated forfeiture rates at the initial grant date.

 

ESTIMATED USEFUL LIVES AND DEPRECIATION/AMORTIZATION OF PROPERTY AND EQUIPMENT, AS WELL AS INTANGIBLE ASSETS

 

Property, plant and equipment are measured at cost, including directly attributable costs, less accumulated depreciation, accumulated impairment losses and excluding day-to-day servicing expenses. Cost includes spare parts and auxiliary equipment that are used in connection with plant and equipment. A part of an item of property, plant and equipment with a cost that is significant in relation to the total cost of the item is depreciated separately using the component method.

 

Depreciation of property, plant and equipment is dependent upon estimates of useful lives and residual values which are determined through the exercise of judgement and calculated on a straight-line basis over the useful lives of the assets at annual rates.

 

LEASES

 

Judgment is used in determining the value of the Company’s right-of-use assets and lease liabilities. The value determined for the Company’s right-of-use assets and lease liabilities can be materially different based on the discount rate selected to present value the future lease payments as well as the likelihood of the Company exercising extensions, termination, and/or purchase options. The discount rate used to present value the future lease payments over the life of the lease is based on the Company’s incremental borrowing rate at inception of the lease. This rate is determined by the Company using judgment.

 

In determining the value of the Company’s right-of-use assets and lease liabilities, the Company assesses future business plans to determine whether to include certain extension options noted in the lease agreement.

 

If there is no interest rate implicit in the lease agreement, the Company uses a discount rate that would be charged to a similar borrower, with similar risk characteristics, in a mortgage loan to purchase the leased facility. This discount rate is used to present value the future lease payments in determining the right-of-use asset and lease liability values at inception of the leases.

 

DETERMINING THE FAIR VALUE OF AN UNQUOTED FINANCIAL ASSETS AND LIABILITIES

 

The fair value of unquoted financial assets in Level 3 of the fair value hierarchy is determined using valuation techniques, generally using future cash flows discounted at current rates applicable for items with similar terms and risk characteristics. changes in estimated future cash flows and estimated discount rates, after consideration of risks such as liquidity risk, credit risk and volatility, are liable to affect the fair value of these assets.

 

REVENUE RECOGNITION

 

Revenue from contracts with customers is recognized when the control over the goods or services is transferred to the customer. The transaction price is the amount of the consideration that is expected to be received based on the contract terms, excluding amounts collected on behalf of third parties (such as taxes). In determining the amount of revenue from contracts with customers, the Group evaluates whether it is a principal or an agent in the arrangement. The Group is a principal when the Group controls the promised goods or services before transferring them to the customer. In these circumstances, the Group recognizes revenue for the gross amount of the consideration. When the Group is an agent, it recognizes revenue for the net amount of the consideration, after deducting the amount due to the principal.

 

REVENUE FROM THE SALE OF GOODS

 

Revenue from the sale of cannabis products is generally recognized at a point in time when control over the goods have been transferred to the customer. Payment is typically due prior to or upon delivery and revenue is recognized upon the satisfaction of the performance obligation. The Group satisfies its performance obligation and transfers control upon delivery and acceptance by the customer.

 

Variable consideration:

 

The Group determines the transaction price separately for each contract with a customer. When exercising this judgment, the Group evaluates the effect of each variable amount in the contract, taking into consideration discounts, penalties, variations, claims, and non-cash consideration. In determining the effect of the variable consideration, the Group normally uses the "most likely amount" method described in the Standard. Pursuant to this method, the amount of the consideration is determined as the single most likely amount in the range of possible consideration amounts in the contract. According to the Standard, variable consideration is included in the transaction price only to the extent that it is highly probable that a significant reversal in the amount of revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

 

Bill-and-hold arrangements:

 

Due to strict regulations of security, storage and handling large quantities of cannabis products, the Group's customers may request the Group to retain physical possession of a sold product until it is delivered to the customer at a future point in time. Revenue from bill-and-hold sales is recognized before the product is physically delivered to the customer when all of the following criteria are met:

 

 

CHANGES IN ACCOUNTING POLICIES INCLUDING INITIAL ADOPTION

 

The following new accounting standards applied or adopted during the six months ended June 30, 2024, and had no impact on the Interim Financial

Statements:

In January 2020, the IASB issued amendments to IAS 1, regarding the criteria for classifying liabilities with covenants as current or non-current.

In October 2022 the IASB issued an additional amendment accordingly a Company has to disclose of the book value of the liability and information on the financial benchmarks as well as facts and circumstances at the end of the reporting period that may lead to the conclusion that the entity will have difficulty in complying with the financial covenants. The Amendment is applicable for annual periods beginning on or after January 1, 2024.

The Company has a loan that is presently convertible into Ordinary shares of the Company. The conversion component is classified in the financial statements as a financial liability.

In September 2022, the IASB issued an amendment to IFRS 16, " Lease Liability in a Sale and Leaseback" ("IFRS 16"), which provides accounting treatment in the financial statements of the seller-lessee in sale and leaseback transactions when the lease payments are variable lease payments that do not depend on the index or the exchange rate. As part of the amendment, the seller-lessee is required to adopt one of two approaches to measuring the liability for the lease at the time of first recognition of such transactions. The chosen approach constitutes an accounting policy that must be applied consistently.

The Amendment is applicable for annual periods beginning on or after January 1, 2024.

The Amendment did not have a material impact on the Company interim consolidated financial statements.

In May 2023, the IASB published amendments to International Accounting Standard 7, Statement of Cash Flows, and IFRS 7, Financial Instruments: Disclosures (hereinafter: "the amendments"), to clarify the characteristics of to address the presentation of liabilities and the associated cash flows arising out of supplier finance arrangements, as well as disclosures required for such arrangements.

The disclosure requirements in the amendments are intended to assist and enable users of the financial statements to assess the effects of supplier financing arrangements on the entity's obligations as well as on the entity's cash flows and exposure to liquidity risk. The Amendment is applicable for annual periods beginning on or after January 1, 2024.

According to the transition provisions of the Amendments, the Company is not required to provide disclosures in interim periods during the first year of adoption, and therefore the above Amendments did not have a material impact on the Company's condensed interim consolidated financial statements. However, the Amendments are expected to affect the disclosures of supplier finance arrangements in the Company's annual consolidated financial statements.

In April 2024, the International Accounting Standards Board ("the IASB") issued IFRS 18, "Presentation and Disclosure in Financial Statements" ("IFRS 18") which replaces IAS 1, "Presentation of Financial Statements". IFRS 18 is aimed at improving comparability and transparency of communication in financial statements.

 

IFRS 18 retains certain existing requirements of IAS 1 and introduces new requirements on presentation within the statement of profit or loss, including specified totals and subtotals. It also requires disclosure of management-defined performance measures and includes new requirements for aggregation and disaggregation of financial information.

 

IFRS 18 does not modify the recognition and measurement provisions of items in the financial statements. However, since items within the statement of profit or loss must be classified into one of five categories (operating, investing, financing, taxes on income and discontinued operations), it may change the entity's operating profit. Moreover, the publication of IFRS 18 resulted in consequential narrow scope amendments to other accounting standards, including IAS 7, "Statement of Cash Flows", and IAS 34, "Interim Financial Reporting".

 

IFRS 18 is effective for annual reporting periods beginning on or after January 1, 2027, and is to be applied retrospectively. Early adoption is permitted but will need to be disclosed.

 

The Company is evaluating the effects of IFRS 18, including the effects of the consequential amendments to other accounting standards, on its consolidated financial statements.

 

FINANCIAL INSTRUMENTS

 

 

Note:

The warrants fair value for June 30, 2024, was measured using the Black & Scholes model with the following key assumptions:

 

B.

Debentures are measured in fair value for the issuance date. The Debentures fair value for the issuance date was measured using 16.55% IRR and was summarized to $1,975 of Convertible Debt and $327 of conversion option for Convertible Debt. Finance (income) expense in respect of the Convertible Debt for the six months ended June 30, 2024, and 2023, amounted to $442 and $nil, respectively.

●

maintenance of records in reasonable detail, that accurately and fairly reflect the transactions and dispositions of assets.

●

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with applicable IFRS.

●

receipts and expenditures are only being made in accordance with authorizations of management or the Board; and

●

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial instruments.

(a)

the Company receiving economic benefits from Focus (and the terms of the contractual agreements between the Company and Focus cannot be changed without the approval of IMC Holdings);

(b)

IMC Holdings having the option to purchase the divested 74% interest in Focus held by Oren Shuster, the CEO, director and a promoter of the Company, and Rafael Gabay, a former director and a promoter of the Company.

(c)

Messrs. Shuster and Gabay each being a director of Focus (while Mr. Shuster concurrently being a CEO, director and substantial shareholder of the Company and Mr. Gabay concurrently being a substantial shareholder of the Company); and

(d)

the Company providing management and support activities to Focus through a services agreement.

●

the Company’s business objectives and milestones and the anticipated timing of execution.

●

the performance of the Company’s business, strategies and operations.

●

the Company’s intentions to expand the business, operations and potential activities of the Company.

●

the Company’s plans to expand its sales channels, distribution, delivery and storage capacity, and reach to medical cannabis patients.

●

the competitive conditions of the cannabis industry and the growth of medical or adult-use recreational cannabis markets in the jurisdictions in which the Company operates.

●

the competitive conditions of the industry, including the Company’s ability to maintain or grow its market share and maintain its competitive advantages.

●

statements relating to the Company’s commitment to responsible growth and compliance with the strictest regulatory environments.

●

the Company’s focus on providing premium cannabis products to medical patients in the jurisdictions in which the Company conducts business and any other jurisdiction in which the Company may conduct business in the future.

●

the Company’s plans to amplify its commercial and brand power to become a global high-quality cannabis player.

●

the Company’s primary goal of sustainably increasing revenue in its core markets.

●

the demand and momentum in the Company’s Israeli and Germany operations.

●

how the Company intends to position its brands.

●

the efficiencies and synergies of the Company as a global organization with domestic expertise in Israel and Germany.

●

expectations that providing high-quality, reliable supply to the Company’s customers and patients will lead to recurring sales.

●

expectations related to the Company’s introduction of new Stock Keeping Unit (“SKUs”)

●

anticipated cost savings from the reorganization of the Company's and the completion thereof upon the timelines disclosed herein.

●

geographic diversification and brand recognition and the growth of the Company’s brands in the jurisdictions that the Company operates in or may expand to.

●

expectations related to the Company’s ability to address the ongoing needs and preferences of medical cannabis patients.

●

the Company’s retail presence, distribution capabilities and data-driven insights.

●

the future impact of the Regulations Amendment regarding the transition reform from licenses to prescriptions for medical treatment of cannabis.

●

the Company’s continued partnerships with third party suppliers and partners and the benefits thereof.

●

the Company’s ability to achieve profitability in 2024.

●

the number of patients in Israel licensed by the Israeli Ministry of Health (“MOH”) to consume medical cannabis.

●

expectations relating to the number of patients paying out-of-pocket for medical cannabis products in Germany.

●

the anticipated decriminalization or legalization of adult-use recreational cannabis in Israel and Germany.

●

expectations related to the demand and the ability of the Company to source premium and ultra-premium cannabis products exclusively and competition in this product segment.

●

the anticipated impact of inflation and liquidity on the Company’s performance.

●

expectations with respect to the Company’s operating budget and the assumptions related thereto.

●

expectations relating to the Company as a going concern and its ability to conduct business under the ordinary course of operations.

●

expectations related to the collection the payment awarded in the Judgment and the chances of the claim advancing or the potential outcome of the Test Kits Appeal (as defined herein);

●

the continued listing of the Company’s Common Shares in the capital of the Company (“Common Shares”) on the Nasdaq Stock Market (“Nasdaq”) and Canadian Securities Exchange (“CSE”);

●

cannabis licensing in the jurisdictions in which the Company operates.

●

the renewal and/or extension of the Company’s licenses.

●

the Company’s anticipated operating cash requirements and future financing needs.

●

the Company’s expectations regarding its revenue, expenses, profit margins and operations.

●

the anticipated Gross Margins, EBITDA and Adjusted EBITDA from the Company’s operations.

●

the expected increase in revenue and margins in its Israeli medical cannabis market activities arising from its acquisitions.

●

future opportunities for the Company in Israel, particularly in the retail and distribution segments of the cannabis market.

●

future expansion and growth opportunities for the Company in Germany and Europe and the timing of such.

●

contractual obligations and commitments; and

●

the Company completing the Potential Transaction with Kadimastem (each as defined herein).

●

the Company has the ability to achieve its business objectives and milestones under the stated timelines.

●

the Company will succeed in carrying out its business, strategies and operations.

●

the Company will realize upon its intentions to expand the business, operations and potential activities of the Company.

●

the Company will expand its sales channels, distribution, delivery and storage capacity, and reach to medical cannabis patients.

●

the competitive conditions of the cannabis industry and the growth of medical or adult-use recreational cannabis in the jurisdictions in which the Company operates.

●

the competitive conditions of the industry will be favourable to the Company, and the Company has the ability to maintain or grow its market share and maintain its competitive advantages.

●

the Company will commit to responsible growth and compliance with the strictest regulatory environments.

●

the Company will remain focused on providing premium cannabis products to medical patients in the jurisdictions in which the Company conducts business and any other jurisdiction in which the Company may conduct business in the future.

●

the Company has the ability to amplify its commercial and brand power to become a global high-quality cannabis player.

●

the Company will maintain its primary goal of sustainably increasing revenue in its core markets.

●

the demand and momentum in the Company’s Israeli and Germany operations will be favourable to the Company.

●

the Company will carry out its plans to position its brands as stated.

●

the Company’s Company has the ability to realize upon the stated efficiencies and synergies the Company as a global organization with domestic expertise in Israel and Germany.

●

providing a high-quality, reliable supply to the Company’s customers and patients will lead to recurring sales.

●

the Company will introduce of new SKUs.

●

the Company will realize the anticipated cost savings from the reorganization.

●

the Company has the ability to achieve geographic diversification and brand recognition and the growth of the Company’s brands in the jurisdictions that the Company operates in or may expand to.

●

the Company’s has the ability to address the ongoing needs and preferences of medical cannabis patients;

●

the Company has the ability to realize upon its retail presence, distribution capabilities and data-driven insights.

●

the future impact of the Regulations Amendment will be favourable to the Company.

●

the Company will maintain its partnerships with third parties, suppliers and partners.

●

the Company has the ability to achieve profitability in 2024;

●

the accuracy of number of patients in Israel licensed by the MOH to consume medical cannabis.

●

the accuracy of the number of patients paying out-of-pocket medical cannabis products in Germany.

●

the anticipated decriminalization or legalization of adult-use recreational cannabis in Israel and Germany will occur.

●

the Company has the ability to source premium and ultra-premium cannabis products exclusively and competition in this product segment.

●

the anticipated impact of inflation and liquidity on the Company’s performance will be as forecasted.

●

the accuracy with respect to the Company’s operating budget and the assumptions related thereto.

●

the Company will remain as going concern.

●

a favourable outcome with respect to the collection the payment awarded in the Judgment and the chances of the claim advancing or the potential outcome of the Test Kits Appeal.

●

the Company’s Common Shares will remain listed on the Nasdaq and the CSE.

●

the Company’s ability to maintain cannabis licensing in the jurisdictions in which the Company operates.

●

the Company has the ability to obtain the renewal and/or extension of the Company’s licenses.

●

the Company has the ability to meet operating cash requirements and future financing needs.

●

the Company will meet or surpass its expectations regarding its revenue, expenses, profit margins and operations.

●

the Company will meet or surpass its expectations regarding Gross Margins, EBITDA and Adjusted EBITDA from the Company’s operations.

●

the Company will increase its revenue and margins in its Israeli medical cannabis market activities arising from its acquisitions.

●

the Company has the ability to capitalize on future opportunities for the Company in Israel, particularly in the retail and distribution segments of the cannabis market.

●

the Company will carry out its future expansion and growth opportunities for the Company in Germany and Europe and the timing of such.

●

the Company will fulfill its contractual obligations and commitments; and

●

the Company will complete the Proposed Transaction with Kadimastem.

●

the Company’s inability to achieve its business objectives and milestones under the stated timelines.

●

the Company inability to carry out its business, strategies and operations.

●

the Company’s inability to realize upon its intentions to expand the business, operations and potential activities of the Company.

●

the Company will not expand its sales channels, distribution, delivery and storage capacity, and reach to medical cannabis patients.

●

the competitive conditions of the cannabis industry and the growth of medical or adult-use recreational cannabis markets will be unfavourable to the Company in the jurisdictions in which the Company operates.

●

the competitive conditions of the industry will be unfavourable to the Company, and the Company’s inability to maintain or grow its market share and maintain its competitive advantages.

●

the Company will not commit to responsible growth and compliance with the strictest regulatory environments.

●

the Company’s inability to remain focused on providing premium cannabis products to medical patients in the jurisdictions in which the Company conducts business and any other jurisdiction in which the Company may conduct business in the future.

●

the Company inability to amplify its commercial and brand power to become a global high-quality cannabis player.

●

the Company will not maintain its primary goal of sustainably increasing revenue in its core markets.

●

the demand and momentum in the Company’s Israeli and Germany operations will be unfavourable to the Company.

●

the Company will not carry out its plans to position its brands as stated.

●

the Company’s inability to realize upon the stated efficiencies and synergies of the Company as a global organization with domestic expertise in Israel and Germany.

●

providing a high-quality, reliable supply to the Company’s customers and patients will not lead to recurring sales.

●

the Company will not introduce of new SKUs.

●

the Company’s inability to realize upon the anticipated cost savings from the reorganization.

●

the Company’s inability to achieve geographic diversification and brand recognition and the growth of the Company’s brands in the jurisdictions that the Company operates in or may expand to.

●

the Company’s inability to address the ongoing needs and preferences of medical cannabis patients.

●

the Company’s inability to realize upon its retail presence, distribution capabilities and data-driven insights.

●

the future impact of the Regulations Amendment will be unfavourable to the Company.

●

the Company will not maintain its partnerships with third party suppliers and partners.

●

the inaccuracy of number of patients in Israel licensed by the MOH to consume medical cannabis.

●

the inaccuracy of the number of patients paying out-of-pocket for medical cannabis products in Germany.

●

the anticipated decriminalization or legalization of adult-use recreational cannabis in Israel and Germany will not occur.

●

the Company’s ability to source premium and ultra-premium cannabis products exclusively and competition in this product segment.

●

the anticipated impact of inflation and liquidity on the Company’s performance will not be as forecasted.

●

the inaccuracy with respect to the Company’s operating budget and the assumptions related thereto.

●

the Company will not remain as going concern.

●

an unfavourable outcome of the negotiations or the Construction Proceedings.

●

an unfavourable outcome with respect to the collection the payment awarded in the Judgment and the chances of the claim advancing or the potential outcome of the Appeal.

●

the Company’s Common Shares will not remain listed on the Nasdaq and the CSE.

●

the Company’s inability to maintain cannabis licensing in the jurisdictions in which the Company operates.

●

the Company’s inability to obtain the renewal and/or extension of the Company’s licenses.

●

the Company’s inability to meet operating cash requirements and future financing needs.

●

the Company will not meet or surpass its expectations regarding its revenue, expenses, profit margins and operations.

●

the Company will not meet or surpass its expectations regarding Gross Margins, EBITDA and Adjusted EBITDA from the Company’s operations.

●

the Company will not increase its revenue and margins in its Israeli medical cannabis market activities arising from its acquisitions.

●

the Company’s ability to capitalize on future opportunities for the Company in Israel, particularly in the retail and distribution segments of the cannabis market.

●

the Company will not carry out its future expansion and growth opportunities for the Company in Germany and Europe and the timing of such; and

●

the Company will not fulfill its contractual obligations and commitments; and

●

the Company will not complete the Proposed Transaction with Kadimastem.