We can readily understand why investors are attracted to unprofitable companies. For example, although Amazon.com made losses for many years after listing, if you had bought and held the shares since 1999, you would have made a fortune. Having said that, unprofitable companies are risky because they could potentially burn through all their cash and become distressed.

So, the natural question for IM Cannabis (CSE:IMCC) shareholders is whether they should be concerned by its rate of cash burn. For the purpose of this article, we’ll define cash burn as the amount of cash the company is spending each year to fund its growth (also called its negative free cash flow). We’ll start by comparing its cash burn with its cash reserves in order to calculate its cash runway.

When Might IM Cannabis Run Out Of Money?

A company’s cash runway is the amount of time it would take to burn through its cash reserves at its current cash burn rate. When IM Cannabis last reported its balance sheet in September 2019, it had zero debt and cash worth CA$1.3m. Looking at the last year, the company burnt through CA$5.2m. So it had a cash runway of approximately 3 months from September 2019. With a cash runway that short, we strongly believe that the company must raise cash or else douse its cash burn promptly. The image below shows how its cash balance has been changing over the last few years.


CNSX:IMCC Historical Debt April 8th 2020

How Well Is IM Cannabis Growing?

It was quite stunning to see that IM Cannabis increased its cash burn by 512% over the last year. While that isa little concerning at a glance, the company has a track record of recent growth, evidenced by the impressive 55% growth in revenue, over the very same year. Considering both these factors, we’re not particularly excited by its growth profile. Clearly, however, the crucial factor is whether the company will grow its business going forward

How Hard Would It Be For IM Cannabis To Raise More Cash For Growth?

Given the trajectory of IM Cannabis’s cash burn, many investors will already be thinking about how it might raise more cash in the future. Generally speaking, a listed business can raise new cash through issuing shares or taking on debt. One of the main advantages held by publicly listed companies is that they can sell shares to investors to raise cash to fund growth. By comparing a company’s annual cash burn to its total market capitalisation, we can estimate roughly how many shares it would have to issue in order to run the company for another year (at the same burn rate).

Since it has a market capitalisation of CA$32m, IM Cannabis’s CA$5.2m in cash burn equates to about 16% of its market value. As a result, we’d venture that the company could raise more cash for growth without much trouble, albeit at the cost of some dilution.

So, Should We Worry About IM Cannabis’s Cash Burn?

Even though its increasing cash burn makes us a little nervous, we are compelled to mention that we thought IM Cannabis’s revenue growth was relatively promising. After looking at that range of measures, we think shareholders should be extremely attentive to how the company is using its cash, as the cash burn makes us uncomfortable.



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