Intercure(INCR) - 2021 Q4 - Annual Report

Regulatory Compliance and Challenges - The company holds licenses for breeding and cultivating pharmaceutical-grade cannabis in Israel, with compliance to IMC-GAP and IMC-GSP standards[42] - The company operates under strict regulatory requirements, which may impact its ability to expand operations and secure necessary permits[50] - The company’s operations are subject to ongoing inspections and compliance assessments by regulatory authorities[43] - The company faces risks related to regulatory changes that could materially impact its business operations and market participation[39] - The company’s pharmacy operations are limited to authorized pharmacies, which may affect future expansion plans[51] - The company may incur increased costs due to compliance with regulations as a public company listed on both Canadian and U.S. exchanges[115] - The company may be classified as a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, which could lead to adverse tax consequences for U.S. shareholders[189] - The company is subject to privacy and information security risks, with potential penalties for breaches of patient health information confidentiality[134] Clinical Trials and Research - The company has received IMCA feasibility approval to initiate nine clinical trials, with one phase 3 clinical trial currently underway[55] - The company has not completed any clinical trials to date, and future trials may be expensive and time-consuming[56] - The company has initiated one phase 3 clinical trial to study the effects of its product on children on the autistic spectrum, with a total of nine trials approved[208] - The company is currently involved in one active clinical study, providing GMP-certified products, but does not own the intellectual property generated from this study[155] - Future studies may not be sponsored by the company, limiting control over design and terms, and ownership of generated intellectual property may remain with the institutions conducting the studies[156] Market Expansion and Distribution - The company has entered into agreements with a licensed producer in Denmark and a distributor in Germany to establish distribution channels for its products in the EU[46] - The company has established a joint venture in Canada for the production and distribution of pharmaceutical-grade cannabis-based products, pending regulatory approvals[47] - The company anticipates beginning exports of pharmaceutical-grade cannabis products once guidelines are finalized by Israeli government agencies[44] - The company plans to expand its operations internationally, exposing it to various political, economic, and legal risks associated with different jurisdictions[67] - The company plans to distribute products globally under the "CANNDOC" brand, manufactured under GMP standards, although distribution through partnerships has not yet commenced due to regulatory requirements[206] - The company has developed a global distribution network and has entered into agreements with licensed producers in Denmark and Germany, as well as a joint venture in Austria[225] Financial Performance and Risks - The company has experienced positive cash flow from operating activities for the years ended December 31, 2021, and December 31, 2020, but had negative cash flow for the year ended December 31, 2019[79] - Revenue growth has been achieved in recent years, but sustaining this growth will depend on factors such as capital availability, regulatory changes, and competition from alternative markets[110] - Additional financing will be required for continued business development, and there is no assurance that such financing will be available on favorable terms[112] - The company may incur significant costs and management resources due to potential product recalls related to contamination or defects[87] - The company may face legal proceedings that could divert management's attention and resources, potentially impacting financial results[140] Competition and Market Position - The company faces competition from licensed producers of pharmaceutical-grade cannabis and cannabis-based products, as well as major pharmaceutical and biotechnology companies, which may have greater financial and operational resources[61] - The company is a pioneer in the production and distribution of pharmaceutical-grade cannabis and cannabis-based products for medical use, with over 13 years of experience in the Israeli market[199] - The company is well-positioned to dominate the recreational cannabis and CBD market in Israel, pending regulatory approval[230] Operational Risks and Management - The company faces operational risks that could result in financial loss, reputational damage, or legal proceedings, and management is focused on minimizing these risks through effective infrastructure and controls[132] - The company is dependent on key inputs such as raw materials and utilities, and any significant interruptions could impair cannabis cultivation[92] - Attracting and retaining skilled personnel is crucial for the company's success, with high demand for qualified individuals in the cannabis industry[94] - The leadership team consists of experienced pioneers in the cannabis space, including a globally recognized expert cultivator, enhancing the company's regulatory compliance capabilities[227] Strategic Partnerships and Alliances - The company has established strategic partnerships with leading industry players, including Tilray and Charlotte's Web, to enhance product sourcing and distribution capabilities[219] - The company relies on joint ventures for production and distribution outside of Israel, facing risks if partners fail to meet their obligations[80] - The company faces challenges in joint ventures due to lack of sole decision-making authority, which may lead to poor or delayed business decisions[81] Infrastructure and Production Capacity - The production facility in Southern Kibbutz has a gross area of 1.7 million square feet, currently utilizing 300,000 square feet to produce 7 tons of cannabis annually, with potential to scale up to 88 tons per year upon full operational capacity[203] - The Northern Kibbutz facility has a gross area of 55,000 square feet, capable of producing up to 3 tons of cannabis annually, with an option to expand to 10 tons[204] - The company has developed a quality management system that meets pharmaceutical-grade production standards while maintaining profitability[228] External Factors and Risks - Political, economic, and military instability in Israel, where the company's operations are based, may adversely affect business results and operations[159] - The Israeli government has previously covered damages from terrorist attacks, but there is no assurance that such coverage will continue or be sufficient[163] - Military service obligations for Israeli citizens, including key employees, may disrupt operations and adversely affect business[164] - The war in Ukraine and related sanctions may adversely affect the company's operations, although it does not rely on materials or revenue from the affected regions[197] - The ongoing COVID-19 pandemic has not yet negatively impacted the demand for medical cannabis products, and the company continues to operate and sell on an ongoing basis[195] - The company is exposed to risks related to the COVID-19 pandemic, including potential disruptions in supply chains and clinical trials[192] Shareholder and Governance Issues - Shareholder rights and responsibilities are governed by Israeli law, which may differ from U.S. corporate governance standards[165] - The CEO holds over 26% of the company's voting power, and insiders collectively hold approximately 28% of the outstanding ordinary shares, leading to substantial control over company operations[183] - The company is classified as a "foreign private issuer," allowing it to follow home country governance practices, which may provide less protection to investors compared to U.S. domestic issuers[122]