Clever Leaves Holdings Inc. (NASDAQ:CLVR) Q2 2022 Earnings Conference Call August 11, 2022 5:00 PM ET
Company Participants
Jackie Keshner – Investor Relations
Andrés Fajardo – Chief Executive Officer
Hank Hague – Chief Financial Officer
Conference Call Participants
Pablo Zuanic – Cantor Fitzgerald
Operator
Good afternoon and welcome to the Clever Leaves’ Second Quarter 2022 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please also note this event is being recorded.
I would now like to turn the conference over to Jackie Keshner. Please go ahead.
Jackie Keshner
Good afternoon, everyone, and thank you for participating in today’s conference call to discuss Clever Leaves financial results for the second quarter ended June 30, 2022. Joining us today are Clever Leaves CEO, Andrés Fajardo; and the company’s CFO, Hank Hague.
Before I introduce Andrés, I remind you that during today’s call, including the question-and-answer session, statements that are not historical facts, including any projections or guidance, statements regarding future events or future financial performance or statements of intent or belief are forward-looking statements and are covered by the Safe Harbor disclaimers contained in today’s press release and the company’s public filings with the SEC.
Actual outcomes and results may differ materially from what is expressed in or implied by these forward-looking statements. Specifically, please refer to the company’s Form 10-Q for the quarter ended June 30, 2022, which was filed prior to this call as well as other filings made by Clever Leaves with the SEC from time-to-time. These filings identify factors that could cause results to differ materially from those forward-looking statements. Please also note that during this call, management will be disclosing adjusted EBITDA, adjusted gross profit, and adjusted gross margin. These are non-GAAP financial measures as defined by SEC Regulation G.
Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measure and a statement disclosing the reasons why company management believes that adjusted EBITDA, adjusted gross profit, and adjusted gross margin provides useful information to investors regarding the company’s financial conditions and results of operations are included in today’s press release that is posted on the company’s website.
With that, I will turn the call over to Kyle.
Andrés Fajardo
Thank you, Jackie, and good afternoon, everyone. Our second quarter performance reflects our continued execution or our redefined growth strategy. We generated solid year-over-year revenue growth across both segments of our business, including 124% increasing cannabinoid revenues as we continue to expand on existing commercial partnerships and drive strong momentum in our target markets of Australia, Brazil, Germany, Israel and the United States. In addition, we’ve completed significant restructuring initiatives to more closely align our cost structure with our core operational priorities. From a balance sheet perspective, we fully repaid our two largest debt obligations, which has significantly reduced our total debt and given us additional flexibility to support our ongoing strategic initiatives. I am proud of the strategic progress we have made and our team’s tireless work to maintain our momentum through the first half of 2022.
To review our second quarter commercial progress in greater depth, I will focus on each of our target markets. In Germany, we have continued to sell our IQANNA flower product and received strong demand and positive market feedback for the brand and product. As we continue to grow this brand and complete additional shipments, we believe this product line will become a strong contributor to our revenues from the German market. In April, Clever Leaves Germany also became a fully licensed medical cannabis distributor granting us direct access to a network of wholesalers and around 20,000 pharmacies throughout the country.
I will speak in greater depth about additional commercial and regulatory opportunities within this market later in the call, but we look forward to further supporting the momentum we’ve generated through the first half of 2022. In Israel, we have remained vigilant in our appearance, the country’s fluid regulatory framework and work to ramp our existing commercial agreements. To ensure compliance with heightened quality standard Israel has in place, we strengthened our post-harvest flower product testing and analysis capabilities demonstrating our deep market knowledge and commitment to meeting even the most stringent pharmaceutical standards around the globe.
As a result of these efforts, we successfully completed our first high THC flower shipment to InterCure, Israel’s leading cannabis company. Having only announced our InterCure partnership in late March of this year, we are proud to have reached this milestone so swiftly, and we will work closely with them to make additional progress on this long-term partnership. In Brazil, we increased our product shipments during the second quarter as several of our products that have been approved on their RDC 327, the Brazilian regulatory authority’s strict cannabis manufacturing and import standards officially enter the market.
Furthermore GreenCare, one of our current Brazilian partners launched this product to a large number of physicians in late June, marking the initiation of sales of our products to patients under RDC 327. We’ve previously had shipments in market on a compassionate use basis where medical products were unregistered and could be imported by individual patients when they obtain regulatory and prescriber permissions. Now having products approved for broader market entry through RDC 327 is a stringent and multi-year process, but one that provides immense long-term value for us and current partners. As we seek additional product approvals, we are working to activate and rub our current agreements to deepen our foothold within this market.
We’ve demonstrated similar regulatory agility in Australia, which instituted a new set of sanitary requirements for cannabis import producers. Our Portugal team worked quickly to adapt to these standards and our flower exports have proceeded seamlessly ever since. We have since launched our Wappa flower strain with one of our large Australian take-or-pay partners, and we believe this high quality offering has a compelling product market fit. Finally, in the U.S., we announced a two year supply agreement with Biom Therapeutics, an American clinical stage biopharmaceutical company, in April. Under the terms of the agreement, we will provide high quality CBD isolate for using studies and clinical trials centered on where neurological and developmental disease is. This partnership complements our commercial CBD offering JOYSOL, which we are gradually rolling out with a launch and learn approach to small retail chains with an Herbal Brands’ nutraceutical partnered network, as well as select online marketplaces.
We have had solid traction within the detox space thus far by increasing our distribution into major retailers countrywide and our portfolio penetration on a same-store basis. While we have continued to drive strong cannabinoid revenue expansion relative to last year, I want to remind everyone that our quarter-to-quarter sales cycles can appear lumpy due to the many regulatory approvals and quality control checks involved in our production and expert process. As we adapt to evolving regulatory standards in our target markets and are certain that our products meet all necessary pharmaceutical specifications. These measures impact the timing of individual shipments and how quickly a given supply agreement can ramp.
That said our ability to provide high quality pharmaceutical grade products and adhere closely to our target market standards remain a central tenant of our value proposition as we expand our existing agreements and work to further expand our global partner base. From a regulatory perspective, we have another market expansion opportunity in Colombia that we are carefully monitoring. With the country’s new Congress that started in July 20th of this year, there are so far three bills for legalizing the recreational use of cannabis in Colombia. Two of the projects are oriented towards amending the Colombian constitution for creating an exemption to the prohibition that exists now. The main purpose of the third bill is to create a regulatory framework for the usage, cultivation, production, marketing, import, expert and related functions for cannabis and its derivatives in a recreational context.
The current version of the bill allows for the current license holders to add a new modality in the existing license for cultivation and processing cannabis for recreational use. This would also create a new license for dispensaries that will be issued by the Ministry of Commerce. The elected President Gustavo Petro has publicly expressed that he is going to support both medicinal and recreational uses of cannabis in the country. Among many other benefits legalizing recreational cannabis in Columbia has the potential to strengthen and diversify the domestic cannabis industry as well as retail distribution channels.
As we’ve voiced further markets around the world, Clever Leaves is fully committed to supporting the legalization efforts and propelling the future of all use cannabis in Columbia forward. The additional growth opportunities offered by this potential market expansion benefits us as a domestic operator and positions Columbia as a major cannabis export hub globally. We are proud to support the significant development and are closely following additional regulatory progress along these lines.
Our progress in each of our target markets demonstrates our growing value within the global cannabinoid supply chain. We have built deep and growing B2B partnerships across our target markets and we’re still heading towards an inflection point in our business as we activate and ramp our supply agreements.
Narrowing our operational focus to these markets has allowed us to execute on our pipeline more effectively and improve our positioning for additional development in these markets. Whether they come in the form of new product approvals, recreational market potential, or new distribution inroads, we believe we’re well-positioned to leverage these and further establish travel lease as an efficient multi-national operator.
To support our commercial growth, we have undertaken a series of restructuring and optimization initiatives that into align our cost and operational infrastructure more tightly with our redefined core strategic objectives. As we prepare for additional opportunities and our core markets, we have focused on shifting away from non-core operational activities and improving our capital efficiency.
To this end, we have already undertaking a global workforce reduction that is expected to drive solid cost savings this year, and even greater savings on an annual basis going forward, which Hank will summarize in greater detail shortly. Alongside our commitment to production efficiency across our Colombia and Portugal operations, we are simultaneously working to optimize our working capital and in particular, our inventory.
As a result, we have significantly scaled down our Colombian output and have optimized our product meets across both Colombia and Portugal. We are working to better reflect our green market opportunities with our production plan, which we believe would allow us to meet our annual revenue targets for 2022.
These factors contributed to the sequential and year-over-year increase in our all-in cost programs during Q2. So I will briefly discuss our production considerations in each country. In Colombia, we significantly reduce our harvest output relative to a year ago quarter. As a result, we harvested 1,200 kilograms of dry flower in total across our production operations during Q2, which is a 90% reduction compared to 11,464 kilograms harvested in the prior year period.
However, we have continued to incur cost related to processing our current inventory for our ongoing extra sales in our existing partnerships. We continue to drive efficiencies within the production process itself and leverage the advantages of the country’s low labor cost and ideal cultivation climate. These changes to where harvest output have begun impacting our all-in cost program.
We expect our reduced agricultural output levels to remain in place for the next few quarters as we work to right size our inventory levels, which will place similar pressure on this metric in the short-term, that benefit the efficiency for infrastructure moving forward.
Additionally, as we mentioned in April, the Colombian government’s passage of Joint Resolution 539 has completed the national regulatory framework needed to begin exporting dry flower and we expect our own dry flower experts to begin during Q4 of this year. With our harvest, we have begun shifting our harvest mix to include fewer CBD plants and more THC plans, which reflects a broader mix trends in our current product portfolio as we plan to increase our THC flower exports over time.
Our preparations for commencing flower experts require different and potentially higher cost approaches to the harvest and post harvest process compared to our previous extraction on the approach. Plants grown for flower expert purposes will need to meet certain physical specifications in addition to THC content levels and will be subject to a different trimming and processing methods.
In Portugal, we’re working to scale our operations as we quickly expand our flower portfolio. We are not yet at full planted capacity after finishing our cultivation facility expansion last year, which increases our production cost program in the short-term. At the same time, we have been optimizing our production plan to ensure production of the right strains for commercial purposes, while ensuring we continue with our ability to launch new strains into the market in a consistent basis.
Though, we are still underway with the EU-GMP certification process for our post harvest facility and the facility will not be in full use until the licenses process is complete. We are incurring cost related to the heightened product testing and analysis process I mentioned earlier, as well as higher supplemental lightning costs relative to what we need in Colombia.
While these factors across both of our production geographies have increased our cost in the short-term, the preparation and optimization initiatives we’re implementing today, strengthen our positioning for current partnerships as well as for future market expansion opportunities. We expect that these harvest dynamics will pressure our unit economics in the short-term, but they will also allow us to optimize the revenues we can generate from our harvest each of our production geographies over the longer-term.
We can leverage the existing efficiencies of our extraction operations in Colombia and the flower expert learnings we’ve cleaned from Portugal to prepare for forthcoming opportunities, including Colombia flower experts, while closely monitoring respective partnerships and regulatory catalyst near global target markets.
In addition, we gained additional balance sheet flexibility after completing the full paydown of her debt obligations to Catalina L.P. and our remaining Herbal Brands debt. This improves her ability to support our growth initiatives and further optimize our operational foundation. Hank will share more about this short, but I am proud of the necessary work we are doing to improve our organizational efficiency and effectiveness.
As we enter the second half of 2022, I believe that the strategic steps and investments we are deploying today will benefit the business on our path towards becoming a supplier of choice within the global cannabis market.
Now I’d like to turn the call over to our CFO, Hank Hague, who will discuss our second quarter financial performance in greater detail. Hank?
Hank Hague
Thank you, Andrés. Our revenue in the second quarter of 2022 increased 27% to $4.7 million compared to $3.7 million in the year ago period. This increase was driven by higher sales in both our cannabinoid and non-cannabinoid segments, which grew 124% and 9% year-over-year respectively. Our cannabinoid revenue growth reflects continued strong performance across our target markets, particularly Australia, Brazil, Germany, and Israel.
As our existing commercial agreements, further activate and ramp. We will continue our momentum by seeking additional opportunities to deepen and expand our global partner base. Our all-in cost per gram of dry flower in the second quarter of 2022 was $2.26 per gram compared to $0.22 per gram in the year ago period,
As Andrés just mentioned, the increase on a per gram basis was driven by our significantly reduced harvest of approximately 90%. In Columbia, the harvest in the quarter was reduced to zero kilograms, while the harvest in Portugal increased 14% from the year ago period, During the quarter, we were able to significantly reduce the cost to produce in Columbia due to the reduced harvest. But we’re offset by increased costs in Portugal as the agricultural operation ramps as the new post harvest facility awaits its final GMP certification expected later this year. During the quarter, the Columbian operation continued its extraction operations to consume previously harvested dry flour in the manufacturing of GMP extracts and isolates.
Over the coming quarters, we expect our total all-in cost per gram to remain elevated through a combination of these dynamics. I’d like to emphasize that these are all near-term unit economic considerations as we right size our harvest and pivot to harvesting flower in Columbia, compared to previously harvesting [indiscernible] for extracts. In Columbia, we expect to keep our harvest output reduced as we go through the gradual process of right sizing our inventory levels and optimizing our production, operations for smokeable dry flower export.
We believe our costs will moderate to more advantageous levels as we ramp drive flower production, unique partner demand and further optimize the production process. From an extract perspective, we expect our costs to remain at similar or lower levels to what we achieve historically. But we expect flower products to comprise a greater share of our overall market portfolio over the long term. In Portugal, we expect our costs to remain higher as we drive towards greater capacity utilization, but expect unit costs to improve over time as we process additional harvest, finalize our cultivation ramp and bring our post-harvest facility fully online once we complete the EU-GMP licensing process, which we expect to do by the end of this year.
Our gross profit was $1.3 million, which included a $1.3 million inventory provision compared to $1.8 million, which included a $0.6 million inventory provision in the year ago period.
As a reminder, we are now reporting an adjusted gross profit figure to adjust for our inventory provision that was previously classified in SG&A and is now classified within cost of goods sold.
That said, our adjusted gross profit, which excludes the inventory provision in the second quarter of 2022 increased 8% to $2.6 million compared to $2.4 million in the year ago period. This reflects an adjusted gross margin of 55.5% compared to 65.4% in a year ago period. The year-over-year gross profit growth on an adjusted basis was driven by our top line revenue growth during the quarter partially offset by the higher inventory provision charge we reported for the quarter.
This inventory charge negatively impacted our gross margins for the quarter and it was primarily driven by inventory obsolescence in Portugal through a combination of product exploration timing and our continued work to refine our flower strains to strict specifications required by our target markets.
In our nutraceutical business, we are also still impacted by wage pressure, rising transportation costs and the availability of both labor and materials. We continue to believe that these factors will serve as headwinds for our margin performance and we are closely monitoring impacts of these effects on our business and on broader labor and supply chain conditions.
Operating expenses in the second quarter of 2022 decreased to $9.5 million compared to $11.4 million in the year ago period,. The decrease was driven by a lower level of general and administrative expenses during the quarter, including lower share-based compensation expense. As Andrés mentioned at the start of the call, we completed several restructuring initiatives to align our expense base more closely with our current revenue profile, including a global workforce reduction. While these measures like this are never desirable, we value each one of our dedicated team members. These actions are necessary to achieving operational leverage we previously expected in our business.
We expect the reduction to generate cash savings of $2 million this year and $4 million in the years to come. Net loss in the second quarter of 2022, improved significantly to $1 million compared to $9 million in the year ago period. The decrease was primarily driven by a $6.9 million gain on investments following our sale of a portion of our minority stake in Cansativa as well as a $2.2 million decrease in stock-based compensation.
The gain on investments related to the Cansativa sale comprised a $2 million realized gain on the sale and a $4.9 million unrealized gain due to the remeasurement of the Cansativa shares retained interest..
Adjusted EBITDA in the second quarter of 2022 was negative $6.3 million compared to negative $5.7 million in the year ago period. The decrease was mainly due to increased cost of sales, including increased inventory provision and additional sales and marketing expenses.
At June 30, 2022, our cash balance was $19.5 million compared to $37.7 million at December 31, 2021. The decrease was primarily attributable to our operating losses in paying down our two largest pieces of debt offset by net proceeds raised from our at-the-market stock offering, which will significantly enhance our balance sheet for Q3 and beyond.
In April, we repay the remaining approximately $13.2 million balance of the aggregate amount outstanding under our secured convertible note with Catalina LP. This repayment satisfied all of our outstanding debt and obligations under the note purchase agreement and convertible note. In May, we also fully repaid our outstanding debt and obligations under our loan and security agreement between Herbal Brands and Rock Cliff Capital of approximately $5.6 million. These repayments represented our outstanding debt related to our 2019 acquisition of Herbal Brands. Through paying off our Catalina and Herbal Brands debt, we have significantly improved our leverage and balance sheet flexibility as we enter the second half of 2022. These actions represent significant progress in our efforts to optimize our balance sheet and drive greater cash efficiency.
Throughout 2022, we will continue working to improve our liquidity position through reducing our expenses and investment in working capital. During the second quarter of 2022, there was no sales activity resulting from the aftermarket common stock offering program and $26.6 million remained available at the end of the quarter.
Lastly, turning to our financial outlook. We continue to reiterate our full year 2022 financial guidance in which we expect our 2022 revenue to range between $20 million and $25 million with an adjusted gross margin between 50% and 55%. As a reminder, our top line expectations reflect an expected year-over-year increase in our cannabinoid revenues as we activate additional commercial opportunities in our core markets.
We also anticipate our full year adjusted EBITDA to be within the range of negative $23 million and negative $20 million with maintenance level capital expenditures of between approximately $2 million to $3 million. We have made progress advancing our strategic objectives throughout the first half of 2022 and we believe our focus on restructuring our costs and optimizing our cash efficiency has positioned us to continue to strengthen our foundation for long-term growth and profitability.
This concludes my prepared remarks, and I’ll now turn the call back over to Andrés to review some of our more recent operational highlights and market opportunities in greater depth. Andrés?
Andrés Fajardo
Thank you, Hank. Before opening the call to questions, I’d like to briefly discuss the progress we’ve made in our focus markets subsequent to the second quarter, as well as summarize some of the ongoing and emerging regulatory catalysts within them. As I mentioned earlier in the call, we made an important first step in our partnership with InterCure through completing our first commercial export of high THC medical flower from our Portugal facility in July.
Our Wappa strain was launched by InterCure in late July, and we expect sales to be strong. This initial high THC strain is just the first of several genetics we expect to launch during the multi-year duration of the partnership. In addition to this shipments of our own flower strains, we will cultivate Canndoc’s proprietary in our Columbian and Portugal facilities for distribution across Israel and other countries.
Our partnership with InterCure has been a long time in the making and we look forward to making additional progress with InterCure and deepening our overall market presence in Israel.
As of the end of July, we have also launched our Wappa strain with ANTG a large stake or pay Australian partner. This launch also signifies swift progress with one of our newest partners in the country. We look forward to further ramping our shipments on supplying the Australian market with high quality flower products.
In Germany, we have also built upon our momentum through expanding our partnership with Cantourage, a European medical cannabis leader. Under the expanded agreement, we are supplying Cantourage with high-THC 24% plus dry flower product from our Wappa strain. Cantourage will then use our Wappa flower to produce IQANNA #10, which will have one of the highest THC levels available in the German pharmacies. This expanded partnership further increases the range of international high quality medical cannabis products available to the EU market under our IQANNA brand and growing our products distribution with partners like Cantourage is an important objective for our European operations.
IQANNA #10 is the second Clever Leaves product that is currently available in Germany. And we are in tract to introduce additional products under the IQANNA brand over the coming months. Beyond our expanding IQANNA brand and our status as a licensed medical cannabis distributor, our strong relationship with seasoned [ph] pharmaceutical operators and our distributors like Ethypharm and Cansativa have strengthened our position within the fast growing German market. Having multiple commercial pathways in this market, a key advantage, I mean the country’s ongoing regulatory tailwind with a draft due to legalize recreational candidates expect to be published later this year.
While we are staying closely attuned to the potential development, our high quality pharmaceutical grade products and growing partner base have provided us with a solid foundation within Germany’s current medical market. As we continue to strengthen our position on the medical market, we remain attentive to the legalization process for adult use as we believe Clever Leaves is well positioned to capitalize in this opportunity through our production facilities in Portugal and Columbia, as well as our established presence in Germany.
In Columbia as I mentioned earlier, the passage of Joint Resolution 539 April completed the regulatory framework needed dry flower exports. The resolution regulates for trade related to cannabis and its derivatives establishing the competent authorities needed to issue input and expert presence for these products. We are also closely monitoring the progress of the three bills to legalize recreational cannabis in the country. And we look forward to further supporting these regulatory initiatives in strengthening our position for this expanded market potential.
Through the first half of 2022, the diligent foundation we’ve laid across our production and commercial operation has begun to activate. As additional contracts ramp towards securing shipments and new partnerships demands, we are well positioned to execute on these opportunities as an even leaner and more efficient organization.
We will continue working diligently to further advance our existing contracts, seek and leverage additional commercial opportunities across our target markets and solidify our cost structure and liquidity position to support additional progress on our focused growth strategy. As we progress further into 2022, we look forward to taking additional steps on our longer term vision as a multinational operator.
We will now open the call for Q&A.
Question-and-Answer Session
Operator
Thank you. We will now begin the question-and-answer session. [Operator Instructions] And the first question will come from Pablo Zuanic from Cantor Fitzgerald. Please go ahead.
Pablo Zuanic
Thank you. Hank, just I guess, two questions. So just a reminder of the guidance, when you say $20 million to $25 million for the year, how much of that would be cannabinoids? I mean, I see that the number dropped sequential in the second quarter, but it will be lumpy. So just a reminder of that and related to that, when you said in the call that you’d be able to export dry flower from Colombia in the fourth quarter. Just a reminder of what markets would be open to Colombian flower. I mean, I assume not Germany yet, but just some color there, Hank. Thanks.
Hank Hague
Hi, Pablo. Thank you for the question and joining our call. Our target within the guidance range for the non-cannabinoid business is about $13 million for the year. So the balance would be the cannabinoid business.
Pablo Zuanic
And the question regarding the – go on.
Hank Hague
Yes. Andrés, would you like to address the target markets for the Columbian flower right at the tail end of the year?
Andrés Fajardo
Sure. Hank, thank you. Pablo, thank you very much for being here. We’re preparing the Columbian flower to be shipped from a regulatory perspective. The pathways are open as we speak from the productions standpoint in Columbia from a receiving standpoint to different countries. We believe the first countries that we’re going to be targeting include Germany and Australia and we’re sorting through the final regulatory matters to be able to do that.
The good thing as we have said in the past is we have been working on getting our flower up to par with market standards in terms of THC levels, the organoleptic size, bud size, trichome, density, color, terpenes, et cetera. And we’re done great strides there. We’re just – as I said, we’re finalizing all of the final regulatory and quality elements to be able to be shipping flower by the end of the year most probably to one of those two markets.
Pablo Zuanic
Right. And just on that point and following up, so when you setting the call that you had to cut harvest in Colombia by about 90%, I understand the financial logic of that. But how is that – how does that affect your ability to be ready right by the fourth quarter to meet those German standards? I mean, I suppose if you’re cutting production a lot that may create disruptions and might even delay your efforts to be ready by the fourth quarter. Maybe more color there would help.
Andrés Fajardo
Absolutely, Pablo. First of all, we did cutter our harvest in Columbia, as Hank mentioned during the call, we basically had zero harvest during this quarter for flower. And the reality is that, if we compare it to the previous year, it’s basically was CBD and THC flower for extraction. So we are not planting anymore of that flower basically. As we’re managing our cash and managing our working capital as we don’t need any more of the flower we – of that kind of flower as we have inventory for extracts.
Having said that, what we have been focusing is putting plants on the ground, basically on the one hand to do all of these R&D product development. And second, we do have plants on the ground, of course to be able to meet our targets for exporting in the fourth quarter. So the flowers will be harvested in Q3 and Q4. So there is – there are plants on the ground. So by no means, do we see any threat to those targets from a production standpoint, really the cut on planting and harvesting was for mostly CBD flower for extraction.
Pablo Zuanic
Okay. Thank you. And just one last one. So regarding the kind of 2 – 24% potency, that sounds quite exciting. I mean, my surveys are always very anecdotal, but the architects we’ve met and the people we’ve talked to is that, there’s a lot of 20% potency product in the market, but like 25% or close to range, there’s almost nothing right now. So that you have a lot of traction.
I guess my question is not so much about the product, but maybe for you Hank, I see that you said you sold the taking Cansativa, but the balance sheet, and I don’t want to ask an accounting question, but the balance sheet shows Cansativa investment like $5.7 million. It was $1.5 million at the start of a year. I don’t know if it was revalued or you invested for million more Cansativa. And the reason I bring that up is that to me, at least what you’re trying to do in Cantourage sounds very exciting, but showing you invested money in Cantourage as opposed to against Cansativa, unless I’m reading the balance sheet wrong here. Thanks.
Hank Hague
Hi, Pablo, thanks for the question. And I’m happy to clarify. The company had an investment in Cansativa. It still does. With that, you’ve actually asked an accounting question. So I’m sorry. And I’ll give you the answer. When we sold a portion of our Cansativa stake with that transaction, we gave up [indiscernible] Cansativa and that reduced our an influence of control. So under the accounting rules we had to account for our treatment of that investment differently. So that’s what you’re seeing rolling through on the balance sheet. We did not make a further cash investment in the company.
Pablo Zuanic
Right. Okay. No, that’s fine. That’s good. And I guess the very last one Andrés, is that, the more people we talk to in Germany, it just sounds that you need to be partnering with local folks to be ready for those licenses that may be issued in the future, if it’s all going to be domestic production, right. So I know we don’t know what’s going to happen in Germany in terms of what the program is going to look like. Although there’s a lot of people that think that at least in initial phase, it will all be domestic production. I mean, well, first of all, do you agree with that view? And if that’s the case, what’s your game plan, right? Because that would mean that you would not shoot from Portugal or Columbia. I know it’s a scenario that I’m describing, but I’m just trying to understand what would be the game plan for Clever Leaves if that were to happen?
Andrés Fajardo
Absolutely. Pablo, very good question. So the reality is, remember in Germany we have an approach which has different dimensions to it. Number one, we have Clever Leaves, Germany, which is a holy license importer and distributor of product into Germany. So that means we, even, if we, sometimes use [indiscernible] pathway, we are having direct conversations with pharmacists and players within the German market. And we are a German player ourselves and we’re setting directly not only our product, we’re actually working with other companies aiding them to help pardon me, helping them to sell some other products. So we’re building those relationships with the pharmacy on different stakeholders in the German market.
That’s number one. Number two is we have been partnering with B2B clients of ours who are at this stage are taking our different products, being extracts for flowers and bringing them to the German market. So we have different ways into and in which we’re reaching the German market as we speak.
In terms of the question regarding, the scenario as you know, and I’ve been very open in the past is it’s not clear yet adult user recreational is going to be legalized in Germany. Is it going to be internal production at first, maybe if it is – it’s really going to be constrained because I don’t think, that’s scalable or that’s going to scale in the short term, our view at least, is that having Portugal within the European Union is going to be a big advantage for us, as we believe that some of the INCB [ph] restrictions regarding recreational cannabis import and expert would not apply if we’re within the European Union, of course, that’s our hypotheses.
In any case assuming that it’s only going to be local, the reality is that we are there, we’re operating there as an import distributor. We are building a brand right now, which is called IQANNA. We’re using our own product and product from third parties for that. So we’re trying to be flexible, not – let’s say marrying ourself with just one vision of what the future can be, which is something we’ve seen from others, but rather having different paths to market being very well connected working with different partners so that when things get a little bit more clear in terms of the regulatory pathway for recreational cannabis, we are among the companies that are able to win.
Pablo Zuanic
Okay. Thank you.
Andrés Fajardo
Thank you.
Operator
[Operator Instructions] This concludes our question-and-answer-session. I would like to turn the conference back over to Andrés Fajardo for any closing remarks.
Andrés Fajardo
Thank you. And I’d like to take this opportunity to thank everyone that attended a call today. And we look forward to speaking with our investors and analyst when we reported a third quarter results in November. Thanks. all very much.
Operator
And thank you, sir. The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.
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