Good day, and thank you for standing by. Welcome to the InterCure Q2 2022 earnings call and webcast. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star one one on your telephone. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Adam Haliva, Communications Officer. Please go ahead.
Thank you, Michelle, and good morning, everyone, and welcome to InterCure's second quarter 2022 results conference call and webcast. A copy of the company's earnings press release is available on the news and events section of our website at www.intercure.co. With me on today's call are Alexander Rabinovitch, InterCure's CEO , and Amos Cohen, the company's CFO . Today, we'll review the highlights and financial results for the Q1 ended June 30, 2022, as well as more recent developments. Following these formal remarks, we will be prepared to answer your questions. Before we begin, please let me remind you that during this conference call, InterCure's management may make forward-looking statements made within the meaning of applicable securities laws. Forward-looking statements may include, but are not necessarily limited to financial projections or other statements of the company's plans, objectives, expectations, or intentions.
These forward-looking statements are based on current expectations that are subject to a number of risks and uncertainties that may cause actual results to differ materially from those expressed or implied in such statements. Factors that could cause actual results to differ materially include, but are not limited to, the risk factors contained in the company's filings with SEDAR and the Securities and Exchange Commission. Please also note any forward-looking statements made here are as of today, and except to the extent required by law, the company assumes no obligation to update statements as circumstances changes. Also, please note that all amounts expressed today and during this call are in Canadian dollars or new Israeli shekels, unless otherwise noted. With that, I will turn over the call to Alexander Rabinovitch, InterCure's CEO. Alex, please go ahead.
Thank you, Adam. Good morning, everyone, and thank you for joining us for our second quarter 2022 earnings call. I'm proud to report that InterCure had a record-breaking Q2 with quarter-over-quarter top line growth of 9%, reaching $37 million, more than double the revenue of our second quarter 2021. This marks our third consecutive quarter of high growth, representing an annual run rate over $150 million. Our momentum coming out of our last quarter and our continued focus on execution and financial discipline resulted in another strong performance in the Q2 . Adjusted EBITDA grew by 4% to $9 million, which represents 22% of revenue. Additionally, gross profit increased by over 150% year-over-year and 60% sequentially to over $60 million during the second quarter.
Q2 was also our eighth consecutive quarter with positive cash flow from operations as we exited the quarter with $96 million in cash. As I'm sure you're all aware, I'm very proud of our team delivering a solid performance. We continue to expand and grow our dynamic international supply chain, which now stretches across four continents, utilizing six high-end cultivation sites across the globe to supply the growing demand for our high-quality branded pharmaceutical-grade medical cannabis products. During the Q2 , we continued investing in scaling up our cultivation, production, and dispensing operations. Our southern cultivation site located near the Gaza Strip was able to remain 100% operational during the recent military conflict in the area as we designed and built an armored layout, safeguarding 150 employees.
Hi, everybody. Apologies, we had a connection problem, and we got thrown out, but we're back, and we can continue from the pre-recording that we started. Alex, go ahead.
Thank you, Adam. These strong results are especially impressive when you take into account the slowdown in new patients for all treatments in Israel during the first half of 2022. This was mainly due to the loss of physicians responsible for more than 20,000 monthly prescriptions as the Ministry of Health halted their license to prescribe medical cannabis. However, in July, almost 2,500 new patients have been added, and we expect to see this trend to continue, with recruitment coming back to the growth we've been accustomed to in the past three years. While we believe that the potential number of patients is about 5% of the population, according to the Ministry of Health, there are now about 160,000 medical cannabis patients in the country, representing only 1.3% of the population.
The rise in patient count is naturally followed by a rise in demand for high-quality branded medical products. This is true not only in Israel, but we are seeing the same trend in our core targeted markets, Germany, U.K., Austria, and Australia, where we expect to launch our platform in the coming year. Parallel, we continue to experience rising demand for our branded medical products coming from many new territories around the globe, including Switzerland and even Thailand. As part of our strategy to duplicate our model internationally, we are working with local regulators and evaluating local partnerships that can execute in these new and exciting markets. During this quarter, we've scaled up our upstream operation by enlarging the southern facility's growth house, nursery, and the flowering room. This further solidifies Canndoc's southern cultivation site as one of the largest and most advanced facilities of its kind in the state.
Our expert teams have also successfully added and produced 12 new highly demanded strains into their growth cycles, including premium high-THC Cookies cultivars, four of which have been successfully launched during the third quarter. Our strong internal distribution and dispensing operation could dispense many more of our own products if we had more. To meet the demand, we remain focused on increasing not only our local cultivation in Israel, but utilizing our global exclusive strategic partnerships. At the end of the second quarter, we've been able once again to meet the strict Procedure 109 protocol and complete the first importation from our partner, MedReleaf. These products have been processed and produced by our own local teams and have been successfully launched during the third quarter under the Canndoc brand.
With that said, we now face a new Procedure 109 protocol which added more barriers and complexity to already a complex import process which may create a slowdown in importation into Israel. We are well-prepared for these challenges as we invested heavily in scale, depth, and reach of our domestic supply chain as the largest cultivator in Israel. Furthermore, our teams have made a progress with the top international pharmaceutical labs to meet these new requirements, and I'm confident that just as we were the first company to crack the previous Procedure 109, we will be the first to resume importation under the new protocol. Although the hardening of the importation process, there is an easing on the exportation.
Both the Ministry of Health and the Ministry of Economy have eased the process for exportation, enabling us to ship pharmaceutical-grade cannabis in any format to any legal medical market in the world. Our teams have made great advancements, and we expect commercial export shipments to ramp up in the coming quarters. As our core markets are growing and evolving, to meet the demand for our branded products, we are also increasing the high-quality supplies from our existing strategic partners and evaluating new potential strategic partnerships. We've built a unique international supply chain that can supply every core market, and we will continue to scale up our upstream operation in the coming quarters. Moving on to downstream. I'm also happy to report that we continued to expand our one-of-a-kind leading medical cannabis-dedicated pharmacy chain during the second quarter.
Together with the international Cookies team, we completed the grand opening of our flagship Cookies pharmacy in Be'er Sheva, the largest city in Israel's southern region, known as the capital of the Negev. This cannabis monument is located at the center of Be'er Sheva in front of the city hall in a unique building that covers an area of over 1,000 square meters and is painted entirely in the globally recognized Cookies baby blue. As far as I know, this is the largest medical cannabis-dedicated pharmacy in the world. The pharmacy is uniquely adapted to serve Israel's medical cannabis patient community, which includes, among all other things, the largest pharmacy safe room in Israel with a capacity to store over a ton of medical cannabis products. It took us two years to complete building the pharmacy and acquiring all the needed approvals and licenses.
A milestone worth celebrating, and we sure did with a grand opening celebration, which included live music, food trucks, deals, and special offers for all patients that are living in Be'er Sheva and the surrounding towns. Now, for the first time, patients in the south have access to the highly demanded products, including Cookies strains cultivated in our southern facility. Additionally, by the end of the quarter, we've added a medical cannabis dispensing pharmacy located in the northern city of Nahariya, which is currently the only pharmacy in the area approved to dispense medical cannabis, supplying not only the city residents, but also the surrounding region. The addition of Nahariya location and the opening of Be'er Sheva now grows our medical cannabis-dedicated pharmacy chain to 25 locations, of which 17 are actively dispensing pharmaceutical-grade medical cannabis.
We expect that by the end of the year, we will receive medical cannabis dispensing licenses for most of the remaining eight pharmacies and add new locations to our leading chain. In June, we also made another big advancement in our global expansion with the successful opening of our first flagship Cookies store in Austria, located in the heart of Vienna. This flagship location offers Cookies' unique CBD menu available for the first time in Europe, as well as cannabis-related lifestyle products. In the future, as regulations are evolving, pharmaceutical-grade medical cannabis will be available for Austrian patients, including Cookies' EU-GMP THC products. This successful launch represents the spearhead of our expansion into additional European countries as we continue our mission to supply the highest quality branded cannabis products to communities across the globe. We are also progressing with duplicating our winning model in the United Kingdom, Germany, and Australia.
All of these markets are in early stages, a few years behind the Israeli market, which is the largest and most advanced in this space. Our 15 years of know-how and execution, proven model, and leadership position sets us up to succeed in every territory with a supportive regulatory framework. Before I hand the call over to Amos, I want to note that June 30th concluded our best half year ever, and we couldn't be prouder. During H1 2022, InterCure achieved record revenues of approximately ILS 72 million, 130% more than the revenues of the first half of 2021.
Our gross profit increased over 120% year-over-year to over $30 million and adjusted EBITDA increased 100% year-over-year to $17 million and profit before taxes for the first half were just under $60 million, 188% growth year-over-year. We expect this growth to continue while we remain focused and committed to expand our unique platform, building shareholder value and improving quality of life for patient communities. Now I will turn the call over to our CFO, Amos Cohen, following which we will open the line for Q&A. Amos, the floor is yours.
Thank you, Alex, and good morning, everyone. I am very pleased to be sharing with you today some details on our financial results for the Q2 of 2022. Our focus continues to be execution, expansion, and scaling up our unique vertically integrated platform globally. We just reported another record revenue, record quarter with total revenue of $37 million or ILS 95 million, more than double compared to the second quarter of 2021, revenue of $18 million or ILS 45 million, and up by 9% sequentially compared to the first quarter of 2022. Revenue growth during the second quarter of 2022 reflects increased market share and growing patient demand for our branded products, same-store sales growth, and the strength of our medical cannabis dispensing operations, which we continue to expand and reach 25 pharmacies.
Eight of those are still in the process of obtaining medical cannabis dispensing license. Our efficiencies of our vertically integrated structure continue to positively impact our gross margin. Our gross margin for the quarter reached 44% compared to 33% in the second quarter of 2021 and 41% in the first quarter of 2022. Alex mentioned we have invested in our upstream operations and successfully achieving this growth while maintaining our G&A costs at the same level of the previous quarter at ILS 3 million, representing an effective 9%-10% of revenue, and ILS 11 million for the full year of 2021, which was 12% of revenue. Our reported IFRS operating profit for the quarter reached ILS 7 million, representing over 100% growth year-over-year. Turning now to adjusted EBITDA.
We believe adjusted EBITDA of the cannabis sector, a non-IFRS measure, provides valuable insight into our operating performance. Adjusted EBITDA excludes from net income as reported interest, tax, depreciation, amortization, non-cash expenses, share-based compensation, acquisition and transaction costs, fair value step up of inventory and other income or expenses. For the Q2 of 2022, adjusted EBITDA was $9 million or ILS 22 million, which is 23% of revenue, 90% more than the second quarter of 2021, which ended with $5 million or ILS 12 million. We are proud with our 8th consecutive quarter with a positive cash flow from operation, demonstrating the strength of our platform and our financial discipline. We have finished the quarter with one of the strongest balance sheets in the space, with $96 million or ILS 245 million cash on hand.
Looking at our half year results, we achieved total revenue of CAD 72 million or ILS 183 million and adjusted EBITDA of CAD 17 million or ILS 43 million, which is 23% of revenues compared to the first half of 2021, with total revenue of CAD 31 million or ILS 78 million and adjusted EBITDA of CAD 9 million or ILS 22 million. This represents revenue growth of over 130% and nearly doubling our adjusted EBITDA. Looking forward, we expect revenue growth to continue throughout 2022. With a proven track record of executing profitable growth, we are well positioned to continue scaling up and building shareholder value as the leading cannabis company outside North America. This concludes our prepared remarks.
We would like to thank everybody for joining us on today's call, and I would like to open the line for questions. Operator, please open the line for questions.
Thank you. If you have a question, you will need to press star one one on your telephone. Please stand by while we compile the Q&A roster.
Our first question comes from the line of Vivien Azer with Cowen. Your line is open. Please go ahead.
Hi. Good afternoon. This is actually Victor Ma on for Vivien Azer, and thank you for taking the questions. My first question is on inventory. Given the IMCA stance in limiting cannabis imports, can you comment on current inventory levels in Israel and how much excess foreign inventory is in the system?
Hi, Victor Ma. There are no official data regarding inventory, total inventory in Israel. IMCA does not supply us with official numbers. Again, it's hard to speculate. I would say there is no shortage of inventory on the low and medium quality. If the new Procedure 109 regulation will keep importation out and there will be no importation, we will be missing high quality products shortly in Israel.
Great. Thanks for the color. Just to follow up. You know, we've recently heard of increased discounting in the Israeli market from some of your peers. What has your response been to the intensifying price competition, especially in light of weaker patient growth?
Victor, can you repeat the question, please?
Yeah, sure thing, Alex. We've recently heard of increased discounting in the Israeli market from some of your peers. What has your response been to the intensifying price competition, especially in light of weaker patient growth?
Israel market, of course, as you know, pharmaceutical grade is the leading market in the world. We are competing here with basically all the players. I don't think there is any player that don't ship or try to ship to Israel or cultivate in Israel. It's a competitive landscape. I would say we have a big edge on competition. We are first of all vertically integrated with a very strong distribution and dispensing system. I think by far the leading one in Israel. We are still far away from reaching the demand for our product.
The way we see it right now, the real competition is not there, is not affecting us. We still need to produce more products and sell more products, and this is our main focus. Regarding patient counts, yeah, we had, I would say, two quarters with a very slow patient recruitment. It doesn't come from the demand side. It comes from regulatory step that our regulators took against a couple of our physicians. In July, we saw you know, the demand coming back and the recruitment coming back 'cause the demand is there.
Once the technical barrier is kind of sold out, our patient count increased by 2,500 new patients. I mean, I don't think there's any question about the demand. The demand remains solid. We estimate the potential patient count in Israel to be between 3%-5% of population. I think it's just very in line with the estimates of the Ministry of Health. Looking forward, I don't think there is a question regarding the market.
Having said that, of course, we are seeing more and more companies with kind of a weak balance sheet and trying to get rid of products and cash out. This puts some pressure on mostly low to mid quality products. We are seeing those trends. This may affect the market. As you know, Canndoc is totally focused on the highest grade. We do not produce or intend to produce a medium or low quality product. At the moment, we don't see any effect on our business.
Understood. Just to follow up with a third question. With the opening of your first international store in Vienna, do you expect the higher sales and marketing expense in 2Q to reflect normal operations going forward?
Okay. The opening is kind of a spearhead. We intend to of course open more retail locations across Europe in the coming years. Again, I mean, we are operating a bit differently from other companies. We have a very strong financial discipline, and we don't expect to see any material impact on, you know, coming from that. Actually, I can share with you that since the opening, the location is performing according to expectation, and it's even profitable. I don't see any negative influence on our future performance.
Great. Thank you. I'll jump back into the queue.
Our next question comes from the line of Pablo Zuanic with Cantor. Your line is open. Please go ahead.
Hello, Alex. Look, I mean, obviously, you answered the question about the demand and supply dynamics in the market, but I was surprised that, you know, one of your partners or one of your suppliers, Tilray, would sound so negative in the last call about the Israeli market. It pretty much sounded like they were not supplying you anymore. Maybe just relationships, I guess, OrganiGram, Clever Leaves, as you look forward. Thank you.
Hi, Pablo. You know, I can't get into details regarding specific remarks of partners. You know, it's still a very fragmented market, and each one of the partners is using a bit of a different approach. I can say that relationship with all partners are very healthy. With most of the partners are applying our QA approach. The Clever Leaves is, of course, a new partnership. We need to ramp up our production with them. We just made the first shipment into Israel.
Of course, it was just to, you know, to start the relationship with Clever Leaves. We intend to use some of their facilities with our genetics and our know-how and actually scale up our production line. It will take a bit of a time. With all others, I would say the relationships are very healthy.
Okay. Thank you. Then, I don't know if you disclosed this, but in terms of your total sales, can you say how much is retail and how much is wholesale, or pretty much all your production is being sold through your own stores and you're not net wholesaling?
Pablo, thank you for the question. Okay. You know, we operate in a vertically integrated model, and as time will move and we'll have more and more retail reach, we will move more into the integrated model. Currently, we do not disclose additional information or breakdowns regarding, you know, how much was sold inside our vertically integrated system and how much we sold to third party. You can guess from the gross profit that, you know, that this quarter we had more sales internally as our retail reach is growing.
Right. Again, and again, of course, you don't have to disclose, but, of your total retail sales, I mean, within your stores, if I look at your retail business, would your own brands be like a quarter of your retail sales right now? Would they be 75%? Can you just give a rough range?
The rough range is about, I would say about, 40%-45%, sometimes 50%. But again, it may be a little bit volatile as we ramp up our production, as the demand for our product remain strong and solid. This is about the numbers.
Okay. Look, I'm gonna ask you a couple of follow-ups. I don't know if there's many other people on the line here on the queue. Can you maybe give more color on your e-commerce capabilities? I mean, we saw IMC buy the Panaxia online business. I'm just trying to understand, you know, your omni-channel and the way you're able to work online and maybe deliver, if that's a growing segment in the market.
Okay. Yeah, of course, I would like to give more colors about that. Israeli online, including call center, is about, I would say, about 10%-15% of the market. I don't see it growing that much. Again, that's been traditionally the number. We are also focused on that segment, and I would say carefully we are leading this segment in Israel. Again, in Israel, all deliveries has to come out from a physical pharmacy, so there is no online pharmacy like the German model. It's a bit of a.
The regulation is much tighter, so every delivery has to be directly to the home of the patient, only to his official home. It's a very tight and strict regulation. It's been traditionally about 10%-15% of the market. With this, I would say proudly we just launched the first app which can give patients the ability to order their pharmaceutical branded products directly from their phone or from the app. This is the first app in Israel and it's up and running.
Actually, the last two launches we made it only through the app, so it kind of ramping up the downloads of the app. We are looking forward, we intend to keep our leading position also in the online segment.
Okay. Just to follow up. Maybe you can expand on your confidence that the demand for medical cannabis in Israel will start to pick up or accelerate. I want to get more color there, if you can provide, please.
The demand is solid. I mean, the government stated that 27% of adult Israelis are consuming cannabis and cannabis demand. Medical cannabis demand is very solid. The big question has always been regulations and the process to obtain the license and the prescription. Right now, and as you know, Israel is kind of a weird situation. Kind of a, you know, weird political situation. We don't have a stable government in the last five years or so. We have election almost every year. In that environment, it's really hard to put a new regulations. The Minister of Health has formed a committee to assess the process of obtaining the prescription is, for medical cannabis.
The result of this committee was that first of all you have to ease the process and cancel the need for a license. Right now new patients need to obtain a license and a prescription. The committee suggested that GPs could prescribe medical cannabis, and medical cannabis will become a regular prescribed product. Right now only authorized specialists can prescribe and can give a license. The Ministry of Health is kind of controlling the recruitment by giving those physicians the number of licenses every month.
This committee has already finished, and this has been already kind of approved by the Minister of Health. We are still waiting for a new government to form and implement those regulations. Once those regulations will be implemented, I believe that the market, you know, will get to between 3%-5% of population.
Got it. One last one. If you can expand on your ability to operate in Germany, in Europe, particularly Germany, right? I mean, you talked about your CBD store in Austria. I suppose it's CBD only, right? Obviously. I'm just trying to understand if I'm, you know, company X in Portugal or in Australia or Denmark, and I'm trying to enter the German market, I'm going to try to work with the people that are established there, whether they are, you know, licensed importer, distributors or even producers like DEMECAN. I'm just trying to understand what's your approach, particularly to Germany and what can you claim that you bring to the party for us to think that you can actually win in Germany eventually?
Yeah, again, thanks for the question. Again, I can't elaborate too much. Again, there is a lot of strategy here, so I have to be careful with what I'm saying. I'll share some color, of course. Our strategy is to duplicate the same model, the same structure we have here in Israel, to core markets, and Germany is one of our core markets. We've been, of course, working with the leading companies in Germany the last two years.
Eventually, when we will launch the product in Germany, we want to be sure that we have as much integration as we can, and not only sell our products to distributors. Duplicating the same structure and the same model from Israel takes time. Anyway, it takes time to ramp up the production. Currently, as I said, we still are kind of missing products even for the Israeli market. We are aiming to do a big splash in Germany, of course, with the local partners, and building the same structure, using the same system, same product and product line we have here in Israel.
Basically doing like launch the best product that, of course, winning the Israeli market and the German market. The way we see German market right now is where Israeli market used to be about three years ago, in terms of quality of products, in terms of competition, in terms of players, it's very similar to Israel.
Thank you very much.
Thank you, Pablo.
Our next question comes from the line of Yuong Khan with CGF. Your line is open. Please go ahead.
Hi there. Good afternoon. Thank you for taking my question. I just had a quick question on if you guys could provide some color on how the Cookies-branded dispensaries have been performing compared to InterCure branded retail stores? If you could also provide some commentary on the rollout plan for the rest of the year in terms of expanding your retail dispensary count in Israel. Thanks.
Hi, Yvonne. Thanks for the question. Again, just on the color side, I would say that we are a company that really believe in branding, and Cookies is one of our top brands that we use. We have seen and we have noticed that once you put the right brand and you market it right, of course, you get more economics and better traffic. I would say that the Cookies we have right now four Cookies-branded retail pharmacies focus, of course, on dispensing medical cannabis in Israel. Those one are performing, of course, at a one.
As the top pharmacies actually in Israel, not only in our system. Again, it was a big investment for us. We choose prime location in major cities for those pharmacies. Those pharmacies are invested heavily. They bring a bit of a different experience. Of course, some of the products are exclusively sold only on those pharmacies. They are performing, I would say, better than any other pharmacy.
Thank you.
Can you repeat the second question? Sorry for that.
We have a follow-up question from Vivien Azer with Cowen. Your line is open. Please go ahead.
Hi, this is Vikram on for Vivien Azer again, and thank you again for the questions. I just have one more. With increased competition in Israel, can you just remind us of your current market share position over the quarter and how much it increased sequentially or year over year? Thank you.
Okay. Again, there is no official numbers in Israel, so I have to be kind of careful with you know with information. I can't give you the exact market share, again, with no official numbers. As you know, patient count almost didn't grow in the last or in the first half. We grew nine or 10% sequentially quarter-over-quarter. You can of course understand that we increased our market share. Again, with no official numbers, I'll have to be really careful about you know the numbers I can provide.
Got it. Thank you for all the answers.
Thank you. I'm showing no further questions, so this does conclude today's question. Everyone, have a great day. This also does conclude today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.