Clever Leaves Holdings Inc. (NASDAQ:CLVR) Q2 2023 Earnings Call Transcript

Clever Leaves Holdings Inc. (NASDAQ:CLVR) Q2 2023 Earnings Call Transcript August 14, 2023

Clever Leaves Holdings Inc. beats earnings expectations. Reported EPS is $-0.08, expectations were $-0.09.

Operator: 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, 2023. To announce today are Clever Leaves’ CEO, Andres 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 the forward-looking statements.

Specifically, please refer to the company’s Form 10-Q for the quarter ended June 30, 2023, 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 measures and a statement disclosing the reasons why company management believes that adjusted EBITDA, adjusted gross profit, and adjusted gross margin provide useful information to investors regarding the company’s financial condition and results of operations are included in today’s press release that is posted on the company’s website.

With that, I’ll turn the call over to Andrés.

Andres Fajardo: Thank you, Jackie, and good afternoon, everyone. Our second-quarter performance reflects the commercial progress we have made in our core cannabinoid markets, along with our meaningfully improved cost and capital structure. We generated 151% year-over-year growth in our cannabinoid revenues as we supported strong extract demand and continued ramping our Colombian flower shipments. Though we continued to navigate specialty channel softness in our non-cannabinoid business, which compress this segment’s revenue performance for the quarter, we have diligently maintained our margin performance on a sequential and year-over-year basis. We continued to make significant progress with our OpEx reductions, achieving a 25% decrease year over year during the quarter.

With the wind-down of our Portugal operations nearly complete, we have substantially reduced our cash burn relative to Q1, and we further improved our liquidity position through the recent sale of our Portuguese post-harvest assets. I am proud of our continued execution in all of these fronts, which has strengthened our position for the second half 2023. To share more detail on our progress during Q2, I will discuss each of the three key strategic areas of profitable growth: our optimized cash management, our low-cost high-quality production in Colombia, and our focused commercial strategy. To first address our cash management, we closed our second quarter with $5.1 million compared to $6.7 million at the end of last quarter. These represent a net burn of $1.5 million, a significant decrease compared to the $6.2 million burn in Q1 of this year.

Our improved capital efficiency reflects our revenue growth and the continued progress we have made with our optimization initiatives from the substantial debt repayment and initial restructuring measures we completed last year to winding down our operations in Portugal this year. As we previewed on our call last quarter, our Portuguese wind-down activities and operational transition generated increased cost savings during Q2, positioning us to drive additional savings in the second half of 2023. We have substantially completed the wind-down process. Most recently, we reached a key milestone in the process through completing the sale of our Portuguese processing assets to Terra Verde, Lda., an affiliate of Curaleaf Holdings, in July. The transaction comprised the sale of our processing facilities lease hold improvements, all installed equipment needed for drying, trimming, curing, and packaging, and the facility current quality systems processes, and it resulted in gross proceeds of approximately $2.7 million.

Having this additional non-dilutive capital further enhances our levers towards optimized cash management. We thank the Curaleaf team for their partnership in this sales process, and we continue to target selling our remaining Portuguese agricultural assets by the end of this calendar year. Turning to our Colombian production operations. We continued to support growing traction in our extract business during the second quarter, as well as from our dried flower exports. Brazil and Israel remained strong markets for our extract products as we supplied approved products under RDC 327 to Brazil and continue to ship APIs in the form of isolates and extracts to Israel. While we have processed existing CBD inventory for extract sales and focused our new harvest on cultivating THC flower or export over the past few quarters, we are now planting some CBD hemp crops to ensure we can continue meeting the demand for our extract products.

With that said, we expect our harvest to remain skewed towards THC flower and to keep our overall new harvest output aligned with demand and lower than their historical levels in 2021. For our flower products, we have already developed three commercial flower strains so far this year. We expect to have completed at least two additional strains by year end, with more to follow in 2024. The THC levels characteristics of the flower have continued to improve, better aligning our product with patient demand. During the second quarter, we continued our commercial shipments of our first strain to Australia, and we expect to launch a second strength in this market during Q3. As we announced at the end of July, our Colombian flower is being distributed through our partnership with Australian Natural Therapeutics Group, or ANTG, one of the region’s leading medicinal cannabis providers.

Our flower products are available to medical patients under ANTG’s global select brand portfolio, and we look forward to building upon our traction in the Australian markets. As mentioned in our call last quarter, we also expect to start selling our Colombia-produced flower in Germany through our wholly-owned licensed subsidiary, Clever Leaves Germany, by the end of the year. As a reminder, we also announced our partnership with a leading US-based brand owner, Praetorian Global, during Q2. Praetorian operates the Binske brand and provides intellectual property to the global cannabis and hemp industry. In collaboration with Praetorian, we will select specific flower strains for preliminary cultivation trials at our Colombian facilities, with the aim of producing premium quality cannabis flower and downstream products for distribution to the European Union, United Kingdom, and Australia by the second quarter of 2024.

This enables us to continue advancing our flower cultivation and strain development, while building upon our emerging pathways into our key international markets. Finally, to summarize some of the recent progress on our focused commercial strategy in which our target markets continue to be Australia, Germany, Brazil, Israel, and the United Kingdom, and Colombia, we announced a five-year agreement with a leading Brazilian pharmaceutical company, Hypera Pharma, in April. The agreement cover the sale of CBD products that are registered under the RDC 327 framework, and we plan to launch additional products over time. As we continue to develop this partnership, we expect to leverage high ferrous expertise in the local registration, commercialization, and distribution of prescription and OTC medicines.

We also strengthened our position in Brazil with the receipt of the Brazilian-GMP certification from ANVISA, the country’s health regulatory agency, in May. The certification is required for manufacturing and commercializing cannabis products in the country to maintain top-quality medicinal standards. Clever Leaves remains the first and only medicinal cannabis company globally with GMP certifications from the EU, Colombia, and Brazil. And this latest certification is a testament to the premium quality of our products and production standards. I will provide additional comments on our objectives in our target markets later in the call. In the meantime, I want to highlight our early inroads into some other international markets beyond the core six we named at the beginning of this year.

As we announced in late May, we entered into a five-year agreement with a specialist biotechnology company, SOMAÍ Pharmaceuticals, to supply its operations in Portugal with EU GMP-certified APIs and CBD exports from Colombia. We have already completed our first shipments under the agreement supporting SOMAÍ goal of signing new dosage forms that deliver consistent quantities of active ingredients to patients by going beyond conventional drug delivery systems. This partnerships helps grow our position in Europe’s rapidly expanding medicinal cannabis market, and we will continue working with this and my team to propel its product lines with advanced formulations and delivery methods. To further supplement to our European footprint, we also announced our first commercial shipment to Switzerland in late May.

The shipment was under our supply agreement with a Swiss cannabis company Astrasana Holding AG. In this partnership, we have agreed to supply medical cannabis extracts to both Switzerland and the Czech Republic, where Astrasana has pharmaceutical operations and manages its own pharmacy specializing in the sale of medicinal cannabis. To date, we have exported to over 15 countries, and we are proud to continue growing our international footprint. We believe we have built a strong industry reputation for high-quality products and maintaining premium, efficient production standards. We remain dedicated to driving innovation and creating safe pharmaceutical-grade products for patients around the world, as well as continuing to deepen our foothold within the international medical cannabis supply chain.

With our financial and operational performance through Q2, we believe we are well positioned to make additional strategic progress in the second half of this year. I’d now like to turn the call over to our CFO, Hank Hague, who will discuss our second-quarter financial performance. Hank?

Hank Hague: Thank you, Andrés. As a reminder, we have continued to account for Portugal as a discontinued operation in our financial results for the year-ago period. We determined that the nature and extent of our restructuring measures in Portugal meet the discontinued operations criteria as of last quarter’s end for Accounting Standards Codification 205, presentation of financial statements. As a result, our condensed consolidated balance sheet, the condensed consolidated statement of operations, and the notes to the consolidated financial statements have been restated for all periods presented to reflect the discontinuation of these operations in accordance with ASC 205. This presentation will continue through the second half of this year, and further explanatory notes are available in our second quarter 10-Q as filed.

Moving into our quarterly results, our revenue in the second quarter of 2023 increased 21% to $5 million, compared to $4.1 million in the year-ago period. The increase reflects growth in our cannabinoid segment revenues during the quarter, which in turn resulted from strong extracts sales in Australia, Brazil, and Israel. Our non-cannabinoid segment revenues declined due to ongoing softness in specialty channel customer inventory levels. This was partially offset by improved traction with the new online marketplace partner that came on board during Q1. We have invested in marketing efforts, geared towards greater customer education, working to increase their engagement and understanding as they make their purchases. Our all-in cost per gram of dry flower equivalent in the second quarter of 2023 was $0.07 per gram compared to nil per gram in the year-ago period.

During the quarter, 1,132 kilograms were harvested compared to zero in the year-ago period. The cost per gram in the second quarter is $0.59 lower than the first quarter’s cost of $1.29, an approximate 45% reduction. As Andrés mentioned earlier, we have started adding new CBD hemp crops to our harvest cycle in order to replenish the inventory for previous sold extract products. Even with these additions, we have continued to focus our Colombian harvest on growing THC flower for export, and our overall new harvest output remains significantly reduced. As we optimize and evolve our harvest mix over time, we continue to believe that we can leverage greater cost advantages over time as we scale our flower production and benefit from no longer having the higher costs associated with our Portugal operation.

We aim to bring our production cost per gram closer to their historical levels. Our gross profit in the second quarter of 2023, which included an inventory provision of $0.2 million, increased 10% to $2.7 million, compared to $2.5 million in the year-ago period, which also included a $0.2 million inventory provision. Our adjusted gross profit, which excluded the inventory provisions, was $2.9 million in the second quarter of 2023 compared to $2.7 million in the year-ago period. This reflects an adjusted gross margin of 58.8% compared to 66.3% in the year-ago period. The increase in our gross profit reflects the revenue growth we generated during the quarter, as well as stabilized pricing for both raw materials and labor in our non-cannabinoid segment.

Operating expenses in the second quarter of 2023 improved to $5.9 million compared to $7.8 million in the year-ago period. The 25% decrease reflects continued benefits of our restructuring and cost reduction initiatives. We expect to drive additional savings in the second half of 2023. Net loss in the second quarter of 2023 was $3.6 million compared to a net loss of $1 million in the year-ago period. Net loss in the year-ago quarter included a $6.9 million gain on investment following the company’s sale of a portion of its minority stake in Cansativa, along with a $1.3 million gain on remeasurement of warrant liability. Adjusted EBITDA in the second quarter of 2023 was negative $2.1 million, compared to negative $3.5 million in the year-ago period.

This was mainly due to the benefits of the restructuring initiatives we have previously implemented and ongoing cost reductions. At June 30, 2023, cash, cash equivalent, and restricted cash were $5.1 million compared to $12.9 million at December 31, 2022. The decrease was primarily attributable to continued operating losses, working capital needs, and cash expenditures related to our remaining Portugal wind-down activity. Our cash balance also reflects the approximately $0.4 million in net proceeds we raised from our at-the-market stock offering during the second quarter. This program remains available for us to leverage where applicable, and we will continue to evaluate other potential pathways for additional capital throughout the year. In line with the expectations we outlined during our May conference call, we generated increased cost savings and significantly reduced our cash burn during Q2.

This reflects our improved revenue performance, as well as the cost benefits of having substantially completed the Portugal wind-down. As Andrés mentioned, we completed the sale of our Portuguese processing assets to a Curaleaf affiliate in early July, generating $2.7 million in additional non-dilutive capital that we expect to use for working capital and general corporate purposes. This additional source of capital enhances the flexibility of our balance sheet, and we remain underway with evaluating additional capital pathways as we enter the second half of 2023. As noted in our public filings, including our 10-Q for the second quarter of 2023, there is a substantial doubt about our ability to continue as a going concern. Our operational execution continues to be dependent on our ability to obtain funding, which could include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets.

We aim to continue enhancing our liquidity position by maintaining a lean and efficient cost structure and reducing our working capital investments. With the improvements we have already driven in our cost and capital structure, as well as our continued commercial momentum, we are continuing to reiterate our previously stated full year 2023 financial targets. These include expectations for our full year 2023 revenue to be within the range of $19 million to $22 million, with an expected adjusted gross margin of approximately 58% to 53%. In addition, we continue to anticipate our 2023 adjusted EBITDA to range between negative $13.6 million to negative $10.6 million. As we focus on driving additional expense reductions and improving our capital efficiency, we continue to expect our 2023 capital expenditures to be between $0.5 million to $0.7 million.

This represents an approximately 50% reduction relative to our full year 2022 CapEx. This concludes my prepared remarks. And I’ll now turn the call back over to Andrés to review our target market opportunities in greater depth. Andrés?

Andres Fajardo: Thank you, Hank. Before opening the call to questions, I’d like to provide a quick summary of our target markets, along with our objectives and catalysts within them. In Australia, we will work to continue ramping our Colombian flower shipments, capitalizing on our flowers’ continued traction in this market as we gradually expand our available strains. In conjunction with this work, we will also continue scaling and securing additional extract sales agreements. In Germany, we are tracking towards launching our Colombian flower shipments in the second half of 2023. We’re leveraging our brand and our existing partnership with seasoned pharmaceutical operators and distributors such as Ethypharm. Having multiple available pathways through this market improves our positioning as German regulatory conditions evolve.

We are closely monitoring Germany’s regulatory progress and believe that there were motion of cannabis from the narcotic list would prove to be a catalyst for the medical markets. We hold a similar stance in Colombia, where we are attuned to the reintroduction of a legalization bill in the forthcoming legislative session. Our mature production operations in Colombia strengthen our position for future market opportunities as they arise, and we will continue supporting advancements towards legalization. In Brazil and Israel, we will continue supporting the ongoing ramp of our extract sales in these markets. Leveraging our Brazilian-GMP certification and the regulatory approvals we have already received for our in-market products, we aim to further activate sales agreements for these products and complete additional product approval.

In Israel, we also continue target launching our Colombian flower products in this market by end of the year. Our commitment to quality and our agility amid changing regulatory requirements and developments in these markets have allowed us to effectively ramp our existing cannabinoid agreements and continue growing our base of international partners. Underlying our commercial momentum, we have made a meaningful strides with establishing a leaner expense structure and operating with greater capital efficiency. Our progress through the first half of 2023 demonstrates our consistent execution on our focused commercial strategy, Colombian production operations, and optimized cash management. These strategic tenets will remain at the core of our work through the remainder of the year.

And we thank our team and our shareholders for their continued support. We’ll now open up the call for Q&A.

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Q&A Session

Operator: [Operator Instructions]. Your first question will come from Diana Tokar with Cannacord Genuity.

Diana Tokar: Hey, guys. Thanks for taking my question. Could you maybe outline your biggest revenue growth drivers for Q3, and maybe give some color on the revenue split between cannabinoid and non-cannabinoid businesses? Thank you.

Andres Fajardo: Hello, Diana, this is Andrés. How are you? And thanks for your question. Yes, I think, Q3 we will see two or three things. Number one, we continue to see growth in our in our key geographies. I’d say particularly in Australia, in Brazil, and Israel. I would say number two, we’re going to continue seeing increases in the sale of our Colombian flower. I am currently in Australia, and the realities of flower is being well received by the market in terms of its quality, in terms of its legacy and its history. So we’re really very excited about that. And we’ll continue selling the strain that we — it’s currently in market. And we expect to bring new and additional strains on Q3 and Q4 here, as well as launching it in Germany by the end of the year.

So I would say those — that will be another important driver of growth. Yes, and I think we expect our non-cannabinoid business to go through this phase of complexity at the retail level, which means in the end, we expect that towards the end of the year, both segments are going to continue to grow. But of course, given the past growth that we have exhibited in cannabinoids, we do expect that our percentage of revenues coming from the cannabinoid segment will increase further.

Diana Tokar: Okay, great. And maybe one more for me on the balance sheet. Looks like you guys reduced your cash burn this quarter, which is great. So maybe can you help me understand when you would need to raise additional cash to sustain your operation?

Hank Hague: Yes. Hi, Diana. Thank you for your question and joining us on the call today. We have not come out with any specific guidance in terms of timing of where and when we would be required to raise additional capital. Obviously, we’re going to pay close attention to the market as an opportunity to do that. But at this point, we closed the quarter with over $5 million of cash — $5.1 million. And we just successfully sold our post-harvest operations to a unit of Curaleaf for $2.7 million. So you can get the sense of our cash position at this point.

Diana Tokar: Okay. Thanks, guys. That’s it for me.

Operator: [Operator Instructions]. It appears we have no further question. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Fajardo for his closing remarks.

Andres Fajardo: Well, I want to thank everybody for joining us today. And we look forward to speaking with our investors and analysts when we report our third-quarter results in November. So thank you all very much.

Operator: The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.