Clever Leaves Holdings Inc. (NASDAQ:CLVR) Q1 2023 Earnings Call Transcript May 11, 2023

Clever Leaves Holdings Inc. beats earnings expectations. Reported EPS is $-0.09, expectations were $-0.15.

Operator: Good day, and welcome to the Clever Leaves First Quarter 2023 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Jackie Keshner, Gateway Group, Director of Investor Relations. 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 first quarter ended March 31, 2023. Joining us today are Clever Leaves CEO, Andres Fajardo; and the company’s CFO, Hank Hague. Before I introduce Andres, 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-K for the year ended March 31, 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 conditions 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 Andres.

Andres Fajardo: Thank you, Jackie, and good afternoon, everyone. During the first quarter, we continued to execute on our strategic growth objectives, leveraging our commercial momentum in our core cannabinoid markets on our meaningfully improved cost structure. We generated particular sales strength in Brazil and Israel, and we drove sequential and year-over-year margin improvement in our non-cannabinoid segments. In addition, we have progress on ramping our Colombian smokeable dry flower shipments, and completing the wind down of our operations in Portugal. Importantly, we have reduced our operating expenses by 48% year-over-year, reflecting the benefits of our restructuring and cost optimization initiatives. With these changes, we are able to reduce net loss by 75% and reduce adjusted EBITDA loss by 35% as we continue to navigate our path to cash flow positivity.

We came into 2023 with an emphasis on three key strategic areas of growth: our focused commercial strategy, our low cost high quality production in Colombia, and our optimized cash management. I will share a brief update on our recent progress in each of these areas, starting with our Colombian production operations. As we previously disclosed, we are now exclusively cultivating and producing our products out of Colombia from supporting our existing extract business to progressing early launch and ramp efforts for our flower exports. To optimize our cultivation process, we have maintained reduced harvest levels relative to the year ago quarter, reflecting our continued focus on cultivating THC flower for export and processing our existing CBD inventory for extract sales.

We ultimately expect to leverage these operations’ expansive mature capacity, advantageous cost structure, and optimal agricultural climate to drive greater operational efficiencies and cost reductions over time. To further catalyze these efforts, we partner with Praetorian Global, a leading U.S.-based brand owner that operates the Binske brand and an intellectual property provider to the global cannabis and hemp industry. Under the terms of this agreement, we will work with Praetorian to select specific flower strains for initial cultivation trials at our Colombia facility with the goal of producing premium quality cannabis flowers and downstream products for distribution to the European Union, United Kingdom, and Australia by Q2 of 2024. From an R&D perspective, this partnership allows us to combine our cultivation and development know-how with Praetorian’s production efficient, high yield, and flavor forward genetics.

Developing and launching these products also enables us to build on our existing traction in Australia and Europe while establishing our early pathways into the UK. From a production standpoint, one of our key operational priorities has been completing and supporting the launch of our Colombian dry flower exports. We have already sent our first commercial shipments of our Colombian grown flower product to both Australia and Germany The completion of our flower shipments to both of these core markets represent a key operational milestone. We soon expect to complete sales to pharmacies and from there, we continue to target ramping flower shipments to the UK and Israel by end of 2023. We will further fine tune our product and processes in response to the respective market feedback we received from these shipments.

As we have discussed in relation to our prior flower production in Portugal, adapting our products to the evolving requirements of the core markets is an imperative and ongoing step towards scaling our Colombian flower shipments. With these market specific evaluations underway, we are maintaining a focused approach to strain development to ensure we are prioritizing the highest quality and most commercially viable genetics. At present, we are focused on refining 2 or 3 individual strains and we will provide updates on new strain launches in our target markets as they reach completion. Moving into our focused commercial strategy, we have continued to activate and ramp our commercial pathways across the core markets we identified for 2023, which comprise Australia, Germany, Brazil, Israel, the United Kingdom and Colombia.

This work includes both building upon the inroads we have already established and signing new partnerships to take on deeper into our earlier stage markets. And I will share some recent developments on these drugs. In Brazil, our largest market during Q1, sales of our approved products under RDC 327 have continued to ramp and they served as a strong driver of our cannabinoid revenues in Q1. Most recently, we announced a 5 year agreement to supply CBD dominant products to Hypera, one of the largest Brazilian multinational pharmaceutical companies. Through our partnerships with GreenCare and Hypera, we expect to significantly grow in the Brazilian cannabis markets. The CBD products manufactured under these agreements are registered under RDC 327 and they are already being sold into drugstores and pharmaceutical distribution channels.

We look forward to further supporting these partnerships and expanding our presence in the Brazilian market. In Australia, we were able to sell the vast majority of our remaining Portuguese flower inventory. As we’ve previously shared our Portuguese flower has historically received strong market feedback in Australia, given its high THC content, bud size and terpene profile. We aim to build upon this track record as we launch and scale our Colombian flower exports in Australia. The sales of our Portuguese flower to Australia also made the progression of our wind down process. However, even our Portuguese production operations have fully ceased, please note that we are now accounting for items related to our Portugal operations including these sales under discontinued operations.

You will see this change reflected in Q1 2023 financial presentation and year-over-year comparisons, as Hank will describe in the detail shortly. In Israel, we have continued to sell APIs in the form of isolates and extracts and we are in the process of preparing our flower to be launched later in the year. Finally, we continue to expect our first shipments of cannabinoid products to the UK in the coming months. To touch on our third growth objective, optimized cash management. Our wind down process in Portugal has continued to proceed smoothly. We undertook this process as part of our ongoing restructuring initiatives with the aim of capturing greater cost and capital efficiencies, as we leverage our existing production advantages and minimal CapEx needs in Colombia.

As of the end of the first quarter, our Portuguese flower cultivation, post-harvest processes and manufacturing activities have all ceased in full, and we have completed the bulk of our workforce reductions. We continue to track towards the completion of our wind down activities, and we expect our operational transition to drive increased savings by end of this year. With our strategic progress during the first quarter, we believe we have built a solid foundation for continued execution on these objectives for the remainder of 2023. I will describe our opportunities and objectives in greater detail later in the call. First, I’d like to turn the call over to our CFO, Hank Hague who will discuss our first quarter financial performance. Hank?

Hank Hague: Thank you, Andres. Before I discuss our Q1 performance, I wanted to provide some additional context on how we’re accounting for Portugal in our financials, which Andres mentioned earlier. With the cessation of our core operational activities in Portugal and the associated ongoing wind down process, we have determined that the nature and extent of our restructuring measures in Portugal meet the discontinued operations criteria as of March 31, 2023 per Accounting Standards Codification 205, Presentation of Financial Statements. As a result, our condensed consolidated balance sheet, our 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.

We will maintain this presentation during the coming quarters of this fiscal year, and further explanatory notes are available in our Q1 2023 10-Q as filed today. Moving on to our quarterly results, our revenue in the first quarter of 2023 was $4 million compared to $5 million in the year ago period. For our cannabinoid revenues, the decrease reflects the benefits of a one-time influx of pipeline shipments to Brazil in the year ago quarter that did not repeat in the first quarter of this year, as well as the discontinuation of Portuguese flower and the ramp up of Colombian flower. With that said, we have maintained a strong and steady cadence of Brazilian shipments, and this market has continued to be a strong revenue driver for us in Q1 and into the second quarter.

We also had solid contributions from Israel during the quarter. While we have also continued to generate traction in Australia, note that approximately $300,000 in revenues from the sale of our remaining Portuguese flower inventory have been categorized under our discontinued operations classification. Our non-cannabinoid segment revenues declined due to marketplace adjustments with onboarding a new online marketplace partner, as well as implementing new sales terms in our specialty channel. Inflationary pressures impacted the specialty channel customer inventory levels during the quarter. Larger accounts, including food, drug, and mass, continued with solid point of sales results. Ordering has bounced back from the prior quarter inventory adjustments, reflecting the measures we’ve taken to mitigate broader macroeconomic headwinds.

Our all in cost per gram of dry flower equivalent in the first quarter of 2023 was $1.29 per gram compared to $0.12 per gram in the year ago period. The increase was driven by our reduced harvest in Colombia relative to the year ago period, as well as continued costs associated with processing our existing hemp and CBD inventory for extract sales. Consistent with our work over the past few quarters, we have remained focused on rightsizing and optimizing our Colombian harvest to support the ramp of our dry flower export, as we expect our flower products to comprise a greater share of our product portfolio over the long-term. As we continue exclusively producing our products out of Colombia, we believe we can leverage greater cost advantages over time, as we scale our flower production and benefit from no longer having the higher cost associated with our Portugal operations.

We ultimately expect to reduce our production cost per gram to their historical levels. Our gross profit in the first quarter of 2023, which included an inventory provision of $0.1 million was $2.2 million compared to $2.6 million in the year ago period, which included a $0.3 million inventory provision. Our adjusted gross profit which excluded the inventory provisions was $2.4 million in the first quarter of 2023, compared to $2.9 million in the year ago period. This reflects an adjusted gross margin of 59.2% compared to 57.6% in the year ago period. The decrease in our gross profit reflects the lower revenue generated during the quarter. This was partially offset by the lower inventory provision we recorded for our cannabinoid business and the improved margin performance of our non-cannabinoid business, both of which drove our gross margin improvements for the quarter.

Operating expenses in the first quarter of 2023 improved significantly to $6.4 million compared to $12.3 million in the year ago period. The 48% decrease reflects the significant benefits and diligence of our cost reduction initiative. And we expect to continue seeing these benefits through and beyond the second quarter. Note that our operating expenses in the year ago quarter included a $3.8 million restructuring charge related to charging-off certain excess extraction equipment for our Colombian operations as well as employee exit costs. Net loss in the first quarter of 2023 improved to $4.1 million compared to a net loss of $16.1 million in the year ago period. The improvement was driven by our continued restructuring and cost reduction measures, as well as significantly lower interest expense and amortization of debt issuance costs, compared to the year ago period.

Net loss in the first quarter of 2022 also included the $3.8 million restructuring charge I just mentioned, as well as loss on debt extinguishment of $2.3 million. Adjusted EBITDA in the first quarter of 2023 improved to negative $3 million compared to negative $4.7 million in the year ago period. This was mainly due to the benefits of cost reduction and restructuring initiatives we have previously implemented. The cost improvements we have put in place over the past year and maintained through these early months of 2023have contributed towards our reduced adjusted EBITDA loss. At March 31, 2023, cash, cash equivalent and restricted cash were $6.7 million compared to $12.9 million at December 31, 2022. The decrease was primarily attributable to operating losses, working capital needs, and cash expenditures related to the wind down of our Portugal operations.

As we discussed on our March conference call, we believe our operational transition to Colombia and workforce reduction in Portugal will meaningfully reduce our cash burn going forward. While we expect our restructuring cash expenditures to persist through the first half of 2023, we anticipate that we will begin seeing cost savings and significantly reduce cash burn during the second quarter. As a reminder, we are also preparing to sell our Portuguese assets as part of our broader wind down process. We continue to target completing these asset sales during this calendar year, and we will provide further updates as they arise over the coming quarters. Subsequent to the first quarter, we also raised approximately $273,000 in net proceeds from our at-the-market stock offering.

We will continue to leverage this program where applicable and evaluate other potential pathways for additional capital throughout the year. As noted in our public filings, including our 10-Q for the first quarter of 2023, there is substantial doubt about our ability to continue as a growing concern. Our ability to execute our operating plans through 2023 remains dependent on our ability to obtain additional funding, which may include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets. We will continue working to enhance our liquidity position and reducing our investments in working capital and maintaining a lean expense structure across our business. With the momentum we have generated in our core markets and the cost improvements we have driven during the first quarter and over the past year, we remain comfortable with our previously stated full year 2023 financial targets.

We continue to expect our full year 2023 revenue to range between $19 million and $22 million with an expected adjusted gross margin of approximately 58% to 63%. We also anticipate our 2023 adjusted EBITDA to be in the range of negative $13.6 million to negative $10.6 million. Reflecting our ongoing focus on improving our capital efficiency and driving additional expense reductions, our projected 2023 capital expenditures of $0.5 million to $0.7 million represent an approximately 50% reduction relative to our full year 2022 CapEx. This concludes my prepared remarks. And now, I’ll turn the call back over to Andres to review our market opportunities and catalysts in greater depth. Andres?

Andres Fajardo: Thank you, Hank. Before we open the call to questions, I’d like to provide a quick overview of some additional regulatory catalysts in our core markets. In Brazil, we recently received our GMP certification from ANVISA, the Brazilian health regulatory agency. This certification is required for the manufacturing and commercialization of cannabis products in this market where we are one of the few companies outside of Brazil to receive it. Being GMP certified in Brazil is a major milestone for our positioning within this market, which has the potential to become the largest cannabis market in Latin America. Further, it serves as a testament to the high-quality and premium standard production practices we have hoped, and it complements the GMP certifications we have already received in the EU and Colombia.

As for broader catalysts, we are most closely monitoring trends and progress towards the adoption of Colombian flower across our target markets, both within our own shipments and in the overarching progress of these exports. According to our report from the [New Century], overall legal medical cannabis exports from Colombia increased 96% last year relative to 2021, with four of our core markets, Brazil, Australia, Israel and Germany comprising some of the top export destinations. These statistics highlight the traction that Colombia has continued to gain within the global medical cannabis market as well as our own strategic positioning within this backdrop. We are also monitoring further regulatory and recreational developments in the Colombian domestic market.

As of late March, a Recreational Legalization Bill has received approval from the House of Representatives, Senate, and now the First Committee of the Chamber. And we will stay closely at two to further progress on this measure. In Germany, we’re following German Health Minister, Karl Lauterbach on new on two phased approach to recreational cannabis legalization. While the first phase focuses on implementing cannabis social clubs for German citizens, a second 5 year phase would allow certain municipalities to have licensed specialty shops that can sell recreational cannabis. The multiple avenues we currently occupy in Germany’s cannabis supply chain places in a beneficial position to adapt to the country’s recreational framework as it develops.

In Brazil, where medical cannabis prescriptions have increased, individual states have moved to enact legislation that seeks to improve patients’ access to the cannabis products they need. For example, São Paulo passed along in January that facilitates access to free medical cannabis as well as measures to increase public awareness and diagnosis surrounding cannabis medicines. With the products we have available under our RDC 327 we aim to continue supplying pharmaceutical quality cannabinoid products and ingredients for enhanced patient care. We will continue to monitor and adapt to regulatory landscapes in our own markets as they evolve. And we remain confident in our overall strategy and commercial position, as we further activate and grow our global footprint and do so from a leaner and more efficient operational infrastructure.

We aim to make additional progress on our commercial objectives, production advantages and capital improvement initiatives through the remainder of 2023. We will now open up the call for Q&A.

Q&A Session

Operator: [Operator Instructions]. The first question today comes from Bobby Burleson with Canaccord. Please go ahead.

Operator: This concludes our question-and-answer session. I would like to turn the conference back over to Andres Fajardo for any closing mark.

Andres Fajardo: I just want to thank everyone who attended the call today, and we look forward to speaking with all of our investors and analysts when we report our second quarter results in August.

Operator: The conference has not concluded. Thank you for attending today’s presentation. You may now disconnect.