Q2 2021 Clever Leaves Holdings Inc Earnings Call
Good afternoon, everyone and thank you for participating in today's conference call to discuss clubbed them easy its financial results for the second quarter ended June 30th 2021, joining us today are CEO, Kyle that Walter and the company's CFO Hey, Craig.
Before I introduce call 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 30th 2021.
Was filed prior to this call.
As well as other filings made by clever leaves with the SEC from time to time.
Filings identify factors that could cause results.
She really from those forward looking statements.
Please also note that during this call management will be disclosing adjusted EBITDA is a non-GAAP financial measure as defined by SEC regulation G.
A reconciliation of these non-GAAP financial measure to the most directly comparable GAAP measure in our statement disclosing the reasons why company management believes that adjusted EBITDA provides.
For information to investors regarding the company's financial condition and results of operations.
In today's press release that is posted on the company's website.
With that I will turn the call over to Carl.
Thank you Cody and good afternoon, everyone.
The second quarter marks meaningful progress toward our long term vision of becoming a leading low cost multinational candidates company and a continuation of our trajectory to achieve our near term target.
We are annoyed shipments continued to drive robust year over year revenue growth.
Well the market leading efficiencies we are achieving at our cultivation facilities in Colombia in Portugal led to improvement in adjusted EBITDA.
It's a business development standpoint, we signed new partnership agreements in Australia and Mexico.
In our global distribution network to more partners in new geographies.
We also launched project change lives are 25 million dollar research initiative, which allows us to help support key U S. Cannabis research projects, while advancing the cause I believes position.
Emerging segment of the candidates industry, our success in expanding our footprint through new partnerships, while attaining positive financial momentum leaves us confident in a bright future ahead, so quite a leap.
During the next call I reminded everyone that our future success will be defined by the foundation, we are busy establishing today.
Our journey is still young, but I would like to highlight a few significant achievements across our core markets.
In Portugal, we continued to ramp our operation, which began to generate revenue for the company. During the second quarter. It is important to remember that although we have had several successful commercial crops in Portugal. The operation is still in its early innings, we are continuing to optimize our processes as well as to adjust the clients.
Evolving downstream strategies and preferences, along with international regulation.
The cost profile will also need to undergo a period of optimization and refinement.
That said, we are pleased with the progress being made and the opportunities for both expansion within our existing markets and entry into new geographies.
This possibility became a reality in late June when our team entered into a commercial partnership with pharmaceutical manufacturing company IDT, Australia to export our pharmaceutical grade flowers directly from our G. HCP certifying facility in Portugal to Australia.
Not only does this signify our first commercial shipment of high THC flower to Australia from our Portuguese facility, but it is also a step towards resolving Australia is ongoing shortage of medical candidates, which is what patients are unable to access their prescribed candidate stage medicines.
We're pleased with the early days of this arrangement and they were aiming to widen our distribution channel with the ITT the better service and meet the demand of yes really nothing.
We also further expanded our distribution network into Latin America during the quarter in Mexico, We were quick to capitalize on the regulatory changes that now allow for the production and commercialization of medical candidates, when we announced our entry into the market through a commercial partnership with CBD life.
CBD life is an emerging leader in the Mexican candidates industry that offers a developing line of CBD wellness and consumer products I believes will act as the active pharmaceutical ingredient or API supplier with the development and manufacturing activity lights medical candidates products, beginning with CBD isolate.
We are pleased to have partnered with the team experience with brand building and pharmaceutical distribution to the Liberal cannabinoid products from our EU GMP certified facility in Colombia into Mexico and what.
What we view as an important step in our strategic growth opportunity. We aim to be an ongoing supplier of the required API for CBD life product manufacturing purposes.
Turning to Colombia, we would of course be remiss. If we did not address the historic decree that was signed subsequent to the quarter and that should allow Colombian licensed cannabis companies sexual I believe to participate in the commercial production and export of medical cannabis flower for the first time.
We will have I will have more to say about this later in the call, but with flower estimated to represent as much as half of the global cannabinoid market. This.
Development has the potential to double our long term addressable market.
Further contextualize the gravity of this advancement in regulatory reform the occasion with celebrated for me visit.
The president of Colombia, I haven't bouquet and several key ministers to our cultivation facilities near Bogota as our operations in the country had been designated a project of national and strategic interests by the Colombian government.
While flower exports from Colombia will not turn out every night. This is undoubtedly one of the most significant regulatory milestone in <unk> history, we look forward to one day, providing our high quality flower grown in our EU GMP certified facilities to patients across the globe.
As demonstrated by the continued momentum of our global expansion, we are confident in our positioning to execute on our go forward strategy.
Further we are optimistic about the prospects that have opened as a result of the regulatory reform.
In addition to the tailwind out of Australia, Mexico, and Colombia that I mentioned earlier, we are staying closely attuned to other changes across our current and prospective geographies, including evolving quality standards in Israel as well as the ongoing legalization efforts in the United States.
Within our core geographies all of our major operational centers are now producing revenue.
I am very proud of the hard work put in by our team during the first half 2021, and all of the exciting steps we have already made as we progress into the third quarter.
Before I discuss these recent accomplishments in greater detail and provide greater detail on our operational highlights from the quarter.
I'd like to turn the call over to our CFO NK provide more details on our financial performance for the second quarter and.
Over to you.
Thank you Kyle turning to our financial results.
Revenue in the second quarter of 2021 increased 89% to $3.7 million compared to $1.9 million in the year ago period.
This increase was driven in part by the growth in our snap annoyed revenue segment.
Which increased nearly four fold from the prior year period, as we continue to pursue global business development opportunities.
Enter new markets with Pathfinder shipments, which are typically lumpy.
In our non cannabinoid segment sales in our nutraceutical herbal brands business have continued to make a healthy recovery from last year's pandemic related impacts.
On the whole we have sustained our momentum with diversifying our revenue mix and working to further improve our positioning.
Key part of the global cannabinoid supply chain.
Our all in cost per Gram of dry flower in the second quarter of 2021 was 22 cents per gram compared to 11 cents.
Year ago period.
This was largely due to production costs associated with ramping our early stage operations in Portugal.
As this market grows we expect our costs to drop as we capture economies of scale.
As a reminder, this all in costs includes both cultivation and production expenses, including those associated with extraction.
Appreciate it and quality assurance and other supply chain related items.
Which all encompassed ongoing expense of maintaining production at an easier GMP certified level of quality and traceability.
Gross profit in the second quarter of 2021 increased 157% to $2.3 million compared to <unk> 9 million in the year ago period, resulting in a gross margin of 63, 6%.
This was largely due to strong performance in our nutraceutical business.
As I just mentioned.
In the coming quarters, we anticipate that future periods will track closer to our previously advised gross margin target.
61% as cannabinoid revenue continues to scale.
Operating expenses in the second quarter of 2021 were $12 million compared to $8.2 million in the year ago period.
The increase is attributable to approximately $3 million increase in noncash share based compensation expense.
As well as insurance and professional fees relating to being a public company.
Across our organization, we remain committed to maintaining our prudent approach to cost control as we proceed into the second half of the year.
Net loss in the second quarter of 2021 was $9 million compared to a net loss of $8.8 million in the year ago period.
In spite of a general increase in expenses, which was primarily associated with the cost of operating as a public company.
Adjusted EBITDA in the second quarter of 2021 improved to a negative $5.8 million compared to a negative $6.7 million in year ago period. The improvement was mainly driven by our aforementioned gross profit growth and cost management throughout the organization.
<unk>, including cultivation and production efficiency.
At June 30th 2021, our cash balance was $57.1 million compared to $79.5 million at December 31, 2020.
Primarily attributed to our anticipated operating losses and capital investments during the year.
As an additional balance sheet update in July 2021.
A $25 million strategic financing from Sun stream Bancorp, Inc.
A joint venture initiative sponsored by sundial growers as well as the full repayment of our secured convertible notes due March 30th 2022 at a 90% of par value.
The financing came in the form of secured convertible note with a three year maturity and an interest rate of 5% per annum.
This rate represents a reduction from the prior rate of 8% per annum, which combined with the discounted principal reduction will result in over $3 million in savings for shareholders.
This action bolsters, our liquidity position and reduces our depth of service commitment, while providing additional working capital as we continue our expansion efforts across our core market.
We are grateful to have received the support from Sun stream and look forward to further developing this partnership and remaining disciplined stewards of capital over the long term.
Turning to our outlook, we remain pleased with the progress we have made thus far and are on track to achieve our previously disclosed year full year 2021 guidance to reiterate our aforementioned guidance reflects solid year over year performance with between 17 million to 20.
And revenue.
Gross margin of approximately 61% and adjusted EBITDA in the range of negative $24 million to negative $26 million as well as capital expenditures of approximately $10 million.
This concludes my prepared remarks, I'll turn the call back over to Kyle.
Thank you Amy.
In both of our business and the broader candidates industry. The pace of global regulatory reform plays a significant role in our ability to continue expanding our product reach within a growing international customer base.
Well, we're thrilled with the progress made across several of our key geographies during the quarter and the prospects for commercial success. We hope it will usher in we recognize the communities around the world are still contain contending with the consequences of the prolonged prohibition of candidates.
The lease we operate with a mission to cultivate Mojo great value and change lives and this means taking proactive measures to help solve these problems, particularly those that involved supply and research knowledge gaps related to medical cannabis.
Global reforms progress and operators continued to gain greater regulatory validation, we are better able to execute on this mission I would like to take this time to call out some of the progress we've made towards these efforts over the past few months.
Yes, Australia as I mentioned earlier, our recent partnership with IDT, Australia helps address the country's limited access to affordable pharmaceutical grade medicinal candidate flower products, we witnessed the long term harm that prohibition causes firsthand as patients suffering from chronic condition, who have been prescribed.
<unk> candidate space medicinal products found themselves unable to access to treatment due to supply shortages across the continent.
We believe patient should be able to access and trusted products. They were prescribed which is why we are proud to be supplying flower from our GE HCP certified facility in Portugal.
Well, we are proud to provide cost effective flower from our European cultivation facility in Portugal, we see great potential in the newly created opportunity to export medical cannabis flower from our Colombian operation a region, which requires no additional investment to access one 8 million square feet of already.
<unk> and operating cultivation.
I spoke a bit earlier about the financial opportunities this new degree present, including the potential to double our pushed our total addressable market and compete more effectively within the global medical cannabis market of which flower makes up approximately.
In terms of our existing operation the opportunity to export flower from Colombia complements our existing strong flower production client relationships and market insights in Portugal, and expands our portfolio of cannabinoid solutions for clients.
We can leverage the lessons we learned from our dry flower production operations in Portugal, as we commence these operations in Colombia, giving us an additional advantage as we capitalize on this opportunity.
We may not be the only operator in Colombia, we are the only EU GMP certified candidates operation in Latin America today, including EU GMP certification for dry flower production.
We applaud the Colombian government approval and look forward to developing this additional product offerings.
Growing global partner network.
In addition.
And to leveraging opportunities to export different forms of candidates. We've also created an opportunity to help advance U S. Researchers understanding of the potential medical benefits of candidates.
In June we announced project change life work Tcl in partnership with Biopharmaceutical Research company in which clearly has pledged to donate up to $25 million in medical cannabis products to any eligible U S organization to help advance Pfizer.
The big research into the potential medical benefits of cannabinoids.
Through this initiative, we have already helped catalyze a research study focused on DNA sequencing announcing our first partnership with a major U S research institution through supplying researchers at UC Davis with three of her cultivars.
Which they will use that study DNA sequencing and extraction as well as new methods of RNA extraction.
These landmark studies share our commitment to rigorous scientific exploration of cannabinoid medicines potentially lifesaving applications. We are proud to be spearheading this contribution to the cannabis industry. One of the largest of its kind that I'm aware of and we look forward to supporting World class teams of scientific researchers at UC Davis.
And other qualified U S institutions.
Finally, we have also continued to drive progress in our European operations.
In addition to sending our first commercial shipment of high THC dried flower from Portugal to Australia through our IDT commercial partnership construction on our Portuguese cultivation expansion and the new post harvest facility remains relatively on track. We currently expect our construction at our cultivation facility.
To be completed by year end with our post harvest facility up and running by the end of 2022.
I am very proud of all the hard work our team has put in to help us achieve these accomplishments and further position us as a supplier of choice within the global B to B cannabinoid supply chain in the second half of 2021, we will remain focused on working to further expand our international distribution.
Network.
To build and support global partnerships and to capitalize on the regulatory tailwind and development and the geographies in which we focus.
Our work is not yet done as we continue our construction efforts and production ramp in Portugal.
Begin working towards flower export preparations in Colombia.
Closely monitor changes in quality standards and approval processes across our geography.
I'm looking forward to making further progress on our long term strategy and seen it through to our vision for <unk> at maturity.
I believe we will now open the call up for Q&A.
Thank you Sir.
Hey, guys just a first question on the phone lines. Please pass for one followed by the four on your telephone you'll hear at three telecom technology I request.
That's your question has been answered and you like to withdraw your registration. Please press. The one followed by the three one moment. Please for the first question.
And our first question is coming from the line of Bobby Burleson with Canaccord. Please proceed.
Hey, everybody. Thanks for taking my questions. Congratulations on the continued progress.
Great to talk with you this afternoon.
So I think I'd start with.
You know you're a.
Target model when we talk about the current footprint that maturity you guys are talking about doing 220 million in revenue and $90 million EBITDA, but you also called out an estimated capex to get to that outcome, but $50 million.
And I'm wondering I know, it's too early right now to revisit that number given the decree just happened.
In Colombia, but I'm curious kind of general order of magnitude.
How the capital intensity there might be reduced.
If we're able to shift more of that flower.
Export to the Colombian operation.
Just curious kind of what the Optionality.
It is there for you.
Sure.
Great. Yes, thanks for the question, Bobby and good to hear from you.
Yes, the decree is relatively young and we are waiting for subsequent resolutions and regulations, which will help clarify.
Some of the other details around.
Around Colombia flower exports.
Otherwise I think you were definitely thinking about one of the main questions that we're thinking through.
Yeah, we have definitely.
<unk> our capacity in Colombia at a much lower cost per square foot that facility is also already.
GMP certified so it makes it slightly easier to expand.
Within there but.
But nevertheless, it's still a bit too early.
If we are able to replicate.
Our replicate that that flower that we were previously planning to.
Cultivate into Portuguese facility.
The $50 million Capex number could be substantially reduced.
I think we're in a position to provide sort of any new estimates if that scenario were to.
Develop but we do anticipate and expect it to come down if we are able to export from Colombia seamlessly.
Fantastic and then I guess.
Quick.
Well another question.
Follow up.
On the nutraceutical business.
That's still obviously, a big footprint on under guidance this year.
Sounds like the momentum there is healthy maybe a little bit more beneath the hood there in terms of what's going on.
Kind of.
Trends are you seeing both in terms of.
Yeah, just just.
Volume that's moving through.
Distribution there.
May be additional.
Opportunities for per shelf.
Shelf space.
How much.
How dynamic is that business in your view.
Yes, well I definitely am very encouraged by the results.
We I think are benefiting from two two major forces here one is in 2020.
U S retail, especially in sort of the nutraceutical channel.
Was significantly impacted by COVID-19, so when stores were closed has been deemed nonessential that had a negative dislocation.
For our business and in 2021.
Until recently.
It looked like things were getting.
Much much better.
We have to keep our vigilance with.
Covid.
The delta variance, but.
We are very encouraged up until recently up till now.
I think the second factor is this business, which we acquired in 2019 was family run for 30 years, and we've upgraded the organization and gradually expanded distribution that means new retail partners and that means more skus within those partners and more stores within those partners. So I think we're very pleased.
<unk>.
With the progress over time, and hopefully there'll be more more to come.
Great and then just with your your pipeline outside of the Nutraceuticals and thought for general geographies that you'd highlight Europe being the biggest.
I'm curious whether or not.
Yeah, as we look out to 'twenty two and beyond.
Which one of those geographies you would expect.
Gain in terms of its overall mix of pipeline.
Yes at this point, we Havent made any statements about 2022, yet never.
Nevertheless, if youre comparing 2022 to 2021, there are new geographies, which are becoming more.
Offering greater potential.
Some of those countries are in Europe, like depending on whether you count the U K as part of Europe. Some of those might be in Latin America.
<unk>.
Like Mexico, again kind of depending on how you classify it.
We also don't assume any product comes into Canada, and the United States. So it all really just depends on on regulation.
But I think we're probably expecting global growth across all the different geographies, but a bit too early to say how much the geographic mix will shift.
Are there any geographies that you expect to expand in terms of mix or right now you're just looking at them all kind of.
Calling at a similar pace.
Certain markets are in greater steps of their growth curve than others, Germany has been a market where candidates has been around for several years, so growth might look more incremental rather than.
Revolutionary I suppose, whereas Brazil, we are at the very early innings, you know very few companies are able to commercialize product.
We believe we are among the the.
The earliest path there and so that will be kind of building from <unk>.
Square one.
So you are likely to see greater growth in markets, such as that but again, it's a bit too early to tell.
Okay, great. Thanks for taking my questions.
As a reminder to register for a question you May press the one followed by the four.
Our next question is coming from the line of <unk> <unk> with Cowen. Please proceed with your question.
Hi, good evening or good afternoon.
Hey, Vivien.
Thanks for taking my questions.
So I think perhaps a little bit more near term I appreciated all the commentary around kind of a.
Long term aspirations and in 2022, which is hard to predict but if we just kind of dial in to the back half of 2021, you guys are reiterating your revenue guidance. It would imply a lot more incremental revenue sequentially than you posted in <unk> versus <unk>. So if you could offer some color on how we should think about the phasing of that.
And between the third quarter third quarter, and the fourth quarter and what the principal drivers that would be that'd be helpful. Thank you.
Great Yeah. Thanks.
Thanks, Vivien and definitely that is very logical.
<unk> from the reiteration of guidance I think the business in the pipeline.
<unk> is looking good.
As we.
Sit in sort of the Pathfinder.
Phase of a lot of our commercial partnerships you know there is significant lung.
Penis to that which makes it a little tricky to predict quarter to quarter.
But as we get towards the back half of the year and further down the road with some of our contracts you know our hope and our anticipation is that pathfinder lumpy shipments turned into something a bit more predictable and repeatable on top of that we do also have a number.
Partnerships or initiatives, which were always expected to be in the back half.
Many of these are subject to a regulatory considerations largely out of the company's control new quality standards pharmaceutical drug registrations or approvals things that could be subject to delays caused by <unk>.
Resurgence in Covid.
But right now we still feel pretty good about it there are lots of.
Opportunities Thats why the range remains relatively wide at this point.
And we still feel good about the pace of the business so far.
Okay understood moving on to gross margin heard loud and clear on the incremental depreciation and just the the headwinds around scaling, but the full year guidance of 61 would suggest.
And accelerating.
Pace of margin degradation in the back half should we think about that as flowing through evenly and <unk> or is there something that we should be contemplating that would have an outsized impact on one quarter over another.
Hi, Vivien a tank. Thank you for the question.
Yeah.
We have reiterated our guidance at 61% the major driver in our strong margin performance in this quarter was the herbal brands business.
Where it was disproportionately larger.
Our cannabinoid business. So as we expect as we anticipate in our pipeline as we see it going forward.
Greater and greater quantities of cannabinoid shipments, we expect the margin.
To work a little bit lower on a combined basis.
And we'd expect that.
Glide.
Smoothly are slowly into that range.
And is that.
And I would anticipate that continues into FY 2022, I'm not ask me at all for 2020 guidance I know that that's pretty mature.
What point does your revenue mix allow for kind of a normalization alright stabilization of gross margin.
Yeah when that occurs our expectation is that.
We're more fully selling more cannabinoid business.
Non cannabinoid business, we'd be looking at a high a higher utilization of our Portuguese flower business, which is just getting started.
As you know we're under construction for a significant expansion there.
And that's sorry, it's the timing of when we would expect to adjust.
And.
This is obviously forward looking but as things develop in Colombia, and the effort and the volumes grow there.
We would also expect to have lower cost per gram driving gross margins higher as well.
Understood. That's helpful last one for me.
Hi.
The deal that you did with south stream and addressing the converts like is the interest expense that you booked in the second quarter is that a good run rate or should it improve a little bit from here.
Yes.
I expect it to improve.
Mainly because our interest cost was significantly reduced.
We were at 8% on that large note and our new note is at 5%. So I do expect it to decline.
Okay. That's helpful. Thanks, very much I appreciate the color.
Thank you Youre welcome.
As a reminder to register for a question you May press, one followed by the four.
Our next question is coming from the line of Mccann vessels kickoff with Argo Capital Advisors. Please proceed with your question.
I appreciate all the updates.
Because we get a little more clarity around it.
Any progress being made in Brazil, and then sort of follow up questions about it.
Any highlights around cats achieve in your investment there.
In terms of additional sort of break out into the broader European market. Thank you.
Great Yeah. Thanks for the question.
So on on Brazil.
We definitely are in a.
Innovation speed with getting some of the country's first candidate and Wade products registered so not only are we learning as we go but the Brazilian regulatory authorities are learning as they as they go so.
Progress remains at a pharmaceutical pace.
Which is.
Something that clever leaves us uniquely capable of tackling because of its strong focus on quality as exemplified by both the Colombian GMP certification at a European certification. So we are working through things.
Smoothly.
So no no warning signs at this point, but.
There are unanticipated matters that pop up which we know factor into sort of normal course business at almost everything we do.
On cancer.
If we almost think about this as sort of a.
Question about the greater German opportunity.
Probably have kind of.
Two things to say.
I think the first is that we are starting to see more operators enter the space, we see that data point through Kansas, Teva, which is greatly broadens the number of suppliers entrant in the market.
And I actually think that's really a good thing it's important to remember that the true competition. At this point is not other producers it is on us.
Our regulated sources apply for a patient.
Or it is a patient not knowing or being able to access that data.
Medical products. So the more companies that are there to help educate physicians and patients.
The better.
On top of that I would say other data points that we are seeing through Kansas, either or that product diversity is increasing gradually so yes, there are new suppliers of us.
Cannabis flower.
And there are also increased the number of players entering on the extracted products side, which is which is great for us as we have a partnership with etsy firm one of the largest specialty pharma companies in Europe focused on the central nervous system.
And so that product will.
Hopefully be coming to market.
Relatively soon.
And so I think everything looks pretty good we keep the big picture minded, Germany, we're still dealing with one of the 1000 people in Germany, using medical candidates versus the U S and Canada. Both figures north of 10 in 1000 people. So a lot of potential in the market I think is gradually and healthily evolving.
Thank you.
At this time. This concludes our question and answer session and I'd like to turn the call back over to Mr. <unk> for closing remarks.
Thank you all for joining and we look forward to the next our next quarterly results.
Okay.
Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
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