Clever Leaves Holdings Inc. Q1 2023 Earnings Call
Speaker 2: Good day and welcome to the Clever Leads first quarter 2023 earnings conference call. All participants will be in a listen-only mode.
Speaker 2: Should you use the system, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions.
Speaker 2: To ask a question, you may press star than one on a touchtone phone. Do withdraw your question, please press star than two. Please note, this event is being recorded. I would now like to turn the conference over to Jackie Kesner, Gateway Group Director of Investor Relations. Please go ahead.
Speaker 2: Good afternoon everyone and thank you for participating in today's conference call to discuss Cleverleaf's financial results for the first quarter ended March 31, 2023. Joining us today are Cleverleaf's CEO Andres Pajardo and the company's CFO Hank Haag. Before I introduce Andres.
Speaker 3: 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.
Speaker 3: or implied by these forward-looking statements.
Speaker 3: Specifically, please refer to the company's Form 10Q for the quarter ended March 31, 2023, which was filed prior to this call, as well as other filings made by Klepper Leaves with the SEC from time to time. These filings identify factors that could cause results to differ materially from those forward looking statements.
Speaker 3: 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.
Speaker 3: Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures in 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.
Speaker 3: With that, I'll turn the call over to Andress.
Speaker 4: Thank you, Jackie. Good afternoon, everyone.
Speaker 4: During the first quarter, we continue to execute on our strategic growth objectives, leveraging our commercial momentum in our core candidate markets and our meaningful improved cost structure.
Speaker 4: We generated particular sales strength in Brazil and Israel, and we draw sequential and year-over-year margin improvements in our non-cannabinoid segments. In addition, we have progress in ramping our Colombian smokeable dry flower shipments and completing the wind-down of our operations in Portugal.
Speaker 4: 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 were able to reduce net loss by 75% and reduce adjusted EBITDA net loss by 35% as we continue to navigate our path to cash flow positivity.
Speaker 4: exclusively cultivating and producing our products out of Colombia.
Speaker 4: 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.
Speaker 4: 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.
Speaker 4: To further catalyze these efforts, we partnered with Pretorian Global, a leading US-based brand owner that operates the BIMS brand and an intellectual property provider to the global cannabis and hemp industry.
Speaker 4: Under the terms of this agreement, we will work with Pretorian to select specific flower strains for initial cultivation trials at our Columbia facilities, 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.
Speaker 4: From an R&D perspective, this partnership allows us to combine our cultivation and development know-how with Pretoria'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 Columbian dry flower exports.
Speaker 4: We have already sent our first commercial shipments of our Colombian grown flower product both Australia and Germany.
Speaker 4: 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 Epea and Israel by end of 2023.
Speaker 4: We will further fine-tune our product and processes in response to the respective market feedback we received from these shipments.
Speaker 4: As we have discussed in relation to our prior flower production in Portugal, adapting our products to the evolving requirements of the corn markets is an imperative and ongoing step towards scaling our Columbia flower shipments.
Speaker 4: With these market-specific evaluations on the way, we are maintaining a focused approach to strain development to ensure we are prioritizing the highest quality and most commercially viable analytics.
Speaker 4: At present, we're focused on refining two or three individual strains, and we will provide updates on new strain notches 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.
Speaker 4: and I will share some recent developments on these products.
Speaker 4: In Brazil, our largest market during Q1, sales of our approved products under RBC327 have continued to run, and they served as a strong driver over catalogued revenues in Q1.
Speaker 4: 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.
Speaker 4: The CBD products manufactured under these agreements are registered under RDC327 and they are already being sold to drugstores and pharmaceutical distribution channels. Look forward to further supporting these partnerships and expanding our presence in the Brazilian market. In Australia, we are able to sell the vast majority of our remaining Portuguese flower inventory. As we have previously shared, our Portuguese flower has the story to receive strong market feedback in Australia, given its high-chaget content, websites and therapy profile.
Speaker 4: as we launch on scale our Columbia Flower experts in Australia. The fails of our Portuguese Flower to Australia also aid the progression of our one-down process.
Speaker 4: 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.
Speaker 4: You will see this change reflected in a Q1 2023 financial presentation and year-over-year comparisons as Hank will describe in better detail shortly.
Speaker 4: 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.
Speaker 4: Finally, we continue to expect our first shipments of cannabinoid products to the UK in the coming months.
Speaker 4: To touch on our third growth objective, optimized cash management, our wind-down process in Portugal has continued to proceed smoothly.
Speaker 4: We undertook this process as part of our ongoing restructuring initiatives with the aim of capturing greater cost and capital deficiencies as we leverage our existing production advantages and minimal capex needs in Colombia.
Speaker 4: 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 work list reductions.
Speaker 4: 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 of these objectives through the remainder of 2023. I will describe our opportunities and objectives in greater detail later in the call.
Speaker 4: 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 31st.
Speaker 4: 2023, her Accounting Standards Codification 205, presentation of Financial Statements.
Speaker 4: 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.
Speaker 4: in accordance with ASC205.
Speaker 4: We will maintain this presentation during the coming quarters of this fiscal year, and further explanatory notes are available in our Q1 2023 10Q 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 benefit
Speaker 4: 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...
Speaker 4: 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.
Speaker 4: 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.
Speaker 4: Inflationary pressures impacted the specialty channel customer inventory levels during the quarter.
Speaker 4: larger accounts including food, drug, and math continued with solid point of sale to results.
Speaker 5: Ordering has bounced back from the prior quarter inventory adjustment.
Speaker 5: Reflecting the measures we've taken to mitigate broader macroeconomic headwind.
Speaker 5: Our all-in cost program of dry flower equivalent in the first quarter of 2023 was $1.29 per gram compared to 12 cents per gram in the year ago period.
Speaker 5: The increase was driven by our reduced harvest in Columbia relative to the year ago period, as well as continued costs associated with processing our existing hemp and CBD inventory for extract sales.
Speaker 5: Consistent with our work over the past few quarters, we have remained focused on right-sizing and optimizing our Colombian harvest to support the rant of our dry flower exports as we expect our flower products to comprise a greater share of our product portfolio over the long term.
Speaker 5: As we continue exclusively producing our products out of Columbia, we believe 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 ultimately expect to reduce our production cost per gram.
Speaker 5: to their historical levels. Our gross profit in the first quarter of 2023, which included an inventory provision of 0.1 million.
Speaker 5: was 2.2 million compared to 2.6 million in the year-ago period, which included a 0.3 million inventory provision.
Speaker 5: 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 a year ago period. This reflects an adjusted gross margin of 59.2% compared to 57.6% in a year ago period.
Speaker 5: 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.
Speaker 5: Operating expenses in the first quarter of 2023 improved significantly to 6.4 million compared to 12.3 million in the year ago period.
Speaker 5: The 48% decrease reflects the significant benefit and diligence of our cost reduction initiative.
Speaker 5: and we expect to continue seeing these benefits through and beyond the second quarter.
Speaker 5: Note that our operating expenses in the near ago quarter included a $3.8 million restructuring charge related to charging off certain excess extraction equipment for our Columbia operation as well as employee exit costs.
Speaker 5: 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.
Speaker 5: The improvement was driven by our continued restructuring and cost reduction measures.
Speaker 5: as well as significantly lower interest expense and amortization of debt issuance costs compared to the year-ago period.
Speaker 5: Net loss in the first quarter of 2022 also included the $3.8 million instruction charge I just mentioned.
Speaker 5: as well as loss on debt extinguishment of 2.39.
Speaker 5: Adjusted EBITDA in the first quarter of 2023 improved to negative 3 million compared to negative 4.7 million in a year ago period.
Speaker 5: This was mainly due to the benefits of cost reductions and restructuring initiatives we have previously implemented.
Speaker 5: The cost improvements we have put in place over the past year and maintained through these early months of 2023 have contributed towards our reduced adjusted EBITDA loss.
Speaker 5: At March 31, 2023, cash, cash equivalents, and restricted cash were $6.7 million compared to $12.9 million at December 31, 2022.
Speaker 5: down of our Portugal operation.
Speaker 5: 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 firm going forward.
Speaker 5: will begin seeing cost saving and significantly reduce cash burn during the second quarter.
Speaker 5: 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.
Speaker 5: Subsequent to the first quarter, we also raised approximately $273,000 in net proceeds from our at-the-market stock offering.
Speaker 5: We will continue to leverage this program where applicable and evaluate other potential pathways for additional capital throughout the year.
Speaker 5: As noted in our public volumes, including our 10Q for the first quarter of 2023, there is substantial doubt about our ability to continue as a going concern.
Speaker 5: Our ability to execute our operating plans through 2023 remains dependent on our ability to obtain additional funds.
Speaker 5: 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 through reducing our investments in working capital and maintaining a lean expense structure across our business.
Speaker 5: 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.
Speaker 5: to range between $19 million and $22 million.
Speaker 5: With an expected adjusted gross margin of approximately 58% to 63%.
Speaker 5: to negative 10.6 million.
Speaker 5: 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.
Speaker 5: 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?
Speaker 6: Thank you, Hank.
Speaker 4: 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 AMBISA, the Brazilian Health Regulatory Agency.
Speaker 4: This certification is required for the manufacturing and commercialization of cannabis products in this market and we are one of the few companies outside of Brazil to receive it. Being GMP certified in Brazil is a major milestone for our position within this market which has the potential to become the largest cannabis market in Latin America.
Speaker 4: Further, it serves as a testament to the high quality and premium standard production practices we uphold and it complements the GMP certifications we have already received in the EU and Colombia.
Speaker 4: As for broader catalysts, we are most closely monitoring trends and progress towards the adoption of Columbia flour across our target markets.
Speaker 4: both within our own shipments and in the overarching progress of these exports. According to a 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, we have a
Speaker 4: comprising some of the top expert destinations.
Speaker 4: These statistics highlight the traction that Colombia has continued to gain within the global medical cannabis market as well as our own strategic position within this backdrop.
Speaker 4: We are also monitoring further regulatory and recreational developments in the Colombian domestic market.
Speaker 4: As of late March, a recreation 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.
Speaker 4: In Germany, we're following German Health Minister Karl Lauterbaas' new two-phased approach to recreational cannabis legalization.
Speaker 4: While the first phase focuses on implementing cannabis social clubs for German citizens, a second five-year phase would allow certain municipalities to have licensed specialty shops that can sell recreational cannabis.
Speaker 4: The multiple avenues we currently occupy in Germany's cannabis supply chain place us in a beneficial position to adapt to the country's recreational framework as it develops.
Speaker 4: 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.
Speaker 4: For example, Sao Paulo passed a law in January that facilitates access to free medical cannabis, as well as measures to increase public awareness and diagnosis surrounding cannabis-based medicines.
Speaker 4: With the products we have available under RDC 327, we aim to continue supplying from a suitable quality cannabinoid products and ingredients for enhanced patient care.
Speaker 4: We will continue to monitor and adapt to the regulatory landscapes in our own markets as they evolve and we remain confident in our overall strategy and commercial position.
Speaker 4: 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. sitting in regards to anGA Analyst Branch perspective, a
Speaker 2: We will now open up the call for Q&A. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster.
Speaker 2: The first question today comes from Bobby Burleson with Canacorn. Please go ahead. You guys, so a couple of quick ones.
Speaker 5: Brazil, Israel, UK, and Columbia. Maybe help.
Speaker 5: prioritize those for us if you tier them in terms of you may be excluding the CBD activity that you're doing in Brazil. How would you kind of rank the THC opportunities timing-wise across those markets? Bobby, thank you very much.
Speaker 4: The products we have right now, which have a little THC, and the ones we're going to have in the future that includes higher levels of THC, are going to be treated exactly the same as per the regulation there. And that's where we believe part of our significant part of our growth is going to come from. We have very strong partnerships in green current hypera. We recently announced, you know, that we move the ladder. So, we have partners who have strength, who have been investing heavily into the market.
Speaker 4: We're looking very positively at Australia.
Speaker 4: of growth, but I would say that extracts in Australia are becoming very, very important. The Australian authorities and the Australian market is becoming even more, you know,
Speaker 4: specific in the requirements of the quality of the products. And as we mentioned, we have our business certification now, our EUGMP certification, our Colombian certification. So we're very, very well positioned to actually serve a market like Australia who's getting more and more and more tighter as time passes. So that means many suppliers are not going to be able to enter Australia and we're confident that we will...
Speaker 4: into the market growing significantly as our Columbia production ramps. As a reminder, in Germany we have our own distributor which means we are actually able to sell our own branded products directly to pharmacies, of course at a very different margin profile than what we have to.
Speaker 4: that we have when we sail to a wholesale business. So I would say those are top markets. But having said that, and you mentioned it, we continue to sell and focus on Israel, but we believe flower for Israel is going to be later in the year. The UK is a market where we see a lot of opportunity. It's opening up for us. And we expect.
Speaker 5: in Brazil at the state level. Obviously in the US
Speaker 5: you know, the states are driving legalization, you know, in terms of really accelerating things like REC and more liberal medical programs. And I'm wondering, you know, what's the dynamic in Brazil? How significant is the Sao Paulo action that you're seeing?
Speaker 4: Are there other opportunities where you're going to see state level activity really help pick up demand? Absolutely. And I think it is going to be an important driver for growth. Sao Paulo, it's a large state, a very influential state, is opening up this program which basically really sets a goal, and the big money is going to be for it to work out even more.
Speaker 4: addresses the issue of affordability of cannabis products for the Brazilian population. And it basically facilitates the access and of course the payment for the vast majority of the products for the Brazilian population. And it basically facilitates the access and of course the payment for the vast majority of the products for the vast majority of the products. So definitely it's a market catalyst with our partners. We're looking very closely at what's happening in Sao Paulo. In other states there is start to be.
Speaker 4: or who can help us participate and eventually be able to win those market tenders. Of course, sometimes there's still before that happens, but we think it's going to be a catalyst and we think we're going to be very well positioned with the products for that.
Speaker 5: And then in terms of you know how ready some of these markets are to really turn on the spigot for more orders You know is there some hesitancy maybe that kind of goes away when you address the balance sheet concerns You know where whereby you know if you raise
Speaker 5: capital or you know in various ways selling assets or whatever it is, do you think that that will increase confidence in the part of some of these customers to turn on the orders some more?
Speaker 4: I would say what we have been discussing with customers, which is basically the same that we have been discussing today, is the company that's lowering costs, improving margins, we've closed down an operation that was using a significant amount of our cash, the revenues are increasing, we have lower capex, we have some non-core assets. So I would say at this point we're not seeing that as a constraint on ordering.
Speaker 4: The constraints are mostly in general, regulatory, commercial, timing, etc. But I see some tailwinds, we're feeling some clear tailwinds. In Brazil, again, we just got the ENVISTA certification, which is a requirement. We had to work very hard for that with our partners. We got that. That's something that, of course, we were all waiting for.
Speaker 4: this point, you know, that's really not, you know, a clear concern such that it can reduce our revenues, mainly because, you know, they're being addressed. And, you know, and as we said, you know, with all the actions that we're undertaking, you know, we do see, you know, significant reduced use of cash.
Speaker 5: item essentially reiterated or was there some shifting around a little bit on the rename the hair line of theun Gentlemen home RM the line
Speaker 5: yeah hi Bobby it's Hank we maintain dark guidance line by line so no movement.
Speaker 5: We maintain DART guidance line by line, so no movement.
Speaker 7: Thanks guys.
Speaker 7: Okay, thanks guys. Absolutely. Thank you very much Bobby.
Speaker 4: This concludes our question and answer session. I would like to turn the conference back over to Andre Fajardo for the second part. No, I just want to thank everyone with the call today. We look forward to speaking with all of our investors and analysts when we report our second quarter results in August . Thank you.
Speaker 2: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
Speaker 1: so