Q2 2023 Clever Leaves Holdings Inc Earnings Call

Speaker 1: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Cleverley's financial results for the second quarter and June 30, 2023.

Speaker 1: Joining us today are Cleverleaf's CEO , Andres Pajardo, and the company's CFO , Hank Haag. 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.

Speaker 1: Specifically, please refer to the company's Form 10Q for the quarter ended June 30, 2023, which was filed prior to this call, as well as other filings made by Cleverley's with the SEC from time to time.

Speaker 1: 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.

Speaker 1: These are non-GAAP financial measures as defined by SEC Regulation G.

Speaker 1: Reconciliation 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 operations are included in today's press release that is posted on the company's website.

Speaker 2: and our core cannot be done in markets, along with our many-foot-leaf-proof cost and capital structure.

Speaker 2: We generated 151% year-over-year growth in our Canabinant revenues as we supported strong extract demand and continued ramping our Colombian flowers shipments.

Speaker 2: Though we continue to navigate specialty channel softness in our non-cannabinoid business, which compress the segments revenue performance for the quarter, we have diligently maintained our margin performance on a sequential and year over year basis.

Speaker 2: We continue to make significant progress with our OPAC reductions, achieving a 25% decrease year-over-year during the quarter.

Speaker 2: 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 Portugal's post harvest pass.

Speaker 2: I am proud of our continued execution and all of these fronts which has trended their position for the second half of 2023.

Speaker 2: 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.

Speaker 2: To first address our cash management, we close our second quarter with 5.1 million compared to 6.7 million at the end of last quarter.

Speaker 2: This represents a net burn of 1.5 million, a significant decrease compared to a 6.2 million burn in Q1 of this year.

Speaker 2: 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 in complete last year, to winding down our operations in Portugal this year.

Speaker 2: 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.

Speaker 2: Most recently, we reached a key milestone in the process through completing the sale of our Portuguese processing assets to terraverde, LDA, and affiliate of cure leaf holdings in July .

Speaker 2: The transaction comprised the sale of our processing facilities and these holding improvements all installed equipment needed for drying, trimming, curing and packaging. And the facilities could current quality system processes and it resulted in gross proceeds of approximately 2.7 million.

Speaker 2: We thank the Curial Lift 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.

Speaker 2: Turning to our Columbian production operations, we continue to support growing traction in our extract business during the second quarter, as well as ramp our dried flower exports.

Speaker 2: Brazil and Israel remained strong markets for our extract products as we supplied approved products under RDC-327 to Brazil and continued to ship APIs in the form of isolate and extracts to Israel.

Speaker 2: While we have processed existing CBD inventory for extract sales and focused our new harvest on cultivating THC flower for 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.

Speaker 2: With that said, we expect our harvest to remain tuned towards DHC flower. And to keep our overall new harvest output aligned with demand and lower than the historical levels in 2021.

Speaker 2: For our flower products, we have already developed three commercial flowers trained so far this year.

Speaker 2: We expect to have completed at least two additional strengths by year-end with more to follow in 2024.

Speaker 2: The THC levels and organoleptic characteristics of the flower have continued to improve, better aligning our product with patient demand.

Speaker 2: During the second quarter, we continued our commercial shipments of our first train to Australia, and we expect to launch a second train in this market during Q3.

Speaker 2: As we announced at the end of July , our Columbian flower is being distributed through our partnership with Australian Natural Therapeutics Group, or ANTG, one of the region's leading medicinal cannabis providers.

Speaker 2: Our flower products are available to medical patients under ANTG's global selects, Brad portfolio, and we look forward to building upon a traction in the Australian market.

Speaker 2: As mentioned in our last quarter, we also expect to start selling our Columbia-produced flower in Germany through our wholly owned, licensed subsidiary CleverDisturmmony by the end of the year. As a reminder, we also announced our partnership with a leading US-based brand-owner, Pretorian Global during Q2.

Speaker 2: Pretorian operates the Bing's brand and provides intellectual property to the global cannabis and hemp industry.

Speaker 2: 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.

Speaker 2: We announced a five-year agreement with a leading Brazilian pharmaceutical company, Hypera Pharma, in April . The agreement covers the sale of CBD products that are registered under the RDC-327 framework. We plan to launch additional products over time. As we continue to develop this partnership, we expect to leverage Hypera's 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 AMVISA, the country's health regulatory agency, in May.

Speaker 2: The certification is required for manufacturing and commercializing cannabis products in the country to maintain top quality medicinal standards. Leverleaf 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.

Speaker 2: our early inroads into some other international markets beyond the Core 6 we named at the beginning of this year.

Speaker 2: As we announced in late May, we entered into a five-year agreement with a specialist biotechnology company, Somai Pharmaceuticals, to supply its operations in Portugal with EU GFP-certified APIs and CBD extracts from Colombia.

Speaker 2: We have already completed our first shipment to turn the deal agreement supporting Somais goal of designing new dosage forms that deliver consistent quantities of active and read instant patients by going beyond conventional drug delivery systems.

Speaker 2: This partnership helps grow our position in Europe's rapidly expanding medicinal cannabis market and we will continue working with the Somai team to propel its product lines with advanced formulations and delivery methods.

Speaker 2: 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, AstraZeneca Holdings AG.

Speaker 2: In this partnership, we have agreed to supply medical cannabis extracts to both Switzerland and the Czech Republic, whereas Tarasana 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.

Speaker 2: 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 great products for patients around the world, as well as continuing to deepen our foothold within the international medical cannabis supply chain.

Speaker 2: 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?

Speaker 2: Thank you, Andres. 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 the last quarter's end.

Speaker 2: Her Accounting Standards Cautification 205, Presentation of Financial State.

Speaker 2: As a result, our condensed consolidated balance sheet, the condensed consolidated statement of operations,

Speaker 2: and the notes to the consolidated financial statement 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, 10Q as filed.

Speaker 2: Moving into our quarterly results, our revenue in the second quarter of 2023 increased 21 percent to 5 million compared to 4.1 million in the year ago period. The increased reflects growth in our cannabinoid segment revenues during the quarter.

Speaker 3: which in turn resulted from strong extract sales in Australia, Brazil, and Israel.

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 70 cents 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 Anders 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 harvests on growing THC flour for export, and our overall new harvest output remained 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 costs per grand 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.

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-comap annoyed 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 state in Cancetiva, along with a $1.3 million gain on re-vegiment of warrant liability.

Adjust to 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 reduction.

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 Coffin call, regenerated increased cost savings and significantly reduced our cash firm during Q2. This refusks our improved revenue performance as well as the cost benefits of having substantially completed the Portugal wind out.

As Andreas mentioned, we completed the sale of our Portuguese processing assets to a currently affiliate in early July , generating 2.7 million in additional non-diolutive capital that we expect to use for working capital in general corporate purposes. This additional source of capital enhances the flexibility of our balance sheets.

As noted in our public files, including our 10Q, the second quarter of 2023, there is a substantial doubt about our ability to continue as they go in 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 investment.

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 target.

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 63%.

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 Andres to review our target market opportunities in greater depth.

This concludes my prepared remarks and I will now turn the call back over to Andres to review our target market opportunities in greater depth. Andres? You can find questions and wer five earlier at the end of the session.

I will now turn the call back over to Andres to review our target market opportunities in greater depth. Andres? Thank you, Hank.

Before opening the called 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 Columbia 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 Columbia flower shipments in the second half of 2023, leveraging our ICanna brand and our existing partnership with season pharmaceutical operators and these tributers such as Petty Park.

Having multiple available pathways to this market improves our positioning as German regulatory conditions evolve.

We are closely monitoring German regulatory progress and leave that the emotion of cannabis from the narcotic list.

who proved to be a catalyst for the medical market.

We hold a similar stance in Colombia, where we are attuned to their reintroduction of a legalization bill in a forthcoming legislative session.

Our mature production operations in Colombia strengthen our position for future market opportunities as they arise and we will continue supporting at that moment forward to legalization.

In Brazil and Israel, we will continue supporting the ongoing grant over 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 approvals.

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 and with changing regulatory requirements and developments in these markets have allowed us to effectively romper existing cannabinoid agreements and continue growing our base of international partners.

Underlying our commercial momentum, we have made a meaningful strides with establishing a linear expense structure and operating with greater capital efficiency.

These strategic tenants 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. We will now begin the question and answer session. To ask a question, or press star, the one is telephone keypad. If you're using a speaker phone, please pick up your hands with me for President Keith. To a dry question, please press star it in two.

At this time, we'll pause momentarily to assemble our roster. Our first question will come from Diana Tokar with CataCore Genuity.

Hey guys, thanks for taking my question. Could you maybe outline your biggest revenue? Rose drivers for Q3 and maybe give some color on the revenues to play between, can I have a note and not a note of businesses? Thank you. Hello, Diana. This is under as 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 energy geography sites, particularly in Australia.

and the reality is the flower is being well received by the market in terms of its quality, in terms of its legacy and its history. So we're very excited about that and we'll continue selling the strain that is currently in market and we expect to bring new and additional strains 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.

as well as launching it in Germany by the end of the year. So I will say those, that will be another important driver of growth.

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 pest growth that we have exhibited in cannabinoids, we do expect that our percentage of revenues coming from the cannabinoid segment will increase further. 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 kind of help me understand when you would need to raise additional cash to...

of timing of where and when we would be required to raise additional capital. Obviously, we're going to pay close attention to the markets as an opportunity to do that. But at this point, we closed the quarter with over $5 million of cash, 5.1.

And we just successfully sold our post-hiverous operations to a unit of currently for 2.7 million. So you can get the sense of our cash position at this point.

Okay, thanks guys. That's all for me. Again, if you have a question, please press star then 1.

Again, if you have a question, please press star, then 1.

We have no further questions. This concludes our question and answer session. I would like to turn the conference back over to Mr. Pajad, who will 40 schools and remarks. Well, I want to thank everybody for joining us today.

The conference is now concluded. Thank you, person. Today's presentation, you may now disconnect.