Good day, and welcome Clever Leaves Third Quarter 2023 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note that this event is being recorded. I'd like to turn the call over to Ms. Jackie Keshner, Director of Investor Relations. Please go ahead..

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Clever Leaves' financial results for the third quarter ended September 30, 2023. Joining us today are Clever Leaves' CEO, Andres Fajardo; and the company's CFO, Hank Hague.

Before I introduce Andres, I'll 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 September 30, 2023, which was filed prior to this call, as well as other filings made by Clever Leaves with the SEC from time to time.

These filings identify factors that could cause results to differ materially from those forward-looking statements. Please also note that, during this call, management will be disclosing adjusted EBITDA, adjusted gross profit and adjusted gross margin. These are non-GAAP financial measures as defined by SEC Regulation G.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures and a statement disclosing the reasons why company management believes that adjusted EBITDA, adjusted gross profit and adjusted gross margin provide useful information to investors regarding the company's financial condition and results of operations, are included in today's press release that is posted on the company's website.

With that, I will turn the call over to Andres..

Thank you, Jackie, and good afternoon, everyone. In the third quarter, we continued to make progress on our strategic commercial production and capital efficiency initiatives. We supported ongoing demand strength for our cannabinoid extract and continued refining our Colombian flower, driving 135% year-over-year growth in our cannabinoid revenues.

In our non-cannabinoid business, we have maintained our margin performance and delivered 6% year-over-year revenue growth. Within this segment, we have continued to strengthen our relationship with the Food-Drug-Mass channel, optimize our go-to-market model for the specialty channel, and grow our direct-to-consumer sales.

We further reinforced our leaner, more efficient cost and capital structure in Q3, benefiting from the sale of our Portuguese processing asset and the cost reduction initiatives we've put in place over the past year.

Our performance through the first three quarters of 2023 is a testament to the strategic improvements we've made to strengthen our position in the global medical cannabis supply chain.

I will discuss each of our three key strategic areas of profitable growth, our optimized cash management, our focused commercial strategy and our low-cost, high-quality production in Colombia. Starting with cash management. Our quarter-end balance represent a net gain relative to the end of last quarter.

We closed the third quarter with $6.5 million compared to $5.1 million at the end of Q2 of this year, demonstrating our success in reducing our quarter-to-quarter cash burn and creating a leaner expense structure for the business.

In addition, our debt obligations have remained low since the second quarter of last year, in which the company's debt was reduced from $22.6 million in Q1 2022 to $2.1 million in Q2 2022, thereby yielding annual cash interest expense savings in future years. At September 30 of this year, our total debt was $1.3 million.

On an ongoing basis, we are seeing the improved savings generated by our work to right-size our labor force, transition our production operations solely to Colombia and leverage our extensive and fully built-out Colombian operation infrastructure.

In fact, our progress on this front has helped facilitate the positive adjustments we have made to the full-year CapEx expectation for 2023, which we will discuss later in the call.

As a reminder, a significant contributor to our third quarter balance sheet improvement was the July 5 sale of our Portuguese post-harvest asset to Terra Verde Lda, an affiliate of Curaleaf Holdings.

The transaction resulted in gross proceeds of $2.7 million, representing both an infusion of additional non-dilutive capital and an important milestone in the wind-down of our Portuguese operations. The broader wind-down process has been substantially completed, positioning us to drive continued expense improvements through the remainder of Q4.

At October 31, 2023, we had a cash balance of $6.2 million. As Hank will describe in greater detail, we have since further enhanced our liquidity through the post-Q3 sale of our remaining stake in Cansativa, which we disclosed on October 23.

One of our wholly owned subsidiaries, Northern Swan Deutschland Holdings, has agreed to sell its remaining Cansativa shares back to Cansativa and to EIP Entrepreneurial Investments GmbH for EIP. The sale resulted in proceeds of approximately $1.9 million.

We would like to thank Cansativa and EIP for their partnership in the transaction, and we look forward to leveraging our other strong pathways to the German market as we develop our commercial opportunities in the region. Turning to our commercial strategy.

We have maintained our focus on our core target markets, which continue to be Australia, Germany, Brazil, Israel, the United Kingdom and Colombia. In July, we announced that we expanded our agreement with Australian Natural Therapeutics Group, or ANTG, to include our Colombian flower.

The flower products are now available to Australian medical patients through pharmacy outlets throughout the country under AMTG's Global Selects brand portfolio.

As a whole, the Australian economic market has been robust growth through the first half of this year, with authorized prescriber medical cannabis approvals growing over 120% year-over-year according to data from Australia's medicine and therapeutic regulatory agency, the Therapeutic Goods Administration.

We are proud of how we have built upon our flower structure in the Australian market, and we continue to receive positive reception for our most recent strains. Our next strain is currently on track to launch in Australia during the fourth quarter.

Australia and Brazil have continued to be the strongest markets for our extract products, building upon our approved product shipments under RDC-327 in Brazil and a growing base of supply partnerships in the other markets.

In our work to support our partners and mitigate any potential business impacts, we are closely monitoring news surrounding the Israel-Hamas war. Current conditions have both shipping, transportation and related logistic challenges in the region that we are navigating with our partners in real-time.

While our collective visibility remains limited, we are working to stay flexible for our partners and ensure that patients receive the medicine they need. Our thoughts are with everyone who is affected by the war. We are also working diligently to grow our commercial footprint in the United Kingdom and Germany. Similar to Australia, the U.K.

has seen strong growth in its medical cannabis market this year, with the government's Home Office reporting that medical cannabis imports have tripled in volume year-over-year. In Germany, we continue to view our branded flower product and our existing B2B partnerships in the region as key entry points for our Colombian flower shipment.

We are focused on positioning our product along these lines as we monitor further developments in the regulatory evolution of the country's cannabis market.

To conclude by reviewing our Colombian production operations, we have continued to focus our harvest on cultivating THC flower for exports while planting some new CBD hemp crops to ensure we have the inventory to address demand for our extract products.

We continue to keep our harvest skewed towards THC flower and keep rollout more closely aligned with demand. From a strain development perspective, we believe we remain on track to complete two additional strains by the end of this year and have made solid progress in our early cultivation work with Pretorian Global.

The strains we develop through this partnership are expected to benefit our market penetration strategy across our target markets. More broadly, we expect to continue expanding our flower portfolio throughout 2024 as we work to refine THC levels, [indiscernible] characteristics and other key flower qualities in line with patient needs.

With our mature production operations in Colombia, we have worked to build and sustain our industry reputation for high-quality products and pharmaceutical-grade production standards. Importantly, many of the practices that maximize the quality and efficiency of our operations have also demonstrated our commitment to sustainability.

For example, the environmental advantages from receiving 12 hours of natural sunlight and cultivating at a high elevation have not only benefited production costs, but also allowed us to optimize our energy and water usage as well as entirely eliminate the need for pesticides.

As evidence of our leadership on this front, we are awarded the International Declaration of Carbon Neutrality by the 100% carbon neutral program for our active commitment to environmental sustainability and climate change mitigation in late August.

To date, we believe we are one of the first non-vertically integrated medicinal cannabis companies worldwide to have achieved international certification for carbon neutrality.

In addition to leveraging our environmental advantages, we have implemented various measures to curb carbon emissions and preserve natural resources, including methods of harnessing solar energy and optimizing waste management practice. In fact, we currently repurpose or recycle more than 50% of waste into productive processes.

Our dedication to and track record in environmental sustainability demonstrates the high quality standards of our products and processes. Producing medical-grade cannabinoid products at scale for a global base of patients requires a careful strategic matrix.

We have had to be nimble in adapting to market-specific requirements, decisive in implementing key capital optimization measures, and comprehensive in ramping our Colombian operations to support extract momentum while building traction for our flower exports. The work to strengthen this foundation has been gradual yet steady.

As we move further into Q4 and prepare for the year ahead, we aim to continue building upon our growing base of international partnerships as well as the advantages of our extensive Colombian production base and leaner corporate infrastructure.

I am proud of the progress we have made through the third quarter of this year, and we expect to continue leveraging our significantly improved capital efficiencies and growing commercial traction through the end of this year into the next.

I'd now like to turn the call over to our CFO, Hank Hague, who will discuss our third quarter financial performance.

Hank?.

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.

As a result, our condensed consolidated balance sheet, the condensed consolidated statement of operations, and the notes to the consolidated financial statements have been restated for all periods presented to reflect the discontinuation of these operations in accordance with ASC 205.

This presentation will continue through the fourth quarter of this year, and further explanatory notes are available in our third quarter 10-Q filing.

Please also note that, on August 24, we implemented a 1-for-30 reverse split of our common shares, which reduced the number of issued and outstanding common shares from approximately $45.7 million to approximately $1.5 million.

The reverse split helped facilitate our compliance with the NASDAQ's minimum bid price requirement, which we have regained as of September 8. Moving into our quarterly results. Our revenue in the third quarter of 2023 increased 33% to $3.8 million compared to $2.9 million in the year-ago period.

The increase reflects growth in our cannabinoid segment revenues during the quarter generated from continued extract sales strength in Australia and Brazil. On a sequential basis compared to the second quarter of this year, we had some variability in the timing of certain regulatory approvals in Brazil, which delayed some of our expected shipments.

However, we believe these are now on track to be delivered by the end of Q4. Our non-cannabinoid segment revenues increased 6% year-over-year as we worked to mitigate the specialty channel softness that has pressured our top line growth through the first half of the year. We have also continued to support traction with our online marketplace partners.

From late Q3 into early Q4, we began to generate some incremental channel improvements as customer buying patterns have adjusted to current economic conditions. To further support these patterns, we are working to optimize our product mixes across certain channels and invest in marketing efforts geared towards enhancing customer education.

In particular, we are making packaging and marketing improvements around the relaunch of our premium herbal clean product, Ultra Eliminex with positive reception thus far. Our all-in cost per gram of dry flower equivalent in the third quarter of 2023 was $0.75 per gram compared to $0.52 per gram in the year-ago period.

During the quarter, 1,210 kilograms were harvested compared to 1,211 kilograms in the year ago period. We also made some meaningful changes in our cultivation techniques to improve the quality and properties of the flower as well as meet more stringent market and regulatory requirements.

We have continued to add new CBD hemp crops to our harvest cycle to replenish our inventory for previously sold extract products while mainly focusing our Colombian harvest on growing THC flower for export.

We expect to drive greater cost advantages over time as we continue to optimize our harvest mix and scale our Colombian flower operations with the aim of bringing our production cost per gram closer to their historical levels.

Our gross profit in the third quarter of 2023, which included an inventory provision of $0.3 million, increased 49% to $1.9 million compared to $1.3 million in the year-ago period, which included a $0.6 million inventory provision.

Our adjusted gross profit, which excluded the inventory provisions, increased 19% to $2.2 million in the third quarter of 2023 compared to $1.9 million in the year-ago period. This reflects an adjusted gross margin of 57.7% compared to 64.7% in the year-ago period.

The increase in our gross profit reflects the revenue growth we generated during the quarter along with stabilized pricing for both raw materials and labor in our non-cannabinoid segment. Operating expenses in the third quarter of 2023 improved to $5.3 million compared to $25.6 million in the year-ago period.

Note that our OpEx in the third quarter of 2022 included a $19 million intangible asset impairment charge related to our Colombian cannabis licenses.

Excluding the year-ago impairment charge, our operating expenses decreased 20% year-over-year, reflecting increased savings as we benefit from the cost reduction and restructuring initiatives we have previously implemented. Net loss in the third quarter of 2023 was $5.1 million compared to a net loss of $20.2 million in the year-ago period.

Net loss in the year ago quarter reflects the impact of the $19 million asset impairment charge I just mentioned. Net loss in the third quarter of this year includes a $3.7 million investment impairment related to the sale of our remaining stake in Cansativa.

Subsequent to the quarter, our wholly-owned subsidiary entered into a first share purchase and transfer agreement with Cansativa and EIP, as Andres mentioned earlier. Per the agreement, Cansativa and EIP purchased our remaining 3,648 shares for a total purchase price of approximately $1.9 million.

While the Cansativa investment does not have a readily determinable fair value, we have determined that the sale price of the investment represents a discounted price as compared to the value of the investment at the historical costs shown in the books.

Upon comparing the subsequent transaction value of the shares sold to the carrying value, we recorded a $3.7 million impairment loss provision during the third quarter. Adjusted EBITDA in the third quarter of 2023 improved to negative $2.6 million compared to negative $3.7 million in the year-ago period.

This was mainly due to the benefits of the cost reduction and restructuring activities we have previously implemented. At September 30, 2023, cash, cash equivalents and restricted cash were $6.5 million compared to $12.9 million at December 31, 2022. The decrease was primarily attributable to continued operating losses and working capital needs.

Our third quarter cash balance reflects the $2.7 million in proceeds from the sale of our Portuguese post-harvest assets along with the approximate $0.8 million in net proceeds we raised from our at-the-market stock offering during the third quarter.

This program remains available for us to leverage where applicable, and we will continue to evaluate other potential pathways for additional capital. With our improved revenue performance and increased cost savings, we have continued to drive significant improvements in our cash burn.

The wind-down of our Portuguese operations has given us an even leaner go-forward operational foundation, and we are still working towards selling our remaining agricultural assets by the end of Q1 2024.

Additionally, we have received the approximate $1.9 million in net proceeds from the sale of the Cansativa shares, which is not included in the $6.2 million cash balance we recorded at October 31, 2023.

As noted in our public filings, including our 10-Q for the third quarter of 2023, there continues to be substantial doubt about our ability to continue as a going concern.

Our operational execution continues to be dependent on our ability to obtain additional 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 reducing working capital investments and driving additional efficiencies in our overall cost structure.

With the phasing and mix of our revenues across both business segments, along with the improvements we have made in our cost and capital structure, we have adjusted our full-year 2023 financial forecast across all metrics.

On the top line, we now expect our full-year 2023 revenue to be within the range of $17 million to $18 million compared to the prior range of $19 million to $22 million. We also expect our adjusted gross margin to range between 55% to 57% compared to our prior expectation of 58% to 63%.

The revisions primarily reflect timing variability across our cannabinoid markets, mainly Brazil as a result of the timing and the issuance of internal quotas and Israel as a result of the recent geopolitical complexities facing the nation.

In our non-cannabinoid business, which is our higher-margin segment, the revisions also reflect the softness in our specialty channel during the first half of the year, which pressured our segment-level top line performance.

For full-year adjusted EBITDA, we have reduced the loss and narrowed our expected range, which is now between minus $11 million and minus $10 million compared to our prior range of minus $13.6 million to minus $10.6 million. This adjustment reflects the strong cost reductions we have driven throughout the year.

We also further reduced our expected 2023 capital expenditures to a range of $0.2 million to $0.3 million compared to our prior range of $0.5 million to $0.7 million. This resulted from the minimal CapEx needs of our mature Colombian production operations, and the new range represents a nearly 80% reduction relative to our full-year 2022 CapEx.

This concludes my prepared remarks, and I will now turn the call back over to Andres..

Thank you, Hank. Through the end of the third quarter, we have made demonstrable strides on all three of our key strategic fronts.

By substantially reducing our cash burn relative to historical levels and working to optimize our products and processes to meet evolving commercial dynamics across our core markets, we believe we have strengthened our positioning and efficiency as a global medical cannabis operator.

Focusing our commercial efforts on a concentrated set of core markets, which we have done since early last year, has allowed us to deepen and ramp our existing sale agreements more effectively while positioning us to address new opportunities as several markets develop further around the world.

Our work to accelerate cannabinoid sales momentum has been supported by improving our balance sheet and leveraging our low-cost unit economics in Colombia.

Taken together, we believe we are nearing an inflection point for our business in 2024, benefiting from our revenue and profitability optimization initiatives and the high-quality reputation we have built in the international cannabis supply chain.

We would like to thank our shareholders for their support as we make additional progress on our growth trajectory. We'll now open up the call for Q&A..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Thank you. Our first question will be from Bobby Burleson of Canaccord. Please go ahead..

Hi guys, unfortunately, I'm going to have to drop off this call quickly because I have another call overlapping with it, but I wanted to squeeze a question in here.

So just curious, in terms of how you prioritize things, given what's happening in Israel, what can you do kind of mid-strokes, midstream here to make adjustments where possible in terms of backfilling demand or backfilling programs that were underway and dedicating those resources elsewhere, if at all possible? Thanks..

Hello, Bobby, thank you very much for the question and for being in the call. And certainly, that's a topic we have been monitoring very closely, first and foremost, because we have a series of clients and partners over there. So we have been in continued conversations with them.

I would say that, after a few weeks have passed, we are now actually starting to move ahead with potentially reinitiating some of the planned shipments and sales we had into the country. There is still some logistic challenges as flights are extremely limited for products to get there.

But there are some signs that, probably in the first weeks of December, that's going to be resolved to some extent, and some of the product can be flowing there. So we have been focusing on, first and foremost, making sure that the patients in Israel have access to the products and somehow find ways to fill those orders from our clients over there.

Beyond that, as we've always said, we have a very specific set of countries we're focusing on. So basically, as some of the product is not flowing into Israel or is delayed at some degree, we're basically finding homes for it in other geographies.

For example, for the APIs, we're shifting some of that volume to Australia, where demand has been increasing quite significantly. We're placing a little bit more effort in the launch of our flowers in Australia and Germany and the U.K. and strengthening our work, of course, in Brazil. So we keep focusing on the core markets.

And as I said, we keep making sure that the Israeli patients have access to the products. And we believe that the logistics are going to be solved and the supply can start hopefully as soon as this quarter, but if not, hopefully early Q1 of next year..

Great, thank you. I have to hop off the call. But thank you so much for that color and looking forward to talking to you soon..

Thank you, Bobby..

Thank you. That concludes our question-and-answer session. I'll turn the call back over to Andres Fajardo for closing remarks..

Well, thank you, Nick, and thanks all of our shareholders and others in the call. I'd like to now thank everyone who attended the call today, and we look forward to speaking with our investors and analysts when we report our fourth quarter and full-year results in March..

Thank you. This conference has now concluded. Thank you for attending today's presentation. You may now disconnect..