Good afternoon, everyone and thank you for participating in today’s Conference Call to discuss Clever Leaves’ Financial Results for the Second Quarter ended June 30, 2021. Joining us today are Clever Leaves’ CEO, Kyle Detwiler and the company’s CFO, Hank Hague.

Before I introduce Kyle, 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 30, 2021, 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. This is a non-GAAP financial measure as defined by SEC Regulation G.

A reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure and a statement disclosing the reasons why company management believes that adjusted EBITDA provides 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 Kyle.

Kyle?.

Thank you, Cody and good afternoon everyone. The second quarter marked meaningful progress toward our long-term vision of becoming a leading low cost multinational cannabis companies and a continuation of our trajectory to achieve our near-term targets.

Cannabinoid shipments continue to drive robust year-over-year revenue growth, while the market leading efficiencies we are achieving at our cultivation facilities in Colombia and Portugal led to improvements in adjusted EBITDA.

From a business development standpoint, we signed new partnership agreements in Australia and Mexico, widening our global distribution network to more partners and new geographies. We also launched Project Change Lives, our $25 million research Initiative, which allows us to help support the U.S.

cannabis research projects while advancing Clever Leaves position in this emerging segment of the cannabis industry. Our success in expanding our footprint through new partnerships, while attaining positive financial momentum, leaves us confident in the bright future ahead for Clever Leaves.

During our last 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 continue to ramp our operations, 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 client’s evolving downstream strategies and preferences along with international regulations. 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 companies by IDT Australia to export our pharmaceutical grade flower directly from our GACP certified 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’s ongoing shortage of medical cannabis, which has left patients unable to access their prescribed cannabis-based medicines.

We are pleased with the early days of this arrangement and are aiming to widen our distribution channel with IDT to better service and meet the demand of the Australian market. 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 cannabis when we announced our entry into the market through a commercial partnership with CBD Life.

CBD Life is an emerging leader in the Mexican cannabis industry that offers a developing line of CBD wellness and consumer products. Several leaders will act as the active pharmaceutical ingredient or API supplier for the development and manufacturing of CBD Life’s medical cannabis products, beginning with CBD isolate.

We are pleased to have partnered with a team experienced with brand building and pharmaceutical distribution to deliver on cannabinoid products from our EU GMP certified facility in Colombia into Mexico.

In what we view as an important step in our strategic growth opportunity, we aim to be an ongoing supplier of the required APIs for CBD Life’s product manufacturing purposes.

Turning to Colombia, we would of course be remiss if we did not address this historic decree that was signed subsequent to the quarter end that should allow Colombia’s licensed cannabis companies such as Clever Leaves participate in the commercial production and export of medical cannabis flower for the first time.

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.

To further contextualize the gravity of this advancement in regulatory reform, the occasion was celebrated from a visit with the President of Colombia, Ivan Duque and several key ministers to our cultivation facility near Bogota, as our operations in the country have been designated a project of national and strategic interest by the Colombian government.

While flower exports from Colombia will not turn out overnight, this is undoubtedly one of the most significant regulatory milestones in Clever Leaves 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 regulatory reforms.

In addition to the tailwinds 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 of 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, Hank Hague to provide more details on our financial performance for the second quarter.

Hank, 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 cannabinoid revenue segment, which increased nearly fourfold from the prior year period as we continue to pursue global business development opportunities and enter new markets with Pathfinder shipments, which are typically lumpy.

In our non-cannabinoid segments, 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 had sustained our momentum with diversifying our revenue mix and working to further improve our positioning in key parts of the global cannabinoid supply chains.

Our all-in cost per gram of dried flower in the second quarter of 2021 was $0.22 per gram compared to $0.11 in the year ago period. This was largely due to production cost 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 cost includes both cultivation and production expenses, including those associated with extraction, depreciation, quality assurance and other supply chain-related items, which all encompassed in ongoing expense pf maintaining production at an EU GMP certified level of quality and traceability.

Gross profit in the second quarter of 2021 increased 157% to $2.3 million compared to $0.9 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 targets of 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 non-cash 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 the year ago period. The improvement was mainly driven by our aforementioned gross profit growth and cost management throughout the organization, including cultivation and production efficiencies.

At June 30, 2021, our cash balance was $57.1 million compared to $79.5 million at December 31, 2020 primarily attributed to our anticipated operating losses in capital investments during the year.

As an additional balance sheet update in July 2021, we announced a $25 million strategic financing from SunStream Bancorp, a joint venture initiative sponsored by Sundial Growers as well as the full repayment of our secured convertible notes due March 30, 2022 at a 90% of par value.

The financing team in the form of a secured convertible note, with a 3-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 debt service commitments, while providing additional working capital as we continue our expansion efforts across our core markets.

We are grateful to have received the support from SunStream 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 full year 2021 guidance.

To reiterate, our aforementioned guidance reflects solid year-over-year performance with between $17 million to $20 million in 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 will turn the call back over to Kyle.

Kyle?.

Thank you, Hank. In both our business in the broader cannabis industry, the pace of global regulatory reform plays a significant role in our ability to continue expanding our products reach within a growing international customer base.

While we are thrilled with the progress made across several of our key geographies during the quarter and the prospects for commercial success we hope they will usher in, we recognize that communities around the world are still contending for the consequences of the prolonged prohibition of cannabis.

At Clever Leaves, we operate with a mission to cultivate mojo, create value and change lives and this means taking proactive measures to help solve these problems, particularly those that involve supply and research knowledge gaps related to medical cannabis.

As global reforms progress and operators continue to gain greater regulatory validations, we are better able to execute on this mission. I would like to take this time to callout some of the progress we have made towards these efforts over the past few months.

In Australia, as I mentioned earlier, our recent partnership with IDT Australia helps address the country’s limited access to affordable pharmaceutical grade medicinal cannabis flower products.

We witnessed the long-term harm that prohibition causes firsthand as patients suffering from chronic conditions who have been prescribed cannabis-based medicinal products found themselves unable to access to treatments due to supply shortages across the continent.

We believe patients should be able to access and trust the products they were prescribed, which is why we are proud to be supplying flower from our GACP certified facility in Portugal.

While 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 dried medical cannabis flower from our Colombian operations, a region which requires no additional investment to access 1.8 million square feet of already constructed and operating cultivation.

I spoke a bit earlier about the financial opportunities this new decree presents, including the potential to double our total addressable market and compete more effectively within the global medical cannabis market of which flower makes up approximately half.

In terms of our existing operations, 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 dried flower production operations in Portugal as we commence these operations in Colombia, giving us an additional advantage as we capitalize on this opportunity.

While we may not be the only operator in Colombia, we are the only EU GMP certified cannabis operation in Latin America today, including EU GMP certification for dried flower production. We applaud the Colombian government’s approval and look forward to developing this additional product offering for our growing global partners’ network.

In addition to leveraging opportunities to export different forms of cannabis, we have also created an opportunity to help advance U.S researchers understanding of the potential medical benefits of cannabis.

In June, we announced Projects Change Lives, or PCL, in partnership with biopharmaceutical research company, in which Clever Leaves has pledged to donate up to $25 million in medical cannabis products to any eligible U.S organizations to help advance scientific 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 our cultivars, which they will use to 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 am 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 of 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 B2B 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 regulatory tailwinds and developments in the geographies in which we focus.

Our work is not yet done as we continue our construction efforts of production ramps in Portugal to begin working towards flower export preparations in Colombia and closely monitor changes in quality standards and approval processes across our geographies.

I am looking forward to making further progress on our long-term strategy and seeing it through to our vision for Clever Leaves at maturity. I believe we will now open the call up for Q&A..

Thank you, sir. [Operation Instructions] And our first question is coming from the line of Bobby Burleson with Canaccord. Please proceed..

Hi, everybody. Thanks for taking my questions. Congratulations on the continued progress. It’s great to talk with you this afternoon.

So I think I’d start with your target model and we talk about the current footprint at maturity, you guys are talking about doing $220 million in revenue and $90 million in EBITDA, but you also callout an estimated CapEx to get to that outcome of $50 million.

But I am wondering, I know it’s too early right now to revisit that number given the decree just happened in Colombia, but I am curious kind of general order of magnitude how the capital intensity there might be reduced if we are able to shift more of that flower export to the Colombian operation.

Just curious kind of what the optionality is there for you?.

Great, yes. Thanks for the question, Bobby and good to hear from you. The decree is relatively young and we are waiting for subsequent resolutions and regulations, which will help clarify some of the other details around Colombia flower exports.

Nevertheless, I think you are definitely thinking about one of the main questions that we are thinking through, we have definitely constructed our capacity in Colombia at a much lower cost per square foot that facility is also already EU GMP certified, so it makes it slightly easier to expand within there.

But nevertheless, it’s still a bit too early. If we are able to replicate that that flower that we are previously planning to cultivate in the Portuguese facility, the $50 million CapEx number could be substantially reduced. I don’t think we are 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 – I have another question, it’s not really a follow-up. On the nutraceutical business, it’s still, obviously, a big footprint on your guidance this year.

It sounds like the momentum there is healthy, maybe a little bit more beneath the hood there in terms of what’s going on? What kind of trends you are seeing both in terms of just volume that’s moving through distribution there, maybe additional opportunities for 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 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 as being deemed non-essential that had a negative implication for our business.

And in 2021, until recently it looks like things were getting much better. We have to keep our vigilance with, COVID, the Delta variant, but we are very encouraged up until recently, or up till now.

I think the second factor is, this business which we acquired in 2019 was family run for 30 years, and we have upgraded the organization and gradually expanded distribution, that means new retail partners. And that means more skews within those partners and more stores within those partners. So, I think we are very pleased with the progress over time.

And hopefully, there will be more to come..

Great.

And then just, your pipeline outside of nutraceutical is in fact, four general geographies that you highlighted, Europe being the biggest, I am curious whether or not as we look out to ‘22 and beyond which one of those geographies you would expect to kind of gain in terms of its overall mix of pipeline?.

Yes. At this point, we haven’t made any statements about 2022, yet. Nevertheless, if you are comparing 2022, to 2021, there are new geographies which are becoming more offering greater potential.

Some of those countries are in Europe, like the – depending on whether you count the UK as part of Europe, some of those might be in Latin America, like Mexico, again, kind of depending on how you classify it. But, we also don’t assume any products comes into Canada and the United States. So, it all really just depends on regulation.

But, I think we are 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 are just making them all kind of going on a similar pace?.

And certain markets are in greater steps of their growth curve than others. Germany has been a market where cannabis 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, very few companies are able to commercialize products.

We believe we are among the earliest past there. And so, that will be kind of building from 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..

[Operator Instructions] Our next question is coming from the line of Vivien Azer with Cowen. Please proceed with your question..

Hi, good evening, or good afternoon..

Hey, Vivian..

Thank you for taking the questions. On – just focusing perhaps a little bit more near-term, I appreciated all the commentary around kind of long-term aspirations and 2022, which is hard to predict.

But if we just kind of dial-in to the back half of 2021, you guys were reiterating your revenue guidance, it would imply a lot more incremental revenue sequentially than you posted in 2Q versus 1Q.

So, if you could offer some color on how we should think about the phasing of that between the third quarter and the fourth quarter, and what the principal drivers of that would be, that would be helpful? Thank you..

Great, yes. No, thanks, Vivian. And definitely, that is very logical conclusion from the reiteration of guidance. I think the business and the pipeline is looking good. As we sit in sort of the pathfinder phase of a lot of our commercial partnerships, there is significant lumpiness 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, our hope and our anticipation is that, pathfinder, lumpy shipments turn into something a bit more predictable and repeatable. On top of that, we do also have a number of partnerships or initiatives, which were always expected to be in the back half.

And many of these are subject to 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 resurgences in COVID. But right now, we still feel pretty good about it. There are lots of opportunities.

That’s 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 headwinds around scaling, but the full year guide of the 61% would suggest an accelerating pace of margin degradation in the back half.

So, we think about that as flowing through evenly in 3Q, 4Q, or is there something that we should be contemplating that would have an outsized impact on one quarter over another?.

Hi, Vivian, it’s Hank. Thank you for the question. We have reiterated our guidance and 61%. The major driver in our strong margin performance in this quarter was the herbal brands business, where it was disproportionately larger than our cannabinoid business.

So as we expect, as we anticipate, in our pipeline, as we see it going forward, greater and greater quantities of cannabinoids shipments, we expect the margin to work a little bit lower on a combined basis. And we would expect that to glide smoothly or slowly into that range..

And is that – I would anticipate that continues into 2022. I am not asking you to offer 2022 guidance.

I know that’s premature, but like, at what point does your revenue mix allow for kind of normalization, or stabilization of gross margin?.

Yes. When that excess, our expectation is that we are more fully selling more cannabinoid business than non-cannabinoid business. We would be looking at a higher utilization of our Portuguese flower business, which is just getting started. As you know, we are under construction for a significant expansion there.

And that’s sort of the timing of when we would expect it to adjust. And this is obviously forward-looking. But as things develop in Colombia and the volumes grow there, we would also expect to have lower cost per gram driving new gross margins higher as well..

Understood, that’s helpful. Last one, for me.

The deal that you did with Sunscreen and addressing the kind of words 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 costs were 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. Appreciate the color..

Thank you. You’re welcome..

[Operator Instructions] Our next question, it is coming from the line of [indiscernible] with ARGO Capital Advisors. Please proceed with your question..

I will appreciate all the updates. As we get a little more clarity around, if at any progress be made in Brazil and then sort of the follow-up questions about it, any highlights around Cansativa and your investment there in terms of additional sort of breakouts into the broader European market? Thank you..

Great, yes and thanks for the question. So, on Brazil, we definitely are in a innovation state with getting some of the country’s first cannabinoid products registered. So, not only are we learning as we go, but the Brazilian regulatory authorities are learning as they go.

So, progress remains at a pharmaceutical pace, which is something that Clever Leaves is uniquely capable of tackling because of its strong focus on quality as exemplified by both the Colombian GMP certification and a European certification. So, we are working through things, smoothly. So, no warning signs at this point.

But here are unanticipated matters that pop up, which we now factor into sort of normal course, business in almost everything we do.

On Cansativa 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 points through Cansativa, which has greatly broadened the number of suppliers entering 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 an unregulated sources applied for a patient, or it is a patient not knowing or being able to access, that medical product, so, the more companies that are there to help educate physicians and/or patients, the better.

On top of that, I would say other data points that we are seeing through Cansativa are that, product diversity is increasing gradually. So, yes, there are new suppliers of cannabis flower.

And there are also increasing number of players entering on the extracted product side, which is great for us as we have a partnership with Ethypharm, 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 of mind in Germany. We are still dealing with one in 1,000 people in Germany using medical cannabis versus the U.S. and Canada, both figures north of 10 in 1000 people. So, a lot of potential and the market I think is gradually and healthily evolving..

Thank you..

At this time, this concludes our question-and-answer session. And I would like to turn the call back over to Mr. Detwiler for closing remarks..

Thank you all for joining and we look forward to the next quarterly results..

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation..