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, 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 September 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..
Thank you, Cody, and good afternoon, everyone. During the third quarter, we made key operational advancements that have positioned us for continued execution on our long-term growth strategy. We sustained year-over-year growth across revenue and gross profit as our U.S.
nutraceutical business continued its recovery from last year's pandemic related impacts.
In our cannabinoid segment, we have scaled our Portugal cultivation operations and improves our positioning within several core international markets, even as segment level revenue comparisons for the quarter were impacted by variability around the timing and size of our shipments, which can cause our sales activity to fluctuate from quarter-to-quarter.
With our continued production efficiencies and growing base of global partners, we are establishing our business as a leading multinational operator within the global cannabinoid supply chain. Across several of our core geographies, we've made meaningful progress enhancing our operational foundation.
Beginning in Portugal, we completed construction on our cultivation expansion during the third quarter, reaching this point well ahead of the timing expectations we previously provided as well as on budget.
This expansion adds another 150,000 square feet to our cultivation footprint, bringing our total Portuguese cultivation capacity up to 260,000 square feet. With this addition, we are now able to achieve greater levels of productive capacity at the same levels of SG&A, which we expect to lead to increased economies of scale.
Furthermore, this expansion also includes key design features that we believe should enhance our product quality and expand our ability to innovate. These include larger air chapels and new fans that improve air circulation as well as a fully dedicated R&D facility that has new led lights and CO2 injection capabilities.
Taken together, these technologies and expanded capacity, improve our ability to stabilize and validate new cannabis genetic varietals, which is an increasingly important and challenging feat. We also remain on track with construction on our new post-harvest facility, which we still expect to be operational and EU GMP certified by the end of 2022.
Our team has worked diligently to begin pathfinder shipments from Portugal, completing shipments of high-THC flower to Australia at the end of Q2 and even to the United States in October, as I'll discuss later.
With this additional capacity and new capabilities, we believe we are well positioned to serve growing demand among our international customer base with even greater scale and efficiency.
In Colombia, we now have the opportunity to complement our ramping Portuguese flower production and existing commercial relationships, thanks to a decree signed by Colombian President, Ivan Duque this past July.
This decree allows for the commercial export of medical cannabis flower, which we believe has the potential to double our total addressable market from the Colombian operation.
We were honored to host President Duque for this historic signing at our cultivation facility near Bogata, and we remain attentive to further legislative progress on the accompanying resolutions that determine the time lines and guidelines that will govern these new flower exports.
We believe our efficient, cost-effective production processes, significant scale, experience selling flower products in Portugal, which has quite a different sales and technical process compared to extracts, established commercial relationships and EU GMP certifications, which already include flower product, put us in a strong position to capitalize on the sizable market opportunity once subsequent regulations are formally released.
We are capturing new growth opportunities and market entry points, not only abroad, but also here in the United States. After launching the Project Change Lives initiative in June to establish the Clever Leaves brand in the eyes of U.S.
pharmaceutical research, we have already announced our first two university research partnerships with UC Davis and the University of Missouri. Through supporting projects like these, we are leveraging our industry-leading certifications and quality commitments to become a trusted supply partner to U.S.
research institutions undertaking potentially medically significant cannabis studies and research. Further, we are working to create new opportunities for the advancement of medical treatments and patient access by allowing legal cannabis ingredients in pharmaceuticals to cross-borders truly.
Lastly, project change lives and our ensuing university partnerships demonstrate the potential market entry opportunities on which we are able to execute through our gradual path finding cadence and the foundation of trust we build with all of our partners, whether they're in research or commercial settings.
While this initiative began publicly as a charitable research initiative, we are also very pleased that it's led to a historic commercial milestone as well, which I shall speak to later.
Our early success with Project Change Lives builds on the robust foundation we have already established in the United States with our Herbal Brands nutraceutical business, where sales have continued to rebound nicely from last year's pandemic related impacts and our distribution footprint has grown.
Yet in this market and others, I want to remind everyone that we are still in a very complex and evolving operating environment from both a pandemic recovery perspective and from a regulatory perspective. In the U.S.
alone, we are closely monitoring macroeconomic factors surrounding labor availability, wage pressure and assorted supply chain and transportation challenges in our nutraceutical business.
These have had an increasing impact on domestic consumer packaged good businesses, and Hank will be on shortly to touch on those factors as they relate to our margin expectations for our non-cannabinoid segment.
As for our cannabinoid segment, aside from the significant regulatory opportunity presented to us as one of the largest producers of cannabis flower in Colombia, we were very pleased by the progress we've made with our early commercial ramp with customers.
This industry and this year, in particular, has created challenges, and we anticipated several key commercial initiatives to activate late in the year, which have time lines with higher uncertainty. We now expect some of these commercial opportunities to materialize later than previously anticipated.
Some of these delays are related to fine-tuning quality standards and product preferences for B2B clients, which are typically expedited with in-person visits and these visits have often been postponed or challenging to take place at all due to COVID-19.
Other delays remain regulatory in nature, such as product registrations, audits or other authorizations. Some delays are the result of product availability. For instance, we are now planning for a quarter or more of delay in the full launch of our branded medical cannabis product in Germany.
While we did not amass inventory suitable for a full launch as originally planned, we chose to move forward with a soft launch to test and validate the product market fit as well as our operational capabilities.
Results so far have been encouraging as the batch of product offered sold out to German pharmacies in less than 24 hours, which suggests a growing demand among medical customers in the country as well as demand for our specific product designed far in advance of launch.
As we deepen our presence in existing markets and continue working to expand our overall footprint, we recognize that there are complex global factors out of our control related to both broader post-COVID supply chain recovery and cannabinoid export specific approval, shipment and quality control processes.
However, we have delivered solid execution on the factors that are within our control, such as our pharmaceutical-grade quality and strong operational efficiency, maintaining a suitable inventory of product is also essential as out of stock alerts are quite common in Germany, so we have decided to prioritize a smooth brand growth at the expense of more intermittent sales even if this moves critical revenue realizations out a quarter or two.
Our incremental achievements throughout the third quarter demonstrate continued early progress on our growth objectives. We expect our advancements in some of these core geographies to help us leverage additional opportunities both within and outside of these markets.
As well as continue optimizing the value we provide to our expanding international partner network. I'll have more to share on our strategy and some additional operational highlights later in the call. But first, I'd like to turn the call over to our CFO, Hank Hague, to provide more details on our financial performance for the third quarter.
Hank, over to you..
Thank you, Kyle. Turning to our financial results. Revenue in the third quarter of 2021 increased 3% to $4 million compared to $3.9 million in the year ago period.
This increase was primarily driven by the continued strong performance of our non-cannabinoid segment as sales in our nutraceutical Herbal Brands business continued to make a healthy recovery from last year's pandemic related impacts.
We experienced some softness in our cannabinoids segment due to lumpiness in our pathfinder shipments and sales cycle.
As we previously discussed, this lumpiness is a function of the many regulatory approvals and quality control checks involved in our production and export process, which can drive delays in shipment completion and individual contract ramp time.
Our ability to provide high-quality, pharmaceutical-grade products and adhere closely to evolving regulatory standards around the world is the central tenet of our value proposition as we continue working to ramp our existing contracts and enter new global markets.
Our all-in cost per gram of dry flower in the third quarter of 2021 remained flat at $0.15 per gram, compared to the year ago period. This was achieved largely due to continued cost efficiencies we are driving in Colombia, though offset by production costs associated with ramping our early-stage operations in Portugal.
As our Portugal operations become more mature, we continue to expect our cost to drop over time as we capture economies of scale. Gross profit in the third quarter of 2021 increased 22% to $2.5 million compared to $2.1 million in the year ago period, resulting in a gross margin of 62.9%, up 1,000 basis points from last year.
The increase was largely due to strong performance in our nutraceuticals business, and we believe positions us to achieve our previously disclosed gross margin target of 61%.
While our nutraceutical business has continued to rebound, we also anticipate that several pandemic related concerns around wage pressure, transportation efficiency and the availability of both labor and materials will pressure our margins over the coming quarters.
We are staying closely attuned to these developments across our business and the broader U.S. economy and remain committed to maintaining the optimal quality and continuity of our operations for our workforce and nutraceutical customers. Operating expenses in the third quarter of 2021 were $12.2 million compared to $6.8 million in the year ago period.
The increase is attributable to an approximately $2.8 million increase in noncash share-based compensation expense as well as insurance and professional fees related to being a public company.
We have continued to prioritize prudent cost controls across our organization in order to maximize our operational efficiency through the end of 2021 and into 2022. Net income in the third quarter of 2021 increased significantly to $1 million compared to a net loss of $6.1 million in the year ago period.
The increase was primarily attributable to gains on re-measurement of warrant liability of $9.1 million and gains on debt extinguishment, in part, offset by the aforementioned increase in expenses attributable to higher share-based compensation expenses and the costs associated with operating as a public company.
Adjusted EBITDA in the third quarter of 2021 was negative $6 million compared to negative $3.7 million in the year ago period. The decrease was mainly driven by public company expenses.
At September 30, 2021, our cash balance was $46.2 million compared to $79.5 million at December 31, 2020, with the decrease primarily attributable to our operating losses and capital investments during the year.
As a reminder, we announced a $25 million financing from SunStream Bancorp, a joint venture initiative sponsored by sundial growers in July as well as the full repayment of our secured convertible notes due March 30, 2022, at 90% of par value, plus certain expenses.
The financing came in the form of a secured convertible note with a three-year maturity and an interest rate of 5% per annum, which was lower than the rate on our prior 2022 convertible notes. During the quarter, we reduced our total debt by over $7.5 million.
I am pleased with the progress we've made on these fronts so far, and we will continue to be disciplined and selective with how we deploy our capital in order to maximize shareholder value.
While our performance proves our execution on our key growth drivers, namely securing new partnerships, reaching the path finder shipment stage within existing agreements and evolving to repeated and scaled commercial shipments, product, shipment and supply chain delays have challenged some of our progress towards our previously stated top-line expectations for our full year 2021 financial outlook.
As a result, we now expect our full year 2021 revenue to be between $14 million to $16 million compared to the previously stated range of $17 million to $20 million.
With that being said, gross margin is expected to remain at approximately 61%, and we have narrowed our full year adjusted EBITDA expectations from our previously stated range of negative $24 million to negative $26 million to a revised range of negative $24 million to negative $25 million.
Despite the reduction to our top-line guidance, we believe our ongoing cost containment initiatives will allow us to achieve our bottom line forecast. In terms of our capital expenditures, we remain on track with our previously disclosed CapEx expectations of approximately $10 million.
We will continue to prioritize our strong operational efficiency and remain disciplined stewards of capital as we progress our current supply agreements and seek to pursue additional revenue growth opportunities in developing cannabis markets around the world. This concludes my prepared remarks. I'll turn the call back over to Kyle.
Kyle?.
Thank you, Hank. Before we open up the call to questions, I wanted to briefly review some of the progress we've made in our core geographies subsequent to the quarter. In the United States, as I described earlier, we launched a research oriented initiative called Project Change Lives.
While important in its own right, we are pleased to see this initiative open commercial avenues.
One example of this commercial halo effect, of course, is the milestone achieved of successfully exporting and selling 30 kilograms of high-THC cannabis flower from our Portugal facility to Biopharmaceutical Research Company, a U.S.-based DEA licensed pharmaceutical company that develops federally compliant active pharmaceutical ingredients for plant-based therapeutics.
The flower product will be used in BRC's pharmaceutical development projects. This export serves as an important commercial milestone for us as it continues our progress from a multiyear U.S. path finding exercise, including our first DEA authorized THC and CBD exports to the United States in 2020.
We believe these early shipments are positive indicators of an opportunity to determine and execute upon a viable regulatory pathway for U.S. market entry.
On a collaboration level, Biopharmaceutical Research Company is also our import partner for project change lives, so we are proud to continue strengthening this partnership and driving mutual benefits for our companies, including solidifying BRC's ability to transact internationally and identifying future joint opportunities that can leverage our shared commitment to strict quality controls and adherence to DEA regulations.
To discuss our U.S. opportunity in greater depth, one of the primary motivations for acquiring Herbal Brands in 2019 was to gain not just a product but a capability as we prepare to unveil our U.S. CBD brand, which we believe remains on track to launch in Q4 2021 or Q1 2022. We are focused on developing a timely brand at an accessible price point.
We plan to leverage the learning's we've gained in the U.S. CBD industry as well as herbal brands diffuse distribution network to scale the brand. This will also represent an opportunity to develop stronger direct-to-consumer capabilities, a common format for most U.S. CBD brands today.
This product launch should also yield insights, experience and relationships, which may be relevant for a U.S. THC product launch down the road, pending regulatory evolution in the United States.
We have already established Clever Leaves as an early leader within the Colombian cannabinoid export market, with our shipments comprising over 55% of the country's total oral solutions, isolates and extract cannabinoid exports by dollar value with a dominant share of oral solutions in isolates to high value-add product categories, which are assisted by the company's various certifications year-to-date through July 31.
We are also prepared to leverage our local operating advantages in Colombia by deepening our presence in the country's domestic market.
In October, we announced a commercial supply agreement with Pharmalab PHL Laboratories, a Colombian Healthcare group specializing in the commercialization and distribution of medicines, dietary supplements and cosmetics.
Under this agreement, we will supply the pharmaceutical-grade cannabinoid formulation to Pharmalab for the distribution of magistral medications in Colombia, which are used to treat painful and inflammatory pathologies.
In addition to allowing for the commercial export of medical cannabis flower, President Duque's July and decree, expanded the number of drugstores authorized to distribute and sell magistral medicinal cannabinoids in Colombia, enhancing the availability for patients.
As such, this partnership represents a historic opportunity to provide locally produced pharmaceutical quality products to Colombian doctors and patients.
Given the challenges of shipping controlled substances internationally, this regulatory development could present an opportunity for a domestic or a non-export demand center of scale for our Colombian operations, which has benefited U.S.
and Canadian licensed producers, given their domestic source of demand, which does not require international export protocols.
Our growing opportunity within the domestic Colombian cannabis market is advantaged by a national regulatory framework that now offers expanded legal pathways for safe regulated patient access to cannabinoid-based medications.
In fact, certain cannabinoid sales, including Clever Leaves products, are now eligible for government reimbursement within the country. Because affordability for patients is likely a constraint on market growth, pharmaceutical reimbursement could unlock potential in Colombia, a country with a population of over 50 million people.
To quickly summarize a few of our other emerging markets, our ramp in Brazil remains dependent upon critical regulatory approvals of various products. Progress in this market is gradual as the country's health regulatory agency and Visa continues to evolve and learn about cannabinoid-based therapies.
We have also made gradual progress in Australia as we work closely with our supply partners to move our partnerships forward and follow-up on the milestone of our first flower shipment from Portugal last quarter.
In Israel, we've successfully navigated the evolving quality regulations we've referenced on prior calls, but have faced some additional delays in cementing commercial relationships due to pandemic related travel restrictions and an uptick in nationwide Delta variant cases in August and the necessary fine-tuning of products based on B2B client requirements and preferences.
In addition to monitoring the status of quality and regulatory standards around the world, we are, of course, taking care to follow pandemic related health and safety guidelines that govern our current and targeted geographies as we further ramp our international partner network despite these headwinds.
As we look ahead, we will work to get our expanded cultivation capacity in Portugal licensed and ready for harvest. To complete our new Portuguese post-harvest facility and secure EU GMP certification and to monitor regulatory developments and drive internal preparations for the eventual commencement of flower sales from Colombia.
Across our cultivation and production operations, we remain focused on careful cost management and will work to continue delivering bottom line improvements as we further leverage our efficiencies.
I am grateful for our team's tireless efforts to advance our existing contracts, work through changes in quality standards and approval processes across our current geographies and source new markets and growth opportunities that we can add to our pipeline.
While we are still in the early days of our strategic initiatives, the robust footprint we are building is allowing us to play an important and growing role in addressing underserved patient and research needs around the world. We'll now open up the call for Q&A..
[Operator Instructions]. At this time, we will pause momentarily to assemble our roster. First question today comes from Aaron Grey with Alliance Global Partners..
This is Andrew Vaughn [ph] on the line for Aaron Gray. Just wanted to ask where you stand in terms of adding other pharmaceutical partnerships.
And maybe can you talk about whether there are any limitations to having multiple partnerships within any specific region?.
Great. Yes. Thanks, Andrew, for the question. I think we are consistently focusing on the pharmaceutical channel in most geographies that we operate.
I was just in Germany a couple of weeks ago, meeting with Ethypharm, for example, one of our first named pharmaceutical partners in Europe, and we continue to work on developing new relationships with new pharmaceutical companies in our core geographies.
As you mentioned, pharmaceutical companies do have a standard of conducting business, which may be a bit different than the traditional consumer products space. Often, contracts are longer in length, there could be take-or-pay components to them. Pricing tends to be a bit better for suppliers such as Clever Leaves.
But once in a while, you do entertain exclusive relationships, either for a certain product or a product category to compensate that pharmaceutical partner, which may be making significant investments downstream. For example, Ethypharm is an expert in going to market with pharmaceutical products in the country of Germany.
They have a sales force that needs to be educated. There's literature that will describe their products. So there's a significant and symbiotic investment by both companies and often to make the partnership more aligned. We look to engage in exclusivity arrangements from time to time..
Great. Great. Thanks, Kyle. Really helpful color. And congrats on the developments in the quarter. I'll pass it on..
Our next question comes from Vivian Azer with Cowen..
This is Gerald Pascarelli on for Vivien. So on Germany, Kyle, would look to get your thoughts on the new ruling coalition, the potential for the a country to legalize cannabis for adult-use or expand rec.
And if that happens, just the implications or the possibility of potentially accelerating EU GMP-certification? Any thoughts you could provide there would be helpful..
Great. Yes. Thanks for the question, Gerald. It's certainly an exciting time to be thinking about the potential changes in German cannabis regulation.
Of course, while there are a number of people, including myself, which are very optimistic that the new political regime structure in Germany, often referred to as the Stop Light Coalition will lead to an expansion of the medical market and/or the creation of adult-use market. Now none of this has been set in stone. The government is still forming.
And there's nothing at this point which can provide concrete certainty on which direction it could go. However, as we are very focused on this market, I think there are some interesting directions this could go.
Because the German market has established itself as a pharmaceutical market, not a medical market for cannabis, but a truly pharmaceutical market, the dependency of the pharmacy supply chain is likely or could possibly play a larger role in an adult-use market that may or may not require EU GMP certification as well, even if it's for an adult-use product, which I might mentally think is something closer to an OTC product as opposed to how an American may think about a kind of adult-use product.
So I think there's a lot that has yet to be written. We're not exactly sure how this could work. But I think no matter what -- I personally do not believe that there will be a -- the tall pole in the tent will not be the EU GMP certification from Portugal.
I think the tall pole the tent will be the actual implementation of the German regulation, but Clever Leaves is very well positioned already with the EU GMP-certified production in Colombia as well as being close in Portugal..
Got it. That's super helpful color. Next one for me is just on the nutraceutical side of the business in CBD. I know you touched on it in terms of route to market and launch in your prepared remarks. But I guess just as you assess the current landscape, now that things are evolving coming out of COVID. Just, I guess, your broad outlook on U.S.
CBD as a category, where we go from here, and in particular, headed into 2022? I guess just your broad thoughts on the overall U.S. category, that would be helpful..
Yes. Great. And thanks for that question. We believe a Clever Leaves that the CBD industry, like many new nutraceutical categories has experienced sort of a first wave of euphoria. A number of participants entered into that sector. And many of them didn't have sustainable brand or value propositions for American consumers.
And so there is -- it appears that there is a bit of a consolidation in the industry, both in the number of players that have significant share as well as the number of players that large retailers are offering. This is, of course, with the backdrop of significant regulatory changes or uncertainty from agencies like the U.S. FDA.
However, we do believe that a CBD product has a strong value proposition for the American consumer. But there is not a brand that we believe addresses a significant opportunity in the low price point and a more fashion-forward approach to consumer products.
I think there is a lot of discounting that seems to be occurring in the cannabis or in the CBD world today. I even saw a product going on an installment type marketing orientation. And we think that creates a great opportunity. So I'm going to be very excited to unveil the brand and its promise in the next quarter or two.
But hopefully, that gives you a little bit more insight into how we're thinking about it..
It does indeed. And we'll pass it on..
[Operator Instructions]. Our next question comes from Pablo Zuanic with Cantor Fitzgerald..
This is Matthew Baker on behalf of Pablo. Congrats on the quarter. So we have two questions today. Firstly, how much progress are you guys making in Germany? And could you guys give a bit of color and talk about your market share in flower and oils there..
Great. Yes. Thanks for the question, Matt. I think with Germany, we think about the market in a couple of different slices. So there is the Clever Leaves owned brand, and then there is sort of our B2B operation. And then with each of those categories, you kind of think about a flower and an extract market.
And so I think this will also answer your second question about market share in Germany as well. Our focus and our partnership with Ethypharm took a significant amount of time to develop, and it will take a significant amount of time and energy to profit from that partnership.
But we are working hand-in-hand with them, and that product portfolio is an extract focus product, which is a long-winded way of saying that we haven't begun to enter in terms of revenue realizations or sales at German pharmacies, that market. We believe that is approaching very quickly.
And so then if we flip to the flower side of the house, I mentioned in my remarks earlier that we have a Clever Leaves brand called IQANNA, which is preparing for its true debut in the German market. We had a soft launch, which sold several kilograms of product, but nothing of the scale of what we would consider a full launch.
So I think Clever Leaves, because that product sold out very quickly in less than a day, we believe that is a very positive sign about the product market fit. But our next step is to scale that brand launch up, which is today also a single strain. So again, it's a bit of a -- let's learn to crawl before we walk, before we run.
But I think those are all very positive indications of the bright future for us in Germany and, of course, to the question earlier, there is nothing yet that we have factored in for potential changes in adult-use or recreational regulation..
All right. Just one more question regarding Europe, it seems distribution partners are extremely important in that market. I was wondering if you guys could talk about your distribution partnerships there..
Yes. Distribution definitely is a critical part of this industry as moving controlled substances across international boundaries, requires a lot of effort on both sides of the border, so to speak. So it's really a country-by-country effort. I would say in Germany, the distribution partner is -- I'm not sure if I would even really use that word.
It's more of an importation partner who works through the various quality steps, often required to have GMP certification or GDP certification, but true distributors like a whole line pharmaceutical distributor, we haven't yet scoped a strategy or partnership there. I think as we scale up, that will become more relevant.
And as Germany is sort of the island in and of itself, distribution path in other geographies is still early stage for us. It's not necessarily clear that we may need one. Again, it really just depends on the particular country..
Ladies and gentlemen, this will conclude our question-and-answer session. I would like to turn the conference back over to Mr. Detwiler for any closing remarks..
Thank you. I'd like to thank everyone that attended the call today, and we look forward to speaking with our investors and analysts when we report on our fourth quarter and full year results in March. Thank you very much..
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..