Clever Leaves Holdings Inc.
Q1 2021 Earnings Call Transcript

Published: 17 May 2021

[Cody Slach:]

Good afternoon everyone and thank you for participating in today’s conference call to discuss Clever’s financial results for the First Quarter ended March 31, 2021. Joining us today are Clever’s 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 March 31 2021, which was filed prior to this call, as well as other 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.

[Kyle Detwiler:]

Thank you, Cody. And good afternoon, everyone. During the first quarter, we made continued progress towards our long-term objective of becoming a leading low-cost provider of pharmaceutical grade cannabis to medicinal and wellness markets worldwide. We saw strong year-over-year revenue growth, despite difficulties resulting from COVID-19. And we continued to drive improvements across our operating cost structure and through adjusted EBITDA. On an operational level, we established additional partnerships with key operators around the world, further advancing our global growth strategy. I am proud of how we are positioning our business within an evolving regulatory landscape and challenging macroeconomic environment. We are pleased to have achieved numerous key milestones during the quarter across our international markets. In Portugal, we began construction efforts on our cultivation expansion, as well as our new post-harvest facility, while strong execution and project management has helped navigate challenging weather conditions. We continue to contend with COVID-19 restrictions, which most recently, at the end of April, culminated in a local travel quarantine in the region around our cultivation facility, disrupting the flow of essential products, such as food and construction materials, as well as the usual work processes for our employees and laborers commuting to the construction site. Despite these obstacles, we became GACP certified across our operations in Portugal, allowing us to continue ramping our production, strengthening our value proposition to clients, while increasing quality standards as required in certain countries, such as Israel. These developments helped us officially generate our first revenues out of Portugal in April, an important milestone for us, which took two years to achieve. While Portugal revenue contributions remain small, and the initial increase production costs placed some pressure on our margins, we expect these operations to become a significant contributor to our business over time.

[Hank Hague:]

Thank you, Kyle. Turning to our financial results, revenue in the first quarter of 2021 increased 19% to $3.5 million, compared to $2.9 million in the year ago, period. This increase was primarily by the growth in our cannabinoid segment revenue, which nearly tripled from the prior year as we continue to pursue global business development opportunities and enter new markets.

[Kyle Detwiler:]

Thank you, Hank. As we previously mentioned, this quarter marked great progress towards scaling the foundation that our long-term targets will be built on. I want to reiterate that over the next 12 months laying this essential groundwork will be our primary priority. We expect to achieve progress made across four primary areas. First, the establishment of new strategic partnerships with reputable businesses to bring Clever Leaves products to consumers worldwide. Second, insuring extracts produced in Colombia move from pathfinder phase to recurring shipment phase with our partners. For some of these products, this entails completing pharmaceutical drug registrations, or other regulatory requirements per sale of our highest grade GMP certified pharmaceutical extracts. And third, turning on our commercial engine for the production of dry flour in Portugal, which involves continued emphasis on quality, business developmental clients in building customer excitement in our strain offerings. And fourth, strong execution in our U.S. nutraceutical business, laying the foundation for our initial CBD product launches, which serves as both a commercial opportunity as well as a test case and how to go to market with other cannabinoid products as legalization unfolds. I am pleased to share with you some exciting progress towards these efforts, beginning with several new partnerships. When plotting out our Latin American strategy, Brazil was an obvious target due to its sizable population of approximately 210 million people making it the largest cannabis market in the region. Additionally, Brazil has unique regulatory protocols that we believe would hinder the efforts of most other operators, but which we believe we are able to navigate. In the first quarter, we expanded our list of partners in Brazil and Peru, and are providing both finished products, such as oral solutions, as well as active pharmaceutical ingredients or APIs for use in proprietary formulations in the region.

[Operator:]

Thank you, sir. And the first question will come from Vivien Azer with Cowen. Please go ahead.

[Vivien Azer:]

Hi, good evening.

[Kyle Detwiler:]

Hi, Vivian.

[Vivien Azer:]

So my first question has to do with your revenue outlook for the first – for the full year, please Kyle. So sequentially, which is I think how a lot of people tend to look at cannabis businesses, your revenues were up 4%. So, obviously extrapolating that out. It doesn't get you to the low end of guidance. So can you just help us think through how you think about the shape of your revenues for the rest of the year? Thanks.

[Kyle Detwiler:]

Yes. Thanks for the question Vivian. I think, there's probably a couple of things going on. The first is that the business, especially in early shipments to customers tends to be quite lumpy, some customers or destination geographies are able to work through a pathfinder shipment to something more recurring in nature faster than others. But there is a significant amount of lumpiness in the revenues that we have booked today. I think so as we start to approach the remainder of the year, a lot of the contracts that we have on – what I would call kind of colloquially the true pharma business those have a significant ramp period associated with them. There are a lot of regulatory protocols or filings that need to take place before those revenues can move to a recurrent nature or even take place at all. So as some of those shipments take place, I would call out those to Brazil. And those to Germany is kind of having that most pharmaceutical fuel to them, typically a GMP certified product. So you could anticipate that there will be more of that in the back of the year than in the front. And probably the last element just to wrap up, I would probably suggest thinking about Portugal and sort of a similar framework we generated our first revenues here in April. They indeed were small, a bit of a similar dynamic to pharma sales and that there was a pathfinder shipment, we're working with a client, we're working with a new destination geography as we work through those hurdles. It becomes easier to send subsequent shipments. Those customers can come to depend on Clever Leaves more reliably and therefore volumes we hope to pick up. So based on sort of our internal views of the timing of all of those different dynamics, we still feel good about the revenue and frankly the rest of the earnings guidance that we gave a couple of months ago.

[Vivien Azer:]

Understood. Just to follow up on that. With the commentary around Germany and Brazil of the $17 million to $20 million that you guys are looking for the full year, how much of that is regulatory timing dependent?

[Kyle Detwiler:]

Yes, that's a good question. And I'm not sure if you're speaking about, is it just, or how much of the German and Brazilian revenue is regulatory dependent? And I might say that the answer to that question probably is very similar to that of sort of our global cannabinoid revenue which is – it is all heavily regulatory dependent and we could try to breakdown exactly what regulatory impediments may impede different markets. It's certainly a longer conversation, but I think, calling out specifically what is going on in Brazil, in Germany tends to be more of the traditional pharmaceutical drug process matters. It's not about a cannabis license, it's not about EuGMP certification, it's about filing the drug dossier or establishing a master drug file that is recognized by the appropriate regulatory body. So those tend to be little bit more unique processes.

[Vivien Azer:]

Understood. Okay, that's helpful. And then last one on the full year guide, what if anything are you guys embedding in Israel, given some of the dynamics in that market today?

[Kyle Detwiler:]

We haven't broken out geographies specifically when it relates to revenue. I think as people can look to our investor presentation, we do note a component of our revenue pipeline is approximately 19% rest of world. Rest of world includes other geographies besides just as Israel is a is a big piece of that. So again, that's the pipeline it’s not necessarily the revenue. I think Israel is likely to be a larger source of demand for our flower products from Portugal. So, you can kind of make some additional assumptions around to kind of extract from Columbia versus flower from Portugal. But at this time, we haven't specified an exact breakdown.

[Vivien Azer:]

Okay that's helpful. Thank you very much for that. Just drilling down through the P&L then, on your G&A line item some nice progress sequentially. Do you guys think $7.2 million is an appropriate run rate or is there any kind of onetime factors that we should consider?

[Hank Hague:]

Hi Vivien. This is Hank. Thank you for the question. You are referring to the general and administrative expense of the $7.2 million. That's a reasonable expectation.

[Vivien Azer:]

Okay thanks for that Hank.

[Kyle Detwiler:]

Yes.

[Vivien Azer:]

And then just on marketing that was down year-over-year fairly considerably but then more than doubled quarter-over-quarter. So how do we think about that?

[Hank Hague:]

Yes, we're being very cautious how we're spending our sales and marketing dollars as market opportunities open up. And we feel much more confident of spending those dollars. We will deploy them. So, for example, in Germany as we start – in these various countries as we start to deploy and work through and train our customer sales forces on how to represent our products and educate properly on them, we will then start to spend those dollars. But please be assured we will spend them judiciously.

[Vivien Azer:]

Awesome, yes, that makes sense. Going below the line, net of interest expense, there was an other expense of $5 million. Can you elaborate on that?

[Hank Hague:]

You're probably talking about the loss and measurement of warrant liability a $4.8 million, $4.9 million, that's a non-cash charge. Earlier in my comments I spoke about that in the SEC’s staff comment. We do have a number of warrants that are outstanding. The SEC came out with their commentary. We carefully evaluated our warrant treatment of private warrants. And in consultation with our auditor and our consultants, we decided to re-evaluate how we treat those warrants where we will now be moving forward performing a mark-to-market exercise to recognize any change in fair value. But again, that's a non-cash charge.

[Vivien Azer:]

Yes absolutely. Sorry for missing that. All right, that is all very helpful. Thank you. I'll jump back in the queue.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Detwiler for any closing remarks. Please go ahead, sir.

[Kyle Detwiler:]

Great. Thank you all for joining. 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 our second quarter results in August.

[Operator:]

Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.