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spk04: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Cleverleaf's financial results for the first quarter ended March 31st, 2021. Joining us today are Cleverleaf's CEO, Kyle Detweiler, and the company's CFO, Hank Haag. 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 filings made by Cleverleafs 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.
spk05: With that, I will turn the call over to Kyle. Kyle?
spk03: 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 with 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 increased production costs place some pressure on our margins, we expect these operations to become a significant contributor to our business over time. We were also pleased to complete our first project financing in the region, raising €1 million at a modest cost of capital of Euribor plus 3%. In Colombia, we have received our annual cultivation quota from the Colombian Technical Quotas Group, further augmenting the sizable extraction quota we received from the group earlier in Q1. As a reminder, this extraction quota allows us to process up to approximately 59,000 kilograms of cannabis into dried flower derivatives, and this allocation represents approximately 50% of Columbia's total quota and approximately 18% of the world's legal medical cannabis production quota as issued in early 2021 by the International Narcotics Control Board. In addition to our extraction quotas, we also received our cultivation quotas in April for approximately 44,000 kilograms of psychoactive flower. With the added benefit of these achievements in our two primary production sites, I'd like to remind everyone that we have an established foundation for growth. We are cultivating out of a 1.8 million square feet of GACP and EU GMP certified greenhouse operation in Colombia, with our Colombian extraction operations also EU GMP certified. And we are also actively scaling our 110,000 square foot Portugal operation by another approximately 150,000 square feet, expanding our capacity and obtaining critical quality certificates within two of the world's most favorable growing climates, strengthens our competitive advantage, and puts the capital intensity of our business behind us. As regulatory tailwinds persist in our core markets, we believe we have a strong framework from which to continue supplying medical markets around the world and preparing for the further opening of new markets. I'll have more to say about our recent global partnerships later in the call, but in the meantime, we believe that these achievements constitute meaningful progress towards our strategic objectives. Before we discuss how we are currently establishing the groundwork for Cleverleaf's future over the next year, I'd like to turn the call over to our CFO, Hank Haag, to provide more details on our financial performance for the first quarter. Hank, over to you.
spk02: 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 driven 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. Our all-in cost per gram of dry flour in the first quarter of 2021 was $0.13 per gram, an improvement from $0.15 in the year-ago period. due largely to lower operating costs in Colombia, offset by production costs associated with ramping our early stage operations in Portugal. Gross profit in the first quarter of 2021 increased slightly to 2.2 million compared to the year ago period, resulting in a gross margin of 64.2%. Operating expenses in the first quarter of 2021 improved to $10 million, compared to $11.3 million in the year-ago period. The improvement is attributable to cost control measures established in 2020, partially offset by an increase in share-based compensation expense, insurance, and professional fees related to being a public company. Net loss, excluding a non-cash expense resulting from an increase in our newly classified warrant liability, improved to $8.9 million compared to $10.2 million, with the improvement primarily driven by the operating expense reductions I just mentioned, partially offset by an increase in public company expenses. As many of you know, the SEC recently released the staff statement on accounting and reporting considerations for warrants issued by special purpose acquisition companies on April 12, 2021. Based on the review of our historical accounting and after consideration of the SEC statement, the company determined that our historical accounting for the private warrants should be updated and classified as liabilities with subsequent changes in fair value recognized through earnings at each reporting period. This update did not and is not expected to have a material impact on the company's operating, investing, or financing cash flows. Adjusted EBITDA in the quarter of 2021 improved to a negative 5.4 million compared to a negative 6.7 million in the year-ago period. The improvement is mainly attributed to cost control measures previously mentioned. At March 31, 2021, our cash balance was 69.2 million compared to 79.5 million at December 31, 2020, primarily attributed to our anticipated operating losses and capital investments in the quarter, partially offset by €1.4 million in warrant exercise proceeds and the aforementioned €1 million project financing in Portugal. 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 $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, and capital expenditures of approximately $10 million. Among our international market opportunities and current markets, we are respectively monitoring recent military conflicts in Israel, as well as civic demonstrations in Colombia. At this stage, we are not seeing any material impacts on our business, but we remain attentive to any potential effects these developments may have on our operations. On an operational level, we have continued to work through the initial Pathfinder shipments of flower products to Australia and Israel, and stay closely attuned to the developments in these markets, as well as the others in which we operate. We are encouraged by the progress of our operations, but we are still working to execute on our global strategic initiatives. This concludes my prepared remarks. I'll turn the call back over to Kyle. Kyle?
spk03: 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 Cleverly's products to consumers worldwide. Second, ensuring 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 for sale of our highest grade GMP certified pharmaceutical extracts. And third, turning on our commercial engine for the production of dried flour in Portugal, which involves continued emphasis on quality business development with clients, and 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 in 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. Keeping true to our belief in treating cannabis as a traditional pharmaceutical product, these products are expected to be registered as pharmaceutical products and made available to patients in need of care. Not only do we establish a continued line of revenue and represent entry into the market that New Frontier Data calls the fastest-growing cannabis patient community in Latin America, but we also embed Cleverly's products within our customer supply chain. Looking to Europe, we faced entry into one of the most stringent regulatory environments in the world where cannabis was and continues to be treated with standards comparable to traditional pharmaceuticals. Looking to the pharmaceutical market for guidance, we identified Germany as the gateway market to the region, giving its long history of pioneering the adoption of products and solutions previously considered to be unconventional. Naturally, we sought out a reputable pharmaceutical company to champion our entry, and we found just that in Epiphone. Although many U.S. investors may not know this name, Effie Farm is a major European pharmaceutical company with backing from PIA Partners, an approximate 15 billion euro private equity firm. Additionally, Effie Farm brings a company with experience in European cannabis partnerships, having previously inked a deal with Aurora to supply medical cannabis in the country of France. We are excited to bring our cannabinoid products from our Colombian EU GMP certified facilities to Germany, setting the stage for our ambitions across the continent. If not for our attention to quality control and our commitment to ensuring our cultivation facilities meet the standards set forth by government regulatory bodies across the world, these partnerships would not have been possible. Not only does this recognition from regulatory authorities send a reassuring message to our customers, but it also expands our commercial value proposition by saving our partners the years it takes to receive these strict certifications, such as EU GMP. As I mentioned earlier, we advanced our regulatory compliance efforts during Q1, with our facility in Portugal receiving GACP certifications. This represents a significant step towards getting our European cultivation operation fully certified, and we believe it will prove to be an invaluable asset in our go-forward strategy. We also saw our first revenues in the Portuguese market during the month of April after exporting our first commercial shipment. Though small, these initial sales represent the early stages of commercial entry into Portugal. We are proud of this accomplishment and view it as one of many that we will achieve there. Although we do not include U.S. cannabis legalization in our near-term guidance and we remain confident in the ample opportunities presented abroad, we have not forgotten to include the United States in our long-term strategy. Our wholly-owned subsidiary, Herbal Brands, is at the crux of what we believe is a unique call option to capitalize on the CBD opportunity across the United States. This is due to its diverse distribution network that spans national retail drugstore chains as well as e-commerce giants. We intend to leverage this infrastructure network of over 15,000 retail locations to launch an initial CBD brand in the United States. In the meantime, we will continue to monitor the ongoing developments in the regulatory environment at the state and federal levels, and we will continue to fine-tune our familiarity with U.S. customs protocols following our successful shipment of commercializable cannabinoids into the United States during the first quarter. As of Q1, we have already successfully exported cannabis products to more than 15 different countries across five continents. which we believe demonstrates our ability to maintain partnerships with global, national, and regional governments and regulatory bodies. While attempting to build a disruptive business model in an early stage and rapidly developing industry, such as the cannabis industry, we believe our only hope for success is to establish the right foundation. I am very proud of all the hard work our team has done this past quarter to further our efforts to build that foundation for Cleverleafs. The first quarter may have marked the fifth year in our ongoing mission to cultivate Mojo, create value, and change lives, but we believe we are in the midst of defining days for the company's future. We are excited to have you along this journey, and we look forward to providing further updates in the quarters ahead. We'll now open up the call for Q&A.
spk06: Thank you, sir. I'll begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2.
spk05: And at this time, we'll pause momentarily to assemble our roster. And the first question will come from Vivian Azer with Cowan. Please go ahead. Hi, good evening. Hi, Vivian.
spk07: So my first question has to do with your revenue outlook 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 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.
spk03: Great. Yeah, and thanks for the question, Vivian. I think there's probably a couple things going on. The first is that, you know, the business, especially in early shipments to customers, tends to be, you know, quite lumpy. You know, some customers or destination geographies are able to work through a Pathfinder shipment to something more recurring in nature faster than others. But, you know, there is, you know, 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, you know, a lot of the contracts that we have on what I would call kind of colloquially the true, true pharma business, those have a significant ramp period associated with them. You know, there are a lot of regulatory protocols or filings that need to take place before, you know, those revenues can move to a recurring 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 as kind of having that most, you know, pharmaceutical feel 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, you know, thinking about Portugal and sort of a similar framework. You know, we generated our first revenues here in April. They indeed were small, you know, a bit of a similar dynamic to pharma sales in that there's a pathfinder shipment. You know, we're working with a client. We're working with a new destination geography. As we work through those hurdles, you know, it becomes easier to send subsequent shipments. those customers can come to depend on Cleverleaf more reliably and therefore volumes we hope to pick up. So, you know, based on sort of our internal views of the timing of all of those different dynamics, you know, we still feel good about the revenue and, frankly, the rest of the earnings guidance that we gave, you know, a couple months ago.
spk07: Understood. Just to follow up on that, with the commentary around Germany and Brazil, of the 17 to 20 million that you guys are looking for for the full year, how much of that is regulatory timing dependents?
spk03: Yeah, that's a good question. And I'm not sure if you're speaking about, you know, is it just or, you know, 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, you know, it is all heavily regulatory dependent. And we could try to, you know, break down, you know, exactly what regulatory impediments may impede different markets. You know, it's certainly a longer conversation. But I think, you know, the, you know, calling out specifically what is going on in Brazil and Germany tends to be more of the traditional pharmaceutical drug process matters. You know, it's not about a cannabis license. You know, it's not about EU GMC certification. You know, it's about filing a drug dossier or, you know, establishing a master drug file that is, you know, recognized by the appropriate regulatory bodies. So those tend to be a little bit more unique processes.
spk07: Understood. Okay, that's helpful. And then just 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?
spk03: Yeah, 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 a revenue pipeline is approximately 19% rest of world. You know, rest of world includes other geographies besides just Israel, but Israel is a big piece of that. So again, you know, that's the pipeline. It's not necessarily the revenue pipeline. You know, I think Israel is likely to be a larger source of demand for our flour products from Portugal. So you can kind of, you know, make some additional, you know, assumptions around, you know, kind of extract from Colombia versus flour from Portugal. But at this time, you know, we haven't specified an exact breakdown.
spk07: 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 one-time factors that we should consider?
spk05: Hi, Vivian. This is Hank. Thank you for the question.
spk02: You're referring to the general administrative expense of $7.2 million. That's a reasonable expectation.
spk07: Okay. Thanks for that, Hank. And then just on marketing, that was, you know, down year over year fairly considerably, but then, you know, more than doubled quarter over quarter. So how do we think about that?
spk02: Yeah, we're being very cautious of 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.
spk07: Awesome. Yeah, that makes sense. Going below the line, net of interest expense, there was an other expense of $5 million. Can you elaborate on that?
spk01: Vivian, you're probably talking about the loss and remeasurement of warrant liability of $4.8, $4.9 million.
spk02: That's a non-cash charge. Earlier in my comments, I spoke about that in the SEC's staff comments. 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 reevaluate how we treated 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.
spk07: Yeah, absolutely. Sorry for missing that. All right, that is all very helpful. Thank you. I'll jump back in the queue.
spk05: Again, if you have a question, please press star, then 1. This concludes our question and answer session.
spk06: I would like to turn the conference back over to Mr. Detweiler for any closing remarks. Please go ahead, sir.
spk03: 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.
spk06: Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.
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