Clever Leaves Holdings Inc.

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 30th, 2021. Joining us today are Clever Leaves' 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 September 30th, 2021, which was filed prior to this call, as well as other filings made by CleverLeaves 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 improved 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. Taking together these technologies in 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 flour 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 Columbian operation. We were honored to host President Duque for this historic signing at our cultivation facility near Bogota, and we remain attentive to further legislative progress on the accompanying resolutions that determine the timelines and guidelines that will govern these new flower exports. We believe our efficient, cost-effective production processes Significant scale, experience selling flour 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 flour products, put us in a strong position to capitalize on this 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 Cleverly's 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 and pharmaceuticals to cross borders freely. 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 pathfinding 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 has 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 brand's 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 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 segments. 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 timelines 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 Haag, 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 cannabinoid 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 tenant 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 flour in the third quarter of 2021 remained flat at 15 cents 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 costs 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 non-cash 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 the gains on remeasurement 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 30th, 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 Pathfinder shipment stage within existing agreements, and evolving through 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 to $16 million compared to the previously stated range of $17 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 reductions 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?