Clever Leaves Holdings Inc.

Good afternoon, everyone, and thank you for participating in today's conference call to discuss Cleverleaf's financial results for the third quarter ended September 30th, 2022. Joining us today are Cleverleaf's CEO, Andres Fajardo, and the company's CFO, Hank Hague. Before I introduce Andres, 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, 2022, which was filed prior to this call as well as other filings made by Cleverlees 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, adjusted gross profit, and adjusted gross margin. These are non-GAAP financial measures as defined by SEC Regulation G. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures In a statement disclosing the reasons why company management believes that adjusted EBITDA, adjusted gross profit, and adjusted gross margin provide useful information to investors regarding the company's financial condition and results of operations are included in today's release that is posted on the company's website. With that, I will turn the call over to Andres.

Thank you, Jackie, and good afternoon, everyone. During the third quarter, we worked diligently to continue progressing our growth strategy by improving the quality of our product and enhancing our commercial capabilities while reducing operating costs across all our subsidiaries. In our cannabinoid business, we generated 12% year-over-year revenue growth as we adapted to evolving demand dynamics in our target markets and navigated quarter-to-quarter variability in our sales cycle. We also faced some one-time disruptions in our non-cannabinoid segment revenues, due to retailer inventory reductions across a variety of channels. We continue to reduce our cash burn and focus on aligning our cost structure more closely with our core operational priorities. As we progress further into the fourth quarter, we will continue working to improve our operational efficiency and to strengthen our foundation for growth. To further contextualize our performance during the quarter, I'd like to first review the operating dynamics in our production geographies. In Portugal, we have seen product requirements evolve across several key flower markets around the world. These changes have affected our product market fit, and we have been working diligently on realigning it. For instance, our flower has been very successful in the Australian market given its high THC profile, bud size, and terpene profile. However, following the results of our most recent flower product launch in Israel, we identified and are in the process of changing the organoleptic characteristics of our flowers to better meet market demand. Part of this process of improvement, we had to delay several Icana shipments to Germany that we had planned to complete during the quarter. New shipments are already being processed and expected to be in the German market by year-end. We also plan to optimize the number of cultivated strains and harvest cycles to ensure that we're growing the most premium and commercially viable genetics to address greater selectivity in our markets. While these changes will lengthen the runtime of our Portugal operations, we are already seeing progress as improvements in our current crop and R&D cycles. To further improve our Portuguese operations, we replaced leadership and completed an overall restructuring to ensure that we can operate with improved efficiency and expertise, bringing in new talent with significant experience in cannabis flower cultivation. While these changes resulted in softer output from our Portugal operation during the quarter and corresponding pressure on our cannabis segment revenues, we are convinced that with the operational improvements being implemented, Our Portuguese operations are now optimally positioned for growth in 2023 and beyond through higher quality, more stable, and lower cost products. Finally, we have recently obtained EU GMP certification for our post-harvest facility in Portugal, which will further encounter revenue regenerating capabilities in the country. For instance, we have recently expanded our customer service portfolio to include GMP processing services now that we have the certifications. providing a gateway for flour into the EU. This will allow us to gain operating scale and will give us access to product from top growers around the world, which we intend to use as a complement to our self-grown portfolio. We will provide additional updates on these considerations and look forward to identifying additional value creation opportunities for our customers. In Colombia, We continue to prepare for the commencement of dried flower exports while navigating the effects of quarter-to-quarter lumpiness in our extract sales cycle. As we progress our flower preparations, we are applying the learnings from our Portugal operations to establish an efficient foundation and a focus on premium products. Many of our current customers have already visited our cultivation facility and expressed strong interest in our Colombian flower capabilities due to our expansive capacity and cost competitiveness. From a capacity perspective, we have the ability of scale to cultivate a significantly higher number of strains relative to both our competitors and our own existing Portugal operation, allowing us to explore, identify, select, and grow premium genetics. In conjunction with Colombia's optimal environmental growing conditions, which meaningfully reduce our need for artificial lightning or extensive pest control, Our scale and location offer a strong cost advantage as we prepare to address a greater portion of the global flower market. From where our flower preparations sit today, we believe we are currently on track to complete our first flower shipments from Colombia to Germany and Australia in the first quarter of 2023. Within our existing extract business, several shipments that we plan to complete in Q3 were delayed to Q4 of this year or Q1 of 2023. These were primarily due to regulatory delays and hurdles in both Germany and Israel, the phasing of certain orders from Brazil and Australia, and a cyber attack that the Colombian health agency in Lima suffered which delayed export certificates. For Brazil in particular, shipments of products approved under RDC 327 ramped very swiftly in the first half of this year, and we expect some of this pickup to resume in Q4. As a fundamental part of our growth strategy, we transformed our commercial capabilities during Q3. We created a Chief Revenue Officer function, and I am currently spearheading this position, which centralizes all commercial efforts and functions. including marketing and sales operations, looking to improve pipeline management, optimize relationship management with our current and potential customers, manage outreach strategies to increase our customer base, and increase our speed and probability of conversions from leads to sales. In line with these efforts, we created product expert teams for both flour and extracts that we integrated with the operation teams under our COO, to be focused on producing the highest quality products for our core markets, as well as working with commercial teams in an expert role to increase our sales effectiveness. Alongside these operational enhancements we have driven in Colombia and Portugal, we have continued our work to improve our working capital and right-size our inventory levels to better reflect current market opportunities. We harvested 1,936 kilograms of dried flour during the quarter compared to 17,304 in the year-ago period, representing an 89% year-over-year reduction. In Colombia, we have sustained our exclusive focus on THC flour product development, and we are using our existing inventory to complete our extract shipments. We will continue incurring costs related to processing our current inventory for extract sales in our existing partnerships, and we will soon have some additional and potentially higher cost contributions related to the new harvest and post-harvest processes needed for our dry flower products. As a result, we believe that these costs and our reduced agricultural output will continue to pressure our all-in cost per gram in the short term. However, we believe that driving improvements in our inventory over time will allow us to operate with a more efficient long-term infrastructure. In Portugal, as I mentioned earlier, we are further refining our production plant to ensure we are cultivating only the most premium and commercially viable flower strains. This increased selectivity has caused us to adapt our previous approach to launching new strains and addressing our capacity utilization. We are currently operating with reduced scale as we complete this additional work, but expect to build a stronger long-term operational strategy and benefit from additional economies of scale now that we've completed EU GMP licensing for our post-harvest facility. The reduction in scale implemented in Q3 and in early November will allow us to further reduce operating expenses in Portugal. While our work to optimize both of our cannabinoid production geographies remain gradual, We believe that strengthening our operational framework will allow us to maximize the revenue generation potential of our harvests and position ourselves to capture additional market expansion opportunities around the globe. Finally, in our nutraceutical business, we experienced some one-time order adjustments in Q3 across most of our channels as retailers reduced inventory levels. Our specialty distributors had ordered inventory more heavily in the first half of the year, which ended up reducing their volumes in Q3. Nearly all of our channels had inventory reductions at the warehouse level. While these dynamics pressured our third quarter top-line performance in our non-cannabinoid segment, we believe the bulk of the adjustments to our distributors' ordering cadence in Q3 are complete as of the end of Q3. Despite these one-time inventory adjustments, we have also been increasing our presence in major mass market retailers and pharmacy chains across the U.S. We have expanded our presence to over 30,000 stores and key major retail pharmacy chains have increased their portfolio with us by increasing the number of our SKUs in-store. We believe that the strength of our retailer and distributor relationships coupled with innovative marketing strategies we have recently implemented will result in strong revenue performance in the fourth quarter and 2023. As we continue adapting to evolving market conditions across our business, we believe that our operational agility, the depth of our knowledge and partnerships across our core markets, and our commitment to driving greater operational and cost efficiencies are strengthening our capabilities and our foundation for long-term growth. On an organizational level, we have continued to support our team members and enhance the quality and efficiency of our operations amid the strong restructuring progress we have made. As we close 2022 and enter 2023, we are moving forward as a leaner and more focused business with an unrelenting commitment to quality across our product portfolio. Now, I'd like to turn the call over to our CFO, Hank Haidt, who will discuss our third quarter financial performance in greater detail. Hank?

Thank you, Andres. Our revenue in the third quarter of 2022 was $3.3 million compared to $4 million in the year-ago period. We experienced softness in our non-cannabinoid segment revenues as a result of inventory reductions across most of our channels. as well as the timing of inventory orders among our distributors. However, as Andres mentioned earlier, we believe the bulk of these disruptions were concentrated in Q3 and that we should return to a more normalized top-line performance over the coming quarters as we work with our partners to mitigate broader economic pressures. While our cannabinoid segment revenue grew 12% year over year, This was offset by variability in the timing of certain flour and extract shipments. As a reminder, the quarter-to-quarter lumpiness in our sales cycle is a factor of the many regulatory approvals and quality control checks involved in our production and export process, which can drive delays in shipment completion. With that said, our ability to adhere closely to evolving regulatory standards and provide high-quality pharmaceutical-grade products in our target markets is central to the value we provide to our global customer base. Our all-in cost per gram of dry flour equivalent in the third quarter of 2022 was $1.13 per gram compared to $0.15 per gram in the year-ago period. The year-over-year increase was driven by our significantly reduced harvest with our new harvest decreasing by approximately 89% year-over-year. While our harvest production costs remained low in Columbia as a result of our reduced harvest, we continued to incur costs related to processing our existing inventory for extract sales. In Portugal, we incurred costs related to scaling our existing flower operations which we have recently worked to reconfigure. Though we expect our total all-in cost per gram to remain elevated through a combination of these dynamics, I'd like to emphasize that these are all near-term unit economic considerations. In Columbia, we are working to right-size our harvest and prepare for smokable dry flower exports, and we believe that our costs will moderate to more advantageous levels as we ramp dry flower production to meet customer demand. We also expect flower products to eventually comprise a greater share of our product portfolio and that our extra costs will remain at similar or lower levels to what we've driven historically. In Portugal, we expect unit costs to improve over time as we process additional harvests ramp cultivation of our premium flower on a smaller scale, and bring our post-harvest facility fully online now that we've completed the EU GMP licensing process. The operational enhancements and workforce reductions we've already implemented have generated some initial cost savings, and we aim to drive additional efficiencies as we continue progressing these initiatives. Our gross profit in the third quarter of 2022 was $0.3 million, which included a $1.7 million inventory provision compared to $1.9 million, which included a $0.7 million inventory provision in the year-ago period. Our adjusted gross profit, which excludes the inventory provision in the third quarter of 2022, was $2 million compared to $2.6 million in the year-ago period, This reflects an adjusted gross margin of 59.8% compared to 65.1% in the year-ago period. The year-over-year decreases were primarily driven by our softer revenue performance during the quarter, as well as by increased inventory provisions related to aged, obsolete, or unusable inventory. We also continue to mitigate headwinds from wage inflation rising transportation costs, and both labor and material availability in our nutraceutical business. These factors have continued to pressure our margin performance, and we will continue monitoring these impacts on the broader status of the labor and supply chain conditions. As a result of the headwinds we've discussed in our revenue performance, as well as adverse conditions in the broader cannabis market, we've performed an interim impairment assessment on our indefinite lives intangible assets related to our Colombian licenses and recognized a total impairment charge of $19 million during the third quarter. This was partially offset by the write-off of approximately $6.7 million in corresponding deferred tax liability related to the indefinite lives intangible assets. Operating expenses in the third quarter of 2022 were 26.5 million compared to 11.6 million in the year-ago period. The increase was primarily driven by the intangible asset impairment charge of 19 million related to our Colombian cannabis licenses. As we continue adapting to evolving conditions in our operating environment, we will keep advancing the cost reduction and restructuring work we've undertaken throughout the year. including the most recent reductions we've made to our workforce and operational scale in Portugal. Starting with our restructuring near the end of the first quarter, we have steadily rightsized our personnel, new harvest output, production infrastructure, and organizational priorities to align more closely with our current market opportunities. In Q2 and Q3 combined, These actions drove sequential reductions in our G&A, R&D, and sales and marketing expenses of approximately $2.8 million. Additionally, one other significant example of our cost reduction efforts was our recent decision to change our audit service provider. We implemented a competitive bid process with several qualified firms, each submitting proposals for evaluation. As a result of this process, the company will realize a meaningful reduction in expense for the coming year. Net loss in the third quarter of 2022 was $20.2 million compared to net income of $1 million in the year-ago period. Net loss in the current period was primarily driven by the $19 million impairment charge, partially offset by $6.7 million deferred tax liability write-offs related to the indefinite live intangible assets I just mentioned. Note that net income in the prior year includes a $9.1 million gain on re-measurement of warrant liability and a $3.4 million gain on debt extinguishment, as well as a $0.5 million in interest and amortization of debt issuance costs. Adjusted EBITDA in the third quarter of 2022 improved to negative $5.4 million compared to negative $6 million in the year-ago period. This is mainly due to cost reductions mentioned earlier, partially offset by higher inventory provision and sales and marketing expense. The cost improvements we have implemented throughout the first three quarters of 2022 have significantly contributed towards our reduced adjusted EBITDA loss. We have driven steady sequential improvements in this metric year to date from the first quarter of negative 6.7 million to the second quarter of negative 6.3 million and to the third quarter of negative 5.4 million. At September 30th, 2022, our cash balance was 17.6 million compared to 37.7 million at December 31st, 2021. The decrease was primarily attributable to operating losses and our repayment of $22.9 million in debt obligations earlier in the year. This was partially offset by net proceeds of $26.3 million raised in our at-the-market stock offering year-to-date through the third quarter, as well as by $2.5 million proceeds related to the partial sale of equity investments. Through the remainder of 2022, we aim to further improve our liquidity position through reducing our expenses and investment in working capital. Lastly, due to our softer than expected revenue performance across both business segments during the quarter, we have revised our full year 2022 revenue forecast. We now expect our 2022 revenue to range between $17 million and $17.7 million compared to our previously disclosed range of $20 million to $25 million. Based on our continued progress with reducing costs across our organization, we currently remain comfortable with our previously stated expectations for our full year adjusted gross margin, which we expect to range between 50% and 55%. We have also narrowed the range of our 2022 adjusted EBITDA, which is expected to range between negative 23 million to negative 22 million as compared to our previous range of between negative 23 million to negative 20 million. With our continued cash burn reductions, we now expect our 2022 capital expenditures to be approximately 1.5 million compared to the previous range of approximately 2 million to 3 million. We believe our ongoing focus on restructuring our costs, optimizing our cash efficiency, and streamlining our organizational processes has placed us in a strong position to support our long-term growth and profitability objectives as we execute on our strategy into 2023. This concludes my prepared remarks, and now I'll turn the call back over to Andres to review some of our market opportunities and most recent operational highlights in greater depth. Andres?