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spk04: Good afternoon and welcome to the CleverLeaf Q4 and Fall Year 2022 earnings call. All participants will be in a listen-only mode. Should you need any assistance, please say no for operator by pressing the star key followed by zero. After today's presentation, you'll be having an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To cancel your question, please press star then two. Please note, this event is being recorded. I'd now like to turn the conference over to Ms. Jackie Kashner, Director of Investigation. Please go ahead.
spk05: Good afternoon, everyone, and thank you for participating in today's conference call to discuss Cleverleaf's financial results for the fourth quarter and full year ended December 31, 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-K for the year ended December 31, 2022, which was filed prior to this call, as well as other filings made by cleverly 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 conditions 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 Andres.
spk02: Thank you, Jackie, and good afternoon, everyone. Our fourth quarter on full-year results reflect the strategic progress we have made across our target markets, as well as the development of a leaner, more efficient operational foundation for our business. Across our key metrics, our full-year performance came in line with our revised 2022 financial outlook. In fact, the 90% year-over-year growth that we generated within our cannabinoid business for the year allowed us to exceed our revised top-light guidance targets, even as we continue to experience revenue headwinds stemming from broader macroeconomic pressures in our non-cannabinoid business. From a cost perspective, we expect that the steady expense reductions and restructuring initiatives we implemented throughout the year will allow us to operate with greater operational and capital efficiency. As we continue to progress our strategy, we remain focused on further optimizing our foundation in 2023. At the outset of 2022, we announced a refined strategic focus for cleverness. In this new approach, we aligned our commercial efforts on a select set of international core markets with near-term catalysts, and we worked diligently to optimize our cost structure and balance sheet to best support these pipeline opportunities. I am proud to say that we made progress on these fronts during the year. On the commercial side, we announced several new partnerships for our extract and flower products. and we activated, ramped, and expanded some of our key commercial pathways across our target markets of Australia, Brazil, Germany, and Israel. In addition, we welcomed the completion of Colombia's regulatory framework for dry flower exports and continued our preparations for launching our own commercial flower shipments out of Colombia. One significant recent strategic step we announced earlier this year is the wind-down of all of our operations in Portugal and transitioning our operational focus solely to Colombia. In line with our ongoing restructuring initiatives, we've worked to have our Portuguese flower cultivation, post-harvest process, and manufacturing activities ceasing full by the end of the first quarter of 2023. Currently, We are exclusively cultivating our flower strains in Colombian greenhouses, where we expect to leverage our expansive, mature, environmentally sustainable, and cost-effective production infrastructure. With over 1.8 million square feet of fully built-out cultivation capacity and the UGMP certifications for the production of both cannabis extracts and dry flower, we have significant capacity to meet consumer demand and reach our key international markets. In addition, Colombia's lower cost structure and optimal agricultural climate continue to give us a critical competitive advantage, allowing us to drive greater production and cost efficiency. With our existing production infrastructure, we believe we are well positioned to ramp quickly in Colombia to serve our global customer base while maintaining our focus on growing premium and commercially viable strains. As we have previously shared, we expect Colombia flower sales to be a significant avenue of growth for us this year. as we work diligently to improve the quality and key characteristics of our flowers, such as THC content, terpene profile, bud size, and density. Our Colombian operations house a genetic discovery and development platform, comprising of outside strains from major cannabis brands and in-house development products, and we expect that successful output from the program will expand as we accelerate our dry flower production and continue making key product market fit improvements for our core geography. We're currently on track to complete our first commercial flower shipment from Colombia to Australia by early in the second quarter. We have completed some early test shipments with a focus on scaling our shipping process once our initial commercial shipment is complete. With our first commercial shipment targeted for Australia, we then aim to ramp shipments to Germany, the UK, and Israel by the end of the second half of this year. We believe our robust and efficient foundation in Colombia will allow us to optimally launch our flour exports while supporting the continued growth of our extract business. We have continued to focus exclusively on THC flour product development while using our existing inventory for extract sales. We have significantly reduced our Colombian harvests year over year to manage the inventory buildup and focus on the right strengths. And this decrease in new harvests, our ongoing extraction and processing costs, and the forthcoming incremental cost contributions related to the harvest and post-harvest processes for dry flour will pressure our all-in cost program in the near term. However, we believe that right-sizing our inventory levels will allow us to be efficient with our cash spending, besides having some reduction in costs to produce our cannabinoid products, as we will not have the higher expenses related to our Portugal operations going forward. The operation of footprint optimization, which resulted in the winding of our Portugal operations, was part of a broader effort we have been working on to optimize our cash use. In March, we went through a leadership change that resulted in profound restructuring of the company's executive team and top-level organization, which was in line with a focused strategy for profitable growth. Similarly, we reduced and right-sized headcount across all of our operations, optimized spending across all our functions, and reassessed all CapEx projects, resulting in an 82% CapEx reduction as compared to 2021. From a balance sheet perspective, we paid off two of our largest remaining pieces of debt. In sum, we implemented varied restructuring activities that we believe will allow us to drive greater costs and cash-use savings in 2023. Finally, in our non-cannabinoid segment, we experienced some headwinds across certain channels as retailers reduced inventory levels at the warehouse level. During the fourth quarter, this primarily occurred across our smoke shop and alternative channels, and nearly all of our channels saw reduced union volumes as a result of broader macroeconomic pressures on consumer spending. To help mitigate these effects, we've implemented select pricing increases, and we're closely monitoring how macroeconomic conditions evolve over the coming months. That said, we believe that the depth and breadth of our retailer and distribution relationships will help us navigate further variability in this segment. With the significant improvements we've made to our cost structure and the minimal capex required by our Colombian operations, we have built a linear operational framework for this business, one that I believe will allow us to make greater progress towards cash flow positivity. From a commercial standpoint, we expect to concentrate our efforts on the core target markets we've announced for this year, Australia, Brazil, Israel, Germany, the United Kingdom, and Colombia. As we build upon the market pathways we have developed and position ourselves for additional near and long-term catalysts in these markets going forward. I will describe our opportunities and objectives in these markets in greater detail later in the call. But first, I'd like to turn the call over to our CFO, Hank Haidt, who will discuss our fourth quarter and full-year financial performance in greater detail. Hank?
spk03: Thank you, Andres. Starting with our quarterly results, our revenue in the fourth quarter of 2022 increased 10% to $4.6 million. compared to 4.2 million in the year-ago period. Our cannabinoid segment revenues grew 71% year-over-year as we continued to ramp commercial pathways across our core markets. In particular, we have continued to gain traction in Brazil as we increase sales of our approved products. We have also generated momentum in Australia and had solid contributions from sales of our APIs in Israel. As Andres mentioned, we continued to experience 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. This primarily reflected broader macroeconomic headwinds, and we are working closely with our partners to mitigate these pressures through select pricing increases, marketing measures, and other initiatives. As these conditions persist, we are working to improve our visibility on how sell-through dynamics may evolve within our distributor network. Our all-in costs per gram of dry flour equivalent in the fourth quarter of 2022 was $3.46 per gram compared to 47 cents per gram in the year-ago period. The year-over-year increase was driven by our significantly reduced harvest in Columbia as well as the costs we have incurred related to processing our existing inventory for extract sales. Our fourth quarter cost per gram also reflects higher expenses related to our Portugal operations, which we are in the process of winding down. In Colombia, we have continued to focus on right-sizing our harvest and preparing for smokable dry flower exports. This includes focusing exclusively on THC harvests rather than hemp and CBD, and thereby continuing to use our existing hemp and CBD inventory for extraction. We believe that our costs will ultimately moderate to more advantageous levels as we ramp dry flower production to meet customer demand. We also expect our flower products to eventually comprise a greater share of our product portfolio and that our extract costs will remain at similar or lower levels to what we've driven historically. Following the announcement of our wind down in Portugal, We expect to leverage the cost advantages we've been able to drive in Colombia, where our harvest production costs have remained low due to optimal environmental conditions and the maturity of our operations. Consistent with what we have announced in January, our flower cultivation in Portugal has now fully ceased and we are solely cultivating our flower products in Colombia. Our gross profit in the fourth quarter of 2022 which included an inventory provision of $0.9 million, improved to $0.7 million compared to negative $0.3 million in the year-ago period, which included a $3 million inventory provision. Our adjusted gross profit, which excluded the inventory provisions, was $1.6 million in the fourth quarter of 2022 compared to $2.7 million in the year-ago period. This reflects an adjusted gross margin of 35.2% compared to 64.1% in the year-ago period. The increase in our gross profit reflects our revenue growth and lower inventory provision compared to the year-ago quarter. While the margin impacts reflect the continued revenue headwinds we've experienced within our non-cannabinoid business, Within that segment, we have also continued to mitigate margin pressures from wage inflation, rising transportation costs, and both labor and material availability. We will continue monitoring these impacts and the broader status of labor and supply chain conditions as we progress further into 2023. In conjunction with our restructuring plan, we recorded a total restructuring charge of 26.9 million in 2022, which included 23.1 million in restructuring charges during the fourth quarter. This charge is primarily related to the Portugal wind down, inclusive of expenses related to severance and employee benefits, certain cash expenditures, provision for inventory that will not be sold, real estate and equipment costs, which comprise of lease impairment along with property and equipment abandonment charges. Within the wind-down process itself, we've completed the bulk of our staff exits this month. We expect restructuring cash expenditures to persist through the first half of 2023. We expect to start seeing cost savings by the second quarter, and we believe we will be at a lower cash expenditure run rate starting in the third quarter. Taken together with this timeline in mind, we expect our operational transition to Colombia and workforce reduction in Portugal to meaningfully reduce our cash burn going forward. Operating expenses in the fourth quarter of 2022 were $29.5 million compared to $29.9 million in the year-ago period. The operating expenses during the fourth quarter were driven by the $23.1 million restructuring charge, primarily related to the wind down of our Portugal operations. Note that operating expenses in the fourth quarter of 2021 include the impact of an $18.5 million non-cash goodwill impairment charge we recorded that quarter, related to the acquisition of our Columbian operations in November 2019. Net loss in the fourth quarter of 2022 was $28.8 million compared to a net loss of $24 million in the year-ago period. This was driven primarily by the $23.1 million restructuring charge we recorded during the quarter. Net loss in the year-ago quarter included the impact of $18.5 million non-cash goodwill impairment charge into higher non-cash share-based compensation expense, inventory provision, and non-cash interest expense recognized in connection with the conversion feature related to our 2024 convertible note with Catalina LP. Net loss in the year-ago quarter was partially offset by the gain on re-measurement of warrant liability and continued cost-cutting measures. Adjusted EBITDA in the fourth quarter of 2022 was negative 5.2 million compared to negative 6.6 million in the year-ago period. This was mainly due to our ongoing cost reduction measures. The cost improvements we implemented throughout 2022 have contributed towards our reduced adjusted EBITDA loss. At December 31, 2022, our cash balance was $12.9 million compared to $37.7 million at December 31, 2021. The decrease was primarily attributable to operating losses, working capital needs, and the repayment of $23.1 million in debt obligations during the past year. This was partially offset by net proceeds of $26.3 million raised in our at-the-market stock offering during 2022, as well as by $2.5 million in proceeds related to the partial sale of our equity investment in CanSativa. Note that we did not have any new stock issuances under our at-the-market offering during the fourth quarter. As noted in our public filings, including our 2022 10K, there is substantial doubt about our ability to continue as a going concern. Our ability to execute our operating plans through 2023 and beyond depends on our ability to obtain additional funding, which may include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets. Throughout 2023, our goal is to further improve our liquidity position through reducing our expenses and investment in working capital. As we work to complete the wind down process for our Portugal operations, we are also preparing for the sale process of these assets. Our goal is to complete the sale of the remaining assets in Portugal during this calendar year. which we expect to provide some additional non-dilutive capital to the business. We will provide further updates on the wind down and sale process as it moves forward in the coming quarters. Now briefly turning to our full year results. Revenue in 2022 increased 16% to $17.8 million compared to $15.4 million in 2021. The increase was driven by increased sales in our cannabinoid segment, in part offset by a slight decrease in our non-cannabinoid segment. The growth in our cannabinoid segment sales reflects continued expansion of sales activity and selling more products which have higher margins. The decreased sales in our non-cannabinoid segment were driven by current economic challenges faced by mass retailers, and specialty distributors during the year ended December 31st, 2022. All in costs of dry flour in 2022 was 87 cents per gram compared to 22 cents per gram in 2021. The increase was primarily driven by our significantly reduced agricultural output in Columbia and continued extraction processing costs on current inventory in Columbia. During the year, cost per gram also reflected higher expenses associated with our Portugal facilities, which we are in the process of winding down. Gross profit, which included an inventory provision of $4.7 million, was $4.3 million compared to $6.8 million in 2021, which included an inventory provision of $3 million. Including these inventory provisions, our 2022 gross margin was 24.3% compared to 44.3% in 2021. The decrease in gross profit is attributable to higher inventory provision as well as the revenue headwinds and labor and supply chain related costly impacts within the non-cannabinoid segment. Adjusted gross profit was $9.1 million compared to $9.8 million in 2021, reflecting a 50.9% adjusted gross margin compared to 63.7% in the year-ago period. Operating expenses in 2022 were $79.4 million compared to $64 million in 2021, The increase was attributable to the $26.9 million restructuring expense that was primarily related to the Portugal wind down, as well as the $19 million cash intangible asset impairment charge we recorded in relation to our Colombian cannabis-related licenses in the third quarter of 2022. This was partially offset by the cost reductions we drove during the year, as our combined G&A and sales and marketing expenses decreased 30% year over year. As a note for the prior year, operating expenses in 2021 included the impact of the $18.5 million goodwill impairment charge we recorded during the fourth quarter of 2021 related to the acquisition of our Colombian operations. Net loss in 2022 was 66.2 million compared to a net loss of 45.7 million in 2021. The increase was driven primarily by the 26.9 million restructuring charge we incurred in 2022 along with the $19 million intangible asset impairment charge related to our Colombian cannabis licenses in the third quarter of 2022. Net loss in 2021 included the impact of the $18.5 million goodwill impairment charge I just mentioned for the fourth quarter of 2021. In addition to higher non-cash share-based compensation expense, the aforementioned inventory provision and a non-cash interest expense recognized in connection with the conversion feature related to the 2024 convertible note, partially offset by a gain on remeasurement of warrant liability and continued cost-cutting measures. Adjusted EBITDA in 2022 was negative $23.1 million compared to negative $23.7 million in 2021. The improvement was mainly driven by sustained cost reductions we drove throughout 2022. As we progress into 2023, Our execution on our refined growth strategy has positioned us to further support our commercial momentum and operate with greater operational efficiency. Our six strategic growth objectives and key regions of focus will support these full year 2023 targets. We expect our full year 2023 revenue to range between $19 million and $22 million. with an expected adjusted gross margin of approximately 58% to 63%. In addition, we expect our 2023 adjusted EBITDA to be within the range of negative 13.6 million to negative 10.6 million. As we continue to focus on driving capital efficiency and expense reduction, we expect to incur approximately 0.5 million, to $0.7 million in capital expenditures for the year, which represents an approximately 50% reduction compared to our 2022 CapEx. This concludes my prepared remarks, and now I'll turn the call back over to Andres to review our 2023 market opportunities in greater depth. Andres?
spk02: Thank you, Hank. Before we open the call to questions, I'd like to provide a quick overview of our strategic objectives in 2023. Our three main strategic priorities this year are our focused commercial strategy, our low-cost, high-quality production in Colombia, and our continued work toward optimized cash management. Starting with our focused commercial strategy, we will continue to align our commercial efforts towards a concentrated set of international markets. As I mentioned earlier in the call, these markets are Australia, Brazil, Germany, Israel, the United Kingdom, and Colombia. In Australia, our flour has historically been successful in this market due to its high THC content, terpene profile, and bat size. Having originally cultivated these strains in Portugal, we've leveraged our learnings from this cultivation in our dry flour preparations in Colombia. The strong product market fit we've already achieved has allowed us to continue shipping much of our remaining Portuguese flour to Australia, and it has also helped make the country a priority market for our initial commercial flour shipment from Colombia. We are underway with finalizing our preparations for our first shipment, and we expect to continue ramping the new and existing Australian partnerships we have for extracts and flour throughout 2023. In Brazil, we expect to continue ramping extract shipments, which grew nicely in Q4 and are expected to be a strong driver for us this year. We have continued to complete additional sales under RDC 327. Our products have been available for sale among various Brazilian pharmacies since the middle of last year, after several of our products were approved for the market entry under the country's stringent regulatory framework. We seek to expand our foothold in this market as we support momentum in our current agreements and pursue additional product approvals. Moving to Germany, part of our Colombian flour preparation involves refining our flour for use in our Arcana brand, after previously cultivating flour for the brand out of Portugal. After initially supplying CBD-dominant products to Germany, we've secured partnerships to supply flour strains with high THC. On the distribution level, we've built relationships with prescribing physicians as we grow our ability to sell through various pharmacies and generate physician demand. As we've discussed throughout 2022, we have multiple pathways to this prominent European market. Beyond developing the ICANA brand, we've secured our status as a licensed medical cannabis distributor and as a valued partner to various seasoned pharmaceutical operators and distributors in the country. We currently expect to launch Colombian flower sales in Germany during the second half of this year, leveraging our ICANA brand and our B2B partnerships. In the meantime, we'll continue to support additional product sales through our current extract B2B partnerships. In Israel, our partnership with Intercure fulfilled one of our key strategic objectives for this market in 2022, securing a commercial-scale flower agreement. We have worked to adapt to this market's evolving product requirements to ensure we fulfill the pharmaceutical-grade specifications required for Infer. As we prepare to launch Colombian flower sales in this market by the second half of this year and work to maintain sales momentum for our extracts and EPIs, we also continue to see opportunities for helping Israel domiciled cannabis companies internationally, both from a distribution and production standpoint. Our large production capacity and deep market knowledge allows us to be a nimble partner and provide optimal product quality. One new target market for us in 2023 is the United Kingdom. As we disclosed last quarter, we've forged some early commercial inroads in this market. According to a recent report from the Peterborough Telegraph, prescriptions of medical cannabis by doctors across England have grown 56% over the past year. This increased demand presents a promising opportunity for us, with our proven ability to produce at pharmaceutical-grade quality levels and develop strong pharmacy-oriented distribution networks. We expect to begin flower exports to the UK by the second half of this year and look forward to providing additional updates on the opportunities that arise in this market. Finally, we expect to propel further growth from the deep and extensive roots we've built in Colombia. In the country itself, we believe the domestic cannabis market presents a growing opportunity for us, and it has become one of our focus markets for 2023. As of January 1, 2023, Colombia's universal coverage healthcare system includes medical cannabis and prescribed medical cannabis derivatives as a reimbursable therapy, and we aim to sell products into the local market as we leverage these new regulations. The Colombian Senate also approved a nationwide marijuana legalization bill in December, after the bill had previously received initial approval in the Chamber of Representatives. We welcome these regulatory developments and are closely monitoring further progress, as we believe our mature operations in Colombia give us a strong position in the market as it expands. Staying with Colombia as we move to our second growth objectives, we will leverage the low-cost, high-quality production infrastructure we've built in Colombia to support our commercial efforts. As we are concentrating our operations in Colombia, our focus is to continue expanding our already successful extract portfolio and commercially launch the high THC flour we are producing in Colombia. With our advantageous scale, operating experience, and factor costs in Colombia, we seek to drive improvements in our margins during 2023. As for our third growth objective, optimized cash management, We're focused on improving our balance sheet as we work to accelerate revenue growth and leverage our low-cost unit economics in Colombia. As Hank mentioned, we have multiple potential pathways towards seeking additional funding, and we are making these evaluations alongside our continued work to reduce our operating expenses and capital intensity. Using our robust production infrastructure in Colombia, our more streamlined cost structure, and the various international market pathways we have activated, We are continuing to develop a strong runway for long-term growth. I am proud of the progress we have made, and we aim to continue ramping our commercial opportunities and driving towards greater cost and capital efficiency in 2023.
spk01: We'll now open up the call for Q&A.
spk04: Thank you. We will now begin the question and answer section. To ask a question, you may press Start N1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. We will now pause for a brief moment for questions to be registered.
spk01: There are no questions registered at this time. I will now hand back to Mr. Fajardo for closing remarks. Thank you very much.
spk02: 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 first quarter results in May.
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