Clever Leaves Holdings Inc. - Quarter Report: 2023 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2023
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-39820
Clever Leaves Holdings Inc.
(Exact name of registrant as specified in its charter)
British Columbia, Canada | Not Applicable | |||||||
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |||||||
Bodega 19-B Parque Industrial Tibitoc P.H, Tocancipá - Cundinamarca, Colombia | N/A | |||||||
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code): (561) 634-7430
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||||||||||||||
Common shares without par value | CLVR | The Nasdaq Stock Market LLC | ||||||||||||||||||||||||
Warrants, each warrant exercisable for one common share at an exercise price of $11.50 | CLVRW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | ||||||||||||
Smaller reporting company | ☒ | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of registrant’s common shares outstanding as of August 10, 2023 was 45,726,599.
1
CLEVER LEAVES HOLDINGS INC.
TABLE OF CONTENTS
Page | ||||||||
PART I - FINANCIAL INFORMATION | ||||||||
ITEM 1. | ||||||||
Condensed Consolidated Statements of Financial Position as of June 30, 2023 and December 31, 2022 | ||||||||
Condensed Consolidated Statements of Operations for the Three and Six months ended June 30, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Shareholders’ Equity for the Three and Six months ended June 30, 2023 and 2022 | ||||||||
Condensed Consolidated Statements of Cash Flows for the Six months ended June 30, 2023 and 2022 | ||||||||
Notes to Unaudited Condensed Consolidated Financial Statements | ||||||||
ITEM 2. | ||||||||
ITEM 3. | ||||||||
ITEM 4. | ||||||||
PART II - OTHER INFORMATION | ||||||||
ITEM 1. | ||||||||
ITEM 1A. | Risk Factors | |||||||
ITEM 5. | ||||||||
ITEM 6. | ||||||||
2
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (this “Form 10-Q”) includes certain statements that are not historical facts but are forward-looking statements for purposes of the safe harbor provisions under the United States Private Securities Litigation Reform Act of 1995. You should not place undue reliance on such statements because they are subject to numerous risks and uncertainties which are difficult to predict and many of which are beyond our control and could cause our actual results to differ from the forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “forecast,” “will,” “expect,” “budget,” “contemplate,” “believe,” “estimate,” “continue,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. You should read statements that contain these words carefully because they:
•discuss future expectations;
•contain projections of future results of operations or financial condition; or
•state other “forward-looking” information.
All such forward-looking statements are based on our current expectations and involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. We believe it is important to communicate our expectations to our security holders. However, there may be future events that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in this Part I, Item 1A, “Risk Factors” in our annual report on Form 10-K for the year ended December 31, 2022 (the “Annual Report” or “2022 Form 10-K”) provide examples of risks, contingencies, uncertainties, and events that may cause our actual results to differ materially from the expectations described by us in such forward-looking statements, including among other things:
•our ability to continue as a going concern;
•our ability to maintain the listing of our securities on Nasdaq;
•changes adversely affecting the industry in which we operate;
•our restructuring plans;
•the availability or terms of future financing;
•our ability to achieve our business strategies;
•general economic conditions, including the ongoing military conflict between Russia and Ukraine (and resulting sanctions) on the global economy, global financial markets and our business;
•regional political and economic conditions, including emerging market conditions;
•the impact and magnitude of rising energy costs;
•the impact and magnitude of inflation and currency fluctuations;
•the regulation and legalization of adult-use, recreational cannabis;
•our ability to retain our key employees; and
•other factors that are more fully discussed in Part I, Item 1A of the "2022 Form 10-K" under the heading “Risk Factors”, and those discussed in other documents we file with the SEC.
These risks could cause actual results to differ materially from those implied by the forward-looking statements contained in this Form 10-Q.
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. These forward-looking statements speak only as of the date of this Form 10-Q. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
This Form 10-Q contains estimates, projections and other information concerning our industry, our business, and the markets for our products. Information that is based on estimates, forecasts, projections, market research or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances that are assumed in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from our own internal estimates and research as well as from reports, research surveys, studies and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data and similar sources.
3
ITEM 1. FINANCIAL STATEMENTS
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Financial Position
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
As of | As of | ||||||||||||||||
Note | June 30, 2023 | December 31, 2022 | |||||||||||||||
Assets | |||||||||||||||||
Current: | |||||||||||||||||
Cash and cash equivalents | $ | 5,077 | $ | 12,449 | |||||||||||||
Restricted cash | 64 | 439 | |||||||||||||||
Accounts receivable, net | 2,590 | 2,252 | |||||||||||||||
Prepaids, deposits and other receivables | 6 | 3,207 | 2,708 | ||||||||||||||
Inventories, net | 5 | 7,470 | 8,399 | ||||||||||||||
Total current assets | 18,408 | 26,247 | |||||||||||||||
Investment – Cansativa | 7 | 5,777 | 5,679 | ||||||||||||||
Property, plant and equipment, net of accumulated depreciation of $7,990 and $7,120 for June 30, 2023 and December 31, 2022, respectively | 9 | 13,094 | 13,963 | ||||||||||||||
Assets held for sale - Land | 1,500 | 1,500 | |||||||||||||||
Intangible assets, net | 8 | 2,987 | 3,354 | ||||||||||||||
Operating lease right-of-use assets, net | 18 | 981 | 1,303 | ||||||||||||||
Other non-current assets | 84 | 52 | |||||||||||||||
Total Assets | $ | 42,831 | $ | 52,098 | |||||||||||||
Liabilities | |||||||||||||||||
Current: | |||||||||||||||||
Accounts payable | $ | 2,300 | $ | 2,299 | |||||||||||||
Accrued expenses and other current liabilities | 3,115 | 4,238 | |||||||||||||||
Loans and borrowings, current portion | 10 | 471 | 465 | ||||||||||||||
Warrant liability | 168 | 113 | |||||||||||||||
Operating lease liabilities, current portion | 18 | 663 | 1,239 | ||||||||||||||
Deferred revenue | 845 | 1,072 | |||||||||||||||
Total current liabilities | 7,562 | 9,426 | |||||||||||||||
Loans and borrowing — long-term | 10 | 908 | 1,065 | ||||||||||||||
Operating lease liabilities — long-term | 18 | 389 | 1,087 | ||||||||||||||
Other long-term liabilities | 24 | 112 | |||||||||||||||
Total Liabilities | $ | 8,883 | $ | 11,690 | |||||||||||||
Contingencies and commitments | |||||||||||||||||
Shareholders’ equity | |||||||||||||||||
Preferred shares, without par value, unlimited shares authorized, nil shares issued and outstanding for each of June 30, 2023 and December 31, 2022 | — | — | |||||||||||||||
Common shares, without par value, unlimited shares authorized: 45,704,459 and 43,636,783 shares issued and outstanding as of June 30, 2023 and December 31, 2022, respectively | 11 | — | — | ||||||||||||||
Additional paid-in capital | 222,530 | 221,313 | |||||||||||||||
Accumulated deficit | (188,582) | (180,905) | |||||||||||||||
Total shareholders' equity | 33,948 | 40,408 | |||||||||||||||
Total liabilities and shareholders' equity | $ | 42,831 | $ | 52,098 | |||||||||||||
See accompanying notes to the condensed consolidated financial statements
4
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||||||||
Note | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||
Revenue, net | 16 | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 | ||||||||||||||||||||
Cost of sales | (2,255) | (1,619) | (3,999) | (4,067) | |||||||||||||||||||||||||
Gross profit | 2,726 | 2,481 | 4,960 | 5,074 | |||||||||||||||||||||||||
Expenses | |||||||||||||||||||||||||||||
General and administrative | 12 | 4,805 | 6,424 | 10,172 | 13,422 | ||||||||||||||||||||||||
Sales and marketing | 469 | 728 | 1,018 | 1,461 | |||||||||||||||||||||||||
Research and development | 403 | 359 | 615 | 771 | |||||||||||||||||||||||||
Restructuring expenses | 13 | — | — | — | 3,842 | ||||||||||||||||||||||||
Depreciation and amortization | 224 | 318 | 460 | 644 | |||||||||||||||||||||||||
Total expenses | 5,901 | 7,829 | 12,265 | 20,140 | |||||||||||||||||||||||||
Loss from operations | (3,175) | (5,348) | (7,305) | (15,066) | |||||||||||||||||||||||||
Other Expense (Income), net | |||||||||||||||||||||||||||||
Interest and amortization of debt issuance cost | 35 | 645 | 18 | 2,754 | |||||||||||||||||||||||||
Loss (Gain) on remeasurement of warrant liability | 11 | 11 | (1,323) | 55 | (1,813) | ||||||||||||||||||||||||
Gain on investment | 7 | — | (6,851) | — | (6,851) | ||||||||||||||||||||||||
Loss on debt extinguishment, net | 10 | — | — | — | 2,263 | ||||||||||||||||||||||||
Foreign exchange loss | 67 | 264 | 22 | 475 | |||||||||||||||||||||||||
Other (income) expense, net | (27) | 61 | 12 | 9 | |||||||||||||||||||||||||
Total other expenses (income), net | 86 | (7,204) | 107 | (3,163) | |||||||||||||||||||||||||
Loss (income) before income taxes and equity investment loss | $ | (3,261) | $ | 1,856 | $ | (7,412) | $ | (11,903) | |||||||||||||||||||||
Equity investment share of loss | — | — | — | 64 | |||||||||||||||||||||||||
Loss (income) from continuing operations | $ | (3,261) | $ | 1,856 | $ | (7,412) | $ | (11,968) | |||||||||||||||||||||
Loss from discontinued operations | (334) | (2,902) | (264) | (5,218) | |||||||||||||||||||||||||
Net loss | $ | (3,595) | $ | (1,046) | $ | (7,676) | $ | (17,186) | |||||||||||||||||||||
Net loss per share: | |||||||||||||||||||||||||||||
Basic and diluted from continuing operations | 17 | $ | (0.07) | $ | 0.05 | $ | (0.17) | $ | (0.35) | ||||||||||||||||||||
Basic and diluted from discontinued operations | (0.01) | (0.08) | (0.01) | (0.16) | |||||||||||||||||||||||||
Net loss per share | $ | (0.08) | $ | (0.03) | $ | (0.18) | $ | (0.51) | |||||||||||||||||||||
Weighted-average common shares outstanding: | 44,866,179 | 39,559,793 | 44,387,392 | 33,792,261 | |||||||||||||||||||||||||
Basic and diluted | 17 | (0.08) | (0.03) | (0.18) | (0.51) | ||||||||||||||||||||||||
See accompanying notes to the condensed consolidated financial statements.
5
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Shareholders’ Equity
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | |||||||||||||||||||||||||||||
Shares | Amount | Amount | Amount | Amount | ||||||||||||||||||||||||||||
Balance at December 31, 2021 | 26,605,797 | $ | — | $ | 187,510 | $ | (114,740) | $ | 72,770 | |||||||||||||||||||||||
Issuance of common shares, gross | 11,047,567 | — | 23,400 | — | 23,400 | |||||||||||||||||||||||||||
Issuance of common shares upon vesting RSUs | 247,453 | — | — | — | — | |||||||||||||||||||||||||||
Stock option exercise | 116,112 | — | 22 | — | 22 | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 500 | — | 500 | |||||||||||||||||||||||||||
Equity issuance costs | — | — | (1,177) | — | (1,177) | |||||||||||||||||||||||||||
Beneficial conversion feature of Convertible Note | — | 1,749 | — | 1,749 | ||||||||||||||||||||||||||||
Conversion of Convertible Note to common shares | 607,000 | — | 1,324 | — | 1,324 | |||||||||||||||||||||||||||
Net loss | — | — | — | (16,140) | (16,140) | |||||||||||||||||||||||||||
Balance at March 31, 2022 | 38,623,929 | $ | — | $ | 213,328 | $ | (130,880) | $ | 82,448 | |||||||||||||||||||||||
Issuance of common shares upon vesting RSUs | 39,898 | — | — | — | — | |||||||||||||||||||||||||||
Stock option exercise | 35,582 | — | — | — | — | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 1,148 | — | 1,148 | |||||||||||||||||||||||||||
Conversion of Convertible Note to common shares | 900,000 | — | 2,039 | — | 2,039 | |||||||||||||||||||||||||||
Net loss | — | — | — | (1,046) | (1,046) | |||||||||||||||||||||||||||
Balance at June 30, 2022 | 39,599,409 | $ | — | $ | 216,515 | $ | (131,926) | $ | 84,589 | |||||||||||||||||||||||
Note | Common Stock | Additional Paid-in Capital | Accumulated Deficit | Total Shareholders’ Equity | ||||||||||||||||||||||||||||
Shares | Amount | Amount | Amount | Amount | ||||||||||||||||||||||||||||
Balance at December 31, 2022 | 43,636,783 | $ | — | $ | 221,313 | $ | (180,905) | $ | 40,408 | |||||||||||||||||||||||
Issuance of common shares upon vesting RSUs | 370,489 | — | — | — | — | |||||||||||||||||||||||||||
Stock-based compensation expense | — | — | 468 | — | 468 | |||||||||||||||||||||||||||
Equity issuance costs | — | — | (25) | — | (25) | |||||||||||||||||||||||||||
Net loss | — | — | — | (4,081) | (4,081) | |||||||||||||||||||||||||||
Balance at March 31, 2023 | 44,007,272 | $ | — | $ | 221,756 | $ | (184,986) | $ | 36,770 | |||||||||||||||||||||||
Issuance of common shares upon vesting RSUs | 14 | 137,614 | — | — | — | — | ||||||||||||||||||||||||||
Stock-based compensation expense | 12 | — | — | 433 | — | 433 | ||||||||||||||||||||||||||
Issuance of common stock - gross | 1,559,573 | — | 438 | — | 438 | |||||||||||||||||||||||||||
Equity issuance costs | — | $ | — | (97) | $ | — | (97) | |||||||||||||||||||||||||
Net loss | (3,595) | (3,595) | ||||||||||||||||||||||||||||||
Balance at June 30, 2023 | 45,704,459 | $ | — | $ | 222,530 | $ | (188,582) | $ | 33,948 | |||||||||||||||||||||||
6
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands of U.S. Dollars)
(Unaudited)
Six Months Ended June 30, | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash Flow from Operating Activities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss from continuing operations | (7,412) | (11,968) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss from discontinued operations | (264) | (5,218) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net loss | (7,676) | (17,186) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Adjustments to reconcile to net cash used in operating activities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Depreciation and amortization | 1,242 | 1,984 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Amortization of debt discount and debt issuance cost | — | 1,949 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventory provision | 5 | 326 | 2,126 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Restructuring and related costs | 13 | — | 3,430 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Gain) loss on remeasurement of warrant liability | 11 | 55 | (1,813) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss on disposal of fixed assets | 72 | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Non-cash lease expense | 18 | 322 | 155 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Foreign exchange loss | 22 | 652 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | 14 | 901 | 1,648 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investment share of loss | — | 64 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Gain on investment | 7 | — | (6,851) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loss on debt extinguishment, net | 10 | — | 2,263 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other non-cash expense, net | — | 600 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in operating assets and liabilities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Increase) decrease in accounts receivable | (338) | (1,169) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Increase) in prepaid expenses | 6 | (499) | (1,014) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decrease (increase) in other receivables and other non-current assets | (34) | 178 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Decrease) in lease liability | 18 | (614) | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Increase) decrease in inventory | 602 | (3,458) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Decrease) in accounts payable and other current liabilities | (2,059) | (1,957) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(Decrease) increase in accrued and other non-current liabilities | (86) | (185) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash used in operating activities | (7,764) | (18,584) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash Flow from Investing Activities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Purchase of property, plant and equipment | (79) | (1,601) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from partial sale of equity method of investment | — | 2,498 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash provided by (used in) investing activities | (79) | 897 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash Flow from Financing Activities: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Repayment of debt | 10 | (257) | (22,665) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other borrowings | — | 73 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Proceeds from issuance of shares | 11 | 438 | 23,400 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity issuance costs | 11 | (123) | (1,177) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercise | — | 22 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Net cash (used in) provided by financing activities | 58 | (347) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Effect of exchange rate changes on cash, cash equivalents & restricted cash | 38 | (202) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Decrease in cash, cash equivalents & restricted cash | (7,747) | (18,236) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents & restricted cash, beginning of period (a) | 12,888 | 37,699 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash, cash equivalents & restricted cash, end of period (a) | 5,141 | 19,463 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(a) These amounts include restricted cash of $64 and $454 as of June 30, 2023 and June 30, 2022, respectively, which are comprised primarily of cash on deposits for certain lease arrangements.
See accompanying notes to the condensed consolidated financial statements.
7
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
1. CORPORATE INFORMATION
Clever Leaves Holdings Inc., (the “Company”) is a multi-national U.S. based holding company focused on cannabinoids. In addition to the cannabinoid business, the Company is also engaged in the non-cannabinoid business of nutraceutical and other natural remedies and wellness products. The Company is incorporated under the Business Corporations Act of British Columbia, Canada.
The mailing address of the Company's principal executive office is Bodega 19-B Parque Industrial Tibitoc P.H, Tocancipá - Cundinamarca, Colombia.
2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements (“Financial Statements”) are unaudited. These Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of regulation S-X. Accordingly, they do not include all disclosures required for annual financial statements. These Financial Statements reflect all adjustments, which, in the opinion of the management, are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances have been eliminated. All adjustments were of a normal recurring nature. Interim results are not necessarily indicative of results to be expected for the full year.
The Financial Statements include the accounts of the Company and its wholly owned subsidiaries. Company’s subsidiaries and respective ownership percentage has not changed from the year ended December 31, 2022.
These Financial Statements should be read in conjunction with the Company's audited financial statements for the year ended December 31, 2022, included in its Annual Report on Form 10-K, as filed with the SEC on March 30, 2023 (the "Annual Report").
Discontinued Operations
During the fiscal year 2022, the Company undertook various strategic initiatives aimed at reducing costs, improving organizational efficiency, and optimizing its business model. As part of these initiatives, the Company implemented several restructuring activities.
Additionally, in December 2022, the Company made the decision to shut down its Portugal operations in order to preserve cash. In January 2023, the Company further approved the wind-down of its entire Portuguese operations to enhance operating margin and focus solely on cannabis cultivation and production in Colombia. As part of this restructuring plan, the Company has completed the cessation of its Portuguese flower cultivation, post-harvest processes, and manufacturing activities and is expected to fully shut down the remainder of its operations by the end of the second quarter of 2023. Subsequently, the post harvest facility has been sold and preparations are currently underway for the sale process of the farm land with the objective of concluding the sale during the fiscal year ending December 31, 2023.
Considering the nature and extent of the restructuring activities undertaken, in accordance with Accounting Standards Codification (ASC) 205, Presentation of Financial Statements, the Company has determined that these operations meet the "discontinued operations" criteria as of June 30, 2023. As a result, the condensed consolidated statements of financial position, the condensed consolidated statements of operations, the condensed consolidated statements of cash flows, and the notes to the consolidated financial statements have been restated for all periods presented to reflect the discontinuation of these operations in accordance with ASC 205.
Please refer to Note 19, "Discontinued Operations," for further details regarding the discontinued businesses. The discussion in the notes to these financial statements, unless otherwise noted, pertains solely to the Company's continuing operations.
8
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Going Concern
These interim condensed financial statements have been prepared in accordance with U.S. GAAP, which assumes that the Company will be able to meet its obligations and continue its operations for the next twelve months from the date of issue.
As shown in the accompanying interim condensed financial statements, the Company had an accumulated deficit as of June 30, 2023, as well as operating losses and negative cash flows from operations since inception and expects to continue to incur net losses for the foreseeable future until such time that it can generate significant revenue from the sale of its available inventories.
At June 30, 2023, the Company had cash and cash equivalents of $5,077. As of June 30, 2023, the Company’s current working capital, anticipated operating expenses and net losses, and the uncertainties surrounding its ability to raise additional capital as needed, raise substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations as they come due within twelve months from the date the consolidated financial statements were issued. The consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company’s ability to execute its operating plans through 2023 and beyond depends on its ability to obtain additional funding, which may include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets, to meet planned growth requirements and to fund future operations, which may not be available on acceptable terms, or at all.
Principles of Consolidation
The Financial Statements include the accounts of the Company and its consolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in its audited consolidated financial statements for the year ended December 31, 2022, included in the Annual Report. Except as noted below, there have been no other changes in the Company's significant accounting policies as discussed in the Annual Report.
Use of Accounting Estimates
The preparation of these Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Financial Statements and accompanying notes in the reported period. These estimates include, but are not limited to, allowance for doubtful accounts, inventory valuation, determination of fair value of stock-based awards and estimate of incremental borrowing rate for determining the present value of future lease payments, intangible assets, useful lives of property and equipment, revenue recognition and income taxes and related tax asset valuation allowances. While the significant estimates made by management in the preparation of the consolidated financial statements are reasonable, prudent, and evaluated on an ongoing basis, actual results may differ materially from those estimates.
Recently Adopted Accounting Pronouncements
ASU No. 2016-13- Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses for certain financial instruments and financial assets. For trade receivables, we are required to estimate lifetime expected credit losses. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023. We have adopted the provisions of Accounting Standards
9
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Update (ASU) No. 2016-13, Credit Losses on Financial Instruments (Topic 326). After careful consideration and analysis, we have determined that the adoption of this pronouncement has not had a material impact on our financial reporting. Therefore, our financial statements and disclosures have not been significantly affected by the adoption of this standard.
4. FAIR VALUE MEASUREMENTS
The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities, except for those assets and liabilities that are short term in nature and approximate the fair values, as of the periods presented:
Level 1 | Level 2 | Level 3 | Total | |||||||||||||||||||||||
As of June 30, 2023 | ||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Investment – Cansativa | — | — | 5,777 | 5,777 | ||||||||||||||||||||||
Total Assets | $ | — | $ | — | $ | 5,777 | $ | 5,777 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Loans and borrowings | — | 1,379 | — | 1,379 | ||||||||||||||||||||||
Warrant liability | — | — | 168 | 168 | ||||||||||||||||||||||
Total Liabilities | $ | — | $ | 1,379 | $ | 168 | $ | 1,547 | ||||||||||||||||||
As of December 31, 2022 | ||||||||||||||||||||||||||
Assets: | ||||||||||||||||||||||||||
Investment – Cansativa | — | — | 5,679 | 5,679 | ||||||||||||||||||||||
Total Assets | $ | — | $ | — | $ | 5,679 | $ | 5,679 | ||||||||||||||||||
Liabilities: | ||||||||||||||||||||||||||
Loans and borrowings | — | 1,530 | — | 1,530 | ||||||||||||||||||||||
Warrant liability | — | — | 113 | 113 | ||||||||||||||||||||||
Total Liabilities | $ | — | $ | 1,530 | $ | 113 | $ | 1,643 |
Investment – Cansativa
Our investment in Cansativa's equity securities does not have a “readily determinable fair value,” or is not traded in a verifiable public market. The Company accounted for this investment under ASC 321, Investments - Equity Securities. The Company used the practical expedient available under ASU 2016-01, the cost method investment which presents and carries this investment using the alternative measurement method which is cost minus impairment, if any, plus or minus changes resulting from observable price changes in “orderly transactions,” as defined in ASC 321, for the identical or a similar investment of the same issuer. The Company periodically reviews the investments for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. As of June 30, 2023, the carrying value of its cost method investments were recoverable in all material respects. For more information, refer to Note 7 to our Financial Statements for the six months ended June 30, 2023.
The following table provides a summary of changes in fair value of the Company’s level 3 investments for the six months ended June 30, 2023:
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Level 3 | |||||
Balance, December 31, 2022 | $ | 5,679 | |||
Change in value due to foreign exchange gain | 74 | ||||
Balance, March 31, 2023 | $ | 5,753 | |||
Change in value due to foreign exchange gain | $ | 24 | |||
Balance, June 30, 2023 | $ | 5,777 |
During the six months ended June 30, 2023, there were no transfers between fair value measurement levels.
The change in fair value of warrant liabilities related to private warrants during the six months ended June 30, 2023, is as follows:
Private Placement Warrants: | Total Warrant Liability | ||||
Warrant liability at December 31, 2022 | $ | 113 | |||
Change in fair value of warrant liability | 44 | ||||
Warrant liabilities at March 31, 2023 | $ | 157 | |||
Change in fair value of warrant liability | 11 | ||||
Warrant liabilities at June 30, 2023 | $ | 168 | |||
The Company determined the fair value of its private warrants using the Monte Carlo simulation model. The following assumptions were used to determine the fair value of the Private Warrants as of June 30, 2023 and December 31, 2022:
As of | |||||||||||
June 30, 2023 | December 31, 2022 | ||||||||||
Risk-free interest rate | 4.69% | 4.23% | |||||||||
Expected volatility | 145% | 105% | |||||||||
Share Price | $0.20 | $0.31 | |||||||||
Exercise Price | $11.50 | $11.50 | |||||||||
Expiration date | December 18, 2025 | December 18, 2025 |
•The risk-free interest rate assumptions are based on U.S. dollar zero curve derived from swap rates at the valuation date, with a term to maturity matching the remaining term of warrants.
•The expected volatility assumptions are based on average of historical volatility based on comparable industry volatilities of public warrants.
5. INVENTORIES, NET
Inventories are comprised of the following items as of the periods presented:
June 30, 2023 | December 31, 2022 | ||||||||||
Raw materials | $ | 1,063 | $ | 1,204 | |||||||
Work in progress – harvested cannabis and extracts | 141 | 21 | |||||||||
Finished goods – cannabis extracts | 5,806 | 6,703 | |||||||||
Finished goods – other | 460 | 471 | |||||||||
Total | $ | 7,470 | $ | 8,399 |
During the three and six months ended June 30, 2023 the Company recorded inventory provisions for approximately $205 and $326, respectively, to cost of sales to write-down obsolete inventories. During the three and six months ended June 30, 2022, the Company recorded inventory provisions for approximately $236 and $548, respectively, to cost of sales to write-down
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
obsolete inventory.
6. PREPAID, DEPOSITS AND OTHER RECEIVABLES
Prepaid and advances are comprised of the following items as of the periods presented:
June 30, 2023 | December 31, 2022 | ||||||||||
Prepaid expenses | $ | 1,155 | $ | 590 | |||||||
Indirect tax receivables | 1,981 | 2,007 | |||||||||
Deposits | 52 | 51 | |||||||||
Other receivable and advances | 19 | 60 | |||||||||
Total | $ | 3,207 | $ | 2,708 |
Prepaid expenses and deposits represent amounts paid upfront to vendors for director and officer's insurance, security deposits and supplies.
7. INVESTMENTS
Cansativa
On December 21, 2018, the Company, through its subsidiary Northern Swan Deutschland Holdings, Inc., entered into a seed investment agreement with the existing stockholders of Cansativa GmbH (“Cansativa”), a German limited liability company primarily focused on the import and sale of cannabis products for medical use and related supplements and nutraceuticals. Prior to the Company’s investment, Cansativa’s registered and fully paid-in share capital amounted to 26,318 common shares. Under the investment agreement, the Company has agreed with the existing stockholders to invest up to EUR 7,000 in Cansativa in three separate tranches of, respectively, EUR 1,000, EUR 3,000 and up to a further EUR 3,000. The first EUR 1,000 (specifically, EUR 999.92, approximately $1,075, or “Seed Financing Round”) was invested in Cansativa to subscribe for 3,096 newly issued preferred voting shares at EUR 322.97 per preferred share, and as cash contributions from the Company to Cansativa. The seed EUR 322.97 per share price was based on a fully diluted pre-money valuation for Cansativa of EUR 8,500, and the increase of Cansativa’s registered share capital by the 3,096 preferred shares in the Seed Financing Round provided the Company with 10.53% of the total equity ownership of Cansativa. The Company paid the seed investment subscription by, first, an initial nominal payment of EUR 3.1, (i.e., EUR 1.00 per share) upon signing the investment agreement to demonstrate the Company’s intent to invest, and the remainder of EUR 996.82 was settled in January 2019 to officially close the investment deal after certain closing conditions have been met by the existing stockholders and Cansativa. The Company accounted for its investment in Cansativa using the equity accounting method, due to the Company's significant influence, in accordance with ASC 323, Investments — Equity Method and Joint Ventures.
The Company recorded its investment in Cansativa at the cost basis of an aggregated amount of EUR 999.92, approximately $1,075, which is comprised of EUR 3.10 for the initial nominal amount of the Seed Financing Round and EUR 996.82 for the remaining Seed Financing Round (i.e., Capital Reserve Payment), with no transaction costs.
In accordance with the seed investment agreement, in September 2019, the Company made an additional investment of approximately EUR 650, or approximately $722, for 2,138 shares in Cansativa, thereby increasing its equity ownership to 16.6% of the book value of Cansativa’s net assets of approximately EUR 1,233, and approximately EUR 1,122 of equity method goodwill as Cansativa was still in the process of getting the licenses and expanding its operations. As of September 30, 2020, the balance of Tranche 2 option expired un-exercised and as a result the Company recognized a loss on investment of approximately $370 in its Statement of Operations and Comprehensive Loss and the carrying value of the Tranche 2 option was reduced to nil.
In December 2020, Cansativa allocated shares of its common stock to a newly installed employee-stock ownership plan (“ESOP”). As a result of the ESOP installment, the Company’s equity ownership of Cansativa, on a fully-diluted basis, decreased from 16.59% to 15.80% of the book value of Cansativa’s net assets. Additionally, Cansativa raised additional capital through the issuance of Series A preferred stock (“Cansativa Series A Shares”) to a third-party investor at a per share price of
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
EUR 543.31. As a result of the Series A Share issuance, the Company’s equity ownership of Cansativa, on a fully diluted basis, decreased from 15.80% to 14.22% of the book value of Cansativa’s net assets. The Company accounted for the transaction as a proportionate sale of ownership share and recognized a gain of approximately $211 in its consolidated statement of operations within loss on investments line. This change did not impact the equity method classification.
In April 2022, the Company sold 1,586 shares in Cansativa to an unrelated third-party for approximately EUR 2,300.
Additionally Cansativa issued 10,184 series B and 992 ESOP shares. As a result, the Company's equity ownership of Cansativa, on a fully diluted basis, decreased from 14.22% to 7.6% of the book value of Cansativa's net assets. Furthermore, the Company relinquished the board seat, indicating that the Company's influence was no longer "significant", to which the equity method of accounting was applicable. The Company started to account for this investment under ASC 321, Investments – Equity Securities. The Company utilized the practical expedient under ASC 321 as the investment does not qualify for the practical expedient under ASC 820 and there is no readily determinable fair value for these privately held shares of Cansativa on a recurring basis.
At the time of the sale, the Company compared the transaction value of the shares sold to the carrying value of shares sold and recognized a gain of $1,983. Immediately following the sale, the Company then remeasured its retained interest which resulted in an additional gain of $4,868. No gain or loss on investments was recorded in other income in the Consolidated Statements of Operations during the three and six months ended June 30, 2023. Using the measurement alternative, as defined in ASC 321, the Company will remeasure the value of its retained interest if and when additional sales of Cansativa shares occur with third parties. For the six months ended June 30, 2023 and 2022, the Company’s share of net losses from the investment were $nil and $64, respectively.
8. INTANGIBLE ASSETS, NET
As part of the Herbal Brand acquisition in 2019, the Company acquired finite-lived intangible assets with a gross value of approximately $7,091. During the three months ended June 30, 2023 and 2022 the Company recorded $175 and $191, respectively, of amortization related to its finite-lived intangible assets. During the six months ended June 30, 2023 and 2022 the Company recorded $366 and $382, respectively, of amortization related to its finite-lived intangible assets.The following tables present details of the Company’s total intangible assets as of June 30, 2023 and December 31, 2022. The value of product formulation intangible asset is included in the value of Brand:
June 30, 2023 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Useful Life (in Years) | ||||||||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||||||
Customer contracts | $ | 925 | $ | 925 | $ | — | 0.0 | ||||||||||||||||
Customer relationships | 1,000 | 745 | 255 | 2.8 | |||||||||||||||||||
Customer list | 650 | 542 | 107 | 0.8 | |||||||||||||||||||
Trade name | 4,516 | 1,891 | 2,625 | 5.8 | |||||||||||||||||||
Total finite-lived intangible assets | $ | 7,091 | $ | 4,103 | $ | 2,987 | |||||||||||||||||
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
December 31, 2022 | |||||||||||||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount | Weighted- Average Useful Life (in Years) | ||||||||||||||||||||
Finite-lived intangible assets: | |||||||||||||||||||||||
Customer contracts | $ | 925 | $ | 925 | $ | — | 0.0 | ||||||||||||||||
Customer relationships | 1,000 | 669 | 331 | 3.0 | |||||||||||||||||||
Customer list | 650 | 478 | 172 | 1.3 | |||||||||||||||||||
Trade name | 4,516 | 1,665 | 2,851 | 6.3 | |||||||||||||||||||
Total finite-lived intangible assets | $ | 7,091 | $ | 3,737 | $ | 3,354 | |||||||||||||||||
Indefinite-lived intangible assets: | |||||||||||||||||||||||
Licenses | $ | 19,000 | N/A | $ | 19,000 | ||||||||||||||||||
Impairment Charge | $ | (19,000) | N/A | $ | (19,000) | ||||||||||||||||||
Total indefinite-lived intangible assets | $ | — | $ | — | |||||||||||||||||||
Total intangible assets | $ | 7,091 | $ | 3,737 | $ | 3,354 |
Annual Impairment Testing
In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company performs its annual impairment test as
of December 31 of each year. As part of the review, the Company has performed a qualitative assessment to determine whether indicators of impairment existed, along with considering, among other factors, the financial performance, industry conditions, as well as microeconomic developments. The Company also reviews intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of its intangibles may not be recoverable. After the close of each interim quarter,
management assesses whether any indicators of impairment exist requiring the Company to perform an interim goodwill and other intangible assets impairment analysis.
Impairment Testing - Finite-Lived Intangibles
In conjunction with the 2022 annual impairment testing, the Company reviewed finite-lived intangible assets for impairment. In performing such review, the Company makes judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. The Company recognizes an impairment if the carrying amount of the long-lived asset group exceeds the Company’s estimate of the asset group’s undiscounted future cash flows. For the six months ended June 30 2023, no impairment was recognized related to the carrying value of any of the Company's finite lived intangible assets. The Company will perform an impairment test at fiscal year ending December 31, 2023.
Impairment Testing - Indefinite-Lived Intangibles
In 2022, due to the continued decline in the Company’s stock price and the projected revenues falling behind target, the Company performed an interim impairment assessment on its indefinite-lived intangible assets, consisting of cannabis related licenses for its Colombian operations. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including assumptions about revenue projections, regulations, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. Utilizing a discounted cash flow model with a weighted average cost of capital (“WACC”) of 24%, the Company performed the assessment and recognized an impairment charge of $19,000 along with the related deferred tax liability write-off of $6,650 for the year ended December 31, 2022. As a result of this recognition in 2022, no indefinite-lived intangible assets exist as of June 30, 2023.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Amortization Expense
The following table reflects the estimated future amortization expense for each period presented for the Company’s finite-lived intangible assets as of June 30, 2023:
Estimated Amortization Expense | |||||
2023 | $ | 336 | |||
2024 | 585 | ||||
2025 | 541 | ||||
2026 | 482 | ||||
2027 | 452 | ||||
Thereafter | 591 | ||||
Total | $ | 2,987 |
9. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
June 30, 2023 | December 31, 2022 | ||||||||||
Land | $ | 1,806 | $ | 1,806 | |||||||
Building & warehouse | 7,736 | 7,658 | |||||||||
Laboratory equipment | 6,426 | 6,416 | |||||||||
Agricultural equipment | 1,480 | 1,477 | |||||||||
Computer equipment | 1,397 | 1,397 | |||||||||
Furniture & appliances | 785 | 785 | |||||||||
Construction in progress | 130 | 240 | |||||||||
Other | 1,324 | 1,304 | |||||||||
Property, plant and equipment, gross | 21,084 | 21,083 | |||||||||
Less: accumulated depreciation | (7,990) | (7,120) | |||||||||
Property, plant and equipment, net | $ | 13,094 | $ | 13,963 |
10. DEBT
June 30, 2023 | December 31, 2022 | ||||||||||
Loans and borrowings, current portion | $ | 471 | $ | 465 | |||||||
Loans and borrowings, non-current portion | 908 | 1,065 | |||||||||
Total debt | $ | 1,379 | $ | 1,530 |
Portugal Debt
In January 2021, Clever Leaves Portugal Unipessoal LDA borrowed €1,000 ($1,213) (the "Portugal Debt"), from a local lender (the "Portugal Lender") under the terms of its credit line agreement. The Portugal Debt pays interest quarterly at a rate of Euribor plus 3.0 percentage points. For the three months ended June 30, 2023 and 2022, the company recognized interest expense of approximately €10 ($11) and €7 ($8), respectively, and repaid principal of approximately €63 ($68) and €63 ($67),
15
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
respectively, of the Portugal Debt in accordance with the terms of the loan agreement. For the six months ended June 30, 2023 and 2022, the company recognized interest expense of approximately €20 ($21) and €15 ($17), respectively, and repaid principal of approximately €125 ($134) and €125 ($137), respectively, of the Portugal Debt in accordance with the terms of the loan agreement. As of June 30, 2023 and December 31, 2022, the outstanding principal balance of the Portugal Debt was €625 ($671) and €875 ($1,076), respectively.
Colombia Debt
Ecomedics S.A.S. has entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,305,800 ($1,295) of mainly working capital loans. The working capital loans are secured by mortgage of our farm land in Colombia as collateral. These loans bear interest at a range of 10.96% to 12.25% per annum denominated in Colombian pesos. The first payment of the principal and interest will be repaid six months after receiving the loan. After the first payment, the principal and interest will be repaid semi-annually. For the period ended June 30, 2023 and December 31, 2022, the outstanding principal balance was approximately COP$3,390,173 ($708) and COP$3,471,576 ($725), respectively.
11. CAPITAL STOCK
Common Shares
As of June 30, 2023 and December 31, 2022, a total of 45,704,459 and 43,636,783 common shares were issued and outstanding, respectively. The increase in outstanding shares was primarily the result of shares issued under the ATM. See Equity Distribution Agreement disclosed below.
Equity Distribution Agreement
On January 14, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC, as sales agent (the “Agent”). Under the terms of the Equity Distribution Agreement, the Company may issue and sell its common shares, without par value, having an aggregate offering price of up to $50,000 from time to time through the Agent. The issuance and sale of the common shares under the Equity Distribution Agreement have been made, and any such future sales will be made, pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-262183), which includes an “at-the-market” (“ATM”) offering prospectus supplement (the "Prospectus Supplement"), as amended from time to time.
Following the filing of the 2022 Form 10-K, we are subject to the limitations under General Instruction I.B.6. of Form S-3. As such, we filed Amendment No. 3 to the Prospectus Supplement, updating our proposed maximum offering amount based on the aggregate market value of our outstanding common shares held by non-affiliates as of March 27, 2023. On such date our public float was $22,548, which is calculated based on 40,996,523 of our common shares outstanding held by non-affiliates at a price of $0.55 per share. This calculation of our public float reduced our proposed offering amount to up to $7,516. If our public float increases such that we may sell additional amounts under the Equity Distribution Agreement and the Prospectus Supplement, we will file another amendment to the Prospectus Supplement prior to making additional sales.
For the three and six months ended June 30, 2023, 1,559,573 shares and 1,559,573 shares, respectively were sold for total gross proceeds of $438 pursuant to the ATM offering and $123 of equity issuance costs.
As of June 30, 2023, the Company had issued and sold 11,047,567 shares pursuant to the ATM offering, for aggregate net proceeds of $22,223, which consisted of gross proceeds of $23,400 and $1,177 of equity issuance costs.
Warrants
As of June 30, 2023, the Company had 12,877,361 of its public warrants classified as a component of equity and 4,900,000 of its private warrants recognized as liability. Each warrant entitles the holder to purchase one common share at an exercise price
16
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
of $11.50 per share commencing 30 days after the closing of the Business Combination and will expire on December 18, 2025, at 5:00 p.m., New York City time, or earlier upon redemption. Once the warrants are exercisable, the Company may redeem the outstanding public warrants at a price of $0.01 per warrant if the last reported sales price of the Company’s common shares equals or exceeds $18.00 per share (as adjusted for share splits, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within a 30 trading day period ending on the third trading day prior to the date on which the Company will send the notice of redemption to the warrant holders. The private warrants were issued in the same form as the public warrants, but they (i) are not redeemable by the Company and (ii) may be exercised for cash or on a cashless basis at the holder’s option, in either case as long as they are held by the initial purchasers or their permitted transferees (as defined in the warrant agreement). Once a private warrant is transferred to a holder other than an affiliate or permitted transferee, it is treated as a public warrant for all purposes. The terms of the warrants may be amended in a manner that may be adverse to holders with the approval of the holders of at least a majority 50.1% of the then outstanding warrants.
In accordance to ASC 815, certain provisions of private warrants that do not meet the criteria for equity treatment are recorded as liabilities with the offset to additional paid-in capital and are measured at fair value at inception and at each reporting period in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the statement of operations and comprehensive loss in the period of change.
As of June 30, 2023, the Company performed a valuation of the private warrants and as a result recorded a net loss on remeasurement for the three and six months ended June 30, 2023, of approximately $11 and $55, respectively, in its statement of operations.
As of June 30, 2022, the Company performed a valuation of the private warrants and as a result recorded, in the statement of operations, a net gain on remeasurement for the three and six months ended June 30, 2022 of approximately $1,323 and $1,813, respectively.
12. GENERAL AND ADMINISTRATION
The components of general and administrative expenses were as follows:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Salaries and benefits | $ | 2,536 | $ | 3,171 | $ | 5,201 | $ | 6,938 | |||||||||||||||
Office and administration | 754 | 1,074 | 1,432 | 2,073 | |||||||||||||||||||
Professional fees | 903 | 850 | 2,266 | 2,398 | |||||||||||||||||||
Share based compensation | 434 | 1,148 | 901 | 1,648 | |||||||||||||||||||
Rent | 199 | 200 | 386 | 430 | |||||||||||||||||||
Other (a) | (21) | (19) | (14) | (65) | |||||||||||||||||||
Total | $ | 4,805 | $ | 6,424 | $ | 10,172 | $ | 13,422 |
(a) For the six months ended June 30, 2023 and 2022, other general and administrative costs includes freight-out cost of approximately $328 and $438, respectively, related to costs of packaging, labelling, and courier services, respectively.
13. RESTRUCTURING EXPENSE
The Company has been reviewing, planning and implementing various strategic initiatives targeted principally at reducing costs, enhancing organizational efficiency and optimizing its business model. As part of this process, the Company recorded a restructuring charge related to asset write off, severance, and other related costs during the year 2022. For the six months ended
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
June 30, 2023 and 2022, the Company recorded no restructuring charge related to asset write off, severance, and other related costs
Our restructuring charges are comprised primarily of costs related to asset abandonment, including future lease commitments, and employee termination costs related to headcount reductions.
The following table summarizes the activities related to the restructuring program for the six months ended June 30, 2023:
Employee severance and related benefits | Costs associated with Exit and Disposal Activities | Total | |||||||||||||||||||||
Balance at December 31, 2022 | $ | 1,407 | $ | 830 | $ | 2,237 | |||||||||||||||||
Cash payment | (857) | $ | (319) | $ | (1,176) | ||||||||||||||||||
Balance at June 30, 2023 | $ | 550 | $ | 511 | $ | 1,061 |
14. SHARE-BASED COMPENSATION
Stock-Based Compensation Plans
The Company's 2018 Equity Incentive Plan, 2020 Equity Incentive Plan and Earnout Plan are described in the Company's 2022 Form 10-K.
Share-Based Compensation Expense
The following table summarizes the Company's share-based compensation expense for each of its awards, included in the Consolidated Statements of Operations for the three and six months ended June 30, 2023.
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Share-based compensation award type: | |||||||||||||||||||||||
Stock Options | 39 | 85 | 127 | 270 | |||||||||||||||||||
RSUs | 395 | 1,063 | 774 | 1,378 | |||||||||||||||||||
Total Shared Based Compensation Expense | $ | 434 | $ | 1,148 | 901 | 1,648 |
The Company recognized share-based compensation expense in general and administrative expense.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Stock Options
The following table is a summary of options activity for the Company’s equity incentive plans for the six months ended June 30, 2023:
Stock Options | Weighted-Average Exercise Price | Weighted-Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||||||||||||||||
Balance as at December 31, 2022 | 410,477 | $ | 7.15 | 2.56 | $ | — | |||||||||||||||||
Forfeited | (8,029) | $ | 11.03 | — | — | ||||||||||||||||||
Expired | (48,066) | $ | 15.54 | — | — | ||||||||||||||||||
Balance as of June 30, 2023 | 354,382 | $ | 5.93 | 2.28 | $ | — | |||||||||||||||||
Vested and expected to vest as of June 30, 2023 | 343,849 | $ | 5.79 | 2.32 | $ | — | |||||||||||||||||
Vested and exercisable as of June 30, 2023 | 314,495 | $ | 5.11 | 1.97 | $ | — |
The aggregate intrinsic value of stock options is calculated as the difference between the exercise price of the stock options and the fair value of the Company’s common shares for all stock options that had exercise prices lower than the fair value of the Company’s common shares.
The share-based compensation expense related to unvested stock options awards not yet recognized as of June 30, 2023 and December 31, 2022, was $211 and $392, respectively, which is expected to be recognized over a weighted average period of 1.1 and 1.0 years respectively.
Restricted Share Units
Time-based Restricted Share Units
The fair value for time-based RSUs is based on the closing price of the Company’s common shares on the grant date.
The following table summarizes the changes in the Company’s time-based restricted share unit activity during the six months ended June 30, 2023:
Restricted Share Units | Weighted-Average Grant Date Fair Value | ||||||||||
Non-vested as of December 31, 2022 | 1,368,151 | $ | 3.50 | ||||||||
Granted | 1,358,000 | 0.25 | |||||||||
Vested | (508,103) | 2.65 | |||||||||
Canceled/forfeited | (12,269) | 7.34 | |||||||||
Non-vested as of June 30, 2023 | 2,205,779 | $ | 1.67 |
Market-based Restricted Share Units
The Company has previously granted RSUs with both a market condition and a service condition (market-based RSUs) to the Company’s employees. No such market-based RSUs were granted during the six months ended June 30, 2023. The market-based condition for these awards requires that (i) the Company’s common shares maintain a closing price equal to or greater than $12.50 for any 20 trading days within any consecutive 30 trading day period on or before December 18, 2022 (which
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
condition was met on March 16, 2021) or (ii) the Company's common shares maintain a closing price equal to or greater than $15.00 for any 20 trading days within any consecutive 30 trading day period on or before December 18, 2024. Provided that the market-based condition is satisfied, and the respective employee remains employed by the Company, the market-based restricted share units will vest in four equal annual installments on the applicable vesting date.
The following table summarizes the changes in the Company’s market-based restricted share unit activity during the six months ended June 30, 2023:
Restricted Share Units | Weighted-Average Grant Date Fair Value | ||||||||||
Non-vested as of December 31, 2022 | 529,793 | $ | 12.79 | ||||||||
Granted | — | — | |||||||||
Vested | — | — | |||||||||
Canceled/forfeited | (63,428) | 13.34 | |||||||||
Non-vested as of June 30, 2023 | 466,365 | $ | 12.71 |
15. REVENUE
The Company’s policy is to recognize revenue at an amount that reflects the consideration that the Company expects that it will be entitled to receive in exchange for transferring goods or services to its customers. The Company’s policy is to record revenue when control of the goods transfers to the customer. The Company evaluates the transfer of control through evidence of the customer’s receipt and acceptance, transfer of title, the Company’s right to payment for those products and the customer’s ability to direct the use of those products upon receipt. Typically, the Company’s performance obligations are satisfied at a point in time, and revenue is recognized, either upon shipment or delivery of goods. In instances where control transfers upon customer acceptance, the Company estimates the time period it takes for the customer to take possession and the Company recognizes revenue based on such estimates. The transaction price is typically based on the amount billed to the customer and includes estimated variable consideration where applicable.
Disaggregation of Revenue
Refer to Note 16 Segment Reporting to our unaudited condensed consolidated interim financial statements for the period ended June 30, 2023 included in this Form 10-Q for disaggregation of revenue data.
Contract Balances
The timing of revenue recognition, billing and cash collections results in billed accounts receivable and deferred revenue primarily attributable to advanced customer payment, on the Consolidated Statements of Financial Position. Accounts receivables are recognized in the period in which the Company's right to the consideration is unconditional. The Company's contract liabilities consist of advance payment from a customer, which is classified on the Consolidated Statements of Financial Position as current and non-current deferred revenue.
As of June 30, 2023, the Company's deferred revenue, included in current and non-current liabilities was $845 and $nil, respectively.
As of December 31, 2022, the Company's deferred revenue, included in current and non-current liabilities was $1,072 and $nil, respectively.
16. SEGMENT REPORTING
Operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company’s Chief Executive Officer, “CEO”) in deciding how to allocate resources and in assessing the Company’s performance.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Operating segments for the Company are organized by product type and managed by segment managers who are responsible for the operating and financial results of each segment. Due to the similarities in the manufacturing and distribution processes for the Company’s products, much of the information provided in these consolidated financial statements and the footnotes to the consolidated financial statements, is similar to, or the same as, that information reviewed on a regular basis by the Company’s CEO.
The Company’s management evaluates segment profit/loss for each of the Company’s operating segments. The Company defines segment profit/loss as income from continuing operations before interest, taxes, depreciation, amortization, share-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit/loss also excludes the impact of certain items that are not directly attributable to the reportable segments’ underlying operating performance. Such items are shown below in the table reconciling segment profit/(loss) to consolidated income/(loss) from continuing operations before income taxes. The Company does not have any material inter-segment sales. Information about total assets by segment is not disclosed because such information is not reported to or used by the Company’s CEO. Segment intangible assets, net, are disclosed in Note 8.
As of June 30, 2023, the Company’s operations were organized in the following two reportable segments:
1.The Cannabinoid operating segment: comprised of the Company’s cultivation, extraction, manufacturing and commercialization of cannabinoid products. This operating segment is in the early stages of commercializing cannabinoid products internationally pursuant to applicable international and domestic legislation, regulations, and other permits. The Company’s principal customers and sales for its products are primarily outside of the U.S.
2.Non-Cannabinoid operating segment: comprised of the brands acquired as part of the Herbal Brands acquisition in April 2019. The segment is engaged in the business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing nutraceutical and other natural remedies, wellness products, detoxification products, nutraceutical, and nutritional and dietary supplements. The Company’s principal customers for its Herbal Brands products include mass retailers, specialty and health retailer and distributors in the U.S.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The following table is a comparative summary of the Company’s net sales and segment profit by reportable segment for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 (*) | 2023 | 2022 (*) | ||||||||||||||||||||
Segment Net Sales: | |||||||||||||||||||||||
Cannabinoid | $ | 1,873 | $ | 745 | $ | 3,095 | $ | 2,553 | |||||||||||||||
Non-Cannabinoid | 3,108 | 3,355 | 5,864 | 6,588 | |||||||||||||||||||
Total net sales | 4,981 | 4,100 | 8,959 | 9,141 | |||||||||||||||||||
Segment Profit (Loss): | |||||||||||||||||||||||
Cannabinoid | (1,697) | (2,706) | (4,012) | (8,412) | |||||||||||||||||||
Non-Cannabinoid | 831 | 666 | 1,278 | 1,014 | |||||||||||||||||||
Total segment loss | $ | (866) | $ | (2,040) | $ | (2,734) | $ | (7,398) | |||||||||||||||
Reconciliation: | |||||||||||||||||||||||
Total segment loss | (866) | (2,040) | (2,734) | (7,398) | |||||||||||||||||||
Unallocated corporate expenses | (2,571) | (1,843) | (4,129) | (5,376) | |||||||||||||||||||
Non-cash share-based compensation | (434) | (1,148) | (902) | (1,648) | |||||||||||||||||||
Depreciation and amortization | 696 | (317) | 460 | (644) | |||||||||||||||||||
Loss from continuing operations before income taxes | $ | (3,175) | $ | (5,348) | $ | (7,305) | $ | (15,066) | |||||||||||||||
Loss on debt extinguishment, net | — | — | — | 2,263 | |||||||||||||||||||
Loss (Gain) on remeasurement of warrant liability | 11 | (1,323) | 55 | (1,813) | |||||||||||||||||||
Gain on investment | — | (6,851) | — | (6,851) | |||||||||||||||||||
Foreign exchange loss | 67 | 264 | 22 | 475 | |||||||||||||||||||
Interest and amortization of debt issuance cost | 35 | 645 | 18 | 2,754 | |||||||||||||||||||
Other (income) expense, net | (27) | 61 | 12 | 9 | |||||||||||||||||||
Income (loss) before loss from equity investment | $ | (3,261) | $ | 1,856 | $ | (7,412) | $ | (11,903) |
(*)Prior period numbers are re-stated to exclude discontinued operations to make it comparative with current period numbers.
The following table disaggregates the Company’s revenue by channel for the periods presented:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Mass retail | $ | 2,991 | $ | 1,683 | $ | 5,515 | $ | 4,496 | |||||||||||||||
Distributors | 1,552 | 1,664 | 2,815 | 3,322 | |||||||||||||||||||
Specialty, health and other retail | 94 | 560 | 254 | 952 | |||||||||||||||||||
E-commerce | 344 | 193 | 375 | 371 | |||||||||||||||||||
Total | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 |
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The following table represents the Company's revenues attributed to countries based on location of customer:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||
United States | $ | 3,108 | $ | 3,275 | $ | 5,864 | $ | 6,508 | ||||||||||||
Israel | 350 | $ | 69 | $ | 600 | $ | 707 | |||||||||||||
Australia | 671 | — | 707 | 368 | ||||||||||||||||
Brazil | 384 | 277 | 1,271 | 920 | ||||||||||||||||
Germany | — | 300 | 9 | 445 | ||||||||||||||||
Other | 468 | 179 | 508 | 193 | ||||||||||||||||
Total | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 |
Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenue of 10% or greater of total revenues are presented below for the periods indicated:
Percentage of Revenues | Percentage of Accounts Receivable | |||||||||||||||||||||||||||||||||||||
Three Months Ended June 30, | Six Months Ended June 30, | June 30, | December 31, | |||||||||||||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||
Customer A (a) | 11% | 10% | 13% | 10% | * | 18% | ||||||||||||||||||||||||||||||||
Customer B (b) | * | * | * | * | 14% | 13% | ||||||||||||||||||||||||||||||||
Customer C (b) | * | * | 12% | * | * | * | ||||||||||||||||||||||||||||||||
Customer D (b) | * | * | * | * | * | 15% | ||||||||||||||||||||||||||||||||
Customer E (b) | * | * | * | * | * | 10% | ||||||||||||||||||||||||||||||||
Customer F (b) | * | * | * | * | 10% | * |
* denotes less than 10%
(a) net sales attributed are reflected in the non-cannabinoid segments
(b) net sales attributed are reflected in the cannabinoid segments
During the three and six months ended June 30, 2023 and 2022, the Company's net sales for the non-cannabinoid segment were in the U.S.; cannabinoid net sales were mostly outside of the U.S., primarily in Israel, Brazil and Australia.
The following table disaggregates the Company’s long-lived assets, by segment for the periods presented:
June 30, 2023 | December 31, 2022 | ||||||||||
Long-lived assets | |||||||||||
Cannabinoid | $ | 12,978 | $ | 15,308 | |||||||
Non-Cannabinoid | 116 | 155 | |||||||||
Total | $ | 13,094 | $ | 15,463 |
Long-lived assets consist of non-current assets other than goodwill; intangible assets, net; investments in unconsolidated subsidiaries and equity securities; and financial instruments.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
17. NET INCOME (LOSS) PER SHARE
Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the year, without consideration for common share equivalents. Diluted net loss per share is computed by dividing net loss by the weighted-average number of common share equivalents outstanding for the year determined using the treasury-stock method. For purposes of this calculation, common share warrants and stock options are considered to be common share equivalents and are only included in the calculation of diluted net income per share when their effect is dilutive.
The following table sets forth the computation of basic and diluted net loss and the weighted average number of shares used in computing basic and diluted net loss per share:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Numerator: | |||||||||||||||||||||||
Income (loss) from continuing operations | $ | (3,261) | $ | 1,856 | $ | (7,412) | (11,968) | ||||||||||||||||
Loss from discontinued operations | $ | (334) | $ | (2,902) | $ | (264) | (5,218) | ||||||||||||||||
Net loss - basic and diluted | $ | (3,595) | $ | (1,046) | $ | (7,676) | $ | (17,186) | |||||||||||||||
Denominator: | |||||||||||||||||||||||
Weighted-average common shares outstanding - basic and diluted | 44,866,179 | 39,559,793 | 44,387,392 | 33,792,261 | |||||||||||||||||||
Net loss per common share - basic and diluted: | |||||||||||||||||||||||
Income (loss) from continuing operations | $ | (0.07) | $ | 0.05 | $ | (0.17) | $ | (0.35) | |||||||||||||||
Loss from discontinued operations | $ | (0.01) | $ | (0.08) | $ | (0.01) | $ | (0.16) |
The Company's potentially dilutive securities, which include common stock, warrants, stock options, and unvested restricted stock have been excluded from the computation of diluted net loss per share as the effect would be to reduce the net loss per share. Therefore, the weighted-average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common shareholders is the same.
The Company excluded the following potential common shares, presented based on amounts outstanding as of June 30, 2023 and 2022, from the computation of diluted net loss per share attributable to common shareholders because including them would have had an anti-dilutive effect:
June 30, 2023 | June 30, 2022 | ||||||||||
Common stock warrants | 17,777,361 | 17,840,951 | |||||||||
SAMA earnout shares | 570,211 | 570,211 | |||||||||
Stock options | 354,382 | 498,798 | |||||||||
Unvested restricted share units | 2,672,145 | 2,370,289 | |||||||||
Total | 21,374,099 | 21,280,249 |
18. LEASES
On January 1, 2022, we adopted the accounting standard ASC 842, Leases, using the modified retrospective method. We elected this adoption date as our date of initial application. As a result, we have not updated financial information related to, nor have we provided disclosures required under ASC 842 for, periods prior to January 1, 2022. The primary changes to our policies relate to recognizing most leases on our statement of financial position as liabilities with corresponding right-of-use ("ROU") assets.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The Company has entered into agreements under which we lease various real estate spaces in North America, Europe and Latin America, under non-cancellable leases that expire on various dates through calendar year 2029. Some of our leases include options to extend the term of such leases for a period from 12 months to 60 months, and/or have options to early terminate the lease. Some of our leases require us to pay certain operating expenses in addition to base rent, such as taxes, insurance and maintenance costs.
As the Company’s leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment.
Practical Expedients
The modified retrospective approach included a package of optional practical expedients that we elected to apply. Among other things, these expedients permitted us not to reassess prior conclusions regarding lease identification, lease classification and initial direct costs under ASC 842. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less.
Financial Statement Classification | Three Months Ended June 30, 2023 | Six Months Ended June 30, 2023 | |||||||||||||||
Operating lease costs: | |||||||||||||||||
Fixed lease costs | Operating expenses | $ | 185 | $ | 365 | ||||||||||||
Total lease costs | $ | 185 | $ | 365 |
The table above includes amounts relating to the Company's lease costs, which includes net costs recognized in our operating expenses during the period, including amounts capitalized as part of the costs of Inventory, in accordance with ASC 330. Variable lease costs primarily include maintenance, utilities and operating expenses that are incremental to the fixed base rent payments and are excluded from the calculation of operating lease liabilities and ROU assets. For the three and six months ended June 30, 2023, cash paid for amounts associated with our operating lease liabilities was approximately $213 and $428, respectively, For the six months ended June 30, 2022, Operating lease cost was $448 cash paid for amounts associated with our operating lease liabilities was approximately $475, which was classified as operating activities in the consolidated statement of cash flows.
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The following table shows our undiscounted future fixed payment obligations under our recognized operating leases and a reconciliation to the operating lease liabilities as of June 30, 2023:
Leases and a reconciliation to the operating lease liabilities as of June 30, 2023 | ||||||||
Remainder of Year 2023 | $ | 687 | ||||||
2024 | 112 | |||||||
2025 | 111 | |||||||
2026 | 117 | |||||||
2027 | 91 | |||||||
Thereafter | 65 | |||||||
Total future fixed operating lease payments | $ | 1,183 | ||||||
Less: Imputed interest | $ | 131 | ||||||
Total operating lease liabilities | $ | 1,052 | ||||||
Weighted-average remaining lease term - operating leases | 2.89 | |||||||
Weighted-average discount rate - operating leases | 8.0 | % |
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CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
19. DISCONTINUED OPERATIONS
As part of the restructuring activities, the Company conducted a comprehensive review of its production capacity for cannabis extracts. This evaluation led to the decision to scale back on certain extraction capacity and related assets, resulting in asset write-off charges. The Company also approved the shutdown of its cultivation activities in Portugal to preserve cash and improve operating margins. The wind-down of the entire Portuguese operations, including flower cultivation, post-harvest processes, and manufacturing activities, is expected to be completed by the end of the second quarter of 2023. Additionally, the Company has initiated the sale process of these assets with the goal of concluding the sale during the fiscal year ending December 31, 2023.
The company determined that shutdown of Portugal operations met the criteria to be classified as a discontinued operation, and, as a result, its historical financial results are reflected in the Company's financial statements as a discontinued operation and, assets and liabilities were classified as assets and liabilities held for sale.
To provide transparency and facilitate comparison, the table below presents the major line items constituting the pretax profit or loss of the discontinued operations for the three and six months ended June 30, 2023, and the three and six months ended June 30, 2022:
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
Revenue, net | $ | 215 | $ | 556 | $ | 552 | 740 | ||||||||||||||||
Cost of sales | $ | — | (1,734) | $ | — | (2,472) | |||||||||||||||||
Gross profit (loss) | $ | 215 | (1,178) | 552 | (1,733) | ||||||||||||||||||
Expenses | |||||||||||||||||||||||
General and administrative | $ | 564 | 1,589 | $ | 846 | 2,852 | |||||||||||||||||
Restructuring expenses | $ | — | (135) | $ | — | 30 | |||||||||||||||||
Depreciation and amortization | $ | — | 220 | $ | — | 410 | |||||||||||||||||
Total expenses | $ | 564 | 1,673 | 846 | 3,291 | ||||||||||||||||||
Loss from operations | $ | (350) | (2,851) | (294) | (5,024) | ||||||||||||||||||
Interest (income) expense and amortization of debt issuance cost | $ | 9 | 8 | $ | 20 | 17 | |||||||||||||||||
Loss on investments | $ | (47) | — | $ | (47) | ||||||||||||||||||
Foreign exchange (gain) loss | $ | — | 43 | $ | (4) | 177 | |||||||||||||||||
Other expense, net | $ | 21 | — | $ | 1 | — | |||||||||||||||||
Net loss | $ | (333) | $ | (2,902) | $ | (264) | $ | (5,218) |
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CLEVER LEAVES INTERNATIONAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(In thousands of U.S. dollars, except where otherwise noted and share and per share amounts)
20. SUBSEQUENT EVENTS
Sale of Processing Assets in Portugal to Curaleaf International Subsidiary
Subsequent to June 30, 2023, the Company has closed the sale of the assets, including lab and processing equipment, previously used in its EU-GMP certified cannabis processing facility in Setúbal, Portugal for gross proceeds of approximately €2.5 million ($2.7 million). Proceeds from the sale are expected to improve Clever Leaves’ cash position. Clever Leaves plans to use the proceeds for working capital and general corporate purposes.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Amounts in thousands of U.S. dollars, except as otherwise noted.
Our Company
We are a multi-national operator in the botanical cannabinoid and nutraceutical industries, with operations and investments in Colombia, Germany, the United States, and Canada We are working to develop one of the industry’s leading, low-cost global supply chains with the goal of providing high quality, pharmaceutical grade cannabis and wellness products to customers and patients at competitive prices produced in a sustainable and environmentally friendly manner. Our customers consist of retail distributors and pharmaceutical and cannabis companies, and pharmacies.
We have invested in ecologically sustainable, large-scale, cultivation and processing, as the cornerstone of our medical cannabinoid business, and we seek to continue to develop strategic distribution channels and brands.
We currently own approximately 1.8 million square feet of greenhouse cultivation capacity in Colombia. In addition, our pharmaceutical-grade extraction facility is capable of processing 108,000 kilograms of dry flower per year.
In July 2020, we became one of a small number of vertically integrated cannabis companies in the world to receive European Union Good Manufacturing Practices (“EU GMP”) certification for our Colombian operations. We believe this certification will provide us with one of the largest quality-certified licensed capacities for cannabis cultivation and cannabinoid extraction globally, while our strategically located operations allow us to produce our products at a fraction of the average cost of production incurred by our peers in Canada and the United States.
In addition to the cannabinoid business, we are also engaged in the non-cannabinoid business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing nutraceutical and other natural remedies, and wellness products to more than 20,000 retail locations across the United States, through our wholly owned subsidiary Herbal Brands, Inc. Herbal Brands has an Arizona based GMP-compliant, FDA registered facility and is a national distributor of nutraceutical products. Herbal Brands’ nationwide customer base provides a platform we intend to leverage for greater potential cannabinoid distribution in the future, should U.S. federal laws change and regulations permit.
Our business model is focused on partnering with leading and emerging cannabis and pharmaceutical businesses by providing them with lower cost product, variable cost structures, reliable supply throughout the year, and accelerated speed to market. We believe this is achievable due to our production locations, capacity, product registrations and various product certifications.
We manage our business in two segments: the Cannabinoid and Non-Cannabinoid segments.
1. The Cannabinoid operating segment is comprised of the Company’s cultivation, extraction, manufacturing, commercialization, and distribution of cannabinoid products. This operating segment is in the early stages of commercializing cannabinoid products internationally subject to applicable international and state laws and regulations. Our customers and sales for our cannabinoid segment products are mostly outside of the U.S.
2. The Non-Cannabinoid operating segment is comprised of the brands and manufacturing assets acquired as part of our acquisition of Herbal Brands. The segment is engaged in the business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing wellness products and nutraceutical, excluding cannabinoid products. Our principal customers for the Herbal Brands products include specialty and health retailers, mass retailers and specialty and health stores in the United States.
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Factors Impacting our Business
We believe that our future success will primarily depend on the following factors:
Globalization of the industry. Due to our multi-national operator model focused on geographic diversification, which distinguishes us from many of our competitors and allows us to scale our production in low-cost regions of the world, we believe we are well positioned to capitalize in markets where the medical cannabis and hemp industry offers a reasonably regulated and free flow of goods across national boundaries. While certain countries, such as Canada, have historically not welcomed imported cannabis or hemp products for commercial purposes, other countries, such as Germany and Brazil, depend primarily on imports.
Global medical market expansion. Medical cannabis is now authorized at the national or federal level in over 41 countries, and more than half of these countries have legalized or introduced significant reforms to their cannabis-use laws to broaden the scope of permitted medical uses beyond the original parameters. Over the past three years, we have established regional operations in Colombia, Germany, the United States and Canada, and we have invested significant resources in personnel and partnerships to build the foundation for new export channels. The Company also owned agricultural and post-harvest facilities in Portugal which have since been wound down as a result of a restructuring initiative that was undertaken by management during December 2022.
Product development and innovation. Because of the rapid evolution of the cannabis industry, the disparate regulations across different geographies, and the time required to develop and validate pharmaceutical-grade products, the pace at which we can expand our portfolio of products and formulations will impact market acceptance for our products. To increase our output while maintaining or reducing unit costs, we may need to enhance our cultivation, extraction, and other processing methods. We believe our focus on the production of proprietary and exclusive products or formulations that comply with stringent regulations, or that result in enhanced benefits for patients or consumers, could create advantages in various markets.
Regulatory expertise and adaptation. As more markets welcome the importation of cannabis or hemp products for commercial purposes, this will require navigating and complying with the strict and evolving cannabis regulations across the different geographies. We have built a global regulatory team that is experienced in developing good relationships with regulatory agencies and governments that govern and shape the cannabis industry in their respective jurisdictions. Key expertise includes complying with and securing quotas, product approvals, export permits, import permits and other geographic specific licenses.
Strategically expanding productive capacity and manufacturing capabilities. It is beneficial to have low operating costs and to control the production process to generate consistency and quality on a large scale. As we seek to expand into new markets and grow our presence in existing markets, we will need significant investments in cultivation and processing, which will necessitate additional capital. We also aim to increase productive capacity through innovation in cultivation or processing methods, improving yields and output levels of our existing assets. While we believe our core cultivation and extraction operations in Colombia are adequately sized for our current business operations, as our cannabis sales grow and expand to flower products, we plan to expand our operations in Colombia and invest in advanced processing or finished good manufacturing capabilities.
Key Operating Metrics
We use the following key operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance and make strategic decisions. Other companies, including companies in our industry, may calculate key operating metrics with similar names differently, which may reduce their usefulness as comparative measures.
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The following table presents select operational and financial information of the Cannabinoid segment for the three and six months ended June 30, 2023 and 2022:
Three months ended June 30, | ||||||||||||||||||||||||||
Operational information: | 2023 | 2022(*) | Change | |||||||||||||||||||||||
(In $000s, except kilogram and per gram data) | ||||||||||||||||||||||||||
Kilograms (dry flower) harvested (a) (d) | 1,132 | — | 1,132 | — | % | |||||||||||||||||||||
Costs to produce (b) | $ | 789 | $ | 881 | $ | (92) | (10) | % | ||||||||||||||||||
Costs to produce per gram | $ | 0.70 | $ | — | $ | 0.70 | — | % | ||||||||||||||||||
Selected financial information: | ||||||||||||||||||||||||||
Revenue | $ | 1,873 | $ | 867 | $ | 1,006 | 116 | % | ||||||||||||||||||
Kilograms sold (c) | 6,748 | 1,422 | 5,326 | 375 | % | |||||||||||||||||||||
Revenue per gram sold | $ | 0.28 | $ | 0.61 | $ | (0.33) | (54) | % |
Six Months Ended June 30, | ||||||||||||||||||||||||||
Operational information: | 2023 | 2022(*) | Change | |||||||||||||||||||||||
(In $000s, except kilogram and per gram data) | ||||||||||||||||||||||||||
Kilograms (dry flower) harvested (a) | 1,850 | 6,765 | (4,915) | (73) | % | |||||||||||||||||||||
Costs to produce (b) | $ | 1,715 | $ | 1,682 | $ | 33 | 2 | % | ||||||||||||||||||
Costs to produce per gram | $ | 0.93 | $ | 0.25 | $ | 0.68 | 273 | % | ||||||||||||||||||
Selected financial information: | ||||||||||||||||||||||||||
Revenue | $ | 3,095 | $ | 2,642 | $ | 453 | 17 | % | ||||||||||||||||||
Kilograms sold (c) | 9,466 | 5,681 | 3,785 | 67 | % | |||||||||||||||||||||
Revenue per gram sold | $ | 0.33 | $ | 0.47 | $ | (0.14) | (30) | % |
(a)Kilograms (dry flower) harvested - represents the weight of dried plants post-harvest both for sale and for research and development purposes. This operating metric is used to measure the productivity of our farms.
(b)Costs to produce - includes costs associated with cultivation, extraction, depreciation, quality assurance and supply chain related to kilograms (dry flower) harvested.
(c)Kilograms sold - represents the amount in kilograms of product sold in dry plant equivalents. Extract is converted to dry plant equivalent for purposes of this metric.
(d)During the second quarter of 2022, there was no production.
During the three months ended June 30, 2023 and 2022 we sold 6,748 and 1,422 kilograms, respectively, of dry flower equivalent. For the three months ended June 30, 2023, our Cannabinoid segment sales were primarily in Australia, Israel and Brazil. The increase in cannabinoid revenues is the result of strong extract sales.
During the six months ended June 30, 2023 and 2022 we sold 9,466 and 5,681 kilograms, respectively, of dry flower equivalent. For the six months ended June 30, 2023, the increase in cannabinoid revenues was primarily driven by ongoing sales strength for the Company’s extract products, particularly in Brazil, Australia, and Israel.
We harvested 1,132 kilograms of cannabinoids in the three months ended June 30, 2023, as compared to nil kilograms in the three months ended June 30, 2022. The increase is due to the agricultural output from new harvests, along with the ongoing extraction and processing costs at its Colombian operations. The Company did not harvest new crops at its Colombian operations for the three months ended June 30, 2022.
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We harvested 1,850 kilograms of cannabinoids in the six months ended June 30, 2023, as compared to 6,765 kilograms in the six months ended June 30, 2022. The decrease was primarily attributable to a decrease in our production capacity at our Colombia facility.
Costs to produce were approximately $0.70 per gram of dry flower equivalent for the three months ended June 30, 2023, as compared to $nil per gram of dry flower equivalent for the three months ended June 30, 2022. The increase is attributable to the Company's significantly reduced agricultural output, along with ongoing extraction and processing costs at its Colombian operations. The Company did not harvest new crops at its Colombian operations for the three months ended June 30, 2022.
Costs to produce were approximately $0.93 per gram of dry flower equivalent for the six months ended June 30, 2023, as compared to $0.25 per gram of dry flower equivalent for the six months ended June 30, 2022. The increase is attributable to the Company's significantly reduced agricultural output, along with ongoing extraction and processing costs at its Colombian operations.
Recent Developments
Bid Price Deficiency
On September 29, 2022, the Company received a notice (the “Notice”) from the Listing Qualifications department (the “Staff”) of Nasdaq notifying the Company that, based upon the closing bid price of the Company’s common shares for the 30 consecutive business day period between August 17, 2022 through September 28, 2022, the Company did not meet the “Minimum Bid Price Requirement” (the "Minimum Bid Price Requirement"). The Notice also indicated that the Company would be provided 180 calendar days, or until March 28, 2023, to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
On March 29, 2023, the Company received a second notice (the “Second Notice”) from Nasdaq indicating that, while the Company has not regained compliance with the Minimum Bid Price Requirement, the Staff has determined that the Company is eligible for an additional 180 calendar day period, or until September 25, 2023 (the “Second Compliance Period”), to regain compliance. According to the Second Notice, the Staff’s determination was based on (i) the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and (ii) the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse share split, if necessary.
On June 28, 2023, the board of directors of the Company approved a 1-for-30 reverse share split. The Company plans to effect the reverse share split at such a time that will allow them to demonstrate compliance with Nasdaq’s Minimum Bid Price Requirement prior to the end of the Second Compliance Period, in accordance with Nasdaq rules. As a result of the reverse share split, the Company’s outstanding common shares will be reduced from approximately 45.7 million to approximately 1.5 million, based on the number of common shares outstanding as of August 10, 2023. No fractional shares will be issued in connection with the reverse share split. Instead, pursuant to the Business Corporations Act (British Columbia), each fractional share remaining after completion of the reverse share split that is less than half of a whole share will be rounded down and canceled without consideration to the holders thereof and each fractional share that is at least half of a whole share will be rounded up to one whole common share. The reverse share split will apply to all of the Company’s outstanding common shares and therefore will not affect any shareholder’s ownership percentage of the shares, except for changes as a result of the elimination of fractional shares. The reverse share split will not alter the voting rights or other rights attached to the shares.
The common shares issuable upon exercise of the Company’s warrants, as well as the exercise price per share, will be ratably adjusted. The number of shares available for issuance under each of the Company’s 2020 Incentive Award Plan, as amended (the “Incentive Award Plan”), and the Company’s 2020 Earnout Award Plan (the “Earnout Plan”) will be equitably adjusted to reflect the reverse share split. The number of common shares underlying each award of restricted share units (whether vesting based on time or performance) issued under the Incentive Award Plan and the 2020 Earnout Plan that are outstanding as of immediately prior to the reverse share split will be ratably adjusted to reflect the reverse share split. Each award of restricted share units issued under the Earnout Award Plan that vests based on the achievement by the Company of certain threshold share prices, outstanding as of immediately prior to the reverse share split, will have its share price targets ratably adjusted to reflect the reverse share split. The number of common shares underlying stock option awards issued under each of the Northern Swan Holdings, Inc. 2018 Omnibus Incentive Compensation Plan and the Incentive Award Plan that are outstanding and unexercised as of immediately prior to the reverse share split and the exercise price of such stock options will be ratably adjusted to reflect the reverse share split.
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Licensing Requirement - Decree 811
In late July 2021, the Colombian government passed Decree 811, which replaced Decree 613. Decree 811 removed the prohibition contained in Decree 613 to allow the exportation of cannabis flowers. In February 2022, the Colombian government passed Regulation 227, which defines the procedures to begin cultivating cannabis for exporting the flower for medicinal use. Later, in April 2022, a joint resolution 539 was passed, which allows us to export cannabis flower for medicinal use.
Equity Distribution Agreement
On January 14, 2022, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC, as sales agent (the “Agent”). Under the terms of the Equity Distribution Agreement, we may issue and sell our common shares, without par value, having an aggregate offering price of up to $50,000 from time to time through the Agent. The issuance and sale of the common shares under the Equity Distribution Agreement have been made, and any such future sales will be made, pursuant to our effective registration statement on Form S-3 (File No. 333-262183), which includes an “at-the-market” (“ATM”) offering prospectus supplement (the “Prospectus Supplement”), as amended from time to time.
Following the filing of the 2022 Form 10-K, we are subject to the limitations under General Instruction I.B.6. of Form S-3. As such, we filed Amendment No. 3 to the Prospectus Supplement, updating our proposed maximum offering amount based on the aggregate market value of our outstanding common shares held by non-affiliates as of March 27, 2023. On such date our public float was $22,548, which is calculated based on 40,996,523 of our common shares outstanding held by non-affiliates at a price of $0.55 per share. This calculation of our public float reduced our proposed offering amount to up to $7,516. If our public float increases such that we may sell additional amounts under the Equity Distribution Agreement and the Prospectus Supplement, we will file another amendment to the Prospectus Supplement prior to making additional sales.
For the three and six months ended June 30, 2023, 1,559,573 shares and 1,559,573 shares, respectively were sold for a gross proceeds of $438 pursuant to the ATM offering and 123 of equity issuance costs. The Company did not sell any common shares under the ATM and Equity Distribution Agreement during the six months ended June 30, 2022. As of June 30, 2023, the Company had issued and sold 16,554,338 shares pursuant to the ATM offering, for aggregate net proceeds of $26,640, which consisted of gross proceeds of $28,124 and $1,484 of equity issuance costs.
Components of Results of Operations
Revenue — in our Cannabinoid segment, revenue is primarily comprised of sales of our cannabis products, which currently include cannabidiol isolate, full spectrum and standardized extracts as well as dry smokable flowers. In our Non-Cannabinoid segment, revenue is primarily composed of sales of our nutraceutical products to our retail customers. As we continue to grow our cannabinoid sales operations, our main revenues are derived from our Herbal Brands business.
Cost of Sales — in our Cannabinoid segment, cost of sales is primarily composed of pre-harvest, post-harvest and shipment and fulfillment costs. Pre-harvest costs include labor and direct materials to grow cannabis, which includes water, electricity, nutrients, integrated pest management, growing supplies and allocated overhead. Post-harvest costs include costs associated with drying, trimming, blending, extraction, purification, quality testing and allocated overhead. Shipment and fulfillment costs include the costs of packaging, labelling, courier services and allocated overhead. Total cost of sales also includes cost of sales associated with accessories and inventory adjustments. In our Non-Cannabinoid segment, cost of sales primarily includes raw materials, labor, and attributable overhead, as well as packaging labelling and fulfillment costs.
Operating Expenses — We classify our operating expenses as general and administrative, sales and marketing, and research and development expenses.
•General and administrative expenses include salary and benefit expenses for employees, other than in sales and marketing and research and development, including share-based compensation, costs of legal expenses, professional services, general liability insurance, rent and other office and general expenses.
•Sales and marketing expenses consist primarily of services engaged in marketing and promotion of our products and costs associated with initiatives and development programs and salary and benefit expenses for certain employees.
•Research and development expenses primarily consist of salary and benefit expenses for employees engaged in research and development activities, as well as other general costs associated with R&D activities.
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Results of Operations
Three and six months ended June 30, 2023 compared to three and six months ended June 30, 2022
Consolidated Statements of Operations
(In thousands of U.S. dollars)
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2023 | 2022 (*) | 2023 | 2022 (*) | |||||||||||||||||||||||
Revenue, net | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 | ||||||||||||||||||
Cost of sales | (2,255) | (1,619) | (3,999) | (4,067) | ||||||||||||||||||||||
Gross Profit | 2,726 | 2,481 | 4,960 | 5,074 | ||||||||||||||||||||||
Expenses | ||||||||||||||||||||||||||
General and administrative expenses | 4,805 | 6,424 | 10,172 | 13,422 | ||||||||||||||||||||||
Sales and marketing expenses | 469 | 728 | 1,018 | 1,461 | ||||||||||||||||||||||
Research and development | 403 | 359 | 615 | 771 | ||||||||||||||||||||||
Restructuring expenses | — | — | — | 3,842 | ||||||||||||||||||||||
Depreciation and amortization expenses | 224 | 318 | 460 | 644 | ||||||||||||||||||||||
Total expenses | 5,901 | 7,829 | 12,265 | 20,140 | ||||||||||||||||||||||
Loss from operations | (3,175) | (5,348) | (7,305) | (15,066) | ||||||||||||||||||||||
Other Expense (Income), net | ||||||||||||||||||||||||||
Interest and amortization of debt issuance cost | 35 | 645 | 18 | 2,754 | ||||||||||||||||||||||
Loss (Gain) on remeasurement of warrant liability | 11 | (1,323) | 55 | (1,813) | ||||||||||||||||||||||
Gain on investment | — | (6,851) | — | (6,851) | ||||||||||||||||||||||
Loss on debt extinguishment, net | — | — | — | 2,263 | ||||||||||||||||||||||
Foreign exchange loss | 67 | 264 | 22 | 475 | ||||||||||||||||||||||
Other (income) expense, net | (27) | 61 | 12 | 9 | ||||||||||||||||||||||
Total other expenses (income), net | 86 | (7,204) | 107 | (3,163) | ||||||||||||||||||||||
Loss (income) before income taxes and equity investment loss | $ | (3,261) | $ | 1,856 | $ | (7,412) | $ | (11,903) | ||||||||||||||||||
Equity investments share of loss | — | — | — | 64 | ||||||||||||||||||||||
Net income (loss) | $ | (3,261) | $ | 1,856 | $ | (7,412) | $ | (11,967) |
(*)Prior period numbers are re-stated to exclude discontinued operations to make it comparative with current period numbers.
Revenue by Channel
(In thousands of U.S. dollars)
The following table provides our revenue by channel for the three and six months ended June 30, 2023 and 2022.
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Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||
Mass retail | $ | 2,991 | $ | 1,683 | $ | 5,515 | $ | 4,496 | ||||||||||||||||||
Distributors | 1,552 | 1,664 | 2,815 | 3,322 | ||||||||||||||||||||||
Specialty, health and other retail | 94 | 560 | 254 | 952 | ||||||||||||||||||||||
E-commerce | 344 | 193 | 375 | 371 | ||||||||||||||||||||||
Total | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 |
Revenue
Revenue increased to $4,981 for the three months ended June 30, 2023, as compared to $4,100 for the three months ended June 30, 2022. The increase was driven by an increase in cannabinoid segment revenues compared to the same period in 2022, partially offset by lower revenues in the non-cannabinoid segment. The increase in cannabinoid segment revenues was primarily driven by ongoing sales strength for the Company’s extract products, particularly in Brazil, Australia, and Israel. The decrease in non-cannabinoid revenues was due to continued demand headwinds in the segment’s specialty channel, which resulted in lower inventory orders during the quarter.
Revenue decreased to $8,959 for the six months ended June 30, 2023, as compared to $9,141 for the six months ended June 30, 2022. The decrease was driven by lower revenues in the non-cannabinoid segment partially offset by an increase in cannabinoid segment revenues compared to the same period in 2022. The increase in cannabinoid segment revenues was primarily driven by ongoing sales strength for the Company’s extract products, particularly in Brazil, Australia, and Israel. The decrease in non-cannabinoid revenues was due to continued demand headwinds in the segment’s specialty channel, which resulted in lower inventory orders during the quarter.
Cost of sales
Cost of sales increased to $2,255 for the three months ended June 30, 2023, as compared to $1,619 for the three months ended June 30, 2022. Approximately 45% of the increase was due to higher sales volumes and approximately 55% due to customer and product mix differences compared to the year ago period.
Cost of sales decreased to $3,999 for the six months ended June 30, 2023, as compared to $4,067 for the six months ended June 30, 2022. The decrease was primarily due to a decrease in inventory write-down related to aged, obsolete or unusable inventory, during the six months ended June 30, 2023 as compared to the comparable period last year
Operating expenses
(In thousands of U.S. dollars)
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Three months ended June 30, | |||||||||||||||||||||||
2023 | 2022 | Change | |||||||||||||||||||||
General and administrative expenses | $ | 4,805 | $ | 6,424 | $ | (1,619) | (25) | % | |||||||||||||||
Sales and marketing expenses | 469 | 728 | (259) | (36) | % | ||||||||||||||||||
Research and development | 403 | 359 | 44 | 12 | % | ||||||||||||||||||
Depreciation and amortization expenses | 224 | 318 | (94) | (30) | % | ||||||||||||||||||
Total operating expenses | $ | 5,901 | $ | 7,829 | |||||||||||||||||||
(As a percentage of revenue) | |||||||||||||||||||||||
General and administrative expenses | 96 | % | 157 | % | |||||||||||||||||||
Sales and marketing expenses | 9 | % | 18 | % | |||||||||||||||||||
Research and development | 8 | % | 9 | % | |||||||||||||||||||
Depreciation and amortization expenses | 4 | % | 8 | % | |||||||||||||||||||
Total operating expenses | 118 | % | 191 | % |
N/M: Not a meaningful percentage
Six Months Ended June 30, | |||||||||||||||||||||||
2023 | 2022 | Change | |||||||||||||||||||||
General and administrative expenses | $ | 10,172 | $ | 13,422 | $ | (3,250) | (24) | % | |||||||||||||||
Sales and marketing expenses | 1,018 | 1,461 | (443) | (30) | % | ||||||||||||||||||
Research and development | 615 | 771 | (156) | (20) | % | ||||||||||||||||||
Restructuring expenses | — | 3,842 | (3,842) | N/A | |||||||||||||||||||
Depreciation and amortization expenses | 460 | 644 | (184) | (29) | % | ||||||||||||||||||
Total operating expenses | $ | 12,265 | $ | 20,140 | |||||||||||||||||||
(As a percentage of revenue) | |||||||||||||||||||||||
General and administrative expenses | 114 | % | 147 | % | |||||||||||||||||||
Sales and marketing expenses | 11 | % | 16 | % | |||||||||||||||||||
Research and development | 7 | % | 8 | % | |||||||||||||||||||
Restructuring expenses | — | % | 42 | % | |||||||||||||||||||
Depreciation and amortization expenses | 5 | % | 7 | % | |||||||||||||||||||
Total operating expenses | 137 | % | 220 | % |
N/M: Not a meaningful percentage
Three months ended June 30, 2023 compared to three months ended June 30, 2022
General and administrative. General and administrative expenses decreased to $4,805 for the three months ended June 30, 2023, as compared to $6,424 for the three months ended June 30, 2022, primarily due to cost cutting measures, especially related to share-based compensation and salaries & benefits.
Sales and marketing. Sales and marketing expenses decreased to $469 for the three months ended June 30, 2023, as compared to $728 for the three months ended June 30, 2022. The decrease in spending was primarily due to the cost-cutting measures related to our Cannabinoid segment.
Research and development. Research and development expenses increased slightly to $403 for the three months ended June 30, 2023 as compared to $359 for the three months ended June 30, 2022. The increase is primarily due to the decrease in research and development activities related to our cannabinoid products development.
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Restructuring. No restructuring expense was charged for the three months ended June 30, 2023 and 2022, respectively.
Depreciation and amortization. Depreciation and amortization expenses decreased to $224 for the three months ended June 30, 2023, from $318 for the three months ended June 30, 2022. The decrease is mainly attributable to the write-off of assets as part of restructuring.
Six Months Ended June 30, 2023 compared to six months ended June 30, 2022
General and administrative. General and administrative expenses decreased to $10,172 for the six months ended June 30, 2023, as compared to $13,422 for the six months ended June 30, 2022, primarily due to the due to cost cutting measures, especially related to share-based compensation and salaries & benefits.
Sales and marketing. Sales and marketing expenses decreased to $1,018 for the six months ended June 30, 2023, as compared to $1,461 for the six months ended June 30, 2022. The decrease in spending was primarily due to the cost-cutting measures related to our Cannabinoid segment.
Research and development. Research and development expenses decreased to $615 for the six months ended June 30, 2023 as compared to $771 for the six months ended June 30, 2022. The decrease is primarily due to the decrease in research and development activities related to our cannabinoid products development.
Restructuring. We recorded a restructuring charge of $3,842 related to asset write off, severances, and other related costs for the six months ended June 30, 2022. No such restructuring expense was charged during the six months ended June 30, 2023.
Depreciation and amortization. Depreciation and amortization expenses decreased to $460 for the six months ended June 30, 2023, from $644 for the six months ended June 30, 2022. The decrease is mainly attributable to the write-off of assets related to restructuring.
Non-operating income and expenses
(In thousands of U.S. dollars)
Three months ended June 30, | |||||||||||||||||||||||
2023 | 2022 (*) | Change | |||||||||||||||||||||
Interest and amortization of debt issuance cost | $ | 35 | $ | 645 | $ | (610) | (95) | % | |||||||||||||||
Gain on remeasurement of warrant liability | 11 | (1,323) | 1,334 | (101) | % | ||||||||||||||||||
Gain on investment | — | (6,851) | 6,851 | (100) | % | ||||||||||||||||||
Foreign exchange loss | 67 | 264 | (197) | (75) | % | ||||||||||||||||||
Other expense, net | (27) | 61 | (88) | (144) | % | ||||||||||||||||||
Total | $ | 86 | $ | (7,204) | $ | 7,290 | (101) | % |
Six Months Ended June 30, | |||||||||||||||||||||||
2023 | 2022 (*) | Change | |||||||||||||||||||||
Interest and amortization of debt issuance cost | $ | 18 | $ | 2,754 | $ | (2,736) | (99) | % | |||||||||||||||
Gain on remeasurement of warrant liability | 55 | (1,813) | 1,868 | (103) | % | ||||||||||||||||||
Gain on investment | — | (6,851) | 6,851 | (100) | % | ||||||||||||||||||
Loss on debt extinguishment, net | — | 2,263 | (2,263) | (100) | % | ||||||||||||||||||
Foreign exchange loss | 22 | 475 | (453) | (95) | % | ||||||||||||||||||
Other expense, net | 12 | 9 | 3 | 33 | % | ||||||||||||||||||
Total | $ | 107 | $ | (3,163) | $ | 3,270 | (103) | % |
(*)Prior period numbers are re-stated to exclude discontinued operations to make it comparative with current period numbers.
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Three months ended June 30, 2023 compared to three months ended June 30, 2022
Interest and amortization of debt issuance cost, net. Interest and amortization of debt issuance cost, net for the three months ended June 30, 2023 decreased to $35, as compared to $645 for the three months ended June 30, 2022. The decrease was primarily due to the interest expense associated with the Catalina LP Convertible Note issued in connection with the Notes Purchase Agreement, dated July 19, 2021 (the “Catalina Note”) and the Loan and Security Agreement, dated May 3, 2019 in the comparable prior year period, which were fully re-paid in the fiscal year ended December 31, 2022.
Gain on remeasurement of warrant liability. Gain on remeasurement of warrant liability was $11 for the three months ended June 30, 2023, as compared to a loss of $1,323 for the three months ended June 30, 2022. The gains are directly attributable to the remeasurement of the warrant liability as of June 30, 2023 and June 30, 2022, respectively, due to the change in the underlying value related to the private warrants during those periods.
Gain on investments. Gain on investments for the three months ended June 30, 2023 was nil, as compared to a loss of $6,851 for the three months ended June 30, 2022. The gain on investments for the three months ended June 30, 2022 was related to the sale of Cansativa shares to an unrelated third-party and the revaluation of the Company's retained interest of the shares still held.
Foreign exchange loss. The impact of foreign exchange for the three months ended June 30, 2023 was a loss of $67, as compared to a loss of $264 for the three months ended June 30, 2022. The foreign exchange losses for the three months ended June 30, 2023, were primarily driven by the currency fluctuations of the Euro versus the U.S. Dollar.
Other expense, net. Other expense, net includes items not individually material to our consolidated financial statements.
Six Months Ended June 30, 2023 compared to six months ended June 30, 2022
Interest and amortization of debt issuance cost, net. Interest and amortization of debt issuance cost, net for the six months ended June 30, 2023 decreased to $18, as compared to $2,754 for the six months ended June 30, 2022. The decrease was primarily due to writing off of debt discount costs recognized in connection with the beneficial conversion factor related to the Catalina LP Convertible Note issued in connection with the Notes Purchase Agreement, dated July 19, 2021 (the “Catalina Note”) and the Loan and Security Agreement, dated May 3, 2019 in the comparable prior year period, which were fully re-paid in the fiscal year ended December 31, 2022.
Gain on remeasurement of warrant liability. Gain on remeasurement of warrant liability was $55 for the six months ended June 30, 2023, as compared to a loss of $1,813 for the six months ended June 30, 2022. The gain and loss are directly attributable to the remeasurement of the warrant liability as of June 30, 2023 and June 30, 2022, respectively, due to the change in the underlying value related to the private warrants during those periods.
Gain on investments. Gain on investments for the six months ended June 30, 2023 was nil, as compared to $6,851 for the six months ended June 30, 2022. The gain on investments was related to the sale of Cansativa shares to an unrelated third-party and the revaluation of the Company's retained interest of the shares still held.
Loss on debt extinguishment, net. Net loss on debt extinguishment was nil for the six months ended June 30, 2023 compared to $2,263 for the six months ended June 30, 2022. The loss was primarily related to the debt extinguishment as a result of the amendment of the Catalina Note on January 13, 2022.
Foreign exchange loss. The impact of foreign exchange for the six months ended June 30, 2023 was a loss of $22, as compared to a loss of $475 for the six months ended June 30, 2022. The foreign exchange losses for the six months ended June 30, 2023, were primarily driven by the currency fluctuations of the Euro versus the U.S. Dollar.
Other expense, net. Other expenses, net includes items not individually material to our consolidated financial statements.
Operating Results by Business Segment
Our management evaluates segment profit/loss for each of our reportable segments. We define segment profit/loss as income from continuing operations before interest, taxes, depreciation, amortization, share-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit/loss also excludes the impact of certain items that are not directly attributable to the reportable segments’ underlying operating performance. For a reconciliation of segment profit to loss from continuing operations before income taxes, see Note 16 to our
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unaudited condensed consolidated interim financial statements for the three months ended June 30, 2023 included in this Form 10-Q.
Revenue by segment
(In thousands of U.S. dollars)
Three months ended June 30, | Six Months Ended June 30, | |||||||||||||||||||||||||
2023 | 2022 (*) | 2023 | 2022 (*) | |||||||||||||||||||||||
Segment Revenue: | ||||||||||||||||||||||||||
Cannabinoid | $ | 1,873 | $ | 745 | $ | 3,095 | $ | 2,553 | ||||||||||||||||||
Non-Cannabinoid | 3,108 | 3,355 | 5,864 | 6,588 | ||||||||||||||||||||||
Total revenue | $ | 4,981 | $ | 4,100 | $ | 8,959 | $ | 9,141 |
(*)Prior period numbers are re-stated to exclude discontinued operations to make it comparative with current period numbers.
Cannabinoid. Cannabinoid revenue increased to $1,873 for the three months ended June 30, 2023, as compared to $745 for the three months ended June 30, 2022. For the six months ended June 30, 2023, Cannabinoid revenue increased to $3,095 as compared to $2,553 for the six months ended June 30, 2022. The increases in cannabinoid segment revenues were primarily driven by increased sales efforts for the Company’s extract products, particularly in Brazil, Australia, and Israel.
Non-Cannabinoid. Non-Cannabinoid revenue decreased to $3,108 for the three months ended June 30, 2023, as compared to $3,355 the three months ended June 30, 2022. For the six months ended June 30, 2023, non-cannabinoid revenue decreased to $5,864 as compared to $6,588 for the six months ended June 30, 2022. The decrease in non-cannabinoid revenues was due to continued demand headwinds in the segment’s specialty channel, which resulted in lower inventory orders during the quarter.
Segment profit/loss
(In thousands of U.S. dollars)
Three months ended June 30, | Change | ||||||||||||||||||||||
2023 | 2022 (*) | $ | % | ||||||||||||||||||||
Segment Profit/(Loss): | |||||||||||||||||||||||
Cannabinoid | $ | (1,697) | $ | (2,706) | 1,009 | (37) | % | ||||||||||||||||
Non-Cannabinoid | 831 | 666 | 165 | 25 | % | ||||||||||||||||||
Total Segment Loss (a) | $ | (866) | $ | (2,040) | 1,174 | (58) | % |
Six Months Ended June 30, | Change | ||||||||||||||||||||||
2023 | 2022 (*) | $ | % | ||||||||||||||||||||
Segment Profit/(Loss): | |||||||||||||||||||||||
Cannabinoid | $ | (4,012) | $ | (8,412) | 4,400 | (52) | % | ||||||||||||||||
Non-Cannabinoid | 1,278 | 1,014 | 264 | 26 | % | ||||||||||||||||||
Total Segment Loss (a) | $ | (2,734) | $ | (7,398) | 4,664 | (63) | % |
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(a) For a reconciliation of segment (loss) to loss before income taxes see Note 16 to our unaudited condensed consolidated interim financial statements for the three and six months ended June 30, 2023, included in this Form 10-Q.
Prior period numbers are re-stated to exclude discontinued operations to make it comparative with current period numbers.
Cannabinoid — Cannabinoid segment loss decreased to $1,697 for the three months ended June 30, 2023 compared to a loss of $2,706 for the three months ended June 30, 2022, primarily due to the decrease in expenses related to the effective implementation of cost-cutting measures.
Cannabinoid segment loss decreased to $4,012 for the six months ended June 30, 2023 compared to a loss of $8,412 for the six months ended June 30, 2022, primarily due to the effective implementation of cost-cutting measures.
Non-Cannabinoid — Non-Cannabinoid segment profit increased to $831 for the three months ended June 30, 2023, compared to a profit of $666 for the three months ended June 30, 2022. The increase was primarily attributable to decreased payroll related costs and sales and marketing costs.
Non-Cannabinoid segment profit increased to $1,278 for the six months ended June 30, 2023, compared to a profit of $1,014 for the six months ended June 30, 2022. The increase was primarily attributable to decreased payroll related costs and sales and marketing costs.
Liquidity and Capital Resources
We are actively seeking sources of financing or proceeds from sales of assets to fund our continued operations. There can be no assurance that we will be able to complete any financing or asset sale transaction in a timely manner or on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to suspend or curtail planned programs, or cease operations altogether.
The following table sets forth the major components of our Consolidated Statements of Cash Flows for the periods presented:
(In thousands of U.S. dollars)
Six months ended June 30, | ||||||||||||||
2023 | 2022 | |||||||||||||
Net cash used in operating activities | $ | (7,764) | $ | (18,584) | ||||||||||
Net cash provided by (used in) investing activities | (79) | 897 | ||||||||||||
Net cash (used in) provided by financing activities | 58 | (347) | ||||||||||||
Effect of foreign currency translation on cash and cash equivalents | 38 | (202) | ||||||||||||
Cash, cash equivalents, and restricted cash beginning of period | 12,888 | 37,699 | ||||||||||||
Cash, cash equivalents, and restricted cash end of period | 5,141 | 19,463 | ||||||||||||
Decrease in cash and cash equivalents | $ | (7,747) | $ | (18,236) |
Cash flows used in operating activities
The decrease in net cash used by operating activities decreased during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily the result of decreased operating and other expenses due to implementation of cost cutting measures, and changes in operating assets and liabilities.
Cash flows from investing activities
The decrease in net cash used in investing activities during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily due to net cash provided by proceeds from partial sale of equity method of investments during 2022.
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Cash flows from financing activities
The increase in net cash provided by financing activities during the six months ended June 30, 2023 compared to the six months ended June 30, 2022, was primarily driven by the net proceeds from issuance of shares under the Equity Distribution Agreement and the related shelf registration statement in the six months ended June 30, 2022 being offset by repayment of substantial outstanding debt in the six months ended June 30, 2022. For more information refer to Note 11 to our unaudited condensed consolidated interim financial statements for the period ended June 30, 2023 included in this Form 10-Q.
Sources of Liquidity
We have historically financed our operations through the issuance of shares, the issuance of convertible debt and cash from operations. As of June 30, 2023 and December 31, 2022, we had cash and cash equivalents (excluding restricted cash) of $5,077 and $12,449, respectively, which were held for working capital, repayment of loans and general corporate purposes. This represents an overall decrease of $7,372.
On January 14, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC, as sales agent (the “Agent”). Under the terms of the Equity Distribution Agreement, the Company may issue and sell its common shares, without par value, having an aggregate offering price of up to $50,000 from time to time through the Agent. The issuance and sale of the common shares under the Equity Distribution Agreement have been made, and any such future sales will be made, pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-262183), which includes an “at-the-market” (“ATM”) offering prospectus supplement (the "Prospectus Supplement"), as amended from time to time.
We have had operating losses and negative cash flows from operations since inception and expect to continue to incur net losses for the foreseeable future until such time, if ever, that we can generate significant revenue from the sale of our available inventories. We anticipate that we will continue to incur losses from operations due to pre-commercialization activities, marketing and manufacturing activities, and general and administrative costs to support operations. For more information refer to Note 11 to our unaudited condensed consolidated interim financial statements for the period ended June 30, 2023 included in this Form 10-Q.
We have historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing and proceeds from the sale of assets. While we have been successful in raising financing in the past, there can be no assurances that additional financing will be available when needed on acceptable terms, or at all. The continued influence of the direct and indirect results of the outbreak of COVID-19 and uncertain market and regulatory conditions may further limit our ability to access capital. If we are not able to secure adequate additional funding or sell additional assets, we may be forced to make reductions in spending, extend payment terms with suppliers, and suspend or curtail planned programs. Any of these actions could materially harm our business, results of operations, financial condition, and prospects.
Uses of Liquidity
Our primary need for liquidity is to fund working capital requirements, capital expenditures, debt service obligations and for general corporate purposes. Our ability to fund operations, make planned capital expenditures and debt service obligations depends on future operating performance and cash flows, which are subject to prevailing economic conditions and financial, business and other factors. Our interim financial statements have been prepared on a going concern basis, which assumes that we will continue to be in operation for the foreseeable future and, accordingly, will be able to realize our assets and discharge our liabilities in the normal course of operations as they come due.
We manage our liquidity risk by preparing budgets and cash forecasts to ensure we have sufficient funds to meet obligations. In managing working capital, we may limit the amount of our cash needs by selling inventory at wholesale rates, pursuing additional financing sources, and managing the timing of capital expenditures.
However, the Company's current working capital needs, anticipated operating expenses and net losses, and the uncertainties surrounding its ability to raise additional capital as needed, raise substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations as they come due within twelve months from the issuance date of the interim financial statements. The consolidated financial statements do not include any adjustments for the recovery and
classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to
41
continue as a going concern.
The Company’s ability to execute its operating plans through 2023 and beyond depends on its ability to obtain additional funding, which may include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets to meet planned growth requirements and to fund future operations, which may not be available on acceptable terms, or at all.
Debt
Total debt outstanding as of June 30, 2023 and December 31, 2022 was $1,379 and $1,530, respectively. The debt outstanding as of June 30, 2023 was comprised of our current and non-current portions of other borrowings of $471 and $908, respectively, related to the Colombia and Portugal working capital loans. The debt outstanding as of June 30, 2023 was comprised of our current and non-current portions of other borrowings of $457 and $922, respectively, related to the Colombia and Portugal working capital loans. The debt outstanding as of December 31, 2022 was comprised of our current and non-current portions of other borrowings of $465 and $1,065, respectively, related to the Colombia and Portugal working capital loans. For more information refer to Note 10 to our unaudited condensed consolidated interim financial statements for the period ended of June 30, 2023 included in this Form 10-Q.
Portugal Debt
In January 2021, Clever Leaves Portugal Unipessoal LDA borrowed €1,000 ($1,213) (the "Portugal Debt"), from a local lender (the "Portugal Lender") under the terms of its credit line agreement. The Portugal Debt pays interest quarterly at a rate of Euribor plus 3.0 percentage points. For the three months ended June 30, 2023 and 2022, the company recognized interest expense of approximately €10 ($11) and €7 ($8), respectively, and repaid principal of approximately €63 ($68) and €63 ($67), respectively, of the Portugal Debt in accordance with the terms of the loan agreement. For the six months ended June 30, 2023 and 2022, the company recognized interest expense of approximately €20 ($21) and €15 ($17), respectively, and repaid principal of approximately €125 ($134) and €125.00 ($137.00) , respectively, of the Portugal Debt in accordance with the terms of the loan agreement. As of June 30, 2023 and December 31, 2022, the outstanding principal balance of the Portugal Debt was €625 ($671) and €875 ($1,076), respectively. In December 2022, the Company approved a plan to shut-down its cultivation activities in Portugal in order to preserve cash. The Portugal Debt was not discharged as part of the restructuring and remains outstanding. For more information on the Restructuring, see Note 21 to our audited consolidated financial statements for the year ended December 31, 2022 included in our 2022 Form 10-K.
Colombia Debt
Ecomedics S.A.S. has entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,305,800 ($1,295) of mainly working capital loans. The working capital loans are secured by mortgage of our farm land in Colombia as collateral. These loans bear interest at a range of 10.96% to 12.25% per annum denominated in Colombian pesos. The first payment of the principal and interest will be repaid six months after receiving the loan. After the first payment, the principal and interest will be repaid semi-annually. For the period ended June 30, 2023 and December 31, 2022, the outstanding principal balance was approximately COP$3,390,173 ($708) and
COP$3,471,576 ($725), respectively.
Contingencies
In the normal course of business, we receive inquiries or become involved in legal disputes regarding various litigation matters. Other than as disclosed in Item 1A Risk Factor of this Form 10-Q. In the opinion of management, as of June 30, 2023 any potential liabilities resulting from claims we have received would not have a material adverse effect on our consolidated financial statements.
Off-Balance Sheet Arrangements
We did not have off-balance sheet arrangements during the periods presented, other than the obligations discussed above.
Critical Accounting Policies and Significant Judgments and Estimates
See Part II, Item 7, "Critical Accounting Policies and Estimates" in our 2022 Form 10-K. There have been no material changes to our critical accounting policies and estimates since our 2022 Form 10-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
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Item 4. Controls and Procedures
Evaluation of Controls and Procedures
Management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of as June 30, 2023. The term "disclosure control and procedures" as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures as of June 30, 2023 were not effective due to a material weakness as described below.
Inherent Limitations of Disclosure Controls and Internal Control over Financial Reporting
Because of their inherent limitations, our disclosure controls and procedures and our internal control over financial reporting may not prevent material errors or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. The effectiveness of our disclosure controls and procedures and our internal control over financial reporting is subject to risks, including that the control may become inadequate because of changes in conditions or that the degree of compliance with our policies or procedures may deteriorate.
Material Weakness in Internal Control over Financial Reporting
As initially reported in the Annual Report on Form 10-K for the year ended December 31, 2020, Management did not maintain effective control environment attributed to the following:
•The Company's insufficient number of trained professionals with an appropriate level of accounting knowledge, training and experience to appropriately analyze, record and disclose accounting matters timely and accurately.
•Insufficient segregation of duties, lack of structure, reporting lines and appropriate authorities and responsibilities to achieve financial reporting objectives. Lack of evidence to support the performance of controls and the adequacy of review procedures, including the completeness and accuracy of information used in the performance of controls.
During the year ended December 31, 2022, an additional material weakness was identified as follows:
•Information technology general controls were not properly designed and implemented in user access over certain information technology systems that support the Company's financial reporting process. The access issues relate to the extent of privileges afforded to certain users as well as the Company's user access review controls.
Management Plan to Remediate Material Weaknesses
During the year ended December 31, 2022 and the six months ended June 30, 2023, we made the following enhancements to our control environment:
a. We enhanced our controls to improve the preparation and review over complex accounting measurements, and the application of GAAP to significant accounts and transactions, and our financial statement disclosures; and,
b. We engaged outside consultants to assist us in our evaluation of the design, implementation, and documentation of internal controls that address the relevant risks, and that provide for appropriate evidence of performance of our internal
44
controls (including completeness and accuracy procedures) and to provide technical Sarbanes-Oxley Act training to individuals throughout the organization that are responsible for executing internal controls.
Our remediation activities are ongoing during calendar year 2023. In addition to the above actions, we expect to engage in additional activities, including, but not limited to:
a. Adding more technical accounting resources to enhance our control environment and to allow for proper segregation of duties;
b. Enhance the Company's accounting software system with a system designed with the functionality to properly segregate duties and implement appropriate user access controls;
c. Until we have sufficient technical accounting resources, we will continue to engage external consultants to provide support and to assist us in our evaluation of more complex applications of GAAP, and to assist us with documenting and assessing our accounting policies and procedures; and,
d. Engaging outside consultants to assist us in performing testing in order to evaluate the operating effectiveness of our internal controls.
Under the direction of the audit committee of the board of directors, management will continue to take measures to remediate the material weaknesses in calendar year 2023. As such, we will continue to enhance corporate oversight over process-level controls and structures to ensure that there is appropriate assignment of authority, responsibility, and accountability to enable remediation of our material weaknesses. We believe that our remediation plan will be sufficient to remediate the identified material weaknesses and strengthen our internal control over financial reporting.
We believe the corrective actions and controls need to be in operation for a sufficient period for management to conclude that the control environment is operating effectively and has been adequately tested through audit procedures. Therefore, the material weaknesses have not been remediated as of the date of this report.
Changes in Internal Control over Financial Reporting
The Company is in the process of implementing certain changes in its internal controls to remediate the material weakness described above. Except as noted above, no change to our internal control over financial reporting occurred during the three months ended June 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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Part II - OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will have a material adverse effect on our financial condition, results of operations, or cash flows. We cannot assure you that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of management attention.
Item 1A. Risk Factors
The following discussion supplements the discussion of risk factors affecting the Company as set forth in Part I, Item 1A, “Risk Factors” in our 2022 Form 10-K and Cautionary Note Regarding Forward-Looking Statements on page 4 of this Form 10-Q. The discussion of risk factors, as so supplemented, sets forth the material risk factors that could affect the Company’s financial condition and operations. Readers should not consider any descriptions of such factors to be a complete set of all potential risks that could affect the Company.
The reverse share split may adversely impact the liquidity of our common shares and warrants and may not be effective in facilitating our efforts to regain compliance with the continued listing requirements of Nasdaq.
The liquidity of our common shares and warrants may be adversely affected by the reverse share split, given the significantly reduced number of common shares that will be outstanding following the reverse share split, especially if the market price of our common shares does not increase as a result.
The reverse share split, if effected, should have the effect of increasing the per share trading price of our common shares in proportion to the reduction in the number of common shares outstanding before the reverse share split; however, there can be no assurance that the trading price of our common shares after the reverse share split will rise (or remain constant). The trading performance following reverse share splits effected by other companies is varied, particularly because some investors may view a reverse share split negatively. We cannot predict the impact of the reverse share split on the trading price of our common shares or warrants, and it may result in a greater percentage decline than would occur in the absence of the reverse share split, and the liquidity of our common shares and warrants could be adversely affected following the reverse share split.
In addition, the reverse share split may result in some shareholders owning “odd lots” of less than 100 common shares on a post-reverse share split basis. Odd lots may be more difficult to sell, or require greater transaction costs per share to sell, than shares in “round lots” of even multiples of 100 shares.
The reverse share split is intended to regain compliance with the Nasdaq Minimum Bid Price Requirement, in order to maintain our Nasdaq listing and an active trading market for our common shares and warrants. However, there can be no assurance that we will regain compliance with the Minimum Bid Price Requirement by effecting the reverse share split, or that even if we do, we will not become deficient with respect to other Nasdaq listing requirements following, or as a result of, the reverse share split.
Failure to resolve a dispute regarding the alleged default under Herbal Brands’ lease agreement for its facilities in Tempe, Arizona could have a material adverse effect on the Company.
Herbal Brands is currently in dispute with Double G Enterprises, LLC (“Double G”), the landlord for the facility out of which Herbal Brands conducts substantially all of its operations, including the manufacture and distribution of Herbal Brands’ products, regarding the lease between Double G and Herbal Brands. Double G has alleged that Herbal Brands is in default under the lease agreement’s “change of control” provision, suggesting that more than 49% of the ownership interest in Herbal Brands has been transferred without Double G’s prior written consent, in contravention of the lease terms. Double G sent a letter noticing acceleration of all future rents due under the lease (approximately $460,000) and termination of the right to possess the premises. Double G has not provided a basis for its claim regarding Herbal Brands’ transfer of ownership. Herbal Brands was acquired by us prior to entering into the lease agreement. No action has been filed in any court, in any jurisdiction, for this dispute. Even though we believe that Herbal Brands is presently in compliance with all material provisions of its lease with Double G, there can be no assurance that this dispute will be resolved in our favor. If this dispute evolves to require formal dispute resolution there is no guarantee that it will be decided that Herbal Brands is not in default. In the event that Herbal Brands is found to be in default, and the actions we take are not sufficient to cure the default raised by Double G, the remedies available to Double G may include acceleration of all future rents under the lease agreement and/or termination of the lease.
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The lease is set to expire in April 2024. Acceleration of rents due and early termination of the lease would significantly reduce the value of Herbal Brands’ operations, and would materially curtail, if not completely eliminate, our ability to obtain revenues from Herbal Brands.
Item 5. Other Information
Not applicable.
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Item 6. Exhibits
Exhibit No. | Description | ||||||||||
3.1 | |||||||||||
4.2 | |||||||||||
4.3 | |||||||||||
4.4 | |||||||||||
4.5 | |||||||||||
4.6 | |||||||||||
4.7 | |||||||||||
10.1 | |||||||||||
10.2 | |||||||||||
31.1** | |||||||||||
31.2** | |||||||||||
32.1*** | |||||||||||
101.INS | Inline XBRL Instance Document | ||||||||||
101.SCH | Inline XBRL Taxonomy Schema Linkbase Document | ||||||||||
101.CAL | Inline XBRL Taxonomy Calculation Linkbase Document | ||||||||||
101.DEF | Inline XBRL Taxonomy Definition Linkbase Document | ||||||||||
101.LAB | Inline XBRL Taxonomy Labels Linkbase Document | ||||||||||
101. PRE | Inline XBRL Taxonomy Presentation Linkbase Document | ||||||||||
104 | Cover Page Interactive Date File - (formatted as Inline XBRL and contained in Exhibit 101) |
** Filed herewith
*** Furnished herewith
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Clever Leaves Holdings Inc. | ||||||||
August 14, 2023 | ||||||||
By: | /s/ Andres Fajardo | |||||||
Name: | Andres Fajardo | |||||||
Title: | Chief Executive Officer |