Company History and Operational Overview
Clever Leaves Holdings Inc. (NASDAQ:CLVR) is a multi-national operator in the botanical cannabinoid and nutraceutical industries, with operations and investments in Colombia, Germany, the United States, and Canada. The company is focused on developing one of the industry's leading, low-cost global supply chains to provide high-quality, pharmaceutical-grade cannabis and wellness products to customers and patients at competitive prices.
Clever Leaves was incorporated in 2016 and has since invested significantly in establishing ecologically sustainable, large-scale cultivation and processing capabilities as the cornerstone of its medical cannabinoid business. The company currently owns approximately 1.80 million square feet of greenhouse cultivation capacity in Colombia. Additionally, its pharmaceutical-grade extraction facility is capable of processing 108,000 kilograms of dry flower per year. In July 2020, Clever Leaves 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 its Colombian operations.
Clever Leaves operates in two main business segments: Cannabinoid and Non-Cannabinoid. The Cannabinoid segment focuses on the cultivation, extraction, manufacturing, and commercialization of cannabinoid products, primarily for international markets. The Non-Cannabinoid segment, acquired through the Herbal Brands acquisition in 2019, is engaged in the formulation, manufacturing, marketing, selling, distributing, and commercialization of nutraceutical and other natural remedies, wellness products, detoxification products, and nutritional and dietary supplements.
In 2018, Clever Leaves entered into a seed investment agreement with Cansativa GmbH, a German company focused on the import and sale of cannabis products for medical use. This investment helped establish the company's regional operations in various countries. Over the next few years, the company continued to build its presence globally, including setting up agricultural and post-harvest facilities in Portugal in addition to its core operations in Colombia.
The company faced several challenges over the years. In 2020, Clever Leaves had to navigate the impacts of the COVID-19 pandemic, which disrupted supply chains and impacted demand. Additionally, the company struggled with operational efficiency and cost control, leading to restructuring initiatives in 2022 that included the shutdown of its Portuguese operations. This restructuring was part of the company's efforts to optimize its business model and preserve cash.
Financial Overview and Key Metrics
Clever Leaves reported annual revenue of N/A and an annual net income of N/A in its most recent fiscal year. The company's annual operating cash flow was N/A, and its annual free cash flow was N/A.
In the latest quarter (Q3 2023), Clever Leaves generated revenue of $4.638 million, a 61.4% increase compared to the prior-year quarter. This growth was primarily driven by ongoing strength in the Cannabinoid segment's extract product sales, particularly in markets like Brazil, Australia, and Israel. The company's cannabinoid segment revenue increased by 132% year-over-year to $1.44 million, while the non-cannabinoid segment revenue increased by 6% year-over-year to $2.38 million.
Gross profit for the quarter was $1.94 million, resulting in a gross margin of 50.8%, compared to 45.3% in the prior-year quarter. The improvement in gross margin was primarily attributable to changes in product and customer mix, as well as continued cost optimization efforts.
Operating expenses decreased 79% year-over-year to $5.32 million, driven by a 24% reduction in general and administrative expenses and a 5% decrease in sales and marketing expenses. The company also recorded a $19 million goodwill impairment charge in the prior-year quarter, which did not recur in the current period.
Net income for Q3 2023 was -$5.085 million, a decline from the prior year period. Operating cash flow (OCF) was -$1.543 million, and free cash flow (FCF) was -$1.387 million, both showing declines compared to Q3 2022.
Liquidity
As of September 30, 2023, Clever Leaves had cash and cash equivalents of $6.47 million, down from $12.45 million at the end of 2022. The company's total debt stood at $1.34 million, primarily consisting of working capital loans in Colombia and Portugal.
The company's debt-to-equity ratio was 0.086, indicating a relatively low level of debt compared to equity. The current ratio stood at 2.40, and the quick ratio was 1.63, suggesting that the company has sufficient short-term assets to cover its short-term liabilities.
Operational Highlights and Strategic Initiatives
During the quarter, Clever Leaves continued to execute on its strategy to optimize its global supply chain and drive operational efficiencies. The company harvested 1,210 kilograms of cannabinoids, consistent with the prior-year period, as it focused on improving the quality and properties of its Colombian flower to meet more stringent market and regulatory requirements.
In July 2023, Clever Leaves' wholly-owned subsidiary in Portugal, Clever Leaves Portugal Unipessoal, Lda., entered into an asset purchase agreement to sell certain laboratory and processing equipment, as well as informational rights related to its EU-GMP certified cannabis processing facility, to a subsidiary of Curaleaf International. This transaction aligns with the company's strategy to streamline its operations and focus on its core cannabinoid business in Colombia.
Subsequent to the quarter, on October 17, 2023, Clever Leaves' subsidiary Northern Swan Deutschland Holdings, Inc. entered into an agreement to sell its remaining investment in the shares of Cansativa GmbH, a Germany-based cannabis distributor, for approximately $1.90 million. This divestiture will further strengthen the company's balance sheet and allow it to focus on its core operations.
Risks and Challenges
Clever Leaves' business is subject to various risks and challenges, including regulatory uncertainty in the rapidly evolving global cannabis industry, supply chain disruptions, and intense competition. The company's operations in Israel have also been impacted by the recent conflict between Israel and Hamas, which has limited its ability to market and sell products in that key market.
Additionally, the company's ability to execute its operating plans and meet its financial obligations is dependent on its ability to obtain additional funding, which may include initiatives such as raising capital, reducing working capital, and monetizing non-core assets. The company's consolidated financial statements have been prepared on a going concern basis, and there is substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations as they come due within the next 12 months.
Outlook and Conclusion
Despite the challenges faced by Clever Leaves, the company remains focused on building a sustainable global medicinal cannabis business. The company's recent strategic initiatives, including the sale of its Portuguese assets and investment in Cansativa, demonstrate its commitment to streamlining operations and strengthening its financial position.
Going forward, Clever Leaves will need to navigate the evolving regulatory landscape, address supply chain disruptions, and continue driving operational efficiencies to achieve profitability and long-term success. The company's ability to execute its strategy and secure additional funding will be critical in determining its future trajectory.
Segment Performance
Cannabinoid Segment
The Cannabinoid segment is focused on the cultivation, extraction, manufacturing, and commercialization of cannabinoid products, primarily for international markets. In Q3 2023, the segment's revenue increased to $1.44 million, a 132% increase compared to the same period in 2022. This growth was driven by strong demand for cannabinoid extract products, particularly in markets like Australia, Brazil, and Israel.
For the nine months ended September 30, 2023, Cannabinoid segment revenue increased to $4.54 million, up 39% from the prior year period. The company harvested 1,210 kilograms of dry cannabis flower in Q3 2023, consistent with the previous year. However, for the first nine months of 2023, harvest volume decreased by 62% to 3,060 kilograms, primarily due to reduced production capacity at the Colombia facility.
The cost to produce cannabis in the Cannabinoid segment increased to $0.75 per gram of dry flower equivalent in Q3 2023, up from $0.52 per gram in the same period in 2022. This increase was attributed to ongoing extraction and processing costs on existing inventory and costs associated with ramping up Colombian flower exports. For the first nine months of 2023, the production cost rose to $0.86 per gram from $0.29 per gram in the prior year period, due to reduced agricultural output and changes in cultivation techniques to improve flower quality.
Non-Cannabinoid Segment
The Non-Cannabinoid segment, comprised of the Herbal Brands business, focuses on nutraceutical and wellness products, primarily sold in the United States. In Q3 2023, the segment's revenue increased by 6% to $2.38 million, driven by improved demand in the mass retail channel. However, for the first nine months of 2023, revenue decreased by 7% to $8.24 million due to demand headwinds in the specialty retail channel.
Despite the revenue challenges, the Non-Cannabinoid segment's profitability improved. In Q3 2023, the segment reported a profit of $316,000, up from $95,000 in the same period in 2022. For the first nine months of 2023, profit increased by 44% to $1.59 million, primarily due to reduced expenses in payroll, sales, and marketing.
The Non-Cannabinoid segment continues to be an important part of Clever Leaves' business, providing a potential platform for future cannabinoid distribution in the United States, should federal laws permit such activities.
As Clever Leaves continues to navigate the complex global cannabis market, the company's focus on operational efficiency, strategic partnerships, and expanding its presence in key international markets will be crucial for its long-term success. The company's ability to capitalize on the growing demand for pharmaceutical-grade cannabinoid products while managing costs and regulatory challenges will be key factors in its future performance.