CLEVER LEAVES HOLDINGS INC. Our Company We are a multi-national cannabis company with the mission to be an industry-leading global cannabinoid company recognized for our principles, people and performance while fostering a healthier global community. We are working to develop one of the industry's leading, low-cost global business-to-business supply chains with the goal of providing high quality, pharmaceutical grade cannabis and wellness products to customers and patients at competitive prices. In addition to the cannabinoid business, we are also engaged in the non-cannabinoid business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing homeopathic and other natural remedies, wellness products, and nutraceuticals. We continue to invest in building a distribution network with a global footprint, with operations and investments inColombia ,Portugal ,Germany ,the United States andCanada . Our business model is focused on partnering with leading and emerging cannabis businesses by providing them with lower cost product, variable cost structures, reliable supply throughout the year, and accelerated speed to market. This is achievable due to our production locations, capacity, product registrations and various product certifications. To date, we have had limited export shipments of our cannabis products toAustralia ,Brazil ,Canada ,Chile ,Germany ,Israel ,Italy ,the Netherlands ,New Zealand ,Peru ,Poland ,Spain ,South Africa , theUnited Kingdom andthe United States . 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. All our customers and sales for our cannabinoid segment products are presently outside of theU.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 nutraceuticals, excluding cannabinoid products. Our principal customers for the Herbal Brands products include specialty and health retailers, mass retailers and specialty and health stores in theU.S. 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 ("MNO") 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 asCanada , have historically not welcomed imported cannabis or hemp products for commercial purposes, other countries, such asGermany andBrazil , depend primarily on imports. Global medical market expansion. We believe that we are well-positioned to capitalize on expansion of global cannabis markets, as more legal medical cannabis geographies emerge. 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 inCanada ,Colombia ,Portugal , andGermany , and we have invested significant resources in personnel and partnerships to build the foundation for new export channels. 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. 29 -------------------------------------------------------------------------------- Table of Contents Regulatory expertise and adaptation. As more markets welcome the importation of cannabis or hemp products for commercial purposes, which requires navigating and complying with the strict and evolving cannabis regulations across the different geographies, we believe that we are well positioned to expand in these markets.Clever Leaves has 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 expand into new markets and grow our presence in existing markets, we expect significant investments in cultivation and processing will be required, which may necessitate additional capital raises. 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 inColombia are adequately sized for our current business operations, as our cannabis sales grow and expand to flower products, we plan to expand our operations and invest in advanced processing or finished good manufacturing capabilities, particularly inColombia andPortugal . 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. The following table presents select operational and financial information of the Cannabinoid segment for the three months endedMarch 31, 2021 and 2020: Three months ended March 31, Operational information: 2021 2020 Change (In $000s,except kilogram and per gram data) Kilograms (dry flower) harvested(a) 15,566 11,759 3,807 32 % Costs to produce (b)$ 2,044 $ 1,744 $ 300 17 % Costs to produce per gram $ 0.13$ 0.15 $ (0.02) (13) % Selected financial information: Revenue $ 663$ 242 $ 421 N/M Kilograms sold(c) 2,476 1,256 1,220 N/M Revenue per grams sold $ 0.27$ 0.19 $ 0.08 42 % N/M: Not a meaningful percentage. _______________ (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. During three months endedMarch 31, 2021 and 2020 we sold 2,476 and 1,256 kilograms, respectively, of dry flower equivalents. For the three months endedMarch 31, 2021 , our cannabinoid segment sales were primarily inColombia ,Australia ,Israel andBrazil . The increase was primarily driven by the Company continued expansion of its sales activity for cannabinoid products. -------------------------------------------------------------------------------- Table of Contents We harvested 15,566 kilograms of cannabinoids in the three months endedMarch 31, 2021 , as compared to 11,759 kilograms in the three months endedMarch 31, 2020 . The increase was primarily attributable to the expansion of our cultivation facilities inColombia , as well as addition of production capacity inPortugal . Costs to produce were approximately$0.13 per gram of dry flower equivalent for the three months endedMarch 31, 2021 , as compared to$0.15 per gram of dry flower equivalent for the three months endedMarch 31, 2020 . The decrease in costs to produce per gram is primarily driven by the expansion of our cultivation facilities inColombia and the resulting economies of scale, partly offset by higher cost per gram inPortugal .
Recent Developments
COVID-19 Pandemic
The Company expects its operations to continue to be affected by the ongoing
outbreak of the 2019 coronavirus disease ("COVID-19"), which was declared a
pandemic by the WHO in March 2020 . The spread of COVID-19 has severely impacted
many economies around the globe. In many countries, including those where the
Company operates, businesses are being forced to cease or limit operations for
long or indefinite periods of time. Measures taken to contain the spread of the
virus, including travel bans, quarantines, social distancing, and closures of
non-essential services have triggered significant disruptions to businesses
worldwide, resulting in an economic slowdown. Global stock markets have also
experienced increased volatility and, in certain cases, significant declines.
Governments and central banks have responded with monetary and fiscal
interventions to stabilize economic conditions and the Company has taken steps
to obtain financial assistance made available from jurisdictional governments,
however the Company expects its 2021 financial performance to continue to be
impacted and result in a delay of certain of its go-to-market initiatives.
The duration and impact of the COVID-19 pandemic, as well as the effectiveness
of government and central bank responses, remains unclear. It is not possible to
reliably estimate the duration and severity of these consequences, nor their
impact on the financial position and results of the Company for future periods.
We continue to monitor closely the impact of COVID-19, with a focus on the
health and safety of our employees, and business continuity. We have implemented
various measures to reduce the spread of the virus including requiring that our
non-production employees work from home, restricting visitors to production
locations, screening employees with infrared temperature readings and requiring
them to complete health questionnaires on a daily basis before they enter
facilities, implementing social distancing measures at our production locations,
enhancing facility cleaning protocols, and encouraging employees to adhere to
preventative measures recommended by the WHO. Our global operational sites have
been reduced to business-critical personnel only and physical distancing
measures are in effect. In addition, since our non-production workforce can
effectively work remotely using various technology tools, we are able to
maintain our full operations. Although our operational sites remain open,
mandatory or voluntary self-quarantines may further limit the staffing of our
facilities.
For more information on the potential impact of COVID-19 on our business, refer
to "Risk Factors - Risks Related to Our Business - The current outbreak of the
novel coronavirus, or COVID-19, has caused severe disruptions in the global
economy and to our business, and may have an adverse impact on our performance
and results of operations" in our Annual Report on Form 10-K/A for the year
ended December 31, 2020 ("2020 Form 10-K").
InAugust 2020 , we received a provisional license from theNational Authority of Medicines andHealth Products , the Portuguese pharmaceutical regulator ("INFARMED") to cultivate, import and export dried cannabis flower produced at our Portuguese cultivation site and inMarch 2021 , we received our definitive license. Under the current license granted by INFARMED, our production facility inPortugal is currently cultivating cannabis for commercial purposes. OurPortugal facility received the Good Agricultural and Collection Practices ("GACP") certificate inMarch 2021 . To maintain the GACP certificate, we must cultivate and operate under GACP guidelines.
These certificates must be renewed annually.
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Closing of the Business Combination
On December 18, 2020 , Clever Leaves and SAMA consummated the previously
announced Business Combination contemplated by the Amended and Restated Business
Combination Agreement, dated as of November 9, 2020 , by and among SAMA, Clever
Leaves , the Company and Merger Sub.
Pursuant to the Business Combination Agreement, each of the following
transactions occurred in the following order: (i) pursuant to a court-approved
Canadian plan of arrangement (the "Plan of Arrangement" and the arrangement
pursuant to such Plan of Arrangement, the "Arrangement"), at 11:59 p.m., Pacific
time , on December 17, 2020 (2:59 a.m., Eastern time , on December 18, 2020 ) (a)
all of the Clever Leaves shareholders exchanged their Class A common shares
without par value of Clever Leaves ("Clever Leaves common shares") for our
common shares without par value ("common shares") and/or non-voting common
shares without par value ("non-voting common shares") (as determined in
accordance with the Business Combination Agreement) and (b) certain Clever
Leaves shareholders received approximately $3,100 in cash in the aggregate (the
"Cash Arrangement Consideration"), such that, immediately following the
Arrangement, Clever Leaves became our direct wholly-owned subsidiary; (ii) at
12:01 a.m., Pacific time (3:01 a.m. Eastern time ), on December 18, 2020 , Merger
Sub merged with and into SAMA, with SAMA surviving such merger as our direct
wholly-owned subsidiary (the "Merger") and, as a result of the Merger, all of
the shares of SAMA common stock were converted into the right to receive common
shares as set forth in the Business Combination Agreement; (iii) immediately
following the consummation of the Merger, we contributed 100% of the issued and
outstanding capital stock of SAMA (as the surviving corporation of the Merger)
to Clever Leaves , such that, SAMA became a direct wholly-owned subsidiary of
Clever Leaves ; and (iv) immediately following the contribution of SAMA to Clever
Leaves , Clever Leaves contributed 100% of the issued and outstanding shares of
NS US Holdings, Inc. , a Delaware corporation and a wholly-owned subsidiary of
Clever Leaves , to SAMA. Upon the closing of the Merger, SAMA changed its name to
Clever Leaves US, Inc.
On December 18, 2020 , SAMA's units, shares of SAMA common stock and warrants
ceased trading on The Nasdaq Stock Market ("Nasdaq"), and our common shares and
warrants began trading on Nasdaq under the symbols "CLVR" and "CLVRW,"
respectively.
Convertible Note Amendments
In connection with the Business Combination, onNovember 9, 2020 ,Clever Leaves and the noteholders agreed to amend the terms of the 2022 Convertible Notes to, among other matters, decrease the interest rate to 8%, commencingJanuary 1, 2021 , and provide that such interest is to be paid in cash, quarterly in arrears, and also provides the Company with the option to satisfy the payment of quarterly interest by issuing common shares to the noteholders. Following the closing of the Business Combination, the 2022 Convertible Notes remained outstanding, but are convertible into our common shares in accordance with their terms. For additional detail see " - Liquidity and Capital Resources - Debt - Convertible Note Amendments" our unaudited condensed consolidated interim financial statements for the three months endedMarch 31, 2021 included in this Form 10-Q. EU GMP Certification OnJuly 8, 2020 ,Clever Leaves received European Union Good Manufacturing Practices ("EU GMP") certification from theCroatian Agency for Medicinal Products and Medical Devices for its post-harvest and extraction facilities located inColombia . EU GMP certification is expected to expandClever Leaves' ability to serve the burgeoning European medical cannabis and hemp markets, which have rigorous quality, compliance, and regulatory requirements. Because we are among a small number of companies globally to have earned EU GMP certification, EU GMP certification is also expected to expand our early mover advantage in the pharmaceutical channel as global demand increases and more legal cannabis geographies emerge.Portugal Licensing InAugust 2020 , we received a license from INFARMED to cultivate, import and export dried cannabis flower produced at our Portuguese cultivation site and, similar to other licensed cannabis companies inPortugal , we are listed as ofAugust 2020 onINFARMED's Licensing Department's registry. Due to the COVID-19 pandemic and restrictions on INFARMED's ability to conduct a physical inspection of our Portuguese operation, the license was issued under a special licensing procedure and requires a confirmatory physical inspection from INFARMED. Our license provides our Portuguese operations the same rights and qualifications as licenses issued under the normal procedures, including the ability to conduct commercial operations. The physical inspection took place onAugust 27, 2020 and, upon successful completion of the inspection review, we expect our current license to be replaced with a license issued under the normal procedures. Under the current license granted by 32
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Table of Contents INFARMED, our production facility inPortugal is currently cultivating cannabis for commercial purposes. OurPortugal facility received the GACP certificate inMarch 2021 . To maintain the GACP certificate, we must cultivate and operate under GACP guidelines. 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. In our Non-Cannabinoid segment, revenue is primarily composed of sales of our nutraceutical products to our retail customers. As we have only recently begun to carry out 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. 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.
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