ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read in conjunction with the “Business” section and our audited consolidated financial statements as of and for the years ended December 31, 2021, which are included elsewhere in this Form 10-K. The financial information contained herein is taken or derived from such consolidated financial statements, unless otherwise indicated. The following discussion contains forward-looking statements. Actual results could differ materially from those that are discussed in these forward-looking statements. Factors that could cause or contribute to such differences include those discussed below and elsewhere in this Form 10-K, particularly under “Risk Factors.”
Amounts are presented in thousands of U.S. dollars, except for per share data or as otherwise noted.
Our Company
We are a multi-national operator in the botanical cannabinoid and nutraceutical industries, with operations and investments in Colombia, Portugal, Germany the United States and Canada. 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 produced in a sustainable and environmentally friendly manner. Our customers consist of retail distributors and pharmaceutical and cannabis companies.
We have invested in ecologically sustainable, large-scale, botanical cultivation and processing, as the cornerstone of our medical cannabinoid business, and we continue to develop strategic distribution channels and brands.
We currently own approximately 2.1 million square feet of greenhouse cultivation capacity across two continents and approximately 13 million square feet of agricultural land, with an option to acquire approximately 73 million additional square feet of land for cultivation expansion. In addition, our pharmaceutical-grade extraction facility is capable of processing 104,400 kilograms of dry flower per year and is expandable to over 300,000 kilograms of dry flower per year with limited additional investment.
In July 2020, we became one of a number of vertically integrated cannabis companies to receive EU GMP certifications for our Colombian operations. We believe these features of our business provide us with one of the largest 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 is an Arizona based GMP-compliant, FDA registered facility and 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 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 the United States.
Factors Impacting our Business
We believe that our future success will primarily depend on the following factors:
Globalization of the industry. Due to our 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 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. 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 in Colombia, Portugal, Germany, the United States and Canada, 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.
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. 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 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 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 and invest in advanced processing or finished good manufacturing capabilities, particularly in Colombia and Portugal.
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 years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
Operational information: | | 2021 | | 2020 | | Change |
(In $000s, except kilogram and per gram data) | | | | | | | | |
Kilograms (dry flower) harvested(a) | | 52,159 | | | 56,685 | | | (4,526) | | | (8) | % |
Costs to produce (b) | | $ | 11,438 | | | $ | 8,027 | | | $ | 3,411 | | | 42 | % |
Costs to produce per gram | | $ | 0.22 | | | $ | 0.14 | | | $ | 0.08 | | | 57 | % |
| | | | | | | | |
Selected financial information: | | | | | | | | |
Revenue | | $ | 3,242 | | | $ | 2,511 | | | $ | 731 | | | 29 | % |
Kilograms sold(c) | | 11,131 | | | 24,035 | | | (12,904) | | | (54) | % |
Revenue per grams sold | | $ | 0.29 | | | $ | 0.10 | | | $ | 0.19 | | | 190 | % |
_______________
(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 the years ended December 31, 2021 and 2020 we sold 11,131 and 24,035 kilograms, respectively, of dry flower equivalent. For the year ended December 31, 2021 and 2020, our cannabinoid segment sales were primarily in Australia, Israel, Colombia, and Brazil. The decrease in sale of dry flower equivalent for the Cannabinoid segment was primarily due to a shift to selling more higher margin products.
We harvested 52,159 kilograms of cannabinoids in the year ended December 31, 2021, as compared to 56,685 kilograms in the year ended December 31, 2020. The decrease was primarily attributable to a decrease in our planned reduction in our production capacity at our Colombia facilities. The decrease in production capacity compared to the year ended December 31, 2020 was partially offset by an increase in our production capacity at our Portugal facilities following completion of our cultivation facility expansion in the third quarter of 2021.
Costs to produce were approximately $0.22 per gram of dry flower equivalent for the year ended December 31, 2021, as compared to $0.14 per gram of dry flower equivalent for the year ended December 31, 2020. The increase in costs to produce per gram was primarily driven by the initial higher production costs at our Portugal facility as we continued to expand production capacity. The increase in costs was party reduced by lower production costs at our facilities in Colombia and the resulting economies of scale.
Recent Developments
Licensing Requirement - Decree 811
The Colombian government passed Decree 811 in late July 2021, which replaced Decree 613. Decree 811 removed the prohibition contained in Decree 613 to export 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. An additional resolution defining the procedures for exporting is expected to be passed in the first half of 2022 by the Colombian government.
2024 Note Purchase Agreement and 2022 Convertible Notes Repayment
On July 19, 2021, we entered into the Note Purchase Agreement with Catalina LP in a transaction exempt from registration pursuant to Section 4(a)(2) of the Securities Act, the Catalina LP Convertible Note in the principal amount of $25,000. The Catalina LP Convertible Note matures three years from its issuance date, and we have the option to prepay the outstanding principal and accrued interest on the Catalina LP Convertible Note at any time at our election. Interest accrues on the Catalina LP Convertible Note at 5% per annum and is payable on a quarterly basis, either in cash or, at our option, by increasing the principal amount of the note. The Catalina LP Convertible Note is guaranteed by certain subsidiaries of the Company and secured by pledged equity interests in certain subsidiaries of the Company.
The principal and accrued interest owing under the Catalina LP Convertible Note may be converted at any time by the holder into common shares at a per share price of $13.50, subject to certain limitations. Up to $12,500 in aggregate principal under the Catalina LP Convertible Note may be so converted within one year of issuance. In addition, each of the Company and the holder may redeem all or a portion of the outstanding principal and accrued interest owing under the Catalina LP Convertible Note into common shares, at a per share price equal to the greater of (x) an 8% discount to the closing price per share on the applicable redemption date or (y) $6.44 (the “Optional Redemption Rate”), subject to certain limitations. Up to $12,500 in aggregate principal under the Catalina LP Convertible Note may be so redeemed within one year of issuance.
The holder of the Catalina LP Convertible Note will not be entitled to convert any portion of the Catalina LP Convertible Note if, after such conversion, such holder would have beneficial ownership of, and direct or indirect control or direction over, more than 9.99% of the Company’s outstanding common shares.
In connection with the issuance of the Catalina LP Convertible Note, we agreed, pursuant to a Registration Rights Agreement with Catalina LP dated as of July 19, 2021 (the “Catalina LP Registration Rights Agreement”), to register for resale with the
SEC all of the common shares issuable under the Catalina LP Convertible Note, and in any event not less than 3,881,988 common shares (which represents the number of common shares that would be issuable if the entire principal amount of the Catalina LP Convertible Note was redeemed at the minimum Optional Redemption Rate). Under the Catalina LP Registration Rights Agreement, we were required to use commercially reasonable efforts to have such registration statement declared effective by the SEC within 90 calendar days of the Catalina LP Convertible Note issuance date, and are required to keep such registration statement continuously effective until the earlier of (x) 30 days after the maturity date of the Catalina LP Convertible Note or (y) the date on which all common shares issued or issuable upon conversion of the Catalina LP Convertible Note are no longer restricted securities under Rule 144 of the Securities Act. There are no contractual transfer restrictions or lock-up arrangements on the common shares issuable upon conversion or redemption of the Catalina LP Convertible Note.
During the year ended December 31, 2021, the Company issued a total of 720,085 common shares upon debt conversion to the noteholder of $5,559 aggregate principal amount. As of December 31, 2021, the Catalina LP Convertible Note's outstanding principal balance, including interest and net of debt discount and debt issuance cost was $17,699.
On July 19, 2021, the Company fully repaid its 2022 Convertible Notes with accrued interest and cancelled the associated warrants. Under the Payout and Release Agreement, the Company paid an amount equal to the sum of 90% of the aggregate outstanding principal on the 2022 Convertible Notes, including accrued interest and certain legal fees.
The Company recorded a gain on extinguishment of debt, net of unamortized debt financing costs, for approximately $2,267, in connection with the settlement of the 2022 Convertible Notes, during the December 31, 2021.
On January 13, 2022, the Company and Catalina LP entered a First Amendments to Secured Convertible Note (the "First Amendment Agreement"), amending certain terms of the original Secured Convertible Note issued by the Company to Catalina. These amendments are temporary amendments that expire on July 19, 2022, at which time the terms of the original note apply with respect to such amendments. The First Amendment Agreement allows Catalina to elect to receive cash repayment on account of Principal if the closing price per share of the Company’s common shares on the Nasdaq Capital Market is below $2.20 (from $7.00 in the original Catalina LP Convertible Note) on any 10 of the previous 20 trading days. The terms of the Original Note will apply to redemptions or repayments after July 19, 2022, unless further amended by the parties thereto. For more information refer to note 22, Subsequent Events for more information.
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 with 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. As of the date of filing this Form 10-K, the Company is now subject to “baby shelf” rules pursuant to Instruction I.B.6. of Form S-3. As such, the Company may not sell more than one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates, where such aggregate market value is calculated using figures from a date or dates, as the case may be, within the preceding 60-days from the date of filing this 10-K. Pursuant this baby shelf cap, we may not offer to or sell equity securities for more than one-third of our public float, which, as of the date of this filing, limits the aggregate offering price pursuant to the ATM to approximately $18,000, but may increase if our public float increases.
Subject to terms of the Equity Distribution Agreement, the Agent is not required to sell any specific number or dollar amount of common shares but has agreed to act as the Company’s sales agent, using commercially reasonable efforts to sell on the Company’s behalf all of the common shares requested by the Company to be sold, consistent with the Agent’s normal trading and sales practices, on terms mutually agreed between the Agent and the Company. The Agent is entitled to compensation under the terms of the Equity Distribution Agreement at a fixed commission rate not to exceed 3.0% of the gross proceeds from each issuance and sale of common shares. As of March 22, 2022, the Company has issued and sold 2,801,997 shares pursuant to the ATM offering, for aggregate net proceeds of $3,316 and may issue and sell additional shares, subject to the limitations described above.
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 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 certain employees, 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.
Results of Operations
Year Ended December 31, 2021 compared to year ended December 31, 2020
Consolidated Statements of Net Loss Data
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2021 | | 2020 |
| | | | |
Revenue | | $ | 15,374 | | | $ | 12,117 | |
Cost of sales: | | | | |
Cost of sales, before inventory write-down | | (5,585) | | | (4,305) | |
Inventory write-down | | (2,980) | | | (399) | |
Total cost of sales | | (8,565) | | | (4,704) | |
Gross profit | | 6,809 | | | 7,413 | |
General and administrative expenses | | 38,398 | | | 28,819 | |
Sales and marketing expenses | | 3,796 | | | 2,577 | |
Research and development | | 1,546 | | | 1,009 | |
Goodwill impairment | | 18,508 | | | 1,682 | |
Depreciation and amortization expenses | | 1,768 | | | 1,854 | |
Total expenses | | 64,016 | | | 35,941 | |
Loss from operations | | (57,207) | | | (28,528) | |
Interest expense, net | | 6,818 | | | 4,455 | |
Gain on remeasurement of warrant liability | | (16,856) | | | (10,780) | |
Loss on investments | | — | | | 464 | |
(Gain) loss on debt extinguishment, net | | (3,262) | | | 2,360 | |
Loss on fair value of derivative instrument | | — | | | 657 | |
Foreign exchange loss | | 1,276 | | | 491 | |
Other income, net | | (502) | | | (284) | |
Total other income, net | | (12,526) | | | (2,637) | |
Loss before income taxes and equity investment loss | | (44,681) | | | (25,891) | |
| | | | |
Deferred income tax expense | | 950 | | | — | |
Equity investment and securities loss | | 95 | | | 4 | |
Net loss | | $ | (45,726) | | | $ | (25,895) | |
| | | | |
| | | | |
Revenue by Channel
(in thousands of U.S. dollars)
The following table provides our revenues by channel for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2021 | | 2020 |
Mass retail | | | | | $ | 8,070 | | | $ | 6,879 | |
Distributors | | | | | 5,835 | | | 4,036 | |
Specialty, health and other retail | | | | | 945 | | | 689 | |
E-commerce | | | | | 524 | | | 513 | |
Total | | | | | $ | 15,374 | | | $ | 12,117 | |
Revenue
Revenue increased to $15,374 for the year ended December 31, 2021 from $12,117 for the year ended December 31, 2020. The increase was driven by increased sales in both our Non-Cannabinoid and Cannabinoid segments. The increased sales in our Non-Cannabinoid segment were primarily driven by stronger demand from specialty distributors combined with less stringent COVID-19 restrictions compared to the prior period, during which we saw a decline in sales due to closure of store fronts and a reduction in foot traffic for our retail partners. The increase in our Cannabinoid segment sales was primarily driven by our continued expansion of sales activity.
Cost of sales
Cost of sales, before inventory write-down increased to $5,585 for the year ended December 31, 2021 as compared to $4,305 for the year ended December 31, 2020. The increase was due to costs associated with increased sales from both the Non-Cannabinoid and Cannabinoid segments during the twelve months ended December 31, 2021 compared to the prior year.
Inventory write-down. During the years ended December 31, 2021 and 2020, we recognized inventory write-down of $2,980 and $399, respectively, to cost of sales for inventory, primarily related to aged, obsolete or unsaleable inventories.
Operating expenses
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | |
| 2021 | | 2020 | | Change |
General and administrative | $ | 38,398 | | | $ | 28,819 | | | $ | 9,579 | | | 33 | % |
Sales and marketing | 3,796 | | | 2,577 | | | 1,219 | | | 47 | % |
Research and development | 1,546 | | | 1,009 | | (a) | 537 | | | 53 | % |
Goodwill impairment | 18,508 | | | 1,682 | | | 16,826 | | | N/M |
Depreciation and amortization | 1,768 | | | 1,854 | | | (86) | | | (5) | % |
Total operating expenses | $ | 64,016 | | | $ | 35,941 | | | | | |
(as a percentage of revenue) | | | | | | | |
General and administrative | 250 | % | | 238 | % | | | | |
Sales and marketing | 25 | % | | 21 | % | | | | |
Research and development | 10 | % | | 8 | % | | | | |
Goodwill impairment | 120 | % | | 14 | % | | | | |
Depreciation and amortization | 11 | % | | 15 | % | | | | |
Total operating expenses | 416 | % | | 297 | % | | | | |
N/M: Not a meaningful percentage
(a) The Company reclassified $1,009 research and development expenses, reported in previous period in general and development expense and depreciation and amortization, to conform to the current period presentation.
General and administrative. General and administrative expenses increased to $38,398 for the year ended December 31, 2021 from $28,819 for the year ended December 31, 2020, primarily due to the increase in share-based compensation, increased legal fees, and insurance costs related to being a public company, partially offset by our cost-cutting measures.
Sales and marketing. Sales and marketing expenses increased to $3,796 for the year ended December 31, 2021 from $2,577 for the year ended December 31, 2020. The increase in spending was due to the launch of cannabinoid products and the launch of the Project Change Lives campaign we had initiated in the United States during the twelve months ended December 31, 2021 combined with easing of cost control measures in 2020 to address the impact from the COVID-19 pandemic.
Research and development. Research and development expenses increased to $1,546 for the year ended December 31, 2021 from $1,009 for the year ended December 31, 2020. The increase is primarily due to research and development activities related to our cannabinoid products development.
Goodwill impairment. During the years ended December 31, 2021 and 2020, we recognized goodwill impairment charges of $18,508 and $1,682, respectively. The goodwill impairment charge of $18,508 for the year ended December 31, 2021 was related to the Eagle Canada Acquisition and operating segments, as compared to the impairment charge of $1,682 related to our Herbal Brands business in the prior year. For more information, see Note 9 and Note 10 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Depreciation and amortization. Depreciation and amortization expenses decreased slightly to $1,768 for the year ended December 31, 2021 from $1,854 for the year ended December 31, 2020. The decrease is mainly attributable to the lower amortization cost recognized during the year ended December 31, 2021 as compared to the year ended December 31, 2020. The decrease in amortization cost recognized was due to the acceleration of the period over which the useful life of the GNC intangible asset was amortized in 2020 and 2021, which was fully amortized as of June 30, 2021.
Non-operating income and expenses
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2021 | | 2020 | Change |
| | | | | | | |
Interest expense, net | $ | 6,818 | | | $ | 4,455 | | | $ | 2,363 | | | 53 | % |
Gain on remeasurement of warrant liability | (16,856) | | | (10,780) | | | (6,076) | | | 56 | % |
Loss on other investments | — | | | 464 | | | (464) | | | (100) | % |
(Gain) loss on debt extinguishment, net | (3,262) | | | 2,360 | | | (5,622) | | | (238) | % |
Loss on fair value of derivative instrument | — | | | 657 | | | (657) | | | (100) | % |
Foreign exchange loss | 1,276 | | | 491 | | | 785 | | | 160 | % |
Other income, net | (502) | | | (284) | | | (218) | | | 77 | % |
Total | $ | (12,526) | | | $ | (2,637) | | | $ | (9,889) | | | N/M |
N/M: Not a meaningful percentage
Interest expense, net. Interest expense, net for the year ended December 31, 2021 was $6,818 as compared to $4,455 for the year ended December 31, 2020. The increase was primarily due to the expense recognized related to the debt issuance costs in connection with the 2022 Convertible Notes and the debt discount costs in connection with the beneficial conversion factor related to the 2024 Convertible Note. For additional details, see Note 12 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Gain on remeasurement of warrant liability. Gains on remeasurement for the years ended December 31, 2021 and 2020 were $16,856 and $10,780, respectively. The gains for both periods are directly attributable to remeasurement of the warrant liability at December 31, 2021 and December 31, 2020 due to the decline in the underlying value related to the private warrants. For more information refer to Note 13 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Loss on investments. There was no loss or gain on investment for the year ended December 31, 2021 as compared to a loss of $464 for the year ended December 31, 2020. The loss on investments in the year ended December 31, 2020 was primarily related to the decline in the carrying value of our investments in Lift & Co. and Cansativa.
(Gain) loss on debt extinguishment, net. The Company recognized a net gain on debt extinguishment of $3,262 for the year ended December 31, 2021 as compared to recognizing a net loss on debt extinguishment of $2,360 for the year ended December 31, 2020. The gain on debt extinguishment during the twelve months ended December 31, 2021 was primarily due to the extinguishment of debt in connection with the settlement of the 2022 Convertible Notes. The loss on debt extinguishment during the twelve months ended December 31, 2020 was primarily related to the conversion of the Series E Convertible Debentures and the September 2023 Convertible Debentures at the closing of the Business Combination. For additional details, see Note 12 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Loss on fair value of derivative instrument. There was no loss on fair value of derivative instrument during the year ended December 31, 2021. During the year ended December 31, 2020, we experienced a loss of $657 primarily due to the conversion of the September 2023 Convertible Debentures.
Foreign exchange loss. The impact of foreign exchange for the year ended December 31, 2021 was a loss of $1,276 compared to a loss of $491 for the year ended December 31, 2020. The increased foreign exchange losses for the year ended December 31, 2021 were primarily driven by the exchange rate fluctuations between the Euro and the U.S. Dollar.
Other income, net. Other income, net includes costs 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 17 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Revenue by segment
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2021 | | 2020 |
Segment Revenue: | | | | | | | |
Cannabinoid | | | | | $ | 3,242 | | | $ | 2,511 | |
Non-Cannabinoid | | | | | 12,132 | | | 9,606 | |
Total Revenue | | | | | $ | 15,374 | | | $ | 12,117 | |
Cannabinoid. Cannabinoid revenue increased to $3,242 for the year ended December 31, 2021, from $2,511 for the year ended December 31, 2020, driven primarily by key customer contracts maturing and transitioning from a preparation to revenue generating phase.
Non-Cannabinoid. Revenue for the year ended December 31, 2021 increased to $12,132 from $9,606 for the year ended December 31, 2020 driven primarily by stronger demand from specialty distributors combined with recovery of demand from COVID-19 that resulted in the closure of store fronts or reduction in foot traffic for our retail partners in the prior period and increased sales efforts in various revenue channels.
Segment Profit/(Loss)
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Change |
| 2021 | | 2020 | | $ | | % |
Segment Profit/(Loss): | | | | | | | |
Cannabinoid | $ | (16,915) | | | $ | (18,798) | | | 1,883 | | | (10) | % |
Non-Cannabinoid | 2,631 | | | 1,863 | | | 768 | | | 41 | % |
Total Segment Loss (a) | $ | (14,284) | | | $ | (16,935) | | | 2,651 | | | (16) | % |
(a) For a reconciliation of segment profit/(loss) to loss before income taxes see Note 17 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Cannabinoid — Cannabinoid segment loss decreased to $16,915 for the year ended December 31, 2021 from $18,798 for the year ended December 31, 2020 primarily due to cost control measures we implemented in 2020, as well as increased sales of cannabinoid products. The decrease was partly offset by costs incurred relating to the expansion of our operations in Portugal.
Non-Cannabinoid — Non-Cannabinoid segment profit increased to $2,631 for the year ended December 31, 2021 compared to $1,863 the year ended December 31, 2020. The increase was primarily attributable to cost control measures we implemented during 2020, as well as increased sales of Non-Cannabinoid products.
Liquidity and Capital Resources
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)
| | | | | | | | | | | | | | | | | |
| | | Year ended December 31, |
| | | | | 2021 | | 2020 |
Net cash used in operating activities | | | | | $ | (36,233) | | | $ | (21,961) | |
Net cash used in investing activities | | | | | (7,280) | | | (3,665) | |
Net cash provided by financing activities | | | | | 1,834 | | | 91,838 | |
Effect of foreign currency translation on cash and cash equivalents | | | | | (82) | | | 50 | |
Cash, cash equivalents, and restricted cash beginning of period | | | | | 79,460 | | | 13,198 | |
Cash, cash equivalents, and restricted cash end of period | | | | | 37,699 | | | 79,460 | |
(Decrease) increase in cash and cash equivalents | | | | | $ | (41,761) | | | $ | 66,262 | |
Cash flows used in operating activities
The increase in net cash used in operating activities during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily due to changes in operating assets and liabilities. This change primarily consisted of increases in inventory, prepaid expense and other receivables, general and administrative expenses and sales and marketing expenses.
Cash flows from investing activities
The increase in net cash used in investing activities during the year ended December 31, 2021 compared to the year ended December 31, 2020 was primarily related to higher capital expenditures in Portugal.
Cash flows from financing activities
The decrease in net cash provided by financing activities during the year ended December 31, 2021, compared to the year ended December 31, 2020, was primarily due to the higher cash inflows from net, debt and equity financing during the twelve months ended December 31, 2020. During the year ended December 31, 2020, we had financing activities related primarily to the Business Combination and the Series E Financing, whereas during the twelve months ended December 31, 2021, we had the funds raised through the issuance of the Catalina LP Convertible Note offset by the repayment of the 2022 Notes. For more information see Note 8 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Sources of Liquidity
We have historically financed our operations through the issuance of shares, the issuance of convertible debt and our cash from operations. In connection with the closing of the Business Combination, we received approximately $73,509 of net proceeds (refer to Note 8 to the audited consolidated financial statements included within this Form 10-K). As of December 31, 2021, and December 31, 2020, we had cash and cash equivalents (excluding restricted cash) of $37,226 and $79,107, respectively, which were held for working capital and general corporate purposes. This represents an overall decrease of $41,881. Our outstanding warrants entitle the holder to receive one common share for each warrant, at an exercise price of $11.50 per warrant. During the year ended December 31, 2021 we received $1,410 from the exercise of warrants. As of March 22, 2022, we have 17,840,951 warrants outstanding.
Subsequent to December 31, 2021, we entered into the Equity Distribution Agreement and filed the related shelf registration statement on Form S-3 (as described above under the caption “Equity Distribution Agreement”), which we believe will provide an ongoing source of liquidity. Due to our current public float and applicable SEC rules and regulations, our ability to raise capital pursuant to this shelf registration statement may be limited. See Note 22 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K for more information.
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 expenses to support operations. On July 19, 2021, we entered into a Note Purchase Agreement and issued a secured convertible note in the principal amount of $25,000. See Note 12 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K for more information.
We have historically been able to manage liquidity requirements through cost management and cost reduction measures, supplemented with raising additional financing. 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 spread 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, 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 and 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 consolidated 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, at December 31, 2021, 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 through equity offerings, debt financing, or other forms of financing 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 December 31, 2021 and 2020 was $25,095 and $33,843, respectively. The debt outstanding as of December 31, 2021 is comprised of the remaining balance of the 2024 Convertible Note of $17,699, net of debt issuance cost, that was issued in July 2021, the $5,230 Herbal Brands loan (as defined below) that was issued to finance the Herbal Brands acquisition in April 2019, and the remaining debt of $2,166 from other borrowings. Other borrowing consists of the debt related to the Portugal Line of Credit and Colombia working capital loan. For more information, refer to Note 12 to the audited consolidated financial statements included within this Form 10-K. On July 19, 2021, we repaid the holders of the 2022 Convertible Notes and the 2022 Convertible Notes were discharged.
The debt outstanding as of December 31, 2020 was primarily related to the 2022 Convertible Notes issued in March 2019 and the Herbal Brands Loan.
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 requires interest payments quarterly at a rate of Euribor plus 3.0 percentage points. Principal will be repaid in quarterly installments of approximately €63 with the first installment having been paid on February 28, 2022. As of December 31, 2021, the full amount borrowed was outstanding under the Portugal Debt.
Colombia Debt
During 2021, Ecomedics S.A.S. entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,015,800 ($1,222) of mainly working capital loans. The working capital loans are secured by mortgage of our farmland in Colombia as collateral. These loans bear interest at a range of 12.20% 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. As of December 31, 2021, the outstanding principal balance was COP$4,592,095 ($1,153).
Herbal Brands Debt
In April 2019, to facilitate the financing of the Herbal Brands acquisition, Herbal Brands entered into the Herbal Brands Loan (the “Herbal Brands Loan”) with, and issued warrants to, a third-party lender, Rock Cliff Capital LLC (“Lender”).
The Herbal Brands Loan is a non-revolving loan with a principal amount of $8,500 and interest of 8% per annum due and payable in arrears on the first day of each fiscal quarter, commencing July 1, 2019, and calculated based on the actual number of days elapsed. In addition, Herbal Brands is required to pay in kind interest ("PIK") on the outstanding principal amount of the Herbal Brands Loan from August 27, 2020 until payment in full at a rate equal to 4.0% per annum, with such PIK interest being capitalized as additional principal to increase the outstanding principal balance of the Herbal Brands Loan on the first day of each fiscal quarter. The Herbal Brands Loan is to be repaid or prepaid prior to its maturity date of May 2, 2023. On a quarterly basis, the loan requires Herbal Brands to repay 85% of positive operating cash flows. Herbal Brands can also choose to prepay a portion or the Herbal Brands Loan, subject to a fee equal to the greater of (1) zero, and (2) $2,338, net of interest payments already paid (excluding PIK interest paid and PIK interest capitalized as outstanding principal) on such prepayment date. The Herbal Brands Loan is guaranteed by certain subsidiaries of the Company, secured by Herbal Brands’ assets and equity interests in Herbal Brands and is subject to certain covenants. The Herbal Brands Loan remained outstanding following the closing of the Business Combination.
Concurrently with the execution of the Herbal Brands Loan, Clever Leaves issued warrants to the Lender to purchase 193,402 Class C preferred shares of Clever Leaves on a 1:1 basis, at a price of $8.79 per share. The warrants can be exercised in whole or in part at any time prior to the expiration date of May 3, 2021, and are not assignable, transferable, or negotiable. Following
the closing of the Business Combination, the warrants issued to the Lender remained outstanding but entitle the Lender to purchase common shares of the Company rather than common shares of Clever Leaves.
On August 27, 2020, we amended certain terms of the Herbal Brands Loan to provide for an additional interest of 4% per annum, compounding quarterly and payable in-kind at maturity. In addition, we extended the expiry date of the outstanding 193,402 warrants until May 3, 2023. As part of the amendment, the covenant testing under the Herbal Brands Loan is no longer required due to the occurrence of a qualified IPO on December 18, 2020.
Following the closing of the Business Combination and pursuant to the terms, the holder of the Rock Cliff Warrants can purchase 63,597 of our common shares at a strike price of $26.73 per share.
Convertible Notes
In March 2019, as part of the Series D financing, Clever Leaves issued $27,750 aggregate principal amount of secured convertible notes (the “2022 Convertible Notes”) with a maturity date of March 30, 2022 (the “2022 Maturity Date”). The 2022 Convertible Notes initially had an interest of 8% per annum, payable quarterly in cash in arrears. The 2022 Convertible Notes were guaranteed by certain subsidiaries of Clever Leaves and were secured by pledged equity interests in certain subsidiaries. In March 2020 and June 2020, Clever Leaves and the noteholders amended the terms of the 2022 Convertible Notes, to increase the interest rate to 10% from January 1, 2020 and provided that such interest is to be paid in-kind on the 2022 Maturity Date.
On July 19, 2021, Clever Leaves prepaid the holders of the 2022 Convertible Notes and the 2022 Convertible Notes were discharged. The aggregate amount repaid by the Company was $25,115 representing the sum of (1) 90% of the aggregate outstanding principal amount owing under the 2022 Convertible Notes; (2) all accrued interest through July 19, 2021 and (3) certain legal fees.
In connection with the issuance of the 2022 Convertible Notes, Clever Leaves issued 9,509 warrants to acquire Clever Leaves common shares to one of the noteholders. The warrants were cancelled when the 2022 Convertible Notes issued to the warrant holder was repaid.
In October 2018, as part of the Series C financing, Clever Leaves issued $17,890 aggregate principal amount of noninterest bearing unsecured convertible debentures due 2021 (the “2021 Convertible Debentures”). The 2021 Convertible Debentures had a maturity date of September 30, 2021. All of the 2021 Convertible Debentures were converted into an aggregate of 2,546,670 of Class C preferred shares in March 2019.
Subsequently, in July 2021, Series D convertible notes with accrued interest were settled and the related warrants were cancelled. For more information, refer to Note 13 to the audited consolidated financial statements included within this Form 10-K.
On July 19, 2021, the Company entered into a Note Purchase Agreement with Catalina LP (the "Note Purchase Agreement") and issued a secured convertible note (the "Convertible Note") to Catalina LP (“SunStream”), an affiliate of SunStream Bancorp Inc., a joint venture initiative sponsored by Sundial Growers Inc. (Nasdaq: SNDL), pursuant to the Note Purchase Agreement in the principal amount of $25,000. The Convertible Note matures three years from the date of issuance and accrues interest from the date of issuance at the rate of 5% per annum. Interest on the Convertible Note is payable on a quarterly basis, either in cash or by increasing the principal amount of the Convertible Note, at the Company's election. The Company may, in its sole discretion, prepay any portion of the outstanding principal and accrued and unpaid interest on the Convertible Note at any time prior to the maturity date. For more information, refer to Note 12 to the audited consolidated financial statements included within this Form 10-K.
Contingencies
In the normal course of business, we receive inquiries or become involved in legal disputes regarding various litigation matters. In the opinion of management, as of December 31, 2021 any potential liabilities resulting from claims we have received would not have a material adverse effect on our consolidated financial statements.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses. We base our estimates on our historical experience, known trends and
events, and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 3 to our consolidated financial statements included in this Form 10-K, we believe that the following accounting policies are the most critical to the judgments and estimates used in the preparation of our consolidated financial statements.
Share-Based Payments
We measure all stock option awards granted to employees, non-employee directors and consultants based on the fair value on the date of grant and recognize compensation expense over the requisite estimated service period which is generally the vesting period of the respective award. The straight-line method of expense recognition is applied to all awards with service-only conditions. We account for forfeitures as they occur.
The fair value of each option grant is estimated using the Black-Scholes option-pricing model and restricted stock units, with a performance vesting condition based on risk-neutral Monte-Carlo model which requires assumptions regarding the expected volatility of our stock, the expected life of the options, an expectation regarding future dividends on our common shares, estimation of an appropriate risk-free interest rate and expected term. The assumptions used in our option-pricing model are as follows:
Expected Term. Due to the historical lack of a public market for the trading of our common shares and the lack of sufficient company-specific historical data, the expected term of employee options is calculated considering the weighted average mid-point of the vesting and expiry dates, compared to the grant date.
Expected Volatility. The expected volatility is based on our historical volatilities and that of similar entities within our industry for periods commensurate with the expected term assumption.
Risk-Free Interest Rate. The risk-free interest rate is based on the interest rate payable on U.S. Treasury securities in effect at the time of grant for a period that is commensurate with the assumed expected term.
Expected Dividends. The expected dividend yield is 0% because we have not historically paid, and do not expect for the foreseeable future to pay, a dividend on our common shares.
While assumptions used to calculate and account for share-based compensation awards represent management’s best estimates, these estimates involve inherent uncertainties and the application of management’s judgement. As a result, if revisions are made to our underlying assumptions and estimates, our share-based compensation expense could vary significantly from period to period.
Impairment calculation
We test goodwill and intangible assets for impairment annually in 4th quarter or whenever there are any impairment indicators that may negatively impact the carrying value. 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. Underperformance to the financial projections used in the impairment analysis could negatively impact the fair value of our reporting units. Additionally, the passage of time, and the availability of additional information, regarding areas of uncertainty with respect to the reporting units’ operations could cause these assumptions to change in the future.
For our intangible assets related to the Cannabinoid segment, our estimated revenue projections reflect that Decree 811 that was followed by the passing of the Regulation 227 in February 2022 is expected to be further resolved to allow us to export cannabis flower from Colombia from 2023. If further regulation around the cannabis flower export does not pass and the Company is not able to export dried flower from Colombia, our intangible assets related to the Cannabinoid section may be impaired. As of December 31, 2021, we completed our annual impairment tests for goodwill and recorded $18,508 non-cash goodwill impairment charge and no impairment was recognized related to the carrying value of any of the Company’s intangible assets as a result of the annual impairment testing.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements and notes thereto and the reports of the independent registered public accounting firm are filed as part of this Report and incorporated herein by reference.
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Tel: 604 688 542 Fax: 604 688 513 www.bdo.ca | BDO Canada LLP Suite 1100 1055 West Georgia Street Vancouver BC V6E 3P3 Canada
|
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
Clever Leaves Holdings Inc.
Boca Raton, Florida
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of financial position of Clever Leaves Holdings, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for each of years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Going Concern Uncertainty
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 2, the Company has a significant working capital deficiency, had an accumulated deficit as of December 31, 2021, 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 revenues from the sale of its available inventories. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 2018.
/s/ BDO Canada LLP
Vancouver, Canada
March 24, 2022
BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms.
BDO is the brand name for the BDO network and for each of the BDO Member Firms.
CLEVER LEAVES HOLDINGS INC.
Consolidated Statements of Financial Position
(Amounts in thousands of U.S. Dollars, except share and per share data) | | | | | | | | | | | | | | | | | |
| Note | | December 31, 2021 | | December 31, 2020 |
Assets | | | | | |
Current: | | | | | |
Cash and cash equivalents | | | $ | 37,226 | | | $ | 79,107 | |
Restricted cash | | | 473 | | | 353 | |
Accounts receivable, net | | | 2,222 | | | 1,676 | |
Prepaids, advances and other | 6 | | 2,668 | | | 3,174 | |
Other receivables | | | 2,396 | | | 1,306 | |
Inventories, net | 5 | | 15,408 | | | 10,190 | |
Total current assets | | | 60,393 | | | 95,806 | |
| | | | | |
Investment – Cansativa | 7 | | 1,458 | | | 1,553 | |
Property, plant and equipment, net of accumulated depreciation of $5,702 and $3,356 for the years ended December 31, 2021 and 2020, respectively | 11 | | 30,932 | | | 25,680 | |
Intangible assets, net | 9 | | 23,117 | | | 24,279 | |
Goodwill | 10 | | — | | | 18,508 | |
Other non-current assets | | | 260 | | | 52 | |
Total Assets | | | $ | 116,160 | | | $ | 165,878 | |
| | | | | |
Liabilities | | | | | |
Current: | | | | | |
Accounts payable | | | $ | 3,981 | | | $ | 4,429 | |
Accrued expense and other current liabilities | | | 2,898 | | | 4,865 | |
Convertible note due 2024, current portion | 12 | | 16,559 | | | — | |
Loans and borrowings, current portion | 12 | | 949 | | | 880 | |
Warrant liability | 13 | | 2,205 | | | 19,061 | |
Deferred revenue | | | 653 | | | 870 | |
Total current liabilities | | | 27,245 | | | 30,105 | |
Convertible note due 2024 | 12 | | 1,140 | | | — | |
Convertible notes due 2022 | 12 | | — | | | 27,142 | |
Loans and borrowings | 12 | | 6,447 | | | 5,821 | |
Deferred revenue | | | 1,548 | | | 1,167 | |
Deferred tax liabilities | | | 6,650 | | | 5,700 | |
Other long-term liabilities | | | 360 | | | 693 | |
Total Liabilities | | | $ | 43,390 | | | $ | 70,628 | |
Contingencies and commitments | 20 | | | | |
Shareholders’ equity | | | | | |
Preferred shares, without par value, unlimited shares authorized, nil shares issued and outstanding for each of December 31, 2021 and 2020 | 13 | | — | | | — | |
Common shares, without par value, unlimited shares authorized: 26,605,797 and 24,883,024 shares issued and outstanding as of December 31, 2021 and 2020, respectively | 13 | | — | | | — | |
Additional paid-in capital | | | 187,510 | | | 164,264 | |
Accumulated deficit | | | (114,740) | | | (69,014) | |
| | | | | |
| | | | | |
| | | | | |
Total shareholders' equity | | | 72,770 | | | 95,250 | |
Total liabilities and shareholders' equity | | | $ | 116,160 | | | $ | 165,878 | |
See accompanying notes to the consolidated financial statements
CLEVER LEAVES HOLDINGS INC.
Consolidated Statements of Operations and Comprehensive Loss
(Amounts in thousands of U.S. Dollars, except share and per share data)
| | | | | | | | | | | | | | | | | | | | |
| | | For the year ended | |
| Note | | December 31, 2021 | | December 31, 2020 | |
| | | | | | |
Revenue | 17 | | $ | 15,374 | | | $ | 12,117 | | |
Cost of sales: | | | | | | |
Cost of sales, before inventory write-down | | | (5,585) | | | (4,305) | | |
Inventory write-down | 5 | | (2,980) | | | (399) | | |
Total cost of sales | | | (8,565) | | | (4,704) | | |
Gross profit | | | 6,809 | | | 7,413 | | |
| | | | | | |
Expenses | | | | | | |
General and administrative | 14 | | 38,398 | | | 28,819 | | |
Sales and marketing | | | 3,796 | | | 2,577 | | |
Research and development | | | 1,546 | | | 1,009 | | (a) |
Goodwill impairment | 10 | | 18,508 | | | 1,682 | | |
Depreciation and amortization | 9, 11 | | 1,768 | | | 1,854 | | |
Total expenses | | | 64,016 | | | 35,941 | | |
| | | | | | |
Loss from operations | | | (57,207) | | | (28,528) | | |
| | | | | | |
Other Expense (Income), net | | | | | | |
Interest and amortization of debt issuance cost | | | 6,818 | | | 4,455 | | |
Gain on remeasurement of warrant liability | 13 | | (16,856) | | | (10,780) | | |
Loss on investments | 7 | | — | | | 464 | | |
(Gain) loss on debt extinguishment, net | 12 | | (3,262) | | | 2,360 | | |
Loss on fair value of derivative instrument | | | — | | | 657 | | |
Foreign exchange loss | | | 1,276 | | | 491 | | |
Other income, net | | | (502) | | | (284) | | |
Total other income, net | | | (12,526) | | | (2,637) | | |
| | | | | | |
Loss before income taxes and equity investment loss | | | (44,681) | | | (25,891) | | |
Deferred income tax expense | 18 | | 950 | | | — | | |
Equity investment share of loss | 7 | | 95 | | | 4 | | |
Net loss | | | $ | (45,726) | | | $ | (25,895) | | |
| | | | | | |
Net loss per share - basic and diluted | 19 | | $ | (1.78) | | | $ | (3.34) | | |
Weighted-average common shares outstanding - basic and diluted | | | 25,690,096 | | | 10,815,580 | | |
| | | | | | |
| | | | | | |
(a) The Company reclassified $1,009 research and development expenses, reported in previous period in general and development expense, to conform to the current period presentation.
See accompanying notes to the consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Consolidated Statements of Shareholders’ Equity
(Amounts in thousands of U.S. Dollars, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Note |
Common Shares | | | | Additional Paid-in Capital | | Retained Deficit | | Accumulated Deficit Other Comprehensive Income | | | | Total Shareholders’ Equity |
| | Shares | | $ | | | | | | | | | | | | | | |
Balance at December 31, 2019 | | 8,304,030 | | | $ | — | | | | | | | $ | 77,431 | | | $ | (31,933) | | | $ | 4,695 | | | | | $ | 50,193 | |
Net loss | | — | | | — | | | | | | | | | (25,895) | | | — | | | | | (25,895) | |
Stock issuance | | 2,574,374 | | | — | | | | | | | 18,087 | | | — | | | — | | | | | 18,087 | |
Share-based compensation expense | | — | | | — | | | | | | | 1,652 | | | — | | | — | | | | | 1,652 | |
Share repurchase | | (233,788) | | | — | | | | | | | (6,250) | | | — | | | — | | | | | (6,250) | |
Stock option exercise | | 88,707 | | | — | | | | | | | 20 | | | — | | | — | | | | | 20 | |
Issuance of common shares upon vesting of RSUs | | 2,989 | | | — | | | | | | | — | | | — | | | — | | | | | — | |
Share exchange, net | | 717,085 | | | — | | | | | | | | | — | | | — | | | | | — | |
Conversion of Convertible Debentures | | 984,567 | | | — | | | | | | | 9,850 | | | — | | | — | | | | | 9,850 | |
Common shares issued for exercise of warrants | | 300,000 | | | — | | | | | | | 3 | | | — | | | — | | | | | 3 | |
Conversion of the redeemable non-controlling interest | | 1,562,339 | | | — | | | | | | | 4,695 | | | — | | | (4,695) | | | | | — | |
Business combination and PIPE financing | | 10,582,721 | | | — | | | | | | | 47,794 | | | — | | | — | | | | | 47,794 | |
Accretion of Class D preferred shares to liquidation preference on automatic conversion | | — | | | — | | | | | | | 10,219 | | | (10,219) | | | — | | | | | — | |
Reclassification and other | | — | | | — | | | | | | | 763 | | | (967) | | | $ | — | | | | | (204) | |
Balance at December 31, 2020 | | 24,883,024 | | | $ | — | | | | | | | $ | 164,264 | | | $ | (69,014) | | | $ | — | | | | | $ | 95,250 | |
Net Loss | | — | | | — | | | | | | | — | | | (45,726) | | | — | | | | | (45,726) | |
Founders earnout shares vested | 13 | 570,212 | | | — | | | | | | | — | | | — | | | — | | | | | — | |
Issuance of common shares upon vesting of RSUs | | 268,895 | | | — | | | | | | | — | | | — | | | — | | | | | — | |
Exercise of warrants | 13 | 122,639 | | | — | | | | | | | 1,410 | | | — | | | — | | | | | 1,410 | |
Stock option exercise | | 40,942 | | | — | | | | | | | 10 | | | — | | | — | | | | | 10 | |
Share-based compensation expense | 15 | — | | | — | | | | | | | 11,451 | | | — | | | — | | | | | 11,451 | |
Beneficial conversion feature of Convertible Note | 12 | — | | | — | | | | | | | 4,748 | | | — | | | — | | | | | 4,748 | |
Conversions of Convertible Note to common shares | 12 | 720,085 | | | | | | | | | 6,047 | | | — | | | — | | | | | 6,047 | |
Reclassification and other | | — | | | — | | | | | | | (420) | | | — | | | — | | | | | (420) | |
Balance at December 31, 2021 | | 26,605,797 | | | $ | — | | | | | | | $ | 187,510 | | | $ | (114,740) | | | $ | — | | | | | $ | 72,770 | |
See accompanying notes to the consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
CLEVER LEAVES HOLDINGS INC.
Consolidated Statements of Cash Flows
(Amounts in thousands of U.S. Dollars) | | | | | | | | | | | | | | | | | | |
| | For the year ended | | |
| | December 31, 2021 | | December 31, 2020 | | |
Cash Flow from Operating Activities | Notes | | | | | |
Net loss | | $ | (45,726) | | | $ | (25,895) | | | |
Adjustments to reconcile to net cash used in operating activities: | | | | | | |
Depreciation and amortization | 9, 11 | 3,508 | | | 3,590 | | | |
Amortization of debt discount and debt issuance cost | | 4,227 | | | 426 | | (b) | |
Inventory write-down | 5 | 2,980 | | | 399 | | | |
Fixed Asset write-off | | 228 | | | — | | | |
Gain on remeasurement of warrant liability | 13 | (16,856) | | | (10,780) | | | |
Deferred tax | 18 | 950 | | | — | | | |
Foreign exchange loss | | 1,276 | | | 491 | | | |
Share-based compensation expense | 15 | 11,451 | | | 1,652 | | | |
Goodwill impairment | 10 | 18,508 | | | 1,682 | | | |
Loss on investment | | — | | | 319 | | | |
Loss on equity method investment, net | 7 | 95 | | | 148 | | | |
(Gain) loss on debt extinguishment, net | 12 | (3,262) | | | 2,360 | | | |
Loss on derivative instruments | | — | | | 657 | | | |
Other non-cash expense, net | | 697 | | | 3,426 | | (b) | |
Changes in operating assets and liabilities: | | | | | | |
(Increase) in accounts receivable | | (546) | | | (1,150) | | | |
Decrease in prepaid expenses | 6 | 506 | | | 118 | | | |
(Increase) in other receivables and other non-current assets | | (1,298) | | | (230) | | | |
(Increase) in inventory | 5 | (8,198) | | | (5,173) | | | |
(Decrease) increase in accounts payable and other current liabilities | | (4,197) | | | 3,198 | | | |
(Decrease) increase in accrued and other non-current liabilities | | (576) | | | 2,801 | | | |
Net cash used in operating activities | | $ | (36,233) | | | $ | (21,961) | | | |
| | | | | | |
Cash Flow from Investing Activities | | | | | | |
Purchase of property, plant and equipment | | (7,280) | | | (3,665) | | | |
Net cash used in investing activities | | $ | (7,280) | | | $ | (3,665) | | | |
| | | | | | |
Cash Flow from Financing Activities | | | | | | |
Proceeds from issuance of long-term debt | 12 | 25,000 | | | 9,737 | | | |
Repayment of debt | 12 | (26,538) | | | (4,191) | | | |
Other borrowings | | 2,917 | | | 992 | | | |
Proceeds from issuance of shares, net of issuance costs | | — | | | 18,021 | | | |
Purchase and cancellation of shares | | — | | | (6,250) | | | |
Proceeds from exercise of warrants | | 1,410 | | | — | | | |
Deferred debt issuance costs | | (965) | | | — | | | |
Stock option exercise | 15 | $ | 10 | | | $ | 20 | | | |
Business Combination and PIPE financing, net of costs paid | | $ | — | | | $ | 73,509 | | | |
Net cash provided by financing activities | | $ | 1,834 | | | $ | 91,838 | | | |
Effect of exchange rate changes on cash, cash equivalents & restricted cash | | (82) | | | 50 | | | |
(Decrease)/ increase in cash, cash equivalents & restricted cash (a) | | $ | (41,761) | | | $ | 66,262 | | | |
Cash, cash equivalents & restricted cash, beginning of period (a) | | 79,460 | | | 13,198 | | | |
Cash, cash equivalents & restricted cash, end of period (a) | | $ | 37,699 | | | $ | 79,460 | | | |
| | | | | | |
Supplemental schedule of cash flow information: | | | | | | |
Cash paid for interest | | $ | 492 | | | $ | 603 | | | |
| | | | | | |
Supplemental disclosures for non-cash activity: | | | | | | |
Conversions of debt to common shares | 12 | $ | 6,047 | | | — | | | |
Conversion of Convertible Debentures | 12 | $ | — | | | 9,850 | | | |
Non-cash exchange of redeemable non-controlling interest | 8 | $ | — | | | 4,695 | | | |
Non-cash paid-in-kind-interest | 8 | $ | 697 | | | 2,881 | | | |
Unpaid property, plant and equipment | | $ | 546 | | | — | | | |
(a) These amounts include restricted cash of $473 and $353 as of December 31, 2021 and December 31, 2020, respectively, which are comprised primarily of cash on deposits for certain lease arrangements.
(b) The Company reclassified $426 debt issuance amortization, reported in previous period in other-noncash expense, net to debt issuance amortization, to conform to the current period presentation.
See accompanying notes to the consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Notes to the 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 6501 Congress Avenue, Suite 240, Boca Raton, FL 33487.
Business Combination
On December 18, 2020 (the "Closing Date"), Clever Leaves International Inc., a corporation organized under the laws of British Columbia, Canada (“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 (the “Business Combination Agreement”), by and among SAMA, Clever Leaves, Clever Leaves Holdings Inc., a corporation organized under the laws of British Columbia, Canada (“Holdco” or the “Company”), and Novel Merger Sub Inc., a Delaware corporation (“Merger Sub”). Pursuant to the Business Combination Agreement, SAMA agreed to combine with Clever Leaves in the Business Combination that resulted in both Clever Leaves and SAMA becoming wholly-owned subsidiaries of Holdco.
Clever Leaves was deemed the accounting acquirer in the Business Combination based on an analysis of the criteria outlined in Accounting Standards Codification ("ASC") 805. This determination was primarily based on Clever Leaves’ stockholders prior to the Business Combination having a majority of the voting interests in the combined company, Clever Leaves’ operations comprising the ongoing operations of the combined company, Clever Leaves’ board of directors comprising a majority of the board of directors of the combined company, and Clever Leaves’ senior management comprising the senior management of the combined company. Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Clever Leaves’ issuing stock for the net assets of SAMA, accompanied by a recapitalization. The net assets of SAMA are stated at historical cost, with no goodwill or other intangible assets recorded.
While Holdco was the legal acquirer in the Business Combination, because Clever Leaves was deemed the accounting acquirer, the historical financial statements of Clever Leaves became the historical financial statements of the combined company upon the consummation of the Business Combination. As a result, the financial statements included in this report reflect (i) the historical operating results of Clever Leaves prior to the Business Combination; (ii) the combined results of the Company and Clever Leaves following the closing of the Business Combination; (iii) the assets and liabilities of Clever Leaves’ at their historical cost; and (iv) the Company’s equity structure before and after the Business Combination.
In accordance with applicable guidance, the equity structure has been restated in all comparative periods to reflect the number of shares of the Company's common shares, issued to Clever Leaves’ shareholders in connection with the recapitalization transaction. As such, the shares and corresponding capital amounts and earnings per share related to Clever Leaves’ convertible preferred shares and Clever Leaves’ common shares prior to the Business Combination have been retroactively restated as shares reflecting the exchange ratio of 0.3288 shares (the "Exchange Rate") established in the Business Combination Agreement. Activity within the statement of shareholders' equity for the issuances and repurchases of Clever Leaves’ convertible preferred shares were also retroactively converted to Clever Leaves’ common shares. See Note 13 for more information.
2. BASIS OF PRESENTATION
The Company's consolidated financial statements and accompanying notes are prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") and pursuant to the rules and regulations of the U.S. Securities and Exchange Commission, and include the accounts of the Company and its wholly owned subsidiaries. The financial statements of the subsidiaries are prepared for the same reporting period as the parent company. All intercompany transactions, balances, unrealized gains and losses resulting from intra-group transactions, have been eliminated.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Going Concern
These consolidated 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.
As shown in the accompanying consolidated financial statements, the Company had an accumulated deficit as of December 31, 2021, 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 revenues from the sale of its available inventories.
At December 31, 2021, the Company had cash and cash equivalents of $37,699. As of December 31, 2021, 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 through equity offerings, debt financing, or other forms of financing to meet planned growth requirements and to fund future operations, which may not be available on acceptable terms, or at all.
Impact of 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 have been 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. 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 future financial performance to continue to be impacted and result in a delay of certain of its go-to-market initiatives.
More recently, other, more infectious, variants of COVID-19 have been identified, which continue to spread throughout the U.S. and worldwide. We could be materially and adversely affected by the risks, or the public perception of the risks, related to an epidemic, pandemic, outbreak, or other public health crisis, such as the current COVID-19 pandemic. Since the onset of the global pandemic in 2020, we have been closely monitoring the spread of COVID-19 and its variants, and plan to continue taking steps to identify and mitigate the adverse impacts on, and risks to, our business posed by its spread and actions taken by governmental and health authorities to address the COVID-19 pandemic. The spread of COVID-19 caused us to modify our business practices, including implementing a temporary global work from home policy in March 2020 for all employees who were able to perform their duties remotely and temporarily restricting all nonessential business travel, and we expect to continue to take actions as may be required or recommended by government authorities or as we determine are in the best interests of our employees, the customers we serve and other business partners in light of COVID-19 and variants thereof. Where and to the extent permitted to be open under local regulations, our office sites are operational with appropriate safety precautions based on vaccination rates and local guidance. The effects of the COVID-19 pandemic continue to evolve and, at this time, we cannot predict when certain restrictions that remain in place to protect our employees and customers will no longer be needed. Recognizing that local conditions vary for our offices around the world and that the trajectory of the virus continues to be uncertain, we may adjust our plans for employees returning to our offices as deemed necessary. Since early 2021, global vaccination efforts have been underway to control the pandemic. However, due to the speed and fluidity with which the COVID-19 pandemic continues to evolve, and the emergence of highly contagious variants, we do not yet know the full extent of the impact of COVID-19 on our business operations. The ultimate extent of the impact of any epidemic, pandemic, outbreak, or other public health crisis on our business, financial condition and results of operations will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of such epidemic, pandemic, outbreak, or other public health crisis and actions taken to contain or prevent the further spread, including the effectiveness of vaccination and booster vaccination campaigns, among others. Accordingly, we cannot predict the extent to which our business, financial condition and results of operations will be affected. We remain focused on maintaining a strong
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
balance sheet, liquidity and financial flexibility and continue to monitor developments as we deal with the disruptions and uncertainties from a business and financial perspective relating to COVID-19 and variants thereof. For additional information related to the actual or potential impacts of COVID-19 on our business, please read Part I, Item 1A, "Risk Factors" of this Annual Report on Form 10-K.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its consolidated subsidiaries. The following table provides a summary of the Company’s subsidiaries and respective ownership percentage at December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | |
Subsidiaries | | Jurisdiction of incorporation | | Ownership | | | | | |
| | | | December 31, 2021 | | December 31, 2020 | | | | | |
Clever Leaves US, Inc. ("SAMA") | | Delaware, United States | | 100% | | 100% | | | | | |
NS US Holdings, Inc. | | Delaware, United States | | 100% | | 100% | | | | | |
Herbal Brands, Inc. | | Delaware, United States | | 100% | | 100% | | | | | |
1255096 B.C. Ltd. ("Newco") | | British Columbia, Canada | | 100% | | 100% | | | | | |
Northern Swan International, Inc. (“NSI”) | | British Columbia, Canada | | 100% | | 100% | | | | | |
Arizona Herbal Brands, Inc. (1) | | British Columbia, Canada | | 100% | | 100% | | | | | |
Northern Swan Management, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Clever Leaves Australia Pvt Ltd | | Australia | | 100% | | N/A | | | | | |
Northern Swan Deutschland Holdings, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Northern Swan Portugal Holdings, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Clever Leaves Portugal Unipessoal LDA | | Portugal | | 100% | | 100% | | | | | |
Clever Leaves II Portugal Cultivation SA | | Portugal | | 100% | | 100% | | | | | |
Northern Swan Europe, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Nordschwan Holdings, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Clever Leaves Germany GmbH | | Hamburg, Germany | | 100% | | 100% | | | | | |
NS Herbal Brands International, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Herbal Brands, Ltd. | | London, United Kingdom | | 100% | | 100% | | | | | |
Clever Leaves International, Inc. | | British Columbia, Canada | | 100% | | 100% | | | | | |
Eagle Canada Holdings, Inc. (“Eagle Canada”) | | British Columbia, Canada | | 100% | | 100% | | | | | |
Ecomedics S.A.S. (“Ecomedics”) | | Bogota, Colombia | | 100% | | 100% | | | | | |
Clever Leaves UK Limited | | London, United Kingdom | | 100% | | 100% | | | | | |
(1) Arizona Herbal Brands, Inc. was dissolved by way of voluntary dissolution under the Business Corporation Act on December 31, 2021.
3. SIGNIFICANT ACCOUNTING POLICIES
Use of Accounting Estimates
The preparation of these consolidated financial statements in conformity with U.S. GAAP requires management to make judgments, estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes in the reported period. 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. The information below outlines several accounting policies applied by the Company in preparing its consolidated financial statements that involve complex situations and judgment in the development of significant estimates and assumptions.
Consolidation
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The determination of whether or not to consolidate entities under U.S. GAAP requires significant judgment.
Subsidiaries are consolidated from the date of acquisition, being the date on which the Company obtains control, and continue to be consolidated until the date when such control ceases. The Company treats transactions with non-controlling interests that do not result in a loss of control as transactions with equity owners of the Company. A change in ownership interest results in an adjustment between the carrying amounts of the controlling and non-controlling interests to reflect their relative interests in the subsidiary. Any difference between the amount of the adjustment to non-controlling interests and any consideration paid or received is recognized in equity and attributable to the controlling interest.
In regard to the Company’s interests in entities that do not meet the requirements for consolidation, refer to Investments discussion later in this footnote.
Background on Amended Form 10-K for the year ended December 31, 2020
Following the Business Combination consummated on December 18, 2020, the Company had outstanding: a) 13,000,000 of public warrants (the "public warrants"), which were initially issued by SAMA in connection with its initial public offering and assumed by the Company in connection with the consummation of the transactions contemplated by the Business Combination; and b) 4,900,000 of private warrants (the "private warrants" and collectively with the public warrants, the “warrants”) issued simultaneously with the consummation of the Business Combination to Schultze Special Purpose Acquisition Sponsor, LLC (the “Sponsor”). Refer to Note 13 for more information on the warrants' terms.
The Company originally concluded that the warrants met the criteria to be classified as a component of equity. Subsequent to filing our Original Report on March 30, 2021, the staff of the U.S Securities and Exchange Commission (“SEC”) released a statement, Staff Statement on Accounting and Reporting Considerations for warrants Issued by Special Purpose Acquisition Companies (“SPACs”), on April 12, 2021 (the “SEC Statement”). After consideration of the SEC Statement, and in further consideration of the guidance in Accounting Standard Codification ("ASC") 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity, the Company concluded that the public warrants met the criteria to be classified as a component of equity. The Company concluded that a provision in the private warrants agreement, that differentiates the settlement amount if the warrant is held by a third party rather than held by the initial purchaser or a permitted transferee, precludes the private warrants from being accounted for as a component of equity. As a result, the Company determined that the private warrants should be recorded as liabilities, with the offset to additional paid-in capital, and measured at fair value at inception (on December 18, 2020) 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 a result, the Company had restated its consolidated annual financial statements as of and for the year ended December 31, 2020, filed on Form 10-K/A with the SEC on May 14, 2021. The Company recorded $29,841 in warrant liabilities, with an offset to additional paid-in-capital on December 18, 2020. Subsequent changes in fair value of the warrant liabilities, from the date of issuance through December 31, 2020, were recorded as a gain on remeasurement of warrant liabilities of $10,780 for the year ended December 31, 2020 within the consolidated statement of operations and comprehensive loss. At December 31, 2021, warrant liabilities were valued at $2,205 and for the year ended December 31, 2021, $16,856 were recorded as gain on remeasurement of warrant liabilities. For more information, refer to Form 10-K/A, filed with the SEC on May 14, 2021.
Foreign Currencies
The functional currency of the Company, and for each subsidiary, is the currency of the primary economic environment in which it operates. All figures presented in the consolidated financial statements are reflected in U.S. dollars, which is the functional currency of the Company and all of its subsidiaries.
Once the Company determines the functional currency of a subsidiary, it is consistently used unless there are significant and clear indications that the functional currency has changed in economic facts and circumstances. Previously issued financial statements are not restated for any change in the functional currency.
Any transactions not denominated in the Company’s functional currency are considered foreign currency transactions, and exchange differences arising from translation are recognized in profit or loss.
Cash and Cash Equivalents
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Cash and cash equivalents are comprised of cash balances at financial institutions and highly liquid short-term investments with original maturities of three months or less that are readily convertible into known amounts of cash. Cash and cash equivalents are stated at cost which approximates fair value. Cash and cash equivalents are primarily held in U.S. dollars, Canadian dollars, Euros, and Colombian pesos.
Restricted Cash
Restricted cash is comprised of cash on deposit for payments related to the cash on deposit for certain of the Company's lease arrangements.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents and accounts receivable. The Company limits its exposure by primarily placing its cash in accounts with high credit quality financial institutions.
Cash and cash equivalents are comprised of cash balances at financial institutions and highly liquid short-term investments with original maturities of three months or less that are readily convertible into known amounts of cash. Cash and cash equivalents are primarily held in U.S. dollars, Canadian dollars, Euros and Colombian pesos.
The Company derives its accounts receivable from revenues earned from customers. The Company bases credit decisions primarily on a customer's past credit history, before the customer is granted standard credit terms, which range from net 30 to 60 days.
As of December 31, 2021, three of the Company's customers accounted for an aggregate of approximately 43% of the Company's outstanding accounts receivable.
As of December 31, 2020, three of the Company's customers accounted for an aggregate of approximately 74% of the Company's outstanding accounts receivable.
Accounts Receivable
Accounts receivable represent payments due to the Company for previously recognized net sales, reduced by an allowance for doubtful accounts for balances which are estimated to be uncollectible at period end.
Allowance for Doubtful Accounts
The Company records it allowance for doubtful accounts based on its assessment of various factors, including historical experience, age of the accounts receivable balances, credit quality of the Company's customers, current economic conditions and other factors that may affect the customers' ability to pay. Allowance for doubtful accounts as of December 31, 2021 was $917. The Company did not record allowance for doubtful accounts as of December 31, 2020.
Prepaid Expenses, Deposits and Advances
Prepaid expenses, deposits, and advances primarily represent amounts previously paid to vendors for security deposits and supplies, leased premises, facility construction and expansion projects not yet delivered.
Other Receivables
Other receivables arise from transactions other than credit sales. The Company's other receivables primarily relate to value added taxes, other taxes and recoverable sales.
Inventories
Inventories consist of raw materials, work-in-progress, and finished goods, and are valued at the lower of cost and net realizable value. Cost is determined using the weighted average cost method. Net realizable value is equal to the estimated selling price in
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
the ordinary course of business, less estimated costs of sale or completion. Cost of inventories include all direct expenditures to get the inventory ready for sale, attributable overhead, and are determined as follows:
Raw materials
•Purchase costs on a weighted average cost basis.
•Consist of soil, fertilizers, seeds, and other supplies and consumables used in the cultivation and processing of cannabis. In addition, flavorings, sugars, vitamins, additives, and components used to manufacture finished goods including bottles, packaging, and shrink wrap are used in the production of the Company’s nutraceutical products.
Work-in-progress
•Costs of direct raw materials, labor, and attributable overhead incurred to cultivate cannabis plants, and process and develop cannabis derivatives, manufacture, handle and shipment of finished goods.
•Consist of cannabis buds currently in the propagation, vegetation, or flowering stages (i.e. cultivated cannabis), and any harvested dry cannabis to be used in the production of cannabis derivatives (i.e. harvested cannabis and extracts).
Finished goods
•Costs of direct raw materials, labor, and attributable overhead incurred based on normal operating capacity to complete finished goods.
•Consist of completed cannabis derivatives, such as cannabis oils and capsules (i.e. cannabis extracts); health and wellness supplements such as liquid and solid dose personal cleansing products, dietary supplements, and personal health care items.
The Company writes down inventory for any obsolescence during the period or when the net realizable value of inventory is less than the carrying value. These adjustments are estimates, which could vary significantly, either favorably or unfavorably, from the amounts that the Company may ultimately realize upon the disposition of inventories if future economic conditions, customer inventory levels, product discontinuances, sales return levels or competitive conditions differ from the Company’s estimates and expectations. Any inventory write-downs to net realizable value are not reversed for subsequent recoveries in value, except in cases of changes in exchange rates.
Investments
The Company determines the appropriate classification of its equity investments at the date of purchase and reevaluates the classification at the statement of financial position date. The Company measures equity instruments at fair value and recognizes any changes in fair value in its consolidated statement of operations. The Company measures equity investments without a readily determinable fair value that do not qualify for the net asset value practical expedient under Topic 820 at its cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer.
In regards to the Company’s interests in entities that do not meet the requirements for consolidation, the Company uses either the cost method of accounting whereby it records the investments at historical cost (as a policy choice in accordance with ASC 321 measurement alternative) or the equity method of accounting whereby it records its share of the underlying income or loss of these entities, as well as adjustments for basis differences. The evaluation of whether the Company exerts control or significant influence over the financial and operational policies of an entity requires judgment based on the facts and circumstances surrounding each individual entity.
Equity Method Investments
Investments are assessed to determine whether they qualify as an investment in an entity that does not represent a controlling financial interest but provides the Company with significant influence in the investee. The Company determines whether the equity investment is an in-substance common share investment in the entity. This assessment considers subordination, risks and rewards of ownership, and obligation to transfer value in determining whether risks and reward characteristics that are substantially similar to the entity’s common shares. The Company applies judgment in considering various indicators of the
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
ability to exercise significant influence over the investee, such as through ownership of 20% or more of the investee voting stock but not greater than 50%, board representation, and/or participation in the financial, operating, or governance decisions made by the investee.
Investments where the Company has the ability to exercise significant influence in the investee qualify for equity method accounting and are presented separately on the consolidated statements of financial position. The equity method investment is recognized using a cost accumulation model, based on the cost of consideration transferred and related transaction costs.
Fair Value of Financial Instruments
The Company’s financial instruments are measured and reported at fair value, which is the price receivable upon sale of an asset or payable upon transfer of a liability in the principal or most advantageous market for the asset or liability, conducted in an orderly transaction between market participants at the measurement date. Carrying amounts of certain financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable (trade and accrued liabilities) approximate their fair value, as the time between initiation and the eventual realization of their value is relatively short-term in nature. Estimates of the fair value of an asset or liability consider the unique characteristics of the asset or liability, and consider inputs such as liquidity risk, foreign exchange risk, and volatility.
The fair value hierarchy is based on the lowest level input that is significant to the fair value measurement as a whole:
•Level 1 — Based on quoted (unadjusted) market prices in active markets using observable inputs, for identical assets or liabilities;
•Level 2 — Based on inputs other than quoted prices in active markets, that is significant to the fair value measurement is directly or indirectly observable;
•Level 3 — Based on unobservable inputs, where little to no market data exists, that is significant to the fair value measurement is unobservable and thus require more assumptions by the Company.
For assets and liabilities recognized at fair value on a recurring basis, the Company reassesses categorization to determine whether changes have occurred between the hierarchy levels at the end of each reporting period.
Property, Plant and Equipment, Net
Property, plant and equipment, net is recorded at cost, net of accumulated depreciation and any accumulated impairment losses, if applicable. Attributed costs include the original cost of the item, any direct materials and labor to bring the asset into working condition, borrowing costs, and costs of replacing parts if the recognition criteria are met. All other repair and maintenance costs are recognized in the consolidated statement of operations as incurred.
Depreciation begins when the asset becomes available for use and is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
| | | | | |
| Estimated Useful Life (In Years) |
| |
Land | N/A – indefinite |
Buildings & warehouse | 2 – 40 years |
Leasehold improvements | Shorter of lease term or useful life |
Furniture and appliances | 5 years |
Agricultural equipment | 2 – 10 years |
Computer equipment | 3 years |
Laboratory equipment | 3 – 20 years |
The Company reviews the depreciation method, residual values, and useful lives of property, plant and equipment at least annually and adjusts prospectively, if appropriate.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The carrying amount of an asset and any significant part is derecognized on disposal of the asset, or when no future economic benefits are expected from its continued use. Any gain or loss arising on derecognition of the asset (equal to the difference between the net disposal proceeds and the carrying amount) is included in the consolidated statement of operations in the period of derecognition.
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. If events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable, the Company estimates the undiscounted future cash flows (excluding interest) resulting from the use of the asset and its ultimate disposition. If the sum of the undiscounted cash flows (excluding interest) is less than the carrying value, the Company recognizes an impairment loss, measured as the amount by which the carrying value exceeds the fair value of the asset. There were no impairment charges to long-lived assets during the years ended December 31, 2021 and 2020.
Borrowing costs, which consist of interest and other costs incurred by the Company in connection with the borrowing of funds, are capitalized as part of the cost of a qualifying asset if it is directly attributable to the acquisition, construction or production of the respective asset. All other borrowing costs are expensed in the period in which they are incurred.
Intangible Assets
Intangible assets include the licenses acquired as part of the acquisition of Herbal Brands and Clever Leaves through business combinations (Note 9), as well as trade name, customer relationships, contracts and customer lists. Intangible assets acquired in a business combination are initially recognized as cost at their fair value based on the present value of expected future cash flows as at the date of acquisition. After initial measurement, intangible assets are carried at cost less accumulated amortization and any accumulated impairment losses. Costs of internally developed intangible assets are not capitalized, and related expenditures are recognized in profit or loss as incurred.
Intangible assets are assessed to determine whether they have finite or indefinite useful lives, and the carrying values and remaining estimated useful lives are subject to impairment testing to determine if events or circumstances warrant a revision.
Intangible Assets with Finite Useful Lives
Intangible assets with finite lives are amortized over their respective useful economic lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The Company reviews the amortization period and the amortization method for an intangible asset with a finite useful life on an annual basis. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset is accounted for by changing the amortization period or method, as appropriate, and are treated as changes in accounting estimates to be applied prospectively. The amortization expense on intangible assets with finite lives is recognized in profit or loss. The finite lived intangible assets acquired in the Herbal Brands acquisition and the related estimated useful lives at time of acquisition were as follows:
| | | | | |
| Remaining Useful Life at the Acquisition Date (In Years) |
Finite-lived intangible assets: | |
Customer contracts | 8.7 |
Customer relationships | 4 - 7 |
Customer list | 5 |
Brand | 10 |
Amortization of finite lived intangibles is calculated on a straight–line basis over the estimated useful lives of the assets.
Intangible Assets with Indefinite Useful Lives
Intangible assets with indefinite useful lives are not amortized but are subject to impairment testing at least annually. The assessment of indefinite life is reviewed on an annual basis to determine whether the indefinite life is still appropriate. If not, the change in useful life from indefinite to finite is made on a prospective basis as a change in accounting estimate.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Intangible assets are not revalued subsequently. Intangible assets are subject to impairment testing at least annually and such test considers the estimated future cash flows expected to result from use of the intangible asset or asset group, and eventual disposal. An indefinite-life intangible asset is considered impaired if its fair value is less than its carrying amount.
Business Combinations and Goodwill
The Company accounts for an acquisition of a business using the acquisition method. When control of another entity is obtained, the Company measures the underlying transaction at fair value, and establishes the basis on which the assets, liabilities, and non-controlling interests of the acquired entity at the date of acquisition.
To be considered a business combination, the acquired entity must meet the definition of a business under Topic 805, which states that a business must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create outputs as a result of revenue-generating activities. If substantially all of the fair value of the gross assets acquired (which excludes cash and cash equivalents, deferred tax assets and any goodwill created from recognition of deferred tax liabilities) is concentrated in a single identifiable asset or group of similar identifiable assets, the set is not a business and does not require further evaluation.
The consideration transferred to the acquirer is measured at fair value at the date of acquisition, and includes assets transferred and liabilities assumed by the Company upon acquisition. The identifiable assets and liabilities that are exchanged as part of the business combination, and which meet the definition of assets and liabilities, are recognized separately from goodwill at the date of acquisition and measured on the acquisition date at their fair values. The non-controlling interest in the acquiree is initially measured at fair value, including goodwill, at the date of acquisition. Any contingent consideration transferred is initially recognized at fair value and is remeasured at fair value each period until settled, with any identified changes in fair value to be recognized in profit or loss.
Goodwill is initially measured as a residual, recognized as an asset and represents the excess of the aggregate of consideration transferred in the business combination, the amount of any non-controlling interest in the acquired, and the fair value of any previously held equity interest in the acquirer at the acquisition date, over the net of the identifiable assets acquired and liabilities assumed. In cases where the acquisition occurred as a bargain purchase, the residual deficit would be recognized in profit or loss after reassessing the values used in the acquisition accounting. If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the gain is recognized in profit or loss.
After initial recognition, goodwill is not subject to amortization but rather is tested for impairment at least annually, or when an event or change in circumstance indicates that the carrying value of the asset may not be recoverable. See Note 10 for the Company's goodwill information.
Warrant Liability
Warrants are accounted for in accordance with the applicable authoritative accounting guidance as either liabilities or as equity instruments depending on the specific terms of the agreements. Liability-classified instruments are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of warrant liabilities in the consolidated statements of operations and comprehensive loss.
2024 Note Purchase Agreement
On July 19, 2021, the Company entered into a Note Purchase Agreement with Catalina LP (the “Note Purchase Agreement”) and issued a secured convertible note (the “Convertible Note”) to Catalina LP pursuant to the Note Purchase Agreement. Based upon the overall assessment of settlement possibilities, the Company concluded that the Convertible Note is not subject to ASC 480. In order for the Convertible Note to be subjected to ASC 480, this obligation must also be the predominant settlement outcome at inception. In the case of the Convertible Note, settlement may be in cash at maturity, converted based upon the First Conversion Feature (fixed rate conversion), converted based upon the Second Conversion Feature (fixed rate conversion), or settled with a variable number of shares under the Share Redemption Feature. Consistent with the objective allowing only a “small” amount of variability in settlement value, the Company determined that in order for the Convertible Note to be subject
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
to ASC 480, there must be a 90% likelihood of settlement using a variable number of shares such that the monetary value is substantially fixed.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"). ASU 2016-02 requires lessees to recognize a lease liability and a corresponding right-of-use asset for virtually all lease contracts, as of the date on which the lessor makes the underlying asset available to the lessee. ASC 842 supersedes the lease accounting guidance in ASC 840 Leases. The effective date of this ASU 842 was delayed for two years by the issuance of ASU 2020-05. As of December 31, 2021, the Company has not adopted ASC 842. The Company will be adopting this standard on January 1, 2022.
As of December 31, 2021, the Company's currently accounts for leases under ASC 840. The Company leases its facilities under cancellable and noncancellable operating leases.
At commencement, capital leases are recorded with a leased asset and a corresponding liability at an amount equal to the lower
of the fair value of the leased assets at lease inception and the present value of the minimum lease payments (using the lower of
the lessee’s incremental borrowing rate or interest rate implicit in the lease, if known).
Operating leases do not recognize a leased asset or liability in the statement of financial position. Rather, a lessee recognizes the
operating expense in the consolidated statement of operations on a straight-line basis over the lease term.
Revenue Recognition
The Company elected to use the practical expedient prescribed by the standard and applied the standard using a portfolio approach to contracts (or performance obligations) with similar characteristics, as the Company reasonably expects that the effects on the financial statements of applying this guidance to the portfolio would not differ materially from applying this guidance to the individual contracts (or performance obligations) within that portfolio. 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.
In instances when the Company’s products are sold under consignment arrangements, the Company does not recognize revenue until control over such products has transferred to the end consumer.
The Company’s net revenues are comprised of gross revenues from sales of products less expected product returns, trade discounts and customer allowances, which include costs associated with mark-downs and other price reductions. Product returns are not material to Company net sales.
The Company incurs costs associated with product distribution, such as freight and handling costs. The Company has elected to treat these costs as fulfillment activities and recognizes these costs at the same time that it recognizes the underlying product revenue.
See Note 17 for disaggregated revenue data.
Embedded Conversion Features
The Company evaluates embedded conversion features within convertible debt under ASC 815 “Derivatives and Hedging” to determine whether the embedded conversion features should be bifurcated from the host instrument and accounted for as a derivative at fair value with changes in fair value recorded in earnings. If the conversion feature does not require derivative treatment under ASC 815, the instrument is evaluated under ASC 470-20 “Debt with Conversion and Other Options” for consideration of any beneficial conversion feature.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Share-Based Compensation
The Company grants share-based awards to employees, directors and consultants of the Company as compensation for services rendered or performance achieved. We recognize the cost of share-based awards granted to employees, directors and consultants based on the estimated grant-date fair value of the awards. The fair value is recognized as compensation expense over the requisite service period for all awards that vest. For performance-based stock options, compensation cost is recognized over the requisite service period if it is probable that the performance condition will be satisfied. Compensation costs for awards that cliff vest and for graded vesting awards based solely on service conditions are recognized on a straight-line basis. Graded vesting based on performance conditions are recognized on a ratable basis over the requisite service period using the accelerated attribution model. For restricted stock, compensation cost is recognized over the original restriction period. The Company reverses previously recognized costs for unvested options in the period that forfeitures occur. The Company's restricted stock units with a performance vesting condition were measured at fair value on its grant date using a risk-neutral Monte-Carlo simulation model. The Monte-Carlo model includes assumptions for expected term, volatility, risk free interest rate and dividend yield, each of which are determined in reference to the Company's historical results. The Company determines the fair value of the stock options using the Black-Scholes option pricing model, which are impacted by the following assumptions:
•Expected Term—Expected option term is calculated considering the weighted average mid-point of the vesting and expiry dates, compared to the grant date. The expected term used in the Monte-Carlo simulation model to determine the fair value of the market-based RSUs granted was 1.3 - 3.8 years.
•Expected Volatility—Volatility range is based on historical industry volatility at the grant date.
•Expected Dividend Yield—The dividend rate used is zero as we have never paid any cash dividends on common shares and do not anticipate doing so in the foreseeable future.
•Risk-Free Interest Rate—The interest rates used are based on USD treasury yields at the grant date, with a term to maturity matching the expected option term.
Reportable Segments
Refer to Note 17 for more information on the Company's operating segments.
Income Taxes
Current income tax assets and liabilities for the period are measured at the amount expected to be recovered from or paid to the taxation authorities and includes foreign income taxes from the Company’s operations that are consolidated, combined, for accounted for under the equity method. The tax rates and tax laws used to compute the amount are those that are enacted at the reporting date in the countries where the Company operates and generates taxable income.
Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
The Company uses the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial reporting and the tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Management makes an assessment of the likelihood that the resulting deferred tax assets will be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized.
The Company recognizes uncertain income tax positions at the largest amount that is more likely than not to be sustained upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Changes in recognition or measurement are reflected in the period in which judgment occurs.
The Company recognizes any interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying Consolidated Statements of Net Loss and Comprehensive Loss.
Net Loss Per Share
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The Company applies the two-class method to compute basic and diluted net (loss) income per share attributable to the Company's common shareholders when shares meet the definition of participating securities. The two-class method determines net loss per share for each class of the Company’s common shares and preferred shares according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires (loss) income available to common shareholders of the Company for the period to be allocated between the Company’s common shares and preferred shares based upon their respective rights to share in the earnings as if all (loss) income for the period had been distributed.
Basic net loss per share attributable to the Company shareholders is computed by dividing net loss by the weighted-average number of shares outstanding during the period without consideration of potentially dilutive common shares.
Diluted net loss per share reflects the potential dilution that could occur if securities or other contracts to issue the Company’s common shares were exercised or converted into common shares or resulted in the issuance of common shares that then shared in the earnings of the Company unless inclusion of such shares would be anti-dilutive. For periods in which the Company reports net losses, diluted net loss per common share attributable to the Company common shareholders is the same as basic net loss because potentially dilutive common shares are not assumed to have been issued if their effect is anti-dilutive.
Research and Development Costs
The Company expenses research and development ("R&D") costs as incurred. R&D includes expenditures for new products and process innovation, as well as significant technological improvements to existing products and processes. The Company's R&D expenditures primarily consist of payroll-related costs and office and general costs attributable to time spent on R&D activities. Other costs include depreciation and amortization of facilities and equipment and legal and professional fees related to R&D activities.
Reclassifications
Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year's presentation.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and Form 10-K, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes (“ASU No. 2019-12"), which is intended to simplify various aspects related to accounting for income taxes. ASU No. 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU No. 2019-12 is effective for the Company beginning January 1, 2021. The ASU has no material impact to the Company's consolidated financial statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments — Equity Securities (Topic 321), Investments — Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) (“ASU No. 2020-01”), which is intended to clarify the interaction of the accounting for equity securities under Topic 321 and investments accounted for under the equity method of accounting in Topic 323 and the accounting for certain forward contracts and purchased options accounted for under Topic 815. ASU No. 2020-01 is effective for the Company beginning January 1, 2021. The adoption of ASU did not have a material impact to the Company's consolidated financial statements.
In October 2020, the FASB issued this ASU No. 2020-09, Debt - (Topic 470) ("ASU No. 2020-09"), which clarifies, streamlines, and in some cases eliminates, the disclosures a registrant must provide in lieu of the subsidiary’s audited financial statements. The rules require certain enhanced narrative disclosures, including the terms and conditions of the guarantees and how the legal obligations of the issuer and guarantor, as well as other factors, may affect payments to holders of the debt securities. The amendments in ASU No. 2020-09 are effective January 1, 2021, and earlier compliance is permitted. The adoption of ASU did not have a material impact to the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” (“ASU 2016-02”), which establishes a new lease accounting model for lessees. The updated guidance requires an entity to recognize assets and liabilities arising from financing and operating leases, along with additional qualitative and quantitative disclosures. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842) Targeted Improvements, which provides for an optional transition method that allows for the application of current legacy guidance, including its disclosure requirements, in the comparative periods presented in the year of adoption. Otherwise, Topic 842 must be adopted by a modified retrospective method, with elective reliefs, which requires application of the new guidance for all periods presented. The Company plans to use the optional transition method when adopting the new standard. The amendments have the same effective date and transition requirements as the new lease standard. The Company will adopt this standard on January 1, 2022. While the Company expects the adoption of these standards will not result in a material increase to the reported assets and liabilities, the Company has not yet determined the full impact that the adoption of this standard will have on its condensed consolidated financial statements.
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. For available-for-sale debt securities, the Company will recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. ASU 2016-13 is effective for fiscal years beginning after December 15, 2022. Early adoption of the guidance is permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating and assessing the impact this guidance will have on its consolidated financial statements.
In August 2020, the FASB issued ASU No. 2020-06, Debt - (Topic 815) ("ASU No. 2020-06"), which simplifies an issuer’s
accounting for convertible instruments and its application of the derivatives scope exception for contracts in its own equity. The
amendments in ASU No. 2020-06 are effective for public companies, other than smaller reporting companies, for fiscal years
beginning after December 15, 2021, including interim periods within those fiscal years. For all other entities, the amendments
are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early
adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those
fiscal years. The Company is currently evaluating the effect of adopting ASU No. 2020-06.
In October 2020, the FASB issued ASU No. 2020-08, Codification Improvement — (Topic 310) ("ASU No. 2020-08"), which
clarifies that an entity should reevaluate whether a callable debt security is within the scope of paragraph ASC 310-20-35-33 for
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
each reporting period. The amendments in this ASU No. 2020-08 are effective for public companies, other than smaller
reporting companies, for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years.
For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, including interim
periods within fiscal years after December 15, 2022. Early adoption is permitted, but no earlier than fiscal years beginning after
December 15, 2020, including interim periods within those fiscal years. The Company is currently evaluating the effect of
adopting ASU No. 2020-08.
In October 2020, the FASB issued ASU No. 2020-10, Codification Improvement — (Topic Various) ("ASU No. 2020-10"), to make incremental improvements to U.S. GAAP and address stakeholder suggestions, including, among other things, clarifying that the requirement to provide comparative information in the financial statements extends to the corresponding disclosures section. The amendments in this update will be effective for public companies, other than smaller reporting companies, for fiscal years beginning after December 15, 2020. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2021, and interim periods beginning after December 15, 2022. Early adoption is permitted. As the Company is evaluating the effect of the amendments, we believe the adoption of the amendments in this update is not expected to have a material impact on our consolidated financial position and results of operation.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options ("ASU No. 2021-04"), which provides a principles-based framework to determine whether an issuer should recognize the modification or exchange as an adjustment to equity or an expense. ASU No. 2021-04 requires issuers to account for modifications or exchanges of freestanding equity-classified written call options (e.g., warrants) that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. The amendments in ASU No. 2021-04 are effective for all entities for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted for all entities, including adoption in an interim period. The Company is currently evaluating the effect of adopting ASU No. 2021-04.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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 December 31, 2021 | | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Investment – Cansativa | | — | | | — | | | 1,458 | | | 1,458 | |
Total Assets | | $ | — | | | $ | — | | | $ | 1,458 | | | $ | 1,458 | |
Liabilities: | | | | | | | | |
Loans and borrowings | | — | | | 7,396 | | | — | | | 7,396 | |
Warrant liability | | — | | | — | | | 2,205 | | | 2,205 | |
Convertible notes | | — | | | 17,699 | | | — | | | 17,699 | |
Total Liabilities | | $ | — | | | $ | 25,095 | | | $ | 2,205 | | | $ | 27,300 | |
| | | | | | | | |
As of December 31, 2020 | | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Investment – Cansativa | | — | | | — | | | 1,553 | | | 1,553 | |
Total Assets | | $ | — | | | $ | — | | | $ | 1,553 | | | $ | 1,553 | |
Liabilities: | | | | | | | | |
Loans and borrowings | | $ | — | | | $ | 6,701 | | | $ | — | | | $ | 6,701 | |
Warrant Liability | | — | | | — | | | 19,061 | | | $ | 19,061 | |
Convertible notes | | — | | | 27,142 | | | — | | | 27,142 | |
Total Liabilities | | $ | — | | | $ | 33,843 | | | $ | 19,061 | | | $ | 52,904 | |
During the years ended December 31, 2021 and December 31, 2020, there were no transfers between fair value measurement levels.
The change in fair value of warrant liabilities related to private warrants during the year ended December 31, 2021 is as follows:
| | | | | |
Private Placement Warrants: | Total Warrant Liability |
Warrant liability at December 31, 2020 | $ | 19,061 | |
Change in fair value of warrant liability | (16,856) | |
Warrant liability at December 31, 2021 | $ | 2,205 | |
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 December 31, 2021 and December 31, 2020:
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | |
| As of |
| December 31, 2021 | | December 31, 2020 |
Risk-free interest rate | 1.11 | % | | 0.43 | % |
Expected volatility | 60 | % | | 60 | % |
Share Price | $ | 3.10 | | | $ | 8.90 | |
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:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Raw materials | $ | 1,477 | | | $ | 1,148 | |
Work in progress – cultivated cannabis | 1,241 | | | 1,482 | |
Work in progress – harvested cannabis and extracts | 1,070 | | | 274 | |
Finished goods – cannabis extracts | 11,432 | | | 7,003 | |
Finished goods – other | 188 | | | 283 | |
Total | $ | 15,408 | | | $ | 10,190 | |
During the years ended December 31, 2021 and 2020, the Company recorded inventory write-down for approximately $2,980 and $399, respectively, to cost of sales to write-down obsolete inventories.
6. PREPAIDS, DEPOSITS AND ADVANCES
Prepaids and advances are comprised of the following items as of the periods presented:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| | | |
Prepaid expenses | $ | 935 | | | $ | 1,404 | |
Deposits | 47 | | | 109 | |
Other advances | 1,686 | | | 1,661 | |
Total | $ | 2,668 | | | $ | 3,174 | |
Prepayments and advances represent amounts previously paid to vendors for security deposits and supplies, leased premises, facility construction and expansion projects not yet delivered.
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
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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 3.10, (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 accounts 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, balance of Tranche 2 option expired unexercised 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 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 sales 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. Subsequent to December 31, 2021, the Company sold a portion of its share of investments in Cansativa, reducing its equity ownership to approximately 9%. See Note 22 for more information.
For the years ended December 31, 2021 and 2020, the Company’s share of net losses from the investment were $95 and $4, respectively.
8. BUSINESS COMBINATIONS
2020
Business Combination
On December 18, 2020, Clever Leaves International, Inc. ("Clever Leaves Int'l") and Schultze Special Purpose Acquisition Corp., a Delaware corporation ("SAMA") consummated the previously announced business combination (the "Business Combination") contemplated by the Amended and Restated Business Combination Agreement, dated as of November 9, 2020, by and among SAMA, Clever Leaves, Int’l, the Company and Novel Merger Sub Inc., a Delaware corporation (“Merger Sub”) (the “Business Combination Agreement”). Pursuant to the Business Combination Agreement, SAMA agreed to combine with Clever Leaves Int’l in the Business Combination that resulted in both Clever Leaves Int’l and SAMA becoming wholly-owned subsidiaries of the Company.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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 Int'l shareholders exchanged their Class A Common shares without par value of Clever Leaves Int'l (“Clever Leaves common shares”) for the Company's 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 Int'l shareholders received approximately $3,100 in cash in the aggregate (the “Cash Arrangement Consideration”), such that, immediately following the Arrangement, Clever Leaves Int'l became a direct wholly-owned subsidiary of the Company; (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 a direct wholly-owned subsidiary of the Company (the “Merger”) and, as a result of the Merger, all of the shares of SAMA common stock were converted into the right to receive the Company's common shares as set forth in the Business Combination Agreement; (iii) immediately following the consummation of the Merger, the Company contributed 100% of the issued and outstanding capital stock of SAMA (as the surviving corporation of the Merger) to Clever Leaves Int'l, such that, SAMA became a direct wholly-owned subsidiary of Clever Leaves Int'l; and (iv) immediately following the contribution of SAMA to Clever Leaves Int'l, Clever Leaves Int'l contributed 100% of the issued and outstanding shares of NS US Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of Clever Leaves Int'l, to SAMA. Upon the closing of the Merger, SAMA changed its name to Clever Leaves US, Inc.
In connection with the closing of the Business Combination, the Company's Articles were amended and restated to, among other things, provide for an unlimited number of common shares without par value, an unlimited number of non-voting common shares without par value and an unlimited number of preferred shares without par value.
In connection with the Business Combination, SAMA obtained commitments (the “Subscription Agreements”) from certain investors (the “Subscribers”) to purchase $8,881 in shares of SAMA common stock for a purchase price of $9.50 per share, in the SAMA PIPE. As part of the SAMA PIPE, certain Subscribers who were holders of the 2022 Convertible Notes agreed to purchase shares of SAMA common stock in exchange for the transfer of the PIK Notes received in satisfaction of approximately $2,881 of accrued and outstanding interest under the 2022 Convertible Notes from January 1 to December 31, 2020. Prior to the effective time of the Merger, SAMA issued an aggregate of 934,819 shares of SAMA common stock the Subscribers in the SAMA PIPE that were exchanged for our common shares, on a one-for-one basis, in connection with the Closing.
The Business Combination was accounted for as a recapitalization in accordance with U.S. GAAP. Under this method of accounting, SAMA was treated as the "acquired" company for financial reporting purposes (see Note 1). Accordingly, for accounting purposes, the Business Combination was treated as the equivalent of Clever Leaves issuing shares for the net assets of SAMA, accompanied by a recapitalization. The net assets of SAMA are stated at historical cost, with no goodwill or other intangible assets recorded.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The following table reconciles the elements of the Business Combination to the consolidated statement of cash flows and the consolidated statement of shareholders’ equity for the year ended December 31, 2020:
| | | | | |
| Recapitalization |
Cash - SAMA trust and cash, net of redemptions | $ | 86,644 | |
| |
Cash - SAMA PIPE | 6,000 | |
Non-cash PIK | (2,881) | |
Cash assumed from SAMA | 698 | |
| |
| |
Cash consideration to certain Clever Leaves shareholders | (3,057) | |
Less: transaction costs and advisory fees | (13,895) | |
Net Business Combination | $ | 73,509 | |
Non-cash PIK | 2,881 | |
Deferred issuance costs | 1,503 | |
Warrant liability | (29,841) | |
Net liabilities assumed from SAMA | (258) | |
| |
Net contributions from Business Combination | $ | 47,794 | |
See Note 13 for more information on all capital stock issuances.
9. INTANGIBLE ASSETS, NET
The Company has acquired cannabis-related licenses as part of a business combination with a gross value of approximately $19,000, which have indefinite useful lives as they are expected to generate economic benefit to the Company in perpetuity. In addition, 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 years ended December 31, 2021 and 2020 the Company recorded approximately $1,162 and $1,231, respectively, of amortization related to its finite-lived intangible assets.
The following tables present details of the Company’s total intangible assets as of December 31, 2021 and December 31, 2020.
The value of product formulation intangible asset is included in the value of Brand:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 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 | | | 487 | | | 513 | | | 3.4 |
Customer list | 650 | | | 346 | | | 304 | | | 2.3 |
Brand | 4,516 | | | 1,216 | | | 3,300 | | | 7.3 |
Total finite-lived intangible assets | $ | 7,091 | | | $ | 2,974 | | | $ | 4,117 | | | |
| | | | | | | |
Indefinite-lived intangible assets: | | | | | | | |
Licenses | $ | 19,000 | | | N/A | | $ | 19,000 | | | |
Total indefinite-lived intangible assets | $ | 19,000 | | | N/A | | $ | 19,000 | | | |
Total intangible assets | $ | 26,091 | | | $ | 2,974 | | | $ | 23,117 | | | |
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted- Average Useful Life (in Years) |
Finite-lived intangible assets: | | | | | | | |
Customer contracts | $ | 925 | | | $ | 525 | | | $ | 400 | | | 0.5 |
Customer relationships | 1,000 | | | 304 | | | 696 | | | 4.4 |
Customer list | 650 | | | 217 | | | 433 | | | 3.3 |
Brand | 4,516 | | | 766 | | | 3,750 | | | 8.3 |
Total finite-lived intangible assets | $ | 7,091 | | | $ | 1,812 | | | $ | 5,279 | | | |
| | | | | | | |
Indefinite-lived intangible assets: | | | | | | | |
Licenses | $ | 19,000 | | | N/A | | $ | 19,000 | | | |
Total indefinite-lived intangible assets | $ | 19,000 | | | N/A | | $ | 19,000 | | | |
Total intangible assets | $ | 26,091 | | | $ | 1,812 | | | $ | 24,279 | | | |
Annual Impairment Testing
In conjunction with the annual impairment testing, see Note 10, 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.
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. For our intangible assets related to the Cannabinoid segment, our estimated revenue projections reflect that Decree 811 that was followed by the passing of the Regulation 227 in February 2022 is expected to be further resolved to allow us to export cannabis flower from Colombia starting 2023.
Indefinite-lived intangible assets, consisting of certain of the Company’s licenses, were reviewed for the annual impairment assessment during the fourth quarter of 2021 similar to goodwill, in accordance with ASC 350.
For the year ended December 31, 2021 and 2020, no impairment was recognized related to the carrying value of any of the Company’s finite or indefinite-lived intangible assets as a result of the annual impairment testing.
The Company calculated the fair value of the operating segments using discounted estimated future cash flows. The weighted-average cost of capital used in testing the reporting unit for impairment was 14%, with a perpetual growth rate of 2%-3%.
2020 Interim Impairment Testing
In conjunction with the impairment testing performed as of March 31, 2020 (refer to Note 10 for more detail) the Company reviewed finite-lived intangible assets for impairment. In performing such review, the Company made judgement 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 flow. Indefinite-lived intangibles assets, consisting of certain of the Company's licenses, were reviewed as part of the impairment assessment during the first quarter 2020 similar to goodwill, in accordance with ASC 350. The Company did not recognize an impairment related to the carrying value of any of
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
the Company's finite or indefinite-lived intangible assets as a result of the impairment assessments performed as of March 31, 2020.
GNC Holdings, Inc. Bankruptcy
On June 23, 2020, GNC Holdings, Inc. (“GNC”) and its affiliates filed voluntary petitions for relief pursuant to chapter 11 of title 11 of the United States Code (the “Bankruptcy Code”) in the U.S. Bankruptcy Court for the District of Delaware. In September 2020, a bankruptcy court judge approved the sale of GNC to an investor with the transaction expected to close by the end of the year. Herbal Brands has engaged legal counsel to provide advice with respect to Herbal Brands’ rights under the Bankruptcy Code, prepare and file proof(s) of claim by the applicable bar date established by the Court, and otherwise enforce Herbal Brands’ rights in the Court and in connection with any sale transaction or plan of reorganization pursued by GNC. The Company also reviewed the unpaid inventory balances at GNC and determined that a reserve of approximately $86 was necessary for the inventory, which the Company recorded during the second quarter of 2020. Additionally, the Company reviewed the useful life of a finite-lived intangible asset related to the GNC contract, which was acquired during the Herbal Brands acquisition. Following the review, the Company determined that accelerating the period over which the useful life of this intangible asset is amortized was appropriate following its impairment analysis in the first quarter of 2020. The life of the finite lived intangible asset related to the GNC contract was reduced to 12 months from the date of the bankruptcy filing given the uncertainty around the future of GNC. During the third quarter of 2020, the Company was able to recover balances due from GNC and as a result no reserves were recorded as of December 31, 2020. In the third quarter of 2020, substantially all of the assets of GNC were sold to Harbin Pharmaceutical Group Holding Corp. Ltd., and GNC emerged from Chapter 11 of the Bankruptcy Code.
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 December 31, 2021:
| | | | | |
| Estimated Amortization Expense |
2022 | $ | 795 | |
2023 | 715 | |
2024 | 542 | |
2025 | 542 | |
2026 | 482 | |
Thereafter | 1,041 | |
Total | $ | 4,117 | |
10. GOODWILL
The following table presents the changes in goodwill by segment:
| | | | | | | | | | | | | | | | | | | | |
Cost | | Cannabinoid | | Non- Cannabinoid | | Total |
Balance at December 31, 2019 | | $ | 18,508 | | | $ | 1,682 | | | $ | 20,190 | |
Impairment | | $ | — | | | $ | (1,682) | | | $ | (1,682) | |
Balance at December 31, 2020 | | $ | 18,508 | | | $ | — | | | $ | 18,508 | |
Impairment | | (18,508) | | | — | | (18,508) |
Balance at December 31, 2021 | | $ | — | | | $ | — | | | $ | — | |
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 will perform a qualitative assessment to determine whether indicators of impairment existed, along with considering, among other factors, the financial performance, industry conditions,
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
as well as microeconomic developments. The Company also reviews goodwill for impairment whenever events or changes in circumstances indicate that the carrying value of its goodwill 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
impairment analysis.
Annual Impairment Testing
During the fourth quarter of 2021, the Company assessed whether there were events or changes in circumstances that would indicate that our goodwill was impaired. The Company performed a quantitative impairment test, including computing the fair value of the reporting units and comparing that value to its carrying value. The Company considered external and internal factors, including overall financial performance and entity-specific factors as part of the assessment. We recognized the challenge of the overall decline in the cannabinoid sector in the months preceding to December 31, 2021, combined with our stock price volatility experience and related factors and as a result the Company determined that it was more likely than not that the carrying value of its cannabinoid operating segment exceeds the fair value as of the year end testing date. Based upon the Company's annual goodwill impairment test, the Company concluded that goodwill was impaired as of the testing date of December 31, 2021. During the three months ended December 31, 2021 the Company recognized $18,508 non-cash goodwill impairment charge related to the cannabinoid segment.
The Company calculated the fair value of the operating segments using discounted estimated future cash flows. The weighted-average cost of capital used in testing the reporting unit for impairment was 14%, with a perpetual growth rate of 3%.
2020 Interim impairment Testing
As of March 31, 2020, the Company recognized the COVID-19 pandemic and its impact as a negative indicator to its business performance. As a result, the Company performed an assessment to determine whether goodwill was impaired. Based upon such assessment, the Company determined that it was more likely than not that only the carrying value of its non-cannabinoid operating segment exceeded the fair value as of March 31, 2020.
Following the results of such assessment, the Company recorded an impairment for the full carrying value of the operating segment’s goodwill carrying value. The Company calculated the fair value of the operating segment using discounted estimated future cash flows. The weighted-average cost of capital used in testing the reporting unit for impairment was 19%, with a perpetual growth rate of 2%. As a result of this interim impairment testing, the Company recognized a $1,682 non-cash goodwill impairment charge related to the non-cannabinoid operating segment in the first quarter of 2020. Following the recognition of this non-cash goodwill impairment charge, the operating segment’s goodwill was $nil.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
11. PROPERTY, PLANT AND EQUIPMENT, NET
The Company has property, plant, and equipment related to land, buildings and warehouses, leasehold improvements, laboratory, and construction in progress. Property, plant and equipment, net consisted of the following:
| | | | | | | | | | | | | | |
| | December 31, 2021 | | December 31, 2020 |
Land | | $ | 5,065 | | | $ | 5,065 | |
Building & warehouse | | 13,381 | | | 8,464 | |
Laboratory equipment | | 6,295 | | | 5,942 | |
Agricultural equipment | | 2,404 | | | 1,904 | |
Computer equipment | | 1,681 | | | 1,534 | |
Furniture & appliances | | 852 | | | 819 | |
Construction in progress (b) | | 5,709 | | | 4,288 | |
Other | | 1,247 | | | 1,020 | |
Property, plant and equipment, gross | | 36,634 | | | 29,036 | |
Less: accumulated depreciation | | (5,702) | | | (3,356) | |
Property, plant and equipment, net | | $ | 30,932 | | | $ | 25,680 | |
(a) The Company recorded total depreciation expense in the Consolidated Statement of Operations for approximately $2,346 and $2,359 in 2021 and 2020, respectively. Total depreciation for the year ended December 31, 2021 includes approximately $1,133 and $586 of depreciation, included in inventory and cost of goods sold, respectively. Total depreciation for the year ended December 31, 2020 includes approximately $1,051 and $685 of depreciation, included in inventory and costs of goods sold, respectively.
(b) Construction in progress primarily relate to on-going construction of the Company's Colombian and Portugal facilities.
12. DEBT
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Convertible Note due 2024, current portion(a) | 16,559 | | | — | |
Herbal Brands Loan due May 2023, current portion (d) | 470 | | | 880 | |
Other loans and borrowings, current portion | 479 | | | — | |
Total debt, current portion | $ | 17,508 | | | $ | 880 | |
Convertible Note due 2024 | 1,140 | | | — | |
Series D Convertible Note due March 2022 (b)(c) | — | | | 27,142 | |
Herbal Brands Loan due May 2023 (e) | 4,760 | | | 5,191 | |
Other loans and borrowings | 1,687 | | | 630 | |
Total debt, long term | $ | 7,587 | | | $ | 32,963 | |
Ending balance | $ | 25,095 | | | $ | 33,843 | |
(a)Convertible Note, current portion reflects, net of debt discount and debt issuance costs of $2,197 in 2021.
(b)Series D Convertible note, non current reflects, net of debt issuance costs of $741 in 2020.
(c)During the year ended December 31, 2021, the Company wrote off $483 of unamortized debt financing cost related to the repayment of its Series D Convertible Note due March 2022.
(d)The Company reclassified $880 current portion of Herbal Brands Loan, reported in previous period in long term debt, to conform to the
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
current period presentation.
(e)Herbal Brand's Loan, non current reflects debt issuance amortization of $410 in 2021.
Neem Holdings Convertible Note and Neem Holdings Warrants
On November 9, 2020, Clever Leaves and the Company had entered into an unsecured subordinated convertible note (the “Neem Holdings Convertible Note”) with a principal amount of $3,000 in favor of Neem Holdings, LLC (“Neem Holdings”), a shareholder of Clever Leaves. Clever Leaves was required to repay the Neem Holdings Convertible Note within 10 business days after the closing of the Business Combination, and the Company agreed to promptly satisfy this obligation in full. If the Business Combination Agreement is terminated, Clever Leaves was required to issue to Neem Holdings 194,805 fully paid and non-assessable Clever Leaves Class D preferred shares within 10 business days of termination. The Neem Holdings Convertible Note was interest free and was repaid on December 23, 2020.
In addition, the Company had issued to Neem Holdings, as part of the Neem Holdings Convertible Note, a warrant (the “Neem Holdings Warrants”) to purchase the number of common shares (the “Warrant Shares”) that would have entitled Neem Holdings to receive 300,000 common shares in the Arrangement for an aggregate purchase price of $3. The Neem Holdings Warrants were exercisable for all, but not less than all, of the Warrant Shares and expired at the earlier of (i) the date and time that the Business Combination Agreement was terminated in accordance with its terms; and (ii) the Arrangement Effective Time. The Neem Holdings Warrants were exercised prior to the Arrangement Effective Time.
The two instruments were deemed freestanding as they were legally detachable and separately exercisable. The allocation of the proceeds to the two instruments was based on their respective fair values at issuance. At the time of issuance, the Company determined that the fair value of the debt instrument was $3,000 and as a result the initial carrying amounts of Neem Holdings Convertible Note and Neem Holdings Warrants were $3,000 and $nil, respectively. Upon consummation of the Business Combination, the Company repaid the Neem Holdings Convertible Note in full and Neem Holdings exercised the Neem Holdings Warrants.
Series E Convertible Debentures
In July 2020 and in connection with its Series E fundraising, the Company had issued convertible debentures in an aggregate principal amount of $4,162 (the "Series E Convertible Debentures"). The Series E Convertible Debentures, which commenced on June 30, 2021, had a maturity date of June 30, 2023 and bear interest of 8.00% per annum. The Series E Convertible Debentures was payable semi-annually in arrears. At the discretion of the Company and in lieu of being paid to the holders of the Series E Convertible Debentures in cash, any interest accrued and payable on the Series E Convertible Debentures was allowed to be added to the outstanding principal balance of the Series E Convertible Debentures.
At any time prior to the Maturity Date or a Debenture Liquidity Event, a holder of the Series E Convertible Debentures was allowed to elect to convert the principal amount of the Series E Convertible Debentures and accrued and unpaid interest thereon into common shares of Clever Leaves, at a price per share equal to $5.95. The Series E Convertible Debentures, including any accrued and unpaid interest, willed be automatically converted into Clever Leaves common shares at a price per Clever Leaves common share equal to 70% of the price attributable to the Clever Leaves common shares upon occurrence of a Debenture Liquidity Event ("Redemption Feature"), subject to adjustment in the event of the subdivision or consolidation of the outstanding Clever Leaves common shares, the issue of Clever Leaves common shares or securities convertible into Clever Leaves common shares by stock dividend or distribution, or the issue or distribution of rights, options, or warrants to all or substantially all of the holders of Clever Leaves common shares in certain circumstances. For purposes of the Series E Convertible Debentures, a “Liquidity Event” meant (1) the listing of Clever Leaves common shares on a recognized securities exchange or market, either by way of initial public offering or direct listing, (2) any transaction whereby all of the outstanding Clever Leaves common shares are sold, transferred, or exchanged for listed securities of a resulting issuer whose equity securities are listed on recognized securities exchange or market, (3) any merger, plan of arrangement, or any other similar business combination or transaction whereby the Company merges or combines with an entity whose securities are listed for trading on a recognized securities exchange or market and all of the outstanding Clever Leaves common shares are sold, transferred or exchanged for such listed securities, or (4) any event as a result of or following which any person or group beneficially owns over an aggregate of more than 50% of the then outstanding Clever Leaves common shares or the sale or other transfer of all or substantially all of the consolidated assets of the Company. The Company incurred approximately $181 in debt issuance costs related to the Series E Convertible Debentures.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The embedded conversion feature was not deemed to be a derivative instrument and as a result no portion of the proceeds from the debt issuance were allocated to the conversion feature at issuance. The Redemption Feature within Series E Convertible Debentures was considered an embedded derivative with the debt instrument being the host instrument. Under ASC 815, redemption features such as the one in the June 2023 Convertible Debentures, which may accelerate the repayment of principal on debt would also not be considered clearly and closely related to the debt host because the debt involves a substantial premium (resulting from the 30% discount on future conversion price).
ASC 815 requires embedded derivatives that do not meet requirements for hedge accounting to be recorded as a liability at fair value in accordance with ASC 820. The fair value of the derivative was estimated at approximately $1,705, considering the conversion probability at 90%. The difference between the proceeds allocated to the hybrid debt instrument and the fair value of the embedded derivative instrument was assigned as the carrying value of the host debt instrument, which at the date of issuance was approximately $2,457.
The Business Combination qualified as a Debenture Liquidity Event and the $4,162 in Series E Convertible Debentures converted to Clever Leaves class A common shares at a conversion price of $2.303 per share, which were exchanged for Holdco common shares at the Exchange Rate. Upon redemption of the convertible debentures through conversion into and settlement in Clever Leaves class A common shares, the Company issues a total fair value of $5,950 in common shares. The Company accounted for the conversion of the Series E Convertible Debentures as a debt extinguishment and recognized a non-cash loss on extinguishment of debt $1,705 and a loss on fair value of derivative instrument of $85.
October 2020 Convertible Debenture Financing
In October 2020, the Company completed the first tranche of a financing pursuant to which it issued $1,230 aggregate principal amount of convertible debentures due September 30, 2023 (the “September 2023 Convertible Debentures”). The September 2023 Convertible Debentures mature on September 30, 2023 (the “September 2023 Maturity Date”) and bear interest of 8.00% per annum, commencing September 30, 2021, payable semi-annually in arrears. At the discretion of the Company, any interest accrued and payable in respect of the September 2023 Convertible Debentures may, in lieu of being paid to the holders of the September 2023 Convertible Debentures, be added to the principal amount outstanding under the September 2023 Convertible Debentures. Provided that no Debenture Liquidity Event has occurred, on the September 2023 Maturity Date, the principal aggregate amount of the September 2023 Convertible Debentures and the accrued and unpaid interest thereon will be payable in cash. At any time prior to the September 2023 Maturity Date or a Debenture Liquidity Event, a holder of the September 2023 Convertible Debentures may elect to convert its principal amount of the September 2023 Convertible Debentures and the accrued and unpaid interest thereon into Clever Leaves common shares, at a price per share equal to $5.95 (subject to adjustment). The September 2023 Convertible Debentures, including any accrued and unpaid interest, will be automatically converted into Clever Leaves common shares at a price per Clever Leaves common share equal to 70% of the price attributable to the Clever Leaves common shares upon occurrence of a Debenture Liquidity Event, subject to adjustment in the event of the subdivision or consolidation of the outstanding Clever Leaves common shares, the issue of Clever Leaves common shares or securities convertible into Clever Leaves common shares by stock dividend or distribution, or the issue or distribution of rights, options, or warrants to all or substantially all of the holders of Clever Leaves common shares in certain circumstances.
In November 2020 in connection with the Business Combination, certain subscribers in the SAMA PIPE signed subscription agreements with Clever Leaves to invest $1,500 in the aggregate in additional September 2023 Convertible Debentures (the “September 2023 Convertible Debenture Investment”).
The two issuances were completed very close to one another and had identical terms. The embedded conversion feature was not deemed to be a derivative instrument and as a result no portion of the proceeds from the debt issuance were allocated to the conversion feature at issuance. The redemption feature within the September 2023 Convertible Debentures was considered an embedded derivative with the debt instrument being the host instrument. The fair value of the derivative feature was estimated at approximately $570, considering the conversion probability of approximately 43%. The difference between the proceeds allocated to the hybrid debt instrument and the fair value of the embedded derivative instrument was assigned as the carrying value of the host debt instrument, which at the date of issuance was approximately $2,160. The Business Combination qualified as a Debenture Liquidity Event and the $2,730 in September 2023 Convertible Debentures converted to Clever Leaves class A common shares at a conversion price of $2.303 per share, which were exchanged for Holdco common shares at the Exchange Rate. The Company accounted for the conversion of the September 2023 Convertible Debentures as a debt extinguishment and
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
recognized a non-cash loss on extinguishment of debt of $570 and a loss on fair value of derivative instrument of approximately $600.
Series D Convertible Notes due March 2022
In March 2019 and in connection with the Company's Series D fundraising, the Company issued secured convertible notes totaling $27,750, with maturity date of March 30, 2022 (“2022 Convertible Notes”). The 2022 Convertible Notes bore interest of 8.00% per annum, payable quarterly in arrears, and were secured through collateral, guarantee, and pledge agreements signed between the Company, the noteholders, and an appointed paying and collateral agent. Specifically, the 2022 Convertible Notes were guaranteed by the Company’s subsidiaries and secured by 1,300,002 common shares of pledged equity interests in specific subsidiaries.
A noteholder could convert the principal amount, in whole or in part, at a minimum of $1,000 into common shares at a conversion price of $11 per share. The Company could issue financing securities (common shares) upon the exercise of the conversion options within each convertible notes, in part or in whole, at the option of the holder at any time or at the option of the issuer subsequent to a trigger event (i.e., a qualified IPO at greater than or equal to $13.54 per common share, or a non-qualified IPO with a 10-day trailing volume weighted average price exceeding $13.54 per common share). The Company was contractually restricted from prepaying the obligations prior to the maturity date except in the case of (1) conversion of the whole or part of the principal amount or (2) a change in control which would trigger immediate repayment in full.
In its assessment to determine the accounting treatment for the Class C Preferred Shares and 2022 Convertible Notes, the Company reviewed the guidance in ASC 480 — Distinguishing Liabilities from Equity. Based on the analysis the Company deemed that the: 1) Class C Preferred Shares meet the criteria for a freestanding equity classified instrument that are initially measured at fair value and subsequent changes to their fair are not recognized; and 2) 2022 Convertible Notes were debt-like in nature. In its assessment, the Company considered the terms and features within the hybrid instrument, including redemption consideration, the preferred shares’ cumulative dividend, voting rights, contingent and optional conversion feature, as well as the liquidation rights, prior to concluding on the classification. Following the review, no features were segregated, and no derivative instruments or beneficial conversion features were recognized. As a result, upon issuance, the Company had recognized approximately $30,258 of Class C Preferred Shares and approximately $27,750 of Series D convertible debt on its statement of financial position.
In March 2020, the Company amended certain terms of its 2022 Convertible Notes. As a result of this amendment the Company amended the 2022 Convertible Notes to provide for an increase in the rate of interest payable on the principal amount to 10% and to provide that such interest could be payable in-kind at maturity. In addition, the Company amended the restrictive covenants to allow for the creation, incurrence or assumption of certain additional debt, as well as to extend the date on which the Company was required to deliver its audited year-end financial statements. The amendments were accounted for as debt modification.
In connection with the Business Combination (Note 8) and effective on the Closing Date, Clever Leaves and the holders of the 2022 Convertible Notes agreed to amend the terms of the 2022 Convertible Notes as follows: (i) decrease the interest rate to 8%, commencing January 1, 2021, and provide that such interest is to be paid in cash, quarterly in arrears; (ii) provide for the payment of all accrued and outstanding interest from January 1, 2020 to December 31, 2020 to be made in the form of PIK Notes; to consent to the transfer of the PIK Notes to SAMA in exchange for the PIPE Shares to be issued as part of the SAMA PIPE pursuant to the terms of the Subscription Agreements; (iii) at the option of Clever Leaves, satisfy the payment of quarterly interest by issuing the Company's common shares to the noteholders, at a price per share equal to 95% of the 10-day volume weighted average trading price of the Company's common shares ending three trading days prior to the relevant interest payment date (the “10-Day VWAP”); (iv) at the option of Clever Leaves, prepay, in cash, any or all amounts outstanding under the 2022 Convertible Notes at any time without penalty; (v) at the option of Clever Leaves on each quarterly interest payment date, repay up to the lesser of (a) $2,000, or (b) an amount equal to four times the average value of the daily volume of the Company's common shares traded during the 10-Day VWAP period, of the total amounts outstanding under the 2022 Convertible Notes at such time by issuing the Company's common shares to the noteholders at a price per share equal to 95% of the 10-Day VWAP; and (vi) at the option of each noteholder, in the event, following the Merger Effective Time, Clever Leaves, the Company or any of their respective affiliates proposed to issue equity securities for cash or cash equivalents (the “Equity Financing”) (save and except for certain exempt issuances) at any time after Clever Leaves, the Company or any of their respective affiliates completes one or more equity financings raising, in aggregate, net proceeds of $25,000 (net of reasonable fees, including reasonable accounting, advisory and legal fees, commissions and other out-of-pocket expenses and inclusive of
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
net cash retained as a result of the Business Combination on the Merge Effective Time), convert an amount of principal and/or accrued interest owing under the 2022 Convertible Notes into subscriptions to purchase up to the noteholder’s pro rata share of 25% of the total securities issued under such Equity Financing on the same terms and conditions as such Equity Financing is offered to subscribers; provided, however, that if the noteholder did not elect to participate in such Equity Financing through the conversion of amounts owing under the 2022 Convertible Notes, then Clever Leaves was required to repay, in cash within five (5) business days following the closing of such Equity Financing, an amount equal to the noteholder’s pro rata share of 25% of the total net proceeds raised from such Equity Financing (collectively, the “November 2020 Convertible Amendments”). The November 2020 Convertible Amendments were accounted as debt modification. As of closing of the Business Combination, the conversion price was changed from $11 to $30.62 per share.
In connection with the November 2020 Amendments, the Required Holders (as that term is defined in the amended and restated intercreditor and collateral agency agreement, dated as of May 10, 2019, in respect of the 2022 Convertible Notes) agreed to waive Clever Leaves’ required compliance with certain restrictive covenants set forth in the 2022 Convertible Notes solely for the purposes of allowing Clever Leaves, Holdco and their affiliates to complete the Business Combination, and agreed to direct GLAS Americas LLC, as collateral agent in respect of the 2022 Convertible Notes, to further provide its consent therefor.
In accordance with the terms of the 2022 Convertible Notes and in connection with the November 2020 Amendments, Holdco, 1255096 B.C. Ltd. and SAMA (as the surviving corporation of the Merger) each entered into a guarantee agreement in favor of the collateral agent in respect of the 2022 Convertible Notes (the “Guarantees”) and became guarantors thereunder. Further, the terms of the amended and restated pledge agreement, dated as of May 10, 2019, made by Clever Leaves in favor of the collateral agent was amended such that Holdco and certain of its subsidiaries, as the case may be, in connection with the Business Combination, pledged all of the shares in the capital of each of Clever Leaves, 1255096 B.C. Ltd., SAMA (as the surviving corporation of the Merger), Northern Swan International, Inc. and NS US Holdings, Inc. to the collateral agent.
On July 19, 2021, the Company, and the holders of the secured convertible notes entered into a Payout and Release Agreement (the “Payout and Release Agreement”). Under the Payout and Release Agreement, the Company agreed, upon the closing of a financing transaction by the Company with aggregate net proceeds of at least $10,000 on or before July 31, 2021, to prepay the holders of 2022 Convertible Notes, in full satisfaction of the aggregate amounts outstanding under the 2022 Convertible Notes, an amount equal to the sum of (1) 90% of the aggregate outstanding principal amount on the 2022 Convertible Notes; (2) all accrued interest through the date of repayment and (3) certain legal fees. On July 19, 2021, the Company repaid the holders of the 2022 Convertible Notes pursuant to the Payout and Release Agreement, and the 2022 Convertible Notes were discharged. The Company considered the general extinguishment guidance in ASC 405-20 in concluding that the 2022 Convertible Notes met the threshold to be “extinguished”. In accordance with ASC 470-60, the Company evaluated the concessions received for early repayment of the 2022 Convertible Notes for Troubled Debt Restructuring (TDR) and concluded that the concessions did not fall under the TDR because the Company had not been in default on any of its existing debts and had not declared or was not in process of declaring bankruptcy. Furthermore, the Company had sufficient cash flows to service the debt and the availability to raise additional debt at that point.
The Company recorded a gain on extinguishment of debt, net of unamortized debt financing costs, for approximately $2,267, in connection with the settlement of the 2022 Convertible Notes, during the year ended December 31, 2021.
Herbal Brands Loan due May 2023
In April 2019 and in connection with the Herbal Brands acquisition, the Company entered into a loan agreement with Rock Cliff Capital under which the Company secured a non-revolving loan of $8,500 (the "Herbal Brands Loan"). The Herbal Brands Loan bears interest at 8.00% per annum, calculated based on the actual number of days elapsed, due and payable in arrears on the first day of each fiscal quarter commencing July 1, 2019. The Herbal Brands Loan is to be repaid or prepaid prior to its maturity date May 2, 2023 and requires the Company to repay, on a quarterly basis, 85% of positive operating cash flows. The Company can also choose to prepay a portion of or the full balance of the loan, subject to a fee equal to the greater of (i) zero, and (ii) $2,338, net of interest payments already paid on such prepayment date. This loan is secured by inventory, property plant and equipment and other assets as collateral.
In connection with the Herbal Brands Loan, the Company issued equity-classified warrants for Class C preferred shares to Rock Cliff Capital (the "Rock Cliff Warrants") with an initial fair value of $717, which was reflected in additional paid-in capital, with an initial expiration date of May 3, 2021. Refer to Note 13 for further details regarding the Rock Cliff Warrants.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The Herbal Brands Loan and Rock Cliff Warrants were deemed freestanding financial instruments with the loan accounted for as debt, subsequently measured using amortized cost, and the Rock Cliff Warrants, representing a written call option, accounted for as an equity-classified contract with subsequent changes in fair value not recognized as long as warrants continue to be classified as equity. Using a relative fair value method, at the time of issuance the Company recognized approximately $7,783 as loans and borrowings and approximately $717 in additional paid-in capital for the equity classified warrant.
In August 2020, the Company amended certain terms of the Herbal Brands Loan to provide for additional interest of 4.00% per annum, compounding quarterly and payable in-kind at maturity. In addition, the Company extended the expiration date of the Rock Cliff Warrants to May 3, 2023. As part of the amendment, the net debt to EBITDA covenant test is no longer required due to the occurrence of a Qualified IPO on December 18, 2020. The Company accounted for the amendment to the Herbal Brands Loan as a debt modification. Due to the extension of the warrants expiration, the Company reviewed the fair value of the options before and after the amendment, as a result the Company recognized approximately $400 of additional debt issuance costs related to the increase in the fair value of the warrants in its statement of financial position. Such costs will be amortized on a straight-line basis through the amended expiration date of the Rock Cliff Warrants.
Following the closing of the Business Combination and pursuant to the terms, the holder of the Rock Cliff Warrants can purchase 63,597 of the Company's common shares at a strike price of $26.73 per share.
For the year ended December 31, 2021 and December 31, 2020, the Company recognized interest expense of approximately $733 and $704, respectively, and repaid principal of approximately $1,495 and $1,191, respectively, of the Herbal Brands Loan in accordance with the terms of the loan agreement.
2024 Note Purchase Agreement
On July 19, 2021, the Company entered into a Note Purchase Agreement with Catalina LP (the "Note Purchase Agreement") and issued a secured convertible note (the "Convertible Note") to Catalina LP ("SunStream"), an affiliate of SunStream Bancorp Inc., a joint venture initiative sponsored by Sundial Growers Inc. (Nasdaq: SNDL), pursuant to the Note Purchase Agreement in the principal amount of $25,000. The Convertible Note matures three years from the date of issuance and accrues interest from the date of issuance at the rate of 5% per annum. Interest on the Convertible Note is payable on a quarterly basis, either in cash or by increasing the principal amount of the Convertible Note, at the Company's election. The Company may, in its sole discretion, prepay any portion of the outstanding principal and accrued and unpaid interest on the Convertible Note at any time prior to the maturity date.
The principal and accrued interest owing under the Convertible Note may be converted at any time by the holder into the Company's common shares, without par value, at a per share price of $13.50. Up to $12,500 in aggregate principal under the Convertible Note may be so converted within one year of issuance, subject to certain additional limitations.
Subject to certain limitations set forth in the Convertible Note, each of the Company and the noteholder may redeem all or a portion of the outstanding principal and accrued interest owing under the Convertible Note into common shares, at a per share price equal to the greater of (x) an 8% discount to the closing price per share on the applicable redemption date or (y) $6.44 (the “Optional Redemption Rate”). Up to $12,500 in aggregate principal under the Convertible Note may be so redeemed within one year of issuance, subject to certain additional limitations.
If the closing price per share of the Company’s common shares on the Nasdaq Capital Market is below $7.00 for 15 consecutive trading days, neither party will be permitted to redeem any portion of the Convertible Note until the closing price per common share has been above $7.00 for 15 consecutive trading days. At any time, including during the time while the holder is restricted from redeeming all or any portion of the Notes, the holder of the Convertible Note may elect to receive cash repayment of principal and accrued interest on the Convertible Note, in an amount not to exceed $3,500 in any 30 consecutive calendar day period, which amount shall be reduced to $2,000 when the principal on the Convertible Note is less than $12,500.
The holder of the Convertible Note will not be entitled to convert any portion of the Convertible Note if, after such conversion, such holder would have beneficial ownership of, and direct or indirect control or direction over, more than 9.99% of the Company’s outstanding common shares.
The Convertible Note is subject to certain events of default. The occurrence of these events of default would give rise to a 5% increase in the interest rate to a total of 10% per annum for as long as the event of default continues and give the holder of the
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Convertible Note the right to redeem the outstanding principal and accrued interest on the Convertible Note at the Optional Redemption Rate. Certain events of default also require the Company to repay all outstanding principal and accrued interest on the Convertible Note. In addition, in certain circumstances, if the Company fails to timely deliver common shares as required upon conversion or redemption of the Convertible Note, then the Company will be required to pay, on each day that such failure to deliver common shares continues, an amount in cash equal to 0.75% of the product of (x) the number of common shares the Company failed to deliver (on or prior to share delivery deadline and to which holder is entitled) multiplied by (y) any closing trading price of the common shares (selected by the Holder in writing during the period beginning on the applicable Conversion/Redemption Date and ending on the applicable Conversion/Redemption Share Delivery Deadline.) The obligations of the Company under the Note Purchase Agreement are guaranteed by certain of the Company's subsidiaries.
The Company evaluated all settlement possibilities to conclude if the Convertible Note represented an obligation under ASC 480. As of the inception of the Convertible Note, the Company analyzed whether the Share Redemption is predominant based on the likelihood the Convertible Note will settle in accordance with that particular provision, compared to the likelihood of settling under all other possibilities and determined that in order for the Convertible Note to be subject to ASC 480, there must be a 90% likelihood of settlement using a variable number of shares such that the monetary value is substantially fixed. Based upon the overall assessment of settlement possibilities, the Company concluded that the Convertible Note is not subject to ASC 480.
In connection with the 2024 Convertible Note and issuance of common shares upon Convertible Note conversions during year 2021, the Company analyzed the convertible instrument for a beneficial conversion feature in accordance with ASC 470-10 and in accordance to ASC 815. The Company determined it was not a derivative requiring liability treatment and the redemption feature was not bifurcated as a derivative liability, as it was closing related to the host. The Company concluded that during October 2021, the contingency linked to the beneficial conversion factor was met and the beneficial conversion factor with discount on debt was recognized. The Company recorded a beneficial conversion feature of $4,748 in Additional Paid in Capital. The discount created by the beneficial conversion factor was amortized from the date the contingency was met to maturity or earlier redemption date of holder's put. As a result, the Company recorded $3,519 total debt amortization, within Interest expense in the Consolidated Statement of Operations for 2021. The Conversion feature was evaluated under ASC 815 for an embedded derivative and noted that conversion features qualifies for the scope exception for instruments that are indexed to its own equity and bifurcation is not require from the host debt instrument.
The Company evaluated the guidance for Beneficial Conversion Features (BCF) per ASC 470. At the commitment date, the fair value of the shares contingently issuable upon conversion was greater than the allocated proceeds and calculated the intrinsic value of conversion feature for the amount of $9,496 which should be recognized in earnings if and when the contingencies are resolved. In establishing the accounting policy for the recognition of this contingent BCF, the Company considered that this settlement is only available to a limited portion of principal ($12,500 convertible in the first year), when price is below $7. The second half of the debt becomes convertible when the trading price falls to $7.00 during the second or third year the Convertible Note is outstanding. During the 2021, first contingency feature was resolved and BCF for $4,748 was recorded.
Additionally, the Company recorded debt issuance cost of $630 and debt discount of $335, together total of $965. The discount created by the beneficial conversion factor was amortized from the date the contingency was met to maturity or earlier redemption date of holder's put. These costs are amortized to interest expense over the life of the debt. A portion of the discount was accelerated in proportion to the extent note holder had the right to exercise contingent put to receive cash repayments on account of principal and accrued Interest.
During the year ended December 31, 2021, the Company issued a total of 720,085 common shares upon Convertible Note conversion to the noteholder of $5,559 aggregate principal amount. As of December 31, 2021, the Convertible Note's outstanding principal balance, including interest and net of debt discount and debt issuance cost was $17,699.
Subsequent to December 31, 2021, in connection with the 2024 Note Purchase Agreement, the Company issued a total of 7,000 common shares upon debt conversion to the noteholders, with a value of $15. The Company also repaid principal and accrued interest of approximately $3,500 related to the 2024 Convertible Note.
On January 13, 2022, the Company and Catalina LP entered a First Amendments to Secured Convertible Note (the "First Amendment Agreement"), amending certain terms of the original Secured Convertible Note issued by the Company to Catalina. Refer to Note 22, Subsequent Events for more information.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Other Borrowings
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. This loan is secured by our mortgaged asset. Principal will be repaid through quarterly installments of approximately €63 beginning February 28, 2022. As of December 31, 2021, the full amount borrowed was outstanding under the Portugal Debt.
Colombia Debt
During year 2021, Ecomedics S.A.S. entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,015,800 ($1,222) 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 12.20% 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. As of December 31, 2021, the outstanding principal balance was COP$4,592,095 ($1,153).
13. CAPITAL STOCK
Common Shares
As of December 31, 2020, the Company's amended and restated articles provided for an unlimited number of voting common shares without par value and an unlimited number of non-voting common shares without par value.
As of December 31, 2021 and 2020, a total of 26,605,797 and 24,883,024 common shares were issued and outstanding, respectively.
Convertible Note due July 2024
In connection with the convertible note purchase agreement, the Company issued a total of 720,085 common shares upon debt conversion to the noteholder for the year ended December 31, 2021. Refer to Note 12 for more information.
Subsequent to December 31, 2021, in connection with the 2024 Note Purchase Agreement, the Company issued a total of 7,000 common shares upon debt conversion to the noteholders, with a value of $15. The Company also repaid principal and accrued interest of approximately $3,500 related to the 2024 Convertible Note. Refer to Note 22 Subsequent Events for more information.
Preferred Shares
As of December 31, 2020, the Company's amended and restated certificate of incorporation provided for an unlimited number of preferred shares without par value. As of December 31, 2021 and 2020, the Company had no preferred shares issued and outstanding.
In April 2020 and in connection with the initial closing of the Series E fundraising, Clever Leaves issued 1,308,733 Class D convertible preferred shares ("Class D Preferred Shares") (2,015,449 shares of Holdco common share on an as-converted, post-Exchange Rate basis) at a price of $11.00 per share, resulting in gross proceeds to the Company of $14,396. In connection with the Series E fundraising, the Company granted an investor a right to cause the Company to purchase up to 711,035 Clever Leaves' Class C convertible preferred shares (the “Put Right”) (233,788 Holdco common shares on an as-converted, post-Exchange Rate basis) of the investor’s previously purchased at the investor’s original purchase price of $8.79 per share.
In April 2020, the investor exercised the Put Right in full and the Company paid the investor $6,250 in exchange for the Company’s purchase and cancellation of 711,035 Class C convertible preferred shares (233,788 Holdco common shares on an
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
as-converted, post-Exchange Rate basis). The initial closing of the Series E fundraising and the exercise of the investor's Put Right resulted in net proceeds to the Company of $7,771, inclusive of Class D Preferred Shares issuance costs of approximately $375.
In July 2020 and in connection with a subsequent closing of the Series E fundraising, the Company issued 363,636 Class D Preferred Shares (559,999 Holdco common shares on an as-converted, post-Exchange Rate basis) at a price of $11.00 per share, resulting in gross proceeds to the Company of $4,000. As part of the July 2020 portion of the Series E fundraising, three investors, in aggregate, exchanged 848,363 Clever Leaves' Class C convertible preferred shares (278,942 Holdco common shares on an as-converted, post-Exchange Rate basis) for 646,846 Class D Preferred Shares (996,143 Holdco common shares on an as-converted, post-Exchange Rate basis). Issuance costs associated with the subsequent closing of Class D Preferred Shares were immaterial.
Class D Preferred Shares vote together with the Clever Leaves common shares, and are not considered a separate class for voting purposes, except as required by law or in cases of dissolution, liquidation, windup or bankruptcy proceedings which require the consent of a majority of the shareholders of Class D Preferred Shares. The Class D Preferred Shares carries a liquidation preference (the “Class D Liquidation Preference”) of 1.4 times the original issue price of $11.00 for the one-year period following the original issue date, increasing by 0.02 times quarterly to a maximum of 1.75 times the original issue price, in each case subject to anti-dilution adjustments. The Class D Liquidation Preference is payable on a liquidation or merger with, reverse takeover of, or other business combination with, a public company, provided that such transaction does not provide for the conversion of Class D Preferred Shares into Clever Leaves common shares, or certain other deemed liquidation events (the “Class D Liquidation Event”). The Class D Preferred Shares are not redeemable but are convertible at any time, at the option of the holders, into Clever Leaves common shares on a 1:1 basis, subject to anti-dilution adjustments. Automatic conversion into Clever Leaves common shares shall occur at the applicable conversion price which takes into account the Class D Liquidation Preference in the event of (1) the holders of at least a majority of the outstanding Class D Preferred Shares consenting to such conversion, (2) an initial public offering or direct listing of Clever Leaves common shares on Nasdaq, NYSE or TSX, or (3) completion of a merger with, reverse takeover of or other business combination with a public company, provided that such transaction provides for the conversion of Class D Preferred Shares into Clever Leaves common shares (otherwise such transaction will trigger the payment of the Class D Liquidation Preference).
The Business Combination qualified as an automatic conversion and the Class D Preferred Shares were converted into 3,571,591 Holdco common shares in accordance with the terms of the agreement. As a result of this conversion, the Company recognized approximately $10,219 of non-cash accretion expense in additional paid-in capital related to the difference between the fair value and the carrying value of the Class D Preferred Shares.
Business Combination
In connection with the Business Combination, the consolidated statement of shareholders' equity has been retroactively restated to reflect the number of shares received in the Business Combination. The consolidated statement of shareholders' equity as of December 31, 2020 reflects the following transactions consummated in connection with the Business Combination in regards to outstanding instruments of Clever Leaves: (i) the conversion of the Series E Convertible Debentures to 984,567 of the Company's common shares, (ii) the conversion of the redeemable non-controlling interest of Eagle Canada, a former subsidiary of the Company, to 1,562,339 of the Company's common shares, adjusted to reflect the secondary sale of 287,564 of the Company's common shares, (iii) the automatic conversion, on a one-for-one basis, of Clever Leaves' Class C convertible preferred shares to 1,456,439 of the Company's common shares triggered by the consummation of the Business Combination, (iv) the automatic conversion, at the liquidation preference of 1.4x and conversion price per share of $3.288, of Class D Preferred Shares to 3,571,591 of the Company's common shares triggered by the consummation of the Business Combination (a Class D Liquidation Event), (v) the exercise of the warrants held by Neem Holdings, LLC for 300,000 of the Company's common shares, and (vi) the recapitalization of 1,168,421 shares and 8,486,300 shares of outstanding SAMA founders stock and SAMA common stock, respectively, to 9,654,721 of the Company's common shares.
In addition, SAMA founders received 1,140,423 common shares in exchange for their SAMA common stock as earn-out shares. Under the terms these shares would be released from escrow as follows: (i) shares constituting 50% of the common shares reserve will be released to the Sponsor if the closing price of the Company's common shares on Nasdaq equals or exceeds $12.50 per share (as adjusted for shares splits, reverse splits, stock dividends, reorganizations, recapitalizations) for any 20 trading days within any consecutive 30 trading day period on or before the second anniversary of the Closing, and (ii) shares constituting the remaining 50% of the common shares reserve will be released to the Sponsor if the closing price of the
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Company's common shares on Nasdaq equals or exceeds $15.00 per share (as adjusted for stock splits, reverse splits, stock dividends, reorganizations, recapitalizations) for any 20 trading days within any consecutive 30 trading day period on or before the fourth anniversary of the Closing. As of December 31, 2020, the shares were legally outstanding, however since none of the performance conditions were met, no shares were included in the Company's statement of shareholders equity.
The condition for the first 50% of the shares reserve was met in the three months ended March 31, 2021, and therefore 570,212 shares are included in the Company's statement of shareholders equity. Since then, the performance condition for the remaining 50% of the common shares reserves has not been met, therefore no additional shares were released from escrow.
Warrants
As of December 31, 2021, excluding the Rock Cliff warrants, 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 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.
For the year ending December 31, 2021, the Company received total proceeds of $1,410 from the exercise of 122,639 of its public warrants by their holders.
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. Refer to Note 3 for valuation of warrants.
As of December 31, 2021, the Company performed a valuation of the private warrants and as a result recorded a net gain on remeasurement for the twelve months ended December 31, 2021, of $16,856 in its statement of operations.
Series D Convertible Notes due March 2022
In connection with the issuance of the 2022 Convertible Notes, the Company issued 9,509 warrants to acquire Clever Leaves common shares to one of the note holders. The warrants vest when the 2022 Convertible Notes issued to the warrant holder is converted into shares and expire on March 30, 2023. The warrants were cancelled in July 2021 upon repayment of the 2022 Convertible Notes. Refer to Note 12 for more information.
Herbal Brands Acquisition
In April 2019, the Company issued the Rock Cliff Warrants to purchase 193,402 Clever Leaves Class C convertible preferred shares on a 1:1 basis, at a strike price of $8.79 per share. The fair value of the Rock Cliff Warrants was $717. The warrants can be exercised in part or in whole at any time prior to the expiration date of May 3, 2021, and are not assignable, transferable, or negotiable. The equity classified warrants are amortized to interest expense over the life of the debt. During the year ended December 31, 2021, the Company amortized $410 to interest expense.
In August 2020 and in connection with the Company's modification to the Herbal Brands Loan, the Company extended the expiration date of the Rock Cliff Warrants to May 3, 2023. Following the closing of the Business Combination and pursuant to the terms, the holder of the Rock Cliff Warrants can purchase 63,597 of the Company's common shares at a strike price of $26.73 per share.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Neem Holdings Warrants
In November 2020, Clever Leaves issued to Neem Holdings Warrants to purchase the number of Clever Leaves common shares that would entitle Neem Holdings to receive 300,000 Holdco common shares. Warrants were exercisable for all, but not less than all, of the Warrant Shares and expire at the earlier of (i) the date and time that the Business Combination Agreement is terminated in accordance with its terms; and (ii) the Closing Date. Following the successful closing of the Business Combination Agreement, Neem Holdings exercised their right and as a result the Company issued 300,000 Holdco common shares for an aggregate purchase price of $3. Refer to Note 12 for more information on the Neem Holdings Convertible Note.
14. GENERAL AND ADMINISTRATION
The components of general and administrative expenses were as follows:
| | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 |
| | | |
Salaries and benefits | $ | 14,309 | | | $ | 13,354 | |
Office and administration | 5,024 | | | 3,319 | |
Professional fees | 6,227 | | | 6,985 | |
Share based compensation | 11,451 | | | 1,652 | |
Rent | 1,082 | | | 1,700 | |
Other (a) | 305 | | | 1,809 | |
Total | $ | 38,398 | | | $ | 28,819 | |
(a) The Company reclassified $1,009 research and development ("R&D") expenses, reported in previous period in other general & administrative expense to R&D expense, as presented on the Consolidated Statements of Operations, to conform to the current period presentation.
15. SHARE-BASED COMPENSATION
Northern Swan Holdings, Inc. 2018 Omnibus Incentive Compensation Plan
The Northern Swan Holdings, Inc. 2018 Omnibus Incentive Compensation Plan, as amended (the “2018 Plan”) provides for the Company to grant incentive stock options, nonqualified stock options, restricted share units ("RSUs") and other share-based awards to its employees, directors, officers, outside advisors and non-employee consultants. The 2018 Plan was terminated as of December 18, 2020 in respect of future grants of awards and issuances and distributions of common shares, other than issuances of common shares upon the exercise of options or the vesting of RSUs granted under the 2018 Plan that were outstanding on December 18, 2020.
As of December 31, 2020, the Company had reserved 4,500,000 common shares for issuance to its employees, directors, outside advisors and non-employee consultants pursuant to the 2018 Plan Unless otherwise provided, at the time of grant, the options issued pursuant to the 2018 Plan expire ten years from the date of grant and generally vest over four years, with 25% of the award vesting in four equal installments. As of December 31, 2020, no new awards will be issued under the 2018 Plan.
Clever Leaves Holdings Inc. 2020 Incentive Award Plan
In connection with the Business Combination, the Company adopted the Clever Leaves Holdings Inc. 2020 Incentive Award Plan (the “2020 Plan”) which provides for the Company to grant incentive stock options, nonqualified stock options, RSUs and other shares-based awards to its employees, directors, officers, outside advisors and non-employee consultants.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Under the 2020 Plan, the Company had reserved 2,813,215 common shares for issuance to its employees, directors, outside advisors and non-employee consultants. Unless otherwise provided, at the time of grant, the options and RSUs issued pursuant to the 2020 Plan generally expire ten years from the date of grant and generally vest over four years, with 25% of the award vesting in four equal installments. As of December 31, 2021 and December 31, 2020, 2,378,365 and 2,813,215 common shares, respectively, were available for future grants of the Company’s common shares under the 2020 Incentive Award Plan.
Subsequent to December 31, 2021, the Company granted 1,741,659 RSUs to its management, employees, and outside advisors available under the 2020 Incentive Award Plan. The vesting period of these grants range from 1 to 4 years. Please refer to Note 22 for more details.
Clever Leaves Holdings Inc. 2020 Earnout Award Plan
In connection with the Business Combination, the Company adopted the Clever Leaves Holdings Inc. 2020 Earnout Award Plan (the “Earnout Plan”). The purpose of the Earnout Plan is to provide equity awards following the closing of the Business Combination to certain directors, employees and consultants that have contributed to the Business Combination. Under the Earnout Plan, (i) shares constituting 50% of the share reserve were to be issuable only if the closing price of the Company's common shares on Nasdaq equals or exceeds $12.50 per share (as adjusted for shares splits, reverse splits, stock dividends, reorganizations, recapitalizations or any similar event) for any 20 trading days within any consecutive 30 trading day period on or before the second anniversary of the closing (which condition was met on March 16, 2021), and (ii) shares constituting the remaining 50% of the share reserve will be issued only if the closing price of the Company's common shares on Nasdaq equals or exceeds $15.00 per share (as adjusted for stock splits, reverse splits, stock dividends, reorganizations, recapitalizations or any similar event) for any 20 trading days within any consecutive 30 trading day period on or before the fourth anniversary (December 18, 2024) of the closing. Equity awards granted prior to these hurdles being met will vest only if the applicable hurdles are achieved; equity awards granted following the hurdles being achieved need not include the hurdles. In addition, the Company’s board of directors may choose to impose additional vesting conditions.
The 2018 Plan, 2020 Plan, and Earnout Plan are administered by the Company’s board of directors or, at the discretion of the Company’s board of directors, by a committee thereof. The exercise prices, vesting and other restrictions are determined at the discretion of the Company’s board of directors, or its committee if so delegated. The Company’s board of directors values the Company’s common shares, taking into consideration the most recently available valuation thereof performed by third parties, as well as additional factors which may have changed since the date of the most recent contemporaneous valuation through the date of grant.
As of December 31, 2021 and December 31, 2020, 35,602 and 1,440,000 common shares, respectively, were available for future issuance under the 2020 Earnout Award Plan.
Share-Based Compensation Expense
The following table summarizes the Company's share-based compensation expense for each of its awards, included in the Consolidated Statement of Operations:
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
| | | |
Share-based compensation award type: | | | |
Stock Options | 1,293 | | | 1,366 | |
RSUs | 10,158 | | | 286 | |
Total Shared Based Compensation Expense | 11,451 | | | 1,652 | |
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The Company recognized share-based compensation expense in general and administrative expenses.
Share-Based Award Valuation
The following table presents the weighted average assumptions used in the Black-Scholes Merton option pricing model to determine the fair value options granted during the periods presented:
| | | | | | | | |
| Weighted Average Assumptions |
| December 31, 2021 | December 31, 2020 |
Risk-free interest rate | 0.78% - 1.09% | 0.22% - 0.41% |
Expected dividend yield | 0.0% | 0.0% |
Expected volatility | 75% to 90% | 85% to 90% |
Expected life (in years) | 5.00 - 6.25 | 0.14 - 5.00 |
Stock Options
The following table summarizes the Company’s stock option activity during the twelve months ended December 31, 2021 and 2020: | | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
Balance as at December 31, 2019 | 1,195,544 | | | $ | 14.18 | | | 3.21 | | $ | 3,194 | |
Granted | 121,291 | | | $ | 6.71 | | | 3.64 | | $ | — | |
Exercised | (88,706) | | | $ | 0.24 | | | — | | | $ | 705 | |
Forfeited | (331,241) | | | $ | 11.86 | | | — | | | $ | — | |
Balance as at December 31, 2020 | 896,888 | | | $ | 5.22 | | | 3.96 | | $ | 2,889 | |
Granted | 64,736 | | | $ | 13.81 | | | 9.23 | | |
Exercised | (40,942) | | | $ | 0.24 | | | — | | | $ | 434 | |
Forfeited | (46,830) | | | $ | 10.65 | | | — | | | $ | — | |
Expired | (89,659) | | | $ | 9.43 | | | — | | | $ | — | |
Balance as at December 31, 2021 | 784,193 | | | $ | 5.91 | | | 3.68 | | $ | — | |
Vested and expected to vest as at December 31, 2021 | 772,912 | | | $ | 5.85 | | | 3.69 | | $ | — | |
Vested and exercisable as at December 31, 2021 | 496,830 | | | $ | 5.83 | | | 3.61 | | $ | — | |
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 weighted-average grant-date fair value per share of stock options granted during the years ended December 31, 2021 and 2020 was $9.97 and $2.02, respectively.
The share-based compensation expense related to unvested stock options awards not yet recognized as of December 31, 2021and 2020 was $1,414 and $2,276, respectively, which is expected to be recognized over a weighted average period of 1.4 years and 1.9 years respectively.
Restricted Share Units
Time-based Restricted Share Units
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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 changed in the Company’s time-based restricted share unit activity during the twelve months ended December 31, 2021 and 2020:
| | | | | | | | | | | |
| Restricted Share Units | | Weighted-Average Grant Date Fair Value |
Unvested as of December 31, 2019 | — | | | $ | — | |
Granted | 83,715 | | | $ | 3.25 | |
Vested | (2,989) | | | $ | 3.25 | |
Canceled/forfeited | (2,092) | | | $ | 3.25 | |
Unvested as of December 31, 2020 | 78,634 | | | $ | 3.25 | |
Granted | 592,213 | | | 12.61 | |
Vested | (151,000) | | | 13.86 | |
Canceled/forfeited | (17,146) | | | 7.86 | |
Unvested as of December 31, 2021 | 502,701 | | | $ | 10.93 | |
The stock-based compensation expense related to unvested time-based restricted share units not yet recognized as of December 31, 2021 and 2020 was $4,708 and $521, respectively, which is expected to be recognized over a weighted average period of 2.4 years and 1.3 years respectively.
Market-based Restricted Share Units
During the year ended December 31, 2021, the Company granted RSUs with both market conditions and a service condition (market-based RSUs) to the Company's employees under the Earnout Plan. The market-based condition for these awards requires that (i) the Company's common share 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 condition was met on March 16, 2021) or (ii) the Company's common share 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 RSUs will vest in four equal annual installments on the applicable vesting date. The RSUs with the closing-price condition of $12.50 or more was met in the twelve months ended December 31, 2021.
The following table represents the weighted-average assumptions used in the Monte Carlo simulation model to determine the fair value of the market-based restricted share units granted during the twelve months ended December 31, 2021.
| | | | | | |
| Weighted Average Assumptions |
| December 31, 2021 | |
Grant date share price | $13.68 | |
Risk-free interest rate | 0.52% | |
Expected dividend yield | 0.0% | |
Expected volatility | 90% | |
Expected life (in years) | 1.3 - 3.8 | |
The following table summarizes the change in the Company's market-based restricted share units activity during the twelve months ended December 31, 2021.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | |
| Restricted Share Units | | Weighted-Average Grant Date Fair Value |
Unvested as of December 31, 2020 | — | | | $ | — | |
Granted | 1,256,785 | | | 13.06 | |
Vested | (117,895) | | | 13.91 | |
Canceled/forfeited | (65,559) | | | 13.53 | |
Unvested as of December 31, 2021 | 1,073,331 | | | $ | 12.94 | |
There was no market-based RSUs activity during the twelve months ended December 31, 2020.
The share-based compensation expense related to unvested market-based RSUs not yet recognized as of December 31, 2021 was $8,462, which is expected to be recognized over a weighted average period of 3.1 years.
16. REVENUE
Disaggregation of Revenue
See Note 17 Segment Reporting for disaggregation of revenue data.
Contract Balances
The timing of revenue recognition, billing and cash collections results in billed accounts receivable, 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 December 31, 2021, the Company's deferred revenue, included in current liabilities and non-current was $653 and $1,548, respectively.
As of December 31, 2020, the Company's deferred revenue, included in current liabilities and non-current was $870 and $1,167, respectively.
17. 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.
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 to consolidated income 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
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Company’s CEO. Segment goodwill and other intangible assets, net, are disclosed in Note 10 Goodwill and Note 9 Intangible Assets, respectively.
As of December 31, 2021 and 2020, the Company’s operations were organized in the following two reportable segments:
1.The Cannabinoid operating segment: comprised of the Company’s cultivation, extraction, 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, 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.
The following table is a comparative summary of the Company’s net sales and segment profit for by reportable segment for the periods presented:
| | | | | | | | | | | | | | | | | |
| | | Year ended |
| | | | December 31, 2021 | | December 31, 2020 |
Segment Net Sales: | | | | | | | |
Cannabinoid | | | | | $ | 3,242 | | | $ | 2,511 | |
Non-Cannabinoid | | | | | 12,132 | | | 9,606 | |
Total Net Sales | | | | | 15,374 | | | 12,117 | |
| | | | | | | |
Segment Profit (Loss): | | | | | | | |
Cannabinoid | | | | | (16,915) | | | (18,798) | |
Non-Cannabinoid | | | | | 2,631 | | | 1,863 | |
Total Loss | | | | | $ | (14,284) | | | $ | (16,935) | |
| | | | | | | |
Reconciliation: | | | | | | | |
Total Segment Loss | | | | | (14,284) | | | (16,935) | |
Unallocated corporate expenses | | | | | (11,196) | | | (6,405) | |
Non-cash share based compensation | | | | | (11,451) | | | (1,652) | |
Depreciation and amortization | | | | | (1,768) | | | (1,854) | |
Goodwill impairment | | | | | (18,508) | | | (1,682) | |
Loss from operations | | | | | $ | (57,207) | | | $ | (28,528) | |
| | | | | | | |
(Gain) loss on debt extinguishment, net | | | | | (3,262) | | | 2,360 | |
Gain on remeasurement of warrant liability | | | | | (16,856) | | | (10,780) | |
Loss on fair value of derivative instrument | | | | | — | | | 657 | |
Loss on investments | | | | | — | | | 464 | |
Foreign exchange loss | | | | | 1,276 | | | 491 | |
Interest expense | | | | | 6,818 | | | 4,455 | |
Other income, net | | | | | (502) | | | (284) | |
Loss from operations before income taxes and equity investment loss | | | | | $ | (44,681) | | | $ | (25,891) | |
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:
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | | | | | | | |
| Percentage of Revenues | | Percentage of Accounts Receivable |
| December 31, | | December 31, |
| 2021 | 2020 | | 2021 | 2020 |
Customer A (a) | * | * | | * | 40% |
Customer B (a) | * | * | | * | 23% |
Customer C (b) | 17 | % | 21 | % | | 25% | 11% |
Customer D (a) | * | * | | 18% | * |
* denotes less than 10%
(a) net sales attributed are reflected in the cannabinoid segments
(b) net sales attributed are reflected in the non-cannabinoid segments
During 2021 and 2020, 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 Colombia, Israel, Brazil and Australia.
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
Long-lived assets | | | |
Cannabinoid | $ | 30,709 | | | $ | 25,485 | |
Non-Cannabinoid | 216 | | | 176 | |
Other(a) | 7 | | | 19 | |
| $ | 30,932 | | | $ | 25,680 | |
____________
(a)“Other” includes long-lived assets primarily in the Company’s corporate offices.
Long-lived assets consist of non-current assets other than goodwill; intangible assets, net; deferred tax assets; investments in unconsolidated subsidiaries and equity securities; and financial instruments. The Company’s largest markets in terms of long-lived assets are Colombia and Portugal.
The following table disaggregates the Company’s revenues by channel for the for the periods presented:
| | | | | | | | | | | | | | | | | |
| | | Year ended |
| | | | | December 31, 2021 | | December 31, 2020 |
Mass retail | | | | | $ | 8,070 | | | $ | 6,879 | |
Distributors | | | | | 5,835 | | | 4,036 | |
Specialty, health and other retail | | | | | 945 | | | 689 | |
E-commerce | | | | | 524 | | | 513 | |
| | | | | $ | 15,374 | | | $ | 12,117 | |
18. INCOME TAX
Income tax recognized in the statement of operations:
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 |
Current tax | | | |
Current tax expense in respect of the current year | $ | — | | | $ | — | |
| | | |
Deferred tax | | | |
Deferred tax expense (recovery) in the current year | 950 | | | — | |
Total income tax expense recognized in the current year | $ | 950 | | | $ | — | |
The reconciliation of income tax expense attributable to loss before income taxes differs from the amounts computed by applying the combined federal and provincial combined tax rate of 27% (2020 — 27%) of pre-tax loss as a result of the following:
| | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 |
Net loss before income tax | $ | (44,681) | | | $ | (25,891) | |
Expected federal income tax recovery calculated at 27% (a) | (12,064) | | | (6,992) | |
Effect of income/expenses, net, that are not (taxable)/deductible (permanent differences) in determining taxable profit | 3,493 | | | (1,454) | |
Tax rates differences applicable to foreign subsidiaries | (708) | | | (143) | |
Adjustments related to prior years | 0 | | 958 | |
Change valuation allowance | 7,988 | | | 8,009 | |
Foreign exchange | 1,226 | | | (378) | |
Changes in tax rates | 950 | | | — | |
Other | 65 | | | — | |
Income tax expense | $ | 950 | | | $ | — | |
(a)Due to the substantial alignment of the taxable income base between Canada and its provinces, the combined federal and provincial rate has been used as the reconciliation rate.
The following net deferred tax assets are not recognized in the consolidated financial statements due to the unpredictability of future income as of the periods presented:
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | |
| Year ended |
| December 31, 2021 | | December 31, 2020 |
Deferred tax asset (liability) | | | |
Non-capital losses carry forward | $ | 24,139 | | | $ | 18,436 | |
Capital losses carryforward | 98 | | | 98 | |
Other | 3,765 | | | 1,697 | |
Property, plant and equipment | 595 | | | 279 | |
Intangibles | 581 | | | 441 | |
Deferred tax assets | $ | 29,178 | | | $ | 20,951 | |
Valuation allowance | (28,513) | | | (20,525) | |
Intangible assets | (6,650) | | | (5,700) | |
Other | (665) | | | (426) | |
Net deferred tax liability | $ | (6,650) | | | $ | (5,700) | |
As at December 31, 2021, the Company has operating losses, which may be carried forward to apply against future year’s income tax for income tax purposes, subject to final determination by taxation authorities and expiring as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Canada | | United States | | Colombia | | United Kingdom | | Portugal | | Germany | | Total |
| | | | | | | | | | | | | |
2030 | $ | — | | | $ | — | | | $ | 2,689 | | | $ | — | | | $ | — | | | $ | — | | | $ | 2,689 | |
2031 | — | | | — | | | 12,395 | | | — | | | 1,909 | | | — | | | $ | 14,304 | |
2032 | — | | | — | | | 6,135 | | | — | | | 4,088 | | | — | | | $ | 10,223 | |
2033 | — | | | — | | | 7,591 | | | — | | | 4,159 | | | — | | | $ | 11,750 | |
2037 | — | | | 641 | | | — | | | — | | | — | | | — | | | $ | 641 | |
2038 | 117 | | | — | | | — | | | — | | | — | | | — | | | $ | 117 | |
2039 | 1,058 | | | — | | | — | | | — | | | — | | | — | | | $ | 1,058 | |
2040 | 11,605 | | | — | | | — | | | — | | | — | | | — | | | $ | 11,605 | |
2041 | 9,297 | | | — | | | — | | | — | | | — | | | — | | | $ | 9,297 | |
Indefinite | — | | | 13,520 | | | — | | | — | | | — | | | 9,103 | | | $ | 22,623 | |
Total | $ | 22,077 | | | $ | 14,161 | | | $ | 28,810 | | | $ | — | | | $ | 10,156 | | | $ | 9,103 | | | $ | 84,307 | |
Should all of the deferred tax assets be recognized as an asset in the future, approximately $390 of the benefit would be credited to share capital. Due to the losses sustained by the Company in the current and prior periods, no amount of deferred tax related to investments in subsidiaries has been recognized.
Uncertain Tax Benefits
The Company has recorded no provisions for, or reserved amounts related to unrecognized deferred tax assets in respect of, uncertain tax benefits during calendar year December 31, 2021 and 2020. The Company did not record any expenses related to interest or penalties related to income taxes during calendar year December 31, 2021 and 2020. All years since the incorporation of the Company and its subsidiaries remain open to be audited by tax authorities.
19. NET 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 loss per share when their effect is dilutive.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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:
| | | | | | | | | | | |
| Year Ended |
| December 31, 2021 | | December 31, 2020 |
Numerator: | | | |
Net loss | $ | (45,726) | | | $ | (25,895) | |
Adjustments to reconcile to net loss available to common stockholders: | | | |
Accretion of Class D preferred shares to liquidation preference on automatic conversion | — | | | 10,219 | |
| | | |
Net loss — basic and diluted | $ | (45,726) | | | $ | (36,114) | |
| | | |
Denominator: | | | |
Weighted-average common shares outstanding - basic and diluted | 25,690,096 | | | 10,815,580 | |
| | | |
Net loss per common share - basic and diluted | $ | (1.78) | | | $ | (3.34) | |
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 at December 31, 2021 and 2020, from the computation of diluted net loss per share attributable to common shareholders because including them would have had an anti-dilutive effect:
| | | | | | | | | | | |
| December 31, 2021 | | December 31, 2020 |
| | | |
Common stock warrants | 17,840,951 | | | 17,963,591 | |
SAMA earnout shares | 570,211 | | | 1,140,423 | |
Stock options | 784,193 | | | 896,888 | |
Unvested restricted share units | 1,576,031 | | | 78,634 | |
Total | 20,771,386 | | | 20,079,536 | |
20. CONTINGENCIES AND COMMITMENTS
The Company is involved in various legal claims and actions arising in the normal course of the Company’s operations. Although the outcome of these claims cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on the Company’s financial position, cash flows or results of operations.
Lease Commitments
The Company and its subsidiaries lease its office facilities and cannabis related facilities in the United States and Colombia under non-cancellable operating lease agreements.
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Undiscounted future minimum annual lease payments for the next five years and thereafter are as follows:
| | | | | | | | |
Lease Commitments | | |
2022 | | $ | 1,910 | |
2023 | | 1,562 | |
2024 | | 845 | |
2025 | | 337 | |
2026 | | 152 | |
Thereafter | | 286 | |
Total | | $ | 5,092 | |
Purchase Commitments
The Company does not have any commitments to purchase raw materials at specific prices under any supplier contracts. Additionally, the Company is committed to pay approximately $2,350 for insurance coverage. In 2020, the Company was committed to pay approximately $2,800 for insurance coverage. See Note 12 for information on the Company's debt obligations.
21. RELATED PARTY TRANSACTIONS
The Company entered into a guaranty (the “Guaranty”) in favor of Rock Cliff on May 3, 2019 in connection with the Herbal Brands Loan to its subsidiary Herbal Brands, Inc. The Guaranty was a condition of the Herbal Brands Loan, which enabled the Herbal Brands acquisition. Pursuant to the Guaranty, the Company guaranteed Herbal Brands’ payment obligations under the Herbal Brands Loan and related loan documents, including the payment of the $8,500 principal amount of the Herbal Brands Loan, the interest at the 8% rate, as well as the payment of Rock Cliff ’s related out-of-pocket fees and expenses.
As part of the Herbal Brands acquisition financing, the Company also issued warrants to Rock Cliff, to purchase 193,402 Class C preferred shares of Clever Leaves on a 1:1 basis, at a strike price of $8.79 per share, with a relative fair value of approximately $717. The warrants can be exercised in part or in whole at any time prior to the expiration date of May 3, 2023, and are not assignable, transferable, or negotiable. Following the closing of the Business Combination and pursuant to the terms, the holder of the Rock Cliff Warrants can purchase 63,597 of the Company's common shares at a strike price of $26.73 per share.
Refer to Note 8, Note 12, and Note 13 for more information on the Herbal Brands acquisition and related financing.
On November 9, 2020, Clever Leaves and the Company entered into the Neem Holdings Convertible Note and the Neem Holdings Warrants with Neem Holdings, a shareholder of the Company. Upon consummation of the Business Combination, the Company repaid the Neem Holdings Convertible Note in full and Neem Holdings exercised the Neem Holdings Warrants. See Note 12 for more information.
22. SUBSEQUENT EVENTS
The Company has evaluated its subsequent events from December 31, 2021 through the date these consolidated financial statements were issued and has determined that there are no subsequent events requiring disclosure in these consolidated financial statements other than the items noted below.
2024 Convertible Note-Redemption
CLEVER LEAVES HOLDINGS INC.
Notes to the Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Subsequent to December 31, 2021, in connection with the 2024 Note Purchase Agreement, the Company issued a total of 7,000 common shares upon debt conversion to the noteholders, with a value of $15. The Company also repaid principal and accrued interest of approximately $3,500 related to the 2024 Convertible Note. As of March 22, 2022, the outstanding balance on the Convertible Note payable was approximately $16,395.
First Amendment to Secured 2024- Convertible Note
On January 13, 2022, the Company and Catalina LP entered the First Amendment to the Secured Convertible Note (the "First Amendment Agreement"), amending certain terms of the original Secured Convertible Note issued by the Company to Catalina. These amendments are temporary amendments that expire on July 19, 2022, at which time the terms of the original note apply with respect to such amendments. The First Amendment Agreement allows Catalina to elect to receive cash repayment on account of Principal if the closing price per share of the Company’s common shares on the Nasdaq Capital Market is below $2.20 (from $7.00 in the original Secured Convertible Note) on any 10 of the previous 20 trading days. The terms of the Original Note will apply to redemptions or repayments after July 19, 2022, unless further amended by the parties thereto. For more information refer to exhibit 10.59 incorporated herein by reference, in Part IV, Exhibits, of this Annual Report on Form 10-K.
Investment in Cansativa
On February 1, 2022, the Company signed an agreement, which is subject to regulatory approval with Germany, to sell 1,586 shares of investment in Cansativa for approximately EUR 2,300, resulting in a gain of approximately $2,055. As a result of this sale, the Company's equity ownership of Cansativa, on a fully diluted basis, decreased from 14.22% to approximately 9% of the book value of Cansativa net assets. This change did not impact the equity method classification.
Grant of RSUs
On January 14, 2022, the Company granted 1,741,659 RSUs to its management, employees, and outside advisors available under the 2020 Incentive Award Plan. The vesting period of these grants range from 1 to 4 years. Please refer to Note 15 for more details on the 2020 Incentive Award Plan.
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 with 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, 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. As of the date of filing this Form 10-K, the Company is now subject to “baby shelf” rules pursuant to Instruction I.B.6. of Form S-3. As such, the Company may not sell more than one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates, where such aggregate market value is calculated using figures from a date or dates, as the case may be, within the preceding 60-days from the date of filing this 10-K. Pursuant this baby shelf cap, we may not offer to or sell equity securities for more than one-third of our public float, which, as of the date of this filing, limits the aggregate offering price pursuant to the ATM to approximately $18,000, but may increase if and when our public float increases.
Subject to terms of the Equity Distribution Agreement, the Agent is not required to sell any specific number or dollar amount of common shares but has agreed to act as the Company’s sales agent, using commercially reasonable efforts to sell on the Company’s behalf all of the common shares requested by the Company to be sold, consistent with the Agent’s normal trading and sales practices, on terms mutually agreed between the Agent and the Company. The Agent is entitled to compensation under the terms of the Equity Distribution Agreement at a fixed commission rate not to exceed 3.0% of the gross proceeds from each issuance and sale of common shares. As of March 22, 2022, the Company has issued and sold 2,801,997 shares pursuant to the ATM offering, for aggregate net proceeds of $3,316 and may issue and sell additional shares, subject to the limitations described above.
Warrant Waiver Agreement
On February 2, 2022, (the Sponsor entered into a Waiver of Certain Rights (the “Waiver”) with the Company, pursuant to which the Holder (1) waived its right to exercise any of its 4,900,000 warrants to purchase common shares, which waiver shall terminate upon 61 days’ prior written notice to the Company; (2) waived its right to nominate a director to the board of directors of the Company (the “Board”) pursuant to the Investors’ Rights Agreement, dated December 18, 2020, by and among the Company, the Holder and certain investors named therein, until the earlier of when George J. Schultze (i) is no longer a member of the audit committee of the Board (the “Audit Committee”) or (ii) ceases to be a eligible to be a member of the Audit Committee under the rules and regulations of Nasdaq (the period commencing on February 2, 2022 and ending on such date, the “Restricted Period”); (3) agreed not to acquire, directly or indirectly, by means of purchase or in any other manner, beneficial or economic ownership of any securities of the Company during the Restricted Period; and (4) agreed that it will not, without prior written consent of the Board, dispose of any Common Shares, warrants or any securities convertible into, or exercisable, or exchangeable for, Common Shares until the date that is twelve (12) months after the date of the Waiver.