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 year ended December 31, 2022, 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, Germany, the United States, Canada, and through December 2022, Portugal. We are working to develop one of the industry’s leading, low-cost global supply chains with the goal of providing high quality, pharmaceutical grade cannabis and wellness products to customers and patients at competitive prices produced in a sustainable and environmentally friendly manner. Our customers consist of retail distributors and pharmaceutical and cannabis companies, and pharmacies. The Company approved a plan to shut down its cultivation activities in Portugal in December 2022 to preserve cash and to cease all operations in Portugal. As we work to complete the wind-down process for our Portugal operations, we are also preparing for the sale process of these assets, with a goal to complete the sale during the fiscal year ending December 31, 2023.
We have invested in ecologically sustainable, large-scale, cultivation and processing, as the cornerstone of our medical cannabinoid business, and we seek to continue to develop strategic distribution channels and brands.
We currently own approximately 1.8 million square feet of greenhouse cultivation capacity in Colombia. In addition, our pharmaceutical-grade extraction facility is capable of processing 108,000 kilograms of dry flower per year.
In July 2020, we became one of a small number of vertically integrated cannabis companies in the world to receive European Union Good Manufacturing Practices (“EU GMP”) certification for our Colombian operations. We believe this certification will provide us with one of the largest quality-certified licensed capacities for cannabis cultivation and cannabinoid extraction globally, while our strategically located operations allow us to produce our products at a fraction of the average cost of production incurred by our peers in Canada and the United States.
In addition to the cannabinoid business, we are also engaged in the non-cannabinoid business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing nutraceutical and other natural remedies, and wellness products to more than 20,000 retail locations across the United States, through our wholly owned subsidiary Herbal Brands, Inc. Herbal Brands has an Arizona based GMP-compliant, FDA registered facility and is a national distributor of nutraceutical products. Herbal Brands’ nationwide customer base provides a platform we intend to leverage for greater potential cannabinoid distribution in the future, should U.S. federal laws change and regulations permit.
Our business model is focused on partnering with leading and emerging cannabis and pharmaceutical businesses by providing them with lower cost product, variable cost structures, reliable supply throughout the year, and accelerated speed to market. We believe this is achievable due to our production locations, capacity, product registrations and various product certifications.
We manage our business in two segments: the Cannabinoid and Non-Cannabinoid segments.
1. The Cannabinoid operating segment is comprised of the Company’s cultivation, extraction, manufacturing, commercialization, and distribution of cannabinoid products. This operating segment is in the early stages of commercializing cannabinoid products internationally subject to applicable international and state laws and regulations. Our customers and sales for our cannabinoid segment products are mostly outside of the U.S.
2. The Non-Cannabinoid operating segment is comprised of the brands and manufacturing assets acquired as part of our acquisition of Herbal Brands. The segment is engaged in the business of formulating, manufacturing, marketing, selling, distributing, and otherwise commercializing wellness products and 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. Medical cannabis is now authorized at the national or federal level in over 41 countries, and more than half of these countries have legalized or introduced significant reforms to their cannabis-use laws to broaden the scope of permitted medical uses beyond the original parameters. Over the past three years, we have established regional operations in Colombia, Germany, the United States and Canada, and we have invested significant resources in personnel and partnerships to build the foundation for new export channels. The Company also owned agricultural and post-harvest facilities in Portugal which have since been wound down as a result of a restructuring initiative that was undertaken by management during December 2022.
Product development and innovation. Because of the rapid evolution of the cannabis industry, the disparate regulations across different geographies, and the time required to develop and validate pharmaceutical-grade products, the pace at which we can expand our portfolio of products and formulations will impact market acceptance for our products. To increase our output while maintaining or reducing unit costs, we may need to enhance our cultivation, extraction, and other processing methods. We believe our focus on the production of proprietary and exclusive products or formulations that comply with stringent regulations, or that result in enhanced benefits for patients or consumers, could create advantages in various markets.
Regulatory expertise and adaptation. As more markets welcome the importation of cannabis or hemp products for commercial purposes, this will require navigating and complying with the strict and evolving cannabis regulations across the different geographies. We have built a global regulatory team that is experienced in developing good relationships with regulatory agencies and governments that govern and shape the cannabis industry in their respective jurisdictions. Key expertise includes complying with and securing quotas, product approvals, export permits, import permits and other geographic specific licenses.
Strategically expanding productive capacity and manufacturing capabilities. It is beneficial to have low operating costs and to control the production process to generate consistency and quality on a large scale. As we seek to expand into new markets and grow our presence in existing markets, we will need significant investments in cultivation and processing, which will necessitate additional capital. We also aim to increase productive capacity through innovation in cultivation or processing methods, improving yields and output levels of our existing assets. While we believe our core cultivation and extraction operations in Colombia are adequately sized for our current business operations, as our cannabis sales grow and expand to flower products, we plan to expand our operations in Colombia and invest in advanced processing or finished good manufacturing capabilities.
Key Operating Metrics
We use the following key operating metrics to evaluate our business and operations, measure our performance, identify trends affecting our business, project our future performance and make strategic decisions. Other companies, including companies in our industry, may calculate key operating metrics with similar names differently, which may reduce their usefulness as comparative measures.
The following table presents select operational and financial information of the Cannabinoid segment for the years ended December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, | | |
Operational information: | | 2022 | | 2021 | | Change |
(In $000s, except kilogram and per gram data) | | | | | | | | |
Kilograms (dry flower) harvested(a) | | 11,123 | | | 52,159 | | | (41,036) | | | (79) | % |
Costs to produce (b) | | $ | 9,661 | | | $ | 11,438 | | | $ | (1,777) | | | (16) | % |
Costs to produce per gram | | $ | 0.87 | | | $ | 0.22 | | | $ | 0.65 | | | N/M |
| | | | | | | | |
Selected financial information: | | | | | | | | |
Revenue | | $ | 6,119 | | | $ | 3,242 | | | 2,877 | | | 89 | % |
Kilograms sold(c) | | 13,880 | | | 11,131 | | | 2,749 | | | 25 | % |
Revenue per grams sold | | $ | 0.44 | | | $ | 0.29 | | | $ | 0.15 | | | 51 | % |
N/M: Not a meaningful percentage
(a) Kilograms (dry flower) harvested - represents the weight of dried plants post-harvest both for sale and for research and development purposes. This operating metric is used to measure the productivity of our farms.
(b) Costs to produce - includes costs associated with cultivation, extraction, depreciation and quality assurance 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, 2022 and 2021 we sold 13,880 and 11,131 kilograms, respectively, of dry flower equivalent. For the years ended December 31, 2022 and 2021, our cannabinoid segment sales were primarily in Australia, Germany, Israel, and Brazil. The increase in sale of dry flower equivalent for the Cannabinoid segment was due to continued expansion of sales activity including improvement in product mix.
We harvested 11,123 kilograms of cannabinoids in the year ended December 31, 2022, as compared to 52,159 kilograms in the year ended December 31, 2021. The decrease was primarily attributable to a decrease in our planned reduction in our production capacity at our Colombia facility in order to manage inventory levels and focus on higher margin products.
Costs to produce were approximately $0.87 per gram of dry flower equivalent for the year ended December 31, 2022, as compared to $0.22 per gram of dry flower equivalent for the year ended December 31, 2021. The increase was primarily driven by our significantly reduced agricultural output in Colombia and continued extraction processing costs on current inventory in Colombia, as well as higher expenses associated with our Portugal facilities that we are in the process of winding down.
Recent Developments
Bid Price Deficiency
On September 29, 2022, the Company received a notice (the “Notice”) from the Listing Qualifications department (the “Staff”) of Nasdaq notifying the Company that, based upon the closing bid price of the Company’s common shares for the 30 consecutive business day period between August 17, 2022 through September 28, 2022, the Company did not meet the minimum bid price of $1.00 per share required for continued listing on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The Notice also indicated that the Company would be provided 180 calendar days, or until March 28, 2023, to regain compliance pursuant to Nasdaq Listing Rule 5810(c)(3)(A).
On March 29, 2023, the Company received a second notice (the “Second Notice”) from Nasdaq indicating that, while the Company has not regained compliance with the Minimum Bid Price Requirement, the Staff has determined that the Company is eligible for an additional 180 calendar day period, or until September 25, 2023 (the “Second Compliance Period”), to regain compliance. According to the Second Notice, the Staff’s determination was based on (i) the Company meeting the continued listing requirement for market value of publicly held shares and all other applicable requirements for initial listing on The Nasdaq Capital Market, with the exception of the Minimum Bid Price Requirement, and (ii) the Company’s written notice of its intention to cure the deficiency during the second compliance period by effecting a reverse share split, if necessary. If at any
time the Second Compliance Period, the closing bid price of the Company’s common shares is at least $1.00 per share for a minimum of 10 consecutive business days, the Staff will provide the Company written confirmation of compliance. The Staff may, in its discretion, require the Company to maintain a bid price of at least $1.00 per share for a period in excess of ten consecutive business days, but generally no more than 20 consecutive business days, before determining that the Company has demonstrated an ability to maintain long-term compliance. If the Company chooses to implement a reverse share split, it must complete the split no later than 10 business days prior to the expiration of the Second Compliance Period. If compliance cannot be demonstrated by September 25, 2023, the Staff will provide written notification that the Company’s securities will be delisted. At that time, the Company may appeal the Staff’s determination to a Hearings Panel.
The Company is actively monitoring the bid price for its common shares and will consider available options to resolve the deficiency and regain compliance with the Nasdaq minimum bid price requirement
Licensing Requirement - Decree 811
In late July 2021, the Colombian government passed Decree 811, which replaced Decree 613. Decree 811 removed the prohibition contained in Decree 613 to allow the exportation of cannabis flowers. In February 2022, the Colombian government passed Regulation 227, which defines the procedures to begin cultivating cannabis for exporting the flower for medicinal use. Later, in April 2022, a joint resolution 539 was passed, which allows us to export cannabis flower for medicinal use.
2024 Convertible Note Settlement
On April 5, 2022, the Company repaid to Catalina LP (“Catalina” or the "Holder”) an amount equal to $13,246, in full satisfaction of the aggregate amount outstanding, including accrued interest, under the Secured Convertible Note (the “Convertible Note”) issued pursuant to the Note Purchase Agreement, dated July 19, 2021, between the Company and Catalina, as amended on January 13, 2022 (the “Note Purchase Agreement”). As a result of the repayment, all outstanding indebtedness and obligations of the Company owing to Catalina under the Note Purchase Agreement and Convertible Note have been paid in full.
Pursuant to the repayment and termination of the Convertible Note, our ancillary agreements, including the Guarantee made by Clever Leaves International, Inc., 1255096 B.C. Ltd., NS US Holdings, Inc., Herbal Brands, Inc., Northern Swan International, Inc., Northern Swan Management, Inc., Clever Leaves US Inc., Northern Swan Deutschland Holdings, Inc. and Northern Swan Portugal Holdings, Inc., in favor of Catalina, and the pledge agreements made in favor of Catalina by us, Clever Leaves International, Inc., 1255096 B.C. Ltd. and Clever Leaves US Inc., each dated as of July 19, 2021, in respect of the shares of Clever Leaves International Inc., 1255096 B.C. Ltd., Northern Swan International, Inc., Clever Leaves US, Inc., and NS US Holdings, Inc. were concurrently terminated.
Herbal Brands Loan Settlement
On May 2, 2022, the Company fully repaid its outstanding indebtedness and obligations under the Herbal Brand's Loan and Security Agreement in the aggregate principal amount of $5,592, accrued and unpaid interest of $47 and aggregate fees of $3, in full satisfaction of Herbal Brands' obligations under the Loan and Security Agreement (the “Payoff”). Notwithstanding the provisions of the Loan and Security Agreement, no Back-End Fee (as defined in the Loan and Security Agreement) was due in connection with the Payoff. In addition, in connection with the Payoff, all liens, guarantees and encumbrances under the Loan and Security Agreement were released.
As of December 31, 2022, there was no outstanding principal balance, including interest, of the Herbal Brands Loan. For more information, see Note 11 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Impact of COVID-19 Pandemic
The COVID-19 pandemic and restrictions aimed at stopping its spread have had, and may continue to have, an adverse impact on our performance and results of operations. Such restrictions have resulted in disruptions in global supply chains, including the business operations of our third-party manufacturers, suppliers and vendors. This has resulted in our inability to secure adequate supply of certain intermediate goods on which our business depends, longer lead times for receiving such goods, and inflationary pressures. It has also delayed our planned expansion of certain product line and production processes. If new variants emerge, such disruptions may persist. In addition, the effects of COVID-19 may delay our research and development
programs and our ability to execute certain of our strategic plans, including recruiting senior management professionals, construction, new product launches, new market expansions, acquisitions and access to capital. Future GMP inspections, inclusions or certifications for new product capabilities could be delayed due backlogs or restrictions on travel. For example the COVID-19 pandemic affected the completion of licensing in Portugal due to INFARMED’s delay conducting physical inspections of our facilities. Our licensing could also be delayed if regulators are directed to focus their time and resources on the health emergency instead of licensing activities. Similarly, such reprioritization may slow efforts to efficiently regulate or legalize cannabis in many countries.
Even after the pandemic subsides, our businesses could be negatively impacted if the effects of COVID-19 result in lasting changes in consumer behavior, including as a result of a decline in discretionary spending or changed preferences. We cannot predict the ongoing negative impact of the COVID-19 pandemic on our business, nor how long such effects will last.
Equity Distribution Agreement
On January 14, 2022, we entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC, as sales agent (the “Agent”). Under the terms of the Equity Distribution Agreement, we may issue and sell our common shares, without par value, having an aggregate offering price of up to $50,000 from time to time through the Agent. The issuance and sale of the common shares under the Equity Distribution Agreement have been made, and any such future sales will be made, pursuant to our effective registration statement on Form S-3 (File No. 333-262183), which includes an “at-the-market” (“ATM”) offering prospectus supplement (the “Prospectus Supplement”), as amended from time to time.
Following the filing of this annual report on Form 10-K, we expect to be subject to the limitations under General Instruction I.B.6 of Form S-3. As such, we will not be able to sell more than one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates, with such aggregate market value calculated using figures from a date or dates, as the case may be, within the preceding 60-days from the date of filing this Annual Report.
For the year ended December 31, 2022, the Company had issued and sold 14,994,765 shares pursuant to the ATM offering, for aggregate net proceeds $26,325, which consisted of gross proceeds of $27,686 and $1,361 equity issuance costs. No shares were sold pursuant to the ATM offering during the three months ended December 31, 2022.
Restructuring and Asset Impairment
The Company has been reviewing, planning, and implementing various strategic initiatives targeted principally at reducing
costs, enhancing organizational efficiency and optimizing its business model. As part of this process, the Company undertook
several restructuring activities during 2022.
In February 2022, with the passage of Regulation 227, followed by the Joint Resolution 539 of 2022 by the Colombian Government in April 2022, the Company could export cannabis flower for medicinal use. With this significant development, the Company evaluated its current production capacity for cannabis extracts and thus identified the need to scale back on some of the extraction capacity and related assets. This initiative included a global workforce reduction and actions to right-size the
Company’s extraction related assets, which triggered some asset write-off charges.
In December 2022, the Company approved a plan to shut-down its cultivation activities in Portugal in order to preserve cash. Subsequently, in January 2023, the Company further approved the wind-down of the entire Portuguese operations to improve operating margin and solely focusing its Cannabis cultivating and production in Colombia. Under this restructuring plan, the Company expects its Portuguese flower cultivation, post-harvest processes, and manufacturing activities to cease in full by the end of the first quarter of 2023. As we work to complete the wind-down process for our Portugal operations, we are also preparing for the sale process of these assets, with a goal to complete the sale during the fiscal year ending December 31, 2023.
Our restructuring charges in 2022 are comprised primarily of costs related to asset abandonment, including future lease
commitments, and employee termination costs related to headcount reductions.
The Company does not expect further material charges because of the closure of the Portugal facilities. For more information, see Notes 21 and 22 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Components of Results of Operations
Revenue — in our Cannabinoid segment, revenue is primarily comprised of sales of our cannabis products, which currently include cannabis flowers, 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 and post-harvest 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. 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. It also includes shipment and fulfillment costs which is made up of costs of packaging, labelling, courier services and allocated overhead.
• 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, 2022 compared to year ended December 31, 2021
Consolidated Statements of Net Loss Data
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
| | | | |
Revenue, net | | $ | 17,800 | | | $ | 15,374 | |
Cost of sales | | (13,470) | | | (8,565) | |
Gross profit | | 4,330 | | | 6,809 | |
General and administrative expenses | | 27,815 | | | 39,279 | |
Sales and marketing expenses | | 1,897 | | | 2,915 | |
Research and development | | 1,719 | | | 1,546 | |
Goodwill impairment | | — | | | 18,508 | |
Depreciation and amortization expenses | | 2,059 | | | 1,768 | |
Intangible asset impairment | | 19,000 | | | — | |
Restructuring expenses | | 26,942 | | | — | |
Total expenses | | 79,432 | | | 64,016 | |
Loss from operations | | (75,102) | | | (57,207) | |
Interest expense and amortization of debt issuance cost | | 2,702 | | | 6,818 | |
Gain on remeasurement of warrant liability | | (2,092) | | | (16,856) | |
Gain on investments | | (6,851) | | | — | |
Loss (gain) on debt extinguishment, net | | 2,263 | | | (3,262) | |
Foreign exchange loss | | 1,129 | | | 1,276 | |
Other expense (income), net | | 202 | | | (502) | |
Total other income, net | | (2,647) | | | (12,526) | |
Loss before income taxes and equity investment loss | | (72,455) | | | (44,681) | |
Deferred income tax (recovery) expense | | (6,650) | | | 950 | |
Current income tax expense | | 296 | | | — | |
Equity investment and securities loss | | 64 | | | 95 | |
Net loss | | $ | (66,165) | | | $ | (45,726) | |
Revenue by Channel
(in thousands of U.S. dollars)
The following table provides our revenues by channel for the years ended December 31, 2022 and 2021.
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
Mass retail | | $ | 9,920 | | | $ | 8,070 | |
Distributors | | 6,796 | | | 5,835 | |
Specialty, health and other retail | | 578 | | | 945 | |
E-commerce | | 506 | | | 524 | |
Total | | $ | 17,800 | | | $ | 15,374 | |
Revenue
Revenue increased to $17,800 for the year ended December 31, 2022 from $15,374 for the year ended December 31, 2021. The increase was driven by increased sales in our Cannabinoid segment, in part offset by a slight decrease in our Non-Cannabinoid segment. The growth in our Cannabinoid segment sales reflects continued expansion of sales activity including increased sales of higher margin products and ramping commercial pathways across our core markets. The decreased sales in our Non-Cannabinoid segment were driven by current economic challenges faced by our mass retailers and specialty channels during the year ended December 31, 2022 partially offset by an increase in price.
Cost of sales
Cost of sales, increased to $13,470 for the year ended December 31, 2022 as compared to $8,565 for the year ended December 31, 2021. The increase was due to costs associated with sales from both our Non-Cannabinoid and Cannabinoid segments and increased inventory provisions related to aged, obsolete or unusable inventory, during the year ended December 31, 2022 as compared to the prior year.
During the years ended December 31, 2022 and 2021, we recognized inventory provision of $4,736 and $2,980, 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, | | |
| 2022 | | 2021 | | Change |
General and administrative | $ | 27,815 | | | $ | 39,279 | | | (11,464) | | | (29)% |
Sales and marketing | 1,897 | | | 2,915 | | | (1,018) | | | (35)% |
Research and development | 1,719 | | | 1,546 | | | 173 | | | 11% |
Goodwill impairment | — | | | 18,508 | | | (18,508) | | | (100) | |
Depreciation and amortization | 2,059 | | | 1,768 | | | 291 | | | 16% |
Intangible asset impairment | 19,000 | | | — | | | 19,000 | | | N/M |
Restructuring expenses | 26,942 | | | — | | | 26,942 | | | N/M |
Total operating expenses | $ | 79,432 | | | $ | 64,016 | | | | | |
(as a percentage of revenue) | | | | | | | |
General and administrative | 156 | % | | 250 | % | | | | |
Sales and marketing | 11 | % | | 25 | % | | | | |
Research and development | 10 | % | | 10 | % | | | | |
Goodwill impairment | — | % | | 120 | % | | | | |
Depreciation and amortization | 12 | % | | 11 | % | | | | |
Intangible asset impairment | 107 | % | | — | | | | | |
Restructuring expense | 151 | % | | — | | | | | |
Total operating expenses | 446 | % | | 416 | % | | | | |
N/M: Not a meaningful percentage
General and administrative. General and administrative expenses decreased to $27,815 for the year ended December 31, 2022 from $39,279 for the year ended December 31, 2021, primarily due to the decrease in share-based compensation related to forfeitures as a result of restructuring, along with other cost cutting measures, partially offset by a slight increase in payroll related expenses.
Sales and marketing. Sales and marketing expenses decreased to $1,897 for the year ended December 31, 2022 from $2,915 for the year ended December 31, 2021. The decrease in spending was due to cost control measures instituted by the Company.
Research and development. Research and development expenses increased to $1,719 for the year ended December 31, 2022 from $1,546 for the year ended December 31, 2021. The increase is primarily due to research and development activities related to our cannabinoid products development.
Goodwill impairment. During the year ended December 31, 2022 we recognized no charges in goodwill impairment as compared to goodwill impairment charge of $18,508 for the year ended December 31, 2021. The goodwill impairment charge of $18,508 for the year ended December 31, 2021 was related to the cannabinoid segment. For more information, see Note 9 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Depreciation and amortization. Depreciation and amortization expenses increased to $2,059 for the year ended December 31, 2022 from $1,768 for the year ended December 31, 2021. The increase is mainly attributable to higher amortization cost recognized during the year ended December 31, 2022 as compared to the year ended December 31, 2021. The increase in depreciation and amortization cost recognized was as a result of capital expenditures of our cultivation and post-harvest assets in Portugal, which we are in the process of winding down. see Note 21 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Restructuring expense. Restructuring expense increased to $26,942 for the year ended December 31, 2022 from $nil for the year ended December 31, 2021. The increase is primarily attributable to a wind-down of Portugal operations. For more information, see Note 21 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Intangible asset impairment. During the year ended December 31, 2022, we recognized intangible asset impairment charge of $19,000 related to Colombian cannabis-related licenses. The intangible asset impairment was related to the carrying value of the cannabis-related licenses intangible assets was not recoverable based on the excess of the carrying value of the asset group over the undiscounted future cash flow. For more information, see Note 8 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Non-operating income and expenses
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, | | |
| 2022 | | 2021 | Change |
| | | | | | | |
Interest expense, net and amortization of debt issuance cost | $ | 2,702 | | | $ | 6,818 | | | $ | (4,116) | | | (60) | % |
Gain on remeasurement of warrant liability | (2,092) | | | (16,856) | | | 14,764 | | | (88) | % |
Gain on other investments | (6,851) | | | — | | | (6,851) | | | N/M |
Loss (gain) on debt extinguishment, net | 2,263 | | | (3,262) | | | 5,525 | | | (169) | % |
Foreign exchange loss | 1,129 | | | 1,276 | | | (147) | | | (12) | % |
Other expense (income), net | 202 | | | (502) | | | 704 | | | (140) | % |
Total | $ | (2,647) | | | $ | (12,526) | | | $ | 9,879 | | | N/M |
N/M: Not a meaningful percentage
Interest expense, net and amortization of debt issuance cost. Interest expense, net and amortization of debt issuance cost, net for the year ended December 31, 2022 was $2,702 as compared to $6,818 for the year ended December 31, 2021. The decrease
was due to no 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 both of which occurred
in 2021. For additional details, see Note 11 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Gain on remeasurement of warrant liability. Gains on remeasurement for the years ended December 31, 2022 and 2021 were $2,092 and $16,856, respectively. The gains for both periods are directly attributable to remeasurement of the warrant liability at December 31, 2022 and December 31, 2021 due to the decline in the underlying value related to the private warrants. For more information refer to Note 12 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Gain on investments. Gain on investment for the year ended December 31, 2022 was $6,851. There was no loss or gain on investment for the year ended December 31, 2021. The gain on investments in 2022 was related to the sale of Cansativa shares to an unrelated third-party and revaluation of the Company's retained interest of the shares still held. For more information, see Note 7 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Loss (gain) on debt extinguishment, net. The Company recognized a net loss on debt extinguishment of $2,263 for the year ended December 31, 2022 as compared to recognizing a net gain on debt extinguishment of $3,262 for the year ended December 31, 2021. The loss on debt extinguishment during the year ended December 31, 2022 was primarily related to the September 2023 Catalina LP Secured Convertible note. The gain on debt extinguishment during the year ended December 31, 2021 was primarily due to the extinguishment of debt in connection with the settlement of the 2022 Convertible Notes. For additional details, see Note 11 to our audited consolidated financial statements for the year ended December 31, 2021 included in this Form 10-K.
Foreign exchange loss. The impact of foreign exchange for the year ended December 31, 2022 was a loss of $1,129 compared to a loss of $1,276 for the year ended December 31, 2021. The decreased foreign exchange losses for the year ended December 31, 2022 were primarily driven by the exchange rate fluctuations between the Euro and the U.S. Dollar.
Other expense (income), net. Other expense (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 operations before interest, taxes, depreciation, amortization, share-based compensation expense, gains/losses on foreign currency fluctuations, gains/losses on the early extinguishment of debt and miscellaneous expenses. Segment profit/loss also excludes the impact of certain items that are not directly attributable to the reportable segments’ underlying operating performance. For a reconciliation of segment profit to loss from continuing operations before income taxes, see Note 16 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Revenue by segment
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
Segment Revenue: | | | | |
Cannabinoid | | $ | 6,119 | | | $ | 3,242 | |
Non-Cannabinoid | | 11,681 | | | 12,132 | |
Total Revenue | | $ | 17,800 | | | $ | 15,374 | |
Cannabinoid. Cannabinoid revenue increased to $6,119 for the year ended December 31, 2022, from $3,242 for the year ended December 31, 2021, driven primarily by increased sales of higher margin products and ramping commercial pathways across our core markets.
Non-Cannabinoid. Revenue for the year ended December 31, 2022 decreased to $11,681 from $12,132 for the year ended December 31, 2021 driven by current economic challenges faced by our mass retailers and specialty distributors during the year ended December 31, 2022.
Segment Profit/(Loss)
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, | | Change |
| 2022 | | 2021 | | $ | % |
Segment Profit/(Loss): | | | | | | | |
Cannabinoid | $ | (63,720) | | | $ | (16,915) | | | (46,805) | | | 277 | % |
Non-Cannabinoid | 1,346 | | | 2,631 | | | (1,285) | | | (49) | % |
Total Segment Loss (a) | $ | (62,374) | | | $ | (14,284) | | | (48,090) | | | 337 | % |
(a) For a reconciliation of segment profit/(loss) to loss before income tax (recovery) see Note 16 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Cannabinoid — Cannabinoid segment loss increased to $63,720 for the year ended December 31, 2022 from $16,915 for the year ended December 31, 2021 primarily due to the restructuring charges relating to the wind down of our operations in Portugal and the impairment charges related to its indefinite-lived intangible assets.
Non-Cannabinoid — Non-Cannabinoid segment profit decreased to $1,346 for the year ended December 31, 2022 compared to $2,631 the year ended December 31, 2021. The decrease was primarily attributable to lower sales combined with increased payroll related costs and sales and marketing costs, partially offset by an increase in price.
Liquidity and Capital Resources
We are actively seeking sources of financing to fund our continued operations. There can be no assurance that we will be able to complete any financing transaction in a timely manner or on acceptable terms or otherwise. If we are not able to raise additional cash, we may be forced to suspend or curtail planned programs, or cease operations altogether.
The following table sets forth the major components of our Consolidated Statements of Cash Flows for the periods presented:
(in thousands of U.S. dollars)
| | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2022 | | 2021 |
Net cash used in operating activities | | $ | (29,066) | | | $ | (36,233) | |
Net cash provided by (used in) investing activities | | 1,192 | | | (7,280) | |
Net cash provided by financing activities | | 3,289 | | | 1,834 | |
Effect of foreign currency translation on cash and cash equivalents | | (226) | | | (82) | |
Cash, cash equivalents, and restricted cash beginning of period | | $ | 37,699 | | | $ | 79,460 | |
Cash, cash equivalents, and restricted cash end of period | | $ | 12,888 | | | $ | 37,699 | |
(Decrease) in cash and cash equivalents and restricted cash | | $ | (24,811) | | | $ | (41,761) | |
Cash flows used in operating activities
The decrease in net cash used in operating activities during the year ended December 31, 2022 compared to the year ended December 31, 2021 was primarily the result of decreased operating and other expenses due to implementation of cost cutting measures, and changes in operating assets and liabilities.
Cash flows from investing activities
The increase in net cash provided by investing activities during the year ended December 31, 2022 compared to the year ended December 31, 2021 was due to reduced capital expenditures as offset by sale of investments in 2022. The gain on investments was related to the sale of Cansativa shares to an unrelated third-party and revaluation of the Company's retained interest of the shares still held. For more information, see Note 7 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Cash flows from financing activities
The increase in net cash provided by financing activities during the year ended December 31, 2022, compared to the year ended December 31, 2021, was primarily driven by the net proceeds from issuance of shares under the Equity Distribution Agreement and the related shelf registration statement, offset in part by the repayment of the 2024 Convertible Note and the Herbal Brand Loans. For more information refer to Note 11 and 12 to our audited consolidated financial statements for the year ended December 31, 2022 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. As of December 31, 2022, and December 31, 2021, we had cash and cash equivalents (excluding restricted cash) of $12,449 and $37,226, respectively, which were held for working capital and general corporate purposes. This represents an overall decrease of $24,777. As of December 31, 2022, 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.
Our outstanding warrants entitle the holder to receive one common share for each warrant, at an exercise price of $11.50 per warrant. No amount was received from the exercise of warrants during the year ended December 31, 2022. As of March 22, 2023, we have 17,840,951 warrants outstanding.
During the year ended December 31, 2022, 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. As of the date of filing this Form 10-K, the Company is again subject to “baby shelf” rules pursuant to Instruction I.B.6. of Form S-3. Pursuant this baby shelf cap, the Company may not offer to or sell equity securities for more than one-third of its public float, which, as of the date of this filing, limits the aggregate offering price pursuant to the ATM to approximately $7,516, but may increase if and when the Company’s public float increases. See Note 12 to our audited consolidated financial statements for the year ended December 31, 2022 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 commercialization activities, marketing and manufacturing activities, and general and administrative expenses to support operations.
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. If we are not able to secure adequate additional funding, we may be forced to make reductions in spending, extend payment terms with suppliers, suspend or curtail planned programs, or cease operations altogether. Any of these actions could materially harm our business, results of operations, financial condition, and prospects. See Item 1A Risks Factors - Related to Our Business and Industry - There is substantial doubt about our ability to continue as a going concern included in this Form 10-K for more information.
Uses of Liquidity
Our primary need for liquidity is to fund working capital requirements, capital expenditures, 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. See Item 1A Risks Factors - Related to Our Business and Industry - There is substantial doubt about our ability to continue as a going concern included in this Form 10-K for more information.
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, 2022, 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 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, 2022 and 2021 was $1,530 and $25,095, respectively. The debt outstanding as of December 31, 2022 was comprised of our current and non-current portions of other borrowings of $465 and $1,065, respectively, related to the Colombia and Portugal working capital loans. The debt outstanding as of December 31, 2021 was comprised of the remaining balance of the 2024 Convertible Note of $17,699, net of debt issuance cost, that was issued in July 2021, and fully repaid in April 2022, the $5,230 (net of debt issuance cost) Herbal Brands loan (as defined below) that was issued to finance the Herbal Brands acquisition in May 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. During the year ended December 31, 2022, we fully repaid our 2024 Convertible Note with accrued interest and Herbal Brands loan with accrued interest. For more information, refer to Note 11 to the audited consolidated financial statements included within this Form 10-K.
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 percentage points.
For the years ended December 31, 2022 and 2021, the Company recognized interest expense of approximately €28 ($30) and $nil, respectively, and repaid principal of approximately €250 ($264) and $nil, respectively, of the Portugal Debt in accordance with the terms of the loan agreement. The outstanding principal balance of the Portugal Debt as of December 31, 2022 and
December 31, 2021 was €750 ($805) and €1,000 ($1,213), respectively. In December 2022, the Company approved a plan to shut-down its cultivation activities in Portugal in order to preserve cash. The Portugal Debt was not discharged as part of the restructuring and remains outstanding. For more information on the Restructuring, see Note 21 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Colombia Debt
Ecomedics S.A.S. has entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,305,800 ($1,295) of mainly working capital loans. The working capital loans are secured by our farm land in Colombia as collateral. These loans bear interest at a range of 10.96% to 12.25% per annum denominated in Colombian pesos. The first payment of the principal and interest will be repaid six months after receiving the loan. After the first payment, the principal and interest will be repaid semi-annually. For the years ended December 31, 2022 and 2021, the outstanding principal balance was approximately COP$3,471,576 ($725) and COP$4,592,095 ($1,153), respectively.
Contingencies
We are involved in various investigations, claims and lawsuits arising in the normal conduct of our business, none of which, in our opinion, will have a material adverse effect on our financial condition, results of operations, or cash flows. We cannot assure you that we will prevail in any litigation. Regardless of the outcome, any litigation may require us to incur significant litigation expense and may result in significant diversion of management attention.
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 of Long-Lived Assets
We regularly review our long-lived assets for impairment indicators, such as changes in market conditions or the usage of assets. If an impairment indicator is present, we perform an impairment test to determine whether the carrying value of the asset exceeds its fair value. The impairment test involves significant estimates and judgments, including the selection of appropriate valuation methods, assumptions related to future cash flows and growth rates, and the determination of appropriate discount rates. Changes in these estimates and assumptions could result in impairment charges, which could have a material impact on our financial results.
Valuation of Inventory
Our inventory is valued using the lower of cost or net realizable value (NRV) method. We estimate the cost of our inventory using the weighted average method, which involves significant estimates and judgments related to the valuation of raw materials, labor costs, and overhead expenses. We also estimate NRV based on various factors, such as market demand, product obsolescence, and quality issues. Changes in these estimates and judgments could result in adjustments to the carrying value of inventory, which could have a material impact on our financial results.
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.
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Clever Leaves Holdings Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated statement of financial position of Clever Leaves Holdings Inc. (the “Company”) as of December 31, 2022, the related consolidated statements of operations and comprehensive loss, shareholders’ equity and cash flows for the year then ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022, and the results of its operations and its cash flows for the one year in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying 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 negative cash flows from operations, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. 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 financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. 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 audit 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 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 audit 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 audit included performing procedures to assess the risks of material misstatement of the 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 financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2022.
New York, NY
March 30, 2023
| | | | | |
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 statement of financial position of Clever Leaves Holdings Inc. (the “Company”) as of December 31, 2021, the related consolidated statements of operations and comprehensive loss, shareholders’ equity, and cash flows for the year 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 the results of its operations and its cash flows for the year 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 audit. 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 audit 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 audit 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 audit 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 audit 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 audit provides a reasonable basis for our opinion.
/s/ BDO Canada LLP
We have served as the Company's auditor from 2018 to 2022.
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, 2022 | | December 31, 2021 |
Assets | | | | | |
Current: | | | | | |
Cash and cash equivalents | | | $ | 12,449 | | | $ | 37,226 | |
Restricted cash | | | 439 | | | 473 | |
Accounts receivable, net | | | 2,252 | | | 2,222 | |
Prepaids, deposits and other receivables | 6 | | 2,708 | | | 5,064 | |
Inventories, net | 5 | | 8,399 | | | 15,408 | |
Total current assets | | | 26,247 | | | 60,393 | |
| | | | | |
Investment – Cansativa | 7 | | 5,679 | | | 1,458 | |
Property, plant and equipment, net of accumulated depreciation of $7,120 and $5,702 for the years ended December 31, 2022 and 2021, respectively | 10 | | 15,463 | | | 30,932 | |
Intangible assets, net | 8 | | 3,354 | | | 23,117 | |
Operating lease right-of-use assets, net | 20 | | 1,303 | | | — | |
Other non-current assets | | | 52 | | | 260 | |
Total Assets | | | $ | 52,098 | | | $ | 116,160 | |
| | | | | |
Liabilities and Shareholders' Equity | | | | | |
Current: | | | | | |
Accounts payable | | | $ | 2,299 | | | $ | 3,981 | |
Accrued expense and other current liabilities | | | 4,238 | | | 2,898 | |
Convertible note due 2024, current portion | 11 | | — | | | 16,559 | |
Loans and borrowings, current portion | 11 | | 465 | | | 949 | |
Warrant liability | 12 | | 113 | | | 2,205 | |
Operating lease liabilities, current portion | 20 | | 1,239 | | | — | |
Deferred revenue | | | 1,072 | | | 653 | |
Total current liabilities | | | 9,426 | | | 27,245 | |
Convertible note due 2024 | 11 | | — | | | 1,140 | |
Loans and borrowings | 11 | | 1,065 | | | 6,447 | |
Deferred revenue | | | — | | | 1,548 | |
Operating lease liabilities — long-term | 20 | | 1,087 | | | — | |
Deferred tax liabilities | | | — | | | 6,650 | |
Other long-term liabilities | | | 112 | | | 360 | |
Total Liabilities | | | $ | 11,690 | | | $ | 43,390 | |
Contingencies and commitments | 19 | | | | |
Shareholders’ equity | | | | | |
Preferred shares, without par value, unlimited shares authorized, nil shares issued and outstanding for each of December 31, 2022 and 2021 | 12 | | — | | | — | |
Common shares, without par value, unlimited shares authorized: 43,636,783 and 26,605,797 shares issued and outstanding as of December 31, 2022 and 2021, respectively | 12 | | — | | | — | |
Additional paid-in capital | | | 221,313 | | | 187,510 | |
Accumulated deficit | | | (180,905) | | | (114,740) | |
| | | | | |
| | | | | |
| | | | | |
Total shareholders' equity | | | 40,408 | | | 72,770 | |
Total liabilities and shareholders' equity | | | $ | 52,098 | | | $ | 116,160 | |
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, 2022 | | December 31, 2021 | |
| | | | | | |
Revenue, net | 15 | | $ | 17,800 | | | $ | 15,374 | | |
Cost of sales | | | (13,470) | | | (8,565) | | |
Gross profit | | | 4,330 | | | 6,809 | | |
| | | | | | |
Expenses | | | | | | |
General and administrative | 13 | | 27,815 | | | 39,279 | | |
Sales and marketing | | | 1,897 | | | 2,915 | | (a) |
Research and development | | | 1,719 | | | 1,546 | | |
Restructuring expenses | 21 | | 26,942 | | | — | | |
Intangible asset impairment | 8 | | 19,000 | | | — | | |
Goodwill impairment | 9 | | — | | | 18,508 | | |
Depreciation and amortization | 8, 10 | | 2,059 | | | 1,768 | | |
Total expenses | | | 79,432 | | | 64,016 | | |
| | | | | | |
Loss from operations | | | (75,102) | | | (57,207) | | |
| | | | | | |
Other Expense (Income), net | | | | | | |
Interest expense and amortization of debt issuance cost | | | 2,702 | | | 6,818 | | |
Gain on remeasurement of warrant liability | 12 | | (2,092) | | | (16,856) | | |
Gain on investments | 7 | | (6,851) | | | — | | |
Loss (gain) on debt extinguishment, net | 11 | | 2,263 | | | (3,262) | | |
| | | | | | |
Foreign exchange loss | | | 1,129 | | | 1,276 | | |
Other expense (income), net | | | 202 | | | (502) | | |
Total other income, net | | | (2,647) | | | (12,526) | | |
| | | | | | |
Loss before income taxes and equity investment loss | | | (72,455) | | | (44,681) | | |
Deferred income tax (recovery) expense | 17 | | (6,650) | | | 950 | | |
Current income tax expense | 17 | | 296 | | | — | | |
Equity investment share of loss | 7 | | 64 | | | 95 | | |
Net loss | | | $ | (66,165) | | | $ | (45,726) | | |
| | | | | | |
Net loss per share - basic and diluted | 18 | | $ | (1.72) | | | $ | (1.78) | | |
Weighted-average common shares outstanding - basic and diluted | | | 38,392,392 | | | 25,690,096 | | |
| | | | | | |
| | | | | | |
(a) The Company reclassified $818 of sales and marketing, reported in previous period in general and administrative 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 | | Accumulated Deficit | | | | Total Shareholders’ Equity |
| | Shares | | $ | | | | | | | | | | | | |
Balance at December 31, 2020 | | 24,883,024 | | | $ | — | | | | | | | $ | 164,264 | | | $ | (69,014) | | | | | $ | 95,250 | |
Founders earnout shares vested | | 570,212 | | | — | | | | | | | — | | | — | | | | | — | |
Issuance of common shares upon vesting of RSUs | | 268,895 | | | — | | | | | | | — | | | — | | | | | — | |
Exercise of warrants | | 122,639 | | | — | | | | | | | 1,410 | | | — | | | | | 1,410 | |
Stock option exercise | | 40,942 | | | — | | | | | | | 10 | | | — | | | | | 10 | |
Share-based compensation expense | | — | | | — | | | | | | | 11,451 | | | — | | | | | 11,451 | |
Beneficial conversion feature of Convertible Note | | — | | | — | | | | | | | 4,748 | | | — | | | | | 4,748 | |
Conversions of Convertible Note to common shares | | 720,085 | | | — | | | | | | | 6,047 | | | — | | | | | 6,047 | |
Reclassification and other | | — | | | — | | | | | | | (420) | | | — | | | | | (420) | |
Net Loss | | — | | | $ | — | | | | | | | $ | — | | | $ | (45,726) | | | | | $ | (45,726) | |
Balance at December 31, 2021 | | 26,605,797 | | | $ | — | | | | | | | $ | 187,510 | | | $ | (114,740) | | | | | $ | 72,770 | |
Issuance of common shares, gross | 12 | 14,994,765 | | | — | | | | | | | 27,686 | | | — | | | | | 27,686 | |
Issuance of common shares upon vesting of RSUs | 14 | 377,527 | | | — | | | | | | | — | | | — | | | | | — | |
Stock option exercise | | 151,694 | | | — | | | | | | | 22 | | | — | | | | | 22 | |
Share-based compensation expense | 14 | — | | | — | | | | | | | 2,343 | | | — | | | | | 2,343 | |
Equity issuance costs | | — | | | — | | | | | | | (1,361) | | | — | | | | | (1,361) | |
Beneficial conversion feature of Convertible Note | 11 | — | | | — | | | | | | | 1,750 | | | — | | | | | 1,750 | |
Conversions of Convertible Note to common shares | 11 | 1,507,000 | | | $ | — | | | | | | | 3,363 | | | — | | | | | 3,363 | |
Net Loss | | — | | | — | | | | | | | — | | | (66,165) | | | | | (66,165) | |
Balance at December 31, 2022 | | 43,636,783 | | | $ | — | | | | | | | $ | 221,313 | | | $ | (180,905) | | | | | $ | 40,408 | |
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, 2022 | | December 31, 2021 | | |
Cash Flow from Operating Activities | Notes | | | | | |
Net loss | | $ | (66,165) | | | $ | (45,726) | | | |
Adjustments to reconcile to net cash used in operating activities: | | | | | | |
Depreciation and amortization | 8, 10 | 3,672 | | | 3,508 | | | |
Amortization of debt discount and debt issuance cost | | 1,949 | | | 4,227 | |
| |
Inventory provision | 5 | 4,736 | | | 2,980 | | | |
Restructuring and related costs | | 25,809 | | | — | | | |
Fixed Asset write-off | | — | | | 228 | | | |
Gain on remeasurement of warrant liability | 12 | (2,092) | | | (16,856) | | | |
Non-cash lease expense | | 127 | | | — | | | |
Deferred income tax (recovery) expense | 17 | (6,650) | | | 950 | | | |
Foreign exchange loss | | 1,129 | | | 1,276 | | | |
Share-based compensation expense | 14 | 2,343 | | | 11,451 | | | |
Intangible asset impairment | 8 | 19,000 | | | — | | | |
Goodwill impairment | 9 | — | | | 18,508 | | | |
Loss on equity method investment, net | 7 | 64 | | | 95 | | | |
Gain on investment | | (6,851) | | | — | | | |
(Gain) loss on debt extinguishment, net | 11 | 2,263 | | | (3,262) | | | |
Other non-cash expense, net | | 600 | | | 697 | |
| |
Changes in operating assets and liabilities: | | | | | | |
(Increase) in accounts receivable | | (278) | | | (546) | | | |
Decrease in prepaid expenses | 6 | 190 | | | 506 | | | |
Decrease (Increase) in other receivables and other non-current assets | | 538 | | | (1,298) | | | |
(Increase) in inventory | 5 | (4,453) | | | (8,198) | | | |
(Decrease) in accounts payable and other current liabilities | | (4,749) | | | (4,197) | | | |
(Decrease) in accrued and other non-current liabilities | | (248) | | | (576) | | | |
Net cash used in operating activities | | $ | (29,066) | | | $ | (36,233) | | | |
| | | | | | |
Cash Flow from Investing Activities | | | | | | |
Purchase of property, plant and equipment | | (1,306) | | | (7,280) | | | |
Proceeds from partial sale of equity method investment | | 2,498 | | | — | | | |
Net cash provided by (used in) investing activities | | $ | 1,192 | | | $ | (7,280) | | | |
| | | | | | |
Cash Flow from Financing Activities | | | | | | |
Proceeds from issuance of long-term debt | 11 | — | | | 25,000 | | | |
Repayment of debt | 11 | (23,131) | | | (26,538) | | | |
Other borrowings | | 73 | | | 2,917 | | | |
Proceeds from issuance of shares | | 27,686 | | | — | | | |
Equity issuance costs | | $ | (1,361) | | | $ | — | | | |
| | | | | | |
Proceeds from exercise of warrants | | — | | | 1,410 | | | |
Deferred debt issuance costs | | — | | | (965) | | | |
Stock option exercised | 14 | $ | 22 | | | $ | 10 | | | |
Net cash provided by financing activities | | $ | 3,289 | | | $ | 1,834 | | | |
Effect of exchange rate changes on cash, cash equivalents & restricted cash | | (226) | | | (82) | | | |
(Decrease) in cash, cash equivalents and restricted cash | | $ | (24,811) | | | $ | (41,761) | | | |
Cash, cash equivalents & restricted cash, beginning of period (a) | | 37,699 | | | 79,460 | | | |
Cash, cash equivalents & restricted cash, end of period (a) | | $ | 12,888 | | | $ | 37,699 | | | |
| | | | | | |
Supplemental schedule of cash flow information: | | | | | | |
Cash paid for interest | | $ | 285 | | | $ | 492 | | | |
| | | | | | |
Supplemental disclosures for non-cash activity: | | | | | | |
Conversions of debt to common shares | 11 | $ | 3,363 | | | 6,047 | | | |
Right-of-use asset recognized | 20 | 3,764 | | | — | | | |
Beneficial conversion feature | 11 | 1,749 | | | — | | | |
| | | | | | |
Non-cash paid-in-kind-interest | 11 | $ | 281 | | | 697 | | | |
Unpaid property, plant and equipment | | $ | — | | | 546 | | | |
(a) These amounts include restricted cash of $439 and $473 as of December 31, 2022 and December 31, 2021, respectively, which are comprised primarily of cash on deposits for certain lease arrangements.
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 Bodega 19-B Parque Industrial Tibitoc P.H, Tocancipá - Cundinamarca, Colombia.
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 12 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 INTERNATIONAL INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(In thousands of U.S. dollars, except where otherwise noted and share and per share amounts)
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, 2022, 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 inventories.
On December 31, 2022, the Company had cash and cash equivalents of $12,449. As of December 31, 2022, the Company’s current working capital, anticipated operating expenses and net losses, and the uncertainties surrounding its ability to raise additional capital as needed, raise substantial doubt as to whether existing cash and cash equivalents will be sufficient to meet its obligations as they come due within twelve months from the date the consolidated financial statements were issued. The consolidated financial statements do not include any adjustments for the recovery and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company’s ability to execute its operating plans through 2023 and beyond depends on its ability to obtain additional funding, which may include several initiatives such as raising capital, reducing working capital, and monetizing non-core assets, to meet planned growth requirements and to fund future operations, which may not be available on acceptable terms, or at all.
Impact of COVID-19 Pandemic
The Company expects its operations to continue to be affected by the direct and indirect results of the outbreak of the coronavirus disease (“COVID-19”). 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. 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. 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 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.
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)
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. Significant estimates made by management include, but are not limited to: economic lives of leased assets; inputs used in the valuation of inventory; allowances for potential collectability of accounts receivable, provisions for inventory obsolescence; impairment assessment of long- lived assets; depreciable lives of property, plant and equipment; useful lives of intangible assets; accruals for contingencies including tax contingencies; valuation allowances for deferred income tax assets; and estimates of the fair value of stock-based payment awards.
Consolidation
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.
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
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. Cash and cash equivalents are invested in banks in the U.S., Canada, Columbia. and Germany. Such deposits in the United States may be in excess of insured limits and are not insured in other jurisdictions. The Company has not experienced any losses on deposits of 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)
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.
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, 2022, four of the Company's customers accounted for an aggregate of approximately 55% of the Company's outstanding accounts receivable.
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.
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, 2022 and 2021 were $885 and $917 respectively.
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 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
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)
•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 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
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)
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.
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. We recognized an impairment charge of $14,160 related to our long-lived assets during the year ended
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, 2022. For more information refer to Note 21. There were no impairment charges to long-lived assets during the year ended December 31, 2021.
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 8), 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 |
Trade name | 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.
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.
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
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)
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 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.
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.
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 16 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.
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
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)
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 2.1 - 2.4 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.
Restructuring
Restructuring charges may occur when the Company takes action to exit or significantly curtail a part of the Company’s operations or change the deployment of assets or personnel. A restructuring charge can consist of an impairment, severance costs associated with reductions to the workforce, costs to terminate an operating lease or contract, write-off of inventory and charges for legal obligations for which no future benefit will be derived. For more information refer to Note 21.
Reportable Segments
Refer to Note 16 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.
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 Loss Per Share
The Company applies basic and diluted net (loss) income per share attributable to the Company's common shareholders when shares meet the definition of participating securities.
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
As part of our ongoing efforts to enhance the transparency and consistency of our financial reporting, we have reclassified certain financial statement line items of our Form 10-K. We believe that these reclassifications provide a more accurate representation of our financial position and results of operations.
These reclassifications do not impact our previously reported financial results, as they represent a reorganization of the presentation of the financial statements rather than a change in the underlying accounting principles or policies. The reclassifications are intended to align our financial statement presentation with industry practices and improve comparability with peer companies.
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
ASU No. 2016-02, Leases (Topic 842)
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update ("ASU") No. 2016-02, Leases ("ASU 2016-02") and in July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements ("ASU 2018-11") (collectively referred to as "ASC 842"). This guidance requires the recognition of right-of-use ("ROU") assets and lease liabilities, arising from financing and operating leases, on the consolidated balance sheet, along with additional qualitative and quantitative disclosures. Companies are required to adopt this guidance using a modified retrospective approach and apply the transition provisions under the guidance at either 1) the later of the beginning of the earliest comparative period presented in the financial statements and the commencement date of the lease, or 2) the beginning of the period of adoption (i.e., on the effective date). Under the transition method using the second application date, a company initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.
The Company adopted the guidance on January 1, 2022, beginning of our calendar year 2022, using the modified retrospective transition method and initially applied the transition provisions at January 1, 2022, which allowed us to continue to apply the legacy guidance in ASC 840 for periods prior to calendar year 2022. We elected the package of transition practical expedients, which among other things, allows us to keep the historical lease classifications and not have to reassess the lease classification for any existing leases as of the date of adoption. We also made the following accounting policy elections as allowed by ASC 842:
•to apply the short-term lease exception, which allows us to keep leases with an initial term of twelve months or less off the statement of financial position.
•to account for each separate lease component of a contract and its associated non-lease components as a single-lease component for all our leases.
As a result of the adoption of this standard, there was no adjustment to the opening balance of retained earnings as there was no cumulative effect adjustment at the date of adoption. Accordingly, the primary impact of adopting ASC 842 was the recognition of ROU assets and lease liabilities for operating leases of approximately $4,120 and $4,120, respectively for all existing leases which had remaining obligations as of January 1, 2022. ASC 842 did not have a material impact on our results of operations or statement of cash flow.
ASU No. 2021-04, Earnings Per Share (Topic 260)
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 adoption of ASU No.2021-04 did not have a material impact on the Company's consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
ASU No. 2020-06, Debt (Topic 815)
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
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)
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.
ASU No. 2016-13- Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (collectively with amendments issued subsequently thereto, “ASC 326”). ASC 326 eliminates the probable recognition threshold for credit impairments. The new guidance broadens the information that an entity must consider in developing its expected credit loss estimate for assets measured either collectively or individually to include forecasted information, as well as past events and current conditions. There is no specified method for measuring expected credit losses, and an entity is allowed to apply methods that reasonably reflect its expectations of the credit loss estimate. ASU 2016-13 will be effective for the Company beginning on January 1, 2023. The Company does not expect the adoption to have a material impact to its consolidated financial statements.
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, 2022 | | | | | | | | |
Assets: | | | | | | | | |
| | | | | | | | |
Investment – Cansativa | | — | | | — | | | 5,679 | | | 5,679 | |
Total Assets | | $ | — | | | $ | — | | | $ | 5,679 | | | $ | 5,679 | |
Liabilities: | | | | | | | | |
Loans and borrowings | | — | | | 1,530 | | | — | | | 1,530 | |
Warrant liability | | — | | | — | | | 113 | | | 113 | |
Total Liabilities | | $ | — | | | $ | 1,530 | | | $ | 113 | | | $ | 1,643 | |
| | | | | | | | |
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 | |
Investment – Cansativa
Our investment in Cansativa’s equity securities that was previously accounted for using the equity method was partially divested during the three months ended June 30, 2022. Given that this investment does not have a “readily determinable fair value,” or is not traded in a verifiable public market, the Company accounted for this investment under ASC 321, Investments - Equity Securities. The Company used the practical expedient available under ASU 2016-01, the cost method investment which presents and carries this investment using the alternative measurement method which is cost minus impairment, if any, plus or minus changes resulting from observable price changes in “orderly transactions,” as defined in ASC 321, for the identical or a similar investment of the same issuer. The Company periodically reviews the investments for other than temporary declines in fair value below cost and more frequently when events or changes in circumstances indicate that the carrying value of an asset
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)
may not be recoverable. As of December 31, 2022, the Company believes the carrying value of its cost method investments were recoverable in all material respects. Refer to Note 7 for more information.
The following table provides a summary of changes in fair value of the Company’s Level 3 investments for the year ended December 31, 2022:
| | | | | |
| Level 3 |
Balance, December 31, 2021 (Measured at equity method) | $ | 1,458 | |
Share of Equity investment loss | $ | (64) | |
Partial sale on investments | $ | (515) | |
Gain due to change in fair value included in earnings | $ | 4,868 | |
Change in value due to foreign exchange loss | $ | (68) | |
Balance, December 31, 2022 | $ | 5,679 | |
During the years ended December 31, 2022 and December 31, 2021, 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, 2022 is as follows:
| | | | | |
Private Placement Warrants: | Total Warrant Liability |
Warrant liability at December 31, 2021 | $ | 2,205 | |
Change in fair value of warrant liability | (2,092) | |
Warrant liability at December 31, 2022 | $ | 113 | |
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, 2022 and December 31, 2021: | | | | | | | | | | | |
| As of |
| December 31, 2022 | | December 31, 2021 |
Risk-free interest rate | 4.23 | % | | 1.11 | % |
Expected volatility | 105 | % | | 60 | % |
Share Price | $ | 0.31 | | | $ | 3.10 | |
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.
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)
5. INVENTORIES, NET
Inventories are comprised of the following items as of the periods presented:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Raw materials | $ | 1,204 | | | $ | 1,477 | |
Work in progress – cultivated cannabis | — | | | 1,241 | |
Work in progress – harvested cannabis and extracts | 21 | | | 1,070 | |
Finished goods – cannabis extracts | 6,703 | | | 11,432 | |
Finished goods – other | 471 | | | 188 | |
Total | $ | 8,399 | | | $ | 15,408 | |
During the years ended December 31, 2022 and 2021, the Company recorded inventory provision for approximately $4,736 and $2,980, respectively, to cost of sales for obsolete inventories.
As disclosed in Note 21, the Company executed a restructuring plan to shut-down Portugal operations in December 2022 and recorded inventory provision of $6,726 as part of restructuring. For more information refer to Note 22.
6. PREPAID, DEPOSITS AND OTHER RECEIVABLES
Prepaid, deposits and other receivables are comprised of the following items as of the periods presented:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| | | |
Prepaid expenses | 590 | | | 935 | |
Indirect tax receivables (a) | 2,007 | | | 2,322 | |
Deposits | 51 | | | 47 | |
Other receivables and advances (a) | 60 | | | 1,760 | |
Total | $ | 2,708 | | | $ | 5,064 | |
(a) December 31, 2021 amounts include $2,396 of other advances and indirect tax receivables to confirm to the current year presentation .
Prepaid expenses and deposits represent amounts paid upfront to vendors for director and officer's insurance, security deposits and supplies. As part of restructuring, $1,837 is written off from other receivables and advances. For more information refer to Note 21
7. INVESTMENTS
Cansativa
On December 21, 2018, the Company, through its subsidiary Northern Swan Deutschland Holdings, Inc., entered into a seed investment agreement with the existing stockholders of Cansativa GmbH (“Cansativa”), a German limited liability company primarily focused on the import and sale of cannabis products for medical use and related supplements and nutraceuticals. Prior to the Company’s investment, Cansativa’s registered and fully paid-in share capital amounted to 26,318 common shares. Under the investment agreement, the Company has agreed with the existing stockholders to invest up to EUR 7,000 in Cansativa in three separate tranches of, respectively, EUR 1,000, EUR 3,000 and up to a further EUR 3,000. The first EUR 1,000 (specifically, EUR 999.92, approximately $1,075, or “Seed Financing Round”) was invested in Cansativa to subscribe for 3,096 newly issued preferred voting shares at EUR 322.97 per preferred share, and as cash contributions from the Company to Cansativa. The seed EUR 322.97 per share price was based on a fully diluted pre-money valuation for Cansativa of EUR 8,500, and the increase of Cansativa’s registered share capital by the 3,096 preferred shares in the Seed Financing Round provided the Company with 10.53% of the total equity ownership of Cansativa. The Company paid the seed investment subscription by, first,
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)
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.
In April 2022, the Company sold 1,586 shares in Cansativa to an unrelated third-party for approximately EUR 2,300. Additionally Cansativa issued 10,184 series B and 992 ESOP shares. As a result, the Company's equity ownership of Cansativa, on a fully diluted basis, decreased from 14.22% to 7.6% of the book value of Cansativa's net assets. Furthermore, the Company relinquished the board seat, indicating that the Company's influence was no longer "significant", to which the equity method of accounting was applicable. The Company started to account for this investment under ASC 321, Investments – Equity Securities. The Company utilized the practical expedient under ASC 321 as the investment does not qualify for the practical expedient under ASC 820 and there is no readily determinable fair value for these privately held shares of Cansativa on a recurring basis.
At the time of the sale, the Company compared the transaction value of the shares sold to the carrying value of shares sold and recognized a gain of $1,983. Immediately following the sale, the Company remeasured its retained interest which resulted in an additional gain of $4,868. As a result, a total of $6,851 was recorded in other income in the Consolidated Statements of Operations during the year ended December 31, 2022. Using the measurement alternative, as defined in ASC 321, the Company will remeasure the value of its retained interest if and when additional sales of Cansativa shares occur with third parties. For the years ended December 31, 2022 and 2021, the Company’s share of net losses from the investment were $64 and $95, respectively.
8. INTANGIBLE ASSETS, NET
The Company had acquired cannabis-related licenses as part of a business combination in 2018 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. We recognized an impairment charge of $19,000 related to its indefinite-lived intangible assets during the year ended December 31, 2022. There were no impairment charges to long-lived assets during the year ended December 31, 2021. During the years ended December 31, 2022 and 2021 the Company recorded approximately $763 and $1,162, respectively, of amortization related to its finite-lived intangible assets.
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 tables present details of the Company’s total intangible assets as of December 31, 2022 and December 31, 2021.
The value of product formulation intangible asset is included in the value of Brand:
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Weighted- Average Useful Life (in Years) |
Finite-lived intangible assets: | | | | | | | |
Customer contracts | $ | 925 | | | $ | 925 | | | $ | — | | | 0.0 |
Customer relationships | 1,000 | | | 669 | | | 331 | | | 3.0 |
Customer list | 650 | | | 478 | | | 172 | | | 1.3 |
Brand | 4,516 | | | 1,665 | | | 2,851 | | | 6.3 |
Total finite-lived intangible assets | $ | 7,091 | | | $ | 3,737 | | | $ | 3,354 | | | |
| | | | | | | |
Indefinite-lived intangible assets: | | | | | | | |
Licenses | $ | 19,000 | | | N/A | | $ | 19,000 | | | |
Impairment Charge | $ | (19,000) | | | N/A | | $ | (19,000) | | | |
Total indefinite-lived intangible assets | $ | — | | | | | $ | — | | | |
| | | | | | | |
Total intangible assets | $ | 7,091 | | | $ | 3,737 | | | $ | 3,354 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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)
Annual Impairment Testing
In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company performs its annual impairment test as
of December 31 of each year. As part of the review, the Company has performed a qualitative assessment to determine whether indicators of impairment existed, along with considering, among other factors, the financial performance, industry conditions, as well as microeconomic developments. The Company also reviews intangibles for impairment whenever events or changes in circumstances indicate that the carrying value of its intangibles may not be recoverable. After the close of each interim quarter,
management assesses whether any indicators of impairment exist requiring the Company to perform an interim goodwill and other intangible assets impairment analysis.
Impairment Testing - Finite-Lived Intangibles
In conjunction with the annual impairment testing, see Note 9, the Company reviewed finite-lived intangible assets for impairment. In performing such review, the Company makes judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. The Company recognizes an impairment if the carrying amount of the long-lived asset group exceeds the Company’s estimate of the asset group’s undiscounted future cash flows. For the year ended December 31, 2022, no impairment was recognized related to the carrying value of any of the Company's finite lived intangible assets.
Impairment Testing - Indefinite-Lived Intangibles
Due to the continued decline in the Company’s stock price and the current year’s projected revenues falling behind target, the Company performed an interim impairment assessment on its indefinite-lived intangible assets, consisting of cannabis related licenses for its Colombian operations. Significant assumptions used in the impairment analysis include financial projections of free cash flow (including assumptions about revenue projections, regulations, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. Utilizing a discounted cash flow model with a weighted average cost of capital (“WACC”) of 22%, the Company performed the assessment and recognized an impairment charge of $19,000 along with the related deferred tax liability write-off of $6,650 for the year ended December 31, 2022.
For the year ended December 31, 2021, no impairment was recognized related to the carrying value of any of the Company’s finite or indefinite-lived intangible assets.
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, 2022:
| | | | | |
| Estimated Amortization Expense |
2023 | $ | 702 | |
2024 | 585 | |
2025 | 542 | |
2026 | 482 | |
2027 | 452 | |
Thereafter | 591 | |
Total | $ | 3,354 | |
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)
9. GOODWILL
The following table presents the changes in goodwill by segment:
| | | | | | | | | | | | | | | | | | | | |
Cost | | Cannabinoid | | Non- Cannabinoid | | Total |
Balance at December 31, 2020 | | $ | 18,508 | | | $ | — | | | $ | 18,508 | |
Impairment | | $ | (18,508) | | | $ | — | | | $ | (18,508) | |
Balance at December 31, 2021 | | $ | — | | | $ | — | | | $ | — | |
Impairment | | — | | | — | | — |
Balance at December 31, 2022 | | $ | — | | | $ | — | | | $ | — | |
In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company performs its annual impairment test as
of December 31 of each year. As part of the review, the Company has performed a qualitative assessment to determine whether indicators of impairment existed, along with considering, among other factors, the financial performance, industry conditions, as well as microeconomic developments. The Company also reviews 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 year ended December 31, 2021 the Company recognized $18,508 non-cash goodwill impairment charge related to the cannabinoid segment. No goodwill impairment charge was recognized for the year ended December 31, 2022.
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%.
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)
10. 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, 2022 | | December 31, 2021 |
Land | | $ | 3,306 | | | $ | 5,065 | |
Building & warehouse | | 7,658 | | | 13,381 | |
Laboratory equipment | | 6,416 | | | 6,295 | |
Agricultural equipment | | 1,477 | | | 2,404 | |
Computer equipment | | 1,397 | | | 1,681 | |
Furniture & appliances | | 785 | | | 852 | |
Construction in progress (b) | | 240 | | | 5,709 | |
Other | | 1,304 | | | 1,247 | |
Property, plant and equipment, gross | | 22,583 | | | 36,634 | |
Less: accumulated depreciation(a) | | (7,120) | | | (5,702) | |
Property, plant and equipment, net | | $ | 15,463 | | | $ | 30,932 | |
(a) The Company recorded total depreciation expense in the Consolidated Statement of Operations for approximately $1,418 and $2,346 in 2022 and 2021, respectively. Total depreciation for the year ended December 31, 2022 includes approximately $1,213 and $802 of depreciation, included in inventory and cost of goods sold, respectively. Total depreciation for the year ended December 31, 2021 includes approximately $1,133 and $586 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 facilities.
11. DEBT
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Convertible Note due 2024, current portion(a) | $ | — | | | $ | 16,559 | |
Herbal Brands Loan due May 2023, current portion | — | | | 470 | |
Other loans and borrowings, current portion | 465 | | | 479 | |
Total debt, current portion | $ | 465 | | | $ | 17,508 | |
Convertible Note due 2024 | — | | | 1,140 | |
Herbal Brands Loan due May 2023 (b) | — | | | 4,760 | |
Other loans and borrowings | 1,065 | | | 1,687 | |
Total debt, long term | $ | 1,065 | | | $ | 7,587 | |
Ending balance | $ | 1,530 | | | $ | 25,095 | |
(a) Convertible Note, current portion reflects, net of debt discount and debt issuance costs of $nil and $2,197 in December 2022 and 2021, respectively.
(b) Herbal Brand's Loan, non-current is reflected net of debt issuance costs of $410 in as of December 31, 2021
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
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)
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 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. 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.
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 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 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.
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. The amendment changed the Optional Redemption Price to be the greater of (i) $2.208 ($6.44 in the Original Note); and (ii) an 8% discount to the 4-day lowest volume weighted average trading price (VWAP) of the Common Shares on the Nasdaq Capital Market on each of the three days prior to and including the date of the Optional Redemption Notice (the Original Note provided for an 8% discount to the closing price of the Common Shares on the Original Redemption Date). These amendments were temporary amendments that would have expired on July 19, 2022, at which time the terms of the original note would have applied with respect to such amendments. The First Amendment Agreement allowed 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 was 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 would have applied to redemptions or repayments after July 19, 2022, unless further amended by the parties thereto.
The amendment also added the limitations on redemptions into Common Shares by Catalina as follows: (1) from and after February 1, 2022, Catalina may redeem up to an aggregate amount of $2,000 (the “Base Redemption Amount”) during a calendar month at the Optional Redemption Price; (2) from and after February 1, 2022, Catalina may redeem up to an additional $1,500 (the “Additional Redemption Amount”) during a calendar month at a redemption price that is the greater of (i) $4.60 and (ii) an 8% discount to the 4-day VWAP; and (3) until January 31, 2022, Catalina may redeem up to an aggregate amount of $4,000 (the “Make-Up Base Redemption Amount”) at the Optional Redemption Price; and (4) until January 31, 2022, Catalina may redeem up to an additional $3,000 (the “Make-Up Additional Redemption Amount”) at a redemption price that is the greater of (i) $4.60 and (ii) an 8% discount to the 4-day VWAP. The Company compared the change in fair value of the conversion feature to the pro forma carrying amount and noted it to be more than 10%. The Company accounted for this amendment as a debt extinguishment. The Company also compared the effective conversion price with fair value of the Company's common stock and noted no BCF to be reacquired at the time of extinguishment. As a result, during the three months ended March 31, 2022, the Company recognized a loss on debt extinguishment of $2,263 which included unamortized debt issuance cost and BCF that was evaluated under the terms of the original Catalina LP Secured Convertible note.
At the amendment date, new terms were evaluated for BCF per ASC 470 and noted that the fair value of the shares issuable upon conversion was greater than the allocated proceeds. As a result, the Company calculated and recorded the intrinsic value of conversion feature and BCF of $1,749. The Company recognized $1,644 discount created by the BCF for the quarter ended March 31, 2022, accelerating amortization on straight line basis from the date of amendment to the date of payment. No other derivative bifurcation was noted.
In April 2022, the Company fully repaid its 2024 Convertible Note with accrued interest. As a result of the full repayment of the 2024 Convertible Note, the Company recognized the remaining balance of $105 discount created by the BCF for the quarter ended June 30, 2022, within interest expense in the Consolidated Statement of Operations.
The Company repaid principal of $16,719 and accrued interest of $27, for a total amount of $16,746, of the 2024 Convertible Note during the year ended December 31, 2022.
During the years ended December 31, 2022 and 2021, the Company issued a total of 1,507,000 and 720,085 common shares
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)
upon Convertible Note conversion to the noteholder of $3,363 and $6,047 aggregate principal amounts, respectively. As of December 31, 2022 and 2021, there were nil and $16,559 outstanding principal balance, including interest and net of debt discount and debt issuance cost, of the 2024 Convertible Note payable, respectively.
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 percentage points.
For the years ended December 31, 2022 and 2021, the Company recognized interest expense of approximately €28 ($30) and nil, respectively, and repaid principal of approximately €250 ($264) and nil, respectively, of the Portugal Debt in accordance with the terms of the loan agreement. The outstanding principal balance of the Portugal Debt as of December 31, 2022 and December 31, 2021 was €750 ($805) and €1,000 ($1,213), respectively. In December 2022, the Company approved a plan to shut-down its cultivation activities in Portugal in order to preserve cash. The Portugal Debt was not discharged as
part of the restructuring and remains outstanding. For more information on the Restructuring, see Note 21 to our audited consolidated financial statements for the year ended December 31, 2022 included in this Form 10-K.
Colombia Debt
Ecomedics S.A.S. has entered into loan agreements with multiple local lenders (collectively, the "Colombia Debt"), under which the Company borrowed approximately COP$5,305,800 ($1,295) of mainly working capital loans. The working capital loans are secured by mortgage of our farm land in Colombia as collateral. These loans bear interest at a range of 10.96% to 12.25% per annum denominated in Colombian pesos. The first payment of the principal and interest will be repaid six months after receiving the loan. After the first payment, the principal and interest will be repaid semi-annually. For the years ended December 31, 2022 and 2021, the outstanding principal balance was approximately COP$3,471,576 ($725) and COP$4,592,095 ($1,153), respectively.
Herbal Brands Debt
In May 2019 and in connection with the Herbal Brands, Inc ("Herbal Brands") acquisition, the Company entered into a loan agreement (the "Loan and Security 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 bore 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 was to be repaid or prepaid prior to its maturity date of May 2, 2023 and required the Company to repay, on a quarterly basis, 85% of positive operating cash flows. The Company could 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. The loan was 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. For more information, refer to Note 12.
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.
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)
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 was 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 at December 31, 2021. 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 on December 18, 2020 between Clever Leaves International Inc., a corporation organized under the laws of British Columbia, Canada, Schultze Special Purpose Acquisition Corp., a Delaware corporation, Novel Merger Sub Inc., a Delaware corporation and the Company, which resulted in both Clever Leaves International Inc. and Schultze Special Purpose Acquisition Corp. becoming wholly owned subsidiaries of the Company (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 years ended December 31, 2022 and 2021, the Company recognized interest expense of approximately $715 and $733, respectively, from the Herbal Brands Loan and repaid principal of approximately $5,642 and $1,495, respectively, of the Herbal Brands Loan in accordance with the terms of the loan agreement.
As of December 31, 2022, there was no outstanding principal balance, including interest, of the Herbal Brands Loan.
12. CAPITAL STOCK
Common Shares
As of December 31, 2022 and 2021, a total of 43,636,783 and 26,605,797 common shares were issued and outstanding, respectively. The increase in outstanding shares was primarily the result of shares issued under the ATM. See Equity Distribution Agreement disclosed below.
In April 2022, the Company fully repaid its 2024 Convertible Note with accrued interest. In connection with the convertible note purchase agreement, the Company issued a total of 1,507,000 and 720,085, common shares upon debt conversion to the noteholder as of December 31, 2022 and 2021, respectively. For more information, refer to Note 11 to our financial statements.
Equity Distribution Agreement
On January 14, 2022, the Company entered into an Equity Distribution Agreement (the “Equity Distribution Agreement”) with Canaccord Genuity LLC, as sales agent (the “Agent”). Under the terms of the Equity Distribution Agreement, the Company may issue and sell its common shares, without par value, having an aggregate offering price of up to $50,000 from time to time through the Agent. The issuance and sale of the common shares under the Equity Distribution Agreement have been made, and any such future sales will be made, pursuant to the Company’s effective registration statement on Form S-3 (File No. 333-262183), which includes an “at-the-market” (“ATM”) offering prospectus supplement (the "Prospectus Supplement"), as amended from time to time.
Following the filing of this annual report on Form 10-K, we expect to be subject to the limitations under General Instruction I.B.6. of Form S-3. As such, we will not be able to sell more than one-third of the aggregate market value of the voting and non-voting common equity held by non-affiliates, with such aggregate market value calculated using figures from a date or dates, as the case may be, within the preceding 60-days from the date of filing this Annual Report. Pursuant to this baby shelf cap, we will not be able to offer to or sell equity securities for more than one-third of our public float.
For the year ended December 31, 2022, the Company had issued and sold 14,994,765 shares pursuant to the ATM offering, for aggregate net proceeds $26,325, which consisted of gross proceeds of $27,686 and $1,361 equity issuance costs.
No shares were sold pursuant to the ATM offering during the three months ended December 31, 2022.
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)
Warrants
As of December 31, 2022, 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 capitalization, reorganizations, recapitalization and the like) for any 20 trading days within a 30 trading day period ending on the third trading day prior to the date on which the Company will send the notice of redemption to the warrant holders. The private warrants were issued in the same form as the public warrants, but they (i) are not redeemable by the Company and (ii) may be exercised for cash or on a cashless basis at the holder’s option, in either case as long as they are held by the initial purchasers or their permitted transferees (as defined in the warrant agreement). Once a private warrant is transferred to a holder other than an affiliate or permitted transferee, it is treated as a public warrant for all purposes. The terms of the warrants may be amended in a manner that may be adverse to holders with the approval of the holders of at least a majority 50.1% of the then outstanding warrants.
In accordance to ASC 815, certain provisions of private warrants that do not meet the criteria for equity treatment are recorded as liabilities with the offset to additional paid-in capital and are measured at fair value at inception and at each reporting period in accordance with ASC 820, Fair Value Measurement, with changes in fair value recognized in the statement of operations in the period of change.
As of December 31, 2022 and 2021, the Company performed a valuation of the private warrants and as a result recorded a net gain on remeasurement of approximately $2,092 and $16,856, respectively in its consolidated statement of operations.
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.
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.
In May 2022, the Company fully repaid the Herbal Brands Loan in the amount of approximately $5,642, including interest and fees, in full satisfaction of Herbal Brands' obligations under the Loan and Security Agreement. As a result of the full repayment of the Herbal Brand Loan, the Company recorded the remaining amortization balance of the Rock Cliff Warrants within interest and amortization of debt issuance cost in the consolidated statement of operation as of June 30, 2022.
During the years ended December 31, 2022 and 2021, the Company amortized $38 and $410, respectively, to interest expense.
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)
13. GENERAL AND ADMINISTRATION
The components of general and administrative expenses were as follows:
| | | | | | | | | | | |
| Year ended |
| December 31, 2022 | | December 31, 2021 |
| | | |
Salaries and benefits | $ | 14,665 | | | $ | 14,309 | |
Office and administration | 4,778 | | | 5,024 | |
Professional fees | 4,030 | | | 6,227 | |
Share based compensation | 2,343 | | | 11,451 | |
Rent | 1,382 | | | 1,082 | |
Other (a)(b) | 617 | | | 1,186 | |
Total | $ | 27,815 | | | $ | 39,279 | |
(a) The Company reclassified $818 of sales and marketing, reported in previous period in general and administrative expense, to conform to the current period presentation.
(b) For the years ended December 31, 2022 and 2021, other general and administrative costs includes freight-out cost of approximately $541 and $623, respectively, related to costs of packaging, labelling, and courier services, respectively.
14. 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. No new awards have been issued under the 2018 Plan since 2020.
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.
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, 2022 and December 31, 2021, 1,141,945 and 2,378,365 common shares, respectively, were available for future grants of the Company’s common shares under the 2020 Incentive Award Plan.
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,
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)
reorganizations, recapitalization 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, 2022 and December 31, 2021, 538,651 and 35,602 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, 2022 | | December 31, 2021 |
| | | |
Share-based compensation award type: | | | |
Stock Options | $ | 237 | | | $ | 1,293 | |
RSUs | 2,106 | | | 10,158 | |
Total Shared Based Compensation Expense | $ | 2,343 | | | $ | 11,451 | |
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, 2022 | December 31, 2021 |
Risk-free interest rate | 0.40% - 2.82% | 0.78% - 1.09% |
Expected dividend yield | 0.0% | 0.0% |
Expected volatility | 75% to 90% | 75% to 90% |
Expected life (in years) | 0.25 - 6.08 | 5.00 - 6.25 |
Exercise price (per share) (a) | $1.64 - $2.76 | $11.07 - $14.40 |
(a) The Company has reported exercise price in previous period to conform to the current period presentation.
Stock Options
The following table summarizes the Company’s stock option activity during the years ended December 31, 2022 and 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)
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Weighted-Average Exercise Price | | Weighted-Average Remaining Contractual Term (Years) | | Aggregate Intrinsic Value |
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 | | $ | — | |
Granted | 23,114 | | | $ | 2.16 | | | 7.05 | | |
Exercised | (158,882) | | | $ | 0.24 | | | — | | | $ | 130 | |
Forfeited | (60,789) | | | $ | 7.53 | | | — | | | $ | — | |
Expired | (177,159) | | | $ | 6.34 | | | — | | | $ | — | |
Balance as at December 31, 2022 | 410,477 | | | $ | 7.15 | | | 2.56 | | $ | — | |
Vested and expected to vest as at December 31, 2022 | 399,944 | | | $ | 7.07 | | | 2.58 | | $ | — | |
Vested and exercisable as at December 31, 2022 | 306,575 | | | $ | 6.75 | | | 2.09 | | $ | — | |
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, 2022 and 2021 was $9.05 and $9.97, respectively.
The share-based compensation expense related to unvested stock options awards not yet recognized as of December 31, 2022 and 2021 was $392 and $1,414, which is expected to be recognized over a weighted average period of 1.0 years and 1.4 years respectively.
Restricted Share Units
Time-based Restricted Share Units
The fair value for time-based RSUs is based on the closing price of the Company's common shares on the grant date.
The following table summarizes the change in the Company’s time-based restricted share unit activity during the years ended December 31, 2022 and 2021:
| | | | | | | | | | | |
| Restricted Share Units | | Weighted-Average Grant Date Fair Value |
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 | |
Granted | 2,004,324 | | | $ | 2.53 | |
Vested | (276,921) | | | $ | 9.19 | |
Canceled/forfeited | (861,953) | | | $ | 3.75 | |
Unvested as of December 31, 2022 | 1,368,151 | | | $ | 3.50 | |
The stock-based compensation expense related to unvested time-based restricted share units not yet recognized as 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)
December 31, 2022 and 2021 were $2,949 and $4,708, respectively, which is expected to be recognized over a weighted average period of 1.8 years and 2.4 years respectively.
Market-based Restricted Share Units
The Company has previously granted RSUs with both a market conditions and a service condition (market-based RSUs) to the Company's employees. No such market-based RSU were granted during the year ended December 31 2022. 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 year ended December 31, 2021.
The following table summarizes the change in the Company's market-based restricted share units activity during the years ended December 31, 2021 and December 31, 2022.
| | | | | | | | | | | |
| 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 | |
Granted | — | | | — | |
Vested | (100,607) | | | 13.91 | |
Canceled/forfeited | (442,931) | | | 12.90 | |
Unvested as of December 31, 2022 | 529,793 | | | $ | 12.79 | |
The share-based compensation expense related to unvested market-based RSUs not yet recognized as of December 31, 2022 and 2021 were $2,081, and 8,462 which is expected to be recognized over a weighted average period of 2.1 years and 3.1 years respectively.
The following table represents the weighted-average assumptions used in the Monte Carlo simulation model to determine the fair value of the restricted share units granted during the years ended December 31, 2021 and December 31, 2022.
| | | | | | | | | |
| Weighted Average Assumptions |
| December 31, 2022 | December 31, 2021 | |
Grant date share price | $2.53 | $13.68 | |
Risk-free interest rate | 1.56% | 0.52% | |
Expected dividend yield | 0.0% | 0.0% | |
Expected volatility | 75% | 90% | |
Expected life (in years) | 2.1-2.4 | 1.3-3.8 | |
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)
15. REVENUE
Disaggregation of Revenue
See Note 16 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, 2022, the Company's deferred revenue, included in current liabilities and non-current were $1,072 and $nil, respectively.
As of December 31, 2021, the Company's deferred revenue, included in current liabilities and non-current was $653 and $1,548, respectively.
16. SEGMENT REPORTING
Operating segments include components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker (the Company’s Chief Executive Officer, “CEO”) in deciding how to allocate resources and in assessing the Company’s performance.
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 Company’s CEO. Segment goodwill and other intangible assets, net, are disclosed in Note 9 Goodwill and Note 8 Intangible Assets, respectively.
As of December 31, 2022 and 2021, 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 May 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.
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 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, 2022 | | December 31, 2021 |
Segment Net Revenue: | | | | | | | |
Cannabinoid | | | | | $ | 6,119 | | | $ | 3,242 | |
Non-Cannabinoid | | | | | 11,681 | | | 12,132 | |
Total Net Revenue | | | | | 17,800 | | | 15,374 | |
| | | | | | | |
Segment Profit (Loss): | | | | | | | |
Cannabinoid | | | | | (63,720) | | | (16,915) | |
Non-Cannabinoid | | | | | 1,346 | | | 2,631 | |
Total Loss | | | | | $ | (62,374) | | | $ | (14,284) | |
| | | | | | | |
Reconciliation: | | | | | | | |
Total Segment Loss | | | | | (62,374) | | | (14,284) | |
Unallocated corporate expenses | | | | | (8,327) | | | (11,196) | |
Non-cash share based compensation | | | | | (2,343) | | | (11,451) | |
Depreciation and amortization | | | | | (2,058) | | | (1,768) | |
| | | | | | | |
Goodwill impairment | | | | | — | | | (18,508) | |
Loss from operations | | | | | $ | (75,102) | | | $ | (57,207) | |
| | | | | | | |
Loss (gain) on debt extinguishment, net | | | | | 2,263 | | | (3,262) | |
Gain on remeasurement of warrant liability | | | | | (2,092) | | | (16,856) | |
Gain on investment | | | | | (6,851) | | | — | |
Foreign exchange loss | | | | | 1,129 | | | 1,276 | |
Interest expense | | | | | 2,702 | | | 6,818 | |
Other expense (income), net | | | | | 202 | | | (502) | |
Loss from operations before income taxes and equity investment loss | | | | | $ | (72,455) | | | $ | (44,681) | |
Customers with an accounts receivable balance of 10% or greater of total accounts receivable and customers with net revenue of 10% or greater of total revenues are presented below for the periods indicated:
| | | | | | | | | | | | | | | | | |
| Percentage of Revenues | | Percentage of Accounts Receivable |
| December 31, | | December 31, |
| 2022 | 2021 | | 2022 | 2021 |
| | | | | |
Customer B (a) | 12% | 17% | | 18% | 25% |
Customer C (b) | * | * | | 13% | 18% |
Customer H (a) | * | * | | 15% | * |
Customer I (a) | * | * | | 10% | * |
* 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 2022 and 2021, 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.
The following table disaggregates the Company’s long-lived assets, by segment for 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)
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
Long-lived assets | | | |
Cannabinoid | $ | 15,308 | | | $ | 30,709 | |
Non-Cannabinoid | 155 | | | 216 | |
Other(a) | — | | | 7 | |
Total | $ | 15,463 | | | $ | 30,932 | |
____________
(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 market in terms of long-lived assets is in Colombia.
The following table disaggregates the Company’s revenues by channel for the periods presented:
| | | | | | | | | | | | | | | | | |
| | | Year ended |
| | | | | December 31, 2022 | | December 31, 2021 |
Mass retail | | | | | $ | 9,920 | | | $ | 8,070 | |
Distributors | | | | | 6,796 | | | 5,835 | |
Specialty, health and other retail | | | | | 578 | | | 945 | |
E-commerce | | | | | 506 | | | 524 | |
| | | | | $ | 17,800 | | | $ | 15,374 | |
The following table represents the Company's revenues attributed to countries based on location of customer:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | 2021 |
United States | $ | 11,461 | | | $ | 12,132 | |
Israel | 1,424 | | | $ | 809 | |
Australia | 1,835 | | | 1,584 | |
Brazil | 1,431 | | | 153 | |
Germany | 1,431 | | | 100 | |
Other | 218 | | | 596 | |
Total | $ | 17,800 | | | $ | 15,374 | |
(a) The Company has presented December 31, 2021 information to conform to the current period presentation.
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)
17. INCOME TAX
Income tax recognized in the statement of operations:
| | | | | | | | | | | |
| Year ended |
| December 31, 2022 | | December 31, 2021 |
Current tax | | | |
Current tax expense in respect of the current year | $ | 296 | | | $ | — | |
| | | |
Deferred tax | | | |
Deferred tax expense (recovery) in the current year | (6,650) | | | 950 | |
Total income tax expense recognized in the current year | $ | (6,354) | | | $ | 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% (2021 — 27%) of pre-tax loss as a result of the following:
| | | | | | | | | | | |
| Year ended |
| December 31, 2022 | | December 31, 2021 |
Net loss before income tax | $ | (72,455) | | | $ | (44,681) | |
Expected federal income tax recovery calculated at 27% (a) | (19,563) | | | (12,064) | |
Effect of income/expenses, net, that are not (taxable)/deductible (permanent differences) in determining taxable profit | 591 | | | 3,493 | |
Tax rates differences applicable to foreign subsidiaries | 616 | | | (708) | |
Loss related to loan conversion | (319) | | | — | |
Change valuation allowance | 13,825 | | | 7,988 | |
Foreign exchange | — | | | 1,226 | |
Changes in tax rates | — | | | 950 | |
Intangible asset impairment - effect of tax rate difference | (1,520) | | | — | |
Other | 16 | | | 65 | |
Income tax expense | $ | (6,354) | | | $ | 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, 2022 | | December 31, 2021 |
Deferred tax asset (liability) | | | |
Non-capital losses carry forward | $ | 36,794 | | | $ | 24,139 | |
Capital losses carryforward | 516 | | | 98 | |
Other | 4,222 | | | 3,765 | |
Property, plant and equipment | 978 | | | 595 | |
Intangibles | 625 | | | 581 | |
Deferred tax assets | $ | 43,135 | | | $ | 29,178 | |
Valuation allowance | (42,338) | | | (28,513) | |
Intangible assets | — | | | (6,650) | |
Investments | (600) | | | — | |
Other | (197) | | | (665) | |
Net deferred tax liability | $ | — | | | $ | (6,650) | |
As at December 31, 2022, 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 | | | — | | | 1,802 | | | — | | | $ | 14,197 | |
2032 | — | | | — | | | 6,135 | | | — | | | 3,859 | | | — | | | $ | 9,994 | |
2033 | — | | | — | | | 7,591 | | | — | | | 3,925 | | | — | | | $ | 11,516 | |
2034 | — | | | — | | | 25,247 | | | — | | | 7,778 | | | — | | | $ | 33,025 | |
2037 | — | | | 641 | | | — | | | — | | | — | | | — | | | $ | 641 | |
2038 | — | | | — | | | — | | | — | | | — | | | — | | | $ | — | |
2039 | 479 | | | — | | | — | | | — | | | — | | | — | | | $ | 479 | |
2040 | 10,824 | | | — | | | — | | | — | | | — | | | — | | | $ | 10,824 | |
2041 | 8,675 | | | — | | | — | | | — | | | — | | | — | | | $ | 8,675 | |
2042 | 7,090 | | | — | | | — | | | — | | | — | | | — | | | $ | 7,090 | |
Indefinite | — | | | 15,692 | | | — | | | 49 | | | — | | | 10,350 | | | $ | 26,091 | |
Total | $ | 27,068 | | | $ | 16,333 | | | $ | 54,057 | | | $ | 49 | | | $ | 17,364 | | | $ | 10,350 | | | $ | 125,221 | |
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 for the year ended December 31, 2022 and 2021, and there are no foreseeable changes for the 12 months following December 31, 2022. During the years ended December 31, 2022 and 2021, the Company recorded $109 and $44, respectively of interest or penalties related to Canadian foreign reporting late filing penalties. All years since the incorporation of the Company and its subsidiaries remain open to be audited by tax authorities.
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)
18. 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.
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, 2022 | | December 31, 2021 |
Numerator: | | | |
Net loss | $ | (66,165) | | | $ | (45,726) | |
Adjustments to reconcile to net loss available to common stockholders: | | | |
| | | |
Net loss — basic and diluted | $ | (66,165) | | | $ | (45,726) | |
| | | |
Denominator: | | | |
Weighted-average common shares outstanding - basic and diluted | 38,392,392 | | | 25,690,096 | |
| | | |
Net loss per common share - basic and diluted | $ | (1.72) | | | $ | (1.78) | |
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, 2022 and 2021, 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, 2022 | | December 31, 2021 |
| | | |
Common stock warrants | 17,840,951 | | | 17,840,951 | |
SAMA earnout shares | 570,211 | | | 570,211 | |
Stock options | 410,477 | | | 784,193 | |
Unvested restricted share units | 1,897,943 | | | 1,576,031 | |
Total | 20,719,582 | | | 20,771,386 | |
19. 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.
Commitments
The Company does not have any commitments to purchase raw materials at specific prices under any supplier contracts. The Company is committed to pay approximately $1,100 for the year 2023 insurance coverage. Additionally, see Note 11 for information on the Company's debt obligations.
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)
20. LEASES
On January 1, 2022, we adopted the accounting standard ASC 842, Leases, using the modified retrospective method. We elected this adoption date as our date of initial application. As a result, we have not updated financial information related to, nor have we provided disclosures required under ASC 842 for, periods prior to January 1, 2022. The primary changes to our policies relate to recognizing most leases on our statement of financial position as liabilities with corresponding right-of-use ("ROU") assets.
The Company has entered into agreements under which we lease various real estate spaces in North America, Europe and Latin America, under non-cancellable leases that expire on various dates through calendar year 2029. Some of our leases include options to extend the term of such leases for a period from 12 months to 60 months, and/or have options to early terminate the lease. Some of our leases require us to pay certain operating expenses in addition to base rent, such as taxes, insurance and maintenance costs.
As the Company’s leases do not typically provide an implicit rate, the Company utilizes the appropriate incremental borrowing rate, determined as the rate of interest that the Company would have to pay to borrow on a collateralized basis over a similar term and in a similar economic environment.
Practical Expedients
The modified retrospective approach included a package of optional practical expedients that we elected to apply. Among other things, these expedients permitted us not to reassess prior conclusions regarding lease identification, lease classification and initial direct costs under ASC 842. The Company does not separate lease and non-lease components in determining ROU assets or lease liabilities for real estate leases. Additionally, the Company does not recognize ROU assets or lease liabilities for leases with original terms or renewals of one year or less.
| | | | | | | | | | | | | | |
| | Financial Statement Classification | | Year Ended December 31, 2022 |
Operating lease costs: | | | | |
Operating lease costs-Fixed | | General and administrative | | $ | 1,440 | |
Sub-lease income | | General and administrative | | $ | (212) | |
Operating lease costs | | Inventory | | $ | 154 | |
Total lease costs | | | | $ | 1,382 | |
The table above includes amounts relating to the Company's lease costs, which includes net costs recognized in our operating expenses during the period, including amounts capitalized as part of the costs of Inventory, in accordance with ASC 330. Variable lease costs primarily include maintenance, utilities and operating expenses that are incremental to the fixed base rent payments and are excluded from the calculation of operating lease liabilities and ROU assets. For year ended December 31, 2022, cash paid for amounts associated with our operating lease liabilities was approximately $1,611, which was classified as operating activities in the consolidated statement of cash flows.
The following table shows our undiscounted future fixed payment obligations under our recognized operating leases and a reconciliation to the operating lease liabilities as of December 31, 2022:
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)
| | | | | | | | |
Leases and a reconciliation to the operating lease liabilities as of December 31, 2022 | | |
2023 | | $ | 1,202 | |
2024 | | 755 | |
2025 | | 279 | |
2026 | | 131 | |
2027 | | 113 | |
Thereafter | | 100 | |
Total future fixed operating lease payments | | $ | 2,580 | |
| | |
Less: Imputed interest | | $ | 266 | |
Total operating lease liabilities | | $ | 2,314 | |
| | |
Weighted-average remaining lease term - operating leases | | 2.73 |
Weighted-average discount rate - operating leases | | 8.2 | % |
Due to our election to apply the effective date method of adoption for ASC 842, we have included the following additional disclosure under our historical lease accounting under ASC 840.
As of December 31, 2021, future minimum lease payments under non-cancelable operating lease were as follows
| | | | | | | | |
Future minimum lease payments | | |
2023 | | $ | 1,910 | |
2024 | | 1,562 | |
2025 | | 845 | |
2026 | | 337 | |
2027 | | 152 | |
Thereafter | | 286 | |
Total | | $ | 5,092 | |
21. RESTRUCTURING AND ASSET IMPAIRMENT CHARGES
The Company has been reviewing, planning, and implementing various strategic initiatives targeted principally at reducing costs, enhancing organizational efficiency and optimizing its business model. As part of this process, the Company undertook several restructuring activities during 2022.
In February 2022, with the passage of Regulation 227, followed by the Joint Resolution 539 of 2022 by the Colombian Government in April 2022, the Company could export cannabis flower for medicinal use. With this significant development, the Company evaluated its current production capacity for cannabis extracts and thus identified the need to scale back on some of the extraction capacity and related assets. This initiative included a global workforce reduction and actions to right-size the Company’s extraction related assets, which triggered some asset write-off charges.
In December 2022, the Company approved a plan to shut-down its cultivation activities in Portugal in order to preserve cash. Subsequently, in January 2023, the Company further approved the wind-down of the entire Portuguese operations to improve operating margin and solely focusing its Cannabis cultivating and production in Colombia. Under this restructuring plan, the Company expects its Portuguese flower cultivation, post-harvest processes, and manufacturing activities to cease in full by the end of the first quarter of 2023. As we work to complete the wind-down process for our Portugal operations, we are also preparing for the sale process of these assets, with a goal to complete the sale during the fiscal year ending December 31, 2023.
Our restructuring charges are comprised primarily of costs related to asset abandonment, including future lease commitments, and employee termination costs related to headcount reductions.
The following table summarizes the activities related to the restructuring program for the year ended December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Employee severance and related benefits | | Asset Impairment | | Costs associated with Exit and Disposal Activities | | Total |
Total restructuring charges | | $ | 2,233 | | | $ | 23,865 | | | $ | 844 | | | $ | 26,942 | |
Charges against the reserve | | — | | | (23,571) | | | — | | | (23,571) | |
Cash payment | | (826) | | | (294) | | | (14) | | | (1,134) | |
Balance at December 31, 2022 | | $ | 1,407 | | | $ | — | | | $ | 830 | | | $ | 2,237 | |
As part of its restructuring activities, the Company has incurred expenses that qualify as exit and disposal costs under GAAP. For the year ended December 31, 2022, total restructuring charges included employee severance of $2,233, asset write-off of $23,865, and exit and disposal cost of $844. Asset write off includes Property, plant and equipment write offs of $10,396 and other assets write off of $1,494 related to the exit of the Portuguese operations including inventory reserve of $6,726 and costs to maintain the facilities until an orderly wind-down. The Company charged the restructuring program costs to other operating expenses. The Company does not expect further material charges because of the closure of the Portugal facilities.
During the year ended December 31, 2022, the Company made payments of $1,134 for employee-related and other costs, respectively. The remaining exit and disposal costs were non-cash expenses. As of December 31, 2022, the liability related to the exit and disposal costs was $2,237, which is included in Accrued expenses and Other current liabilities.
22. SUBSEQUENT EVENTS
The Company expanded the scope of its restructuring plan in January 2023, designed to improve operating margin and support the company's growth, scale, and profitability objectives. As part of this plan, the Company started winding down its operations in Portugal, resulting in a 21% reduction in the total workforce and an approximately 96% reduction in the workforce in Portugal. The Company incurred charges related to severance, employee benefits, real estate and equipment exit costs, and write-offs of inventories.
The Company has identified and disclosed all subsequent events that require disclosure as of the date of this statement. Therefore, apart from the event disclosed, there are no other subsequent events that require disclosure as of the year end December 31, 2022.