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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-39820
Clever Leaves Holdings Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | |
British Columbia, Canada | | Not Applicable |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
6501 Congress Ave, Suite 240 Boca Raton, FL | | 33487 |
(Address of principal executive offices) | | (Zip Code) |
(Registrant’s telephone number, including area code): (561) 634-7430
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
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| | | | | | | | |
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Common shares without par value | CLVR | The Nasdaq Stock Market LLC |
Warrants, each warrant exercisable for one common share at an exercise price of $11.50 | CLVRW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ |
| | Smaller reporting company | ☒ | Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of registrant’s common shares and non-voting common shares outstanding as of May 10, 2022 was 39,806,182 and 332,961, respectively.
CLEVER LEAVES HOLDINGS INC.
TABLE OF CONTENTS
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| PART I - FINANCIAL INFORMATION | |
ITEM 1. | | |
| Condensed Consolidated Statements of Financial Position as of March 31, 2022 and December 31, 2021 | |
| Condensed Consolidated Statements of Operations for the Three months ended March 31, 2022 and 2021 | |
| Condensed Consolidated Statements of Shareholders’ Equity for the Three months ended March 31, 2022 and 2021 | |
| Condensed Consolidated Statements of Cash Flows for the Three months ended March 31, 2022 and 2021 | |
| Notes to Unaudited Condensed Consolidated Financial Statements | |
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ITEM 2. | | |
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ITEM 3. | | |
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ITEM 4. | | |
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| PART II - OTHER INFORMATION | |
ITEM 1. | | |
ITEM 1A. | Risk Factors | |
ITEM 5. | | |
ITEM 6. | | |
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements made by us or on our behalf. Some of the statements in this quarterly report on Form 10-Q of Clever Leaves Holdings Inc. ("Form 10-Q") constitute forward-looking statements that do not directly or exclusively relate to historical facts. You should not place undue reliance on such statements because they are subject to numerous risks and uncertainties which are difficult to predict and many of which are beyond our control and could cause our actual results to differ from the forward-looking statements. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements are often, but not always, made through the use of words or phrases such as “believe,” “anticipate,” “could,” “may,” “would,” “should,” “intend,” “plan,” “potential,” “predict,” “forecast,” “will,” “expect,” “budget,” “contemplate,” “believe,” “estimate,” “continue,” “project,” “positioned,” “strategy,” “outlook” and similar expressions. You should read statements that contain these words carefully because they:
•discuss future expectations;
•contain projections of future results of operations or financial condition; or
•state other “forward-looking” information.
All such forward-looking statements are based on our current expectations and involve estimates and assumptions that are subject to risks, uncertainties and other factors that could cause actual results to differ materially from the results expressed in the statements. We believe it is important to communicate our expectations to our security holders. However, there may be future events that we are not able to predict accurately or over which we have no control. The risk factors and cautionary language discussed in Part I, Item 1A, "Risk Factors" in our 2021 Form 10-K, provides examples of risks, contingencies, uncertainties, and events that may cause our actual results to differ materially from the expectations described by us in such forward-looking statements, including among other things:
•changes adversely affecting the industry in which we operate;
•our ability to achieve our business strategies or to manage our growth;
•general economic conditions, including the effects of COVID-19, the United Kingdom's exit from the European Union and the ongoing military conflict between Russia and Ukraine (and resulting sanctions) on the global economy, global financial markets and our business;
•regional political and economic conditions, including emerging market conditions;
•the effects of COVID-19 on the supply and distribution chain, and the availability of third-party distributors generally;
•the impact and magnitude of rising energy costs;
•the impact and magnitude of inflation and currency fluctuations;
•the regulation and legalization of adult-use, recreational cannabis;
•our ability to maintain the listing of our securities on Nasdaq;
•our ability to retain our key employees;
•the availability or terms of future financing; and
•other factors that are more fully discussed in Part I, Item 1A of the Company's annual report on Form 10-K for the year ended December 31, 2021 (the "Annual Report" or "2021 Form 10-K") under the heading “Risk Factors”, and those discussed in other documents we file with the SEC.
These risks could cause actual results to differ materially from those implied by the forward-looking statements contained in this Form 10-Q.
All forward-looking statements included herein attributable to us or any person acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable laws and regulations, we undertake no obligation to update these forward-looking statements to reflect events or circumstances after the date of this Form 10-Q or to reflect the occurrence of unanticipated events.
ITEM 1. FINANCIAL STATEMENTS
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Financial Position
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
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| Note | | March 31, 2022 | | December 31, 2021 |
| | | | | |
Assets | | | | | |
Current: | | | | | |
Cash and cash equivalents | | | $ | 44,315 | | | $ | 37,226 | |
Restricted cash | | | 467 | | | 473 | |
Accounts receivable, net | | | 2,581 | | | 2,222 | |
Prepaids, advances and other | 6 | | 2,760 | | | 2,668 | |
Other receivables | | | 2,803 | | | 2,396 | |
Inventories, net | 5 | | 16,230 | | | 15,408 | |
Total current assets | | | 69,156 | | | 60,393 | |
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Investment – Cansativa | 7 | | 1,394 | | | 1,458 | |
Property, plant and equipment, net of accumulated depreciation of $6,407 and $5,702 for March 31, 2022 and December 31, 2021, respectively | 10 | | 30,056 | | | 30,932 | |
Intangible assets, net | 8 | | 22,926 | | | 23,117 | |
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Operating lease right-of-use assets, net | 19 | | 3,682 | | | — | |
Other non-current assets | | | 3 | | | 260 | |
Total Assets | | | $ | 127,217 | | | $ | 116,160 | |
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Liabilities | | | | | |
Current: | | | | | |
Accounts payable | | | $ | 4,374 | | | $ | 3,981 | |
Accrued expenses and other current liabilities | | | 3,112 | | | 2,898 | |
Convertible note due 2024, current portion | 11 | | 15,170 | | | 16,559 | |
Loans and borrowings, current portion | 11 | | 1,306 | | | 949 | |
Warrant liability | | | 1,715 | | | 2,205 | |
Operating lease liabilities, current portion | 19 | | 1,552 | | | — | |
Deferred revenue, current portion | | | 265 | | | 653 | |
Total current liabilities | | | 27,494 | | | 27,245 | |
Convertible note due 2024 | 11 | | — | | | 1,140 | |
Loans and borrowing | 11 | | 6,149 | | | 6,447 | |
Deferred revenue | | | 1,290 | | | 1,548 | |
Operating lease liabilities — long-term | 19 | | 2,267 | | | — | |
Deferred tax liabilities | | | 6,650 | | | 6,650 | |
Other long-term liabilities | | | 919 | | | 360 | |
Total Liabilities | | | $ | 44,769 | | | $ | 43,390 | |
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Shareholders’ equity | | | | | |
Common shares, without par value, unlimited shares authorized: 38,623,929 and 26,605,797 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively | 12 | | — | | | — | |
Preferred shares, without par value, unlimited shares authorized, nil shares issued and outstanding for each of March 31, 2022 and December 31, 2021 | 12 | | — | | | — | |
Additional paid-in capital | | | 213,328 | | | 187,510 | |
Accumulated deficit | | | (130,880) | | | (114,740) | |
Total shareholders' equity | | | 82,448 | | | 72,770 | |
Total liabilities and shareholders' equity | | | $ | 127,217 | | | $ | 116,160 | |
See accompanying notes to the condensed consolidated financial statements
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Operations
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
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| | | Three Months Ended March 31, | | |
| Note | | 2022 | | 2021 | | | | |
Revenue | 17 | | $ | 5,224 | | | $ | 3,477 | | | | | |
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Cost of sales | | | (3,186) | | | (1,337) | | | | | |
Gross profit | | | 2,038 | | | 2,140 | | | | | |
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Expenses | | | | | | | | | |
General and administrative | 13 | | 8,261 | | | 8,464 | | | | | |
Sales and marketing | | | 733 | | | 587 | | | | | |
Research and development | | | 412 | | | 278 | | | | | |
Restructuring expenses | 14 | | 4,008 | | | — | | | | | |
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Depreciation and amortization | | | 517 | | | 579 | | | | | |
Total expenses | | | 13,931 | | | 9,908 | | | | | |
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Loss from operations | | | (11,893) | | | (7,768) | | | | | |
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Other Expense (Income), net | | | | | | | | | |
Interest and amortization of debt issuance cost | | | 2,118 | | | 978 | | | | | |
(Gain) loss on remeasurement of warrant liability | 12 | | (490) | | | 4,851 | | | | | |
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Loss on debt extinguishment, net | 11 | | 2,263 | | | — | | | | | |
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Foreign exchange loss | | | 345 | | | 759 | | | | | |
Other income, net | | | (53) | | | (602) | | | | | |
Total other expenses, net | | | 4,183 | | | 5,986 | | | | | |
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Loss before income taxes and equity investment loss | | | $ | (16,076) | | | $ | (13,754) | | | | | |
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Equity investment share of loss | | | 64 | | | 11 | | | | | |
Net loss | | | $ | (16,140) | | | $ | (13,765) | | | | | |
Net loss per share - basic and diluted | 18 | | $ | (0.58) | | | $ | (0.55) | | | | | |
Weighted-average common shares outstanding - basic and diluted | 18 | | 27,960,584 | | | 25,030,080 | | | | | |
See accompanying notes to the condensed consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Shareholders’ Equity
(Amounts in thousands of U.S. Dollars, except share and per share data)
(Unaudited)
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Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Total Shareholders’ Equity |
| | Shares | | Amount | | Amount | | Amount | | Amount |
Balance at December 31, 2020 | | 24,883,024 | | $ | — | | | $ | 164,264 | | | $ | (69,014) | | | $ | 95,250 | |
Net loss | | — | | | — | | | — | | | (13,765) | | | (13,765) | |
Founders earn-out shares vested | | 570,212 | | | — | | | — | | | — | | | — | |
Issuance of common shares upon vesting RSUs | | 7,713 | | | — | | | — | | | — | | | — | |
Exercise of warrants | | 122,639 | | | — | | | 1,410 | | | — | | | 1,410 | |
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Stock-based compensation expense | | — | | | — | | | 1,550 | | | — | | | 1,550 | |
Balance at March 31, 2021 | | 25,583,588 | | $ | — | | | $ | 167,224 | | | $ | (82,779) | | | $ | 84,445 | |
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| Note |
Common Stock | | Additional Paid-in Capital | | Retained Deficit | | Total Shareholders’ Equity |
| | Shares | | Amount | | Amount | | Amount | | Amount |
Balance at December 31, 2021 | | 26,605,797 | | | $ | — | | | $ | 187,510 | | | $ | (114,740) | | | $ | 72,770 | |
Net loss | | — | | | — | | | — | | | (16,140) | | | (16,140) | |
Issuance of common shares upon vesting RSUs | 15 | 247,453 | | | — | | | — | | | — | | | — | |
Stock option exercise | | 116,112 | | | — | | | 22 | | | — | | | 22 | |
Stock-based compensation expense | 15 | — | | | — | | | 500 | | | — | | | 500 | |
Issuance of common stock - gross | 12 | 11,047,567 | | | — | | | 23,400 | | | — | | | 23,400 | |
Equity issuance costs | 12 | — | | | — | | | (1,177) | | | — | | | (1,177) | |
Conversions of Convertible Note to common shares | 12 | 607,000 | | | — | | | 1,324 | | | — | | | 1,324 | |
Beneficial conversion feature | 11 | — | | | — | | | 1,749 | | | — | | | 1,749 | |
Balance at March 31, 2022 | | 38,623,929 | | | $ | — | | | $ | 213,328 | | | $ | (130,880) | | | $ | 82,448 | |
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See accompanying notes to the condensed consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands of U.S. Dollars)
(Unaudited)
| | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | |
| | 2022 | | 2021 | |
Cash Flow from Operating Activities: | | | | | |
Net loss | | $ | (16,140) | | | $ | (13,765) | | |
Adjustments to reconcile to net cash used in operating activities: | | | | | |
Depreciation and amortization | | 896 | | | 795 | | |
Amortization of debt discount and debt issuance cost | | 1,681 | | | 161 | | |
Inventory write-down | 5 | 845 | | | 168 | | |
Restructuring and related costs | 14 | 3,919 | | | — | | |
(Gain) loss on remeasurement of warrant liability | 12 | (490) | | | 4,851 | | |
Non-cash lease expense | 19 | 137 | | | — | | |
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Foreign exchange loss | | 345 | | | 759 | | |
Stock-based compensation expense | 15 | 500 | | | 1,550 | | |
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Loss on equity method investment | 7 | 64 | | | 11 | | |
Loss on debt extinguishment | 11 | 2,263 | | | — | | |
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Other non-cash expense, net | | 281 | | | 269 | | |
Changes in operating assets and liabilities: | | | | | |
(Increase) in accounts receivable | | (359) | | | (61) | | |
(Increase) in prepaid expenses | 6 | (1,578) | | | (160) | | |
(Increase) in other receivables and other non-current assets | | (150) | | | (253) | | |
(Increase) in inventory | 5 | (1,667) | | | (1,533) | | |
(Decrease) increase in accounts payable and other current liabilities | | (830) | | | (2,417) | | |
(Decrease) increase in accrued and other non-current liabilities | | (88) | | | (1,002) | | |
Net cash used in operating activities | | $ | (10,371) | | | $ | (10,627) | | |
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Cash Flow from Investing Activities: | | | | | |
Purchase of property, plant and equipment | | (1,215) | | | (2,216) | | |
Net cash used in investing activities | | $ | (1,215) | | | $ | (2,216) | | |
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Cash Flow from Financing Activities: | | | | | |
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Repayment of debt | 11 | (3,554) | | | — | | |
Other borrowings | | — | | | 1,223 | | |
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Proceeds from issuance of shares | 12 | 23,400 | | | — | | |
Equity issuance costs | 12 | (1,177) | | | — | | |
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Proceeds from exercise of warrants | | — | | | 1,410 | | |
Stock option exercise | | 22 | | | — | | |
Net cash provided by financing activities | | $ | 18,691 | | | $ | 2,633 | | |
Effect of exchange rate changes on cash, cash equivalents & restricted cash | | (22) | | | (75) | | |
Increase (Decrease) in cash, cash equivalents & restricted cash (a) | | $ | 7,083 | | | $ | (10,285) | | |
Cash, cash equivalents & restricted cash, beginning of period (a) | | 37,699 | | | 79,460 | | |
Cash, cash equivalents & restricted cash, end of period (a) | | $ | 44,782 | | | $ | 69,175 | | |
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Supplemental schedule of cash flow information: | | | | | |
Cash paid for interest | | $ | 375 | | | $ | 548 | | |
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Supplemental disclosures for non-cash financing activity: | | | | | |
Right-of-use assets recognized | | $ | 4,023 | | | — | | |
Conversions of debt to commons shares | | $ | 1,324 | | | — | | |
Beneficial conversion feature | | $ | 1,749 | | | — | | |
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(a) These amounts include restricted cash of $467 and $451 as of March 31, 2022 and March 31, 2021, respectively, which are comprised primarily of cash on deposits for certain lease arrangements.
See accompanying notes to the condensed consolidated financial statements.
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
1. CORPORATE INFORMATION
Clever Leaves Holdings Inc., (the “Company”) is a multi-national U.S. based holding company focused on cannabinoids. In addition to the cannabinoid business, the Company is also engaged in the non-cannabinoid business of nutraceutical and other natural remedies and wellness products. The Company is incorporated under the Business Corporations Act of British Columbia, Canada.
The mailing address of the Company's principal executive office is 6501 Congress Avenue, Suite 240, Boca Raton, FL 33487.
2. BASIS OF PRESENTATION
The accompanying interim condensed consolidated financial statements (“Financial Statements”) are unaudited. These Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of regulation S-X. Accordingly, they do not include all disclosures required for annual financial statements. These Financial Statements reflect all adjustments, which, in the opinion of the management, are necessary for a fair presentation of the results for the interim periods presented. All significant intercompany transactions and balances have been eliminated. All adjustments were of a normal recurring nature. Interim results are not necessarily indicative of results to be expected for the full year.
Prior Period Reclassifications - Certain prior period reclassifications were made to conform to the current period presentation.
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 March 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 revenue from the sale of its available inventories.
At March 31, 2022, the Company had cash and cash equivalents of $44,782. As of March 31, 2022, based on the Company's current business plan and the Company’s current cash position, the Company believes it will result in increased revenue and a reduction in net losses, which will satisfy the Company's estimated liquidity needs during the twelve months from the issuance of the condensed consolidated financial statements.
During the three months ended March 31, 2022 the Company raised additional financing through an "at-the-market" ("ATM") equity offering as discussed in Note 12.
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
Principles of Consolidation
The Financial Statements include the accounts of the Company and its consolidated subsidiaries. The following table provides a summary of the Company’s subsidiaries and respective ownership percentage as of and March 31, 2022 and December 31, 2021.
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Subsidiaries | | Jurisdiction of incorporation | | Ownership |
| | | | March 31, 2022 | December 31, 2021 |
Clever Leaves US, Inc. ("SAMA") | | Delaware, United States | | 100% | 100% |
NS US Holdings, Inc. | | Delaware, United States | | 100% | 100% |
Herbal Brands, Inc. | | Delaware, United States | | 100% | 100% |
1255096 B.C. Ltd. ("Newco") | | British Columbia, Canada | | 100% | 100% |
Northern Swan International, Inc. (“NSI”) | | British Columbia, Canada | | 100% | 100% |
Arizona Herbal Brands, Inc. (1) | | British Columbia, Canada | | 100% | 100% |
Northern Swan Management, Inc. | | British Columbia, Canada | | 100% | 100% |
Clever Leaves Australia Pvt Ltd | | Australia | | 100% | 100% |
Northern Swan Deutschland Holdings, Inc. | | British Columbia, Canada | | 100% | 100% |
Northern Swan Portugal Holdings Inc. | | British Columbia, Canada | | 100% | 100% |
Clever Leaves Portugal Unipessoal LDA | | Portugal | | 100% | 100% |
Clever Leaves II Portugal Cultivation SA | | Portugal | | 100% | 100% |
Northern Swan Europe, Inc. | | British Columbia, Canada | | 100% | 100% |
Nordschwan Holdings, Inc. | | British Columbia, Canada | | 100% | 100% |
Clever Leaves Germany GmbH | | Hamburg, Germany | | 100% | 100% |
NS Herbal Brands International, Inc. | | British Columbia, Canada | | 100% | 100% |
Herbal Brands, Ltd. | | London, United Kingdom | | 100% | 100% |
Clever Leaves International, Inc. | | British Columbia, Canada | | 100% | 100% |
Eagle Canada Holdings, Inc. (“Eagle Canada”) | | British Columbia, Canada | | 100% | 100% |
Ecomedics S.A.S. (“Ecomedics”) | | Bogota, Colombia | | 100% | 100% |
Clever Leaves UK Limited | | London, United Kingdom | | 100% | 100% |
(1)Arizona Herbal Brands, Inc. was dissolved by way of voluntary dissolution under the Business Corporation Act on December 31, 2021.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company's significant accounting policies are disclosed in its audited consolidated financial statements for the year ended December 31, 2021, included in the Annual Report. Except as noted below, there have been no other changes in the Company's significant accounting policies as discussed in the Annual Report.
Use of Accounting Estimates
The preparation of these Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the Financial Statements and accompanying notes in the reported period. These estimates include, but are not limited to, allowance for doubtful accounts, inventory valuation, determination of fair value of stock-based awards and estimate of incremental borrowing rate for determining the present value of future lease payments. While the significant estimates made by management in the preparation of the consolidated financial statements are reasonable, prudent, and evaluated on an ongoing basis, actual results may differ materially from those estimates.
Recently Adopted Accounting Pronouncements
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
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 and comprehensive income 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
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.
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
ASU No. 2016-13- Credit Losses on Financial Instruments (Topic 326)
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 replaces the existing incurred loss impairment model with a forward-looking expected credit loss model which will result in earlier recognition of credit losses for certain financial instruments and financial assets. For trade receivables, we are required to estimate lifetime expected credit losses. For available-for-sale debt securities, the Company will recognize an allowance for credit losses rather than a reduction to the carrying value of the asset. ASU 2016-13 is effective for the Company’s fiscal year beginning January 1, 2023. The Company is currently evaluating the effect of adopting ASU No 2016-13.
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 March 31, 2022 | | | | | | | | |
Assets: | | | | | | | | |
Investment – Cansativa | | — | | | — | | | 1,394 | | | 1,394 | |
Total Assets | | $ | — | | | $ | — | | | $ | 1,394 | | | $ | 1,394 | |
Liabilities: | | | | | | | | |
Loans and borrowings | | — | | | 7,455 | | | — | | | 7,455 | |
Warrant liability | | — | | | — | | | 1,715 | | | 1,715 | |
Convertible notes | | — | | | 15,170 | | | — | | | 15,170 | |
Total Liabilities | | $ | — | | | $ | 22,625 | | | $ | 1,715 | | | $ | 24,340 | |
| | | | | | | | |
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 | |
During the three months ended March 31, 2022, there were no transfers between fair value measurement levels.
The change in fair value of warrant liabilities related to private warrants during the three months ended March 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 | (490) | |
Warrant liabilities at March 31, 2022 | $ | 1,715 | |
| |
| |
| |
| |
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 March 31, 2022 and December 31, 2021:
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | December 31, 2021 |
Risk-free interest rate | 2.44% | | 1.11% |
Expected volatility | 65% | | 60% |
Share Price | $2.49 | | $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.
5. INVENTORY, NET
Inventories are comprised of the following items as of the periods presented:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Raw materials | $ | 1,333 | | | $ | 1,477 | |
Work in progress – cultivated cannabis | 1,562 | | | 1,241 | |
Work in progress – harvested cannabis and extracts | 2,875 | | | 1,070 | |
Finished goods – cannabis extracts | 10,368 | | | 11,432 | |
Finished goods – other | 92 | | | 188 | |
Total | $ | 16,230 | | | $ | 15,408 | |
During the three months ended March 31, 2022 and for year ended December 31, 2021, the Company recorded inventory write-downs for approximately $845 and $2,980, respectively, to cost of sales to write-down obsolete inventories.
6. PREPAID, DEPOSITS AND ADVANCES
Prepaid and advances are comprised of the following items as of the periods presented:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Prepaid expenses | $ | 2,654 | | | $ | 935 | |
Deposits | 106 | | | 47 | |
Other advances | — | | | 1,686 | |
Total | $ | 2,760 | | | $ | 2,668 | |
Prepayments and advances represent amounts previously paid to vendors for security deposits and supplies, leased premises, facility construction and expansion projects not yet delivered.
7. INVESTMENTS
Cansativa
On December 21, 2018, the Company, through its subsidiary Northern Swan Deutschland Holdings, Inc., entered into a seed investment agreement with the existing stockholders of Cansativa GmbH (“Cansativa”), a German limited liability company primarily focused on the import and sale of cannabis products for medical use and related supplements and nutraceuticals. Prior
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
to the Company’s investment, Cansativa’s registered and fully paid-in share capital amounted to 26,318 common shares. Under the investment agreement, the Company has agreed with the existing stockholders to invest up to EUR 7,000 in Cansativa in three separate tranches of, respectively, EUR 1,000, EUR 3,000 and up to a further EUR 3,000. The first EUR 1,000 (specifically, EUR 999.92, approximately $1,075, or “Seed Financing Round”) was invested in Cansativa to subscribe for 3,096 newly issued preferred voting shares at EUR 322.97 per preferred share, and as cash contributions from the Company to Cansativa. The seed EUR 322.97 per share price was based on a fully diluted pre-money valuation for Cansativa of EUR 8,500, and the increase of Cansativa’s registered share capital by the 3,096 preferred shares in the Seed Financing Round provided the Company with 10.53% of the total equity ownership of Cansativa. The Company paid the seed investment subscription by, first, an initial nominal payment of EUR 3.1, (i.e., EUR 1.00 per share) upon signing the investment agreement to demonstrate the Company’s intent to invest, and the remainder of EUR 996.82 was settled in January 2019 to officially close the investment deal after certain closing conditions have been met by the existing stockholders and Cansativa. The Company 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, the balance of Tranche 2 option expired un-exercised and as a result the Company recognized a loss on investment of approximately $370 in its Statement of Operations and Comprehensive Loss and the carrying value of the Tranche 2 option was reduced to nil.
In December 2020, Cansativa allocated shares of its common stock to a newly installed employee-stock ownership plan (“ESOP”). As a result of the ESOP installment, the Company’s equity ownership of Cansativa, on a fully-diluted basis, decreased from 16.59% to 15.80% of the book value of Cansativa’s net assets. Additionally, Cansativa raised additional capital through the issuance of Series A preferred stock (“Cansativa Series A Shares”) to a third-party investor at a per share price of EUR 543.31. As a result of the Series A Share issuance, the Company’s equity ownership of Cansativa, on a fully diluted basis, decreased from 15.80% to 14.22% of the book value of Cansativa’s net assets. The Company accounted for the transaction as a proportionate sale of ownership share and recognized a gain of approximately $211 in its consolidated statement of operations within loss on investments line. This change did not impact the equity method classification.
On February 1, 2022, the Company signed an agreement, which was subject to regulatory approval with Germany, to sell 1,586 shares of investment in Cansativa for approximately EUR 2,300, resulting in a gain of approximately $2,055, which was recognized in the consolidated statements of operations during the three months ended June 30, 2022. As a result of this sale, the Company's equity ownership of Cansativa, on a fully diluted basis, decreased from 14.22% to approximately 9% of the book value of Cansativa net assets. This change did not impact the equity method classification. The Company subsequently received regulatory approval in April 2022 as further noted in Note 20.
For the three months ended March 31, 2022 and 2021, the Company's share of net losses from the investment were $64 and $11, respectively.
8. INTANGIBLE ASSETS, NET
The Company has acquired cannabis-related licenses as part of a business combination with a gross value of approximately $19,000, which have indefinite useful lives as they are expected to generate economic benefit to the Company in perpetuity. In addition, as part of the Herbal Brand acquisition in 2019, the Company acquired finite-lived intangible assets with a gross value of approximately $7,091. During the three months ended March 31, 2022 and 2021 the Company recorded approximately $191 and $390, respectively, of amortization related to its finite-lived intangible assets.
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
The following tables present details of the Company’s total intangible assets as of March 31, 2022 and December 31, 2021. The value of product formulation intangible asset is included in the value of Brand:
| | | | | | | | | | | | | | | | | | | | | | | |
| March 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 | | | 532 | | | 468 | | | 3.40 |
Customer list | 650 | | | 379 | | | 271 | | | 2.0 |
Brand | 4,500 | | | 1,313 | | | 3,187 | | | 7.0 |
Total finite-lived intangible assets | $ | 7,075 | | | $ | 3,149 | | | $ | 3,926 | | | |
| | | | | | | |
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 | $ | 26,075 | | | $ | 3,149 | | | $ | 22,926 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | 4,500 | | | 1,200 | | | 3,300 | | | 7.3 |
Total finite-lived intangible assets | $ | 7,075 | | | $ | 2,958 | | | $ | 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 | $ | 26,075 | | | $ | 2,958 | | | $ | 23,117 | | | |
Impairment Testing - Finite-Lived Intangibles
In accordance with ASC Topic 350, “Intangibles – Goodwill and Other,” the Company performs its annual impairment test as
of December 31 of each year. As part of the review, the Company will perform a qualitative assessment to determine whether indicators of impairment existed, along with considering, among other factors, the financial performance, industry conditions, 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.
In conjunction with the 2021 annual impairment testing, the Company reviewed finite-lived intangible assets for impairment. In performing such review, the Company makes judgments about the recoverability of purchased finite lived intangible assets whenever events or changes in circumstances indicate that an impairment may exist. The Company recognizes an impairment if
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
the carrying amount of the long-lived asset group exceeds the Company’s estimate of the asset group’s undiscounted future cash flows.
Significant assumptions used in the impairment analysis include financial projections of free cash flow (including assumptions about revenue projections, regulations, operating margins, capital requirements and income taxes), long-term growth rates for determining terminal value beyond the discretely forecasted periods and discount rates. For our intangible assets related to the Cannabinoid segment, our estimated revenue projections reflect that Decree 811 that was followed by the passing of the Regulation 227 in February 2022, which was further resolved in April 2022, to allow us to export cannabis flower from Colombia starting 2023. The Colombian government signed Resolution 539, which outlines the regulation and the technical guidelines for commercializing dried flower and medicinal-grade cannabis extracts.
Indefinite-lived intangible assets, consisting of certain of the Company’s licenses, were reviewed for the annual impairment assessment during the fourth quarter of 2021 similar to goodwill, in accordance with ASC 350.
For the three months ended March 31, 2022 and March 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 March 31, 2022:
| | | | | |
| Estimated Amortization Expense |
2022 | $ | 603 | |
2023 | 715 | |
2024 | 542 | |
2025 | 542 | |
2026 | 482 | |
Thereafter | 1,042 | |
Total | $ | 3,926 | |
9. GOODWILL
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 may have been 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 December 31, 2021, combined with our stock price volatility 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 2021 annual goodwill impairment test, the Company concluded that goodwill was impaired as of the testing date of December 31, 2021. During the three months ended December 31, 2021 the Company recognized $18,508 non-cash goodwill impairment charge related to the cannabinoid segment, as a result, the Company had no goodwill on the statement of financial position as of December 31, 2021.
For the three months ended March 31, 2021, no impairment was recognized related to the carrying value of goodwill.
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 Unaudited Condensed 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
Property, plant and equipment, net consisted of the following:
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Land | $ | 5,065 | | | $ | 5,065 | |
Building & warehouse | 15,519 | | | 13,381 | |
Laboratory equipment | 6,337 | | | 6,295 | |
Agricultural equipment | 2,471 | | | 2,404 | |
Computer equipment | 1,700 | | | 1,681 | |
Furniture & appliances | 826 | | | 852 | |
Construction in progress (a) | 3,302 | | | 5,709 | |
Other | 1,243 | | | 1,247 | |
Property, plant and equipment, gross | 36,463 | | | 36,634 | |
Less: accumulated depreciation | (6,407) | | | (5,702) | |
Property, plant and equipment, net | $ | 30,056 | | | $ | 30,932 | |
(a) Construction in progress primarily relates to on-going construction of the Company's Colombian and Portugal facilities
11. DEBT
| | | | | | | | | | | |
| March 31, 2022 | | December 31, 2021 |
Convertible Notes due 2024, current portion (a) | 15,170 | | | 16,559 | |
Herbal Brands Loan due May 2023, current portion | 770 | | | 470 | |
Other loans and borrowings, current portion | 536 | | | 479 | |
Total debt, current portion | $ | 16,476 | | | $ | 17,508 | |
Convertible notes due 2024 | — | | | 1,140 | |
Herbal Brands Loan due May 2023 (b) | 4,553 | | | 4,760 | |
Other loans and borrowings, net | 1,596 | | | 1,687 | |
Total debt, long term | $ | 6,149 | | | $ | 7,587 | |
Ending balance | $ | 22,625 | | | $ | 25,095 | |
(a) Convertible Note, current portion is reflected net of debt discount and debt issuance costs of $105 as of March 31, 2022 and $2,197 as of December 31, 2021.
(b) Herbal Brand's Loan, non current is reflected net of debt issuance costs of $38 as of March 31, 2022 and $410 in as of December 31, 2021.
Herbal Brands Loan due May 2023
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,
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
with an initial expiration date of May 3, 2021. For more information refer to Note 12 to our unaudited condensed consolidated interim financial statements for the period ended of March 31, 2022.
The Herbal Brands Loan and Rock Cliff Warrants were deemed freestanding financial instruments with the loan accounted for as debt, subsequently measured using amortized cost, and the Rock Cliff Warrants, representing a written call option, accounted for as an equity-classified contract with subsequent changes in fair value not recognized as long as warrants continue to be classified as equity. Using a relative fair value method, at the time of issuance, the Company recognized approximately $7,783 as loans and borrowings and approximately $717 in additional paid-in capital for the equity classified warrant.
In August 2020, the Company amended certain terms of the Herbal Brands Loan to provide for additional interest of 4.00% per annum, compounding quarterly and payable in-kind at maturity. In addition, the Company extended the expiration date of the Rock Cliff Warrants to May 3, 2023. As part of the amendment, the net debt to EBITDA covenant test 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 three months ended March 31, 2022 and 2021, the Company recognized interest expense of approximately $239 and $202, respectively, of the Herbal Brands Loan in accordance with the terms of the loan agreement. There was no repayment of principal for the three months ended March 31, 2022 and 2021.
Subsequently, on May 2, 2022, the Company fully repaid the Herbal Brands loan in the amount of $5,642, including interest and fees, in full satisfaction of Herbal Brands' obligations under the Loan and Security Agreement. The Rock Cliff Warrants continues to remain outstanding until it's expiration date of May 3, 2023.
For more information refer to Note 20 in our unaudited condensed consolidated interim financial statements for the period ended March 31, 2022 included in this Form 10-Q.
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 (“Catalina”), 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 provided for maturity three years from the date of issuance and interest accrual at a rate of 5% per annum from the date of issuance. Interest on the Convertible Note was payable on a quarterly basis, either in cash or by increasing the principal amount of the Convertible Note, at the Company's election. The Company may, in its sole discretion, prepay any portion of the outstanding principal and accrued and unpaid interest on the Convertible Note at any time prior to the maturity date.
The principal and accrued interest owing under the Convertible Note could 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 could 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 could 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
CLEVER LEAVES HOLDINGS INC.
Notes to the Unaudited Condensed Consolidated Financial Statements
(Amounts in thousands of U.S. dollars, except share and per share amounts and where otherwise noted)
“Optional Redemption Rate”). Up to $12,500 in aggregate principal under the Convertible Note could 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 would 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 could 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 would 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 was 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 failed to timely deliver common shares as required upon conversion or redemption of the Convertible Note, then the Company would 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 were 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 would settle in accordance with that particular provision, compared to the likelihood of settling under all other possibilities and determined that in order for the Convertible Note to be subject to ASC 480, there must be a 90% likelihood of settlement using a variable number of shares such that the monetary value is substantially fixed. Based upon the overall assessment of settlement possibilities, the Company concluded that the Convertible Note is not subject to ASC 480.
In connection with the 2024 Convertible Note and issuance of common shares upon Convertible Note conversions during year 2021, the Company analyzed the convertible instrument for a beneficial conversion feature in accordance with ASC 470-10 and in accordance to ASC 815. The Company determined it was not a derivative requiring liability treatment and the redemption feature was not bifurcated as a derivative liability, as it was closely related to the host. The Company concluded that during October 2021, the contingency linked to the beneficial conversion factor was met and the beneficial conversion factor with discount on debt was recognized. The Company recorded a beneficial conversion feature of $4,748 in Additional Paid in Capital. The discount created by the beneficial conversion factor was amortized from the date the contingency was met to maturity or earlier redemption date of holder's put. As a result, the Company recorded $3,519 total debt amortization, within Interest expense in the Consolidated Statement of Operations for 2021. The Conversion feature was evaluated under ASC 815 for an embedded derivative and noted that conversion features qualifies for the scope exception for instruments that are indexed to Company's own equity and bifurcation is not required from the host debt instrument.
The Company evaluated the guidance for Beneficial Conversion Features ("BCF") per ASC 470. At the commitment date, the fair value of the shares contingently issuable upon conversion was greater than the allocated proceeds and calculated the intrinsic value of conversion feature for the amount of $9,496 which should be recognized in earnings if and when the contingencies are resolved. In establishing the accounting policy for the recognition of this contingent BCF, the Company considered that this settlement is only available to a limited portion of principal ($12,500 convertible in the first year), when price is below $7.00. 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.
CLEVER LEAVES HOLDINGS INC.
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