This is the first time I’ve looked at a NASDAQ ‘only’ listed organization that doesn’t file on SEDAR, and it isn’t giving up the warm and fuzzies. I’ve captured the statements on EDGAR (an inline XBRL viewer), and while everything is there, it’s a clunky interface written to a form filing. I’m not adverse to learning something new…and adaptation is a big piece of life. One has to swallow the pill. At Deloitte I was occasionally billed as an ‘agent of change’ and billed many an hour in process initiation/formation and design. Maybe I’m just getting old, but my first impression is that EGDAR sucks.

At any rate, this is our first look at Clever Leaves ($CLVR) – and I honestly know very little about them. Their tag line is ‘Cultivate Mojo’ <heh>, and boast of operations in Columbia, Portugal, Germany, Canada, and the US. Corporately, they are slick in presentation, and were birthed as a public outfit via an SPAC last December. 

Despite that ‘mojo’ line, these guys look a little more heavily starched than most MSOs. 

<As an aside, I’m a little fatigued at looking at companies that continue to lose money in the sector, even after several years in operation. And I’m bored as hell listening to the ‘EBITDA’ and ‘Adjusted EBITDA’ refrain that keeps getting peddled. Yes, EBITDA is a high level measure of the overall health of a company. But, it’s not a destination (as GoBlue is fond of saying), it’s simply a signpost. This sector will not grow up until we get past it, and actually see some bottom line production from the capital insertions and assets that have been deployed out there. Many in MSOGang-land are shaking their fists at Booker & Schumer for doing what they said they were going to do, and back to blaming price sluggishness (and volatility) on banking, rather than the obvious impact on verticality and interstate commerce opening up. The third rail of regulatory – social justices’ impact on publicly listed companies – will remain highly fluid, and I expect will be a slow play.

And that’s where I’m most fatigued: having sell-side tropes tossed at me like they’re some sort of high-minded reflection. They’re not. Almost all of it is no different than the inside cover of a glossy magazine: it’s an advertisement. Remember when NY was expected to flip, what a catalyst it was going to be for the sector? Do you hear that much now? Nope. That sale is over, the product out of stock, and discontinued. Right now the din is all about about the utter evil-ness of taxes and access to banking. If only (insert favorite stock symbol here) could get a checking account, we’d all be rich and social justice would be served up in all-you-can-eat-buffet sized helpings. The logic is facile, but to so many who have melded these sell-side tropes directly into their DNA – it sounds perfectly on point. And its’ reinforced by self proclaimed ‘experts’ who disingenuously conflate an income tax (280e) with a sales tax (excise). At a lower heat but just as facile is TAM, or ‘total addressable market’. Or hey – what about the Big Daddy catch-all of 2019: ‘DCF’. Not so much anymore.

And if these sorts are complaining now (with the refrain: “this will never pass as is, just get banking done!”), wait until that first wholesale shipment of top-shelf leaves the California border and craters basis differentials on the East Coast. It’ll sound like an entire kindergarten class tripped and skinned their knee…. all at the exact same moment.

Anyhow – I just needed to get that off my chest. As an analyst – I really don’t care which team wins or loses, or whether Canadian valuations ‘should/shouldn’t’ be higher/lower than US ones. It’s simply business, and it’ll serve one well to remove emotion in dealing with your capital and trading and investing. As well as in recognizing what’s an advertisement, and what’s impartial analysis. I know I’ve gone on about this before, but the brain is just like a muscle – it’s gotta be used and trained, and that means repetition. Back to…..$CLVR> 

Rather than going too deep into the entrails of formation, I’m going to approach this one as standalone set of financials, and see where that leads us. Typically, detailing existing deals/acquisitions takes me down a company’s historical road (as it were), but I’m not sure if there’s much utility in examining an SPAC’s formation – as much as looking at the ‘here and now’. 

And….that doesn’t look like it’s a good idea here. As often mentioned, I don’t ‘do’ pitch decks as general habit, but being I know zip about this outfit, one needs to start somewhere. As I try to get oriented, one of my main takeaways is they’re positioning themselves as a ‘global’ pharmaceutical outfit, that’ll ultimately sell into the domestic US market. They claim 2MM ft² of cultivation in Columbia, and another 700 hectares (!?!?) of outdoor potential there (umm, fwiw, that’s more than $ACB, $WEED, $HEXO, $OGI, TGOD, $TLRY, and $SNDL’s total cultivation canopy….. combined). $CLVR’s pitch decks compares the cost of Canadian bitumen to Saudi Light crude (odd), and American labour costs to those of Chinese manufacturers (odder) – which I infer is meant to illustrate cost advantages that come with having a global footprint. ‘EU-GMP’ certification is tossed around often, and $CLVR seems to like to compare themselves directly with Tilray and Aurora for being vertically integrated botanical extractors – with the potential (!) to expand extraction to a $LABS level capacity of 324k kg/yr.

They claim there’s been sales of output into 14 countries no less, and all the good stuff that comes with supply chain build and efficiency enhancements and yadda yadda. A very ‘investment bank’ feel to it all. Given their CEO is an ex-fund manager, not much of a surprise.

Let’s see if their statements support all that glossy paper handed out at roadshows.

No time like the present…..along with my handy inline XBRL viewer’ and all. Dollar amounts in USD unless otherwise mentioned.

To the financials!

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• Cash at $68MM. Given they were capitalized with ~=$240MM, their cups aren’t exactly running-eth over.
• Revenue an utterly underwhelming $3.4MM, reporting a negative gross margin of 30%. They do point out revenue is up 40% YoY (!), but I’ll repeat the word ‘underwhelming‘.
• And….SG&A of $9.4MM. Sigh. They lost another $4.8MM on a derivative liability, more below.
• $27MM in PP&E, $41MM in goodwill and intangibles. 
• But, there is convertibles and redeemables. The narratives around them are of relatively low quality (as is this @#$%! inline XBRL viewer). This company has the feels of a hedge fund. If this outfit shows any kind of real ramp, I’ll revisit and value some the exotics. As it is, they’re showing little.
• There’s supposedly been international shipments taking place in Q2, we’ll see how much actually went out the door next financials.
• $CLVR ‘investment’ in Cansativa, their German entry point, is a complex arrangement of seed capital contribution and contingent share subscriptions. International tax planning and corporate organization is arcane at the best of times.
• $11MM in inventory. Fully 65% of that number is in finished goods, specifically extracts. This will be a useful value to look for as time goes by, as WIP and feedstock is only 9% of total inventory (ie: nothing really in the pipe, and a whole whack of product ready to ship).
• And yep, they disclose a material weakness that was found in their financial controls during the year end audit just completed. Their annual 10-K filing mentions ‘material weakness’ no less than 39 times, and but it’s horribly circular and largely just repetitious. At the bottom of it, it appears it had to do with the private warrants mentioned below. Yet, I don’t see the values around it demanding the depth of self-flagellation that’s shown.
• $CLVR states that the weakness in financial controls still exist, and have not been rectified. I’ll raise an eyebrow to that.

Ok. Since this is my first cut – and there’s so little to speak of operationally – I’ll stop there.

That convertible debt issue they did with Sundial ($SNDL) is quite the paper. What we wrote the other day covers that paper, but the paper it was raised to extinguish is far more complex, containing a seperate class of preferred shares along with the convertible debt. My observation is that while there may be some nominal cash savings (claimed initially at least), I can see why $CLVR would have wanted the original deal out of the books. And if there’s another theme emergent in these statements, it’s in complexity of some of the deals.

$CLVR has been claiming moves over the past 6 months, initiating sales into and/or out of Brazil, Portugal, Germany, Mexico….et al. Kinda surprised their SG&A is as low as it is. And I haven’t heard any outfit positioning themselves this way for years now. Many hands were burnt by touching LATAM; Germany has become an incremental and somewhat meaningless market; and the lack of geo-political uniformity on cannabis policy had pretty much put a stake in many of those with global ambition, at least for the past couple of years. I mean, I think it’ll get there….but it’s going to be a looooong road to hoe.

That derivative liability (Note 11, Warrants) stems from a somewhat ornate deal comprised of public and private warrants that have multiple conversion and strike provisions. I’m not going to bother formally valuing them for the moment, they loosely back into a pure intrinsic calculation. $CLVR share price went on an absolute rampage during the February run (hitting north of $19), which even after calming down, left the warrants about a $1 in-the-money (I can back into the reported liability). Late May brought another run as well…..and this chart is not for the faint of heart:

I’m getting a little facial tic at this point – and some mild flashbacks to some of the international outfits that emerged in 2017/18, and promised much. I mean, tracking an international conglomerate with multi-national financial exposures can be challenging. And frankly, the numbers these guys are putting up are anemic, at least so far. Particularly for being in business for 4 years.

It has all the feels of a highly structured financial play on top of (presumeably) sourcing cheap biomass from Columbia, transformation into API’s, and establishing/initiating sales into global pharmaceutical channels. That’s a distinct (and somewhat out of fashion) business model in legal cannabis. Whether it’s coming back into vogue or not (several other outfits are beginning to tout international shipments again), revenue numbers will reveal its’ success in the short term, but determining its’ ultimate potential I think is a very challenging endeavour.

I prefer to avoid highly structured outifts – unless that’s a core piece of their business model. Growing weed and extracting and selling it doesn’t fall into that category in general (to myself), despite that regulatory and nation-state pharmaceutical laws and supply chain is a complex landscape on its’ face. Given $CLVR’s CEO was a fund manager in a previous life, it could be as simple as what his experience and preferences are in sourcing debt, and perhaps somewhat benign. That’s the issue with complexity – unless one does the work, one never really knows. And for $3.4MM in unprofitable sales – well.

I wouldn’t touch this thing until they show they can do anything. It’s been 4 years now, and despite the promises of funded capacity and cultivation and cheap labour/capital – that’s all it looks like to me right now: just a promise.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $CLVR.