Edible Garden AG Inc Q2 FY2023 Earnings Call

Greetings, and welcome to the Edible Garden Second Quarter 2023 Business Update Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to your host, Ted Ayvas, Investor Relations. Ted, you may begin.

Thanks, Tom. Good morning, and thank you for joining Edible Garden's Second Quarter 2023 Business Update and Conference Call. On the call with us today are Jim Kras, Chief Executive Officer of Edible Garden and Mike James, Chief Financial Officer of Edible Garden. Earlier this morning, the company announced its operating results for the three months ended June 30, 2023. The press release is posted on the company's website, www.ediblegardenag.com. In addition, the company will file its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission, which can also be accessed on the company's website as well as the SEC's website at www.sec.gov. If you have any questions after the call, or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. Before Mr. Kras reviews the company's operating results for the quarter ended June 30, 2023, and provides a business update, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future results of operations and financial position, strategy and plans, and our expectations for future operations are forward-looking statements. The words 'expect,' 'project,' 'plan,' 'believe,' 'may,' 'will,' 'would,' 'should,' 'could,' 'mission,' 'strategy,' 'potential,' 'seek,' 'strive' and the negative of such terms in other words, and terms of similar expressions are intended to identify forward-looking statements. These forward-looking statements are based largely on the company's current expectations and projections about future events and trends that it believes may affect its financial condition, results of operations, strategy, short-term and long-term business operations and objectives and financial needs. These forward-looking statements are subject to several risks, uncertainties and assumptions as described in the company's most recent quarterly report on Form 10-Q filed with the U.S. Securities and Exchange Commission. Because of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this conference call may not occur, and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. Although the company believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, level of activity, performance or achievement. In addition, neither the company nor any other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The company disclaims any duty to update any of the forward-looking statements except as required by law. All forward-looking statements attributable to the company are expressly qualified in their entirety by these cautionary statements as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties. With that, I will now turn the call over to Jim Kras. Jim?

Thanks, Ted. Good morning, and thank you to everyone for joining us today. I want to begin by extending our sincere thanks to our investors for the trust and belief you've placed in our vision. Our commitment to achieving our goals is unwavering as we continue to focus on generating lasting long-term value for all shareholders. We are excited to report year-over-year revenue growth of 41.4% for the second quarter of 2023. Edible Garden has always stood out for its consistently high level of execution, a feature that sets the company apart from our competition. While others in our industry have struggled, often shrinking or even ceasing operations, Edible Garden continues to grow successfully, building its reputation and gaining a larger portion of market share. Edible Garden has regularly executed at a level that surpasses those of our competitors, and our order-fill rates across retail and distribution partners is a testament to the company's dedication to exceptional service. Our ability to continually surpass our retail partners' expectations solidifies Edible Garden's position as a strong and dependable supplier of sustainably grown products. This superior performance has furthered the expansion of our distribution to encompass some of the most prestigious names in retail nationwide. It is our belief that both existing and prospective retail customers view Edible Garden as a reliable and trustworthy partner, often looking to reinforce and establish a distribution relationship with the company. In the second quarter, the company initiated a deliberate strategy to concentrate our energies and redistribute resources towards more profitable customer and partner relationships. The impact of this strategy was evident almost immediately as we achieved a 168% increase in our gross profit compared to the same quarter in the previous year. Additionally, with the launch of Edible Garden Heartland in April 2023, we expect additional positive impacts on our margins. We have attributed this expected improvement to increased and growing capacity offered by Edible Garden Heartland. This expanded capacity allows us to reduce the company's reliance on third-party providers and transition previously outsourced production to in-house operations. We believe that these actions will positively impact the company's margin. We also believe that the facility's potential to generate up to $20 million in annualized revenue provides us with the opportunity to vertically integrate our Midwest production capabilities, further enhancing our operational efficiencies. Additionally, the company is witnessing expansion across all segments of our business and platform, including leafy greens, floral products, alternative proteins, and pulp flavors, a comprehensive line of gourmet sauces and chili-based products, which has begun scaling and building inventory for a near-term retail introduction. Furthermore, during the second quarter, in response to the growing demand for our potted herbs and their sustainability for our customers' home gardens, Edible Garden expanded the distribution of our Garden Service product at all Wakefern and ShopRite retail locations across the Northeast. This expansion came on the heels of introducing Garden Service at Meijer retail locations in the Midwest, just in time for Mother's Day. The 35% of American households grow some of their own food. Edible Garden's sustainably grown herbs and produce have become popular choices among consumers looking to enhance the flavors of their meals. By placing our potted herbs in the same supermarket section as cut herbs and sustainably grown produce that customers often purchase, we have made it more accessible and convenient for those looking to incorporate Edible Garden potted herbs into their home gardens. In addition, during the quarter, we enhanced our partnership with Walmart to provide a wider range of Edible Garden's SKUs in their Northeast locations and initiated distribution to retail stores in the East South Central region of the U.S. Walmart, recognized as the world's largest retailer of fresh produce, has consistently been one of our most significant customers. Our partnership with them goes beyond simply supplying produce. Edible Garden actively contributes to Walmart's Project Gigaton, an ambitious initiative launched in 2017 that aims to unite suppliers, NGOs, and various stakeholders in an effort to reduce or eliminate 1 billion metric tons of greenhouse gases in the global value chain by 2030. The company has also been honored by Walmart as a Project Gigaton Giga Guru, reflecting our unwavering dedication to our Zero-Waste Inspired mission and our leadership in the Controlled Environment Agriculture (CEA) sector. We're confident this expanded distribution relationship with Walmart will positively impact our revenue and cash flow in 2023 and subsequent years. In June, the company received grants from West Michigan Works and the Specialty Crop Block program of the Michigan Department of Agriculture and World Development. The grants were specifically earmarked to compensate Western Michigan employers with the costs related to leadership and food safety training for their workforce. These grants will enable employees at our Edible Garden Heartland facility to participate in food safety training. Key areas covered in the training will include produce safety alliance, grower training, training in hazard analysis, critical control points, and good agricultural practices training. The grants reflect our commitment to food safety while also complementing our research collaboration with the New Jersey Institute of Technology, the USDA, and the EPA focusing on the effect of nanobubble technology on fresh produce, food safety, and processing methods. They also align with our collaborative research study with Auburn University's Department of Horticulture investigating food safety concerns tied to fresh produce contamination such as listeria. In July, Edible Garden introduced GreenThumb 2.0, the most current version of our advanced greenhouse management system, marking a substantial advancement in our automation technology. This improved version of the system significantly boosts our dynamic forecasting capabilities using real-time data to more precisely anticipate our distribution partners' needs and to modify our growing strategies as needed, taking into account factors such as year-over-year patterns, sales trends, and seasonal fluctuations. A significant enhancement in GreenThumb 2.0 is the integration of a real-time inventory system that tracks all raw materials, work in progress, and finished products. This allows the company to dissect our costs for every element involved in plant growth with an unparalleled degree of detail. We are confident that this level of detail will furnish essential information to aid us in managing our expenses. We've also expanded our distribution at both King Kullen and IGA retail locations across Long Island, New York, just in time for the 2023 summer season. This expansion comes in response to the increasing consumer demand for fresh produce and herbs that have become synonymous with the Edible Garden brand. To accommodate this growing demand, both King Kullen and IGA have doubled the shelf space allocated in their retail locations for Edible Garden products. The initiatives that the company has been working on since the beginning of 2023 have started to manifest in our financial results. The record revenue we achieved in the second quarter, coupled with the rise in both gross profit and profit margins, provides evidence that our strategic approach is working. We believe that the ongoing execution of our strategic plan will enable us to achieve our target of becoming cash flow positive on a quarterly basis before the year's end. I'd like to turn the call over to Mike James, Chief Financial Officer at Edible Garden, who will review the financial results for the three-month period ending June 30, 2023.

Thanks, Jim and good morning. The company reported an all-time record year-over-year revenue growth of 41.4% to $4.2 million in the quarter ended June 30, 2023, compared to $3 million reported in the second quarter of 2022. The herbs, produce, and floral business saw a 41.7% increase, largely driven by the initiation of shipping from the Edible Garden Heartland facility at the start of the quarter. In addition, revenue from alternative plant-based supplements experienced a 39.3% rise, thanks to new flavor SKUs ordered by customers across every store in their retail chain. Cost of goods sold was $3.7 million for the three months ended June 30, 2023, compared to $2.8 million for the three months ended June 30, 2022. The increase is primarily due to the additional labor and materials needed to cultivate the products sold into the retail channel. Selling, general and administrative expenses were $2.4 million for the three months ended June 30, 2023, compared to $2.7 million for the three months ended June 30, 2022. The 12.9% decrease was primarily driven by a decrease in compensation and benefits expense, primarily offset by the costs incurred in ramping up and operating Edible Garden Heartland, which was acquired in August 2022. The net loss was $638,000 or $0.24 per share for the three months ended June 30, 2023, compared to a net loss of $4.8 million or $20.44 per share for the three months ended June 30, 2022. I would now like to open up the call for questions. Operator, could you please assist us with that.

And our first question this morning is coming from Nick Pincuss from Forest Investments.

Good morning, guys. Congratulations on a very strong quarter. You mentioned some difficulties that your competitors have faced. Maybe you could expand a little bit on the macro environment, what those challenges have been? And as a follow-up to that question, what's allowed Edible Garden to buck that trend?

Thanks for the question, Nick. In the competitive environment, we have benefited from our unique positioning with strong retail partnerships that enable us to deepen our collaboration with major players like Walmart, Meijer, and Wakefern. With our platform boasting over 4,000 stores, we can leverage these relationships to introduce more products, particularly shelf-stable items like pulp, which help us expand our assortment within produce and into other store areas. We're receiving many requests to utilize our established trust with these retailers to act as a distribution partner for a wider variety of products that we both cultivate and develop. Our ongoing innovation of the GreenThumb platform, now with its 2.0 version, has greatly enhanced our operational efficiency. We are growing stronger as a partner in picking, packing, and shipping, and this focus is beginning to yield benefits in efficiency, profit margins, increased revenue, and stronger relationships.

That's great. And you've stated that the goal is to become cash flow positive in the near term, which would be a tremendous milestone. I know you've talked about this a little bit, but maybe you could just expand on the steps that we're taking, the scalability of the business, and some of the enhancements for operating efficiency.

Yes. Thank you. Yes, I mean, the goal here is to become cash flow positive by year's end as stated in our release and in our script today. We are really focused on profitability as we continue to ramp the business. I think that being able to have not only the technology that we've developed, which is proprietary, that's specific to this business and to this platform, but also we continue to refine personnel as well as our focus, I think, has allowed us to continue to get stronger and grow the revenue. We have quite a bit on the horizon as it relates to the new introductions and new opportunities. I think the level of confidence is high that we will get to cash flow positive pretty soon.

And we have a question from Anthony Vendetti from Maxim Group.

Thank you. I'll echo the sentiments of the last caller. Across the board, in terms of revenues, margin significantly smaller or narrower loss. So it seems like, like you said on the call, kind of everything is coming together this quarter. Can you talk about the Heartland facility opportunity? I know that you started shipping from there. But can you talk about what's the total opportunity there and the timeline for the ramp to get to full capacity?

Heartland right now, as we sort of earmarked, has the capacity to produce about $20 million in revenue. We started shipping in April. We really didn't get a full month of shipping; it was just timing on when we could start to cut over. That's been a huge impact on the business because it's allowed us to vertically integrate, get margin expansion where we needed it, to get out from under some third-party growers and producers that we just weren't making the type of money we needed to make working with them. It's also allowed us to expand the assortment capabilities from a distribution standpoint. The facility is impressive; not only is it located near one of our biggest customers, Meijer, but it's allowed us to really open up that part of the country to service accounts and drive distribution well beyond Meijer into other regionals as well as local stores. It allows us to do that with not only the produce that is being grown there and growing there much more profitably because it's grown in-house, but also with items like pulp, where we can house it, store it, ship it, and push it out of that facility, which is centrally located, giving us a wide reach beyond shipping from the East Coast. The central location is strategic. It aligns with one of our biggest customers. It has allowed us to open up a major metro in Chicago and Chicago Land, as well as Detroit and even St. Louis and some of these other areas that we're expanding into right now. So I like the land grab, I like the strategic location, I like the efficiency, I like the control, I like the vertical integration, and I love the margin expansion. The top-line opportunity is significant, and I think is even potentially beyond the $20 million that we've put out there as we deepen the assortment of items that we offer. As time goes by, you'll see some strategic moves on our end to maximize that key location where it is, and the cost of doing business there is lower than, let's say, New York. One of the nice things about Grand Rapids is that they're very manufacturing and growing friendly. So it's a great spot. We're very happy with the people that we have working with us there. So it worked out great.

It sounds like there are a lot of advantages to that facility in Michigan. So can you tell us where it's currently at in terms of capacity? You said $20 million is the capacity. Maybe it's a little bit more than that now, but in terms of the opportunity. Are you currently at about 50% capacity and approximately what capacity are you at now? And when do you think you can get close to that $20 million in annualized revenue?

Yes. I anticipated that question. I apologize for trying to avoid it. Currently, our capacity can be examined from four perspectives. The processing aspect has no significant limiting factors aside from time and staffing. As we gain more business, we can continue to produce more units. This aspect is already operational and serviceable to key clients in the region, including Meijer and another major retailer that has recently engaged us. We also have the floral business, which is an established asset that we are leveraging, and we will continue to supply products to our wholesaler customers. We plan to strategically position this business for potential additional capacity in the future. The leafy greens segment is already in production and shipping, with more anticipated business in Q3. Capacity growth will depend on how we define it, but I expect it to be fully utilized by year-end or definitely by the end of Q1 next year. The production and processing aspects do not encounter significant factors limiting our current output or projections. Therefore, I believe the $20 million estimate is quite conservative. Several elements contribute to that figure. The fourth aspect includes products we aim to distribute, whether they are commodities we are being asked to include in our platform or potentially importing other shelf-stable products. That $20 million estimate reflects a cautious outlook of our potential with the facility. As we keep investing and expanding our business, we are receiving increasing opportunities from major retailers pleased with our performance.

Just lastly on the gross margin. I know you mentioned you had some plant-based supplements, which have high margins. Your gross margin came in significantly greater than we expected. Is that sustainable, or is that one-time? I'm not saying it's a one-time order, but that order helped this quarter and the gross margin may tick down a little bit as we move forward? Or is this a much better gross margin and new run rate?

I think that business has kind of always been in the background, and we're continuing to optimize that business. The margins that we are really seeing the expansion on are really the stuff that we're growing as a function of bringing it in-house that's going to continue to be the key driver. Floral was a nice add-on. It's not as production-heavy technology-wise as maybe some of the leafy green items or some of the other things that we've continued to invest in within the CEA aspect of the business. I think you'll see more things out of the supplement business as we push into 2024. We've really just tried to focus on what our core business is, which is picking, packing, and shipping. I think that's what's allowed us to separate ourselves from some of these other companies, some major players that are in this space have gone out of business and claimed bankruptcy just in the last 90 to 120 days. I think keeping our head down and driving product, driving margin, and focusing on the core business, with the understanding that then adding on what we know we can take on, has worked out well. It takes a little longer than maybe people would like, but we're starting to see the fruits of our labor. The supplement business, once again, I think helped us a little bit on the margin, but I don't think it's going to be the driving factor moving forward recently or next quarter or two. I think you can continue to see margin improvement like I said, in the leafy greens business and the floral. So we're pretty excited. To answer your question, yes, it will be sustainable moving forward if you only see improvement.

Thank you. And there are no further questions in the queue at this time. I would now like to turn the floor back to management for closing comments.

Thank you again for joining us today. We are pleased with our progress at Edible Garden, and we're excited about the opportunities that lie ahead. We will continue to execute our strategy and look forward to updating you on our progress in coming months. Thank you, again.

Thank you. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.