Edible Garden AG Inc Q4 FY2023 Earnings Call

Greetings, and welcome to the Edible Garden Fourth Quarter 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, Mr. Ted Ayvas of Investor Relations. Sir, you may begin.

Thanks, Ali. Good morning, and thank you for joining Edible Garden's quarter and year-end December 31, 2023 conference call and business update. On the call with us today are Jim Kras, Chief Executive Officer of Edible Garden; and Kostas Dafoulas, Interim Chief Financial Officer of Edible Garden. Earlier this morning the company announced its operating results for the three months and year ended December 31, 2023. The press release is posted on the company's website, www.ediblegardenag.com. In addition, the company has filed its Annual Report on Form 10-K 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 and year ended December 31, 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 result of operations and financial position, strategy and plans, and our expectations for future operations are forward-looking statements. The words aim, anticipate, believe, could, expect, may, plan, project, strategy, will, and the negative of such terms and other words in 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 filings with the SEC, including the company's annual report on Form 10-K for the year ended December 31, 2023. Because of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in the conference call may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statement. 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, levels of activity, performance or achievements. 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. Having said that, I will now turn the call over to Jim Kras, Chief Executive Officer of Edible Garden. Jim?

Thanks, Ted. Good morning, and thank you to everyone for joining us today. We are extremely pleased with the 21.6% increase in our annual revenue that we reported for 2023, along with an even more impressive 32.8% year-over-year increase in revenue for the fourth quarter. This robust growth underscores the effectiveness of our efforts over the past year to leverage our distribution network in order to drive revenue. Our strategy to further develop our distribution network is two-pronged, adding new retail partners and expanding our product offerings with existing partners. In 2023, we achieved significant success in both areas, thanks to our growing industry market position driven by our outstanding service and reliability. As a result, Edible Garden has become a go-to partner for retailers seeking a trusted source for organic and sustainable products. Additionally, the company continually strives to identify additional opportunities to boost profit margins. The prudent management of our operations is reflected in our financials by the increase in our gross profit margin by 270 basis points in 2023 to 5.9% of revenue, nearly double the 3.2% gross profit margin we achieved in 2022 and the 767 basis points improvement in our operating margin. Moreover, our gross profit increased to 6.9% of revenue in the fourth quarter. We believe that by continuing to add higher margin products to the Edible Garden product line, we will be able to further increase our gross profit margin in 2024 and in the future years to come. We have further leveraged our platform to enrich and broaden our wider range of Edible Garden products. We recently partnered with Tops Friendly Markets, introducing our sustainable herbs to 149 stores across New York, Pennsylvania, and Vermont. Additionally, Uncle Giuseppe’s Marketplace, a division of RBest Produce, is now carrying Edible Garden herbs in their 12 locations throughout New York and New Jersey. These new partnerships further enhance our footprint in the Northeastern United States, marking a significant step forward in making our sustainable, fresh produce more accessible to consumers in the region. In February, we entered into a three-year agreement with a leading U.S. food retailer to broaden the range of Edible Garden products available in their stores. This expansion encompasses a diverse selection of our offerings, including potted and fresh-cut herbs, fresh-cut basil, and wheatgrass. The partnership goes beyond merely increasing our product assortment. It introduces fresh and innovative displays designed to elevate our brand's visibility and prominence on the retailer's shelf. These initiatives underscore our commitment to deepening our relationship with retail partners aiming to better satisfy the requirements and simplify the shopping experience for their customers. In the fourth quarter of 2023, we expanded our offerings at Meijer stores with two new flavors from our Vitamin Whey collection, notable for its blend of high-quality whey protein, amino acids, while providing excellent nutritional value at an affordable price. This addition is expected to bolster Edible Garden's reputation as a flavor maker through our ongoing collaboration with Nutricon for innovative flavors. This success of Vitamin Whey supports our belief that these flavors will enhance our brand and facilitate nationwide expansion. Additionally, we enhanced our production capabilities out of greenhouse operations in New Jersey and Michigan, which has led to a decreased dependency on contract growers, allowing us greater control and flexibility in our operations, while impacting potential profitability. Moreover, our investment in Edible Garden in Heartland has been rewarding incorporating advanced technology such as our proprietary GreenThumb greenhouse management system which significantly improves the efficiency of our supply chain, allowing the company to ship tens of thousands of fall ornamentals just in time for the fall gardening season. We anticipate increased profit margins from the ornamental sector and are confident that this expanding line of business will have a positive effect on the company's overall profitability. A major milestone for the company in 2023 was the introduction of pulp, our cutting-edge selection of sustainable gourmet sauces and chili-based products, which allowed Edible Garden to enter the global sauces and condiments sector, a sector that is projected to grow from $172 billion in 2021 to over $240 billion by 2028. Expanding into a new product category was significant for the company as it provides us with higher margin products with longer shelf life. In addition, it provides the Edible Garden brand with additional visibility as the product will be located in retailers' refrigerated sections, which are adjacent to products that they are already carrying in the produce section of their locations. Within a short time, we have introduced pulp to many new retailers and markets. After the initial launch at Whole Foods Market, retail locations across their Mid-Atlantic and Southeastern divisions in the summer of 2023, we rapidly added new retailers that are now carrying pulp products. Pulp is now available at Morton Williams, 16 locations in the New York metropolitan area, Dierbergs Market, 26 locations in the greater St. Louis metropolitan area, as well as Woodman's Market with 19 locations across Wisconsin and Illinois. Most recently, Target joined our growing list of retail partners carrying the pulp line in 2024. The expansion to the Target Southeastern stores significantly expands our distribution network for all Edible Garden products, which now spans over 5,000 retail locations across the nation, including several major big box retailers. Edible Garden will support this launch by rolling out a robust marketing campaign that includes sampling, geotargeting, influencer partnerships, and promotional pricing. We are confident that once customers try our sustainable USDA organic bland-to-bold gourmet sauces, they will be eager to explore more offerings from the product line. Given Target's nationwide presence, we anticipate that this collaboration will significantly boost the growth and visibility of both our pulp product line and Edible Garden brand overall. In early March of this year, we announced that KeHE Distributors, the premier distributor of natural and organic specialty and fresh products, is now carrying our pulp product line. KeHE’s expansive distribution network encompasses over 31,000 national food stores, chain and independent grocery stores, e-commerce retailers, and other specialty product retailers across North America. In January 2024, we launched the pulp e-commerce site, enhancing accessibility to our gourmet sauces by enabling online purchase directly. This move significantly broadens consumer access to our distinctive flavors. The overwhelming positive reception of pulp has underscored our reputation as the flavor maker with our unique peppers, turning sauce enthusiasts into aficionados. Thanks to our e-commerce platform, customers across the country can now enjoy bland-to-bold flavors of pulp from their homes. Earlier this year, the US Patent Trademark Office awarded Edible Garden two new patents. The first patent pertains to GreenThumb, a web-based greenhouse management system and demanding planning system that enables the company to enhance our supply chain which has led to improved shipping and thoroughness alongside notable sales growth. This was the third distinct patent awarded for this advanced system. The second patent highlights our commitment to innovation to our proprietary self-watering display technology. This technology has been a game changer for the company, extending plant shelf life, ensuring freshness, and dramatically reducing spoilage at retailer outlets. Aligned with our zero waste inspired mission, these self-watering displays allow retailers to showcase plants at their peak, minimizing waste and delivering superior products to customers. These patents are a testament to Edible Garden's leading role in the ag tech industry, further demonstrating the company's unwavering commitment to leading edge innovation. Through the deployment of advanced technology such as these patents, we are driving operational efficiency and enhancing expected profitability, highlighting Edible Gardens' commitment to sustainable development and its position as a leader in agricultural technology. Recently the company was awarded several grants to cover various expenses related to the organic crop certification training costs of our greenhouse facilities in Belvidere, New Jersey and Grand Rapids, Michigan. In Michigan the company was granted funding by the Going Pro Talent Fund, overseen by the Michigan Department of Labor and Economic Opportunity, and facilitated by Michigan Works. This support is designated to cover training costs for our staff at the Edible Garden Heartland facility in Grand Rapids, Michigan, focusing on essential skills like supply chain management, transportation, and logistics. Additionally, we secured a grant from Michigan Occupational Safety and Health Administration, which will assist in creating a safer and healthier work environment at Edible Garden, Heartland, thereby reducing the risk of workplace accidents and health issues among employees. In New Jersey, the company was awarded a grant by the United States Department of Agriculture Organic Certification Program, managed by the Hackettstown Farm Service Agency. This grant provides financial assistance to organic producers and handlers, offering reimbursement to help cover the expenses related to obtaining organic certification and processing and handling certifications. The grants we've received underscore our commitment to food safety and are a valuable addition to our research collaborations. We are also engaged in a project with the New York Institute of Technology, the USDA, and the EPA to explore the impact of nanobubble technology on the safety and processing of fresh produce. Additionally, our collaboration with Auburn University's Department of Horticulture aims to tackle food safety challenges associated with fresh produce. These collaborations highlight our dedication to upholding the highest standards of food safety and quality across our product range. I would like now to turn the call over to Kostas Dafoulas who recently joined Edible Garden as our Interim Chief Financial Officer who will review the financial results for the three months and year ended December 31, 2023.

Thanks, Jim, and good morning, everyone. Starting with the fourth quarter of 2023 results, the company reported revenue of $4.1 million, an increase of 32.8% compared to $3.1 million for the fourth quarter of 2022. This increase was driven by higher demand from the existing customer base, expansion of our product lines, and the expansion of our product footprint in key retail partner stores. Cost of goods sold was $3.8 million for the three months ended December 31, 2023, compared to $3 million for the 2022 comparable quarter. The increase was the result of costs related to the buildout and staffing of a Heartland facility, increases in rates charged by our suppliers, higher packaging costs due to inflation, and higher labor costs. Despite the increase in COGS, we expanded margin by 4.5% year-over-year. Selling, general and administrative expenses were $2.6 million for the three months ended December 31, 2023, compared to $3.1 million for the same quarter in 2022. The decrease was primarily driven by reduction of professional service expenses related to our IPO, along with costs associated with the build-out of a Heartland facility. Net loss was $3.1 million or $0.54 per share for the three months ended December 31, 2023, compared to a net loss of $3 million or $9.13 a share for the quarter ended December 31, 2022. The net loss for the three months ended December 31 also included a one-time non-cash impairment charge of $700,000 related to the write-down of legacy assets acquired from our predecessor company. Now turning to the full year 2023 results, revenue totaled $14 million, an increase of $2.5 million or 21.6% compared to $11.6 million in 2022. The $2.2 million revenue increase was attributed to sales of our herbs, produce, and floral products driven by a mix of organic growth and new customers. Additionally, sales of our vitamins and supplements increased $324,000 during the year ended December 31, 2023, driven by consumer demand. Cost of goods sold was $13.2 million for the year ended December 31, 2023 compared to $11.2 million for the year ended December 31, 2022. The increase was primarily due to $2.6 million of higher costs for operating the Edible Garden Heartland facility, which transitioned to growing our herbs and lettuce products during 2023. These increases were offset by a $377,000 decrease in freight and shipping costs and a decline of $264,000 in costs for supplies and raw materials for our Edible Garden flagship facility. Gross profit increased 126% or $458,000 to $822,000 for the year compared to $364,000 last year. Gross profit margin increased by 270 basis points to 5.85% of revenue in 2023 compared to 3.15% of revenue in 2022. The improvement in margins was primarily attributed to less reliance on contract growers in 2023 versus 2022. Selling, general and administrative expenses were $10 million for the year ended December 31st, 2023 compared to $9.4 million for the year ended December 31, 2022. The increase was primarily driven by additional costs incurred to operate the Edible Garden Heartland facility. Net loss was $10.2 million, or $3.08 per share for the year ended December 31, 2023, compared to a net loss of $12.5 million, or $48.68 per share last year. Please note, per share amounts have been adjusted to reflect all stock split. Net loss for the 12 months ended December 31, 2023 also included a one-time non-cash impairment expense of $700,000 related to legacy assets acquired from our predecessor company. In conclusion, we continue to focus on providing outstanding products and value to our customers while improving the financial performance of the company. We've demonstrated in 2023 that we're focused on growth while improving profitability, and I'm excited for what's to come in 2024.

Thank you. At this time, we will be conducting a question-and-answer session. Thank you. Our first question is coming from Nick Sherwood with Maxim Group. Your line is live.

Thank you. Good morning and congrats on the quarter and the year. Can you provide us an update on the build-out and the integration of the Heartland facility?

Hi, Nick. It's Jim Kras. How are you?

Good, how are you?

I'm good. The status right now is that the facility, we've made a significant investment, it's currently shipping Meijer, which is one of our largest customers, significant volume. We've deployed not only our GreenThumb technology to help us run the operations, we have a fully operational state-of-the-art packhouse, which we just put in some new machinery in the last 30 to 60 days to help lower our manpower costs while increasing the ability to ship more units. In April, we'll be bringing in a considerable amount of our four-inch potted higher margin product that's currently already being grown in the greenhouse. We have five acres there. That will convert into being vertically integrated in April, and we'll start to see some of the benefits of that in May. So we'll be 100% fully operational come the next few weeks with us handling all of our product that's in the Midwest flowing through our facility. So once again, five acres, fully operational, full processing, 100% deployed as well as our software overlay GreenThumb being deployed.

Awesome. Thank you for that, Kras. And then kind of switching gears, you mentioned the protein powder being sold at the Meijer locations. This is kind of one of the first times it's been mentioned during these earnings releases recently. What is the near-term, the medium-term plan? Is this more of just an opportunistic where you're working with Meijer and you're increasing your SKUs, or is this the beginning of maybe a more substantial kind of accelerated rollout to your other retail partners? Thank you.

With the completion of the Heartland facility, we are now focused on maximizing our distribution platform. Being in over 5,000 stores and partnered with major retailers like Meijer, Walmart, and Target gives us the opportunity to increase product distribution. Our legacy brand, Vitamin Whey, has performed well at Meijer, and we aim to enhance that business, which will help us expand our reach to other retail partners. We have already initiated the national rollout presentation process and are developing a new product line to complement Vitamin Whey. This new offering will be a price-friendly, high-quality performance product that appeals to a broader audience and potentially features cleaner labeling. One of our advantages is our strong partnership with Nutricon, experts in flavoring and formulating advanced products. Collaborating with them will help us introduce higher-margin, health-conscious products as we move into the second half of the year, focusing on leveraging our relationships, contemporary offerings, and improved margins.

Understood. And then my final question is, can you provide us any more extensive details on the introduction of EG Direct and the sourcing and supplier?

Yes. EG Direct continues to be developed. The thrust of EG Direct is really to start to leverage, once again, the relationships that we have. We have really good relationships with our retailers based on our performance. We're looking at that for not only national but international opportunities. So we really use that as sort of the arm of the business that helps source products, ideally higher margin potentially to party things that we don't necessarily grow or things that we end up manufacturing and want to bring into the platform. So we continue to work on that. We've already started utilizing the relationships there to start to bring in some products from overseas at a higher margin.

Understood. Well, thank you again for answering all of my questions. Congrats on the quarter and I'll return to the queue.

Thanks, Nick.

Thank you. Our next question is coming from an unidentified analyst. Your line is live.

Good morning, gentlemen, and thanks for taking my questions. Congrats on the fourth quarter results and 2023 results. So in the past you guys have talked about getting the company cash flow positive. Can you guys discuss what you're doing to drive efficiencies there and get the company cash flow positive?

Sure, thank you. I will address this closely. We have been focused on investing in technology, particularly in enhancing the speed and efficiency of our production lines for cut herbs. Currently, we are integrating our contract grower business, which we are not yet benefiting from in terms of margin contributions. This segment, largely based in the Midwest, will significantly improve our cash flow and aid in our pursuit of profitability. Last year, we continued to invest in the business while resolving several issues to get operations running smoothly at scale. With improvements such as more efficient lines and reduced manpower due to automation, we expect to see overall optimization throughout the supply chain, which should enable us to achieve positive cash flow in the future.

Thanks, Jim. That's helpful. And then regarding your gross profit margin, which almost doubled in 2023, what do you attribute that success to? And moving forward, how would you further increase your gross profit margin?

Kostas, do you want to take that one?

Yes, I can start on that and you can add to it. Nicole, thanks for the question. One of the things we mentioned earlier, Nicole, is less reliance on contract growers, and that's going to continue to manifest itself this year and beyond with the online of our Heartland facility. So that's going to reduce our kind of raw costs of the materials and supplies and seeds, etc., that we purchase for the business. And less reliance on those contractor growers gives us much more control over our cost structure and profitability, essentially. So as we continue to kind of online and drive more products through our internal facilities rather than rely on those contract growers, we should expect that margin to continue to grow somewhat. Furthermore, to what Jim was saying, we're looking to add to our product mix and drive products that are higher margin through the business, more shelf stable, so we're less reliant on the seasonality and sort of potential product issues with plants in general. And I think those two things, as they continue to kind of manifest themselves through our financial results, will continue to drive gross profit. Jim, feel free to add to that.

I believe that summarizes it well. It's a mix of factors, focusing on broadening our base and product assortment. We're not only emphasizing our strengths in the produce and floral sectors, but also introducing higher margin, shelf-stable products. You can see this with our offerings in pulp and vitamins. As we diversify our base and strengthen our relationships with more higher-margin items, we anticipate a significant improvement in our margins moving forward.

Thank you both. That makes sense, and thanks for the additional color on that. And so to touch on pulp for a minute. With the new entry into this new product category, are you exploring any other product categories that you would be looking to enter?

Yes, once again. I mean, sticking with the zero waste inspired theme and our brand promise of doing more with less, we are looking at products that fit that kind of brand persona. And with that, we're going to be introducing new products this year that are within this condiment category that we're looking to lead and drive with the relationships that we have. I mean, being known as a purveyor of fresh and being so prominent in so many of these big box retailers in their produce section gives us permission to develop products that sort of link to what we're known for. And you're going to see that type of product introduction and innovation that we're known for as a company. Kind of go from being fresh into more bottled, more shelf-stable, more good for you, and more sustainable type of product. So yes, that would be the answer. And that is underway. And I think you'll see some of the exciting stuff over the next quarter as we get ramped up on that part of the business.

Thanks, Jim. I'm looking forward to that. And my last question is, can you provide any additional color on how the sales of pulp are going?

I can't provide specific details, but I can share that we are seeing an increase in retailer partnerships, including KeHE, which has recently given us access to 31,000 doors. We are actively nurturing this relationship and receiving a positive response to our product line. Therefore, I am optimistic about the future performance of this product line and its potential growth.

Well, great. Thank you for answering all my questions and congratulations again on the results.

Thank you very much.

Thank you. As we have no further questions on the line at this time, I will hand it back to management for any closing remarks.

Thank you again for joining us today. I continue to be optimistic about our business' future, thanks to our growing retail network, diverse product line, and strict expense control. We believe these elements are key to our continued success and are paving the way for sustained revenue growth. Our focus on financial discipline and operational efficiency is crucial to our strategy as we aim to become cash flow positive. We look forward to providing updates on our progress in the coming months. Thank you.

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