Edible Garden AG Inc Q2 FY2024 Earnings Call

Good morning, everyone, and welcome to the Edible Gardens Second Quarter 2024 Business Update Conference Call. At this time, all participants have been placed on a listen-only mode, and we will open for questions following the presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Ted Ayvas, Investor Relations Crescendo Communications. Ted, the floor is yours.

Thanks, Jenny. Good morning, and thank you for joining Edible Garden's quarter ended June 30, 2024, 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 ended June 30, 2024. The press release is posted on the company's website at www.ediblegardenag.com. In addition, the company has filed 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 and 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, 2024, 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 the 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 aim, anticipate, believe, could, expect, may, plan, project, strategy, will, and the negative of such terms and other 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 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, 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 these 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'd now like to 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're excited to report another outstanding quarter, highlighted by a 157% increase in gross profit, fueled by year-over-year growth of 61% in cut herbs and a 30% growth in vitamins and supplements. The shift away from third-party growers and a focus on higher-margin businesses are driving our gross profit margin improvement. Now with approximately 95% of our fresh product line produced in-house, our gross margin increased to 36.7% in the second quarter of 2024, up from 13.1% in the same period last year. We've also conducted a thorough review of our business operations and made the strategic decision to move away from less profitable segments of our business. Instead, we are directing our focus and efforts towards more profitable, higher-margin segments. We believe this strategic shift, combined with the vertical integration of our operations, positions us well to achieve our goal of becoming cash flow positive in the near future. In the second quarter, we expanded the distribution of our pulp line of sustainable USDA organic fermented gourmet sauces and chili-based products with the addition of UNFI distributors. As a leading North American wholesaler of health and specialty foods, UNFI serves over 30,000 locations, including natural product superstores, independent retailers, supermarket chains, and e-commerce platforms and food service providers across the continent. We believe the addition of UNFI, which is dedicated to promoting a better food system and leading the way in meeting consumer demand for healthier options, aligns perfectly with Edible Garden's zero-waste inspired mission. Through KeHE distributors, UNFI distributors, and our own e-commerce platform, retailers across the continent now have access to our Bland to Bold product pulp product line. Our growing roster of major retailers with pulp includes Target, Whole Foods, Meijer, Morton Williams, Dierberg Markets, and Woodman's. According to research and markets, the global sauces and condiments product category is expected to grow to $240 billion in 2028 from $172 billion in 2021. The response to the pulp product line has been overwhelmingly positive from consumers seeking to enhance their meals with its Bland to Bold fruit flavor profile, reinforcing Edible Garden's reputation as the flavor maker. We are confident that with the expanding availability of our pulp lines for UNFI and the KeHE distributors, we are accelerating pulps momentum and ensuring our unique flavors reach consumers across the United States and Canada. We've also strengthened our distribution through our partnership with Hemingway's, which serves more than 350 retailers across the Northeast region. This includes developing a new integrated rack program designed to provide Hemingway's retail partners with a more efficient method for displaying Edible Garden products. These integrated racks align with our strategy to enhance brand visibility and improve consumer access to our products. We believe this initiative will offer a more engaging and efficient shopping experience for all retail customers, which can help increase sales and overall customer satisfaction. In July, we expanded our retail distribution network with the addition of Seasons Kosher, a local supermarket chain celebrated for its extensive range of Kosher products distinguished by a commitment to quality and ethical sourcing. In addition, Lincoln Market, known for its fair pricing and diverse selection of high-quality organic and conventional products, will also be carrying Edible Garden products. Our dedication to sustainability and community involvement aligns seamlessly with the principles of both these retailers, making them a natural fit for our growth strategy. Furthermore, we are excited that our entire product line, including pulp, is now available at every Brooklyn Fare location in New York City. Brooklyn Fare is renowned for offering products that satisfy their customers' sophisticated flavor preferences. At the Hudson Yards location, they also operate Chef’s Table at Brooklyn Fare, a restaurant where cutting-edge culinary expertise and creativity come to life. We launched Garden Starters, potted herbs and basil bowls designed for home gardening to retailers. First introduced in 2023 to cater to the growing popularity of home gardening, these eco-friendly herbs meet the needs of 35% of American households that grow at least some of their own food, providing them with diverse flavor options. Our vertically integrated Edible Garden facilities manage their production, packaging, and distribution. By placing Garden Starters next to cut herbs and sustainably sourced produce in supermarkets, we aim to offer maximum convenience to our customers. In May, we entered a product development partnership with Hermann Pickle Company, a leading brand in refrigerated kosher dill pickles, sauerkraut, and other fermented foods, now nationwide for their presence in delis and on family dinner tables. This collaboration will continue. We'll combine the strengths of both companies to explore and develop scalable commercial opportunities, focusing on producing, marketing, and distributing fermented plant-based products and non-GMO consumer packaged goods. We are excited to work with the Hermann Pickles team, leveraging their esteemed legacy to create a contemporary line of fermented products. In addition, we have implemented several new proprietary innovations focused on packaging and shipping, which is expected to significantly extend the shelf life of our products, reducing spoilage and driving cost savings for our retail partners. These innovations serve as an important competitive differentiator for Edible Garden and build on our other unique solutions. For example, our patented self-watering in-store display has already transformed how plants are displayed, ensuring they remain fresh for longer and greatly minimize waste at retail outlets. Aligned with our zero-waste inspired mission, these innovations allow retailers to showcase plants at their peak, minimizing waste and providing superior products to our customers. In July, we launched a comprehensive training program with Abilities in Northwest New Jersey, a non-profit providing employment and data services for individuals with disabilities. Our decade-long partnership with Abilities in Northwest New Jersey has been incredibly rewarding. By integrating workers with disabilities, we have consistently demonstrated exceptional dedication and hard work, creating an environment that benefits Edible Garden and empowers these individuals. Our training programs offer valuable skills and professional development opportunities, enhancing these workers' employability and career prospects while enriching our workforce with diverse talent. As we expand this partnership, Edible Garden remains committed to community involvement, local investment, and leadership in ESG and sustainability initiatives that we are known for. I would like to turn the call over to Kostas Dafoulas, our interim Chief Financial Officer, who will review the financial results for the three months ended June 30, 2024. Kostas?

Thanks, Jim, and good morning, everyone. Turning to our second quarter results. Total revenue for the second quarter was $4.2 million, relatively flat compared to Q2 2023. The slight increase in revenue was driven by our core product portfolio, primarily cut herbs and our vitamin supplement business. Our strategic shift away from lower-margin products offset the revenue increase in our core products, specifically from the floral segment. Cost of goods sold decreased by 37% to $2.7 million for the three months ended June 30, 2024, compared to $3.7 million for the 2023 comparable quarter. The decrease was largely driven by the company's strategic shift away from our largest third-party growers. As Jim stated earlier, in the second quarter of 2024, the company's gross profit increased by 157% as compared to the 2023 comparable period. In addition, gross margin increased to a record 34.4% in the second quarter of 2024 compared to 13.1% for the same period last year. Both these impressive results were driven by the shift away from our dependence on third-party growers. Selling, general and administrative expenses totaled $2.7 million for the three months ended June 30, 2024, compared to $2.4 million for the three months ended June 30, 2023. The increase was primarily driven by higher audit, accounting, and legal fees related to our capital-raising activities in the quarter and a one-time expense of $100,000. Net loss was $1.21 per share for the three months ended June 30, 2024, compared to a net loss of $4.83 per share for the three months ended June 30, 2023, while a loss from operations improved year-over-year by $645,000 from the loss of $1.83 million in Q2 of 2023 to $1.18 million in Q2 of 2024. Higher interest expense and a one-time loss on the extinguishment of debt in Q2 of 2024, along with a one-time $1.2 million credit in Q2 of 2023 related to the employee retention credit, led to an increase in our net loss this year. In closing, we've been working hard to improve our margins, and we are pleased with the way our team executed this quarter. Our results in Q2 show that the strategic shift we made in our product mix and reliance on third-party growers is starting to deliver results, and we remain committed to a disciplined financial approach.

Your first question is coming from Anthony Vendetti of the Maxim Group.

So Jim, it's great to see that we're moving more towards the high profitable items and vitamins and supplements grew this quarter. Can you talk about the outlook for that product line for the rest of this year? And then also just talk to us about the contract growers. I know you've been trying to reduce that to improve gross margin. How did that do this quarter and then expectations for that for the rest of the year as well?

We're very happy with this quarter as reflected in our numbers. We continue to broaden our range of products, ensuring we have the variety and flexibility we need. As a CEA company, our greenhouse operations shape everything we do, and we're increasingly focusing on finished goods, particularly through our farm's formula approach to vitamins and supplements. We have a significant trade show coming up in September where we'll introduce a new line alongside our existing vitamin way line. In the near future, we will announce efforts to boost our sales in e-commerce, which will help us expand our reach. This growth will be driven by new products and our strong relationships with the 5,000 stores we partner with, presenting opportunities to enhance our business. The margin for vitamins and supplements is substantially higher than that of plants, which will not only allow us to maintain healthy profits but also significantly boost our revenue as we optimize our CEA operations, particularly in Michigan, where we now fully utilize greenhouses that produce 95% of our fresh goods. Once this segment becomes cash flow positive, we'll be poised to enhance our supplement offerings. We're also developing a line of functional pickles, which will be a new product in the market, expected to launch at the major produce show this fall. We have additional products gaining acceptance from retailers that will be launched in 2025, encompassing both the vitamin supplement sector and shelf-stable fresh items. I'm very optimistic about our business as everything is coming together successfully. We will continue investing in vertical integration to improve efficiency and reduce reliance on exterior sources for many of our fresh goods. This approach not only expands our margins but also enhances quality and consistency while minimizing shrinkage. We have tight control over our supply chain, especially with major retailers like Meijer, Wakefern, Shoprite, and Walmart, benefiting from proximity to their distribution centers. This arrangement allows for smoother operations and significant reductions in transportation costs through backhauls. This method is environmentally friendly and enhances efficiency since our processes run smoothly. I'm truly excited about our progress; over the last three months, we've made substantial operational improvements by bringing more processes in-house.

And obviously, you have many of the top, if not all, top well-known retailers as customers, which speaks to the quality of your products. Can you talk about the expansion of SKUs within those retailers this quarter and expectations for the rest of the year?

And I think that's important to focus on because this quarter has really been getting the house in even better order, once again, like I said, all you have to do is look at the GP increase to see that the impact of the investment we've made in people and in machinery and just getting better oil. For us, it's really moving forward. This quarter is going to be a good strong quarter as usual with our existing relationships. We have a contract with Meijer on the herbs that allows us a ringside seat to do what we need to do to get new items in. That's always an ongoing conversation that we have because we're a mile from their headquarters; they want rapid. So we spent a lot of time with the buyers, really focusing on innovation. There's a considerable amount of private label opportunities for all these retailers; there's been a big shift there in the marketplace, especially with inflation. Private label continues to pick up steam, and they're coming to us to help round out their assortment. So for us, look, we've got 5,000 doors plus and growing Walmart, Wakefern, Shoprite, Meijer, Hannaford, which is Della Hayes; the list goes on and on. And so for us, it's really not only driving the existing business by adding SKUs of maybe herbs that they may not carry or let us products that they want, but there's also this opportunity since we are a leader in that produce set, especially in sustainability and cut herbs to leverage that to help inform other more shelf-stable products that give us kind of less pressure to get it out the door quickly and allow us to get a better margin as a function of just being shelf-stable, and we can put the time and the need to kind of formulate the stuff to make it acceptable on all fronts. So like I said, we got a big trade show in fall, vitamin supplement new line coming out which is going to be fantastic. Everything we do is more sustainable and better for you. I couldn't say it better than that, but better for you and more sustainable. And that positioning, I think, continues to give us, like I said, a ringside seat to be able to go in there and always get into the fight and we're coming out with a lot of wins, which is great. So I couldn't be more excited about where the business is. It's been a dramatic shift. I'd like to thank Kostas who came on board in January and has really helped us operate at the high level that's expected from a finance perspective from our retailers; when you're dealing with such large retailers, the expectation is nothing short of excellence. Otherwise, they'll just find somebody else. And I think that's where not only have we done it, but I think in the products that we grow and the new innovations that we're coming out with and some of the technology that we have that supports who we are as a brand and what we stand for, but now we have team members that we brought in like Kostas that are elevating how we conduct business, how we manage the relationships, and how we manage our cash. Like I said, it's been exciting.

Your next question is coming from Nick Pinkus of Forest Capital.

Congratulations on a very strong quarter, particularly with the improvement in margins. As the previous caller pointed out, you have an impressive distribution network with dedicated retailers, and now it's about increasing the flow of higher-margin products through that channel. My first question is related to your previous discussion, but could you elaborate a bit on the transition to shelf-stable items and the advantages that come with it? Additionally, how do you foresee this playing out in the latter half of this year?

To reinforce what I mentioned earlier, it's essential to provide the right products at the right price and margin within our distribution platform. A key strength of Edible Garden has always been our relationships. Many people ask why we've maintained these connections for so long, and it boils down to our team and our execution abilities. Our fill rates are impressively high, typically in the mid- to high 90s, which is remarkable given we're handling live goods, making us a reliable partner. Our trucks are frequently delivering to major retailers like Walmart, Meijer, Hannaford, and Shoprite, reaching around 60% to 70% of the U.S. population multiple times a week. It's crucial to have the right offerings, and we can collaborate with retailers to promote effectively. Our sales team includes talented individuals from these retailers, such as Dave Ross, who understands their needs and what’s required for successful execution in-store, including promoting our innovative products and ensuring they are sold through. We have exciting upcoming product launches, and I'm enthusiastic about our partnership with Nutracom, our vitamin supplement collaborator, who has become a trusted ally in introducing the next generation of products. Anticipation is high for what we'll showcase at eCRM in early September, with major meetings and early commitments for our 2025 product line, which is quite rare. This highlights the strength of our relationships and the retailers' willingness to commit so early on for these products. Ultimately, we aim to focus on higher-margin items that can leverage our 5,000 retail doors, benefiting our top and bottom lines. Since these items are shelf-stable, they will provide a more consistent margin compared to the pressures from fresh goods. I hope that clarifies things.

It certainly does. To put it another way, it appears that the relationships and trust established with the major retailers have not yet been recognized by the market. However, I hope they will become apparent as you begin to distribute more products through these retailers and this channel. Best of luck with that. Regarding the second part of my question, you mentioned this briefly, but could you elaborate further? As you approach the peak season around Thanksgiving and the holidays, is there potential for further vertical integration and improvement in gross margins in 2025? What are your thoughts on that?

It's an important time for our company as we approach Q4. We've always regarded this period as crucial, particularly for herbs, due to increased cooking during the holidays. The current trends show that people, influenced by inflation and a desire for healthier options, are opting for fresher ingredients and cooking more at home. This trend has persisted, with consumers looking for nutritious alternatives to dining out. As a result, home cooking is on the rise, and herbs are increasingly sought after for enhancing flavor and nutrition in meals. Last Thanksgiving was a huge success for us, and I anticipate similarly strong results this year. Our business continues to expand, and we have established ourselves as specialists during the holiday season with our consumer-focused displays and promotions that drive sales and volume. Demand for herbs remains high from early November through the first week of January, which is promising for our margins. We've engaged an outside consultant to enhance our operational efficiency, and we're adding a new production line in Heartland, Michigan, to boost our output even further. We're fully invested in this endeavor. I expect margins to keep improving within our core business, with herbs continuing to thrive, including cut and live varieties, alongside our holiday displays. In the coming weeks, we have meetings lined up with major retailers to discuss additional opportunities for the holiday season. We're also shifting focus to our vitamin supplement line, which we're now ready to accelerate since our core business is solid. We're gearing up for Q4 as we prepare for the New Year’s resolution sales wave in January. We're uncertain about how many new products will launch in Q4, but we're making progress with some commitments. We see substantial potential for growth, not only through our strong relationships and the trust we’ve built but also by expanding our product offerings to cater to consumers looking for unique, sustainable, and organic sauces. Over the years, people have relied on familiar condiments like ketchup and mustard, but we are emerging with fresher, healthier alternatives that reduce preservatives. Our relationships will facilitate successful strides in this area; our pulp product line has performed well all year, and we're continually pushing to enhance it. Our distribution network, including partners like Target and Whole Foods, highlights our not only our reach but also our quality products. We aim to position ourselves as a next-generation provider of healthier options rooted in our growth of many components. This focus is likely to set us apart in the market, and I’m genuinely excited about the prospects ahead.

That's awesome. We really appreciate your hard work and the entire team. It seems like we're making tremendous progress, and I am very excited to get updates in future quarters. Good luck.

Thank you very much. We appear to have reached the end of our question-and-answer session. I will now hand back over to the management team for closing remarks.

Thank you for joining us today. Our impressive performance in the second quarter and the first half of 2024 is a testament to the dedication and years of effort from the entire Edible Garden team. We have consistently delivered high fill rates and built a strong reputation in the industry as a trusted dependable supplier. Our results also highlight the significant benefit that vertical integration has added to our operations. We are optimistic about what lies ahead and believe the future is extremely promising. Thank you again, and thank you for being on the call.

Thank you very much. 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.