Earnings Call Transcript - EDBL Q1 2024

Operator, Operator

Good morning, and welcome to Edible Garden's First Quarter 2024 Business Update Conference Call. I will now turn the conference over to your host, Ted Ayvas, from Crescendo Communications. Ted, it's yours.

Ted Ayvas, Host

Thank you. Good morning. Thank you for joining Edible Garden's quarter ended March 31, 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 3 months ended March 31, 2024. The press release is posted on the company's website. 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 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 March 31, 2024, and provides the 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 aim, anticipate, believe, could, expect, may, plan, project, strategy, will, and the negative of such terms and 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. The 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 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 achievements. In addition, neither the company nor any 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. With that, I would now like to turn the call over to Mr. Jim Kras, Chief Executive Officer of Edible Garden. Jim?

Jim Kras, CEO

Thanks, Ted. Good morning, and thank you to everyone for joining us today. We are excited about the significant 27.6% year-over-year increase in revenue the company achieved in the first quarter of 2024, a period typically recognized as the slowest for the industry. This considerable growth showcases the dedication of the entire Edible Garden team and our ability to perform at a high level, resulting in high fill rates and an outstanding reputation as a trusted supplier within the industry. It also reflects the positive impact of our move towards vertical integration. Over recent quarters, we've not only seen consistent revenue growth, but an expansion in our profit margins, particularly since we've been decreasing our dependency on third-party growers during the latter half of 2023. The advantages of this strategic pivot became evident by the end of 2023 and continued into the quarter of 2024, where our gross profit margin surged by 195.8% and our gross margin expanded by 171 basis points from the same period the previous year. Our move away from third-party growers has accelerated with Edible Garden now producing approximately 95% of our fresh products in company-owned facilities. This transition marks a critical milestone in our company's development. With all essential elements now in place, we believe that we are well positioned to substantially enhance our margins. We continue to utilize our platform to enhance and expand our product range as well. In the first quarter, we partnered with Uncle Giuseppe’s Marketplace, as part of RBest Produce, to distribute Edible Garden Herbs across their locations in New York and New Jersey, thus broadening our footprint in the Northeastern U.S. Perhaps more significantly, in February, we entered into a 3-year agreement, unprecedented in our history, with a prominent U.S. food retailer. This agreement is expected to generate between $18 million and $20 million in revenue during its initial term, supporting the expansion of our product range in their stores. More than just diversifying our lineup, this partnership will introduce innovative and engaging displays that aim to boost our brand's visibility and impact within the retail environment. These initiatives underscore our commitment to building our relationships with our retail partners, aiming to better serve their needs and streamline the shopping experience for their customers. Our investment in Edible Garden Heartland has been fruitful, integrating cutting-edge technologies like our proprietary patented GreenThumb greenhouse management system, which has enhanced our supply chain efficiency. In late April, we started distributing Garden Starters, a display that features the company's potted herbs and basil bowls intended for home gardeners to various retail locations across the Midwest starting with Meijer. Launched in 2023 in response to growing interest in our potted herbs, these products cater well to home gardening enthusiasts. Given that 35% of American households grow some of their own food, our sustainably produced herbs and vegetables are increasingly popular among consumers looking for enhanced flavor in their meals. Located in Grand Rapids, Michigan, our Edible Garden Heartland facility now fully manages all the production, packaging, and distribution of these products. In April, the company began shipping spring ornamentals, also grown in its Edible Garden Heartland facility to major big box retailers in the lead-up to Mother's Day, one of the biggest days of the year in the floral industry. Implementing proprietary technologies, including GreenThumb, has been instrumental in expanding our ornamental and floral business from this facility. We believe that the expansion of this segment of our business will positively impact the company's margins and overall profitability as ornamentals and florals are typically higher-margin products. In 2023, we introduced Pulp, our fresh and fermented line of sustainable gourmet sauces and chili-based, venturing into the global sauces and condiments market, which is expected to grow from $172.79 billion in 2021 to $240.7 billion by 2028, according to Research and Markets. In a relatively brief time, Pulp has become available at Whole Foods Market, Morton Williams, Dierbergs Markets, and Woodman's. In January 2024, Target joined our growing list of retail partners carrying the Pulp line. The expansion into Target Southeastern stores significantly expands our distribution network of all Edible Garden products, which now spans over 5,000 retail locations across the country, including several major big box retailers. Edible Garden supported this launch by rolling out a robust marketing campaign, including influencer partnerships and promotional pricing. Given Target's nationwide presence, we anticipate that this collaboration will significantly boost the growth and visibility of our Pulp product line and the Edible Garden brand overall. Diversifying into new product categories marks a significant development for the company as we are introducing products with higher margins and more shelf stability. Additionally, this expansion enhances the visibility of Edible Garden's brand by placing the new products in the refrigerated sections of retailers right next to our existing products where they are already carrying produce in this section. This strategic placement not only boosts our brand presence, but also complements our current offerings. In early March 2024, we further broadened our distribution through KeHE distributors, the premier distributor of natural, organic, specialty, and fresh products, which is now carrying our Pulp line. KeHE's expansive distribution network encompasses 31,000 natural food stores, chain and independent stores, e-commerce retailers, and other specialty products located across North America. In April, we added UNFI distributors, one of North America's top grocery wholesalers of Health and Specialty Foods serving over 30,000 locations, including superstores, independent retailers, supermarket chains, and e-commerce platforms and food service providers. The inclusion of these two major distributors significantly expands the availability of our Bland to Bold Pulp product lines. Following closely on the heels of the launch of our Pulp e-commerce platform in early January, this platform enables consumers to directly buy our unique and flavorful products online. The Pulp line has received overwhelming positive feedback, quickly earning the admiration of sauce enthusiasts for its unique peppers and the distinctive Bland to Bold taste they bring to any dish. This success has helped cement Edible Garden's status as The Flavor Maker. Earlier this month, we formed a product development partnership with Hermann Pickle Company, a leading brand in refrigerated kosher dill pickles, sauerkraut, and other fermented foods, which have long been fixtures at delis and family dinner tables nationwide. Our joint effort will harness the strength of both companies to explore and develop scalable commercial opportunities focused on the production, marketing, and distribution of fermented plant-based products and non-GMO consumer packaged food. We're eager to collaborate with Hermann Pickle's team, utilizing their esteemed legacy to create a contemporary line of fermented products. Earlier this year, the U.S. Patent Trademark Office granted Edible Garden several new patents. The first recognized are GreenThumb's web-based greenhouse management and demand planning system, which enhances supply chain efficiency and has led to better shipping and fill rates as well as notable sales growth. This is the third patent for the state-of-the-art system. The second patent was awarded for our proprietary Self-Watering Display technology, a key innovation that extends plant shelf life, maintenance freshness, and significantly reduces spoilage at retail outlets. These patents affirm Edible Garden's leadership in the ag-tech sector, showcasing our commitment to advanced technology and sustainable development. Through these innovations, we are driving operational efficiencies and enhancing profitability, reinforcing our role as a pioneer in agriculture technology. Recently, the company was awarded several grants to cover various expenses related to organic crop certification and training costs at our greenhouse facilities in Belvidere, New Jersey, and Grand Rapids, Michigan. In Michigan, Edible Garden received funding from the Going PRO Talent Fund, managed by the Michigan Department of Labor and Economic Opportunity, to cover training expenses for our staff at the Edible Garden Heartland facility focusing on crucial skills in supply chain management, transportation, and logistics. Additionally, we received security grants from the Michigan Occupational Safety and Health Administration to enhance workplace safety and health at Edible Garden Heartland, aiming to minimize workplace accidents and health issues among our employees. In New Jersey, the company received a grant from the United States Department of Agriculture Organic Certification program, which is administered by the Hackettstown Farm Service Agency. This grant offered financial support to organic producers and handlers by providing reimbursements to help offset the costs associated with obtaining organic certification processing and handling certifications. The grants further underscore our commitment to food safety and greatly enrich our research partnerships. These include our project with the New Jersey Institute of Technology, the USDA, and the EPA, where we are investigating the effects of nanobubble technology on the safety and processing of fresh produce. Additionally, our collaboration with Auburn University's Department of Horticulture is focused on addressing food safety issues as well as fresh produce. These initiatives emphasize our dedication to maintain the highest standards of food safety and quality throughout the product lineup. I would now like to turn the call over to Kostas Dafoulas, our Interim Chief Financial Officer, who will review the financials and results for the 3 months ended March 31, 2024. Kostas?

Kostas Dafoulas, Interim CFO

Thanks, Jim, and good morning, everyone. I'm excited about our start to 2024. The company reported first quarter 2024 revenue of $3.1 million, compared to $2.5 million in Q1 of '23, an increase of 27.6% year-over-year. Our revenue growth was driven by an increase in customer demand for our cut herbs and potted herbs products and the continued expansion of our product base. Cost of goods sold was $3.1 million for the 3 months ended March 31, 2024, compared to $2.5 million in last year's comparable quarter. The increase was consistent with the company's increase in revenue for the same period. The company achieved 171 basis points of gross profit margin expansion, primarily driven by our shift away from third-party growers to in-house production. Selling, general, and administrative expenses were $3.9 million for the 3 months ended March 31, 2024, compared to $2.7 million for the 2023 comparable quarter. This increase was primarily driven by a one-time $600,000 charge related to the departure of our previous CFO. Excluding these one-time charges, SG&A expenses were $3.3 million, representing a 476 basis point expansion of the company's operating margin. Net loss was $4 million, or $13.65 a share, for the 3 months ended March 31, 2024, compared to a net loss of $2.9 million, or $44.19 per share, for the quarter ended March 31, 2023. Higher SG&A expenses and approximately $0.6 million of non-recurring expenses contributed to the increase in the net loss. We are continuing to identify and execute on opportunities to reduce the company's SG&A expenses and improve operating efficiency. In conclusion, I feel great about our business and am excited about the prospects for 2024. Operator, please open the line for questions.

Operator, Operator

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

Anthony Vendetti, Analyst

So just want to jump into the Heartland Facility capacity. Where is that capacity at? How much do you have left there? And with the new distribution partners, particularly UNFI, do you feel like you could get that up to as close to 100% capacity as possible now, with the distributors signed as well as this large customer that has the potential to generate $18 million to $20 million in annual revenue? And then I'll have one more follow-up.

Jim Kras, CEO

So Anthony, this is Jim. Thanks for the question. Heartland right now, I would put us at around 65% to 70% of capacity, fluctuating somewhat based on time of year and the needs that we have. Obviously, spring is heavy for us and fall is more processing-driven. Our capacity on the processing side, where we've seen quite a bit of growth, especially during this last quarter, is robust, with products like Walmart and Meijer. We have almost unlimited capacity there to continue to process those products. As far as the growing space goes, I'd say we're at probably 65% to 70%. I don't see any issues being able to service the UNFI or any of the other accounts that we're looking to bring in over the next quarter. So what's great now is we're fully operational, and everything coming out of that facility is being grown or processed there. So it's an exciting time for us, and that all took place really in April, and we're on schedule as per the guidance we put out. So we're on track, and we look forward to benefiting from the vertical integration and the margin expansion you'll start to see.

Anthony Vendetti, Analyst

Okay. Great. And then can you talk about the ramp-up in orders from the customer, the recent customer signing that could eventually account for $18 million to $20 million in annual revenue?

Jim Kras, CEO

Well, that's begun. We've had a strong season, and it's going to continue to ramp up. That number is fairly conservative. We're fortunate to be where we're located and have great relationships with the key retailers here in the Midwest. Not only are we seeing more consumer demand as people are cooking more at home, especially due to inflation and the desire to spend less dining out, but we've also benefited from the trend of people coming off the pandemic and cooking more at home. The retailers are positioning themselves to capture those sales by putting in displays we've designed and expanding the offerings to market herbs and lettuces, providing direction on how to use them versus just purchasing a cilantro or rosemary. The sky's the limit here, and we continue to see nice growth, both organically and with the significant shift in consumer behavior.

Anthony Vendetti, Analyst

Okay. And then the impact from contract growers, what was the impact this quarter? And any progress on reducing the reliance on the contract growers?

Jim Kras, CEO

Well, the progress has been significant. We just started to see benefits from this in Q4 last year as we ramped up the processing side of Heartland. We just launched our garden starters from Heartland, which is a massive program. We've seen some real impact of the products coming out of the greenhouse and shipping out at the tail end of April. We completed a contract with our key contract grower in April and are expecting to see the impact in the coming quarters. We've brought in some items as we started the integration process, but you'll really see that now that we're fully operational with 95% of all fresh goods coming from us. The contract growers served their purpose in scaling the business, but now we have the capabilities and capital to drive growth through vertical integration without the reliance on contract growers in the foreseeable future.

Anthony Vendetti, Analyst

Okay. Great. And just to clarify, the impact from less reliance on contract growers would be an improved gross margin, correct?

Jim Kras, CEO

Absolutely. Yes. This has been the plan. I appreciate our partners sticking with us to reach this point. We haven't fully realized the margin expansion from being vertically integrated in Q1, but we're moving in that direction.

Anthony Vendetti, Analyst

Excellent. And any update on the Nutraceuticals business, and I'll hop back in the queue.

Jim Kras, CEO

The Nutraceuticals business has several interesting developments. We're working on a new line that you'll see on the market in Q4. We have some exciting innovations in the pipeline, and we're leveraging strong relationships with retailers. We've noticed a general uptick in the business overall across the board, and this segment is starting to pick up in momentum.

Operator, Operator

Your next question is coming from William Jordan, who is a Private Investor.

Unknown Attendee, Private Investor

Congratulations on a strong quarter. Could you provide a little more color on what your key growth drivers are right now?

Jim Kras, CEO

Thanks, William. Right now, especially in Q1, our growth is driven by our cut herbs and our potted business, which is gaining traction. We've secured significant business with retailers like Walmart and Meijer, which has driven this growth. We've executed well operationally, achieving nice fill rates, particularly on these two product lines. The cut herbs are high volume, and the potted herbs provide a higher margin. We'll continue to see growth in these areas as Edible Garden is well-known for these items, and we excel in this space.

Operator, Operator

Thank you very much. We appear to have no further questions in the queue. So I will now hand back over to the management team for any closing comments.

Jim Kras, CEO

Thank you for joining us today. I remain optimistic about the company's future, driven by our growing retail network, diverse product offerings, and stringent cost management. With all these critical elements in place, we are poised to improve our margins in the upcoming quarters and accelerate our journey towards generating positive cash flow in 2024. Our dedication to financial prudence and operational efficiency is the cornerstone of our strategy, and we look forward to sharing updates on our progress in the upcoming months. Thank you.

Operator, Operator

Thank you very much, everyone. This does conclude today's conference. You may now disconnect your phone lines and have a wonderful day. Thank you for your participation.