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spk11: Quarter 2023 earnings call. I'm Travis Parman, Chief Communications Officer for AppHarvest. Joining me today are several members of the senior management team, including Jonathan Webb, founder and CEO, Tony Martin, Chief Operating Officer and board member, and Lauren Eggleton, Chief Financial Officer. The earnings release is available on our investor website at investors.appharvest.com. On today's call, we'll begin with prepared remarks from the team. Then we'll open the call to questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the securities laws. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For more information on important factors that could affect these expectations, please see our most recent SEC filings. And now, I'd like to turn the call over to Jonathan.
spk14: Thanks, Travis. $13 million. AppHarvest achieved $13 million in net sales for Q1 2023. That's nearly 90% of our sales for the full year of 2022. We're working hard to make these farms as productive as possible as quickly as possible. In 2022, we quadrupled the number of farms in our network. With our flagship farm in Moorhead now in its third harvest season, we're seeing fantastic progress. Production is looking great, and Moorhead is regularly setting weekly performance records. This quarter marked the first time that all four farms were shipping commercially to top national grocery store chains, restaurants, and food service outlets. That means we still have lots of room for upside as we fully plant the new farms and continue to increase production. This year, we are laser-focused on achieving operational excellence as we work to ramp up production and revenue from the four farms with an increasingly diversified crop portfolio. As you know, Masternardy is our exclusive marketing and distribution partner. Paul Mastronardi and his team have been tremendous mentors to our team and great problem solvers as we work to ramp up production and improve core operations. We are pleased that our board member, Tony Martin, agreed to join us starting this past January as Chief Operating Officer to help us with that journey. As you likely recall, Tony is a veteran in the controlled environment agriculture industry. we already are benefiting tremendously from his experience and the resources he readily brings to the table. In the brief time Tony has been with us as COO, he already is shaping a culture of measurement, accountability, collaboration, responsiveness, and learning. Farming is not for the faint of heart. Fortunately, AppHarvest's mission has helped us attract a purpose-driven team with the faith and grit to keep moving us forward on a path to profitability. I believe Tony can help us accelerate our path to profitability and positive operating cash flow. Tony is working to optimize production, revenue, and cost through the strategic plan Project New Leaf. I'll welcome Tony to the call to share more details on progress in the first quarter.
spk06: Thank you, Jonathan. Last quarter, we shared details on the next phase of Project New Leaf, our five-point strategy to focus operational efforts across the farms. As you can see from our net sales for Q1, we're strengthening our core business plan and it's driving better results. The first of our strategic initiatives, leveraging our relationship with Mastro Nardi. As the largest domestic producer for Mastro Nardi produce in the U.S., it's critical that we work as strategic partners, driving mutually beneficial results. We are actively focused on increasing the cross-functional integration between the Mastro Nardi and App Harvest teams as we bring new products to market. For example, this quarter we accelerated our plan to plant Long English cucumbers at Somerset. The Mastro Nardi team were instrumental in facilitating the crop changeover and were able to quickly place the new product with their customers. Just as variety is the spice of life, variety also matters in CEA. We are leveraging Mastronardi's industry knowledge to further diversify our crop portfolio through more favorably priced varietals of tomatoes. We are trialing high-wire cucumber growing in Somerset to improve yield and trialing mini cucumbers to round out our product offering. Another area where we're seeing progress is in better understanding Mastronardi's produce grading guidelines. Working directly with their teams, we are achieving higher compliance rates and obtaining better pricing for our tomatoes. We have successfully completed our food safety audits at the Moorhead, Somerset, and Richmond farms. That means we've been able to increase the number of direct shipments, reduce transportation costs, and the number of food miles traveled so our fruits and vegetables arrive on the shelves fresher and with less waste. In Berea, we're working on our food safety certification so that we can also do more direct shipments from that facility. We meet regularly with the Mastinardi sales and marketing team on format packaging, inline bagging, and other product specifications for some of their largest clients. This level of collaboration between our companies is especially important as we launch new products. It helps to ensure that we can coordinate sufficient lead time for packaging and placement in the marketplace. Our second strategic imperative, improving labor efficiency. Our labor fulfillment is at the level we need it to be. We aren't experiencing any concerns with labor shortages. The development of the new productivity bonus program is now underway. As part of our work, we are further defining the assessment criteria and methodology verifying the tracking database, and measuring performance. At Moorhead, we're already seeing results where their teams are meeting the performance threshold necessary for productivity bonuses to kick in. The new bonus program will identify and provide opportunities for retraining any underperforming team members. That will enable them to improve their performance and further help the enterprise overall to be more efficient. It also allows us to be more selective when identifying and placing high-performing team members. We expect the full bonus program to be implemented across the four farm network in the 2023-2024 growing season. Our third strategic imperative, improving the feedback loop. As we strive to become a world-class production facility, communication is key to our continuous improvement process and to working more efficiently. We've established a regular cadence of management meetings across the farm network. These meetings help us avoid working in silos, and we constantly measure performance against our annual operating plan, or AOP. Each week, we meet with the farms to review performance metrics such as yield, labor efficiency, transportation, utility consumption, and production revenue. We compare actual results to the plan. The reporting is then cascaded to the four farm general managers and executive leadership. We also discuss opportunities for improvement, both in our meetings by farm and at the four farm general managers meeting. Opportunities to enhance our practices and drive results are shared and discussed. Because of our massive scale, even small changes to processes and equipment configurations now can have a much larger impact in the future when all four farms are at full production. This meeting cadence has enabled us to address issues from pests to plant health in a timelier manner. This helps to prevent small concerns from escalating and to identify any retraining opportunities as quickly as possible. We are even realizing on the benefit of insights from the new facilities having been operational for a few months. Our fourth strategic initiative, initiating comprehensive spending reviews. As the saying goes, a bargain ain't a bargain unless it's something you need. Our production and procurement teams continue to review our suppliers and vendors on a case-by-case basis to determine their return of investment to core operations and to reduce third-party spend when possible. We are also collaborating with the Mastinardi sales and marketing team to ensure alignment and efficiency when sourcing packing materials for new product launches. Next quarter will be our first full review of these expenditures. Our fifth strategic initiative, aligning our team members to milestones outlined in our five-year strategic vision. As we work to create a culture of transparency, all team members need to fully understand the five-year strategic plan for Project New Leaf to be successful and the importance of their contribution to our collective success. Following each quarterly call, we'll be hosting team meetings to share performance results, what went well, where we have opportunities for improvement, what we need to do to achieve our key milestones, and to celebrate our successes. We're also augmenting our talent pool by bringing on the right people at the right level to support core operations. We recently hired a business analyst to establish and track key metrics across the four farm network. Insights on pick and pack rates per hours, hours of crop work per square meter, pounds picked versus packed versus shipped will help us take a data-driven approach to continuous improvement. We have hired several food safety professionals to lead our food safe practice. We have added experienced growers for our diversified crop portfolio as we look to expand varietals. What I'm seeing this quarter is that there's a maturity building in the organization to better manage issues and to mitigate any material impact from challenges. We're working more collaboratively with our customer, Master Nardi. which is driving higher revenues, cost savings, and product quality. And we still have two facilities that are not yet fully producing. Both Berea and Richmond are opening in planned phases. We are finding it takes about three years to fully ramp up a facility to scale. We are working to shorten that time by applying lessons learned across the four farm network. Salad greens at Berea and strawberries and cucumbers at Somerset are new products to us. We expect our future performance to improve each quarter as we gain more experience under our belts. Moorhead is achieving significant production records in its third season. And by leveraging some of the experience talent from Moorhead at Richmond, we've been able to avoid some of the challenges that Moorhead encountered in its first year of operations. I'm proud of the progress we're making. I expect to see more operational efficiencies leading to increased performance in Q2. Now, over to Lauren to review the Q1 2023 financials. Thanks, Tony.
spk03: As Jonathan mentioned, we reported first quarter net sales of $13 million, compared to net sales of $5.2 million in the first quarter of 2022, an increase of approximately $7.8 million year over year. With all four farms in the network now shipping under a variety of brands for Massanardi produce, we expect to see significant year-over-year net sales increases throughout 2023. We expect that trend to continue in 2024 as we leverage more of the farm acreage and work to optimize production. As we announced at the end of FY 2022, we are now reporting overall net sales by produce type rather than a metric of pounds sold. Looking at net sales by crop type, in Q1, we sold almost $11 million in tomatoes, more than $1 million in strawberries, over $800,000 in salad greens, and nearly $200,000 in cucumbers. In Q1 2023, we recorded a net loss of $33.6 million and a non-GAAP adjusted EBITDA loss of $23.2 million as we worked to ramp up production across our farm network. This compares to a prior year net loss of $30.6 million and a non-GAAP adjusted EBITDA loss of $18 million. This increase was primarily driven by cost of goods sold at the new farms, including the removal of strawberry plants and acceleration of Long English cucumber production in Somerset that we announced last quarter. Turning now to our balance sheet and liquidity, we ended the quarter with cash and cash equivalents of $50 million. We have taken aggressive steps to address liquidity, and we continue to explore additional financing alternatives, including third-party transactions such as a sale leaseback on another of our high-tech farms. In February 2023, we completed our public follow-on offering that raised gross proceeds of $46 million before deducting the underwriting discount, commissions, and estimated offering expenses. We expect to use the net proceeds from this offering for working capital and general corporate purposes as we ramp up production and sales from the four farms. In terms of capital expenditures beyond Q1, we expect to spend approximately $40 to $45 million in 2023 for final project details at the Richmond, Berea, and Somerset facilities. Approximately $17.7 million of this CAPEX spend range will come from amounts included in restricted cash and other assets as of March 31st. In line with expectations, we saw an increase in the cost of goods sold during the first quarter of 2023. This $20.8 million increase in COGS over a year was due primarily to the costs related to the ramp-up of operations at the three new farms and the change in crop production at Somerset. As we shared last quarter, we expect to see significant SG&A annualized savings in FY 2023. For Q1, our SG&A was reduced by more than half. down to $10 million compared to $21 million for the first quarter in 2022. These savings are primarily driven by corporate restructuring actions taken in 2022, reductions in executive stock compensation, and operational efficiencies. Operations in the first quarter of 2023 continue to ramp up as expected. We are seeing significant progress at Moorhead in terms of their key performance indicators and the number of team members qualifying for productivity bonuses. We're applying lessons learned from Moorhead to accelerate our path to operational excellence at each of the three new farms. We're especially seeing results at Richmond in terms of labor efficiency, plant health, and premium production. To sum up the quarter, we beat consensus with net sales of $13 million, driven by the net sales of almost $11 million in tomatoes and more than $1 million of strawberries, yet recognize we still have work to do in terms of adjusted EBITDA. We reduced SG&A by $11 million in Q1 2023, more than half of Q1 2022 total spend. We continue to believe in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with our four-farm network. We remain confident in our FY 2023 guidance of net sales to be in the range of $40 to $50 million and non-GAAP adjusted EBITDA loss to be in the range of $67 to $76 million. With that, I'll turn it over to our Chief Communications Officer, Travis Parman.
spk11: Thank you, Lauren. Operator, we'll now begin to take questions.
spk07: As a reminder to ask a question, please press star 1-1 on your telephone. and wait for your name to be announced. Please stand by while we compile the Q&A roster. The first question comes from Ben Toyer with Barclays. Your line is now open.
spk04: Thank you very much and good afternoon. Congrats on the results. Just two things I wanted to follow up, and maybe the first one is maybe more question for Lauren. Just if we look ahead and as to your guidance as it relates to the gross profit break-even point and then the EBITDA – well, positive and then EBITDA going to be positive – Help us understand a little bit what are the opportunities to potentially accelerate that and where are the risks as it relates to a potential delay of that and how you think in light of that for the needs as it relates to capital. That would be my first question.
spk03: Yeah, sure. Hey, Ben. So, you know, as we've mentioned previously and as we discussed today, we expect that All farms should be adjusted gross profit positive by 2024. Farm operations should be adjusted EBITDA positive by 2025. And on a consolidated basis, we expect the company to be adjusted EBITDA positive by 2026. You know, for this year, we continue to expect net sales of $40 to $50 million for the year, with Q2 likely being the highest sales quarter of the year. You know, COGS, we continue to expect that cost of goods sold will be slightly more than double than in 2022 as we increased production at the three new farms. The ramp up of the new farms contributed to the large increase in COGS in Q1. Also, as mentioned earlier, that the earlier removal of the strawberry plants resulted in a large write down of inventory and that materially impacted our cost of goods in Q1. However, we are encouraged by the year over year reduction in COGS at Moorhead as it continues to be more efficient. And so in terms of like what you're asking, I think just we're seeing the progress happen at Moorhead and seeing how Richmond has performed in its first quarter of harvesting. I think all that's very encouraging. You know, I think as Tony and his team continues to work to bring efficiencies in this, you know, the bonus rate program that he's talking about, you know, I think that's an area where we could see some more improvement. You know, we do expect an overall consolidated gross loss for 2023, but we do expect that gross margins will be better in the rest of this year versus Q1. We continue to expect that total SG&A for the year should decline by nearly 40 to 50 percent from 2022. You know, one thing we saw, stock compensation was unusually low in Q1 due to some reversals of expense from some recent employee departures. So, we would expect that stock compensation expense is likely higher in future quarters. However, we expect the total SG&A in future quarters should be relatively close to what we saw in Q1.
spk04: Okay, perfect.
spk13: Thank you very much.
spk14: Ben DeLair on top of that. This is John. I mean, simply, there's yield, there's quality, and there's price. So when you're asking how do we accelerate that path of profitability, there's really three distinct levers. How much stuff do we produce? What's the quality of the stuff? and what's the price per unit we get on the stuff. So that's where Tony has been able to come in with us quickly to try to optimize these facilities on yield, quality, and price. And if you look at our Q1 results, Moorhead has obviously been the topic of conversation here for a better part of a year, year and a half, two years. Moorhead carried us in Q1. That was our one production facility that was in full go. We've said that we were producing nearly half of the facility because we're opening it in two phases. Berea, you know, it's our first foray into leafy greens, and this is one of the largest leafy green facilities in North America. So, you know, having that ramp-up stage there and then switching in Somerset from strawberries to cucumbers on the site, you know, if you look at the opportunity for the company, it's really taken the four assets we have to optimize for yield, quality, and price. And that's where Tony's been able to, you see the results in Q1, and we're pretty hopeful here that, you know, as we continue to get the four up and fully online, you know, you saw a Q1 result with really only one facility that was fully operating.
spk04: Okay. That's very helpful. Thanks for that, John. And then, actually, that's one more question I have for Tony. It's just to understand a little bit. We've gotten used to the significant seasonality throughout the year, and you just also focused and said that the second quarter is most likely going to be the highest, but just wanted to understand with now the other facilities, berries, leafy greens, some cucumber. We know about the seasonality of tomatoes, but is it exactly the same with all the others? How much of an impact or maybe of a support to third quarter results could all these other fruits and vegetables have versus what used to be always a very soft quarter?
spk06: Well, thank you for that question, and good afternoon. So certainly the Berea facility, as an example, is a year-round production. So, you know, lettuces, they're both lit naturally and under light. Their cycle of production ranges from about 22 days for some varieties in the summer months to 40 days in the winter months. But it should be in production year-round. With regards to strawberries, there is a changeover from cucumbers that will happen in August. strawberries take a little while to start producing, so we should start to see in the fourth quarter, at the beginning of the fourth quarter, we should start to see strawberry production return at Somerset. Tomatoes, they grow, and we plan them this way to take advantage of the changes in the broader market, but we do a crop changeover sometime mid-August. So in the If you're with me, in the third quarter, we see our tomato production come out about halfway through the quarter. We see the changeover to strawberries in about the same time, but Berea continues to perform. As to the seasonality of the business, you have to think in terms of day length. The level of tomato production is a direct result of the length of day, and that can be influenced by artificial lightings. but it's also the intensity of the light that matters in crop production. And so you see your best yield at this time of year as we move into the summer months.
spk04: Does that help you? Thanks for that. Yep, that helps. Thanks. You're welcome.
spk07: Please stand by for our next question. The next question comes from Kristen Owen with Oppenheimer. Your line is now open.
spk09: Great. Thank you for taking the question and congratulations on the progress made in the quarter. Tony, you had made a comment about the food safety certification and how that's helping you to do more direct shipment. I'm just wondering if you can say a bit more about how we should think about that direct shipment influencing both the absolute price that we see on our end as well as your cost of goods. Just help us understand how important that ability to do more direct shipment is for revenue and cost of goods.
spk06: So there are two aspects to the food safe audit. The first is the retail customer that opens up to us as a result of having our food safe certification. Large retailers like Walmart or Costco or some of the large retail chains, even in food service like Wendy's, require that food safe practice certification. And so it opens the door to a broader relationship with those customers. That's the first thing. And because of the nature of that relationship through the program pricing, through the nature of the volume that they take, it provides opportunity for us as a producer. The nature of direct shipments, currently what happens right now is we ship to kind of a cross-docking facility where mixer loads are created with other products to then ship to a retail customer. Because of the nature of our food-safe practice, we're able to ship directly full truckloads directly to retail customers because they themselves have distribution centers for that product. Companies like Walmart or Costco, they have distribution points that we shift to directly. What that does is it reduces the cross-stocking facility fees that we have to pay to unload a truck and then rebuild it. And it also reduces the amount of transport we pay, the amount of mileage that that produce has to travel first to the cross-stocking facility and then out to the retail customer. Instead, we ship direct to the retail customer. So there's two opportunities that get created. It's the size of the order and it's the nature of the retail relationship. Does that answer your question?
spk09: That is helpful. I do wonder if you could put a finer point just around the spread of net pricing versus gross pricing. If I recall, that net pricing that we see in the model is that includes some of the transportation costs? So just an order of magnitude, if you could, on that spread.
spk06: Well, again, I think that that's maybe a question we could direct to Lauren, but typically we see transport costs, I believe, Lauren, is in the area of about 10% of the selling price. And so if you reduce that by 1%, 2%, or 3%, it's a significant savings. Depends on the number of direct loads we have, of course.
spk03: That's right. Yeah, it would impact net sales on the gross to net calculation as freight for us as a pass-through from gross to net. So, you know, I don't know if we can kind of give an order of magnitude right now, but, you know, as Tony has indicated, it could be approximately 10% of that spread. You know, we have seen a reduction in that. You know, you would expect to see a reduction in that on the freight cost. As we talk about the direct shipments, having one leg directly to a customer distribution center versus potentially two legs to a distribution center going to the customer.
spk05: And cross-stocking, right? So there's a cost to the labor of unloading the truck.
spk09: Okay, that's super, super helpful. I appreciate the incremental detail there. I'm also going to ask a question similar to Ben's, just on EBITDA break-even, but I want to ask it specifically about Moorhead, particularly given some of your comments, Jonathan, about how that carried the quarter. But, you know, we're in year three. Obviously, it was sort of the beta test farm. As we are thinking about that facility, can you give us a sense of how close to facility EBITDA break-even Moorhead is today, and could we see that facility on a standalone basis turn EBITDA positive this year?
spk14: You know, we're not zooming in specifically on that, but, you know, we're excited about the progress in Moorhead, and given the fact that it was the one operating facility you saw in Q1 that was fully ramped up, Yeah, we're inching closer, but again, I think the hesitancy on us going out with firm indication is, you know, there are three distinct levers here, price, yield, and quality, and it's for us getting all three of those, you know, at a maximum point. And we saw in Q1, Moorhead was inching towards that direction, and in Q2, we continue to see the trend in that progress. Yeah, I'll let Lauren try to maybe get more granular, but we're certainly encouraged where we're at on, like you said, the beta of Moorhead being our model and very encouraged by the progress we're finally seeing in that third season where we're at today.
spk03: Yeah, I would say definitely not on a four-year basis for this year for Moorhead, but we think that it is possible that Moorhead could be adjusted EBITDA positive in the second quarter, potentially even the third quarter of this year, and likely next year, 2024, would be the earliest when it would be adjusted EBITDA positive on a four-year basis.
spk09: That's great. I'll take the rest offline. Thank you so much.
spk07: I show no further questions at this time. This concludes today's conference call. Thank you for participating.
spk01: You may now disconnect. Thank you. you Thank you. music music Thank you.
spk07: Good afternoon and thank you for standing by. Welcome to the App Harvest first quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Travis Parman, Chief Communications Officer. Please go ahead.
spk11: Thank you for joining us on the AtParvest first quarter 2023 earnings call. I'm Travis Parman, Chief Communications Officer for AtParvest. Joining me today are several members of the senior management team, including Jonathan Webb, founder and CEO, Tony Martin, chief operating officer and board member, and Lauren Eggleton, chief financial officer. The earnings release is available on our investor website at investors.apppyrist.com. On today's call, we'll begin with prepared remarks from the team. Then we'll open the call to questions. Before we start, I'd like to remind you that comments today regarding the company's future business plans, prospects, and financial performance are forward-looking statements that we make pursuant to the safe harbor provisions of the securities laws. These statements are made based on management's current knowledge and assumptions about future events, and they involve risks and uncertainties that could cause actual results to differ materially from our expectations. In providing projections and other forward-looking statements, the company disclaims any intent or obligation to update them. For more information on important factors that could affect these expectations, please see our most recent SEC filings. And now, I'd like to turn the call over to Jonathan.
spk14: Thanks, Travis. $13 million. AppHarvest achieved $13 million in net sales for Q1 2023. That's nearly 90% of our sales for the full year of 2022. We're working hard to make these farms as productive as possible as quickly as possible. In 2022, we quadrupled the number of farms in our network. With our flagship farm in Moorhead now in its third harvest season, we're seeing fantastic progress. Production is looking great, and Moorhead is regularly setting weekly performance records. This quarter marked the first time that all four farms were shipping commercially to top national grocery store chains, restaurants, and food service outlets. That means we still have lots of room for upside as we fully plant the new farms and continue to increase production. This year, we are laser-focused on achieving operational excellence as we work to ramp up production and revenue from the four farms with an increasingly diversified crop portfolio. As you know, Masternardy is our exclusive marketing and distribution partner. Paul Mastronardi and his team have been tremendous mentors to our team and great problem solvers as we work to ramp up production and improve core operations. We are pleased that our board member, Tony Martin, agreed to join us starting this past January as Chief Operating Officer to help us with that journey. As you likely recall, Tony is a veteran in the controlled environment agriculture industry. we already are benefiting tremendously from his experience and the resources he readily brings to the table. In the brief time Tony has been with us as COO, he already is shaping a culture of measurement, accountability, collaboration, responsiveness, and learning. Farming is not for the faint of heart. Fortunately, AppHarvest's mission has helped us attract a purpose-driven team with the faith and grit to keep moving us forward on a path to profitability. I believe Tony can help us accelerate our path to profitability and positive operating cash flow. Tony is working to optimize production, revenue, and cost through the strategic plan Project New Leaf. I'll welcome Tony to the call to share more details on progress in the first quarter.
spk06: Thank you, Jonathan. Last quarter, we shared details on the next phase of Project New Leaf, our five-point strategy to focus operational efforts across the farms. As you can see from our net sales for Q1, we're strengthening our core business plan and it's driving better results. The first of our strategic initiatives, leveraging our relationship with Mastro Nardi. As the largest domestic producer for Mastro Nardi produce in the U.S., it's critical that we work as strategic partners, driving mutually beneficial results. We are actively focused on increasing the cross-functional integration between the Mastro Nardi and App Harvest teams as we bring new products to market. For example, this quarter we accelerated our plan to plant long English cucumbers at Somerset. The Mastro Nardi team were instrumental in facilitating the crop changeover and were able to quickly place the new product with their customers. Just as variety is the spice of life, variety also matters in CEA. We are leveraging Mastronardi's industry knowledge to further diversify our crop portfolio through more favorably priced varietals of tomatoes. We are trialing high-wire cucumber growing in Somerset to improve yield and trialing mini cucumbers to round out our product offering. Another area where we're seeing progress is in better understanding Mastronardi's produce grading guidelines. Working directly with their teams, we are achieving higher compliance rates and obtaining better pricing for our tomatoes. We have successfully completed our food safety audits at the Moorhead, Somerset, and Richmond farms. That means we've been able to increase the number of direct shipments, reduce transportation costs, and the number of food miles traveled so our fruits and vegetables arrive on the shelves fresher and with less waste. In Berea, we're working on our food safety certification so that we can also do more direct shipments from that facility. We meet regularly with the Mastinardi sales and marketing team on format packaging, inline bagging, and other product specifications for some of their largest clients. This level of collaboration between our companies is especially important as we launch new products. It helps to ensure that we can coordinate sufficient lead time for packaging and placement in the marketplace. Our second strategic imperative, improving labor efficiency. Our labor fulfillment is at the level we need it to be. We aren't experiencing any concerns with labor shortages. The development of the new productivity bonus program is now underway. As part of our work, we are further defining the assessment criteria and methodology verifying the tracking database, and measuring performance. At Moorhead, we're already seeing results where their teams are meeting the performance threshold necessary for productivity bonuses to kick in. The new bonus program will identify and provide opportunities for retraining any underperforming team members. That will enable them to improve their performance and further help the enterprise overall to be more efficient. It also allows us to be more selective when identifying and placing high-performing team members. We expect the full bonus program to be implemented across the four farm network in the 2023-2024 growing season. Our third strategic imperative, improving the feedback loop. As we strive to become a world-class production facility, communication is key to our continuous improvement process and to working more efficiently. We've established a regular cadence of management meetings across the farm network. These meetings help us avoid working in silos, and we constantly measure performance against our annual operating plan, or AOP. Each week, we meet with the farms to review performance metrics such as yield, labor efficiency, transportation, utility consumption, and production revenue. We compare actual results to the plan. The reporting is then cascaded to the four farm general managers and executive leadership. We also discuss opportunities for improvement, both in our meetings by farm and at the four farm general managers meeting. Opportunities to enhance our practices and drive results are shared and discussed. Because of our massive scale, even small changes to processes and equipment configurations now can have a much larger impact in the future when all four farms are at full production. This meeting cadence has enabled us to address issues from pests to plant health in a timelier manner. This helps to prevent small concerns from escalating and to identify any retraining opportunities as quickly as possible. We are even realizing on the benefit of insights from the new facilities having been operational for a few months. Our fourth strategic initiative, initiating comprehensive spending reviews. As the saying goes, a bargain ain't a bargain unless it's something you need. Our production and procurement teams continue to review our suppliers and vendors on a case-by-case basis to determine their return of investment to core operations and to reduce third-party spend when possible. We are also collaborating with the Mastro Nardi sales and marketing team to ensure alignment and efficiency when sourcing packing materials for new product launches. Next quarter will be our first full review of these expenditures. Our fifth strategic initiative, aligning our team members to milestones outlined in our five-year strategic vision. As we work to create a culture of transparency, all team members need to fully understand the five-year strategic plan for Project New Leaf to be successful and the importance of their contribution to our collective success. Following each quarterly call, we'll be hosting team meetings to share performance results, what went well, where we have opportunities for improvement, what we need to do to achieve our key milestones and to celebrate our successes. We're also augmenting our talent pool by bringing on the right people at the right level to support core operations. We recently hired a business analyst to establish and track key metrics across the four farm network. Insights on pick and pack rates per hours, hours of crop work per square meter, pounds picked versus packed versus shipped will help us take a data-driven approach to continuous improvement. We have hired several food safety professionals to lead our food-safe practice. We have added experienced growers for our diversified crop portfolio as we look to expand varietals. What I'm seeing this quarter is is that there's a maturity building in the organization to better manage issues and to mitigate any material impact from challenges. We're working more collaboratively with our customer, Masternardi, which is driving higher revenues, cost savings, and product quality. And we still have two facilities that are not yet fully producing. Both Berea and Richmond are opening in planned phases, We are finding it takes about three years to fully ramp up a facility to scale. We are working to shorten that time by applying lessons learned across the four farm network. Salad greens at Berea and strawberries and cucumbers at Somerset are new products to us. We expect our future performance to improve each quarter as we gain more experience under our belts. Moorhead is achieving significant production records in its third season, and by leveraging some of the experienced talent from Moorhead at Richmond, we've been able to avoid some of the challenges that Moorhead encountered in its first year of operations. I'm proud of the progress we're making. I expect to see more operational efficiencies leading to increased performance in Q2. Now, over to Lauren to review the Q1 2023 financials.
spk03: Thanks, Tony. As Jonathan mentioned, we reported first quarter net sales of $13 million compared to net sales of $5.2 million in the first quarter of 2022, an increase of approximately $7.8 million year over year. With all four farms in the network now shipping under a variety of brands for Massanardi produce, we expect to see significant year-over-year net sales increases throughout 2023. We expect that trend to continue in 2024 as we leverage more of the farm acreage and work to optimize production. As we announced at the end of FY 2022, we are now reporting overall net sales by produce type rather than a metric of pounds sold. Looking at net sales by crop type, in Q1 we sold almost $11 million in tomatoes more than $1 million in strawberries, over $800,000 in salad greens, and nearly $200,000 in cucumbers. In Q1 2023, we recorded a net loss of $33.6 million and a non-GAAP adjusted EBITDA loss of $23.2 million as we worked to ramp up production across our farm network. This compares to a prior year net loss of $30.6 million and a non-GAAP adjusted EBITDA loss of $18 million. This increase was primarily driven by cost of goods sold at the new farms, including the removal of strawberry plants and acceleration of Long English cucumber production in Somerset that we announced last quarter. Turning now to our balance sheet and liquidity, we ended the quarter with cash and cash equivalents of $50 million. We have taken aggressive steps to address liquidity, and we continue to explore additional financing alternatives, including third-party transactions such as a sale leaseback on another of our high-tech farms. In February 2023, we completed our public follow-on offering that raised gross proceeds of $46 million before deducting the underwriting discount, commissions, and estimated offering expenses. We expect to use the net proceeds from this offering for working capital and general corporate purposes as we ramp up production and sales from the four farms. In terms of capital expenditures beyond Q1, we expect to spend approximately $40 to $45 million in 2023 for final project details at the Richmond, Berea, and Somerset facilities. Approximately $17.7 million of this CapEx spend range will come from amounts included in restricted cash and other assets as of March 31st. In line with expectations, we saw an increase in the cost of goods sold during the first quarter of 2023. This $20.8 million increase in COGS over year was due primarily to the costs related to the ramp-up of operations at the three new farms and the change in crop production at Somerset. As we shared last quarter, we expect to see significant SG&A annualized savings in FY 2023. For Q1, our SG&A was reduced by more than half. down to $10 million compared to $21 million for the first quarter in 2022. These savings are primarily driven by corporate restructuring actions taken in 2022, reductions in executive stock compensation, and operational efficiencies. Operations in the first quarter of 2023 continue to ramp up as expected. We are seeing significant progress at Moorhead in terms of their key performance indicators and the number of team members qualifying for productivity bonuses. We're applying lessons learned from Moorhead to accelerate our path to operational excellence at each of the three new farms. We're especially seeing results at Richmond in terms of labor efficiency, plant health, and premium production. To sum up the quarter, we beat consensus with net sales of $13 million, driven by the net sales of almost $11 million in tomatoes and more than $1 million in strawberries, yet recognize we still have work to do in terms of adjusted EBITDA. We reduced SG&A by $11 million in Q1 2023, more than half of Q1 2022 total spend. We continue to believe in our ability to be self-sufficient and to generate positive operating cash flow over the longer term with our four-farm network. We remain confident in our FY 2023 guidance of net sales to be in the range of $40 to $50 million and non-GAAP-adjusted EBITDA loss to be in the range of $67 to $76 million. With that, I'll turn it over to our Chief Communications Officer, Travis Parman. Thank you, Lauren.
spk11: Operator, we'll now begin to take questions.
spk07: As a reminder to ask a question, please press star 1-1 on your telephone. and wait for your name to be announced. Please stand by while we compile the Q&A roster. The first question comes from Ben Toyer with Barclays. Your line is now open.
spk04: Thank you very much, and good afternoon. Congrats on the results. Just two things I wanted to follow up and maybe the first one is maybe more question for Lauren. Just if we look ahead and as to your guidance as it relates to the gross profit break-even point and then the EBITDA, well, positive and then EBITDA going to be positive. Help us understand a little bit what are the opportunities to potentially accelerate that and where are the risks as it relates to a potential delay of that and how you think in light of that for the needs as it relates to capital. That would be my first question.
spk03: Yeah, sure. Hey, Ben. So, you know, as we've mentioned previously and as we discussed today, we expect that All farms should be adjusted gross profit positive by 2024. Farm operations should be adjusted EBITDA positive by 2025. And on a consolidated basis, we expect the company to be adjusted EBITDA positive by 2026. You know, for this year, we continue to expect net sales of 40 to 50 million for the year, with Q2 likely being the highest sales quarter of the year. You know, COGS, we continue to expect that cost of goods sold will be slightly more than double than in 2022 as we increased production at the three new farms. The ramp up of the new farms contributed to the large increase in COGS in Q1. It also was mentioned earlier that the earlier removal of the strawberry plants resulted in a large write down of inventory and that materially impacted our cost of goods in Q1. However, we are encouraged by the year over year reduction in COGS at Moorhead as it continues to be more efficient. In terms of what you're asking, I think we're seeing the progress happen at Moorhead, and seeing how Richmond has performed in its first quarter of harvesting, I think all that's very encouraging. I think as Tony and his team continues to work to bring efficiencies in the bonus rate program that he's talking about, I think that's an area where we could see some more improvement there. We do expect an overall consolidated gross loss for 2023, but we do expect that gross margins will be better in the rest of this year versus Q1. We continue to expect that total SG&A for the year should decline by nearly 40 to 50% from 2022. One thing we saw, stock compensation was unusually low in Q1 due to some reversals of expense from some recent employee departures. So we'd expect that stock compensation expense is likely higher in future quarters. However, we expect that total SG&A in future quarters should be relatively close to what we saw in Q1.
spk04: Okay, perfect.
spk13: Thank you very much. Ben DeLair on top of that.
spk14: This is John. I mean, simply, there's yield, there's quality, and there's price. So when you're asking how do we accelerate that path of profitability, there's really three distinct levers. How much stuff do we produce? What's the quality of the stuff? and what's the price per unit we get on the stuff. So that's where Tony has been able to come in with us quickly to try to optimize these facilities on yield, quality, and price. And if you look at our Q1 results, Moorhead has obviously been the topic of conversation here for the better part of a year, year and a half, two years. Moorhead carried us in Q1. That was our one production facility that was in full go. You know, Richmond, we've said that we were producing nearly half of the facility because we're opening it in two phases. Berea, you know, it's our first foray into leafy greens, and this is one of the largest leafy green facilities in North America. So, you know, having that ramp-up stage there and then switching in Somerset from strawberries to cucumbers on the site, you know, if you look at the opportunity for the company, it's really taken the four assets we have to optimize for yield, quality, and price. And that's where Tony's been able to, you see the results in Q1, and we're pretty hopeful here that, you know, as we continue to get the four up and fully online, you know, you saw a Q1 result with really only one facility that was fully operating.
spk04: Okay. That's very helpful. Thanks for that, John. And then, actually, that's one more question I have for Tony. It's just to understand a little bit. We've gotten used to the significant seasonality throughout the year, and you just also focused on said that the second quarter is most likely going to be the highest, but just wanted to understand with now the other facilities, berries, leafy greens, some cucumber. We know about the seasonality of tomatoes, but is it exactly the same with all the others? How much of an impact or maybe of a support to third quarter results could all these other fruits and vegetables have versus what used to be always a very soft quarter?
spk06: Well, thank you for that question and good afternoon. So certainly the Berea facility, as an example, is a year-round production. So, you know, lettuces, they're both lit naturally and under lights. Their cycle of production ranges from about 22 days for some varieties in the summer months to 40 days in the winter months. But it should be in production year-round. With regards to strawberries, there is a changeover from cucumbers that will happen in August. strawberries take a little while to start producing, so we should start to see in the fourth quarter, at the beginning of the fourth quarter, we should start to see strawberry production return at Somerset. Tomatoes, they grow, and we plan them this way to take advantage of the changes in the broader market, but we do a crop changeover sometime mid-August. So in the If you're with me, in the third quarter, we see our tomato production come out about halfway through the quarter. We see the changeover to strawberries in about the same time, but Berea continues to perform. As to the seasonality of the business, you have to think in terms of day length. The level of tomato production is a direct result of the length of day, and that can be influenced by artificial lightings. but it's also the intensity of the light that matters in crop production. And so you see your best yield at this time of year as we move into the summer months.
spk04: Does that help you? Thanks for that. Yep, that helps. Thanks. You're welcome.
spk07: Please stand by for our next question. The next question comes from Kristen Owen with Oppenheimer. Your line is now open.
spk09: Great. Thank you for taking the question and congratulations on the progress made in the quarter. Tony, you had made a comment about the food safety certification and how that's helping you to do more direct shipment. I'm just wondering if you can say a bit more about how we should think about that direct shipment influencing both the absolute price that we see on our end as well as your cost of goods. Just help us understand how important that ability to do more direct shipment is for revenue and cost of goods.
spk06: So there are two aspects to the food safe audit. The first is the retail customer that opens up to us as a result of having our food safe certification. Large retailers like Walmart or Costco or some of the large retail chains, even in food service like Wendy's, require that food safe practice certification. And so it opens the door to a broader relationship with those customers. That's the first thing. And because of the nature of that relationship through the program pricing, through the nature of the volume that they take, it provides opportunity for us as a producer. The nature of direct shipments, currently what happens right now is we ship to kind of a cross docking facility where mixer loads are created with other products to then ship to a retail customer. Because of the nature of our food safe practice, we're able to ship full truckloads directly to retail customers because they themselves have distribution centers for that product. Companies like Walmart or Costco, they have distribution points that we ship to directly. What that does is it reduces the cross-stocking facility fees that we have to pay to unload a truck and then rebuild it. And it also reduces the amount of transport we pay, the amount of mileage that that produce has to travel first to the cross-stocking facility and then out to the retail customer. Instead, we ship direct to the retail customer. So there's two opportunities that get created. It's the size of the order and it's the nature of the retail relationship. Does that answer your question?
spk09: That is helpful. I do wonder if you could put a finer point just around the spread of net pricing versus gross pricing. If I recall, that net pricing that we see in the model is that includes some of the transportation costs. So just an order of magnitude, if you could, on that spread.
spk06: Well, again, I think that that's maybe a question we could direct to Lauren, but typically we see transport costs, I believe, Lauren, is in the area of about 10% of the selling price. And so if you reduce that by 1%, 2%, or 3%, it's a significant savings. Depends on the number of direct loads we have, of course.
spk03: That's right. Yeah, it would impact net sales on the gross to net calculation as freight for us as a pass-through from gross to net. So, you know, I don't know if we can kind of give an order of magnitude right now, but, you know, as Tony has indicated, it could be approximately 10% of that spread. You know, we have seen a reduction in that. You know, you would expect to see a reduction in that on the freight cost. As we talk about the direct shipments, having one leg directly to a customer distribution center versus potentially two legs to a distribution center going to the customer.
spk05: And cross-talking, right? So there's a cost to the labor of unloading a truck.
spk09: Okay, that's super, super helpful. I appreciate the incremental detail there. I'm also going to ask a question similar to Ben's, just on EBITDA break-even, but I want to ask it specifically about Moorhead, particularly given some of your comments, Jonathan, about how that carried the quarter. But, you know, we're in year three. Obviously, it was sort of the beta test farm. As we are thinking about that facility, can you give us a sense of how close to facility EBITDA break-even Moorhead is today, and could we see that facility on a standalone basis turn EBITDA positive this year?
spk14: You know, we're not zooming in specifically on that, but, you know, we're excited about the progress in Moorhead, and given the fact that it was the one operating facility you saw in Q1 that was fully ramped up, Yeah, we're inching closer, but again, I think the hesitancy on us going out with firm indication is, you know, there are three distinct levers here, price, yield, and quality, and it's for us getting all three of those, you know, at a maximum point. And we saw in Q1, Moorhead was inching towards that direction, and in Q2, we continue to see the trend in that progress. Yeah, I'll let Lauren try to maybe get more granular, but we're certainly encouraged where we're at on, like you said, the beta of Moorhead being our model and very encouraged by the progress we're finally seeing in that third season where we're at today.
spk03: Yeah, I would say definitely not on a full-year basis for this year for Moorhead, but we think that it is possible that Moorhead could be adjusted EBITDA positive in the second quarter, potentially even the third quarter of this year, and likely next year, 2024, would be the earliest when it would be adjusted EBITDA positive on a four-year basis.
spk09: That's great. I'll take the rest offline. Thank you so much.
spk07: I show no further questions at this time. This concludes today's conference call. Thank you for participating.
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