Edible Garden AG Incorporated

Greetings. Welcome to the Edible Garden first quarter 2023 business update conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Ted Avis, Investor Relations. You may begin.

Thank you. Good morning and thank you for joining Edible Garden's quarter-ended March 31st, 2023 conference call and business update. On the call with us today is Mr. Jim Kress, Chief Executive Officer of Edible Garden, and Mike James, Chief Financial Officer of Edible Garden. Earlier this morning, the company announced its operating results for the three-month-ended March 31st, 2023. The press release is posted on the company's website, www.ediblegardenag.com. In addition, the company filed its quarterly report on Form 10-Q with the United States Securities and Exchange Commission this morning, 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. Kress reviews the company's operating results for the quarter ended March 31st, 2023, and provides a business update, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in 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, Expect, project, plan, believe, may, will, would, should, could, mission, strategy, potential, seek, strive, and the negative of such terms, in other words, and terms of similar expressions are intended to identify forward-looking statements. These forward-looking statements are based largely on the company's current expectations and projections about future events and trends that it believes may affect its financial condition, result of operation, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to several risks, uncertainties, and assumptions as described in the company's most recent quarterly report on Form 10-Q filed with the United States Securities and Exchange Commission. Because of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in this conference call may not occur and actual results could differ materially and adversely from those anticipated or applied 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 will now turn the call over to Mr. Jim Kras. Jim?

Thanks, Ted. Good morning, and thank you to everyone for joining us today. I would like to start by expressing our deep gratitude to our investors for your support and confidence in our mission. We remain steadfast in our pursuit of our objectives and in creating long-term value for our shareholders. In the most recent quarter, the company experienced a slight decline in revenue compared to Q1 2022 as a result of several substantial orders initially anticipated in the first quarter slipping into the second quarter. Furthermore, the company diligently evaluated all its business partnerships and opted to focus on and reallocate resources to more profitable customer and partner relationships. This strategic move aims to phase out lower margin relationships that have been adversely affecting our overall margins and substitute them with higher margin relationships and products in an effort to strengthen the company's overall profitability. Our first quarter results provide evidence that the strategy is working and our gross profit margin increased from the 2022 first quarter. Furthermore, the launch of Edible Garden Heartland in April 2023 presents a substantial opportunity for our profit margins to experience a positive influence due to the expanded growing capacity provided by the facility. We anticipate that this extra capacity will alleviate or remove previous capacity constraints that affected the company, enabling Edible Garden to become more self-reliant and less dependent on third-party contract growers. Consequently, this is likely to result in a significant increase in Edible Garden's profitability. Moreover, Edible Garden is expanding our product offerings to showcase that we believe in what we believe are higher margin growth products within new categories, such as our newly acquired pulp line of all-natural, non-GMO, preservative-free, sustainable gourmet sauces and chili-based products. These items will become available at Whole Foods Market, Mid-Atlantic, and Southeastern retail locations starting in the summer of 2023. Founded in the supermarket's refrigerated section, typically near the produce department, these fermented sauces let us take advantage of Edible Garden's increasing brand recognition in this innovative product category. At the same time, we have enhanced our distribution network from the start of 2023 by adding several new retail partners and strengthening existing partnerships. The addition of Whole Foods Market as a retail distribution partner represents a further expansion of an already robust distribution network across the country. Additionally, as we touched upon on our last conference call, Morton Williams Supermarkets joined our distribution network in the Northeast, and they now carry Edible Garden's produce and products across all their stores in the New York metropolitan area. We also deepened our market reach with Gristiti's and D'Agostino supermarkets, substantially expanding our product offerings across their numerous locations in Manhattan, Brooklyn, and Westchester. In addition, through continued partnerships and investments in research and technology, Edible Garden is at the forefront of establishing a more secure and sustainable food supply chain. One of the company's groundbreaking innovations is the Green Thumb patented software, which monitors plants across the supply chain, GreenThomb enables us to carefully observe plant growth and movement within the greenhouse, guaranteeing quality control and enhanced traceability at every stage of production and distribution. Additionally, with ongoing collaborations and investments in research and technology, Edible Garden is leading the way towards a safer and more sustainable food supply chain. In April, on the heels of our previously announced research and collaboration with the New York Institute of Technology, the USDA and the EPA to investigate nanobubble technology in a controlled environment agriculture setting, we embarked on a funded research project with Auburn University's Department of Horticulture, focused on addressing food safety matters and the potential contamination of fresh produce, including pathogens, like Listeria. Taking part in groundbreaking research efforts like this, we can draw insights from seasoned experts and contribute our own expertise, ultimately enhancing the safety and quality of our produce for consumers. We're confident that our zero waste inspired mission, along with our steadfast commitment to sustainable hydroponic farming and food safety practices, resonate with eco-conscious consumers and retail distribution partners, thus driving a growing demand for our products. In a time when businesses are experiencing the stress of mounting inflation and assorted challenges, Edible Garden continues to outperform its competition, as demonstrated by the company's order fulfillment rates across all retailers and distribution partners. which are consistently higher than industry averages. Achieving such performance levels, despite the unparalleled supply chain challenges the industry is encountering, illustrates Edible Garden's commitment to providing exceptional service and execution to its customers. By consistently surpassing partner expectations, we believe retailers perceive Edible Garden as a dependable, credible provider of sustainably cultivated produce and are looking for opportunities to initiate or strengthen distribution relationships with the company. We are confident that the various initiatives undertaken by the company since early 2023 are beginning to manifest in our financial performance. In April, we achieved record revenue, which we believe validates our strategy is working and expect to turn cash flow positive on a quarterly basis prior to the end of the year. Before handing the call to Mike James for an overview of the company's quarterly financial results, I would like to extend a warm welcome to Pamela Donnarumma, who joined the Edible Garden Board in April. As the founder and CEO of Futures Inc, Pamela brings extensive experience in human resource management, accreditation, financial operations, and governmental compliance. Her commitment to promoting access to healthy, sustainable, and locally sourced products resonates with our mission, as does her dedication to supporting and investing in local communities. As a master gardener, we believe Pamela is uniquely aligned to help the company continue to focus on quality and sustainability. I would now like to turn the call over to Mike James, Chief Financial Officer of Edible Garden, who will review the financial results for the three-month period ending March 31st, 2023. Mike?

Thanks, Jim, and good morning. The company reported revenues of $2.5 million in the 2023 first quarter compared to $2.7 million for the 2022 first quarter. This decrease was largely the result of the previously discussed orders that were expected in the first quarter of 2023, sliding into the second quarter. Cost of goods sold was 2.5 million for the three months ended March 31st, 2023, compared to 2.8 million for the three months ended March 31st, 2022. The decrease was primarily due to the decrease in revenue. Selling general and administrative expenses were 2.7 million for the three months ended March 31st, 2023, compared to 2 million for the three months ended March 31, 2022. The increase was primarily driven by the cost incurred as it relates to the ramping up and operation of Edible Garden Heartland, higher payroll and compensation expense, as well as other public company expenses that were not incurred in 2022, partially offset by a decrease in outside consulting services needed to prepare the company for its initial public offerings. Net loss was $2.9 million, or $2.21 per share, for the three months ended March 31, 2023, compared to a net loss of $2.6 million, or $15.40 per share, for the three months ended March 31, 2022. At March 31, 2023, the company had $3.9 million in cash and cash equivalents, compared to $110,000 at year-end. In addition, the Quarter end of March 31st, 2023, the company paid down approximately 25% of our total debt outstanding, and at March 31st, 2023, had 4.7 million in total debt outstanding compared to 6.3 million at year end. I would now like to turn the call over for questions. Operator, could you please assist us with that?

Certainly. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for questions. Your first question for today is coming from Elin Friedman at VKC Fund.

Good morning. Can you please provide any additional details on the new research partnership with Auburn University regarding food safety concerns and fresh produce contamination?

Yes, sure. This is Jim. The Auburn University partnership is a very interesting one and very timely. There's been recalls in the industry. There continues to be recalls. What we've been able to do is leverage our standing in the industry as an expert in the greenhouse and CEA space to work with Auburn to start to put together a group that is going to identify pathogens such as Listeria. and identify them and be able to research them and see what can be done moving forward in order to address and be proactive to make sure that hopefully those contaminants are kept outside of the greenhouse and that we start to reduce the exposure to potential recalls. So we're pretty excited about The opportunity, I think it's a credit to our team and our expertise that Auburn actively reached out to get us involved as a leader in this research.

So thank you for the question. Thanks, Jim.

Your next question for today is coming from Anthony Vendetti at Maxim Group.

Yes, hi. Thank you. How many stores right now are your products in?

We're still over 4,000 stores. That continues to increase. We're excited about the next few months as we expect some new partnerships to start to develop, which will increase that number substantially. We are very, very strong east of the Mississippi with leading retailers such as Walmart, Meijer, ShopRite, which is ShopRite, Wakefern, Hannaford, and so on. So we continue to grow our distribution, our penetration, not only with the store count, but how many items that we have going into the store. This year, a big part of the strategy is to continue to go deep into our retailer relationships, knowing that we offer three product lines and that we can get more items into the existing channels. that will allow us to increase revenue, as well as increasing doors.

Okay, so you're increasing SKUs in these over 4,000 stores, including some of the largest stores in the country. Yeah, in the world.

Yeah.

Right. Which is great. Wake Fern, which is ShopRite, Walmart.

Yeah, Wake Fern, Walmart. Yeah, right, exactly. We have probably one of the strongest stores distribution networks compared to our contemporaries. Once again, we're continuing to increase what's called our ACV or penetration with more SKUs into channels that can handle more items and drive more revenue. So adding more skews of herbs, adding more lettuces, looking to go deeper into the floral business, as well as now introducing our sauces into the likes of whole foods and some of our existing relationships, which is for us kind of a path of least resistance, which is pretty good.

Excellent. And one of the other things you pointed out is looking to – change the mix towards the more higher margin products. Can you talk about specifically which products you're focused on increasing the SKUs for?

Yes. So we're starting to get diversity in our offering. One of the great things about Edible Garden is a couple of things. One is it's a great name that lends itself to different product lines as an authenticator, but even more so are the relationships that we have at these major retailers. And so they're looking for more and more products. We have the additional capacity with Heartland that's come on board, which allows us to drive even more units and more units at a much higher margin. We're looking to – we just shipped our – some of our largest floral orders for Mother's Day. That was an asset that came along with the facility out in the Midwest, out at Obago Heartland. We will continue to build on that. We had a record April. A big driver of that was the floral, which is a higher ring and a nice margin product. Um, we've also continued to optimize our supply chain and vertically integrate, which is driving margin as well. And we're focusing on some of the top sellers, um, to get more, more of those into more distribution. So, um, that combined with, um, pulp, which is starting to roll out and we just completed, uh, our first manufacturing run and taking inventory on that actually this week. Um, that's a nice margin self shelf stable. product that allows us to expand our penetration as well.

Excellent. And the Michigan facility has roughly a $20 million annual capacity. And I know you just started that facility up and running. Where is that capacity currently at and where do you expect to be with that capacity by the end of 23?

Well, right now our capacity is probably somewhere around, I would say, call it on the food side of the business, probably maybe 25%. Floral is probably at 50%. It's all about space allocation and greenhouse, right? But I would say we're probably at 30%, 35% now, and I would think towards the end of the year we would probably be around, you know, 60, all depending on continued build out since we were retrofitting the facility. So we've got some runway. It's really driven about just being able to continue to convert and put product in there and be able to, you know, execute the way that, you know, we execute with all the guidelines and whatnot. But we got the facility certified USDA organic in record time. Consider we bought at the end of August, September 1. We were shipping the second week in April. Once again, we're cranking the place up, and I feel pretty confident that we're going to be in a real nice spot. you know, by the end of the year and ready for, you know, our big sales season, which is Thanksgiving and Christmas. So, once again, I'd say probably somewhere in the 30s, 35 right now, but we're pretty early on. We're just about a month in on shipping. And then I would think, you know, probably double that, you know, call it 60% by the year end, and I would think we'd be full at some point next year.

Excellent. That's helpful. And then on the contracted growers, are you less reliant on those right now? Because I know that could depress margins.

Well, look, it was a margin concern. I mean, people have to make their money, right? So we're buying what's called landed product, which had labor, cost of goods built in, and then we pay one price and then we transport it. We have not only had our reliance down to one, right about one or two key contract growers that we have longer term contracts with. And the reality is when you start to build up capacity and you have the relationships with the retailers, you have some leverage to renegotiate the contracts that are more favorable. You obviously can blend your cost of goods average with what you have coming out of your own facility. And so our reliance is more strategic now than one of a necessity. And I think one of the interesting things were we were able to drive the distribution platform with the third parties. And I think the people that we worked with that helped us get there. But now we're really driving towards, you know, being cash flow positive and profitable. And really the only way to do it was to get as much of it in-house as possible to control those costs, considering the margin pressures that the business is constantly under. We've also invested in, you know, we took some of the use of proceeds. Not only did we buy a fantastic facility centrally located next to our number one, you know, partner, that being earlier, Meijer. And we're downtown Grand Rapids. They're downtown Grand Rapids, which is very cool. We've also invested in building out our fleet of trucks and have been able to take on the transportation, which has limited our exposure to fluctuations in pricing on a supply-demand basis. basis out in the marketplace with 3PLs and whatnot. So we've vertically integrated as much as we can and tried to control our costs so that we can really drive the profit line of the business moving forward.

All really helpful. Thanks so much. Appreciate it.

Thank you, Anthony. Appreciate it.

Once again, if there are any questions or comments, please press star 1 on your telephone keypad. Your next question for today is a follow-up question coming from Elin Friedman. Elin, your line is live.

Thank you. One more question. 20% revenue growth in 2023 is higher than analysts have projected for the company in 2023. How do you see the company getting there?

Well, great question. Appreciate it. We are ahead of schedule as it relates to our integration of the facility out in the Midwest, Heartland. That's a big piece of it. That additional being able to leverage that capacity is really driving a lot of the overall growth since we can put more and more product in there at a much higher margin. We also see our existing partnerships on the East Coast allowing us to increase the amount of units that are coming out of our Belvedere, New Jersey facility. Floral has been a nice addition since that. Once again, higher-end, nice margin product, and I think we'll do more of that since our core relationships that we have are looking for more products. And so there's that, as well as I think I may have mentioned this, just new partnerships that we're going to be looking to bring on over the next few months, which will hopefully continue to accelerate that number. So I hope that answers your question.

Thank you. Yeah, thanks, Jim.

We have reached the end of the question and answer session, and I will now turn Nicole over to management for closing remarks.

Thank you.

I would like to express my sincere thanks to all of you for your participation today. We take pride in the progress Edible Garden has made and eagerly anticipate what the future holds. Our firm commitment to implementing our strategy continues, and we look forward to keeping you informed about our progress in the months to follow.

Thank you very much.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.