Edible Garden AG Incorporated

And welcome to the Edible Garden second quarter 2023 business update conference call. At this time, all participants are in a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, 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. Ted, you may begin.

Thanks, Tom. Good morning, and thank you for joining Edible Garden's second quarter 2023 business update and conference call. On the call with us today are Jim Kras, 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 months ended June 30, 2023. The press release is posted on the company's website, www.ediblegardenag.com. In addition, the company will file its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission, which can also be accessed on the company's website as well as the SEC's website at www.sec.gov. If you have any questions after the call and would like any additional information about the company, please contact Crescendo Communications, at 212-671-1020. Before Mr. Perez reviews the company's operating results for the quarter ended June 30, 2023, and provides a business update, we would like to remind everyone that this conference call may contain forward-looking statements. All statements other than statements of historical facts contained in this conference call, including statements regarding our future 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, in terms of similar expressions, are intended to identify forward-looking statements. These forward-looking statements are based largely on the company's current expectations and projections about future events and trends that it believes may affect its financial condition, results of operations, strategy, short-term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to several risks, uncertainties, and assumptions as described in the company's most recent quarterly report on Form 10-Q filed with the U.S. 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 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 other person assumes responsibility for the accuracy and completeness of any of these forward-looking statements. The company disclaims any duty to update any of the forward-looking statements except as required by law. All forward-looking statements attributable to the company are expressly qualified in their entirety by these cautionary statements as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties. With that, I will now turn the call over to Jim Kras. Jim?

Thanks, Ted. Good morning, and thank you to everyone for joining us today. I want to begin by extending our sincere thanks to our investors for the trust and belief you placed in our vision. Our commitment to achieving our goals is unwavering as we continue to focus on generating lasting long-term value for all shareholders. We are excited to report year-over-year revenue growth of 41.4% for the second quarter of 2023. Edible Garden has always stood out for its consistently high level of execution, a feature that sets the company apart from our competition. While others in our industry have struggled, often shrinking or even ceasing operations, Edible Garden continues to grow, successfully building its reputation and gaining a larger portion of market share. Edible Garden has regularly executed at levels that surpass those of our competitors, and our order flow rates across retail and distribution partners is a testament to the company's dedication to exceptional service. Our ability to continually surpass our retail partners' expectations Solidify's Edible Gardens position is a strong and dependable supplier of sustainably grown produce and products. This superior performance has furthered the expansion of our distribution to encompass some of the most prestigious names in retail nationwide. It is our belief that both existing and prospective retail customers view Edible Gardens as a reliable and trustworthy partner, often looking to reinforce established distribution relationships with the company. In the second quarter, the company initiated a deliberate strategy to concentrate our energies and redistribute resources towards more profitable customer and partner relationships. The impact of this strategy was evident almost immediately as we achieved a 168% increase in our gross profit compared to the same quarter in the previous year. Additionally, with the launch of Edible Garden Heartland in April of 2023, we expect additional positive impacts on our margins. We attribute this expected improvement to increased and growing capacity offered by Edible Garden Heartland. This expanded capacity allows us to reduce the company's reliance on third-party providers and transition previously outsourced production to in-house operations. We believe that these actions will positively impact the company's margin. We also believe that the facility's potential to generate up to $20 million in annualized revenue provides us with the opportunity to vertically integrate our Midwest production capabilities, further enhancing our operational efficiencies. Additionally, the company is witnessing expansion across all segments of our business and platform, including leafy greens, floral products, alternative proteins, and pulp flavors, a comprehensive line of gourmet sauces and chili-based products, which has begun scaling and building inventory for a near-term retail introduction. During the second quarter, in response to the growing demand of our potted herbs and their sustainability for our customers' home gardens, Edible Garden expanded the distribution of our Garden Starters product to all Wakefern ShopRite retail locations across the Northeast. This expansion came on the heels of introducing Garden Starters at Meijer retail locations in the Midwest just in time for Mother's Day. The 35% of American households grown some of their own food. Edible Garden's sustainably grown herbs and produce have become popular choices among consumers looking to enhance the flavors of their meals. By placing our potted herbs in the same supermarket section as cut herbs and sustainably grown produce that customers often purchase, we have made it more accessible and convenient for those looking to incorporate edible garden potted herbs into their home gardens. In addition, during the quarter, we enhanced our partnership with Walmart to provide a wider range of edible garden SKUs in their northeast locations and initiated distribution to the retail stores in the east-south central region of the U.S. Walmart, recognized as the world's largest retailer of fresh produce, has consistently been one of our most significant customers, and our partnership with them goes beyond simply supplying produce. Edible Garden actively contributes to Walmart's Project Gigaton, an ambitious initiative launched in 2017 that aims to unite suppliers, NGOs, and various stakeholders in an effort to reduce or eliminate one billion metric tons of greenhouse gases from the global value chain chain by 2030. The company has also been honored by Walmart as a project gigaton giga guru, reflecting our unwavering dedication to our zero waste inspired mission and our leadership in the controlled environment agriculture, CEA sector. We're confident this expanded distribution relationship with Walmart will positively impact your revenue and cash flow in 2023 and subsequent years. In June, the company received grants from West Michigan Works and the Specialty Crop Crop Block Program of the Michigan Department of Agriculture and Rural Development. The grants were specifically earmarked to compensate Western Michigan employers for the costs related to leadership and food safety training for their workforce. These grants will enable employees at our Edible Garden Heartland facilities to participate in food safety training. The areas covered in the training will include Produce Safety Alliance grower training, training in hazard analysis critical control points, and good agriculture practices training. The grants reflect our commitment to food safety, while also complementing our research collaboration with the New Jersey Institute of Technology, the USDA, and the EPA, focusing on the effect of nanobubble technology on fresh produce, food safety, and processing methods. They also align with our collaborative research study with Auburn University's Department of Horticulture, investigating food safety concerns tied to fresh produce contamination, such as listeria. In July, Edible Garden introduced GreenSub 2.0, the most current version of our advanced greenhouse management system, marking a substantial advancement in our automation technology. This improved version of the system significantly boosts our dynamic forecasting capabilities using real-time data with increased efficiency, aiming to anticipate to our distribution partners' needs more precisely and to modify our growing strategies as needed. taking into account factors such as year-over-year patterns, sales trends, and seasonal fluctuations. A significant enhancement in Green Thumb 2.0 is the integration of a real-time inventory system that tracks all raw materials, work in progress, and finished products. This allows the company to dissect our costs for every element involved in the plant growth with an unparalleled degree of detail. We are confident that this level of detail will furnish essential information to aid us in managing our expenses. We've also expanded our distribution at both King Colin and IGA retail locations across Long Island, New York, just in time for the 2023 summer season. This expansion comes in response to the increasing consumer demand for fresh produce and herbs that become synonymous with the Edible Garden brand. To accommodate this growing demand, both King Colin and IGA have doubled their shelf space allocated in their retail locations for Edible Garden products. The initiative that the company has been working on since the beginning of 2023 have started to manifest in our financial results. The record revenue we achieved in the second quarter, coupled with the rise in both gross profit and profit margins, provides evidence that our strategic approach is working. We believe that the ongoing execution of our strategic plan will enable us to achieve our target of becoming cash flow positive on a quarterly basis before the year's end. I'd like to turn the call over to Mike James, Chief Financial Officer at Noble Garden, who will review the financial results of the three-month period ending June 30, 2023. Mike?

Thanks, Jim, and good morning. The company reported an all-time record year-over-year revenue growth of 41.4% to $4.2 million in the quarter ended June 30, 2023, compared to $3 million reported in the second quarter of 2022. The herbs, produce, and floral business saw a 41.7% increase, largely driven by the initiation of shipping from the Edible Garden Heartland facility at the start of the quarter. In addition, revenue from alternative plant-based supplements experienced a 39.3% rise thanks to new flavor SKU ordered by a customer across every store in their retail chain. Cost of goods sold was $3.7 million for the three-month end of June 30, 2023, compared to $2.8 million for the three-month end of June 30, 2022. The increase was primarily due to the additional labor and materials needed to cultivate the products sold into the retail channel. Selling general and administrative expenses were $2.4 million for the three months ended June 30th, 2023, compared to $2.7 million for the three months ended June 30th, 2022. The 12.9% decrease was primarily driven by a decrease in compensation and benefits expense, primarily offset by the cost incurred in the ramping up and operation of Edible Garden Heartland, which was acquired in August of 2022. Net loss was $638,000, or 24 cents per share, for the three-month end of June 30, 2023, compared to a net loss of $4.8 million, or $20.44 per share, for the three-month end of June 30, 2022. I would now like to open up the call for questions. Operator. Could you please assist us with that?

Certainly. The floor is now open for questions. If you would like to join the queue to ask a question at this time, you may press star 1 on your telephone keypad to join the queue. We do ask, if listening on speakerphone this morning, that you pick up your handset to provide optimal sound quality. Once again, please press star 1 on your telephone keypad at this time if you would like to enter the queue to ask a question. Please hold a moment while we poll for questions. And our first question this morning is coming from Nick Pincus from Forrest Investment. Nick, your line is live. Please go ahead.

Good morning, guys. Congratulations on a very strong quarter. You mentioned some difficulty that your competitors have faced. Maybe you could expand a little bit on the macro environment, what those challenges have been, and as a follow-up to that question, what's allowed Edible Garden to buck that trend?

Thanks for the question, Nick. The competitive environment has been, we've been able to benefit from being uniquely positioned with strongly told partnerships that have allowed us to go deeper with the likes of Walmart and Meijer and Wake Fern and these major players. You know, having a platform that has an increasing store count, you know, well over 4,000 currently, you know, allows us to continue to leverage that relationship to put in more products. And even, you know, more importantly, more shelf-stable products like pulp that allow us to expand the assortment within produce and then expand to other parts of the store. And we're getting a lot of requests to leverage our relationships, to be able to take advantage of our strong relationships and trust that we've built with these retailers to be a distribution partner for even more types of products that we both grow and that we develop. As far as, you know, the, you know, I think what else has made us unique is just, you know, we continue to innovate. Our Green Thumb platform, which has just come out with a 2.0 version, allows us to really increase our operational efficiency. And I think we just continue to get stronger and stronger as a partner, you know, as a picker, packer. shipper, that focus is starting to really pay out in efficiency, profit margin, and increased revenue and stronger relationships.

That's great. You've stated that the goal is to become cash flow positive in the near term, which would be a tremendous milestone. I know you've talked about this a little bit, but maybe you could just expand on the steps that we're taking, the scalability of the business, and some of the enhancements for operating efficiency.

Yeah, thank you. Yes, I mean, the goal here is to become cash flow positive by the year's end, as stated in our release and in our script today. We are really focused on profitability as we continue to ramp the business. And I think that being able to have not only The technology that we've developed, which is proprietary, that's specific to this business and to this platform, but also we continue to refine personnel as well as our focus, I think has allowed us to continue to get stronger, grow the revenue. We have quite a bit on the horizon as it relates to the new introductions and new opportunities. So I think the level of confidence is high that we will get to cash flow positive pretty soon.

Again, congratulations and keep up the good work.

Thank you, Nick.

Thank you. Once again, If you would like to join the queue at this time to ask a question, you may press star one on your telephone keypad. Once again, ladies and gentlemen, that'll be star one at this time if you would like to join the queue to ask a question. Please hold a moment while we poll for questions. And we do have a question from Anthony Vendetti from Maxim Group. Anthony, your line is live. Please go ahead.

Thank you. Yeah, I'll echo the settlements, the last caller, across the board B, in terms of revenues margin, significantly smaller or narrower loss. So it seems like, like you said, on the call, kind of everything's coming together this quarter. Can you talk about the Heartland facility opportunity I know that you started shipping from there, but can you talk about what's the total opportunity there and the timeline for the ramp to get to full capacity?

So thanks, Anthony. Hope you're doing well. Heartland right now, as we sort of earmarked, is got the capacity to produce about, call it, $20 million in revenue. We started shipping in April. We really didn't get a full month of shipping. It was just timing on when we could start to cut over. That's been a huge impact on the business because it's allowed us to vertically integrate, get margin expansion where we needed it, get out from under some third parties, uh growers and producers that you know we just weren't making the type of money we needed to make working with them it's also allowed us to expand the assortment capabilities from a distribution standpoint the facility is is impressive not only is it located near one of our biggest customers Meyer, what it's allowed us to do is really open up that part of the country to service accounts and to drive distribution well beyond Meyer into other regionals as well as local stores. And it allows us to do that with not only the produce that is being grown there and grown there much more profitably because it's grown in-house, but also with items like pulp where we can house it, store it, ship it and push it out of that facility, which is centrally located, which gives us some pretty wide reach beyond sort of shipping from the East Coast. So the central location is strategic. It happens to align with one of our biggest customers. It's allowed us to open up a major metro in Chicago and Chicagoland, as well as Detroit and then even St. Louis and some of these other areas. that we're expanding into right now. So I like the land grab. I like the strategic location. I like the efficiency. I like the control. I like the vertical integration. Love the margin expansion. And then obviously, you know, the top line opportunity is significant and I think is, you know, is even potentially beyond the $20 million that we've put out there as we deepen the assortment of items that it is that we offer. And I think, you know, as time goes It goes by, you'll see some strategic moves on our end to even to maximize that key location where it is. And the cost of doing business there is lower than, let's say, a New York. So that's one of the nice things about Grand Rapids is they're very manufacturing and growing business. So it's a great spot. We're very happy. We're happy with the people that we have working with us there. So it's worked out great.

That sounds like there's a lot of advantages to that facility in Michigan. So can you tell us kind of where it's at in terms of the capacity? You said $20 million is the capacity. Maybe it's a little bit more than that now in terms of the opportunity. But are you at right now – 50% capacity and approximately what capacity you're at now and when do you think you can get close to that $20 million in annual revenue?

I know you asked that question and I think you even nicked it as well and I apologize. I wasn't looking to steer away from it. Right now, our capacity, let's step back for a second and look at it. There's almost four aspects of the business. There's the The processing aspect, which is, you know, there's not really a limiting factor other than time and staffing on that. And as we bring in more business, we can continue to push more units out there. And that currently is up and running and servicing a couple key players in that part of the country. Obviously, Meijer and then another one that's a major retailer that brought on some business near term. or just has within the last few months. And then we have the floral business, which is an existing asset that we've been able to leverage, and we continue to ship those products out. And I think you'll see us continue to service the customers that we have that are wholesalers. And then I think we're going to look to strategically leverage place that business probably in the area with maybe some other additional capacity we may have to bring on in the future. The produce business, that's the leafy greens, that's already in production and shipping with more business coming online in Q3. I would think capacity, once again, it's kind of how you define capacity, growing capacity. I would think we will have that place full by either year's end or definitely by end of Q1 next year. But the production aspect of it with the processing, there isn't really a major gating factor that won't allow us to go past what we currently are doing and what we think we have projected. So I think the $20 million is fairly conservative. There's different things that go in there. And then the fourth piece of it would be obviously some of the products that we look to distribute that, whether it's commodities that we're getting asked to put into our platform or potentially even importing some other types of products or shelf-stable that we're looking at right now. So, you know, once again, that $20 million number was something we put out there based on on a conservative outlook of what we thought we could do with the facility. But as we continue to invest, we continue to, and as we continue to drive business, we're just getting more and more opportunity from these major retailers since they're very happy with how we execute.

Just lastly, on the, on the gross margin, I know you mentioned you had some plant-based facilities, plant-based supplements, which is higher margins, your gross margin came in significantly greater than we expected. Is that sustainable, or is that one-time, I'm not saying it's a one-time order, but that order helped this quarter, and the gross margin may tick down a little bit as we move forward, or is this much better gross margin a new run rate?

I, you know, look, I think that that's in there is, you know, we're, that business has kind of always been in the background and we're continuing to optimize that business. But the margins that, you know, we really are seeing the expansion on are, are really the stuff that we're growing as a function of, of bringing it in house. That's going to continue to be the key driver. Uh, you know, floral is, is, was, it was a nice add on. Um, it's, it's not as, um, production heavy. And as technology sort of media, I guess, is maybe some of the beliefs and some of the other things that, you know, we continue to invest in the CEA aspect of the business. I think you'll see more things out of the supplement business as we push into 2024. You know, we've really just tried to focus on, you know, what our core business is, and our core business is, you know, picking, packing, shipping. I think that's what's allowed us to separate ourselves from some of these other companies. You know, some major players that are in the CE, they've gone out of business and, you know, claimed bankruptcy just in the last 90 to 120 days. And I think that's just keeping our heads down and, you know, driving product, driving margin, focusing on the core business, and then adding on what we know we can take it on, I think has worked out well. It's, you know, it takes a little longer than maybe people would like, but we're starting to see the fruits of our labor. So, you know, the supplement business, once again, I think, you know, helps us a little bit on the margin, but I don't think it's going to be the driving factor moving forward, at least in the next, you know, quarter or two. I think you're going to continue to see margin improvement with, the, like I said, the leafy greens and the florals. So, you know, we're pretty excited. And I think, you know, to answer your question, yeah, it will be sustainable moving forward. I think you'll only see, you know, improvement.

Excellent. All right. Thanks so much. I'll hop back into the queue. Appreciate it.

Thanks, Anthony.

Thank you. And there are no further questions in queue at this time. I would now like to turn the floor back to management. for closing comments.

Thank you.

Thank you again for joining us today. We are pleased with our progress at Edible Garden and we're excited about the opportunities that lie ahead. We'll continue to execute our strategy and look forward to updating you on our progress in coming months. Thank you again.

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