Edible Garden AG Incorporated

Greetings and welcome to the Edible Garden third 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 quarter-ended June 30, 2023 conference call and business update. On the call with us today are Jim Kratz, 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 September 30, 2023. June 30, 2023, excuse me. The press release is posted on the company's website, www.ediblegarden.com. In addition, the company will file its quarterly report on Swarm 10Q with the U.S. Securities and Exchange Commission, which can also be accessed on the company's website as well 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. Katz CRAS reviews the company's operating results for the quarter end of 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 positions, 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 and 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, 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 10Q filed with the U.S. Securities and Exchange Commission. Because of these risks, uncertainties, and assumptions, the forward-looking statements 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 these forward-looking statements except as required by law. All forward-looking statements attributable to the company are expressly qualified in their entirety by these cautionary statements as well as others made in this conference call. You should evaluate all forward-looking statements made by the company in the context of these risks and uncertainties. With that, I would now like to turn the call over to Jim Kress. Jim?

Thanks, Ted. Good morning, and thank you to everyone for joining us today. We continue to execute on our growth strategy as evidenced by the 19.4% increase in revenue for the third quarter of 2023. This growth reflects the expansion of our distribution channels as well as our growing brand recognition. We continue to be a leader in our industry, setting the standard in terms of both service excellence and dependability. As a result, an increasing number of retailers are choosing Edible Garden to fulfill their requirements for organic and sustainable products. The company is growing our distribution network by strengthening ties with current retailers, as well as welcoming new retailers, thereby enhancing our reach. For instance, a collaboration with Woodman's Market has resulted in introducing Edible Garden produce and products across their 19 stores in Wisconsin and Illinois. Woodman's addition to our Retail distribution network boosts our presence in the Midwest and allows us to leverage our edible garden heartland facility in Grand Rapids, Michigan, which we launched in April of 2023. Additionally, we're pleased to welcome Topps Friendly Markets as the latest major retailer to join our distribution network and carry the edible garden brand, offering our range of sustainably grown, high-quality herbs. The addition of Topps Friendly Markets is significant as our products will now be available at all of their 149 stores across New York, Pennsylvania, and Vermont. In July, as previously reported, the company expanded its relationship with Walmart to provide additional SKUs at Edible Garden Sustainably Grown Produce in locations across the Northeast, as well as broadening our reach within Walmart's retail locations in the East-South Central region of the United States. We've also continued with the rollout of our new Pulp Lime Sustainable Gourmet Sauces, All 16 Morton Williams retail locations across New York metropolitan area have introduced the pulp line, representing the brand's initial venture into the substantial and influential New York City marketplace. Morton Williams serves as an excellent partner for our pulp line, aligning with their customers' demand for flavorful, sustainable, and organic fermented products, a concept best expressed in the pulp tagline, Bland Bold. Building on this momentum, the company also brought Dearburg's market into its distribution network, introducing pulp gourmet sauce selection to all 26 of its outlets in the greater St. Louis metropolitan area, as well as their location at Missouri's Lake of the Ozarks. In the third quarter, Edible Garden launched EG Direct, a new division specifically focused on sourcing produce from partners and supplying these products to the company's retail distribution network. The company has consistently outperformed our competitors. as evidenced by order fulfillment rates, which routinely exceed industry averages. We view EG Direct as a strategic move to capitalize on the company's existing distribution network partners and its expensive network of over 5,000 retail locations, potentially opening up additional revenue streams by distributing essential high-volume produce such as broccoli, carrots, and potatoes, among others. We believe that EG Direct could have substantial effect on both revenue and profits of Edible Garden by leveraging our established infrastructure. Edible Garden began shipping fall ornamentals from our new Edible Garden Heartland facility in Grand Rapids, Michigan, just in time for the fall gardening season. These plants are now being shipped to prominent big box retailers across the company's distribution network. Following the acquisition of Edible Gardens Heartland last year, the company integrated cutting-edge technologies like our proprietary and patented Green Thumb greenhouse management systems to boost our supply chain efficiency, in addition to implementing our advanced growing techniques. These steps were in line with Edible Garden's philosophy of maximizing all available assets at our disposal. The company received a notice of allowance from the U.S. Patent and Trademark Office for our innovative self-watering display, underscoring our dedication to innovation. The self-watering display has proven to be a game-changer, revolutionizing the way plant life is extended, maintaining optimal freshness, and greatly reducing spoilage in retail settings. The implementation of this cutting-edge technology allows retailers to showcase plants at their freshest minimizing waste, and delivering superior products to the consumer. Initially introduced at all Meijer locations, the success of these displays has led to a broader national deployment. The company also started distributing two new flavors, our Vitamin Whey product line, to Meijer stores across the Midwest. These innovative additions, Ice Cream Cake and Orange Creamsicle, enhance our flavor-focused Vitamin Whey line, known for its advanced, high-performance formula that supports muscle recovery and overall well-being, while also offering great taste. The product features our proprietary multivitamin, whey protein, and amino acid complex formulas. Vitamin Whey stands out for its exceptional value, providing superior supplementation and recovery benefits at an affordable price. We believe these new flavors will reinforce Edible Garden's image as a flavor maker as we continue to develop innovative, cutting-edge flavors in collaboration with our partner, Nutricon. Given Vitamin Whey's successful history at Meijer, we're optimistic that these new flavors will further enhance the brand's appeal. Our aim is to create the highest quality and most flavorful whey protein on the market, and we plan to launch it nationwide and roll out of the product in the near future. Recently, the company was awarded a grant from the USDA Organic Certification Program managed by the Farm Service Agency to cover various expenses related to organic crop certification at Belvedere, New Jersey facility. This support is valuable and appreciated as we continue to lead the controlled environment agriculture industry and prioritize local, organic, and sustainable produce. Additionally, following grants from West Michigan Works and the specialty crop block program of the Michigan Department of Agriculture and Rural Development, our employees at Edible Garden Heartland Facility will undergo additional leadership and food safety training. These grants not only demonstrate our dedication to food safety, but also complement our ongoing research collaborations. We are currently working with the New York Institute of Technology, the USDA, and the EPA on how nanobubble technology impacts food safety and processing of fresh produce. Moreover, our partnership with Auburn University's Department of Horticulture is focused on addressing food safety issues related to fresh produce such as contamination from listeria. These combined efforts reflect our commitment to maintaining the highest standards of food safety and quality in our products. In July, Edible Garden unveiled Green Thumb 2.0, the latest iteration of our sophisticated greenhouse management system, representing a major leap forward in automation technology. This upgraded system enhances our dynamic forecasting abilities, utilizing real-time data more efficiently. Our goal is to more accurately predict the requirements of our distribution partners and adapt our growing strategies accordingly. Overall, I'm encouraged by the outlook of the business, given the growth in our retail network, that expansion of our product offering, and careful management of our expenses. As a result, we expect to maintain strong organic revenue growth and remain laser-focused on achieving our target of positive cash flow before year-end. I would like now 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 September 30, 2023. Mike? Mike?

Thanks, Jim, and good morning. The company reported year-over-year revenue growth of 19.4% to $3.3 million in the quarter ended September 30, 2023, compared to $2.8 million reported in the third quarter of 2022. The herbs, produce, and floral business saw a 22.8% increase, primarily due to a net increase in orders received from our existing customer base and a slight increase in orders for herbs received from new distribution partners. Cost of goods sold was $3.3 million for the three months ended September 30, 2023, compared to $2.6 million for the three months ended September 30, 2022. We continued to use contract growers to grow herbs for our customers as we ramped up production in Edible Garden Heartland, which resulted in higher costs of goods sold. Additional labor and material costs required to grow the products sold into the retail channel also contributed to the increase. Selling general and administrative expenses were $2.4 million for the three months ended September 30th, 2023, an increase of $459,000 compared to $1.9 million for the three months ended September 30th, 2022. The increase was primarily driven by an increase in costs incurred as it relates to the ramping up of operations of Edible Garden Heartland facility, which was acquired in August of 2022, as well as an increase in depreciation costs due to the acquisition of the facility. We also increased production of cut herbs of Edible Garden Heartland and our Belvedere, New Jersey facility, for which we purchased equipment intended to increase our efficiency. Net loss was $2.4 million, or 69 cents per share, for the three months ended September 30th 2023 compared to a net loss of $2.1 million or $7.13 per share for the three months ended September 30th, 2022. Before turning back the call over to the operator for questions, I would like to take a moment to discuss the successful public offering we completed in September, which generated roughly $3 million in gross proceeds. The capital raised was an important step that enabled us to obtain the essential financing required to expedite the company's growth strategy. 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 enter the queue to ask a question at this time, please press star 1 on your telephone keypad. We do ask if listening on speakerphone this morning that you pick up your handset while asking your question to provide optimal sound quality. Once again, you may enter the queue by pressing star one on your telephone keypad at this time. Please hold a moment while we poll for questions. And your first question this morning is coming from Anthony Vendetti from Maxim Group. Anthony, your line is live. Please go ahead.

Thank you. I was just wondering, just give us a little more color. You've signed up lots of new partners. Any highlights from the Walmart partnership or any of the other recent partnerships that you signed up? What do you think is giving you the ability to get these new contracts? And then in terms of margins, as you roll out some of the higher margin products, should we start to see that materialize in higher gross margins in the following quarter?

Thanks. Thanks, Anthony. Good morning. In regards to new distribution, the company has continued to build the momentum of its success at key partners like Meijer. Obviously, there's syndicated data out there that show the market share that we continue to help drive for our partners. Walmart, I think, has seen that as well as our performance as a top flight picker, packer, shipper. with great in-stock rates and fill rates, which has allowed them, obviously, to gain share themselves in this category. We were awarded additional business, as I noted in the script today, by bringing in more distribution centers. I think, hopefully, we'll continue to see that type of commitment from Walmart as they look at us as a trusted partner, considering our performance. Word gets out in these in this industry and people turn to us to supply their own needs, I think you see that. That's evident with TOPS. There's always the challenge of someone having an existing supplier and long-standing relationships. So when you're talking about the size of businesses that they are looking to move to, let's say, to an edible garden, that process is well thought out and evaluated before they do so. So it's a real credit to the company when we do pick up new accounts because usually you're dislodging a competitor and the buyers do not make moves that quickly. So I think just performance, in-stock rates, fill rates, commitment, support, customer service, and we continue to fire on all cylinders and execute. And I think that's why you see the type of growth that you see in the additional partnerships that we're bringing in from the retailers. And I think that will continue. As far as the higher margin pulp sustainable product, sustainable sauces and products like that. You'll continue to see more offerings. New products are always the lifeblood of a consumer packaged goods company. I think you can see this evolution of edible garden go from grower, picker, packer, shipper, grower, to more of a, I think, integrated provider of not only living products, but more shelf-stable products that we can help grow some of the ingredients and have high quality, all with an eye on sustainability. So this idea or notion of just this CEA-informed, next-generation CPG company, which I think is the big vision for the company moving forward, and we're already making strides towards that.

Okay, great. And then, so Jim, just on the hot sauce, you mentioned that. When you're selling that into your customer base, Is that a different shelf space than your produce and herbs? Or how does the negotiation go when you're dealing with hot sauce versus some of the fresh produce?

Sure. Great question. You know, the strategy here was to continue to, you know, we always focus, Mike and I really focus on leveraging the existing assets that we have and get the most out of it. to get the most out of that. And this is a great example of that, where we developed this line of sauces, scaled it up. We made that investment this last quarter in inventory and sales calls. But that product and the buyer that we call on is the same buyer that buys produce. And so the strategy with this is to have this in the refrigerated salad dressings part of the produce section, and the buyer is usually the same buyer that's already buying our herbs. So, it's a new product, it's an extension from where we're at. Obviously, peppers are sold in produce, so it's a natural fit. So, for us, the barriers of entry to that buyer are kind of wiped away because we're already shipping in. Not only is it proven to be a door opener with the likes of Dierberg's and some of these other areas of the country where it's totally new and they may not necessarily be taking our produce in, but with Metro New York and east of the Mississippi where we're a powerhouse, we're able to go in there and present it. Like I said, the barriers of entry are pretty much eliminated. It's a unique new item that's gotten some pretty good traction. we're pretty excited about the future and we're already, you know, making some pretty great strides on, you know, some new activity.

Okay, great. Thanks. And lastly, Jim or Mike, you know, feel free to answer this question. So in terms of pricing, you know, a number of our companies have taken price increases in this, obviously, inflationary environment. Have you been able to do that at this point Are you planning on doing that or, you know, do you have to sort of wait, you know, until the reset? You know, how does that work for you in terms of taking price increases?

Do you want me to answer that or do you want Mike? I can answer that. And Mike, feel free to chime in. You know, look, I think we've worked hard this past year You take price increases, we've held our prices. You go back and you look at some of our releases. We've worked hard to hold prices through the pandemic prior to the IPO. And then we help prices through kind of the integration of being a public company as well as providing that value to our retailers. We started to take price increases really this year. And that was accepted because I know we were a great partner to our retailers. So they were obviously willing to help us out and put us in a position to continue to grow. I think that food still suffers a little bit from inflation. It's calmed down quite a bit, but I think strategically... We're warranted, and I think as we become more prominent with the brand, we'll look to try to do what we can on the price increase part. I know we provide exceptional service, and I think the profits for what we do to help the retailers sell our product, we should share in some of that. So I think on an account-by-account basis where We know that certain items can get a little bit more pricing power. Obviously, we have volume discounts in place for the bigger players, but we continue to push to try to get our fair share based on our performance relationship and what the market can shoulder. Mike, do you want to add anything to that?

No, no. I think that kind of sums it up. I mean, some of the price increases started to go into effect at the end in q2 and you know continued into q3 so uh you know where where the grocery chain will accept it and pass it on to the consumer you know obviously we want to see it i mean we've had increases in plastic and corrugated and fuel and health insurance wages so you know we we've suffered as well as you know everybody else out in the industry And the retailer does realize that they have to give us a price increase.

It's an ongoing negotiation. And I think what's nice is, look, I think Mike is pretty good on the company, staying focused on making sure that we're striving towards profitability. And it's important for us to, once again, get what I think we've earned as a partner It's an ongoing negotiation. We have fantastic relationships with our key retailers, probably unlike our competitors in the industry. And so those conversations continue to go on. You know, it's a constant negotiation, but, you know, we push to get what should, you know, should be fair. And I think the retailer understands that. But, you know, obviously, you know, they always want to be best priced and, you know, it's a competitive environment for them. But, you know, I think, once again, I think we have a good open dialogue, which is kind of rare.

Okay, great. Thanks very much. I'll hop back in the queue. Appreciate it.

All right. Thank you. Thank you, Anthony.

Thank you. And as a reminder, if you'd like to ask a question today, you may press star 1 on your telephone keypad at any time. Once again, that'll be star 1 to enter the queue to ask a question at this time. And your next question today is coming from Nick Pincus from Forest Capital. Nick, your line is live. Please go ahead.

Thanks for taking my call. Congrats on another very strong quarter. I know you've touched on this, but you've clearly built a very robust distribution network, and now you've started introducing pulp, which appears to be a very high margin, shelf-stable product. Are you planning to introduce any other new products, either your own or third-party products through the distribution channel?

Thank you for the question, Nick. Yes. So right now it's really, you know, we've used the produce business to continue to drive the distribution platform. We continue to increase our door count or store count over 5,000 currently growing. Not only have we been opening new accounts, we've been expanding within the existing accounts that we have. So what you'll see is you'll see an introduction of new products. We have a pipeline, a very compelling pipeline, all of which is sort of tied back to who we are as a company, whether it's a living good or something that is sustainably grown or packaged. We're really focused on being this leader in this kind of next-gen space of building better products for you with an eye on the environment. And there's really no one else better to do this, in my humble opinion, of course I'm biased, than Edible Garden since we are a grower, picker, packer, chipper. We are USDA organic certified. We are a leader of the CEA space. So again, you're going to see an interesting slate leveraging not only the current relationships but new relationships. We've also set up something called EG Direct, which is going to be sourcing commodity items. So when you're a company like Edible Garden and you continue to deploy your resources in order to develop patented software and you have an eye on your fill rates and you achieve some of the industry's highest fill rates in a very tough perishable industry you know you leverage leverage those relationships to to work with the buyers to supply them with some of these commodities since I have field growers and other type of growers who come to us all the time who may not have the relationship that want to work with us to help bring in some of these commodity products so it's really based on trust and performance to move some of this product. And so, you know, we've just been working on our 20,000 square foot pack house in Belvedere, New Jersey. We just started laying down asphalt and finishing some of the finishing touches on that part of the facility. Having that type of storage processing and cross dock will allow us to leverage that facility to its fullest. And so I'm thrilled about that because I think we can really take on quite a bit of business and we have the relationships and the appetite from our customers in order to do so. So you'll see a whole, just to recap, a whole new slate of products. I'm not going to say they're full spectrum. I think they will be focused on what we're good at as well as some of these commodity items that we know that we can move pretty quickly through the distribution platform. But, you know, the big asset at Edible Garden is the distribution platform and the name and the relationships. And I think you're going to see a lot coming from us moving forward as it relates to leveraging that, sticking with the strategy that Mike and I have always deployed, which is really working with what we have.

Thanks. That's definitely helpful. And to follow up on that, can you elaborate specifically on the Walmart relationship and how you intend to expand on that?

Yes, thank you. The Walmart relationship, you know, continues to grow quite nicely. We put a significant investment in both facilities this past quarter in order to increase our capacity for processing. And we started in, I believe it was in July, we started to ship additional cut herbs to more DCs based on an award that we got from them. We have a very active relationship with the buyer there. They continue to turn to us for more. They've already, you know, started to increase some of their orders over the holidays, you know, from their forecast. And it's a nice relationship. And we work hard to hit their target. I mean, you're talking about a 98% fill rate in a perishable market. uh multi-skew business that could uh you know that always has its challenges um just uh considering how fickle produce can be at times but we continue to strive forward the company's been laser focused on you know servicing uh walmart knowing that you know they are uh you know they're they're a potential game changer account for for the business and um you know we treat them as such and they've been they've been they've been a good partner frankly and so uh Onward and upward. We're excited about what we're doing with them. I only expect if we continue to execute that they will return the favor as they always have because they work on numbers and performance, and that's what we're focused on. Once again, nice relationship and fingers crossed. We're in the heat of the battle right now with our peak season, but I think we should come out in pretty good shape.

Thanks. Keep up the good work. Appreciate it, Nick.

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 remarks.

Thank you again for joining us today. We are encouraged by the progress we have made at Edible Garden and are enthusiastic about the prospects for the business. We remain committed to maintaining and accelerating our organic revenue growth as well as turning the corner to positive cash flow. We look forward to providing updates on our progress in the coming months. Thank you and have a great day.

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.