Edible Garden AG Incorporated

Good morning everyone and welcome to the Edible Gardens second quarter 2024 business update conference call. At this time all participants have been placed on a listen only mode and we will open for questions following the presentation. If anyone should require operator assistance during the conference please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Mr. Ted Avas, Investor Relations, Crescendo Communications. Ted, the floor is yours.

Thanks, Jenny. Good morning, and thank you for joining Edible Gardens' quarter-ended June 30, 2024 conference call and business update. On the call with us today are Jim Kras, Chief Executive Officer of Edible Gardens, and Costas Tafoulis, Interim Chief Financial Officer of Edible Gardens. Earlier this morning, the company announced its operating results for the three-month end of June 30, 2024. The press release is posted on the company's website, www.ediblegardenag.com. In addition, the company has filed its quarterly report on Form 10-Q with the U.S. Securities and Exchange Commission, which can also be accessed on the company's website, as well as the SEC's website at www.sec.gov. If you have any questions after the call or would like any additional information about the company, please contact Crescendo Communications at 212-671-1020. Before Mr. Kratz reviews the company's operating results for the quarter ended June 30, 2024, 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 plan, and our expectations for future operations are forward-looking statements. The words aim, anticipate, believe, could, expect, may, plan, project, strategy, will, and the negative of such terms, in other words, in terms of similar expression, 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 filings with the SEC, including the company's annual report on Form 10-K for the year ended December 31st, 2023. Because of these risks, uncertainties, and assumptions, the forward-looking events and circumstances discussed in the 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 achievement. In addition, neither the company or 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 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. Having said that, I'd now like to turn the call over to Jim Corrett, Chief Executive Officer of Edible Garden. Jim?

Thanks, Ed. Good morning, and thank you to everyone for joining us today. We're excited to report another outstanding quarter. highlighted by a 157% increase in gross profit, fueled by year-over-year growth of 61% in cut herbs and a 30% growth in vitamins and supplements. A shift away from third-party growers and a focus on higher margin businesses are driving our gross profit margin improvement. Now, with approximately 95% of our fresh product line produced in-house, our gross margin increased to 36.7% in the second quarter of 2024, up from 13.1% in the same period last year. We've also conducted a thorough review of our business operations and made the strategic decision to move away from less profitable segments of our business. Instead, we are directing our focus and efforts towards more profitable, higher margin segments. We believe this strategic shift, combined with the vertical integration of our operations, positions us well to achieve our goal of becoming cash flow positive in the near future. The second quarter, we expanded the distribution of our pulp line of sustainable USDA organic fermented gourmet sauces and chili-based products with the addition of UNFI distributors. As a leading North American wholesaler of health and specialty foods, UNFI serves over 30,000 locations, including natural product superstores, independent retailers, supermarket chains, and e-commerce platforms. and food service providers across the continent. We believe the addition of UNFI, which is dedicated to promoting a better food system and leading the way in meeting consumer demand for healthier options, aligns perfectly with Edible Garden's zero-waste-inspired mission. Through KEHI distributors, UNFI distributors, and our own e-commerce platform, retailers across the continent now have access to our bland-to-bold pulp product line. Our growing roster of major retailers with pulp includes Target, Whole Foods, Meijer, Morton Williams, Dierberg Markets, and Woodman. According to research and markets, the global sauces and condiments product category is expected to grow to $240 billion in 2028 from $172 billion in 2021. The response to the pulp product line has been overwhelmingly positive from consumers seeking to enhance their meals with its bland to bold flavor profiles, reinforcing Edible Garden's reputation as a flavor maker. We are confident that expanding the availability of our pulp lines through UNFI and the Cahey distributors, we are accelerating pulp's momentum and ensuring our unique flavors reach consumers across the United States and Canada. We've also strengthened our distribution through our partnership with Hemingway's, which serves more than 350 retailers across the Northeast region. This includes developing a new integrated rack program designed to provide Hemingway's retail partners with an improved and more efficient method for displaying edible garden herbs. These integrated racks align with our strategy to enhance brand visibility and improve consumer access to our products. We believe this initiative will offer a more engaging and efficient shopping experience for all retail customers, which can help increase sales and overall customer satisfaction. In July, we expanded our retail distribution network with the addition of Seasons Kosher, a local supermarket chain celebrated for its extensive range of kosher products distinguished by a commitment to quality and ethical sourcing. In addition, Lincoln Market, known for its fair pricing and diverse selection of high-quality organic and conventional products, will also begin carrying edible garden products. Our dedication to sustainability and community involvement aligns seamlessly with the principles of both these retailers, making them a natural fit for our growth strategy. Furthermore, we are excited that our entire product line, including pulp, is now available at every Brooklyn Fair location in New York City. Brooklyn Fair is renowned for its offering products that satisfy their customers' sophisticated flavor preferences. At their Hudson Yards location, they also operate Chef's Table at Brooklyn Fair, a restaurant where cutting-edge culinary expertise and creativity comes to life. We launched Garden Starters, potted herbs and basil bowls designed for home gardening to retailers. First introduced in 2023 to cater to the growing popularity of home gardening, these eco-friendly herbs meet the needs of 35% of American households that grow at least some of their own food, providing them with diverse flavor options. Our vertically integrated edible garden facilities manage their production, packaging, and distribution. By placing garden starters next to our cut herbs and sustainably sourced produce in supermarkets, we aim to offer maximum convenience to our customers. In May, we entered a product development partnership with Herman Pickle Company, a leading brand in refrigerated kosher dill pickles, sauerkraut, and other fermented foods, known nationwide for their presence in delis and on family dinner tables. This collaboration will continue will combine the strengths of both companies to explore and develop scalable commercial opportunities, focusing on producing marketing and distributing fermented plant-based products and non-GMO consumer package goods. We are excited to work with the Herman Pickles team, leveraging their esteemed legacy to create a contemporary line of fermented products. In addition, we have implemented several new proprietary innovations, focus on packaging and shipping, which is expected to significantly extend the shelf life of our products, reducing spoilage and driving cost savings for our retail partners. These innovations serve as an important competitive differentiator for Edible Garden and build on our other unique solutions. For example, our patented self-watering in-store display has already transformed how plants are displayed, ensuring they remain fresh for longer and greatly minimize waste at retail outlets. Aligned with our zero waste inspired mission, These innovations allow retailers to showcase plants at their peak, minimizing waste and providing superior products to their customers. In July, we launched a comprehensive training program with Abilities of Northwest New Jersey, a nonprofit providing employment and day services for individuals with disabilities. Our decade-long partnership with Abilities of Northwest New Jersey has been incredibly rewarding. By integrating workers with disabilities who consistently demonstrate exceptional dedication and hard work, we have created an environment that benefits Edible Garden and empowers these individuals. Our training programs offer valuable skills and professional development opportunities, enhancing these workers' employability and career prospects while enriching our workforce with diverse talents. As we expand this partnership, Edible Garden remains committed to community involvement, local investment, and leadership at ESG and sustainability initiatives that we are known for. I would like to turn the call over to Costas DeFoulis, our Interim Chief Financial Officer who will review the financial results for the three months ended June 30th, 2024. Costas?

Thanks, Jim. And good morning, everyone. Turn to our second quarter results. Total revenue for the second quarter was $4.2 million, relatively flat compared to Q2 2023. The slight increase in revenue was driven by our core product portfolio, primarily cut herbs in our vitamin and supplement business. Our strategic shift away from lower margin products offset the revenue increase in our core products, specifically from the floral segment. Cost of goods sold decreased by 37% to $2.7 million for the three months ended June 30, 2024, compared to $3.7 million for the 2023 comparable quarter. The decrease was largely driven by the company's strategic shift away from our largest third-party growers. As Jim stated earlier, in the second quarter of 2024, the company's gross profit increased by 157% as compared to the 2023 comparable period. In addition, gross margin increased to a record 34.4% in the second quarter of 2024 compared to 13.1% for the same period last year. Both these impressive results were driven by the shift away from our dependence on third-party growers. Selling general and administrative expenses totaled $2.7 million for the three months ended June 30th, 2024, compared to $2.4 million for the three months ended June 30th, 2023. The increase was primarily driven by higher audit, accounting, and legal fees related to our capital raising activities in the quarter at a one-time expense of $100,000. Net loss was $1.3 million. $1.21 per share for the three months ended June 30th, 2024, compared to a net loss of $4.83 per share for the three months ended June 30th, 2023. While the loss from operations improved year over year by $645,000 from a loss of $1.83 million in Q2 of 2023 to $1.18 million in Q2 of 2024, higher interest expense and a one-time loss on the extinguishment of debt in Q2 of 2024, along with a one-time $1.2 million credit in Q2 of 2023 related to the employee retention credit led to an increase in our net loss this year. In closing, we've been working hard to improve our margins, and we are pleased with the way our team executed this quarter. Our results in Q2 show that the strategic shift we made in our product mix and reliance on third-party growers is starting to deliver results We remain committed to a disciplined financial approach. With that, operator, please open the line for questions.

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star 1 on your phone keypad now. A confirmation tone will indicate that your line is in the queue. You may press star 2 if you would like to remove your question from the queue. For any participants using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment whilst we poll for questions. Thank you. Your first question is coming from Anthony Vendetti of the Maxon Group. Anthony, your line is live.

Thank you. So, Jim, it's great to see that we're moving more towards the high profitable items and vitamins and supplements grew this quarter. Can you talk about the outlook for that product line for the rest of this year? And then also just talk to us about contract growers. I know you've been trying to reduce that to improve gross margin. How did that do this quarter? And then expectations for that for the rest of the year as well.

Thanks, Anthony. We're extremely pleased with the quarter, with the reflection of the numbers. I mean, we are continuing to expand the assortment of our products so we have the diversity that we need and the flexibility. You know, obviously, we are a CEA company. company that uses the greenhouses to inform everything we do and when we'll be more to finished goods, i.e., the farm formula approach to the vitamins and supplements. To answer your question, vitamin supplements, we have a big trade show coming up in September. We'll be introducing a new line. In addition to the existing vitamin way line that we have, there'll be some near-term announcements as far as us expanding our sales efforts in the e-commerce realm in the age shortly. So that'll allow us to, you know, expand our reach. You know, that's going to really be driven by a combination of not only new products, but our, you know, our, I think our positioning and relationship with the 5,000 stores that we have, which allow us to have some, you know, opportunity to drive that business in and expand it. Obviously the ring for vitamins and supplements is much higher than a plant, let's say. So for us, we see that not only allowing us to drive a business at a good, healthy margin, but also drive that top line significantly as we have been able to really dig in and get the CEA part of the business, the greenhouses, with Michigan fully online now and us growing 95% of our fresh goods, really allows us to kind of check the box shortly here once that business is is, um, cashflow positive that segment and really start to, you know, you drive the vitamins and supplements. We've got a line of, of, uh, functional pixel pickles, which will be kind of, uh, one of the, uh, totally new item out in, uh, out into the marketplace. That's something that we're currently working on. And I would, I think that launch will happen at the big produce show, uh, this fall. Um, and, uh, we have some other products that have already gotten acceptance into our retailers that will be launching in 2025, not only in the vitamin supplement, uh, part of the business, but also, uh, in the, uh, in the, uh, in the more shelf stable, fresh stagnant. So, um, I couldn't be more bullish on the business right now. It's all starting to come together. Um, and, um, you know, we're, we're really starting to kind of hit our marks. So. We'll continue on the vertical integration piece to answer your second question as it relates to continuing to make an investment in efficiency, shifting away from bringing the product from the outside, specifically a lot of the fresh goods. It helps in so many different ways. Yeah, there's the margin expansion that it drives, but it's also just quality, consistency, cuts down on shrink. We control what now is a very tight supply chain, especially to the likes of Meijer and Wakeford and ShopRite and Walmart, where we're so close to their distribution centers. with our own facility that it's very smooth and we have a lot of control over it. And we have been able to continue to cut down our transportation costs by using backhauls with both the retailers that pick up goods at our facilities, which, you know, really helps us not only with the environment and taking trucks off the roads, but also by ride sharing, but but also just by proficiency since everything kind of runs at clockwork. So really, really excited. It's taken us a little bit of time to get here. The last three months, we've improved the operations by a huge jump just with the ability of having everything in-house and controlling more of it.

I know. That's great, Chairman. And obviously, you have many of the top if not all of the top well-known retailers as customers, which speaks to the quality of your product. Can you talk about the expansion of SKUs within those retailers this quarter and expectation for the rest of the year? Thanks.

Yeah, that's a great question. And I think that's important to focus on because, you know, this quarter has really been a getting the houses in even better order. Once again, like I said, all you have to do is look at the GP increase to see the impact of the investment we've made in people and in machinery and just getting better oiled. For us, it's really moving forward. This quarter is going to be a good, strong quarter as usual with our existing relationships. We have a contract with Meijer on the herbs that allows us, um, you know, a ringside seat to, to, to do what we need to do to get new items. And, um, that's always an ongoing conversation that we have because we're, you know, a mile from there, a couple of miles from their headquarters in grand Rapids. So we're, we spend a lot of time with the buyers, um, you know, really focusing on innovation. There's considerable amount of, you know, private label opportunities for all these retailers since there's been a big shift there in the marketplace, especially with inflation. Private Label continues to pick up steam, and they're coming to us to help, you know, round out their assortment. So for us, you know, look, we've got 5,000 doors plus and growing. Walmart, Wakefield, ShopRite, Meijer, Hannaford, which is a whole deli. The list goes on and on. And so, you know, for us, it's really, you know, not only driving the existing business by adding on, you know, skews of, of maybe herbs that they may not carry or lettuce products that they want. But there's also, you know, this opportunity since we are a leader in that, in that, uh, produce set, especially in sustainability and, and in cut, cut herbs to, to leverage that, to help that inform other more shelf stable products that give us, you know, um, kind of less pressure to get it out the doors quickly and allow us to, uh, get a better margin, um, as a function of, um, you know, of just, uh, it being shelf stable and we can put the time in to, you know, kind of formulate this stuff to make it, make it, you know, acceptable on all fronts. So, you know, like I said, we got big trade show in fall, vitamin supplements, new line coming out. It's going to be a fantastic, you know, everything we do is more sustainable, more better for you. I don't know if that's, I can say it that way, but better for you. You said a more better for that for you. And you know, that positioning I think is continues to, give us, like I said, a ringside seat to be able to go in there and always get into the fight. And we're coming out with a lot of wins, which is great. So I couldn't be more excited about where the business is. It's been a dramatic shift. I'd like to thank Costas, who came on board in January and has really helped us really operate at the high level that's expected from a finance perspective. From our retailers, when you're dealing with such large retailers, I mean, the expectation is nothing short of excellence. Um, otherwise we'll just find somebody else. And I think that's where not only have we done it, I think in the products that we grow and the new innovations that we're coming out with and some of the technology that we have that supports. Uh, who we are as a, as a brand and what we stand for. But now we have team members that we've brought in like houses that are, you know, uh, elevating how we conduct business, how we manage the relationships, how we managed our cash. And, and, um, like I said, it's, it's, it's been, it's been, uh, it's been exciting. Okay, that's great, Collin.

Thanks for all that, Collin. Congrats on the progress. I'll turn it back to you. Thanks.

Thank you very much. Just a reminder there, if there are any remaining questions, you can press star 1 on your phone keypad now. Thank you. Your next question is coming from Nick Pinkers of Forest Capital. Nick, your line is live.

Hey, guys. Congrats on a very strong quarter, especially the improvement in margins. And as the last caller mentioned, it seems to me you've got this amazing distribution network with all these loyal retailers, and now it's really just about pushing more high-margin product through that funnel. So my first question, and you touched a bit on this in the last question, but if you could expand a little bit on the shift in the product specifically to shelf-stable items and the benefits there. as well as how you kind of see that playing out in the second half of this year.

Thanks, Nick. Yeah, look, just to kind of reinforce what I had to say to Anthony, it's really a function of putting the right products in, the right pricing at the right margin into the funnel, as you would say, or this distribution platform. And one of the crown jewels of Edible Garden has always been our relationships as a company. You know, many people say, well, Jim, you've been dealing with these guys for the last couple decades, and it's not. It's, you know, it really comes down to the, and I'm not just saying the team and our ability to execute. You know, when you look at our fill rates, I mean, when we're running mid to high 90s, which is, you know, which is exceptional when you consider we're handling live goods, you know, that makes us a trusted partner. And if our trucks are running in and they're running into the store's I'll name them again, Walmart and Meijer and Hannaford and ShopRite. We're covering off on 60% to 70% of the total population in the U.S., and we're going into these stores three to four times a week with our trucks or their trucks. It's just a matter of having the right offerings once again. that, that, you know, we know that we can sell work with the retailers to promote, we've got some exceptional team members that come from these retailers, Dave Ross, who heads up our sales department. I mean, you know, a smart guy who, you know, work at, you know, Wake Fern and Church and Dwight and he understands, you know, what these retailers want at a buying level, what it takes to execute, especially in the store. to not only, you know, have, you know, to communicate that you're an innovative product, but to also know what you have to do in order to not only get the product in, but to sell it through. And, you know, that's not only from a marketing advertising push perspective, but from a promotional and trade marketing standpoint. So, you know, we've got big shows coming up with new product lines and we're coming out with all guns ablaze. And I couldn't be, you know, like I said, more excited. We have a great relationship with Nutri calm, who's our, you know, vitamin supplement command, you know, they just become more and more of a trusted partner to help us push out the next generation of products. And I think people will be very excited about what they're going to see. In the first week of September at ECRM, we've got major meetings set up there, we've already got some commitments on the new line for 2025, which is pretty much unheard of. So once again, speaks to our relationships, the team's wherewithal that, you know, these retailers would, you know, would, you know, commit to, you know, so early on to some of this stuff really kind of sight unseen. And then, and then, you know, all of this really comes down to, you know, higher ring products, products that help us leverage those $5,000 at a higher margin that should not only help the top line of the business and continue to go out hopefully at an even more accelerated rate as a function of what we charge for these items, but also the bottom line, since the margin is going to be a lot more intact since these are self-stable products versus some of the pressures we get from fresh goods. I hope that helps, Nick.

It definitely does. And kind of to put it another way, it seems like it's the relationships and the trust that you've built with the big retailers that the street really hasn't woken up to yet, but hopefully they will as you start pushing more products through these retailers and through this channel, so good luck with that. The second part of my question, you also touched on this a little bit, but if you could expand on it a little bit more, as you head into the peak season around Thanksgiving and the holidays, is there room for more vertical integration and gross margin improvement going forward in 2025? What are your thoughts on that?

Look, it's game time for us as a company come Q4. I mean, that's, to us, we've always said that's the Super Bowl of herbs and lettuces, especially herbs, just a function of people cooking around the holidays. Look, the trending data all points to people, because of inflation, because of creativity, because of nutritional value, people wanting fresher goods, uh, people are cooking more and more at home. Um, and that's only continued for, you know, and there's always seems to be, you know, a reason whether, like I said, it's inflation or, you know, or people, uh, just want, you know, more nutritious product. Uh, some people just, they just, it comes down to, you know, spending money, uh, out at, uh, you know, at the, uh, at the restaurant. And, uh, in that all of, you know, that all equates to people, like I said, cooking, you know, um, more at home and, you know, herbs, have continued to gain such a great prominence since they really are a flavor maker and they allow you to, you know, add flavor and some nutrition to your products. And so that's always been the case in the holiday. We crushed it last Thanksgiving. I would expect nothing less this Thanksgiving. You know, that business for us continues to grow. We continue to be an expert in the holiday business. season with the items and the displays and the things that we do that, that are, uh, consumer facing that help drive turns and volumes. I mean, there's no short of the shortage of demand of people buying herbs, uh, from, uh, you know, the beginning of November through the second, you know, the first week in January. Um, so for us, uh, the margin, um, will, you know, will continue to improve. We were bringing in actually, uh, I brought in a, uh, an outside, uh, um, consultant who is dedicated. She's got a Cargill to help us improve our efficiency on our lines. We're putting in another production line out in Heartland, Michigan, so that we can increase even more volume. So, you know, for us, you know, it's game on. I expect the margins to continue to improve on that core business. uh expect the uh you know the the herbs to continue to grow not only uh for cut but also living and and everything around the displays for the holidays you know we've got meetings coming up with major retailers you know in the next couple weeks uh talk even more about incremental opportunities during the holidays and uh you know like i said we've got some of these other products uh the vitamin supplement business you know we're just starting to really put the effort towards that now that we've got uh, the core business, uh, in a place that we can really start to drive it. And now we can really focus on innovation and scale the vitamin supplement business. I mean, that's, you know, that Q4 load in for us, uh, for a new year's resolution sale season in January is always big. And, And this year we're going to be pushing that as well, and we'll have some new lines. I don't know how much of the new lines we'll get in Q4, but we'll get some in. We've got some commitment. So for us, once again, I think there's a huge opportunity here to continue to do better than the year before as a function of not only opportunities because of our relationships and people wanting and trusting us to do more, but expanding the product lines to pick up more opportunities of that consumer that's in there that's looking for either, you know, sustainable sauces that are organic, that are very unique and play in a white space and produce, you know, that right on our truck that's already going in there with the herbs, i.e. pulp, or some of these other new products that we'll be announcing shortly, you know, as it relates to other sort of quote-unquote sort of condiments. And, you know, that's something I didn't mention, which was our development of the fresh condiment category. which is our, is incredibly unique for us as a company and unique for, uh, you know, for, uh, you know, for the, uh, industry. I mean, for years, people have been kind of buying the same old tired, you know, condiments, ketchups and mustards and whatnot. And now, you know, being able to come out with a better product, it's fresher, tastes better, better for you. Doesn't have all the kind of negative preservatives. to us is where we're pushing. And, you know, and I think because of the relationship that we have, you're going to see some pretty, some pretty great strides there. Pulp has been a bright spot all year long. The team is pushing to, you know, to continue to gain that. I mean, just look at the list from Target to Whole Foods to Meijer just in the last, you know, year. And, you know, I think the industry is starting to look at us and say, you know, not only do you have great distribution, but you've got great products. And you guys are more than just a company that grows, you know, leafy greens. And so to me it's that, you know, being that next generation provider of better for you products that are, you know, rooted in, you know, excuse the pun, rooted in the fact that we actually grow a lot of these items or they end up in the product I think is going to be for us a huge differentiator, and I'm pretty excited about it, frankly.

That's awesome, and we really appreciate your hard work and the entire team. It seems like we're making tremendous progress and very excited to get updates in future quarters. Good luck. Thank you, Nick.

Thank you very much. Well, we appear to have reached the end of our question and answer session. I will now hand back over to the management team for closing remarks.

Thank you for joining us today. Impressive performance in the second quarter and the first half of 2024 is a testament to the dedication and years of effort from the entire Edible Garden team. We have consistently delivered high fill rates and built a strong reputation in the industry as a trusted, dependable supplier. Our results also highlight the significant benefits that vertical integration has added to our operations. We are optimistic about what lies ahead and believe the future is extremely promising. Thank you again, and thank you for being on the call.

Thank you very much. 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.