Edible Garden AG Incorporated (NASDAQ:EDBL) Q1 2024 Earnings Call Transcript

Edible Garden AG Incorporated (NASDAQ:EDBL) Q1 2024 Earnings Call Transcript May 15, 2024

Edible Garden AG Incorporated misses on earnings expectations. Reported EPS is $-13.65 EPS, expectations were $-7.6.

Operator: Good morning and welcome to the Edible Garden First Quarter 2024 Business Update Conference Call. At this time all participants are on a listen-only mode and we will open for questions following the presentation. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Ted Ayvas, Crescendo Communications. Ted, over to you.

Ted Ayvas: Thank you. Good morning, and thank you for joining Edible Garden’s quarter ended March 31, 2024 conference call and business update. On the call with us today are Jim Kras, Chief Executive Officer of Edible Garden; and Kostas Dafoulas, Interim Chief Financial Officer of Edible Garden. Earlier this morning the company announced its operating results for the three months ended March 31, 2024. The press release is posted on the company’s website, www.ediblegardenag.com. In addition, the company has filed its Annual 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. Kras reviews the company’s operating results for the quarter ended March 31, 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 this conference call, including statements regarding our future result of operations and financial position, strategy and plans, 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 and 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 filings with the SEC, including the company’s annual report on Form 10-K for the year ended December 31, 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 statement. 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 like to turn the call over to Jim Kras, Chief Executive Officer of Edible Garden. Jim?

Jim Kras: Thanks, Ted. Good morning, and thank you to everyone for joining us today. We are excited about the significant 27.6% year-over-year increase in revenue the company achieved in the first quarter of 2024, the period typically recognized as the slowest for the industry. This considerable growth showcases the dedication of the entire Edible Garden team and our ability to perform at a high level, resulting in high fill rates and an outstanding reputation as a trusted supplier within the industry. It also reflects the positive impact of our move towards vertical integration. Over recent quarters, we’ve not only seen consistent revenue growth, but an expansion in our profit margins, particularly since we’ve been decreasing our dependency on third-party growers during the later half of 2023.

The advantages of this strategic pivot became evident by the end of 2023 and continued into the quarter of 2024, where our gross profit margin surged by 195.8% and our gross margin expanded by 171 basis points from the same period the previous year. Our move away from third-party growers has accelerated with Edible Garden now producing approximately 95% of our fresh products in company-owned facilities. This transition marks a critical milestone in our company’s development. With all essential elements now in place, we believe that we are well-positioned to substantially enhance our margins. We continue to utilize our platform to enhance and expand our product range as well. In the first quarter, we partnered with Uncle Giuseppe’s Marketplace, part of our best produce to distribute Edible Garden herbs across their locations in New York and New Jersey.

That’s broadening our footprint in the Northeastern U.S. Perhaps more significantly, in February, we entered into a three-year agreement unprecedented in our history with a prominent U.S. food retailer. This agreement, expected to generate between $18 million and $20 million in revenues during its initial term, will support the expansion of our product range in their stores. More than just diversifying our lineup, this partnership will introduce innovative and engaging displays that aim to boost our brand’s visibility and impact within the retail environment. These initiatives underscore a commitment to building our relationships with our retail partners, aiming to better serve their needs and streamline the shopping experience for their customers.

Our investment in Edible Garden Heartland has been fruitful, integrating cutting-edge technology like our proprietary patented GreenThumb greenhouse management system, which has enhanced our supply chain efficiency. In late April, we started distributing garden starters, a display that features the company’s potted herbs and basil bowls intended for home gardeners to various retail locations across the Midwest starting with Meijer. Launched in 2023 in response to growing interest in our potted herbs, these products cater well to home gardening enthusiasts. Considering that 35% of American households grow some of their own food, our sustainably produced herbs and vegetables are increasingly popular among consumers looking for enhanced flavor in their meals.

Located in Grand Rapids, Michigan, our Edible Garden Heartland facility now fully manages all the production packaging and distribution of these products. In April, the company began shipping spring ornamentals, also grown in its Edible Garden Heartland facility, in major big box retailers in the lead-up to Mother’s Day, one of the biggest days of the years in the floral industry. Implementing proprietary technologies, including Green Thumb, has been instrumental in expanding our ornamental and floral business from this facility. We believe that the expansion of this segment of our business will positively impact the company’s margins and overall profitability as ornamentals and florals are typically higher margin products. In 2023, we introduced Pulp, our fresh and fermented line of sustainable gourmet sauces and chili-based products, venturing into the global sauces and condiments market, a market expected to grow from $172.79 billion in 2021 to $240.7 billion by 2028, according to Research And Markets.

In a relatively brief time, Pulp has become available at Whole Foods Market, Morton Williams, Dierbergs Markets, and Woodman’s. In January 2024, Target joined our growing list of retail partners carrying the Pulp line. The expansion into Target’s southeastern stores significantly expands our distribution network of all Edible Garden products, which now spans over 5,000 retail locations across the country, including several major big box retailers. Edible Garden supported this launch by rolling a robust marketing campaign, including influencer partnerships and promotional prizes. Given Target’s nationwide presence, we anticipate that this collaboration will significantly boost the growth and visibility of our Pulp product line and the Edible Garden brand overall.

Diversifying into new product categories marks a significant development for the company as we are introducing products with higher margins and more shelf stability. Additionally, this expansion enhances the visibility of Edible Garden’s brand by placing the new products in the refrigerated sections of retail right next to our existing products where they are already carrying produce in the section. This strategic placement not only boosts our brand presence, but also complements our current offerings. In early March 2024, we further broadened our distribution through KeHE Distributors, the premier distributor of natural, organic specialty, and fresh products, which is now carrying our Pulp line. KeHE’s expansive distribution network encompasses 31,000 natural food stores chain, and independent stores, e-commerce retailers, and other specialty products retailers located across the North America.

In April, we added UNFI Distributors, one of North America’s top grocery wholesalers of health and specialty fruits, serving over 30,000 locations, including super stores, independent retailers, supermarket chains, and e-commerce platforms, and food service providers. The inclusion of these two major distributors significantly expanded the availability of our Bland to Bold Pulp product line. Following closely on the heels of our launch of our Pulp e-commerce platform in early January, this platform enables consumers to directly buy our unique and flavorful products online. The Pulp line has received overwhelming positive feedback, quickly earning the admiration of sauce enthusiasts for its unique peppers and the distinctive Bland to Bold taste they bring to any dish.

This success has helped cement Edible Garden’s status as a flavor maker. Earlier this month, we formed a product development partnership with Hermann Pickle Company, the leading brand in refrigerated kosher dill pickles, sauerkraut, and other fermented foods, which have long been fixtures at delis and family dinner tables nationwide. Our joint effort will harness the strengths of both companies to explore and develop scalable commercial opportunities. This collaboration will focus on the production, marketing, and distribution of fermented plant-based products and non-GMO consumer packaged foods. We’re eager to collaborate with Hermann Pickle team, utilizing their esteemed legacy as a benchmark in this category to create a contemporary line of fermented products.

Earlier this year, the U.S. Patent and Trademark Office granted Edible Garden several new patents. The first recognized our Green Thumb web-based greenhouse management and demand planning system, which enhances supply chain efficiency and has led to better shipping and fill rates, as well as notable sales growth. This is the third patent for this state-of-the-art system. The second patent was awarded for our proprietary self-watering display technology, a key innovation that extends plant shelf life, maintains freshness, and significantly reduces spoilage at retail outlets. These patents affirm Edible Garden’s leadership in the ag tech sector, showcasing our commitment to advanced technology and sustainable development. Through these innovations, we are driving operational efficiencies, enhancing profitability, and reinforcing our role as a pioneer in agriculture technology.

Recently, the company has awarded several grants to cover various expenses related to the organic crop certification and training costs at our greenhouse facilities in Belvedere, New Jersey, and Grand Rapids, Michigan. In Michigan, Edible Garden received funding from the Going PRO Talent Fund, managed by the Michigan Department of Labor and Economic Opportunity, workforce development and facilitated by Michigan Works. This funding will cover training expenses for our staff at the Edible Garden Heartland facility, focusing on crucial skills in supply chain management, transportation, and logistics. Additionally, we secured a grant from the Michigan Occupational Safety and Health Administration to enhance workplace safety and health at Edible Garden Heartland, aiming to minimize workplace accidents and health issues among our employees.

In New Jersey, the company received a grant from the United States Department of Agriculture Organic Certification Program, which is administered by the Hackettstown Farm Service Agency. This grant offered financial support to organic producers and handlers by providing reimbursements to help offset the costs associated with obtaining organic certification processing and handling certifications. The grants further underscore our commitment to food safety and greatly enrich our research partnerships. These include our project with the New Jersey Institute of Technology, the USDA, and the EPA, where we are investigating the effects of nanobubble technology on the safety and processing of fresh produce. Additionally, our collaboration with Auburn University Department of Horticulture is focused on addressing food safety issues related to fresh produce.

These initiatives emphasize our dedication to maintaining the highest standards of food safety and quality throughout the product lineup. I would now like to turn the call over to Kostas Dafoulas, our Interim Chief Financial Officer, who will review the financials and results for the three-months ended March 31, 2024. Kostas?

Kostas Dafoulas: Thanks, Jim, and good morning, everyone. I’m excited about our start to 2024. The company reported first quarter 2024 revenue of $3.1 million, compared to $2.5 million in Q1 of 2023, an increase of 27.6% year-over-year. The revenue growth was driven by an increase in customer demand for our cut herbs and potted herb products and the continued expansion of our product base. Cost of goods sold was $3.1 million for the three months ended March 31, 2024, compared to $2.5 million in last year’s comparable quarter. The increase was consistent with the company’s increase in revenue for the same period. The company achieved 171 basis points of gross profit margin expansion, primarily driven by our shift away from third-party growers to in-house production.

Selling, general, and administrative expenses were $3.9 million for the three months ended March 31, 2024, compared to $2.7 million for the 2023 comparable quarter. This increase was primarily driven by a one-time $600,000 charge related to the departure of our previous CFO. Excluding these one-time charges, SG&A expenses were $3.3 million, representing a 476 basis point expansion of the company’s operating margin. Net loss was $4 million, or $13.65 a share, for the three months ended March 31, 2024, compared to a net loss of $2.9 million, or $44.19 per share, for the quarter ended March 31, 2023. Higher SG&A expenses, and approximately $0.6 million non-recurring expenses, contributed to the increase in the net loss. We are continuing to identify and execute on opportunities to reduce the company’s SG&A expenses and improve operating efficiency.

In conclusion, I feel great about our business and excited about the prospects for 2024. Operator, please open the line for questions.

Q&A Session

Operator: Thank you very much. We are now opening the floor for questions. [Operator Instructions] Thank you. Your first question is coming from Anthony Vendetti of Maxim Group. Anthony, your line is live.

Anthony Vendetti: Thank you. Good morning. So, I just want to jump into the Heartland facility capacity. Where is that capacity at? How much do you have left there? With the new distribution partners, particularly UNFI, do you feel like you could get that up to as close to 100% capacity as possible now, with the distributors assigned as well as this large customer that has the potential to get to $18 million to $20 million in annual revenue? And then I’ll have one more follow-up. Thank you.

Jim Kras: So, this is Jim. Thanks for the question. Heartland right now, I would put us at around 65% to 70% of capacity. It fluctuates somewhat based on time of year and the needs that we have. Obviously, spring is heavy for us. And fall is heavy, but also more processing-driven. Our capacity on the processing side, where we’ve seen quite a bit of growth, especially during this last quarter with the likes of Walmart and Meijer, we have almost unlimited capacity there to continue to process those products. As far as the growing space goes, again, I’d say we’re at probably 65% to 70%. I don’t foresee any issues being able to service a UNFI or any of the other accounts that we’re looking to bring in over the next quarter. So, what’s great now is where we’re fully operational and everything that we’re selling in the Midwest is coming out of that facility and we’re growing it or processing it there.

So, exciting times for us and that all took place really in April on schedules, as the guys that we had put out. So, we’re on track and we’re looking forward to benefiting from the vertical integration. And I think the margin expansion you’ll start to see.

Anthony Vendetti: Okay, great. And then, can you talk about the ramp up in orders from the customer, the recent customer signing that could eventually count for $18 million to $20 million in annual revenue?

Jim Kras: Well, that’s begun. We’ve had a strong season and it’s going to continue to ramp up. And I would think that that number is fairly conservative. I think we’re fortunate to be where we’re located and have the relationships that we have with the key retailers here in the Midwest. And so, they’re coming. Not only are we seeing more consumer demand as it relates to people cooking more at home, especially because of inflation and the inability to really want to go out to eat and spend more than it may cost to make your own meal. We also benefited from people coming off of the pandemic and cooking more at home. So, more consumer demand and the retailers are doing what they need to do to be positioned to capture those sales by putting in displays that we’ve helped design, expanding the offering, starting to really market herbs and lettuces and to give people direction on how to use them versus just sort of buying a clamshell of rosemary.

So, you’re really marketing how to use herbs, how to improve your dishes. So, for us, kind of sky’s the limit here and we continue to see real nice growth, not only organically, but with I think just a huge consumer shift into just cooking more at home and whatnot.

Anthony Vendetti: Okay. And then the impact from contract growers. What was the impact this quarter, and any progress on reducing the reliance on the contract growers?

Jim Kras: Well, the progress has been significant, and we really just started to benefit from some of that in Q4 last year as we started to ramp up the processing part of Heartland and then being able to start to grow. And we just launched our garden starters from Heartland. That’s a massive program that just launched a few weeks ago. So, really, we started to see the real impact of what was being grown in the greenhouse and shipped out in the tail end of April. We just completed a contract with our key contract grower in April. I think it was April 26. So, we’re really going to see that impact this coming quarter. We’ve seen some of it on certain items that we brought in-house as we started to integrate the business and convert it over.

But you’re really going to see that now that we’re kind of, like I said, fully operational and we’re at probably around 95% of all fresh goods coming from us. And I think we’re going to keep it there for quite some time. I think the contract growers, they’re good partners and they helped us get where we are to help scale the business. And now, with the capabilities and the money that we raised, we’re able to really drive the growth and do it with vertical integration, so we don’t have to necessarily pay any type of upcharge from a contract grower. I think that’s where it will stay for the foreseeable future. We still have a lot of runway in both these facilities. And I think as we start to grow the business, then we can start to figure out kind of what our next move is.

And the contract growers, they serve a purpose. And once again, they were good partners. And we’ll see what happens in the future. But I have no plans on having any reliance on third-party for right now.

Anthony Vendetti: Okay, great. And just to be clear, the impact that you’re talking about from less reliance on the contract growers would be an improved gross margin, correct?

Jim Kras: Absolutely. Absolutely. Yeah, I mean, this has been the plan. And I appreciate our various partners sticking with us to get to where we are. But yeah, we haven’t really fully realized that margin expansion from being vertically integrated in Q1. A little bit, a touch, but it’s really going to impact us moving forward now that we’re shipping everything out of our own facilities.

Anthony Vendetti: Excellent. And then just any update on the nutraceutical business, and then I’ll hop back in the queue. Thank you.

Jim Kras: Nutraceutical business, a few cool things are happening. We have a new line that we’re working on. I think you’ll see an interesting Q4 from us with us really going out into the marketplace and putting some eyes on that. We’ve got some need for innovations. We continue to have the benefit of a strong brand name and really great relationships with the likes of Walmart and Meijer and Wakefern and ShopRite and Ahold Delhaize. And I think what you’ll see from us is being able to leverage the distribution platform to continue to put in products like the nutraceuticals that are much more shelf stable. I think we’ll be able to drive our own form of innovation there in a category that doesn’t have a lot of innovation. And I think you’re going to see some really interesting happenings there.

Q1 was a little soft, but Q2, I think things have kind of shifted. A lot of it, I think, was just a lot of things going on in the marketplace with the retailers. But I think that business is starting to pick up overall across the board. And I think we’re going to — at some point we will be a significant player in that.

Anthony Vendetti: Thank you for all the color, Jim. I’ll hop back in the queue.

Jim Kras: All right. Thanks, Anthony. Take care.

Operator: Thank you very much. [Operator Instructions] Your next question is coming from William Jordan, who is a private investor. William, your line is live.

Unidentified Analyst: Thank you. Good morning, guys. Congratulations on a strong quarter. Could you provide a little bit more color on what your key growth drivers are right now?

Jim Kras: Thank you, William. Yeah. Right now, where we’re seeing, especially in Q1, the growth for us is really around our cut herbs and our potted business, which is really starting to really take hold. We’ve brought in some significant business with the likes of Walmart and Meijer on some of these lines. That’s really helped drive the growth. We continue to do, I think, nice demand. And I think we’ve done a good job. The team’s done a great job of executing operationally to drive nice fill rates, especially on those two product lines. But the cut herbs are high volume and the potted is a nice product with a higher ring than some other products that we offer. And so, I think we’ll continue to see growth in those segments. I think Edible Garden is known for those items and we do them really well. But that’s where the growth is coming from right now.

Unidentified Analyst: Thanks. Appreciate the color.

Jim Kras: Thanks.

Operator: Thank you very much. Well, we appear to have no further questions in the queue. So, I will now hand back over to the management team for any closing comments.

End of Q&A:

Jim Kras: Thank you for joining us today. I remain optimistic about the company’s future, driven by our growing retail network, diverse product offerings and stringent cost management. With all these critical elements in place, we are poised to improve our margins in the upcoming quarters and to accelerate our journey towards generating positive cash flow in 2024. Our dedication to financial prudence and operational efficiency is the cornerstone of our strategy and we look forward to sharing updates on our progress in the upcoming months. Thank you.

Operator: Thank you very much, everyone. This does conclude today’s conference. You may now disconnect your phone lines and have a wonderful day. Thank you for your participation.