Edible Garden AG Inc Q4 FY2024 earnings call

• Refocused operations around core herb business and launched shelf stable products and Kick Sports Nutrition, exiting lower margin categories like lettuce and floral.
• Strengthened balance sheet through disciplined cost controls, capital raises, and operational realignment.
• Signed a non-binding letter of intent to acquire Narayan Group, a European producer of organic coconut and superfood products, which would expand international footprint and diversify product offerings.
• Expanded retail footprint across the US, distributing USDA organic herb line and new products.
• Innovated with products like Squeezables (shelf stable herbs), pulp (fermented gourmet sauces), Pickle Party (function pickles), and Kick Sports Nutrition.
• Advanced agriculture innovation through nano bubble trials, showing potential to increase yield and reduce harvest cycle time.

For the year ended December 31, 2024, total revenue was $13.9 million, a 1.4% decrease from 2023. The core herb business saw revenue growth of $1.7 million or 16.3% year-over-year. Cost of goods sold decreased by $1.7 million or 12.7% to $11.6 million due to internalizing production of the herb portfolio. Gross profit increased 181.3% to $2.3 million, and gross margin improved from 5.9% in 2023 to 16.7% in 2024. In Q4 2024, revenue was $3.9 million, a slight decrease from $4.1 million in 2023, with cost of goods sold at $3.8 million and SG&A expenses at $2.7 million.

• Believes momentum from 2024 will carry into 2025, with vertically integrated model and product introductions driving growth.
• Anticipates ramping up top line growth now that transition from lower margin categories is mostly complete.
• Sees bright second half of 2025 with new products like Kick Sports Nutrition and Pickle Party, leveraging retail distribution and vertical integration.
• Potential from Narayan acquisition to accelerate growth and expand into new markets.

• Uncertainties associated with forward-looking statements, as actual results could differ from expectations.
• Risks related to executing on the proposed acquisition of Narayan Group, including integration challenges and market dynamics.
• Potential challenges in fully realizing margin improvements and top line growth as new products are launched and scaled.

Q: Just to focus a little bit on the gross margins, and then I'd like to ask a question about the proposed acquisition. On the gross margins, you mentioned that the actual gross profit increased this year, which is a step in the right direction. But for the fourth quarter, it was barely profitable. Was that due to an inventory write off? And the numbers you provided are excluding any inventory write offs due to obsolescence or any other reasons for the inventory write offs? And are those largely complete, do you believe?

A: There was kind of two components that drove that fourth quarter number. Part of it the majority of it was a ramp up in labor costs for the holiday season in early in Q1. We went into pretty heavy production mode for the holiday, and there were some increase in cost of good labor to support those efforts in the fourth quarter. I would say tilting more towards those costs in the fourth quarter was a bigger driver of the lower gross profit margin. So those Q: In terms of the acquisition, Jim, you mentioned some cross selling opportunities. Can you specifically talk about which products do you believe there's cross selling opportunities with? And what kind of margins does Narayan Foods have that in terms of gross profit? And does that support your movement towards higher gross margin products overall as a company of value?

A: They have two lines of businesses, right? They very steeped in the coconut water, coconut oil business, which is a growing global business. They're number one supplier to Aldi and Aldi is one of the top grocery store chains in the world and fastest growing grocery store chain in the US. So that starts to give us some wherewithal there to start to make inroads not only to Aldi where we've done business in the past but also into more coconut informed and developed products whether it's coconut oils, waters, whatnot. And then you have superfoods which is a combination of oat porridges and other types of products that are all organic and they're fully certified. So, for us, what's nice is that starts to allow us to leverage the 5,000 doors here in the US. To start to bring those products in. I know they have a new pistachio butter product that they're coming out with as well. So really all about organic certified products that will help us expand the portfolio and we're going to different parts of the stores leveraging our relationships. In addition, when you have Kick, Kick is a sports nutrition brand, we would look to add some of that coconut water since it has such great hydration properties to that line. So, the upside for us is dramatic here to be able to use some of those products on our platform. And then conversely, there's quite a few things that we offer that we could potentially bring over to Europe to plug into their 75,000 doors that they're in throughout Europe. Their margins are very healthy. We know that. We know that their cost of doing business there is less than ours. We know that they've been very efficient in the way that they source and manufacture. So, for us, we're pretty excited about it. We know it's very complementary not only from a product portfolio and cross selling, but also just from an operational strength and margin standpoint.

Q: First off, congrats on the tremendous progress that you guys are making. You touched on this previously in the prior q&a, but you benefited from only six months of the vertical integration implementation, and it really is impacting the gross profit. Can you expand on your plans to leverage these improvements going forward?

A: Like I said, six months was you know, when you think about how far we came in such a short period of time and where the business is now, we're really positioned to focus our energies on that top line growth, right? And so last year was really, as I like to kind of say around the office, was really about fixing the machine. And that was something that we were able to not only think about it, bring five acres up and running, put in more automation and be able to be ready for big capacity and output in Q4, all of that sort of had to happen pretty quickly last year as we were transitioning out of contract growers. So, I'm really proud of what the team was able to accomplish. We were able to keep our reputation as someone who could pick, pack and ship at such a high rate, which is the expectation by all these major big box retailers. All of that drives new opportunity and those new opportunities are coming to fruition now. So, to have that it's an ongoing process no matter what, but to have that kind of behind us and focus on the second half of this year and putting in these new products, which I think are the right products at the right time with the right pricing and the right formulas, I couldn't be more proud of how quickly the team has been able to rise to that occasion. And when you start to think about what makes smaller companies great and bigger companies, it's the ability to be the ability to go to market quickly, to be able to react. There was something that was put into the release and into the script, which I believe was put in by which is he's got the he's somewhat new. Now he's a vet because he's here and lived through it the past year and has really impacted our business. But it's really about this ability to move quickly, to take the capital that we have. We've strengthened the balance sheet and we can go after opportunities and really move on a dime, whereas bigger companies are going to they're just going to take a long time in the market. A lot of times the market opportunity passes them by or they don't have that opportunity of being a first market mover which is something that I've always prided myself on and what I thought I brought to the table with my marketing background. And I think here, that's what you're going to see is our ability to really stick and move, leverage off that. We're going to have some good base business growth that but really, it's the new products, the new accounts moving into the likes of big box retailers that are truly going to drive the volume. And so, this is the first time since I've been involved in the business that I really feel like we can really put our energies towards growing the business with the right products, with the right margins. And I know we've got the right team. So last year was really still a, hey. Let's we got to fix all of this before we can really start to start to run. And so that's where I think when you look at only six months, I mean, it's only six months. This year is to be pretty compelling. And I'm pretty excited about between the new products, the opportunity with Narayan, which I think is very like-minded companies that are looking to put great products out there with the right formulas and the right nutritionals at the right time. And having that manufacturing leverage now that we'll have that we haven't had in the past because we didn’t have it. And if we can do something accretive like Narayan, it's really going to accelerate the business. And it's going to get really interesting really quick for us, which I think is great.

Q: Just to reiterate what Nick said, yes, congratulations. That's a very impressive gross margin improvement. And the fact that it's such a short period of time that you achieved it in. I'm looking at the numbers, mean, I look at year to date numbers annually, you're approaching 20% there and you only did it for what part of the year. I'm just trying to understand a little bit though in terms of what the gross profit was in the fourth quarter. I mean, the drag doesn't really reflect what your full year was. So, can you speak a little bit about what maybe impacted it? I think you're on a trend here taking 20% and normalized. Is it fair to say you'd be more approaching 30% once everything kind of works through the system?

A: Yeah. I think that's fair. Think, look, I think we've got a target GP that's 35 to 40. We think that's definitely achievable as the product mix starts to sort of iron out with some of these more shelf stable products coming in at much higher rings as they would say, right? So, when you think about the fact that how many basil plants you have to sell versus how many jars of sports nutrition or pickles, it's considerable. Q4 was and we continue to invest in people. I think Anthony had asked this question earlier, and I'll hand over to Kos in a second to talk a little bit more about the nuts and bolts of the numbers. But it was really about Q4 tends to be our heaviest time of year. Obviously, in The States, it's Thanksgiving, Christmas, New Year's, and herbs are a big part of everybody's meals and parties. So, we see a considerable lift and we see it at some of our key retailers. And in this instance, Meyer does a huge what's called a holiday program that really kicks off in the middle of to the end of October all the way through the first week in January where we see a 10 times lift in volume coming out of the facility. So, this year was a combination of labor ramp up plus there were some items that we ended up having to pay a little bit more for because of the fires that were out in California. So, whether it was thyme or thyme or sage that were impacted, all of that sort of went into our cost of goods. The labor was a big piece of it that we ended up investing in to make sure that we nailed holiday because we knew that that drives kind of the next year. If you fall down during the holiday and you don't ship at 98% plus, that's the expectation from these retailers, whether it's Meyer or Walmart, which was in that facility this year as well. So that was really where that I look at it more of an investment knowing that this year, we're going to be a lot more prepared since this was the first year, Brian, that we had all of that program for both those major retailers in our Heartland facility. We didn't have the year before, we had outsourced it. So, we ended up making sure and left nothing to chance by making sure we had enough people. And that was a lot of what that expense was related to. Kos, do you have anything to add there?

A: I think you hit the highlights on the head, Jim. The COGS was certainly related to the ramp up in the labor component and the purchases component really drove the decline versus a year's trend. But I think this will normalize as we get through 2025, and we have a much better understanding, of our demand and how to how to properly adjust for those things from an inputs perspective.