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Kathleen Valiasek

Thank you, Craig, and good morning, everyone. First, I completely echo Craig's sentiment and want to acknowledge the incredible dedication and focus of our entire organization. As Craig alluded, our team has fully embraced our mission to reach positive adjusted EBITDA in the third quarter of this year.
From operations to sales to finance, everyone is aligned around this critical goal, and I couldn't be prouder of the collective effort.
To that end, our first quarter progress, including all of our commercial and operational initiatives, are converging toward a significant revenue lift in the second half of 2025, and our achievement of this positive adjusted EBITDA milestone we are positioned to reach in quarter three.
Importantly, the disciplined approach we've taken from product diversification to operational efficiencies to cost management is creating a strong foundation that will support our long-term growth and profitability as we scale our business to meet growing retail demand for our products.
Starting with our operational progress, the product mix recalibration work at our Texas facility continues to advance as planned. We are in the final stages of completing this work and expect to begin for full commercial production in this section starting this month.
As we discussed previously, the purpose-built automated harvesting equipment will be installed early in the third quarter, replacing the temporary harvester we will use this quarter. The new harvester is expected to drive significant operational efficiencies and marginal improvement. I'm particularly excited to share that our yields in our Georgia facility have increased by 20% in the first quarter compared to our fourth quarter rates.
This improvement is largely attributable to the refinement of our growing system with the stack phase which has outperformed our internal expectations. Our next step is to implement this program in our Texas and Washington facilities where we expect. Achieve similar yield increases.
These yield improvements over our existing performance create an excellent opportunity for a sales team to engage prospective retail partners who are looking for CEA suppliers that can deliver consistent performance, something that truly differentiates us at a time when retailers are increasingly taking interest in CEA products.
Regarding our plans to enter the Midwest with a new facility, I'm pleased to report significant advancement in our strategy there. We are actively engaged in promising discussions with multinational and national retailers to include the Midwest region in their sourcing plans. While we're very far along in this process, it's still too early to announce anything definitive.
These developing relationships represent important validation of our expansion strategy and our ability to serve retail partners across multiple regions.
Turning now to our commercial progress, building on the incredible momentum from last year in quarter one 2025, we expanded our Texas grown arugula offering with Brookshires in approximately 80 stores and began distributing organic living butter lettuce from California to HEB.
We also started shipping Living Basil to an existing large retail customer across 60 stores and secured distribution with several other wholesalers for our basil products.
Notably, our relationship with Walmart continues to strengthen. In addition to the 191 stores, we are already serving with premium baby varieties as of quarter four, we secured an additional commitment to serve 13 Walmart distribution centers with our conventional living butter lettuce.
With those shipments having commenced just a couple weeks ago from both our California and Texas facilities, we've also evolved our grab and go salad kit offerings to better serve retail partners and consumer trends.
This includes the launch of new salad kits in quarter one 2025 with additional Flavors expected to be introduced in quarter three, as well as the creation of a new product line that meets the needs of today's value-oriented consumer.
We're particularly excited about our upcoming exclusive launch of a new larger approximately 12-ounce family size Caesar salad kit with a large multinational retailer in the Pacific Northwest, beginning in the third quarter.
We also continue to expand our relationship with the leading meal subscription business that is now seeking additional skills from us. These commercial wins demonstrate the strong pull we're seeing from our customers and their increasing desire to purchase more CEA products, validating our mission and reinforcing the long-term market opportunity ahead of us. Turning briefly to our first quarter results.
Our first quarter sales were $11.6 million in line with our expectations and representing a 38% increase compared to the first quarter of 2024 and a 15% sequential increase compared to the fourth quarter of 2024.
This growth was driven by increased production and sales from our Georgia, Washington, and Texas facilities, partially offset by the ongoing product mix for calibration work at our Texas facility, which has temporarily decreased capacity.
Our adjusted growth margin for the first quarter improved approximately 500 basis points versus the prior year and approximately 400 basis points versus the fourth quarter 2024. This improvement is particularly encouraging as it demonstrates that our product mix recalibration work and operational efficiency initiatives are yielding tangible results.
We continue to expect that over time, our adjusted gross margin will increase as a percentage of sales as a result of the continued scaling of the business and ongoing efforts to optimize costs.
Net loss for the quarter was $37.7 million compared to a net loss of $24.1 million in the prior year period, which largely reflects higher interest expense. Our adjusted EBITDA loss for the quarter was $8.8 million compared to $6.9 million in the prior year period, and importantly, representing an improvement of $50 million from our fourth quarter 2024 loss of $9.3 million.
We remain on track to achieve our third quarter target to reach positive adjusted EBITDA, driven by the full realization of our ongoing cost reductions alongside our anticipated revenue lift that we expect to be more fully visible in the third quarter of 2025.
To emphasize the cost reduction point, we took out approximately $3 million of annualized GNA expenses in the first quarter, and during the second quarter to date period, we've actioned another $4 million of annualized expenses across both GNA. And cost of goods sold.
These initiatives are a direct result of our operational focus, which is resulting in significantly improved consistency across all facets of our growing operations and allowing us to drive those efficiencies through our income statement.
Turning to our balance sheet, we ended the quarter with a significantly strengthened financial position with cash and cash equivalents and restricted cash of $28.4 million.
That said, I do want to provide some clarity on how our debt restructuring appears on our financial statements. While we eliminated approximately $197 million of debt to our March restructuring. Accounting rules require us to maintain the original carrying value of the pre-restructuring debt amount on our balance sheet, with the reduction being recorded as a debt premium that is amortized over the new loan term.
You'll see this as a new line item on our first quarter balance sheet. This means that our reported debt balance won't immediately show the reduction, but the economic benefit remains unchanged and will be reflected through lower interest expense over time. This accounting treatment is standard for transactions of this nature and does not impact the fundamental improvement of our capital structure.
Now for some comments on our outlook for the second quarter, we expect revenue in the range of $12 to $12.5 million, which reflects the partial impact from our Texas facility transition, which is expected to be complete in the third quarter.
Looking at the cadence for the balance of the year, we expect to see a material lift in the second half of 2025, resulting from a convergence of activity, including the aforementioned full quarter contribution from our Texas facility transition and the additional capacity from our Georgia yield improvement.
Additionally, new product introductions and expansions with existing customers are anticipated to also support our expectations for sequential growth in the second half of the year.
I'd also like to briefly comment on our EBI progression from quarter four to quarter one and highlight how we expect to improve on this in quarter two. In quarter one, we experienced temporary cost increases that we expect will be eliminated in quarter two.
These included higher utilities associated with weather anomalies and higher GNA expenses, which were impacted by the combination of a higher mix of product donations associated with the better than anticipated yield improvements in Georgia, lower capitalization of labor now that the construction projects have been completed, and lastly, higher severance associated with our cost optimization work.
These collectively impacted our EBITDA by approximately 900,000 in the first quarter and are not expected to reoccur in the second quarter. These dynamics combined with our second quarter to date cost actions are providing us some tailwind toward our goal of achieving positive adjusted EBITDA in the third quarter of 2025. In conclusion, we're energized by the progress we're making across all areas of our business.
Our entire organization is aligned behind our mission to reach positive adjusted in the third quarter, and I couldn't be prouder of the collective effort of our team. With that please open the call for Q&A.

Question and Answer Session

Operator

Thank you.
(Operator Instructions)
Our first question comes from the line of Kristen Owen with Oppenheimer and Company. Please proceed.

Kristen Owen

Hi, good morning, and thank you for taking the question. Congratulations on the nice progress made in the first quarter here. Kathy, you touched on this in some of your final, prepared comments here, but I want to double click on sort of what's driving that material list, coming into the back half of the year. You noted Texas transition, the Georgia yield improvements, some new products.
I want to double click on that towards the yield improvement. I think you said 20% over fourth quarter. Just help us understand, what, what's changing in the production process, how you're achieving that yield, and then on the commercial side, sort of the velocity of sales and your ability to sort of sell out that incremental yield as you're thinking about that at the back half of the year.

Kathleen Valiasek

Yeah, great series of questions, Kristen, and good morning to you.
Thank you. So yeah, the 20% yield increase in Georgia is an R&D program that was developed last year. We were able to finally put it in place in Georgia, and it was, it actually exceeded our expectations in terms of yield increases, which is fantastic, right?
So, as we said in my, as I said in my comments, we will also be implementing that program in Texas and Washington in quarter three, so we expect to see that similar level of bump and yield in both of those facilities. If you think about it, so out of Georgia, when the yield increases that much, your production increases, right?
And so, it takes a little bit of time for our sales team to place the product, right, which is normal. So And then in terms of the ramp in the back half, right, it's several things going on with all of our customers, right?
We, talked about all of the Walmart projects, the grab and go salads, the increased revenue that we will anticipate out of Montana. Several things are impacting the uptick, including, also as we discussed, the yields.
So hopefully that's helpful.

Kristen Owen

That's great. The follow up question that I have is a little bit more modelling oriented just given some of the nuance around the restructuring that you announced last quarter, you mentioned the balance sheet implications. I'm trying to think about the.
The income statement implications in particular how to think about the interest expense that you're reporting what if that is cash versus non-cash and how that will change with this restructuring just a little bit of nuance on the model that would be helpful.
Thank you. Yeah.

Kathleen Valiasek

Yeah for sure so you know GAAP accounting, right? You would have anticipated that we would be able to recognize the full gain of the debt write off of $197 million. But we're actually having to take it over 10 years, which actually in effect is fantastic because every quarter it will reduce our interest expense on the face of our P&L, right?
So, the accrual every quarter is the debt balance times the interest rate, which again we, as we disclosed, it's, 50% of what it used to be. And then the amortization of the premium will reduce the interest expense on the face of the P&L. So, in effect, every quarter, the interest expense as it appears on the P&L will be less than $5 million.
And then also keep in mind, yeah, let me just add one more comment there. Keep in mind that the restructure with Cargo allows for, two full years of no cash interest or am amortization payments. So, but obviously right there there's still the accrual.

Kristen Owen

Perfect thank you I'll pass it on.

Kathleen Valiasek

Okay, thanks Kristen.

Operator

Thank you. Our next question comes from the line of Ben Klieve with Lake Street Capital Markets. Please proceed with your question.

Ben Klieve

Alright, thanks for taking my questions. I want to circle back to this 20% yield enhancement. I'd like to kind of better understand I think cat in your prepared remarks you said that this was, a project, explicitly around the stack phase of the Georgia facility.
And so, I'm wondering is this a situation where you have 20% more plants coming out of the stack phase, just from a pure, kind of per square foot perspective, are they coming, are the same number of plants coming off 20% faster? Are you kind of changing the varieties to maybe faster growing, options? What exactly is the driving force behind that?

Kathleen Valiasek

Yeah, sure, great question, and good morning, Ben. Yeah, so it's really within the stack phase. It's very simply light optimization, okay, and it's something we nicknamed it Thor. Our R&D scientists who are amazing developed the program, actually early last year.
What it does is it just, it increases the output out of the stack phase and basically, even all the way through then the process through the greenhouse, we're literally seeing 20% increase in pack down every single week.
It's actually pretty amazing, but it's basically within the stack, it's light optimization. And what it does is it increases the output of number of plants, sorry, poundage of plants out of the coming out of the stack face.

Ben Klieve

Got it. So, four is light optimization on the same number of plants that makes those plants grow 20% faster.

Kathleen Valiasek

Correct.

Ben Klieve

Got it okay, very impressive, so then.
Yeah, sounds like it. My other question, then before I'll get back into you is, you talked, it seems like it was a bit more, kind of conviction regarding the future of the Midwest, facility, and I'm wondering if you can talk about.
How you're thinking about financing that facility, are you looking at kind of project specific financing, the external parties, leaning back into the existing credit facilities that you have a mix of those two or something else?

Kathleen Valiasek

So, we're, as any company, right, you're always trying to bring new capital providers in the capital stack, so we are talking to sort of very project specific financing, but you know I think we'll probably be bringing new, obviously non-dilutive partners into the capital stack.
Okay.

Ben Klieve

Very good that's helpful well I appreciate you taking my questions best of luck here and what should be a, pretty interesting next few months for you guys. I'll get back in you.

Kathleen Valiasek

Thanks.

Operator

Thank you, ladies and gentlemen. I'm showing no other questions at this time. I'll turn the floor back to for any final comments.

Kathleen Valiasek

I just would like to thank everybody for joining us today and we look forward to updating you on our progress as we further scale and grow local bani’s business in the coming quarters.
Thank you very much.

Operator

Thank you. This concludes today's conference call. You may disconnect your lines at this time.
Thank you for your participation.