Edible Garden AG Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022; financial statements are unaudited. Edible Garden is a controlled-environment agriculture company selling herbs, lettuce and other products, including vitamins and supplements. Its produce was sold at approximately 4,500 supermarkets.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $2.754 million | $2.447 million | $8.476 million | $7.708 million |
| Gross profit / margin | $182,000 / 6.61% | $170,000 / 6.95% | $293,000 / 3.46% | $608,000 / 7.89% |
| Operating loss | $1.746 million | $1.070 million | $5.975 million | $3.316 million |
| Net loss | $2.069 million | $1.103 million | $9.451 million | $3.449 million |
| Basic and diluted loss per share | $0.24 | $0.28 | $1.36 | $0.86 |
Cash flow: For the first nine months of 2022, operating activities used $7.540 million, investing activities used $1.813 million, and financing activities provided $11.297 million. Cash rose from $31,000 at December 31, 2021 to $1.975 million at September 30, 2022.
Liquidity and debt: Current assets were $3.396 million and current liabilities $4.638 million; management reported a $1.243 million working-capital deficit. Debt on the balance sheet was $2.808 million current and $4.331 million long-term, net of discounts. Gross debt was $7.172 million. Total assets were $8.648 million, total liabilities $9.028 million, and stockholders’ deficit $380,000.
Material changes and notable items
- Revenue increased 12.6% in Q3 and 10.0% year to date, which management attributed to growth from existing customers. Nine-month revenue included $7.361 million from herbs and produce and $1.115 million from vitamins and supplements.
- Nine-month cost of goods sold rose 15.3%, outpacing revenue growth. Management cited inflation in packaging, higher labor costs associated with COVID-19, and higher contract-farmer costs; the nine-month gross margin fell to 3.46% from 7.89%.
- Nine-month SG&A increased 59.7% to $6.268 million. Drivers included $1.0 million in IPO transaction bonuses to the CEO and CFO, added compensation and staffing, director fees, D&O insurance, accounting costs, and facility maintenance.
- Other year-to-date charges included $1.825 million of net interest expense, an $826,000 loss on debt extinguishment, and $825,000 of other losses, including a $189,000 warrant revaluation, $401,000 related to Evergreen’s leak-out provision, and a $235,000 legal contingency accrual.
- The May 2022 IPO generated $13.625 million in net proceeds. In August, the company acquired Greenleaf’s assets and a five-acre greenhouse property in Michigan for $2.886 million: $1.750 million cash and a $1.136 million seller note. The note bears 5% interest, is secured by the property and acquired assets, and requires monthly payments of $28,089 beginning January 2023.
Outlook, risks and controls
- No quantitative revenue or earnings guidance was provided. Management said it would seek to reduce operating expenses and grow revenue, while continuing to invest in expansion and promotion. It expected significant further losses in the remainder of 2022 and the foreseeable future.
- Going concern: Management stated that available liquidity would not fund operations through the next 12 months without additional capital and that substantial doubt exists about the company’s ability to continue as a going concern. Financing may not be available on acceptable terms or at all; failure to obtain funding could require scaling back or ceasing operations.
- Nasdaq compliance: The company had not regained compliance with the $2.5 million stockholders’ equity requirement as of September 30, 2022. Nasdaq separately notified it in October of a minimum-bid-price deficiency, with a stated compliance deadline of April 10, 2023. Delisting could impair trading liquidity and access to capital.
- Legal matters: A former officer and director filed a breach-of-contract action in September 2022; the company accrued $235,000 as its best estimate of potential loss. In a separate supplier-agreement case, Green City Growers Cooperative seeks damages; the company denies the allegations and filed a counterclaim.
- Internal controls: Management concluded disclosure controls were ineffective because of material weaknesses, including insufficient finance personnel and inadequate segregation of duties in financial-statement preparation.
- Management cited COVID-19 and macroeconomic uncertainty, supply-chain and workforce disruption, inflation and higher natural-gas costs as ongoing risks.
Important facts for investors to verify
- Whether the company can raise sufficient capital to fund operations and address the going-concern uncertainty, cash burn and upcoming debt payments.
- Whether margins improve as the company manages inflation, labor, packaging and contract-farming costs.
- Progress toward Nasdaq stockholders’ equity and minimum-bid-price compliance, and the status and terms of any extensions or subsequent actions.
- The final valuation and operating performance of the Greenleaf acquisition, and the cash demands of its seller financing.
- Developments in the legal proceedings and any change to the recorded contingency or potential exposure.
- Post-quarter financing and dilution: on October 26, Evergreen exchanged approximately $962,000 of note obligations for 1,526,183 preferred shares, leaving approximately $1.02 million of A&R Note principal; the filing also reports that 706,800 preferred shares were subsequently converted into common stock. The filing reported 9,860,321 common shares outstanding as of November 9, 2022.