Business context and reporting period
Edible Garden AG Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2022. The company sells locally grown hydroponic produce and related products, principally to supermarkets in the Northeast and Midwest; it reported distribution to approximately 4,500 supermarkets. Unless stated otherwise, financial amounts below are in U.S. dollars.
Financial results and liquidity
| Metric | Q1 2022 | Q1 2021 or comparison |
|---|---|---|
| Revenue | $2.737 million | $2.483 million; up 10.2% |
| Gross profit (loss) and margin | $(95,000); (3.5%) | $117,000; 4.7% |
| Operating expenses, SG&A | $2.007 million | $1.274 million; up 57.5% |
| Operating loss | $(2.102) million | $(1.157) million |
| Interest expense | $503,000 | $38,000 |
| Net loss | $(2.606) million; $(0.51) per share | $(1.195) million; $(0.30) per share |
| Cash from operating activities | $(1.279) million | $(173,000) |
| Cash at period-end | $18,000 | $31,000 at December 31, 2021 |
| Debt at March 31 | $10.241 million gross; $9.609 million net of discounts | $8.776 million gross at December 31, 2021 |
At March 31, current assets were $1.301 million and current liabilities $9.046 million, a working-capital deficit of $7.745 million. Total assets were $3.908 million, against total liabilities of $13.120 million and a stockholders’ deficit of $9.212 million. Cash provided by financing was $1.285 million; investing activities used $19,000.
Material changes versus the prior comparable period
- Revenue growth did not keep pace with costs: cost of goods sold rose 19.7%, compared with 10.2% revenue growth, and gross margin turned negative.
- Management attributed higher production costs to labor, packaging inflation, and contract-farmer charges. SG&A rose 57.5%, including $420,000 of additional outside professional fees, $400,000 of which was paid in stock; higher natural-gas costs, repairs, wages, legal costs, and commissions also contributed.
- Net loss more than doubled, while operating cash use increased. Interest expense rose substantially, including costs associated with seller financing, officer loans, and Evergreen convertible notes.
- Gross debt increased from $8.776 million at year-end to $10.241 million. The company issued Evergreen notes with a 15% original issue discount and 5% interest, supported by warrants; debt-discount amortization was $333,000 in the quarter.
Outlook, risks, contingencies, and unusual items
- Outlook: Management said it would seek to lower operating costs, increase revenue, and continue investing in operations and brand promotion. It expects fixed or quasi-fixed expenses to decline as a share of revenue if revenue grows, but gave no quantified guidance and cautioned that revenue growth is not assured.
- Post-quarter IPO: The May 2022 offering comprised 2.93 million units at $5 each, with one common share and one warrant per unit. The filing reports net proceeds of $13.625 million in the financial-statement note, while the use-of-proceeds discussion reports approximately $12.7 million after offering expenses. The company used proceeds to repay Evergreen notes and certain officer notes; it also converted SAFEs and officer-held convertible notes into shares. These proceeds arose after quarter-end.
- Going concern and liquidity: The filing says prior liquidity conditions raised substantial doubt about the company’s ability to continue as a going concern; management believed the IPO removed material uncertainty. The business nevertheless had very limited quarter-end cash and significant debt, and may need further financing.
- Risks: Management cited COVID-19 and macroeconomic volatility, supply-chain and workforce disruption, higher commodity costs including natural gas, competition, customer retention, and access to financing. It also identified reliance on access to and operation of its Belvidere facility.
- Contingency: Green City Growers Cooperative sued over an alleged supplier-agreement breach. Edible Garden denies the allegations and filed a counterclaim. An adverse outcome, including costs beyond insurance coverage, could materially affect the business and financial condition.
- Controls: Management concluded disclosure controls were ineffective due to a material weakness: the small finance team did not permit adequate segregation of duties in financial-statement preparation.
Most important facts for investors to verify
- Reconcile the IPO proceeds disclosures ($13.625 million versus approximately $12.7 million) and confirm amounts applied to debt repayment and other uses.
- Review the company’s post-IPO cash, remaining debt maturities, interest costs, and continuing working-capital requirements.
- Assess whether revenue growth can restore positive gross margins given labor, packaging, contract-farmer, and energy costs.
- Track the Green City Growers litigation, potential exposure, and insurance coverage.
- Monitor remediation of the finance-function segregation-of-duties weakness and the reliability of subsequent reporting.