Edible Garden AG Incorporated — Q3 2023 Form 10-Q
Business and period: The company sells hydroponically and greenhouse-grown produce, herbs and floral products, as well as vitamins and supplements, primarily through supermarkets. This unaudited report covers the three and nine months ended September 30, 2023; amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3.289m | $2.754m | $9.965m | $8.476m |
| Gross profit (margin) | $0.012m (0.36%) | $0.182m (6.61%) | $0.540m (5.42%) | $0.293m (3.46%) |
| SG&A | $2.387m | $1.928m | $7.458m | $6.268m |
| Operating loss | $(2.375)m | $(1.746)m | $(6.918)m | $(5.975)m |
| Net loss | $(2.431)m | $(2.069)m | $(5.948)m | $(9.451)m |
- Q3 revenue rose 19.4%, led by herbs, produce and floral; cost of goods sold grew faster, up 27.4%, and gross profit fell 93.4%. Management attributed margin pressure to ramp-up costs at Edible Garden Heartland, additional labor and materials, floral shrink, and sales of lower-margin vitamins and supplements inventory.
- Nine-month revenue increased 17.6%. Gross margin improved year over year, reflecting customer price increases and Heartland shipments, partly offset by floral shrink and lower-margin inventory. Operating loss nevertheless widened 15.8% as SG&A rose 19.0%.
- The nine-month net loss improved primarily alongside lower interest expense, a $1.233m employee retention credit (ERC) benefit, and a $0.070m gain on debt extinguishment; the prior-year period included a $0.826m debt-extinguishment loss and $0.825m of other expenses. These items do not indicate that operations were profitable.
Cash, debt and liquidity
- Cash was $2.578m at September 30, 2023, versus $0.110m at December 31, 2022. Working capital was $3.193m, compared with a $2.966m deficit at year-end 2022.
- For the first nine months, operating activities used $6.778m of cash; investing activities used $0.800m, mainly for Heartland equipment; financing activities provided $10.046m. Cash burn from operations remained substantial.
- Total gross debt was $4.539m at September 30, down from $6.354m at year-end 2022. Balance-sheet debt, net of discounts, was $0.382m current and $4.135m long term. Scheduled debt maturities include $3.514m in 2025, largely the secured promissory note.
- Public offerings raised approximately $10.2m gross in February and $3.1m gross in September 2023. Management said remaining offering proceeds were expected to fund operations through December 2023, while also stating the company would need additional capital and that substantial doubt existed about its ability to continue as a going concern for twelve months from issuance of the financial statements.
Material developments, outlook and risks
- Heartland shipments began in April 2023 following its acquisition and retrofit. The ramp-up contributed to higher operating and production costs. Management expects further losses in the near term and is pursuing cost reductions and potential debt or equity financing; the filing provides no specific revenue, earnings or cash-flow guidance.
- Customer concentration is significant: five customers represented about 83% of nine-month revenue, and four customers represented about 80% of gross trade receivables at quarter-end. Loss of a major customer could materially affect results.
- The company recognized $1.233m of ERC income in the nine-month statements. It reported filing claims totaling about $1.146m plus accrued interest, with $0.368m still outstanding at quarter-end. Verify the amount, timing and collectability of the remaining credit.
- On October 24, 2023, Nasdaq notified the company that it failed the $1 minimum bid-price requirement; the compliance period ran through April 22, 2024. The company disclosed that delisting could impair trading liquidity and access to capital. Stockholders later approved authority for a reverse split within a 1-for-5 to 1-for-50 range. A separate amendment increasing authorized common shares to 100m became effective November 10, 2023; additional share issuance could dilute holders.
- Disclosure controls were judged ineffective at September 30, 2023 because of unremediated material weaknesses, including inadequate segregation of duties and deficiencies in control documentation and review.
- Management reported no pending or threatened legal proceeding expected to have a material adverse effect; a lawsuit that had driven a prior-period accrual was settled. Other principal risks include financing availability, access to the Belvidere facility, competition and customer retention.
Important facts for investors to verify
- Whether operating cash use can be reduced and additional financing obtained before available liquidity is depleted; management’s stated runway was only through December 2023.
- Heartland’s production ramp, unit economics and ability to restore gross margins after Q3’s 0.36% margin.
- Collection and final amount of the ERC claims, and the gap between the claims described in the notes and the income recognized.
- Nasdaq bid-price compliance and any reverse split or subsequent share issuance; assess potential dilution given the increase in outstanding shares and warrants.
- Progress remediating material weaknesses in internal controls and the concentration of revenue and receivables among a small number of customers.