Edible Garden AG Incorporated — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparative period is Q1 2022. Amounts below are in millions of dollars unless otherwise stated. The company grows and sells hydroponic herbs and produce and also sells vitamins and supplements.
Financial results and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $2.455 | $2.737 |
| Gross profit (loss) | $(0.024); (1.0)% margin | $(0.095); (3.5)% margin |
| Operating expenses, SG&A | $2.691 | $2.008 |
| Operating loss | $(2.715) | $(2.103) |
| Net loss | $(2.879) | $(2.606) |
| Net loss per share | $(2.21) | $(15.40) |
| Cash used in operating activities | $(3.319) | $(1.279) |
- At March 31, cash was $3.948 million, compared with $0.110 million at year-end 2022. The February public offering generated approximately $9.4 million in net proceeds.
- Gross debt was $4.725 million; reported net long-term debt was $4.324 million and short-term debt was $0.373 million. The company repaid the Evergreen note and a Sament note during the quarter. Net interest expense was $0.234 million, down from $0.503 million.
- Total assets were $11.276 million and total liabilities were $6.981 million at quarter-end. Inventory rose to $1.022 million from $0.586 million, primarily reflecting the Grand Rapids ramp-up.
- The balance sheet shows current assets of $6.019 million and current liabilities of $2.648 million, implying positive working capital of approximately $3.371 million. However, MD&A reports a working-capital deficit of $3.328 million. The filing text does not reconcile this discrepancy.
Material changes versus Q1 2022
- Revenue declined 10.3%. Herbs and produce revenue fell 24.0% to $1.832 million, which management attributed to lower orders from existing retail customers. Vitamins and supplements revenue increased 90.5% to $0.623 million, following an additional product listing at a customer’s stores.
- Gross loss narrowed by $0.071 million; management attributed the improvement to customer price increases. Gross margin remained negative.
- SG&A increased $0.684 million, or 34.0%. Management cited Grand Rapids facility costs, higher depreciation, public-company costs and increased staffing, partly offset by lower consulting and other costs. Operating loss widened, and net loss increased despite lower interest expense and a $0.070 million debt-extinguishment gain.
- Operating cash use increased by $2.040 million, reflecting the larger net loss, inventory build and vendor payments. Capital spending was $0.361 million, compared with $0.019 million a year earlier.
Outlook, risks and unusual items
- Management states that remaining offering proceeds are expected to fund operations through December 2023, but also says the company will need additional funding unless it reduces operating cash use. The filing says substantial doubt exists about the company’s ability to continue as a going concern for twelve months from issuance; losses are expected to continue, and financing may not be available on acceptable terms or at all.
- Grand Rapids Heartland completed its second buildout phase, obtained USDA Organic and PrimusGFS certifications, and began shipping product in April 2023. Management expects margins to improve when facility revenue is reflected in results, but provided no quantified forecast.
- The February offering issued 1,619,000 common shares and warrants to purchase 1,861,850 shares at $6.30 per share, creating potential dilution. The company reported 2,739,582 common shares outstanding as of May 10, 2023.
- Three customers represented approximately 69% of Q1 revenue; three customers accounted for approximately 80% of gross receivables at quarter-end. Loss of a major customer could materially affect results.
- Disclosure controls were deemed ineffective due to unremediated material weaknesses, including inadequate segregation of duties and insufficient control documentation and review.
- The company settled and paid $120,000 in a supplier dispute and $235,000 in a former officer’s claim; both matters were dismissed. The filing reports a $0.070 million gain on the Sament debt extinguishment and a $0.153 million early-repayment penalty on the Evergreen note.
Key facts for investors to verify
- Reconcile the MD&A working-capital deficit of $3.328 million with the balance-sheet figures, which indicate positive working capital.
- Monitor cash burn, financing needs and the basis for management’s estimate that funds would last through December 2023, alongside the stated going-concern uncertainty.
- Track Heartland production, sales and margins against management’s expectation of improved gross margins; the filing gives no quantified target.
- Assess customer concentration and the durability of herbs-and-produce orders, as well as the effect of price increases on margins.
- Review potential dilution from outstanding warrants and the company’s plan to remediate ineffective disclosure controls.