Edible Garden AG Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2022. Edible Garden grows and sells hydroponic herbs and produce, and related products, to retailers; it reported sales in approximately 4,500 supermarket stores. The company began trading on Nasdaq in May 2022.
Financial results
| Metric | Three months ended June 30, 2022 | Six months ended June 30, 2022 | Prior-year comparable period |
|---|---|---|---|
| Revenue | $2.985 million | $5.722 million | $2.777 million and $5.260 million |
| Gross profit / margin | $206,000 / 6.9% | $111,000 / 1.9% | $320,000 / 11.5% and $437,000 / 8.3% |
| Operating loss | $2.527 million | $4.229 million | $1.090 million and $2.247 million |
| Net loss | $4.776 million | $7.382 million | $1.152 million and $2.347 million |
| Net loss per share | $0.68 | $1.22 | $0.29 and $0.59 |
| Cash used in operations | Not separately stated | $5.601 million | $899,000 used |
Revenue grew 7.5% in the quarter and 8.8% for the half year. Cost of goods sold rose faster—13.1% and 16.3%, respectively—reducing gross margin. Management attributed the cost pressure to inflation in packaging, higher labor costs associated with COVID-19, and increased contract-farmer charges. Six-month revenue included $5.054 million from herbs and produce and $668,000 from vitamins and supplements.
Six-month SG&A increased to $4.340 million from $2.684 million. The increase included $1 million in IPO-completion bonuses to the CEO and CFO, as well as higher wages, hiring, accounting, insurance, natural gas, director fees, and repairs. Interest expense was $1.737 million for the half year, versus $100,000 a year earlier. The period also included an $826,000 debt-extinguishment loss; other losses totaled $590,000, including $189,000 from warrant revaluation and $401,000 associated with a leak-out provision.
Balance sheet, financing, and liquidity
- At June 30, cash was $5.704 million, total current assets $6.999 million, and current liabilities $4.481 million; working capital was approximately $2.518 million.
- Total liabilities were $7.870 million. Debt was $5.848 million net of discounts ($5.882 million gross); lease liabilities were also reported. Cash exceeded reported net debt by approximately $0.144 million.
- Cash increased from $31,000 at December 31, 2021, largely following the May IPO. The company reported $11.307 million of net financing cash flow for the first half, including $14.650 million of stock proceeds, offset by debt principal payments, issuance costs, and IPO costs.
- The IPO sold 2.93 million units at $5 each, each comprising one common share and one warrant. The filing reports net IPO proceeds of $13.625 million in one section but $13.211 million in the use-of-proceeds section; these figures should be reconciled.
- On June 30, the company replaced Evergreen notes with a $1.842 million secured note bearing 7% interest and maturing March 31, 2023. Evergreen received 200,000 common shares; the note has conversion and future-financing provisions, including mandatory repayment following a securities offering with at least $4 million in gross proceeds.
Outlook, risks, and unusual items
- Going concern: The company disclosed substantial doubt about its ability to continue as a going concern for the next 12 months, citing losses, operating cash use, and the need for additional financing. Management also said available cash and operating resources should meet needs over the next 12 months. The filing provides no formal revenue or earnings guidance and acknowledges that financing may not be available on acceptable terms.
- Management plans to reduce expenses while continuing to invest in operations and product promotion. It expects fixed or quasi-fixed costs to decline as a share of revenue if sales grow, but gives no assurance that revenue will increase.
- COVID-19, supply-chain volatility, inflation, natural-gas costs, workforce disruption, competition, customer retention, and access to the Belvidere facility are among the cited business risks.
- Disclosure controls were deemed ineffective because of material weaknesses, including inadequate segregation of duties in financial reporting due to a small finance team.
- The company reported a supplier-contract lawsuit brought by Green City Growers Cooperative. It disputes the allegations and filed a counterclaim; an adverse outcome could result in legal costs, settlement, or judgment with potentially material effects.
- Nasdaq notified the company that it no longer met board and audit-committee independence requirements after a director’s resignation. It also reported equity below the $2.5 million continued-listing threshold and failure to meet the market-value standard as of August 11, 2022; the company said it intended to seek compliance within the applicable cure period.
Important facts for investors to verify
- How the company will fund operations and meet debt obligations as the Evergreen note approaches its March 2023 maturity, given substantial doubt about going concern.
- Whether revenue growth can restore gross margins after the sharp decline to 1.9% for the first half.
- The correct net IPO proceeds and use of those proceeds, given the differing amounts reported in the filing.
- Progress toward Nasdaq listing compliance and remediation of internal-control weaknesses.
- Developments and potential financial exposure in the Green City Growers litigation.
- Potential dilution from outstanding warrants, convertible debt, and future equity financing; 8,654,941 common shares were outstanding at June 30, 2022, and the filing reports 3,758,961 outstanding warrants.