Edible Garden AG Incorporated — Q2 2023 Form 10-Q
Business context and reporting period. The company grows and sells locally grown hydroponic produce, herbs and lettuces, and vitamins and supplements. Its products are sold at approximately 4,500 supermarkets. This unaudited quarterly report covers the three and six months ended June 30, 2023; financial amounts below are in millions of dollars unless otherwise noted.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $4.221 | $2.985 | $6.676 | $5.722 |
| Gross profit (margin) | $0.553 (13.1%) | $0.206 (6.9%) | $0.528 (7.9%) | $0.111 (1.9%) |
| Operating loss | $(1.827) | $(2.527) | $(4.543) | $(4.229) |
| Net loss | $(0.638) | $(4.776) | $(3.517) | $(7.382) |
- Q2 revenue grew 41.4% year over year; six-month revenue grew 16.7%. Herbs, produce and floral revenue increased with Heartland facility shipments and customer demand; vitamins and supplements benefited from an additional customer flavor SKU.
- Q2 gross margin improved to 13.1%, which management attributed to customer price increases and Heartland shipments. For the six-month period, SG&A rose 16.8% to $5.071 million, and operating loss widened 7.4%.
- Q2 net loss included $1.233 million of Employee Retention Credit income and lower interest expense. The credit was recorded as a receivable, not reported as cash received. For the six months, other income also included a $70,000 debt-extinguishment gain.
- Cash was $1.368 million at June 30, versus $110,000 at year-end 2022. Working capital was positive $2.797 million, compared with a $2.966 million deficit at year-end.
- For the six months, operating cash outflow was $5.568 million, investing outflow was $591,000, and financing inflow was $7.417 million. Capital expenditures were $591,000.
- Total debt was $4.605 million at June 30, down from $6.324 million at year-end 2022. Reported balance-sheet debt was $4.605 million net of discounts; gross debt was $4.630 million. $3.106 million of gross debt was a secured note maturing in 2025.
Material changes and financing
- In February 2023, the company raised approximately $10.2 million gross, or $9.4 million net, in a public offering of common stock and warrants. It used offering proceeds in part to repay debt and fund operations. Shares outstanding increased from 362,716 at December 31, 2022 to 2,827,082 at June 30, 2023; warrant exercises and other issuances also contributed.
- Heartland, acquired in 2022, began shipping products in April 2023 after facility buildout. It obtained USDA Organic and PrimusGFS certifications.
- Management said remaining offering proceeds were expected to fund operations through December 2023, but also said the company would need additional capital unless it reduces cash use. No specific revenue, earnings or margin guidance is provided.
Outlook, risks and unusual items
- Going concern: The company reported substantial doubt about its ability to continue as a going concern for twelve months from issuance of the financial statements. It expects further significant losses, has not generated sufficient operating cash to fund operations, and may need additional debt or equity financing. Failure to obtain funding could require it to scale back or cease operations. Equity financing may significantly dilute shareholders.
- Customer concentration: Five customers generated approximately 81% of six-month revenue; four customers represented approximately 83% of gross trade receivables at June 30. Loss of a major customer could materially harm results.
- Internal controls: Management concluded disclosure controls were ineffective at June 30 because of an unremediated material weakness, including inadequate segregation of duties and deficiencies in control documentation and review.
- Other risks: The filing identifies access to and operation of the Belvidere facility, Nasdaq listing compliance, competition, customer retention, financing availability, growth execution and liquidity as risks. Cash balances exceeded FDIC insurance limits by approximately $1.161 million at June 30.
- The $1.233 million Employee Retention Credit was recognized as income and receivable after the company filed amended payroll tax returns. Its collection timing is not specified in the filing text provided.
Important facts for investors to verify
- Whether the Employee Retention Credit claim is approved, collectible and received, and whether its reported income is nonrecurring.
- Whether cash use declines sufficiently to extend liquidity beyond management’s stated December 2023 runway, and whether additional financing is obtained.
- Heartland’s production ramp, sales contribution and effect on gross margins and operating costs.
- Debt repayment requirements, including the secured note maturity in 2025, and the company’s ability to meet them.
- Progress in remediating the material weaknesses in internal controls and maintaining Nasdaq listing compliance.
- Customer concentration, accounts-receivable collections and the potential dilution from outstanding warrants, equity-plan capacity and future financing.