Edible Garden AG Inc 10-Q for FY2022 Q3
Edible Garden AG Inc (EDBL)
About this 10-Q
Edible Garden AG Inc filed this 10-Q on November 10, 2022, covering the quarter ended September 30, 2022 (FY2022 Q3).
Headline figures
Quarter ended September 30, 2022, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $2.75M
- up 12.5% from $2.45M a year earlier
- Net loss
- $2.07M
- compared with a net loss of $1.1M a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number:
(Exact name of registrant as specified in its charter) |
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(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
(Address of principal executive offices) (Zip Code)
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(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
The | ||
Warrants to purchase Common Stock | EDBLW | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days:
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large Accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
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| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act. Yes
As of November 9, 2022, the registrant had
PART I — FINANCIAL INFORMATION |
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Item 1. | Financial Statements |
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| Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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EDIBLE GARDEN AG, INC. | ||||||||
CONDENSED CONSOLIDATED BALANCE SHEETS | ||||||||
(in thousands, except shares) | ||||||||
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| September 30, |
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ASSETS | ||||||||
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Current assets: |
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Cash |
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Accounts receivable, net |
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Inventory |
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Prepaid expenses and other current assets |
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Total current assets |
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Property, equipment and leasehold improvements, net |
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Other assets |
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TOTAL ASSETS |
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LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
LIABILITIES: |
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Current liabilities: |
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Accounts payable and other accrued expenses |
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Short-term debt, net of discounts |
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Total current liabilities |
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Long-term liabilities: |
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Long-term debt, net of discounts |
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Long-term lease liabilities |
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Total long-term liabilities |
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Total liabilities |
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COMMITMENTS AND CONTINGENCIES (Note 10) |
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STOCKHOLDERS’ EQUITY (DEFICIT): |
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Common stock ($ |
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Additional paid-in capital |
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Accumulated deficit |
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Total stockholders’ equity (deficit) |
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TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) |
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(1) Adjusted to reflect the stock splits as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
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| Table of Contents |
EDIBLE GARDEN AG, INC. | ||||||||||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | ||||||||||||||||
(in thousands, except share and per-share information) | ||||||||||||||||
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, |
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Revenue |
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Cost of goods sold |
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Gross profit |
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Selling, general and administrative expenses |
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Loss from operations |
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Other income / (loss) |
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Interest expense, net |
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Gain (Loss) from extinguishment of debt |
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Other income / (loss) |
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Total other expenses |
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NET LOSS |
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Net Income / (Loss) per common share - basic and diluted (1) |
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Weighted-Average Number of Common Shares Outstanding – Basic and Diluted (1) |
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(1) Adjusted to reflect the stock splits as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
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EDIBLE GARDEN AG, INC. | ||||||||
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | ||||||||
(in thousands) | ||||||||
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net Income (Loss) |
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation |
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Amortization of operating lease right of use asset |
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Amortization of debt discount |
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Loss on extinguishment of debt |
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Stock issued as payment for services |
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Stock issued to Directors |
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Expense for modification of warrants |
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Accrual for loss contingency related to legal proceedings |
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Change in operating assets and liabilities: |
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Accounts receivable |
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Inventory |
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Prepaid expenses and other current assets |
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Other assets |
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Accounts payable and accrued expenses |
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Operating lease liabilities |
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NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Purchase of property, equipment and leasehold improvements |
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NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES |
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Proceeds from debt |
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Payments of debt principal |
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Payment of debt issuance costs |
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Proceeds from common stock issuance |
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Proceeds from issuance of warrants |
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Payment of costs related to initial public offering |
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NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES |
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NET CHANGE IN CASH |
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Cash at beginning of period |
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CASH AT END OF PERIOD |
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SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES: |
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Cash paid for interest |
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SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Debt and interest converted into common stock |
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Stock issued for debt extinguishment |
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Fixed assets acquired with debt |
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Warrants issued with debt |
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The accompanying notes are an integral part of the consolidated financial statements.
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| Table of Contents |
UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||||||
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 | ||||||||||||||||||||
(in thousands, except for shares) (1) | ||||||||||||||||||||
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Common Stock | Paid-In | Accumulated | ||||||||||||||||||
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Balance at June 30, 2022 |
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Issuance of common stock |
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Net Income (Loss) |
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Balance at September 30, 2022 |
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Balance at June 30, 2021 |
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Net Income (Loss) |
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Balance at September 30, 2021 |
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(1) Adjusted to reflect the stock splits as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
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UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||||||
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021 | ||||||||||||||||||||
(in thousands, except for shares) (1) | ||||||||||||||||||||
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Balance at December 31, 2021 |
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Issuance of warrants |
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Issuance of common stock |
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Conversion of debt to common stock |
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Modification of warrants |
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Net Income (Loss) |
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Balance at September 30, 2022 |
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Balance at December 31, 2020 |
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Net Income (Loss) |
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Balance at September 30, 2021 |
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(1) Adjusted to reflect the stock splits as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
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| Table of Contents |
EDIBLE GARDEN AG, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION, NATURE OF BUSINESS, AND BASIS OF PRESENTATION
Organization and Recent Developments
Edible Garden Corp., a Nevada corporation, was incorporated on
We authorized
Initial Public Offering
On May 5, 2022, the Company’s stock began trading on Nasdaq under the symbol “EDBL”. On May 5, 2022, the Company entered into an underwriting agreement with Maxim Group LLC as representative of the underwriters in a firm commitment initial public offering of an aggregate of
From the net proceeds received from the offering, the Company paid Evergreen Capital Management LLC (the “Holder” or “Evergreen”) an aggregate of $
Nature of Business
Edible Garden is a controlled environment agriculture (“CEA”) farming company. We use traditional agricultural growing techniques together with technology to grow fresh, organic food, sustainably and safely using the controlled environment of traditional greenhouse structures, such as glass greenhouses, together with hydroponic and vertical greenhouses to sustainably grow organic herbs and lettuces. We are a retail seller of locally grown hydroponic produce, which is distributed throughout the Northeast and Midwest. Currently, Edible Garden’s products are sold at approximately
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| Table of Contents |
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Therefore, these financial statements should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2021, included in the final prospectus dated May 5, 2022 and filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b) under the Securities Act of 1933, as amended, on May 6, 2022. The December 31, 2021 balances reported herein are derived from the audited consolidated financial statements for the year ended December 31, 2021. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year.
All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the accompanying condensed consolidated financial statements contain all normal and recurring adjustments necessary to present fairly the financial position of the Company as of September 30, 2022 and the results of operations for the three and nine-month periods ended September 30, 2022 and 2021, cash flows for the nine-month periods ended September 30, 2022 and 2021 and changes in shareholders’ equity for the three and nine-month periods ended September 30, 2022 and 2021.
Going Concern
The accompanying financial statements have been prepared assuming that we will continue as a going concern. In an effort to achieve liquidity that would be sufficient to meet all of our commitments, we have undertaken a number of actions, including minimizing capital expenditures and reducing recurring expenses. However, we believe that even after taking these actions, we will not have sufficient liquidity to satisfy all of our future financial obligations. The risks and uncertainties surrounding our ability to raise capital and our limited capital resources raise substantial doubt as to our ability to continue as a going concern. See Note 12, “Going Concern” of the Notes to Consolidated Financial Statements for additional information.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the consolidated financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reported period. Changes in these estimates and assumptions may have a material impact on the consolidated financial statements and accompanying notes.
Examples of significant estimates and assumptions include provisions for doubtful accounts, accrued liabilities, and discount rates used in the measurement and recognition of lease liabilities. These estimates generally involve complex issues and require us to make judgments, involving an analysis of historical and future trends, that can require extended periods of time to resolve, and are subject to change from period to period. In all cases, actual results could differ materially from our estimates.
Trade and other Receivables
The Company extends non-interest-bearing trade credit to its customers in the ordinary course of business which is not collateralized. Accounts receivable are shown on the face of the consolidated balance sheets net of an allowance for doubtful accounts. The Company analyzes the aging of accounts receivable, historical bad debts, customer creditworthiness and current economic trends in determining the allowance for doubtful accounts. The Company does not accrue interest receivable on past due accounts receivable. The reserve for doubtful accounts was $
Inventory
We value our inventory at the lower of the actual cost of our inventory, as determined using the first-in, first-out method, or its net realizable value. We periodically review our physical inventory for excess, obsolete, and potentially impaired items and reserve accordingly. Our reserve estimate for excess and obsolete inventory is based on expected future use. Our reserve estimates have historically been consistent with our actual experience as evidenced by actual sale or disposal of the goods. The reserve for excess and obsolete inventory was nil and $
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Prepaid Expenses and Other Current Assets
Prepaid expenses consist of various payments that the Company has made in advance for goods or services to be received in the future. These prepaid expenses include advertising, insurance, and service or other contracts requiring up-front payments.
Property, Equipment and Leasehold Improvements, Net
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Our fixed assets, which are comprised of leasehold improvements, equipment and vehicles, have useful lives of three to five years.
Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations. The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets. See Note 5, “Property, Equipment and Leasehold Improvements, Net” for further information.
Revenue Recognition and Performance Obligations
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company does not offer returns, discounts, loyalty programs or other sales incentive programs that are material to revenue recognition. Payments from our customers are due upon delivery or within a short period after delivery.
Disaggregation of Revenue
The following table includes revenue disaggregated by revenue stream for the nine months ended September 30, 2022 and 2021:
|
| Nine Months Ended, |
| |||||
|
| September 30, 2022 |
|
| September 30, 2021 |
| ||
Herbs & Produce |
| $ |
|
| $ |
| ||
Vitamins and Supplements |
|
|
|
|
|
| ||
Total |
| $ |
|
| $ |
| ||
Contract Balances
Due to the nature of the Company’s revenue from contracts with customers, the Company does not have material contract assets or liabilities that fall under the scope of ASC Topic 606.
| 10 |
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Contract Estimates and Judgments
The Company’s revenue accounted for under ASC Topic 606 generally do not require significant estimates or judgments, due to the nature of the Company’s revenue streams. The sales prices are generally fixed at the point of sale and all consideration from contracts is included in the transaction price. The Company’s contracts do not include multiple performance obligations or variable consideration.
Cost of Goods Sold
Cost of goods sold includes materials, labor and overhead costs incurred in cultivating, producing, and shipping our products.
Advertising Expenses
The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising expenses totaled $
Loss Per Common Share
In accordance with the provisions of ASC 260, “Earnings Per Share,” net loss per share is computed by dividing net loss by the weighted-average shares of common stock outstanding during the period. During a loss period, the effect of the potential exercise of stock options, warrants, convertible preferred stock, and convertible debt are not considered in the diluted loss per share calculation since the effect would be anti-dilutive. The results of operations were a net loss for the nine-month periods ended September 30, 2022 and 2021. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for all periods.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes”. The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred income taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At September 30, 2022 and December 31, 2021, such net operating losses were offset entirely by a valuation allowance.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
Segment reporting
The Company is not organized by multiple operating segments for the purpose of making operating decisions or assessing performance. Accordingly, the Company operates in one reportable operating segment. The Company’s principal decision makers are the Chief Executive Officer and its Chief Financial Officer. Management believes that its business operates as one reportable segment because: a) the Company measures profit and loss as a whole; b) the principal decision makers do not review information based on any operating segment; c) the Company does not maintain discrete financial information on any specific segment; d) the Company has not chosen to organize its business around different products and services, and e) the Company has not chosen to organize its business around geographic areas.
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NOTE 3 – ASSET ACQUISITION
On August 30, 2022, a wholly owned subsidiary, 2900 Madison Ave Holdings, LLC (the “Subsidiary”), of the Company entered into an asset purchase agreement (“Purchase Agreement”) with Greenleaf Growers, Inc. (“Greenleaf”), NJD Investments, LLC (“NJDI”), Soleri, LLC, and Nicholas DeHaan (collectively, the “Sellers”) and completed the purchase of the assets of Greenleaf used in its business (“Assets”) and the real property at 2900 Madison Ave. SE, Grand Rapids, Michigan (“Property”). The Assets include all vehicles, fixtures, fixed assets and equipment used in the operation of Greenleaf’s business; Greenleaf’s intellectual property; any inventory; and rights in and to certain outstanding contracts of Greenleaf pursuant to which the Company will sell Greenleaf’s existing inventory and work-in-process. The Property includes a 5-acre greenhouse facility that is currently used as a controlled indoor agriculture flower farm. The Sellers are not affiliated with the Company or any of the Company’s affiliates. The Purchase Agreement contains customary representations and warranties, covenants, agreements and indemnification obligations of the Subsidiary and the Seller. If the Subsidiary is entitled to indemnification by the Seller, the Subsidiary must offset amounts due under the Greenleaf Promissory Note, as described below, as its remedy for claims for indemnification under the Purchase Agreement.
The Subsidiary paid an aggregate purchase price of $
The fair value of the consideration was allocated to the assets acquired based on management’s preliminary estimate of their relative fair values, pending receipt of a final valuation report from experts engaged by the Company. The preliminary allocation of the consideration to the assets acquired was as follows:
|
| (in thousands) |
| |
Consideration |
|
|
| |
Fair value of promissory note |
| $ |
| |
Cash consideration |
|
|
| |
Total fair value of consideration: |
| $ |
| |
|
|
|
|
|
Net book value of assets acquired |
|
|
|
|
Inventory |
| $ |
| |
Equipment |
|
|
| |
Leasehold improvements |
|
|
| |
Land |
|
|
| |
Liabilities assumed |
|
| ( | ) |
Total Net Assets Acquired |
| $ |
| |
NOTE 4 – INVENTORY
Inventory as of September 30, 2022 and December 31, 2021 consisted of the following:
|
| (in thousands) |
| |||||
|
| September 30, |
|
| December 31, |
| ||
| 2022 |
| 2021 |
| ||||
|
|
|
|
|
|
| ||
Raw materials |
| $ |
|
| $ |
| ||
Work-in-progress |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total inventory |
| $ |
|
| $ |
| ||
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NOTE 5 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements (net) as of September 30, 2022 and December 31, 2021 consisted of the following:
|
|
| (in thousands) |
| |||||
|
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
| 2021 |
| ||||
|
|
| $ | - |
|
| $ | - |
|
Furniture and equipment |
|
|
|
|
|
|
| ||
Computer hardware |
|
|
|
|
|
|
| ||
Land |
|
|
| 1,953 |
|
|
| - |
|
Leasehold improvements |
|
|
|
|
|
|
| ||
Vehicles |
|
|
|
|
|
|
| ||
Construction in progress |
|
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
|
Subtotal |
|
|
|
|
|
|
| ||
Less accumulated depreciation |
|
|
| ( | ) |
|
| ( | ) |
Property, equipment and leasehold improvements, net |
|
| $ |
| $ |
| |||
Depreciation expense related to property, equipment and leasehold improvements for the nine months ended September 30, 2022 and 2021 was $
NOTE 6 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of September 30, 2022 and December 31, 2021 consisted of the following:
|
| (in thousands) |
| |||||
|
| September 30, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Accounts payable |
| $ |
|
| $ |
| ||
Accrued expenses |
|
|
|
|
|
| ||
Accrued interest payable |
|
|
|
|
|
| ||
Accrued payroll |
|
|
|
|
|
| ||
Accrued vacation |
|
|
|
|
|
| ||
Current lease liability |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total Accounts Payable and Accrued Expenses |
| $ |
|
| $ |
| ||
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NOTE 7 – NOTES PAYABLE
Notes payable as of September 30, 2022 and December 31, 2021 consisted of the following:
|
| (in thousands) |
| |||||
|
| September 30, |
|
| December 31, |
| ||
|
| 2022 |
| 2021 |
| |||
Sament promissory note |
| $ |
|
| $ |
| ||
Evergreen promissory note |
|
|
|
|
|
| ||
SBA loan |
|
|
|
|
|
| ||
Greenleaf promissory Note |
|
|
|
|
|
| ||
SAFE agreements |
|
|
|
|
|
| ||
Related party loans |
|
|
|
|
|
| ||
Vehicle loans |
|
|
|
|
|
| ||
Total Gross Debt |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Less: Gross short term debt |
|
| ( | ) |
|
| ( | ) |
Less: Debt discount |
|
| ( | ) |
|
| ( | ) |
Net Long Term Debt |
| $ |
|
| $ |
| ||
Scheduled maturities of long-term debt as of September 30, 2022, are as follows (in thousands):
Years Ending December 31, |
|
|
| |
2022 (remaining) |
|
|
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Thereafter |
|
|
| |
|
| $ |
| |
Secured Promissory Notes
On March 30, 2020, the Company entered into a promissory note (the “First Sament Note”) for $
On June 2, 2020, the Company entered into a promissory note for $
| 14 |
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Evergreen Private Placement
On October 7, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Evergreen, whereby Evergreen agreed to purchase up to $
On October 7, 2021, upon exercise of the first tranche of the Agreement, the Company entered into a $
On November 8, 2021, upon exercise of the second tranche of the Agreement, the Company entered into a $
On November 22, 2021, upon exercise of the third tranche of the Agreement, the Company entered into a $
On December 20, 2021, upon exercise of the fourth tranche of the Agreement, the Company entered into a $
On January 14, 2022, upon exercise of the fifth tranche of the Agreement, the Company entered into a $
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| Table of Contents |
On February 11, 2022, the Company executed an amendment to the Agreement with Evergreen, which increased the aggregate subscription amount of the Notes to $
On February 18, 2022, the Company executed an amendment to the Agreement with Evergreen, which increased the aggregate subscription amount of the Notes to $
On March 2, 2022, upon exercise of the eighth tranche of the Agreement, the Company entered into a $
On March 9, 2022, the Company executed an amendment to the Agreement with Evergreen, which increased the aggregate subscription amount of the Notes to $
On March 18, 2022, upon exercise of the tenth tranche of the Agreement, the Company entered into a $
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| Table of Contents |
On March 30, 2022, upon exercise of the eleventh tranche of the Agreement, the Company entered into a $
On May 9, 2022, upon completion of the Company’s initial public offering, the Company repaid Evergreen an aggregate of $
On June 30, 2022, the Company issued an amended and restated consolidated secured promissory note (the “A&R Note”) to Evergreen. The A&R Note consolidated $
The A&R Note bears interest at
Small Business Administration (“SBA”) Loan
On June 22, 2020, the Company entered into a U.S. Small Business Administration Loan Authorization and Agreement pursuant to which the Company received loan proceeds of $
| 17 |
| Table of Contents |
Greenleaf Promissory Note
On August 30, 2022, the Company issued the Greenleaf Promissory Note for $
In addition, the Company’s obligation to repay the amounts due under the Greenleaf Promissory Note, or up to $
During the three months ended September 30, 2022, accrued interest of $
SAFE Agreements
During the year ended December 31, 2020,
| (a) | the quotient of $18,500,000 divided by the aggregate number of issued and outstanding shares of capital stock, assuming full conversion or exercise of all convertible and exercisable securities then outstanding, including shares of convertible preferred stock and all outstanding vested or unvested options or warrants to purchase capital stock, but excluding (i) the issuance of all shares of capital stock reserved and available for future issuance under any of the Company’s existing equity incentive plans, (ii) convertible promissory notes issued by the Company, (iii) any SAFEs, and (iv) any equity securities that are issuable upon conversion of any outstanding convertible promissory notes or SAFEs, or |
|
|
|
| (b) | the lowest price per share of the securities sold in such future equity financing. |
The price (either (a) or (b)) determined above shall be deemed the “First Financing Price” and may be used to establish the conversion price of the securities at a later date, even if the Company does not choose to convert the SAFE securities upon the first future equity financing.
Upon the Company’s initial public offering of common shares or a change of control (a “Liquidity Event”) prior to any equity financing, the investors were entitled to receive, at the option of the investors, either (i) a cash payment equal to the purchase amount or (ii) a number of shares of common stock of the Company equal to the purchase amount divided by the quotient of (a) $18,500,000 divided by (b) the number, as of immediately prior to the Liquidity Event, of shares of the Company’s capital stock (on an as-converted basis) outstanding, assuming exercise or conversion of all outstanding, vested and unvested options, warrants and other convertible securities, but excluding (i) shares of common stock reserved and available for future grant under any equity incentive or similar plan; (ii) any SAFEs; and (iii) convertible promissory notes.
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| Table of Contents |
In the case of a Liquidity Event following any equity financing, the investors were entitled to receive, at the option of the investors, either (i) a cash payment equal to the Purchase Amount, or (ii) a number of shares of the most recently issued preferred stock equal to the Purchase Amount divided by the First Financing Price. Shares of preferred stock granted in connection shall have the same liquidation rights and preferences as the shares of preferred stock issued in connection with the Company’s most recent Equity Financing.
From October 2020 through April 2021, the Company raised a total of $
On May 9, 2022, upon the closing of the IPO, the Company converted SAFEs into
Related Party Loans
During 2020, the Company borrowed $25,000 from Michael James, the Company’s Chief Financial Officer and Director, which was repaid during the nine months ended September 30, 2022. The funds borrowed were utilized to fund ongoing operations and did not accrue interest.
During 2021, the Company issued Convertible Promissory Notes (the “Convertible Notes”) with principal amounts totaling $
During 2021, the Company issued demand notes totaling $35,200 to James Kras, the Company’s Chief Executive Officer and Director. The funds borrowed were utilized to fund ongoing operations and did not accrue interest. During 2021, the remaining outstanding balance of $
During 2021, the Company issued Promissory Notes (the “Promissory Notes”) totaling $
| 19 |
| Table of Contents |
On January 7, 2022, the Company issued a promissory note totaling $
On March 7, 2022, the Company issued a promissory note totaling $
Other Loans
During the nine months ended September 30, 2022, the Company issued promissory notes with principal amounts totaling $
Vehicle Loans
During 2020, the Company entered into a financing agreement for the purchase of a vehicle. The loan, which accrues interest at a rate of
During 2021, the Company entered into three financing agreements totaling $
During the three-month period ended September 30, 2022, the Company entered into two financing agreements totaling $
NOTE 8 – LEASES
A lease provides the lessee the right to control the use of an identified asset for a period of time in exchange for consideration. Operating lease right-of-use assets (“Lease Assets”) are included within “Other assets” on the Company’s consolidated balance sheet.
Lease assets represent the Company’s right to use an underlying asset for the lease term and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. The Company determines if an arrangement is a lease at inception. Lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.
The discount rate used to determine the commencement date present value of lease payments is the interest rate implicit in the lease, or when that is not readily determinable, the Company utilizes its secured borrowing rate. Lease assets include any lease payments required to be made prior to commencement and exclude lease incentives. Both lease assets and lease liabilities exclude variable payments not based on an index or rate, which are treated as period costs. The Company’s lease agreements do not contain significant residual value guarantees, restrictions, or covenants.
We are currently party to an ongoing arrangement with the Predecessor whereby we made lease payments of approximately $
During the nine-month period ended September 30, 2022, total operating lease cost was $
|
| (in thousands) |
| |
|
| September 30, |
| |
|
| 2022 |
| |
Operating lease assets |
| $ |
| |
Operating lease liabilities |
| $ |
| |
| 20 |
| Table of Contents |
The table below presents the maturities of operating lease liabilities as of September 30, 2022:
|
| (in thousands) |
| |
|
| Operating Leases |
| |
2022 (Remaining) |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
Total lease payments |
|
|
| |
Less: discount |
|
| ( | ) |
Total operating lease liabilities |
| $ |
| |
The table below presents the weighted average remaining lease term for operating leases and weighted average discount rate used in calculating operating lease right-of-use assets:
|
| September 30, |
| |
|
| 2022 |
| |
Remaining lease term (years) |
|
|
| |
Discount rate |
|
| % | |
NOTE 9 – STOCKHOLDERS’ EQUITY (DEFICIT) AND STOCK-BASED COMPENSATION
Common Stock
The Company has authorized
| 21 |
| Table of Contents |
During the nine months ended September 30, 2022, the Company issued
|
| Number of Shares |
Issuance of common stock in public offering |
| |
Issuance of common stock to Evergreen |
| |
Issuance of common stock for conversion of debt |
| |
Common stock issued for Director's fees |
| |
Common stock issued during the nine months ended September 30, 2022 |
| |
On May 5, 2022, the Company’s stock began trading on Nasdaq under the symbol “EDBL”. On May 9, 2022, the Company completed its IPO. The Company sold a total of
On January 14, 2022, the Company issued
On June 30, 2022, the Company issued the A&R Note to Evergreen. See Note 7, “Notes Payable,” for more information. As consideration for accepting the A&R Note, the Company issued
During the nine months ended September 30, 2022, the Company issued
Stock-Based Compensation
On January 18, 2022 in connection with the IPO, the board of directors (the “Board”) approved the Edible Garden AG Incorporated 2022 Equity Incentive Plan (the “2022 Plan”). The 2022 Plan provides for equity incentive compensation for employees, non-employee directors, and any other individuals who perform services for the Company. The number of shares initially available for grant under the 2022 Plan was
During the nine months ended September 30, 2022, the Company issued time-vesting restricted stock awards to the Company’s non-employee directors as compensation for director fees, with
We satisfy stock option exercises and vested stock awards with newly issued shares. Shares available for future stock compensation grants totaled
| 22 |
| Table of Contents |
Warrants
The following table summarizes transactions involving the Company’s outstanding warrants to purchase common stock for the nine months ended September 30, 2022:
|
|
| Warrants (Underlying Shares) |
|
|
| Weighted-Average Exercise Price Per Share |
|
Outstanding December 31, 2021 |
|
|
|
| $ |
| ||
Issuance of Warrants |
|
|
|
| $ |
| ||
Outstanding September 30, 2022 |
|
|
|
| $ |
|
On May 5, 2022, the Company entered into an Underwriting Agreement (the “Underwriting Agreement”) with Maxim Group LLC, as representative of the underwriters (the “Representative”), for an underwritten public offering (the “Offering”) of an aggregate of
Pursuant to the Underwriting Agreement, the Company agreed to issue to the Representative, as a portion of the underwriting compensation payable to the Representative, warrants to purchase up to a total of
During the nine months ended September 30, 2022, the Company issued warrants to purchase an aggregate of
Expected term |
|
| ||
Volatility |
|
| % | |
Risk-free interest rate |
|
| % | |
Dividend yield |
|
| % | |
NOTE 10 – COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, there are various threatened and pending legal proceedings against the Company. Management believes that the aggregate liability, if any, arising from such litigation, except for the matter described below, would not have a material adverse effect on the Company’s consolidated financial statements.
On September 16, 2022, Dennis Rodrigues, a former officer and director of the Company, filed a breach of contract claim against the Company, its Chief Executive Officer, and its Chief Financial Officer in the Superior Court of New Jersey in Warren County (the “New Jersey Matter”). The plaintiff seeks damages relating to an alleged breach of contract for services rendered and related claims. Accrual of a loss contingency is required when (1) it is probable that a loss has been incurred at the date of the financial statements and (2) the amount can be reasonably estimated. Accordingly, the Company has recorded an accrual of a loss contingency of $
| 23 |
| Table of Contents |
The Company is party to an action filed against us on November 29, 2021 by Green City Growers Cooperative in the Court of Common Pleas in Cuyahoga County, Ohio. The plaintiff seeks damages for an alleged breach of a supplier agreement. The Company denies the allegations and has filed a counterclaim against the plaintiff. The Company plans to vigorously defend itself.
If the Company settles this claim or the action is not resolved in its favor, the Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. The Company can provide no assurances that its insurer will insure the legal costs, settlements or judgments incurred in excess of its deductible. If the Company is unsuccessful in defending itself from this claim or if its insurer does not insure against legal costs incurred in excess of the Company’s deductible, the result may materially adversely affect the Company’s business, results of operations and financial condition.
NOTE 11 – RELATED PARTY TRANSACTIONS
The Company has entered into loan agreements with certain officers, the terms of which are disclosed in Note 7, “Notes Payable.”
The Company is party to an ongoing arrangement with the Predecessor whereby the Company made lease payments of approximately $
NOTE 12 – GOING CONCERN
These financial statements are prepared on a going concern basis. The Company began operating in 2020. For the year ended December 31, 2021 and the nine-month period ended September 30, 2022, we incurred net losses of $
We will be required to raise additional funds through public or private financing, additional collaborative relationships or other arrangements until we are able to raise revenue and reduce costs to a point of positive cash flow. We are evaluating various options to further reduce our cash requirements to operate at a reduced rate, as well as options to raise additional funds, including obtaining loans and selling securities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations, or if we are able to raise capital, that it will be available to us on acceptable terms, on an acceptable schedule, or at all.
The issuance of additional securities may result in a significant dilution in the equity interests of our current stockholders. Obtaining loans, assuming these loans would be available, will increase our liabilities and future cash commitments. There is no assurance that we will be able to obtain further funds required for our continued operations or that additional financing will be available for use when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, we will not be able to meet our other obligations as they become due and we will be forced to scale down or perhaps even cease our operations.
The risks and uncertainties surrounding our ability to continue to raise capital and our limited capital resources raise substantial doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements.
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| Table of Contents |
NOTE 13 – SUBSEQUENT EVENTS
Stock-Based Compensation
On October 6, 2022, the compensation committee of the Board approved the award of an aggregate of
Evergreen Exchange Agreement
On October 26, 2022, the Company entered into an exchange agreement (the “Exchange Agreement”) with Evergreen, pursuant to which a portion of the principal and accrued interest of the A&R Note was converted into shares of a newly created series of preferred stock of the Company, the Series A Convertible Preferred Stock, par value $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which provides a “safe harbor” for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as “might,” “will,” “would,” “could,” “should,” “may,” “can,” “estimates,” “expects,” “continues,” “anticipates,” “projections,” “plans,” “potential,” “intends,” “believes,” “future,” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs, estimates, and projections will occur or can be achieved. Actual results may vary materially from what is expressed in or indicated by the forward-looking statements.
These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including:
| · | our history of losses and our ability to continue as a going concern; |
| · | our ability to continue to access and operate our Belvidere, New Jersey facility; |
| · | our market opportunity; |
| · | the effects of increased competition as well as innovations by new and existing competitors in our market; |
| · | our ability to retain our existing customers and to increase our customer base; |
| · | the future growth of the indoor agriculture industry and demands of our customers; |
| · | our ability to effectively manage or sustain our growth; |
| · | our ability to grow the business due to the uncertainty resulting from the COVID-19 pandemic or any future pandemic; |
| · | our expected use of proceeds from our initial public offering; |
| · | our ability to maintain, or strengthen awareness of, our brand; |
| · | our ability to maintain, protect, and enhance our intellectual property; |
| · | future revenue, hiring plans, expenses and capital expenditures; |
| · | our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business; |
| · | our ability to recruit and retain key employees and management personnel; |
| · | our financial performance and capital requirements; |
| · | the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud; |
| · | our ability to regain compliance with the listing standards of the Nasdaq Capital Market (“Nasdaq”); |
| · | the potential lack of liquidity and trading of our securities; |
| · | the lack of an established market for our securities; and |
| · | our potential ability to obtain additional financing. |
The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and our other reports filed with the Securities and Exchange Commission (“SEC”).
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OVERVIEW
Edible Garden is a controlled environment agriculture (“CEA”) farming company. We use traditional agricultural growing techniques together with technology to grow fresh, organic food, sustainably and safely while improving traceability. We use the controlled environment of traditional greenhouse structures, such as glass greenhouses, together with hydroponic and vertical greenhouses to sustainably grow organic herbs and lettuces. In our hydroponic greenhouse, we grow plants without soil. Instead of planting one row of lettuce in the ground, by using a vertical greenhouse, we can grow many towers of lettuce in the same area by planting up instead of planting across. Growing these products sustainably means that we avoid depleting natural resources in order to maintain an ecological balance, such as by renewing, reusing and recycling materials in order to lower the overall one-time use of materials.
Our controlled greenhouse facilities allow us to grow consistent quality herbs and lettuces year-round, first by eliminating some of the variability of outdoor farming with our CEA techniques, and second by leveraging our proprietary software, GreenThumb. In addition to using hydroponic and vertical greenhouse systems, we use a “closed loop” system in our greenhouses. Generally, in a “closed loop” system, drain water is recollected and reused for irrigation. In our closed loop system, we also cycle water back into the system that has been collected through reverse osmosis. When compared with conventional agriculture, our closed looped systems and hydroponic methods use less land, less energy and less water (than legacy farms), thus conserving some of the planet’s limited natural resources. Our advanced systems are also designed to help mitigate contamination from harmful pathogens, including salmonella, e-coli and others.
We have also developed patented software called GreenThumb that assists in tracking plants through our supply chain. Utilizing our GreenThumb software to track the status of our plants as they grow and move throughout the greenhouse allows us to add a layer of quality control due to the frequent monitoring of the growing process, leading to improved traceability. In this context, traceability means being able to track a plant through all stages of production and distribution. In addition to improving traceability, GreenThumb helps us better manage the day-to-day operations of our business. GreenThumb is a web-based greenhouse management and demand planning system that does the following:
| · | integrates in real-time with our cloud business software suite for monitoring daily sales data; |
| · | generates reports by category, product, customer, and farm to allow us to analyze sales, trends, margins and retail shrink (spoiled product); |
| · | provides dynamic pallet mapping for packout, which enables us to more efficiently ship our products; |
| · | utilizes a proprietary algorithm that uses year-over-year and trending sales data to develop customer specific and aggregate product specific forecasting for our greenhouses; |
| · | aggregates all greenhouse activity input to provide real-time inventory and availability reports of all products in our greenhouses; |
| · | manages our online ordering system with user controlled product availability based upon greenhouse inventory; |
| · | provides a route management system for coordinating the logistics of our direct store delivery program; and |
| · | tracks all production activities at greenhouses, including sowing, spacing, dumping, spraying, picking and packing, using hand held devices. |
We also use our GreenThumb software to help monitor the quality of our products, and we have dedicated quality assurance and quality control personnel that check and monitor our products. We have customer service personnel that answer any questions the consumers of our products may have, and we regularly ask for feedback from our customers on the quality of our products. The combination of the GreenThumb software, quality assurance and control processes (including compliance with food safety standards), and feedback from consumers and purchasers holds us accountable for maintaining the quality of our herbs and lettuce.
We focus our efforts on producing our herbs and vegetables in a sustainable manner that will reduce consumption of natural resources, by recycling water in our closed loop system and using LED lights instead of conventional lightbulbs to accelerate crop growth and yield, when necessary. In addition, the inventory management component of GreenThumb allows us to manage inventory levels, order quantities and fill rates while maximizing truck loads. This means that we are better able to control shipping our products in full truck loads, thus eliminating multiple deliveries and decreasing the excess emission of greenhouse gases that would result from many partially full trucks delivering our products. Together, these elements of our production and distribution process are intended to reduce our carbon footprint, or the total amount of greenhouse gases that are generated by our actions, as compared with a legacy farm business.
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We believe our focus on our brand “Edible Garden” is a significant differentiator. The brand not only lends itself to our current portfolio of products but allows us to develop other products in the “Consumer Brands” category. Our focus on sustainability, traceability, and social contribution, which we define as an ongoing effort to improve employee relations, working conditions, and local communities, presents our value proposition to our customers and supermarket partners and distributors.
RECENT DEVELOPMENTS
Edible Garden Heartland
On August 30, 2022, a wholly owned subsidiary, 2900 Madison Ave Holdings, LLC (the “Subsidiary”), of the Company entered into an asset purchase agreement (“Purchase Agreement”) with Greenleaf Growers, Inc. (“Greenleaf”), NJD Investments, LLC (“NJDI”), Soleri, LLC, and Nicholas DeHaan (collectively, the “Sellers”) and completed the purchase of the assets of Greenleaf used in its business (“Assets”) and the real property at 2900 Madison Ave. SE, Grand Rapids, Michigan (“Property”). The Assets include all vehicles, fixtures, fixed assets and equipment used in the operation of Greenleaf’s business; Greenleaf’s intellectual property; any inventory; and rights in and to certain outstanding contracts of Greenleaf pursuant to which the Company will sell Greenleaf’s existing inventory and work-in-process. The Property includes a 5-acre greenhouse facility that is currently used as a controlled indoor agriculture flower farm.
The Subsidiary paid an aggregate purchase price of $2,886,000, consisting of (i) a cash payment of $1,750,000 to the Sellers and (ii) a promissory note from the Subsidiary to NJDI for $1,136,000 (the “Greenleaf Promissory Note”).
The Greenleaf Promissory Note accrues interest at a rate of 5% per annum and will mature on September 1, 2026. The Company may prepay the outstanding amount due under the Greenleaf Promissory Note at any time without penalty. The Company will make monthly payments of principal and interest of $28,089 beginning January 1, 2023 and until the maturity date of the Greenleaf Promissory Note. The Greenleaf Promissory Note is secured by a mortgage on the Property (the “Mortgage”) and a security interest in the assets owned by the Subsidiary in favor of NJDI (the “Security Agreement”).
In addition, the Company’s obligation to repay the amounts due under the Promissory Note, or up to $1,136,000 plus any accrued interest, is guaranteed by the Company under a guaranty in favor of NJDI (the “Guaranty”) entered into on August 30, 2022. Under the Guaranty, in the event that the Company defaulted on the Greenleaf Promissory Note, the Company would be responsible for any sum remaining due after NJDI foreclosed on the Mortgage and exercised its rights under the Security Agreement.
Evergreen Exchange Agreement
On October 26, 2022, we entered into an exchange agreement (the “Exchange Agreement”) with Evergreen Capital Management LLC (“Evergreen”), pursuant to which a portion of the principal and accrued interest of the Amended and Restated Consolidated Senior Secured Promissory Note dated as of June 30, 2022 (the “A&R Note”) was converted into shares of a newly created series of our preferred stock, the Series A Convertible Preferred Stock, par value $0.0001 per share (“Preferred Stock”). We and Evergreen exchanged approximately $962,000, consisting of $820,000 in principal and approximately $142,000 of accrued interest and prepayment premium thereon, of the amount payable under the A&R Note for 1,526,183 shares of Preferred Stock issued to Evergreen. The remaining principal balance of the A&R Note is approximately $1.02 million. Other than reducing the principal balance of the A&R Note, the terms of the A&R Note remain unchanged. Also on October 26, 2022, our board of directors approved a certificate of designation fixing the voting powers, designations, preferences and rights and the qualifications, limitations or restrictions of the Preferred Stock, which was accepted for filing by the Secretary of State of the State of Delaware on October 26, 2022. Of the Company’s 10,000,000 previously undesignated shares of preferred stock, par value $0.0001 per share, 1,526,183 shares were designated as Series A Convertible Preferred Stock as of October 26, 2022.
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CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on historical experience, the relevant information available at the end of each period, and their judgment. Although management believes the judgment applied in preparing estimates is reasonable based on circumstances and information known at the time, actual results could differ materially from these estimates under different assumptions or market conditions.
The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include allowance for doubtful accounts. The following are the accounting policies most critical to the preparation of our consolidated financial statements.
Revenue Recognition
Revenues is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company does not offer returns, discounts, loyalty programs or other sales incentive programs that are material to revenue recognition. Payments from our customers are due upon delivery or within a short period after delivery.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Our fixed assets, which are comprised of leasehold improvements, equipment and vehicles, have useful lives of five years. Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.
The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, ”Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.
Income Taxes
The provision for income taxes is determined in accordance with ASC 740, “Income Taxes.” The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At September 30, 2022 and December 31, 2021, such net operating losses were offset entirely by a valuation allowance.
The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.
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RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(in thousands) |
| Three Months Ended September 30, 2022 |
|
| Three Months Ended September 30, 2021 |
| ||
Revenue |
| $ | 2,754 |
|
| $ | 2,447 |
|
Cost of goods sold |
|
| 2,572 |
|
|
| 2,277 |
|
Gross Profit |
|
| 182 |
|
|
| 170 |
|
Selling, general and administrative expenses |
|
| 1,928 |
|
|
| 1,240 |
|
Loss from operations |
|
| (1,746 | ) |
|
| (1,070 | ) |
Other income / (expense) |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (88 | ) |
|
| (74 | ) |
Gain from extinguishment of debt |
|
| - |
|
|
| 42 |
|
Other income / (Loss) |
|
| (235 | ) |
|
| - |
|
Total other expenses |
|
| (323 | ) |
|
| (33 | ) |
NET LOSS |
| $ | (2,069 | ) |
| $ | (1,103 | ) |
Revenues
Revenues were $2.754 million for the three months ended September 30, 2022, compared to $2.447 million for the three months ended September 30, 2021. Revenues increased $307 thousand, or 12.55%, compared to the three months ended September 30, 2021. The increase represents growth from our existing customer base.
Cost of goods sold
Cost of goods sold were $2.572 million for the three months ended September 30, 2022, compared to $2.277 million for the three months ended September 30, 2021. Cost of goods increased $295 thousand, or 12.96% compared to the three months ended September 30, 2021. The increase was primarily due to the increase in revenue.
Gross profit
Gross profit was $182 thousand or 6.61% of sales for the three months ended September 30, 2022, compared to $170 thousand or 6.95% of sales for the three months ended September 30, 2021. Gross profit increased by $12 thousand or 0.44% of sales for the three months ended September 30, 2022. Our margins dropped due to the increased costs incurred to fulfill the demand by our customers for our products which we were able to produce and deliver. The increased costs were due to inflation.
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Selling, general and administrative
Selling, general and administrative expenses were $1.928 million for the three months ended September 30, 2022, compared to $1.240 million for the three months ended September 30, 2021. Selling, general and administrative expenses increased by $688 thousand or 55.48%, compared to the three months ended September 30, 2021. Compensation expense increased by $202 thousand driven by hiring new employees and wage increases for existing employees. Benefits increased by $18 thousand due to additional employees hired. Director fees increased by $184 thousand, comprised of $43 thousand paid in cash and the issuance of common stock valued at $141 thousand. Insurance expense increased by $117 thousand due to the new Directors and Officers liability insurance policy which went into effect in connection with the IPO in May 2022. Travel expense increased by $23 thousand for business development and performing due diligence on greenhouse locations for potential acquisitions. Public relations costs increased by $43 thousand compared to the three months ended September 30, 2021 to support our investor outreach efforts. Repairs and maintenance increased by $40 thousand as a result of maintaining the condition of the Belvidere, New Jersey greenhouse. Depreciation expense increased by $25 thousand due to the acquisition of the greenhouse located in Grand Rapids, Michigan and the purchase of additional trucks. Other professional fees increased by $13 thousand for work performed by outside experts.
Loss from operations
Loss from operations was $1.746 million for the three months ended September 30, 2022, compared to $1.070 million for the three months September 30, 2021. The increase in loss from operations was $676 thousand, or 63.21% compared to the three months ended September 30, 2021.
Interest expense
Interest expense was $88 thousand for the three months ended September 30, 2022, versus $75 thousand for the three months ended September 30, 2021. The interest was incurred to the seller financing notes for the Greenleaf Asset Acquisition, bridge loans for working capital and the mortgage for the newly acquired property in Grand Rapids, Michigan. See Note 7 to our financial statements.
Gain from extinguishment of debt
The Company recognized a gain from the extinguishment of debt of $42 thousand in the prior period due to the modification of the debt issued to Evergreen.
Other income (loss)
The Company recognized a loss of $235 thousand due to recognition of an accrual for a loss contingency. See Note 10 to our financial statements for more information.
Net loss
Net loss was $2.069 million for the three months ended September 30, 2022, compared to a net loss of $1.103 million for the three months ended September 30, 2021.
Management plans to continue its efforts to attempt to lower operating expenses and increase revenues. We continue to invest in further expanding our operations and promoting our name and products. Since most of the operating expenses are fixed or have a quasi-fixed character, management expects that as revenues increase, those expenses, as a percentage of revenue, will decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in future periods.
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COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2022 AND 2021
(in thousands) |
| Nine Months Ended September 30, 2022 |
|
| Nine Months Ended September 30, 2021 |
| ||
Revenue |
| $ | 8,476 |
|
| $ | 7,708 |
|
Cost of goods sold |
|
| 8,183 |
|
|
| 7,100 |
|
Gross Profit |
|
| 293 |
|
|
| 608 |
|
Selling, general and administrative expenses |
|
| 6,268 |
|
|
| 3,924 |
|
Loss from operations |
|
| (5,975 | ) |
|
| (3,316 | ) |
Other income / (expense) |
|
|
|
|
|
|
|
|
Interest expense, net |
|
| (1,825 | ) |
|
| (175 | ) |
Loss from extinguishment of debt |
|
| (826 | ) |
|
| 42 |
|
Other income / (loss) |
|
| (825 | ) |
|
| - |
|
Total other expenses |
|
| (3,476 | ) |
|
| (133 | ) |
NET LOSS |
| $ | (9,451 | ) |
| $ | (3,449 | ) |
Revenues
Revenues were $8.476 million for the nine months ended September 30, 2022, compared to $7.708 million for the nine months ended September 30, 2021. Revenues increased $768 thousand, or 9.96%, compared to the nine months ended September 30, 2021. The increase represents growth from our existing customer base.
Cost of goods sold
Cost of goods sold were $8.183 million for the nine months ended September 30, 2022, compared to $7.100 million for the nine months ended September 30, 2021. Cost of goods increased $1.083 million, or 15.25% compared to the nine months ended September 30, 2021. The increase was due to higher packaging costs due to inflation, higher labor costs due to COVID-19 and higher costs charged by our contract farmers.
Gross profit
Gross profit was $293 thousand or 3.46% of sales for the nine months ended September 30, 2022, compared to $608 thousand or 7.89% of sales for the nine months ended September 30, 2021. Gross profit declined by $315 thousand or 4.09% of sales for the nine months ended September 30, 2021. Our margins dropped due to the increased costs incurred to fulfill the demand by our customers as a result of COVID-19 for our products which we were able to produce and deliver. The increased costs were higher labor due to COVID-19, higher packaging costs due to inflation and higher costs charged by our contract farmers.
Selling, general and administrative
Selling, general and administrative expenses were $6.268 million for the nine months ended September 30, 2022, compared to $3.924 million for the nine months ended September 30, 2021. Selling, general and administrative expenses increased by $2.344 million or 59.73%, compared to the nine months ended September 30, 2021. Compensation expense increased by $1.391 million, driven primarily by $500 thousand transaction bonuses paid to each of our Chief Executive Officer and Chief Financial Officer upon the completion of the IPO pursuant to their employment agreements. The balance of the increase was due to wage increases and hiring additional employees. Payroll taxes increased by $27 thousand due to additional employees hired. Director fees increased by $221 thousand, comprised of $80 thousand paid in cash and issuance of common stock valued at $141 thousand. Insurance expense increased by $163 thousand due to the new Directors and Officers liability insurance policy which went into effect in connection with the IPO. Accounting costs increased by $148 thousand due to the completion of the year end audit and review of the quarterly financial statements. Repairs and maintenance increased by $130 thousand as a result of maintaining the condition of the Belvidere, New Jersey greenhouse. Other professional fees increased by $58 thousand for work performed by outside experts. Depreciation expense increased by $51 thousand due to the acquisition of the greenhouse located in Grand Rapids, Michigan and the purchase of additional trucks. Public relations increased by $51 thousand to support our investor outreach efforts. Travel expense increased by $39 thousand for business development and performing due diligence on greenhouse locations for potential acquisitions.
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Loss from operations
Loss from operations was $5.975 million for the nine months ended September 30, 2022, compared to $3.316 million for the nine months September 30, 2021. The increase in loss from operations was $2.659 million, or 80.19% compared to the nine months ended September 30, 2021.
Interest expense
Interest expense was $1.825 million for the nine months ended September 30, 2022, versus $175 thousand for the nine months ended September 30, 2021. The interest was incurred to the seller financing notes for the Greenleaf Asset Acquisition, loans provided by an officer for working capital, bridge loans for working capital, and the mortgage for the newly acquired property in Grand Rapids, Michigan. See Note 7 to our financial statements.
Loss from extinguishment of debt
The company incurred a loss from the extinguishment of debt of $826 thousand due to the modification of the debt issued to Evergreen compared to a gain of $42 thousand for the nine months ended September 30, 2021.
Other income (loss)
The company incurred a loss of $825 thousand for the nine months ended September 30, 2022. $189 thousand of the loss was from the revaluation of the warrants issued to Evergreen, $401 thousand was due to a leak out provision for stock owned by Evergreen and $235 thousand was due to recognition of an accrual for a loss contingency. See Note 10 to our financial statements for more information.
Net loss
Net loss was $9.451 million for the nine months ended September 30, 2022, compared to a net loss of $3.449 million for the nine months ended September 30, 2021.
Management plans to continue its efforts to attempt to lower operating expenses and increase revenues. We continue to invest in further expanding our operations and promoting our name and products. Since most of the operating expenses are fixed or have a quasi-fixed character, management expects that, as revenues increase, those expenses, as a percentage of revenue, will decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in future periods.
LIQUIDITY AND CAPITAL RESOURCES
Going Concern Considerations
We have incurred significant losses since our inception. We have experienced net losses of approximately $9.451 million during the nine months ended September 30, 2022 and $2.347 million in the year ended December 31, 2021. We expect our capital expenses and operational expenses to increase in the future due to expected increased sales and marketing expenses, operational costs, and general and administrative costs. Therefore, we believe our operating losses will continue or even increase at least through the near term.
The risks and uncertainties surrounding our ability to continue to raise capital and our limited capital resources raise substantial doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements. Our financial statements have been prepared on a “going concern” basis, which implies we may not continue to meet our obligations and continue our operations for the next twelve months. Our consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. If we are unable to continue as a going concern, holders of our securities might lose their entire investment. Although we plan to attempt to raise additional capital through one or more private placements or public offerings, the doubts raised relating to our ability to continue as a going concern may make our shares an unattractive investment for potential investors. These factors, among others, may make it difficult to raise any additional capital and may cause us to be unable to continue to operate our business.
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There is no assurance that we will ever be profitable or that debt or equity financing will be available to us in the amounts, on terms, and at times deemed acceptable to us, if at all. The issuance of additional equity or equity-linked securities by us would result in significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, would increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business as planned and as a result may be required to scale back or cease operations, which could cause our stockholders to lose some or all of their investment in us. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result should we be unable to continue as a going concern.
Liquidity
The Company’s primary liquidity requirements are for working capital, continued investments in capital expenditures, and other strategic investments. Although income taxes are not currently a significant use of funds, after the benefits of our net operating loss carryforwards are fully recognized, they could become a material use of funds, depending on our future profitability and future tax rates. The Company’s liquidity needs have been met primarily through term loan borrowings, convertible notes, related party loans, and our initial public offering.
As of September 30, 2022 and December 31, 2021, we had $1.975 million and $31 thousand in cash and cash equivalents available, respectively. As of September 30, 2022 and December 31, 2021, we had working capital deficits of $1.243 million and $5.896 million, respectively. As of September 30, 2022 and December 31, 2021, we had $7.139 million and $8.091 million of total debt outstanding, respectively. To resolve our working capital deficit and meet our cash needs, we are implementing cost savings programs and plan to raise capital in order to extend our cash runway. If we are unable to raise additional capital, we believe that our existing cash and cash equivalents will not be sufficient to fund our operations through the next twelve months. We anticipate that we will need to raise additional capital through one or more private placements or public offerings. We may not be able to access the capital markets on commercially acceptable terms or at all. Our ability to fund future operating expenses and capital expenditures and our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control, including those described under “Risk Factors” in our filings with the SEC.
Capital Resources
On May 9, 2022, we completed our IPO and raised total net proceeds of $13,624,500, after deducting underwriting discounts and commissions and expenses associated with the offering of $1,025,500.
On August 30, 2022, we entered into the Greenleaf Promissory Note for $1,136,000, which provided seller financing in connection with the purchase of the Michigan Property. The Greenleaf Promissory Note accrues interest at a rate of 5% per annum and will mature on September 1, 2026. The Company may prepay the outstanding amount due under the Greenleaf Promissory Note at any time without penalty. The Company will make monthly payments of principal and interest of $28,089 beginning January 1, 2023 and until the maturity date of the Greenleaf Promissory Note. The Greenleaf Promissory Note is secured by a mortgage on the Property (the “Mortgage”) and a security interest in the assets owned by the Subsidiary in favor of NJDI (the “Security Agreement”).
In addition, the Company’s obligation to repay the amounts due under the Promissory Note, or up to $1,136,000 plus any accrued interest, is guaranteed by the Company under a guaranty in favor of NJDI (the “Guaranty”) entered into on August 30, 2022. Under the Guaranty, in the event that the Company defaulted on the Greenleaf Promissory Note, the Company would be responsible for any sum remaining due after NJDI foreclosed on the Mortgage and exercised its rights under the Security Agreement.
For more information on our outstanding debt as of September 30, 2022 and December 31, 2021, see Note 7 to our financial statements.
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Cash Flows
Operating activities
During the nine months ended September 30, 2022 and 2021, cash used for operating activities was $7.540 million and $2.015 million, respectively. Cash expenditures for the nine months ended September 30, 2022 increased primarily due to the timing of vendor payments and an increase in executive and directors’ compensation.
Investing activities
During the nine months ended September 30, 2022 and 2021, cash used in investing activities was $1.813 million and $73 thousand, respectively. The increase in cash used in for investing activities was primarily driven by our purchase of Greenleaf’s assets. See Note 3 to our financial statements.
Financing activities
During the nine months ended September 30, 2022 and 2021, cash provided by financing activities was $11.297 million and $2.098 million. The increase in cash provided by financing activities was primarily driven by completion of the IPO.
Nasdaq Deficiency Notices
On August 22, 2022, we received a letter from the Listing Qualifications Department of Nasdaq indicating that we do not comply with the minimum stockholders’ equity requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Rule”) because: (i) our stockholders’ equity of $1,548,000, as reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, was less than the required minimum of $2,500,000; and (ii) as of August 19, 2022, we did not meet the alternative compliance standards of market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. As of September 30, 2022, our stockholder’s deficit is $381 thousand and we have not regained compliance with the Stockholders’ Equity Rule.
This notice of noncompliance has no immediate impact on the continued listing or trading of our securities on Nasdaq, which will continue to be listed and traded on Nasdaq, subject to our compliance with the other Nasdaq continued listing requirements. If Nasdaq accepts our plan for compliance with the Stockholders’ Equity Rule, then Nasdaq has discretion to grant an extension of up to 180 calendar days from August 22, 2022, or through February 18, 2023, to regain compliance with the Stockholders’ Equity Rule.
In the event the plan is not accepted by Nasdaq, or in the event the plan is accepted, and an extension period is granted but we fail to regain compliance within that period, we would have the right to a hearing before a Nasdaq hearings panel. The hearing request would stay any suspension or delisting action pending the conclusion of the hearing process and the expiration of any additional extension period granted by the panel following the hearing.
On October 11, 2022, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that, based on the closing bid price of our common stock for 30 consecutive business days, we no longer meet Nasdaq Listing Rule 5550(a)(2), which requires listed companies to maintain a minimum bid price of at least $1 per share (the “Bid Price Rule”). The Nasdaq Listing Rules provide a compliance period of 180 calendar days, or until April 10, 2023, in which to regain compliance with the Bid Price Rule. If we evidence a closing bid price of at least $1 per share for a minimum of 10 consecutive business days during the 180-day compliance period, we will automatically regain compliance. In the event we do not regain compliance with the Bid Price Rule by April 10, 2023, we may be eligible for consideration of a second 180-day compliance period if we meet the continued listing requirement for market value of publicly held shares and all other initial listing standards for Nasdaq’s Capital Market, other than the minimum bid price requirement, as long as we notify Nasdaq of our intent to cure the minimum bid price deficiency.
If we fail to regain compliance with the Bid Price Rule, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal that determination to a Nasdaq hearings panel. This notification has no immediate effect on the listing of our common stock on Nasdaq.
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We intend to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and remain listed on Nasdaq. However, there can be no assurance that we will ultimately regain compliance with all applicable requirements for continued listing. If we do not regain compliance with the Nasdaq Listing Rules within the time periods permitted by Nasdaq, then our securities will be delisted from Nasdaq.
Impact of COVID-19 and Macroeconomic Conditions
The COVID-19 pandemic and resulting worldwide economic conditions have affected, and may continue to affect, our business, financial condition and results of operations. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains and created significant volatility and disruption of financial markets. We have experienced volatile supply and demand conditions in our retail and food service distribution channels. This volatility has continued amid uncertain global economic conditions related to the COVID-19 pandemic and the Russian invasion of Ukraine. In particular, we have experienced increased costs of certain commodities, such as natural gas. The future extent of the impact of the COVID-19 pandemic and other macroeconomic conditions on our financial performance, including our ability to execute our strategic initiatives, is still uncertain and will depend on future developments as the global economic impacts of continue, fluctuate and/or change. These conditions may also impact our ability to meet our financial obligations. Our operating results have been and may continue to be impacted by the pandemic, and we cannot predict whether future developments will materially adversely affect our long-term liquidity position. In the event of a continued sustained market deterioration or further delayed recovery, we may need additional liquidity which would require us to evaluate available alternative strategies such as seeking additional debt or equity capital, which may be unsuccessful.
In addition, our ability to continue to supply our products is highly dependent on our workforce, including our workers involved in the growing, harvesting, transportation, processing and distribution of our products. Our ability to maintain the safety of our workforce may be significantly impacted by individuals contracting or being exposed to COVID-19, and our operations and financial results may be negatively affected as a result. Workforce disruptions related to COVID-19 may significantly impact our ability to maintain our operations and may adversely affect our financial results. Throughout the pandemic governments have restricted travel and transportation generally, and while these restrictions have not significantly impacted our ability to supply our products to date, there is no guarantee that future restrictions will not have a significant impact on our business. We also incurred costs in relation to safety precautions undertaken in our shipping operations and there can be no assurances that we would not be required to incur such costs or similar costs in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2022 pursuant to Rule 13a-15 under the Exchange Act. Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that due to material weaknesses in internal control over financial reporting, our disclosure controls and procedures were not effective as of the end of the period covered by this quarterly report at the reasonable assurance level.
The material weaknesses related to the few employees in our finance department, we lacked the ability to have adequate segregation of duties in the financial statement preparation process.
Changes in Internal Control Over Financial Reporting
This Quarterly Report does not include a report of management’s assessment regarding internal control over financial reporting due to the transition period established by the SEC for newly public companies.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be party to or otherwise involved in various legal proceedings and claims arising in the ordinary course of business. Management does not believe that there is any pending or threatened proceeding against us, which if determined adversely, would have a material adverse effect on our business, results of operations, or financial condition, except as described below.
The Company is party to an action filed against us on November 29, 2021 by Green City Growers Cooperative in the Court of Common Pleas in Cuyahoga County, Ohio. The plaintiff seeks damages for an alleged breach of a supplier agreement. The Company denies the allegations and has filed a counterclaim against the plaintiff. The Company plans to vigorously defend itself.
If the Company settles this claim or the action is not resolved in its favor, the Company may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. The Company can provide no assurances that its insurer will insure the legal costs, settlements or judgments incurred in excess of its deductible. If the Company is unsuccessful in defending itself from this claim or if its insurer does not insure against legal costs incurred in excess of the Company’s deductible, the result may materially adversely affect the Company’s business, results of operations and financial condition.
ITEM 1A. RISK FACTORS
For a discussion of the Company’s potential risks or uncertainties, please see the section titled “Risk Factors” in the final prospectus for our IPO, dated as of May 5, 2022 and filed with the SEC on May 6, 2022, and the additional risks described below.
We are currently not in compliance with the Nasdaq continued listing requirements. If we are unable to regain compliance with Nasdaq’s listing requirements, our securities could be delisted, which could affect our common stock’s market price and liquidity and reduce our ability to raise capital.
On August 22, 2022, we received a letter from the Listing Qualifications Department of Nasdaq indicating that we do not comply with the minimum stockholders’ equity requirement for continued listing on Nasdaq under the Stockholders’ Equity Rule because: (i) our stockholders’ equity of $1,548,000, as reported in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, was less than the required minimum of $2,500,000; and (ii) as of August 19, 2022, we did not meet the alternative compliance standards of market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. As of September 30, 2022, our stockholder’s deficit is $381 thousand and we have not regained compliance with the Stockholders’ Equity Rule.
In addition, on October 11, 2022, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that, based on the closing bid price of our common stock for 30 consecutive business days, we no longer meet the Bid Price Rule, which requires listed companies to maintain a minimum bid price of at least $1 per share.
We cannot assure you that we will be able to regain compliance with Nasdaq listing standards. Our failure to continue to meet these requirements would result in our common stock being delisted from Nasdaq, and if our common stock is delisted, our warrants will also be delisted. We and holders of our securities could be materially adversely impacted if our securities are delisted from Nasdaq. In particular:
| · | we may be unable to raise equity capital on acceptable terms or at all; |
| · | we may lose the confidence of our customers, which would jeopardize our ability to continue our business as currently conducted; |
| · | the price of our common stock will likely decrease as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws; |
| · | holders may be unable to sell or purchase our securities when they wish to do so; |
| · | we may become subject to stockholder litigation; |
| · | we may lose the interest of institutional investors in our common stock; |
| · | we may lose media and analyst coverage; |
| · | our common stock could be considered a “penny stock,” which would likely limit the level of trading activity in the secondary market for our common stock; and |
| · | we would likely lose any active trading market for our common stock, as it may only be traded on one of the over-the-counter markets, if at all. |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On August 30, 2022, we granted an aggregate of 167,580 shares of time-vested restricted common stock to Mathew McConnell and Ryan Rogers as compensation for their service as directors under the Edible Garden AG Incorporated 2022 Equity Incentive Plan in reliance on the exemption from registration under Section 4(a)(2) of the Securities Act. Fifty percent of the awards vested immediately upon issuance and the remaining fifty percent will vest on August 30, 2023.
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ITEM 6. EXHIBITS
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| Incorporated by Reference | ||
Exhibit Number |
| Description | Form | File No. | Filing Date |
| 8-K | 001-41371 | September 6, 2022 | ||
| 8-K | 001-41371 | September 6, 2022 | ||
| 8-K | 001-41371 | September 6, 2022 | ||
| 8-K | 001-41371 | September 6, 2022 | ||
| Guaranty, by Edible Garden AG Incorporated, dated as of August 30, 2022 | 8-K | 001-41371 | September 6, 2022 | |
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| Filed herewith | ||
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| Filed herewith | ||
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| Filed herewith | ||
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| Filed herewith | ||
101 |
| Materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Extensible Business Reporting Language (XBRL); (i) Unaudited Consolidated Balance Sheet, (ii) Unaudited Consolidated Statements of Operations, (iii) Unaudited Consolidated Statements of Cash Flows, (iv) Unaudited Consolidated Statements of Stockholders’ Equity (Deficit), and (v) related Notes to Consolidated Financial Statements. |
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| Filed herewith |
104 |
| Cover Page Interactive Data File (included in Exhibit 101) |
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| Filed herewith |
# | Schedules and similar attachments have been omitted pursuant to Item 601(a)(5) of Regulation S-K. The Company will furnish a copy of any omitted schedule or similar attachment to the Securities and Exchange Commission upon request. |
+ | Management contract or compensatory arrangement. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
EDIBLE GARDEN AG INCORPORATED |
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By: | /s/ James E. Kras | |
James E. Kras |
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Chief Executive Officer and President (principal executive officer) |
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By: | /s/ Michael James | |
Michael James |
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Chief Financial Officer, Treasurer and Secretary (principal financial and accounting officer) |
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Date: November 10, 2022
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EXHIBIT 10.6
EDIBLE GARDEN AG INCORPORATED
2022 EQUITY INCENTIVE PLAN
DIRECTOR RESTRICTED STOCK AWARD AGREEMENT
This Director Restricted Stock Award Agreement (this “Award Agreement”) is made effective as of the Date of Grant specified below, by and between Edible Garden AG Incorporated, a Delaware corporation (the “Company”), and the Participant specified below.
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| Number of Shares of Restricted Stock: | |
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| Vested Shares:
| The Number of Shares of Restricted Stock that become Vested Shares as of any date is determined pursuant to Appendix A attached to this Award Agreement. The period over which the Restricted Stock vests is referred to as the “Restricted Period.” |
The purpose of this Award Agreement is to establish a written agreement evidencing the Restricted Stock Award granted pursuant to the Edible Garden AG Incorporated 2022 Equity Incentive Plan (the “Plan”). All of the terms and conditions of the Plan are fully incorporated herein by reference. Unless the context clearly indicates otherwise, capitalized terms used but not defined herein will have the meaning given to such terms in the Plan.
Section 1. Grant of Restricted Stock
(a) Grant. Pursuant to Section 9 of the Plan, the Company hereby grants to the Participant on the Date of Grant set forth above, a Restricted Stock Award consisting of, in the aggregate, the Number of Shares of Restricted Stock of the Company set forth above (the “Restricted Stock”), on the terms and conditions and subject to the restrictions set forth in this Award Agreement and the Plan.
(b) Consideration. The grant of the Restricted Stock is made in consideration of the services to be rendered by the Participant to the Company.
Section 2. Restrictions. Subject to any exceptions set forth in this Award Agreement or the Plan, during the Restricted Period, the Restricted Stock or the rights relating thereto may not be assigned, alienated, pledged, attached, sold or otherwise transferred or encumbered by the Participant. Any attempt to assign, alienate, pledge, attach, sell or otherwise transfer or encumber the Restricted Stock or the rights relating thereto during the Restricted Period shall be wholly ineffective and, if any such attempt is made, the Restricted Stock will be forfeited by the Participant and all of the Participant’s rights to such shares shall immediately terminate without any payment or consideration by the Company.
Section 3. Rights as Stockholder; Dividends
(a) The Participant shall be the record owner of the Restricted Stock until the shares of Stock are sold or otherwise disposed of, and shall be entitled to all of the rights of a stockholder of the Company including, without limitation, the right to vote such shares and receive all dividends or other distributions paid with respect to such shares. Notwithstanding the foregoing, any dividends or other distributions shall be subject to the same restrictions on transferability as the shares of Restricted Stock with respect to which they were paid, and any such dividends or other distributions shall become vested on the same date as the Restricted Stock to which such dividends or other distributions relate become Vested Shares.
(b) The Company may issue stock certificates or evidence the Participant’s interest by using a restricted book entry account. Physical possession or custody of any stock certificates that are issued shall be retained by the Company until such time as the Restricted Stock vests.
(c) If the Participant forfeits any of his or her rights under this Award Agreement in accordance with Section 5, the Participant shall, on the date of such forfeiture, no longer have any rights as a stockholder with respect to the Restricted Stock and shall no longer be entitled to vote or receive dividends on such shares.
Section 4. Section 83(b) Election. The Participant may make an election under Section 83(b) of the Code (a “Section 83(b) Election”) with respect to the Restricted Stock. Any such election must be made within 30 days after the Date of Grant. If the Participant elects to make a Section 83(b) Election, the Participant shall provide the Company with a copy of an executed version and satisfactory evidence of the filing of the executed Section 83(b) Election with the Internal Revenue Service. The Participant agrees to assume full responsibility for ensuring that the Section 83(b) Election is actually and timely filed with the Internal Revenue Service and for all tax consequences resulting from the Section 83(b) Election.
Section 5. Effect of Termination of Service. If the Participant’s service terminates for any reason, any Restricted Stock that is not vested on the date of such termination shall be forfeited immediately and repurchased by the Company for no consideration.
Section 6. Effect of Change in Control. In the event of a Change in Control, any unvested shares of Restricted Stock shall immediately vest in full and become Vested Shares, and Sections 11.2 and 11.3 of the Plan will govern the treatment of the Restricted Stock.
Section 7. Miscellaneous.
(a) Legends. A legend may be placed on any certificate(s) or other document(s) delivered to the Participant indicating the restrictions on transferability of the shares of Restricted Stock pursuant to this Award Agreement or any other restrictions that the Committee may deem advisable under the rules, regulations and other requirements of the SEC or any stock exchange on which the shares of Common Stock are then listed or quoted.
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(b) No Right to Continued Service. The Participant’s right, if any, to continue to serve the Company or any Affiliate will not be enlarged or otherwise affected by the Plan or this Award Agreement. This Award Agreement does not restrict the right of the Company or any Affiliate to terminate the Participant’s service at any time.
(c) Adjustments. If any change is made to the outstanding Common Stock or the capital structure of the Company, if required, the shares of Restricted Stock shall be adjusted in any manner as contemplated by Section 11.1 of the Plan.
(d) Amendment. The Committee has the right to amend, alter, suspend, discontinue or cancel the Restricted Stock Award, prospectively or retroactively; provided, that, no such amendment shall adversely affect the Participant’s rights under this Award Agreement without the Participant’s consent.
(e) Cancellation of Restricted Stock Award. Notwithstanding Section 7(d), if the Participant in any way violates the terms of any confidentiality, non-competition, or non-solicitation agreement, or other similar agreements entered into between the Company and the Participant, then, to the extent not prohibited by applicable law, the Committee in its sole discretion may cancel the Restricted Stock Award.
(f) Notices. All notices and other communications required or permitted under this Award Agreement shall be written and shall be either delivered personally or sent by registered or certified first-class mail, postage prepaid and return receipt requested, or by telex or telecopier, addressed as follows: (i) if to the Company, to the Company’s principal corporate office; and (ii) if to the Participant or his or her successor, to the address last furnished by such person to the Company. Each such notice and other communication delivered personally shall be deemed to have been given when delivered. Each such notice and other communication delivered by mail shall be deemed to have been given when it is deposited in the United States mail in the manner specified herein, and each such notice and other communication delivered by telex or telecopier shall be deemed to have been given when it is so transmitted and the appropriate answer-back is received. A party may change its address for the purpose hereof by giving notice in accordance with the provisions of this Section 7(f).
(g) Successors and Assigns. The Company may assign any of its rights under this Award Agreement. This Award Agreement will be binding upon and inure to the benefit of the successors and assigns of the Company. Subject to the restrictions on transfer set forth herein, this Award Agreement will be binding upon the Participant and the Participant’s beneficiaries, executors, administrators and the person(s) to whom the Restricted Stock may be transferred by will or the laws of descent or distribution.
(h) Discretionary Nature of Plan. The Plan is discretionary and may be amended, cancelled or terminated by the Company at any time, in its discretion. The grant of the Restricted Stock Award in this Award Agreement does not create any contractual right or other right to receive any Restricted Stock Awards or other Awards in the future. Future Awards, if any, will be at the sole discretion of the Company. Any amendment, modification, or termination of the Plan shall not constitute a change or impairment of the terms and conditions of the Participant’s service to the Company.
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(i) No Impact on Other Benefits. The value of the Participant’s Restricted Stock Award is not part of his or her normal or expected compensation for purposes of calculating any severance, retirement, welfare, insurance or similar benefit.
(j) Interpretation. This Award Agreement is subject to and controlled by the Plan. Any inconsistency between this Award Agreement and the Plan shall be resolved in favor of the Plan. Any dispute regarding the interpretation of this Award Agreement shall be submitted by the Participant or the Company to the Committee for review. The resolution of such dispute by the Committee shall be final and binding on the Participant and the Company. This Award Agreement is the final, complete and exclusive expression of the understanding between the parties and supersedes any prior or contemporaneous agreement or representation, oral or written, between them. In the event that any provision of this Award Agreement shall be held to be illegal or unenforceable, such provision shall be severed from this Award Agreement and the entire Award Agreement shall not fail on account thereof, but shall otherwise remain in full force and effect. As used herein, the masculine pronoun shall include the feminine and the neuter, as appropriate to the context. Unless the context otherwise requires, references herein to a “Section” means a Section of this Award Agreement. Section headings contained herein are for convenience only and shall not alter any of the parties’ respective rights or obligations hereunder.
(k) Governing Law. This Award Agreement, to the extent not otherwise governed by the Code or the laws of the United States, shall be governed by the laws of the State of Delaware, without reference to principles of conflict of laws, and construed accordingly.
(l) Counterpart Execution. This Award Agreement may be executed in any number of counterparts, each of which shall be deemed an original but all of which together shall be deemed one and the same instrument. Counterparts may be delivered via facsimile, electronic mail (including pdf or any electronic signature complying with the U.S. federal ESIGN Act of 2000, e.g., www.docusign.com) or other transmission method and any counterpart so delivered shall be deemed to have been duly and validly delivered and be valid and effective for all purposes.
(m) Acceptance. The Participant hereby acknowledges receipt of a copy of the Plan and this Award Agreement. The Participant has read and understands the terms and provisions thereof, and accepts the Restricted Stock Award subject to all of the terms and conditions of the Plan and this Award Agreement.
(signature page immediately follows)
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IN WITNESS WHEREOF, this Award Agreement has been executed effective as of the date first set forth above.
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Appendix A
Vesting Schedule
Provided that the Participant provides continuous services to the Company or any Affiliate through each such date, except as otherwise provided in Section 5 or Section 6, and subject to earlier termination as provided by this Award Agreement, the Number of Shares of Restricted Stock that become Vested Shares as of any date is determined as follows:
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| · | 50% of the Number of Shares of Restricted Stock shall be Vested Shares on the Date of Grant; and |
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| · | 50% of the Number of Shares of Restricted Stock shall become Vested Shares on the one-year anniversary of the Date of Grant. |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, James E. Kras, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Edible Garden AG Incorporated; | |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have: | |
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| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b. | [Paragraph omitted pursuant to Exchange Act Rules 13a-14(a) and 15d-15(a)]; |
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| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): | |
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| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 10, 2022
| /s/ James E. Kras |
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| James E. Kras |
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| President and Chief Executive Officer |
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EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael James, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Edible Garden AG Incorporated; | |
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| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
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| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
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| 4. | The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and have: | |
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| a. | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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| b. | [Paragraph omitted pursuant to Exchange Act Rules 13a-14(a) and 15d-15(a)]; |
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| c. | Evaluated the effectiveness of the registrant's disclosure controls and procedures, and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
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| d. | Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and |
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| 5. | The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent functions): | |
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| a. | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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| b. | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Date: November 10, 2022
| /s/ Michael James |
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| Michael James |
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| Chief Financial Officer, Treasurer and Secretary |
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EXHIBIT 32
Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
James E. Kras, President and Chief Executive Officer, and Michael James, Chief Financial Officer, Treasurer and Secretary of Edible Garden AG Incorporated (the “Company”), each certify in his capacity as an officer of the Company that he has reviewed the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2022 and that:
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| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
| Date: November 10, 2022 |
| /s/ James E. Kras |
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| James E. Kras |
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| President and Chief Executive Officer |
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| Date: November 10, 2022 |
| /s/ Michael James |
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| Michael James |
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| Chief Financial Officer, Treasurer and Secretary |
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| (Principal Financial Officer) |
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The purpose of this statement is solely to comply with Title 18, Chapter 63, Section 1350 of the United States Code, as amended by Section 906 of the Sarbanes-Oxley Act of 2002. A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.