Edible Garden AG Inc S-1/A, filed Dec 21, 2021
Edible Garden AG Inc (EDBL)
As filed with the Securities and Exchange Commission on December 21, 2021
Registration No. 333-260655
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1/A
(Amendment No. 1)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
| EDIBLE GARDEN AG INCORPORATED |
| (Exact name of registrant as specified in its charter) |
| Delaware |
| 100 |
| 85-0558704 |
| (State or other jurisdiction of incorporation or organization) |
| (Primary standard industrial classification code number) |
| (I.R.S. employer identification number) |
283 County Road 519
Belvidere, NJ 07823
(908) 750-3953
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
James E. Kras
Chief Executive Officer
283 County Road 519
Belvidere, NJ 07823
(908) 750-3953
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
| Alexander R. McClean, Esq. Margaret K. Rhoda, Esq. Harter Secrest & Emery LLP 1600 Bausch & Lomb Place Rochester, NY 14604 Tel: (585) 232-6500 Fax: (585) 232-2152 |
| Mitchell Nussbaum, Esq. Angela M. Dowd, Esq. Loeb & Loeb LLP 345 Park Avenue New York, NY 10154 Tel: (212) 407-4000 Fax: (212) 407-4990 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
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 the 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 | ☐ |
| Non-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 financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
| Title of Each Class of Security Being Registered(1) |
| Proposed Maximum Aggregate Offering Price(2) |
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| Amount of Registration Fee |
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| Common stock, par value $0.0001 per share |
| $ | 86,250,000 |
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| $ | 7,996 |
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| Representative’s warrants to purchase common stock(3) |
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| – |
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| – |
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| Common stock underlying representative’s warrants(4) |
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| 6,641,250 |
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| 616 |
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| Total |
| $ | 92,891,250 |
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| $ | 8,612 | * |
__________
| (1) | Pursuant to Rule 416 under the Securities Act, the securities being registered hereunder include such indeterminate number of additional shares of common stock as may be issued after the date hereof as a result of stock splits, stock dividends or similar transactions. |
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| (2) | Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended (the “Securities Act”) and includes shares of common stock that may be issued upon exercise of a 45-day option granted to the underwriters to cover over-allotments, if any. |
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| (3) | In accordance with Rule 457(g) under the Securities Act, because the registrant’s shares of common stock underlying the representative’s warrants are registered hereby, no separate registration fee is required with respect to the warrants registered hereby. |
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| (4) | The representative’s warrants are exercisable for a number of shares of common stock equal to 4.0% of the number of shares of common stock sold in this offering, excluding upon exercise of the option to purchase additional securities, at a per share exercise price equal to 125% of the public offering price. The representative’s warrants are exercisable commencing six months immediately following the closing of this offering for a period of five years after the closing of this offering, at any time, and from time to time, in whole or in part. As estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(g) under the Securities Act. Resales of shares of common stock issuable upon exercise of the representative’s warrants on a delayed or continuous basis pursuant to Rule 415 under the Securities Act are also registered hereby. |
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| * | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
| PRELIMINARY PROSPECTUS |
| SUBJECT TO COMPLETION, DATED DECEMBER 21 , 2021 |
[___] Shares of
Common Stock
EDIBLE GARDEN AG INCORPORATED
This is an initial public offering of our shares of common stock. We are offering on a firm commitment basis, shares of common stock, $0.0001 par value per share (“common stock”). The initial public offering price per share of common stock is expected to be between $____ and $______.
Prior to this offering, there has been no public market for our common stock. We have applied to list our common stock on the Nasdaq Capital Market under the symbol “EDBL.” No assurance can be given that our application will be approved. If our application is not approved or we otherwise determine that we will not be able to secure the listing of our common stock on the Nasdaq Capital Market, we will not complete this offering.
We are an “emerging growth company,” as defined under the federal securities laws and, as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary — Implications of Being an Emerging Growth Company and Smaller Reporting Company.”
Investing in our securities is speculative and involves a high degree of risk. You should carefully consider the risk factors beginning on page 7 of this prospectus before purchasing our securities.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
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| (1) | We have also agreed to issue warrants to purchase shares of common stock to the representative of the underwriters and reimburse the underwriters for certain expenses in connection with this offering. See “Underwriting” for additional information regarding total underwriting compensation, including information on underwriting discounts and offering expenses. |
We have granted the representative of underwriters an option to purchase from us, at the public offering price, up to additional shares of common stock, less the underwriting discounts and commissions, within 45 days from the date of this prospectus to cover over-allotments, if any. If the representative of the underwriters exercises the option in full, the total underwriting discounts and commissions payable will be $ , and the total proceeds to us, before expenses, will be $ .
The underwriters expect to deliver the shares of common stock to purchasers on or about ________, 2021.
Sole Book-Running Manager
Maxim Group LLC
The date of this prospectus is _________, 2021
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| MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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You should rely only on the information contained in this prospectus and in any free writing prospectus. We and the underwriters have not authorized anyone to provide you with information different from that contained in this prospectus. We and the underwriters are offering to sell, and seeking offers to buy, our securities only in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our securities.
Neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our securities and the distribution of this prospectus outside of the United States.
We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products. This prospectus may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this prospectus is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this prospectus are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.
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PROSPECTUS SUMMARY
The following summary highlights information contained elsewhere in this prospectus and is qualified in its entirety by the more detailed information and financial statements included elsewhere in this prospectus. This summary does not contain all of the information you should consider before investing in our securities. Before you decide to invest in our securities, you should read and carefully consider the following summary together with the entire prospectus, including our financial statements and the related notes thereto and the matters discussed in the sections in this prospectus entitled “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business.” Some of the statements in this prospectus constitute forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including those discussed in the “Risk Factors” and other sections of this prospectus. In this prospectus, unless otherwise stated or the context otherwise requires, references to “Edible Garden,” the “Company,” “we,” “us,” “our,” or similar references mean Edible Garden AG Incorporated and its subsidiaries on a consolidated basis.
Our Company
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 to 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. |
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| 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 to a legacy farm business.
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.
We believe that Edible Garden’s facilities comply with food safety and handling standards. We have food safety certifications from Primus GFS (“Primus”), a Global Food Safety Initiative (“GFSI”) certification program, the United States Department of Agriculture (“USDA”) for organic products (“USDA Organic”), and some of our products are verified as non-genetically modified (“non-GMO”) by the non-GMO Project. We are licensed under the Perishable Agricultural Commodities Act (“PACA”) to operate our business. We voluntarily comply with the Hazard Analysis Critical Control Point (“HACCP”) principles established by the United States Food and Drug Administration (“FDA”). See “Business — Overview” for more information about our certifications, license and the standards we follow.
We intend to use our approach to expand in key strategic markets across the country while supporting our existing operations. Our priority in the near term is to strengthen our existing business in part with the proceeds from this offering. We have a history of operating losses since inception and expect to incur additional near-term losses. As discussed further in “Management’s Discussion and Analysis — Liquidity and Capital Resources,” our auditors have issued an opinion that there is a substantial doubt about our ability to continue as a going concern if we are unable to complete this offering. However, we are pursuing this offering because we believe that we have the potential to take advantage of strategic growth opportunities. Our model of growing local produce near high population density centers and being able to provide fresh produce to our existing supermarket partners, who have a wider network than us, is intended to create organic growth in our business through those existing relationships. If we complete this offering, we intend to use part of the proceeds to either build or acquire greenhouses near population centers and distribution centers to be able to grow more produce close to where it is in demand and to deepen our relationships with regional and national supermarkets. Our model allows us to reduce transportation food miles, reduce fuel costs, and lower emissions related to food transportation.
We believe that the power of our brand together with the quality, innovative packaging and traceability of our products allow all of our customers to associate Edible Garden with locally grown and sustainably sourced packaged herbs and vegetables. Our tag line “Simply Local, Simply Fresh” is intended to describe our business plan: growing herbs and lettuce in local farms in the regional communities where our customers sell our products so that the products stay fresher for longer. We believe this strategy allows us to drive local grass roots brand awareness while we grow our business to support our plan to become a national brand. |
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| We currently offer 31 stock keeping units “SKU’s” and expect to further cross sell products across our supermarket partners to meet their demand. These products include: | ||
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| · | 10 types of individually potted, live herbs; |
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| · | 10 types of cut single-herb clamshells; |
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| · | 2 specialty herb items; |
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| · | 6 different types of lettuce; |
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| · | hydro basil; |
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| · | bulk basil; and |
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| · | vegan protein powder. |
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| We currently sell our products to a number of regional and national supermarkets. Since inception, a few of our customers constitute a majority of our total revenue. For example, during the nine months ended September 30, 2021, we earned approximately 76% of our revenue from three customers, and we earned approximately 34% of our revenue from one customer in the period from our inception through December 31, 2020. While we value our strong relationship with these major customers, we face the risk of losing a significant source of revenue if our major customers do not continue to purchase our products. If that were to occur and we were unable to replace the revenue by selling our products to additional customers, our ability to earn revenue would be significantly negatively impacted. Part of our growth strategy is to reduce this customer concentration by expanding our production capacity, which would allow us to sell our products to more supermarket partners.
Corporate History and Structure
Our company was incorporated on March 28, 2020 in the State of Wyoming as Edible Garden Inc. We subsequently changed our name to Edible Garden AG Incorporated on July 20, 2020. Effective July 7, 2021, our parent company, Edible Garden Holdings Inc., merged with and into us with us as the surviving entity. We converted into a Delaware corporation effective July 12, 2021. We have one wholly-owned subsidiary, EG Transportation, LLC, through which we manage the distribution of our products. Our current corporate structure is as shown below:
The outstanding common stock of our company is currently held by only a few individuals and one entity. An affiliate of Terra Tech, Sament Capital Investments, Inc. (“Sament”) owns 20.0% of our outstanding shares of common stock and is one of our creditors. Our executive officers collectively own 71.2% of our outstanding shares of common stock. As a result, our executive officers are able to exercise a significant level of control over all matters requiring stockholder approval. Our executive officers and Sament have significant influence over our business strategies and would have the ability to delay or prevent a change of control of our company or other significant corporate transactions.
Our principal address is 283 County Road 519, Belvidere, NJ 07823. Our telephone number is (908) 750-3953. We maintain a website at www.ediblegarden.com. The information contained on our website is not, and should not be interpreted to be, incorporated into this prospectus. | ||
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Private Placement
On October 7, 2021, we closed on the first tranche of a private placement with Evergreen Capital Management LLC (“Evergreen”) and raised $1.0 million, which we used to support our working capital requirements. In the private placement, we issued a 15% original issue discount secured promissory note to Evergreen (the “First Evergreen Note”) and a warrant to purchase 751,634 shares of our common stock (the “First Evergreen Warrant”). The First Evergreen Note matures on July 7, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the First Evergreen Note into shares of common stock at a conversion price of $1.53 per share. The First Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $1.53 per share until October 7, 2026.
On November 8, 2021 we closed on the second tranche of the Evergreen private placement and raised $350,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Second Evergreen Note”) and a warrant to purchase 96,988 shares of our common stock (the “Second Evergreen Warrant”). The Second Evergreen Note matures on August 8, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Second Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Second Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until November 8, 2026.
On November 22, 2021 we closed on the third tranche of the Evergreen private placement and raised $350,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Third Evergreen Note”) and a warrant to purchase 96,988 shares of our common stock (the “Third Evergreen Warrant”). The Third Evergreen Note matures on August 22, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Third Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Third Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until November 22, 2026.
On December 20, 2021 we closed on the fourth tranche of the Evergreen private placement and raised $300,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Fourth Evergreen Note,” and with the First, Second and Third Evergreen Notes, the “Evergreen Notes”) and a warrant to purchase 83,133 shares of our common stock (the “Fourth Evergreen Warrant,” and together with the First, Second and Third Evergreen Warrants, the “Evergreen Warrants”). The Fourth Evergreen Note matures on September 20, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Fourth Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Fourth Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until December 20, 2026.
The Evergreen Notes are secured and subordinated to the notes held by Sament. If the Evergreen Notes are not converted into shares of common stock prior to the closing of this offering, we intend to repay the amount due under the Evergreen Notes with some of the proceeds of this offering.
As part of the private placement, Maxim Group LLC, the representative of the underwriters in this offering, received a cash fee equal to 6% of the private placement proceeds. The offering was conducted pursuant to an exemption from registration under the Securities Act of 1933, as amended (the “Securities Act”) in reliance upon Rule 506(b) promulgated under the Securities Act.
Exercise of Options by Sament
On October 8, 2021, Sament exercised its option to purchase 5,000,000 shares of our common stock for an aggregate exercise price of $2.00.
Listing on the Nasdaq Capital Market
There is currently no public trading market for our shares of common stock. In connection with this offering, we have applied to list our common stock on the Nasdaq Capital Market (“Nasdaq”) under the symbol “EDBL.” If our listing application is approved, we expect to list our common stock on Nasdaq upon consummation of the offering. No assurance can be given that our listing application will be approved or that our common stock will be listed on Nasdaq. This offering will occur only if Nasdaq approves the listing of our common stock.
Summary Risk Factors
Our business is subject to a number of risks and uncertainties that you should understand before making an investment decision. These risks are discussed more fully in the section entitled “Risk Factors” following this prospectus summary. These include: | ||
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| · | our history of losses and the substantial doubt about our ability to continue as a going concern, which could cause our stockholders to lose some or all of their investment in us; |
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| · | our ability to continue to access and operate our Belvidere, New Jersey facility, since we are operating the property through an arrangement with our predecessor and the lessor instead of a lease; |
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| · | our ability to raise additional capital in this offering or through additional offerings, which may not be available on favorable terms, if at all, and without which we may not be able to continue as a going concern; |
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| · | our relatively short operating history; |
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| · | the concentration of our revenue among a few customers and the risks of losing one of those customers; |
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| · | the existence of a material weakness in our internal control over financial reporting; |
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| · | the impact of any general and regional economic volatility or economic downturn; |
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| · | our reliance on our management team and our ability to attract, train and retain qualified personnel; |
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| · | the impact of any labor shortage or external price increases; |
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| · | implementing any new lines of business or offering new products; |
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| · | the impact of reputational damage; |
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| · | the impact of product contamination or product liability claims; |
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| · | our ability to protect our intellectual property rights; |
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| · | the impact of cyber-attacks or security breaches; |
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| · | our ability to maintain the necessary permits and compliance with regulations and requirements as a producer and distributor of food products; |
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| · | our ability to properly use hydroponic farming methods; |
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| · | fluctuation in the market price and demand for agricultural products; |
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| · | seasonality; |
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| · | increases in the cost of commodities or raw product inputs; |
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| · | our ability to comply with government policies and regulations specifically affecting the agricultural sector; |
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| · | our ability to compete in our industry; |
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| · | the immediate and substantial dilution investors in this offering will experience; |
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| · | the broad discretion of our management team to apply the net proceeds of this offering; |
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| · | the concentration of ownership among related parties, including existing executive officers and directors; |
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| · | our status as an emerging growth company and a smaller reporting company; |
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| · | our expectation that we will not declare dividends to our stockholders in the foreseeable future; |
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| · | the potentially dilutive impact of seeking additional funds; |
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| · | the public offering price in this offering was determined between us and the underwriter; |
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| · | the potential impact of shares of common stock available for future sale after this offering; |
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| · | a possible “short squeeze” due to a sudden increase in demand of our shares of common stock leading to price volatility; |
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| · | our certificate of incorporation and bylaws could discourage a change in control or acquisition of us by a third party; and |
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| · | the impact of the COVID-19 pandemic on our business. |
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| Implications of Being an Emerging Growth Company and Smaller Reporting Company
We qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements that are applicable to other companies that are not emerging growth companies. Accordingly, we have included detailed compensation information for only our three most highly compensated executive officers and have not included a compensation discussion and analysis of our executive compensation programs in this prospectus. In addition, for so long as we are an “emerging growth company,” we will not be required to: | ||
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| · | engage an auditor to report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”); |
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| · | comply with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements; |
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| · | comply with new or revised accounting standards applicable to public companies as quickly as other public companies; |
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| · | submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay,” “say-on-frequency,” and “say-on-golden parachutes;” or |
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| · | disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparison of the chief executive officer’s compensation to median employee compensation. |
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| In addition, the JOBS Act provides that an “emerging growth company” can use the extended transition period for complying with new or revised accounting standards.
We will remain an “emerging growth company” until the earliest to occur of: | ||
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| · | our reporting $1.07 billion or more in annual gross revenues; |
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| · | our issuance, in a three-year period, of more than $1 billion in non-convertible debt; |
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| · | the end of the fiscal year in which the market value of our common stock held by non-affiliates exceeds $700 million on the last business day of our second fiscal quarter; and |
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| · | December 31, 2026. |
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| We cannot predict if investors will find our securities less attractive because we may rely on these exemptions, which could result in a less active trading market for our securities and increased volatility in the price of our securities.
Finally, we are a “smaller reporting company” (and may continue to qualify as such even after we no longer qualify as an emerging growth company) and accordingly may provide less public disclosure than larger public companies, including the inclusion of only two years of audited financial statements and only two years of management’s discussion and analysis of financial condition and results of operations disclosure. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests. | ||
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| THE OFFERING | ||
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| Issuer:
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| Edible Garden AG Incorporated
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| Common stock being offered by us:
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| shares (or shares of common stock if the underwriters exercise their over-allotment option in full).
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| Assumed public offering price:
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| $ per share, which is the mid-point of the price range indicated on the cover page of this prospectus.
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| Common stock outstanding immediately prior to this offering:
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| shares
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| Common stock to be outstanding immediately after this offering:
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| shares(1) (or shares of common stock if the underwriters exercise their over-allotment option in full), including shares issuable upon conversion of our Series 2020 Crowd SAFEs, the Evergreen Notes and convertible notes held by our Messrs. Kras and James, our Chief Executive Officer and Chief Financial Officer. |
| Over-allotment option:
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| We have granted the underwriters an option, exercisable for 45 days after the date of this prospectus, to purchase up to an additional shares of common stock at the public offering price less the underwriting discounts payable by us, solely to cover over-allotments, if any.
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| Use of proceeds:
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| We intend to use the net proceeds from this offering for the construction and/or acquisition of existing greenhouses, working capital, organizational build out, including the hiring of a chief operating officer, chief marketing officer, head of sales, and support and operational staff, debt repayment, transaction bonuses for our executive officers, completion of a packhouse at our New Jersey facility and general corporate purposes. See “Use of Proceeds.”
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| Representative’s warrants:
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| Upon the closing of this offering, we will issue to Maxim Group LLC or its designee, as the representative of the underwriters in this offering, warrants entitling it to purchase a number of shares of common stock equal to 4.0% of the shares of common stock sold in this offering at an exercise price equal to 125% of the public offering price in this offering (the “Representative’s Warrants”). The Representative’s Warrants shall be exercisable commencing six months after the closing of this offering and will expire five years after the effective date of the registration statement of which this prospectus forms a part. This prospectus also relates to the offering of the shares of common stock issuable upon exercise of the Representative’s Warrants.
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| Underwriter compensation:
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| The underwriter will receive an underwriting discount equal to 7.0% of the gross proceeds from the sale of securities in the offering. We will also reimburse the underwriter for certain out-of-pocket actual expenses related to the offering. See “Underwriting.”
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| Proposed Nasdaq trading symbol:
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| We have applied to have our common stock listed on Nasdaq under the symbol “EDBL.” No assurance can be given that the listing will be approved or that a trading market will develop for the common stock. We will not complete this offering unless we receive approval for listing on Nasdaq.
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| Lock-up agreements:
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| We and our directors, officers and the holders of 1.0% or more of the outstanding shares of our common stock have agreed with the representative not to offer for sale, issue, sell, contract to sell, pledge or otherwise dispose of any of our common stock or securities convertible into common stock for a period of 180 days after the closing of this offering. See “Underwriting—Lock-Up Agreements.”
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| Transfer agent and registrar: |
| The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. |
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| Risk factors: |
| The securities offered by this prospectus are speculative and involve a high degree of risk. Investors purchasing securities should not purchase the securities unless they can afford the loss of their entire investment. See “Risk Factors” beginning on page 7. |
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| (1) | The number of shares of our common stock to be outstanding following this offering is based on 25,000,000 outstanding shares of common stock as of December 20, 2021, and excludes: | |
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| · | 751,634 shares of common stock issuable upon the exercise of a warrant held by Evergreen at an exercise price of $1.53 per share; |
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| · | 277,109 shares of common stock issuable upon the exercise of warrants held by Evergreen at an exercise price of $4.15 per share; and |
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| · | shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued in this offering. |
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| Unless otherwise indicated, this prospectus reflects and assumes that the following are not converted into or exercised for shares of our common stock: | ||
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| · | 751,634 shares of common stock issuable upon the exercise of a warrant held by Evergreen at an exercise price of $1.53 per share; |
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| · | 277,109 shares of common stock issuable upon the exercise of warrants held by Evergreen at an exercise price of $4.15 per share; |
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| · | 1,037,410 shares of common stock issuable upon the conversion of the Evergreen Notes, as of December 20, 2021; |
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| · | shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued in this offering; and |
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| · | no exercise by the underwriters of their option to purchase up to additional shares of our common stock from us to cover over-allotments, if any. |
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Investing in our common stock is highly speculative and involves a significant degree of risk. You should carefully consider the risks described below and elsewhere in this prospectus, which could materially and adversely affect our business, results of operations or financial condition. Our business faces significant risks and the risks described below may not be the only risks we face. Additional risks not presently known to us or that we currently believe are immaterial may materially affect our business, results of operations, or financial condition. If any of these risks occur, the trading price of our common stock could decline and you may lose all or part of your investment.
Risks Related to Our Business
We have a history of losses, expect to continue to incur losses in the near term and may not achieve or sustain profitability in the future, and as a result, our management has identified and our auditors agreed that there is a substantial doubt about our ability to continue as a going concern.
We have incurred significant losses since our inception. We have experienced net losses of approximately $2.081 million for the period March 28, 2020 (inception) through December 31, 2020 and $3.449 million in the nine months ended September 30, 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 and, therefore, our operating losses will continue or even increase at least through the near term. Furthermore, to the extent that we are successful in increasing our customer base, we will also incur increased expenses because costs associated with generating and supporting customer agreements are generally incurred up front, while revenue is generally recognized ratably over the term of the relationship. You should not rely upon our recent revenue growth as indicative of future performance. We may not reach profitability in the near future or at any specific time in the future. If and when our operations do become profitable, we may not sustain profitability.
The report of our independent registered public accounting firm that accompanies our audited consolidated financial statements contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern. 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.
We currently operate our flagship facility pursuant to an arrangement with our predecessor and the lessor of the land instead of a lease.
We currently do not have a formal lease to the land on which our flagship facility, in Belvidere, New Jersey, is built. We are currently party to an ongoing, informal arrangement with our predecessor company, Edible Garden Corp., whereby we make lease payments of approximately $15,300 per month to the lessor of the land on which our flagship facility is built, Whitetown Realty, LLC (the “Landlord”), and for which our predecessor company is the lessee. We effectively rent the property on a month-to-month basis with no set term. We do not have a lease in place directly with the lessor of the property that gives us the right to operate the property, and there is no written agreement between us and our predecessor company or us and the Landlord describing this arrangement. Accordingly, we are subject to the risk that we will lose access to the property if the lessor were to evict us from the facility and property. If we were unable to access the property and continue operations in Belvidere, New Jersey, we may lose the ability to continue growing as great a quantity of herbs and lettuce and may be unable to continue our business. If those risks occur, you could lose the entire value of your investment in us.
We may need to raise capital in addition to this offering, which may not be available on favorable terms, if at all, and which may cause dilution to holders of our common stock, restrict our operations or adversely affect our ability to operate and continue our business.
If we need to raise additional funds due to unforeseen circumstances or material expenditures or if our operating results are worse than expected, we cannot be certain that we will be able to obtain additional financing on favorable terms, if at all, and any additional financings could result in additional dilution to holders of our common stock. Debt financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions such as incurring additional debt, expending capital, or declaring dividends, or which impose financial covenants on us that limit our ability to achieve our business objectives. If we need additional capital and cannot raise it on acceptable terms, we may not be able to meet our business objectives, our stock price may fall and you may lose some or all of your investment.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects.
We have a relatively short operating history, which makes it difficult to evaluate our business and future prospects. While the predecessor business has existed since 2013, our company has been in existence only since March 2020. We have encountered, and will continue to encounter, risks and difficulties frequently experienced by growing companies in rapidly changing industries, including those related to:
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| · | market acceptance of our current and future products and services; |
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| · | changing regulatory environments and costs associated with compliance; |
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| · | our ability to compete with other companies offering similar products and services; |
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| · | our ability to effectively market our products and services and attract new customers; |
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| · | the amount and timing of expenses, particularly sales and marketing expenses, related to the maintenance and expansion of our business, operations and infrastructure; |
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| · | our ability to control costs, including our expenses; |
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| · | our ability to manage organic growth; and |
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| · | general economic conditions and events. |
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If we do not manage these risks successfully, our business and financial performance will be adversely affected.
We earned approximately 76% of our revenue from three customers during the nine months ended September 30, 2021 and approximately 34% of our revenue from one customer in the period from March 28, 2020 (inception) through December 31, 2020, and if we lose any of these customers or if we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results from operations would be materially and adversely affected.
During the nine months ended September 30, 2021, three customers accounted for approximately 76% of our total revenue, and during the period from March 28, 2020 (inception) through December 31, 2020, one of our customers accounted for approximately 34% of our total revenue. This concentration of customers leaves us exposed to the risks associated with the loss of one or more of these significant customers, which would materially and adversely affect our revenues and results of operations. If these customers were to significantly reduce their relationship with us, or in the event that we are unable to replace the revenue through the sale of our products to additional customers, our financial condition and results from operations could be negatively impacted, and such impact would likely be significant.
The loss of one or more of the Company’s customers, or a reduction in the level of purchases made by these customers, could negatively impact the sales and profits of the Company.
The Company sells its products to national and local supermarket chains. If sales to one or more of the Company’s largest customers are reduced, this reduction may have a material adverse effect on the Company’s business and financial condition. These customers make purchase decisions based on a combination of price, product quality, consumer demand, customer service performance, desired inventory levels and other factors that may be important to them at the time the purchase decisions are made. Changes in these customers’ strategies or purchasing patterns may adversely affect the sales of the Company. For example, the customers may face financial or other difficulties, which may impact their operations and cause them to reduce their level of purchases, which could then adversely affect the Company’s results of operations. Any bankruptcy or other business disruption involving one of the Company’s significant customers also could adversely affect the results of operations as well.
Our relationships with customers are based on purchase orders rather than long-term purchase commitments.
We are subject to uncertainty because our relationships with customers are based on purchase orders rather than long-term purchase commitments. Our produce is grown both at our New Jersey facility and by contract growers. To ensure availability of products grown in our New Jersey facility, in some cases we start sowing our products in advance of receiving purchase orders for those products. Inaccuracies in our estimates of customer demand and product mix could negatively affect our ability to supply product to our customers and operating results. Our customers can cancel purchase orders or defer the shipments of our products under certain circumstances with little or no advance notice to us. If we grow more products than we are able to sell to our customers, we will incur losses and our results of operations and financial condition will be harmed.
Our secured indebtedness could have important consequences to you.
Our secured indebtedness could have important consequences to you. For example, it could:
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| · | limit our ability to obtain additional financing for working capital, capital expenditures, acquisitions and other general corporate requirements; |
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| · | require us to dedicate a portion of our cash flow from operations to payments on our debt, thereby reducing the availability of our cash flow for operations and other purposes; |
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| · | limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and |
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| · | place us at a competitive disadvantage compared to competitors that may have proportionately less debt and greater financial resources. |
Our secured indebtedness, held by Sament and Evergreen, is secured by a security interest in all of our assets. If we were to default on our obligations under the Sament Notes and Evergreen Notes, Sament first, and then Evergreen, would have the right to our assets. We could be required to dispose of material assets or operations to meet our debt service and other obligations, and the value realized on such assets or operations will depend on market conditions and the availability of buyers. Accordingly, any such sale may not, among other things, be for a sufficient dollar amount. If we were to otherwise attempt to sell material assets or operations, the foregoing encumbrances may limit our ability to dispose of material assets or operations. In the event that Sament and Evergreen enforced their rights to our assets, we may have to discontinue our business, and our investors could lose all or a part of their investment in us.
We have a material weakness in our internal control over financial reporting, which if left unremediated could materially and adversely affect the market price of our common stock.
As of December 31, 2020 and September 30, 2021, we did not maintain effective controls over the control environment, including our internal control over financial reporting. Because we are a small company with few employees in our finance department, we lacked the ability to have adequate segregation of duties in the financial statement preparation process. Further, our Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level controls have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. If we are unable to remediate this material weakness as a newly public company, our financial reporting may not be reliable and the market price of our common stock may be adversely affected.
The Company’s performance may be impacted by general and regional economic volatility or an economic downturn.
An overall decline in economic activity could adversely impact the Company’s business and financial results. Economic uncertainty may reduce consumer spending as consumers make decisions on what to include in their food budgets. Economic uncertainty could also result in changing consumer preference. Shifts in consumer spending could result in increased pressure from competitors or customers that may require the Company to increase promotional spending or reduce the prices of some products, which could then lower revenue and profitability.
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Additionally, the Company is subject to regional economic volatilities since the Company’s growing operations are located in a few areas, including Belvidere, New Jersey; Half Moon Bay, California; Hilliard, Florida; Francesville, Indiana; Grand Rapids, Michigan; Berlin, New York; and Hixton, Wisconsin. The Company’s use of hydroponic farming requires that it rely on local disease-free water sources and growing materials. Accordingly, any change in the availability of these local raw materials could adversely affect the Company’s operating results.
Our business would be adversely affected by the departure of members of our management team.
Our success depends, in large part, on the continued contributions of James E. Kras and Michael James. Although we have employment agreements in place for each of these executives, we cannot assure you that each will remain with us for a specified period. Although we have additional personnel that contribute to our business, the loss of either of these executives could harm our ability to implement our business strategy and respond to the rapidly changing market conditions in which we operate.
If we are unable to attract, train and retain qualified personnel, especially our management and sales personnel, we may not be able to effectively execute our business strategy.
Our future success depends on our ability to attract, retain and motivate qualified personnel, including our management, sales and marketing, operational, transportation, finance and administration personnel. For example, we currently have a limited number of personnel for our picking, packing and shipping group and greenhouse floor operations. We do not know whether we will be able to hire sufficient workers for these positions to meet our production goals or, if hired, retain all of these personnel as we continue to pursue our business strategy. The loss of the services of one or more of our key employees, or our inability to attract, retain and motivate qualified personnel could have a material adverse effect on our business, financial condition and operating results.
The costs of our operations may exceed our estimates due to factors outside of our control, such as labor shortages or external price increases, and we may be unable to pass those costs to our customers, which would negatively impact our financial results.
We depend on our employees and contracted grow operations teams to grow and distribute our products to our customers. We rely on access to competitive, local labor supply, including skilled and unskilled positions, to operate our business consistently and reliably. Any labor shortage, caused by the COVID-19 pandemic or other factors, and any disruption in our ability to hire workers would negatively affect our operations and financial condition. If we experience a sustained labor shortage, we may need to increase wages to attract workers, which would increase our costs of growing our products. Furthermore, if the prices of our raw materials, utilities or distributing our products were to increase, including due to inflationary pressures, we may be unable to pass those increased costs on to our customers. If we are unable to do so, our gross margin would decline, and our financial results would be negatively impacted.
We may implement new lines of business or offer new products and services within existing lines of business.
As an early-stage company, we may implement new lines of business at any time. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new products and services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved, and price and profitability targets may not prove feasible. We may not be successful in introducing new products and services in response to industry trends or developments in technology, or those new products may not achieve market acceptance. As a result, we could lose business, be forced to price products and services on less advantageous terms to retain or attract clients, or be subject to cost increases. As a result, our business, financial condition or results of operations may be adversely affected.
Damage to our reputation could negatively impact our business, financial condition and results of operations.
Our reputation and the quality of our brand are critical to our business and success in existing markets, and will be critical to our success as we enter new markets. Any incident that erodes consumer loyalty for our brand could significantly reduce its value and damage our business. We may be adversely affected by any negative publicity, regardless of its accuracy. Also, there has been a marked increase in the use of social media platforms and similar devices, including blogs, social media websites and other forms of internet-based communications that provide individuals with access to a broad audience of consumers and other interested persons. The availability of information on social media platforms is virtually immediate as is its impact. Information posted may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects or business. The harm may be immediate and may disseminate rapidly and broadly, without affording us an opportunity for redress or correction.
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The Company is subject to risk of product contamination and product liability claims.
The sales of our products involve the risk of injury to consumers. Such injuries may result from tampering by unauthorized personnel, product contamination or spoilage, including the presence of foreign objects, substances, chemicals, or residues introduced during the growing, packing, storage, handling or transportation phases. The Company cannot be sure that consumption of its products will not cause a health-related illness in the future or that it will not be subject to claims or lawsuits relating to such matters. Even if a product liability claim is unsuccessful, the negative publicity surrounding any assertion that the Company’s products caused illness or injury could adversely affect the Company’s reputation with existing and potential customers and its brand image.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings.
We may incur substantial costs enforcing or acquiring intellectual property rights and defending against third-party claims as a result of litigation or other proceedings. In connection with the enforcement of our own intellectual property rights, the acquisition of third-party intellectual property rights or disputes related to the validity or alleged infringement of third-party intellectual property rights, including patent rights, we may be subject to claims, negotiations or complex, protracted litigation. Intellectual property disputes and litigation may be costly and can be disruptive to our business operations by diverting attention and energies of management and key technical personnel, and by increasing our costs of doing business. If we fail to prevail in any future litigation and disputes, it could adversely affect our results of operations and financial condition. Third-party intellectual property claims asserted against us could subject us to significant liabilities, require us to enter into royalty and licensing arrangements on unfavorable terms, prevent us from assembling or licensing certain of our products, subject us to injunctions restricting our sale of products, cause severe disruptions to our operations or the marketplaces in which we compete or require us to satisfy indemnification commitments with our customers, including contractual provisions under various license arrangements. In addition, we may incur significant costs in acquiring the necessary third-party intellectual property rights for use in our products. Any of these could seriously harm our business.
If we are unable to obtain patent protection for our products or otherwise protect our intellectual property rights, our business could suffer.
Our success depends, in part, on our ability to obtain patent protection for or maintain as trade secrets our proprietary products, technologies and inventions and to maintain the confidentiality of our trade secrets and know‑how, operate without infringing upon the proprietary rights of others and prevent others from infringing upon our business proprietary rights. Despite our efforts to protect our proprietary rights, it is possible that competitors or other unauthorized third parties may obtain, copy, use or disclose our technologies, inventions, processes or improvements. We cannot assure you that any of our existing or future patents or other intellectual property rights will be enforceable, will not be challenged, invalidated or circumvented, or will otherwise provide us with meaningful protection or any competitive advantage. In addition, our four pending patent applications may not be granted. If our patents do not adequately protect our technology, our competitors may be able to offer products similar to ours. Our competitors may also be able to develop similar technology independently or design around our patents, and we may not be able to detect the unauthorized use of our proprietary technology or take appropriate steps to prevent such use. We may need to enter into intellectual property license agreements in the future, and if we are unable to obtain these licenses, our business could be harmed. Any of the foregoing events would lead to increased competition and lower revenues or gross margins, which could adversely affect our operating results.
Confidentiality agreements with employees and third parties may not prevent unauthorized disclosure of trade secrets and other proprietary information, and our inability to maintain the confidentiality of that information, due to unauthorized disclosure or use, or other event, could have a material adverse effect on our business.
In addition to the protection afforded by patents, we seek to rely on trade secret protection and confidentiality agreements to protect proprietary know-how that is not patentable or that we elect not to patent, processes for which patents are difficult to enforce, and any other elements of our product discovery and development processes that involve proprietary know-how, information, or technology that is not covered by patents. Trade secrets, however, may be difficult to protect. We seek to protect our proprietary processes, in part, by entering into confidentiality agreements with our employees, consultants, advisors, contractors and collaborators. Although we use reasonable efforts to protect our trade secrets, our employees, consultants, advisors, contractors, and collaborators might intentionally or inadvertently disclose our trade secret information to competitors. In addition, competitors may otherwise gain access to our trade secrets or independently develop substantially equivalent information and techniques. Furthermore, the laws of some foreign countries do not protect proprietary rights to the same extent or in the same manner as the laws of the United States. As a result, we may encounter significant problems in protecting and defending our intellectual property both in the United States and abroad. If we are unable to prevent unauthorized material disclosure of our intellectual property to third parties, or misappropriation of our intellectual property by third parties, we will not be able to establish or maintain a competitive advantage in our market, which could materially adversely affect our business, operating results and financial condition.
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Our business could be negatively impacted by cyber security threats, attacks and other disruptions.
We face advanced and persistent attacks on our information infrastructure where we manage and store various proprietary information and sensitive/confidential data relating to our operations. These attacks may include sophisticated malware (viruses, worms, and other malicious software programs) and phishing emails that attack our products or otherwise exploit any security vulnerabilities. These intrusions sometimes may be zero-day malware that are difficult to identify because they are not included in the signature set of commercially available antivirus scanning programs. Experienced computer programmers and hackers may be able to penetrate our network security and misappropriate or compromise our confidential information or that of our customers or other third-parties, create system disruptions, or cause shutdowns. Additionally, sophisticated software and applications that we produce or procure from third-parties may contain defects in design or manufacture, including “bugs” and other problems that could unexpectedly interfere with the operation of the information infrastructure. A disruption, infiltration or failure of our information infrastructure systems or any of our data centers as a result of software or hardware malfunctions, computer viruses, cyber-attacks, employee theft or misuse, power disruptions, natural disasters or accidents could cause breaches of data security, loss of critical data and performance delays, which in turn could adversely affect our business.
Security breaches of confidential customer information or confidential employee information may adversely affect our business.
Our business requires the collection, transmission and retention of large volumes of customer and employee data, and other personally identifiable information, in various information technology systems that we maintain and in those maintained by third parties with whom we contract to provide services. The integrity and protection of that customer and employee data is critical to us. The information, security and privacy requirements imposed by governmental regulation are increasingly demanding. Our systems may not be able to satisfy these changing requirements and customer and employee expectations, or may require significant additional investments or time in order to do so. A breach in the security of our information technology systems or those of our service providers could lead to an interruption in the operation of our systems, resulting in operational inefficiencies and a loss of profits. Additionally, a significant theft, loss or misappropriation of, or access to, customers’ or other proprietary data or other breach of our information technology systems could result in fines, legal claims or proceedings.
Failure to obtain necessary permits or otherwise comply with USDA regulations and requirements could result in a ban or temporary suspension of our ability to grow, manufacture or market our products as organic, and thus could materially adversely affect our business.
As a producer and distributor of food products, we are subject to the laws and regulations in the jurisdictions where our facilities are located and where our products are distributed. In particular we are subject to the Federal Food, Drug and Cosmetic Act, as amended by the Food Safety Modernization Act in 2011 (the “FSM Act”), which is enforced by the FDA. The FDA has the authority to regulate the growing, harvesting manufacture, including composition and ingredients, processing, labeling, packaging import, distribution and marketing and safety of food in the United States. The FSM Act significantly enhances the FDA’s authority over various aspects of food regulation. For example, the FSM Act granted the FDA mandatory recall authority when the FDA determines there is a reasonable probability that a food is adulterated or misbranded and that the use of, or exposure to, the food will cause serious adverse health consequences or death to humans or animals. While the FDA has been active in implementing the requirements of the FSM Act through issuance of regulations designed to result in a reduction of the risk of contamination in food manufacturing, the full impact of the FSM Act is not yet known, and we cannot assure you that it will not materially impact our business. Regulatory agencies in other jurisdictions have similar authority to address the risk of contamination or adulteration, and to require that contaminated products be removed from the market. The failure to comply with these laws and regulations in any jurisdiction, or to obtain required approvals, could result in a ban or temporary suspension on the production of our products or limit or bar their distribution, and affect our development of new products, and thus could materially adversely affect our business and operating results. In addition, the United States Department of Agriculture (the “USDA”), regulates the import and export of certain fruits and vegetables into and from the United States, and the USDA also imposes growing, manufacturing and certification requirements for certain products labeled with organic claims. Failure to obtain necessary permits or otherwise comply with USDA regulations and requirements could result in a ban or temporary suspension of our ability to grow, manufacture or market our products as organic, and thus could materially adversely affect our business.
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The Company’s improper use of hydroponic farming methods may significantly impact the Company’s ability to maintain its operations and may adversely affect its financial results.
The Company’s improper use of indoor hydroponic farming techniques may adversely impact its operating results. For example, hydroponic farming commingles the use of water and electricity in close proximity which, if combined, may cause an electric shock or a power outage. As the nutrients supply in a hydroponic garden is powered by electricity, an outage could be detrimental to the garden. If an outage occurs, and lasts for a considerable period of time, the plants may die out if a supplementary system of nutrition is not implemented.
Hydroponic farming also necessitates proactive disease management practices to protect against pests and other natural conditions, outside of the control of the Company, from spreading through water sources. If the Company fails to properly manage its hydroponic farms, its operations and financial results may be adversely affected.
The Company is subject to fluctuations in market price and demand for agricultural products.
Fresh produce is highly perishable and generally must be brought to market and sold soon after harvest. The selling price received for the Company’s products may depend on a variety of factors, including timing of the sale, the availability and quality of the produce item in the market, and the availability and quality of competing produce.
In addition, general public perceptions regarding the quality, safety, or health risks associated with particular food products could reduce demand for some of the Company’s products. Food safety warnings, advisories, notices, and recalls, such as those administered by the FDA, the Center for Disease Control and Prevention, other federal/state government agencies, could also reduce demand. To the extent that consumers evolve away from products that the Company produces for health, food safety or other reasons, and the Company is unable to modify the product or to develop products that satisfy new consumer preferences, there will be a decreased demand for the Company’s products.
The Company’s results may vary from quarter to quarter depending on seasonal fluctuations related to the sale of the Company’s products.
Earnings may be affected by seasonal factors, including the availability, quality, and price of raw materials, the timing and effects of ripening and perishability, the ability to process perishable raw materials in a timely manner, the leveraging of certain fixed overhead costs during off-season months, and the slight impacts on consumer demand based on seasonal and holiday timing. Because our products are grown, the expenses incurred to meet consumer demand are often incurred in advance of the revenue earned by selling the herbs and lettuce. For example, in our New Jersey facility, we begin sowing our longest-growing crop 13 to 14 weeks in advance of delivery. The impact of seasonal demand and the sales cycle for our products may cause our results to vary from quarter to quarter, which may make an investment in us less attractive to some investors.
Increases in commodity or raw product input costs, such as fuel, packaging materials, could increase costs significantly.
The Company’s costs are determined in part by the prices of fuel and packaging materials. The Company may be adversely affected if sufficient quantities of these materials are not available. Additionally any significant increase in the cost of these items could also materially and adversely affect the Company’s operating results.
Specifically, the Company requires significant quantities of fuel for delivery vehicles and thus is exposed to the risks associated with fluctuations in the price for fuel. The price and supply of fuel can fluctuate significantly based on international, political, and economic circumstances, as well as other factors outside of the Company’s control.
As a manufacturer of consumable products, the Company’s operations are subject to extensive regulation by various federal government agencies, including the FDA, the USDA and the Federal Trade Commission (“FTC”), as well as state and local agencies, such as the New Jersey Department of Agriculture, with respect to production processes, product attributes, packaging, labeling, storage, and distribution. Under various statutes and regulations, these agencies prescribe requirements and establish standards for safety, purity, and labeling. In addition, the advertising for the Company’s products is subject to regulation by the FTC, and the Company’s operations are subject to certain health and safety regulations, including those issued under the Occupational Safety and Health Act. Failure to comply with existing or modified regulations promulgated by these agencies may adversely affect the Company’s operating results.
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We face intense competition that could prohibit us from developing or increasing our customer base.
The indoor agriculture industry is highly competitive. We may compete with companies that have greater capital resources and facilities. More established companies with much greater financial resources which do not currently compete with us may be able to more easily adapt their existing operations to our line of business. Our competitors may also introduce new and improved products, and manufacturers may sell equipment direct to consumers. We may not be able to successfully compete with larger enterprises devoting significant resources to compete in our target market. Due to this competition, there is no assurance that we will not encounter difficulties in increasing revenues and maintaining and/or increasing market share. In addition, increased competition may lead to reduced prices and/or margins for products we sell.
Risks Related to this Offering and Ownership of our Securities
Investors in this offering will experience immediate and substantial dilution in the book value of their investment.
The public offering price will be substantially higher than the net tangible book value per share of our outstanding shares of common stock. As a result, investors in this offering will incur immediate dilution of $ per share based on the assumed public offering price of $ per share. Investors in this offering will pay a price per share that substantially exceeds the book value of our assets after subtracting our liabilities. See “Dilution” for a more complete description of how the value of your investment will be diluted upon the completion of this offering.
The public offering price of our common stock may have little or no relationship to the historical book value of our common stock or the implied value of our common stock in prior financing transactions.
Prior to the listing of our common stock, our shares have not been listed on any stock exchange or other public trading market, but we have issued options, SAFEs, warrants and convertible notes that are exercisable for or convertible into shares of our common stock. However, our historical book value and the exercise or conversion prices of the options, SAFEs, warrants and convertible notes may have little or no relation to broader market demand for our common stock and thus the public offering price in this offering and the public trading price of our common stock on the Nasdaq once trading begins, provided that our common stock is approved for listing on Nasdaq. As a result, you should not place undue reliance on these historical prices as they may differ materially from the public offering price in this offering.
Our management will have broad discretion over the use of the proceeds we receive in this offering and might not apply the proceeds in ways that increase the value of your investment.
Our management will have broad discretion over the use of our net proceeds from this offering, and you will be relying on the judgment of our management regarding the application of these proceeds. Our management might not apply our net proceeds in ways that ultimately increase the value of your investment. We expect to use the net proceeds from this offering for the construction and/or acquisition of existing greenhouses, working capital, organizational build out, including the hiring of a chief operating officer, chief marketing officer, head of sales, and support and operational staff, debt repayment, transaction bonuses for our executive officers and general corporate purposes. Our management might not be able to yield a significant return, if any, on any investment of these net proceeds. You will not have the opportunity to influence our decisions on how to use our net proceeds from this offering.
Concentration of ownership among related parties, including our existing executive officers and directors, may prevent new investors from influencing significant corporate decisions.
Currently, our executive officers and directors collectively own 71.2% of our outstanding shares of common stock. Sament, an affiliate of our predecessor and one of our creditors, owns 20% of our outstanding common stock.
Upon completion of this offering based on the assumed offering price, our executive officers and directors will beneficially own, in the aggregate, approximately % of our outstanding shares of common stock, with Mr. Kras and Mr. James owning approximately % each, and Sament owning approximately %. As a result, these stockholders will be able to exercise a significant level of control over all matters requiring stockholder approval, including the election of directors, amendment of our certificate of incorporation and approval of significant corporate transactions. These stockholders acquired their shares of common stock for substantially less than the price of the shares of common stock being sold in this offering, and these stockholders may have interests, with respect to their common stock, that are different from those of investors in this offering. The concentration of voting power among these stockholders may have an adverse effect on the price of our common stock. In addition, this concentration of ownership might adversely affect the market price of our common stock by:
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| · | delaying, deferring or preventing a change of control of us; |
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| · | impeding a merger, consolidation, takeover or other business combination involving us; or |
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| · | discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us. |
This concentration of ownership among related parties, including our existing executive officers and directors, will make the approval of certain transactions difficult or impossible without the support of these stockholders.
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We are an “emerging growth company,” as defined in the JOBS Act, and a “smaller reporting company” within the meaning of the Securities Act, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies or smaller reporting companies will make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies, including (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, (2) reduced disclosure obligations regarding executive compensation in this prospectus and our periodic reports and proxy statements, (3) exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved, and (4) an extended transition period for complying with new or revised accounting standards applicable to public companies. Additionally, we may take advantage of certain reduced disclosure obligations as a “smaller reporting company” as defined in Item 10(f)(1) of Regulation S-K. To the extent we take advantage of such reduced disclosure obligations, it may also make comparison of our financial statements with other public companies difficult or impossible.
After we are no longer an “emerging growth company,” we expect to incur additional management time and cost to comply with the more stringent reporting requirements applicable to companies that are deemed accelerated filers or large accelerated filers, including complying with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act. We cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
We have not and do not expect to declare any dividends to our stockholders in the foreseeable future.
We have not and do not anticipate declaring any cash dividends to holders of our common stock in the foreseeable future. Consequently, investors may need to rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any future gains on their investment. Investors seeking cash dividends should not purchase our common stock.
We may seek to raise additional funds, finance acquisitions or develop strategic relationships by issuing securities that would dilute your ownership. Depending on the terms available to us, if these activities result in significant dilution, it may negatively impact the trading price of our shares of common stock.
Any additional financing that we secure may require the granting of rights, preferences or privileges senior to, or pari passu with, those of our common stock. Any issuances by us of equity securities may be at or below the prevailing market price of our common stock and in any event may have a dilutive impact on your ownership interest, which could cause the market price of our common stock to decline. We may also raise additional funds through the incurrence of debt or the issuance or sale of other securities or instruments senior to our shares of common stock, which may be highly dilutive. The holders of any securities or instruments we may issue may have rights superior to the rights of our common stockholders. If we experience dilution from the issuance of additional securities and we grant superior rights to new securities over holders of our common stock, it may negatively impact the trading price of our shares of common stock and you may lose all or part of your investment.
The price of the shares of our common stock and other terms of this offering have been determined by us along with our underwriter.
If you purchase our shares of common stock in this offering, you will pay a price that was not established in a competitive market. Rather, you will pay a price that was determined by us along with our underwriters. The offering price for our shares of common stock may bear no relationship to our assets, book value, historical results of operations or any other established criterion of value. The trading price, if any, of our common stock that may prevail in any market that may develop in the future, for which there can be no assurance, may be higher or lower than the price you paid for our shares of common stock.
Shares eligible for future sale may adversely affect the market price of our common stock if the shares are successfully listed on Nasdaq or other stock markets, as the future sale of a substantial number of outstanding shares of common stock in the public marketplace could reduce the price of our common stock.
The market price of our shares could decline as a result of sales of substantial amounts of our shares in the public market, or the perception that these sales could occur. In addition, these factors could make it more difficult for us to raise funds through future offerings of our common stock. An aggregate of 25,000,000 shares will be issued and outstanding before the consummation of this offering all of which, except those held by management and holders subject to lock-up agreements, are or will be freely tradable immediately upon effectiveness of this registration statement. All of the shares sold in the offering will be freely transferable without restriction or further registration under the Securities Act. The remaining shares will be “restricted securities” as defined in Rule 144. These shares may be sold without registration under the Securities Act to the extent permitted by Rule 144 or other exemptions under the Securities Act. See “Shares Eligible for Future Sale.”
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A possible “short squeeze” due to a sudden increase in demand of our shares of common stock that largely exceeds supply may lead to price volatility in our shares of common stock.
Following this offering, investors may purchase our shares of common stock to hedge existing exposure in our shares of common stock or to speculate on the price of our shares of common stock. Speculation on the price of our shares of common stock may involve long and short exposures. To the extent aggregate short exposure exceeds the number of shares of our common stock available for purchase in the open market, investors with short exposure may have to pay a premium to repurchase our shares of common stock for delivery to lenders of our shares of common stock. Those repurchases may in turn, dramatically increase the price of our shares of common stock until investors with short exposure are able to purchase additional common shares to cover their short position. This is often referred to as a “short squeeze.” A short squeeze could lead to volatile price movements in our shares of common stock that are not directly correlated to the performance or prospects of our company and once investors purchase the shares of common stock necessary to cover their short position the price of our common stock may decline.
Provisions in our certificate of incorporation and bylaws could discourage a change in control, or an acquisition of us by a third party, even if the acquisition would be favorable to you, thereby adversely affecting existing stockholders.
Our certificate of incorporation and bylaws contain provisions that may have the effect of making more difficult or delaying attempts by others to obtain control of our Company, even when these attempts may be in the best interests of our stockholders. For example, our certificate of incorporation authorizes our Board of Directors, without stockholder approval, to issue one or more series of preferred stock, which could have voting and conversion rights that adversely affect or dilute the voting power of the holders of common stock. These provisions and others that could be adopted in the future could deter unsolicited takeovers or delay or prevent changes in our control or management, including transactions in which stockholders might otherwise receive a premium for their shares over then-current market prices. These provisions may also limit the ability of stockholders to approve transactions that they may deem to be in their best interests.
Our certificate of incorporation designate s the Court of Chancery of the State of Delaware as the exclusive forum for certain litigation that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us.
Our certificate of incorporation specifies that, unless we consent in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or other employee to us or to our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine, in each case subject to the Court of Chancery having personal jurisdiction over the indispensable parties named as defendants therein. Any person or entity purchasing or otherwise acquiring any interest in our securities shall be deemed to have notice of and to have consented to the provisions of our certificate of incorporation described above.
This provision may have the effect of discouraging lawsuits against our directors, officers, employees and agents as it may limit any stockholder’s ability to bring a claim in a judicial forum that the stockholder finds favorable for disputes with us or our directors, officers, employees or agents. The enforceability of similar choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that, in connection with any applicable action brought against us, a court could find the choice of forum provisions contained in our certificate of incorporation to be inapplicable or unenforceable in such action. If a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business, financial condition or results of operations.
General Risk Factors
Public health outbreaks, epidemics or pandemics, including the global COVID-19 pandemic, have disrupted and may continue to disrupt, our business and could materially affect our business, financial condition and results of operations.
The recent 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. For example, government imposed mandatory closures and restrictions across various key markets of ours resulted in volatile supply and demand conditions, primarily due to reduced demand in the food service distribution channel. As a result, product in the industry was redirected to the retail channel and in some cases this led to an increased supply and lower pricing. While demand in our retail channels for certain products has increased due to the impact of COVID-19, there is no guarantee that this increased demand will continue. While these effects were pronounced to varying degrees throughout fiscal year 2020, the future extent of the impact of the COVID-19 pandemic on our financial performance, including our ability to execute our strategic initiatives, is still uncertain and will depend on future developments, including the duration and spread of the pandemic, related government restrictions and the success of vaccines and other treatments for COVID-19. Additionally, as the global economic impacts of COVID-19 continue, fluctuate and/or change, the pandemic’s impact on our operating results may change or be prolonged.
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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. While we are following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of our workforce, we cannot be certain that these measures will be successful in ensuring the health of our workforce. 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.
The impact of the COVID-19 pandemic on our operating results can 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 associated with the COVID-19 pandemic 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.
A prolonged economic downturn, particularly in light of the COVID-19 pandemic, could adversely affect our business.
Uncertain global economic conditions, in particular in light of the COVID-19 pandemic, could adversely affect our business. Negative global and national economic trends, such as decreased consumer and business spending, high unemployment levels and declining consumer and business confidence, pose challenges to our business and could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support our brands, unfavorable economic conditions may negatively affect demand for our products.
Increases in costs, disruption of supply or shortage of raw materials could harm our business.
We may experience increases in the cost or a sustained interruption in the supply or shortage of raw materials. For example, the tariffs currently imposed for importing goods from China has significantly increased. Any such an increase or supply interruption could materially negatively impact our business, prospects, financial condition and operating results. We use various raw materials in our business including aluminum. The prices for these raw materials fluctuate depending on market conditions and global demand for these materials and could adversely affect our business and operating results. Substantial increases in the prices for our raw materials increase our operating costs, and could reduce our margins if we cannot recoup the increased costs through increased prices for our products and services.
Litigation may adversely affect our business, financial condition and results of operations.
From time to time in the normal course of our business operations, we may become subject to litigation involving intellectual property, data privacy and security, consumer protection, food safety, commercial disputes and other matters that may negatively affect our operating results if changes to our business operation are required. We may also be subject to claims involving health and safety, hazardous materials usage, other environmental impacts, or service disruptions or failures. The cost to defend such litigation may be significant and may require a diversion of our resources. There also may be adverse publicity associated with litigation that could negatively affect customer perception of our business, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations. In addition, insurance may not cover existing or future claims, be sufficient to fully compensate us for one or more of such claims, or continue to be available on terms acceptable to us. A claim brought against us that is uninsured or underinsured could result in unanticipated costs, thereby adversely affecting our results of operations and resulting in a reduction in the trading price of our stock.
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An active, liquid and orderly trading market for our common stock may not develop, the price of our stock may be volatile, and you could lose all or part of your investment.
The trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. Our stock price could be subject to wide fluctuations in response to a variety of factors, which include:
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| · | whether we achieve our anticipated corporate objectives; |
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| · | actual or anticipated fluctuations in our quarterly or annual operating results; |
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| · | changes in our financial or operational estimates; |
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| · | our ability to implement our operational plans; |
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| · | termination of the lock-up agreements or other restrictions on the ability of our stockholders to sell shares after this offering; |
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| · | changes in the economic performance or market valuations of companies similar to ours; and |
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| · | general economic or political conditions in the United States or elsewhere. |
In addition, during the duration of the COVID-19 pandemic, the stock market has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of those companies. Broad market and industry factors may seriously affect the market price of companies’ stock, including ours, regardless of actual operating performance. These fluctuations may be even more pronounced in the trading market for our stock shortly following this offering. In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.
Our failure to meet the continuing listing requirements of Nasdaq could result in a delisting of our securities.
If we fail to satisfy the continuing listing requirements of Nasdaq, such as the corporate governance, stockholders equity or minimum closing bid price requirements, Nasdaq may take steps to delist our common stock. Such a delisting would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a delisting, we would likely take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our securities, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future non-compliance with Nasdaq’s listing requirements.
We will incur increased costs and demands upon management as a result of complying with the laws and regulations affecting public companies, which could adversely affect our operating results.
As a public company, we will incur significant legal, accounting and other expenses that we did not incur as a private company, including costs associated with public company reporting and corporate governance requirements. These requirements include compliance with Section 404 and other provisions of the Sarbanes-Oxley Act, as well as rules implemented by the Securities and Exchange Commission (“SEC”) and Nasdaq. In addition, our management team also has to adapt to the requirements of being a public company. We expect complying with these rules and regulations will substantially increase our legal and financial compliance costs and to make some activities more time-consuming and costly.
The increased costs associated with operating as a public company will decrease our net income or increase our net loss, and may require us to reduce costs in other areas of our business or increase the prices of our products or services. Additionally, if these requirements divert our management’s attention from other business concerns, they could have a material adverse effect on our business, financial condition and operating results.
As a public company, we also expect that it may be more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified individuals to serve on our board of directors or as our executive officers.
As a public company, we are obligated to develop and maintain proper and effective internal control over financial reporting. We may not complete our analysis of our internal control over financial reporting in a timely manner, or these internal controls may not be determined to be effective, which may adversely affect investor confidence in our company and, as a result, the value of our common stock.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of the IPO. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting.
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We are in the early stages of the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404. We may not be able to remediate future material weaknesses, or to complete our evaluation, testing and any required remediation in a timely fashion. During the evaluation and testing process, if we identify one or more material weaknesses in our internal control over financial reporting, we will be unable to assert that our internal controls are effective. If we are unable to assert that our internal control over financial reporting is effective, we could lose investor confidence in the accuracy and completeness of our financial reports, which would have a material adverse effect on the price of our common stock.
If our shares of common stock become subject to the penny stock rules, it would become more difficult to trade our shares.
The SEC has adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00, other than securities registered on certain national securities exchanges or authorized for quotation on certain automated quotation systems, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system. If we do not retain a listing on Nasdaq and if the price of our common stock is less than $5.00, our common stock will be deemed a penny stock. The penny stock rules require a broker-dealer, before a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document containing specified information. In addition, the penny stock rules require that before effecting any transaction in a penny stock not otherwise exempt from those rules, a broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive (i) the purchaser’s written acknowledgment of the receipt of a risk disclosure statement; (ii) a written agreement to transactions involving penny stocks; and (iii) a signed and dated copy of a written suitability statement. These disclosure requirements may have the effect of reducing the trading activity in the secondary market for our common stock, and therefore stockholders may have difficulty selling their shares.
If we were to dissolve, the holders of our securities may lose all or substantial amounts of their investments.
If we were to dissolve as a corporation, as part of ceasing to do business or otherwise, we may be required to pay all amounts owed to any creditors before distributing any assets to the investors. There is a risk that in the event of such a dissolution, there will be insufficient funds to repay amounts owed to holders of any of our indebtedness and insufficient assets to distribute to our other investors, in which case investors could lose their entire investment.
If securities or industry analysts do not publish or cease publishing research or reports about us, our business or our market, or if they change their recommendations regarding our stock adversely, our stock price and trading volume could decline.
The trading market for our common stock will be influenced by the research and reports that industry or securities analysts may publish about us, our business, our market or our competitors. If any of the analysts who may cover us change their recommendation regarding our stock adversely, or provide more favorable relative recommendations about our competitors, our stock price would likely decline. If any analyst who may cover us were to cease coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause our stock price or trading volume to decline.
In making your investment decision, you should understand that we and the underwriters have not authorized any other party to provide you with information concerning us or this offering.
You should carefully evaluate all of the information in this prospectus before investing in our company. We may receive media coverage regarding our company, including coverage that is not directly attributable to statements made by our officers, that incorrectly reports on statements made by our officers or employees, or that is misleading as a result of omitting information provided by us, our officers or employees. We and the underwriters have not authorized any other party to provide you with information concerning us or this offering, and you should not rely on this information in making an investment decision.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus, including the sections entitled “Prospectus Summary,” “Risk Factors,” “Use of Proceeds,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Business” contains forward-looking statements. All statements other than statements of historical facts contained in this prospectus, including statements regarding our future results of operations and financial position, business strategy and plans and our objectives for future operations, are forward-looking statements. The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect,” “outlook” and similar expressions are intended to identify forward-looking statements. These forward-looking statements include statements relating to:
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| · | our ability to continue as a going concern; |
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| · | our ability to continue to access and operate our Belvidere, New Jersey facility; |
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| · | our market opportunity; |
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| · | the effects of increased competition as well as innovations by new and existing competitors in our market; |
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| · | our ability to retain our existing customers and to increase our customer base; |
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| · | the future growth of the indoor agriculture industry and demands of our customers; |
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| · | our ability to effectively manage or sustain our growth; |
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| · | our ability to grow the business due to the uncertainty resulting from the COVID-19 pandemic or any future pandemic; |
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| · | our expected use of proceeds from this offering; |
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| · | our ability to maintain, or strengthen awareness of, our brand; |
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| · | our ability to maintain, protect, and enhance our intellectual property; |
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| · | future revenue, hiring plans, expenses and capital expenditures; |
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| · | our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business; |
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| · | our ability to recruit and retain key employees and management personnel; |
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| · | our financial performance and capital requirements following this offering; |
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| · | the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud; |
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| · | the potential lack of liquidity and trading of our securities; |
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| · | the lack of an established market for our securities; and |
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| · | our potential ability to obtain additional financing. |
We caution you that the foregoing list may not contain all of the forward-looking statements made in this prospectus. We have based these forward-looking statements largely on our current expectations about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, short term and long-term business operations and objectives, and financial needs. These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors.” Moreover, we operate in a very competitive and rapidly changing environment. New risks emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance and events and circumstances may be materially different from what we expect.
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USE OF PROCEEDS
We estimate that the net proceeds from this offering will be approximately $ after deducting estimated underwriting discounts and estimated offering expenses payable by us. If the over-allotment option is exercised in full, we estimate that our net proceeds will be approximately $ . We intend to use the net proceeds from this offering for the following purposes:
| Proceeds: |
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| Gross Proceeds |
| $ | 75,000,000 |
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| Discounts |
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| 5,250,000 |
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| Estimated Fees and Expenses |
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| 700,000 |
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| Net Proceeds |
| $ | 69,050,000 |
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| Uses: |
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| Construction of new greenhouses and/or acquisition of existing greenhouses(1) |
| $ | 49,100,000 |
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| Working capital and general corporate purposes |
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| 8,177,405 |
|
| Organizational build-out(2) |
|
| 5,000,000 |
|
| Debt repayment(3) |
|
| 4,472,595 |
|
| Transaction bonuses(4) |
|
| 1,400,000 |
|
| Completion of packhouse at New Jersey facility |
|
| 900,000 |
|
| Total Uses |
| $ | 69,050,000 |
|
______________
| (1) | We have no current plans to acquire existing greenhouses, but we may do so as part of our growth strategy in the future. |
| (2) | Includes the hiring of a chief operating officer, chief marketing officer, head of sales, and support and operational staff. |
| (3) | Includes repayment of the (i) Sament Notes and accrued interest for $3,790,888; and (ii) promissory and demand notes and accrued interest totaling $681,707 held by our Chief Financial Officer, as of December 20, 2021. See “Description of Securities” and “Certain Relationships and Related Party Transactions.” Does not include the potential repayment of the Evergreen Notes if those notes are not converted into shares of common stock prior to the closing of this offering. |
| (4) | Transaction bonuses of $700,000 each are payable to our Chief Executive Officer and Chief Financial Officer under the terms of their employment agreements upon the closing of this offering. See “Executive and Director Compensation – Employment Agreements” for more information. |
A $1.00 increase (decrease) in the assumed public offering price of $ per share, would increase (decrease) the net proceeds to us from this offering by approximately $ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions.
We intend to use $3.791 million of the net proceeds to repay the Sament Notes and accrued interest, which mature in June 2023 and March 2025. If the Evergreen Notes are not converted into shares of common stock prior to the closing of this offering, we intend to repay the amount due under the Evergreen Notes and accrued interest, or $2,315,733, with some of the proceeds of this offering. We intend to repay the promissory and demand notes and accrued interest held by our executive officers with part of the net proceeds of this offering, which include $681,707 payable to our Chief Financial Officer. At their election, holders of our outstanding SAFEs may elect to receive cash instead of converting their SAFE into common stock upon the effectiveness of this offering. If all SAFE holders elected to receive cash, we would be required to pay them $538 thousand.
The actual allocation of proceeds realized from this offering will depend upon our operating revenues and cash position and our working capital requirements may change. Therefore, as of the date of this prospectus, we cannot specify with certainty all of the particular uses for the net proceeds to be received upon the completion of this offering. Accordingly, we will have discretion in the application of the net proceeds, and investors will be relying on our judgment regarding the application of the proceeds of this offering. Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities.
DIVIDEND POLICY
We have never paid cash dividends on any of our capital stock, and we do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain all available funds and any future earnings to fund the development and expansion of our business. Any future determination to pay dividends will be at the discretion of our Board of Directors and will depend upon a number of factors, including our results of operations, financial condition, future prospects, contractual restrictions, restrictions imposed by applicable law and other factors our Board of Directors deems relevant.
| 21 |
| Table of Contents |
The following table sets forth our capitalization as of September 30, 2021 as follows:
|
| · | on an actual basis; |
|
|
|
|
|
| · | on a pro forma basis to reflect (i) the exercise by Sament of options to purchase 5,000,000 shares of common stock as of October 8, 2021 for an aggregate purchase price of $2.00, (ii) the conversion of convertible notes held by Messrs. Kras and James, our CEO and CFO, respectively for 1,392,913 shares of our common stock upon the consummation of this offering, (iii) the conversion of the Series 2020 Crowd SAFEs into 748,779 shares of our common stock upon the consummation of this offering, and (iv) the issuance of 1,037,410 shares of our common stock upon the conversion of the Evergreen Notes; and |
|
|
|
|
|
| · | on a pro forma, as adjusted, basis to reflect the issuance and sale by us of $ in shares in this offering at the assumed public offering price of $ per share, after deducting underwriting discounts and commissions and estimated offering expenses payable by us and the receipt by us of the proceeds of such sale. |
The pro forma information below is illustrative only, and our capitalization following the closing of this offering will change based on the actual initial public offering price and other terms of this offering determined at pricing. You should read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the financial statements and related notes included elsewhere in this prospectus.
|
|
| As of September 30, 2021 |
| |||||||||
|
|
| Unaudited, |
|
| Unaudited, Pro |
|
| Unaudited, Pro Forma as |
| |||
| (In thousands) |
| Actual |
|
| Forma(1) |
|
| Adjusted(1) |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Cash and Cash Equivalents |
| $ | 15 |
|
| $ | 15 |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term debt, net of discounts |
|
| 4,466 |
|
|
| 3,992 |
|
|
| - |
|
| Long-term lease liabilities |
|
| 147 |
|
|
| 147 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Stockholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
| Common stock ($0.0001 par value, 200,000,000 shares authorized, 20,000,000 shares outstanding as of September 30, 2021; 27,133,745 shares on a pro forma basis; shares on a pro forma as adjusted basis) |
|
| 2 |
|
|
| 3 |
|
|
| - |
|
| Additional paid in capital |
|
| 4 |
|
|
| 4,082 |
|
|
| - |
|
| Accumulated Deficit |
|
| (5,530 | ) |
|
| (5,530 | ) |
|
| - |
|
| Total stockholders' deficit |
|
| (5,524 | ) |
|
| (1,445 | ) |
|
| - |
|
| Total capitalization |
| $ | (911 | ) |
| $ | 2,694 |
|
| $ | - |
|
| (1) | The pro forma and pro forma as adjusted information is illustrative only and following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of this offering determined at pricing. |
The number of shares of our common stock outstanding set forth in the table above excludes, as of December 20, 2021:
|
| · | 751,634 shares of common stock issuable upon the exercise of a warrant held by Evergreen at an exercise price of $1.53 per share; |
|
| · | 277,109 shares of common stock issuable upon the exercise of warrants held by Evergreen at an exercise price of $4.15 per share; and |
|
| · | shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued in this offering. |
If you invest in our securities in this offering, your investment will be immediately and substantially diluted to the extent of the difference between the public offering price per share of our common stock and the pro forma net tangible book value per share of our common stock after giving effect to the offering.
Our net tangible book value (deficit) as of September 30, 2021 was $(6.563) million, or approximately $(0.33) per share. Net tangible book value per share represents our total tangible assets less total liabilities, divided by the number of shares of common stock outstanding.
Our pro forma net tangible book value (deficit) as of September 30, 2021 was $ ( 2.48 5) million , or approximately $ (0.09) per share after taking into account the pro forma adjustments described in “Capitalization.”
| 22 |
| Table of Contents |
Pro forma, as adjusted net tangible book value dilution per share of common stock to new investors represents the difference between the amount per share paid by purchasers in the offering and the pro forma net tangible book value per share of common stock immediately after completion of the offering. After giving effect to the offering and our sale of the shares of common stock in the offering at an assumed public offering price of $ per share, and after deduction of underwriting discounts and commissions from gross proceeds raised in the offering and estimated offering expenses payable by us, our pro forma, as adjusted net tangible book value as of September 30, 2021 would have been $ , or $ per share of common stock. This represents an immediate increase in pro forma net tangible book value of $ per share of common stock to existing stockholders and an immediate dilution in net tangible book value of $ per share of common stock to investors of the offering, as illustrated in the following table, based on shares outstanding as of September 30, 2021.
| Offering price per share of common stock |
|
|
| |
| Actual net tangible book value per share before this offering, as of September 30, 2021 (1) |
| $ | (0.33 | ) |
| Pro forma adjustments (2) |
|
| 0.24 |
|
| Pro forma net tangible book value per share |
| $ | (0.09 | ) |
| Increase in net tangible book value per share attributable to new investors (3) |
|
| $ |
|
| Pro forma net tangible book value per share of common stock after this offering, as of September 30, 2021 (4) |
|
|
|
|
| Dilution per share to new investors |
|
|
|
|
| (1) | Determined by dividing (i) net tangible book value (total assets less intangible assets) less total liabilities by (ii) the total number of shares of common stock issued and outstanding prior to the offering |
|
|
|
| (2) | Represents (i) the exercise by Sament of options to purchase 5,000,000 shares of common stock as of October 8, 2021 for an aggregate purchase price of $2.00, (ii) the expected conversion of convertible notes held by Messrs. Kras and James, our CEO and CFO, respectively for 1,392,913 shares of our common stock upon the consummation of this offering, (iii) the conversion of the Series 2020 Crowd SAFEs into 748,779 shares of our common stock upon the consummation of this offering, and (iv) the issuance of 1,037,410 shares of our common stock upon the conversion of the Evergreen Notes. |
|
|
|
| (3) | Represents the difference between (i) pro forma, as adjusted net tangible book value per share after this offering and (ii) net tangible book value per share as of September 30, 2021. |
|
|
|
| (4) | Determined by dividing (i) pro forma, as adjusted net tangible book value, which is our pro forma net tangible book value plus the cash proceeds of this offering, after deducting the estimated offering expenses payable by us, by (ii) the total number of shares of common stock to be outstanding following this offering. |
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the pro forma net tangible book value per share after this offering by $ per share and the dilution to new investors purchasing common stock in this offering by $ per share, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters exercise their option in full to purchase an additional shares of common stock in this offering, the pro forma net tangible book value per share after the offering would be $ per share, the increase in the net tangible book value per share to existing stockholders would be $ per share and the dilution to new investors purchasing our common stock in this offering would be $ per share.
The number of shares of our common stock outstanding set forth in the table above excludes, as of December 2, 2021:
|
| · | 751,634 shares of common stock issuable upon the exercise of a warrant held by Evergreen at an exercise price of $1.53 per share; |
|
| · | 277,109 shares of common stock issuable upon the exercise of warrants held by Evergreen at an exercise price of $4.15 per share; and |
|
| · | shares of our common stock issuable upon the exercise of the Representative’s Warrants to be issued in this offering. |
| 23 |
| Table of Contents |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of our operations together with our consolidated financial statements and the notes thereto appearing elsewhere in this prospectus. This discussion contains forward-looking statements reflecting our current expectations, whose actual outcomes involve risks and uncertainties. Actual results and the timing of events may differ materially from those stated in or implied by these forward-looking statements due to a number of factors, including those discussed in the sections entitled “Risk Factors,” “Cautionary Statement regarding Forward-Looking Statements,” and elsewhere in this prospectus.
Business Overview
Edible Garden is a 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.
Our business is a successor business of a subsidiary of Terra Tech. We purchased substantially all of the assets of Edible Garden Corp., a subsidiary of Terra Tech which we refer to in this section as “Predecessor”, from Terra Tech as of March 30, 2020 for approximately $3.0 million. Our company was incorporated on March 28, 2020 in the State of Wyoming as Edible Garden Inc. We are now a Delaware corporation with the name “Edible Garden AG Incorporated.”
Recent Developments
Private Placement
On October 7, 2021, we closed on the first tranche of a private placement with Evergreen and raised $1.0 million, which we used to support our working capital requirements. In the private placement, we issued a 15% original issue discount secured promissory note to Evergreen (the “First Evergreen Note”) and a warrant to purchase 751,634 shares of our common stock (the “First Evergreen Warrant”). The First Evergreen Note matures on July 7, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the First Evergreen Note into shares of common stock at a conversion price of $1.53 per share. The First Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $1.53 per share until October 7, 2026.
On November 8, 2021 we closed on the second tranche of the Evergreen private placement and raised $350,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Second Evergreen Note”) and a warrant to purchase 96,988 shares of our common stock (the “Second Evergreen Warrant”). The Second Evergreen Note matures on August 8, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Second Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Second Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until November 8, 2026.
On November 22, 2021 we closed on the third tranche of the Evergreen private placement and raised $350,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Third Evergreen Note”) and a warrant to purchase 96,988 shares of our common stock (the “Third Evergreen Warrant”). The Third Evergreen Note matures on August 22, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Third Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Third Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until November 22, 2026.
On December 20, 2021 we closed on the fourth tranche of the Evergreen private placement and raised $300,000, which we intend to use to support our working capital requirements. We issued a 15% original issue discount secured promissory note to Evergreen (the “Fourth Evergreen Note,” and with the First, Second and Third Evergreen Notes, the “Evergreen Notes”) and a warrant to purchase 83,133 shares of our common stock (the “Fourth Evergreen Warrant,” and together with the First, Second and Third Evergreen Warrants, the “Evergreen Warrants”). The Fourth Evergreen Note matures on September 20, 2022 and incurs interest at a rate of 5.0% per annum. Evergreen may elect to convert the Fourth Evergreen Note into shares of common stock at a conversion price of $4.15 per share. The Fourth Evergreen Warrant may be exercised for the underlying shares of common stock at an exercise price of $4.15 per share until December 20, 2026.
The Evergreen Notes are secured and subordinated to the Sament Notes. If the Evergreen Notes are not converted into shares of common stock prior to the closing of this offering, we intend to repay the amount due under the Evergreen Notes with some of the proceeds of this offering.
As part of the private placement, Maxim received a cash fee equal to 6% of the private placement proceeds. The offering was conducted pursuant to an exemption from registration under the Securities Act in reliance upon Rule 506(b) promulgated under the Securities Act.
Exercise of Options by Sament
On October 8, 2021, Sament exercised its option to purchase 5,000,000 shares of our common stock for an aggregate exercise price of $2.00.
Impact of COVID-19
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. For example, government imposed mandatory closures and restrictions across various key markets of ours resulted in volatile supply and demand conditions, primarily due to reduced demand in the food service distribution channel. As a result, product in the industry was redirected to the retail channel and in some cases this led to an increased supply and lower pricing. While demand in our retail channels for certain products has increased due to the impact of COVID-19, there is no guarantee that this increased demand will continue. While these effects were pronounced to varying degrees throughout fiscal year 2020, the future extent of the impact of the COVID-19 pandemic on our financial performance, including our ability to execute our strategic initiatives, is still uncertain and will depend on future developments, including the duration and spread of the pandemic, related government restrictions and the success of vaccines and other treatments for COVID-19. Additionally, as the global economic impacts of COVID-19 continue, fluctuate and/or change, the pandemic’s impact on our operating results may change or be prolonged.
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. We are following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of our workforce, we cannot be certain that these measures will be successful in ensuring the health of our workforce. 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.
The impact of the COVID-19 pandemic on our operating results can 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 associated with the COVID-19 pandemic 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.
Results of Operations
The comparability of our operating results in the year ended December 31, 2020 compared to the year ended December 31, 2019 includes the predecessor company, Edible Garden Corp., a subsidiary of Terra Tech (“Predecessor”) as well as the successor company, or Edible Garden AG Incorporated (us or the “Successor”). The period from January 1, 2020 through March 31, 2020 relates to the Predecessor and the period from April 1, 2020 through December 31, 2020 relates to the Successor. The period from January 1, 2019 through December 31, 2019 relate to the Predecessor.
We present the information in this format to assist readers in understanding and assessing the trends and significant changes in our results of operations on a comparable basis. We believe this presentation is appropriate because it provides a meaningful comparison and relevant analysis of our results of operations for the relevant periods.
| 24 |
| Table of Contents |
Comparison of Results of Operations for the Year ended December 31, 2019 (Predecessor) compared to the Period from January 1, 2020 through March 31, 2020 (Predecessor) and the Period from March 28, 2020 (Inception) through December 31, 2020 (Successor)
|
|
| Predecessor |
|
| Successor |
| ||||||
| (in thousands) |
| Year Ended December 31, 2019 |
|
| Period from January 1, 2020 through March 31, 2020 |
|
| Period from March 28, 2020 (inception) through December 31, 2020 |
| |||
| Revenue |
| $ | 5,634 |
|
| $ | 1,750 |
|
| $ | 7,691 |
|
| Cost of goods sold |
|
| 4,366 |
|
|
| 1,599 |
|
|
| 6,488 |
|
| Gross Profit |
|
| 1,268 |
|
|
| 151 |
|
|
| 1,203 |
|
| Selling, general and administrative expenses |
|
| 5,291 |
|
|
| 1,480 |
|
|
| 3,675 |
|
| Impairment of assets |
|
| (34 | ) |
|
| — |
|
|
| — |
|
| (Gain) / Loss on sale of assets |
|
| — |
|
|
| 303 |
|
|
| — |
|
| Loss from operations |
|
| (3,988 | ) |
|
| (1,632 | ) |
|
| (2,472 | ) |
| Other income / (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
| — |
|
|
| — |
|
|
| (112 | ) |
| Gain from Debt Forgiveness |
|
| — |
|
|
| — |
|
|
| 503 |
|
| Total other income / (expense) |
|
| — |
|
|
| — |
|
|
| 391 |
|
| Income / (loss) from continuing operations |
|
| (3,988 | ) |
|
| (1,632 | ) |
|
| (2,081 | ) |
| NET LOSS |
| $ | (3,988 | ) |
| $ | (1,632 | ) |
| $ | (2,081 | ) |
Revenues
Revenues were $7.691 million for the period March 28, 2020 through December 31, 2020 (Successor) and $1.750 million for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $5.634 million for the year ended December 31, 2019 (Predecessor). On a combined basis, revenues for the Predecessor and Successor were $9.441 million for the year ended December 31, 2020, an increase of $3.807 million, or 67.57%, compared to the year ended December 31, 2019 for the Predecessor. This represents growth from new accounts, growth from our existing customers taking in additional product lines due to the increased demand from consumers due to the impact of COVID-19 and overall category growth.
Cost of goods sold
Cost of goods sold were $6.488 million for the period March 28, 2020 through December 31, 2020 (Successor) and $1.599 million for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $4.366 million for the year ended December 31, 2019 (Predecessor). On a combined basis, cost of goods sold for the Predecessor and Successor were $8.087 million for the year ended December 31, 2020, an increase of $3.721 million, or 85.25%, compared to the year ended December 31, 2019 for the Predecessor.
The increase in cost of goods sold was primarily due to the raw material costs in the amount of $2.123 million, on a combined basis, to fulfill the orders placed by our customers and additional costs incurred due to additional supply chain pressure caused by COVID-19. The increase in labor for both production to produce the products and in house delivery costs to get the products to market amounted to $654 thousand, on a combined basis. The increase in the cost of freight to get the products to market amounted to $945 thousand, on a combined basis.
| 25 |
| Table of Contents |
Gross margin
Gross margin was $1.203 million or 15.64% of sales for the period March 28, 2020 through December 31, 2020 (Successor) and $151 thousand or 8.64% of sales for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $1.268 million or 22.52% of sales for the year ended December 31, 2019 (Predecessor). On a combined basis, gross margin for the Predecessor and Successor was $1.354 million or 14.34% of sales for the year ended December 31, 2020, an increase of $85 thousand, or 6.73%, compared to the year ended December 31, 2019 for the Predecessor, while gross margin as a percentage of sales declined by 8.16%. 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 while beginning to leverage a small part of our operating efficiencies.
Selling, general and administrative
Selling, general and administrative expenses were $3.675 million for the period March 28, 2020 through December 31, 2020 (Successor) and $1.480 million for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $5.291 million for the year ended December 31, 2019 (Predecessor). On a combined basis, selling, general and administrative expenses for the Predecessor and Successor were $5.155 million for the year ended December 31, 2020, a decrease of $136 thousand, or 2.57%, compared to the year ended December 31, 2019 for the Predecessor. Bad debt expense is attributable to the predecessor company for reserves established of approximately $162 thousand; commission expense, on a combined basis, increased by $78 thousand due to brokers we retained to help increase revenue; depreciation and amortization, on a combined basis, increased by approximately $171 thousand based on the allocation of the assets acquired in the Asset Acquisition; employee benefits, on a combined basis, increased by approximately $71 thousand due to the higher rates paid for workmen’s compensation insurance due to the changes in our experience rating and other professional fees increased by approximately $165 thousand for outside contractors retained to establish better operating efficiencies. Advertising, on a combined basis, decreased by approximately $72 thousand due to less advertising done during the COVID-19 pandemic; banking, on a combined basis, decreased by approximately $68 thousand since the successor company does not operate in the cannabis industry; salaries, on a combined basis, decreased by approximately $263 thousand due to the reduced headcount while deploying automation in the production facility; legal expense, on a combined basis, decreased by approximately $245 thousand since the predecessor company settled a lawsuit; trade shows, on a combined basis, decreased by approximately $35 thousand since there were no trade shows during the COVID-19 pandemic; and utilities, on a combined basis, decreased by approximately $91 thousand due to better controls put in place at the greenhouse.
Loss on sale of assets
Loss on the sale of assets in the period from January 1, 2020 to March 31, 2020 was approximately $303 thousand from the predecessor company recorded for the sale of the assets to the successor company.
Loss from operations
Loss from operations were $2.472 million for the period March 28, 2020 through December 31, 2020 (Successor) and $1.632 million for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $3.988 million for the year ended December 31, 2019 (Predecessor). On a combined basis, loss from operations for the Predecessor and Successor were $4.104 million for the year ended December 31, 2020, an increase of $116 thousand, or 2.91%, compared to the year ended December 31, 2019 for the Predecessor.
Interest expense
Interest expense was $112 thousand for the period March 28, 2020 through December 31, 2020 (Successor) and zero for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to zero for the year ended December 31, 2019 (Predecessor). On a combined basis, interest expense for the Predecessor and Successor was $112 thousand for the year ended December 31, 2020, an increase of $112 thousand compared to the year ended December 31, 2019 for the Predecessor. The interest was incurred by the successor due to the seller financing notes for the Asset Acquisition.
Gain on Debt Forgiveness
Gain on Debt Forgiveness in the amount of $503 thousand was from the successor due to the Paycheck Protection Program which was approved by the Small Business Administration.
Net Loss
Net Loss was $2.081 million for the period March 28, 2020 through December 31, 2020 (Successor) and $1.632 million for the period from January 1, 2020 through March 31, 2020 (Predecessor), compared to $3.988 million for the year ended December 31, 2019 (Predecessor). On a combined basis, the net loss for the Predecessor and Successor was $3.713 million for the year ended December 31, 2020, an increase of $275 thousand, compared to $3.988 million net loss for the Predecessor in the year ended December 31, 2019.
Management will continue its efforts to attempt to lower operating expenses and increase revenue. We continue to invest in further expanding our operations and promoting our name and products. Given the fact that most of the operating expenses are fixed or have a quasi-fixed character, management expects that, as revenue increases, those expenses, as a percentage of revenue, will significantly decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in future periods.
| 26 |
| Table of Contents |
Comparison of Results of Operations for the three months ended March 31, 2020 (Predecessor) and the period March 28, 2020 (inception) through September 30, 2020 (Successor) are compared to the nine months ended September 30, 2021 (Successor)
|
|
| Predecessor |
|
| Successor |
|
|
| ||||
|
|
|
|
| Period from |
|
| Successor |
| ||||
|
|
|
|
| March 28, 2020 |
|
|
|
| ||||
|
|
| Three |
|
| (inception) |
|
| Nine Months |
| |||
|
|
| Months Ended |
|
| through |
|
| Ended |
| |||
|
|
| March 31, |
|
| September 30, |
|
| September 30, |
| |||
| (in thousands) |
| 2020 |
|
| 2020 |
|
| 2021 |
| |||
| Revenue |
| $ | 1,750 |
|
| $ | 5,118 |
|
| $ | 7,708 |
|
| Cost of goods sold |
|
| 1,599 |
|
|
| 4,244 |
|
|
| 7,100 |
|
| Gross Profit |
|
| 151 |
|
|
| 874 |
|
|
| 608 |
|
| Selling, general and administrative expenses |
|
| 1,480 |
|
|
| 2,380 |
|
|
| 3,924 |
|
| Impairment of assets |
|
| — |
|
|
| — |
|
|
| — |
|
| (Gain) / Loss on sale of assets |
|
| 303 |
|
|
| — |
|
|
| — |
|
| Loss from operations |
|
| (1,632 | ) |
|
| (1,506 | ) |
|
| (3,316 | ) |
| Other income / (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
| — |
|
|
| (87 | ) |
|
| (175 | ) |
| Gain from extinguishment of debt |
|
| — |
|
|
| — |
|
|
| 42 |
|
| Total other income / (expense) |
|
| — |
|
|
| (87 | ) |
|
| (133 | ) |
| Income / (loss) from continuing operations |
|
| (1,632 | ) |
|
| (1,592 | ) |
|
| (3,449 | ) |
| NET LOSS |
| $ | (1,632 | ) |
| $ | (1,592 | ) |
| $ | (3,449 | ) |
Revenues
Revenues were $1.750 million for the three months ended March 31, 2020 (Predecessor) and $5.118 million for the period March 28, 2020 (inception) through September 30, 2020 (Successor) for a total of $6.868 million, compared to $7.708 million for the nine months ended September 30, 2021 (Successor). Revenues for the Successor increased by $840 thousand, or 12.23%, compared to the combined basis for the Predecessor and Successor for the nine months ended September 30, 2020. This represents growth from new accounts, growth from our existing customers taking in additional product lines due to the increased demand from consumers due to the impact of COVID-19 and overall category growth.
Cost of goods sold
Cost of goods sold were $1.599 million for the three months ended March 31, 2020 (Predecessor) and $4.244 million for the period March 28, 2020 (inception) through September 30, 2020 (Successor) for a total of $5.843 million, compared to $7.100 million for the nine months ended September 30, 2021 (Successor). Cost of goods sold for the Successor increased $1.257 million for the nine months ended September 30, 2021, or 21.51%, compared to the combined basis for the Predecessor and Successor for the nine months ended September 30, 2020.
The increase in cost of goods sold was primarily due to the raw material costs in the amount of $652 thousand, on a combined basis, to fulfill the orders placed by our customers and additional costs incurred due to additional supply chain pressure caused by COVID-19. The increase in labor for both production to produce the products and in house delivery costs to get the products to market amounted to $1.061 million, on a combined basis. This increase was offset by a decrease in the cost of freight to get the products to market, of $456 thousand on a combined basis, because our own employees are delivering our products instead of us incurring this cost from third-party carriers.
| 27 |
| Table of Contents |
Gross margin
Gross margin was $151 thousand or 8.64% of sales for the period three months ended March 31, 2020 (Predecessor) and $874 thousand or 17.08% of sales for the period March 28, 2020 (inception) through September 30, 2020 (Successor), compared to $608 thousand or 7.89% of sales for the nine months ended September 30, 2021. Gross margin for the Successor was $608 thousand or 7.89% of sales for the nine months ended September 30, 2021, a decrease of $417 thousand, or 6.07%, compared to the combined basis for the Predecessor and Successor for the nine months ended September 30, 2020, while gross margin as a percentage of sales declined by 7.03%. Our margins decreased 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 while beginning to leverage a small part of our operating efficiencies.
Selling, general and administrative
Selling, general and administrative expenses were $1.480 million for the three months ended March 31, 2020 (Predecessor) and $2.380 million for the period from March 28, 2020 (inception) through September 30, 2020 (Successor), compared to $3.924 million for the nine months ended September 30, 2021 (Successor). Selling, general and administrative expenses for the Successor were $3.924 million for the nine months ended September 30, 2021, an increase of $64 thousand, or 1.66%, compared to the combined basis for the Predecessor and Successor for the nine months ended September 30, 2020. Bad debt expense is attributable to the predecessor company for reserves established of approximately $176 thousand; commission expense, on a combined basis, increased by approximately $50 thousand due to brokers we retained to help increase revenue; employee benefits, on a combined basis, decreased by approximately $109 thousand due to the reduction in personnel offset by higher rates paid for workmen’s compensation insurance due to the changes in our experience rating; and other professional fees, on a combined basis, decreased by approximately $43 thousand for outside contractors retained to establish better operating efficiencies. Salaries, on a combined basis, decreased by approximately $202 thousand due the reduced headcount while deploying automation in the production facility; audit fees increased by $60 thousand, on a combined basis, legal expense, on a combined basis, increased by approximately $72 thousand, utilities increased by $169 thousand, on a combined basis due to increased production, advertising increased by approximately $40 thousand, on a combined basis and depreciation increased by approximately $68 thousand on a combined basis .
Loss on sale of assets
Loss on the sale of assets was approximately $303 thousand from the predecessor company recorded for the sale of the assets to the successor company. There was no loss on the sale of assets in the nine months ended September 30, 2021.
Loss from operations
Loss from operations were $1.632 million for the three months ended March 31, 2020 (Predecessor) and $1.506 million for the period March 28, 2020 (inception) through September 30, 2020 (Successor), compared to $3.316 million for the year nine months ended September 30, 2021 (Successor). Loss from operations for the Successor were $3.316 million for the nine months ended September 30, 2021, an increase of $178 thousand, or 5.67%, compared to the combined basis of the Predecessor and Successor of $3.138 million for the nine months ended September 30, 2020.
Interest expense
Interest expense was zero for the three months ended March 31, 2020 (Predecessor) and $87 thousand for the period March 28, 2020 through September 30, 2020 (Successor), compared to $175 thousand for the nine months ended September 30, 2021 (Successor). On a combined basis, interest expense for the Predecessor and Successor was $87 thousand for the nine months ended September 30, 2020. There was an increase for the Successor of $88 thousand for the nine months ended September 30, 2021. The interest was incurred by the successor due to the seller financing notes for the Asset Acquisition as well as other working capital loans.
Gain from extinguishment of debt
During the first quarter of 2021, the Company purchased a total of $227,365 of goods from Arch City AG, LLC (“Arch City”), an entity partially owned by Mr. Kras, our Chief Executive Officer. In May 2021, the Company entered into an Assumption and Indemnification Agreement (the “Assumption Agreement”) with Arch City, which resulted in the Company assuming a liability of $78,976 that Arch City owed to a third-party supplier. In consideration for payment of the outstanding liability, Arch City forgave the Company’s outstanding balance of accounts payable, which totaled $121,470. The Company recognized a gain from extinguishment of debt of $42,494 during the third quarter of 2021. There was no gain from extinguishment of debt in the nine months ended September 30, 2020.
Net Loss
Net Loss was $1.632 million for the three months ended March 31, 2020 (Predecessor) and $1.592 million for the period March 28, 2020 through September 30, 2020 (Successor), compared to $3.449 million for the nine months ended September 30, 2021 (Successor). On a combined basis, the net loss for the Predecessor and Successor was $3.224 million for the nine months ended September 30, 2020, an increase for the Successor of $225 thousand for the nine months ended September 30, 2021.
Management will continue its efforts to attempt to lower operating expenses and increase revenue. We continue to invest in further expanding our operations and promoting our name and products. Given the fact that most of the operating expenses are fixed or have a quasi-fixed character, management expects that, as revenue increases, those expenses, as a percentage of revenue, will significantly decrease. Nevertheless, there can be no assurance that we will be able to increase our revenues in future periods.
| 28 |
| Table of Contents |
Non-GAAP Financial Measures
In addition to our results determined in accordance with GAAP, we believe certain measures are useful in evaluating our operating performance. These measures constitute non-GAAP measures. These non-GAAP measures are used by management in making operating decisions, allocating financial resources, and internal planning and forecasting, and for business strategy purposes. Non-GAAP financial measures have inherent limitations and are not uniformly utilized by issuers. Therefore, these non-GAAP financial measures should not be considered in isolation, or as a substitute for comparable measures prepared in accordance with GAAP. A reconciliation is provided below for each non-GAAP financial measure to the most directly comparable financial measure stated in accordance with GAAP.
Adjusted EBITDA and Adjusted EBITDA Margin
Management believes that Adjusted EBITDA and Adjusted EBITDA Margin, non-GAAP measures, are strong indicators of our overall operating performance and are useful to management and investors as measures of comparative operating performance from period to period. We define Adjusted EBITDA as net income before interest, taxes, depreciation, and amortization, and as further adjusted for gain on extinguishment of debt, share-based compensation, transaction and acquisition-related charges, integration and restructuring charges, and other non-cash charges. We exclude the impact of share-based compensation because it is a non-cash expense and we believe that excluding this item provides meaningful supplemental information regarding performance and ongoing cash generation potential. We exclude gain on extinguishment of debt, transaction and acquisition related charges, integration and restructuring charges, and other charges because such expenses are episodic in nature and have no direct correlation to the cost of operating our business on an ongoing basis. We define Adjusted EBITDA Margin as Adjusted EBITDA divided by total revenues.
Adjusted EBITDA was $(3.479) million for the year ended December 31, 2019 (Predecessor) and represented an Adjusted EBITDA Margin of (62)%. Adjusted EBITDA was $(1.182) million for the period from January 1, 2020 through March 31, 2020 (Predecessor) and represented an Adjusted EBITDA Margin of (68)%. Adjusted EBITDA was $(1.402) million for the period from March 28, 2020 through December 31, 2020 (Successor) and represented an Adjusted EBITDA Margin of (18)%. On a combined basis, Adjusted EBITDA for the Predecessor and Successor was $(2.584) million for the year ended December 31, 2020 and represented an Adjusted EBITDA Margin of (27)%.
Growth in Adjusted EBITDA was driven primarily from revenue growth attributed to new and existing customers offset by the contraction of margin due to supply chain issues during COVID-19 pandemic.
The following table presents the reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to the comparable GAAP measures for the last two fiscal years.
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
|
|
|
| Period from |
|
| Period from |
| |||
|
|
|
|
|
| January 1, |
|
| March 28, 2020 |
| |||
|
|
|
|
| 2020 |
|
| (inception) |
| ||||
|
|
| Year Ended |
|
| through |
|
| through |
| |||
|
|
| December 31, |
|
| March 31, |
|
| December 31, |
| |||
| (in thousands) |
| 2019 |
|
| 2020 |
|
| 2020 |
| |||
| Net Loss |
| $ | (3,988 | ) |
| $ | (1,632 | ) |
| $ | (2,081 | ) |
| Interest expense, net |
|
| — |
|
|
| — |
|
|
| 112 |
|
| Depreciation and amortization |
|
| 543 |
|
|
| 147 |
|
|
| 567 |
|
| Impairment of assets |
|
| (34 | ) |
|
| — |
|
|
| — |
|
| (Gain) / Loss on sale of assets |
|
| — |
|
|
| 303 |
|
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA |
| $ | (3,479 | ) |
| $ | (1,182 | ) |
| $ | (1,402 | ) |
| 29 |
| Table of Contents |
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
|
|
|
|
|
|
| Period from |
| |||
|
|
|
|
|
| Period from |
|
| March 28, 2020 |
| |||
|
|
|
|
| January 1, 2020 |
|
| (inception) |
| ||||
|
|
| Year Ended |
|
| through |
|
| through |
| |||
|
|
| December 31, |
|
| March 31, |
|
| December 31, |
| |||
| (in thousands) |
| 2019 |
|
| 2020 |
|
| 2020 |
| |||
| Adjusted EBITDA |
| $ | (3,479 | ) |
| $ | (1,182 | ) |
| $ | (1,402 | ) |
| Total Revenues |
|
| 5,634 |
|
|
| 1,750 |
|
|
| 7,691 |
|
| Adjusted EBITDA Margin |
| $ | -62 | % |
| $ | -68 | % |
| $ | -18 | % |
Adjusted EBITDA was $(1.182) million for the three months ended March 31, 2020 (Predecessor) and represented an Adjusted EBITDA Margin of (68)%. Adjusted EBITDA was $(1.402) million for the period from March 28, 2020 (inception) through September 30, 2020 (Successor) and represented an Adjusted EBITDA Margin of (18)%. On a combined basis, Adjusted EBITDA for the Predecessor and Successor was $(2.584) million for the period from January 1, 2020 through September 30, 2020 and represented an Adjusted EBITDA Margin of (27)%. Adjusted EBITDA was $(2.584) million for the nine months ended September 30, 2021 represented an Adjusted EBITDA Margin of (27)%.
Growth in Adjusted EBITDA was driven primarily from revenue growth attributed to new and existing customers offset by the contraction of margin due to supply chain issues during COVID-19 pandemic.
The following table presents the reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to the comparable GAAP measures for the nine-month periods.
|
|
| Predecessor |
|
| Successor |
|
|
| ||||
|
|
|
|
| Period from |
|
| Successor |
| ||||
|
|
|
|
| March 28, 2020 |
|
|
| |||||
|
|
| Three |
|
| (inception) |
|
| Nine Months |
| |||
|
|
| Months Ended |
|
| through |
|
| Ended |
| |||
|
|
| March 31, |
|
| September 30, |
|
| September 30, |
| |||
| (in thousands) |
| 2020 |
|
| 2020 |
|
| 2021 |
| |||
| Net Loss |
| $ | (1,632 | ) |
| $ | (1,592 | ) |
| $ | (3,449 | ) |
| Interest expense, net |
|
| — |
|
|
| 87 |
|
|
| 175 |
|
| Depreciation and amortization |
|
| 147 |
|
|
| 356 |
|
|
| 571 |
|
| (Gain) / Loss on sale of assets |
|
| 303 |
|
|
| — |
|
|
| — |
|
| (Gain) from extinguishment of debt |
|
|
|
|
|
|
|
|
|
| (42 | ) |
| Adjusted EBITDA |
| $ | (1,182 | ) |
| $ | (1,149 | ) |
| $ | (2,745 | ) |
| 30 |
| Table of Contents |
|
|
| Predecessor |
|
| Successor |
|
|
|
| |||
|
|
|
|
|
| Period from |
|
| Successor |
| |||
|
|
|
|
|
| March 28, 2020 |
|
|
|
| |||
|
|
| Three |
|
| (inception) |
|
| Nine Months |
| |||
|
|
| Months Ended |
|
| through |
|
| Ended |
| |||
|
|
| March 31, |
|
| September 30, |
|
| September 30, |
| |||
| (in thousands) |
| 2020 |
|
| 2020 |
|
| 2021 |
| |||
| Adjusted EBITDA |
| $ | (1,182 | ) |
| $ | (1,149 | ) |
| $ | (2,745 | ) |
| Total Revenues |
|
| 1,750 |
|
|
| 5,118 |
|
|
| 7,708 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Adjusted EBITDA Margin |
|
| -68 | % |
|
| -22 | % |
|
| -36 | % |
Liquidity and Capital Resources
Going Concern Considerations
We have incurred significant losses since our inception. We have experienced net losses of approximately $2.081 million for the period March 28, 2020 (inception) through December 31, 2020 and $3.449 million in the nine months ended September 30, 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 and, therefore, our operating losses will continue or even increase at least through the near term.
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. The report of our independent registered public accounting firm that accompanies our audited consolidated financial statements contains a going concern qualification in which such firm expressed substantial doubt about our ability to continue as a going concern. 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.
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. Income taxes are currently not a significant use of funds but after the benefits of our net operating loss carryforwards are fully recognized, could become a material use of funds, depending on our future profitability and future tax rates. The Company’s liquidity needs are met primarily through cash flows from operations, as well as funds available under our term loan borrowings and related party loans. Our cash flows from operations include cash received from customers, less cash costs to provide services to our customers, which includes general and administrative costs and interest payments.
As of December 31, 2020, we had $5 thousand in cash and cash equivalents, respectively, available. As of September 30, 2021, we had $15 thousand in cash and cash equivalents, respectively, available. As of December 31, 2020, we had $3.884 million of total debt outstanding. As of September 30, 2021, we had $6.215 million of total debt outstanding. We believe our cash on hand, together with the proceeds of this offering, amounts available under our factoring facility, related party loans and cash provided by (used in) operating activities are and will continue to be adequate to meet our operational and business needs in the next twelve months. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds. In the event that we need access to additional cash, we may not be able to access the credit 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.”
Long-Term Debt
Secured Promissory Note
On March 30, 2020, the Company issued a promissory note to Sament Capital Investments, Inc. (“Sament”), an affiliate of Terra Tech for $3,000,000 in connection with the acquisition of the Predecessor’s assets. The Note accrues interest at a rate of 3.5% per annum on a 360-day year basis and matures March 30, 2025. In addition, we granted a second secured promissory note to Sament as of June 3, 2020 for $653,870, which accrues interest at a rate of 3.5% until June 3, 2023 (together with the note due March 30, 2025, the “Sament Notes”). The Sament Notes are secured by all of the assets purchased in connection with the Asset Acquisition. Sament also currently owns 20.0% of our outstanding common stock.
| 31 |
| Table of Contents |
Small Business Administration (“SBA”) Loans
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 $150,000 (the “SBA Loan”). The SBA Loan was made under, and is subject to the terms and conditions of, the Economic Injury Disaster Loan Program, which was a program expanded for COVID-19 relief under the CARES Act and is administered by the U.S. Small Business Administration. The term of the SBA Loan is thirty (30) years with a maturity date of June 22, 2050 and the annual interest rate of the SBA Loan is a fixed rate of 3.75%. Under the terms of the CARES Act, the use of loan proceeds for the SBA Loan is limited to alleviating economic injury caused by the COVID-19 pandemic.
SAFE Agreements
During the year ended December 31, 2020, the Company entered into Simple Agreements for Future Equity (“SAFEs”) with investors in a series of transactions exempt from registration under the Securities Act pursuant to Regulation Crowdfunding (the “Crowdfunding offering”).
Upon a future equity financing of greater than $1,000,000 (not including our initial public offering), the SAFE securities are convertible at the option of the Company into securities identical to those issued in the future equity financing (“Shadow Securities”), except (1) they do not have the right to vote except as required by law, (2) they must vote in accordance with the majority of the investors in such future equity financing with respect to any such required vote and (3) they are not entitled to any inspection or information rights. If the Company elects to convert the securities upon the closing of a future equity financing, the investors will receive the number of Shadow Securities equal to the greater the quotient obtained by dividing the amount the investor paid (the “Purchase Amount”) for the securities by:
(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 our initial public offering of common stock or a change of control (a “Liquidity Event”) prior to any equity financing, the SAFE holders will receive, at the option of the holder, 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.
In the case of a Liquidity Event following any equity financing, the investors will 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.
During the year ended December 31, 2020, the Company raised a total of $40 thousand in the Crowdfunding offering, which was made through Open Deal Portal LLC (the “Intermediary”), and a total of approximately $538 thousand. The Intermediary was entitled to receive a 6% commission fee and 2% of the securities issued in connection with the offering, which was closed subsequent to year-end.
| 32 |
| Table of Contents |
Related Party Loans
During 2020, the Company borrowed $32,000 from James E. Kras, the Company’s Chief Executive Officer and Director. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
During 2020, the Company borrowed $25,000 from Jeanne Ciccone, a close relative of James E. Kras. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
During 2020, the Company borrowed $25,000 from Michael James, the Company’s Chief Financial Officer and Director, of which $2,500 remained outstanding as of December 31, 2020. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
See “Certain Relationships and Related Party Transactions” for a summary of the convertible notes the Company has issued to Messrs. Kras and James in order to fund ongoing operations.
Vehicle Loan
On May 26, 2020, the Company entered into a financing agreement for the purchase of a vehicle. The loan, which accrues interest at a rate of 17.51%, matures on April 26, 2024. The loan is secured by the vehicle purchased.
Factoring Facility
On March 30, 2021, the Company entered into an accounts receivable purchasing agreement with Quasar Capital Partners, LLC (the “factoring facility”) pursuant to which the Company agreed to provide Quasar with the right to purchase the Company’s accounts receivable at book value less a discount. The Company’s Chief Financial Officer personally guaranteed the amounts payable under the factoring facility. On October 7, 2021, the Company repaid the amounts due under the factoring facility and the guarantee was released.
Evergreen Notes
On October 7, November 8, November 22, and December 20, 2021, we issued 15% original issue discount secured promissory notes to Evergreen. The Evergreen Notes mature on July 7, August 8, August 22, and September 20, 2022, respectively, and incur interest at a rate of 5.0% per annum. The Evergreen Notes are secured and subordinated to the Sament Notes. Evergreen may elect to convert the First Evergreen Note into shares of common stock at a conversion price of $1.53 per share and the Second, Third, and Fourth Evergreen Notes into shares of common stock at a conversion price of $4.15 per share. If the Evergreen Notes are not converted into shares of common stock prior to the closing of this offering, we intend to repay the amount due under the Evergreen Notes with some of the proceeds of this offering.
Cash Flow Analysis
Comparison of Cash Flows for the Period from March 28, 2020 through December 31, 2020 (Successor) and for the Period from January 1, 2020 through March 31, 2020 (Predecessor) compared to the Year ended December 31, 2019 (Predecessor).
The following table is a summary of our cash flow activity for the periods presented:
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
|
|
|
|
| Period from |
| |||||
|
|
|
|
| Period from |
|
| March 28, 2020 |
| ||||
|
|
|
|
|
| January 1, 2020 |
|
| (inception) |
| |||
|
|
| Year Ended |
|
| through |
|
| through |
| |||
|
|
| December 31, |
|
| March 31, |
|
| December 31, |
| |||
| (in thousands) |
| 2019 |
|
| 2020 |
|
| 2020 |
| |||
| Net cash provided by (used in) operating activities |
| $ | (3,519 | ) |
| $ | (676 | ) |
| $ | (1,351 | ) |
| Net cash provided by (used in) investing activities |
| $ | (207 | ) |
| $ | (79 | ) |
| $ | (48 | ) |
| Net cash provided by (used in) financing activities |
| $ | 3,714 |
|
| $ | 750 |
|
| $ | 1,404 |
|
Cash Flows from Operating Activities
For the period from March 28, 2020 through December 31, 2020 (Successor), the period from January 1, 2020 through March 31, 2020 (Predecessor), and for the year ended December 31, 2019 (Predecessor), net cash provided by (used in) operating activities was $(1.351) million, $(676) thousand, and $(3.519) million, respectively. The cash flows used by operating activities were driven primarily by working capital needs offset by revenue growth from existing customers and new customers.
Cash Flows from Investing Activities
For the period from March 30, 2020 through December 31, 2020 (Successor), the period from January 1, 2020 through March 31, 2020 (Predecessor), and for the year ended December 31, 2019 (Predecessor), net cash used in investing activities was $(48) thousand, $(79) thousand, and $(207) thousand, respectively. Investing cash flows are driven primarily by capitalized purchases of property and equipment.
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Cash Flows from Financing Activities
For the period from March 28, 2020 through December 31, 2020 (Successor), the period from January 1, 2020 through March 31, 2020 (Predecessor), and for the year ended December 31, 2019 (Predecessor), net cash provided by financing activities was $1.404 million, $750 thousand and $3.714 million, respectively. Net cash provided by financing activities for the period from March 28, 2020 through December 31, 2020 (Successor) was driven by proceeds of debt issued. For the January 1, 2020 through March 31, 2020 (Predecessor), and for the year ended December 31, 2019 (Predecessor), net cash provided was for contributions from the parent company.
Comparison of Cash Flows for the three months ended March 31, 2020 (Predecessor) and the period March 28, 2020 (inception) through September 30, 2020 (Successor) are compared to the nine months ended September 30, 2021 (Successor)
The following table is a summary of our cash flow activity for the periods presented:
|
|
| Predecessor |
|
| Successor |
|
| Successor |
| |||
|
|
|
|
|
| Period from |
|
|
|
| |||
|
|
|
|
| March 28, 2020 |
|
|
| |||||
|
|
| Three Months Ended |
|
| (inception) through |
|
| Nine Months Ended |
| |||
|
|
| March 31, 2020 |
|
| September 30, 2020 |
|
| September 30, 2021 |
| |||
| Net cash provided by (used in) operating activities |
| $ | (676 | ) |
| $ | (1,351 | ) |
| $ | (2,015 | ) |
| Net cash provided by (used in) investing activities |
| $ | (79 | ) |
| $ | 48 |
|
| $ | (73 | ) |
| Net cash provided by (used in) financing activities |
| $ | 750 |
|
| $ | 1,312 |
|
| $ | 2,098 |
|
Cash Flows from Operating Activities
For the three months ended March 31, 2020 (Predecessor), the period from March 28, 2020 (inception) through September 30, 2020 (Successor), and the nine months ended September 30, 2021 (Successor), net cash provided by (used in) operating activities was $(676) thousand, $(1.351) million, and $(2.015) million, respectively. The cash flows used by operating activities were driven primarily by working capital needs offset by revenue growth from existing customers and new customers.
Cash Flows from Investing Activities
For the three months ended March 31, 2020 (Predecessor), the period from March 28, 2020 (inception) through September 30, 2020 (Successor), and the nine months ended September 30, 2021 (Successor), net cash used in investing activities was $(79) thousand, $48 thousand, and $(73) thousand, respectively. Investing cash flows are driven primarily by capitalized purchases of property and equipment.
Cash Flows from Financing Activities
For the three months ended March 31, 2020 (Predecessor), the period from March 28, 2020 (inception) through September 30, 2020 (Successor), and the nine months ended September 30, 2021 (Successor), net cash provided by financing activities was $750 thousand, $1.312 million and $2.098 million, respectively. For the three months ended March 31, 2020 (Predecessor), net cash provided was for contributions from the parent company. Net cash provided by financing activities for the period from March 28, 2020 (inception) through September 30, 2020 (Successor) and the nine months ended September 30, 2021 (Successor) were driven by proceeds of debt issued.
Off Balance Sheet Arrangements
There were no material off-balance sheet arrangements as of December 31, 2020 or September 30, 2021.
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Critical Accounting Policies and Estimates
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 are described below.
Revenue Recognition
Revenues are 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.
Intangible Assets
Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. As of December 31, 2020, Edible Garden held one intangible asset related to a non-compete agreement, which has a useful life of two years. The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.
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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 December 31, 2020 and 2019, 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.
Recent Accounting Pronouncements
See Note 2 of the consolidated financial statements included in this prospectus for information about recent accounting pronouncements.
Internal Controls and Procedures
We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first annual assessment of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act until the year following our first annual report required to be filed with the SEC. We will not be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting until our first annual report subsequent to our ceasing to be an “emerging growth company.”
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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 to 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 to a legacy farm business.
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.
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We believe that Edible Garden’s facilities comply with food safety and handling standards.
We have food safety certifications from Primus, a GFSI certification program, the USDA for organic products, and some of our products are verified as non-GMO by the non-GMO Project. We are licensed under PACA to operate our business. We voluntarily comply with the HACCP principles established by the FDA.
Primus annually audits our growing process and entire food safety management system to ensure that our process and products meet the standards established by the GFSI. We value this certification because our customers require purchasing products from producers who are GFSI certified. When we undergo the GFSI audit, Primus audits the following:
|
| · | standard operating procedures and their documentation; |
|
| · | food safety testing (biological hazards) by an ISO 17025 accredited lab; |
|
| · | water testing by an ISO 17025 accredited lab; |
|
| · | quality control processes; |
|
| · | personnel health, hygiene and safety; |
|
| · | sanitation programs; |
|
| · | mock recalls/products on-hold process; |
|
| · | internal auditing system for organic, GFSI, non-GMO and HACCP certifications and verifications; |
|
| · | records retention; |
|
| · | food defense/food fraud; |
|
| · | supplier approval program; |
|
| · | pest management program; and |
|
| · | visual inspection of growing and packing processes. |
To maintain our USDA Organic certification, we must submit:
|
| · | our farm and handling plans annually; |
|
| · | to an annual inspection and audit of our greenhouse and how we handle aspects of our business; |
|
| · | to review of our organic documentation and records retention; and |
|
| · | to review and testing of our water usage and irrigation systems, harvest and post-harvest processing, and supplier monitoring and control. |
In addition, we must:
|
| · | use Organic Materials Review Institute (“OMRI”)-approved inputs, such as fertilizer, pesticides, disease management and media; |
|
| · | use organic in-house seedling production; |
|
| · | use organic pest management practices; |
|
| · | use organic crop management techniques; |
|
| · | perform nutritional deficiencies testing; |
|
| · | perform microbiological water testing; |
|
| · | conserve natural resources and promote biodiversity; and |
|
| · | maintain organic integrity (prevent conventional crops from contaminating organic crops). |
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Some of our products are verified as non-GMO by the non-GMO Project. To have a product verified by the non-GMO Project, we submit to an annual review process of the relevant products. We must source seeds and cuts from reputable and safe suppliers, not use bio-engineered products or ingredients during the growing process, and not include bio-engineered ingredients or products in the final goods sold to customers.
To maintain our PACA license, we submit to an annual review of our business, including our history and principles, to ensure we are meeting our contractual obligations under the law. This includes abiding by fair trading practices, meeting our contractual agreements and specifications, promptly paying all contracts, and maintaining trust assets.
The HACCP principles require that we submit to USDA audits annually. We must also identify the various chemical, physical, and biological hazards that exist in crop production and manage and control those hazards so that they do not contaminate our products or packaging. We must also implement and document critical control points, and implement and document corrective actions taken when those critical control points do not adequately control a hazard.
We intend to use our approach to expand in key strategic markets across the country while supporting our existing operations. Our priority in the near term is to strengthen our existing business in part with the proceeds from this offering. We have a history of operating losses since inception and expect to incur additional near-term losses. As discussed further in “Management’s Discussion and Analysis — Liquidity and Capital Resources,” our auditors have issued an opinion that there is a substantial doubt about our ability to continue as a going concern if we are unable to complete this offering. However, we are pursuing this offering because we believe that we have the potential to take advantage of strategic growth opportunities. Our model of growing local produce near high population density centers and being able to provide fresh produce to our existing supermarket partners, who have a wider network than us, is intended to create organic growth in our business through those existing relationships. If we complete this offering, we intend to use part of the proceeds to either build or acquire greenhouses near population centers and distribution centers to be able to grow more produce close to where it is in demand and to deepen our relationships with regional and national supermarkets. Our model allows us to reduce transportation food miles, reduce fuel costs, and lower emissions related to food transportation.
We believe that the power of our brand together with the quality, innovative packaging and traceability of our products allow all of our customers to associate Edible Garden with locally grown and sustainably sourced packaged herbs and vegetables. Our tag line “Simply Local, Simply Fresh” is intended to describe our business plan: growing herbs and lettuce in local farms in the regional communities where our customers sell our products so that the products stay fresher for longer. We believe this strategy allows us to drive local grass roots brand awareness while we grow our business to support our plan to become a national brand.
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We currently offer 31 stock keeping units “SKU’s” and expect to further cross sell products across our supermarket partners to meet their demand. These products include:
|
| · | 10 types of individually potted, live herbs; |
|
| · | 10 types of cut single-herb clamshells; |
|
| · | 2 specialty herb items; |
|
| · | 6 different types of lettuce; |
|
| · | hydro basil; |
|
| · | bulk basil; and |
|
| · | vegan protein powder. |
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These products are currently sold at over 4000 supermarket stores and food distributors across the Northeast, Midwest and Mid-Atlantic regions of the country. Some of the supermarkets that sell our products include Walmart, Target, Meijer, and Wakefern Food Corporation/ShopRite.
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We also service a large number of food distributors. This market segment allows us greater penetration with smaller local and regional supermarkets and the food services business.
Since inception, a few of our customers constitute a majority of our total revenue. For example, during the nine months ended September 30, 2021, we earned approximately 76% of our revenue from three customers, and we earned approximately 34% of our revenue from one customer in the period from our inception through December 31, 2020. While we value our strong relationship with these major customers, we face the risk of losing a significant source of revenue if our major customers do not continue to purchase our products. If that were to occur and we were unable to replace the revenue by selling our products to additional customers, our ability to earn revenue would be significantly negatively impacted. Part of our growth strategy is to reduce this customer concentration by expanding our production capacity, which would allow us to sell our products to more supermarket partners.
We sell products to our customers on a purchase order basis, with no spend or purchase commitments, in the ordinary course of business. We and our customers enter into purchase orders on a daily basis. To date, no purchase order has exceeded 2.0% of our revenue for the particular quarter in which the products were delivered to the customer.
The packaging we use leverages the latest technology to reduce plastics, extend the shelf life of our products, and reduce retail shrink - all leading to a reduced carbon footprint by reducing waste. The packaging we use features bio-based (sugar cane) sleeves. Using this material, we are able to reduce our use of plastic in our business. Generally, retail shrink is a loss of inventory. For our supermarket customers, one source of this shrinkage is spoiled product, such as herbs that have been in packaging for so long that they become poor quality. We use herb bags that have micro-perforations that allow ethylene gas to escape from the product packaging. Ethylene gas accelerates spoilage of herbs and lettuce. By allowing this gas to escape, we are able to extend the shelf life of the product while reducing the likelihood that our customers experience retail shrink because they have to throw our products in the garbage. Using this technology, cilantro, for example, is in good quality after 11 days, while it would be in poor quality after seven days in other packaging, according to the developer of this bag material1. The CO2 laser perforation creates well-defined holes which allow for a controllable and consistent environment in the bag, while other typical bagged herbs are perforated with a cold needle, which produce inconsistent holes and, therefore, an uncontrollable atmosphere. Less product spoilage means less waste, and less shrinkage means that we will not have to produce as many lettuce and herbs to achieve the same level of retail sales. Altogether, we should be able to produce less carbon and minimize the size of our carbon footprint by using these packaging innovations.
Impact of COVID-19
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. For example, government imposed mandatory closures and restrictions across various key markets of ours resulted in volatile supply and demand conditions, primarily due to reduced demand in the food service distribution channel. As a result, product in the industry was redirected to the retail channel and in some cases this led to an increased supply and lower pricing. While demand in our retail channels for certain products has increased due to the impact of COVID-19, there is no guarantee that this increased demand will continue. While these effects were pronounced to varying degrees throughout fiscal year 2020, the future extent of the impact of the COVID-19 pandemic on our financial performance, including our ability to execute our strategic initiatives, is still uncertain and will depend on future developments, including the duration and spread of the pandemic, related government restrictions and the success of vaccines and other treatments for COVID-19. Additionally, as the global economic impacts of COVID-19 continue, fluctuate and/or change, the pandemic’s impact on our operating results may change or be prolonged.
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. We are following the requirements of governmental authorities and taking additional preventative and protective measures to ensure the safety of our workforce, we cannot be certain that these measures will be successful in ensuring the health of our workforce. 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.
The impact of the COVID-19 pandemic on our operating results can 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 associated with the COVID-19 pandemic 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.
____________
1 “Shelf Life Studies: Herbs,” Windham Packaging, LLC.
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Production and Properties
We utilize prime greenhouse locations in the Northeast, Midwest and Mid-Atlantic regions of the country, allowing us to provide local fresh and organic products to these local communities. Our locally grown and delivered products using a network of sustainable greenhouse farms provide local communities, retailers and consumers the quality they demand with the food safety they expect. The communities, retailers and consumers benefit from this as this allows us to get our products to market in the shortest time without compromising the plant’s quality and nutritional value. The growing locations are chosen to be near key trucking lanes within hours of major cities to cut down on “food miles” and fuel costs. We believe our strategy enhances our products’ appeal to major consumer constituencies that desire products grown and delivered locally.
Consistent year round growing that adheres to our stringent sustainability protocols occurs in our greenhouse locations in California, Florida, Indiana, New Jersey, New York, Michigan, and Wisconsin . The combination of our 5 acre flagship greenhouse location in Belvidere, NJ, together with over 1 million square feet of contracted greenhouse space from contracted growers, enables us to use standardized methods and a suite of proprietary technology innovations to operate these hydroponic greenhouses and deliver consistent, fresh produce.
Our locations and capacity include:
| Location |
| Growing capacity |
|
|
| Belvidere, New Jersey |
| 5 acres |
| Operated by Edible Garden |
| Half Moon Bay, California |
| 55 acres |
| Contract grower |
| Hillard, Florida |
| 2 acres |
| Contract grower |
| Francesville, Indiana |
| 3 acres |
| Contract grower |
| Grand Rapids, Michigan |
| 6 acres |
| Contract grower |
| Berlin, New York |
| 3 acres |
| Contract grower |
| Hixton, Wisconsin |
| 3 acres |
| Contract grower |
We rely on long-term relationships with contract growers to grow our herbs and produce, but have no formal long-term contracts with these growers. Our growing relationships require our produce to be grown in strict accordance with our proprietary growing process and to our specifications, but otherwise leaves control over the growing process to the contract growers. Orders are placed with the contract growers based on purchase orders we receive from our customers and the proximity of the contract grower to the specific customer. The contract grower determines the quantity sown based on the minimum purchase orders received and the contract grower bears the inventory risk, risk of loss and other cost if it over-sows the specific crop. We take title of the produce after inspection has been made in accordance with the specifications agreed to by both parties.
In addition to our contract growers, we operate a 5 acre flagship facility in Belvidere, New Jersey, which began commercial operations in 2015. Our facility incorporates a hydroponic gutter system developed in Holland for the exclusive production of herbs. The flagship facility also includes a cold storage freezer which allows us to package herbs for our distribution partners and a 20,000 sq. ft packhouse, which is under construction. Because we control the growing and shipping processes at this facility, we bear inventory risk, risk of loss, and other risks for the produce grown at this facility.
We are currently party to an ongoing, informal arrangement with our predecessor company, Edible Garden Corp., whereby we make lease payments of approximately $15,300 per month to the Landlord of the land on which our flagship facility is built and for which our predecessor company is the lessee. We effectively rent the property on a month-to-month basis with no set term. We do not have a lease in place directly with the lessor of the property that gives us the right to operate the property, and there is no written agreement between us and our predecessor company or us and the Landlord describing this arrangement. We have been operating under this arrangement with the lessor for more than one year and do not expect to lose access to the property. We expect to have the lease assigned to us once the Landlord obtains the permits necessary to complete construction of the packhouse.
After we complete this offering and the applicable permits from the county government have been obtained by the Landlord, the construction of the packhouse should take between six and nine months to complete. We anticipate investing between $700,000 to $900,000 in capital expenditures to add utilities such as HVAC, electrical service, septic system, and a well, to complete the packhouse. We have not yet incurred expenses on construction of the packhouse. The Landlord on which our flagship facility is built is aware of the construction of the packhouse. We do not anticipate construction on the packhouse will impact our ability to operate the property.
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As of September 30, 2021, we had 45 full-time employees and two part-time employees located in or around Belvidere, New Jersey.
We source the raw materials for production from multiple suppliers, including Ball Horticulture, Brandt Box and Paper, PPC Flexible Packing, Sumit Plastics, Sun Gro Horticulture, Sunshine FPC, and expect that those supplies will continue to be available for our use.
Distribution
Edible Garden utilizes advanced, sustainable, environmentally controlled indoor agriculture to grow and process organic herbs and lettuces. Through our extensive distribution platform and proprietary predictive modeling, we pick, pack and ship to big box retailer’s distribution centers in our network. We distribute our products through more than 50 retail partners including national big box retailers, regional grocery stores, distributors, restaurants and local purveyors.
Our growing and distribution plans are designed to get our locally grown products to our retail partners and consumers immediately after harvest. We want to make sure that our products arrive as fresh, undegraded and nutrient rich as when they were harvested. In order for us to meet this objective we strive to deliver our products to market in no less than 24 hours from when they are picked. We currently rely on our own fleet of nine delivery vehicles, as well as other independent shipping operators. We continue to build a broader footprint and intend to increase our logistics and shipping fleet to include more energy efficient vehicles that will use less fuel and leave less waste in our environment. Our greenhouse farms have to be strategically located in order for us to deliver on this objective.
We hold our transportation-related assets and manage the distribution of our products through our wholly-owned subsidiary, EG Transportation, LLC. This entity owns and leases the delivery vehicles we use to distribute products and holds the liability insurance needed for the transportation aspects of our business. As of December 20, 2021, we have nine delivery vehicles and approximately eight drivers.
Competition
The U.S. fruits and vegetable markets are highly competitive. Our main competitors are Aero Farms, Gotham Greens, Bright Farms, Bowery Farms, Plenty. Many of these companies may have significantly greater financial, technical, marketing and distribution resources, as well as greater experience in the industry than we have. Our services may not be competitive with their services. In addition, our current and potential competitors may establish cooperative relationships with larger companies, to gain access to greater development or marketing resources. Competition may result in price reductions, reduced gross margins and loss of market share. However, we believe the following elements will give us a competitive advantage in the rapidly growing CEA category:
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Customer Relationships and Brand. Our herbs and lettuce product portfolio is sold through our supermarket partners including Walmart, Target, Meijer, Wakefern Food Corporation/ShopRite and food distributors. These key partners make up the majority of our revenue. We believe that we will continue capture more opportunities with these partners as we expand our business and product offering. We also utilize an efficient marketing mix of social media, in-store signage and premium shelf positioning to drive consumer awareness and reinforce purchases.
Value Proposition. We are part of repositioning the way food is grown, packaged and distributed. We believe this is the next generation of farming that is good for people and our planet. We believe scaling our grow operations in a fully controlled environment will result in a higher optimization on yields together with freshness, taste and texture. In addition, our proposition focuses on intelligent, common-sense approach to growing more with less resources. Our Zero Waste Inspired approach is in everything we do – from innovative recyclable packaging across our product portfolio and enterprise, using less water, electricity and land, zero pesticides and less road miles. Simply Local Simply Fresh delivers all of this together with our local farming partners with an accessible, traceable, organic product at a competitive price.
Technology Platform. Technology and data are competitive differentiators for Edible Garden. Rather than relying on “off-the-shelf” systems, we have created a data-driven technology platform to power traceability and integration across plant production, operations, data analytics and demand planning. Our proprietary platform allows us to consistently monitor and control plant production inputs across our flagship facility as well as integrate with all of our contract growers. This allows us to scale throughput with disruption and capture data analytics for better yield and predictability.
Management Team. Our management team has worked together for 6 years. Jim Kras, our CEO and Mike James, our CFO, have a strong working relationship and work collaboratively to advance our growth. We believe that they bring strong senior leadership in their respective roles and responsibilities and have been instrumental in our success to date, including growing our business during a pandemic. The unprecedented COVID-19 pandemic continues to challenge business and the economy. In these uncertain times having a team that has worked together for many years can provide mature leadership and support to the organization at critical moments. Our management team is committed to developing young talent in our business and are committed to continue this employee development as the organization continues to grow.
Industry Overview
Traditional Outdoor Agriculture. The traditional agriculture industry in the United States consists primarily of field crop farms. According to the USDA, the United States had almost 900 million acres of farmland in 2019. Over the last few decades this acreage has shifted and consolidated to larger and larger farms. Today, large-scale family farms make up just 3 percent of farms in the United States and 42 percent of overall production. Production of produce is also regionalized. The American Farm Bureau Foundation reports that Monterey County in California, home of Salinas Valley, supplies 61% of all leaf lettuce and 56% of head lettuce in the United States.
This regional dependency contributes to long, complex distribution chains, with some produce traveling thousands of miles over several days before reaching store shelves. With the environmental and social macrotrends mentioned herein, we believe traditional field farming is also less prepared to support a growing world population, due to its reliance on large amounts of land and water, both of which are becoming scarcer and less available for food production. We also believe consumer trends continue to want to know where their food comes from together with traceability and food safety (food pathogens – listeria and salmonella) are becoming more important to all business partners and consumers.
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Traditional Greenhouse Operators and Controlled Environment Agriculture. CEA has gained market share in recent decades as an alternative source of food production. This consists of both greenhouse operating companies and more high-tech greenhouses selling to retailers and grocery stores throughout the country. Despite growth in select crops, greenhouses have not been able to take meaningful market share from traditional field farms in the United States or in the leafy greens market until now. This is a function of shifting consumer trends together with the realization that the planet has finite natural resources. Overall consumer behavior is shifting away from commoditized produce as they associate consumer branded produce as sustainable, safe, organic, pesticide free all year long that is good for them and the social fabric of our planet. That’s why we believe as a market innovator we can continue to capture market share and brand awareness.
Growth Strategy
We are at an important point as we are operating at commercially viable scale and ready for the next level of growth with additional greenhouses and capabilities. Our business plan is to develop, own and operate commercial greenhouses across North America. Presently and in the near term our greenhouse operations will continue to grow herbs and lettuces. Currently, herb production is grown at our flagship facility in Belvidere with an additional contract grower in Indiana. We expect to scale our business by building a portfolio of new, fully scaled commercial greenhouses across the Northeast, Midwest, Mid-Atlantic, South and Southwest. We plan to locate farms with easy access to distribution centers and major population demographic centers and to sell products into established supermarkets partners and distributors. We expect these full-scale commercial greenhouses to have more production capacity than our current facility and to benefit from economies of scale.
Site selection for future facilities is based on a detailed methodology that weighs factors we believe to be indicative of farm unit economics, operational reliability and market accessibility, among other criteria. Examples include customer access and market depth within a 300-mile radius. The availability, reliability and cost of electricity; construction costs, speed to build, site infrastructure and permitting; local labor are further inputs to our selection process.
Intellectual Property
We rely on a combination of trademark laws, trade secrets, confidentiality provisions, and other contractual provisions to protect our proprietary rights, which are primarily our inventions, brand names, marks, and proprietary pods and seeds. Edible Garden owns trademarks, three pending patent applications, and one issued patent in the United States. The issued patent includes claims related to greenhouse management software and systems (GreenThumb) and is expected to remain in force until November 2040, provided that all required maintenance fees are paid. One of the three pending patent applications is a recently filed continuation patent application related to greenhouse management software and systems. If this pending patent is granted, it would remain in force until at least November 2040, provided that all required maintenance fees are paid. The two remaining patent applications, a design patent application and a utility patent application, are related to automatically watering display stands for herbs and other vegetation. Should these pending patent applications be granted, the design patent would remain in force until February 2035 and the utility patent would remain in force until February 2041, provided that all required maintenance fees are paid for the utility patent.
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Research and Product Development
Edible Garden recognizes the consumer acceptance and growth opportunities associated with plant-based derivatives of the products/plants it currently grows. As a leader in sustainability, research and development is a key focus for us moving forward. We have recently started shipping a new product category with plant based nutraceuticals, a derivative in the plant category. This new product will extend our product suite with major retailers in plant-based proteins under the Vitamin Way brand. We intend to further develop expertise in plant science and horticulture coupled with brand equity in the “plant based” sector. We believe this will lead us to effectively develop and market proprietary industrial ingredients and consumer packaged goods. By unlocking the Company’s capabilities for multiple product lines, we believe significant revenue opportunities are available across a wide spectrum of ancillary markets.
Our Sustainability Plan — Renew, Reuse, Recycle & Innovate
We adhere to an Environmental, Social, and Governance (“ESG”) criteria and set of standards for our operations that is socially conscious. Our Environmental criteria considers how our company performs as a steward of nature. The Social criteria examines how we manage relationships with employees, suppliers, customers, and the communities where we operate. Our Governance deals with the company’s leadership, executive pay, audits, internal controls and stockholder rights.
Environment: We operate our CEA greenhouse facilities with the goal of being a good steward of nature. With our closed loop systems, we recapture and recycle water into our growing process. We are pesticide-free in our flagship facility as well as all contracted grow facilities. In vertical greenhouses, we are able to grow more herbs and lettuce per square foot than legacy farms. Our GreenThumb software allows us to be more efficient in our packing and shipping process with the goal of reducing excess emission of greenhouse gases and carbon that would result from more trucks transporting our products. The packaging we use is intended to reduce food spoilage and food waste while utilizing bio-based materials, leading to a reduction of plastics in the packaging. In the future, we intend for our greenhouses to take advantage of areas with renewable energy alternatives such as solar, wind, and hydro together with suppliers that support greenhouse gas-free electricity generation, when available. We plan to continue to deliver innovation in the products we use for our packaging and potting, further eliminating plastics from our products with recycled, biodegradable packaging. We intend to migrate to alternative fuel vehicles for our shipping needs by 2030. We commit to be carbon neutral by 2030, meaning that any carbon dioxide released into the atmosphere from our business activities will be balanced by an equivalent amount being removed. Beyond our own operations, we consider the business activities of our suppliers, distributors, and other partners to be an important component of our overall environmental impact. We continually try to find partners who share our vision and commitment to sustainability. Accordingly, we prefer to work with suppliers and distributors that mirror our sustainability and carbon-neutrality goals. Many of our major retailers and suppliers have made public commitments to sustainability, net-zero, and zero-waste with a horizon timeline, and we seek partners who are taking a similar approach to reducing their environmental impact and carbon footprint. Although we ultimately rely on our partners to maximize their efficiencies, we drive reductions in overall carbon emissions and food miles by growing and delivering from facilities that are as close to our supermarket partners’ distribution centers as possible. We are working to help those partners who are not currently pursuing sustainability goals to move in that direction by raising awareness and providing information and guidance. However, we recognize that some of our smaller partners are subject to resource limitations and we will not require all of them to achieve our 2030 goals.
Social – Employees: Being local and producing year-round not only allows for competitive produce prices and the opportunity for more consumers to access high quality produce, it also allows our facilities to offer full time, indoor jobs to members of the community, offsetting the seasonal work offered by more traditional agriculture businesses. We are also committed to paying at a living wage, hiring locally, and promoting internally by investing in internal and community training programs to train employees with a skill set that will allow them to be part of the 21st-century workforce in the next generation of farming. To accompany the rapidly expanding workforce demands of our industry we are committed to work with all of our employees to help us understand any issues and to develop and enhance our indoor agriculture training and internal development opportunities.
Social – Community: We will prioritize underserved communities whether urban or rural where our facilities are located. As a company we will continue to develop our corporate mission of giving back to these communities. Charitable contributions to food banks, school systems, community anti-hunger and social reintegration programs are all part of giving back to these communities. For example, we partner with Abilities of Northwest Jersey Inc. to offer skills training in hydroponics and greenhouse farming at our Belvidere, New Jersey, greenhouse for individuals with disabilities, and we were named the Employer of the Year for 2020 by Abilities of Northwest Jersey. These initiatives aim to provide better economic and social results for these underserved communities. Our strategy will be to partner with both local, state and federal programs to help identify investment zones or redevelopment areas that would benefit from one of our greenhouse facilities in their community because of the expected local economic development and employment that would be associated with a new facility. We expect that each of our facilities will employ approximately 35-40 employees in these communities. We plan to consider underserved communities in all our future site selection process.
Governance: Edible Garden looks at diversity as a competitive advantage and strives to be fully supportive of diversity endeavors at all levels of the company. This alignment and focus will aid us in steering our long-term corporate actions in the right direction. Our goal is to build diversity across the whole enterprise with specific focus on the management team and board of directors. We plan on establishing a diversity committee with employees and members of our management team that will have complete oversight of these fundamental areas in conjunction with our nominating and governance committee. In addition, we intend to meet the governance requirements of Nasdaq after this offering is complete and to establish a robust system of corporate governance.
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Regulatory Compliance
As a producer and distributor of food products, we are subject to the laws and regulations in the jurisdictions where our facilities are located and where are products are distributed. In particular we are subject to the FSM Act, which is enforced by the FDA. The FDA has the authority to regulate the growing, harvesting manufacture, including composition and ingredients, processing, labeling, packaging import, distribution and marketing and safety of food in the United States. The FSM Act significantly enhances the FDA's authority over various aspects of food regulation. For example, the FSM Act granted the FDA mandatory recall authority when the FDA determines there is a reasonable probability that a food is adulterated or misbranded and that the use of, or exposure to, the food will cause serious adverse health consequences or death to humans or animals. While the FDA has been active in implementing the requirements of the FSM Act through issuance of regulations designed to result in a reduction of the risk of contamination in food manufacturing, the full impact of the FSM Act is not yet known, and we cannot assure you that it will not materially impact our business. Regulatory agencies in other jurisdictions have similar authority to address the risk of contamination or adulteration, and to require that contaminated products be removed from the market. The failure to comply with these laws and regulations in any jurisdiction, or to obtain required approvals, could result in a ban or temporary suspension on the production of our products or limit or bar their distribution, and affect our development of new products, and thus could materially adversely affect our business and operating results. In addition, the USDA regulates the import and export of certain fruits and vegetables into and from the United States, and the USDA also imposes growing, manufacturing and certification requirements for certain products labeled with organic claims. Failure to obtain necessary permits or otherwise comply with USDA regulations and requirements could result in a ban or temporary suspension of our ability to grow, manufacture or market our products as organic, and thus could materially adversely affect our business.
Legal Proceedings
From time to time, we may be party to or otherwise involved in legal proceedings 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 of approximately $600,000 for an alleged breach of a supplier agreement. The Company denies the allegations and intends to file a counterclaim against the plaintiff. The Company plans to vigorously defend itself.
If we settle this claim or the action is not resolved in our favor, we may suffer reputational damage and incur legal costs, settlements or judgments that exceed the amounts covered by our existing insurance policies. We can provide no assurances that our insurer will insure the legal costs, settlements or judgments we incur in excess of our deductible. If we are unsuccessful in defending ourselves from this claim or if our insurer does not insure us against legal costs we incur in excess of our deductible, the result may materially adversely affect our business, results of operations and financial condition.
Corporate History and Structure
Our business is a successor business of a subsidiary of Terra Tech Corp. (now known as Unrivaled Brands, Inc.)(“Terra Tech”). Unrivaled Brands (OTCQX:UNRV) is a cannabis multi-state operator and the parent company of multiple cannabis brands spanning consumer products, cultivation, distribution, and retail. We purchased substantially all of the assets of Edible Garden Corp., a subsidiary of Terra Tech, from Terra Tech as of March 30, 2020 for approximately $3.0 million, which did not include the purchase of any cannabis assets. To finance the asset purchase, we issued a secured promissory note of $3.0 million to Sament, an affiliate of Terra Tech, which accrues interest at a rate of 3.5% per annum until March 30, 2025. In addition, we granted a second secured promissory note to Sament as of June 3, 2020 for $653,870, which accrues interest at a rate of 3.5% until June 3, 2023. These Sament Notes are secured by the tangible greenhouse assets at our corporate headquarters and any proceeds thereof. Also in connection with the asset purchase, we issued two options to Sament. These options were exercised as of October 8, 2021 for 5.0 million shares of common stock at an aggregate exercise price of $2.00 and are no longer outstanding, as further described below in “Description of Securities.” As a result of this exercise, Sament currently owns 20.0% of our outstanding common stock.
Our company was incorporated on March 28, 2020 in the State of Wyoming as Edible Garden Inc. We subsequently changed our name to Edible Garden AG Incorporated on July 20, 2020, and we effected a stock split of 20 for 1 as of October 14, 2020. Effective July 7, 2021, our parent company, Edible Garden Holdings Inc., merged with and into us with us as the surviving entity. We converted into a Delaware corporation effective July 12, 2021. On September 8, 2021, we effected an additional forward stock split of 20 for 1. We have one wholly-owned subsidiary, EG Transportation, LLC, through which we manage the distribution of our products. Our current corporate structure is as shown below:
Our principal address is 283 County Road 519, Belvidere, NJ 07823. Our telephone number is (908) 750-3953. We maintain a website at www.ediblegarden.com. The information contained on our website is not, and should not be interpreted to be, incorporated into this prospectus. The SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
The following table sets forth certain information about our executive officers, key employees, directors, and director nominees as of the date of this prospectus.
| Name |
| Age |
| Position |
| James E. Kras |
| 53 |
| Chief Executive Officer, President and Director |
| Michael James |
| 63 |
| Chief Financial Officer, Treasurer, Secretary and Director |
| Mathew McConnell |
| 62 |
| Director nominee |
| Tracy A. Nazzaro |
| 53 |
| Director nominee |
| Ryan Rogers |
| 40 |
| Director nominee |
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Executive Officers and Directors
James E. Kras. Mr. Kras is one of our founders, and has served as Chief Executive Officer and a director since our inception in March 2020. Mr. Kras served as President and Chief Marketing Officer of Edible Garden Corp., a wholly-owned subsidiary of Unrivaled Brands (formerly Terra Tech), from March 2016 to March 2020. Prior to that service, Mr. Kras held senior leadership positions in marketing at global leaders Ajinomoto and The Bountiful Company (formerly The Nature’s Bounty Company). Mr. Kras started his career on Madison Avenue in advertising with companies including Grey Advertising and Dentsu/Carat. As our Chief Executive Officer and one of our founders, Mr. Kras brings to the Board of Directors extensive knowledge of our products, structure, and culture as well as years of expertise in the industry.
Michael James. Mr. James is one of our founders, and has served as Chief Financial Officer and a director since our inception in March 2020. Mr. James also currently serves on the board of directors of Guided Therapeutics, Inc. as chairman, audit committee chair and as a member of the compensation committee. Mr. James previously served as Chief Financial Officer of Unrivaled Brands, Inc. (formerly Terra Tech) from February 2012 to March 2020. In addition to this role, Mr. James served as the Chief Executive Officer and Chief Financial Officer of Inergetics, Inc. from June 2012 until January 2016. Previously, Mr. James served as Chief Executive Officer of Nestor, Inc. (“Nestor”), where he successfully completed a financial restructuring of Nestor prior to its sale in September 2009 from the Receiver’s Estate in Superior Court of the State of Rhode Island. He also served on Nestor’s Board of Directors from 2006 to 2009. Mr. James was the Managing Partner of Kuekenhof Capital Management, LLC, a private investment management company, from 1999 to 2015. During his career, Mr. James has served as a Partner at Moore Capital Management, Inc., a premiere private investment management company; Chief Financial and Administrative Officer at Buffalo Partners, L.P., a private investment management company; and Treasurer and Chief Financial Officer of National Discount Brokers. Mr. James began his career in 1980 as a staff accountant with Eisner, LLP. Mr. James is a retired CPA. As our Chief Financial Officer and one of our founders, Mr. James brings to the Board of Directors extensive knowledge of our products, structure, and culture as well as years of expertise in the industry.
Director Nominees
Mathew McConnell. Mr. McConnell has served as Chief Executive Officer of Marco Polo Securities, Inc.’s MPS Chaperone and Distribution business since March 2020. In this position, he oversees international equities, trading, and capital markets processes for this U.S. broker-dealer offering cross-border regulatory and distribution solutions to a robust network of local securities firms across the world. From 2018 to 2020, Mr. McConnell served as Managing Director, Head of Equity Capital Markets of Tellimer (Exotix Capital), including as a member of its U.S. executive committee. Prior to Tellimer, Mr. McConnell was Head of Capital Markets at Auerbach Grayson from 2014 to 2018. Mr. McConnell was chosen to serve as a director because of his extensive international financial and capital markets experience, which we believe will continue to be important as we implement our growth strategy.
Tracy A. Nazzaro. Ms. Nazzaro is presently the President, Chief Financial Officer and General Manager for Traders Hill Farm, an innovative aquaponics greenhouse farming operation in Hilliard, Florida, that produces specialty leafy greens and tilapia year-round. She joined Traders Hill Farm as Chief Financial Officer in late 2015. Prior to joining Traders Hill Farm, Ms. Nazzaro was a certified business analyst with the University of North Florida SBDC where she provided strategic advisory and financial consulting services to businesses in Northeast Florida. Ms. Nazzaro is also the Executive Director of the RWB Foundation, Inc., a non-profit organization providing financial assistance and operating guidance to small agriculture businesses in Florida. Ms. Nazzaro was chosen to serve as a director because of her extensive experience in our industry and her experience in growing agricultural businesses.
Ryan Rogers. Mr. Rogers has spent nearly two decades working in the food retail industry in various merchandising, sales and sourcing positions. Since June 2021, he has served as a brand manager for FDM Sales, a brand development organization helping accelerate growth for food and beverage brands. Prior to joining FDM Sales, Mr. Roger spent 18 years at Target Corp, where he held merchandising and sourcing roles of increasing responsibility within its food division, including produce buyer, where he led the growth strategy for packaged salads, vegetarian, and healthy snacking. Mr. Rogers was chosen to serve as a director because of his extensive experience in our industry and his ability to help organizations like ours accelerate growth.
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Key Employees
Scott Prendergast. Mr. Prendergast has served as our Chief Data Officer since June 2020. Prior to joining Edible Garden, Mr. Prendergast served as VP of Technology for Springbok Energy Partners and Director of Digital Strategy & Analytics for Moroch Partners. Some of Mr. Prendergast’s accomplishments include designing and developing real time well tracking and management portal utilized by Springbok Energy Partners to track well data and optimize mineral right valuations in real time, as well as developing the GreenThumb system that manages real time greenhouse inventory and activities for us and many of our partner farms. Mr. Prendergast started his career after graduating Worcester Polytechnic Institute with a B.S. Aerospace Engineering with a position with Bechtel Corp in the Nuclear Piping Analysis department, working on refueling and NRC compliance at Comanche Peak Nuclear Power Plant and Browns Ferry Nuclear Power Plant.
Stacey Eng. Ms. Eng has served as the Vice President of Logistics for us since inception and our predecessor company since March 2016. Ms. Eng previously worked as the Director of Operations for Inergetics, where she was responsible for developing the company’s supply chain and vendor relationships. Ms. Eng’s accomplishments include building an integrated supply chain to service a complex network of greenhouses throughout the United States while constantly streamlining our business. She has continually ensured that all deliverables were met on time for any size project, reduced lead-time for delivery in conjunction with implementing cost-cutting measures that drove gross margin improvements. Ms. Eng holds B.S. in Supply Chain Management & MIS from Rutgers University where she graduated Magna Cum Laude.
Nick Simons. Mr. Simons joined our predecessor company in 2019 at the flagship Belvidere facility, where he currently supervises over 40 employees. Mr. Simons immediately impacted our results by overseeing improvements that lead his team to break major milestones in case counts we shipped out. With a passion for sustainability, he strives to have our facilities surpass what was previously thought possible. Prior to joining Edible Garden, Mr. Simons worked for Georgia-Pacific where he oversaw and taught Performance Standard Qualification training to production operators, resulting in a decrease in maintenance personal during the shift by over 35%. He also led the night shift to be the first in Dixie’s 85-year history to produce 4.0 million cases during a 12-hour shift. Mr. Simons is a certified 5S Process Leader, has been trained in FDA, cGMP, ISO, ICH Q7 regulations and standards and is Certified Lean Six Sigma Green Belt. Mr. Simons holds B.A. from DeSales University and earned his MBA from East Stroudsburg University.
CORPORATE GOVERNANCE
Director Independence
Our current Board of Directors consists of James E. Kras and Michael James, neither of whom is considered independent based on the listing standards of Nasdaq. We are not currently listed on a national securities exchange or in an inter-dealer quotation system that requires a majority of the Board be independent. We have nominated Mathew McConnell, Tracy Nazzaro and Ryan Rogers, each of whom is considered independent under the Nasdaq listing standards, for appointment to the Board. We expect that these nominees will commence service on the Board at the time of effectiveness of the registration statement of which this prospectus forms a part. As required under applicable Nasdaq rules, we anticipate that our independent directors will meet in regularly scheduled executive sessions at which only independent directors are present.
Committees
Our Board intends to establish three standing committees: audit committee; compensation committee; and nominating and governance committee. Each of these committees will consist solely of independent directors who will join the Board and these committees upon the effectiveness of this registration statement. We will adopt written charters for each of these committees that will be available on our website. Our Board may establish other committees as it deems necessary or appropriate from time to time.
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Audit Committee
The audit committee will be responsible for, among other matters:
|
| · | appointing, compensating, retaining, evaluating, terminating, and overseeing our independent registered public accounting firm; |
|
| · | discussing with our independent registered public accounting firm the independence of its members from its management; |
|
| · | reviewing with our independent registered public accounting firm the scope and results of their audit; |
|
| · | approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
|
| · | overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
|
| · | reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls, and compliance with legal and regulatory requirements; |
|
| · | coordinating the oversight by our board of directors of our code of ethics and our disclosure controls and procedures; |
|
| · | establishing procedures for the confidential and/or anonymous submission of concerns regarding accounting, internal controls or auditing matters; and |
|
| · | reviewing and approving related-person transactions. |
The Nasdaq rules require us to have one independent audit committee member upon the listing of our common stock, a majority of independent directors within 90 days of the date of this prospectus and all independent audit committee members within one year of the date of this prospectus. Upon the effectiveness of this registration statement, Mathew McConnell, Tracy Nazzaro and Ryan Rogers will serve on the audit committee and meet the definition of “independent director” for purposes of serving on an audit committee under Rule 10A-3 under the Exchange Act and Nasdaq rules. One of these nominees will qualify as an “audit committee financial expert,” as such term is defined in Item 407(d)(5) of Regulation S-K.
Compensation Committee
The compensation committee will be responsible for, among other matters:
|
| · | reviewing key employee compensation goals, policies, plans and programs; |
|
| · | reviewing and approving the compensation of our directors and executive officers; |
|
| · | reviewing and approving employment agreements and other similar arrangements between us and our executive officers; and |
|
| · | appointing and overseeing any compensation consultants or advisors. |
Upon the effectiveness of this registration statement, Mathew McConnell, Tracy Nazzaro and Ryan Rogers will serve on the compensation committee and meet the definition of “independent director” for purposes of serving on a compensation committee under Nasdaq rules.
Nominating and Governance Committee
The nominating and governance committee will be responsible for assisting the Board in identifying qualified individuals to become directors, in determining the composition of the Board and in monitoring the process to assess Board effectiveness. Upon the effectiveness of this registration statement, Mathew McConnell, Tracy Nazzaro and Ryan Rogers will serve on the nominating and governance committee.
Board Leadership Structure
Our Board of Directors and management believe that the choice of whether the Chair of our Board of Directors should be an executive of the Company, or a non-executive or independent director, depends upon a number of factors, taking into account the candidates for the position and the best interests of the Company and its stockholders. We do not currently have a Board Chair. Upon the effectiveness of this registration statement, we intend to appoint Mr. Kras, our Chief Executive Officer, as the Board Chair. Mr. Kras’s operating and leadership experience as an officer and director of our company since its inception and combined six years of experience with us and our predecessor company make him a compelling choice for Board Chair.
We intend to appoint Mr. McConnell as lead independent director when each of our independent directors joins our Board of Directors. The lead independent director will preside over executive sessions of the independent directors and serve as a liaison between the independent directors and our management team.
Risk Oversight
Our Board will oversee a company-wide approach to risk management. Our Board will determine the appropriate risk level for us generally, assess the specific risks faced by us and review the steps taken by management to manage those risks. While our Board will have ultimate oversight responsibility for the risk management process, its committees will oversee risk in certain specified areas.
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Specifically, our compensation committee will be responsible for overseeing the management of risks relating to our executive compensation plans and arrangements, and the incentives created by the compensation awards it administers. Our audit committee will oversee management of enterprise risks and financial risks, as well as potential conflicts of interest. Our Board is responsible for overseeing the management of risks associated with the independence of our board of directors.
Compensation Committee Interlocks and Insider Participation
None of our officers currently serves, or has served during the last completed fiscal year, on the compensation committee or board of directors of any other entity that has one or more officers serving as a member of our board of directors.
Code of Ethics
Our Board intends to adopt a Code of Ethics that applies to our directors, officers and employees. A copy of this code will be available on our website. We intend to disclose on our website any amendments to the Code of Ethics and any waivers of the Code of Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer, controller, or persons performing similar functions.
Director and Officer Indemnification Agreements
We intend to enter into separate indemnification agreements with our directors and executive officers, in addition to the indemnification provided for in our certificate of incorporation and bylaws. These agreements, among other things, require us to indemnify our directors and executive officers for certain expenses, including attorneys’ fees, judgments, penalties, fines and settlement amounts incurred by a director or executive officer in any action or proceeding arising out of their services as one of our directors or executive officers or as a director or executive officer of any other company or enterprise to which the person provides services at our request. The indemnification agreements and our certificate of incorporation and bylaws require us to indemnify our directors and officers to the fullest extent permitted by Delaware law.
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EXECUTIVE AND DIRECTOR COMPENSATION
Summary Compensation Table
The following table provides information regarding the compensation paid from our inception on March 28, 2020 through December 31, 2020 to each of the executive officers named below, who are collectively referred to as “named executive officers” elsewhere in this prospectus.
| Name and Principal Position |
| Year |
| Salary ($) |
| Bonus ($) |
| Stock Awards ($) |
| Option Awards ($) |
| Non-Equity Incentive Plan Compensation ($) |
| Non-qualified Deferred Compensation Earnings ($) |
| All Other Compensation ($) |
| Total ($) |
| ||
| James E. Kras, |
| 2020 |
|
| 137,916 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 137,916 |
|
| Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Michael James, |
| 2020 |
|
| 164,449 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 164,449 |
|
| Chief Financial Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dennis Rodrigues,(1) |
| 2020 |
|
| 15,000 |
| — |
| — |
| — |
| — |
| — |
| — |
|
| 15,000 |
|
| Secretary |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________
| (1) | Mr. Rodrigues served as our Secretary and a director from our inception until September 10, 2021, when he resigned both positions. |
Employment Agreements
We did not have employment agreements with our named executive officers in the year ended December 31, 2020. On August 18, 2021, we entered into employment agreements with Messrs. Kras and James pursuant to which each will serve as Chief Executive Officer and Chief Financial Officer, respectively, for a term of two years. These agreements will automatically renew for one additional one-year period unless we or the executive provides written notice prior to the end of the term. Pursuant to these employment agreements. Messrs. Kras and James are entitled to an annual base salary of $300,000, which amount may be increased by the compensation committee or the Board in their discretion. Each executive is eligible to receive an annual cash performance bonus with a target award amount equal to 100% of his base salary in the year of performance (“Performance Bonus”). This Performance Bonus will be based on performance and achievement of Company goals and objectives as defined by the Board or compensation committee. For the year ending December 31, 2021, no performance goals have been set in advance, and the 2021 Performance Bonus will be awarded at the discretion of the Board, or if formed, the compensation committee. In addition, each executive is entitled to four weeks’ paid time off pursuant to our practices for senior executives, and is entitled to the health, welfare and retirement benefits provided generally to our other employees.
Each executive is entitled to a special cash bonus (the “Transaction Bonus”) upon the first to occur of our IPO or the closing of a transaction contemplated by a business combination agreement between us and a special purpose acquisition company that results in the surviving corporation’s securities being listed on a national securities exchange. The Transaction Bonus is equal to $700,000 for each executive.
Potential Payments Upon Termination or Change in Control
Under the employment agreements for Messrs. Kras and James, if the executive is terminated for cause, resigns without good reason, or his employment ends due to his death or permanent disability, he will be entitled to any earned but unpaid base salary plus accrued benefits earned through the date of termination.
Under the employment agreements for Messrs. Kras and James, in the event of an executive’s termination for a reason other than for cause or if an executive terminates voluntarily under one or more of the specified circumstances that constitute a good reason, the executive will receive an amount equal to two times his then-current base salary payable monthly, less any required tax withholdings, plus the pro-rata portion of the Performance Bonus earned during the calendar year of termination, and an aggregate amount equal to 12 times the applicable monthly premium for his group medical, dental and vision coverage. In addition, any stock options held by the executive will accelerate and become fully vested, and any restrictions relating to restricted stock or restricted stock units will lapse and become fully vested.
The executives are subject to non-competition and non-solicitation provisions under their employment agreements effective for the period of time equal to the greater of: (i) the period of time during which the executive is receiving any compensation or benefits from us; or (ii) a period of one year following the executive’s termination of employment. In all cases, the executive’s payments and benefits will be reduced, if necessary, to ensure that the payments and benefits to the executive will not be subject to the “golden parachute” excise tax imposed by Section 4999 of the Internal Revenue Code and the payments will be deductible by us.
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Outstanding Equity Incentive Awards At Fiscal Year-End
There were no stock awards held by our named executive officers as of December 31, 2020.
Stock Incentive Plan
The Company intends to establish a stock incentive plan prior to the effectiveness of the registration statement of which this prospectus forms a part.
Director Compensation
Since inception, none of the directors has received any compensation solely for their service as director.
After this offering, pursuant to letter agreements we have with our director nominees, we intend to pay our independent directors $150,000 per year, comprised of $75,000 in cash compensation and $75,000 in restricted stock to be granted under the stock incentive plan we plan to approve prior to the effectiveness of this registration statement. We intend for the compensation committee of the Board of Directors, once formed, to determine the future compensation of our independent directors.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
The following sets forth a summary of transactions since January 1, 2019, or any currently proposed transaction, in which the Company was to be a participant and the amount involved exceeded or exceeds $120,000 and in which any related person had or will have a direct or indirect material interest.
Working Capital Funding from Executive Officers
Since inception, we have relied on debt financing from our officers for some of our working capital and, as of December 9, 2021, owe our Chief Financial Officer $679,287 represented by promissory notes. During this period, we have entered into promissory notes with the following officers on the following dates:
| Date |
| Payee |
| Annual Interest Rate |
|
| Original Amount |
|
| Remaining Amount |
|
| Accrued Interest |
|
| Maturity Date | |||||
| 4/28/2020 |
| Michael James |
|
| 0 | % |
| $ | 25,000 |
|
| $ | 2,500 |
|
| $ | 0 |
|
| Upon Demand | |
| 11/17/2020 |
| James E. Kras |
|
| 0 | % |
| $ | 5,000 |
|
| $ | 0 | (1) |
| $ | 0 |
|
| Upon Demand | |
| 11/18/2020 |
| James E. Kras |
|
| 0 | % |
| $ | 2,000 |
|
| $ | 0 | (1) |
| $ | 0 |
|
| Upon Demand | |
| 12/11/2020 |
| James E. Kras |
|
| 0 | % |
| $ | 25,000 |
|
| $ | 0 | (1) |
| $ | 0 |
|
| Upon Demand | |
| 9/1/2021 |
| Michael James |
|
| 12 | % |
| $ | 25,000 |
|
| $ | 25,000 |
|
| $ | 825 |
|
| 8/31/2022 | (2) |
| 9/3/2021 |
| Michael James |
|
| 12 | % |
| $ | 75,000 |
|
| $ | 75,000 |
|
| $ | 2,425 |
|
| 9/2/2022 | (2) |
| 9/10/2021 |
| Michael James |
|
| 12 | % |
| $ | 100,000 |
|
| $ | 100,000 |
|
| $ | 3,000 |
|
| 9/9/2022 | (2) |
| 9/15/2021 |
| Michael James |
|
| 12 | % |
| $ | 60,000 |
|
| $ | 60,000 |
|
| $ | 1,700 |
|
| 9/14/2022 | (2) |
| 9/17/2021 |
| Michael James |
|
| 12 | % |
| $ | 100,000 |
|
| $ | 100,000 |
|
| $ | 2,767 |
|
| 9/16/2022 | (2) |
| 9/22/2021 |
| Michael James |
|
| 12 | % |
| $ | 90,000 |
|
| $ | 90,000 |
|
| $ | 2,340 |
|
| 9/21/2022 | (2) |
| 9/29/2021 |
| Michael James |
|
| 12 | % |
| $ | 50,000 |
|
| $ | 50,000 |
|
| $ | 1,183 |
|
| 9/28/2022 | (2) |
| 10/1/2021 |
| Michael James |
|
| 12 | % |
| $ | 60,000 |
|
| $ | 60,000 |
|
| $ | 1,380 |
|
| 9/30/2022 | (2) |
| 10/4/2021 |
| Michael James |
|
| 12 | % |
| $ | 50,000 |
|
| $ | 50,000 |
|
| $ | 1,100 |
|
| 10/3/2022 | (2) |
| 11/19/2021 |
| Michael James |
|
| 12 | % |
| $ | 10,000 |
|
| $ | 10,000 |
|
| $ | 67 |
|
| 11/18/2022 | (2) |
| 12/9/2021 |
| Michael James |
|
| 12 | % |
| $ | 40,000 |
|
| $ | 40,000 |
|
| $ | 0 |
|
| 12/8/2022 | |
| (1) | $25,200 of the aggregate amount of the promissory notes that were issued to Mr. Kras on November 18 and December 11, 2020 were replaced with a convertible note as of July 1, 2021, as shown in the table of convertible notes below. |
| (2) | This note will mature at the earlier of this date or the closing of this offering. |
We have entered into the following convertible notes with our officers, which accrue interest at 12% per annum and convert, at the option of the holder in whole or in part, into shares of our common stock by dividing the total principal and interest due under the note by 0.925, subject to adjustment as set forth in the note:
| Date |
| Holder |
| Amount |
|
| Maturity Date | ||
| 6/22/2021 |
| Michael James |
| $ | 175,000 |
|
| 6/21/2022 | |
| 6/23/2021 |
| Michael James |
| $ | 125,000 |
|
| 6/22/2022 | |
| 6/29/2021 |
| Michael James |
| $ | 100,000 |
|
| 6/28/2022 | |
| 7/1/2021 |
| James E. Kras |
| $ | 25,200 |
|
| 6/30/2022 | |
| 7/2/2021 |
| Michael James |
| $ | 100,000 |
|
| 7/1/2022 | |
| 7/12/2021 |
| Michael James |
| $ | 75,000 |
|
| 7/11/2022 | |
| 7/19/2021 |
| Michael James |
| $ | 75,000 |
|
| 7/18/2022 | |
| 7/23/2021 |
| Michael James |
| $ | 75,000 |
|
| 7/22/2022 | |
| 7/29/2021 |
| Michael James |
| $ | 100,000 |
|
| 7/28/2022 | |
| 8/4/2021 |
| Michael James |
| $ | 100,000 |
|
| 8/3/2022 | |
| 8/13/2021 |
| Michael James |
| $ | 100,000 |
|
| 8/12/2022 | |
| 8/20/2021 |
| Michael James |
| $ | 75,000 |
|
| 8/19/2022 | |
| 8/26/2021 |
| Michael James |
| $ | 100,000 |
|
| 8/25/2022 | |
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| Table of Contents |
The conversion price of the convertible notes is subject to downward adjustment if we issue equity-linked securities with a per share value of less than $0.925 per share. We may prepay the note if we provide the holder 10 days’ notice, during which time the holder may elect to convert the note into shares of common stock.
We expect to repay the indebtedness to our officers represented by the demand notes and promissory notes with the proceeds of this offering. See “Use of Proceeds.”
Sament Notes
On March 30, 2020, we issued a secured promissory note to Sament, an affiliate of Terra Tech and currently an owner of 20.0% of our common stock, for $3,000,000 in connection with the acquisition of our predecessor’s assets. This note accrues interest at a rate of 3.5% per annum on a 360-day year basis and matures March 30, 2025. In addition, we granted a second secured promissory note to Sament as of June 3, 2020 for $653,870, which accrues interest at a rate of 3.5% until June 3, 2023 (together with the note due March 30, 2025, the “Sament Notes”). The Sament Notes are secured by all of the assets purchased in connection with the Asset Acquisition. We expect to repay the Sament Notes with the proceeds of this offering. See “Use of Proceeds.”
Other Arrangements
Mr. James personally guaranteed the amounts payable by the Company under the factoring facility with Quasar Capital Partners, LLC. This guaranty was released when the factoring facility was repaid in October 2021. See "Management's Discussion and Analysis – Liquidity and Capital Resources – Long -Term Debt” for a discussion of the factoring facility.
Each of Messrs. Kras and James is also entitled to a Transaction Bonus pursuant to the terms of his employment agreement at the closing of this offering. See “Executive and Director Compensation – Employment Agreements.”
During the first quarter of 2021, we purchased a total of $227,365 of goods from Arch City AG, LLC (“Arch City”), an entity in which our Chief Executive Officer owns a 50% interest. In May 2021, the Company entered into an Assumption and Indemnification Agreement (the “Assumption Agreement”) with Arch City, which resulted in the Company assuming a liability of $78,976 that Arch City owed to a third-party supplier. In consideration for payment of the outstanding liability, Arch City forgave the Company’s outstanding balance of accounts payable, which totaled $121,470. The Company recognized a gain for forgiveness of debt of $42,494 during the third quarter of 2021.
Policies and Procedures for Transactions With Related Persons
Prior to this offering, we have not had a formal policy regarding approval of transactions with related parties. In connection with this offering, we intend to adopt a written policy that our executive officers, directors, beneficial owners of more than 5% of any class of our capital stock, and any members of the immediate family of any of the foregoing persons (a “related party”) are not permitted to enter into a related party transaction with us without the prior consent of our audit committee. Any request for us to enter into a transaction with a related party in which the related party would have a direct or indirect interest must first be presented to our audit committee for review, consideration, and approval. In approving or rejecting any such proposal, our audit committee will consider the relevant facts and circumstances of the transaction available to it, including, but not limited to, whether the transaction is on terms no less favorable than terms generally available to an unrelated third party or to employees under the same or similar circumstances, and the extent of the related party’s interest in the transaction. The written policy will require that, in determining whether to approve or reject a related person transaction, our audit committee must consider, in light of known circumstances, whether the transaction is in, or is not inconsistent with, our best interests and those of our stockholders, as our audit committee determines in good faith.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial ownership of our common stock as of December 20, 2021, and as adjusted to reflect the sale of common stock being offered in this offering by:
|
| · | each person, or group of affiliated persons, known to us to own beneficially more than 5% of our common stock; |
|
| · | each of our current directors; |
|
| · | each of our named executive officers; and |
|
| · | all of our current directors and executive officers as a group. |
The information in the following table has been presented in accordance with the rules of the SEC. Under such rules, beneficial ownership of a class of capital stock includes any shares of such class as to which a person, directly or indirectly, has or shares voting power or investment power and also any shares as to which a person has the right to acquire such voting or investment power within 60 days through the exercise of any stock option, warrant or other right. If two or more persons share voting power or investment power with respect to specific securities, each such person is deemed to be the beneficial owner of such securities. Except as we otherwise indicate below and under applicable community property laws, we believe that the beneficial owners of the common stock listed below, based on information they have furnished to us, have sole voting and investment power with respect to the shares shown. Except as otherwise indicated, each stockholder named in the table is assumed to have sole voting and investment power with respect to the number of shares listed opposite the stockholder’s name.
The calculations of beneficial ownership in this table are based on (i) 25,000,000 shares of common stock outstanding prior to the offering and (ii) shares of common stock to be issued in this offering.
| Name and Address of Beneficial Owner(1) |
| Shares Beneficially Owned |
|
| Percentage Prior to Offering |
|
| Percentage After This Offering | |||
| Executive Officers and Directors: |
|
|
|
|
|
|
|
| |||
| James E. Kras(2) |
|
| 8,900,000 |
|
|
| 35.6 | % |
| % | |
| Michael James(3) |
|
| 8,900,000 |
|
|
| 35.6 |
|
|
| |
| All directors and executive officers as a group (2 persons) |
|
| 17,800,000 |
|
|
| 71.2 | % |
| % | |
|
|
|
|
|
|
|
|
|
|
|
| |
| 5% stockholders: |
|
|
|
|
|
|
|
|
|
| |
| Sament Capital Investments, Inc.(4) |
|
| 5,000,000 |
|
|
| 20.0 | % |
| % | |
| Dennis Rodrigues |
|
| 2,000,000 |
|
|
| 8.0 | % |
| % | |
____________
| (1) | Unless otherwise indicated, the address of each individual is c/o Edible Garden AG Incorporated, 283 County Road 519, Belvidere, NJ 07823. |
|
|
|
| (2) | Includes 2,000,000 shares held by an immediate family member. |
|
|
|
| (3) | Includes 2,400,000 shares held by immediate family members. |
|
|
|
| (4) | The business address for Sament Capital Investments, Inc. is 3242 S. Halliday St., Suite 202, Santa Ana, CA 92705. |
DESCRIPTION OF SECURITIES
General
Our certificate of incorporation authorizes the issuance of up to 200,000,000 shares of common stock, par value $0.0001 per share, and up to 10,000,000 shares of preferred stock, par value $0.0001 per share. As of the date of this prospectus, there were 25,000,000 shares of common stock outstanding, which were held by approximately nine stockholders of record. No shares of preferred stock are outstanding.
Common Stock
Each holder of common stock is entitled to one vote for each share of common stock held on all matters submitted to a vote of the stockholders, including the election of directors. Our certificate of incorporation and bylaws do not provide for cumulative voting rights.
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Subject to preferences that may be applicable to any then outstanding preferred stock, the holders of our outstanding shares of common stock are entitled to receive dividends, if any, as may be declared from time to time by our board of directors out of legally available funds. In the event of our liquidation, dissolution or winding up, holders of common stock will be entitled to share ratably in the net assets legally available for distribution to stockholders after the payment of all of our debts and other liabilities, subject to the satisfaction of any liquidation preference granted to the holders of any outstanding shares of preferred stock.
Holders of our common stock have no preemptive, conversion or subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of the holders of common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any series of our preferred stock that are outstanding or that we may designate and issue in the future.
Evergreen Notes and Warrants
On October 7, November 8, November 22, and December 20, 2021, we closed on all four tranches of a private placement with Evergreen and raised an aggregate of $2.0 million, which we are using to support our working capital requirements. In the private placement, we issued the Evergreen Notes to Evergreen at a 15% original issue discount. The Evergreen Notes mature on July 7, August 8, August 22, and September 20, 2022, respectively, and incur interest at a rate of 5.0% per annum. The Evergreen Notes are secured and subordinated to the Sament Notes. Evergreen may elect to convert the First Evergreen Note into shares of common stock at a conversion price of $1.53 per share and the Second, Third and Fourth Evergreen Notes into share of common stock at a conversion price of $4.15 per share. If the Evergreen Notes are not converted into shares of common stock prior to the closing of this offering, we intend to repay the amount due under the Evergreen Note with some of the proceeds of this offering. The Notes are subject to a prepayment penalty of 15% of the principal amount to be prepaid until November 30, 2021, 20% after November 30, 2021 until January 1, 2022, and 30% on or after January 1, 2022. If we sell common stock or securities convertible into common stock at a per share price lower than the conversion price of the Evergreen Notes while the notes are outstanding and prior to the closing of this offering, the conversion price of the notes will be reduced to that lower per share price.
In the private placement, we also issued: (a) the First Evergreen Warrant, which Evergreen may exercise for up to 751,634 shares of common stock at an exercise price of $1.53 per share until October 7, 2026; (b) the Second Evergreen Warrant, which Evergreen may exercise for up to 96,988 shares of common stock at an exercise price of $4.15 per share until November 8, 2026; (c) the Third Evergreen Warrant, which Evergreen may exercise for up to 96,988 shares of common stock at an exercise price of $4.15 per share until November 22, 2026; and (d) the Fourth Evergreen Warrant, which Evergreen may exercise for up to 83,133 shares of common stock at an exercise price of $4.15 per share. The Evergreen Warrants may be exercised via cashless exercise after six months after the original issuance date if there is no effective registration statement registering the resale of the shares underlying the applicable Evergreen Warrant. If we sell common stock or securities convertible into common stock at a per share price lower than the exercise price of the Evergreen Warrants while they are outstanding and prior to the closing of this offering, the exercise price of the Evergreen Warrants will be reduced to that lower per share price.
Crowd SAFE (Crowdfunding Simple Agreement for Future Equity)
From October 2020 through April 2021, we issued $538 thousand in our Series 2020 Crowd SAFEs in a series of transactions exempt from registration under the Securities Act pursuant to Regulation Crowdfunding. The Crowd SAFEs do not entitle the holder to the rights of our stockholders, such as voting or dividend rights. However, the Crowd SAFE is contractually preferred in the event of our dissolution over the holders of our common stock. The Crowd SAFEs do not give us the right to repurchase the Crowd SAFEs at our option and will not terminate until we achieve a liquidity event. Accordingly, in connection with this offering and at the Crowd SAFE holder’s option, we will either (1) pay the holder an amount in cash equal to the amount the holder invested in the Crowdfunding offering or (2) issue a number of shares of common stock to the holder equal to (a) the amount of their investment divided by (b) $18.5 million divided by 25 million shares (outstanding as of immediately prior to the offering). If the holder does not notify us of its choice, the holder’s SAFE will convert into common stock. If all SAFE holders convert their SAFE into shares of common stock, 726,923 shares of common stock would be issuable to SAFE holders.
Sament Options
At the time we purchased the assets constituting our business from Terra Tech, we also issued two options to Sament, which is one of our creditors. The first option granted Sament the right to purchase 2,225,000 shares of our common stock. The exercise price to purchase all of the shares underlying this option was $1.00. The second option granted Sament the right to purchase 2,775,000 shares of our common stock at an exercise price of $1.00 for all of the shares underlying the option any time prior to March 30, 2025. Sament exercised both of these options as of October 8, 2021 and neither remains outstanding.
Preferred Stock
Our board of directors is authorized, without vote or action by our stockholders, to issue from time to time up to an aggregate of 10,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each of these series, including, if applicable, the dividend rights and preferences, conversion rights, voting rights, terms and rights of redemption, including without limitation sinking fund provisions, redemption price or prices, liquidation rights and preferences, and the number of shares constituting any series. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by our stockholders and may adversely affect the dividend, liquidation and voting and other rights of the holders of common stock. The issuance of preferred stock with voting and conversion rights may adversely affect the voting power of the holders of common stock, including the loss of voting control to others. We currently have no plans to issue any shares of preferred stock.
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We believe that the ability to issue preferred stock without the expense and delay of a special stockholders’ meeting provides us with increased flexibility in structuring possible future financings and acquisitions, and in meeting other corporate needs that might arise. This also permits the board of directors to issue preferred stock containing terms which could impede the completion of a takeover attempt. This could discourage an acquisition attempt or other transaction which stockholders might believe to be in their best interests or in which they might receive a premium for their stock over the then market price of the stock.
Anti-Takeover Effects of Certain Provisions in our Certificate and Bylaws
Exclusive Forum
The certificate of incorporation provides that, unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers, or other employee to us or to our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the Delaware General Corporation Law, the certificate of incorporation or the bylaws or (iv) any action asserting a claim governed by the internal affairs doctrine. However, this provision does not apply to suits brought to enforce a duty or liability created by the Exchange Act. In addition, the Court of Chancery of the State of Delaware and the federal district courts will have concurrent jurisdiction for the resolution of any suit brought to enforce any duty or liability created by the Securities Act. Notwithstanding the foregoing, the inclusion of such provisions in the certificate of incorporation will not be deemed to be a waiver by us or our stockholders of the obligation to comply with federal securities laws, rules and regulations.
Although we believe these provisions benefit the Company by providing increased consistency in the application of Delaware law in the types of lawsuits to which it applies, these provisions may have the effect of discouraging lawsuits against the Company’s directors and officers. Furthermore, the enforceability of choice of forum provisions in other companies’ certificates of incorporation has been challenged in legal proceedings, and it is possible that a court could find these types of provisions to be inapplicable or unenforceable.
Advance Notice of Stockholder Proposals and Nominations
Our bylaws include an advance notice procedure for stockholders to nominate candidates for election as directors or to bring other business before any meeting of our stockholders. The stockholder notice procedure provides that only persons who are nominated by, or at the direction of, the Board, or by a stockholder who has given timely written notice prior to the meeting at which directors are to be elected, will be eligible for election as directors and that, at a stockholders’ meeting, only such business may be conducted as has been brought before the meeting by, or at the direction of, the Board or by a stockholder who has given timely written notice of such stockholder’s intention to bring such business before such meeting.
Under the stockholder notice procedure, for notice of stockholder nominations or other business to be made at a stockholders’ meeting to be timely, such notice must be received by us not earlier than the close of business on the 120th calendar day and not later than the close of business on the 90th calendar day prior to the one-year anniversary of the immediately preceding year’s annual meeting or as otherwise provided in the bylaws.
A stockholder’s notice to us proposing to nominate a person for election as a director or proposing other business must contain certain information specified in the bylaws, including the identity and address of the nominating stockholder, a representation that the stockholder is a record holder of our stock entitled to vote at the meeting and information regarding each proposed nominee or each proposed matter of business that would be required under the federal securities laws to be included in a proxy statement soliciting proxies for the proposed nominee or the proposed matter of business.
The stockholder notice procedure may have the effect of precluding a contest for the election of directors or the consideration of stockholder proposals if the proper procedures are not followed, and of discouraging or deterring a third party from conducting a solicitation of proxies to elect its own slate of directors or to approve its own proposal, without regard to whether consideration of such nominees or proposals might be harmful or beneficial to us and our stockholder.
Restrictions on Call of Special Meetings
Our bylaws provide that special meetings of stockholders can only be called by the Board, the Board Chair or by the Secretary of the Company upon the written request of the holders of at least 50% of the voting power of the outstanding shares entitled to vote at the meeting.
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No Cumulative Voting
The certificate of incorporation does not authorize cumulative voting for the election of directors.
Preferred Stock Authorization
Our Board, without stockholder approval, has the authority under our certificate of incorporation to issue preferred stock with rights superior to the rights of the holders of common stock. As a result, preferred stock, while not intended as a defensive measure against takeovers, could be issued quickly and easily, could adversely affect the rights of holders of common stock and could be issued with terms calculated to delay or prevent a change of control of the Company or make removal of management more difficult.
Transfer Agent
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC.
Potential Listing
We have applied to list our shares of common stock on Nasdaq under the symbol “EDBL.” If our listing application is approved, we expect to list our common stock on Nasdaq upon consummation of the offering. No assurance can be given that our listing application will be approved or that our common stock will be listed on Nasdaq. This offering will occur only if Nasdaq approves the listing of our common stock.
SHARES AVAILABLE FOR FUTURE SALE
Future sales of substantial amounts of our common stock in the public market could adversely affect prevailing market prices of our common stock from time to time and could impair our future ability to raise equity capital in the future. Furthermore, because only a limited number of shares of our common stock will be available for sale shortly after this offering due to certain contractual and legal restrictions on resale described below, sales of substantial amounts of our common stock in the public market after such restrictions lapse, or the anticipation of such sales, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.
Based upon the number of shares outstanding as of December 20, 2021, upon the closing of this offering, we will have outstanding an aggregate of shares of common stock, assuming the conversion of all SAFEs, the Evergreen Notes, and convertible notes, but no exercise of the underwriters’ over-allotment option. All of the shares sold in this offering by us will be freely tradable without restrictions or further registration under the Securities Act, unless held by our affiliates, as that term is defined under Rule 144 under the Securities Act, or subject to lock-up agreements. The remaining shares of common stock outstanding upon the closing of this offering are restricted securities as defined in Rule 144. Restricted securities may be sold in the U.S. public market only if registered or if they qualify for an exemption from registration, including by reason of Rule 144 under the Securities Act. These remaining shares will generally become available for sale in the public market as follows:
|
| · | no shares will be eligible for sale in the public market on the date of this prospectus; and |
|
| · | 28,179,103 shares will be eligible for sale in the public market upon expiration of lock-up agreements 181 days after the closing date of this offering, subject in certain circumstances to the volume, manner of sale and other limitations of Rule 144. |
We may issue shares of common stock from time to time to raise additional funds or as consideration for future acquisitions, investments or other corporate purposes. In the event that any such financing, acquisition, investment or other transaction is significant, the number of shares of common stock that we may issue may in turn be significant. We may also grant registration rights covering those shares of common stock issued in connection with any such transaction.
We are offering our shares of common stock described in this prospectus through the underwriter named below. Maxim Group LLC, or Maxim, is acting as representative of the underwriter. We have entered into an underwriting agreement with the underwriter. Subject to the terms and conditions of the underwriting agreement, the underwriter has agreed to purchase, and we have agreed to sell to the underwriter, the number of shares of common stock listed next to its name in the following table.
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| Table of Contents |
| Underwriter |
| Number |
| |
| Maxim Group LLC |
| |||
|
|
|
|
|
|
| Total |
|
|
|
|
The underwriting agreement provides that the underwriter must buy all of our shares of common stock being sold in this offering if they buy any of them. However, the underwriter is not required to take or pay for the shares covered by the underwriter’s option to purchase additional shares as described below.
Our shares of common stock are offered subject to a number of conditions, including:
|
| · | receipt and acceptance of our shares of common stock by the underwriter; and |
|
|
|
|
|
| · | the underwriter’s right to reject orders in whole or in part. |
We have been advised by Maxim that the underwriter intends to make a market in our shares of common stock but that it is not obligated to do so and may discontinue making a market at any time without notice.
In connection with this offering, the underwriter or securities dealers may distribute prospectuses electronically.
Option to Purchase Additional Common Stock
We have granted the underwriter an option to buy up to an aggregate of additional shares of common stock. The underwriter has 45 days from the date of this prospectus to exercise this option. If the underwriter exercises this option, it will purchase additional shares of common stock approximately in proportion to the amounts specified in the table above.
Underwriting Discount
Shares sold by the underwriter to the public will initially be offered at the initial offering price set forth on the cover of this prospectus. Any shares sold by the underwriter to securities dealers may be sold at a discount of up to $ ____ per share from the initial public offering price. The underwriter may offer the shares through one or more of their affiliates or selling agents. If all the shares are not sold at the initial public offering price, Maxim may change the offering price and the other selling terms. Upon execution of the underwriting agreement, the underwriter will be obligated to purchase the shares at the prices and upon the terms stated therein.
The following table shows the per share and total underwriting discount we will pay to the underwriter assuming both no exercise and full exercise of the underwriter’s option to purchase up to additional shares of common stock.
|
|
| Per Share |
|
| Total without |
|
| Total with |
| |||
| Public offering price |
| $ |
|
|
| $ |
|
|
| $ |
|
|
| Underwriting discounts and commissions (7.0%) |
| $ |
|
|
| $ |
|
|
| $ |
|
|
| Proceeds, before expenses to us |
| $ |
|
|
| $ |
|
|
| $ |
|
|
We have agreed to pay Maxim’s out-of-pocket accountable expenses, including Maxim’s legal fees, up to a maximum amount of $100,000 if this offering is completed. We have paid $20,000 to Maxim as an advance to be applied towards reasonable out-of-pocket expenses, or the Advance. Any portion of the Advance shall be returned back to us to the extent not actually incurred.
We estimate that the total expenses of the offering payable by us, not including the underwriting discount, will be approximately $0.35 million. We have also agreed to reimburse the underwriter for certain expenses incurred by them.
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Representative’s Warrants
We have also agreed to issue to Maxim (or its permitted assignees) warrants to purchase a number of our shares of common stock equal to an aggregate of 4.0% of the total number of shares of common stock sold in this offering, or the Representative’s Warrants. The Representative’s Warrants will have an exercise price equal to 125% of the offering price of our shares of common stock sold in this offering and may be exercised on a cashless basis. The Representative’s Warrants are exercisable commencing six months after the effective date of the registration statement related to this offering, and will expire five years after the effective date of such registration statement. The Representative’s Warrants are not redeemable by us. We have agreed to a one-time demand registration of our shares of common stock underlying the Representative’s Warrants at our expense and an additional demand registration at the holders’ expense for a period of five years from the effective date of the registration statement related to this offering. The Representative’s Warrants also provide for unlimited “piggyback” registration rights at our expense with respect to the underlying shares of common stock during the five-year period commencing from the effective date of the registration statement related to this offering. The Representative’s Warrants and our shares of common stock underlying the Representative’s Warrants, have been deemed compensation by the Financial Industry Regulatory Authority, or FINRA, and are therefore subject to a 180-day lock-up pursuant to Rule 5110(g)(1) of FINRA. The underwriter (or permitted assignees under the Rule) may not sell, transfer, assign, pledge or hypothecate the Representative’s Warrants or the securities underlying the Representative’s Warrants, nor will they engage in any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Representative’s Warrants or the underlying securities for a period of six months from the effective date of this offering, except to any FINRA member participating in the offering and their bona fide officers or partners. The Representative’s Warrants will provide for adjustment in the number and price of such Representative’s Warrants (and our shares of common stock underlying such Representative’s Warrants) to prevent dilution in the event of a forward or reverse stock split, stock dividend or similar recapitalization.
Right of First Refusal
We have agreed to grant Maxim, for the 24-month period following the effective date of the registration statement related to this offering, a right of first refusal to act as sole manager and book runner and/or sole placement agent, for any and all future public and private equity, convertible or debt offerings of the Company’s securities, or as exclusive financial advisor for any strategic transaction, including a merger, acquisition, joint venture, minority investment or asset sale.
Lock-Up Agreements
We and our directors, officers any other holder(s) of one percent (1.0%) or more of our outstanding our shares of common stock as of the effective date of the Registration Statement (and all holders of securities exercisable for or convertible into shares of common stock) shall enter into customary “lock-up” agreements in favor of Maxim pursuant to which such persons and entities shall agree, for a period of one hundred and eighty (180) days after this offering is completed, that they shall neither offer, issue, sell, contract to sell, encumber, grant any option for the sale of or otherwise dispose of any securities of the Company without Maxim’s prior written consent.
Indemnification
We have agreed to indemnify the underwriter against certain liabilities, including certain liabilities under the Securities Act. If we are unable to provide this indemnification, we have agreed to contribute to payments the underwriter may be required to make in respect of those liabilities.
Other Relationships
The underwriter and its affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us or our affiliates. They have received, or may in the future receive, customary fees and commissions for these transactions.
No Public Market
Prior to this offering, there has not been a public market for our securities in the U.S. and the public offering price for our shares of common stock will be determined through negotiations between us and the underwriter. Among the factors to be considered in these negotiations will be prevailing market conditions, our financial information, market valuations of other companies that we and the underwriter believe to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant.
We offer no assurances that the initial public offering price will correspond to the price at which our shares of common stock will trade in the public market subsequent to this offering or that an active trading market for our shares of common stock will develop and continue after this offering.
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Stock Exchange
We have applied to list our common stock on the Nasdaq Capital Market under the symbol “EDBL.” There can be no assurance that we will be successful in listing our common stock on the Nasdaq Capital Market.
Electronic Distribution
A prospectus in electronic format may be made available on websites or through other online services maintained by the underwriter of this offering, or by their affiliates. Other than the prospectus in electronic format, the information on any underwriter’s website and any information contained in any other website maintained by an underwriter is not part of this prospectus or the registration statement of which this prospectus forms a part, has not been approved and/or endorsed by us or any underwriter in its capacity as underwriter, and should not be relied upon by investors.
Price Stabilization, Short Positions
In connection with this offering, the underwriter may engage in activities that stabilize, maintain or otherwise affect the price of our shares of common stock during and after this offering, including:
|
| · | stabilizing transactions; |
|
| · | short sales; |
|
| · | purchases to cover positions created by short sales; |
|
| · | imposition of penalty bids; and |
|
| · | syndicate covering transactions. |
Stabilizing transactions consist of bids or purchases made for the purpose of preventing or retarding a decline in the market price of our shares of common stock while this offering is in progress. Stabilization transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. These transactions may also include making short sales of our shares of common stock, which involve the sale by the underwriter of a greater number of shares of common stock than they are required to purchase in this offering and purchasing shares of common stock on the open market to cover short positions created by short sales. Short sales may be “covered short sales,” which are short positions in an amount not greater than the underwriter’s option to purchase additional shares referred to above, or may be “naked short sales,” which are short positions in excess of that amount.
The underwriter may close out any covered short position by either exercising their option, in whole or in part, or by purchasing shares in the open market. In making this determination, the underwriter will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option.
Naked short sales are short sales made in excess of the over-allotment option. The underwriter must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriter is concerned that there may be downward pressure on the price of our shares of common stock in the open market that could adversely affect investors who purchased in this offering.
The underwriter also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriter a portion of the underwriting discount received by it because Maxim has repurchased shares sold by or for the account of that underwriter in stabilizing or short covering transactions.
These stabilizing transactions, short sales, purchases to cover positions created by short sales, the imposition of penalty bids and syndicate covering transactions may have the effect of raising or maintaining the market price of our shares of common stock or preventing or retarding a decline in the market price of our shares of common stock. As a result of these activities, the price of our shares of common stock may be higher than the price that otherwise might exist in the open market. The underwriter may carry out these transactions on the Nasdaq Capital Market, in the over-the-counter market or otherwise. Neither we nor the underwriter make any representation or prediction as to the effect that the transactions described above may have on the price of the shares. Neither we, nor the underwriter make any representation that the underwriter will engage in these stabilization transactions or that any transaction, once commenced, will not be discontinued without notice.
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Determination of Offering Price
Prior to this offering, there was no public market for our shares of common stock. The initial public offering price will be determined by negotiation between us and Maxim, and does not necessarily bear any relationship to the value of our assets, our net worth, revenue or other established criteria of value, and should not be considered indicative of the actual value of the securities. The principal factors to be considered in determining the initial public offering price include, but not limited to:
|
| · | the information set forth in this prospectus and otherwise available to Maxim; |
|
| · | our history and prospects and the history and prospects for the industry in which we compete; |
|
| · | our past and present financial performance; |
|
| · | our prospects for future earnings and the present state of our development; |
|
| · | the general condition of the securities market at the time of this offering; |
|
| · | the recent market prices of, and demand for, publicly traded shares of generally comparable companies; and |
|
| · | other factors deemed relevant by the underwriter and us. |
The estimated public offering price range set forth on the cover page of this preliminary prospectus is subject to change as a result of market conditions and other factors. Neither we nor the underwriter can assure investors that an active trading market will develop for our shares of common stock or that our shares of common stock will trade in the public market at or above the initial public offering price.
Affiliations
The underwriter and its respective affiliates are full service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory, investment management, investment research, principal investment, hedging, financing and brokerage activities. The underwriter and its affiliates may from time to time in the future engage with us and perform services for us or in the ordinary course of their business for which they will receive customary fees and expenses. In the ordinary course of their various business activities, the underwriter and its respective affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers, and such investment and securities activities may involve securities and/or instruments of us. The underwriter and its respective affiliates may also make investment recommendations and/or publish or express independent research views in respect of these securities or instruments and may at any time hold, or recommend to clients that they acquire, long and/or short positions in these securities and instruments.
Selling Restrictions
Canada. The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31 103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this prospectus supplement (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s province or territory for particulars of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33 105 Underwriting Conflicts (NI 33 105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriters conflicts of interest in connection with this offering.
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European Economic Area. In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a “Relevant Member State”) an offer to the public of any securities may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any securities may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
|
| · | to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
|
|
|
|
|
| · | to fewer than 100 or, if the Relevant Member State has implemented the relevant provision of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives for any such offer; or |
|
|
|
|
|
| · | in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of securities shall result in a requirement for the publication by us or any underwriters of a prospectus pursuant to Article 3 of the Prospectus Directive. |
For the purposes of this provision, the expression an “offer to the public” in relation to any securities in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any securities to be offered so as to enable an investor to decide to purchase any securities, as the same may be varied in that Member State by any measure implementing the Prospectus Directive in that Member State, the expression “Prospectus Directive” means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in the Relevant Member State, and the expression “2010 PD Amending Directive” means Directive 2010/73/EU.
United Kingdom. Each underwriter has represented and agreed that:
|
| · | it has only communicated or caused to be communicated and will only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act 2000 (the FSMA) received by it in connection with the issue or sale of the securities in circumstances in which Section 21(1) of the FSMA does not apply to us; and |
|
|
|
|
|
| · | it has complied and will comply with all applicable provisions of the FSMA with respect to anything done by it in relation to the securities in, from or otherwise involving the United Kingdom. |
Switzerland. The securities may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (the SIX) or on any other stock exchange or regulated trading facility in Switzerland. This document has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this document nor any other offering or marketing material relating to the securities or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this document nor any other offering or marketing material relating to the offering, or the securities have been or will be filed with or approved by any Swiss regulatory authority. In particular, this document will not be filed with, and the offer of securities will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of securities has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). Accordingly, no public distribution, offering or advertising, as defined in CISA, its implementing ordinances and notices, and no distribution to any non-qualified investor, as defined in CISA, its implementing ordinances and notices, shall be undertaken in or from Switzerland, and the investor protection afforded to acquirers of interests in collective investment schemes under CISA does not extend to acquirers of securities.
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Australia. No placement document, prospectus, product disclosure statement or other disclosure document has been lodged with the Australian Securities and Investments Commission (ASIC), in relation to the offering.
This prospectus does not constitute a prospectus, product disclosure statement or other disclosure document under the Corporations Act 2001 (the Corporations Act) and does not purport to include the information required for a prospectus, product disclosure statement or other disclosure document under the Corporations Act.
Any offer in Australia of the securities may only be made to persons (the Exempt Investors) who are “sophisticated investors” (within the meaning of section 708(8) of the Corporations Act), “professional investors” (within the meaning of section 708(11) of the Corporations Act) or otherwise pursuant to one or more exemptions contained in section 708 of the Corporations Act so that it is lawful to offer the securities without disclosure to investors under Chapter 6D of the Corporations Act.
The securities applied for by Exempt Investors in Australia must not be offered for sale in Australia in the period of 12 months after the date of allotment under the offering, except in circumstances where disclosure to investors under Chapter 6D of the Corporations Act would not be required pursuant to an exemption under section 708 of the Corporations Act or otherwise or where the offer is pursuant to a disclosure document which complies with Chapter 6D of the Corporations Act. Any person acquiring securities must observe such Australian on-sale restrictions.
This prospectus contains general information only and does not take account of the investment objectives, financial situation or particular needs of any particular person. It does not contain any securities recommendations or financial product advice. Before making an investment decision, investors need to consider whether the information in this prospectus is appropriate to their needs, objectives and circumstances, and, if necessary, seek expert advice on those matters.
Notice to Prospective Investors in the Cayman Islands. No invitation, whether directly or indirectly, may be made to the public in the Cayman Islands to subscribe for our securities.
Taiwan. The securities have not been and will not be registered with the Financial Supervisory Commission of Taiwan pursuant to relevant securities laws and regulations and may not be sold, issued or offered within Taiwan through a public offering or in circumstances which constitutes an offer within the meaning of the Securities and Exchange Act of Taiwan that requires a registration or approval of the Financial Supervisory Commission of Taiwan. No person or entity in Taiwan has been authorized to offer, sell, give advice regarding or otherwise intermediate the offering and sale of the securities in Taiwan.
Notice to Prospective Investors in Hong Kong. The contents of this prospectus have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this prospectus, you should obtain independent professional advice. Please note that (i) our shares may not be offered or sold in Hong Kong, by means of this prospectus or any document other than to “professional investors” within the meaning of Part I of Schedule 1 of the Securities and Futures Ordinance (Cap.571, Laws of Hong Kong) (SFO) and any rules made thereunder, or in other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance (Cap.32, Laws of Hong Kong) (CO) or which do not constitute an offer or invitation to the public for the purpose of the CO or the SFO, and (ii) no advertisement, invitation or document relating to our shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere) which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other than with respect to the shares which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional investors” within the meaning of the SFO and any rules made thereunder.
Notice to Prospective Investors in the People’s Republic of China. This prospectus may not be circulated or distributed in the PRC and the shares may not be offered or sold, and will not offer or sell to any person for re-offering or resale directly or indirectly to any resident of the PRC except pursuant to applicable laws, rules and regulations of the PRC. For the purpose of this paragraph only, the PRC does not include Taiwan and the special administrative regions of Hong Kong and Macau.
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LEGAL MATTERS
The validity of the shares of the common stock offered by this prospectus will be passed upon by Harter Secrest & Emery LLP, Rochester, New York, NY. Loeb & Loeb LLP, New York, NY, is acting as counsel to the underwriters.
Marcum LLP, an independent registered public accounting firm, has audited our consolidated financial statements at December 31, 2020 and 2019 as set forth in its report. We have included our financial statements in the prospectus and elsewhere in the registration statement in reliance on Marcum LLP’s report, given on their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1, which includes amendments and exhibits, under the Securities Act and the rules and regulations under the Securities Act for the registration of common stock being offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information that is in the registration statement and its exhibits and schedules. Certain portions of the registration statement have been omitted as allowed by the rules and regulations of the SEC. Statements in this prospectus that summarize documents are not necessarily complete, and in each case you should refer to the copy of the document filed as an exhibit to the registration statement. All filings we make with the SEC are available on the SEC’s web site at www.sec.gov.
Upon completion of this offering, we will be subject to the information requirements of the Exchange Act and will file annual, quarterly and current event reports, proxy statements and other information with the SEC. We also maintain a website at www.ediblegarden.com. The information contained on, or that can be accessed through, our website is not part of, and is not incorporated into, this prospectus. We have included our website in this prospectus solely as an inactive textual reference, and you should not consider the contents of our website in making an investment decision with respect to our securities.
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Index to Consolidated Financial Statements
|
| Page |
| ||
| Audited Financial Statements As of and For the Years Ended December 31, 2020 and 2019 |
|
|
| |
|
|
| F-2 |
| |
|
| F-3 |
| ||
|
| F-4 |
| ||
|
|
| F-5 |
| |
|
| F-6 |
| ||
|
| F-7 |
| ||
|
|
|
| ||
|
|
| F-22 |
| |
|
| F-23 |
| ||
|
|
| F-24 |
| |
|
| F-25 |
| ||
|
| F-26 |
|
| F-1 |
| Table of Contents |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Edible Garden AG, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Edible Garden AG, Inc. (the “Company”) as of December 31, 2020 (Successor balance sheet) and 2019 (Predecessor balance sheet), the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the period from March 28, 2020 to December 31, 2020 (Successor operations) and the period from January 1, 2020 to March 31, 2020 and the year ended December 31, 2019 (Predecessor operations), and the related notes (collectively referred to as the “financial statements”). In our opinion, the Successor financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the period from March 28, 2020 to December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Further, in our opinion, the Predecessor financial statements present fairly, in all material respects, the financial position of the Predecessor as of December 31, 2019, and the results of its operations and its cash flows for the period from January 1, 2020 to March 31, 2020 and for the year ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory Paragraph – Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 13, the Company has a significant working capital deficiency, has incurred significant losses and needs to raise additional funds to meet its obligations and sustain its operations. These conditions raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 13. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum LLP
We have served as the Company’s auditor since 2021
Costa Mesa, California
September 10, 2021
| F-2 |
| Table of Contents |
EDIBLE GARDEN AG INCORPORATED
CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
|
|
| Predecessor |
|
| Successor |
| ||
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2019 |
|
| 2020 |
| ||
| ASSETS |
| |||||||
| Current assets: |
|
|
|
|
|
| ||
| Cash |
| $ | 5 |
|
| $ | 5 |
|
| Accounts receivable, net |
|
| 604 |
|
|
| 629 |
|
| Inventory |
|
| 524 |
|
|
| 314 |
|
| Prepaid expenses and other current assets |
|
| 109 |
|
|
| 122 |
|
| Total current assets |
|
| 1,242 |
|
|
| 1,070 |
|
| Property, equipment and leasehold improvements, net |
|
| 4,187 |
|
|
| 3,053 |
|
| Intangible assets, net |
|
| 85 |
|
|
| 25 |
|
| Other assets |
|
| 2,704 |
|
|
| 331 |
|
| TOTAL ASSETS |
| $ | 8,218 |
|
| $ | 4,479 |
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| LIABILITIES: |
|
|
|
|
|
|
|
|
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable and other accrued expenses |
| $ | 1,868 |
|
| $ | 2,466 |
|
| Total current liabilities |
|
| 1,868 |
|
|
| 2,466 |
|
| Long-term liabilities: |
|
|
|
|
|
|
|
|
| Long-term debt, net of discounts |
|
| - |
|
|
| 3,884 |
|
| Long-term lease liabilities |
|
| 2,139 |
|
|
| 204 |
|
| Total long-term liabilities |
|
| 2,139 |
|
|
| 4,088 |
|
| Total liabilities |
|
| 4,007 |
|
|
| 6,554 |
|
|
|
|
|
|
|
|
|
|
|
| COMMITMENTS AND CONTINGENCIES (Note 11) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| STOCKHOLDERS’ DEFICIT: |
|
|
|
|
|
|
|
|
| Common stock ($0.0001 par value, 100 and 200,000,000 shares authorized, 100 and 20,000,000 shares outstanding as of December 31, 2019 and 2020, respectively)(1) |
|
| - |
|
|
| - |
|
| Additional paid-in capital |
|
| 20,118 |
|
|
| 6 |
|
| Accumulated deficit |
|
| (15,907 | ) |
|
| (2,081 | ) |
| Total stockholders’ deficit |
|
| 4,211 |
|
|
| (2,075 | ) |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 8,218 |
|
| $ | 4,479 |
|
________
(1) Adjusted to reflect the stock splits as described in Note 1.
The accompanying notes are an integral part of the consolidated financial statements.
| F-3 |
| Table of Contents |
EDIBLE GARDEN AG INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except shares and per share information)
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Year Ended |
|
| Period from |
|
| Period from |
| |||
| Revenue |
| $ | 5,634 |
|
| $ | 1,750 |
|
| $ | 7,691 |
|
| Cost of goods sold |
|
| 4,366 |
|
|
| 1,599 |
|
|
| 6,488 |
|
| Gross profit |
|
| 1,268 |
|
|
| 151 |
|
|
| 1,203 |
|
| Selling, general and administrative expenses |
|
| 5,291 |
|
|
| 1,480 |
|
|
| 3,675 |
|
| Impairment of assets |
|
| (34 | ) |
|
| - |
|
|
| - |
|
| (Gain) / Loss on sale of assets |
|
| - |
|
|
| 303 |
|
|
| - |
|
| Loss from operations |
|
| (3,988 | ) |
|
| (1,632 | ) |
|
| (2,472 | ) |
| Other income / (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
| Interest expense, net |
|
| - |
|
|
| - |
|
|
| (112 | ) |
| Gain from debt forgiveness |
|
| - |
|
|
| - |
|
|
| 503 |
|
| Total other income / (expense) |
|
| - |
|
|
| - |
|
|
| 391 |
|
| NET LOSS |
| $ | (3,988 | ) |
| $ | (1,632 | ) |
| $ | (2,081 | ) |
| Net Income / (Loss) per common share - basic and diluted |
| $ | (39,880.00 | ) |
| $ | (16,320.00 | ) |
| $ | (0.10 | ) |
| Weighted-Average Number of Common Shares Outstanding – Basic and Diluted(1) |
|
| 100 |
|
|
| 100 |
|
|
| 20,000,000 |
|
___________
| (1) Successor periods are adjusted to reflect the stock splits as described in Note 1. |
The accompanying notes are an integral part of the consolidated financial statements.
| F-4 |
| Table of Contents |
EDIBLE GARDEN AG INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Year Ended |
|
| Period from |
|
| Period from |
| |||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| |||
| Net Income (Loss) |
| $ | (3,988 | ) |
| $ | (1,632 | ) |
| $ | (2,081 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Bad debt expense |
|
| 14 |
|
|
| 172 |
|
|
| 3 |
|
| Depreciation and amortization |
|
| 543 |
|
|
| 147 |
|
|
| 567 |
|
| Amortization of operating lease right of use asset |
|
| 71 |
|
|
| 16 |
|
|
| 42 |
|
| Loss from sale of assets |
|
| - |
|
|
| 303 |
|
|
| - |
|
| Gain from forgiveness of debt |
|
| - |
|
|
| - |
|
|
| (504 | ) |
| Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| (8 | ) |
|
| 73 |
|
|
| (196 | ) |
| Inventory |
|
| 25 |
|
|
| 1 |
|
|
| 208 |
|
| Prepaid expenses and other current assets |
|
| (75 | ) |
|
| 29 |
|
|
| (48 | ) |
| Other assets |
|
| (2,712 | ) |
|
| (110 | ) |
|
| - |
|
| Accounts payable and accrued expenses |
|
| 472 |
|
|
| 351 |
|
|
| 700 |
|
| Operating lease liabilities |
|
| 2,139 |
|
|
| (28 | ) |
|
| (42 | ) |
| NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES |
|
| (3,519 | ) |
|
| (676 | ) |
|
| (1,351 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Purchase of property, equipment and leasehold improvements |
|
| (107 | ) |
|
| (45 | ) |
|
| (82 | ) |
| Purchase of intangible assets |
|
| (100 | ) |
|
| - |
|
|
| - |
|
| Cash transferred in sale/purchase of assets |
|
| - |
|
|
| (34 | ) |
|
| 34 |
|
| NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES |
|
| (207 | ) |
|
| (79 | ) |
|
| (48 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Contribution from parent company |
|
| 3,714 |
|
|
| 750 |
|
|
| - |
|
| Proceeds from debt |
|
| - |
|
|
| - |
|
|
| 1,484 |
|
| Payments of debt principal |
|
| - |
|
|
| - |
|
|
| (80 | ) |
| NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES |
|
| 3,714 |
|
|
| 750 |
|
|
| 1,404 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET CHANGE IN CASH |
|
| (12 | ) |
|
| (5 | ) |
|
| 5 |
|
| Cash at beginning of period |
|
| 17 |
|
|
| 5 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH AT END OF PERIOD |
| $ | 5 |
|
| $ | - |
|
| $ | 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for interest |
| $ | - |
|
| $ | - |
|
| $ | 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Debt and equity issued to acquire Predecessor's assets |
| $ | - |
|
| $ | - |
|
| $ | 2,966 |
|
| Debt issued to purchase vehicles |
| $ | - |
|
| $ | - |
|
| $ | 24 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| F-5 |
| Table of Contents |
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(in thousands, except for shares) (1)
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
|
| ||||||||
| Predecessor: |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
| Balance at December 31, 2018 |
|
| 100 |
|
| $ | - |
|
| $ | 16,405 |
|
| $ | (11,919 | ) |
| $ | 4,486 |
|
| Contributions from parent company |
|
| - |
|
|
| - |
|
|
| 3,714 |
|
|
| - |
|
|
| 3,714 |
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,988 | ) |
|
| (3,988 | ) |
| Balance at December 31, 2019 |
|
| 100 |
|
|
| - |
|
| $ | 20,118 |
|
| $ | (15,907 | ) |
| $ | 4,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Balance at January 1, 2020 |
|
| 100 |
|
| $ | - |
|
| $ | 20,118 |
|
| $ | (15,907 | ) |
| $ | 4,211 |
|
| Contributions from parent company |
|
| - |
|
|
| - |
|
|
| 750 |
|
|
| - |
|
|
| 750 |
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,632 | ) |
|
| (1,632 | ) |
| Balance at March 31, 2020 |
|
| 100 |
|
|
| - |
|
| $ | 20,869 |
|
| $ | (17,539 | ) |
| $ | 3,330 |
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
| |||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
|
| ||||||||
| Successor: |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
| Balance at March 28, 2020 (inception) |
|
| 20,000,000 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Options issued for acquisition of assets |
|
| - |
|
|
| - |
|
|
| 6 |
|
|
| - |
|
|
| 6 |
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (2,081 | ) |
|
| (2,081 | ) |
| Balance at December 31, 2020 |
|
| 20,000,000 |
|
| $ | - |
|
| $ | 6 |
|
| $ | (2,081 | ) |
| $ | (2,075 | ) |
| (1) Adjusted to reflect the stock splits as described in Note 1. |
The accompanying notes are an integral part of the consolidated financial statements.
| F-6 |
| Table of Contents |
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 April 9, 2013. On March 28, 2020, Edible Garden AG Inc., a Wyoming corporation, was incorporated for the purpose of acquiring substantially all of the operating assets of Edible Garden Corp., which was a separately identified reportable segment of its parent company Unrivaled Brands, Inc. (formerly known as Terra Tech Corporation). The acquisition was completed on March 30, 2020. Prior to March 30, 2020 Edible Garden AG, Inc. had no operations. Hereafter, Edible Garden AG, Inc. and its subsidiaries will collectively be referred to as “Edible Garden,” “we,” “us,” “our,” or the “Successor.” Edible Garden Corp., a wholly-owned subsidiary of Unrivaled Brands, Inc. will be referred to as the “Predecessor.” Throughout these financial statements, the Successor and the Predecessor are also referred to as “the Company” and used interchangeably, unless otherwise noted.
We authorized 100,000 shares of common stock at formation. On October 14, 2020, we simultaneously declared a 20-for-1 forward stock split of our common stock and increased the number of authorized common shares to 20,000,000. On June 30, 2021, we simultaneously (1) converted Edible Garden from a Wyoming into a Delaware corporation, (2) declared a 1-for-2 reverse stock split of our common stock, and (3) increased the total number of authorized common shares to 50,000,000. On September 8, 2021, we simultaneously declared a 20-for-1 forward stock split of our common stock and increased the number of authorized common shares to 200,000,000. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the stock splits described above.
Nature of Business
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of December 31, 2020 and 2019, and the consolidated results of operations and cash flows for the years ended December 31, 2020 and 2019 have been included.
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 13, “Going Concern” of the Notes to Consolidated Financial Statements for additional information.
| F-7 |
| Table of Contents |
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, discount rates used in the measurement and recognition of lease liabilities and valuation of our common stock. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and future trends, 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 $38,287 and $116,759 as of December 31, 2020 (Successor) and 2019 (Predecessor), respectively.
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 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.
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 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.
| F-8 |
| Table of Contents |
Intangible Assets
Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. As of December 31, 2020, Edible Garden held one intangible asset related to a non-compete agreement, which has a useful life of two years.
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.
Revenue Recognition and Performance Obligations
Revenues are 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 year ended December 31, 2019 (Predecessor), the three months ended March 31, 2020 (Predecessor) and the year ended December 31, 2020 (Successor):
|
|
| (in thousands) |
| |||||||||
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| December 31, 2019 |
|
| Period from |
|
| Period from |
| |||
| Herbs & Produce |
| $ | 5,284 |
|
| $ | 1,685 |
|
| $ | 7,482 |
|
| Vitamins and Supplements |
|
| 350 |
|
|
| 65 |
|
|
| 209 |
|
| Total |
| $ | 5,634 |
|
| $ | 1,750 |
|
| $ | 7,691 |
|
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.
| F-9 |
| Table of Contents |
Contract Estimates and Judgments
The Company’s revenues accounted for under ASC Topic 606, generally, do not require significant estimates or judgments based on 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 and producing our products.
Advertising Expenses
The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising expenses totaled $222,038 and $22,025 in the year ended December 31, 2019 (Predecessor) and three months ended March 31, 2020 (Predecessor), respectively. For year ended December 31, 2020 (Successor), the advertising expense totaled $92,681.
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 years ended December 31, 2020 and 2019. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for all years.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive include 5,000,000 options issued by Edible Garden to acquire the assets of the Predecessor. Refer to Note 3, “Asset Acquisition” for details.
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 December 31, 2020 and 2019, 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.
| F-10 |
| Table of Contents |
Recently Adopted Accounting Standards
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, as modified by the Jumpstart Our Business Start-ups Act of 2012, (the “JOBS Act”). Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period provided in Section 13(a) of the Securities Exchange Act of 1934, as amended, for complying with new or revised accounting standards applicable to public companies. As an emerging growth company we plan to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.
FASB ASU No. 2014-09 (Topic 606), “Revenue from Contracts with Customers” – In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. The Company adopted ASC Topic 606, “Revenue from Contracts with Customers”, effective January 1, 2019. The adoption had no material impact on the financial statements.
FASB ASU No. 201602 (Topic 842), “Leases” – Issued in February 2016, ASU No. 2016-02 established ASC Topic 842, “Leases,” as amended by subsequent ASUs on the topic, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. ASU 2016-02 requires lessees to apply a two-method approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase. Lessees are required to record a right of use asset and a lease liability for all leases with a term greater than 12 months. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. Lessees will recognize expense based on the effective interest method for finance leases or on a straight-line basis for operating leases. The accounting applied by the lessor is largely unchanged from that applied under the existing lease standard. We adopted this standard effective January 1, 2020. The adoption had no material impact on the financial statements.
FASB Accounting Standards Update (“ASU”) No. 2016-13, “Measurement of Credit Losses on Financial Instruments” – Issued in June 2016, ASU 2016-13 replaces the “incurred loss” credit losses framework with a new accounting standard that requires management's measurement of the allowance for credit losses to be based on a broader range of reasonable and supportable information for lifetime credit loss estimates. The Company adopted the standard January 1, 2020. Adoption had no material impact on the Company’s financial position or results of operations.
Recently Issued Accounting Standards
FASB ASU No. 2020-06 “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” - Issued in August 2020, ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and the interest rate on convertible debt instruments will typically be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company will adopt the standard beginning January 1, 2021. Adoption is not expected to have a material impact on the Company’s financial position or results of operations.
NOTE 3 – ASSET ACQUISITION
On March 30, 2020, the Successor entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with the Predecessor’s parent company, pursuant to which Edible Garden Inc. purchased substantially all of the assets of the Predecessor. The transaction did not meet the definition of the purchase of a business as defined in ASC 805, “Business Combinations” because a substantive process was not acquired. Michael James, the former Chief Financial Officer of the Predecessor’s parent company, is the Chief Financial Officer of the Successor.
| F-11 |
| Table of Contents |
The consideration paid for the assets included (1) a five year three million secured promissory note bearing interest at 3.5% per annum, (2) options to purchase up to 5,000,000 shares of the Successor for a nominal amount and (3) $2,011,782 of liabilities assumed.
Stock Options
The first option gives Sament Capital Investments, Inc., an affiliate of the Predecessor (“Sament”), the right, but not the obligation, to acquire 2,225,000 common shares of the Successor at any time between the one- and five-year anniversary of the date of the agreement, or at any time in the event of a change in control or a public offering, for a strike price of $1.00. The second option gives Sament the right, but not the obligation, to purchase 2,775,000 common shares of the Successor at any time between the one- and five-year anniversary of the agreement. The second option is automatically terminated upon payment in full of the secured promissory note.
Given the absence of an active market for the Successor’s common stock, the Company was required to estimate the enterprise value of the Successor company as of the date of the options. Management considered numerous objective and subjective factors in determining the value of the Company’s common stock, including the following: (1) valuations performed by an independent valuation specialist; (2) the Company’s stage of development and revenue growth, (3) the fact that the awards involved illiquid securities in a private company and (4) the likelihood of achieving a liquidity event for the shares of common stock underlying the awards, such as an initial public offering or sale of the Company, given prevailing market conditions. As the Company’s common stock is not actively traded, the determination of fair value involves assumptions, judgments, and estimates. If different assumptions were made, the initial purchase price allocation could have been significantly different. The Company estimated the fair value of the stock options using the Black-Scholes-Merton option-pricing (“Black-Scholes”) model, with the following weighted-average assumptions:
| Expected term (years) |
|
| 2.7 |
|
| Volatility |
|
| 22.0 | % |
| Risk-free interest rate |
|
| 0.3 | % |
| Dividend yield |
|
| 0.0 | % |
The fair value of the consideration was allocated to the assets acquired based on their relative fair values, as follows:
|
|
| (in thousands) |
| |
| Consideration |
|
|
| |
| Fair value of promissory note |
| $ | 2,960 |
|
| Fair value of options issued |
|
| 6 |
|
| Total fair value of consideration: |
| $ | 2,966 |
|
|
|
|
|
|
|
| Net book value of assets acquired |
|
|
|
|
| Cash |
| $ | 34 |
|
| Accounts receivable |
|
| 437 |
|
| Inventory |
|
| 522 |
|
| Prepaids and other assets |
|
| 115 |
|
| Property, plant and equipment |
|
| 3,497 |
|
| Intangible assets |
|
| 62 |
|
| Right-of-use asset |
|
| 311 |
|
| Liabilities assumed |
|
| (2,012 | ) |
| Total Net Assets Acquired |
| $ | 2,966 |
|
NOTE 4 – INVENTORY
Inventory as of December 31, 2019 (Predecessor) and December 31, 2020 (Successor) consisted of the following:
| F-12 |
| Table of Contents |
|
|
| (in thousands) |
| |||||
|
|
| Predecessor |
|
| Successor |
| ||
|
|
| December 31, |
|
| December 31, |
| ||
|
| 2019 |
| 2020 |
| ||||
| Raw materials |
| $ | 251 |
|
| $ | 156 |
|
| Work-in-progress |
|
| 283 |
|
|
| 168 |
|
| Inventory reserve |
|
| (10 | ) |
|
| (10 | ) |
|
|
|
|
|
|
|
|
|
|
| Total inventory |
| $ | 524 |
|
| $ | 314 |
|
NOTE 5 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements as of December 31, 2019 (Predecessor) and December 31, 2020 (Successor) consisted of the following:
|
|
| (in thousands) |
| |||||
|
|
| Predecessor |
|
| Successor |
| ||
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2019 |
|
| 2020 |
| ||
|
|
| $ | - |
|
| $ | - |
|
| Furniture and equipment |
|
| 2,172 |
|
|
| 537 |
|
| Computer hardware |
|
| 108 |
|
|
| 4 |
|
| Leasehold improvements |
|
| 3,573 |
|
|
| 3,009 |
|
| Vehicles |
|
| - |
|
|
| 28 |
|
| Construction in progress |
|
| 1,299 |
|
|
| 4 |
|
| Subtotal |
|
| 7,152 |
|
|
| 3,583 |
|
| Less accumulated depreciation |
|
| (2,965 | ) |
|
| (530 | ) |
| Property, equipment and leasehold improvements, net |
| $ | 4,187 |
|
| $ | 3,053 |
|
Depreciation expense related to property, equipment and leasehold improvements for the year ended December 31, 2019 (Predecessor) was $528,702. Depreciation expense for the three months ended March 31, 2020 (Predecessor) was $134,874. Depreciation expense for the nine months ended December 31, 2020 (Successor) was $529,732.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31, 2019 (Predecessor) and 2020 (Successor) (in thousands):
| F-13 |
| Table of Contents |
|
|
|
|
| Predecessor |
|
| Successor |
| ||||||||||||||||||||
|
|
|
|
| December 31, 2019 |
|
| December 31, 2020 |
| ||||||||||||||||||||
|
|
| Estimated Useful Life in Years |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| |||||||
| Amortizing Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Non Compete |
|
| 2 |
|
|
| 100 |
|
|
| (15 | ) |
|
| 85 |
|
|
| 62 |
|
| $ | (37 | ) |
|
| 25 |
|
| Total Intangible Assets, net |
|
|
|
|
|
| 100 |
|
|
| (15 | ) |
|
| 85 |
|
|
| 62 |
|
|
| (37 | ) |
|
| 25 |
|
The total future amortization expense of $25,000 will be recognized during 2021.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of December 31, 2019 (Predecessor) and December 31, 2020 (Successor):
|
|
| (in thousands) |
| |||||
|
| Predecessor |
| Successor |
| ||||
|
| December 31, 2019 |
| December 31, 2020 |
| ||||
|
|
|
|
|
|
|
| ||
| Accounts Payable |
| $ | 1,216 |
|
| $ | 1,929 |
|
| Accrued Expenses |
|
| 25 |
|
|
| 173 |
|
| Accrued Interest Payable |
|
| 0 |
|
|
| 96 |
|
| Accrued Payroll |
|
| 125 |
|
|
| 106 |
|
| Accrued Vacation |
|
| 58 |
|
|
| 97 |
|
| Current Lease Liability |
|
| 444 |
|
|
| 65 |
|
|
|
|
|
|
|
|
|
|
|
| Total Accounts Payable and Accrued Expenses |
| $ | 1,868 |
|
| $ | 2,466 |
|
NOTE 8 – NOTES PAYABLE
Notes payable consisted of the following as of December 31, 2019 (Predecessor) and December 31, 2020 (Successor):
|
|
| (in thousands) |
| |||||
|
|
| Predecessor |
|
| Successor |
| ||
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2019 |
|
| 2020 |
| ||
| Secured promissory note |
| $ | - |
|
| $ | 3,653 |
|
| SBA loan |
|
| - |
|
|
| 150 |
|
| SAFE agreements |
|
| - |
|
|
| 40 |
|
| Related party loans |
|
| - |
|
|
| 60 |
|
| Vehicle Loan |
|
| - |
|
|
| 21 |
|
| Total Gross Debt |
| $ | - |
|
| $ | 3,923 |
|
|
|
|
|
|
|
|
|
|
|
| Less: Debt discount |
|
| - |
|
|
| (40 | ) |
| Net Long Term Debt |
| $ | - |
|
| $ | 3,884 |
|
| F-14 |
| Table of Contents |
Scheduled maturities of long-term debt as of December 31, 2020, are as follows (in thousands):
| Years Ending December 31, |
|
|
| |
| 2021 |
| $ | - |
|
| 2022 |
|
| 3 |
|
| 2023 |
|
| 654 |
|
| 2024 |
|
| 21 |
|
| 2025 |
|
| 3,000 |
|
| Thereafter |
|
| 247 |
|
|
|
| $ | 3,924 |
|
Secured Promissory Notes
On March 30, 2020, the Company entered into a promissory note (the “Note”) for $3,000,000 with Sament in connection with the acquisition of the Predecessor’s assets. The Note accrues interest at a rate of 3.5% per annum on a 360-day year basis and matures March 30, 2025. The Note is secured by the assets purchased in connection with the asset acquisition. See Note 3, “Asset Acquisition” for additional details.
On June 2, 2020, the Company entered into a promissory note for $653,870 with Sament, which accrues interest at a rate of 3.50% per annum and matures on June 3, 2023. The promissory note is secured by the assets purchased in connection with the asset acquisition.
Small Business Administration (“SBA”) Loans
On April 30, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company entered into a promissory note in the principal amount of $503,655. The Company used the entire loan amount for qualifying expenses and the loan was forgiven in its entirety on December 27, 2020.
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 $150,000 (the “SBA Loan”). The SBA Loan was made under, and is subject to the terms and conditions of, the Economic Injury Disaster Loan Program, which was a program expanded for COVID-19 relief under the CARES Act and is administered by the U.S. Small Business Administration. The term of the SBA Loan is thirty (30) years with a maturity date of June 22, 2050 and the annual interest rate of the SBA Loan is a fixed rate of 3.75%. Under the terms of the CARES Act, the use of loan proceeds for the SBA Loan is limited to alleviating economic injury caused by the COVID-19 pandemic.
SAFE Agreements
During the year ended December 31, 2020, the Company entered into Simple Agreements for Future Equity (“SAFEs”) with investors through a Regulation Crowdfunding campaign in exchange for cash investments. Upon a future equity financing of greater than $1,000,000, the SAFE securities are convertible at the option of the Company into securities identical to those issued in the future equity financing (“Shadow Securities”), except (1) they do not have the right to vote except as required by law, (2) they must vote in accordance with the majority of the investors in such future equity financing with respect to any such required vote and (3) they are not entitled to any inspection or information rights. If the Company elects to convert the securities upon the closing of a future equity financing, the investors will receive the number of Shadow Securities equal to the greater the quotient obtained by dividing the amount the investor paid (the “Purchase Amount”) for the securities by:
| F-15 |
| Table of Contents |
|
| (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 an initial public offering of the Company’s common shares or a change of control (a “Liquidity Event”) prior to any equity financing, the investors will 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 (di) 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.
In the case of a Liquidity Event following any equity financing, the investors will 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.
During the year ended December 31, 2020, the Company raised a total of $39,618 in the Regulation Crowdfunding campaign, which was made through OpenDeal Portal LLC (the “Intermediary”). The Intermediary will be entitled to receive a 6% commission fee and 2% of the securities issued in connection with the offering, which was closed subsequent to year-end. Refer to Note 14, “Subsequent Events” for additional details.
Related Party Loans
During 2020, the Company borrowed $32,000 from James Kras, the Company’s Chief Executive Officer and Director. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
During 2020, the Company borrowed $25,000 from Jeanne Ciccone, a close relative of Mr. Kras. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
During 2020, the Company borrowed $25,000 from Michael James, the Company’s Chief Financial Officer and Director, of which $2,500 remained outstanding as of December 31, 2020. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
Vehicle Loan
On May 26, 2020, the Company entered into a financing agreement for the purchase of a vehicle. The loan, which has a principal amount of $21,000 and accrues interest at a rate of 17.51%, matures on April 26, 2024. The loan is secured by the vehicle purchased.
| F-16 |
| Table of Contents |
NOTE 9 – 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 our predecessor company, Edible Garden Corp., whereby we make lease payments of approximately $15,300 per month to the lessor of the land on which our flagship facility is built and for which our predecessor company is the lessee. Our month-to-month arrangement meets the definition of a short-term lease and is therefore excluded from the recognition requirements of ASC 842, “Leases”.
During the year ended December 31, 2019 (Predecessor), total operating lease cost was $657,558, of which $428,727 was associated with short-term leases. During the three months ended March 31, 2020 (Predecessor), total operating lease cost was $196,321, of which $116,813 was associated with short-term leases. During the nine months ended December 31, 2020 (Successor), total operating lease cost was $413,000, of which $332,720 was associated with short-term leases. As of December 31, 2019 (Predecessor) and December 31, 2020 (Successor), short term lease liabilities of $37,570 and $65,019 are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheets, respectively. The table below presents total operating lease assets and lease liabilities as of December 31, 2020 (Successor):
|
|
| Successor |
| |
|
|
| (in thousands) |
| |
|
|
| December 31, |
| |
|
|
| 2020 |
| |
| Operating lease assets |
| $ | 269 |
|
| Operating lease liabilities |
| $ | 269 |
|
|
|
|
|
| |
|
|
| (in thousands) |
| |
|
|
| Operating |
| |
|
|
| Leases |
| |
| 2021 |
| $ | 107 |
|
| 2022 |
|
| 107 |
|
| 2023 |
|
| 107 |
|
| 2024 |
|
| 36 |
|
| Total lease payments |
|
| 357 |
|
| Less: discount |
|
| (88 | ) |
| Total operating lease liabilities |
| $ | 269 |
|
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:
|
|
| December 31, |
| |
|
|
| 2020 |
| |
| Remaining lease term (years) |
|
| 3.3 |
|
| Discount rate |
|
| 17.5 | % |
| F-17 |
| Table of Contents |
NOTE 10 – TAX EXPENSE
The components of deferred income tax assets and (liabilities) are as follows:
|
|
| (in thousands) |
| |||||
|
|
| Predecessor |
|
| Successor |
| ||
|
|
| December 31, |
|
| December 31, |
| ||
|
|
| 2019 |
|
| 2020 |
| ||
| Deferred tax assets: |
|
|
|
|
|
| ||
| Net Operating Losses |
| $ | 4,429 |
|
| $ | 1,350 |
|
| Inventory |
|
| - |
|
|
| 20 |
|
| Reserves & Allowances |
|
| 4 |
|
|
| 41 |
|
| Deferred Revenue |
| $ | 4 |
|
| $ | - |
|
| Other |
|
| - |
|
|
|
|
|
| Gross deferred tax assets |
|
| 4,433 |
|
|
| 1,411 |
|
| Valuation allowance |
|
| (3,792 | ) |
|
| (762 | ) |
| Total deferred tax assets |
|
| 641 |
|
|
| 649 |
|
| Deferred tax Liabilities: |
|
|
|
|
|
|
|
|
| Depreciable asset basis differences |
|
| (641 | ) |
|
| (649 | ) |
| Total deferred tax liabilities |
|
| (641 | ) |
|
| (649 | ) |
| Net deferred tax assets (liabilities) |
| $ | - |
|
| $ | - |
|
The Company did not incur income tax expense or benefit for the years ended December 31, 2019 (Predecessor) or December 31, 2020 (Successor). The reconciliation between the Company’s effective tax rate and the statutory tax rate is as follows:
|
| (in thousands) |
| ||||||||||
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Year Ended |
|
| Period from January 1, 2020 through March 31, 2020 |
|
| Period from |
| |||
|
|
|
|
|
|
|
|
|
|
| |||
| Expected income tax benefit at statutory tax rate, net |
| $ | (838 | ) |
| $ | (343 | ) |
| $ | (437 | ) |
| State taxes (net of federal tax benefits): |
|
| (362 | ) |
|
| (132 | ) |
|
| (228 | ) |
| Increase in valuation allowance |
|
| 1,204 |
|
|
| 537 |
|
|
| 762 |
|
| Loss on disposal |
|
| - |
|
|
| (62 | ) |
|
| - |
|
| Debt Forgiveness |
|
| - |
|
|
| - |
|
|
| (97 | ) |
| Asset Impairment |
|
| (7 | ) |
|
| - |
|
|
| - |
|
| Other |
|
| 2 |
|
|
| - |
|
|
| - |
|
| Reported income tax expense (benefit) |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| F-18 |
| Table of Contents |
The Company believes that income tax filing positions will be sustained upon examination and does not anticipate any adjustments that would result in a material adverse effect on the Company's financial position, results of operations or cash flows. Accordingly, the Company has not recorded any reserves, or related accruals or uncertain income tax positions as of December 31, 2020 (Successor).
Federal and New Jersey tax laws impose significant restrictions on the utilization of net operating loss carryforwards in the event of a change in ownership of the Company, as defined by Internal Revenue Code Section 382 (Section 382). The Company does not believe a change in ownership, as defined by Section 382, has occurred but a formal study has not been completed.
The Company has net operating loss carryforwards for federal and New Jersey income tax purposes of approximately $5,354,203 and $2,506,825, respectively, as of December 31, 2020 (Successor). The federal net operating loss carryforwards, if not utilized, will carryover indefinitely. The state net operating loss carryforwards, if not utilized, will expire beginning in 2040.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
The Company is not currently involved with and does not know of any pending or threatening litigation against the Company.
NOTE 12 – RELATED PARTY TRANSACTIONS
The Company has entered into loan agreements with certain Officers and close relatives of Officers of the Company, the terms of which are disclosed in Note 8, “Notes Payable.”
During the year ended December 31, 2019 and the three-month period ended March 31, 2020, the parent company of the predecessor company provided cash contributions of $3,713,712 and $750,293, respectively, to the predecessor company, which were utilized to fund operating expenses incurred in the ordinary course of business.
The Company is party to an ongoing arrangement with the Predecessor whereby the Company makes lease payments of approximately $15,300 per month to the lessor of land for which the Predecessor was the lessee. The lease agreement is associated with land the Company utilizes for its ongoing operations.
NOTE 13 – GOING CONCERN
These financial statements are prepared on a going concern basis. The Company began operation in 2020. For the year ended December 31, 2020, we incurred a net loss of $2.1 million. We expect to experience further significant net losses in 2021 and the foreseeable future. At December 31, 2020, we had a cash balance of approximately $5,000. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through our issuance of debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.
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 revenues 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 common stock. 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.
| F-19 |
| Table of Contents |
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.
NOTE 14 – SUBSEQUENT EVENTS
In preparing the consolidated financial statements, the Company has evaluated subsequent events through September 9, 2021, which is the date the audited consolidated financial statements were available for issuance.
Issuances of Convertible Promissory Notes to Related Parties
The principal and interest due and owed under the Notes, which bear interest at a rate of 12.0% per annum, are convertible into shares of Common Stock at any time at the election of the Holders at a conversion price equal to $0.925 (subject to adjustment for forward reverse stock splits and the like after the issuance date). The Company may prepay any portion of the principal and accrued interest due under the Notes at any time and without penalty, upon providing ten days written notice to the Holders.
Subsequent to December 31, 2020 the Company issued promissory notes with principal amounts totaling $100,000 to Michael James, the Company’s Chief Financial Officer, which accrue interest at a rate of 12.00% per annum. The promissory notes mature on the earlier of (a) August 31, 2022, (b) the closing of a sale of equity securities in which the Company raises at least $5 million in gross proceeds (excluding the value of any instruments converting into equity in such equity financing), (c) the sale, lease, license or other disposition of all or substantially all of the assets of the Company, or (d) a transaction or series of related transactions in which any person becomes the beneficial owner of more than 50% of the Company’s outstanding voting securities. Payment and enforcement of the Promissory Notes is subordinate to any other debt of the Company.
Regulation Crowdfunding Borrowing
Subsequent to December 31, 2020, the Company received an additional $433,000 from the SAFE Crowdfunding campaign prior to the close of the campaign in January of 2021.
Accounts Receivable Factoring Agreement
Stock Split
On June 30, 2021, we simultaneously (1) converted Edible Garden from a Wyoming into a Delaware corporation, (2) declared a 1-for-2 reverse stock split of our common stock, and (3) increased the total number of authorized common shares to 50,000,000. On September 8, 2021, we simultaneously declared a 20-for-1 forward stock split of our common stock and increased the number of authorized common shares to 200,000,000. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the stock splits described above.
| F-20 |
| Table of Contents |
Employment Agreement
James Kras
On August 18, 2021, the Company entered into an employment agreement with James Kras whereby he will serve as Chief Executive Officer of the Company, effective as of August 18, 2021 (the “Commencement Date”) for a term of 2 years. Commencing on the second anniversary of the Commencement Date and on each anniversary of the Commencement Date thereafter (each, an "Extension Date"), the term of the Mr. Kras’ employment under the employment agreement shall be automatically extended for an additional one-year period, unless the Company or Mr. Kras provides the other at least ninety (90) days prior written notice before the next Extension Date that the term shall not be extended.
During the term of the agreement, the Company agreed to pay Mr. Kras an annual base salary of $300,000, subject to increase if approved by the Board or the Compensation Committee in their discretion. Mr. Kras shall be eligible to receive an annual cash bonus of up to 100% of his base salary, upon approval by the Board or the Compensation Committee.
Michael James
On August 18, 2021, the Company entered into an employment agreement with Michael James whereby he will serve as Chief Financial Officer of the Company, effective as of August 18, 2021 for a term of 2 years. Commencing on the second anniversary of the Commencement Date and on each anniversary of the Commencement Date thereafter, the term of Mr. James’ employment under the employment agreement shall be automatically extended for an additional one-year period, unless the Company or Mr. James’ provides the other at least ninety (90) days prior written notice before the next Extension Date that the term shall not be extended.
During the term of the agreement, the Company agreed to pay Mr. James an annual base salary of $300,000, subject to increase if approved by the Board or the Compensation Committee in their discretion. Mr. James shall be eligible to receive an annual cash bonus of up to 100% of his base salary, upon approval by the Board or the Compensation Committee.
| F-21 |
| Table of Contents |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except shares)
|
|
| December 31, |
|
| September 30, |
| ||||||||||
|
|
| 2020 |
|
| 2021 |
| ||||||||||
| ASSETS |
| |||||||||||||||
| Current assets: |
|
|
|
|
|
| ||||||||||
| Cash |
| $ | 5 |
|
| $ | 15 |
| ||||||||
| Accounts receivable, net |
|
| 629 |
|
|
| 678 |
| ||||||||
| Inventory |
|
| 314 |
|
|
| 197 |
| ||||||||
| Prepaid expenses and other current assets |
|
| 122 |
|
|
| 78 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
| Total current assets |
|
| 1,070 |
|
|
| 968 |
| ||||||||
| Property, equipment and leasehold improvements, net |
|
| 3,053 |
|
|
| 2,683 |
| ||||||||
| Intangible assets, net |
|
| 25 |
|
|
| - |
| ||||||||
| Other assets |
|
| 331 |
|
|
| 283 |
| ||||||||
| TOTAL ASSETS |
| $ | 4,479 |
|
| $ | 3,934 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||||||||||
| LIABILITIES: |
|
|
|
|
|
|
|
| ||||||||
| Current liabilities: |
|
|
|
|
|
|
|
| ||||||||
| Accounts payable and other accrued expenses |
| $ | 2,466 |
|
| $ | 3,096 |
| ||||||||
| Short-term debt |
|
| - |
|
|
| 1,749 |
| ||||||||
| Total current liabilities |
|
| 2,466 |
|
|
| 4,845 |
| ||||||||
| Long-term liabilities: |
|
|
|
|
|
|
|
| ||||||||
| Long-term debt, net of discounts |
|
| 3,884 |
|
|
| 4,466 |
| ||||||||
| Long-term lease liabilities |
|
| 204 |
|
|
| 147 |
| ||||||||
| Total long-term liabilities |
|
| 4,088 |
|
|
| 4,613 |
| ||||||||
| Total liabilities |
|
| 6,554 |
|
|
| 9,458 |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
| COMMITMENTS AND CONTINGENCIES (Note 10) |
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
| STOCKHOLDERS’ DEFICIT: |
|
|
|
|
|
|
|
| ||||||||
| Common stock ($0.0001 par value, 200,000,000 shares authorized and outstanding as of December 31, 2020 and September 30, 2021, respectively)(1) |
|
| - |
|
|
| 2 |
| ||||||||
| Additional paid-in capital |
|
| 6 |
|
|
| 4 |
| ||||||||
| Accumulated deficit |
|
| (2,081 | ) |
|
| (5,530 | ) | ||||||||
| Total stockholders’ deficit |
|
| (2,075 | ) |
|
| (5,524 | ) | ||||||||
|
|
|
|
|
|
|
|
|
| ||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 4,479 |
|
| $ | 3,934 |
| ||||||||
| _________ |
|
|
|
|
|
|
|
| ||||||||
| (1) Adjusted to reflect the stock splits as described in Note 1. |
|
|
|
|
|
|
|
| ||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-22 |
| Table of Contents |
EDIBLE GARDEN AG INCORPORATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per-share information)
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Period from |
|
| Period from |
|
| Nine Months |
| |||
| Revenue |
| $ | 1,750 |
|
| $ | 5,118 |
|
| $ | 7,708 |
|
| Cost of goods sold |
|
| 1,599 |
|
|
| 4,244 |
|
|
| 7,100 |
|
| Gross profit |
|
| 151 |
|
|
| 874 |
|
|
| 608 |
|
| Selling, general and administrative expenses |
|
| 1,480 |
|
|
| 2,380 |
|
|
| 3,924 |
|
| (Gain) / Loss on sale of assets |
|
| 303 |
|
|
| - |
|
|
| - |
|
| Loss from operations |
|
| (1,632 | ) |
|
| (1,506 | ) |
|
| (3,316 | ) |
| Other income / (expense) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| - |
|
|
| (87 | ) |
|
| (175 | ) | |
| Gain from extinguishment of debt |
|
| - |
|
|
| - |
|
|
| 42 |
|
| Total other income / (expense) |
|
| - |
|
|
| (87 | ) |
|
| (133 | ) |
| NET LOSS |
| $ | (1,632 | ) |
| $ | (1,592 | ) |
| $ | (3,449 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income / (Loss) per common share - basic and diluted(1) |
| $ | (16,320.00 | ) |
| $ | (0.08 | ) |
| $ | (0.17 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average Number of Common Shares Outstanding – Basic and Diluted(1) |
|
| 100 |
|
|
| 20,000,000 |
|
|
| 20,000,000 |
|
| ________ |
|
|
|
|
|
|
|
|
|
|
|
|
| (1) Successor periods are adjusted to reflect the stock splits as described in Note 1. | ||||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
| F-23 |
| Table of Contents |
EDIBLE GARDEN AG INCORPORATED
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per-share information)
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Period from |
|
| Period from |
|
| Nine Months |
| |||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
| |||
| Net Income (Loss) |
| $ | (1,632 | ) |
| $ | (1,592 | ) |
| $ | (3,448 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Bad debt expense |
|
| 172 |
|
|
| 3 |
|
|
| - |
|
| Depreciation and amortization |
|
| 147 |
|
|
| 357 |
|
|
| 571 |
|
| Amortization of operating lease right of use asset |
|
| 16 |
|
|
| 27 |
|
|
| 48 |
|
| Loss from sale of assets |
|
| 303 |
|
|
| - |
|
|
| - |
|
| Change in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
| Accounts receivable |
|
| 73 |
|
|
| (214 | ) |
|
| (48 | ) |
| Inventory |
|
| 1 |
|
|
| (80 | ) |
|
| 118 |
|
| Prepaid expenses and other current assets |
|
| 29 |
|
|
| (325 | ) |
|
| 44 |
|
| Other assets |
|
| (110 | ) |
|
| - |
|
|
| - |
|
| Accounts payable and accrued expenses |
|
| 351 |
|
|
| 500 |
|
|
| 748 |
|
| Operating lease liabilities |
|
| (28 | ) |
|
| (27 | ) |
|
| (48 | ) |
| NET CASH PROVIDED BY / (USED IN) OPERATING ACTIVITIES |
|
| (676 | ) |
|
| (1,351 | ) |
|
| (2,015 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Purchase of property, equipment and leasehold improvements |
|
| (45 | ) |
|
| 14 |
|
|
| (73 | ) |
| Cash transferred in sale/purchase of assets |
|
| (34 | ) |
|
| 34 |
|
|
| - |
|
| NET CASH PROVIDED BY / (USED IN) INVESTING ACTIVITIES |
|
| (79 | ) |
|
| 48 |
|
|
| (73 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Contributions from parent company |
|
| 750 |
|
|
| - |
|
|
| - |
|
| Proceeds from debt |
|
| - |
|
|
| 1,332 |
|
|
| 2,277 |
|
| Payments of debt principal |
|
| - |
|
|
| 20 | ) |
|
| (179 | ) |
| NET CASH PROVIDED BY / (USED IN) FINANCING ACTIVITIES |
|
| 750 |
|
|
| 1,312 |
|
|
| 2,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| NET CHANGE IN CASH |
|
| (5 | ) |
|
| 9 |
|
|
| 10 |
|
| Cash at beginning of period |
|
| 5 |
|
|
| - |
|
|
| 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| CASH AT END OF PERIOD |
| $ | - |
|
| $ | 9 |
|
| $ | 15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL DISCLOSURE FOR OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Cash paid for interest |
| $ | - |
|
|
| 3 |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL DISCLOSURE FOR NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
| Debt and equity issued to acquire Predecessor's assets |
| $ | - |
|
| $ | 2,966 |
|
| $ | - |
|
| Debt issued to purchase vehicles |
| $ | - |
|
| $ | 24 |
|
| $ | 103 |
|
The accompanying notes are an integral part of the consolidated financial statements.
| F-24 |
| Table of Contents |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS’ DEFICIT
(in thousands, except shares)(1)
|
|
|
|
|
|
| Additional |
|
|
|
|
| |||||||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
| |||||||||
| Predecessor: |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
| Balance at January 1, 2020 |
|
| 100 |
|
| $ | - |
|
| $ | 20,118 |
|
| $ | (15,907 | ) |
| $ | 4,211 |
|
| Contributions from parent company |
|
| - |
|
|
| - |
|
|
| 750 |
|
|
| - |
|
|
| 750 |
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,632 | ) |
|
| (1,632 | ) |
| Balance at March 31, 2020 |
|
| 100 |
|
|
| - |
|
| $ | 20,869 |
|
| $ | (17,539 | ) |
| $ | 3,330 |
|
|
|
|
|
|
|
| Additional |
|
|
|
|
| |||||||||
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
|
| |||||||||
| Successor: |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
| Balance at April 1, 2020 |
|
| 20,000,000 |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| $ | - |
|
| Options issued for acquisition of assets |
|
| - |
|
|
| - |
|
|
| 6 |
|
|
| - |
|
|
| 6 |
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (1,593 | ) |
|
| (1,593 | ) |
| Balance at September 30, 2020 |
|
| 20,000,000 |
|
| $ | - |
|
| $ | 6 |
|
| $ | (1,593 | ) |
| $ | 1,587 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine months ended September 30, 2021 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
|
|
|
|
|
| |
|
|
| Common Stock |
|
| Paid-In |
|
| Accumulated |
|
| ||||||||||
| Successor: |
| Shares |
|
| Amount |
|
| Capital |
|
| Deficit |
|
| Total |
| |||||
| Balance at December 31, 2020 |
|
| 20,000,000 |
|
| $ | 2 |
|
| $ | 4 |
|
| $ | (2,081 | ) |
| $ | (2,075 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net Income (Loss) |
|
| - |
|
|
| - |
|
|
| - |
|
|
| (3,449 | ) |
|
| (3,449 | ) |
| Balance at September 30, 2021 |
|
| 20,000,000 |
|
| $ | 2 |
|
| $ | 4 |
|
| $ | (5,530 | ) |
| $ | (5,524 | ) |
___________
| (1) Adjusted to reflect the stock splits as described in Note 1. |
The accompanying notes are an integral part of the consolidated financial statements.
| F-25 |
| Table of Contents |
NOTES TO UNAUDITED 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 April 9, 2013. On March 28, 2020, Edible Garden AG Inc., a Wyoming corporation, was incorporated for the purpose of acquiring substantially all of the operating assets of Edible Garden Corp., which was a separately identified reportable segment of its parent company Unrivaled Brands, Inc. (formerly known as Terra Tech Corporation). The acquisition was completed on March 30, 2020. Prior to March 30, 2020 Edible Garden AG, Inc. had no operations. Hereafter, Edible Garden AG, Inc. and its subsidiaries will collectively be referred to as “Edible Garden,” “we,” “us,” “our,” or the “Successor.” Edible Garden Corp., a wholly-owned subsidiary of Unrivaled Brands, Inc. will be referred to as the “Predecessor.” Throughout these financial statements, the Successor and the Predecessor are also referred to as “the Company” and used interchangeably, unless otherwise noted.
We authorized 100,000 shares of common stock at formation. On October 14, 2020, we simultaneously declared a 20-for-1 forward stock split of our common stock and increased the number of authorized common shares to 20,000,000. On June 30, 2021, we simultaneously (1) converted Edible Garden from a Wyoming into a Delaware corporation, (2) declared a 1-for-2 reverse stock split of our common stock, and (3) increased the total number of authorized common shares to 50,000,000. On September 8, 2021, we simultaneously declared a 20-for-1 forward stock split of our common stock and increased the number of authorized common shares to 200,000,000. All historical share and per share amounts reflected throughout this report have been adjusted to reflect the stock splits described above.
Nature of Business
Edible Garden is a retail seller of locally grown hydroponic produce, which is distributed throughout the Northeast, Midwest and Florida. Currently, Edible Garden’s products are sold at approximately 4,500 supermarkets. Our target customers are those individuals seeking fresh produce locally grown using environmentally sustainable methods.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation of the consolidated financial position of the Company as of December 31, 2020 and September 30, 2021, and the consolidated results of operations and cash flows for the nine-month periods ended September 30, 2021 and 2020 have been included. For a more comprehensive understanding of the Company and its unaudited condensed consolidated financial statements, these interim financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2020 included elsewhere in this registration statement.
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.
| F-26 |
| Table of Contents |
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, discount rates used in the measurement and recognition of lease liabilities and valuation of our common stock. These estimates generally involve complex issues and require us to make judgments, involve analysis of historical and future trends, 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 $38,287 and $38,287 as of December 31, 2020 (Successor) and September 30, 2021 (Successor), respectively.
On March 30, 2021, we entered into an accounts receivable factoring program with Quasar Capital Partners, LLC (the “Purchaser”), pursuant to which the Company agreed to provide the Purchaser with the right, but not the obligation, to purchase the Company’s receivables at book value less a discount, with full recourse.
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 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.
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 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.
| F-27 |
| Table of Contents |
Intangible Assets
Intangible assets continue to be subject to amortization, and any impairment is determined in accordance with ASC 360, “Property, Plant, and Equipment,” intangible assets are stated at historical cost and amortized over their estimated useful lives. The Company uses a straight-line method of amortization, unless a method that better reflects the pattern in which the economic benefits of the intangible asset are consumed or otherwise used up can be reliably determined. As of September 30, 2021, Edible Garden held one intangible asset related to a non-compete agreement, which is fully amortized and has a net book value of zero.
The Company reviews intangible assets subject to amortization quarterly to determine if any adverse conditions exist or a change in circumstances has occurred that would indicate impairment or a change in the remaining useful life. Conditions that may indicate impairment include, but are not limited to, a significant adverse change in legal factors or business climate that could affect the value of an asset, a product recall, or an adverse action or assessment by a regulator. If an impairment indicator exists, we test the intangible asset for recoverability. For purposes of the recoverability test, we group our amortizable intangible assets with other assets and liabilities at the lowest level of identifiable cash flows if the intangible asset does not generate cash flows independent of other assets and liabilities. If the carrying value of the intangible asset (asset group) exceeds the undiscounted cash flows expected to result from the use and eventual disposition of the intangible asset (asset group), the Company will write the carrying value down to the fair value in the period identified.
Revenue Recognition and Performance Obligations
Revenues are 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 three months ended March 31, 2020 (Predecessor), six months ended September 30, 2020 (Successor) and the nine months ended September 30, 2021 (Successor):
|
|
| (in thousands) |
| |||||||||
|
|
| Predecessor |
|
| Successor |
| ||||||
|
|
| Period from |
|
| Period from |
|
| Nine months ended |
| |||
| Herbs & Produce |
| $ | 1,685 |
|
| $ | 5,053 |
|
| $ | 7,155 |
|
| Vitamins and Supplements |
|
| 65 |
|
|
| 65 |
|
|
| 553 |
|
| Total |
| $ | 1,750 |
|
| $ | 5,118 |
|
| $ | 7,708 |
|
| F-28 |
| Table of Contents |
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.
Contract Estimates and Judgments
The Company’s revenues accounted for under ASC Topic 606, generally do not require significant estimates or judgments based on 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 and producing our products.
Advertising Expenses
The Company expenses advertising costs as incurred in accordance with ASC 720-35, “Other Expenses – Advertising Cost.” Advertising expenses totaled $15,225 and $43,989 in the three months ended March 31, 2020 (Predecessor) and six months ended September 30, 2020 (Successor), respectively. For the nine months ended September 30, 2021 (Successor), the advertising expense totaled $99,303.
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 year ended December 31, 2020 and nine months ended September 30, 2021. Therefore, the basic and diluted weighted-average shares of common stock outstanding were the same for all years.
Potentially dilutive securities that are not included in the calculation of diluted net loss per share because their effect is anti-dilutive include 5,000,000 options issued by Edible Garden to acquire the assets of the Predecessor. Refer to Note 3, “Asset Acquisition” for details.
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 December 31, 2020 and September 30, 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.
| F-29 |
| Table of Contents |
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.
Recently Adopted Accounting Standards
FASB ASU No. 2020-06 “Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” – Issued in August 2020, ASU 2020-06 simplifies the accounting for convertible instruments by eliminating the requirement to separate embedded conversion features from the host contract when the conversion features are not required to be accounted for as derivatives under Topic 815, Derivatives and Hedging, or that do not result in substantial premiums accounted for as paid-in capital. By removing the separation model, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and the interest rate on convertible debt instruments will typically be closer to the coupon interest rate when applying the guidance in Topic 835, Interest. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those years. The Company adopted ASU 2020-06 as of January 1, 2021, utilizing the modified retrospective method of adoption. Adoption of the new standard did not have a material impact on the Company’s financial condition or results of operations.
NOTE 3 – ASSET ACQUISITION
On March 30, 2020, the Successor entered into and closed an Asset Purchase Agreement (the “Purchase Agreement”) with the Predecessor’s parent company, pursuant to which Edible Garden Inc. purchased substantially all of the assets of the Predecessor. The transaction did not meet the definition of the purchase of a business as defined in ASC 805, “Business Combinations” because a substantive process was not acquired. Michael James, the former Chief Financial Officer of the Predecessor’s parent company, is the Chief Financial Officer of the Successor.
The consideration paid for the assets included (1) a five year three million secured promissory note bearing interest at 3.5% per annum, (2) options to purchase up to 5,000,000 shares of the Successor for a nominal amount and (3) $2,011,782 of liabilities assumed.
Stock Options
The first option gives Sament Capital Investments, Inc. (“Sament”), an affiliate of the Predecessor’s parent company, the right, but not the obligation, to acquire 2,225,000 common shares of the Successor at any time between the one- and five-year anniversary of the date of the agreement, or at any time in the event of a change in control or a public offering, for a strike price of $1.00. The second option gives Sament the right, but not the obligation, to purchase 2,775,000 common shares of the Successor at any time between the one- and five-year anniversary of the agreement. The second option is automatically terminated upon payment in full of the secured promissory note.
Given the absence of an active market for the Successor’s common stock, the Company was required to estimate the enterprise value of the Successor company as of the date of the options. Management considered numerous objective and subjective factors in determining the value of the Company’s common stock, including the following: (1) valuations performed by an independent valuation specialist; (2) the Company’s stage of development and revenue growth, (3) the fact that the awards involved illiquid securities in a private company and (4) the likelihood of achieving a liquidity event for the shares of common stock underlying the awards, such as an initial public offering or sale of the Company, given prevailing market conditions. As the Company’s common stock is not actively traded, the determination of fair value involves assumptions, judgments, and estimates. If different assumptions were made, the initial purchase price allocation could have been significantly different. The Company estimated the fair value of the stock options using the Black-Scholes-Merton option-pricing (“Black-Scholes”) model, with the following weighted-average assumptions:
| Expected term (years) |
|
| 2.7 |
|
| Volatility |
|
| 22.0 | % |
| Risk-free interest rate |
|
| 0.3 | % |
| Dividend yield |
|
| 0.0 | % |
| F-30 |
| Table of Contents |
The fair value of the consideration was allocated to the assets acquired based on their relative fair values, as follows:
|
|
| (in thousands) |
| |
| Consideration |
|
|
| |
| Fair value of promissory note |
| $ | 2,960 |
|
| Fair value of options issued |
|
| 6 |
|
| Total fair value of consideration: |
| $ | 2,966 |
|
| Net book value of assets acquired |
|
|
|
|
| Cash |
| $ | 34 |
|
| Accounts receivable |
|
| 437 |
|
| Inventory |
|
| 522 |
|
| Prepaids and other assets |
|
| 115 |
|
| Property, plant and equipment |
|
| 3,497 |
|
| Intangible assets |
|
| 62 |
|
| Right-of-use asset |
|
| 311 |
|
| Liabilities assumed |
|
| (2,012 | ) |
| Total Net Assets Acquired |
| $ | 2,966 |
|
NOTE 4 – INVENTORY
Inventory as of December 31, 2020 (Successor) and September 30, 2021 (Successor) consisted of the following:
|
|
| (in thousands) |
| |||||
|
|
| Successor |
|
| Successor |
| ||
|
|
| December 31, |
|
| September 30, |
| ||
|
|
| 2020 |
|
| 2021 |
| ||
| Raw materials |
| $ | 156 |
|
| $ | 63 |
|
| Work-in-progress |
|
| 168 |
|
|
| 134 |
|
| Inventory reserve |
|
| (10 | ) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| Total inventory |
| $ | 314 |
|
| $ | 197 |
|
NOTE 5 – PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET
Property, equipment and leasehold improvements (net) as of December 31, 2020 (Successor) and September 30, 2021 (Successor) consisted of the following:
|
|
| (in thousands) |
| |||||
|
|
| Successor |
|
| Successor |
| ||
|
|
| December 31, |
|
| September 30, |
| ||
|
|
| 2020 |
|
| 2021 |
| ||
|
|
| $ | - |
|
| $ | - |
|
| Furniture and equipment |
|
| 537 |
|
|
| 609 |
|
| Computer hardware |
|
| 4 |
|
|
| 6 |
|
| Leasehold improvements |
|
| 3,009 |
|
|
| 3,009 |
|
| Vehicles |
|
| 28 |
|
|
| 131 |
|
| Construction in progress |
|
| 4 |
|
|
| 4 |
|
|
|
|
|
|
|
|
|
|
|
| Subtotal |
|
| 3,583 |
|
|
| 3,759 |
|
| Less accumulated depreciation |
|
| (530 | ) |
|
| (1,076 | ) |
| Property, equipment and leasehold improvements, net |
| $ | 3,053 |
|
| $ | 2,683 |
|
| F-31 |
| Table of Contents |
Depreciation expense related to property, equipment and leasehold improvements for the three months ended March 31, 2020 (Predecessor) was $134,874. Depreciation expense for the six months ended September 30, 2020 (Successor) was $40,173. Depreciation expense for the nine months ended September 30, 2021 (Successor) was $359,066.
NOTE 6 – INTANGIBLE ASSETS
Intangible assets consisted of the following as of December 31, 2020 and September 30, 2021:
|
|
| (in Thousands) |
| |||||||||||||||||||||||||
|
|
|
|
| Successor |
|
| Successor |
| ||||||||||||||||||||
|
|
|
|
| December 31, 2020 |
|
| September 30, 2021 |
| ||||||||||||||||||||
|
|
| Estimated Useful Life in Years |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
|
| Gross Carrying Amount |
|
| Accumulated Amortization |
|
| Net Carrying Value |
| |||||||
| Amortizing Intangible Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
| Non Compete |
|
| 2 |
|
|
| 62 |
|
|
| (37 | ) |
|
| 25 |
|
|
| 62 |
|
| $ | (62 | ) |
|
| - |
|
| Total Intangible Assets, net |
|
|
|
|
|
| 62 |
|
|
| (37 | ) |
|
| 25 |
|
|
| 62 |
|
|
| (62 | ) |
|
| - |
|
Amortization expense for the nine months ended September 30, 2021 was $25,000.
NOTE 7 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following as of December 31, 2020 (Successor) and September 30, 2021 (Successor):
|
|
| (in thousands) |
| |||||
|
|
| Successor |
|
| Successor |
| ||
|
|
| December 31, 2020 |
|
| September 30, 2021 |
| ||
|
|
|
|
|
|
|
| ||
| Accounts payable |
| $ | 1,929 |
|
| $ | 2,585 |
|
| Accrued expenses |
|
| 173 |
|
|
| 163 |
|
| Accrued interest payable |
|
| 96 |
|
|
| 40 |
|
| Accrued payroll |
|
| 106 |
|
|
| 136 |
|
| Accrued vacation |
|
| 97 |
|
|
| 97 |
|
| Current lease liability |
|
| 65 |
|
|
| 74 |
|
|
|
|
|
|
|
|
|
|
|
| Total Accounts Payable and Accrued Expenses |
| $ | 2,466 |
|
| $ | 3,096 |
|
| F-32 |
| Table of Contents |
NOTE 8 – NOTES PAYABLE
Notes payable consisted of the following as of December 31, 2020 (Successor) and September 30, 2021 (Successor):
|
|
| (in thousands) |
| |||||
|
|
| Successor |
|
| Successor |
| ||
|
|
| December 31, |
|
| September 30, |
| ||
|
|
| 2020 |
|
| 2021 |
| ||
| Secured promissory note |
| $ | 3,653 |
|
| $ | 3,784 |
|
| SBA loan |
|
| 150 |
|
|
| 150 |
|
| SAFE agreements |
|
| 40 |
|
|
| 538 |
|
| Related party loans |
|
| 60 |
|
|
| 1,728 |
|
| Vehicle Loan |
|
| 21 |
|
|
| 118 |
|
|
|
|
|
|
|
|
|
|
|
| Total Gross Debt |
| $ | 3,923 |
|
| $ | 6,318 |
|
|
|
|
|
|
|
|
|
|
|
| Less: Short term debt |
|
| - |
|
|
| (1,749 | ) |
| Less: Debt discount |
|
| (40 | ) |
|
| (103 | ) |
| Net Long Term Debt |
| $ | 3,884 |
|
| $ | 4,466 |
|
Scheduled maturities of long-term debt as of September 30, 2021, are as follows (in thousands):
| 2021 (Remaining) |
| $ | 1 |
|
| 2022 |
|
| 1,748 |
|
| 2023 |
|
| 678 |
|
| 2024 |
|
| 29 |
|
| 2025 |
|
| 3,159 |
|
| Thereafter |
|
| 703 |
|
|
|
| $ | 6,318 |
|
Secured Promissory Notes
On March 30, 2020, the Company entered into a promissory note (the “Note”) for $3,000,000 with Sament in connection with the acquisition of the Predecessor’s assets. The Note accrues interest at a rate of 3.5% per annum on a 360-day year basis and matures March 30, 2025. During the nine-month period ended September 30, 2021, accrued interest of $129,661 was added to the principal. The Note is secured by the assets purchased in connection with the asset acquisition. See Note 3, “Asset Acquisition” for additional details.
On June 2, 2020, the Company entered into a promissory note for $653,870 with Sament, which accrues interest at a rate of 3.50% per annum and matures on June 3, 2023. The promissory note is secured by the assets purchased in connection with the asset acquisition.
| F-33 |
| Table of Contents |
Small Business Administration (“SBA”) Loans
On April 30, 2020, the Company received approval from the U.S. Small Business Administration (“SBA”) to fund the Company’s request for a loan under the Paycheck Protection Program (“PPP Loan”) created as part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) administered by the SBA. In connection with the PPP Loan, the Company entered into a promissory note in the principal amount of $503,655. The Company used the entire loan amount for qualifying expenses and the loan was forgiven in its entirety on December 27, 2020.
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 $150,000 (the “SBA Loan”). The SBA Loan was made under, and is subject to the terms and conditions of, the Economic Injury Disaster Loan Program, which was a program expanded for COVID-19 relief under the CARES Act and is administered by the U.S. Small Business Administration. The term of the SBA Loan is thirty (30) years with a maturity date of June 22, 2050 and the annual interest rate of the SBA Loan is a fixed rate of 3.75%. Under the terms of the CARES Act, the use of loan proceeds for the SBA Loan is limited to alleviating economic injury caused by the COVID-19 pandemic.
SAFE Agreements
During the year ended December 31, 2020, the Company entered into Simple Agreements for Future Equity (“SAFEs”) with investors through a Regulation Crowdfunding campaign in exchange for cash investments. Upon a future equity financing of greater than $1,000,000, the SAFE securities are convertible at the option of the Company into securities identical to those issued in the future equity financing (“Shadow Securities”), except (1) they do not have the right to vote except as required by law, (2) they must vote in accordance with the majority of the investors in such future equity financing with respect to any such required vote and (3) they are not entitled to any inspection or information rights. If the Company elects to convert the securities upon the closing of a future equity financing, the investors will receive the number of Shadow Securities equal to the greater the quotient obtained by dividing the amount the investor paid (the “Purchase Amount”) for the securities by:
|
| (c) | 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 |
|
|
|
|
|
| (d) | 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 an initial public offering of the Company’s common shares or a change of control (a “Liquidity Event”) prior to any equity financing, the investors will 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 (di) 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.
| F-34 |
| Table of Contents |
In the case of a Liquidity Event following any equity financing, the investors will 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.
During the year ended December 31, 2020, the Company raised a total of $39,618 in the Regulation Crowdfunding campaign, which was made through OpenDeal Portal LLC (the “Intermediary”). The Intermediary will be entitled to receive a 6% commission fee and 2% of the securities issued in connection with the offering, which was closed in January 2021. The Company received an additional $433,000 from the SAFE Crowdfunding campaign prior to the close of the campaign in January of 2021.
Related Party Loans
During 2020, the Company borrowed $25,000 from Jeanne Ciccone, a close relative of James Kras. The funds borrowed were utilized to fund ongoing operations and do not accrue interest. The debt was fully repaid in January 2021 and there is no outstanding amount as of September 30, 2021.
During 2020, the Company borrowed $25,000 from Michael James, the Company’s Chief Financial Officer and Director, of which $2,500 remained outstanding as of December 31, 2020. The funds borrowed were utilized to fund ongoing operations and do not accrue interest.
During 2021, the Company issued Convertible Promissory Notes with principal amounts totaling $1,700,000 to Michael James, the Company’s Chief Financial Officer. These notes mature on the earlier of (1) one year after issuance, (2) upon the closing of the Company’s next sale of equity securities in which the Company raises at least $5.00 million in gross proceeds (excluding the value of any instruments converting into equity in such equity financing), (3) the sale, lease, license or other disposition of all or substantially all of the assets of the Company, (4) a transaction or series of related transactions in which any person becomes the beneficial owner of more than 50% of the Company’s outstanding voting securities, or (5) upon the occurrence of an event of default.
The principal and interest due and owed under the notes, which bear interest at a rate of 12.00% per annum, are convertible into shares of Common Stock at any time at the election of Mr. James at a conversion price equal to $0.925 (subject to adjustment for forward reverse stock splits and the like after the issuance date). The Company may prepay any portion of the principal and accrued interest due under the notes at any time and without penalty, upon providing ten days written notice to Mr. James.
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. The Company repaid $10,000 of the Demand Notes during 2021. The remaining outstanding balance of $25,200 was exchanged for a Convertible Promissory Note, which matures on the earlier of (1) one year after issuance, (2) upon the closing of the Company’s next sale of equity securities in which the Company raises at least $5.00 million in gross proceeds (excluding the value of any instruments converting into equity in such equity financing), (3) the sale, lease, license or other disposition of all or substantially all of the assets of the Company, (4) a transaction or series of related transactions in which any person becomes the beneficial owner of more than 50% of the Company’s outstanding voting securities, or (5) upon the occurrence of an event of default.
The principal and interest due and owed under the note, which bears interest at a rate of 12.00% per annum, is convertible into shares of Common Stock at any time at the election of the Mr. Kras at a conversion price equal to $0.925 (subject to adjustment for forward reverse stock splits and the like after the issuance date). The Company may prepay any portion of the principal and accrued interest due under the note at any time and without penalty, upon providing ten days written notice to Mr. Kras.
Other Loans
During 2021, the Company issued promissory notes with principal amounts totaling $70,000 to an unaffiliated third party, of which $0 remained outstanding as of September 30, 2021.
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 17.51%, matures on April 26, 2024. The loan is secured by the vehicle purchased.
During 2021, the Company entered into three financing agreements totaling $102,681 for the purchase of vehicles. The loans, which accrue interest at rates of 16.84% - 18.66%, mature in 2026. The loans are secured by the vehicles purchased.
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NOTE 9 – 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 our predecessor company, Edible Garden Corp., whereby we make lease payments of approximately $15,300 per month to the lessor of the land on which our flagship facility is built and for which our predecessor company is the lessee. Our month-to-month arrangement meets the definition of a short-term lease and is therefore excluded from the recognition requirements of ASC 842, “Leases”.
During the nine month period ended September 30, 2021, total operating lease cost was $334,041 , of which $253,761 was associated with short-term leases. During the three months ended March 31, 2020 (Predecessor), total operating lease cost was $196,321, of which $116,813 was associated with short-term leases. During the six months ended September 30, 2020 (Successor), total operating lease cost was $238,792, of which $185,542 was associated with short-term leases. As of December 31, 2020 (Successor) and September 30, 2021 (Successor), short term lease liabilities of $65,019 and $74,073 are included in “Accounts Payable and Accrued Expenses” on the consolidated balance sheets, respectively. The table below presents total operating lease assets and lease liabilities as of September 30, 2021 (Successor):
|
|
| Successor |
| |
|
|
| (in thousands) |
| |
|
|
| September 30, |
| |
|
|
| 2021 |
| |
| Operating lease assets |
| $ | 221 |
|
| Operating lease liabilities |
| $ | 221 |
|
|
|
|
|
|
|
|
|
| (in thousands) |
| |
|
|
| Operating |
| |
|
|
| Leases |
| |
| 2021 |
| $ | 27 |
|
| 2022 |
|
| 107 |
|
| 2023 |
|
| 107 |
|
| 2024 |
|
| 36 |
|
| Total lease payments |
|
| 277 |
|
| Less: discount |
|
| (55 | ) |
| Total operating lease liabilities |
| $ | 221 |
|
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, |
| |
|
|
| 2021 |
| |
| Remaining lease term (years) |
|
| 2.6 |
|
| Discount rate |
|
| 17.5 | % |
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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.
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 intends to file 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 and close relatives of Officers of the Company, the terms of which are disclosed in Note 8, “Notes Payable.”
The Company is party to an ongoing arrangement with the Predecessor whereby the Company makes lease payments of approximately $15,300 per month to the lessor of land for which the Predecessor is the lessee. The lease agreement is associated with land the Company utilizes for its ongoing operations.
During 2021, the Company purchased a total of $227,365 of goods from Arch City AG, LLC (“Arch City”), an entity partially owned by Mr. Kras, our Chief Executive Officer. In May 2021, the Company entered into an Assumption and Indemnification Agreement (the “Assumption Agreement”) with Arch City, which resulted in the Company assuming a liability of $78,976 that Arch City owed to a third-party supplier. In consideration for payment of the outstanding liability, Arch City forgave the Company’s outstanding balance of accounts payable, which totaled $121,470. The Company recognized a gain for forgiveness of debt of $42,494 in non-operating income during the third quarter of 2021. This liability extinguished met the criteria for troubled debt. The basic criteria are that the borrower is troubled, i.e., they are having financial difficulties, and a concession is granted by the creditor.
NOTE 12 – GOING CONCERN
These financial statements are prepared on a going concern basis. The Company began operations in 2020. For the year ended December 31, 2020, and nine months ended September 30, 2021 we incurred a net loss of $2.1 million and 3.4 million respectively. We expect to experience further significant net losses in 2021 and the foreseeable future. At September 30, 2021, we had a cash balance of approximately $15,000. We have not been able to generate sufficient cash from operating activities to fund our ongoing operations. Since our inception, we have raised capital through our issuance of debt securities. Our future success is dependent upon our ability to achieve profitable operations and generate cash from operating activities. There is no guarantee that we will be able to generate enough revenue and/or raise capital to support our operations.
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 revenues 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 common stock. 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.
NOTE 13 – SUBSEQUENT EVENTS
In preparing the unaudited consolidated financial statements, the Company has evaluated subsequent events through December 20, 2021, which is the date the unaudited consolidated financial statements were available for issuance.
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Evergreen Private Placement
On October 7, 2021, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Evergreen Capital Management LLC (“Evergreen” or the “Holder”), whereby Evergreen agreed to purchase up to $2,000,000 of secured convertible notes (the “Notes”) and warrants to purchase an aggregate of 1,028,743 shares of the Company’s common stock, in four tranches. The Notes, which mature nine months after issuance, are convertible, in whole or in part, into shares of the Company’s common stock, at the election of the Holder. The Notes have an original issue discount of 15.00% and incur interest at a rate of 5.00% per annum. The Notes may be prepaid in whole or in part at any time upon providing the Holder at least three business days prior written notice, upon which the Holder will have the option to convert the Notes to shares of the Company’s common stock. The Notes are secured by the Company’s operating and financial assets.
In connection with the Agreement, the Company entered into an Intercreditor Agreement and Amendment with Sament, whereby Sament and Evergreen memorialized their lien priorities with respect to the collateral securing their respective loans to the Company, with Sament as the senior secured lender.
On October 7, 2021, upon exercise of the first tranche of the Agreement, the Company issued a $1,150,000 Senior Secured Convertible Promissory Note to the Holder (“Tranche One Note”), which resulted in total cash proceeds of $1,000,000 after consideration of the original issue discount of 15.00%. The Tranche One Note is convertible to shares of the Company’s common stock at a conversion price of $1.53. Simultaneously, the Company issued a Common Stock Purchase Warrant (the “Tranche One Warrant”) to the Holder, which provides the Holder with the right, but not the obligation, to acquire 751,634 shares of the Company’s common stock at a price of $1.53 per share. The Tranche One Warrant will expire October 7, 2026.
On November 8, 2021, upon exercise of the second tranche of the Agreement, the Company issued a $402,500 Senior Secured Convertible Promissory Note to the Holder (“Tranche Two Note”), which resulted in total cash proceeds of $350,000 after consideration of the original issue discount of 15.00%. The Tranche Two Note is convertible to shares of the Company’s common stock at a conversion price of $4.15. Simultaneously, the Company issued a Common Stock Purchase Warrant (the “Tranche Two Warrant”) to the Holder, which provides the Holder with the right, but not the obligation, to acquire 96,988 shares of the Company’s common stock at a price of $4.15 per share. The Tranche Two Warrant will expire November 8, 2026.
On November 22, 2021, upon exercise of the third tranche of the Agreement, the Company issued a $402,500 Senior Secured Convertible Promissory Note to the Holder (“Tranche Three Note”), which resulted in total cash proceeds of $350,000 after consideration of the original issue discount of 15.00%. The Tranche Three Note is convertible to shares of the Company’s common stock at a conversion price of $4.15. Simultaneously, the Company issued a Common Stock Purchase Warrant (the “Tranche Three Warrant”) to the Holder, which provides the Holder with the right, but not the obligation, to acquire 96,988 shares of the Company’s common stock at a price of $4.15 per share. The Tranche Three Warrant will expire November 22, 2026.
On December 20, 2021, upon exercise of the fourth tranche of the Agreement, the Company issued a $345,000 Senior Secured Convertible Promissory Note to the Holder (“Tranche Four Note”), which resulted in total cash proceeds of $300,000 after consideration of the original issue discount of 15.00%. The Tranche Four Note is convertible to shares of the Company’s common stock at a conversion price of $4.15. Simultaneously, the Company issued a Common Stock Purchase Warrant (the “Tranche Four Warrant”) to the Holder, which provides the Holder with the right, but not the obligation, to acquire 83,133 shares of the Company’s common stock at a price of $4.15 per share. The Tranche Four Warrant will expire December 20, 2026.
Other Subsequent Events
On October 8, 2021, Sament exercised its option to purchase 5,000,000 shares of the Company’s common stock for a nominal amount.
| F-38 |
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Through and including , 2021 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to a dealers’ obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or membership.
Shares of
Common Stock
EDIBLE GARDEN AG INCORPORATED
_________________________
PROSPECTUS
_________________________
Sole Book-Running Manager
Maxim Group LLC
, 2021
| Table of Contents |
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the various expenses, all of which will be borne by the registrant, in connection with the sale and distribution of the securities being registered, other than the underwriting discounts and commissions. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee.
| SEC registration fee |
| $ | 8,612 |
|
| FINRA fees |
| $ | 14,434 |
|
| Printing and engraving expenses |
| $ | 1,500 |
|
| Accounting fees and expenses |
| $ | 100,000 |
|
| Legal fees and expenses |
| $ | 550,000 |
|
| Miscellaneous |
| $ | 25,454 |
|
| Total |
| $ | 700,000 |
|
Item 14. Indemnification of Directors and Officers.
Section 102(b)(7) of the Delaware General Corporation Law (“DGCL”) provides that a Delaware corporation, in its certificate of incorporation, may limit the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duties as a director, except for liability for any:
|
| · | transaction from which the director derived an improper personal benefit; |
|
| · | act or omission not in good faith or that involved intentional misconduct or a knowing violation of law; |
|
| · | unlawful payment of dividends or redemption of shares; or |
|
| · | breach of the director’s duty of loyalty to the corporation or its stockholders. |
Under Section 145 of the DGCL, we can indemnify our directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Our certificate of incorporation (Exhibit 3.1 to this registration statement) provides that we must indemnify our directors and officers to the fullest extent permitted by law and requires us to pay expenses incurred in defending or other participating in any proceeding in advance of its final disposition upon our receipt of an undertaking by the director or officer to repay such advances if it is ultimately determined that the director or officer is not entitled to indemnification. Our certificate of incorporation further provides that rights conferred under such certificate of incorporation do not exclude any other right such persons may have or acquire under the certificate of incorporation, the bylaws, any statute, agreement, vote of stockholders or disinterested directors or otherwise.
The amended and restated certificate of incorporation also provides that, pursuant to Delaware law, our directors shall not be liable for monetary damages for breach of the directors’ fiduciary duty of care to us and our stockholders. This provision in the certificate of incorporation does not eliminate the duty of care, and in appropriate circumstances equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director’s duty of loyalty to us for acts or omissions not in good faith or involving intentional misconduct, or knowing violations of law, for actions leading to improper personal benefit to the director, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director’s responsibilities under any other law, such as the federal securities laws or state or federal environmental laws. We also intend to obtain directors’ and officers’ liability insurance pursuant to which our directors and officers are insured against liability for actions taken in their capacities as directors and officers.
In addition, we intend to enter into agreements to indemnify our directors and certain of our officers in addition to the indemnification provided for in the certificate of incorporation. These agreements, among other things, indemnify our directors and some of our officers for certain expenses (including attorney’s fees), judgments, fines and settlement amounts incurred by such person in any action or proceeding, including any action by or in our right, on account of services by that person as a director or officer of our company or as a director or officer of our subsidiary, or as a director or officer of any other company or enterprise that the person provides services to at our request.
| II-1 |
| Table of Contents |
The underwriting agreement(s) that the Registrant may enter into may provide for indemnification by any underwriters of the Registrant, its directors, its officers who sign the registration statement and the Registrant’s controlling persons for some liabilities, including liabilities arising under the Securities Act.
Item 15. Recent Sales of Unregistered Securities.
The information below lists all of the securities sold by us during the past three years which were not registered under the Securities Act:
|
| · | On October 7, November 8, November 22, and December 20, 2021, we issued 15% original issue discount secured promissory notes to Evergreen Capital Management LLC and warrants to purchase an aggregate of 1,028,743 shares of our common stock for an aggregate of $2.0 million. As part of the private placement, Maxim received a cash fee equal to 6% of the private placement proceeds. The offering was conducted pursuant to an exemption from registration under the Securities Act in reliance upon Rule 506(b) promulgated under the Securities Act. |
|
|
|
|
|
| · | From April 28, 2020 through December 9, 2021, we issued demand, convertible and promissory notes to our officers pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act. See “Certain Relationships and Related Party Transactions” for more information. |
|
|
|
|
|
| · | From October 2020 through April 2021, we issued approximately $538 thousand in our Series 2020 Crowd SAFEs pursuant to an exemption from registration under the Securities Act available under Regulation Crowdfunding for cash. The Crowd SAFEs may convert into this offering at the option of the holder at a conversion price equal to their investment divided by $18.5 million divided by 25 million shares (outstanding as of immediately prior to the offering). |
|
|
|
|
|
| · | In March 2020, we issued two options to Sament Capital Investments, Inc. to purchase an aggregate of 5,000,000 shares of our common stock pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act. The first option granted Sament the right to purchase 2,225,000 shares of our common stock at an exercise price of $1.00 for all of the underlying shares. The second option granted Sament the right to purchase 2,775,000 shares of our common stock at an exercise price of $1.00 for all of the shares underlying the option any time prior to March 30, 2025. Both options were exercised as of October 8, 2021 for the aggregate exercise price of $2.00 pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act. |
|
|
|
|
|
| · | Upon our inception in March 2020, we issued 9,000,000, 9,000,000, and 2,000,000 shares of common stock (after the effect of all forward stock splits to date) to Mr. Kras, Mr. James, and Mr. Rodrigues, respectively, pursuant to the exemption from registration under Section 4(a)(2) of the Securities Act. |
Item 16. Exhibits and Financial Statement Schedules.
The following exhibits to this registration statement included in the Index to Exhibits are incorporated by reference.
| II-2 |
| Table of Contents |
INDEX TO EXHIBITS
| Exhibit No. |
| Description |
| 1.1** |
| Form of Underwriting Agreement |
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| ||
|
| ||
|
| Form of Certificate of Amendment to the Certificate of Incorporation | |
|
| Amended and Restated Bylaws of Edible Garden AG Incorporated | |
|
| ||
| 4.2** |
| Form of Representative's Warrant |
| 5.1** |
| Opinion of Harter Secrest & Emery LLP |
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| ||
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| ||
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| ||
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| 15% OID Senior Secured Promissory Note Due September 20, 2022 | |
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| ||
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| ||
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| ||
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| ||
|
| ||
| 10.22**+ |
| Edible Garden AG Incorporated 2021 Equity Incentive Plan |
|
| ||
|
| ||
|
| ||
|
| ||
| 23.2** |
| Consent of Harter Secrest & Emery LLP (included in Exhibit 5.1) |
|
| ||
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| ||
|
| ||
|
|
____________
* Filed herewith.
** To be filed by amendment.
+ Management contract or compensatory arrangement.
± Certain information has been omitted from this exhibit in reliance upon Item 601(a)(5) of Regulation S-K and will be furnished to the Securities and Exchange Commission upon request.
| II-3 |
| Table of Contents |
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
|
| (1) | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective. |
|
|
|
|
|
| (2) | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
| II-4 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the city of Belvidere, State of New Jersey, on December 21, 2021.
|
| EDIBLE GARDEN AG INCORPORATED | |||
|
|
| |||
|
| By: | /s/ James E. Kras |
| |
|
| Name: | James E. Kras |
| |
|
| Title: | Chief Executive Officer and President |
| |
|
|
| (principal executive officer) |
| |
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
| Signature |
| Title |
| Date |
|
|
|
|
|
|
| /s/ James E. Kras |
| Chief Executive Officer, President and Director |
| December 21, 2021 |
| James E. Kras |
| (principal executive officer) |
|
|
|
|
|
|
|
|
| /s/ Michael James |
| Chief Financial Officer, Treasurer, Secretary and Director |
| December 21, 2021 |
| Michael James |
| (principal financial and accounting officer) |
|
|
| 64 |
EXHIBIT 3.3
CERTIFICATE OF AMENDMENT
OF THE
CERTIFICATE OF INCORPORATION
OF
EDIBLE GARDEN AG INCORPORATED
EDIBLE GARDEN AG INCORPORATED, a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the “General Corporation Law”), hereby certifies as follows:
FIRST: The name of the corporation is Edible Garden AG Incorporated (the “Corporation”).
SECOND: The Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on July 12, 2021.
THIRD: Article Fourteen of the Corporation’s Certificate of Incorporation is hereby amended in its entirety to provide as follows:
“Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall be the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Corporation, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director or officer or other employee of the Corporation to the Corporation or the Corporation’s stockholders, (iii) any action asserting a claim against the Corporation arising pursuant to any provision of the General Corporation Law of the State of Delaware or the Corporation’s certificate of incorporation or by-laws or (iv) any action asserting a claim against the Corporation governed by the internal affairs doctrine. Notwithstanding the foregoing, (i) the provisions of this Article will not apply to suits brought to enforce a duty or liability created by the Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder or any other claim for which the federal courts have exclusive jurisdiction, and (ii) unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery and the federal district courts of the United States of America shall, to the fullest extent permitted by law, have concurrent jurisdiction for the resolution of any complaint asserting a cause of action arising under the Securities Act of 1933, as amended, or the rules and regulations thereunder. Any person or entity purchasing or otherwise acquiring any interest in any security of the Corporation shall be deemed to have notice of and consented to the provisions of this Article.”
FOURTH: These amendments were duly adopted by the written consent of the Board of Directors and the majority of the issued and outstanding capital stock of the Corporation in accordance with the provisions of Section 242 and 228 of the General Corporation Law of the State of Delaware.
[Signature page follows.]
| 1 |
In Witness Whereof, the Company has caused this Certificate of Amendment to be signed by its duly authorized officer on this __ day of ____________, 2021.
| By: | |||
|
|
| James Kras | |
| President and Chief Executive Officer |
| 2 |
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
EDIBLE GARDEN AG INCORPORATED
ARTICLE I
OFFICES
Section 1.1 Registered Office. The registered office of the Corporation shall be maintained in the State of Delaware.
Section 1.2 Principal Executive Office. The principal executive office of the Corporation shall be maintained within or without the State of Delaware. The Corporation may maintain offices at such other places as the board of directors of the Corporation (the “Board of Directors”) may from time to time determine or as may be necessary or convenient for the business of the Corporation.
ARTICLE II
STOCKHOLDERS
Section 2.1 Annual Meeting. The annual meeting of stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting in accordance with these Bylaws, shall be held at such date, time and place (if any) within or without the State of Delaware, as shall be determined by the Board of Directors and stated in the notice of the meeting. In lieu of holding an annual meeting of stockholders at a designated place, the Board of Directors may, in its sole discretion, determine that any annual meeting of stockholders may be held solely by means of remote communication.
Section 2.2 Special Meetings.
(a) Purpose. Special meetings of stockholders for any purpose or purposes shall be called only:
|
| (i) | by the Board of Directors or the Board Chair (as defined in Section 3.15); |
|
|
|
|
|
| (ii) | by the Secretary (as defined in Section 4.6), following receipt of one or more written demands to call a special meeting of the stockholders in accordance with, and subject to, this Section from stockholders of record who own, in the aggregate, at least 50% of the voting power of the outstanding shares of the Corporation then entitled to vote on the matter or matters to be brought before the proposed special meeting. |
(b) Notice. A request to the Secretary shall be delivered to the Secretary at the Corporation’s principal executive offices and signed by each stockholder, or a duly authorized agent of such stockholder, requesting the special meeting and shall set forth:
|
| (i) | a brief description of each matter of business desired to be brought before the special meeting; |
| 1 |
|
| (ii) | the reasons for conducting such business at the special meeting; |
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| (iii) | the text of any proposal or business to be considered at the special meeting (including the text of any resolutions proposed to be considered and in the event that such business includes a proposal to amend these Bylaws, the language of the proposed amendment); and |
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| (iv) | the information required in Section 2.12 of these Bylaws. |
(c) Business. Business transacted at a special meeting requested by stockholders shall be limited to the matters described in the special meeting request; provided, however, that nothing herein shall prohibit the Board of Directors from submitting matters to the stockholders at any special meeting requested by stockholders.
(d) Time and Date. A special meeting requested by stockholders shall be held at such date and time as may be fixed by the Board of Directors; provided, however, that the date of any such special meeting shall be not more than 90 days after the request to call the special meeting is received by the Secretary. Notwithstanding the foregoing, a special meeting requested by stockholders shall not be held if:
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| (i) | the Board of Directors has called or calls for a meeting of the stockholders to be held within 90 days after the Secretary receives the request for the special meeting and the Board of Directors determines in good faith that the business of such meeting includes (among any other matters properly brought before the meeting) the business specified in the request; |
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| (ii) | the stated business to be brought before the special meeting is not a proper subject for stockholder action under applicable law; |
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| (iii) | an identical or substantially similar item (a “Similar Item”) was presented at any meeting of stockholders held within 120 days prior to the receipt by the Secretary of the request for the special meeting (and, for purposes of this Section 2.2(d)(iii), the election of directors shall be deemed a Similar Item with respect to all items of business involving the election or removal of directors); or |
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| (iv) | the special meeting request was made in a manner that involved a violation of Regulation 14A under the Securities Exchange Act of 1934, as amended and the rules and regulations promulgated thereunder (the “Exchange Act”). |
(e) Revocation. A stockholder may revoke a request for a special meeting at any time by written revocation delivered to the Secretary at the Corporation’s principal executive offices, and if, following such revocation, there are unrevoked requests from stockholders holding in the aggregate less than the requisite number of shares entitling the stockholders to request the calling of a special meeting, the Board of Directors, in its discretion, may cancel the special meeting.
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Section 2.3 Notice of Meetings. The Corporation shall give notice of any annual or special meeting of stockholders. Notices of meetings of the stockholders shall state the place, (if any), date, and hour of the meeting, and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and to vote at such meeting. In the case of a special meeting, the notice shall state the purpose or purposes for which the meeting is called. No business other than that specified in the notice shall be transacted at any special meeting. Unless otherwise provided by law, notice shall be given to each stockholder entitled to vote at such meeting not fewer than 10 days or more than 60 days before the date of the meeting.
Section 2.4 Quorum. A majority of the voting power of the shares issued and outstanding and entitled to vote at the meeting, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business, except as otherwise provided by the General Corporation Law of the State of Delaware (“DGCL”), the Corporation’s Certificate of Incorporation, as amended (the “Certificate of Incorporation”) or these Bylaws. Where a separate vote by a class or series is required, a majority of the voting power of the shares of such class or series present in person or represented by proxy shall constitute a quorum entitled to take action with respect to that vote on that matter.
If a quorum shall not be present or represented at any meeting of stockholders, then the chair of the meeting or the holders of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote, shall have the power to adjourn the meeting from time to time, without notice (except as required by law or Section 2.3 of these Bylaws) until a quorum shall again be present or represented by proxy. A quorum, once established, shall not be broken by the subsequent withdrawal of enough votes to leave less than a quorum.
Section 2.5 Adjourned Meetings. Any meeting of stockholders, annual or special, may be adjourned from time to time to reconvene at the same or some other place (if any), and at another date and time. When a meeting is adjourned to another time and place, if any, unless otherwise provided by these Bylaws, notice need not be given of the adjourned meeting if the place (if any), date and time, thereof and the means of remote communication, if any, by which stockholders and proxyholders may be deemed to be present in person and vote at such adjourned meeting, are announced at the meeting at which the adjournment is taken. At the adjourned meeting, the stockholders may transact any business that might have been transacted at the original meeting. The original determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of such meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. If an adjournment is for more than 30 days or, if after an adjournment, a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting.
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Section 2.6 Stockholders’ List. At least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order for each class or series of stock and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary. The list shall be open to the examination of any stockholder, for any purpose germane to the meeting for a period of at least ten days before the meeting: (a) on a reasonably accessible electronic network, provided that the information required to gain access to such list was provided with the notice of the meeting; or (b) during ordinary business hours, at the principal place of business of the Corporation. If the meeting is to be held at a place, the list shall also be produced and kept at the time and place of the meeting the whole time thereof and may be inspected by any stockholder who is present. If the meeting is held solely by means of remote communication, the list shall also be open for inspection by any stockholder during the whole time of the meeting as provided by applicable law. The list shall presumptively determine the identity of the stockholders entitled to vote at the meeting and the number of shares held by each stockholder.
Section 2.7 Conduct of Business. The Board Chair or, in their absence or inability to act, the CEO (as defined in Section 4.1) or, in their absence or inability to act, such person as may be appointed by the Board of Directors, shall call to order any meeting of stockholders and shall preside over and act as chair of the meeting. In the absence of the Secretary of the Corporation, the secretary of the meeting shall be such person as the chair of the meeting appoints. The chair of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of discussion as shall seem to the chair of the meeting in order. The date and time of the opening and closing of the polls for each matter upon which the stockholders will vote at the meeting shall be announced at the meeting.
Section 2.8 Conduct of Meetings.
(a) General Conduct. The Board of Directors of the Corporation may adopt by resolution such rules and regulations for the conduct of any meeting of stockholders as it shall deem appropriate. Except to the extent inconsistent with rules and regulations adopted by the Board of Directors, the chair of the meeting of stockholders shall have the right and authority to prescribe any rules, regulations or procedures and to do all such acts as, in the judgment of the chair of the meeting, are appropriate for the proper conduct of the meeting. Such rules, regulations or procedures, whether adopted by the Board of Directors or prescribed by the chair of the meeting, may include, without limitation, the following: (a) the establishment of an agenda or order of business for the meeting; (b) rules and procedures for maintaining order at the meeting and the safety of those present; (c) limitations on attendance at or participation in the meeting to stockholders of record of the Corporation, their duly authorized and constituted proxies or such other persons as the chair of the meeting shall determine; (d) restrictions on entry to the meeting after the time fixed for the commencement thereof; and (e) limitations on the time allotted to questions or comments by participants. Unless and to the extent determined by the Board of Directors or the chair of the meeting, meetings of stockholders shall not be required to be held in accordance with the rules of parliamentary procedure.
(b) Remote Communication. For the purposes of these Bylaws, if authorized by the Board of Directors in its sole discretion, and subject to such guidelines and procedures as the Board of Directors may adopt, stockholders and proxyholders may, by means of remote communication:
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| (i) | participate in a meeting of stockholders; and |
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| (ii) | be deemed present in person and vote at a meeting of stockholders whether such meeting is to be held at a designated place or solely by means of remote communication; provided, however, that (A) the Corporation shall implement reasonable measures to verify that each person deemed present and permitted to vote at the meeting by means of remote communication is a stockholder or proxyholder, (B) the Corporation shall implement reasonable measures to provide such stockholders and proxyholders a reasonable opportunity to participate in the meeting and to vote on matters submitted to the stockholders, including an opportunity to read or hear the proceedings of the meeting substantially concurrently with such proceedings, and (C) if any stockholder or proxyholder votes or takes other action at the meeting by means of remote communication, a record of such vote or other action shall be maintained by the Corporation. |
Section 2.9 Voting; Proxies.
(a) General. Unless otherwise required by law or provided in the Certificate of Incorporation, each stockholder shall be entitled to one vote, in person or by proxy, for each share of stock having voting power registered in the stockholder’s name on the books of the Corporation, except as otherwise provided in the Certificate of Incorporation.
(b) Election of Directors. Unless otherwise required by law, the Certificate of Incorporation, or these Bylaws, the election of directors shall be decided by a plurality of the votes cast.
(c) Other Matters. Unless otherwise required by law, the Certificate of Incorporation, or these Bylaws, any matter, other than the election of directors, brought before any meeting of stockholders, at which a quorum is present, shall be decided by the affirmative vote of the majority of shares present in person or represented by proxy at the meeting and entitled to vote on the matter.
(d) Proxies. Each stockholder entitled to vote at a meeting of stockholders or to express consent or dissent to corporate action in writing without a meeting may authorize another person or persons to act by proxy, but no such proxy shall be voted or acted upon after three years from its date, unless the proxy provides for a longer period. The authorization of a person to act as proxy may be documented, signed, and delivered in accordance with Section 116 of the DGCL, provided that such authorization shall set forth, or be delivered with, information enabling the corporation to determine the identity of the stockholder granting such authorization. A proxy shall be irrevocable if it states that it is irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. A stockholder may revoke any proxy that is not irrevocable by attending the meeting and voting in person or by delivering to the Secretary a revocation of the proxy or a new proxy bearing a later date.
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Section 2.10 Inspectors at Meetings of Stockholders. The Corporation may, and to the extent required by law, shall, in advance of any meeting of stockholders, appoint one or more inspectors, who may be employees of the Corporation, to act at the meeting and make a written report thereof, including each vote taken. The Corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chair of the meeting may, and to the extent required by law, shall, appoint one or more inspectors to act at the meeting. Each inspector, before acting at the meeting, shall take and sign an oath to faithfully execute the duties of inspector with strict impartially and according to the best of his or her ability. No person who is a candidate for office at an election may serve as an inspector at such election. The inspector or inspectors may appoint or retain other persons or entities to assist the inspector or inspectors in the performance of their duties. Every vote taken by ballot shall be counted by an inspector or inspectors.
Section 2.11 Record Date.
(a) In order that the Corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than 60 nor less than 10 days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the determination of stockholders entitled to notice of or to vote at the adjourned meeting.
(b) In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion, or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than 60 days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
Section 2.12 Advance Notice of Stockholder Nominations and Proposals.
(a) Annual Meetings. At a meeting of the stockholders, only such nominations of persons for the election of directors and such other business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, nominations or such other business must be:
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| (i) | specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or any committee thereof; |
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| (ii) | otherwise properly brought before the meeting by or at the direction of the Board of Directors or any committee thereof; or |
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| (iii) | otherwise properly brought before an annual meeting by a stockholder who is a stockholder of record of the Corporation at the time such notice of meeting is delivered, who is entitled to vote at the meeting, and who complies with the notice procedures set forth in this Section 2.12. |
In addition, any proposal of business (other than the nomination of persons for election to the Board of Directors) must be a proper matter for stockholder action. For business (including, but not limited to, director nominations) to be properly brought before an annual meeting by a stockholder pursuant to Section 2.12(a)(iii), the stockholder or stockholders of record intending to propose the business (the “Proposing Stockholder”) must have given timely notice thereof pursuant to this Section 2.12(a), in writing to the Secretary even if such matter is already the subject of any notice to the stockholders or Public Disclosure from the Board of Directors. To be timely, a Proposing Stockholder’s notice for an annual meeting must be delivered to the Secretary at the principal executive offices of the Corporation: (x) not later than the close of business on the 90th day, nor earlier than the close of business on the 120th day, in advance of the anniversary of the previous year’s annual meeting if such meeting is to be held on a day which is not more than 30 days in advance of the anniversary of the previous year’s annual meeting or not later than 60 days after the anniversary of the previous year’s annual meeting; and (y) with respect to any other annual meeting of stockholders, including in the event that no annual meeting was held in the previous year, not earlier than the close of business on the 120th day prior to the annual meeting and not later than the close of business on the later of: (1) the 90th day prior to the annual meeting and (2) the close of business on the 10th day following the first date of Public Disclosure of the date of such meeting. In no event shall the Public Disclosure of an adjournment or postponement of an annual meeting commence a new notice time period (or extend any notice time period). For the purposes of this Section 2.12, “Public Disclosure” shall mean a disclosure made in a press release reported by a national news service or in a document filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14, or 15(d) of the Exchange Act.
(b) Stockholder Nominations. For the nomination of any person or persons for election to the Board of Directors pursuant to Section 2.12(a)(iii) or Section 2.12(d), a Proposing Stockholder’s timely notice to the Secretary (in accordance with the time periods for delivery of timely notice as set forth in this Section 2.12) shall set forth or include:
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| (ii) | the principal occupation or employment of each such nominee; |
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| (iii) | the class and number of shares of capital stock of the Corporation which are owned of record and beneficially by each such nominee (if any); |
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| (iv) | such other information concerning each such nominee as would be required to be disclosed in a proxy statement soliciting proxies for the election of such nominee as a director in an election contest (even if an election contest is not involved) or that is otherwise required to be disclosed, under Section 14(a) of the Exchange Act; |
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| (v) | a written questionnaire with respect to the background and qualification of such proposed nominee (which questionnaire shall be provided by the Secretary upon written request) and a written statement and agreement executed by each such nominee acknowledging that such person: |
(A) consents to being named in the Corporation’s proxy statement as a nominee and to serving as a director if elected,
(B) intends to serve as a director for the full term for which such person is standing for election, and
(C) makes the following representations: (1) that the director nominee has read and agrees to adhere to the Corporation’s Code of Ethics, Policy for Related Person Transactions, and any other of the Corporation’s policies or guidelines applicable to directors, including with regard to securities trading, (2) that the director nominee is not and will not become a party to any agreement, arrangement, or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any nomination or other business proposal, issue, or question (a “Voting Commitment”) that has not been disclosed to the Corporation or any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, and (3) that the director nominee is not and will not become a party to any agreement, arrangement, or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement, or indemnification (“Compensation Arrangement”) that has not been disclosed to the Corporation in connection with such person’s nomination for director or service as a director; and
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| (vi) | as to the Proposing Stockholder: |
(A) the name and address of the Proposing Stockholder as they appear on the Corporation’s books and of the beneficial owner, if any, on whose behalf the nomination is being made,
(C) a description of any agreement, arrangement, or understanding with respect to such nomination between or among the Proposing Stockholder or the beneficial owner, if any, on whose behalf the nomination is being made and any of their affiliates or associates, and any others (including their names) acting in concert with any of the foregoing, and a representation that the Proposing Stockholder will notify the Corporation in writing of any such agreement, arrangement, or understanding in effect as of the record date for the meeting within five business days after the record date for such meeting,
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(D) a description of any agreement, arrangement, or understanding (including any derivative or short positions, profit interests, options, hedging transactions, and borrowed or loaned shares) that has been entered into as of the date of the Proposing Stockholder’s notice by, or on behalf of, the Proposing Stockholder or the beneficial owner, if any, on whose behalf the nomination is being made and any of their affiliates or associates, the effect or intent of which is to mitigate loss to, manage risk or benefit of share price changes for, or increase or decrease the voting power of such person or any of their affiliates or associates with respect to shares of stock of the Corporation, and a representation that the Proposing Stockholder will notify the Corporation in writing of any such agreement, arrangement, or understanding in effect as of the record date for the meeting within five business days after the record date for such meeting,
(E) a representation that the Proposing Stockholder is a holder of record of shares of the Corporation entitled to vote at the meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice,
(F) a representation whether the Proposing Stockholder intends to deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s outstanding capital stock required to approve the nomination and/or otherwise to solicit proxies from stockholders in support of the nomination, and
(G) the names and addresses of other stockholders (including beneficial and record owners) known by the Proposing Stockholder to support the nomination or other business proposal, and to the extent known, the class and number of all shares of the Corporation’s capital stock owned beneficially or of record by such other stockholders.
The Corporation may require any proposed nominee to furnish such other information as it may reasonably require to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholder’s understanding of the independence, or lack thereof, of such nominee.
(c) Other Stockholder Proposals. For all business other than director nominations, a Proposing Stockholder’s timely notice to the Secretary (in accordance with the time periods for delivery of timely notice as set forth in this Section 2.12) shall set forth as to each matter the Proposing Stockholder proposes to bring before the annual meeting:
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| (i) | a brief description of the business desired to be brought before the annual meeting; |
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| (ii) | the reasons for conducting such business at the annual meeting; |
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| (iii) | the text of any proposal or business (including the text of any resolutions proposed for consideration and in the event that such business includes a proposal to amend these Bylaws, the language of the proposed amendment); |
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| (iv) | any substantial interest (within the meaning of Item 5 of Schedule 14A under the Exchange Act) in such business of such stockholder and the beneficial owner (within the meaning of Section 13(d) of the Exchange Act), if any, on whose behalf the business is being proposed; |
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| (v) | any other information relating to such stockholder and beneficial owner, if any, on whose behalf the proposal is being made, required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for the proposal and pursuant to and in accordance with Section 14(a) of the Exchange Act and the rules and regulations promulgated thereunder; |
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| (vi) | a description of all agreements, arrangements, or understandings between or among such stockholder, the beneficial owner, if any, on whose behalf the proposal is being made, any of their affiliates or associates, and any other person or persons (including their names) in connection with the proposal of such business and any material interest of such stockholder, beneficial owner, or any of their affiliates or associates, in such business, including any anticipated benefit therefrom to such stockholder, beneficial owner, or their affiliates or associates; and |
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| (vii) | all of the other information required by Section 2.12(b)(vi) above. |
(d) Special Meetings. Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporation’s notice of meeting. Nominations of persons for election to the Board of Directors may be made at a special meeting of stockholders called by the Board of Directors at which directors are to be elected pursuant to the Corporation’s notice of meeting:
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| (i) | by or at the direction of the Board of Directors or any committee thereof; or |
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| (ii) | provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who is a stockholder of record at the time the notice provided for in this Section 2.12(d) is delivered to the Secretary, who is entitled to vote at the meeting, and upon such election and who complies with the notice procedures set forth in this Section 2.12. |
In the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any such stockholder entitled to vote in such election of directors may nominate a person or persons (as the case may be) for election to such position(s) as specified in the Corporation’s notice of meeting, if such stockholder delivers a stockholder’s notice that complies with the requirements of Section 2.12(b) to the Secretary at the principal executive offices of the Corporation not earlier than the close of business on the 120th day prior to such special meeting and not later than the close of business on the later of: (x) the 90th day prior to such special meeting; or (y) the 10th day following the date of the first Public Disclosure of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the Public Disclosure of an adjournment or postponement of a special meeting commence a new time period (or extend any notice time period).
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(e) Effect of Noncompliance. Only such persons who are nominated in accordance with the procedures set forth in this Section 2.12 shall be eligible to be elected at any meeting of stockholders of the Corporation to serve as directors and only such other business shall be conducted at a meeting as shall be brought before the meeting in accordance with the procedures set forth in this Section 2.12. If any proposed nomination was not made or proposed in compliance with this Section 2.12, or other business was not made or proposed in compliance with this Section 2.12, then except as otherwise required by law, the chair of the meeting shall have the power and duty to declare that such nomination shall be disregarded or that such proposed other business shall not be transacted. Notwithstanding anything in these Bylaws to the contrary, unless otherwise required by law, if a Proposing Stockholder intending to propose business or make nominations at an annual meeting or propose a nomination at a special meeting pursuant to this Section 2.12 does not provide the information required under this Section 2.12 to the Corporation, including the updated information required by Section 2.12(b)(vi)(B), Section 2.12(b)(vi)(C), and Section 2.12(b)(vi)(D) within five business days after the record date for such meeting or the Proposing Stockholder (or a qualified representative of the Proposing Stockholder) does not appear at the meeting to present the proposed business or nominations, such business or nominations shall not be considered, notwithstanding that proxies in respect of such business or nominations may have been received by the Corporation.
(f) Exchange Act Rule 14a-8. This Section 2.12 shall not apply to a proposal proposed to be made by a stockholder if the stockholder has notified the Corporation of the stockholder’s intention to present the proposal at an annual or special meeting only pursuant to and in compliance with Rule 14a-8 under the Exchange Act and such proposal has been included in a proxy statement that has been prepared by the Corporation to solicit proxies for such meeting.
Section 2.13 Consent of Stockholders in Lieu of Meeting. Unless otherwise restricted by the DGCL or Certificate of Incorporation, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to the Corporation’s registered office shall be made by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein, unless, within 60 days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by holders of a sufficient number of shares to take action are delivered to the Corporation in the manner prescribed in the first paragraph of this Section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent of stockholders shall be given to those stockholders who have not consented in writing.
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ARTICLE III
DIRECTORS
Section 3.1 General Powers. The business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors, which may exercise all such powers and do all such acts and things as may be exercised or done by the Corporation and are not by law or these Bylaws directed or required to be exercised or done by the stockholders.
Section 3.2 Number of Directors. The number of directors shall consist of not less than one director and not more than 15 directors, as may be fixed from time to time solely by resolution of the Board of Directors. The directors shall be elected at the annual meeting of stockholders for a term of one year and shall serve until that director’s successor is elected and qualified or until the director’s earlier death, disqualification, resignation or removal. Directors shall be natural persons, but need not be stockholders.
Section 3.3 Vacancies. If the office of any director or directors becomes vacant by reason of death, disqualification, resignation, retirement, removal from office, or otherwise, or a new directorship is created, the majority of the directors then in office although less than a quorum, may appoint a director to fill the vacancy. A director so appointed shall hold office for the unexpired term or until the director’s successor is elected and qualified.
Section 3.4 Place of Meetings. The Board of Directors may hold its meetings outside of the State of Delaware, at the office of the Corporation or at such other places (if any) as they may from time to time determine, or as shall be fixed in the respective notices or waivers of notice of such meetings.
Section 3.5 Compensation of Directors. Directors, as such, may receive, pursuant to resolution of the Board of Directors, fixed fees and other compensation for their services as directors, including their services as members of committees of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor.
Section 3.6 Regular Meetings. Regular meetings of the Board of Directors may be held without notice at such times and places (if any) as may be determined from time to time by the Board of Directors.
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Section 3.11 Action Without Meeting. Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting, if all members of the Board or of such committee, as the case may be, consent thereto in writing or by electronic transmission and such written consent is filed with the minutes of proceedings of the Board of Directors or committee.
Section 3.12 Quorum. Except as otherwise provided in these Bylaws, a majority of the total number of directors shall constitute a quorum at any meeting of the Board of Directors. Unless a greater proportion is required by the resolution designating the committee of the Board of Directors, a majority of the entire committee shall constitute a quorum for the transaction of business or of any specified item of business. In the absence of a quorum, a majority of the directors present may adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting need not be given, except that notice shall be given to all directors, if the adjournment is for more than 30 days.
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Section 3.13 Conduct of Business. At each meeting of the Board of Directors, the Board Chair or, in the Board Chair’s absence or inability to act, another director or officer selected by the Board of Directors shall preside. The Secretary shall act as secretary at each meeting of the Board of Directors. If the Secretary is absent from any meeting of the Board of Directors, the person presiding at the meeting may appoint any person to act as secretary of the meeting. At any meeting of the Board of Directors, business shall be transacted in such order and manner as the Board may from time to time determine. Except as otherwise provided by law or these Bylaws, the act or vote of a majority of the directors present at any meeting at which a quorum is present shall be the act of the Board of Directors. Any director may require the “ayes” and “noes” to be taken on any question or vote and recorded in the minutes. Members of the Board of Directors, or any committee designated by the Board of Directors, may participate in a meeting of the Board of Directors or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section shall constitute presence in person at such meeting.
Section 3.14 Committees of Directors. The Board of Directors may designate one or more committees, each committee to consist of one or more of the directors of the Corporation. The Board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. A committee, to the extent provided in a resolution of the Board of Directors, shall have and may exercise all the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation, and may authorize the seal of the Corporation to be affixed to all papers which may require it; provided, however, that no committee shall have the power or authority in reference to, adopting or recommending to the stockholders an agreement of merger or consolidation, the sale, lease or exchange of all or substantially all of the Corporation’s property and assets, a dissolution or a revocation of a dissolution of the Corporation, or adopt, amend or repeal any provision of the Certificate of Incorporation or these Bylaws. Unless the resolution, the Certificate of Incorporation or these Bylaws expressly so provides, no committee shall have the power or authority to declare a dividend or to authorize the issuance of stock or other securities. The vote of a majority of the members present at the time of such vote, if a quorum is present, shall be the act of the committee. Committees may have such names as may be determined from time to time by resolution adopted by the Board of Directors. Unless the Board of Directors provides otherwise, each committee designated by the Board of Directors may make, alter and repeal rules and procedures for the conduct of its business. In the absence of such rules and procedures each committee shall conduct its business in the same manner as the Board of Directors conducts its business pursuant to this ARTICLE III. Each committee shall keep regular minutes of its proceedings, provide copies of the same to the whole Board of Directors and shall report to the Board of Directors when required or requested.
Unless otherwise provided in the resolution of the Board of Directors designating the committee, a committee may create one or more subcommittees, each subcommittee to consist of one or more members of the committee, and delegate to a subcommittee any or all of the powers and authority of the committee.
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ARTICLE IV
OFFICERS
Section 4.2 Election, Term of Office and Eligibility. Each officer of the Corporation shall hold office until such officer’s successor is elected and qualified or until such officer’s earlier death, resignation, or removal. Any officer elected or appointed by the Board of Directors may be removed by the Board of Directors at any time with or without cause by the majority vote of the members of the Board of Directors then in office. The removal of an officer shall be without prejudice to the officer’s contract rights, if any. The election or appointment of an officer shall not of itself create contract rights. Any officer of the Corporation may resign at any time by giving notice of his or her resignation in writing, or by electronic transmission, to the Board Chair, President, or Secretary. Any such resignation shall take effect at the time specified therein or, if the time when it shall become effective shall not be specified therein, immediately upon its receipt. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Should any vacancy occur among the officers, the position may be filled for the unexpired portion of the term by appointment made by the Board of Directors.
Section 4.3 The Chief Executive Officer. The CEO shall be the principal executive officer of the Corporation, shall have executive authority to see that all orders and resolutions of the Board of Directors are carried into effect, and, subject to the control vested in the Board of Directors by law or these Bylaws, shall administer and be responsible for the overall management of the business and affairs of the Corporation. The CEO shall perform all duties and have all powers which are commonly incident to such office, including general supervision and direction of all other officers, employees, agents and representatives of the Corporation. The CEO shall perform such other duties as from time to time may be delegated or assigned by the Board of Directors.
Section 4.4 The President. The President shall perform such duties as may from time to time be delegated or assigned by the Board of Directors or the CEO, and in the absence or disability of the CEO, shall perform the duties of the CEO.
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Section 4.5 Vice Presidents. In the event of the absence or disability of the CEO and/or the President, each Vice President, in the order designated, or in the absence of any designation, then in the order of their election, shall perform the duties of the President. Each Vice President shall also perform such other duties as from time to time may be delegated or assigned by the Board of Directors or by the chief executive officer of the Corporation.
Section 4.6 The Secretary. The Secretary shall:
(a) Keep the minutes of the meetings of the stockholders and of the Board of Directors;
(b) Give or cause to be given all notices in accordance with the provisions of law or these Bylaws;
(c) Be custodian of the records and of the seal of the Corporation and ensure that, if required, the seal or a facsimile or equivalent thereof is affixed to or reproduced on all documents, the execution of which on behalf of the Corporation under its seal is duly authorized;
(d) Have charge of the stock record books of the Corporation; and
(e) In general, perform all duties incident to the office of Secretary, and such other duties as are provided by these Bylaws and as from time to time are delegated or assigned by the Board of Directors or by the chief executive officer of the Corporation.
Section 4.7 Chief Financial Officer. The Chief Financial Officer shall be the principal financial officer of the Corporation and shall have such powers and perform such duties as may be assigned by the Board of Directors, the Board Chair, or the Chief Executive Officer.
Section 4.8 The Treasurer. The Treasurer shall:
(a) Receive and be responsible for all funds of and securities owned or held by the Corporation and, in connection therewith, among other things: keep or cause to be kept full and accurate financial records and accounts for the Corporation; deposit or cause to be deposited to the credit of the Corporation all moneys, funds and securities so received in such bank or other depositary as the Board of Directors or an officer designated by the Board may from time to time establish; and disburse or supervise the disbursement of the funds of the Corporation as may be properly authorized.
(b) Render to the Board of Directors at any meeting thereof, or from time to time whenever the Board of Directors or the chief executive officer of the Corporation may require, financial and other appropriate reports on the condition of the Corporation; and
(c) In general, perform all the duties incident to the office of Treasurer, and such other duties as are provided by these Bylaws and as from time to time are delegated or assigned by the Board of Directors or by the chief executive officer of the Corporation.
Section 4.9 Other Officers. Such other officers as the Board of Directors may choose shall perform such duties and have such powers as from time to time may be assigned to them by the Board of Directors. The Board of Directors may delegate to any other officer of the Corporation the power to choose such other officers and to prescribe their respective duties and powers.
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Section 4.10 Salaries. The salaries of the officers shall be fixed from time to time by the Board of Directors. No officer shall be prevented from receiving a salary by reason of the fact that the officer is also a director of the Corporation.
Section 4.11 Delegation of Duties. In the absence of any officer of the Corporation or for any other reason deemed sufficient by the Board of Directors, the Board of Directors may, for the time being, delegate any or all of the powers and duties of such officer to any other officer or to any director.
ARTICLE V
SHARES OF STOCK
Section 5.1 Regulation. Subject to the terms of any contract of the Corporation, the Board of Directors may make such rules and regulations as it may deem expedient concerning the issue, transfer, conversion and registration of certificates for shares of the stock or other securities of the Corporation, including the issue of new certificates for lost, stolen or destroyed certificates, and including the appointment of transfer agents and registrars.
Section 5.2 Certificates Representing Shares; Uncertificated Shares. The shares of stock of the Corporation shall be represented by certificates; provided that the Board of Directors may provide by resolution or resolutions that some or all of any class or series shall be uncertificated shares that may be evidenced by a book-entry system maintained by the registrar of such stock. If shares are represented by certificates, such certificates shall be in the form, other than bearer form, approved by the Board of Directors. The certificates representing shares of stock shall be signed by, or in the name of, the Corporation by any two authorized officers of the Corporation. Any or all such signatures may be facsimiles. In case any officer, transfer agent, or registrar who has signed such a certificate ceases to be an officer, transfer agent, or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if the signatory were still such at the date of its issue.
Section 5.3 Transfers. Stock of the Corporation shall be transferable in the manner prescribed by law and in these Bylaws. Transfers of stock shall be made on the books administered by or on behalf of the Corporation only by the direction of the registered holder thereof or such person’s attorney, lawfully constituted in writing, and, in the case of certificated shares, upon the surrender to the Company or its transfer agent or other designated agent of the certificate thereof, which shall be cancelled before a new certificate or uncertificated shares shall be issued.
Section 5.4 Lost, Stolen, or Destroyed Certificate. Any stockholder claiming that a certificate representing shares of stock or other securities of the Corporation has been lost, stolen or destroyed may make an affidavit or affirmation of the fact and, if the Board of Directors so requires, advertise the same in a manner designated by the Board, and give the Corporation a bond of indemnity in form and with security for an amount satisfactory to the Board of Directors (or an officer designated by the Board of Directors), whereupon a new certificate or uncertificated shares may be issued of the same tenor and representing the same number, class and/or series of shares as were represented by the certificate alleged to have been lost, stolen or destroyed.
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ARTICLE VI
INDEMNIFICATION
Section 6.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (a “proceeding”), by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or who is or was serving at the request of the Corporation as a director, manager, officer, trustee, employee or agent of another corporation or of a partnership, limited liability company, joint venture, trust, nonprofit entity or other enterprise, including service with respect to employee benefit plans (an “indemnitee”), whether the basis of the proceeding is alleged action in an official capacity as a director, manager, officer, trustee, employee or agent or in any other capacity while serving as a director, manager, officer, trustee, employee or agent, shall be indemnified and held harmless by the Corporation to the fullest extent authorized by the General Corporation Law of the State of Delaware, as the same now or may hereafter exist (but, in the case of any change, only to the extent that such change authorizes the Corporation to provide broader indemnification rights than the law permitted the Corporation to provide prior to such change) against all expenses, liabilities and losses (including attorneys’ fees, judgments, fines, ERISA excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by the indemnitee in connection therewith and such indemnification shall continue as to a person who has ceased to be a director or officer and shall inure to the benefit of the indemnitee’s heirs, executors and administrators. The Corporation shall be required to indemnify a person in connection with a proceeding (or part thereof) initiated by such person, only if the proceeding (or part thereof) was authorized by the Board of Directors of the Corporation.
Section 6.2 Right to Advancement of Expenses. In addition to the right to indemnification conferred in Section 6.1, an indemnitee shall also have the right to be paid by the Corporation the expenses (including attorney’s fees) incurred in defending any such proceeding in advance of its final disposition (an “advancement of expenses”); provided, however, that, if the General Corporation Law of the State of Delaware requires, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer (and not in any other capacity in which service was or is rendered by such indemnitee, including service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking (an “undertaking”) by or on behalf of such indemnitee, to repay all amounts so advanced, if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (a “final adjudication”) that such indemnitee is not entitled to be indemnified for expenses under this Section 6.2 or otherwise. The rights to indemnification and to the advancement of expenses conferred in Section 6.1 and Section 6.2 shall be contract rights, and such rights shall continue as to an indemnitee who has ceased to be a director, manager, officer, employee or agent and shall inure to the benefit of the indemnitee’s heirs, executors and administrators.
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Section 6.3 Right of Indemnitee to Bring Suit. If a claim under Section 6.1 and Section 6.2 is not paid in full by the Corporation within 60 days after a written claim has been received by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. Neither the failure of the Corporation (including directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances, because the indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including directors who are not parties to such action, a committee of such directors, independent legal counsel or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this ARTICLE VI or otherwise shall be on the Corporation.
Section 6.4 Non-Exclusivity of Rights. The right to indemnification and the payment of expenses incurred in defending a proceeding in advance of its final disposition conferred in this ARTICLE VI shall not be exclusive of any other right which any indemnitee may have or hereafter acquire under any statute, certificate of incorporation, bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Corporation is specifically authorized to enter into individual contracts with any or all of its directors, officers, employees, or agents respecting indemnification and advances, to the fullest extent not prohibited by the DGCL.
Section 6.5 Other Indemnification. The Corporation’s obligation, if any, to indemnify any person who was or is serving at its request as a director, manger, officer, employee or agent of another corporation, partnership, limited liability company, joint venture, trust, nonprofit entity or other enterprise shall be reduced by any amount such person may collect as indemnification from such other entity or enterprise.
Section 6.6 Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee, agent or representative of the Corporation or another corporation, limited liability company, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.
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Section 6.7 Witness Expenses. To the extent that any director, officer, employee, agent or representative of the Corporation is by reason of such position, or a position with another entity or enterprise at the request of the Corporation, a witness or a deponent in any proceeding, such person shall be reimbursed for all expenses actually and reasonably incurred by such person or on their behalf in connection therewith.
Section 6.8 Indemnification of Employees, Agents and Representatives. The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee, agent or representative of the Corporation to the fullest extent of the provisions of this ARTICLE VI with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
Section 6.9 No Adverse Changes. Any amendment, modification or repeal of any provision of this ARTICLE VI, whether by the stockholders or Board of Directors of the Corporation, shall not adversely affect any right or protection of an indemnitee in respect of any act or omission occurring prior to the time of such amendment, modification or repeal.
ARTICLE VII
NOTICE
Section 7.1 Notices. Except as otherwise required by law, all notices required to be given to the Corporation or to any stockholder, director, officer, employee or agent shall be in writing and may in every instance be effectively given by hand delivery to the recipient thereof, by depositing such notice in the mails, postage paid, or by sending such notice by electronic transmission or by receipted overnight delivery service. Any such notice shall be addressed to the last known address of such person as the same appears on the books of the Corporation. The time of the giving of the notice shall be the time when such notice is received, if hand delivered, or dispatched, if delivered through the mails or by electronic transmission or receipted by overnight delivery service.
Section 7.2 Waiver of Notice. Whenever any notice is required to be given under provision of law or these Bylaws, a written waiver, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein or before or after the meeting is held, shall be deemed equivalent to notice. If a waiver is given by electronic transmission, the electronic transmission must either set forth or be submitted with information from which it can be determined that the electronic transmission was authorized by the stockholder. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any meeting of the stockholders, directors or members of a committee of directors need be specified in any waiver of notice.
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Section 7.3 Notice By Electronic Transmission.
(a) Without limiting the manner by which notice otherwise may be given effectively to stockholders, any notice to stockholders given by the Corporation under law or these Bylaws shall be effective if given by a form of electronic transmission consented to by the stockholder to whom the notice is given. Any such consent shall be revocable by the stockholder by written notice to the Corporation. Any such consent shall be deemed revoked, if (i) the Corporation is unable to deliver by electronic transmission two consecutive notices given by the Corporation in accordance with such consent and (ii) such inability becomes known to the Secretary or an Assistant Secretary of the Corporation or to the transfer agent, or other person responsible for the giving of notice; provided, however, that the inadvertent failure to treat such inability as a revocation shall not invalidate any meeting or other action.
(b) Notice to stockholders may be given by writing in paper form or solely in the form of electronic transmission as permitted by this subsection (b). If given by writing in paper form, notice may be delivered personally, may be delivered by mail, or, with the consent of the stockholder entitled to receive notice, may be delivered by facsimile telecommunication or any of the other means of electronic transmission specified in this subsection (b). If mailed, such notice shall be delivered by postage prepaid envelope directed to each stockholder at such stockholder’s address as it appears in the records of the Corporation. Any notice to stockholders given by the Corporation shall be effective if delivered or given by a form of electronic transmission to which the stockholder to whom the notice is given has consented. Notice given pursuant to this subsection shall be deemed given: (i) if by facsimile telecommunication, when directed to a facsimile telecommunication number at which the stockholder has consented to receive notice; (ii) if by electronic mail, when directed to an electronic mail address at which the stockholder has consented to receive notice; (iii) if by posting on an electronic network together with separate notice to the stockholder of such specific posting, upon the later of (A) such posting and (B) the giving of such separate notice; and (iv) if by any other form of electronic transmission, when directed to the stockholder. An affidavit of the secretary or an assistant secretary or of the transfer agent or other agent of the Corporation that the notice has been given by personal delivery, by mail, or by a form of electronic transmission shall, in the absence of fraud, be prima facie evidence of the facts stated therein.
(c) For purposes of these Bylaws, “electronic transmission” means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by the recipient through an automated process.
(d) The provisions of this Section 7.3 shall not apply to notices required under §§164, 296, 311, 312 or 324 of the General Corporation Law of the State of Delaware.
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ARTICLE VIII
MISCELLANEOUS PROVISIONS
Section 8.1 Seal. The seal of the Corporation shall be in such form as shall be approved by the Board of Directors. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise, as may be prescribed by law or custom or by the Board of Directors.
Section 8.2 Fiscal Year. The fiscal year of the Corporation shall be as fixed by the Board of Directors, but shall initially end on December 31 of each year.
Section 8.3 Facsimile Signatures. In addition to the provisions for use of facsimile signatures or signatures by electronic transmission elsewhere specifically authorized in these Bylaws, facsimile signatures or signatures by electronic transmission of any officer of the Corporation may be used whenever and as authorized by the Board of Directors or a committee thereof.
Section 8.4 Contracts and Other Instruments. The Board of Directors may authorize any officer or agent to enter into any contract or execute and deliver any instrument in the name and on behalf of the Corporation and such authority may be general or confined to specific instances. All checks, drafts or other orders for the payment of money and all notes or other evidences of indebtedness issued in the name of the Corporation shall be signed by the CEO or such other officer or agent as shall from time to time be designated by resolution of the Board of Directors. The Board of Directors, the CEO or another officer designated by the Board shall appoint banks, trust companies or other depositories in which shall be deposited from time to time the money or securities of the Corporation.
Section 8.5 Books and Records. The books, accounts and records of the Corporation may be kept at such place or places within or without the State of Delaware as the Board of Directors may from time to time determine. The books, accounts and records of the Corporation, including its stock ledger, books of account and minute books, shall be maintained in the regular course of its business and may be kept on, or be in the form of, computer files or any other commonly available information storage device that creates a record that can be retained, retrieved and reviewed and that may be directly reproduced in paper form; provided that the books, accounts and records so kept are readily available and can be easily converted into clearly legible form. The books, accounts, and records of the Corporation shall be open to inspection by any member of the Board of Directors at all times; and open to inspection by the stockholders at such times, and subject to such regulations as the Board of Directors may prescribe, except as otherwise provided by statute.
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Section 8.6 Securities in Other Corporations. Any shares of stock or other securities in any corporation or other entity, which may from time to time be held by this Corporation, may be represented and voted at any meeting of security holders of such entity or otherwise, and any and all rights and powers which the Corporation may possess by reason of its ownership of such securities may be exercised, by the Board Chair, if any, or the CEO, or the President, or by any other person authorized by the Board of Directors, or by any proxy designated by written instrument of appointment executed in the name of this Corporation by the Board Chair, the CEO, or the President. Securities belonging to the Corporation need not stand in the name of the Corporation, but may be held for the benefit of the Corporation in the individual name of the Treasurer or of any other nominee designated for the purpose by the Board of Directors. Certificates for securities held for the benefit of the Corporation shall be endorsed in blank or have proper stock or other transfer powers attached, so that the securities and any certificate evidencing the same are at all times in due form for transfer, and shall be held for safekeeping in such manner as shall be determined from time to time by the Board of Directors.
Section 8.7 Time Periods. In applying any provision of these Bylaws which requires that an act be done or not be done a specified number of days prior to an event or that an act be done during a period of a specified number of days prior to an event, calendar days shall be used, the day of the doing of the act shall be excluded, and the day of the event shall be included.
ARTICLE IX
AMENDMENTS
The stockholders, by the affirmative vote of the holders of a majority of the stock issued and outstanding and having voting power, may adopt, amend or repeal any provision of these Bylaws at any meeting of stockholders, if the notice of such meeting lists amendment, modification or repeal among the purposes of the meeting and sets forth the amendment, modification or repeal to be voted upon at the meeting. Any amendment, modification or repeal of any provision of these Bylaws made by the stockholders shall not be amended, modified or repealed by the Board of Directors.
The Board of Directors, by the affirmative vote of a majority of the whole Board, may adopt, amend or repeal any provision of these Bylaws, except as provided in the above paragraph. Any amendment, modification or repeal of any provision of these Bylaws made by the Board of Directors may be amended, modified or repealed by the stockholders.
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EXHIBIT 10.17c
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” FOR U.S. FEDERAL INCOME TAX PURPOSES. THE ISSUER OF THIS NOTE WILL MAKE AVAILABLE TO ANY HOLDER OF THIS NOTE: (1) THE ISSUE PRICE AND ISSUE DATE OF THE NOTE, (2) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE NOTE, (3) THE YIELD TO MATURITY OF THE NOTE, AND (4) ANY OTHER INFORMATION REQUIRED TO BE MADE AVAILABLE BY U.S. TREASURY REGULATIONS UPON RECEIVING A WRITTEN REQUEST FOR SUCH INFORMATION AT THE FOLLOWING ADDRESS: 13850 MANCHESTER RD., BALLWIN, MO 63011.
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
| Dated as of: November 8, 2021 |
| Purchase Price: $350,000 |
| Maturity Date: August 8, 2022 |
| Original Issue Discount: $52,500 |
| Interest Rate: 5% |
| Original Principal Amount: $402,500 |
15% OID SENIOR SECURED PROMISSORY NOTE
DUE AUGUST 8, 2022
THIS 15% OID SENIOR SECURED PROMISSORY NOTE is one of a series of duly authorized and validly issued 15% OID Senior Secured Promissory Notes due August 8, 2022 of Edible Garden AG Incorporated, a Delaware corporation (the “Company”), having its principal place of business at 283 County Road 519, Belvidere, New Jersey 07823, designated as its 15% OID Senior Secured Promissory Notes due August 8, 2022 (this Note, the “Note” and, collectively with the other Notes of such series, the “Notes”).
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of Evergreen Capital Management LLC or its registered assigns or successors-in-interest (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal amount set forth above on August 8, 2022 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.
This Note is being issued pursuant to that Securities Purchase Agreement dated as of October 7, 2021, as amended (the “Purchase Agreement”) between the Company and the Holder (defined below) and the other purchasers, if any, of the Notes.
This Note is subject to the following additional provisions:
1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Change of Control Transaction” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company (other than by means of conversion or exercise of the Notes and the Securities issued together with the Notes), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three-year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.
“Conversion” shall have the meaning ascribed to such term in Section 4.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.
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“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
“Event of Default” shall have the meaning set forth in Section 6(a).
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
“IPO” means the consummation of the first underwritten public offering of Common Stock under the Securities Act.
“Late Fees” shall have the meaning set forth in Section 2(c).
“New Jersey Courts” shall have the meaning set forth in Section 7(d).
“Note Register” shall have the meaning set forth in Section 2(b).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Original Issue Date” means the date of the first issuance of this Note, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence such Notes.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor Entity” shall have the meaning set forth in Section 5(e).
“Trading Market” means any of the following markets or exchanges on which the Common Stock (or any other common stock of any other Person that references the Trading Market for its common stock) is listed or quoted for trading on the date in question: The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE Arca, the NYSE American, the OTCQX Marketplace, the OTCQB Marketplace, the OTC Pink Marketplace or any other tier operated by OTC Markets Group Inc. (or any successor to any of the foregoing).
2. Interest and Prepayments.
(a) Payment of Interest in Cash. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of five percent (5%) per annum. All interest payments hereunder will be payable in cash. Accrued and unpaid interest shall be due on payable on the Maturity Date, or as otherwise set forth herein.
(b) Interest Calculations. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”).
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(c) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily from the date such interest is due hereunder through and including the date of actual payment in full.
(d) Prepayment. This Note may be prepaid by the Company in whole or in part at any time or from time to time, upon at least three (3) Business Days prior written notice to the Holder. If the Company exercises its right to prepay this Note at any time on or prior to November 30, 2021, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 15% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note after November 30, 2021 and prior to January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 20% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note at any time on or after January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 30% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period.
(e) Prepayment Upon Qualified Financing. If the Company completes a Qualified Financing (as defined below), the Company shall repay in full the then-outstanding principal amount of this Note and any accrued but unpaid interest, plus an amount equal to the applicable prepayment premium on the date of such repayment. Such repayment shall be due within one (1) Business Day of the closing of the Qualified Financing. The Company shall give written notice to Holder as soon as practicable, but in no event less than three (3) Business Days before the anticipated closing date of such Qualified Financing, during which period Holder shall have the opportunity to convert this Note pursuant to Section 4 hereof. The term “Qualified Financing” shall mean that the Company issues and sells shares of its equity securities to investors on or before the Maturity Date in an equity financing with total gross proceeds to the Company of not less than $5,000,000 (excluding the conversion of the notes or other convertible securities issued for capital raising purposes).
3. Registration of Transfers and Exchanges.
(a) Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.
(b) Investment Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.
(c) Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
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4. Conversion.
(a) Voluntary Conversion. This Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(d) hereof), but only with the prior written consent of the Company. The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying therein the principal amount of this Note to be converted, accrued and unpaid interest outstanding under this Note to be converted, and the date on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain a Conversion Schedule showing the principal amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within three (3) Business Days of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.
(b) Conversion Price. The conversion price in effect on any Conversion Date shall be equal to $4.15 (the “Conversion Price”).
(c) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal Amount and Interest. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted and any accrued and unpaid interest to be converted, by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates representing the Conversion Shares which, on or after the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information and the Company has received an opinion of counsel to such effect reasonably acceptable to the Company, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion of this Note, and (B) a bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in cash). All certificate or certificates required to be delivered by the Company under this Section 4(c) shall be delivered electronically through the Depository Trust Company or another established clearing corporation performing similar functions, if available. If the Conversion Date is prior to the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information the Conversion Shares shall bear a restrictive legend in the following form, as appropriate:
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| “NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.” |
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iii. Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice. Notwithstanding the obligations of the Company contained in Section 4(c) to deliver share certificates, any requirement to deliver share certificates shall be remedied by recording share issuances in favor of the Holder in book entry form and delivery to the Holder of written evidence of such share issuances.
iv. Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 6 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
vi. Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock a number of shares of Common Stock at least equal to the Required Minimum for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5) upon the conversion of the then outstanding principal amount of this Note and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.
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vii. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
(d) Holder’s Conversion Limitations. Following the IPO, the Company shall not effect any conversion of principal and/or interest of this Note, and a Holder shall not have the right to convert any principal and/or interest of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Note held by the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.
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5. Certain Adjustments.
(a) Stock Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re‑classification.
(b) Subsequent Equity Sales. If, at any time while this Note is outstanding and prior to (but including) the closing of the Qualified Offering, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 5 above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Note is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Note, then, in each such case, upon conversion of this Note, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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(e) Fundamental Transaction. If, at any time while this Note is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Note is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Note and the other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 5(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Note, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Note which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
(f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and outstanding.
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(g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder shall remain entitled to convert this Note during the 10-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
(h) Adjustment for More Favorable Terms Contained in Future Financings. So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any convertible security, including any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) or other Common Stock Equivalents, with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at the Holder’s option, shall become a part of this Note and its supporting documentation. The types of terms contained in the other security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion look back periods, interest rates, original issue discount percentages and warrant coverage.
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6. Events of Default.
(a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within four (4) Trading Days;
ii. the Company shall materially fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (ix) below) which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iii. the Company shall materially fail to observe or perform any other covenant or agreement contained in, or a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under the specific terms of, any of the other Transaction Documents which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iv. any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
vii. [reserved];
viii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);
ix. the Company shall fail for any reason to deliver certificates to a Holder prior to the third Trading Day after a Conversion Date pursuant to Section 4(c) or the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof;
x. [reserved];
xi. if the Company or any Significant Subsidiary shall: (i) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its properties, (ii) make a general assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 11 of the United States Code or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute of any other jurisdiction or foreign country, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or (v) take or permit to be taken any action in furtherance of or for the purpose of effecting any of the foregoing;
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xii. if any order, judgment or decree shall be entered, without the application, approval or consent of the Company or any Significant Subsidiary, by any court of competent jurisdiction, approving a petition seeking liquidation or reorganization of the Company or any Subsidiary, or appointing a receiver, trustee, custodian or liquidator of the Company or any Subsidiary, or of all or any substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days;
xiii. the occurrence of any levy upon or seizure or attachment of, or any uninsured loss of or damage to, any property of the Company or any Subsidiary having an aggregate fair value or repair cost (as the case may be) in excess of $250,000 individually or in the aggregate, and any such levy, seizure or attachment shall not be set aside, bonded or discharged within thirty (30) days after the date thereof;
xiv. the Company or any subsidiary shall default on any of its obligations under any mortgage(s), credit agreement(s) or other facility, indenture agreement(s), factoring agreement(s) or other instrument(s) under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involve(s) obligations greater than $500,000 in the aggregate, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;
xv. any monetary judgement, writ or similar final process shall be entered or filed after the date hereof against the Company, any subsidiary or any of their respective property or assets for more than $250,000, and such judgement, writ or similar process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days; or
xvi. the Company shall fail to maintain sufficient reserved shares pursuant to Section 4.11 of the Purchase Agreement for a period of five (5) Trading Days after the Company has become or should have become aware of such failure.
(b) Remedies Upon Event of Default. Subject to the Beneficial Ownership Limitation as set forth in Section 4(d), if any Event of Default occurs, then the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash. After the occurrence of any Event of Default that results in the eventual acceleration of this Note, the interest rate on this Note shall accrue at an additional interest rate equal to the lesser of 2% per month (24% per annum) or the maximum rate permitted under applicable law. Upon the payment in full of the Note, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 6(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
7. Security. This Note is secured by the Security Agreement (as defined in the Purchase Agreement), executed by the Company in favor of the Holders encumbering the collateral set forth therein, as more specifically set forth in the Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note.
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8. Miscellaneous.
(a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, by email, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number, email or other address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section 7(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, by email or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, email or other address of the Holder appearing on the books of the Company, or if no such facsimile number, email or other address appears on the books of the Company, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto prior to 12:00 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 12:00 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.
(b) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.
(c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.
(d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in Bergen, Essex and Hudson Counties, State of New Jersey (the “New Jersey Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New Jersey Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New Jersey Courts, or such New Jersey Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
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(e) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.
(f) Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
(g) Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.
(h) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
(i) Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.
*********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
| Edible Garden AG Incorporated | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
Facsimile No. for delivery of Notices: None
Email address for delivery of Notices: jkras@ediblegarden.com
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and interest under the 15% OID Senior Secured Promissory Notes due August 8, 2022 of Edible Garden AG Incorporated (the “Company”), into shares of its common stock (the “Common Stock”), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:______________________________________
Principal Amount of Note to be Converted:________________________
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion at Issue.
Number of shares of Common Stock to be issued:___________________
__________________________
Signature
__________________________
Name
Delivery Instructions:
__________________________
__________________________
__________________________
__________________________
__________________________
Schedule 1
CONVERSION SCHEDULE
This 15% OID Senior Secured Promissory Notes due August 8, 2022 in the original principal amount of $402,500 is issued by Edible Garden AG Incorporated (the “Company”). This Conversion Schedule reflects conversions made under Section 4 of the above referenced Note.
Dated:
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EXHIBIT 10.17d
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
EDIBLE GARDEN AG INCORPORATED
| Warrant Shares: 96,988 | Initial Exercise Date: November 8, 2021 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, EVERGREEN CAPITAL MANAGEMENT LLC, or its assigns (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m., New York City Time, on November 8, 2026 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Edible Garden AG Incorporated, a Delaware corporation (the “Company”), up to 96,988 shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 1(b).
This Warrant is being issued pursuant to that certain Securities Purchase Agreement dated as of October 7, 2021 between the Holder and the Company, as amended (the “Securities Purchase Agreement”). In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Securities Purchase Agreement.
1. Exercise.
(a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto and within five (5) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 1(c) below. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within three (3) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall initially be $4.15, subject to adjustment hereunder (the “Exercise Price”).
(c) Cashless Exercise. If at any time after the six-month anniversary of the Initial Exercise Date, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may only be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
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| A = | the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise; |
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| B = | the Exercise Price of this Warrant, as adjusted hereunder; and |
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| X = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 2(c).
Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 1(c).
(d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is five (5) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 1(d)(vi) prior to the issuance of such shares, having been paid.
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ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 1(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
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vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 1(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 1(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 1(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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2. Certain Adjustments.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 2(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.
(b) Subsequent Equity Sales. If, at any time while this Warrant is outstanding and prior to (and including) the closing of the Qualified Offering, the Company sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Exercise Price (such lower price, the “Base Exercise Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the then Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced to equal the Base Exercise Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, exercise price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Exercise Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Exercise Price in the Notice of Exercise.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 2(a) and 2(b) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, upon the exercise of this Warrant, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(e) [Reserved.]
(f) Calculations. All calculations under this Section 2 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 2, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
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(g) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 2, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that, following the closing of the IPO, any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
3. Transfer of Warrant.
(a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 3(d) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 3(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, make usual and customary representations as to investment intent to the Company.
(e) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
4. Miscellaneous.
(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 1(d)(i), except as expressly set forth in Section 2.
(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
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(d) Authorized Shares.
i. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
ii. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
iii. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
(e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the State of Delaware as they are applied to contracts executed, delivered and to be wholly performed within the State of Delaware.
(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and if the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
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(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the either party to the other shall be delivered in by recognized overnight courier, facsimile or email as follows:
If to the Holder:
Evergreen Capital Management LLC
156 West Saddle River Road
Saddle River, NJ 07458
Attn: Manager
Email: jpazdro@egcmllc.com
If to the Company:
Edible Garden AG Incorporated
283 County Road 519
Belvidere, New Jersey 07823
Attn: Chief Executive Officer
Email: jkras@ediblegarden.com
(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
(j) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
(l) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
(m) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
[Signature Page to Follow.]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| EDIBLE GARDEN AG INCORPORATED | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
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EXHIBIT A
NOTICE OF EXERCISE
TO: EDIBLE GARDEN AG INCORPORATED
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 1(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
__________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
__________________________________
__________________________________
__________________________________
(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
________________________
Name of Investing Entity:
________________________
Signature of Authorized Signatory of Investing Entity:
________________________
Name of Authorized Signatory
________________________
Title of Authorized Signatory
________________________
Date
EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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EXHIBIT 10.17e
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” FOR U.S. FEDERAL INCOME TAX PURPOSES. THE ISSUER OF THIS NOTE WILL MAKE AVAILABLE TO ANY HOLDER OF THIS NOTE: (1) THE ISSUE PRICE AND ISSUE DATE OF THE NOTE, (2) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE NOTE, (3) THE YIELD TO MATURITY OF THE NOTE, AND (4) ANY OTHER INFORMATION REQUIRED TO BE MADE AVAILABLE BY U.S. TREASURY REGULATIONS UPON RECEIVING A WRITTEN REQUEST FOR SUCH INFORMATION AT THE FOLLOWING ADDRESS: 13850 MANCHESTER RD., BALLWIN, MO 63011.
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
| Dated as of: November 22, 2021 |
| Purchase Price: $350,000 |
| Maturity Date: August 22, 2022 |
| Original Issue Discount: $52,500 |
| Interest Rate: 5% |
| Original Principal Amount: $402,500 |
15% OID SENIOR SECURED PROMISSORY NOTE
DUE AUGUST 22, 2022
THIS 15% OID SENIOR SECURED PROMISSORY NOTE is one of a series of duly authorized and validly issued 15% OID Senior Secured Promissory Notes due August 22, 2022 of Edible Garden AG Incorporated, a Delaware corporation (the “Company”), having its principal place of business at 283 County Road 519, Belvidere, New Jersey 07823, designated as its 15% OID Senior Secured Promissory Notes due August 22, 2022 (this Note, the “Note” and, collectively with the other Notes of such series, the “Notes”).
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of Evergreen Capital Management LLC or its registered assigns or successors-in-interest (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal amount set forth above on August 22, 2022 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.
This Note is being issued pursuant to that Securities Purchase Agreement dated as of October 7, 2021, as amended (the “Purchase Agreement”) between the Company and the Holder (defined below) and the other purchasers, if any, of the Notes.
This Note is subject to the following additional provisions:
1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Change of Control Transaction” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company (other than by means of conversion or exercise of the Notes and the Securities issued together with the Notes), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three-year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.
“Conversion” shall have the meaning ascribed to such term in Section 4.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.
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“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
“Event of Default” shall have the meaning set forth in Section 6(a).
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
“IPO” means the consummation of the first underwritten public offering of Common Stock under the Securities Act.
“Late Fees” shall have the meaning set forth in Section 2(c).
“New Jersey Courts” shall have the meaning set forth in Section 7(d).
“Note Register” shall have the meaning set forth in Section 2(b).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Original Issue Date” means the date of the first issuance of this Note, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence such Notes.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor Entity” shall have the meaning set forth in Section 5(e).
“Trading Market” means any of the following markets or exchanges on which the Common Stock (or any other common stock of any other Person that references the Trading Market for its common stock) is listed or quoted for trading on the date in question: The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE Arca, the NYSE American, the OTCQX Marketplace, the OTCQB Marketplace, the OTC Pink Marketplace or any other tier operated by OTC Markets Group Inc. (or any successor to any of the foregoing).
2. Interest and Prepayments.
(a) Payment of Interest in Cash. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of five percent (5%) per annum. All interest payments hereunder will be payable in cash. Accrued and unpaid interest shall be due on payable on the Maturity Date, or as otherwise set forth herein.
(b) Interest Calculations. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”).
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(c) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily from the date such interest is due hereunder through and including the date of actual payment in full.
(d) Prepayment. This Note may be prepaid by the Company in whole or in part at any time or from time to time, upon at least three (3) Business Days prior written notice to the Holder. If the Company exercises its right to prepay this Note at any time on or prior to November 30, 2021, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 15% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note after November 30, 2021 and prior to January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 20% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note at any time on or after January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 30% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period.
(e) Prepayment Upon Qualified Financing. If the Company completes a Qualified Financing (as defined below), the Company shall repay in full the then-outstanding principal amount of this Note and any accrued but unpaid interest, plus an amount equal to the applicable prepayment premium on the date of such repayment. Such repayment shall be due within one (1) Business Day of the closing of the Qualified Financing. The Company shall give written notice to Holder as soon as practicable, but in no event less than three (3) Business Days before the anticipated closing date of such Qualified Financing, during which period Holder shall have the opportunity to convert this Note pursuant to Section 4 hereof. The term “Qualified Financing” shall mean that the Company issues and sells shares of its equity securities to investors on or before the Maturity Date in an equity financing with total gross proceeds to the Company of not less than $5,000,000 (excluding the conversion of the notes or other convertible securities issued for capital raising purposes).
3. Registration of Transfers and Exchanges.
(a) Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.
(b) Investment Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.
(c) Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
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4. Conversion.
(a) Voluntary Conversion. This Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(d) hereof), but only with the prior written consent of the Company. The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying therein the principal amount of this Note to be converted, accrued and unpaid interest outstanding under this Note to be converted, and the date on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain a Conversion Schedule showing the principal amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within three (3) Business Days of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.
(b) Conversion Price. The conversion price in effect on any Conversion Date shall be equal to $4.15 (the “Conversion Price”).
(c) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal Amount and Interest. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted and any accrued and unpaid interest to be converted, by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates representing the Conversion Shares which, on or after the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information and the Company has received an opinion of counsel to such effect reasonably acceptable to the Company, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion of this Note, and (B) a bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in cash). All certificate or certificates required to be delivered by the Company under this Section 4(c) shall be delivered electronically through the Depository Trust Company or another established clearing corporation performing similar functions, if available. If the Conversion Date is prior to the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information the Conversion Shares shall bear a restrictive legend in the following form, as appropriate:
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| “NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.” |
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iii. Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice. Notwithstanding the obligations of the Company contained in Section 4(c) to deliver share certificates, any requirement to deliver share certificates shall be remedied by recording share issuances in favor of the Holder in book entry form and delivery to the Holder of written evidence of such share issuances.
iv. Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 6 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
vi. Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock a number of shares of Common Stock at least equal to the Required Minimum for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5) upon the conversion of the then outstanding principal amount of this Note and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.
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vii. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
(d) Holder’s Conversion Limitations. Following the IPO, the Company shall not effect any conversion of principal and/or interest of this Note, and a Holder shall not have the right to convert any principal and/or interest of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Note held by the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.
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5. Certain Adjustments.
(a) Stock Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re‑classification.
(b) Subsequent Equity Sales. If, at any time while this Note is outstanding and prior to (but including) the closing of the Qualified Offering, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 5 above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Note is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Note, then, in each such case, upon conversion of this Note, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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(e) Fundamental Transaction. If, at any time while this Note is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Note is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Note and the other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 5(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Note, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Note which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
(f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and outstanding.
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(g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder shall remain entitled to convert this Note during the 10-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
(h) Adjustment for More Favorable Terms Contained in Future Financings. So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any convertible security, including any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) or other Common Stock Equivalents, with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at the Holder’s option, shall become a part of this Note and its supporting documentation. The types of terms contained in the other security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion look back periods, interest rates, original issue discount percentages and warrant coverage.
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6. Events of Default.
(a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within four (4) Trading Days;
ii. the Company shall materially fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (ix) below) which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iii. the Company shall materially fail to observe or perform any other covenant or agreement contained in, or a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under the specific terms of, any of the other Transaction Documents which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iv. any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
vii. [reserved];
viii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);
ix. the Company shall fail for any reason to deliver certificates to a Holder prior to the third Trading Day after a Conversion Date pursuant to Section 4(c) or the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof;
x. [reserved];
xi. if the Company or any Significant Subsidiary shall: (i) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its properties, (ii) make a general assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 11 of the United States Code or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute of any other jurisdiction or foreign country, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or (v) take or permit to be taken any action in furtherance of or for the purpose of effecting any of the foregoing;
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xii. if any order, judgment or decree shall be entered, without the application, approval or consent of the Company or any Significant Subsidiary, by any court of competent jurisdiction, approving a petition seeking liquidation or reorganization of the Company or any Subsidiary, or appointing a receiver, trustee, custodian or liquidator of the Company or any Subsidiary, or of all or any substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days;
xiii. the occurrence of any levy upon or seizure or attachment of, or any uninsured loss of or damage to, any property of the Company or any Subsidiary having an aggregate fair value or repair cost (as the case may be) in excess of $250,000 individually or in the aggregate, and any such levy, seizure or attachment shall not be set aside, bonded or discharged within thirty (30) days after the date thereof;
xiv. the Company or any subsidiary shall default on any of its obligations under any mortgage(s), credit agreement(s) or other facility, indenture agreement(s), factoring agreement(s) or other instrument(s) under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involve(s) obligations greater than $500,000 in the aggregate, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;
xv. any monetary judgement, writ or similar final process shall be entered or filed after the date hereof against the Company, any subsidiary or any of their respective property or assets for more than $250,000, and such judgement, writ or similar process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days; or
xvi. the Company shall fail to maintain sufficient reserved shares pursuant to Section 4.11 of the Purchase Agreement for a period of five (5) Trading Days after the Company has become or should have become aware of such failure.
(b) Remedies Upon Event of Default. Subject to the Beneficial Ownership Limitation as set forth in Section 4(d), if any Event of Default occurs, then the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash. After the occurrence of any Event of Default that results in the eventual acceleration of this Note, the interest rate on this Note shall accrue at an additional interest rate equal to the lesser of 2% per month (24% per annum) or the maximum rate permitted under applicable law. Upon the payment in full of the Note, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 6(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
7. Security. This Note is secured by the Security Agreement (as defined in the Purchase Agreement), executed by the Company in favor of the Holders encumbering the collateral set forth therein, as more specifically set forth in the Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note.
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8. Miscellaneous.
(a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, by email, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number, email or other address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section 7(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, by email or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, email or other address of the Holder appearing on the books of the Company, or if no such facsimile number, email or other address appears on the books of the Company, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto prior to 12:00 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 12:00 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.
(b) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.
(c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.
(d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in Bergen, Essex and Hudson Counties, State of New Jersey (the “New Jersey Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New Jersey Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New Jersey Courts, or such New Jersey Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
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(e) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.
(f) Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
(g) Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.
(h) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
(i) Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.
*********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
| Edible Garden AG Incorporated | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
Facsimile No. for delivery of Notices: None
Email address for delivery of Notices: jkras@ediblegarden.com
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and interest under the 15% OID Senior Secured Promissory Notes due August 22, 2022 of Edible Garden AG Incorporated (the “Company”), into shares of its common stock (the “Common Stock”), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:______________________________________
Principal Amount of Note to be Converted:________________________
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion at Issue.
Number of shares of Common Stock to be issued:___________________
__________________________
Signature
__________________________
Name
Delivery Instructions:
__________________________
__________________________
__________________________
__________________________
__________________________
Schedule 1
CONVERSION SCHEDULE
This 15% OID Senior Secured Promissory Notes due August 22, 2022 in the original principal amount of $402,500 is issued by Edible Garden AG Incorporated (the “Company”). This Conversion Schedule reflects conversions made under Section 4 of the above referenced Note.
Dated:
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EXHIBIT 10.17f
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
EDIBLE GARDEN AG INCORPORATED
| Warrant Shares: 96,988 | Initial Exercise Date: November 22, 2021 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, EVERGREEN CAPITAL MANAGEMENT LLC, or its assigns (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m., New York City Time, on November 22, 2026 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Edible Garden AG Incorporated, a Delaware corporation (the “Company”), up to 96,988 shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 1(b).
This Warrant is being issued pursuant to that certain Securities Purchase Agreement dated as of October 7, 2021 between the Holder and the Company, as amended (the “Securities Purchase Agreement”). In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Securities Purchase Agreement.
1. Exercise.
(a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto and within five (5) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 1(c) below. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within three (3) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall initially be $4.15, subject to adjustment hereunder (the “Exercise Price”).
(c) Cashless Exercise. If at any time after the six-month anniversary of the Initial Exercise Date, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may only be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
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| X = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 2(c).
Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 1(c).
(d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is five (5) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 1(d)(vi) prior to the issuance of such shares, having been paid.
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ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 1(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
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vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 1(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 1(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 1(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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2. Certain Adjustments.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 2(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.
(b) Subsequent Equity Sales. If, at any time while this Warrant is outstanding and prior to (and including) the closing of the Qualified Offering, the Company sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Exercise Price (such lower price, the “Base Exercise Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the then Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced to equal the Base Exercise Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, exercise price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Exercise Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Exercise Price in the Notice of Exercise.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 2(a) and 2(b) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, upon the exercise of this Warrant, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(e) [Reserved.]
(f) Calculations. All calculations under this Section 2 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 2, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
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(g) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 2, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that, following the closing of the IPO, any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
3. Transfer of Warrant.
(a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 3(d) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 3(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, make usual and customary representations as to investment intent to the Company.
(e) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
4. Miscellaneous.
(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 1(d)(i), except as expressly set forth in Section 2.
(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
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(d) Authorized Shares.
i. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
ii. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
iii. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
(e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the State of Delaware as they are applied to contracts executed, delivered and to be wholly performed within the State of Delaware.
(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and if the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
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(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the either party to the other shall be delivered in by recognized overnight courier, facsimile or email as follows:
If to the Holder:
Evergreen Capital Management LLC
156 West Saddle River Road
Saddle River, NJ 07458
Attn: Manager
Email: jpazdro@egcmllc.com
If to the Company:
Edible Garden AG Incorporated
283 County Road 519
Belvidere, New Jersey 07823
Attn: Chief Executive Officer
Email: jkras@ediblegarden.com
(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
(j) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
(l) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
(m) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
[Signature Page to Follow.]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| EDIBLE GARDEN AG INCORPORATED | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
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EXHIBIT A
NOTICE OF EXERCISE
TO: EDIBLE GARDEN AG INCORPORATED
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 1(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
__________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
__________________________________
__________________________________
__________________________________
(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
________________________
Name of Investing Entity:
________________________
Signature of Authorized Signatory of Investing Entity:
________________________
Name of Authorized Signatory
________________________
Title of Authorized Signatory
________________________
Date
EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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EXHIBIT 10.17g
THIS NOTE HAS BEEN ISSUED WITH “ORIGINAL ISSUE DISCOUNT” FOR U.S. FEDERAL INCOME TAX PURPOSES. THE ISSUER OF THIS NOTE WILL MAKE AVAILABLE TO ANY HOLDER OF THIS NOTE: (1) THE ISSUE PRICE AND ISSUE DATE OF THE NOTE, (2) THE AMOUNT OF ORIGINAL ISSUE DISCOUNT ON THE NOTE, (3) THE YIELD TO MATURITY OF THE NOTE, AND (4) ANY OTHER INFORMATION REQUIRED TO BE MADE AVAILABLE BY U.S. TREASURY REGULATIONS UPON RECEIVING A WRITTEN REQUEST FOR SUCH INFORMATION AT THE FOLLOWING ADDRESS: 13850 MANCHESTER RD., BALLWIN, MO 63011.
NEITHER THIS SECURITY NOR THE SECURITIES INTO WHICH THIS SECURITY IS CONVERTIBLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY AND THE SECURITIES ISSUABLE UPON CONVERSION OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
| Dated as of: | December 20, 2021 | Purchase Price: | $300,000 |
| Maturity Date: | Original Issue Discount: | $45,000 | |
| Interest Rate: | 5% | Original Principal Amount: | $345,000 |
15% OID SENIOR SECURED PROMISSORY NOTE
DUE SEPTEMBER 20, 2022
THIS 15% OID SENIOR SECURED PROMISSORY NOTE is one of a series of duly authorized and validly issued 15% OID Senior Secured Promissory Notes due September 20, 2022 of Edible Garden AG Incorporated, a Delaware corporation (the “Company”), having its principal place of business at 283 County Road 519, Belvidere, New Jersey 07823, designated as its 15% OID Senior Secured Promissory Notes due September 20, 2022 (this Note, the “Note” and, collectively with the other Notes of such series, the “Notes”).
FOR VALUE RECEIVED, the Company hereby promises to pay to the order of Evergreen Capital Management LLC or its registered assigns or successors-in-interest (the “Holder”), or shall have paid pursuant to the terms hereunder, the principal amount set forth above on September 20, 2022 (the “Maturity Date”) or such earlier date as this Note is required or permitted to be repaid as provided hereunder, and to pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note in accordance with the provisions hereof.
This Note is being issued pursuant to that Securities Purchase Agreement dated as of October 7, 2021, as amended (the “Purchase Agreement”) between the Company and the Holder (defined below) and the other purchasers, if any, of the Notes.
This Note is subject to the following additional provisions:
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1. Definitions. For the purposes hereof, in addition to the terms defined elsewhere in this Note, (a) capitalized terms not otherwise defined herein shall have the meanings set forth in the Purchase Agreement and (b) the following terms shall have the following meanings:
“Alternate Consideration” shall have the meaning set forth in Section 5(e).
“Bankruptcy Event” means any of the following events: (a) the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Company or any Significant Subsidiary thereof, (b) there is commenced against the Company or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement, (c) the Company or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Company or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 calendar days after such appointment, (e) the Company or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Company or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts or (g) the Company or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
“Base Conversion Price” shall have the meaning set forth in Section 5(b).
“Beneficial Ownership Limitation” shall have the meaning set forth in Section 4(d).
“Change of Control Transaction” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Company, by contract or otherwise) of in excess of 50% of the voting securities of the Company (other than by means of conversion or exercise of the Notes and the Securities issued together with the Notes), (b) the Company merges into or consolidates with any other Person, or any Person merges into or consolidates with the Company and, after giving effect to such transaction, the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the Company or the successor entity of such transaction, (c) the Company sells or transfers all or substantially all of its assets to another Person and the stockholders of the Company immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a three-year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the date hereof), or (e) the execution by the Company of an agreement to which the Company is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.
“Conversion” shall have the meaning ascribed to such term in Section 4.
“Conversion Date” shall have the meaning set forth in Section 4(a).
“Conversion Price” shall have the meaning set forth in Section 4(b).
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“Conversion Schedule” means the Conversion Schedule in the form of Schedule 1 attached hereto.
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of this Note in accordance with the terms hereof.
“Dilutive Issuance” shall have the meaning set forth in Section 5(b).
“Dilutive Issuance Notice” shall have the meaning set forth in Section 5(b).
“Event of Default” shall have the meaning set forth in Section 6(a).
“Fundamental Transaction” shall have the meaning set forth in Section 5(e).
“IPO” means the consummation of the first underwritten public offering of Common Stock under the Securities Act.
“Late Fees” shall have the meaning set forth in Section 2(c).
“New Jersey Courts” shall have the meaning set forth in Section 7(d).
“Note Register” shall have the meaning set forth in Section 2(b).
“Notice of Conversion” shall have the meaning set forth in Section 4(a).
“Original Issue Date” means the date of the first issuance of this Note, regardless of any transfers of any Note and regardless of the number of instruments which may be issued to evidence such Notes.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 4(c)(ii).
“Successor Entity” shall have the meaning set forth in Section 5(e).
“Trading Market” means any of the following markets or exchanges on which the Common Stock (or any other common stock of any other Person that references the Trading Market for its common stock) is listed or quoted for trading on the date in question: The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE Arca, the NYSE American, the OTCQX Marketplace, the OTCQB Marketplace, the OTC Pink Marketplace or any other tier operated by OTC Markets Group Inc. (or any successor to any of the foregoing).
2. Interest and Prepayments.
(a) Payment of Interest in Cash. The Company shall pay interest to the Holder on the aggregate unconverted and then outstanding principal amount of this Note at the rate of five percent (5%) per annum. All interest payments hereunder will be payable in cash. Accrued and unpaid interest shall be due on payable on the Maturity Date, or as otherwise set forth herein.
(b) Interest Calculations. Interest shall be calculated on the basis of a 360-day year, consisting of twelve 30 calendar day periods, and shall accrue daily commencing on the Original Issue Date until payment in full of the outstanding principal, together with all accrued and unpaid interest, liquidated damages and other amounts which may become due hereunder, has been made. Interest hereunder will be paid to the Person in whose name this Note is registered on the records of the Company regarding registration and transfers of this Note (the “Note Register”).
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(c) Late Fee. All overdue accrued and unpaid interest to be paid hereunder shall entail a late fee at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law (the “Late Fees”) which shall accrue daily from the date such interest is due hereunder through and including the date of actual payment in full.
(d) Prepayment. This Note may be prepaid by the Company in whole or in part at any time or from time to time, upon at least three (3) Business Days prior written notice to the Holder. If the Company exercises its right to prepay this Note at any time on or prior to November 30, 2021, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 15% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note after November 30, 2021 and prior to January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 20% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period. If the Company exercises its right to prepay this Note at any time on or after January 1, 2022, the Company shall make payment to the Holder of an amount in cash equal to the sum of the then outstanding principal amount of this Note and accrued interest thereon, plus a prepayment premium equal to 30% of the principal amount of this Note to be prepaid, within three (3) Business Days after such three (3) Business Day period.
(e) Prepayment Upon Qualified Financing. If the Company completes a Qualified Financing (as defined below), the Company shall repay in full the then-outstanding principal amount of this Note and any accrued but unpaid interest, plus an amount equal to the applicable prepayment premium on the date of such repayment. Such repayment shall be due within one (1) Business Day of the closing of the Qualified Financing. The Company shall give written notice to Holder as soon as practicable, but in no event less than three (3) Business Days before the anticipated closing date of such Qualified Financing, during which period Holder shall have the opportunity to convert this Note pursuant to Section 4 hereof. The term “Qualified Financing” shall mean that the Company issues and sells shares of its equity securities to investors on or before the Maturity Date in an equity financing with total gross proceeds to the Company of not less than $5,000,000 (excluding the conversion of the notes or other convertible securities issued for capital raising purposes).
3. Registration of Transfers and Exchanges.
(a) Different Denominations. This Note is exchangeable for an equal aggregate principal amount of Notes of different authorized denominations, as requested by the Holder surrendering the same. No service charge will be payable for such registration of transfer or exchange.
(b) Investment Representations. This Note has been issued subject to certain investment representations of the original Holder set forth in the Purchase Agreement and may be transferred or exchanged only in compliance with the Purchase Agreement and applicable federal and state securities laws and regulations.
(c) Reliance on Note Register. Prior to due presentment for transfer to the Company of this Note, the Company and any agent of the Company may treat the Person in whose name this Note is duly registered on the Note Register as the owner hereof for the purpose of receiving payment as herein provided and for all other purposes, whether or not this Note is overdue, and neither the Company nor any such agent shall be affected by notice to the contrary.
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4. Conversion.
(a) Voluntary Conversion. This Note shall be convertible, in whole or in part, into shares of Common Stock at the option of the Holder, at any time and from time to time (subject to the conversion limitations set forth in Section 4(d) hereof), but only with the prior written consent of the Company. The Holder shall effect conversions by delivering to the Company a Notice of Conversion, the form of which is attached hereto as Annex A (each, a “Notice of Conversion”), specifying therein the principal amount of this Note to be converted, accrued and unpaid interest outstanding under this Note to be converted, and the date on which such conversion shall be effected (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required. To effect conversions hereunder, the Holder shall not be required to physically surrender this Note to the Company unless the entire principal amount of this Note, plus all accrued and unpaid interest thereon, has been so converted. Conversions hereunder shall have the effect of lowering the outstanding principal amount of this Note in an amount equal to the applicable conversion. The Holder and the Company shall maintain a Conversion Schedule showing the principal amount(s) converted and the date of such conversion(s). The Company may deliver an objection to any Notice of Conversion within three (3) Business Days of delivery of such Notice of Conversion. In the event of any dispute or discrepancy, the records of the Holder shall be controlling and determinative in the absence of manifest error. The Holder, and any assignee by acceptance of this Note, acknowledge and agree that, by reason of the provisions of this paragraph, following conversion of a portion of this Note, the unpaid and unconverted principal amount of this Note may be less than the amount stated on the face hereof.
(b) Conversion Price. The conversion price in effect on any Conversion Date shall be equal to $4.15 (the “Conversion Price”).
(c) Mechanics of Conversion.
i. Conversion Shares Issuable Upon Conversion of Principal Amount and Interest. The number of Conversion Shares issuable upon a conversion hereunder shall be determined by the quotient obtained by dividing (x) the outstanding principal amount of this Note to be converted and any accrued and unpaid interest to be converted, by (y) the Conversion Price.
ii. Delivery of Certificate Upon Conversion. Not later than three (3) Trading Days after each Conversion Date (the “Share Delivery Date”), the Company shall deliver, or cause to be delivered, to the Holder (A) a certificate or certificates representing the Conversion Shares which, on or after the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information and the Company has received an opinion of counsel to such effect reasonably acceptable to the Company, shall be free of restrictive legends and trading restrictions (other than those which may then be required by the Purchase Agreement) representing the number of Conversion Shares being acquired upon the conversion of this Note, and (B) a bank check in the amount of accrued and unpaid interest (if the Company has elected or is required to pay accrued interest in cash). All certificate or certificates required to be delivered by the Company under this Section 4(c) shall be delivered electronically through the Depository Trust Company or another established clearing corporation performing similar functions, if available. If the Conversion Date is prior to the date on which such Conversion Shares are eligible to be sold under Rule 144 without the need for current public information the Conversion Shares shall bear a restrictive legend in the following form, as appropriate:
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| “NEITHER THE ISSUANCE AND SALE OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE NOR THE SECURITIES INTO WHICH THESE SECURITIES ARE EXERCISABLE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED (I) IN THE ABSENCE OF (A) AN EFFECTIVE REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR (B) AN OPINION OF COUNSEL (WHICH COUNSEL SHALL BE SELECTED BY THE HOLDER), IN A GENERALLY ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR (II) UNLESS SOLD PURSUANT TO RULE 144 OR RULE 144A UNDER SAID ACT. NOTWITHSTANDING THE FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY THE SECURITIES.” |
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iii. Failure to Deliver Certificates. If, in the case of any Notice of Conversion, such certificate or certificates are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Company at any time on or before its receipt of such certificate or certificates, to rescind such Conversion, in which event the Company shall promptly return to the Holder any original Note delivered to the Company and the Holder shall promptly return to the Company the Common Stock certificates issued to such Holder pursuant to the rescinded Conversion Notice. Notwithstanding the obligations of the Company contained in Section 4(c) to deliver share certificates, any requirement to deliver share certificates shall be remedied by recording share issuances in favor of the Holder in book entry form and delivery to the Holder of written evidence of such share issuances.
iv. Obligation Absolute; Partial Liquidated Damages. The Company’s obligations to issue and deliver the Conversion Shares upon conversion of this Note in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by the Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by the Holder or any other Person of any obligation to the Company or any violation or alleged violation of law by the Holder or any other Person, and irrespective of any other circumstance which might otherwise limit such obligation of the Company to the Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Company of any such action the Company may have against the Holder. Nothing herein shall limit a Holder’s right to pursue actual damages or declare an Event of Default pursuant to Section 6 hereof for the Company’s failure to deliver Conversion Shares within the period specified herein and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
vi. Reservation of Shares Issuable Upon Conversion. The Company covenants that it will at all times reserve and keep available out of its authorized and unissued shares of Common Stock a number of shares of Common Stock at least equal to the Required Minimum for the sole purpose of issuance upon conversion of this Note and payment of interest on this Note, each as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Holder (and the other holders of the Notes), not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 5) upon the conversion of the then outstanding principal amount of this Note and payment of interest hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable.
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vii. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of this Note. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Company shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
viii. Transfer Taxes and Expenses. The issuance of certificates for shares of the Common Stock on conversion of this Note shall be made without charge to the Holder hereof for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such certificates, provided that, the Company shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such certificate upon conversion in a name other than that of the Holder of this Note so converted and the Company shall not be required to issue or deliver such certificates unless or until the Person or Persons requesting the issuance thereof shall have paid to the Company the amount of such tax or shall have established to the satisfaction of the Company that such tax has been paid. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Conversion.
(d) Holder’s Conversion Limitations. Following the IPO, the Company shall not effect any conversion of principal and/or interest of this Note, and a Holder shall not have the right to convert any principal and/or interest of this Note, to the extent that after giving effect to the conversion set forth on the applicable Notice of Conversion, the Holder (together with the Holder’s Affiliates, and any Persons acting as a group together with the Holder or any of the Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of this Note with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted principal amount of this Note beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Company subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, any other Notes or the Warrants) beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 4(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 4(d) applies, the determination of whether this Note is convertible (in relation to other securities owned by the Holder together with any Affiliates) and of which principal amount of this Note is convertible shall be in the sole discretion of the Holder, and the submission of a Notice of Conversion shall be deemed to be the Holder’s determination of whether this Note may be converted (in relation to other securities owned by the Holder together with any Affiliates) and which principal amount of this Note is convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Company each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 4(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Company, or (iii) a more recent written notice by the Company or the Company’s transfer agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Note, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of this Note held by the Holder. The Holder, upon not less than 61 days’ prior notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 4(d), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of this Note held by the Holder and the Beneficial Ownership Limitation provisions of this Section 4(d) shall continue to apply. Any such increase or decrease will not be effective until the 61st day after such notice is delivered to the Company. The Beneficial Ownership Limitation provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 4(d) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation contained herein or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Note.
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5. Certain Adjustments.
(a) Stock Dividends and Stock Splits. If the Company, at any time while this Note is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions payable in shares of Common Stock on shares of Common Stock or any Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon conversion of, or payment of interest on, the Notes), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Company, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Company) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re‑classification.
(b) Subsequent Equity Sales. If, at any time while this Note is outstanding and prior to (but including) the closing of the Qualified Offering, the Company or any Subsidiary, as applicable, sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Conversion Price (such lower price, the “Base Conversion Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the Conversion Price, such issuance shall be deemed to have occurred for less than the Conversion Price on such date of the Dilutive Issuance), then the Conversion Price shall be reduced to equal the Base Conversion Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 5(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 5(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 5(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Conversion Shares based upon the Base Conversion Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Conversion Price in the Notice of Conversion.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 5 above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Note is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Note, then, in each such case, upon conversion of this Note, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of this Note (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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(e) Fundamental Transaction. If, at any time while this Note is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person whereby such other Person acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of this Note, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock for which this Note is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 4(d) on the conversion of this Note). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one (1) share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this Note following such Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Note and the other Transaction Documents (as defined in the Purchase Agreement) in accordance with the provisions of this Section 5(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the holder of this Note, deliver to the Holder in exchange for this Note a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to this Note which is convertible for a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of this Note (without regard to any limitations on the conversion of this Note) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of this Note immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Note and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Note and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
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(f) Calculations. All calculations under this Section 5 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 5, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Company) issued and outstanding.
(g) Notice to the Holder.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 5, the Company shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be filed at each office or agency maintained for the purpose of conversion of this Note, and shall cause to be delivered to the Holder at its last address as it shall appear upon the Note Register, at least ten (10) calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. The Holder shall remain entitled to convert this Note during the 10-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
(h) Adjustment for More Favorable Terms Contained in Future Financings. So long as this Note is outstanding, upon any issuance by the Company or any of its subsidiaries of any convertible security, including any convertible debt security (whether such debt begins with a convertible feature or such feature is added at a later date) or other Common Stock Equivalents, with any term more favorable to the holder of such security or with a term in favor of the holder of such security that was not similarly provided to the Holder in this Note, then the Company shall notify the Holder of such additional or more favorable term and such term, at the Holder’s option, shall become a part of this Note and its supporting documentation. The types of terms contained in the other security that may be more favorable to the holder of such security include, but are not limited to, terms addressing conversion discounts, conversion look back periods, interest rates, original issue discount percentages and warrant coverage.
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6. Events of Default.
(a) “Event of Default” means, wherever used herein, any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
i. any default in the payment of (A) the principal amount of any Note or (B) interest, liquidated damages and other amounts owing to a Holder on any Note, as and when the same shall become due and payable (whether on a Conversion Date or the Maturity Date or by acceleration or otherwise) which default, solely in the case of an interest payment or other default under clause (B) above, is not cured within four (4) Trading Days;
ii. the Company shall materially fail to observe or perform any other covenant or agreement contained in the Notes (other than a breach by the Company of its obligations to deliver shares of Common Stock to the Holder upon conversion, which breach is addressed in clause (ix) below) which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iii. the Company shall materially fail to observe or perform any other covenant or agreement contained in, or a default or event of default (subject to any grace or cure period provided in the applicable agreement, document or instrument) shall occur under the specific terms of, any of the other Transaction Documents which failure is not cured, if possible to cure, within the earlier to occur of (A) five (5) Trading Days after notice of such failure sent by the Holder or by any other Holder to the Company and (B) ten (10) Trading Days after the Company has become or should have become aware of such failure;
iv. any representation or warranty made in this Note, any other Transaction Documents, any written statement pursuant hereto or thereto or any other report, financial statement or certificate made or delivered to the Holder shall be untrue or incorrect in any material respect as of the date when made or deemed made;
v. the Company or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) shall be subject to a Bankruptcy Event;
vii. [reserved];
viii. the Company shall be a party to any Change of Control Transaction or Fundamental Transaction or shall agree to sell or dispose of all or in excess of 50% of its assets in one transaction or a series of related transactions (whether or not such sale would constitute a Change of Control Transaction);
ix. the Company shall fail for any reason to deliver certificates to a Holder prior to the third Trading Day after a Conversion Date pursuant to Section 4(c) or the Company shall provide at any time notice to the Holder, including by way of public announcement, of the Company’s intention to not honor requests for conversions of any Notes in accordance with the terms hereof;
x. [reserved];
xi. if the Company or any Significant Subsidiary shall: (i) apply for or consent to the appointment of a receiver, trustee, custodian or liquidator of it or any of its properties, (ii) make a general assignment for the benefit of creditors, (iii) be adjudicated a bankrupt or insolvent or be the subject of an order for relief under Title 11 of the United States Code or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute of any other jurisdiction or foreign country, or (iv) file a voluntary petition in bankruptcy, or a petition or an answer seeking reorganization or an arrangement with creditors or to take advantage or any bankruptcy, reorganization, insolvency, readjustment of debt, dissolution or liquidation law or statute, or an answer admitting the material allegations of a petition filed against it in any proceeding under any such law, or (v) take or permit to be taken any action in furtherance of or for the purpose of effecting any of the foregoing;
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xii. if any order, judgment or decree shall be entered, without the application, approval or consent of the Company or any Significant Subsidiary, by any court of competent jurisdiction, approving a petition seeking liquidation or reorganization of the Company or any Subsidiary, or appointing a receiver, trustee, custodian or liquidator of the Company or any Subsidiary, or of all or any substantial part of its assets, and such order, judgment or decree shall continue unstayed and in effect for any period of sixty (60) days;
xiii. the occurrence of any levy upon or seizure or attachment of, or any uninsured loss of or damage to, any property of the Company or any Subsidiary having an aggregate fair value or repair cost (as the case may be) in excess of $250,000 individually or in the aggregate, and any such levy, seizure or attachment shall not be set aside, bonded or discharged within thirty (30) days after the date thereof;
xiv. the Company or any subsidiary shall default on any of its obligations under any mortgage(s), credit agreement(s) or other facility, indenture agreement(s), factoring agreement(s) or other instrument(s) under which there may be issued, or by which there may be secured or evidenced, any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement that (a) involve(s) obligations greater than $500,000 in the aggregate, whether such indebtedness now exists or shall hereafter be created, and (b) results in such indebtedness becoming or being declared due and payable prior to the date on which it would otherwise become due and payable;
xv. any monetary judgement, writ or similar final process shall be entered or filed after the date hereof against the Company, any subsidiary or any of their respective property or assets for more than $250,000, and such judgement, writ or similar process shall remain unvacated, unbonded or unstayed for a period of 45 calendar days; or
xvi. the Company shall fail to maintain sufficient reserved shares pursuant to Section 4.11 of the Purchase Agreement for a period of five (5) Trading Days after the Company has become or should have become aware of such failure.
(b) Remedies Upon Event of Default. Subject to the Beneficial Ownership Limitation as set forth in Section 4(d), if any Event of Default occurs, then the outstanding principal amount of this Note, plus accrued but unpaid interest, liquidated damages and other amounts owing in respect thereof through the date of acceleration, shall become, at the Holder’s election, immediately due and payable in cash. After the occurrence of any Event of Default that results in the eventual acceleration of this Note, the interest rate on this Note shall accrue at an additional interest rate equal to the lesser of 2% per month (24% per annum) or the maximum rate permitted under applicable law. Upon the payment in full of the Note, the Holder shall promptly surrender this Note to or as directed by the Company. In connection with such acceleration described herein, the Holder need not provide, and the Company hereby waives, any presentment, demand, protest or other notice of any kind, and the Holder may immediately and without expiration of any grace period enforce any and all of its rights and remedies hereunder and all other remedies available to it under applicable law. Such acceleration may be rescinded and annulled by Holder at any time prior to payment hereunder and the Holder shall have all rights as a holder of the Note until such time, if any, as the Holder receives full payment pursuant to this Section 6(b). No such rescission or annulment shall affect any subsequent Event of Default or impair any right consequent thereon.
7. Security. This Note is secured by the Security Agreement (as defined in the Purchase Agreement), executed by the Company in favor of the Holders encumbering the collateral set forth therein, as more specifically set forth in the Security Agreement, all the terms and conditions of which are hereby incorporated into and made a part of this Note.
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8. Miscellaneous.
(a) Notices. Any and all notices or other communications or deliveries to be provided by the Holder hereunder, including, without limitation, any Notice of Conversion, shall be in writing and delivered personally, by facsimile, by email, or sent by a nationally recognized overnight courier service, addressed to the Company, at the address set forth above, or such other facsimile number, email or other address as the Company may specify for such purposes by notice to the Holder delivered in accordance with this Section 7(a). Any and all notices or other communications or deliveries to be provided by the Company hereunder shall be in writing and delivered personally, by facsimile, by email or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number, email or other address of the Holder appearing on the books of the Company, or if no such facsimile number, email or other address appears on the books of the Company, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto prior to 12:00 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile or via email at the facsimile number or email set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 12:00 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (iv) upon actual receipt by the party to whom such notice is required to be given.
(b) Absolute Obligation. Except as expressly provided herein, no provision of this Note shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of, liquidated damages and accrued interest, as applicable, on this Note at the time, place, and rate, and in the coin or currency, herein prescribed. This Note is a direct debt obligation of the Company.
(c) Lost or Mutilated Note. If this Note shall be mutilated, lost, stolen or destroyed, the Company shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated Note, or in lieu of or in substitution for a lost, stolen or destroyed Note, a new Note for the principal amount of this Note so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such Note, and of the ownership hereof, reasonably satisfactory to the Company.
(d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of Delaware, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, shareholders, employees or agents) shall be commenced in the state and federal courts sitting in Bergen, Essex and Hudson Counties, State of New Jersey (the “New Jersey Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New Jersey Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New Jersey Courts, or such New Jersey Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Note or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Note, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorney’s fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
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(e) Waiver. Any waiver by the Company or the Holder of a breach of any provision of this Note shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Note. The failure of the Company or the Holder to insist upon strict adherence to any term of this Note on one or more occasions shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Note on any other occasion. Any waiver by the Company or the Holder must be in writing.
(f) Severability. If any provision of this Note is invalid, illegal or unenforceable, the balance of this Note shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law. The Company covenants (to the extent that it may lawfully do so) that it shall not at any time insist upon, plead, or in any manner whatsoever claim or take the benefit or advantage of, any stay, extension or usury law or other law which would prohibit or forgive the Company from paying all or any portion of the principal of or interest on this Note as contemplated herein, wherever enacted, now or at any time hereafter in force, or which may affect the covenants or the performance of this Note, and the Company (to the extent it may lawfully do so) hereby expressly waives all benefits or advantage of any such law, and covenants that it will not, by resort to any such law, hinder, delay or impede the execution of any power herein granted to the Holder, but will suffer and permit the execution of every such as though no such law has been enacted.
(g) Remedies, Characterizations, Other Obligations, Breaches and Injunctive Relief. The remedies provided in this Note shall be cumulative and in addition to all other remedies available under this Note and any of the other Transaction Documents at law or in equity (including a decree of specific performance and/or other injunctive relief), and nothing herein shall limit the Holder’s right to pursue actual and consequential damages for any failure by the Company to comply with the terms of this Note. The Company covenants to the Holder that there shall be no characterization concerning this instrument other than as expressly provided herein. Amounts set forth or provided for herein with respect to payments, conversion and the like (and the computation thereof) shall be the amounts to be received by the Holder and shall not, except as expressly provided herein, be subject to any other obligation of the Company (or the performance thereof). The Company acknowledges that a breach by it of its obligations hereunder will cause irreparable harm to the Holder and that the remedy at law for any such breach may be inadequate. The Company therefore agrees that, in the event of any such breach or threatened breach, the Holder shall be entitled, in addition to all other available remedies, to an injunction restraining any such breach or any such threatened breach, without the necessity of showing economic loss and without any bond or other security being required. The Company shall provide all information and documentation to the Holder that is requested by the Holder to enable the Holder to confirm the Company’s compliance with the terms and conditions of this Note.
(h) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
(i) Headings. The headings contained herein are for convenience only, do not constitute a part of this Note and shall not be deemed to limit or affect any of the provisions hereof.
*********************
(Signature Pages Follow)
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IN WITNESS WHEREOF, the Company has caused this Note to be duly executed by a duly authorized officer as of the date first above indicated.
| Edible Garden AG Incorporated | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
Facsimile No. for delivery of Notices: None
Email address for delivery of Notices: jkras@ediblegarden.com
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ANNEX A
NOTICE OF CONVERSION
The undersigned hereby elects to convert principal and interest under the 15% OID Senior Secured Promissory Notes due September 20, 2022 of Edible Garden AG Incorporated (the “Company”), into shares of its common stock (the “Common Stock”), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Company in accordance therewith. No fee will be charged to the holder for any conversion, except for such transfer taxes, if any.
By the delivery of this Notice of Conversion the undersigned represents and warrants to the Company that its ownership of the Common Stock does not exceed the amounts specified under Section 4 of this Note, as determined in accordance with Section 13(d) of the Exchange Act.
The undersigned agrees to comply with the prospectus delivery requirements under the applicable securities laws in connection with any transfer of the aforesaid shares of Common Stock.
Conversion calculations:
Date to Effect Conversion:______________________________________
Principal Amount of Note to be Converted:________________________
Payment of Interest in Common Stock __ yes __ no
If yes, $_____ of Interest Accrued on Account of Conversion at Issue.
Number of shares of Common Stock to be issued:___________________
__________________________
Signature
__________________________
Name
Delivery Instructions:
__________________________
__________________________
__________________________
__________________________
__________________________
Schedule 1
CONVERSION SCHEDULE
This 15% OID Senior Secured Promissory Notes due September 20, 2022 in the original principal amount of $345,000 is issued by Edible Garden AG Incorporated (the “Company”). This Conversion Schedule reflects conversions made under Section 4 of the above referenced Note.
Dated:
| Date of Conversion (or for first entry, Original Issue Date) | Amount of Conversion | Aggregate Principal Amount Remaining Subsequent to Conversion (or original Principal Amount) |
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EXHIBIT 10.17h
NEITHER THIS SECURITY NOR THE SECURITIES FOR WHICH THIS SECURITY IS EXERCISABLE HAVE BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS. THIS SECURITY AND THE SECURITIES ISSUABLE UPON EXERCISE OF THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT OR OTHER LOAN SECURED BY SUCH SECURITIES.
COMMON STOCK PURCHASE WARRANT
Edible Garden AG Incorporated
| Warrant Shares: 83,133 | Initial Exercise Date: December 20, 2021 |
THIS COMMON STOCK PURCHASE WARRANT (the “Warrant”) certifies that, for value received, EVERGREEN CAPITAL MANAGEMENT LLC, or its assigns (the “Holder”), is entitled, upon the terms and subject to the limitations on exercise and the conditions hereinafter set forth, at any time on or after the date hereof (the “Initial Exercise Date”) and on or prior to 5:00 p.m., New York City Time, on December 20, 2026 (the “Termination Date”) but not thereafter, to subscribe for and purchase from Edible Garden AG Incorporated, a Delaware corporation (the “Company”), up to 83,133 shares (as subject to adjustment hereunder, the “Warrant Shares”) of Common Stock. The purchase price of one share of Common Stock under this Warrant shall be equal to the Exercise Price, as defined in Section 1(b).
This Warrant is being issued pursuant to that certain Securities Purchase Agreement dated as of October 7, 2021 between the Holder and the Company, as amended (the “Securities Purchase Agreement”). In addition to the terms defined elsewhere in this Warrant, capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Securities Purchase Agreement.
1. Exercise.
(a) Exercise of Warrant. Exercise of the purchase rights represented by this Warrant may be made, in whole or in part, at any time or times on or after the Initial Exercise Date and on or before the Termination Date by delivery to the Company (or such other office or agency of the Company as it may designate by notice in writing to the registered Holder at the address of the Holder appearing on the books of the Company) of a duly executed facsimile copy (or e-mail attachment) of the Notice of Exercise in the form annexed hereto and within five (5) Trading Days of the date said Notice of Exercise is delivered to the Company, the Company shall have received payment of the aggregate Exercise Price of the shares thereby purchased by wire transfer or cashier’s check drawn on a United States bank or, if available, pursuant to the cashless exercise procedure specified in Section 1(c) below. No ink-original Notice of Exercise shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Exercise form be required. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company until the Holder has purchased all of the Warrant Shares available hereunder and the Warrant has been exercised in full, in which case, the Holder shall surrender this Warrant to the Company for cancellation within five (5) Trading Days of the date the final Notice of Exercise is delivered to the Company. Partial exercises of this Warrant resulting in purchases of a portion of the total number of Warrant Shares available hereunder shall have the effect of lowering the outstanding number of Warrant Shares purchasable hereunder in an amount equal to the applicable number of Warrant Shares purchased. The Holder and the Company shall maintain records showing the number of Warrant Shares purchased and the date of such purchases. The Company shall deliver any objection to any Notice of Exercise within three (3) Business Day of receipt of such notice. The Holder and any assignee, by acceptance of this Warrant, acknowledge and agree that, by reason of the provisions of this paragraph, following the purchase of a portion of the Warrant Shares hereunder, the number of Warrant Shares available for purchase hereunder at any given time may be less than the amount stated on the face hereof.
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(b) Exercise Price. The exercise price per share of the Common Stock under this Warrant shall initially be $4.15, subject to adjustment hereunder (the “Exercise Price”).
(c) Cashless Exercise. If at any time after the six-month anniversary of the Initial Exercise Date, there is no effective Registration Statement registering, or no current prospectus available for, the resale of the Warrant Shares by the Holder, then this Warrant may only be exercised, in whole or in part, at such time by means of a “cashless exercise” in which the Holder shall be entitled to receive a number of Warrant Shares equal to the quotient obtained by dividing [(A-B) (X)] by (A), where:
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| A = | the VWAP on the Trading Day immediately preceding the date on which Holder elects to exercise this Warrant by means of a “cashless exercise,” as set forth in the applicable Notice of Exercise; |
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| B = | the Exercise Price of this Warrant, as adjusted hereunder; and |
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| X = | the number of Warrant Shares that would be issuable upon exercise of this Warrant in accordance with the terms of this Warrant if such exercise were by means of a cash exercise rather than a cashless exercise. |
If Warrant Shares are issued in such a cashless exercise, the parties acknowledge and agree that in accordance with Section 3(a)(9) of the Securities Act, the Warrant Shares shall take on the characteristics of the Warrants being exercised, and the holding period of the Warrants being exercised may be tacked on to the holding period of the Warrant Shares. The Company agrees not to take any position contrary to this Section 2(c).
Notwithstanding anything herein to the contrary, on the Termination Date, this Warrant shall be automatically exercised via cashless exercise pursuant to this Section 1(c).
(d) Mechanics of Exercise.
i. Delivery of Warrant Shares Upon Exercise. Warrant Shares purchased hereunder shall be transmitted by the Transfer Agent to the Holder by crediting the account of the Holder’s or its designee’s balance account with The Depository Trust Company through its Deposit or Withdrawal at Custodian system (“DWAC”) if the Company is then a participant in such system and either (A) there is an effective registration statement permitting the issuance of the Warrant Shares to or resale of the Warrant Shares by the Holder or (B) the Warrant Shares are eligible for resale by the Holder without volume or manner-of-sale limitations pursuant to Rule 144, and otherwise by physical delivery of a certificate, registered in the Company’s share register in the name of the Holder or its designee, for the number of Warrant Shares to which the Holder is entitled pursuant to such exercise to the address specified by the Holder in the Notice of Exercise by the date that is five (5) Trading Days after the delivery to the Company of the Notice of Exercise (such date, the “Warrant Share Delivery Date”). The Warrant Shares shall be deemed to have been issued, and Holder or any other person so designated to be named therein shall be deemed to have become a holder of record of such shares for all purposes, as of the date the Warrant has been exercised, with payment to the Company of the Exercise Price (or by cashless exercise, if permitted) and all taxes required to be paid by the Holder, if any, pursuant to Section 1(d)(vi) prior to the issuance of such shares, having been paid.
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ii. Delivery of New Warrants Upon Exercise. If this Warrant shall have been exercised in part, the Company shall, at the request of a Holder and upon surrender of this Warrant, at the time of delivery of the Warrant Shares, deliver to the Holder a new Warrant evidencing the rights of the Holder to purchase the unpurchased Warrant Shares called for by this Warrant, which new Warrant shall in all other respects be identical with this Warrant.
iii. Rescission Rights. If the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to Section 1(d)(i) by the Warrant Share Delivery Date, then the Holder will have the right to rescind such exercise.
iv. Compensation for Buy-In on Failure to Timely Deliver Warrant Shares Upon Exercise. In addition to any other rights available to the Holder, if the Company fails to cause the Transfer Agent to transmit to the Holder the Warrant Shares pursuant to an exercise on or before the Warrant Share Delivery Date, and if after such date the Holder is required by its broker to purchase (in an open market transaction or otherwise) or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by the Holder of the Warrant Shares that the Holder anticipated receiving upon such exercise (a “Buy-In”), then the Company shall (A) pay in cash to the Holder the amount, if any, by which (x) the Holder’s total purchase price (including brokerage commissions, if any) for the shares of Common Stock so purchased exceeds (y) the amount obtained by multiplying (1) the number of Warrant Shares that the Company was required to deliver to the Holder in connection with the exercise at issue times (2) the price at which the sell order giving rise to such purchase obligation was executed, and (B) at the option of the Holder, either reinstate the portion of the Warrant and equivalent number of Warrant Shares for which such exercise was not honored (in which case such exercise shall be deemed rescinded) or deliver to the Holder the number of shares of Common Stock that would have been issued had the Company timely complied with its exercise and delivery obligations hereunder. For example, if the Holder purchases Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted exercise of shares of Common Stock with an aggregate sale price giving rise to such purchase obligation of $10,000, under clause (A) of the immediately preceding sentence the Company shall be required to pay the Holder $1,000. The Holder shall provide the Company written notice indicating the amounts payable to the Holder in respect of the Buy-In and, upon request of the Company, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to timely deliver shares of Common Stock upon exercise of the Warrant as required pursuant to the terms hereof.
v. No Fractional Shares or Scrip. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such exercise, the Company shall, at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Exercise Price or round up to the next whole share.
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vi. Charges, Taxes and Expenses. Issuance of Warrant Shares shall be made without charge to the Holder for any issue or transfer tax or other incidental expense in respect of the issuance of Warrant Shares, all of which taxes and expenses shall be paid by the Company, and such Warrant Shares shall be issued in the name of the Holder or in such name or names as may be directed by the Holder; provided, however, that in the event that Warrant Shares are to be issued in a name other than the name of the Holder, this Warrant when surrendered for exercise shall be accompanied by the Assignment Form attached hereto duly executed by the Holder and the Company may require, as a condition thereto, the payment of a sum sufficient to reimburse it for any transfer tax incidental thereto. The Company shall pay all Transfer Agent fees required for same-day processing of any Notice of Exercise and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Warrant Shares.
vii. Closing of Books. The Company will not close its stockholder books or records in any manner which prevents the timely exercise of this Warrant, pursuant to the terms hereof.
(e) Holder’s Exercise Limitations. The Company shall not effect any exercise of this Warrant, and a Holder shall not have the right to exercise any portion of this Warrant, pursuant to Section 2 or otherwise, to the extent that after giving effect to such issuance after exercise as set forth on the applicable Notice of Exercise, the Holder (together with the Holder’s Affiliates, and any other Persons acting as a group together with the Holder or any of the Holder’s Affiliates), would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by the Holder and its Affiliates shall include the number of shares of Common Stock issuable upon exercise of this Warrant with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which would be issuable upon (i) exercise of the remaining, nonexercised portion of this Warrant beneficially owned by the Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or nonconverted portion of any other securities of the Company (including, without limitation, any other Common Stock Equivalents) subject to a limitation on conversion or exercise analogous to the limitation contained herein beneficially owned by the Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 1(e), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder, it being acknowledged by the Holder that the Company is not representing to the Holder that such calculation is in compliance with Section 13(d) of the Exchange Act and the Holder is solely responsible for any schedules required to be filed in accordance therewith. To the extent that the limitation contained in this Section 1(e) applies, the determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable shall be in the sole discretion of the Holder, and the submission of a Notice of Exercise shall be deemed to be the Holder’s determination of whether this Warrant is exercisable (in relation to other securities owned by the Holder together with any Affiliates) and of which portion of this Warrant is exercisable, in each case subject to the Beneficial Ownership Limitation, and the Company shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 1(e), in determining the number of outstanding shares of Common Stock, a Holder may rely on the number of outstanding shares of Common Stock as reflected in (A) the Company’s most recent periodic or annual report filed with the Commission, as the case may be, (B) a more recent public announcement by the Company or (C) a more recent written notice by the Company or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Company shall within two Trading Days confirm orally and in writing to the Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Company, including this Warrant, by the Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon exercise of this Warrant. The Holder, upon notice to the Company, may increase or decrease the Beneficial Ownership Limitation provisions of this Section 2(e), provided that the Beneficial Ownership Limitation in no event exceeds 9.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon exercise of this Warrant held by the Holder and the provisions of this Section 1(e) shall continue to apply. Any increase in the Beneficial Ownership Limitation will not be effective until the 61st day after such notice is delivered to the Company. The provisions of this paragraph shall be construed and implemented in a manner otherwise than in strict conformity with the terms of this Section 1(e) to correct this paragraph (or any portion hereof) which may be defective or inconsistent with the intended Beneficial Ownership Limitation herein contained or to make changes or supplements necessary or desirable to properly give effect to such limitation. The limitations contained in this paragraph shall apply to a successor holder of this Warrant.
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2. Certain Adjustments.
(a) Stock Dividends and Splits. If the Company, at any time while this Warrant is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions on shares of its Common Stock or any other equity or equity equivalent securities payable in shares of Common Stock (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Company upon exercise of this Warrant), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues by reclassification of shares of the Common Stock any shares of capital stock of the Company, then in each case the Exercise Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding treasury shares, if any) outstanding immediately before such event and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event, and the number of shares issuable upon exercise of this Warrant shall be proportionately adjusted such that the aggregate Exercise Price of this Warrant shall remain unchanged. Any adjustment made pursuant to this Section 2(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or reclassification.
(b) Subsequent Equity Sales. If, at any time while this Warrant is outstanding and prior to (and including) the closing of the Qualified Offering, the Company sells or grants any option to purchase or sells or grants any right to reprice, or otherwise disposes of or issues (or announces any sale, grant or any option to purchase or other disposition), any Common Stock or Common Stock Equivalents entitling any Person to acquire shares of Common Stock at an effective price per share that is lower than the then Exercise Price (such lower price, the “Base Exercise Price” and such issuances, collectively, a “Dilutive Issuance”) (if the holder of the Common Stock or Common Stock Equivalents so issued shall at any time, whether by operation of purchase price adjustments, reset provisions, floating conversion, exercise or exchange prices or otherwise, or due to warrants, options or rights per share which are issued in connection with such issuance, be entitled to receive shares of Common Stock at an effective price per share that is lower than the then Exercise Price, such issuance shall be deemed to have occurred for less than the Exercise Price on such date of the Dilutive Issuance), then the Exercise Price shall be reduced to equal the Base Exercise Price. Such adjustment shall be made whenever such Common Stock or Common Stock Equivalents are issued. Notwithstanding the foregoing, no adjustment will be made under this Section 2(b) in respect of an Exempt Issuance. The Company shall notify the Holder in writing, no later than the Trading Day following the issuance of any Common Stock or Common Stock Equivalents subject to this Section 2(b), indicating therein the applicable issuance price, or applicable reset price, exchange price, exercise price, conversion price and other pricing terms (such notice, the “Dilutive Issuance Notice”). For purposes of clarification, whether or not the Company provides a Dilutive Issuance Notice pursuant to this Section 2(b), upon the occurrence of any Dilutive Issuance, the Holder is entitled to receive a number of Warrant Shares based upon the Base Exercise Price on or after the date of such Dilutive Issuance, regardless of whether the Holder accurately refers to the Base Exercise Price in the Notice of Exercise.
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(c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 2(a) and 2(b) above, if at any time the Company grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(d) Pro Rata Distributions. During such time as this Warrant is outstanding, if the Company shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Warrant, then, in each such case, upon the exercise of this Warrant, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Warrant (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
(e) [Reserved.]
(f) Calculations. All calculations under this Section 2 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 2, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding treasury shares, if any) issued and outstanding.
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(g) Notice to Holder.
i. Adjustment to Exercise Price. Whenever the Exercise Price is adjusted pursuant to any provision of this Section 2, the Company shall promptly mail to the Holder a notice setting forth the Exercise Price after such adjustment and any resulting adjustment to the number of Warrant Shares and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Exercise by Holder. If (A) the Company shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Company shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Company shall authorize the granting to all holders of the Common Stock rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Company shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Company is a party, any sale or transfer of all or substantially all of the assets of the Company, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property, or (E) the Company shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Company, then, in each case, the Company shall cause to be mailed to the Holder at its last address as it shall appear upon the Warrant Register of the Company, at least 10 calendar days prior to the applicable record or effective date hereinafter specified, a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange; provided that the failure to mail such notice or any defect therein or in the mailing thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that, following the closing of the IPO, any notice provided in this Warrant constitutes, or contains, material, non-public information regarding the Company or any of the Subsidiaries, the Company shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to exercise this Warrant during the period commencing on the date of such notice to the effective date of the event triggering such notice except as may otherwise be expressly set forth herein.
3. Transfer of Warrant.
(a) Transferability. Subject to compliance with any applicable securities laws and the conditions set forth in Section 3(d) hereof, this Warrant and all rights hereunder are transferable, in whole or in part, upon surrender of this Warrant at the principal office of the Company or its designated agent, together with a written assignment of this Warrant substantially in the form attached hereto duly executed by the Holder or its agent or attorney and funds sufficient to pay any transfer taxes payable upon the making of such transfer. Upon such surrender and, if required, such payment, the Company shall execute and deliver a new Warrant or Warrants in the name of the assignee or assignees, as applicable, and in the denomination or denominations specified in such instrument of assignment, and shall issue to the assignor a new Warrant evidencing the portion of this Warrant not so assigned, and this Warrant shall promptly be cancelled. Notwithstanding anything herein to the contrary, the Holder shall not be required to physically surrender this Warrant to the Company unless the Holder has assigned this Warrant in full, in which case, the Holder shall surrender this Warrant to the Company within three (3) Trading Days of the date the Holder delivers an assignment form to the Company assigning this Warrant in full. The Warrant, if properly assigned in accordance herewith, may be exercised by a new holder for the purchase of Warrant Shares without having a new Warrant issued.
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(b) New Warrants. This Warrant may be divided or combined with other Warrants upon presentation hereof at the aforesaid office of the Company, together with a written notice specifying the names and denominations in which new Warrants are to be issued, signed by the Holder or its agent or attorney. Subject to compliance with Section 3(a), as to any transfer which may be involved in such division or combination, the Company shall execute and deliver a new Warrant or Warrants in exchange for the Warrant or Warrants to be divided or combined in accordance with such notice. All Warrants issued on transfers or exchanges shall be dated the original Issue Date and shall be identical with this Warrant except as to the number of Warrant Shares issuable pursuant thereto.
(c) Warrant Register. The Company shall register this Warrant, upon records to be maintained by the Company for that purpose (the “Warrant Register”), in the name of the record Holder hereof from time to time. The Company may deem and treat the registered Holder of this Warrant as the absolute owner hereof for the purpose of any exercise hereof or any distribution to the Holder, and for all other purposes, absent actual notice to the contrary.
(d) Transfer Restrictions. If, at the time of the surrender of this Warrant in connection with any transfer of this Warrant, the transfer of this Warrant shall not be either (i) registered pursuant to an effective registration statement under the Securities Act and under applicable state securities or blue sky laws or (ii) eligible for resale without volume or manner-of-sale restrictions or current public information requirements pursuant to Rule 144, the Company may require, as a condition of allowing such transfer, that the Holder or transferee of this Warrant, as the case may be, make usual and customary representations as to investment intent to the Company.
(e) Representation by the Holder. The Holder, by the acceptance hereof, represents and warrants that it is acquiring this Warrant and, upon any exercise hereof, will acquire the Warrant Shares issuable upon such exercise, for its own account and not with a view to or for distributing or reselling such Warrant Shares or any part thereof in violation of the Securities Act or any applicable state securities law, except pursuant to sales registered or exempted under the Securities Act.
4. Miscellaneous.
(a) No Rights as Stockholder Until Exercise. This Warrant does not entitle the Holder to any voting rights, dividends or other rights as a stockholder of the Company prior to the exercise hereof as set forth in Section 1(d)(i), except as expressly set forth in Section 2.
(b) Loss, Theft, Destruction or Mutilation of Warrant. The Company covenants that upon receipt by the Company of evidence reasonably satisfactory to it of the loss, theft, destruction or mutilation of this Warrant or any stock certificate relating to the Warrant Shares, and in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to it (which, in the case of the Warrant, shall not include the posting of any bond), and upon surrender and cancellation of such Warrant or stock certificate, if mutilated, the Company will make and deliver a new Warrant or stock certificate of like tenor and dated as of such cancellation, in lieu of such Warrant or stock certificate.
(c) Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then, such action may be taken or such right may be exercised on the next succeeding Business Day.
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(d) Authorized Shares.
i. The Company covenants that, during the period the Warrant is outstanding, it will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of any purchase rights under this Warrant. The Company further covenants that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of issuing the necessary Warrant Shares upon the exercise of the purchase rights under this Warrant. The Company will take all such reasonable action as may be necessary to assure that such Warrant Shares may be issued as provided herein without violation of any applicable law or regulation, or of any requirements of the Trading Market upon which the Common Stock may be listed. The Company covenants that all Warrant Shares which may be issued upon the exercise of the purchase rights represented by this Warrant will, upon exercise of the purchase rights represented by this Warrant and payment for such Warrant Shares in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges created by the Company in respect of the issue thereof (other than taxes in respect of any transfer occurring contemporaneously with such issue).
ii. Except and to the extent as waived or consented to by the Holder, the Company shall not by any action, including, without limitation, amending its certificate of incorporation or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms of this Warrant, but will at all times in good faith assist in the carrying out of all such terms and in the taking of all such actions as may be necessary or appropriate to protect the rights of Holder as set forth in this Warrant against impairment. Without limiting the generality of the foregoing, the Company will (i) not increase the par value of any Warrant Shares above the amount payable therefor upon such exercise immediately prior to such increase in par value, (ii) take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and nonassessable Warrant Shares upon the exercise of this Warrant, and (iii) use commercially reasonable efforts to obtain all such authorizations, exemptions or consents from any public regulatory body having jurisdiction thereof, as may be, necessary to enable the Company to perform its obligations under this Warrant.
iii. Before taking any action which would result in an adjustment in the number of Warrant Shares for which this Warrant is exercisable or in the Exercise Price, the Company shall obtain all such authorizations or exemptions thereof, or consents thereto, as may be necessary from any public regulatory body or bodies having jurisdiction thereof.
(e) Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Warrant shall be determined in accordance with the laws of the State of Delaware as they are applied to contracts executed, delivered and to be wholly performed within the State of Delaware.
(f) Restrictions. The Holder acknowledges that the Warrant Shares acquired upon the exercise of this Warrant, if not registered and if the Holder does not utilize cashless exercise, will have restrictions upon resale imposed by state and federal securities laws.
(g) Nonwaiver and Expenses. No course of dealing or any delay or failure to exercise any right hereunder on the part of Holder shall operate as a waiver of such right or otherwise prejudice the Holder’s rights, powers or remedies, notwithstanding the fact that all rights hereunder terminate on the Termination Date. If the Company willfully and knowingly fails to comply with any provision of this Warrant, which results in any material damages to the Holder, the Company shall pay to the Holder such amounts as shall be sufficient to cover any costs and expenses including, but not limited to, reasonable attorneys’ fees, including those of appellate proceedings, incurred by the Holder in collecting any amounts due pursuant hereto or in otherwise enforcing any of its rights, powers or remedies hereunder.
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(h) Notices. Any notice, request or other document required or permitted to be given or delivered to the either party to the other shall be delivered in by recognized overnight courier, facsimile or email as follows:
If to the Holder:
Evergreen Capital Management LLC
156 West Saddle River Road
Saddle River, NJ 07458
Attn: Manager
Email: jpazdro@egcmllc.com
If to the Company:
Edible Garden AG Incorporated
283 County Road 519
Belvidere, New Jersey 07823
Attn: Chief Executive Officer
Email: jkras@ediblegarden.com
(i) Limitation of Liability. No provision hereof, in the absence of any affirmative action by the Holder to exercise this Warrant to purchase Warrant Shares, and no enumeration herein of the rights or privileges of the Holder, shall give rise to any liability of the Holder for the purchase price of any Common Stock or as a stockholder of the Company, whether such liability is asserted by the Company or by creditors of the Company.
(j) Successors and Assigns. Subject to applicable securities laws, this Warrant and the rights and obligations evidenced hereby shall inure to the benefit of and be binding upon the successors and permitted assigns of the Company and the successors and permitted assigns of Holder. The provisions of this Warrant are intended to be for the benefit of any Holder from time to time of this Warrant and shall be enforceable by the Holder or holder of Warrant Shares.
(k) Amendment. This Warrant may be modified or amended or the provisions hereof waived with the written consent of the Company and the Holder.
(l) Severability. Wherever possible, each provision of this Warrant shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Warrant shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provisions or the remaining provisions of this Warrant.
(m) Headings. The headings used in this Warrant are for the convenience of reference only and shall not, for any purpose, be deemed a part of this Warrant.
********************
[Signature Page to Follow.]
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IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officer thereunto duly authorized as of the date first above indicated.
| Edible Garden AG Incorporated | |||
| By: | /s/ James Kras | ||
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| Name: | James Kras | |
| Title: | Chief Executive Officer | ||
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EXHIBIT A
NOTICE OF EXERCISE
TO: Edible Garden AG Incorporated
(1) The undersigned hereby elects to purchase ________ Warrant Shares of the Company pursuant to the terms of the attached Warrant (only if exercised in full), and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.
(2) Payment shall take the form of (check applicable box):
☐ in lawful money of the United States; or
☐ if permitted the cancellation of such number of Warrant Shares as is necessary, in accordance with the formula set forth in Section 1(c), to exercise this Warrant with respect to the maximum number of Warrant Shares purchasable pursuant to the cashless exercise procedure set forth in Section 1(c).
(3) Please issue said Warrant Shares in the name of the undersigned or in such other name as is specified below:
__________________________________
The Warrant Shares shall be delivered to the following DWAC Account Number:
__________________________________
__________________________________
__________________________________
(4) Accredited Investor. The undersigned is an “accredited investor” as defined in Regulation D promulgated under the Securities Act of 1933, as amended.
[SIGNATURE OF HOLDER]
________________________
Name of Investing Entity:
________________________
Signature of Authorized Signatory of Investing Entity:
________________________
Name of Authorized Signatory
________________________
Title of Authorized Signatory
________________________
Date
EXHIBIT B
ASSIGNMENT FORM
(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)
FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to
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EXHIBIT 10.23
Edible Garden AG Incorporated
283 County Road 519
Belvidere, NJ 07823-2742
[DATE]
Dear [_____],
On behalf of Edible Garden AG Incorporated, a Delaware corporation (the “Company”), I am pleased to invite you to join the Company’s Board of Directors (the “Board”), subject to the approval by the Board of your appointment (the date of such appointment being the “Effective Date”) and effective as of the effective time of the Company’s registration statement for its Initial Public Offering (“IPO”), which we anticipate will be during or after September 2021. You will serve as a director from the Effective Date until the date of the Company’s next annual meeting of stockholders or upon your earlier resignation or removal.
In consideration for your service on the Board and subject to approval by the Board, you will receive a per annum compensation of $150,000. Your compensation will be composed of $75,000 cash compensation and $75,000 in restricted stock under the stock incentive plan to be adopted by the Board (the “Plan”). We will recommend that the Board set your vesting schedule such that (i) the shares shall vest in a series of equal monthly installments over the 24 month period measured from the Effective Date, subject to your continued service on the Board on any such date, and (ii) 100% of the then-unvested shares subject to the option shall immediately vest upon the consummation of a change of control (as will be defined in the Plan).
The Company will reimburse you for all reasonable travel expenses that you incur in connection with your in-person attendance at meetings of the Board, in accordance with the Company’s expense reimbursement policy as in effect from time to time. In addition, you will receive indemnification as a director of the Company to the maximum extent extended to directors of the Company generally, as set forth in the Company’s certificate of incorporation, bylaws, an indemnification agreement between the Company and you (which will be provided to you prior the Effective Date) and any director and officer insurance the Company may have and maintain from time to time.
In accepting this offer, you are representing to us that (i) you do not know of any conflict which would restrict your service on the Board, (ii) you consent to being named in the registration statement to be used in the IPO and to provide such other documentation as the Company may reasonably request in order to facilitate the IPO, and (iii) you will not provide the Company with any documents, records, or other confidential information belonging to other parties.
This letter sets forth the entire compensation you will receive for your service on the Board. Nothing in this letter should be construed as an offer of employment. If the foregoing terms are agreeable, please indicate your acceptance by signing the letter in the space provided below and returning this letter to the Company.
[signature page follows]
Sincerely,
Edible Garden AG Incorporated
By: ________________________
Name: James Kras
Title: Chief Executive Officer
AGREED AND ACCEPTED:
[Name]
____________________________
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EXHIBIT 14
Edible Garden AG Incorporated
CODE OF ETHICS
1. Introduction
The Board of Directors of Edible Garden AG Incorporated (the “Company”) has adopted this code of ethics (the “Code”), which is applicable to all directors, officers and employees, to:
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| · | promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; |
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| · | promote the full, fair, accurate, timely and understandable disclosure in reports and documents that the Company files with, or submits to, the Securities and Exchange Commission (the “SEC”), as well as in other public communications made by or on behalf of the Company; |
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| · | promote compliance with applicable governmental laws, rules and regulations; |
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| · | deter wrongdoing; and |
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| · | require prompt internal reporting of breaches of, and accountability for adherence to, this Code. |
2. Honest, Ethical and Fair Conduct
Each person owes a duty to the Company to act with integrity. Integrity requires, among other things, being honest, fair and candid. Deceit, dishonesty and subordinating one’s principles are inconsistent with integrity. Service to the Company never should be subordinated to personal gain and advantage.
Each person must:
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| · | act with integrity, including being honest and candid while still maintaining the confidentiality of the Company’s information where required or in the Company’s interests. |
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| · | observe and comply with all applicable governmental laws, rules and regulations. |
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| · | comply with the requirements of applicable accounting and auditing standards, as well as the Company’s policies, in order to maintain a high standard of accuracy and completeness in the Company’s financial records and other business-related information and data. |
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| · | adhere to a high standard of business ethics and not seek a competitive advantage through unlawful or unethical business practices. |
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| · | deal fairly with the Company’s customers, suppliers, competitors and employees. |
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| · | refrain from taking advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair-dealing practice. |
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| · | protect the assets of the Company and ensure their proper use. |
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| · | refrain from taking for themselves personally opportunities that are discovered through the use of corporate assets or by using corporate assets, information or position for personal gain outside the scope of employment with the Company. |
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| · | disclose conflicts of interest and only enter into “related party transactions” in compliance with guidelines or resolutions approved by the Board of Directors (or the appropriate committee of the Board of Directors). For purposes of this Code, “related party transaction” has the same meaning as Item 404(a), which means a transaction in which: (1) the aggregate amount involved will or may be expected to exceed $120,000 in any calendar year; (2) the Company or any of its subsidiaries is a participant; and (3) any: (a) executive officer, director or nominee for election as a director; (b) 5% or greater beneficial owner of the Company’s shares of common stock; or (c) immediate family member, of the persons referred to in clauses (a) and (b), has or will have a direct or indirect material interest. A conflict of interest situation can arise when a person takes actions or has interests that may make it difficult to perform his or her work objectively and effectively. Conflicts of interest may also arise if a person, or a member of his or her family, receives improper personal benefits as a result of his or her position. Anything that would be a conflict for a person subject to this Code also will be a conflict if it is related to a member of his or her family or a close relative. Examples of conflict of interest situations include, but are not limited to, the following: |
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| o | any significant ownership interest in any supplier or customer; |
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| o | any consulting or employment relationship with any customer, supplier or competitor; |
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| o | any outside business activity that detracts from an individual’s ability to devote appropriate time and attention to his or her responsibilities with the Company; |
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| o | the receipt of any money, non-nominal gifts or excessive entertainment from any company with which the Company has current or prospective business dealings; |
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| o | being in the position of supervising, reviewing or having any influence on the job evaluation, pay or benefit of any close relative; |
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| o | selling anything to the Company or buying anything from the Company, except on the same terms and conditions as comparable officers or directors are permitted to so purchase or sell; and |
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| o | any other circumstance, event, relationship or situation in which the personal interest of a person subject to this Code interferes – or even appears to interfere – with the interests of the Company as a whole. |
3. Disclosure
The Company strives to ensure that the contents of and the disclosures in the reports and documents that the Company files with the SEC and other public communications shall be full, fair, accurate, timely and understandable in accordance with applicable disclosure standards, including standards of materiality, where appropriate. Each person must:
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| · | not knowingly misrepresent or omit, or cause others to misrepresent or omit, facts about the Company to others, whether within or outside the Company, including to the Company’s independent auditors, outside advisors, governmental regulators, self-regulating organizations and other governmental officials, as appropriate; and |
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| · | in relation to his or her area of responsibility, properly review and critically analyze proposed disclosure for accuracy and completeness. |
In addition to the foregoing, the Chief Executive Officer and Chief Financial Officer of the Company and each subsidiary of the Company (or persons performing similar functions), and persons that typically are involved in the financial reporting of the Company must familiarize themselves with the disclosure requirements applicable to the Company as well as the business and financial operations of the Company.
Each person must promptly bring to the attention of the Chair of the Audit Committee of the Board of Directors any information that person may have concerning (a) significant deficiencies in the design or operation of internal and/or disclosure controls which could adversely affect the Company’s ability to record, process, summarize and report financial data or (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s financial reporting, disclosures or internal controls.
4. Compliance
It is the Company’s obligation and policy to comply with all applicable governmental laws, rules and regulations. It is the personal responsibility of each person to adhere to the standards and restrictions imposed by those laws, rules and regulations, including those relating to accounting and auditing matters.
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5. Reporting and Accountability
The Audit Committee is responsible for administering and applying this Code to the specific situations presented to the Audit Committee and has the authority to interpret this Code in any particular situation. Any person who becomes aware of any existing or potential breach of this Code is required to notify the Audit Committee Chair promptly. Failure to do so is itself a breach of this Code.
Specifically, each person must:
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| · | notify the Audit Committee Chair promptly of any existing or potential violation of this Code; and |
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| · | not retaliate against any other person for reports of potential violations that are made in good faith. |
The Company will follow the following procedures in investigating and enforcing this Code and in reporting on the Code:
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| · | The Audit Committee will take all appropriate action to investigate any breaches of this Code reported to it. |
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| · | If the Audit Committee determines that a breach of this Code has occurred, it will inform the Board of Directors. |
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| · | Upon being notified that a breach has occurred, the Board of Directors will take or authorize such disciplinary, corrective or preventive action as it deems appropriate, after consultation with the Audit Committee and/or internal or external legal counsel, up to and including dismissal or, in the event of criminal or other serious violations of law, notification of the SEC or other appropriate law enforcement authorities. |
No person following the above procedure shall, as a result of following such procedure, be subject by the Company or any officer or employee thereof to discharge, demotion, suspension, threat, harassment or, in any manner, discrimination against such person in terms and conditions of employment.
6. Waivers and Amendments
This Code may be amended only by resolution of the Board of Directors.
Any waiver (as defined below) or an implicit waiver (as defined below) from a provision of this Code for the principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions or any amendment (as defined below) to this Code is required to be publicly disclosed. A “waiver” means the approval by the Board of Directors of a material departure from a provision of the Code. An “implicit waiver” means the Company’s failure to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an executive officer of the Company. An “amendment” means any amendment to this Code other than minor technical, administrative or other non-substantive amendments hereto.
All persons should note that it is not the Company’s intention to grant or to permit waivers from the requirements of this Code. The Company expects full compliance with this Code.
7. Other Policies and Procedures
Any other policy or procedure set out by the Company in writing or made generally known to employees, officers or directors of the Company prior to the date hereof or hereafter are separate requirements and remain in full force and effect.
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8. Inquiries
All inquiries and questions in relation to this Code or its applicability to particular people or situations should be addressed to the Audit Committee Chair.
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EXHIBIT 23.1
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM’S CONSENT
We consent to the inclusion in this Registration Statement of Edible Garden AG Inc. on Form S-1 Amendment No. 1 File No. 333-260655 of our report dated September 10, 2021, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, with respect to our audits of the consolidated financial statements of Edible Garden AG Inc. as of December 31, 2020 (Successor balance sheet) and 2019 (Predecessor balance sheet) and for the period from March 28, 2020 to December 31, 2020 (Successor operations) and the period from January 1, 2020 to March 31, 2020 and the year ended December 31, 2019 (Predecessor operations), which report appears in the Prospectus, which is part of this Registration Statement. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.
/s/ Marcum llp
Marcum llp
Costa Mesa, California
December 21, 2021