Edible Garden AG Inc: Form 10-Q for the period ended Sep 30, 2023

FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which provides a “safe harbor” for forward-looking statements made by us. All statements, other than statements of historical facts, including statements concerning our plans, objectives, goals, beliefs, business strategies, future events, business conditions, results of operations, financial position, business outlook, business trends, and other information, may be forward-looking statements. Words such as “might,” “will,” “would,” “could,” “should,” “may,” “can,” “estimates,” “expects,” “anticipates,” “projections,” “plans,” “potential,” “intends,” “believes,” “future,” and variations of such words or similar expressions are intended to identify forward-looking statements. The forward-looking statements are not historical facts, and are based upon our current expectations, beliefs, estimates and projections, and various assumptions, many of which, by their nature, are inherently uncertain and beyond our control. Our expectations, beliefs, estimates, and projections are expressed in good faith and we believe there is a reasonable basis for them. However, there can be no assurance that our expectations, beliefs, estimates, and projections will occur or can be achieved. Actual results may vary materially from what is expressed in or indicated by the forward-looking statements.

These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or anticipated results, including:

• our history of losses and our ability to continue as a going concern;
• our ability to regain compliance with the listing standards of The Nasdaq Stock Market LLC (“Nasdaq”);
• our ability to continue to access and operate our Belvidere, New Jersey facility;
• our financial performance and capital requirements;
• our market opportunity;
• our ability to effectively manage our growth;
• our ability to integrate business acquisitions;
• our ability to recruit and retain key employees and management personnel;
• the effects of increased competition as well as innovations by new and existing competitors in our market;
• our ability to retain our existing customers and to increase our customer base;
• the future growth of the indoor agriculture industry and demands of our customers;
• our ability to maintain, or strengthen awareness of, our brand;
• our ability to expand the product lines we offer;
• our ability to maintain, protect, and enhance our intellectual property;
• our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business;
• the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud;
• the potential lack of liquidity and trading of our securities; and
• our potential ability to obtain additional financing.

The following discussion should be read in conjunction with our financial statements and notes thereto included elsewhere in this report and our other reports filed with the Securities and Exchange Commission (“SEC”).

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OVERVIEW

We are a controlled environment agriculture (“CEA”) farming company. We use traditional agricultural growing techniques together with technology to grow fresh, organic food, sustainably and safely while improving traceability. We use the controlled environment of traditional greenhouse structures, such as glass greenhouses, together with hydroponic and vertical greenhouses to sustainably grow organic herbs and lettuces. In our hydroponic greenhouse, we grow plants without soil. Instead of planting one row of lettuce in the ground, by using a vertical greenhouse, we can grow many towers of lettuce in the same area by planting up instead of planting across. Growing these products sustainably means that we avoid depleting natural resources in order to maintain an ecological balance, such as by renewing, reusing and recycling materials in order to lower the overall one-time use of materials.

Our controlled greenhouse facilities allow us to grow consistent quality herbs and lettuces year-round, first by eliminating some of the variability of outdoor farming with our CEA techniques, and second by leveraging our proprietary software, GreenThumb. In addition to using hydroponic and vertical greenhouse systems, we use a “closed loop” system in our greenhouses. Generally, in a “closed loop” system, drain water is recollected and reused for irrigation. In our closed loop system, we also cycle water back into the system that has been collected through reverse osmosis. When compared with conventional agriculture, our closed looped systems and hydroponic methods use less land, less energy and less water (than legacy farms), thus conserving some of the planet’s limited natural resources. Our advanced systems are also designed to help mitigate contamination from harmful pathogens, including salmonella, e-coli and others.

We have also developed patented software called GreenThumb that assists in tracking plants through our supply chain. Utilizing our GreenThumb software to track the status of our plants as they grow and move throughout the greenhouse allows us to add a layer of quality control due to the frequent monitoring of the growing process, leading to improved traceability. In this context, traceability means being able to track a plant through all stages of production and distribution. In addition to improving traceability, GreenThumb helps us better manage the day-to-day operations of our business. GreenThumb is a web-based greenhouse management and demand planning system that does the following:

• integrates in real-time with our cloud business software suite for monitoring daily sales data;
• generates reports by category, product, customer, and farm to allow us to analyze sales, trends, margins and retail shrink (spoiled product);
• provides dynamic pallet mapping for packout, which enables us to more efficiently ship our products;
• utilizes a proprietary algorithm that uses year-over-year and trending sales data to develop customer specific and aggregate product specific forecasting for our greenhouses;
• aggregates all greenhouse activity input to provide real-time inventory and availability reports of all products in our greenhouses;
• manages our online ordering system with user controlled product availability based upon greenhouse inventory;
• provides a route management system for coordinating the logistics of our direct store delivery program; and
• tracks all production activities at greenhouses, including sowing, spacing, dumping, spraying, picking and packing, using hand held devices.

We also use our GreenThumb software to help monitor the quality of our products, and we have dedicated quality assurance and quality control personnel that check and monitor our products. We have customer service personnel that answer any questions the consumers of our products may have, and we regularly ask for feedback from our customers on the quality of our products. The combination of the GreenThumb software, quality assurance and control processes (including compliance with food safety standards), and feedback from consumers and purchasers holds us accountable for maintaining the quality of our herbs and lettuce.

We focus our efforts on producing our herbs and vegetables in a sustainable manner that will reduce consumption of natural resources, by recycling water in our closed loop system and using LED lights instead of conventional lightbulbs to accelerate crop growth and yield, when necessary. In addition, the inventory management component of GreenThumb allows us to manage inventory levels, order quantities and fill rates while maximizing truck loads. This means that we are better able to control shipping our products in full truck loads, thus eliminating multiple deliveries and decreasing the excess emission of greenhouse gases that would result from many partially full trucks delivering our products. Together, these elements of our production and distribution process are intended to reduce our carbon footprint, or the total amount of greenhouse gases that are generated by our actions, as compared with a legacy farm business.

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We believe our focus on our brand “Edible Garden” is a significant differentiator. The brand not only lends itself to our current portfolio of products but allows us to develop other products in the “Consumer Brands” category. Our focus on sustainability, traceability, and social contribution, which we define as an ongoing effort to improve employee relations, working conditions, and local communities, presents our value proposition to our customers and supermarket partners and distributors.

RECENT DEVELOPMENTS

Public Offering

On September 8, 2023, we closed on an underwritten public offering of 2,850,726 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price equal to $1.10 per share. Each unit was sold at a public offering price of $1.10 per unit. Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, were approximately $3.1 million.

Nasdaq Deficiency Notice

On October 24, 2023, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that, based on the closing bid price of our common stock for 30 consecutive business days, we no longer meet Nasdaq Listing Rule 5550(a)(2), which requires listed companies to maintain a minimum bid price of at least $1 per share (the “Bid Price Rule”). The Nasdaq Listing Rules provide a compliance period of 180 calendar days, or until April 22, 2024, in which to regain compliance with the Bid Price Rule. If we evidence a closing bid price of at least $1 per share for a minimum of 10 consecutive business days during the 180-day compliance period, we will automatically regain compliance. If we fail to regain compliance with the Bid Price Rule, Nasdaq will provide notice that our common stock will be subject to delisting. We would then be entitled to appeal that determination to a Nasdaq hearings panel. This notification has no immediate effect on the listing of our common stock on Nasdaq.

We intend to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and remain listed on Nasdaq. On November 6, 2023, we held a special meeting of our stockholders at which our stockholders approved an amendment to our Certificate of Incorporation to effect a reverse stock split of our common stock in a range of 1-for-5 to 1-for-50, at the discretion of the board of directors (“Reverse Stock Split”).

There can be no assurance that we will ultimately regain compliance with all applicable requirements for continued listing. If we do not regain compliance with the Nasdaq Listing Rules within the time periods permitted by Nasdaq, then our securities will be delisted from Nasdaq.

CRITICAL ACCOUNTING POLICIES

The preparation of the consolidated financial statements in conformity with GAAP requires management to use judgment in making estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. The following accounting policies are based on, among other things, judgments and assumptions made by management that include inherent risks and uncertainties. Management’s estimates are based on historical experience, the relevant information available at the end of each period, and their judgment. Although management believes the judgment applied in preparing estimates is reasonable based on circumstances and information known at the time, actual results could differ materially from these estimates under different assumptions or market conditions.

The most significant accounting estimates involve a high degree of judgment or complexity. Management believes the estimates and judgments most critical to the preparation of our consolidated financial statements and to the understanding of our reported financial results include allowance for doubtful accounts. The following are the accounting policies most critical to the preparation of our consolidated financial statements.

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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.

Income Taxes

The provision for income taxes is determined in accordance with ASC 740, “Income Taxes.” The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At September 30, 2023 and December 31, 2022, such net operating losses were offset entirely by a valuation allowance.

The Company recognizes uncertain tax positions based on a benefit recognition model. Provided that the tax position is deemed more likely than not of being sustained, the Company recognizes the largest amount of tax benefit that is greater than 50.0% likely of being ultimately realized upon settlement. The tax position is derecognized when it is no longer more likely than not of being sustained. The Company classifies income tax related interest and penalties as interest expense and selling, general and administrative expense, respectively, on the consolidated statements of operations.

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RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(in thousands)

Revenue

Revenue was $3.289 million for the three months ended September 30, 2023, compared with $2.754 million for the three months ended September 30, 2022. Revenue increased $535 thousand, or 19.43%, compared with the three months ended September 30, 2022. Compared with the prior period, the herbs, produce and floral revenue increased by $538 thousand or 22.77% while the vitamins and supplements revenue decreased by $3 thousand or 0.77%. The increase in the herbs, produce and floral business represents a net increase in orders received from our existing customer base based on demand from the retail consumer and a slight increase in orders for herbs received from new distribution partners.

Cost of goods sold

Cost of goods sold were $3.277 million for the three months ended September 30, 2023, compared with $2.572 million for the three months ended September 30, 2022. Cost of goods sold increased $705 thousand, or 27.41% compared with the three months ended September 30, 2022. We continued to use contract growers to grow herbs for our customers as we ramped up production in Edible Garden Heartland, which resulted in higher costs of goods sold. Additional labor and materials costs required to grow the products sold into the retail channel also contributed to the increase.

Gross profit

Gross profit was $12 thousand or 0.36% of sales for the three months ended September 30, 2023, compared with $182 thousand or 6.61% of sales for the three months ended September 30, 2022. Gross profit decreased by $170 thousand or 93.41% for the three months ended September 30, 2023. Lower margins for herbs, produce and floral in the current quarter reflect the impact of additional labor and materials incurred at the Edible Garden Heartland facility as production ramps up and retail shrink in floral sales. During the period, we sold through lower margin inventory in vitamins and supplements, which had a negative impact on gross profit.

Selling, general and administrative

Selling, general and administrative expenses (“SG&A”) were $2.387 million for the three months ended September 30, 2023, compared with $1.928 million for the three months ended September 30, 2022. SG&A expenses increased by $459 thousand or 23.81%, compared with the three months ended September 30, 2022. Approximately $191 thousand of the increase in SG&A expenses relates to the costs incurred to operate the Edible Garden Heartland facility. The facility was acquired in August 2022 and has been retrofitted to grow and supply our customers in the local region. Shipments began in April 2023. We also increased production of cut herbs at Edible Garden Heartland and our Belvidere, New Jersey facility, for which we purchased equipment intended to increase our efficiency. Depreciation expense also increased by $174 thousand due to the acquisition of Edible Garden Heartland and the purchase of additional trucks.

Loss from operations

Lower gross profit and higher SG&A expenses resulted in a loss from operations of $2.375 million for the three months ended September 30, 2023, compared with $1.746 million for the three months September 30, 2022. The increase in loss from operations was $629 thousand, or 36.03% compared with the three months ended September 30, 2022.

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Interest expense

Interest expense was $57 thousand for the three months ended September 30, 2023, versus $88 thousand for the three months ended September 30, 2022. Lower interest expense was related to paying off debt previously outstanding with proceeds from our public offerings. See Note 7 to our financial statements.

Other income / (expense)

The Company recognized $1 thousand of other income during the three months ended September 30, 2023, versus $235 thousand of other expenses in the three months ended September 30, 2022. The Company recognized expense of $235 thousand in the prior period due to recognition of an accrual for a loss contingency related to a lawsuit that has since been settled.

Net loss

Net loss was $2.431 million for the three months ended September 30, 2023, compared with a net loss of $2.069 million for the three months ended September 30, 2022. The reasons for the increase in net loss are explained above.

COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 2023 AND 2022

(in thousands)

Revenue

Revenue was $9.965 million for the nine months ended September 30, 2023, compared with $8.476 million for the nine months ended September 30, 2022. Revenue increased $1.489 million, or 17.57%, compared with the nine months ended September 30, 2022. Compared with the prior period, the herbs, produce and floral revenue increased by $1.227 million or 16.35% while the vitamins and supplements revenue increased by $262 thousand or 26.95%. The increase in the herb, produce and floral business represents a net increase in orders received from our existing customer base based on the demand from the retail consumer and a slight increase in orders for herbs received from new distribution partners. The increase in vitamins and supplements revenue was resulted from an additional SKU ordered by a customer for every store in their chain.

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Cost of goods sold

Cost of goods sold were $9.425 million for the nine months ended September 30, 2023, compared with $8.183 million for the nine months ended September 30, 2022. Cost of goods sold increased $1.242 million, or 15.18% compared with the nine months ended September 30, 2022. We continued to use contract growers to grow herbs for our customers as we ramped up production in Edible Garden Heartland, which resulted in higher costs of goods sold due to the increase in revenue.

Gross profit

Gross profit was $540 thousand or 5.42% of sales for the nine months ended September 30, 2023, compared with $293 thousand or 3.46% of sales for the nine months ended September 30, 2022. Gross profit increased by $247 thousand or 2.48% of sales for the nine months ended September 30, 2023 compared to the prior period. Higher margins in the current period reflect the impact of price increases implemented with our customers during the nine months and shipments out of the Edible Garden Heartland facility, partially offset by retail shrink in floral sales. During the period, we sold through lower margin inventory in vitamins and supplements, which had a negative impact on gross profit.

Selling, general and administrative

SG&A expenses were $7.458 million for the nine months ended September 30, 2023, compared with $6.268 million for the nine months ended September 30, 2022. Selling, general and administrative expenses increased by $1.190 million or 18.99%, compared with the nine months ended September 30, 2022. Approximately $647 thousand of the increase in SG&A expenses relate to the costs incurred to operate the Edible Garden Heartland facility. The facility was acquired in August 2022 and has been retrofitted to grow and supply the customers in the local region. Shipments began in April 2023. We also increased production of cut herbs at Edible Garden Heartland and our Belvidere, New Jersey facility, for which we purchased equipment intended to increase our efficiency. Depreciation expense also increased by $494 thousand due to the acquisition of Edible Garden Heartland and the purchase of additional trucks. Approximately $559 thousand of the increase in SG&A expenses was associated with becoming a public company. Compensation and benefits expense decreased by $838 thousand, due primarily to $500 thousand of one-time bonuses paid to each of our Chief Executive Officer and Chief Financial Officer upon the completion of our initial public offering in 2022.

Loss from operations

Higher SG&A expense relative to the increase in gross profit resulted in a loss from operations of $6.918 million for the nine months ended September 30, 2023, compared with $5.975 million for the nine months September 30, 2022. The increase in loss from operations was $943 thousand, or 15.78% compared with the nine months ended September 30, 2022.

Interest expense

Interest expense was $334 thousand for the nine months ended September 30, 2023, versus $1.825 million for the nine months ended September 30, 2022. Lower interest expense was related to paying off debt previously outstanding with proceeds from our public offerings. See Note 7 to our financial statements.

Gain (Loss) from extinguishment of debt

During the nine months ended September 30, 2023, the Company recognized a gain from the extinguishment of debt of $70 thousand by prepaying a promissory note owed to Sament Capital Investments (“Sament”). During the nine months ended September 30, 2022, the Company incurred a loss from the extinguishment of debt of $826 thousand due to the modification of the debt issued to Evergreen Capital Management LLC (“Evergreen”). See Note 7 to our financial statements.

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Employee retention credit

During the nine months ended September 30, 2023, the Company recognized $1.233 million of income from the Employee Retention Credit. See Note 2 to our financial statements.

Other income / (expense)

The Company recognized $1 thousand of other income during the nine months ended September 30, 2023, versus $825 thousand of other expenses in the nine months ended September 30, 2022. In the prior period, $189 thousand of the loss was from the revaluation of the warrants issued to Evergreen, $401 thousand was due to a leak out provision for stock owned by Evergreen and $235 thousand was due to recognition of an accrual for a loss contingency for a lawsuit that has since been settled.

Net loss

Net loss was $5.948 million for the nine months ended September 30, 2023, compared with a net loss of $9.451 million for the nine months ended September 30, 2022. The reasons for the increase in net loss are explained above.

LIQUIDITY AND CAPITAL RESOURCES

Going Concern Considerations

We have incurred significant losses since our inception. We recognized net losses of approximately $5.948 million during the nine months ended September 30, 2023 and $12.453 million during the twelve months ended December 31, 2022. We expect our capital expenses and operational expenses to increase in the future due to expected increased sales and marketing expenses, operational costs, and general and administrative costs. Therefore, we believe our operating losses will continue or even increase at least through the near term.

The risks and uncertainties surrounding our ability to continue our business with limited capital resources raise substantial doubt as to our ability to continue as a going concern for twelve months from the issuance of these financial statements. Our financial statements have been prepared on a “going concern” basis, which implies we may not continue to meet our obligations and continue our operations for the next twelve months. Our consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern. If we are unable to continue as a going concern, holders of our securities might lose their entire investment. 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, repayment of indebtedness, and other strategic investments. Although income taxes are not currently a significant use of funds, after the benefits of our net operating loss carryforwards are fully recognized, they could become a material use of funds, depending on our future profitability and future tax rates. The Company’s liquidity needs have been met primarily through public equity offerings, term loan borrowings, convertible notes, and related party loans.

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As of September 30, 2023 and December 31, 2022, we had $2.578 million and $110 thousand in cash and cash equivalents available, respectively. During the nine months ended September 30, 2023, we used $6.778 million of cash for operating activities. Unless we are able to reduce the amount of cash we use in operating activities, we will need to raise additional capital through debt or equity financing. As of September 30, 2023 and December 31, 2022, we had working capital of $3.193 million and a working capital deficit of $2.966 million, respectively. As of September 30, 2023 and December 31, 2022, we had $4.539 million and $6.354 million of total debt outstanding, respectively. To resolve our working capital deficit and meet our cash needs, we have implemented cost savings programs in addition to having raised $10.2 million from the sale of securities in February 2023 and $3.1 million in September 2023. In February 2023, we paid off a secured promissory note in the amount of $677 thousand held by Sament and a secured promissory note in the amount of $1.022 million held by Evergreen. See Note 7 to our financial statements. We believe that the remaining offering proceeds will be sufficient to fund our operations through December 2023. We may not be able to access the capital markets in the future on commercially acceptable terms or at all. Our ability to fund future operating expenses and capital expenditures and our ability to meet future debt service obligations or refinance our indebtedness will depend on our future operating performance, which will be affected by general economic, financial and other factors beyond our control, including those described under “Risk Factors” in part II, Item 1A below and in our Annual Report on Form 10-K, filed with the SEC on March 22, 2023.

Capital Resources

On September 8, 2023, we closed on an underwritten public offering of 2,700,726 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price equal to $1.10 per share. Each unit was sold at a public offering price of $1.10 per unit. Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, were approximately $3.1 million. After offering expenses, the Company retained approximately $2.8 million in net proceeds. The Company paid additional costs related to the public offering of $103 thousand.

On February 7, 2023, we closed on an underwritten public offering of 1,619,000 units, with each unit consisting of one share of common stock and one warrant to purchase one share of common stock at an exercise price equal to $6.30 per share. Each unit was sold at a public offering price of $6.30 per unit. Gross proceeds, before deducting underwriting discounts and commissions and estimated offering expenses, were approximately $10.2 million. After offering expenses, the Company retained approximately $9.4 million in net proceeds. With the net proceeds from the offerings, the Company used approximately $2.166 million to fund our operations, paid off debt of $1.9 million, paid down accounts payable of $497 thousand, acquired inventory of $436 thousand, purchased equipment of $361 thousand, and paid costs relating to the public offering of $140 thousand.

From time to time, the Company enters into loans to purchase vehicles that are secured by the vehicle purchased. Some of these loans are also personally guaranteed by the Company’s chief executive officer and/or chief financial officer. These loans accrue interest at annual rates ranging from 7.64% to 18.66% and mature on dates between April 2024 and February 2028. See Note 7 to our financial statements.

For more information on our outstanding debt as of September 30, 2023 and December 31, 2022, see Note 7 to our financial statements.

Cash Flows

Operating activities

During the nine months ended September 30, 2023 and 2022, cash used for operating activities was $6.778 million and $7.540 million, respectively. Cash used for operating activities for the nine months ended September 30, 2023 decreased primarily due to the smaller net loss and higher depreciation expense, offset by lower amortization of debt discount, lower collections of receivables and an increase in payments made to vendors.

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Investing activities

During the nine months ended September 30, 2023 and 2022, cash used in investing activities was $800 thousand and $1.813 million, respectively. The decrease in cash used for investing activities was primarily driven by our prior year purchase of Greenleaf Growers Inc.’s assets. Cash used for investing activities during the current year was primarily used to purchase furniture and equipment for the Edible Garden Heartland facility.

Financing activities

During the nine months ended September 30, 2023 and 2022, cash provided by financing activities was $10.046 million and $11.297 million, respectively. The decrease in cash provided by financing activities was primarily driven by completion of the February 2023 and September 2023 offerings, which in total were smaller than the Company’s initial public offering during the first nine months of 2022. The decrease was partially offset by the repayment of indebtedness; the debt paid down in the nine months ended September 30, 2023 was lower than the prior year.

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023 pursuant to Rule 13a-15 under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2023, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were ineffective as of September 30, 2023, due to the existence of material weaknesses in our internal control over financial reporting that we have yet to fully remediate.

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. Since these entity level controls have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. In addition, we have a material weakness in our internal control over financial reporting because we lack maintenance of appropriate documentation to support our internal controls and we have insufficiently reviewed reports identifying user entity controls.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should consider the risks described in Part I, Item 1A, "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2022. Except as set forth below, there have been no material changes from the risk factors previously disclosed in the Annual Report on Form 10-K. Any of these risks and uncertainties, including those discussed below, could materially and adversely affect our business, results of operations, financial condition, and/or the market price of our common stock. The risks described below and in our Annual Report on Form 10-K, are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially and adversely affect our financial condition and/or operating results.

We are currently not in compliance with the Nasdaq continued listing requirements. If we are unable to regain compliance with Nasdaq’s listing requirements, our securities could be delisted, which could affect our common stock’s market price and liquidity and reduce our ability to raise capital.

On October 24, 2023, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that, based on the closing bid price of our common stock for 30 consecutive business days, we no longer meet the Bid Price Rule, which requires listed companies to maintain a minimum bid price of at least $1 per share.

We cannot assure you that we will be able to regain compliance with Nasdaq listing standards. Our failure to continue to meet these requirements would result in our common stock being delisted from Nasdaq, and if our common stock is delisted, our warrants will also be delisted. We and holders of our securities could be materially adversely impacted if our securities are delisted from Nasdaq. In particular:

• we may be unable to raise equity capital on acceptable terms or at all;
• we may lose the confidence of our customers, which would jeopardize our ability to continue our business as currently conducted;
• the price of our common stock will likely decrease as a result of the loss of market efficiencies associated with Nasdaq and the loss of federal preemption of state securities laws;
• holders may be unable to sell or purchase our securities when they wish to do so;
• we may become subject to stockholder litigation;
• we may lose the interest of institutional investors in our common stock;
• we may lose media and analyst coverage;
• our common stock could be considered a “penny stock,” which would likely limit the level of trading activity in the secondary market for our common stock; and
• we would likely lose any active trading market for our common stock, as it may only be traded on one of the over-the-counter markets, if at all.

We cannot assure you that the proposed Reverse Stock Split will increase the price of our common stock.

We expect that the Reverse Stock Split, if effected, will increase the market price of our common stock. However, the effect of the Reverse Stock Split on the market price of our common stock cannot be predicted with any certainty, and the history of reverse stock splits for other companies of similar size to us is varied, particularly because investors may view a reverse stock split negatively. It is possible that the per share price of our common stock after the Reverse Stock Split will not increase in the same proportion as the reduction in the number of outstanding shares of common stock following the Reverse Stock Split, and the Reverse Stock Split may not result in a per share price that would attract investors who do not trade in lower-priced securities. In addition, we cannot assure you that our common stock will be more attractive to investors. Even if we implement the Reverse Stock Split, the market price of our common stock may decrease due to factors unrelated to the Reverse Stock Split, including our future performance, similar to the prior reverse stock split by the Company. If the Reverse Stock Split is consummated and the trading price of our common stock declines, the percentage decline as an absolute number and as a percentage of our overall market capitalization may be greater than would occur in the absence of the Reverse Stock Split.

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The proposed Reverse Stock Split may decrease the liquidity of our common stock and result in higher transaction costs.

The Reverse Stock Split may decrease the liquidity of our common stock because fewer shares would be outstanding after the Reverse Stock Split. In addition, if the Board implements the Reverse Stock Split, more stockholders may own “odd lots” of fewer than 100 shares of common stock, which may be more difficult to sell. Brokerage commissions and other costs of transactions in odd lots are generally higher than the costs of transactions of more than 100 shares or multiples of 100 shares of common stock. Accordingly, the Reverse Stock Split may not achieve the desired results of increasing marketability of the common stock as described above.

If the Reverse Stock Split is approved and effected, the resulting per-share market price may not attract institutional investors or investment funds and may not satisfy the investing guidelines of such investors and, consequently, the trading liquidity of our common stock may not improve.

While the Board believes that a higher stock price may help generate investor interest, there can be no assurance that the Reverse Stock Split will result in a per-share market price that will attract institutional investors or investment funds or that such share price will satisfy the investing guidelines of institutional investors or investment funds. As a result, the trading liquidity of our common stock may not necessarily improve.

A decline in the market price of our common stock after the Reverse Stock Split is approved and effected may result in a greater percentage decline than would occur in the absence of the Reverse Stock Split.

If the Reverse Stock Split is approved and effected and the market price of our common stock declines, the percentage decline may be greater than would occur in the absence of the Reverse Stock Split. The market price of our common stock will, however, also be based upon our performance and other factors, which are unrelated to the number of shares of common stock outstanding.