Edible Garden AG Inc: Form 10-Q for the period ended Mar 31, 2024

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 obtain additional financing to fund our operations;
• the departure of members of our management team;
• our ability to continue to access and operate our Belvidere, New Jersey facility;
• our ability to regain compliance with the listing standards of Nasdaq;
• our market opportunity;
• our ability to effectively manage our growth;
• our ability to integrate business acquisitions;
• 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;
• future revenue, hiring plans, expenses and capital expenditures;
• our ability to comply with new or modified laws and regulations that currently apply or become applicable to our business;
• our ability to recruit and retain key employees and management personnel;
• our financial performance and capital requirements;
• the material weaknesses in our internal control over financial reporting and the potential insufficiency of our disclosure controls and procedures to detect errors or acts of fraud; and
• the potential lack of liquidity and trading of our securities;

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, lettuces and floral products. 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

Departure of Chief Financial Officer

Effective January 25, 2024, Michael James retired from his positions as Chief Financial Officer, Treasurer, Secretary and Director of the Company. In connection with Mr. James’s retirement, on January 24, 2024, the Company and Mr. James entered into a separation agreement (the “Separation Agreement”). Pursuant to the terms of the Separation Agreement, the Company agreed to pay Mr. James a severance payment of $300,000 in the form of salary continuation until January 2025. In addition, Mr. James is eligible to earn milestone payments under the Separation Agreement in an aggregate amount up to $300,000 if he completes certain transitional deliverables for the Company. The Company granted Mr. James a restricted stock award with a fair value equal to $25,000 as of April 2, 2024.

Equity Distribution Agreement

On February 6, 2024, the Company entered into an Equity Distribution Agreement (the “EDA”) with Maxim Group LLC, as sales agent (the “Agent”), pursuant to which the Company may, from time to time, issue and sell shares of common stock through the Agent in an at-the-market offering for an aggregate offering price of up to $1,146,893. To date, the Company has received net proceeds of $1.1 million after deducting the Agent’s commission of 3.5% of the gross proceeds and other offering expenses from the sale of 181,710 shares of common stock under the EDA.

Supply Agreements

On February 8, 2024, the Company and Meijer Distribution, Inc. (“Buyer”) entered into two agreements pursuant to which the Company will supply and sell products to Buyer until December 2026 (the “Supply Agreements”). Under the Supply Agreements, the Company will sell (i) fresh cut herbs, including basil, bay leaves, chives, cilantro, dill, mint, oregano, rosemary, sage, thyme; (ii) hydroponic basil; and (iii) potted herbs, including basil, chives, cilantro, mint, oregano, parsley, rosemary, sage, thyme, wheatgrass; in quantities and delivery schedule requested by the Buyer at prices per unit set in advance. Under the Supply Agreements, the Company and the Buyer will renegotiate the prices for each unit annually, provided that the price per unit will not increase or decrease at a rate greater than the change in the relevant Consumer Price Index in that year. Once set, the pricing terms will remain fixed for the remainder of the year. Any price increases will take affect after sixty days and any price decrease will be effective immediately. If the Company and the Buyer are unable to mutually agree on price increases, the Company will have the power to terminate the Supply Agreements immediately.

Under the Supply Agreements, the Company agreed to fund the installation of fixtures in each of the Buyer’s stores to display potted herbs in an aggregate amount estimated to be $806,947. These payments will be made as a weekly deduction from the Company’s receivables from the Buyer. The Supply Agreements will expire on December 31, 2026. The Supply Agreements may be renewed for an additional two-year term upon the mutual agreement but may be terminated by the Buyer without cause upon sixty days’ prior notice.

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Cedar Cash Advance Agreement

On March 14, 2024, the Company entered into a standard merchant cash advance agreement (the “Advance Agreement” with Cedar Advance LLC (“Cedar”), pursuant to which the Company agreed to sell $1,491,000 of trade receivables to Cedar in exchange for $1,000,000 of cash proceeds, after deducting $50,000 for underwriting fees and other transaction expenses. On May 7, 2024, the Company entered into an amended and restated standard merchant cash advance agreement (the “Restated Agreement”) with Cedar that amends and restates the Advance Agreement. Except as amended by the Restated Agreement, the remaining terms of the Advance Agreement remain in full force and effect. Under the Restated Agreement, the Company sold to Cedar an additional $994,000 of its future accounts receivable for a purchase price of $700,000, less aggregate fees and expenses of $87,500, for additional net funds provided of $544,250, bringing the total financing with Cedar to $2,485,000 in accounts receivable sold for $1,544,250 of net funds provided. Pursuant to the Restated Agreement, the Company is required to pay Cedar 35.0% of all funds collected from customers for the sale of goods and services. Weekly, Cedar is authorized to withdraw $65,000 of funds from Edible Garden’s bank account until such time a reconciliation is provided calculating the 35.0% of collections owed to Cedar, until such time the total balance of $2,485,000 is repaid. The Restated Agreement is collateralized by the Company’s cash and receivable accounts. In the event of a default (as defined in the Restated Agreement), Cedar, among other remedies, can enforce its security interest in the collateral and demand payment in full of the uncollected amount of receivables purchased plus all fees due under the Restated Agreement.

Reverse Stock Split

As of April 5, 2024, we effected a 1-for-20 reverse stock split of our outstanding common stock. The conversion or exercise prices of our issued and outstanding stock options and warrants were adjusted in connection with the reverse stock split.

Nasdaq Compliance

On April 11, 2024, we received letters from the Listing Qualifications Department of The Nasdaq Stock Market LLC (“Nasdaq”) indicating that we do not comply with the minimum stockholders’ equity requirement for continued listing on Nasdaq under Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Rule”) and Nasdaq Listing Rule 5550(a)(4), which requires us to have a minimum of 500,000 publicly held shares (the “Publicly Held Shares Rule”). These notices of noncompliance have no immediate impact on the continued listing or trading of our securities on Nasdaq, which will continue to be listed and traded on Nasdaq, subject to our compliance with the other Nasdaq continued listing requirements. By May 28, 2024, we must submit a plan to Nasdaq showing how we intend to regain compliance with the Stockholders’ Equity Rule. Because there are 549,392 shares of common stock outstanding as of May 6, 2024, (of which 3,360 are held by our officers and directors), we believe we are in compliance with the Publicly Held Shares Rule.

We intend to take all reasonable measures available to regain compliance under Nasdaq’s listing rules and remain listed on Nasdaq. 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 Nasdaq’s listing rules within the time period permitted by Nasdaq, then our securities will be delisted from Nasdaq.

On April 19, 2024, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that we had regained compliance with the minimum bid price requirement under Nasdaq Rule 5550(a)(2).

CRITICAL ACCOUNTING ESTIMATES

The preparation of the unaudited 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.

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

Revenue Recognition

Revenues is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. The Company does not offer returns, discounts, loyalty programs or other sales incentive programs that are material to revenue recognition. Payments from our customers are due upon delivery or within a short period after delivery.

Property, Equipment and Leasehold Improvements

Property, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Our fixed assets, which are comprised of leasehold improvements, equipment and vehicles, have useful lives of five years. Expenditures for major renewals and improvements are capitalized, while minor replacements, maintenance and repairs, which do not extend the asset lives, are charged to operations as incurred. Upon sale or disposition, the cost and related accumulated depreciation are removed from the accounts and any gain or loss is included in operations.

The Company continually monitors events and changes in circumstances that could indicate that the carrying balances of its property, equipment and leasehold improvements may not be recoverable in accordance with the provisions of ASC 360, “Property, Plant, and Equipment.” When such events or changes in circumstances are present, the Company assesses the recoverability of long-lived assets by determining whether the carrying value of such assets will be recovered through undiscounted expected future cash flows. If the total of the future cash flows is less than the carrying amount of those assets, the Company recognizes an impairment loss based on the excess of the carrying amount over the fair value of the assets.

Income Taxes

The provision for income taxes is determined in accordance with ASC 740, “Income Taxes.” The Company files a consolidated United States federal income tax return. The Company provides for income taxes based on enacted tax law and statutory tax rates at which items of income and expense are expected to be settled in our income tax return. Certain items of revenue and expense are reported for Federal income tax purposes in different periods than for financial reporting purposes, thereby resulting in deferred income taxes. Deferred taxes are also recognized for operating losses that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. The Company has incurred net operating losses for financial-reporting and tax-reporting purposes. At March 31, 2024 and December 31, 2023, 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 MARCH 31, 2024 AND 2023

Revenue

Revenue was $3.132 million for the three months ended March 31, 2024, compared to $2.455 million for the three months ended March 31, 2023. The increase in revenue of $677 thousand, or 27.6%, was primarily attributed to an increase in customer demand for our cut herbs and potted herbs products. Revenue from cut herbs increased from $412 thousand in the three months ended March 31, 2023 to $997 thousand in the three months ended March 31, 2024. Revenue from potted herbs increased from $1.1 million in the three months ended March 31, 2023 to $1.4 million in the three months ended March 31, 2024. Offsetting these increases was a decrease in vitamins and supplements revenue of $190 thousand, from $589 thousand in the three months ended March 31, 2023 to $399 thousand in the three months ended March 31, 2024.

During the three months ended March 31, 2024, total revenue was reduced by approximately $67 thousand as we adjusted the transaction price of our sales to a customer to account for funds we agreed to pay to the customer for the installation of fixtures in their stores. See Note 2, "Summary of Significant Accounting Policies.”

Cost of goods sold

Cost of goods sold were $3.109 million for the three months ended March 31, 2024, compared to $2.479 million for the three months ended March 31, 2023. Cost of goods sold increased $630 thousand, or 25.4%, in line with the increase in revenue for the same period.

Selling, general and administrative

Selling, general and administrative expenses (“SG&A”) were $3.884 million for the three months ended March 31, 2024, compared to $2.691 million for the three months ended March 31, 2023. SG&A increased $1.193 million, or 44.3%, due to a one-time severance charge of $0.6 million and higher audit, accounting and legal fees related to the departure of our Chief Financial Officer.

Loss from operations

Higher SG&A expense resulted in a loss from operations of $3.861 million for the three months ended March 31, 2024, compared to $2.715 million for the three months ended March 31, 2023. The increase in net loss from operations was $1.146 million, or 42.2% compared with the three months ended March 31, 2023.

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Interest expense

Interest expense was $117 thousand for the three months ended March 31, 2024, compared to $234 thousand for the three months ended March 31, 2023. Lower interest expense was related to paying off debt previously outstanding with proceeds from public offerings.

Gain from extinguishment of debt

During the three months ended March 31, 2023, the Company recognized a gain from the extinguishment of debt of $70 thousand by prepaying a promissory note owed to our Predecessor company.

Net loss

Net loss was $3.977 million for the three months ended March 31, 2024, compared to a net loss of $2.879 million for the three months ended March 31, 2023. 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 $3.977 million during the three months ended March 31, 2024 and $10.188 million during the twelve months ended December 31, 2023. 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 raises 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, accounts receivable financing, convertible notes, and related party loans.

As of March 31, 2024 and December 31, 2023, we had $388 thousand and $510 thousand in cash and cash equivalents available, respectively. During the three months ended March 31, 2024, we used $1.06 million of cash for operating activities. As of March 31, 2024 and December 31, 2023, we had a working capital deficit of $6.966 million and $257 thousand, respectively. As of March 31, 2024 and December 31, 2023, we had $5.290 million and $4.427 million of total debt outstanding, respectively. To meet our cash needs, we entered into the Advance Agreement and the Restated Agreement, raised approximately $1.1 million in an at-the-market offering and are implementing cost savings strategies. See “Capital Resources” below for additional details.

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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 our Annual Report on Form 10-K, filed with the SEC on April 1, 2024.

Capital Resources

On February 6, 2024, we entered into the EDA with Maxim as sales agent, pursuant to which we may, from time to time, issue and sell shares of common stock through Maxim in an at-the-market offering for an aggregate offering price of up to $1,146,893. To date, we have received net proceeds of approximately $1.1 million from the sale of common stock under the EDA after deducting Maxim’s commission of 3.5% of the gross proceeds and other offering expenses.

On March 14, 2024, we entered into the Advance Agreement with Cedar, pursuant to which we agreed to sell $1,491,000 of trade receivables to Cedar in exchange for $1,000,000 of cash proceeds, after deducting $50,000 for underwriting fees and other transaction expenses. On May 7, 2024, we entered into the Restated Agreement with Cedar, pursuant to which we sold Cedar an additional $994,000 of our future accounts receivable for a purchase price of $700,000, less aggregate fees and expenses of $87,500, for additional net funds provided of $544,250, bringing the total financing with Cedar to $2,485,000 in accounts receivable sold for $1,544,250 of net funds provided. Pursuant to the Restated Agreement, we are required to pay Cedar 35.0% of all funds collected weekly from customers for the sale of goods and services. Weekly, Cedar is authorized to withdraw $65,000 of funds from our bank account until such time a reconciliation is provided calculating the 35.0% of collections owed to Cedar, until such time the total balance of $2,485,000 is repaid. The Restated Agreement is collateralized by our cash and receivable accounts. In the event of a default (as defined in the Restated Agreement), Cedar, among other remedies, can enforce its security interest in the collateral and demand payment in full of the uncollected amount of receivables purchased plus all fees due under the Restated Agreement.

For more information on our outstanding debt as of March 31, 2024 and December 31, 2023, see Note 7 to our financial statements.

Cash Flows

Operating activities

During the three months ended March 31, 2024 and 2023, cash used for operating activities was $1.059 million and $3.319 million, respectively. Cash expenditures for the three months ended March 31, 2024 decreased primarily due to a decrease in payments to vendors, higher collections and the impact of depreciation, offset by a higher operating loss.

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Investing activities

During the three months ended March 31, 2024 and 2023, cash used in investing activities was $55 thousand and $361 thousand, respectively. The decrease was due to lower purchases of property, equipment and leasehold improvements.

Financing activities

During the three months ended March 31, 2024 and 2023, cash provided by financing activities was $992 thousand and $7.518 million, respectively. The decrease in cash provided by financing activities was primarily driven by completion of the February 2023 public offering, which resulted in a net cash inflow after offering expenses of $9.26 million in the prior period. The decrease was offset by an increase in net proceeds from debt of $2.59 million in the three months ended March 31, 2024 versus the prior period, as proceeds from debt issuances were higher and payments of debt principal were lower in the current versus the prior period. The decrease was also offset by $134 thousand of proceeds from the EDA, net of commissions.

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Interim Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2024 pursuant to Rule 13a-15 under the Exchange Act. Based on that evaluation, our Chief Executive Officer and Interim Chief Financial Officer have concluded that, as of March 31, 2024, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were ineffective as of March 31, 2024, 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, 2023. 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 April 11, 2024, we received a letter from the Listing Qualifications Department of Nasdaq indicating that we do not comply with the minimum stockholders’ equity requirement for continued listing on Nasdaq under the Stockholders’ Equity Rule because: (i) our stockholders’ equity was less than the required minimum of $2,500,000; and (ii) as of August 19, 2022, we did not meet the alternative compliance standards of market value of listed securities of $35 million or net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three most recently completed fiscal years. As of March 31, 2024, our stockholders’ deficit is $4,088,000 and, we have not regained compliance with the Stockholders’ Equity Rule.

In addition, on April 11, 2024, we received a letter from the Listing Qualifications Staff of Nasdaq indicating that we were not in compliance with the Publicly Held Shares Rule, which requires us to have a minimum of 500,000 publicly held shares. This notice of noncompliance has no immediate impact on the continued listing or trading of our securities on Nasdaq, which will continue to be listed and traded on Nasdaq, subject to our compliance with the other Nasdaq continued listing requirements. We have until May 28, 2024 to submit a letter to Nasdaq with our plan to regain compliance with the Stockholders’ Equity Rule and the Publicly Held Shares Rule. If Nasdaq does not accept our plan, Nasdaq will provide notice that our common stock will be subject to delisting, and we would then be entitled to appeal that determination to a Nasdaq hearings panel.

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.

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