Edible Garden AG Inc: Form 10-Q for the period ended Jun 30, 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;
• our ability to repay, refinance, or restructure our substantial indebtedness;
• 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 the Nasdaq Stock Market LLC (“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 handheld 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

Cedar Cash Advance Agreement

On March 14, 2024, we entered into a standard merchant cash advance agreement (the “Advance Agreement”) with Cedar Advance LLC (“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 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, 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. Under 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 or until 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.

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 Nasdaq indicating that we did 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.

On May 28, 2024, we submitted a letter to Nasdaq with our plan to regain compliance with the Stockholders’ Equity Rule and on June 17, 2024, we received a letter from the Listing Qualifications Department of Nasdaq indicating that Nasdaq granted us until October 8, 2024 to regain compliance with the Stockholders’ Equity Rule.

On June 17, 2024, we received a letter from the Listing Qualifications Department of Nasdaq indicating that we had regained 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.

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Public Offering

On May 23, 2024, we closed on a best-efforts public offering (the “Offering”) of (i) 2,437,000 common units, each consisting of one share of common stock, one Class A warrant (“Class A Warrant”) to purchase one share of common stock and one Class B warrant (“Class B Warrant,” together with the Class A Warrants, the “Warrants”) to purchase one share of common stock at a purchase price of $2.26 per unit; and (ii) 218,000 pre-funded units, each consisting of one pre-funded warrant to purchase one share of common stock, one Class A Warrant and one Class B Warrant at a purchase price of $2.25 per unit. The Warrants had an exercise price of $2.26 per share, subject to an exercise price reset, which took effect on June 22, 2024 and reduced the exercise price of the Warrants to $1.49 per share. Gross proceeds from the Offering, before deducting placement agent fees and estimated offering expenses, were approximately $6 million.

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.

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 Accounting Standards Codification (“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.

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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 June 30, 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.

RESULTS OF OPERATIONS

COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2024 AND 2023

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Revenue

Revenue was $4.268 million for the three months ended June 30, 2024, compared to $4.221 million for the three months ended June 30, 2023. The increase in revenue of $47 thousand, or 1.1%, was driven by growth in our core products with cut herbs growing 61% ($433 thousand). Our strategic shift away from lower margin products offset the revenue increase in our core products. Specifically, the floral business resulted in a decrease of $227 thousand (24%). During the three months ended June 30, 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 $2.7 million for the three months ended June 30, 2024, compared to $3.668 million for the three months ended June 30, 2023. Cost of goods sold decreased $966 thousand, or 26.3%, primarily driven by the elimination of the use of large third-party growers that previously made up a material portion of our cost of goods sold.

Selling, general and administrative

Selling, general and administrative expenses (“SG&A”) were $2.748 million for the three months ended June 30, 2024, compared to $2.38 million for the three months ended June 30, 2023. SG&A increased $368 thousand, or 15.5%, due to a one-time bonus charge of $0.1 million and higher audit, accounting and legal fees related to our capital raising activities.

Loss from operations

Lower cost of goods sold resulted in a loss from operations of $1.182 million for the three months ended June 30, 2024, compared to $1.827 million for the three months ended June 30, 2023. The decrease in net loss from operations was $645 thousand, or 35.3% compared with the three months ended June 30, 2023.

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Interest expense

Interest expense was $419 thousand for the three months ended June 30, 2024, compared to $44 thousand for the three months ended June 30, 2023. Higher interest expense was related to our entry into the Restated Agreement in the second quarter of 2024.

Loss from extinguishment of debt

During the three months ended June 30, 2024, we recognized a loss from the extinguishment of the Advance Agreement of $335 thousand.

Net loss

Net loss was $1.932 million for the three months ended June 30, 2024, compared to a net loss of $638 thousand for the three months ended June 30, 2023. In addition to the reasons explained above, the company recorded one time income of $1.233 million in the three months ended June 30, 2023 related to submission of a claim to the IRS for the employee retention credit (“ERC”). See Note 7 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023 for more information about our ERC claim.

COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2024 AND 2023

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Revenue

Revenue was $7.401 million for the six months ended June 30, 2024, compared to $6.676 million for the six months ended June 30, 2023. The increase in revenue of $725 thousand, or 10.9%, was primarily attributed to an increase in customer demand for our core products. Primarily, revenue from cut herbs increased by 81% ($1.1 million) in the period. This was offset by a decrease of $479 thousand or 42% in floral sales.

During the six months ended June 30, 2024, total revenue was reduced by approximately $124 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 $5.811 million for the six months ended June 30, 2024, compared to $6.148 million for the six-month period ended June 30, 2023. Cost of goods sold decreased $337 thousand, or 5.48%, primarily due to our shift away from using third party growers for some of our produce business.

Selling, general and administrative

SG&A were $6.632 million for the six months ended June 30, 2024, compared to $5.071 million for the six months ended June 30, 2023. SG&A increased $1.561 million, or 30.78%, due to the departure of our Chief Financial Officer, a related one-time severance charge of $0.6 million and higher audit, accounting and legal fees related to our capital raising activities.

Loss from operations

Higher SG&A expense resulted in a loss from operations of $5.042 million for the six months ended June 30, 2024, compared to $4.543 million for the six months ended June 30, 2023. The increase in net loss from operations was $499 thousand, or 10.98% compared with the six months ended June 30, 2023.

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Interest expense

Interest expense was $536 thousand for the six months ended June 30, 2024, compared to $277 thousand for the six months ended June 30, 2023. Higher interest expense was a result of the company entering into the Advance Agreement and the Restated Agreement.

Loss from extinguishment of debt

During the six months ended June 30, 2023, the Company recognized a loss from the extinguishment of debt of $335 thousand related to the Restated Agreement.

Net loss

Net loss was $5.909 million for the six months ended June 30, 2024, compared to a net loss of $3.517 million for the six months ended June 30, 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 $5.909 million during the six months ended June 30, 2024 and $10.188 million during the twelve months ended December 31, 2023. As of June 30, 2024, we have an accumulated deficit of $36.3 million. Our operating activities used $5.6 million and $8.5 million of cash during the six months ended June 30, 2024 and the year ended December 31, 2023, respectively. 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. In addition, before June 30, 2025, approximately $4.9 million of short-term debt, net of discounts will become due and payable.

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.

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As of June 30, 2024 and December 31, 2023, we had $2.188 million and $510 thousand in cash and cash equivalents available, respectively. During the six months ended June 30, 2024, we used $5.649 million of cash for operating activities. As of June 30, 2024 and December 31, 2023, we had a working capital deficit of $2.315 million and $257 thousand, respectively. As of June 30, 2024 and December 31, 2023, we had $5.735 million and $4.445 million of total gross debt outstanding, respectively. To meet our cash needs, we entered into the Advance Agreement and the Restated Agreement, raised approximately $5.998 million in gross proceeds in an best efforts public offering, $1.1 million in an at-the-market offering and are implementing cost savings strategies. See “Capital Resources” below for additional details.

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” below and 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. As of June 30, 2024, we used $821 thousand of the proceeds received from the closing of the Offering to repay the remaining principal due for the Advance Agreement and $297 thousand to pay future interest that would have been due under the Advance Agreement under the original maturity date.

On May 23, 2024, we closed on the Offering of (i) 2,437,000 common units, each consisting of one share of common stock, one Class A Warrant to purchase one share of common stock and one Class B Warrant to purchase one share of common stock at a purchase price of $2.26 per unit; and (ii) 218,000 pre-funded units, each consisting of one pre-funded warrant to purchase one share of common stock, one Class A Warrant and one Class B Warrant at a purchase price of $2.25 per unit. The Warrants had an exercise price of $2.26 per share, subject to an exercise price reset, which took effect on June 22, 2024 and reduced the exercise price of the Warrants to $1.49 per share. Gross proceeds from the Offering, before deducting placement agent fees and estimated offering expenses, were approximately $6 million.

For more information on our outstanding debt as of June 30, 2024 and December 31, 2023, see Note 7 to our financial statements.

Cash Flows

Operating activities

During the six months ended June 30, 2024 and 2023, cash used for operating activities was $5.649 million and $5.568 million, respectively. Cash expenditures for the six months ended June 30, 2024 increased primarily due to an increase in our net loss, an increase in payments to vendors and lower collections.

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Investing activities

During the six months ended June 30, 2024 and 2023, cash used in investing activities was $167 thousand and $591 thousand, respectively. The decrease was due to lower purchases of property, equipment and leasehold improvements related to the completion of our Michigan facility.

Financing activities

During the six months ended June 30, 2024 and 2023, cash provided by financing activities was $7.494 million and $7.417 million, respectively, due to the activity described above under “Capital Resources.”

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 June 30, 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 June 30, 2024, our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) were ineffective as of June 30, 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 15, 2024, we do 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 June 30, 2024, our stockholders’ equity is $366 thousand and we have not regained compliance with the Stockholders’ Equity Rule.

On June 17, 2024, we received a letter from the Listing Qualifications Department of the Nasdaq Stock Market LLC indicating that Nasdaq granted the Company until October 8, 2024 to regain compliance with requirements for continued listing on Nasdaq.

On or before October 8, 2024, we must evidence compliance with the Stockholders’ Equity Rule, which requires us to have a minimum $2,500,000 in stockholders’ equity, $35,000,000 market value of listed securities, or $500,000 net income from continuing operations. If we fail to regain compliance with the Stockholders’ Equity Rule, or fail to evidence compliance with the Rule in our periodic report for the year ending December 31, 2024, we may be subject to delisting. In that event, we would have the right to a hearing before a Nasdaq hearings panel, which would stay any suspension or delisting action pending the conclusion of the hearing process and the expiration of any additional extension period granted by the panel following the hearing.

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 may not be able to repay, refinance, or restructure our substantial indebtedness, which would have a material adverse effect on our financial condition and may cause us to discontinue our business.

The promissory note initially issued to Sament Capital Investments, Inc. and later assigned to third parties (the “Sament Note”) is secured by a security interest in all of our assets located at our Belvidere, New Jersey facility, and the promissory note (the “Michigan Note”) issued in connection with our purchase of the assets of 2900 Madison Ave. SE, Grand Rapids, Michigan (the “Property”) is secured by a mortgage on the Property and a security interest in the assets at the Property. In addition, the balance under the Restated Agreement is collateralized by our cash and receivable accounts. As of June 30, 2024, we had short-term debt, net of discounts of $4.9 million. Short-term debt, net of discounts, as of June 30, 2024, includes the outstanding principal balance under the Sament Note of $3.1 million, $308 thousand of the outstanding balance of the Michigan Note and $1.5 million of the outstanding balance of the Restated Agreement. 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 and may limit our ability to adequately operate our business. If we were to attempt to sell material assets or operations, the foregoing encumbrances may limit our ability to dispose of material assets or operations.

We cannot provide any assurances that we will be able to generate cash from operating activities or raise the necessary amount of capital to repay these obligations or that we will be able to extend the maturity dates or otherwise refinance these obligations. If we are unable to generate sufficient income or raise additional capital, we may default on our obligations under these loans and arrangements. We recognized net losses of $6.1 million and $10.2 million during the six months ended June 30, 2024 and the year ended December 31, 2023, respectively. As of June 30, 2024, we have an accumulated deficit of $36.3 million. Our operating activities used $5.6 million and $8.5 million of cash during the six months ended June 30, 2024 and the year ended December 31, 2023, respectively. If we are unable to raise additional capital or improve our ability to generate cash from operating activities, we would not have sufficient cash on hand or available liquidity that can be utilized to repay our short-term debt obligations when they become due. If we were to default on our obligations under these loans and arrangements, the secured counterparties would have the right to our assets. In the event that the counterparties enforced their rights to our assets, we may have to discontinue our business, and our stockholders could lose all or a part of their investment in us.

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