Eightco Holdings Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; filed August 10, 2023. The company operates an inventory-management solutions business (Forever 8) and a corrugated-packaging business. It said it no longer intends to generate revenue from its Web3 business. Forever 8 was acquired in October 2022, so comparisons with 2022 are not fully like-for-like.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $20.55 million | $7.35 million | $36.44 million | $11.07 million |
| Gross profit | $2.53 million | $0.80 million | $4.35 million | $1.34 million |
| Operating loss | $(2.76) million | $(3.49) million | $(6.29) million | $(4.87) million |
| Net loss | $(8.85) million | $(3.46) million | $(58.70) million | $(4.59) million |
| Basic and diluted loss per share | $(3.54) | $(7.71) | $(31.35) | $(10.03) |
- Revenue increased 180% in Q2 and 229% in the first half, primarily from Forever 8 inventory-management sales. Q2 gross margin was approximately 12.3%, versus 10.9% a year earlier; first-half gross margin was approximately 11.9%, versus 12.1%.
- First-half operating cash use was $5.67 million; investing cash use was $0.09 million; financing provided $4.56 million. Cash and cash equivalents were $4.37 million at June 30, while restricted cash was separately reported at $2.85 million.
- At June 30, total current assets were $17.39 million and current liabilities were $20.93 million, a working-capital deficit of approximately $3.54 million. Cash and equivalents were down from $5.58 million at December 31, 2022.
- Balance-sheet carrying amounts included a $4.03 million line of credit, $3.66 million of convertible notes net of discounts, and $25.13 million of related-party convertible notes net of discounts. The company also reported $7.23 million due to its former parent, Vinco Ventures.
Changes, outlook, and risks
- The first-half net loss was driven chiefly by a $46.93 million non-cash loss on warrant issuance/modification and $5.55 million of net interest expense. Q2 included a $3.39 million warrant loss and $2.74 million of net interest expense. These items substantially increased reported losses.
- Management attributed higher selling, general and administrative costs to professional fees, payroll, insurance, rent, selling and warehousing fees, and costs of operating as a standalone public company. The filing recorded a $0.29 million impairment charge in 2023.
- Management stated that approximately $2.4 million of cash and equivalents as of the report date was expected to support projected operating needs for at least 12 months. It also said additional capital may be needed to grow revenue; equity financing could be dilutive, debt financing could carry restrictive covenants, and access to financing is not assured. No quantified revenue or earnings guidance was provided.
- Customer concentration is significant: one customer represented 78% of first-half revenue. The filing also reports concentration in receivables, though its disclosures differ (two customers at 35% and 12% of receivables in one note; one customer at approximately 17% elsewhere).
- The March 2023 secured convertible note had $5.56 million initial principal, matured January 15, 2024, and carried a conversion price subject to adjustment. Default provisions include potential 18% default interest and redemption premiums. Warrants and convertible securities could materially dilute shareholders; the filing lists approximately 8.97 million common-stock equivalents excluded from diluted EPS as anti-dilutive.
- The company completed a 1-for-50 reverse stock split and changed its name and ticker to Eightco Holdings Inc. and OCTO in April 2023. Nasdaq notified the company it had regained minimum-bid-price compliance on April 18, 2023.
- Management said disclosure controls were not effective at June 30, 2023 because of a continuing material weakness in timely financial reporting, limited accounting staff, and inadequate segregation of duties and controls. It planned to use outside consultants to assist remediation. Routine legal matters were not expected to have a material adverse effect; the company reported no material changes to its risk factors.
Important facts for investors to verify
- Reconcile the cash disclosures: the balance sheet reports $4.37 million of cash plus $2.85 million restricted cash, while the cash-flow statement reports ending cash and restricted cash of $4.37 million. Confirm the amount actually available for operations.
- Reconcile the MD&A operating-cash-flow figure, which states $(5.57) million, with the cash-flow statement’s $(5.67) million.
- Assess whether management’s stated 12-month liquidity expectation remains credible given cash use, the working-capital deficit, restricted cash, debt maturities, and the need for potential additional capital.
- Review the warrant and convertible-note terms, including adjustment and default provisions, and their potential effects on dilution and repayment obligations.
- Evaluate dependence on the major revenue customer and the receivables concentration disclosures, and distinguish acquired-business growth from organic growth.
- Track remediation of the material weakness and confirm that financial reporting controls improve.