Eightco Holdings Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; filed May 15, 2023. The company’s businesses included Forever 8 inventory financing, corrugated packaging and Web3-related activities. Forever 8 was acquired in October 2022, so the prior-year comparison does not include that business for the comparable period. The company said it no longer intends to generate revenue from its Web3 business.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Revenue | $15.89 million | $3.72 million |
| Gross profit / margin | $1.82 million / 11.5% | $0.55 million / 14.7% |
| Operating expenses | $5.35 million | $1.92 million |
| Operating loss | $3.53 million | $1.38 million |
| Net loss | $49.85 million | $1.14 million |
| Operating cash flow | $(4.94) million | $(1.55) million |
- Revenue increased 327%, primarily due to Forever 8. Gross profit rose 234%, but gross margin declined approximately 3.2 percentage points. SG&A increased 178%, which management attributed to higher professional fees, payroll, insurance, rent, selling and warehousing costs, and standalone public-company costs.
- Q1 net loss included a $43.54 million loss on warrant issuance/modification and $2.81 million of net interest expense. The warrant charge was the main reason net loss rose sharply; the filing describes substantial warrant valuation and modification accounting.
- At March 31, cash and cash equivalents were $3.09 million, restricted cash was $2.85 million, current assets were $16.95 million, and current liabilities were $16.34 million. Inventories were $7.88 million, including a new $0.30 million obsolescence reserve. Cash and cash equivalents declined from $5.58 million at year-end.
- Balance-sheet obligations included $24.88 million of related-party convertible notes, $1.85 million under lines of credit, $7.23 million due to the former parent, and convertible notes with net carrying amounts of $1.96 million in total across current and long-term portions. The filing presents debt in multiple categories; investors should review the notes for principal, discounts, maturities and terms.
- Financing provided $2.38 million of cash in Q1, including $3.15 million of net convertible-note borrowings, partly offset by financing costs and repayments. Investing activities provided $0.07 million, mainly reflecting proceeds from asset sales.
Material changes, outlook and risks
- Forever 8 generated $13.95 million of Q1 revenue; Corrugated generated $1.94 million. Inventory Management Solutions had a $0.49 million operating loss, while Corrugated reported $0.15 million of operating income. One customer accounted for 77% of consolidated revenue; two customers represented 35% of accounts receivable.
- Management stated that approximately $3.1 million of cash was expected to fund projected operating needs for at least 12 months from the report date, while also stating that additional capital would be needed to grow revenue. The company cautioned that equity financing could be dilutive, debt financing could carry restrictive covenants, and access to capital was not assured.
- The March 2023 financing included a $5.555 million senior secured convertible note, issued for $5.0 million, due January 15, 2024, and warrants for up to 889,512 shares. The note has a $6.245 initial conversion price, anti-dilution provisions, security interests, covenants and potential default-redemption premiums. The company also amended its earlier note and warrant arrangements; those instruments and related potential dilution warrant review.
- After quarter-end, the company effected a 1-for-50 reverse stock split and changed its name from Cryptyde, Inc. to Eightco Holdings Inc.; the shares began trading as OCTO on April 4. Nasdaq notified the company on April 18 that it had regained minimum-bid-price compliance.
- Management reported that disclosure controls were not effective and that a material weakness in internal control over financial reporting persisted at March 31, citing limited accounting personnel, delayed financial reporting and inadequate segregation of duties and transaction controls. Management planned to use outside consultants to help address deficiencies.
- Other risks include inventory obsolescence and customer concentration, financing and dilution, debt repayment, reliance on business partners, execution of the strategic transition, and maintaining Nasdaq listing compliance. Management reported no material adverse expectation from routine legal proceedings and no off-balance-sheet arrangements as of March 31.
Important facts for investors to verify
- Cash availability and restrictions, forecast cash burn, and whether the stated 12-month liquidity expectation remains supportable.
- Full debt and warrant terms, including conversion and exercise prices, collateral, maturity, redemption rights, defaults and potential share dilution.
- The nature and accounting support for the $43.54 million warrant-related loss, and the impact of future warrant revaluations or modifications.
- Forever 8 inventory quality, receivable collectability, customer concentration and the sustainability of revenue and gross margins.
- Progress in remediating the material weakness and improving financial reporting controls.