Eightco Holdings Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; filed November 14, 2023. The company operates Forever 8 inventory management solutions and corrugated packaging, and reported that it no longer intends to generate revenue from its Web3 business. Forever 8 was acquired October 1, 2022, so comparisons with 2022 are not fully like-for-like.
Financial results and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $23.3 million | $4.7 million | $59.8 million | $15.8 million |
| Gross profit | $2.7 million | $0.4 million | $7.1 million | $1.8 million |
| Gross margin | 11.8% | 8.9% | 11.9% | 11.2% |
| Operating loss | $(0.7) million | $(3.8) million | $(7.0) million | $(8.6) million |
| Net loss | $(3.5) million | $(34.9) million | $(62.2) million | $(39.4) million |
| Operating cash flow | Not separately presented for the quarter | $(6.7) million | $(15.2) million |
- Revenue and segments: Q3 revenue rose 396%; nine-month revenue rose 279%, primarily from Forever 8. Nine-month revenue was $53.5 million from Inventory Management Solutions and $6.2 million from Corrugated. One customer accounted for 72% of nine-month revenue; one customer represented 44% of period-end receivables.
- Costs and earnings: Nine-month SG&A increased 33% to $13.8 million. The nine-month loss included a $46.9 million warrant-issuance loss and $8.3 million net interest expense. The warrant loss was noncash; Q3 2023 had no warrant-issuance loss, versus $25.3 million in Q3 2022.
- Cash and working capital: September 30 cash and cash equivalents were $3.66 million, with another $2.85 million restricted. Current assets were $17.82 million and current liabilities $25.99 million. Cash and restricted cash together declined $1.92 million during the first nine months.
- Debt and obligations: September 30 balances included a $4.43 million line of credit, $5.36 million current convertible note net of discount, and $25.38 million related-party convertible notes net of discount. The company also reported $7.23 million due to its former parent and $6.1 million contingent consideration. Lines of credit bear 15% interest and mature June 30, 2024, with an extension option.
- Equity: Total stockholders’ equity was $2.73 million, down from $5.81 million at December 31, 2022. Common shares outstanding were 4.22 million at September 30 and 4.34 million as of November 14, 2023.
Material changes and management commentary
- Management stated that existing cash and internally generated cash flows are insufficient for the next 12 months and disclosed substantial doubt about the company’s ability to continue as a going concern. It expects additional capital will be needed to maintain revenue at current levels; financing may be unavailable, dilutive, or restrictive.
- After quarter-end, the company agreed to pay Hudson Bay $8.215 million in six installments to prepay notes and redeem a warrant. It reported paying the initial $3.0 million on October 25, 2023. Timely completion is material: the agreement suspends certain cash-payment obligations and makes the March 2023 note nonconvertible after the initial payment, subject to default or missed-payment provisions.
- Forever 8 entered into Series B and Series C secured loan arrangements after quarter-end. Series B bears 15% interest and Series C 18%, with additional commitment fees and default charges. The filing does not provide a clear total commitment or full Series C advance amount.
- On October 13, the company committed to reducing its workforce by six employees and said senior executives and directors would defer all or part of their compensation. It estimated a one-time fourth-quarter charge of approximately $0.3 million.
- Nasdaq notified the company of noncompliance with the $1.00 minimum bid-price requirement, giving it until March 27, 2024 to regain compliance; failure could result in delisting.
- Disclosure controls were deemed ineffective, and management said a previously identified material weakness related to limited accounting personnel and financial-reporting controls remained as of September 30. Remediation plans include outside consultants.
- The filing gives no specific revenue or earnings guidance. Management cited inflation, interest rates, consumer confidence, capital-market volatility, supply-chain disruptions, financial-sector uncertainty, and geopolitical conflicts as risks.
Investor verification priorities
- Confirm cash availability, including restrictions, near-term cash needs, and the company’s ability to fund operations and meet the going-concern challenge.
- Track completion of the $8.215 million note prepayment schedule, related conversion/default provisions, and the terms and actual funding of Forever 8’s secured loans.
- Assess customer concentration, receivable collectability, and inventory quality; the company recorded a $0.6 million inventory-obsolescence reserve and a $0.6 million allowance for doubtful accounts.
- Evaluate potential dilution from convertible notes, warrants, equity issuances, and the post-quarter consultant share issuance.
- Monitor Nasdaq bid-price compliance and progress remediating the material weakness in financial reporting controls.
- Distinguish operating performance from noncash warrant and debt-discount charges when evaluating reported losses and cash generation.