Amendment: SEC Form 10-Q/A filed by Eightco Holdings Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
Amendment No. 1
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to ________
Commission
file number:
(Exact Name of Registrant as Specified in its Charter)
| (State or Other Jurisdiction | (I.R.S. Employer | |
| of Incorporation or Organization) | Identification No.) |
| (Address of Principal Executive Offices) | (Zip Code) |
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| The
|
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ |
| Smaller
Reporting Company | |
| Emerging
Growth Company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes
As of May 15, 2024, there were shares of the registrant’s common stock outstanding.
EXPLANATORY NOTE
| ● | The $3,006,896 previously recognized as other income has been reclassified as an adjustment to Additional Paid-In Capital in the equity section of the balance sheet, reflecting the capital nature of the transaction. | |
| ● | The reclassification reduced the previously reported net income for the quarter ended March 31, 2024 by $3,006,896. | |
| ● | Correspondingly, total stockholders’ equity was unaffected by the reclassification, as the adjustment was made within the equity section of the balance sheet. |
Accordingly, the Company is filing this Amendment to modify disclosures in the following sections of the Original 10-Q:
Part I
Item 1. Financial Statements
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Additionally, the Company is filing new certifications required by the Sarbanes-Oxley Act of 2002.
Other than as set forth above, this Amendment does not reflect events occurring after the filing of the Original 10-Q, and no other information in the Original 10-Q is amended hereby. Other events or circumstances occurring after the date of the Original 10-Q or other disclosures necessary to reflect subsequent events have not been updated subsequent to the date of the Original 10-Q. Accordingly, this Amendment should be read in conjunction with the Original 10-Q and our filings with the SEC subsequent thereto.
PART I - FINANCIAL INFORMATION
EIGHTCO HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
| March 31, | December 31, | |||||||
| 2024 | 2023 | |||||||
| ASSETS | ||||||||
| Current assets: |
| |||||||
| Cash and cash equivalents | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Inventories | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Intangible assets, net | ||||||||
| Goodwill | ||||||||
| Loan held-for-investment | ||||||||
| Total assets | $ | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accounts payable – related parties | ||||||||
| Accrued expenses and other current liabilities | ||||||||
| Accrued expenses and other current liabilities – related parties | ||||||||
| Current portion of convertible notes payable, net of debt discount of $ | ||||||||
| Convertible notes payable – related parties, | ||||||||
| Line of credit | ||||||||
| Line of credit – related parties | ||||||||
| Due to Former Parent | ||||||||
| Total current liabilities | ||||||||
| Convertible notes payable – related parties, net of debt discount of $ | ||||||||
| Deferred tax liabilities | ||||||||
| Contingent consideration | ||||||||
| Total liabilities | $ | $ | ||||||
| Stockholders’ equity (deficit): | ||||||||
| Preferred stock, $ par value, shares authorized and and shares outstanding at March 31, 2024 and December 31, 2023, respectively | $ | $ | ||||||
| Common stock, $ par value, shares authorized and and shares outstanding at March 31, 2024 and December 31, 2023, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Foreign currency translation | ||||||||
| Total stockholders’ equity (deficit) attributable to Eightco Holdings Inc. | ( | ) | ||||||
| Non-controlling interest | ( | ) | ( | ) | ||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
| 3 |
EIGHTCO HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues, net | $ | $ | ||||||
| Cost of revenues | ||||||||
| Gross profit | ||||||||
| Operating expenses: | ||||||||
| Selling, general and administrative expenses | ||||||||
| Restructuring and severance | ||||||||
| Total operating expenses | ||||||||
| Operating loss | ( | ) | ( | ) | ||||
| Non-operating income (expense): | ||||||||
| Interest income (expense), net | ( | ) | ( | ) | ||||
| Loss on issuance of warrants | ( | ) | ||||||
| Gain on forgiveness of earnout | ||||||||
| Other income | ||||||||
| Total non-operating income (expense) | ( | ) | ||||||
| Net income (loss) before income tax expense | ( | ) | ||||||
| Income tax expense (benefit) | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Net income (loss) attributable to non-controlling interest | ( | ) | ||||||
| Net income (loss) attributable to Eightco Holdings Inc. | ( | ) | ||||||
| Net income (loss) per share: | ||||||||
| Net income (loss) per share basic | $ | $ | ( | ) | ||||
| Net income (loss) per share diluted | $ | $ | ( | ) | ||||
| Weighted average number of common shares outstanding – basic | ||||||||
| Weighted average number of common shares outstanding – diluted | ||||||||
See the accompanying notes to the condensed consolidated financial statements.
| 4 |
EIGHTCO HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Unaudited)
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Foreign currency translation – unrealized gain (loss) | ( | ) | ||||||
| Comprehensive income (loss) | $ | $ | ( | ) | ||||
| 5 |
EIGHTCO HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
| Common Stock | Additional Paid in | Non controlling | Retained Earnings (Accumulated) | Accumulated Other | ||||||||||||||||||||||||
| Shares | Amount | Capital | Interest | Deficit | Income | Total | ||||||||||||||||||||||
| Balances, January 1, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Issuance of common stock to note holders | ||||||||||||||||||||||||||||
| Exercise of warrants | ||||||||||||||||||||||||||||
| Share-based compensation | ( | ) | ||||||||||||||||||||||||||
| Issuance of warrants | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | |||||||||||||||||||||||||||
| Net loss for the three months ended March 31, 2023 | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Balances, March 31, 2023 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
| Balances, January 1, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ( | ) | ||||||||||||||||
| Issuance of common stock - investors |
|
|
| |||||||||||||||||||||||||
| Issuance of common stock - conversions | ||||||||||||||||||||||||||||
| Issuance of common stock – settlement of cash warrants | ||||||||||||||||||||||||||||
| Issuance of common stock to noteholders | ||||||||||||||||||||||||||||
| Issuance of common stock to board of directors and former employees | ||||||||||||||||||||||||||||
| Issuance of common stock to consultants | ||||||||||||||||||||||||||||
| Forgiveness of interest – related parties | - | |||||||||||||||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||||||||||
| Foreign currency translation | - | ( | ) | ( | ) | |||||||||||||||||||||||
| Net income for the three months ended March 31, 2024 | - | ( | ) | |||||||||||||||||||||||||
| Balances, March 31, 2024 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||
See the accompanying notes to the condensed consolidated financial statements.
| 6 |
EIGHTCO HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Three Months Ended March 31, 2024 | For the Three Months Ended March 31, 2023 | |||||||
| Cash flows from operating activities: | ||||||||
| Net income (loss) | $ | $ | ( | ) | ||||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Amortization of debt issuance costs | ||||||||
| Loss on issuance of warrants | ||||||||
| Provision for credit losses | ||||||||
| Gain on sale | ||||||||
| Share-based compensation | ||||||||
| Amortization of prepaid share-based compensation | ||||||||
| Gain on forgiveness of earnout | ( | ) | ||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ||||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Accrued expenses and other current liabilities | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities: | ||||||||
| Purchases of property and equipment | ( | ) | ||||||
| Investment in developed technology | ( | ) | ||||||
| Proceeds from sale of property and equipment | ||||||||
| Net cash provided by investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Net proceeds from issuance of common stock | ||||||||
| Net borrowings under convertible notes | ||||||||
| Net borrowings under line of credit | ||||||||
| Fees paid for financing costs | ( | ) | ||||||
| Repayments under convertible notes payable | ( | ) | ||||||
| Repayments under convertible notes payable – related parties | ( | ) | ( | ) | ||||
| Net cash provided by (used in) financing activities | ( | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | ( | ) | ( | ) | ||||
| Cash and cash equivalents, beginning of the year | ||||||||
| Cash and cash equivalents, end of the period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Issuance of warrants to noteholders and placement agent | $ | $ | ||||||
| Issuance of common stock to line of credit holders | $ | $ | ||||||
| Issuance of common stock to vendors for future services | $ | $ | ||||||
| Issuance of common stock to employees and directors for settlement of liabilities | $ | $ | ||||||
| Issuance of common stock to vendors for settlement of liabilities | $ | $ | ||||||
| Issuance of common stock to noteholders for settlement of accrued interest | $ | $ | ||||||
| Issuance of common stock to noteholders for settlement of cash warrant liabilities | $ | $ | ||||||
| Forgiveness of interest – related parties | $ | $ | ||||||
| Original issue discount | $ | $ | ||||||
| Convertible shares under notes payable | $ | $ | ||||||
See the accompanying notes to the condensed consolidated financial statements.
| 7 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
As used herein, “Eightco” and the “Company” refer
to Eightco Holdings Inc., a Delaware corporation originally incorporated on September 21, 2021 (date of inception) under the laws of the
State of Nevada, and subsidiaries and/or where applicable, its management. On March 9, 2022, the Company converted to a Delaware corporation pursuant to a plan of conversion entered into with its former
parent, Vinco Ventures, Inc. (“Vinco” or “Former Parent”). The Company operates in three main businesses: Forever
8 Inventory Cash Flow Solution, Web3 Business, and Packaging Business. Forever 8 Fund LLC (“Forever 8”), which focuses on
purchasing inventory for e-commerce retailers, was acquired by the Company on October 1, 2022, and is part of its Inventory Solution
Business. The Company previously sold BTC mining equipment and developed an NFT character set under its Web3 Business but has no intention
of continuing this business at this time. The Packaging Business manufactures and sells custom packaging for a wide variety of products
and helps customers generate brand awareness and promote brand image through packaging. Prior to the Separation (as defined below), the
Company was
As
of March 31, 2024, Eightco had three wholly-owned subsidiaries: Forever 8, Ferguson Containers, Inc. (“Ferguson Containers”)
and BlockHiro, LLC. Ferguson Containers owns
During 2021, the Former Parent announced it plans to spin-off (the “Separation”) certain of its businesses. The Former Parent included Ferguson Containers as well as other subsidiaries of the Former Parent (the “Eightco Businesses”) as part of the spin-off. In anticipation of the Separation, the Former Parent contributed its assets and legal entities comprising the Eightco Businesses to facilitate the Separation. As a result of the Separation, the Company has become an independent, publicly traded company comprised of the Eightco Businesses as of June 30, 2022.
On March 29, 2022, Ferguson Containers ownership was assigned by the Former Parent to the Company. This transaction between entities under common control resulted in a change in reporting entity and required retrospective combination of the entities for all periods presented, as if the combination had been in effect since the inception of common control. Accordingly, the condensed consolidated financial statements of the Company reflect the accounting of the combined acquired subsidiaries at historical carrying values, except that equity reflects the equity of Eightco.
Basis of Presentation.
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial reporting and with the instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, the unaudited condensed financial statements included herein contain all adjustments necessary to present fairly the Company’s financial position and the results of its operations and cash flows for the interim periods presented. Such adjustments are of a normal recurring nature. The results of operations for the three months ended March 31, 2024 may not be indicative of results for the full year. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and the notes to those statements for the year ended December 31, 2023 included in the Annual Report.
The Company is an emerging growth company as the term is used in The Jumpstart Our Business Startups Act, enacted on April 5, 2021 and has elected to comply with certain reduced public company reporting requirements.
| 8 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
2. RESTATEMENT OF PREVIOUSLY ISSUED FINANCIAL STATEMENTS
In connection
with the Company’s review of its unaudited financial statements for the quarter ended June 30, 2024, the Company identified an error
in the accounting treatment of the forgiveness of accrued interest on convertible promissory notes issued to certain sellers in connection
with the previously disclosed Membership Interest Purchase Agreement dated September 14, 2022 with Forever 8 Fund LLC. The forgiveness
of accrued interest, amounting to an aggregate of $
| ● | The
$ | |
| ● | The reclassification reduced the previously reported net income for the quarter ended March 31, 2024 by $3,006,896. | |
| ● | Correspondingly, total stockholders' equity was unaffected by the reclassification, as the adjustment was made within the equity section of the balance sheet. |
Restated Financial Information: As a result of the restatement, the affected financial statement line items for the quarter ended March 31, 2024, are as follows:
| Line Item | As Previously Reported | As Restated | ||||||
| Gain on forgiveness of interest | $ | $ | ||||||
| Total non-operating income (expense) | $ | $ | ||||||
| Net income (loss) before income tax expense | $ | $ | ||||||
| Net income (loss) | $ | $ | ||||||
| Net income (loss) attributable to Eightco Holdings Inc. | $ | $ | ||||||
| Net income (loss) per share basic | $ | $ | ||||||
| Net income (loss) per share diluted | $ | $ | ||||||
| Comprehensive income (loss) | $ | $ | ||||||
| Additional paid in capital | $ | $ | ||||||
| Accumulated deficit | $ | ( | ) | $ | ( | ) | ||
Prior Year Reclassifications: In the current period, the Company made certain reclassifications to the current period and prior year’s financial statements to conform to the current presentation. These reclassifications had no effect on previously reported net income, cash flows, or shareholders’ equity. The reclassifications are made to better reflect the nature of the items in the financial statements.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Reverse
Stock Split: On April 3, 2023, the Company filed a Certificate of Amendment (the “Certificate of Amendment”)
to the Company’s Certificate of Incorporation (the “Certificate of Incorporation”) with the Secretary of State of the
State of Delaware (1) to effect a
Use of Estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. The Company’s significant estimates used in these condensed consolidated financial statements include, but are not limited to, fair value of warrants, revenue recognition and the determination of the economic useful life of depreciable property and equipment. Certain of the Company’s estimates could be affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from those estimates.
Business Combinations. For business combinations that meet the accounting definition of a business, the Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired, the liabilities assumed, and noncontrolling interest, if applicable, as of the date of acquisition at fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future. Revenues and costs of the acquired companies are included in the Company’s operating results from the date of acquisition. The Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, and these estimates and assumptions are inherently uncertain and subject to refinement during the measurement period not to exceed one year from the acquisition date. As a result, any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is determined.
Cash and Cash Equivalents. The Company considers all highly liquid, short-term investments with original maturities of six months or less when purchased to be cash equivalents.
Accounts
Receivable.
Accounts receivable are carried at their contractual amounts, less an estimated allowance for credit losses. Management estimates the
allowance for credit losses using a loss-rate approach based on historical loss information, adjusted for management’s expectations
about current and future economic conditions, as the basis to determine expected credit losses. Management exercises significant judgment
in determining expected credit losses. Key inputs include macroeconomic factors, industry trends, the creditworthiness of counterparties,
historical experience, the financial conditions of the customers, and the amount and age of past due accounts. Management believes that
the composition of receivables at year-end is consistent with historical conditions as credit terms and practices and the client base
has not changed significantly. Receivables are considered past due if full payment is not received by the contractual due date. Past
due accounts are generally written off against the allowance for credit losses only after all collection attempts have been exhausted.
The allowance for credit losses was $
Inventories. Inventory is recorded at the lower of cost or net realizable value on a first-in, first-out basis. The Company reduces the carrying value of inventories for those items that are potentially excess, obsolete, or slow moving based on changes in customer demand, technology developments, or other economic factors.
Property
and Equipment. Property and equipment are stated at cost, net of accumulated depreciation and amortization, which is recorded commencing
at the in-service date using the straight-line method over the estimated useful lives of the assets, as follows:
| 9 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Intangible Assets and Long-lived Assets. The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The Company assesses the recoverability of its long-lived assets using undiscounted cash flows. If an asset is found to be impaired, the amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. We record intangible assets based on their fair value on the date of acquisition. Intangible assets include the cost of developed technology, customer relationships, trademarks and tradenames. Intangible assets are amortized utilizing the straight-line method over their remaining economic useful lives, as follows: 10 years for developed technology, 7 years for customer relationships and 7 years for trademarks and tradenames. The Company reviews long-lived assets and intangible assets for potential impairment annually and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded equal to the excess of the asset’s carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash flows. In the event that management decides to no longer allocate resources to an asset, an impairment loss equal to the remaining carrying value of the asset is recorded. The Company did not record any impairment charges related to intangibles assets or long-lived assets during the three months ended March 31, 2024 and 2023, respectively.
Goodwill. Goodwill is recorded for the difference between the fair value of the purchase consideration over the fair value of the net identifiable tangible and intangible assets acquired. The Company performs an impairment assessment of goodwill on an annual basis as of December 31st, or whenever impairment indicators exist. In the absence of any impairment indicators, goodwill is assessed for impairment during the fourth quarter of each fiscal year. Judgments regarding the existence of impairment indicators are based on market conditions and operational performance of the business. The Company may assess our goodwill for impairment initially using a qualitative approach to determine whether it is more likely than not that the fair value of these assets is greater than their carrying value. When performing a qualitative test, the Company assesses various factors including industry and market conditions, macroeconomic conditions and performance of our businesses. If the results of the qualitative assessment indicate that it is more likely than not that the goodwill and other indefinite-lived intangible assets are impaired, a quantitative impairment analysis would be performed to determine if impairment is required. The Company may also elect to perform a quantitative analysis of goodwill initially rather than using a qualitative approach. The impairment testing for goodwill is performed at the reporting unit level. The valuation methods used in the quantitative fair value assessment, discounted cash flow and market multiples method, requires our management to make certain assumptions and estimates regarding certain industry trends and future profitability of the Company’s reporting units. If the fair value of a reporting unit exceeds the related carrying value, the reporting unit’s goodwill is considered not to be impaired and no further testing is performed. If the carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. The valuation of goodwill is affected by, among other things, the Company’s business plan for the future and estimated results of future operations. Future events could cause the Company to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired.
Contingent Liabilities. The Company, from time to time, may be involved in certain legal proceedings. Based upon consultation with outside counsel handling its defense in these matters and the Company’s analysis of potential outcomes, if the Company determines that a loss arising from such matters is probable and can be reasonably estimated, an estimate of the contingent liability is recorded in its condensed consolidated financial statements. If only a range of estimated loss can be determined, an amount within the range that, based on estimates, assumptions and judgments, reflects the most likely outcome, is recorded as a contingent liability in the condensed consolidated financial statements. In situations where none of the estimates within the estimated range is a better estimate of probable loss than any other amount, the Company records the low end of the range. Any such accrual would be charged to expense in the appropriate period. Litigation expenses for these types of contingencies are recognized in the period in which the litigation services were provided.
| 10 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue
Recognition. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”)
606, Revenue from Contracts with Customers, the Company recognizes revenue when it satisfies performance obligations, by transferring
promised goods or services to customers, in an amount that reflects the consideration to which the Company expects to be entitled in
exchange for fulfilling those performance obligations. Revenue for product sales is recognized upon receipt by the customer. There are
no contract assets or contract liabilities and therefore no unsatisfied performance obligations. One customer represented
Disaggregation of Revenue. The Company’s primary revenue streams include the sale of consumer goods through our inventory management solutions business, the sale of corrugated packaging materials and the sale of mining equipment. There are no other material operations that were separately disaggregated for segment purposes.
Cost of Revenues. Cost of revenues includes freight charges, purchasing and receiving costs, depreciation and inspection costs.
Comprehensive
income. The Company follows Accounting Standards
Codification (“ASC”) 220 in reporting comprehensive income. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that historically has not been recognized in the calculation of
net income. For the three months ended March 31, 2024 and 2023, the Company recognized other comprehensive gain (loss) for foreign currency
translation of $(
Foreign Currency Transactions and Translation. Eightco’s functional currency is the United States Dollar (“USD”) and the Forever 8 functional currency in which it operates is the Euro (“EUR”).
For the purpose of presenting these condensed consolidated financial statements the reporting currency is USD. Forever 8 assets and liabilities are expressed in USDs at the exchange rate on the balance sheet date, equity accounts are translated at historical rates, and income and expense items are translated at the weighted average exchange rate during the period. The resulting translation adjustments are reported under accumulated other comprehensive income in the stockholders’ equity section of the balance sheets.
Transactions in currencies other than the entity’s functional currency are recorded at the rates of exchange prevailing on the date of the transaction. At the end of each reporting period, monetary items denominated in foreign currencies are translated at the rates prevailing at the end of the reporting periods. Exchange differences arising on the settlement of monetary items and on translation of monetary items at period-end are included in statement of comprehensive loss.
Exchange rates used for the translations are as follows:
| March 31, 2024 | December 31, 2023 | |||||||
| Spot | ||||||||
| USD to EUR | $ | $ | ||||||
| USD to GBP | $ | $ | ||||||
| March 31, 2024 | March 31, 2023 | |||||||
| Average | ||||||||
| USD to EUR | $ | $ | ||||||
| USD to GBP | $ | $ | ||||||
March 31, 2024 | March 31, 2023 | |||||||
| Convertible shares under notes payable | ||||||||
| Warrants for noteholders | ||||||||
| Warrants for equity investors | ||||||||
| Warrants for placement agent | ||||||||
| Shares reserved for issuance for preferred units of Forever 8 Fund, LLC | ||||||||
| Convertible notes payable issued in acquisition of Forever 8 Fund, LLC | ||||||||
| Shares reserved for contingent consideration for acquisition of Forever 8 Fund, LLC | ||||||||
| Shares reserved as partial payment towards severance | ||||||||
| Total common stock equivalents | ||||||||
| 11 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred Financing Costs. Deferred financing costs include debt discounts and debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from the carrying value of the debt liability. Amortization of deferred financing costs are included as a component of interest expense. Deferred financing costs are amortized using the straight-line method over the term of the recognized debt liability which approximates the effective interest method.
Income Taxes. The Company accounts for income taxes under the provisions of the FASB ASC Topic 740 “Income Taxes” (“ASC Topic 740”). The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the condensed consolidated financial statements or tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse. The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s condensed consolidated financial statements as of March 31, 2024 and 2023. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date. The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the consolidated statements of comprehensive income. The Company is subject to routine audits by taxing jurisdictions; however, there are currently no audits for any tax periods in progress.
Fair Value Measurements. The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The
carrying amounts of the Company’s financial instruments, such as cash, accounts receivable, accounts payable and other current
liabilities approximate fair values due to the short-term nature of these instruments. The Company’s long-term debt consists of
$
Concentration
of Credit Risks. Financial instruments that potentially subject the Company to concentrations of credit risk are cash
equivalents and accounts receivable. Cash and cash equivalents are invested in deposits with certain financial institutions and may,
at times, exceed federally insured limits. The Company has not experienced any significant losses on its deposits of cash and cash
equivalents. In regard to trade receivables, the Company performs ongoing evaluations of its customers’ financial condition as
well as general economic conditions and, generally, requires no collateral from its customers. On March 31, 2024, the amount due
from three customer represented
approximately
Leases. In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842). This ASU requires a lessee to recognize a right-of-use asset and a lease liability under most operating leases in its balance sheet. The ASU is effective for annual and interim periods beginning after December 15, 2021. Early adoption is permitted. The Company has adopted ASU 2016-02 as of January 1, 2022. The adoption of the standard did not have a material impact on the balance sheet.
| 12 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recently Issued Accounting Pronouncements Adopted. In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280), Improvements to Reportable Segment Disclosures. The amendments in this Update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis for all public entities to enable investors to develop more decision-useful financial analyses. The amendments in this Update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. A public entity should apply the amendments in this Update retrospectively to all prior periods presented in the financial statements. Upon transition, the segment expense categories and amounts disclosed in the prior periods should be based on the significant segment expense categories identified and disclosed in the period of adoption.
Recently Issued Accounting Pronouncements Not Adopted. Management does not believe that any recently issued, but not yet effective, accounting standards could have a material effect on the Company’s condensed consolidated financial statements. As new accounting pronouncements are issued, the Company will adopt those that are applicable under the circumstances.
Segment Reporting. The Company uses “the management approach” in determining reportable operating segments. The management approach considers the internal organization and reporting used by the Company’s chief operating decision maker for making operating decisions and assessing performance as the source for determining the Company’s reportable segments. The Company’s chief operating decision maker is the Chairman and Chief Executive Officer (“CEO”) of the Company, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. The Company’s primary revenue streams include the sale of consumer goods through our inventory management solutions business, which includes the sale of mining equipment, and the sale of corrugated packaging materials. There are no other material operations that were separately disaggregated for segment purposes.
| 13 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. GOING CONCERN
The
financial statements have been prepared on a going concern basis which assumes the Company will be able to realize its assets and
discharge its liabilities in the normal course of business for the foreseeable future. The Company has incurred a loss since
inception resulting in an accumulated deficit of $
As of March 31, 2024, the Company had approximately
$
The Company expects to need additional capital in order to increase revenues above current levels. Any additional equity financing, if available, may not be on favorable terms and would likely be significantly dilutive to the Company’s current stockholders, and debt financing, if available, may involve restrictive covenants. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will likely have a materially adverse effect on our business, financial condition and results of operations. In 2023, the Company began reducing headcount to reduce the corporate overhead. The Company has continued to raise capital in 2024 and will continue to look to reduce costs in 2024. No assurance can be given that the Company will be successful in these efforts. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
5. RESTRUCTURING AND SEVERANCE
Restructuring and severance charges consist of the following for the three months ended March 31, 2024 and 2023, respectively:
| March 31, 2024 | March 31, 2023 | |||||||
| Severance expense | $ | $ | ||||||
| Rent expense | ||||||||
| Total restructuring and severance | $ | $ | ||||||
The changes in the carrying amount of restructuring and severance liabilities for the period from January 1, 2024 through March 31, 2024 consisted of the following:
| Balance, January 1, 2024 | $ | |||
| Additions and adjustments | ||||
| Payments and adjustments | ( | ) | ||
| Balance, March 31, 2024 | $ |
6. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Trade accounts receivable | $ | $ | ||||||
| Less: allowance for credit losses | ( | ) | ( | ) | ||||
| Total accounts receivable | $ | $ | ||||||
7. INVENTORIES
Inventories consist of the following at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Raw materials | $ | $ | ||||||
| Finished goods | ||||||||
| Reserve for obsolescence | ( | ) | ( | ) | ||||
| Total inventories | $ | $ | ||||||
| 14 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
8. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Other current assets consist of the following at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Advances for inventory purchases | $ | $ | ||||||
| Prepaid insurance | ||||||||
| Deposits | ||||||||
| Due from customer | ||||||||
| Other | ||||||||
| Total other current assets | $ | $ | ||||||
9. LOAN HELD-FOR-INVESTMENT, RELATED PARTY
Loan
held-for-investment, related party, represents a senior secured promissory note (the “Wattum Note”) from Wattum
Management Inc., a non-controlling member of CW Machines, LLC, a related party. The Wattum Note bears interest of
10. PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 |
|||||||
| Land | $ | $ | ||||||
| Building and building improvements | ||||||||
| Equipment and machinery | ||||||||
| Furniture and fixtures | ||||||||
| Office and computer equipment | ||||||||
| Vehicles | ||||||||
| Less: accumulated depreciation | ( |
) | ( |
) | ||||
| Total property and equipment, net | $ | $ | ||||||
Depreciation
and amortization expense was $
11. INTANGIBLE ASSETS, NET
Intangible assets consist of the following at March 31, 2024 and December 31, 2023:
| Useful Lives | March 31, 2024 | December 31, 2023 | ||||||||
| Customer relationships | $ | $ | ||||||||
| Developed technology | ||||||||||
| Trademarks and tradenames | ||||||||||
| Less: accumulated amortization | ( | ) | ( | ) | ||||||
| Total intangible assets, net | $ | $ | ||||||||
Amortization
expense was $
Amortization expense for the next five years is as follows:
| For the years ending December 31, | ||||
| 2024 (excluding the three months ended March 31, 2024) | $ | |||
| 2025 | ||||
| 2026 | ||||
| 2027 | ||||
| 2028 | ||||
| Thereafter | ||||
| $ | ||||
| 15 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
12. GOODWILL
The changes in the carrying amount of goodwill for the period from January 1, 2024 through March 31, 2024 consisted of the following:
| Balance, January 1, 2024 | $ | |||
| Additions and adjustments | ||||
| Balance, March 31, 2024 | $ |
13. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist of the following at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Payroll and related benefits | $ | $ | ||||||
| Professional fees | ||||||||
| Accrued taxes | ||||||||
| Accrued settlement liability for equity holders of Forever 8 | ||||||||
| Accrued interest | ||||||||
| Accrued rent | ||||||||
| Other | ||||||||
| Total accrued expenses and other current liabilities | $ | $ | ||||||
14. DUE TO AND FROM FORMER PARENT
As
of March 31, 2024 and December 31, 2023, the amount due to Vinco consists of net amounts
related to management fees and borrowings for working capital and financing needs of Eightco as well as other operating expenses that
were paid for on behalf of one to the other. As of March 31, 2024 and December 31, 2023,
the net amount due to Former Parent was $
| March 31, 2024 | December 31, 2023 | |||||||
| Lines of credit % - % | $ | $ | ||||||
The lines of credit mature on June 30, 2024 with an extension available until September 30, 2024 at the Company’s option.
Interest expense under lines of credit was $ and $ for the three months ended March 31, 2024 and 2023, respectively.
16. LINES OF CREDIT – RELATED PARTIES
Principal due under the lines of credit – related parties was as follows at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Lines of credit | $ | $ | ||||||
Interest expense under lines of credit – related parties was $
17. CONVERTIBLE NOTES PAYABLE
Principal due under the convertible note payable was as follows at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Note payable, | ||||||||
| Less: debt discount | ||||||||
| Note payable, net | $ | $ | ||||||
Interest expense under convertible notes
payable was $
| 16 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. CONVERTIBLE NOTES PAYABLE (continued)
March 2023 Offering
On
March 15, 2023, Eightco entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with Hudson Bay
(the “Investor”) for the issuance and sale of a Senior Secured Convertible Note with an initial principal amount of $
In connection with the Private Placement, the Company entered into a Registration Rights Agreement (the “Registration Rights Agreement”), a Security and Pledge Agreement (the “Pledge Agreement”), and various ancillary certificates, disclosure schedules and exhibits in support thereof prior to the closing of the Securities Purchase Agreement.
Securities Purchase Agreement
The Securities Purchase Agreement provides for the purchase by Hudson Bay and the sale by the Company of the March 2023 Note and the March 2023 Warrant. The Securities Purchase Agreement contains representations and warranties of the Company and Hudson Bay that are typical for transactions of this type. The representations and warranties made by the Company in the Securities Purchase Agreement are qualified by reference to certain exceptions contained in disclosure schedules delivered to Hudson Bay. Accordingly, the representations and warranties contained in the Securities Purchase Agreement should not be relied upon by third parties who have not reviewed those disclosure schedules and the documentation surrounding the transaction as a whole.
The Securities Purchase Agreement closed upon the satisfaction of certain conditions of Hudson Bay and the Company that are typical for transactions of this type, as well certain other condition including the following:
| ● | the Company delivered to Hudson Bay a lock up agreement (the “Lock-Up Agreement”), executed by each of the parties identified in the Securities Purchase Agreement; | |
| ● | the Company received stockholder approval of a resolution to increase the number of authorized shares of the Company, and filed with the Delaware Secretary of State a Certificate of Amendment to the Company’s Certificate of Incorporation causing the increase in the amount of authorized shares of the Company; and | |
| ● | the Company, Hudson Bay and the certain creditors of the Company amended that certain Subordination Agreement, dated as of September 13, 2022, by and among the Company, the Investor and certain persons identified in that Subordination Agreement (the “Subordination Agreement Amendment”). |
The Securities Purchase Agreement also obligates the Company to indemnify Hudson Bay for certain losses resulting from (1) any misrepresentation or breach of any representation or warranty made by the Company or any subsidiary of the Company, (2) any breach of any obligation of the Company or, any subsidiary of the Company, of the Securities Purchase Agreement or any agreements and instruments entered into or connection with the Securities Purchase Agreement and (3) certain third party claims.
Senior Secured Convertible Note
The
Company issued the Note upon the closing. The entire outstanding principal balance and any outstanding fees or interest is due and payable
in full on January 15, 2024 (“Maturity Date”). The Note does not bear interest, provided, however, that the March 2023 Note
will bear interest at
The Maturity Date may be extended at the sole option of Hudson Bay for so long as certain events of default is continuing or for so long as an event is continuing that if not cured and with the passage of time would result in an event of default.
The March 2023 Note is convertible at the option of Hudson Bay into shares of Common Stock at a conversion price of $6.245 per share, subject to adjustment for stock splits, combinations or similar events (each a “Stock Combination Event”). If on the on the fifth trading day immediately following a Stock Combination Event, the conversion price then in effect on such fifth trading day (after giving effect to a proportional adjustment of the conversion price), is greater than the lowest weighted average price of the Common Stock during the twenty consecutive trading day period ending and including the trading day immediately preceding the fifth trading day after such Stock Combination Event (the “Event Market Price”), then the conversion price shall be adjusted to the Event Market Price.
| 17 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. CONVERTIBLE NOTES PAYABLE (continued)
The conversion price of the March 2023 Note will be subject to adjustments for stock splits, combinations or similar events. In addition, the conversion price of the March 2023 Note will also subject to anti-dilution adjustment which, subject to specified exceptions, in the event that the Company issues or is deemed to have issued certain securities at a price lower than the then applicable conversion price, immediately reduces the conversion price of the March 2023 Note to equal the price at which the Company issues or is deemed to have issued its Common Stock.
The March 2023 Note imposes penalties on the Company for any failure to timely deliver any shares of its Common Stock issuable upon conversion.
The March 2023 Note contains events of default that are typical for transactions of this type, as well as the following events:
| ● | the failure of any registration statement required by the Registration Rights Agreement to be filed within five trading days after the date required by the Registration Rights Agreement or the failure of any such registration statement to become effective within five trading days after the date required by the Registration Rights Agreement; | |
| ● | the lapse or unavailability of any registration statement required by the Registration Rights Agreement for more than 5 consecutive trading days or more than an aggregate of 10 trading days in any 365-day period (other than certain allowable grace periods); | |
| ● | the suspension from trading or failure of the Common Stock to be listed for trading on an eligible market for more than 2 consecutive trading days or more than an aggregate of 5 trading days in any 365-day period; | |
| ● | the failure of the Company to issue shares upon conversion of the Note for more than 2 trading days after the relevant conversion date or a notice of the Company’s intention not to comply with a request for conversion; | |
| ● | the failure for 2 consecutive trading days to have reserved for issuance 250% of the full number of shares issuable upon conversion in accordance to the terms of the March 2023 Note; | |
| ● | the failure for 2 trading days to pay Hudson Bay principal, interest, late charges or other amounts when and as due under the March 2023 Note; | |
| ● | the occurrence of any default under, redemption of or acceleration prior to maturity of any indebtedness of the Company or a subsidiary; | |
| ● | the invalidity of any material provision of the Security Documents (defined below) or if the enforceability of validity of any material provision of the Security Documents is contested by the Company; | |
| ● | the failure of the Security Documents to perfect or maintain Hudson Bay’s first priority security interest; and | |
| ● | the failure to comply with certain covenants of the March 2023 Note. |
If
there is an event of default, then Hudson Bay has the right to request redemption of all or any portion of the March 2023 Note, at
The March 2023 Note prohibits the Company from entering into certain transactions involving a change of control, unless the successor entity assumes in writing all of the obligations of the Company under the March 2023 Note and the other transaction documents. In the event of such a transaction, Hudson Bay will have the right to request redemption of the Note, at Redemption Variable Premium (as defined in the March 2023 Note) of the greater of (i) of the sum of the amount of principal, interest and late fees to be redeemed; and (ii) the product of (x) the sum of the amount of principal, interest and late fees to be redeemed and (y) the quotient determined by dividing (1) the greatest closing sale price of the shares of Common Stock during the period beginning on the date immediately preceding the earlier to occur of (A) the consummation of the applicable change of control and (B) the public announcement of such change of control and ending on the date Hudson Bay delivers a change of control redemption notice, by (2) the Conversion Price; or; (iii) Redemption Variable Premium of the product of (x) the number of shares into which the March 2023 Note (including all principal, interest and late fees) subject to such redemption may be converted multiplied by (y) the greatest closing sale price of the shares of Common Stock during the period beginning on the date immediately preceding the earlier to occur of (x) the consummation of the change of control and (y) the public announcement of such change of control and ending on the date Hudson Bay delivers the change of control redemption notice; provided, however, that if no Cash Release Event has occurred on or prior to the applicable change of control redemption date, the principal amount used in calculating the applicable change of control redemption price on such change of control.
| 18 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. CONVERTIBLE NOTES PAYABLE (continued)
If the Company issues options, convertible securities, warrants, stock, or similar securities to holders of its Common Stock, the holder of the March 2023 Note shall have the right to acquire the same as if it had converted its March 2023 Note.
Hudson Bay is entitled to receive any dividends paid or distributions made to the holders of the Common Stock on an “as if converted” to Common Stock basis.
The March 2023 Note contains a variety of covenants on the part of Company that are typical for transactions of this type, as well as the following covenants:
| ● | the March 2023 Note ranks senior to all other indebtedness of the Company, except that certain permitted indebtedness ranks pari passu with the March 2023 Note; | |
| ● | the Company will not incur other indebtedness, except for certain permitted indebtedness; | |
| ● | the Company will not incur any liens, except for certain permitted liens; | |
| ● | the Company will not, directly or indirectly, redeem or repay all or any portion of any permitted indebtedness if at the time such payment is due or is made or, after giving effect to such payment, an event constituting, or that with the passage of time and without being cured would constitute, an event of default has occurred and is continuing; and | |
| ● | the Company will not redeem, repurchase or pay any dividend or distribution on its Common Stock or any other capital stock. |
On
March 23, 2023, the warrants issued were classified as equity with an initial grant date fair value of $
Dividend Yield | Expected Volatility | Risk-free Interest Rate | Expected Life | |||||||||||||
| Hudson Bay Warrant; March 2023 | % | % | % | |||||||||||||
| Palladium Capital Warrant; March 2023 | % | % | % | |||||||||||||
On
April 5, 2023, the warrants issued under the March 2023 Offering were adjusted under the terms and conditions to a strike price of $
Dividend Yield | Expected Volatility | Risk-free Interest Rate | Expected Life | |||||||||||||
| Hudson Bay Warrant; March 2023 | % | % | % | |||||||||||||
| Palladium Capital Warrant; March 2023 | % | % | % | |||||||||||||
On October 23, 2023 (the “Effective Date”), the Company entered into a Prepayment and Redemption Agreement (the “Prepayment Agreement”), by and between the Company and an accredited investor (the “Investor”), pursuant to which, among things, the Company agreed to prepay the Notes (as defined below) and to redeem the March 2023 Warrant (as defined below), subject to the conditions set forth therein.
As previously disclosed,
pursuant to the Note Securities Purchase Agreement, the Company sold to the Investor the January 2022 Note, of which an aggregate principal
amount of $
Pursuant to the Prepayment
Agreement, the Company agreed to make an aggregate payment of $
Any cash payments required to be made pursuant to the terms of the Notes shall be suspended as long as the Company timely makes the payments set forth in the Prepayment Agreement and no Event of Default (as defined in the Notes) (or an event that with the passage of time or the giving of notice would result in an Event of Default) occurs and is continuing. In addition, upon receipt by Hudson Bay of the Initial Payment, all of the aggregate principal amount outstanding of the March 2023 Note will no longer be convertible into shares of Common Stock, provided that any aggregate principal amount outstanding of the March 2023 Note shall again become convertible into shares of Common Stock if an Event of Default (or an event that with the passage of time or the giving of notice would result in an Event of Default) occurs and is continuing or in the event the Company fails to timely make the payments under the Prepayment Agreement.
Upon receipt by Hudson Bay of the Aggregate Payment Amount, the SPAs, the Notes, the March 2023 Warrant and any other transaction documents related to the SPAs shall terminate and be of no further force or effect, other than certain indemnification obligations in the SPAs. In the event that the conditions to closing shall not have occurred by on or before the fifth (5th) business day following the Effective Date, subject to certain conditions, Hudson Bay has the option to terminate the Prepayment Agreement at the close of business on such date.
On
February 26, 2024, pursuant to the Prepayment Agreement, the Company paid to Hudson Bay a final payment of $
January 2022 Offering
On
January 26, 2022, the Company, entered into a Securities Purchase Agreement (the “Note Securities Purchase Agreement”) with
an accredited investor (the “Note Investor”) for the issuance and sale of a Senior Convertible Note with an initial principal
amount of $
On July 28, 2022, the Company entered into an Amendment Agreement (the “July 2022 Amendment Agreement”) with the Note Investor to amend the Note Securities Purchase Agreement, the January 2022 Note, and that certain January 2022 Registration Rights Agreement.
Pursuant
to the July 2022 Amendment Agreement, the Company released an aggregate of $
| 19 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. CONVERTIBLE NOTE PAYABLE (continued)
As
a result of the Adjustment, the exercise price of (i) warrants to purchase up to
The
July 2022 Amendment Agreement amends the January 2022 Note to permit the Company to enter into technology license agreements which obligate
the Company to make cash payments of up to $
The July 2022 Amendment Agreement grants the holder of the January 2022 Note the right, at any time after December 27, 2023, to force the Company to redeem all or any portion of the outstanding principal, interest or penalties on the January 2022 Note.
The parties also amended the Company’s carve out to its financing standstill as set forth in the July 2022 Amendment Agreement.
On
September 14, 2022, the Company and the Note Investor entered into a waiver (the “Waiver”) to permit, subject to the terms
and conditions set forth therein, the entry into a purchase agreement for Forever 8. Pursuant to the Waiver, the conversion price and
exercise price of the January 2022 Note and the January 2022 Warrants, respectively, were voluntarily and irrevocably adjusted to equal
$
As
a result of the adjustment of the January 2022 Note and January 2022 Warrant conversion and exercise price, respectively, in the Waiver,
the exercise price of (i) warrants to purchase up to
On January 6, 2023, the Company entered into a Second Amendment Agreement (the “Second Amendment Agreement”) with Hudson Bay to amend the (i) Note Securities Purchase Agreement, (ii) the January 2022 Note, (iii) the January 2022 Registration Rights Agreement, and (iv) the January 2022 Warrant.
Pursuant
to the Second Amendment Agreement, the conversion price of the balance of the January 2022 Note that remains outstanding was voluntarily
adjusted to $
The
Second Amendment Agreement grants the Company the right to redeem all or a portion of the outstanding amount of the January 2022 Note
(the “Redemption Right”) upon
The
Second Amendment Agreement provides that if Hudson Bay converts any portion of the January 2022 Note during the
As
a result of the voluntary adjustment to the conversion price of the January 2022 Note, the exercise price of the January 2022 Warrant
was automatically adjusted to $
| 20 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
17. CONVERTIBLE NOTE PAYABLE (continued)
The Second Amendment Agreement required the Company to provide each stockholder entitled to vote at the next special or annual meeting of stockholders of the Company, which was required to be held no later than April 1, 2023, a proxy statement soliciting each such stockholder’s affirmative vote at the stockholder meeting for approving the increase of the authorized shares of common stock from to (“Stockholder Approval”). The Stockholder Approval was obtained at the Company’s special meeting of stockholders held on March 15, 2023.
The
warrants issued by the Company were modified to reduce the exercise price, which also increased the number of warrants to purchase common
stock. The warrant modification expense of $
Dividend Yield | Expected Volatility | Risk-free Interest Rate | Expected Life | |||||||||||||
| Hudson Bay Warrant; as adjusted January 2023 | % | % | % | |||||||||||||
| Palladium Capital Warrant; as adjusted January 2023 | % | % | % | |||||||||||||
| BHP Warrant; as adjusted January 2023 | % | % | % | |||||||||||||
18. CONVERTIBLE NOTES PAYABLE – RELATED PARTIES
The convertible notes payable, related party were issued as part of consideration for the acquisition of Forever 8. The discount was calculated based on the fair value of the instrument as of October 1, 2022. Principal due under the convertible note payable – related parties was as follows at March 31, 2024 and December 31, 2023:
| March 31, 2024 | December 31, 2023 | |||||||
| Notes payable, | ||||||||
| Less: current portion | ||||||||
| Notes payable, long-term potion | $ | $ | ||||||
| Less: debt discount | ||||||||
| Notes payable, long-term portion, net | ||||||||
Interest
expense under convertible notes payable – related parties was $
On March 17, 2024, the
Company entered into an agreement to amend certain provisions of the Seller Notes (the “Seller Notes Amendment”) previously
issued under the terms of the MIPA. Pursuant to the Seller Notes Amendment, the Sellers agreed, among other things, to (i) forgive, without
the payment of any additional consideration, accrued interest on the Seller Notes in an aggregate amount of approximately $
On March 27, 2024, the Company issued shares of common stock to convert $
19. INCOME TAXES
Eightco is taxed as a corporation and pays corporate federal, state and local taxes on income.
Forever
8, BlockHiro, LLC and Cryptyde Shares Services, LLC are limited liability companies which are disregarded entities for income tax purposes
and are owned
CW
Machines, LLC is a limited liability company for income tax purposes and is owned
Ferguson Containers is taxed as a corporation and pays corporate federal, state and local taxes on income.
Forever 8 UK Ltd. is taxed as a corporation and pays foreign taxes on income.
F8 Fund EU Holdings BV is taxed as a corporation and pays foreign taxes on income.
Income tax (benefit) expense was $ and $for the three months ended March 31, 2024 and 2023, respectively. The Company has recorded a full valuation allowance on net operating losses.
There are no unrecognized tax benefits and no accruals for uncertain tax positions.
As
of March 31, 2024, the Company had a net operating loss carryforward for federal income
tax purposes of approximately $
| 21 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
20. STOCKHOLDERS’ EQUITY
Common
Stock. Prior to the Separation, Vinco owned
On March 16, 2023, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation with the Secretary of State of the State of Delaware to increase the number of authorized shares of the Company’s common stock, par value $ per share from to and to make a corresponding change to the number of authorized shares of capital stock, effective as of 4:05 p.m. (New York time) on March 16, 2023.
Common stock issuances during the three months ended March 31, 2024:
On January 30, 2024, the
Company issued shares of common stock valued at $
On February 28, 2024, the
Company issued shares of common stock valued at $
On February 22, 2024, the
Company issued shares of common stock value at $
On March 19, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 27, 2024, the Company
issued shares of common stock valued at $
On March 28, 2024, the Company
issued shares of common stock valued at $
As of March 31, 2024 and December 31, 2023, the Company had and issued and outstanding shares of Common Stock, respectively.
Preferred Stock: On January 17, 2023, the board of directors of the Company declared a dividend of one one-thousandth of a share of Series A Preferred Stock, par value $ per share (“Series A Preferred Stock”), for each outstanding share of the Company’s common stock to stockholders of record at 5:00 p.m. Eastern Time on January 27, 2023.
On January 19, 2023, the Company filed a Certificate of Designation with the Delaware Secretary of State for its Series A Preferred Stock. The number of shares authorized for issuance is three hundred thousand ().
As of March 31, 2024 and December 31, 2023, the Company had and issued and outstanding shares of Series A Preferred Stock, respectively. All shares of Series A Preferred Stock issued have been redeemed in accordance with the Certificate of Designations.
| 22 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
21. COMMITMENTS AND CONTINGENCIES
Operating Leases. The Company leases certain office space from an entity affiliated through common ownership under an operating lease agreement on a month-to-month basis.
On
April 26, 2022, the Company entered into an assignment and assumption agreement with Vinco Ventures, Inc. whereby the parties agreed
to transfer and assign to Eightco the lease agreement dated July 16, 2021 by and between Abdi R. Boozer-Jomehri (d/b/a Safety Harbor
Centre, Inc.) and Edison Nation, LLC, a
On
October 19, 2022, the Company entered into a commercial lease agreement with Foxx Trot Tango, LLC to lease approximately
Rent
expense was $
Emmersive Sellers: On April 17, 2021, the Former Parent entered into (and closed on) a certain Asset Contribution Agreement (“Asset Contribution Agreement”) with Emmersive Entertainment, Inc. (“Emmersive”), pursuant to which Emmersive contributed/transferred to the Company the assets used for Emmersive’s business, which include digital assets, software and certain physical assets (the “Contributed Assets”) in consideration for, among other things, the Former Parent assuming certain obligations of Emmersive, hiring certain employees, and issuing preferred membership units (“Preferred Units”) in EVNT Platform, LLC to Emmersive and/or its shareholders (“Preferred Members”) pursuant to a First Amended and Restated Operating Agreement for the Former Parent dated as of April 17, 2021 (“Amended Operating Agreement”). Certain put rights are associated with Preferred Units, which if exercised by the Preferred Members, obligates the Former Parent to purchase the Preferred Units in exchange for shares of the Former Parent’s common stock (“Put Rights”). In addition, the Preferred Members have the opportunity to earn Conditional Preferred Units if certain conditions are satisfied for earn out targets (“Earn-Out Targets”).
On February 25, 2022, the Former Parent and Emmersive entered into a Termination and Release Agreement, terminating certain transaction documents dated April 17, 2021, and a Milestone Agreement for the earnout shares to be earned and any remaining consideration to be paid by Eightco with an effective date of the agreements upon the spin-off being declared effective (“Effective Date”) Upon the spinoff, the agreements release Emmersive of the opportunity to earn the additional shares of common stock of the Former Parent from the Asset Contribution Agreement. The contingent consideration to be paid by Eightco upon the successful completion of the spin-off are described below:
Earned Shares: Issuance of shares of common stock of Eightco (“Eightco Shares”). The Company recorded $ of share-based compensation related to the Eightco Shares.
Milestone
1:
Milestone
2:
Milestone
3:
None of the above milestones were met as of March 31, 2024.
| 23 |
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
22. SEGMENTING REPORTING
The Company’s principal operating segments coincide with the types of products to be sold. The products from which revenues are derived are consistent with the reporting structure of the Company’s internal organization. The Company’s two reportable segments for the three months ended March 31, 2024 were the Inventory Management Solutions segment and the Corrugated segment. The Company’s chief operating decision maker has been identified as the Chairman and CEO, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon the Company’s management organization structure as of March 31, 2024 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to the reportable segments disclosed. There are no inter-segment revenue transactions and, therefore, revenues are only to external customers.
Segment operating profit is determined based upon internal performance measures used by the chief operating decision maker. The Company derives the segment results from its internal management reporting system. The accounting policies the Company uses to derive reportable segment results are the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics, including net revenues, gross profit and operating loss. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments. The Company manages certain operating expenses separately at the corporate level and does not allocate such expenses to the segments. Segment income from operations excludes interest income/expense and other income or expenses and income taxes according to how a particular reportable segment’s management is measured. Management does not consider impairment charges, and unallocated costs in measuring the performance of the reportable segments.
Segment information available with respect to these reportable business segments for the three months ended March 31, 2024 and 2023 was as follows:
| For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Revenues: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Total segment and consolidated revenues | $ | $ | ||||||
| Cost of revenues: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Total segment and consolidated cost of revenues | $ | $ | ||||||
| Gross profit: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Total segment and consolidated gross profit | $ | $ | ||||||
| Income (loss) from operations: | ||||||||
| Inventory Management Solutions | $ | ( | ) | $ | ( | ) | ||
| Corrugated | ||||||||
| Corporate | ( | ) | ( | ) | ||||
| Total segment and consolidated loss from operations | $ | ( | ) | $ | ( | ) | ||
| Depreciation and amortization: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Total segment and consolidated depreciation and amortization | $ | $ | ||||||
| Revenues by geography: | ||||||||
| North America | $ | $ | ||||||
| Europe | ||||||||
| Total geography and consolidated revenues | $ | $ | ||||||
| Segment capital expenditures: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Corporate | ||||||||
| Total segment and consolidated capital expenditures | $ | $ | ||||||
| Segment total assets: | ||||||||
| Inventory Management Solutions | $ | $ | ||||||
| Corrugated | ||||||||
| Corporate | ||||||||
| Total segment and consolidated assets | $ | $ | ||||||
23. SUBSEQUENT EVENTS
On
April 9, 2024, the Company issued a total of shares of common stock valued at $
On
April 10, 2024, the Company issued shares of common stock valued at $
On
April 25, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “ATM Agreement”) with Univest
Securities, LLC, as the sales agent (the “Agent”), pursuant to which the Company may offer and sell, from time to
time through or to the Agent, as sales agent or principal, shares of common stock having an aggregate offering price of up to $
The
Company will pay the Agent a commission of 3% of the aggregate gross sales prices of the shares of common stock under the ATM Agreement. The Company will also reimburse
the Agent for fees and disbursements of counsel to the Agent in an amount not to exceed $
The Company intends to use the net proceeds from the sale of shares of common stock pursuant to the ATM Agreement for working capital and general corporate purposes.
The ATM Agreement may be terminated (i) by the Company at any time in its sole discretion by giving five days’ written notice to the Agent or (ii) by the Agent, at any time in its sole discretion by giving written notice to the Company.
On
May 1, 2024, the Company sold
shares of common stock for net proceeds of $
On
May 6, 2024, the Company entered into an amendment (the “MIPA Amendment”) to the MIPA. The MIPA had provided that
the Sellers would be entitled to receive three potential earnout payments (the “Earnout Consideration) in cash (in the amount
of a total of $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
As explained above, unless otherwise indicated, the terms “we,” “us,” “our,” “our Company,” and “the Company” refer to Eightco Holdings Inc., together with its consolidated subsidiaries. The following discussion and analysis of the Company’s financial condition and results of operations should be read together with the Company’s financial statements and related notes appearing elsewhere in this Quarterly Report. Some of the information contained in this discussion and analysis or set forth elsewhere in this Quarterly Report, including information with respect to the Company’s plans and strategy for the Company’s business and related financing, includes forward-looking statements involving risks and uncertainties and should be read together with the “Cautionary Note Regarding Forwarding- Looking Statements” section of this Quarterly Report. Such risks and uncertainties could cause actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.
Overview
As used herein, “Eightco” and the “Company” refer to Eightco Holdings Inc. and subsidiaries and/or where applicable, its management, a Delaware corporation originally incorporated on September 21, 2021 (date of inception) under the laws of the State of Nevada. On March 9, 2022, the Company converted to a Delaware corporation pursuant to a plan of conversion entered into with the Former Parent. On April 4, 2023, the Company changed its name to Eightco Holdings Inc. from Cryptyde, Inc. and its stock symbol to “OCTO.” The Company is comprised of three main businesses, Forever 8 Inventory Cash Flow Solution, our Web3 Business, which includes the sale of BTC mining hardware, and our Packaging Business. Our Inventory Solution Business, Forever 8 Fund, LLC, a Delaware limited liability company focused on purchasing inventory for e-commerce retailers, which we acquired on October 1, 2022 (“Forever 8”). We no longer intend to generate revenue from our Web 3 Business. Our Packaging Business manufactures and sells custom packaging for a wide variety of products and through packaging helps customers generate brand awareness and promote brand image.
On June 29, 2022, the Company separated from its former parent company, Vinco Ventures Inc. (“Vinco”). As previously announced, we concluded a spin-off from Vinco (the “Separation”) and continue operating our Web3 Business, our BTC Mining Hardware Business and our Packaging Business. The Separation occurred concurrently with the distribution (the “Distribution”) of our common stock to stockholders of Vinco as of May 18, 2022 (the “Record Date”) at a ratio of one share of our common stock for every ten shares of Vinco common stock held by the Vinco stockholders. Following the Separation, we are an independent, publicly traded company, and Vinco retains no ownership interest in our Company.
In connection with the Separation, we entered into a Separation and Distribution Agreement and other agreements with Vinco to effect the Separation and provide a framework for our relationship with Vinco after the Separation. These agreements provide for the allocation between us and our subsidiaries, on the one hand, and Vinco and its subsidiaries, on the other hand, of the assets, liabilities, legal entities, and obligations associated with the Eightco Businesses, on the one hand, and Vinco’s other current businesses, on the other hand, and govern the relationship between our Company and our subsidiaries, on the one hand, and Vinco and its subsidiaries, on the other hand, following the Separation. In addition to the Separation and Distribution Agreement, the other principal agreements entered into with Vinco include a Tax Matters Agreement and certain commercial agreements.
Executive Changes
O’Donnell Severance Agreement
On March 17, 2024, Kevin O’Donnell resigned as Executive Chairman and Interim Chief Executive Officer of the Company, effective immediately. Mr. O’Donnell’s resignation was not the result of any disagreement regarding any matter relating to the Company’s operations, policies, or practices.
In connection with Mr. O’Donnell’s resignation from these positions, on March 17, 2024, the Company and Kevin O’Donnell entered into a General Release and Severance Agreement (the “O’Donnell Severance Agreement”), effective as of March 17, 2024 (the “O’Donnell Effective Date”). The O’Donnell Severance Agreement terminated the amended and restated employment agreement, by and between the Company and Mr. O’Donnell, effective as of October 21, 2022 (the “O’Donnell Employment Agreement”). Pursuant to the O’Donnell Severance Agreement, as of the O’Donnell Effective Date, the O’Donnell Employment Agreement shall terminate forever, and no party shall have any further obligation or liability thereunder except as related to any obligations that survive employment termination, including but not limited to the obligations set forth under the Employee Confidential Disclosure, Invention Assignment, Non-Competition, Non-Solicitation and Non-Interference Agreement, attached to the O’Donnell Employment Agreement.
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Pursuant to the O’Donnell Severance Agreement, the Company will provide Mr. O’Donnell with (i) back pay wages through the Separation Date in the amount of $138,000, less all lawful and authorized withholdings and deductions, to be paid as soon as practicable following the O’Donnell Effective Date and (ii) severance equal to 24 months of Mr. O’Donnell’s base salary, less all lawful and authorized withholdings and deductions, under the O’Donnell Employment Agreement. Pursuant to the O’Donnell Severance Agreement, the Company shall also provide Mr. O’Donnell with (i) reimbursement of the premiums associated with the continuation of Mr. O’Donnell’s health insurance for the period commencing on the Separation Date through and including September 27, 2024, pursuant to applicable law, (ii) reimbursement of expenses in accordance with the Company’s expense reimbursement policy, and (iii) the full vesting of any earned, outstanding and unvested shares of Common Stock subject to the Plan (as define below). The O’Donnell Severance Agreement also provides for a mutual waiver and release of any claims in connection with Mr. O’Donnell’s employment, separation and departure from the Company, and for certain customary covenants regarding confidentiality.
Appointment of Paul Vassilakos as Executive Chairman and Chief Executive Officer
In connection with Mr. O’Donnell’s resignation from his positions as Executive Chairman and Interim Chief Executive Officer,
on March 17, 2024, the Board appointed Paul Vassilakos as Executive Chairman and Chief Executive Officer of the Company, effective immediately,
to serve until a successor is chosen and qualified, or until his earlier resignation or removal.
In connection with Mr. Vassilakos’ appointment as the Executive Chairman and Chief Executive Officer of the Company, on March 17, 2024, the Company and Mr. Vassilakos entered into an Employment Agreement (the “Vassilakos Employment Agreement”), which supersedes and replaces the Employment Agreement dated October 16, 2022, by and between Mr. Vassilakos, the Company and Forever 8. The Vassilakos Employment Agreement provides for an initial term of two years, unless earlier terminated in accordance therein, and automatic renewals for successive one (1) year terms unless either party provides timely written notice otherwise.
Pursuant to the terms of the Vassilakos Employment Agreement, Mr. Vassilakos will be entitled to a base salary payable at the annualized rate of $300,000 per year (the “Vassilakos Base Salary”). Mr. Vassilakos is eligible for an annual cash bonus opportunity equal to up to 75% of the Vassilakos Base Salary and awards of restricted stock units up to 100% of the Vassilakos Base Salary, subject to the terms and conditions of the Eightco Holdings Inc. 2022 Long-Term Incentive Plan (the “Plan”) and the Company’s form of restricted stock unit agreement (the “Vassilakos Bonus”), based on certain milestones to be determined in the sole and absolute discretion of the Board. Mr. Vassilakos may also be eligible for additional compensation in the sole and complete discretion of the Board or the Compensation Committee of the Board.
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Mr. Vassilakos will be eligible to participate in all health, medical, dental and life insurance policies offered to employees of the Company, and the Company will pay all applicable premiums. The Company will reimburse Mr. Vassilakos for all reasonable out-of-pocket expenses incurred by him in the conduct of the Company’s business. The Vassilakos Employment Agreement provides Mr. Vassilakos with four (4) weeks of paid vacation and five (5) days of paid personal time. The Vassilakos Employment Agreement also provides Mr. Vassilakos with liability insurance coverage and shall reimburse certain financial planning expenses incurred by Mr. Vassilakos. Pursuant to the terms and provisions of the Vassilakos Employment Agreement, Mr. Vassilakos and the Company have entered into a standard indemnification agreement (the “Indemnification Agreement”).
In the event the Company terminates Mr. Vassilakos’ employment without cause (as defined in the Vassilakos Employment Agreement), Mr. Vassilakos will receive (i) the Accrued Obligations (as defined in the Vassilakos Employment Agreement) and (ii) severance in the amount of equal to the Vassilakos Base Salary for twelve (12) months, less applicable payroll deductions and tax withholdings. In addition, this termination will cause the vesting of all equity awards subject to the terms of the Plan held by Mr. Vassilakos and entitle Mr. Vassilakos to reimbursement of premiums associated with the continuation of health insurance benefits provided under the Vassilakos Employment Agreement during the remaining Term of Employment (as defined in the Vassilakos Employment Agreement).
On March 17, 2024, the Board approved grants of fully vested stock options in the aggregate amount of 451,560 shares of Common Stock to certain officers, employees and consultants of the Company, subject to the terms and conditions of the Plan and the form of the nonqualified stock option agreement. The Board also approved grants of fully vested stock options outside of the Plan in the aggregate amount of 648,110 shares of Common Stock to certain officers, employees and consultants of the Company, subject to the terms and conditions of the form of the nonqualified stock option agreement.
On March 17, 2024, the Board approved compensation for services to be rendered by its independent directors in 2024 in the following amounts: (i) $40,000 in cash, paid quarterly in four installments during 2024, (ii) 42,500 fully-vested restricted shares of Common Stock, subject to the terms and conditions of the Plan and the Company’s standard restricted stock award agreement and (iii) grants of fully vested stock options permitting each director to acquire up to 100,000 shares of Common Stock with (a) a date of grant as of March 17, 2024, (b) an exercise price equal to the greater of (x) the Fair Market Value (as defined in the Plan) on the date of grant and (y) $0.82 and (c) a five-year term, subject to the terms and conditions of the Plan and the form of the nonqualified stock option agreement.
On March 15, 2024, Forever 8 entered into the Series D Loan and Security Agreement (the “Series D Agreement”), with the lenders party thereto from to time (collectively, the “Lenders”) for an amount of up to $5,000,000.
In connection with the Series D Agreement, on March 15, 2024, Forever 8 also entered into a Subordination Agreement (the “Subordination Agreement”) with each of the Lenders, the several individuals, financial institutions or entities from time to time party thereto (collectively, the “Senior Lenders”) and the collateral agent for the Senior Lenders. Forever 8 additionally entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the lenders party thereto and the collateral agent for such lenders.
McFadden Severance Agreement and Amendment
On February 26, 2024, the Company and Brian McFadden entered into General Release and Severance Agreement, (the “McFadden Severance Agreement”), effective as of the eighth day following the McFadden Severance Agreement (the “McFadden Effective Date”) in connection with Mr. McFadden’s resignation as Chief Executive Officer of the Company, effective as of December 31, 2023 (the “Separation Date”). Pursuant to the McFadden Severance Agreement, Mr. McFadden is eligible to receive $146,683 in accrued but unpaid base salary through the Separation Date in four quarterly payments of $36,670.75 each, less all applicable tax withholdings, by December 31, 2024.
In consideration of the McFadden Severance Agreement, the release therein and Mr. McFadden’s resignation as Chief Executive Officer of the Company, the Company shall provide Mr. McFadden severance pay in the gross amount of amount of $422,500, less all lawful and authorized withholdings and deductions (the “Severance Payment”), which Severance Payment shall be paid in four quarterly installments of $105,625 per each installment, payable at the Company’s option in either cash or Common Stock, with the payment to be made as follows: (i) as of the McFadden Effective Date, on which such date Mr. McFadden shall be granted, in lieu of cash, 128,811 fully-vested restricted shares of the Common Stock at a price of $0.82 per share, which such shares of Common Stock subject to the terms and conditions of the Company’s 2022 Long-Term Incentive Plan (the “Plan”), and as of each of (ii) April 1, 2024, (iii) July 1, 2024, and (iv) October 1, 2024, payable at the Company’s option, in either cash or Common Stock. The shares of Common Stock to be issued to Mr. McFadden under installments (ii), (iii) and (iv), if applicable, shall be fully vested and the number of shares to be issued shall be determined based on the volume weighted average trading price of the Common Stock on the principal exchange on which the Common Stock is listed or admitted to trade during the period of 10 trading days immediately prior to the date of such issuance.
| 27 |
Pursuant to the McFadden Severance Agreement, the Company shall also reimburse to Mr. McFadden the premiums associated with the continuation of Mr. McFadden’s health insurance for the period commencing on the Separation Date through December 31, 2024, pursuant to applicable law, and approved but unpaid business expenses through the Separation Date within 30 days following McFadden Effective Date.
Pursuant to the McFadden Severance Agreement, as of the Separation Date, the amended and restated employment agreement, by and between the Company and Mr. McFadden, effective as of September 27, 2022 (the “McFadden Employment Agreement”), shall terminate forever, and no party shall have any further obligation or liability thereunder except as related to any obligations that survive employment termination, including but not limited to the obligations set forth under the Employee Confidential Disclosure, Invention Assignment, Non-Competition, Non-Solicitation and Non-Interference Agreement (the “Restrictive Covenants Agreement”), attached to the McFadden Employment Agreement. Notwithstanding the foregoing, the Company has agreed to waive certain post-termination obligations as related to certain non-competition and non-compete provisions in the Restrictive Covenants Agreement.
Pursuant to the McFadden Severance Agreement, for a period of 8 weeks following the Separation Date, Mr. McFadden has agreed to reasonably cooperate with the Company in the transition of positions. Additionally, Mr. McFadden shall remain a director of the Company’s board of directors (the “Board”) under the standard terms, conditions, and bylaws of the Company from the Separation Date through March 31, 2024, at which time Mr. McFadden shall resign from the Board. The McFadden Severance Agreement also provides for a mutual waiver and release of any claims in connection with Mr. McFadden’s employment, separation and departure from the Company, and for certain customary covenants regarding confidentiality.
On March 17, 2024, the Board approved the entry by the Company into the First Amendment to McFadden Severance Agreement to amend Mr. McFadden’s end date of service on the Board to March 17, 2024.
Vroman Severance Agreement and Consulting Agreement
On February 26, 2024, the Company and Brett Vroman entered into General Release and Severance Agreement, (the “Vroman Severance Agreement”), effective as of the eighth date following the Vroman Severance Agreement (the “Vroman Effective Date”) in connection with the termination of the amended and restated employment agreement, by and between the Company and Mr. Vroman, effective as of September 27, 2022 (the “Vroman Employment Agreement”). Pursuant to the Vroman Severance Agreement, as of the Separation Date, the Vroman Employment Agreement shall terminate forever, and no party shall have any further obligation or liability thereunder except as related to any obligations that survive employment termination, including but not limited to the obligations set forth under the Employee Confidential Disclosure, Invention Assignment, Non-Competition, Non-Solicitation and Non-Interference Agreement, attached to the Vroman Employment Agreement.
Additionally, on February 22, 2024, the Company and CXO Lite, LLC, a limited liability company organized under the laws of Pennsylvania, of which Mr. Vroman is the sole member, entered into a consulting agreement (the “Consulting Agreement”) pursuant to which Mr. Vroman shall be engaged and continue to serve the Company as its Chief Financial Officer. Pursuant to the Consulting Agreement, the Company has agreed to compensate Mr. Vroman at a rate of $10,000 per month for services rendered as Chief Financial Officer of the Company, commencing as of January 1, 2024. The term of the Consulting Agreement shall automatically renew on a month-to-month basis unless terminated by either the Company or Mr. Vroman upon 30 days written notice to the other party. The Consulting Agreement additionally provides for certain customary covenants regarding confidentiality.
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Pursuant to the Vroman Severance Agreement, the Company will provide Mr. Vroman with (i) back pay wages through the Separation Date in the amount of $151,615.46, less all lawful and authorized withholdings and deductions, to be paid as soon as practicable following the Vroman Effective Date and (ii) severance of 24 months of Mr. Vroman’s base salary, less all lawful and authorized withholdings and deductions, under the Vroman Employment Agreement. Pursuant to the Vroman Severance Agreement, the Company shall also reimburse to Mr. Vroman the premiums associated with the continuation of Mr. Vroman’s health insurance for the period commencing on the Separation Date through December 31, 2024, pursuant to applicable law, expenses in accordance with the Company’s expense reimbursement policy, and the full vesting of any earned shares of Common Stock. The Vroman Severance Agreement also provides for a mutual waiver and release of any claims in connection with Mr. Vroman’s employment, separation and departure from the Company, and for certain customary covenants regarding confidentiality.
Recent Financings
At-The-Market Issuance Sales Agreement
On April 25, 2024, the Company entered into an At-The-Market Issuance Sales Agreement (the “ATM Agreement”) with Univest Securities, LLC, as the sales agent (the “Agent”), pursuant to which the Company may offer and sell, from time to time through or to the Agent, as sales agent or principal, shares of common stock having an aggregate offering price of up to $2,000,000.
The Company will pay the Agent a commission of 3% of the aggregate gross sales prices of the shares sold pursuant to the ATM Agreement. The Company will also reimburse the Agent for fees and disbursements of counsel to the Agent in an amount not to exceed $37,000 in connection with the signing of the ATM Agreement.
The Company intends to use the net proceeds from the sale of shares under the ATM Agreement for working capital and general corporate purposes.
As of the date of this filing, a total of 866,856 shares have been sold under the Agreement.
February 2024 Private Placement
On February 26, 2024, the “Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with certain investors (the “Investors”), pursuant to which the Company sold to the Investors an aggregate of 865,856 shares (the “Shares”) of the Company’s common stock at a purchase price of $0.82 per Share (the “Private Placement”). The Company received aggregate gross proceeds from the Private Placement of approximately $0.71 million. The Shares are being offered and sold in reliance on the exemption from registration under the Securities Act of 1933, as amended, provided by Section 4(a)(2) and Regulation D promulgated thereunder for transactions not involving a public offering.
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Series A Financing
On May 30, 2023, the Company’s wholly owned subsidiary, Forever 8 (the “Borrower”), entered into a Loan and Security Agreement (the “Agreement”) with several individuals, financial institutions and entities (collectively, the “Lenders”). Under the terms of the Agreement, each Lender will severally (and not jointly) make available to Borrower, in an amount not to exceed its respective Commitment, a Loan Advance amount to be determined by the Lender (as such amount may be increased, the “Aggregate Commitment”) in the aggregate, of which (x) a certain amount will be deposited into an account of the Borrower in accordance with its written instructions (the “Initial Loan Advance”) and (y) the remaining balance of the Aggregate Commitment after deducting the Initial Loan Advance shall be deposited into the Escrow Account (the “Escrow Funds”). The Borrower may, at any time, request an advance for all or a portion of the Escrow Funds (each such advance, a “Subsequent Draw”).
The Borrower issued a Promissory Note (the “Note”) to each of the Lenders in the amount of the Lender’s respective Initial Loan Advance. The principal balance of the Initial Loan Advance and each Subsequent Draw shall bear interest thereon from the Closing Date and applicable Advance Date, respectively, at 15.00% per annum. The Borrower shall pay each Lender, according to its Applicable Percentage, an unused commitment fee on the actual daily amount of the Unused Commitment Amount during the immediately preceding calendar quarter at the rate of five percent (5.00%) per annum (the “Unused Commitment Fee”). In the event any payment is not paid on or within five (5) Business Days of the scheduled payment date, an amount equal to two percent (2.00%) of the past due amount shall be payable on demand, in addition to interest accruing. In addition, upon the occurrence and during the continuation of an Event of Default hereunder, the Initial Loan Advance and all Subsequent Draws, including principal, interest, compounded interest, and professional fees thereupon, shall upon the election of the Lenders, bear interest at the Interest Rate, plus five (5) percentage points. In the event any interest is not paid when due hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded.
As security for the prompt and complete payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Borrower grants to Lenders a security interest in all of Borrower’s right, title, and interest in and to all Inventory or Equipment and machinery, in each case, purchased (or refinanced) with the proceeds of the Initial Loan Advance and any Subsequent Draw, and, to the extent not otherwise included, all Proceeds of each of the foregoing and all products, additions, increases and accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing (collectively, the “Collateral”).
As of the date of this filing, $3,425,000 has been committed by the Lenders.
Series B Financing
On October 6, 2023, the Borrower, entered into a Series B Loan and Security Agreement (the “Series B Agreement”) with an individual (the “Lender”). Under the terms of the Series B Agreement, the Lender will make available to Borrower, in an amount not to exceed its respective Commitment, a Loan Advance amount to be determined by the Lender (as such amount may be increased, the “Aggregate Commitment”) in the aggregate, of which (x) a certain amount will be deposited into an account of the Borrower in accordance with its written instructions (the “Initial Loan Advance”) and (y) the remaining balance of the Aggregate Commitment after deducting the Initial Loan Advance shall be deposited into the Escrow Account (the “Escrow Funds”). The Borrower may, at any time, request an advance for all or a portion of the Escrow Funds (each such advance, a “Subsequent Draw”).
The Borrower issued a Promissory Note (the “Note”) to the Lender in the amount of the Lender’s respective Initial Loan Advance. The principal balance of the Initial Loan Advance and each Subsequent Draw shall bear interest thereon from the Closing Date and applicable Advance Date, respectively, at 15.00% per annum. The Borrower shall pay each Lender, according to its Applicable Percentage, an unused commitment fee on the actual daily amount of the Unused Commitment Amount during the immediately preceding calendar quarter at the rate of five percent (5.00%) per annum (the “Unused Commitment Fee”). In the event any payment is not paid on or within five (5) Business Days of the scheduled payment date, an amount equal to two percent (2.00%) of the past due amount shall be payable on demand, in addition to interest accruing. In addition, upon the occurrence and during the continuation of an Event of Default hereunder, the Initial Loan Advance and all Subsequent Draws, including principal, interest, compounded interest, and professional fees thereupon, shall upon the election of the Lender, bear interest at the Interest Rate, plus five (5) percentage points. In the event any interest is not paid when due hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded.
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As security for the prompt and complete payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Borrower grants to Lender a security interest in all of Borrower’s right, title, and interest in and to all Inventory or Equipment and machinery, in each case, purchased (or refinanced) with the proceeds of the Initial Loan Advance and any Subsequent Draw, and, to the extent not otherwise included, all Proceeds of each of the foregoing and all products, additions, increases and accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing (collectively, the “Collateral”).
From October 12, 2023, through February 26, 2024, the Borrower entered into Lender Joinder Agreements (the “Joinder Agreement”) with several individuals and entities (the “Subsequent Lenders”). Under the terms of the Joinder Agreement, the Subsequent Lenders agreed to become a Lender and be bound by the terms of the Series B Agreement as a Lender pursuant to Section 2.6 of the Series B Agreement.
As of the date of this filing, $275,000 has been committed by the Lenders.
Series C Financing
On October 19, 2023, the Borrower, entered into a Series C Loan and Security Agreement (the “Series C Agreement”) with an individual (the “Lender”). Under the terms of the Series C Agreement, the Lender will make available to Borrower, in an amount not to exceed its respective Commitment, a Loan Advance amount to be determined by the Lender (as such amount may be increased, the “Aggregate Commitment”) in the aggregate, of which (x) a certain amount will be deposited into an account of the Borrower in accordance with its written instructions (the “Initial Loan Advance”) and (y) the remaining balance of the Aggregate Commitment after deducting the Initial Loan Advance shall be deposited into the Escrow Account (the “Escrow Funds”). The Borrower may, at any time, request an advance for all or a portion of the Escrow Funds (each such advance, a “Subsequent Draw”).
The Borrower issued a Promissory Note (the “Note”) to the Lender in the amount of the Lender’s respective Initial Loan Advance. The principal balance of the Initial Loan Advance and each Subsequent Draw shall bear interest thereon from the Closing Date and applicable Advance Date, respectively, at 18.00% per annum. The Borrower shall pay the Lender, according to its Applicable Percentage, an unused commitment fee on the actual daily amount of the Unused Commitment Amount during the immediately preceding calendar quarter at the rate of five percent (5.00%) per annum (the “Unused Commitment Fee”). In the event any payment is not paid on or within five (5) Business Days of the scheduled payment date, an amount equal to two percent (2.00%) of the past due amount shall be payable on demand, in addition to interest accruing. In addition, upon the occurrence and during the continuation of an Event of Default hereunder, the Initial Loan Advance and all Subsequent Draws, including principal, interest, compounded interest, and professional fees thereupon, shall upon the election of the Lenders, bear interest at the Interest Rate, plus five (5) percentage points. In the event any interest is not paid when due hereunder, delinquent interest shall be added to principal and shall bear interest on interest, compounded.
As security for the prompt and complete payment when due (whether on the payment dates or otherwise) of all the Secured Obligations, Borrower grants to Lender a security interest in all of Borrower’s right, title, and interest in and to all Inventory or Equipment and machinery, in each case, purchased (or refinanced) with the proceeds of the Initial Loan Advance and any Subsequent Draw, and, to the extent not otherwise included, all Proceeds of each of the foregoing and all products, additions, increases and accessions to, substitutions and replacements for, and rents, profits and products of each of the foregoing (collectively, the “Collateral”).
As of the date of this filing, $2,900,000 has been committed by the Lenders.
Series D Financing
On March 15, 2024, Forever 8 entered into the Series D Loan and Security Agreement (the “Series D Agreement”), with the lenders party thereto from to time (collectively, the “Lenders”) for an amount of up to $5,000,000.
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In connection with the Series D Agreement, on March 15, 2024, Forever 8 also entered into a Subordination Agreement (the “Subordination Agreement”) with each of the Lenders, the several individuals, financial institutions or entities from time to time party thereto (collectively, the “Senior Lenders”) and the collateral agent for the Senior Lenders. Forever 8 additionally entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with the lenders party thereto and the collateral agent for such lenders. As of the date of this filing, a total of $250,000 has been committed by a Lender.
As of the date of this filing, $600,000 has been committed by the Lenders.
Nasdaq Deficiency Notice
On September 29, 2023, the Company received a written notice (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) indicating that the Company was not in compliance with the minimum bid price requirement of $1.00 per share set forth in the Nasdaq Listing Rules (the “Minimum Bid Price Rule”) based on the closing bid price of the Company’s listed securities for the 31 consecutive business days from August 16, 2023 to September 28, 2023. In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company was provided 180 calendar days, or until March 27, 2024, to regain compliance with the Minimum Bid Price Rule. On March 28, 2024, the Company received a staff determination letter (the “Staff Determination Letter”) from Nasdaq informing the Company that the Company had not regained compliance with the Minimum Bid Price Rule. The Staff Determination Letter noted that unless the Company requested an appeal of the staff’s determination, the Company’s securities would be scheduled for delisting from The Nasdaq Capital Market.
On April 9, 2024, the Company received a second staff determination letter (the “Additional Staff Determination Letter”) from Nasdaq indicating that the Company was also not in compliance with a requirement of the rules for continued listing on Nasdaq that the Company maintain a minimum of $2,500,000 in stockholders’ equity (the “Minimum Equity Rule”).
The Company has requested and been granted a hearing to appeal the staff’s determination (the “Hearing”). The Hearing has been scheduled for May 28, 2024 and Nasdaq will consider the matter of noncompliance with the Minimum Equity Rule, in addition to that of the Minimum Bid Price Rule, at such Hearing. The appeal stays the delisting of the Company’s securities, which will continue to be listed on the Nasdaq Capital Market pending the appeal.
Neither the Staff Determination Letter nor the Additional Staff Determination Letter has any current effect on the listing or trading of the Company’s securities on the Nasdaq Capital Market. The Company intends to resolve the deficiencies mentioned above and regain compliance with the Nasdaq Listing Rules; however, there is no guarantee that the Company will be able to do so. Ultimately, if the Company is not able to resolve the deficiencies and regain compliance with the Nasdaq Listing Rules, the Company’s common stock may be delisted from Nasdaq.
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Critical Accounting Policies and Significant Judgments and Estimates
There have been no changes to our critical accounting policies during the nine months ended September 30, 2023. Critical accounting policies and the significant accounting estimates made in accordance with such policies are regularly discussed with the Audit Committee of the Company’s board of directors. Those policies are discussed under “Critical Accounting Policies” in our “Management’s Discussion and Analysis of the Financial Condition and Results of Operations” included in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2022, as well as in our consolidated financial statements and the footnotes thereto, included in the Annual Report on Form 10-K.
Key Components of our Results of Operations
Revenues
We generate the majority of our revenues from inventory financing through our wholly owned subsidiary, Forever 8. In addition, we will generate revenues from the sale of corrugated custom packaging to a wide array of customers.
Cost of Revenues
Our cost of revenues includes inventory costs, materials and supplies costs, internal labor costs and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs. In addition, we will incur costs to purchase Bitcoin mining equipment which will be resold to customers and costs from the development of Web3 products and services.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of selling, marketing, advertising, payroll, administrative, finance and professional expenses.
Restructuring and Severance Expenses
Restructuring and severance expenses consist of costs associated with organizational changes, including employee severance payments, benefits continuation, contract terminations, asset impairments, and other expenses related to restructuring initiatives.
Interest Expense and Income, Net
Interest expense includes the cost of our borrowings under our debt arrangements. Interest income includes the interest earned under our notes receivable.
Gain on Forgiveness of Earnout
Gain on forgiveness of earnout includes the gain recognized related to the forfeiture of the earnout rights by the Sellers of Forever 8.
Other Income
Other income includes the interest income received the Wattum Note.
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Results of Operations
Three Months Ended March 31, 2024 versus Three Months Ended March 31, 2023
The following table sets forth information comparing the components of net (loss) income for the three months ended March 31, 2024 and 2023:
| Three Months Ended March 31, | Period over Period Change | |||||||||||||||
| 2024 | 2023 | $ | % | |||||||||||||
| Revenues, net | $ | 9,619,820 | $ | 15,889,715 | $ | (6,269,895 | ) | -39.46 | % | |||||||
| Cost of revenues | 7,734,058 | 14,070,623 | (6,336,565 | ) | -45.03 | % | ||||||||||
| Gross profit | 1,885,762 | 1,819,092 | 66,670 | 3.67 | % | |||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | 3,461,959 | 4,265,745 | (803,786 | ) | -18.84 | % | ||||||||||
| Restructuring and severance | 1,414,838 | 1,083,686 | 331,152 | 30.56 | % | |||||||||||
| Operating (loss) | (2,991,035 | ) | (3,530,339 | ) | (539,304 | ) | -15.28 | % | ||||||||
| Other (expense) income: | ||||||||||||||||
| Interest income (expense) | (1,198,771 | ) | (2,813,227 | ) | 4,621,352 | -164.27 | % | |||||||||
| Loss on issuance of warrants | - | (43,541,211 | ) | (43,541,211 | ) | -100.00 | % | |||||||||
| Gain on forgiveness of earnout | 6,100,000 | - | 6,100,000 | 100.00 | % | |||||||||||
| Other income | 30,769 | 33,637 | (2,868 | ) | -8.53 | % | ||||||||||
| Total other income (expense), net | 4,931,998 | (46,320,801 | ) | 51,252,799 | -110.65 | % | ||||||||||
| Income (loss) before income taxes | 1,940,963 | (49,851,140 | ) | 51,792,103 | -103.89 | % | ||||||||||
| Income tax expense (benefit) | - | - | - | 0.00 | % | |||||||||||
| Net income (loss) | $ | 1,940,963 | $ | (49,851,140 | ) | $ | 51,792,103 | $ | -103.89 | % | ||||||
Revenue
For the three months ended March 31, 2024, revenues decreased by $6,269,895 or 39.46%, as compared to the three months ended March 31, 2023. The decrease was largely attributable to the decreased sale of goods from revenue derived from the inventory management solutions business due to the Company’s utilization of capital to repay its outstanding convertible notes payable.
Cost of Revenues
For the three months ended March 31, 2024, cost of revenues decreased by $6,336,565 or 45.03%, as compared to the three months ended March 31, 2023. The decrease was largely attributable to the decrease in total revenues for our inventory management solutions business.
Gross Profit
For the three months ended March 31, 2024, gross profit increased by $66,670 or 3.67%, as compared to the three months ended March 31, 2023. The increase was largely attributable to a decrease in lower margin sales in the inventory management solutions business.
Operating Expenses
Selling, general and administrative expenses were $3,461,959 and $4,265,745 for the three months ended March 31, 2024 and 2023, respectively, representing a decrease of $803,786, or 18.84%. The decrease was largely attributable to the decrease in professional fees, payroll costs, insurance expense, and rent expense.
Restructuring and severance were $1,414,838 and $1,083,686 for the three months ended March 31, 2024 and 2023, respectively, representing a increase of $331,152, or 30.56%. The increase was largely attributable to the payroll costs associated with the accrual of severance payments owed to past officers.
Interest Expense
Interest expense was $1,198,771, for the three months ended March 31, 2024, versus $2,813,227 for the three months ended March 31, 2023. The decrease in interest expense was largely attributable to the reduced borrowings under the convertible notes payable.
Gain on forgiveness of earnout
Gain on forgiveness of earnout was $6,100,000 for the three months ended March 31, 2024 versus $0 for the three months ended March 31, 2023. The increase in change in fair value of earnout was related to the forfeiture of the earnout shares by the sellers of Forever 8.
Income tax expense
Income tax expense was $0 for the three months ended March 31, 2024 and 2023, respectively.
Net loss
Net income (loss) was $1,940,963 for the three months ended March 31, 2024, versus ($49,851,140) for the three months ended March 31, 2023. The increase in net income was largely attributable the Company’s other income in the amount of $4,931,998.
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Liquidity and Capital Resources
As reflected in the accompany financial statements for the three months ended March 31, 2024, the Company had net income of $4.9 million and as of March 31, 2024, had stockholders’ equity of $3.5 million and approximately $0.8 million in cash and cash equivalents as compared to $5.2 million at December 31, 2023. The Company expects that its current cash and cash equivalents are not sufficient to support its projected operating requirements for at least the next 12 months from this date. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern within one year of the date that the financial statements are issued.
The Company expects to need additional capital in order to maintain revenues at current levels. Any additional equity financing, if available, may not be on favorable terms and would likely be significantly dilutive to the Company’s current stockholders, and debt financing, if available, may involve restrictive covenants. The Company’s ability to access capital when needed is not assured and, if not achieved on a timely basis, will likely have a materially adverse effect on our business, financial condition and results of operations.
Cash Flows
Since inception, Eightco and its subsidiaries have primarily used its available cash to fund its operations. The following table sets forth a summary of cash flows for the periods presented:
For the Three Months Ended March 31, | ||||||||
| 2024 | 2023 | |||||||
| Cash (used in) provided by: | ||||||||
| Operating Activities | $ | (723,292 | ) | $ | (4,937,282 | ) | ||
| Investing Activities | - | 67,202 | ||||||
| Financing Activities | (3,715,767 | ) | 2,383,909 | |||||
| Net increase (decrease) in cash and restricted cash | $ | (4,439,059 | ) | $ | (2,486,171 | ) | ||
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Cash Flows for the Three Months Ended March 31, 2024 and 2023
Operating Activities
Net cash (used in) operating activities was ($723,376) during the three months ended March 31, 2024, which consisted primarily of net income of $1,940,963, depreciation and amortization of $605,796, amortization of debt issuance costs of $587,750 and changes in assets and liabilities of ($798,719) offset largely by a gain on forgiveness of earnout of $6,100,000.
Net cash (used in) operating activities was ($4,937,282) during the three months ended March 31, 2023, which consisted primarily of a net loss of $49,851,140 offset largely by amortization of debt issuance costs of $2,043,458 and loss on issuance of warrants of $43,541,211 and changes in assets and liabilities of ($1,911,411).
Investing Activities
Net cash provided by investing activities was $0 during the three months ended March 31, 2024 compared to $67,202 for the three months ended March 31, 2023. The decrease in net cash provided by investing activities is largely attributable to no purchases or sales of long-lived assets.
Financing Activities
Net cash provided by (used in) financing activities was ($3,715,767) during the three months ended March 31, 2024 compared to $2,383,909 for the three months ended March 31, 2023. This decrease was largely attributable to proceeds the repayment of convertible notes payable in the amount of $4,915,000 offset by net borrowings under lines of credit of $575,000 and net proceeds from investors of $710,000.
Eightco has required funding from the Former Parent to launch operations. Ferguson Containers has historically had positive cash flows from operations. Since inception, Ferguson Container’s operations have been funded principally through its operations.
The Company did not have any off-balance sheet arrangements as of March 31, 2024.
Known Trends, Events, Uncertainties and Factors That May Affect Future Operations
The impact of general economic conditions, actual and projected, including inflation, rising interest rates, lower consumer confidence, volatile capital markets, supply chain disruptions, uncertainty and volatility in the financial services sector and the impact of the Hamas-Israel and Russia-Ukraine conflicts, and government and business responses thereto, on the global economy and regional economies.
Contractual Obligations and Commitments
The Company has no debt covenants that require certain financial information to be met.
Critical Accounting Policies and Significant Judgments and Estimates
This discussion and analysis of the Company’s financial condition and results of operations is based on the Company’s combined financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported periods. In accordance with U.S. GAAP, the Company bases its estimates on historical experience and on various other assumptions the Company believes are reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
For information on the Company’s significant accounting policies please refer to Note 3 to the Company’s Financial Statements included in this Quarterly Report.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 14, 2024
| EIGHTCO HOLDINGS INC. | ||
| By: | /s/ Paul Vassilakos | |
| Name: | Paul Vassilakos | |
| Title: | Chief Executive Officer | |
| EIGHTCO HOLDINGS INC. | ||
| By: | /s/ Brett Vroman | |
| Name: | Brett Vroman | |
| Title: | Chief Financial Officer | |
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