NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
1.
NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 its former
parent, Vinco Ventures, Inc. The company operates in three main businesses: Forever 8 Inventory Cash Flow Solution, Web3 Business, and
Packaging Business. Forever 8 Fund LLC, 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 100% owned by Vinco Ventures, Inc. (“Vinco” or
“Former Parent”).
As of March 31, 2023, Eightco had three wholly-owned
subsidiaries: Forever 8 Fund, LLC, Ferguson Containers, Inc. and BlockHiro, LLC. Ferguson Containers, Inc. owns 100% of 8co Holdings Shared
Services, LLC. Eightco owns 51% of CW Machines, LLC which is consolidated under the voting interest entity model. Under the voting interest
entity model, control is presumed by the holder of a majority voting interest unless noncontrolling shareholders have substantive participating
rights. Forever 8 Fund, LLC owns 100% of Forever 8 UK, Ltd and Forever 8 Fund EU Holdings BV.
During 2021, the Former Parent announced it plans
to spin-off (the “Separation”) certain of its businesses. The Former Parent has 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 on June 30, 2022.
On
March 29, 2022, Ferguson Containers, Inc. 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 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 Holdings Inc.
Liquidity
Uncertainties.
As of March 31, 2023, the Company had approximately
$3.1 million in cash and cash equivalents as compared to $5.6 million at December 31, 2022. The Company expects that its current
cash and cash equivalents, approximately $3.1 million as of the date of this quarterly report, will be sufficient to support its
projected operating requirements for at least the next 12 months from this date.
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.
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, 2023 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, 2022 included in the Company’s Annual Report on Form
10-K filed with the SEC on April 17, 2023.
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.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
2.
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 Delaware (1) to effect a
1-for-50 reverse stock split of the shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”),
either issued and outstanding or held by the Company as treasury stock (the “Reverse Stock Split”) and (2) to change the
name of the Company from “Cryptyde, Inc.” to “Eightco Holdings Inc.” (the “Name Change”). Both the
Reverse Stock Split and the Name Change were effective as of 4:05 p.m., New York time, on April 3, 2023. The Common Stock began trading
on a reverse stock split-adjusted basis on the Nasdaq Capital Market on April 4, 2023. The trading symbol for the Common Stock following
the Reverse Stock Split and the Name Change is “OCTO.” The new CUSIP number for the Common Stock following the Reverse Stock
Split and the Name Change is 22890A203. All share, equity award, and per share amounts contained in the Consolidated Financial Statements
have been adjusted to reflect the Reverse Stock Split for all prior periods presented.
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 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 (See Note 3 –
Acquisitions).
Cash
and Cash Equivalents. The Company considers all highly liquid, short-term investments with original maturities of three months or
less when purchased to be cash equivalents.
Restricted
Cash. The Company’s restricted cash consists of cash that the Company is contractually obligated to maintain in accordance
with the terms of its January 2022 Secured Convertible Note. See Note 14. Convertible Notes Payable for further discussion.
Accounts
Receivable. Accounts receivable
are carried at their contractual amounts, less an estimate for uncollectible amounts. Management estimates the allowance for bad debts
based on existing economic conditions, historical experience, the financial conditions of the customers, and the amount and age of past
due accounts. 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 bad debts only after all collection attempts have been exhausted. The allowance for doubtful
account was $46,705
as of March 31, 2023 and December 31, 2022, respectively. There were two customers who represented 22%
and 13%
of total accounts receivable as of March 31, 2023.
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: 3 to 5 years for office
equipment, 5 to 7 years for furniture and fixtures, 6 to 10 years for machinery and equipment, 10 to 15 years for building improvements,
5 years for software, 5 years for molds, 5 to 7 years for vehicles and 40 years for buildings. When fixed assets are retired or otherwise
disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the statements
of comprehensive loss for the respective period. Minor additions and repairs are expensed in the period incurred. Major additions and
repairs which extend the useful life of existing assets are capitalized and depreciated using the straight-line method over their remaining
estimated useful lives.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
2.
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. During the three months ended March 31, 2023 and 2022, the Company recorded
impairment charges to long lived assets in the amounts of $0 and $0, respectively. 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 during the three months ended March 31, 2023 and 2022, 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.
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 77%
of total revenues for the three months ended March 31, 2023.
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.
. 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. Since the Company has no items of other comprehensive loss, comprehensive loss
is equal to net loss.
Earnings
Per Share. The Company follows ASC 260 when reporting Earnings Per Share resulting in the presentation of basic and diluted earnings
per share. Basic net (loss) income per common share is computed by dividing net (loss) income by the weighted average number of vested
common shares outstanding during the period. Diluted net income per common share is computed by dividing net income by the weighted average
number vested of common shares, plus the net impact of common shares (computed using the treasury stock method), if dilutive, resulting
from the exercise of dilutive securities. In periods when losses are reported, the weighted-average number of common shares outstanding
excludes common stock equivalents because their inclusion would be anti-dilutive. As of March 31, 2023 and 2022, the Company
excluded the common stock equivalents summarized below, which entitle the holders thereof to ultimately acquire shares of common stock,
from its calculation of earnings per share, as their effect would have been anti-dilutive.
SCHEDULE
OF EARNINGS PER SHARE COMMON STOCK EQUIVALENTS ANTI DILUTIVE
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
|
March 31,
2022 |
|
|
|
|
|
|
|
|
Convertible shares under notes payable |
|
|
1,209,768 |
|
|
|
- |
|
Warrants for noteholders |
|
|
2,889,512 |
|
|
|
- |
|
Warrants for equity investors |
|
|
728,000 |
|
|
|
- |
|
Warrants for placement agent |
|
|
252,760 |
|
|
|
- |
|
Shares reserved for issuance for preferred units of Forever 8 Fund, LLC |
|
|
215,000 |
|
|
|
- |
|
Convertible notes payable issued in acquisition of Forever 8 Fund, LLC |
|
|
275,000 |
|
|
|
- |
|
Shares reserved for contingent consideration for acquisition of Forever 8 Fund, LLC |
|
|
140,000 |
|
|
|
- |
|
Total common stock equivalents |
|
|
5,710,040 |
|
|
|
- |
|
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
2.
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, 2023 and 2022.
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
$29,383,700. The estimated fair value of this debt approximates the carrying value of these instruments, due to the interest rates on
this debt approximating current market interest rates.
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, 2023, amount due from one customer totaled approximately
17% of accounts receivable.
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. As of April 26, 2022, the date
the Company assumed the lease (Note 18), the operating lease right of use asset and operating lease liability amounted to $98,736 with
no cumulative-effect adjustment.
Recent
Accounting Pronouncements.
In June 2016, the FASB
issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments (“ASU 2016-13”). This standard establishes an impairment model (known as the current expected
credit loss (“CECL”) model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity
recognizes as an allowance its estimate of expected credit losses, which is intended to result in a timelier recognition of losses. Under
the CECL model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments,
but not expected extensions or modifications) from the date of initial recognition of the financial instrument. Measurement of expected
credit losses are to be based on relevant forecasts that affect collectability. The scope of financial assets within the CECL methodology
is broad and includes trade receivables from certain revenue transactions and certain off-balance sheet credit exposures. Different components
of the guidance require modified retrospective or prospective adoption.
In
November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. ASU 2018-19
clarifies that receivables arising from operating leases are not within the scope of the credit losses standard. Instead, entities would
need to apply other U.S. GAAP, namely Topic 842 (Leases), to account for changes in the collectability assessment for operating leases.
Other than operating lease receivables, Partnership trade receivables include receivables from finance leases and equipment sales. Under
Topic 606 (Revenue from Contracts with Customers), revenue is recognized when, among other criteria, it is probable that the entity will
collect the consideration to which it is entitled for goods or services transferred to a customer. At the point that finance lease receivables
are recorded, they become subject to the CECL model and estimates of expected credit losses over their contractual life will be required
to be recorded at inception based on historical information, current conditions, and reasonable and supportable forecasts. Trade receivables
derived from equipment sales are of short duration and there is not a material difference between incurred losses and expected losses.
In
April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives
and Hedging, and Topic 825, Financial Instruments, which amends and clarifies several provisions of Topic 326. In May 2019, the FASB
issued ASU 2019-05, Financial Instruments-Credit Losses (Topic 326): Targeted Transition Relief, which amends Topic 326 to allow the
fair value option to be elected for certain financial instruments upon adoption. ASU 2019-10 extended the effective date of ASU 2016-13
until December 15, 2022. The Company adopted this new guidance, including the subsequent updates to Topic 326, on January 1, 2023 and
the adoption did not have a material impact on the Company’s financial statements and related disclosures
Management
does not believe that any other recently issued, but not yet effective, accounting standards could have a material effect on the accompanying
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.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
3.
ACQUISITIONS
Effective
October 1, 2022, the Company acquired 100% of the issued and outstanding membership interests of Forever 8.
Pursuant
to the Purchase Agreement, the Sellers received consideration consisting of (i) an aggregate of 215,000 non-voting preferred membership
units of Forever 8 (the “Initial Base Preferred Units”), subject to adjustments discussed below, (ii) convertible promissory
notes in an aggregate principal amount of $27.5 million (the “Promissory Notes”), and (iii) the right to receive potential
earnout amounts as discussed below. The following table summarizes the aggregate preliminary purchase price consideration paid to acquire
Forever 8 Fund, LLC:
SCHEDULE
OF PRELIMINARY PURCHASE PRICE CONSIDERATION PAID
| |
October 1, | |
| |
2022 | |
215,000 non-voting preferred membership
units of Forever 8 | |
$ | 7,300,000 | |
Convertible promissory notes in an aggregate
principal amount of $27.5 million | |
| 24,500,000 | |
Contingent consideration | |
| 6,100,000 | |
Total purchase price | |
$ | 37,900,000 | |
The
Company believes that this combination will further strengthen its future growth opportunities. The Company accounted for this acquisition
as a business combination under the acquisition method of accounting. The following table summarizes the preliminary purchase price allocation
of fair values of the assets acquired and liabilities assumed at the date of acquisition:
SCHEDULE
OF ASSETS ACQUIRED AND LIABILITIES ASSUMED
| |
October 1, | |
| |
2022 | |
Cash and cash equivalents | |
$ | 732,716 | |
Accounts receivable, net | |
| 561,569 | |
Inventories | |
| 7,464,823 | |
Prepaid expenses and other assets | |
| 116,857 | |
Property and equipment | |
| 2,146 | |
Intangible assets | |
| 19,000,000 | |
Goodwill | |
| 22,324,588 | |
Total assets acquired | |
| 50,202,699 | |
| |
| | |
Accounts payable and accrued expenses | |
| 10,452,699 | |
Debt | |
| 1,850,000 | |
Earnout | |
| - | |
Total liabilities assumed | |
| 12,302,699 | |
| |
| | |
Total | |
$ | 37,900,000 | |
The
Company anticipates the goodwill will be tax deductible.
4.
ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at March
31, 2023 and December 31, 2022:
SCHEDULE
OF ACCOUNTS RECEIVABLE
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Trade accounts receivable |
|
$ |
2,745,623 |
|
|
$ |
1,871,908 |
|
Less: allowance for doubtful accounts |
|
|
(608,356 |
) |
|
|
(608,356 |
) |
Total accounts receivable |
|
$ |
2,137,267 |
|
|
$ |
1,263,552 |
|
5.
INVENTORIES
Inventories consist of the following at March 31,
2023 and December 31, 2022:
SCHEDULE
OF INVENTORIES
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Raw materials |
|
$ |
30,726 |
|
|
$ |
27,922 |
|
Finished goods |
|
|
8,146,613 |
|
|
|
4,474,081 |
|
Reserve for obsolescence |
|
|
(300,000 |
) |
|
|
- |
|
Total inventories |
|
$ |
7,877,339 |
|
|
$ |
4,502,003 |
|
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
Other current assets consist of the following at March
31, 2023 and December 31, 2022:
SCHEDULE
OF PREPAID EXPENSES OTHER CURRENT ASSETS
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Advances for inventory purchases |
|
$ |
295,632 |
|
|
$ |
630,967 |
|
Prepaid insurance |
|
|
384,870 |
|
|
|
735,934 |
|
Deposits |
|
|
273,155 |
|
|
|
90,578 |
|
Prepaid software deposit |
|
|
- |
|
|
|
242,200 |
|
Other |
|
|
33,402 |
|
|
|
36,466 |
|
Total other current assets |
|
$ |
987,059 |
|
|
$ |
1,736,145 |
|
7.
LOAN HELD-FOR-INVESTMENT, RELATED PARTY
Loan held-for-investment, related party, represents
a senior secured promissory note (“Note”) from Wattum Management Inc., a non-controlling member of CW Machines, LLC, a related
party. The note bears interest of 5%
per annum and matures on October
12, 2026 with the entire outstanding principal and accrued interest due at maturity date. The Note is secured by assets of Wattum
Management, Inc. At March 31, 2023 and December 31, 2022, the principal amount of the loan held for investment was $2,224,252.
8.
PROPERTY AND EQUIPMENT, NET
Property and equipment consist of the following at
March 31, 2023 and December 31, 2022:
SCHEDULE OF PROPERTY AND EQUIPMENT
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Land |
|
$ |
- |
|
|
$ |
- |
|
Building and building improvements |
|
|
781,985 |
|
|
|
781,985 |
|
Equipment and machinery |
|
|
4,967,407 |
|
|
|
5,146,029 |
|
Furniture and fixtures |
|
|
278,665 |
|
|
|
280,811 |
|
Office and computer equipment |
|
|
2,146 |
|
|
|
- |
|
Vehicles |
|
|
585,854 |
|
|
|
572,927 |
|
Property plant and equipment, gross |
|
|
6,616,057 |
|
|
|
6,781,752 |
|
Less: accumulated depreciation |
|
|
(5,495,102 |
) |
|
|
(5,460,710 |
) |
Total property and equipment, net |
|
$ |
1,120,955 |
|
|
$ |
1,321,042 |
|
Depreciation and amortization expense was $270,325
and $270,325 for the three months ended March 31, 2023 and 2022, respectively.
9.
INTANGIBLE ASSETS, NET
Intangible assets consist of the following at March
31, 2023 and December 31, 2022:
SCHEDULE
OF INTANGIBLE ASSETS
|
Useful Lives |
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
|
Customer relationships |
7 years |
|
$ |
7,100,000 |
|
|
$ |
7,100,000 |
|
Developed technology |
10 years |
|
|
9,936,085 |
|
|
|
9,858,594 |
|
Trademarks and tradenames |
7 years |
|
|
2,200,000 |
|
|
|
2,200,000 |
|
Total intangible assets, gross |
|
|
|
19,236,085 |
|
|
|
19,158,594 |
|
Less: accumulated amortization |
|
|
|
(1,155,188 |
) |
|
|
(578,608 |
) |
Total intangible assets, net |
|
|
$ |
18,080,897 |
|
|
$ |
18,579,986 |
|
Amortization expense was $578,608 and $0 for the three
months ended March 31, 2023 and 2022, respectively.
Amortization
expense for the next five years is as follows:
SCHEDULE OF AMORTIZATION FUTURE ROLLING MATURITY
For the years ending December 31, |
|
|
|
|
2023 (excluding the three months ended March 31, 2023) |
|
$ |
1,815,342 |
|
2024 |
|
|
2,314,431 |
|
2025 |
|
|
2,314,431 |
|
2026 |
|
|
2,314,431 |
|
2027 |
|
|
2,314,431 |
|
Thereafter |
|
|
7,007,831 |
|
Total |
|
$ |
18,080,897 |
|
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
10.
GOODWILL
The changes
in the carrying amount of goodwill for the period from January 1, 2023 through March 31, 2023 consisted of the following:
SCHEDULE
OF GOODWILL
|
|
|
|
Balance, January 1, 2023 |
|
$ |
22,324,588 |
|
Additions and adjustments |
|
|
- |
|
Balance, March 31, 2023 |
|
$ |
22,324,588 |
|
11.
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consist
of the following at March 31, 2023 and December 31, 2022:
SCHEDULE OF ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Customer deposits |
|
$ |
210,213 |
|
|
$ |
83,504 |
|
Payroll and related benefits |
|
|
1,250,695 |
|
|
|
386,781 |
|
Professional fees |
|
|
558,632 |
|
|
|
280,000 |
|
Accrued taxes |
|
|
481 |
|
|
|
- |
|
Accrued settlement liability for equity holders of Forever 8 |
|
|
- |
|
|
|
469,775 |
|
Accrued interest |
|
|
1,443,375 |
|
|
|
825,872 |
|
Accrued rent |
|
|
787,500 |
|
|
|
525,000 |
|
Accrued warrant liability |
|
|
469,765 |
|
|
|
- |
|
Other |
|
|
209,019 |
|
|
|
53,586 |
|
Total accrued expenses and other current liabilities |
|
$ |
4,929,680 |
|
|
$ |
2,624,518 |
|
12.
DUE TO AND FROM FORMER PARENT
As of March 31, 2023 and December 31, 2022, due to
Former Parent consists of net amounts due to Vinco related to management fees and borrowings for working capital and financing needs
of Eightco Holdings Inc. as well as other operating expenses that were paid for on behalf of one to the other. As of March 31, 2023 and
December 31, 2022, the net amount due to Former Parent was $7,226,700.
13.
LINES OF CREDIT
Principal due under the lines of credit was as follows
at March 31, 2023 and December 31, 2022:
SCHEDULE
OF LINE OF CREDIT
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
|
|
Lines of credit, 15% |
|
$ |
1,850,000 |
|
|
$ |
1,850,000 |
|
Interest expense under lines of credit was $69,375
and $69,375 for the three months ended March 31, 2023 and 2022, respectively.
14.
CONVERTIBLE NOTES PAYABLE
Principal due under the convertible note payable was
as follows at March 31, 2023 and December 31, 2022:
SCHEDULE OF CONVERTIBLE NOTE PAYABLE
|
|
March 31,
2023 |
|
|
December 31,
2022 |
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
Note payable, 0% |
|
|
5,555,000 |
|
|
|
- |
|
Less: debt discount |
|
|
(5,277,250 |
) |
|
|
- |
|
Convertible notes payable, net, current |
|
$ |
277,750 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Long-Term: |
|
|
|
|
|
|
|
|
Note payable, 0% |
|
|
2,000,000 |
|
|
|
9,743,333 |
|
Less: debt discount |
|
|
(316,120 |
) |
|
|
(1,831,828 |
) |
Convertible notes payable, net |
|
$ |
1,683,880 |
|
|
$ |
7,911,505 |
|
Interest expense under the convertible notes
payable was $1,793,458
and $0,
of which $1,793,458
and $0
was related to amortization of the debt discount, for the three months ended March 31, 2023 and 2022, respectively.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
14.
CONVERTIBLE NOTES PAYABLE (continued)
March
2023 Offering
On
March 15, 2023, Eightco Holdings Inc. (the “Company”) 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 $5,555,000
(the “Note”) at a conversion price
of $6.245
per share (the “Common Stock”),
and a warrant (the “Warrant”) to purchase up to 889,512
shares of Common Stock with an initial exercise price of $6.245
per share of Common Stock (the “Private Placement”). The purchase price of the Note was $5,000,000
with an original issue discount of $555,000.
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 the Investor and the sale by the Company of the Note and the Warrant. The
Securities Purchase Agreement contains representations and warranties of the Company and the Investor 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 the Investor. 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 the Investor and the Company that are typical for
transactions of this type, as well certain other condition including the following:
|
● |
the Company delivered to
the Investor 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 amount 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, the Investor
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 the Investor 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 Note will bear
interest at 18% per annum upon the occurrence of an event of default (as described below).
The
Maturity Date may be extended at the sole option of the Investor 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
Note is convertible at the option of the Investor 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.
The
Note contains certain limitations on conversion. It provides that no conversion may be made if, after giving effect to the conversion,
the Investor would own in excess of 9.99% of the Company’s outstanding shares of Common Stock. This percentage may be increased
or decreased to a percentage not to exceed 9.99%, at the option of the Investor, except any increase will not be effective until 61-days’
prior notice to the Company.
The
conversion price of the Note will be subject to adjustments for stock splits, combinations or similar events. In addition, the conversion
price of the 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 Note to equal the price at which the Company issues or is deemed to have issued its Common Stock.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
14.
CONVERTIBLE NOTES PAYABLE (continued)
The
Note imposes penalties on the Company for any failure to timely deliver any shares of its Common Stock issuable upon conversion.
The
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 Note; |
|
|
|
|
● |
the failure for 2 trading
days to pay the Investor principal, interest, late charges or other amounts when and as due under the 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 the Investor’s first priority security interest; and |
|
|
|
|
● |
the failure to comply with
certain covenants of the Note. |
If
there is an event of default, then the Investor has the right to request redemption of all or any portion of the Note, at 130%
of the sum of the outstanding principal, interest and late fees to be redeemed, provided that if certain conditions specified in the
Note are not satisfied, then the Investor has the right to request redemption of all or any portion of the Note, at 130%
of the greater of (i) the sum of the outstanding principal, interest and late fees to be redeemed and (ii) the product of (a) the number
of shares into which the Note (including all principal, interest and late fees) subject to redemption may be converted and (b) the greatest
closing sale price for the Common Stock beginning on the date immediately preceding the event of default and ending on the date the Company
makes the entire payment required to be made upon the redemption provided, however, that if no Cash Release Event (as defined in the
Note) has occurred on or prior to the applicable of default redemption date, the principal amount used in calculating the applicable
event of default redemption price on such event of default redemption date shall be decreased by the holder’s pro rata portion.
The
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 Note and the other transaction documents. In the event of such a transaction,
the Investor will have the right to request redemption of the Note, at Redemption Variable Premium (as defined in the 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 the Note Investor
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 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 the Investor 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.
If
the Company issues options, convertible securities, warrants, stock, or similar securities to holders of its Common Stock, the holder
of the Note shall have the right to acquire the same as if it had converted its Note.
The
Investor 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.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
14.
CONVERTIBLE NOTES PAYABLE (continued)
The
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 Note ranks senior to
all other indebtedness of the Company, except that certain permitted indebtedness ranks pari passu with the 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. |
The warrants issued during the three months ended March 31, 2023 were classified as equity with an initial grand
date fair value of $4,532,673, of which $4,335,611 was recorded as a deferred debt discount,
$197,061 of the excess fair value was immediately expensed as loss on issuance of warrants. The Company also incurred $664,389
of issuance expenses which were recorded as deferred debt discount. For the three months ended March 31, 2023 the
Company recognized interest expense of $277,750 associated with accretion of debt discount. The fair value of the warrants was computed
on the grant date using a per share price of $0.12 per share. The fair value was estimated using the Black Scholes option pricing models with the following assumptions:
SCHEDULE
OF FAIR VALUE OF OPTION WITH ASSUMPTIONS
|
|
Dividend
Yield |
|
|
Expected
Volatility |
|
|
Risk-free Interest
Rate |
|
|
Expected
Life |
|
Hudson Bay Warrant; March 2023 |
|
|
0.00 |
% |
|
|
143.23 |
% |
|
|
3.88 |
% |
|
|
2.5 years |
|
Palladium Capital Warrant; March 2023 |
|
|
0.00 |
% |
|
|
143.23 |
% |
|
|
3.88 |
% |
|
|
2.5 years |
|
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 $33,333,333 (the “Note”) at a conversion price of $10.00 per share of Eightco’s common stock, par value $0.001
(the “Common Stock”) with a purchase amount of $30,000,000 and an original issue discount of $3,333,333, a warrant (the “Warrant”)
to purchase up to 66,667 shares of Common Stock with an initial exercise price of $10.00 per share of Common Stock (the “Note Private
Placement”). In addition, the Company issued a warrant to the placement agent to purchase up to 1,067 shares of Common Stock with
an initial exercise price of $10.00 per share of Common Stock. The warrants vest immediately, expiring on May 16, 2027 and had an estimated
fair value of $3,905,548. The Company recorded a debt discount of $7,798,881 which consists of the original issue discount of $3,333,333,
the fair value of the warrants of $3,905,548 and placement agent fees of $560,000. The discount will be amortized over the term of the
convertible note payable. The entire outstanding principal balance and any outstanding fees or interest shall be due and payable in full
on the third anniversary of the date the note is issued, May 5, 2022 (“Maturity Date”). The Note does not bear interest,
provided, however, that the Note will bear interest at 18% per annum upon the occurrence of an event of default. Eightco and the Note
Investor closed the transaction contemplated by the Note Securities Purchase Agreement on May 5, 2022. In connection with the Note Private
Placement, the Company also entered into a Registration Rights Agreement (the “Registration Rights Agreement”) with the Note
Investor, and, upon the closing, entered into a Security Agreement, a Pledge Agreement and various ancillary certificates, disclosure
schedules and exhibits in support thereof prior to the closing of the Purchase Agreement.
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 Note, and that certain Registration Rights Agreement.
Pursuant
to the July 2022 Amendment Agreement, the Company released an aggregate of $29,000,000 (the “Released Funds”) from the
restricted funds account maintained in accordance with the Note Securities Purchase Agreement (the “Restricted Funds Account”)
and, going forward, must deposit 50% of any Warrant Exercise Cash (as defined in the July 2022 Amendment Agreement) into the Restricted
Funds Account. As required by the July 2022 Amendment Agreement, the Company used $22,000,000 of the Released Funds to repurchase
from the Investor $22,000,000 of the principal of the Note. Pursuant to the July 2022 Amendment Agreement, the conversion price
of the balance of the Note that remains was voluntarily adjusted to $1.06 (the “Adjustment”). The July 2022 Amendment
Agreement also amended the Registration Rights Agreement. to require the Company to register (i) the number of shares of common stock
equal to 200% of the shares issuable upon conversion of the Note and (ii) the number of shares of common stock equal to 200% of the shares
issuable upon exercise of the warrant issued under the Note Securities Purchase Agreement, assuming all cash has been released from the
Restricted Funds Account and the number of shares of common stock issuable upon exercise of the Warrant issued under the Note Securities
Purchase Agreement has been adjusted in accordance with Section 3(c) of the warrant. The July 2022 Amendment Agreement requires the Company
to register additional shares of its common stock underlying the Note. Accordingly, the Company filed a registration statement on Form
S-1 dated August 12, 2022 (the “August S-1”) with the Securities and Exchange Commission. The August S-1 includes 301,007 shares
of the Company’s common stock issuable upon the conversion of the Note as a result of the Adjustment.
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
14.
CONVERTIBLE NOTE PAYABLE (continued)
As
a result of the Adjustment, the exercise price of (i) warrants to purchase up to 15,467 shares of the Company’s common stock held
by Palladium Capital Group, LLC, (ii) warrants to purchase up to 66,667 shares of the Company’s common stock held by the Investor,
and (iii) warrants to purchase up to 30,000 shares of the Company’s common stock held by BHP Capital NY, Inc. was adjusted to $1.06
per share of the Company’s common stock.
The
July 2022 Amendment Agreement amends the Note to permit the Company to enter into technology license agreements which obligate the Company
to make cash payments of up to $10,000,000 (the “Cash Payment”) and Common Stock issuances of up to 5,000 restricted
shares, provided (i) the Cash Payments are not due until at least two years after the signing of such license agreements, and (ii) the
Company must enter into an intercreditor agreement in connection with each license agreement. The July 2022 Amendment Agreement also
amends the Note to increase the permitted amount of a lien on indebtedness of the Company from $500,000 to $10,000,000.
The
July 2022 Amendment Agreement grants the holder of the 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 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 Fund, LLC. Pursuant to the Waiver, the conversion
price and exercise price of the Note and the Warrants, respectively, were voluntarily and irrevocably adjusted to equal $50.00, subject
to further adjustment as set forth therein. As a result of the price adjustment feature, the number of shares of the Company’s
common stock issuable upon exercise of the Warrants and conversion of the Notes was increased upon the acquisition of Forever 8 Fund,
LLC on October 1, 2022.
As
a result of the adjustment of the Note and Warrant conversion and exercise price, respectively, in the Waiver, the exercise price of
(i) warrants to purchase up to 15,467 shares of the Company’s common stock held by Palladium Capital Group, LLC, (ii) warrants
to purchase up to 66,667 shares of the Company’s common stock held by the Investor, and (iii) warrants to purchase up to 30,000
shares of the Company’s common stock held by BHP Capital NY, Inc. was adjusted to $50.00 per share of the Company’s common
stock.
On January 6, 2023, the Company entered into a Second
Amendment Agreement (the “Second Amendment Agreement”) with Hudson Bay to amend the (i) January 2022 Purchase Agreement, (ii)
the January 2022 Note, (iii) the 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 $10.00 per share of common stock.
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 10 trading
days’ notice provided that (i) no Equity Conditions Failure (as defined in the January 2022 Note) exists and (ii) the Company has
sufficient resources to effect the redemption. The Redemption Right is subject to certain other restrictions contained in the Second Amendment
Agreement.
The Second Amendment Agreement provides that if Hudson
Bay converts any portion of the January 2022 Note during the 10 consecutive trading day period starting on January 6, 2023 (the “Applicable
Conversion Period”), Hudson Bay shall, on the first business day immediately following the end of the Applicable Conversion Period,
release to the Company an amount of cash from the Control Account (as defined in the January 2022 Note) equal to 20% of the amount converted
during the Applicable Conversion Period if the volume-weighted average price (“VWAP”) of the common stock on each trading
day during the Applicable Conversion Period equals or exceeds $10.00 and there is no circumstance or event that would, with or without
the passage of time or the giving of notice, result in a material default, material breach or event of default under any Transaction Document
(as defined in the January 2022 Purchase Agreement).
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 $10.00
per share of common stock and the number of shares issuable upon exercise of the January 2022 Warrant (the “HB Warrant
Shares”) was proportionately increased to 3,333,333
HB Warrant Shares. Pursuant to the Second Amendment Agreement, Hudson Bay agreed to waive the adjustment to the number of HB Warrant
Shares issuable pursuant to the January 2022 Warrant to the extent such adjustment results in a number of HB Warrant Shares
underlying the January 2022 Warrant exceeding 2,220,000.
The Second Amendment Agreement provides that Hudson Bay (i) will not exercise Warrants to purchase more than an aggregate of 1,500,000
HB Warrant Shares until March 2, 2023, provided such limitation will be waived upon the occurrence of an Event of Default (as
defined in the January 2022 Note) or if the VWAP of the common stock on any trading day from January 6, 2023 until March 2, 2023 is
less than $11.00
and (ii) will not exercise the January 2022 Warrant until (x) such time as the aggregate principal amount outstanding of the January
2022 Note is equal to or less than the amount remaining in the Control Account or (y) the occurrence of an Event of Default (the
“HB Initial Exercisability Date”). However, Hudson Bay may exercise Warrants for up to 200,000
shares of common stock prior to the HB Initial Exercisability Date if the VWAP of the common stock on any trading day during the
period starting on March 1, 2023 and ending on and including March 31, 2023 is less than $10.00.
If the VWAP of the common stock on each trading day from January 6, 2023 through March 1, 2023, is greater than $11.00,
Hudson Bay will forfeit the right to purchase 720,000
HB Warrant Shares pursuant to the January 2022 Warrant, provided that there is no circumstance or event that would, with or without
the passage of time or the giving of notice, result in a material default, material breach or event of default under any Transaction
Document. Additionally, the exercise price of the January 2022 Warrant was voluntarily further adjusted to $0.01
per share of common stock in lieu of the investors taking less warrant shares. The VWAP of the common stock, from January 6, 2023 through March 1, 2023, was below $11.00, as such Hudson Bay did
not forfeit the 720,000 HB Warrant Shares.
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
14.
CONVERTIBLE NOTE PAYABLE (continued)
The Second Amendment Agreement requires the Company
to provide each stockholder entitled to vote at the next special or annual meeting of stockholders of the Company, which must be held
not 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 250,000,000
to 500,000,000
(“Stockholder Approval”). If despite the Company’s reasonable best efforts, the Stockholder Approval is not
obtained on or prior to the Stockholder Meeting Deadline, the Company shall cause an additional stockholder meeting to be held every
ninety (90) days thereafter until such Stockholder Approval is obtained.
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 $43,344,150 was computed on the modification date using a per share price of $0.32 per share.
The fair value was estimated using the Black Scholes option pricing models with the following assumptions:
15.
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. See Note 3. Acquisitions for further information. Principal due under
the convertible note payable – related parties was as follows at March 31, 2023 and December 31, 2022:
SCHEDULE
OF CONVERTIBLE NOTE PAYABLE RELATED PARTIES
|
|
March 31,
2022 |
|
|
December 31,
2021 |
|
|
|
|
|
|
|
|
Notes payable, 10% |
|
|
27,383,700 |
|
|
|
27,500,000 |
|
Less: debt discount |
|
|
(2,500,000 |
) |
|
|
(2,750,000 |
) |
Notes payable, net |
|
$ |
24,883,700 |
|
|
$ |
24,750,000 |
|
Interest expense under convertible
notes payable – related parties was $937,000 and $0, of which $250,000 and $0 was related to amortization of the debt discount,
for the three months ended March 31, 2023 and 2022, respectively.
16.
INCOME TAXES
Eightco
Holdings Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income.
Forever
8 Fund, LLC, BlockHiro, LLC and Cryptyde Shares Services, LLC are limited liability companies which are disregarded entities for income
tax purposes and are owned 100% by Eightco Holdings Inc. and Ferguson Containers, Inc., respectively. The Company pays corporate federal,
state and local taxes on income allocated to it from BlockHiro, LLC and 8co Holdings Shared Services, LLC.
CW
Machines, LLC is a limited liability company for income tax purposes and is owned 51% by Eightco Holdings Inc. The Company pays corporate
federal, state and local taxes on income allocated to it from CW Machines, LLC.
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 for the three months
ended March 31, 2023 and 2022 was $0
and ($189,997), respectively. The decrease
in income tax benefit is due to the reversal of income taxes payable due to net operating losses incurred in 2022. 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, 2023, the Company had a net operating
loss carryforward for federal income tax purposes of approximately $4,150,207 and credit carryforwards are subject to annual limitations
due to the “change in ownership” provisions of the Internal Revenue Code of 1986 and similar state provisions. The Company’s
net operating loss carryforward begins to expire in 2041.
EIGHTCO HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the three months ended March 31, 2023 and 2022
(Unaudited)
17.
STOCKHOLDERS’ EQUITY
Common Stock. Prior to the Separation, Vinco
Ventures, Inc. owned 100% of the issued and outstanding common stock of Eightco Holdings Inc. Effective June 29, 2022, the Company separated
from its former parent company, Vinco Ventures, Inc., and the distribution of its common stock was completed. As of March 31, 2023 and
December 31, 2022, the Company had 1,797,570 and 633,365 issued and outstanding shares of common stock, respectively.
On March 16,
2023, the Company filed a Certificate of Amendment to the Company’s Certificate of Incorporation with the Secretary of State of
Delaware to increase the number of authorized shares of the Company’s common stock, par value $0.001 per share from 250,000,000
to 500,000,000 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, 2023:
From January 1, 2023 through March 31, 2023, the Company
issued a total of 774,733 shares of common stock to a noteholder for repayment of principal valued at $7,743,333 based on the conversion
price set forth in the Note.
On January 26, 2023, the Company issued a total of
20,550 shares of common stock to employees for services rendered on behalf of the Company valued at $571,200 and previously expensed as
stock-based compensation.
On January 26, 2023, the Company issued a total of
2,700 shares of common stock to three directors for director compensation valued at $91,800 and previously expensed as stock-based compensation.
On March 1, 2023, the Company issued 72,000 shares
of common stock for an exercise of a warrant.
On March 16, 2023, the Company issued 115,355 shares
of common stock for an exercise of two warrants.
On March 22, 2023, the Company issued 59,392 shares
of common stock for an exercise of a warrant.
On March 30, 2023, the Company issued 120,000 shares
of common stock for an exercise of a warrant.
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 $0.001 per share,
for each outstanding share of the Company’s common stock, par value $0.001 per share to stockholders of record at 5:00 p.m. Eastern
Time on January 27, 2023 (the “Record Date”).
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 designated is
three hundred thousand (300,000).
As of March 31, 2023 and December 31, 2022, the
Company had 1,311
and 0
issued and outstanding shares of Series A Preferred Stock, respectively. All shares of Series A Preferred Stock issued have been since redeemed.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
18.
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 Holdings Inc. 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 100% owned subsidiary of Vinco Ventures, Inc. (the “Safety Harbor Lease”).
The Company adopted ASC 842 on January 1, 2022 and recognized a right of use asset and liability of $98,736 using a discount rate of
4.5%. There are no other material operating leases. The Company has elected not to recognize right-of-use assets and lease liabilities
arising from short-term leases.
On
October 19, 2022, the Company entered into a commercial lease agreement with Foxx Trot Tango, LLC to lease approximately 25 acres of
land, including approximately 250,000 square feet of warehouse space in Sylvester, Georgia for $87,500 on a month-to-month basis, effective
July 2022. Owners of Foxx Trot, LLC are also shareholders of the Company. On May 8, 2023, the Company elected to terminate the lease agreement effective as of June 30, 2023.
Rent expense for the three months ended March 31,
2023 and 2022 was $345,720 and $33,700, respectively. Rental payments are expensed in the statements of comprehensive income in the period
to which they relate.
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 Holdings Inc. 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 Holdings Inc. upon the successful completion
of the spin-off are described below:
Earned
Shares: Issuance of 6,000 shares of common stock of Eightco Holdings Inc. (“Eightco Shares”). The Company recorded $609,000
of share-based compensation related to the Eightco Shares.
Milestone
1: In the event that the Company generates a minimum of $5,500,000 in annualized booked revenues from the operation of the Musician &
Artist Platform (“Attributed Revenue”) ending eight (8) months following the Effective Date (“Tranche 1 Milestone Date”),
the Emmersive Parties shall receive 2,000 restricted Eightco Shares (“Tranche One”) within thirty (30) after the Tranche
1 Milestone Date. In the event that the Company does not satisfy this milestone for any reason by the Tranche 1 Milestone Date, the Emmersive
Parties shall have no rights to the additional Eightco Shares.
Milestone
2: After the Effective Date, in the event the Company generates a minimum of $26,500,000 in annualized Attributed Revenues in any three-calendar
month period ending on or before September 30, 2023, from the Musician & Artist Platform, the Emmersive Parties shall receive an
additional 2,000 restricted Eightco Shares (“Tranche Two”). In the event Milestone Two is achieved, then Milestone One shall
also be deemed to have been achieved. In the event that the Company does not satisfy Milestone Two for any reason by September 30, 2023,
the Emmersive Parties shall have no rights to Tranche Two.
Milestone
3: After the Effective Date in the event that Buyer generates a minimum of $60,000,000 in annualized Attributed Revenues in any three-calendar-month
period ending on or before September 30, 2024, from the Musician & Artist Platform, the Emmersive Parties shall receive an additional
2,000 restricted Eightco Shares (“Tranche Three”). In the event Milestone Three is achieved, then Milestones One and Two
shall also be deemed to have been achieved. In the event that the Company does not satisfy Milestone Three for any reason by September
30, 2024, time being of the essence, the Emmersive Parties shall have no rights to Tranche Three. In the event that the Company satisfies
Milestone Three in the time prescribed they shall have the right to receive an additional 100,000 restricted shares of Eightco Shares
(“Bonus Tranche”). In the event that the Company does not satisfy Milestone Three for any reason, the Emmersive Parties shall
have no rights to the Bonus Tranche.
None
of the above milestones were met as of March 31, 2023.
EIGHTCO
HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For
the three months ended March 31, 2023 and 2022
(Unaudited)
19.
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, 2023 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, 2023
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.
For the three months ended March 31, 2022, the
Company had only one operating segment (corrugated) thus segment info for this period is not presented. Segment information available
with respect to these reportable business segments for the three months ended March 31, 2023 was as follows:
SCHEDULE
OF BUSINESS SEGMENTS
|
|
2023 |
|
|
|
For
the
Three Months Ended
March 31, |
|
|
2023 |
|
Revenues: |
|
|
|
|
Inventory Management
Solutions |
|
$ |
13,948,341 |
|
Corrugated |
|
|
1,941,374 |
|
Total segment and consolidated revenues |
|
$ |
15,889,715 |
|
|
|
|
|
|
Cost of revenues: |
|
|
|
|
Inventory Management Solutions |
|
$ |
12,634,589 |
|
Corrugated |
|
|
1,436,034 |
|
Total segment and consolidated cost of revenues |
|
$ |
14,070,623 |
|
|
|
|
|
|
Gross profit: |
|
|
|
|
Inventory Management Solutions |
|
$ |
1,313,752 |
|
Corrugated |
|
|
505,340 |
|
Total segment and consolidated gross profit |
|
$ |
1,819,092 |
|
|
|
|
|
|
Income from operations: |
|
|
|
|
Inventory Management Solutions |
|
$ |
(492,234 |
) |
Corrugated |
|
|
145,582 |
|
Corporate |
|
|
(3,183,687 |
) |
Total segment and consolidated income from operations |
|
$ |
(3,530,339 |
) |
|
|
|
|
|
Depreciation and amortization: |
|
|
|
|
Inventory Management Solutions |
|
$ |
576,580 |
|
Corrugated |
|
|
49,497 |
|
Total segment and consolidated depreciation and amortization |
|
$ |
626,077 |
|
|
|
|
|
|
Revenues by geography: |
|
|
|
|
North America |
|
$ |
3,287,404 |
|
Europe |
|
|
12,602,311 |
|
Total geography and consolidated revenues |
|
$ |
15,889,715 |
|
|
|
|
|
|
Segment capital expenditures: |
|
|
|
|
Inventory Management Solutions |
|
$ |
- |
|
Corrugated |
|
|
36,308 |
|
Corporate |
|
|
- |
|
Total segment and consolidated
capital expenditures |
|
$ |
36,308 |
|
|
|
|
|
|
Segment total assets: |
|
|
|
|
Inventory Management Solutions |
|
$ |
50,777,175 |
|
Corrugated |
|
|
2,494,147 |
|
Corporate |
|
|
7,483,064 |
|
Total segment and consolidated assets |
|
$ |
60,754,386 |
|
20.
SUBSEQUENT EVENTS
On
April 3, 2023, the Company issued 79,099 shares of common stock for an exercise of a warrant.
On
April 11, 2023, the Company issued 100,000 shares of common stock for an exercise of a warrant.
On
April 14, 2023, the Company issued 95,112
shares of common stock for broker dealers to investors for partial share ownership due to the Company’s reverse stock
split.
From
April 18, 2023 through May 3, 2023, the Company issued 399,941 shares of common stock for warrant exercises.