Eightco Holdings Inc.: Form 10-Q for the period ended Sep 30, 2023

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.

Nasdaq Deficiency Notice

On September 29, 2023, the Company received a written notice (the “Notice”) from The Nasdaq Stock Market LLC (“Nasdaq”) that the Company is not in compliance with the minimum bid price requirement of $1.00 per share set forth in Nasdaq Rules for continued listing on Nasdaq.

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, the Company no longer meets the minimum bid price requirement set forth in Listing Rule 5550(a)(2). The Notice is only a notification of deficiency, not of imminent delisting, and has no current effect on the listing or trading of the Company’s securities on the Nasdaq Capital Market.

In accordance with Nasdaq Listing Rule 5810(c)(3)(A), the Company has been provided 180 calendar days, or until March 27, 2024, to regain compliance with Nasdaq Listing Rule 5550(a)(2). To regain compliance, the Company’s common shares must have a closing bid price of at least $1.00 for a minimum of 10 consecutive business days.

The Company intends to resolve the deficiency and regain compliance with the Listing Rules; however, there is no guaranty that the Company will be able to do so. Ultimately, if the Company is not able to resolve the deficiency and regain compliance with the Listing Rules, the Company’s common stock may be delisted.

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 and the sale of Bitcoin mining equipment offered through CW Machines, LLC.

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.

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.

Other Income

Other income includes the gain on disposal of the building located in Washington, New Jersey.

Results of Operations

Three Months Ended September 30, 2023 versus Three Months Ended September 30, 2022

The following table sets forth information comparing the components of net (loss) income for the three months ended September 30, 2023 and 2022:

Revenue

For the three months ended September 30, 2023, revenues increased by $18,632,659 or 396.28%, as compared to the three months ended September 30, 2022. The increase was largely attributable to the increased sale of goods from revenue derived from the inventory management solutions business.

Cost of Revenues

For the three months ended September 30, 2023, cost of revenues increased by $16,305,337 or 380.79%, as compared to the three months ended September 30, 2022. The increase was largely attributable to the increase in total revenues for our inventory management solutions business, as well as increased costs of materials and production in our corrugated business.

Gross Profit

For the three months ended September 30, 2023, gross profit increased by $2,327,322 or 554.15%, as compared to the three months ended September 30, 2022. The increase was largely attributable to an increase in revenue derived from the inventory management solutions business.

Operating Expenses

Selling, general and administrative expenses were $3,434,847 and $4,189,311 for the three months ended September 30, 2023 and 2022, respectively, representing a decrease of $754,464, or 18.01%. The decrease was largely attributable to the decrease in professional fees, payroll costs, insurance expense, rent expense, selling and warehousing fees.

Interest Expense

Interest expense was $2,795,169, for the three months ended September 30, 2023, versus interest expense of $5,803,083 for the three months ended September 30, 2022. The decrease in interest expense was largely attributable to the amortization of debt issuance costs related to borrowing under the convertible notes payable.

Total other (expense) income

Total other (expense) income was ($2,765,607) for the three months ended September 30, 2023 versus ($31,082,403) for the three months ended September 30, 2022. The decrease in total other income (expense) was largely attributable to the loss on issuance of warrants of ($25,318,519) and interest expense of ($5,803,082) for the three months ended September 30, 2022.

Income tax expense

Income tax expense was $0 for the three months ended September 30, 2023, versus an income tax expense of $0 for the three months ended September 30, 2022, respectively.

Net loss

Net loss was $3,453,150 for the three months ended September 30, 2023, versus $34,851,732 for the three months ended September 30, 2022. The decrease in net loss was largely attributable to the loss on issuance of warrants of $25,318,519 for the three months ended September 30, 2022.

Nine Months Ended September 30, 2023 versus Nine Months Ended September 30, 2022

The following table sets forth information comparing the components of net (loss) income for the nine months ended September 30, 2023 and 2022:

Revenue

For the nine months ended September 30, 2023, revenues increased by $44,003,921 or 279.08%, as compared to the nine months ended September 30, 2022. The increase was largely attributable to the increased sale of goods from the revenue derived from the inventory management solutions business.

Cost of Revenues

For the nine months ended September 30, 2023, cost of revenues increased by $38,671,961 or 276.17%, as compared to the nine months ended September 30, 2022. The increase was largely attributable to the increase in total revenues for our inventory management solutions business, as well as increased costs of materials and production in our corrugated business.

Gross Profit

For the nine months ended September 30, 2023, gross profit increased by $5,331,960 or 302.21%, as compared to the nine months ended September 30, 2022. The increase was largely attributable to an increase in revenue derived from the inventory management solutions business.

Operating Expenses

Selling, general and administrative expenses were $13,785,520 and $10,403,414 for the nine months ended September 30, 2023 and 2022, respectively, representing an increase of $3,382,106, or 32.51%. The increase was largely attributable to the increase in professional fees, payroll costs, insurance expense, rent expense, selling and warehousing fees and operating costs as a standalone public company.

Interest Expense

Interest expense was $8,344,729, for the nine months ended September 30, 2023, versus $5,802,758 for the nine months ended September 30, 2022. The increase in interest expense was largely attributable to the amortization of debt issuance costs related to borrowing under the convertible notes payable.

Total other (expense) income

Total other (expense) income was ($55,175,560) for the nine months ended September 30, 2023 versus ($30,979,546) for the nine months ended September 30, 2022. The increase in total other income (expense) was largely attributable to the loss on issuance of warrants of ($46,928,815) and interest expense of ($8,704,274) for the nine months ended September 30, 2023.

Income tax expense

Income tax expense was $0 for the nine months ended September 30, 2023, versus an income tax benefit of $172,997 for the nine months ended September 30, 2022, respectively.

Net loss

Net loss was $62,157,538 for the nine months ended September 30, 2023, versus ($39,445,633) for the nine months ended September 30, 2022. The increase in net loss was largely attributable to the loss on issuance of warrants of $46,928,815.

Liquidity and Capital Resources

As reflected in the accompany financial statements for the three months ended September 30, 2023, the Company incurred a net loss of $3.5 million and as of September 30, 2023, had stockholders’ equity of $2.7 million and approximately $3.6 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 is 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:

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Cash Flows for the Nine months Ended September 30, 2023 and 2022

Operating Activities

Net cash (used in) operating activities was ($6,698,006) during the nine months ended September 30, 2023, which consisted primarily of a net loss of $62,157,538 offset largely by amortization of debt issuance costs of $5,942,084 and loss on issuance of warrants of $46,928,815 and changes in assets and liabilities of ($364,481). Net cash (used in) operating activities was ($15,172,272) during the nine months ended September 30, 2022, which consisted primarily of a net loss of $39,445,633 offset by non-cash depreciation expense of $177,756 and changes in assets and liabilities of ($8,497,732).

Investing Activities

Net cash (used in) investing activities was ($182,871) during the nine months ended September 30, 2023 compared to ($82,644) for the nine months ended September 30, 2022. The increase in net cash used in investing activities is largely attributable to the purchases of developed technology in the amount of ($246,468) offset by the sale of capital expenditures in the amount of $181,000.

Financing Activities

Net cash provided by financing activities was $4,959,110 during the nine months ended September 30, 2023 compared to $20,969,662 for the nine months ended September 30, 2022. This decrease was largely attributable to proceeds from the issuance of debt of $30,000,000 and proceeds from the issuance of common stock of $12,001,000 during the nine months ended September 30, 2022 versus $3,150,000 and $2,575,000 from the issuance of debt and lines of credit, respectively, during the nine months ended September 30, 2023.

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 September 30, 2023.

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 2 to the Company’s Financial Statements included in this Quarterly Report.

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial and Accounting Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Quarterly Report. Based on such evaluation, the Company’s Principal Executive Officer and Principal Financial and Accounting Officer have concluded that, as of the end of such period covered by this Quarterly Report, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information that it is required to disclose in reports that the Company files with the SEC is recorded, processed, summarized and reported within the time periods specified by the Exchange Act rules and regulations due to the reasons set forth below.

As of December 31, 2022, management identified the following material weakness in our internal control over financial reporting: the Company was unable to provide a timely financial reporting package in connection with the year end audit. This was primarily the result of the Company’s limited accounting personnel. This also limits the extent to which the Company can segregate incompatible duties and has a lack of controls in place to ensure that all material transactions and developments impacting the financial statements are reflected. There is a risk under the current circumstances that intentional or unintentional errors could occur and not be detected.

Management has concluded that the material weakness described above currently exists as of September 30, 2023. The Company plans to engage with outside consultants to strengthen its capabilities and help the Company in the design and assessment of its internal controls over financial reporting to further reduce and remediate existing control deficiencies during 2023 and 2024.

Changes in Internal Control over Financial Reporting

During the three months ended September 30, 2023, there were no changes in our internal control over financial reporting that materially affected our internal control over financial reporting as of September 30, 2023.

Our business and common stock are subject to a number of risks and uncertainties. The discussion of such risks and uncertainties may be found under “Risk Factors” in the Company’s annual report on Form 10-K filed with the SEC on April 17, 2023. There have been no material changes to these risks during the three months ended September 30, 2023.