Registration
Statement No. 333-236401
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Amendment
No. 2
to
FORM
S-1
REGISTRATION STATEMENT UNDER THE
SECURITIES
ACT OF 1933
EDISON
NATION, INC.
(Exact name of registrant as specified in its charter)
Nevada
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3944
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82-2199200
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(State
or other jurisdiction of
incorporation or organization)
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|
(Primary
Standard Industrial
Classification Code Number)
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|
(I.R.S.
Employer
Identification No.)
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Edison
Nation, Inc.
1 West Broad Street, Suite 1004
Bethlehem,
Pennsylvania 18018
(484)
893-0060
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Christopher
B. Ferguson
Chief
Executive Officer
Edison
Nation, Inc.
1 West Broad Street, Suite 1004
Bethlehem,
Pennsylvania 18018
(484)
893-0060
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Joseph
Lucosky, Esq.
Lucosky
Brookman LLP
111
Broadway, Suite 807
New
York, NY 10006
(212)
332-8160
Approximate
date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, check the following box: [X]
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [X]
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Smaller
reporting company [X]
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|
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Emerging
growth company [X]
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
[X]
CALCULATION
OF REGISTRATION FEE
Title
of Each Class of Securities To Be Registered
|
|
Amount
to
be
Registered
(1)
|
|
|
Proposed
Maximum
Offering
Price Per
Security
(2)
|
|
|
Proposed
Maximum
Aggregate
Offering
Price
(2)
|
|
|
Amount
of
Registration
Fee
(3)(4)
|
|
Common
Stock, $0.001 par value per share, underlying Selling Agent Warrants issued in connection with the Company’s Initial
Public Offering
|
|
|
65,626
|
|
|
|
2.61
|
|
|
|
171,284
|
|
|
|
22.23
|
|
Common
Stock, $0.001 par value per share, underlying Placement Agent Warrants issued in connection with the placement of the Company’s
Senior Convertible Promissory Notes
|
|
|
24,366
|
|
|
|
2.61
|
|
|
|
63,595
|
|
|
|
8.25
|
|
Common
Stock, $0.001 par value per share, underlying Placement Agent Warrants issued in connection with the PIPE Financing (defined
below)
|
|
|
70,500
|
|
|
|
2.61
|
|
|
|
184,005
|
|
|
|
23.88
|
|
Common
Stock, $0.001 par value per share, issued in connection with the O’Leary Financing (defined below)
|
|
|
13,000
|
|
|
|
2.61
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|
|
|
33,930
|
|
|
|
4.40
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|
Common
Stock, $0.001 par value per share, underlying Warrants issued in connection with the O’Leary (defined below)
|
|
|
25,000
|
|
|
|
2.61
|
|
|
|
65,250
|
|
|
|
8.47
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|
Common
Stock, $0.001 par value per share, issued in connection with the Rawls Financing (defined below)
|
|
|
66,000
|
|
|
|
2.61
|
|
|
|
172,260
|
|
|
|
22.36
|
|
Common
Stock, $0.001 par value per share, underlying Warrants issued in connection with the Rawls (defined below)
|
|
|
125,000
|
|
|
|
2.61
|
|
|
|
326,250
|
|
|
|
42.35
|
|
Common
Stock, $0.001 par value per share, issued in connection with the Solit Financing (defined below)
|
|
|
26,000
|
|
|
|
2.61
|
|
|
|
67,860
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|
|
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8.81
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|
Common
Stock, $0.001 par value per share, underlying Warrants issued in connection with the Solit (defined below)
|
|
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50,000
|
|
|
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2.61
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|
|
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130,500
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|
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16.94
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Common
Stock, $0.001 par value per share, issued in connection with the Greentree Financing (defined below)
|
|
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160,000
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|
|
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2.61
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|
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417,600
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|
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33.88
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|
Common
Stock, $0.001 par value per share, underlying the 10% Convertible Promissory Note issued in connection with the Greentree
Financing (defined below)
|
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|
550,000
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|
|
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2.61
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|
|
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1,435,500
|
|
|
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186.33
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|
Common
Stock, $0.001 par value per share, underlying Warrants issued in connection with the Greentree Financing (defined below)
|
|
|
550,000
|
|
|
|
2.61
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|
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1,435,500
|
|
|
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186.33
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|
Total
|
|
|
1,725,492
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|
|
$
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2.61
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|
|
$
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4,503,534
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$
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564.23
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(1)
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Pursuant
to Rule 416 under the Securities Act, the shares registered hereby also include an indeterminate number of additional shares
as may from time to time become issuable by reason of stock splits, distributions, recapitalizations or other similar transactions.
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(2)
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Estimated
solely for purposes of calculating the registration fee pursuant to Rule 457(c) under the Securities Act, on the basis of
the average high and low sales price of the Registrant’s common stock as reported by The Nasdaq Capital Market on February
11, 2020.
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(3)
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The
fee is calculated by multiplying the aggregate offering amount by 0.0001298, effective October 1, 2019, pursuant to Section
6(b) of the Securities Act.
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(4)
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Previously
paid
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The
registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and may be changed. The Selling Shareholders may not sell these securities
until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is
not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted.
PRELIMINARY
PROSPECTUS
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SUBJECT
TO COMPLETION, DATED July 15, 2020
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Edison
Nation, Inc.
1,725,492 Shares of Common
Stock
Pursuant to this prospectus, the selling shareholders
identified herein (each a “Selling Shareholder” and, collectively, the “Selling Shareholders”) are offering
on a resale basis, up to 1,725,492 shares of common stock, par value $0.001 per share (the “common stock”)
of Edison Nation, Inc. (the “Company,” “Edison Nation,” “we,” “our” or “us”).
These shares include: (i) 160,492 shares of common stock underlying warrants (the “Warrants”) issued to employees
of Alexander Capital, L.P. in relation to three separate financing transactions led by Alexander Capital, L.P. on behalf of the
Company, and (ii) 550,000 shares of common stock underlying a warrant, 550,000 shares of common stock underlying a convertible
note, and 160,000 shares of common stock, all issued to Greentree Financial Group, Inc, and (iii) 25,000 shares of common
stock underlying a warrant and 13,000 shares of common stock all issued to Richard O’Leary, and (iv) 125,000 shares of common
stock underlying a warrant and 66,000 shares of common stock all issued to Rawleigh H. Ralls, and (v) 50,000 shares of common
stock underlying a warrant and 26,000 shares of common stock all issued to Paul J. Solit and Julie B. Solit. We are not selling
any shares under this prospectus, and we will not receive any proceeds from the sales of shares by the Selling Shareholders. We
will, however, receive the exercise price of the Warrants, if and when such Warrants are exercised for cash by the holders of
such Warrants.
The
shares included in this prospectus may be offered and sold directly by the Selling Shareholders in accordance with one or more
of the methods described in the “Plan of Distribution,” which begins on page 31 of this prospectus. To the
extent the Selling Shareholders decide to sell their shares, we will not control or determine the price at which the shares are
sold.
Our
common stock is listed on The Nasdaq Capital Market under the symbol “EDNT.” On February 11, 2020, the last reported
sale price of our common stock was $2.74 per share.
This
offering will terminate on the earlier of (i) the date when all of the shares have been sold pursuant to this prospectus or Rule
144 under the Securities Act of 1933, as amended (the “Securities Act”), and (ii) the date that all of the securities
may be sold pursuant to Rule 144 without volume or manner-of-sale restrictions, unless we terminate it earlier.
We
are an “emerging growth company” as defined under U.S. federal securities laws and, as such, we have elected to comply
with certain reduced public company reporting requirements for this prospectus and future filings. See “Prospectus Summary
— Implications of Being an Emerging Growth Company.”
Investing
in our common stock involves a high degree of risk. See “Risk Factors” beginning on page 16 of this prospectus
for a discussion of the risks that you should consider in connection with an investment in our securities.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is July 15, 2020.
TABLE
OF CONTENTS
No
dealer, salesperson or other person is authorized to give any information or to represent anything not contained in this prospectus.
You must not rely on any unauthorized information or representations. This prospectus is an offer to sell only the shares of common
stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained
in this prospectus is current only as of its date.
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed on behalf of the Selling Shareholders with the United States Securities
and Exchange Commission (the “SEC”) to permit the Selling Shareholders to sell the shares described in this prospectus
in one or more transactions. The Selling Shareholders and the plan of distribution of the shares being offered by them are described
in this prospectus under the headings “Selling Shareholders” and “Plan of Distribution.”
You
should rely only on the information contained in this document and any free writing prospectus we provide to you. Neither we nor
the Selling Shareholders have authorized anyone to provide any information or to make any representations other than those contained
in this prospectus or in any free writing prospectuses we have prepared. We and the Selling Shareholders take no responsibility
for and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is
an offer to sell only the common stock offered hereby, but only under circumstances and in jurisdictions where it is lawful to
do so. The information contained in this prospectus is current only as of its date.
Use
of Industry and Market Data
This
prospectus includes market and industry data that we have obtained from third-party sources, including industry publications,
as well as industry data prepared by our management on the basis of its knowledge of and experience in the industries in which
we operate (including our management’s estimates and assumptions relating to such industries based on that knowledge). Management
has developed its knowledge of such industries through its experience and participation in these industries. While our management
believes the third-party sources referred to in this prospectus are reliable, neither we nor our management have independently
verified any of the data from such sources referred to in this prospectus or ascertained the underlying economic assumptions relied
upon by such sources. Furthermore, internally prepared and third-party market prospective information, in particular, are estimates
only and there will usually be differences between the prospective and actual results, because events and circumstances frequently
do not occur as expected, and those differences may be material. Also, references in this prospectus to any publications, reports,
surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication,
report, survey or article. The information in any such publication, report, survey or article is not incorporated by reference
in this prospectus.
Trademarks,
Trade Names and Service Marks
“Edison
Nation” and other trademarks or service marks of Edison Nation, Inc. appearing in this prospectus are the property of Edison
Nation, Inc. The other trademarks, trade names and service marks appearing in this prospectus are the property of their respective
owners. Solely for convenience, the trademarks and trade names in this prospectus are referred to without the ®
and ™ symbols, but such references should not be construed as any indicator that their respective owners will not assert,
to the fullest extent under applicable law, their rights thereto.
CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
prospectus contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and
Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to future
events including, without limitation, the terms, timing and closing of our proposed acquisitions or our future financial performance.
We have attempted to identify forward-looking statements by using terminology such as “anticipates,” “believes,”
“expects,” “can,” “continue,” “could,” “estimates,” “expects,”
“intends,” “may,” “plans,” “potential,” “predict,” “should,”
“will,” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties
and other factors may cause our actual results, levels of activity, performance, or achievements to be materially different from
any future results, levels or activity, performance, or achievements expressed or implied by these forward-looking statements.
Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance, or achievements. Our expectations are as of the date this prospectus is filed, and we
do not intend to update any of the forward-looking statements after the date this prospectus is filed to confirm these statements
to actual results, unless required by law.
You
should not place undue reliance on forward looking statements. The cautionary statements set forth in this prospectus identify
important factors which you should consider in evaluating our forward-looking statements. These factors include, among other things:
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Our
ability to effectively execute our business plan;
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Our
ability to manage our expansion, growth and operating expenses;
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Our
ability to protect our brands and reputation;
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Our
ability to repay our debts;
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Our
ability to rely on third-party suppliers outside of the United States;
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Our
ability to evaluate and measure our business, prospects and performance metrics;
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Our
ability to compete and succeed in a highly competitive and evolving industry;
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Our
ability to respond and adapt to changes in technology and customer behavior;
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Risks
in connection with completed or potential acquisitions, dispositions and other strategic growth opportunities and initiatives;
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Risks
related to the anticipated timing of the closing of any potential acquisitions; and
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Risks
related to the integration with regards to potential or completed acquisitions; and
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Various risks related
to health epidemics, pandemics and similar outbreaks, such as the coronavirus disease 2019 (“COVID-19”) pandemic,
which may have material adverse effects on our business, financial position, results of operations and/or cash flows; and
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●
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Our ability to take advantage of opportunities
under the Coronavirus Aid, Relief, and Economic Security Act, or the CARES Act, and the potential impact of the CARES Act
on our business, results of operations, financial condition or liquidity.
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This
prospectus also contains estimates and other statistical data made by independent parties and by us relating to market size and
growth and other industry data. This data involves a number of assumptions and limitations, and you are cautioned not to give
undue weight to such estimates. We have not independently verified the statistical and other industry data generated by independent
parties and contained in this prospectus and, accordingly, we cannot guarantee their accuracy or completeness, though we do generally
believe the data to be reliable. In addition, projections, assumptions, and estimates of our future performance and the future
performance of the industries in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety
of factors. Our actual results could differ materially from those anticipated in the forward-looking statements for many reasons,
including, but not limited to, the possibility that we may fail to preserve our expertise in consumer product development; that
existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer
more favorable products or pricing terms; that we may be unable to maintain or grow sources of revenue; that we may be unable
maintain profitability; that we may be unable to attract and retain key personnel; or that we may not be able to effectively manage,
or to increase, our relationships with customers; and that we may have unexpected increases in costs and expenses. These and other
factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by
us.
PROSPECTUS
SUMMARY
This
summary highlights selected information contained elsewhere in this prospectus. This summary does not contain all of the information
that you should consider before deciding to invest in our common stock. You should read the entire prospectus carefully, including
the “Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
and our combined financial statements and the related notes thereto that are included elsewhere in this prospectus, before making
an investment decision.
Unless
the context requires otherwise, “Edison Nation,” the “Company,” “we,” “us,” and
“our,” refer to Edison Nation, Inc. and its subsidiaries.
Overview
Our
Company was incorporated on July, 18 2017 in the State of Nevada under the name of Idea Lab X Products, Inc, On September 12,
2017, we filed an Amendment to our Articles of Incorporation changing the name to Xspand Products Lab, Inc., and then on September
7, 2018 we filed an Amendment to our Articles of Incorporation changing the name to Edison Nation, Inc.
Edison Nation seeks to be involved with every step of the consumer
product life cycle- from ideation, to research and development, manufacturing, sales, packaging and fulfillment. The Company also
seeks to raise awareness of the Edison Nation brand name as a diversified consumer products business through a number of media
channels.
The
first stage of development for any consumer product is the impetus to turn an idea into a salable commodity. Considered to be
the “go-to” resource for independent innovators with great consumer product invention ideas, Edison Nation maintains
a consumer-facing online presence whereby innovators can submit ideas for consideration by us. If an idea is successfully chosen,
Edison Nation will apply its proprietary, web-enabled new product development (“NPD”) and commercialization platform
that can take a product from idea through e-commerce final sale in a matter of months versus a year or more for capital intensive
and inefficient new product development protocols traditionally used by legacy manufacturers serving “big box” retailers.
Edison Nation presently engages with over 180,000 registered online innovators and entrepreneurs interested in accessing the Company’s
NPD platform to bring innovative, new products to market focusing on high-interest, high-velocity consumer categories. The Company
generates revenue from its web presence by charging a fee for each idea submission, and also through subscription-based plans
for innovators that wish to submit high volumes of ideas.
Since
its inception, Edison Nation has received over 200,000 idea submissions, with products selling in excess of $250 million at retail
through the management of over 300 client product campaigns with distribution across diverse channels including e-commerce, mass
merchandisers, specialty product chains, entertainment venues, national drug chains, and tele-shopping. These clients include
many of the largest manufacturers and retailers in the world including Amazon, Bed Bath and Beyond, HSN, Rite Aid, P&G, and
Black & Decker. The Company generates revenue from licensing agreements with such manufacturers and retailers, which such
agreements are entered into when innovators submit their ideas through Edison Nation’s web portal. Occasionally, the Company
also generates revenue from innovators that wish to use the Company’s product development resources, but license or distribute
products themselves.
Edison
Nation has a number of internally developed brands “EN Brands” which act as a launchpad for new innovative items that
have matriculated through the innovation portal. These EN Brands include Cloud B, Pirasta, Uber Mom, Best Party Concepts, Lily
and Grey, Sol and Salud, Trillion Trees, Eco Quest, Smarter Specs, Barkley Lane, and Ngenious Fun. Additionally, the Company
offers a partnership model for entrepreneurs and businesses that are seeking to elevate their existing brands. Recent partnerships
for Edison Nation include 4Keeps Roses and Mother K. Within the partnership model, the Company seeks to identify new lines of
distribution and provide innovation through development of new item that enhance the brands overall image and consumer adoption,
In
addition to developing products for its EN Brands, the Company develops and manufactures products for well-known brands in the
entertainment and theme park industry. For over 20 years, the Company has developed, manufactured and supplied the entertainment
and amusement park industry with exclusive products that are often only available to consumers inside venues such as Disney Parks
and Resorts, Disney Stores, Universal Resorts, Sea World, Sesame Place, Busch Gardens, Merlin Entertainment, and Madison Square
Garden. For the customers listed above, the Company has developed products for core brands such as Harry Potter, Frozen, Marvel,
and Star Wars.
Once
most consumer products are ideated, developed, manufactured, and possibly even licensed, they must be packaged and distributed.
Therefore, we lease a packaging and logistics center in Alpha, New Jersey. The Company generates revenue from the sale of custom
packaging for many of the products that have run through our NPD or in-house product development process. The Company also sells
packaging products to a number of other entities that are not related to the Company’s product development process, including
pharmaceutical and e-commerce companies. When packaging of products is complete, we typically ship products using our own trucks
rather than relying on a common carrier. For packaging products, the Company does not have long-term agreements with customers,
and instead manufactures and sells its packaging products subject to purchase orders from its customers.
Once
a product is ready for distribution, consumer awareness must be raised in order to the sell the product. Accordingly, the Company
has begun to pursue a three-prong media strategy. First, the Company is seeking to re-release episodes of the ‘Everyday
Edisons’ television program, while simultaneously seeking a distribution partner for forthcoming episodes. The Company intends
to generate revenue from the Everyday Edisons brand by entering into a contract with a broadcast network or online streaming service.
Second, the Company is developing a proprietary e-learning platform. The Company intends to generate revenue from the e-learning
platform through the sale of subscription-based plans. Third, the Company is seeking to expand its web presence by acquiring or
creating other innovator-facing internet media properties. The Company intends to generate revenue from such internet media through
the display of paid advertisements on its properties.
COVID-19
COVID-19
has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of
activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease,
and through business and transportation shutdowns and restrictions on people’s movement and congregation.
As
a result of the pandemic, we have experienced, and continue to experience, weakened demand for our traditional products. Many
of our customers have been unable to sell our products in their stores and theme parks due to government-mandated closures and
have deferred or significantly reduced orders for our products. We expect these trends to continue until such closures are significantly
curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where our products are sold that remain
open, and the global economic impact of the pandemic has temporarily reduced consumer demand for our products as they focus on
purchasing essential goods.
In
the United States and Asia, many of our key accounts remain closed or are operating at significantly reduced volumes. As a result,
we have made the strategic decision to expand our operations through our Edison Nation Medical (“Ed Med”) division.
Through Ed Med, the Company wholesales Personal Protective Equipment (“PPE”) products through an online portal for
hospitals, government agencies and distributors.
Given
these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in fiscal 2020 will occur in the first
quarter of 2020 and will result in a significant net sales decline as compared to the first quarter of 2019.
In
addition, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19. As a
result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results. Even if
we are able to find alternate sources for such products, they may cost more and cause delays in our supply chain, which could
adversely impact our profitability and financial condition.
We
have taken actions to protect our employees in response to the pandemic, including closing our corporate offices and requiring
our office employees to work from home. At our distribution centers, certain practices are in effect to safeguard workers, including
a staggered work schedule, and we are continuing to monitor direction from local and national governments carefully. Additionally,
our two retail locations have been closed until further notice.
As
a result of the impact of COVID-19 on our financial results, and the anticipated future impact of the pandemic, we have implemented
cost control measures and cash management actions, including:
●
Furloughing a significant portion of our employees; and
●
Implementing 20% salary reductions across our executive team and other members of upper level management; and
●
Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and
●
Proactively managing working capital, including reducing incoming inventory to align with anticipated sales.
Market
Strategy
The
process for developing and launching consumer products has changed significantly in recent years. Previously, Fortune 500 and
other companies maintained multimillion-dollar research and development divisions to develop and launch products to be sold primarily
on retail shelves and supported by large television and print advertising investment. The emergence of e-commerce giants, including
Amazon.com, has caused retail shelf space to no longer be a requirement to launch a new product. Crowdfunding sites like Kickstarter
enable solo entrepreneurs to inexpensively produce an advertising video and quickly introduce a new product to many millions of
potential customers, and to quickly gain those customers for a low cost of acquisition relative to the cost and time required
in prior years as expensive advertising investment is no longer required to gain market awareness. For example, according to Statista.com,
crowdfunded sales of products will exceed $18.9 billion in 2021. The consumer shift away from brick and mortar retailers toward
e-commerce has resulted in the bankruptcy or downsizing of many iconic retailers which sold toys, including Toys R Us, Sears,
Kmart, and K-B Toys, with the resultant loss in shelf space and available locations helping to drive our market opportunity. By
utilizing the opportunities to market products over the internet, rather than through traditional, commercial channels, we believe
we can reach a much broader market for our brands and products.
Leveraging
Evolving Market Opportunities for Growth
The
Company believes that its anticipated growth will be driven by five macroeconomic factors:
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●
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The
significant growth of ecommerce (14% compound annual growth rate, estimated to reach
$4.9 trillion by 2021 (eMarketer 2018));
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●
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The
increasing velocity of “brick and mortar” retail closures, now surpassing
Great Recession levels (Cushman & Wakefield/Moody’s Analytics 2018);
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Product
innovation and immediate delivery gratification driving consumer desire for next-generation
products with distinctive sets of features and benefits without a reliance on brand awareness
and familiarity;
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The
marriage of media-based entertainment and consumer goods;
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The
rapid adoption of crowdsourcing to expedite successful new product launches; and
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The
opportunity to market products over the internet and television, rather than through
traditional, commercial channels, to reach a much broader, higher qualified target market
for brands, and products.
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In
addition, we intend to acquire more small brands that have achieved approximately $1 million in retail sales over the trailing
twelve-month period with a track record of generating free cash flow. By leveraging our expertise in helping companies launch
thousands of new products and our ability to create unique, customized packaging, we will seek to elevate the value of these acquired
brands by improving each part of their launch process, based on our own marketing methodologies.
We
believe our acquisition strategy will allow us to acquire small brands using a combination of shares of our common stock, cash
and other consideration, such as earn-outs. We intend to use our acquisition strategy in order to acquire up to ten or more small
brands per year for the next three years. In situations where we deem that a brand is not a “fit” for acquisition
or partnership, we may provide the brand with certain manufacturing or consulting services that will assist the brand to achieve
its goals.
One
example of a brand that we have recently acquired is Cloud B, Inc. (“Cloud B”), a leading manufacturer of products
and accessories that help parents and children sleep better. Cloud B distributes its products nationally and in over 100 countries
worldwide.
Founded
in 2002 and acquired by Edison Nation in October 2018, Cloud B’s highly regarded, award-winning products are developed in
consultation with an advisory board of pediatricians and specialists. Cloud B recently won the Toy of the Year award from The
Toy Association. Cloud B’s best-known products are Twilight Turtle™ and Sleep Sheep™.
Cloud
B’s products can be purchased online (through its own e-commerce site and other online retailers), in specialty boutiques,
gift stores, and worldwide at major retailers including Barnes & Noble, Bloomingdale’s, Dillard’s, Nordstrom,
Von Maur, Harrods, and Fnac in France.
Immediate
synergies include expanding Edison Nation’s West Coast footprint by leveraging Cloud B’s sizable distribution, sales
and fulfillment operations. The initial focus for Cloud B has been to optimize existing product performance while helping to develop
new product lines leveraging the Edison Nation NPD platform. In addition, Cloud B is leveraging Edison Nation’s Hong Kong-based
manufacturer sourcing and management capabilities, as well as the Company’s marketing and packaging resources.
Summary
of Risk Factors
Our
business is subject to numerous risks and uncertainties, including those in the section captioned “Risk Factors”
beginning on page 16 and elsewhere in this prospectus. These risks include, but are not limited to, the following:
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our
limited operating history and may not be able to operate our business successfully or
generate sufficient revenue to make or sustain distributions to our shareholders;
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the
loss of key personnel or the inability of replacements to quickly and successfully perform
in their new roles could adversely affect our business;
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our
financial statements may be materially affected if our estimates prove to be inaccurate
as a result of our limited experience in making critical accounting estimates;
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we
may require additional financing to sustain or grow our operations;
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if
we fail to manage our growth, our business and operating results could be harmed;
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our
growth strategy includes pursuing opportunistic acquisitions of additional brands, and
we may not find suitable acquisition candidates or successfully operate or integrate
any brands that we may acquire;
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an
inability to develop and introduce products in a timely and cost-effective manner may
damage our business;
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our
success will depend on the reliability and performance of third-party distributors, manufacturers,
and suppliers;
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we
have debt financing arrangements, which could have a material adverse effect on our financial
health and our ability to obtain financing in the future and may impair our ability to
react quickly to changes in our business; and
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a
significant portion of our business is conducted with customers and suppliers located
outside of the United States. Currency, economic, political, and other risks associated
with our international operations in China could adversely affect our operating results.
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Recent
Developments
Edison
Nation Holdings, LLC Transaction
On
September 4, 2018, the Company completed the acquisition of all of the voting membership interest of Edison Nation Holdings, LLC
(“EN”) for a total purchase price of $11,776,696 comprised of (i) $700,000 in cash to Edison Nation ($550,000 of which
was subsequently used to purchase the membership interests of Access Innovation, LLC, which membership interests were then distributed
to the Members), and $250,000 in cash used to pay off a portion of the indebtedness owed by EN to holders of certain senior convertible
debt), (ii) the assumption of the remaining balance of EN’s senior convertible debt through the issuance of new 4%, 5-year
senior convertible notes (the “New Convertible Notes”), in the aggregate principal and interest amount of $1,428,161
(which amount was previously disclosed in the Company’s Current Report on Form 8-K filed with the SEC on September 6, 2018
as $1,436,159 due to final adjustments for principal and accrued interest), which are convertible into 285,632 shares of the Company’s
common stock, at the option of the holder of the New Convertible Notes, (iii) the reservation of 990,000 shares of the Company’s
common stock that may be issued in exchange for the redemption of certain non-voting membership interests of EN, and (iv) the
issuance of 557,084 shares of the Company’s common stock in satisfaction of the indebtedness represented by promissory notes
payable by EN with a total principal balance of $4,127,602.
Cloud
B, Inc. Transaction
On
October 29, 2018, the Company entered into a Stock Purchase Agreement with a majority of the shareholders (the “Cloud B
Sellers”) of Cloud B, Inc., a California corporation (“Cloud B”). Pursuant to the terms of such Stock Purchase
Agreement, the Company purchased 72.15% of the outstanding capital stock of Cloud B in exchange for 489,293 shares of restricted
common stock of the Company. In addition, the Company entered into an Earn Out Agreement with the Cloud B Sellers, whereby, beginning
in 2019, the Company will pay the Cloud B Sellers an annual amount equal to 8% multiplied by the incremental gross sales of Cloud
B over its 2018 gross sales level. The Earn Out Agreement expires on December 31, 2021. CBAV1, LLC, a wholly-owned subsidiary
of Edison Nation, Inc., owns the senior secured position on the promissory note to Cloud B, Inc. in the amount of $2,270,000.
In February 2019, CBAV1, LLC, pursuant to an Article 9 foreclosure action, perfected its secured UCC interest in all the assets
of Cloud B, Inc. to partially satisfy the outstanding balance on the note and thereby making any payments of such Cloud B trade
payables and notes unlikely in the future.
On
February 17, 2020, the Company divested its Cloud B, Inc. subsidiary and entered into an Agreement for the Purchase and Sale of
Cloud B, Inc.(the “Purchase Agreement”), with Pearl 33 Holdings, LLC (the “Buyer”), pursuant to which
the Buyer purchased from the Company (and the Company sold and assigned) 80,065 shares of common stock of Cloud B (the “Cloud
B Shares”) for $1.00, constituting a 72.15% ownership interest in Cloud B, based on 110,964 shares of Cloud B’s common
stock outstanding as of February 17, 2020. In accordance with the agreement, all of the liabilities of Cloud B were assumed by
Pearl 33.
On
February 17, 2020, the Company entered into an indemnification agreement with Pearl 33 Holdings, LLC in connection with the
divestiture of Cloud B, Inc., whereby pursuant to such agreement the Company is limited to the issuance of 150,000 shares of
the Company’s common stock to the Buyer for indemnification of claims against Cloud B Inc. Please see Note 3
— Acquisitions and Divestitures within the Company’s financial statements for the three months
ended March 31, 2020 for further information.
Impairment
For the year end December 31, 2029, the
Company recorded an impairment charge of $4,443,000 related to our annual impairment assessment. The impairment was a result
of decreased profitability as compared to anticipated profitability in our businesses acquired in 2018. The Company utilized the
simplified test for goodwill impairment. The amount recognized for impairment is equal to the difference between the carrying
value and the asset’s fair value. The valuation methods used in the quantitative fair value assessment was a discounted
cash flow method and required management to make certain assumptions and estimates regarding certain industry trends and future
profitability of our reporting units.
Non-Employee
Director Compensation
On
September 26, 2018, the Compensation Committee of the board of directors approved the terms of compensation to be paid to non-employee
directors for fiscal year 2018. Compensation for non-employee directors includes an annual retainer of $15,000, an annual committee
meeting fee of $5,000, if such director chairs a committee of the board of directors, and an award of options to purchase 20,000
shares of the Company’s common stock (the “Options”). The restricted stock underlying such Options were to vest
one year after the grant date. However, the Options were never granted.
Accordingly,
on November 15, 2019, in lieu of granting the Options, the Company granted the board of directors restricted stock units of 20,000
shares which vested immediately. In addition, on November 15, 2019, the Company granted each non-employee director restricted
stock units of 30,000 shares, which vested on January 1, 2020.
Acquisition
of Pirasta, LLC
On
December 31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn
Capital, LP in exchange for the satisfaction of $470,000 due from related party. NL Penn Capital, LP is owned by Christopher B.
Ferguson, our Chairman and Chief Executive Officer. Accordingly, the consolidated financial statements of the Company reflect
the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects a distribution for
the excess of consideration paid over the net carrying amount of assets.
Acquisition
of Best Party Concepts, LLC
On
December 31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC
from NL Penn Capital, LP in exchange for the satisfaction of $500,000 due from related party. NL Penn Capital, LP is owned by
Christopher B. Ferguson, our Chairman and Chief Executive Officer. Accordingly, the consolidated financial statements of the Company
reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects a distribution
for the excess of consideration paid over the net carrying amount of assets.
FirstFire
Securities Purchase Agreement
On
March 6, 2019, the Company entered into a securities purchase agreement (the “FirstFire SPA”) with an accredited investor
(the “Investor”) pursuant to which the Investor purchased a 2% unsecured, senior convertible promissory note (the
“FirstFire Note”) from the Company. The Company issued 15,000 shares of its common stock to the Investor as additional
consideration for the purchase of the FirstFire Note. Under the terms of the FirstFire SPA, the Investor had piggyback registration
rights in the event the Company files a Form S-1 or Form S-3 within six months from March 6, 2019, as well as a pro rata right
of first refusal in respect of participation in any debt or equity financings undertaken by the Company during the 18 months following
March 6, 2019. The Company was also subject to certain customary negative covenants under the FirstFire SPA, including but not
limited to, the requirement to maintain its corporate existence and assets subject to certain exceptions, and to not to make any
offers or sales of any security under circumstances that would have the effect of establishing rights or otherwise benefitting
other investors in a manner more favorable in any material respect than those rights and benefits established in favor of the
Investor under the terms of the FirstFire SPA and the FirstFire Note. The maturity date of the Note was six months from March
6, 2019. All principal amounts and the interest thereon were convertible into shares common stock only in the event that an Event
of Default occurred (as such term was defined in the FirstFire Note).
On
June 17, 2019, the Company entered into that certain Settlement and Release Agreement with the Investor (the “Settlement
Agreement”) whereby the Company and the Investor agreed to terminate the FirstFire SPA, FirstFire Note, and all other documents
entered into in connection therewith. Pursuant to the terms of the Settlement Agreement, the Company paid $566,000 and issued
15,000 shares of restricted common stock to the Investor (the “Settlement Amount”). Upon receipt of the Settlement
Amount, the Investor and the Company have agreed to terminate the FirstFire SPA, FirstFire Note, and all other documents entered
into in connection therewith, and to release, waive, and forever discharge the other party from, including, but not limited to,
any claim, right, or legal action, whether past, current, or future, which may arise directly or indirectly out of such documents.
Receivables
Financings
On February 21, 2020, the Company entered
into a receivables financing arrangement for certain receivables of the Company not to exceed $1,250,000 at any one time. The
agreement allows for borrowings up to 85% of the outstanding receivable based on the credit quality of the customer. The fee is
between 1% and 2% of the total invoices financed.
On
March 31, 2019, the Company entered into a receivables financing arrangement for specific customer receivables. The agreement
allowed for borrowing up to 80% of the outstanding receivable based on the credit quality of the customer. The Company’s
Chairman and Chief Executive Officer personally guaranteed all amounts due under the agreement. The fee is between 1% and 2% of
the total invoice financed. The proceeds were used for funding the purchase of products sold on HSN, but the Company is not
currently utilizing this receivables financing arrangement, and therefore no amounts are outstanding under the agreement as of
February 12, 2020.
On
November 12, 2019, the Company entered into a Receivables Purchase Agreement with a financial institution (the “Receivables
Purchase Agreement”), whereby the Company agreed to purchase $225,000 of receivables for $200,000. The Company’s Chairman
and Chief Executive Officer as well as NL Penn Capital, LP personally guaranteed all amounts due under the agreement. NL Penn
Capital, LP is owned by Christopher B. Ferguson, our Chairman and Chief Executive Officer. The proceeds were used for general
working capital.
On
November 18, 2019, the Company entered into a Future Receivables Purchase Agreement with a financial institution (the “Future
Receivables Purchase Agreement”), whereby the Company agreed to purchase of $337,500 of receivables for $250,000. The proceeds
were used to fund our orders with our factories for overseas distributors as such receivables were not eligible as collateral
under our current working capital facility. Christopher B. Ferguson, our Chairman and Chief Executive Officer, personally guaranteed
the prompt and complete performance of the Company’s obligations under the Future Receivables Purchase Agreement.
May
2019 Securities Purchase Agreement
On
May 13, 2019, the Company entered into a securities purchase agreement (the “May 2019 SPA”) with certain accredited
investors (the “Investors”) pursuant to which the Investors purchased Senior Convertible Promissory Notes (the “May
2019 Notes”) from the Company. The use of proceeds from the May 2019 Notes was used for general working capital and to fund
new product launches. Unless there is a specific Event of Default (as such term is defined in the May 2019 Notes), the Investors
shall not have the ability to convert the principal and interest under the May 2019 Notes into shares of common stock. Pursuant
to the May 2019 SPA, the Company agreed to sell to the Investors the May 2019 Notes, in the aggregate principal amount of $1,111,111,
which are convertible into shares of common stock. Additionally, the Company will issue an additional 20,000 shares of common
stock to the Investors as additional consideration for the purchase of the May 2019 Notes. Under the terms of the May 2019 SPA,
the Investors have piggyback registration rights in the event the Company files a Form S-1 or Form S-3 within six months of May
13, 2019. The Company is also subject to certain customary negative covenants under the May 2019 SPA, including but not limited
to, the requirement to maintain its corporate existence and assets subject to certain exceptions, and to not to make any offers
or sales of any security under circumstances that would have the effect of establishing rights or otherwise benefitting other
investors in a manner more favorable in any material respect than those rights and benefits established in favor of the Investors
under the terms of the May 2019 SPA and the May 2019 Notes.
As
issued on May 13, 2019, the principal amount of the May 2019 Notes is $1,111,111, with an original issue discount in the
amount of $111,111. The maturity date of the May 2019 Notes is November 13, 2019. The per share conversion price into which the
principal amount and interest under the May 2019 Notes may be converted is equal to 80% multiplied by the lowest traded price
of our common stock during the 20 consecutive trading days preceding the date of conversion. The conversion price may be adjusted
in connection with certain material corporate events, and the Company is subject to cash penalties in the event that the Company
fails to timely deliver certificates for shares of common stock issuable upon conversion of May 2019 Notes. The May 2019 Notes
contain a cap, such that the total number of shares of Common Stock issuable under the May 2019 Notes are limited to 19.99% of
the Company’s outstanding shares of common stock as of May 13, 2019.
So
long as an Event of Default has not occurred under the terms of the May 2019 Notes, the Company may prepay the May 2019 Notes
at any time, given not less than three trading days’ notice. If the Company exercises its right to prepay the May 2019 Notes
at any time within the initial 180 days following May 13, 2019, the prepayment amount to be paid by the Company shall be an amount
in cash equal to the sum of 115% multiplied by the principal on the May 2019 Notes then outstanding, plus all accrued and unpaid
interest, including unpaid default interest, if any.
The
May 2019 notes are no longer outstanding and were converted into 560,185 shares of common stock in November 2019.
Tiburon
Loan Agreement
On
June 14, 2019, the Company entered into that certain Loan Agreement (the “Loan Agreement”) with Tiburon Opportunity
Fund (the “Lender”), dated June 14, 2019 (the “Loan”). Pursuant to the terms of the Loan Agreement, the
Lender agreed to loan the Company $250,000. The Loan bore interest at the rate of 1.5% per month through the term of the Loan.
Additionally, the Loan Agreement provided that the Company would pay the Lender the entire unpaid principal and all accrued interest
upon thirty days’ notice to the Company, but in any event, the notice shall not be sooner than August 11, 2019. The Loan
proceeds were used to fund general working capital needs of the Company. If the Company defaulted on the performance of any obligation
under the Loan Agreement, the Lender would have declared the principal amount of the Loan owing under the Loan Agreement at the
time of default to be immediately due and payable. Furthermore, the Loan Agreement granted the Lender a collateral interest in
certain accounts receivable of SRM Entertainment Ltd. (“SRM”), a subsidiary of the Company. The outstanding principal
and interest on the note were repaid on December 27, 2019.
On
January 2, 2020, the Company entered into that certain Loan Agreement (the “Second Loan Agreement”) with Tiburon Opportunity
Fund (the “Lender”), dated January 2, 2020 (the “Second Loan”). Pursuant to the terms of the Second Loan
Agreement, the Lender agreed to loan the Company $400,000. The Second Loan bears interest at the rate of 1.5% per month through
the term of the Second Loan. Additionally, the Second Loan Agreement provides that the Company shall pay the Lender the entire
unpaid principal and all accrued interest upon thirty days’ notice to the Company, but in any event, the notice shall not
be sooner than June 1, 2020. The Second Loan proceeds are being used to fund general working capital needs of the Company. If
the Company defaults on the performance of any obligation under the Second Loan Agreement, the Lender may declare the principal
amount of the Second Loan owing under the Second Loan Agreement at the time of default to be immediately due and payable. Furthermore,
the Second Loan Agreement grants the Lender a collateral interest in certain accounts receivable of SRM. On April 24, 2020,
the Company and Lender entered into a Debt Conversion Agreement whereby the Lender was given the right and elected to exercise
that right to convert principal and interest of $424,000 of funds loaned to the Company into shares of the Company’s common
stock. The fair value of the Company’s common stock was $2.08 on the date of conversion and the conversion price was $2.00
per share for a total of 212,000 shares of restricted common stock issued by the Company.
Ed
Roses, LLC Joint Venture
On
August 23, 2019, the Company formed Ed Roses, LLC, a 50% joint venture with 4Keeps Roses, Inc., to distribute preserved roses,
flowers and associated gift products.
Labrys
Securities Purchase Agreement
On
August 26, 2019, the Company entered into a securities purchase agreement (the “Labrys SPA”) with Labrys Fund, LP
(“Labrys”) pursuant to which Labrys purchased a 12% Convertible Promissory Note (the “Labrys Note”) from
the Company. Unless there is a specific Event of Default (as such term is defined in the Labrys Note) or the Labrys Note remains
unpaid by the Maturity Date, then Labrys shall not have the ability to convert the principal and interest under the Labrys Notes
into shares of common stock. The per share conversion price into which the principal amount and interest under the Labrys Note
may be converted is equal to the lesser of (i) 80% multiplied by the lowest Trade Price (as such term is defined in the Labrys
Note) of our common stock during the 20 consecutive trading days ending on the latest complete trading day prior to the date of
issuance of the Labrys Note, and (ii) 80% multiplied by the lowest Market Price (as such term is defined in the Labrys Note) of
our common stock during the 20 trading day period ending on the latest complete trading day prior to the Conversion Date (as such
term is defined in the Labrys Note).
Pursuant
to the Labrys SPA, the Company agreed to issue and sell to Labrys the Note, in the principal amount of $560,000, with an original
issue discount in the amount of $60,000. The Labrys Note is due and payable February 26, 2020 (the “Maturity Date”).
Additionally, the Company issued 181,005 shares of common stock to Labrys as a commitment fee, of which 153,005 shares of common
stock must be returned to the Company in the event the Labrys Note is fully paid and satisfied prior to the Maturity Date. The
proceeds from the Labrys Note were used for general working capital and to fund new product launches.
The
Company is also subject to certain customary negative covenants under the Labrys SPA, including but not limited to, the requirement
to maintain its corporate existence and assets subject to certain exceptions, and to not to make any offers or sales of any security
under circumstances that would have the effect of establishing rights or otherwise benefitting other investors in a manner more
favorable in any material respect than those rights and benefits established in favor of the Investor under the terms of the Labrys
SPA and the Labrys Notes. The Company agreed at all times to have authorized and reserved two times the number of shares of common
stock that are issuable upon full conversion of the Labrys Note. Initially, the Company instructed its transfer agent to reserve
700,000 shares of common stock in the name of Labrys for issuance upon conversion.
On
January 24, 2020, the Company repaid the Labrys Note in full. Upon repayment of the Labrys Note, Labrys returned to the Company
for cancellation the 153,005 shares of Common Stock that had been originally issued to as a portion of the commitment fee paid
in connection with the Labrys Note, and allowed the Company to cancel the reservation of the 875,000 shares of Common Stock that
had been reserved pursuant to the Labrys SPA and Labrys Note.
32E
Financing
On
December 4, 2019, the Company agreed to issue and sell to 32 Entertainment LLC (“32E”) a 10% Senior Secured Note (the
“32E Note”), in the principal amount of $250,000. The maturity date of the 32E Note is December 4, 2020. In addition,
the Company issued to 32E 10,000 shares of common stock as an inducement to 32E to purchase the 32E Note. The $250,000 of proceeds
from the 32E Note was used for general working capital needs of the Company and the repayment of debt related to Horberg Enterprises.
Pursuant
to the terms of the 32E Note, on December 4, 2019, the Company also issued 32E a Common Stock Purchase Warrant (the “32E
Warrant”) to purchase 50,000 shares of common stock at an exercise price of $1.50 per share. The 32E Warrant expires on
December 4, 2024. The 32E Warrant contains price protection provisions, as well as a provision allowing 32E to purchase the number
of shares that 32E could have acquired if it held the number of shares of common stock acquirable upon complete exercise of the
32E Warrant, in the event that the Company grants, issues or sells common stock, common stock equivalents, rights to purchase
common stock, warrants, securities or other property pro rate to holders of any class of the Company’s securities. If there
is no effective registration statement registering the resale of the shares of common stock underlying the 32E Warrant, then the
32E Warrant may be exercised cashlessly, based on a cashless exercise formula. The 32E Warrant also contains a conversion limitation
provision, which prohibits 32E from exercising the 32E Warrant in an amount that would result in the beneficial ownership of greater
than 4.9% of the total issued and outstanding shares of common stock, provided that (i) such exercise limitation may be waived
by 32E with 61 days prior notice, and (ii) 32E cannot waive the exercise limitation if conversion of the 32E Warrant would result
in 32E having beneficial ownership of greater than 9.9% of the total issued and outstanding shares of common stock.
In
connection with the sale of the 32E Note, also on December 4, 2019, the Company entered into a registration rights agreement whereby
the Company agreed to register the 10,000 shares of common stock issued to 32E as an inducement on a registration statement on
Form S-1 with the SEC. The Company was required to have such registration statement declared effective by the SEC within 90 calendar
days (or 180 calendar days in the event of a “full review” by the SEC) following the earlier of 30 days from December
4, 2019 or the filing date of the registration statement on Form S-1, which such registration statement has not been filed or
timely declared effective. If the registration statement is not filed or declared effective within the timeframe set forth in
the registration rights agreement, the Company was supposed to be obligated to pay to 32E a monthly amount equal to 1% of the
total subscription amount paid by 32E until such failure is cured. The Company has not made any such payment 32E. The registration
rights agreement also contains mutual indemnifications by the Company and each investor, which the Company believes are customary
for transactions of this type.
On May 19, 2020, the Company entered into
an Amendment (the “Amendment”) to the 32E Note. Under the terms of the Amendment, the Company issued to 32E an Amended
Subordinate Secured Note (the “Replacement Note”) in the principal amount of $200,000 that accrues interest at 16%
annually and matures on May 21, 2021. On May 28, 2020, the Company paid $50,000 toward the principal plus interest in the amount
of $6,250 for a total of $56,250. 32E shall also receive 40,000 restricted stock units and surrender the warrant issued to it
in the December 4, 2019 financing transaction.
PIPE
Financing
On October 2, 2019,
the Company entered into a Share Purchase Agreement (the “PIPE Purchase Agreement”) with certain accredited investors
for the private placement of 1,050,000 shares of the Company’s common stock at a purchase price of $2.00 per share (the
“PIPE Financing”). In a series of four closings, the Company sold a total of 1,175,000 shares of common stock at a
purchase price of $2.00 per share (the “PIPE Shares”), for an aggregate amount sold in the PIPE Financing of $2,350,000.
The PIPE Purchase Agreement contains certain closing conditions relating to the sale of securities, representations and warranties
by the Company and the applicable investors, as well as covenants of the Company and the investors (including indemnifications
from the Company in the event of breaches of its representations and warranties), all of which the Company believes are customary
for transactions of this type of transaction. The PIPE Purchase Agreement contains a prohibition on equity sales by the Company,
which prohibition was violated by the Greentree Financing (defined below). As of July 6, 2020, none of the investors in
the PIPE Financing have taken adverse action as a result of such prohibition.
In connection with the sale, the Company entered
into a registration rights agreement whereby the Company agreed to register all PIPE Shares and file this registration statement
on a Form S-1 with the SEC. The Company was required to have such registration statement declared effective by the SEC within
90 calendar days (or 120 calendar days in the event of a “full review” by the SEC) following the applicable closing
date of the PIPE Financing, which such registration statement has not been timely declared effective. If the registration statement
is not filed or declared effective within the timeframe set forth in the registration rights agreement, the Company was supposed
to be obligated to pay the investors in the PIPE Financing an amount equal to 1% of the total purchase price of the common stock
per month (up to a maximum of 8% in the aggregate) until such failure is cured. The Company has not made any such payment to the
investors in the PIPE Financing. As of July 6, 2020, none of the investors in the PIPE Financing, have taken adverse
action as a result of this delay. The registration rights agreement also contains mutual indemnifications by the Company and each
investor, which the Company believes are customary for transactions of this type.
Furthermore,
the Company issued warrants to the placement agent in the PIPE Financing of a value equal to six percent (6%) of the aggregate
number of PIPE Shares, whereby the exercise price is 125% of the price at which the shares were issued in such offering. For additional
information regarding the PIPE Financing, see “Private Placement of Securities” on page 29.
Acquisition
of Uber Mom, LLC Assets
On
November 6, 2019, the Company issued $22,500 shares of our common stock and paid $52,352 in cash to acquire the assets of Uber
Mom, LLC, which was the approximate value of Uber Mom, LLC’s inventory.
Acquisition
of HMNRTH, LLC Assets
On March 11, 2020, the Company and its
wholly owned subsidiary, Scalematix, LLC (together the “Buyer”), entered into an Asset Purchase Agreement (the “Agreement”)
with HMNRTH, LLC (the “Seller”) and TCBM Holdings, LLC (the “Owner”) (together Seller and Owner the “Selling
Parties”) for the purchase of certain assets in the health wellness industry and related consumer products industry. Under
the terms of the Agreement, Buyer is to remit $70,850 via wire transfer at Closing and shall issue to a representative of the
Selling Parties Two Hundred Thirty-Eight Thousand Seven Hundred and Fifty (238,750) shares of restricted common stock. The shares
were issued on March 16, 2020 and valued at $477,500.
In addition, the Selling Parties shall
have the right to additional earn out compensation based upon the following metrics: (i) at such time as the purchased assets
achieve cumulative revenue of $2,500,000, the Selling Parties shall earn One Hundred Twenty-Five Thousand (125,000) shares of
common stock; and (ii) at such time as the purchased assets achieve cumulative revenue of $5,000,000, the Selling Parties shall
earn One Hundred Twenty-Five Thousand (125,000) shares of common stock. The transaction closed on March 11, 2020.
Global Clean Solutions Agreement and
Plan of Share Exchange
On May 20, 2020 (the “Effective Date”),
Edison Nation, Inc. (the “Company”) entered into an Agreement and Plan of Share Exchange (the “Share Exchange
Agreement”) with PPE Brickell Supplies, LLC, a Florida limited liability company (“PPE”), and Graphene Holdings,
LLC, a Wyoming limited liability company (“Graphene”, and together with PPE, the “Sellers”), whereby the
Company purchased 25 membership units of Global Clean Supplies, LLC, a Nevada limited liability company (“Global”)
from each of PPE and Graphene, for a total of fifty (50) units, representing fifty percent (50%) of the issued and outstanding
units of Global (the “Purchase Units”). The Company issued 250,000 shares of its restricted common stock, $0.001 par
value per share (the “Common Stock”) to PPE, and 50,000 shares of Common Stock to Graphene, in consideration for the
Purchase Units.
Pursuant to the terms of the Share Exchange
Agreement, the Sellers may earn additional shares of Common Stock upon Global realizing the following revenue targets: (i) In
the event that Global’s total orders equal or exceed $1,000,000, Graphene shall receive 200,000 shares of Common Stock;
(ii) In the event that Global’s total orders equal or exceed $10,000,000, PPE shall receive 100,000 shares of restricted
Common Stock; and (iii) In the event that Global’s total orders equal or exceed $25,000,000, Graphene shall receive 125,000
shares of restricted Common Stock. Additionally, the Company shall be entitled to appoint two managers to the Board of Managers
of Global.
Amended Limited Liability Company Agreement
On the Effective Date, the Company entered
into an Amended Limited Liability Company Agreement of Global (the “Amended LLC Agreement”). The Amended LLC Agreement
amends the original Limited Liability Company Agreement of Global, dated May 13, 2020. The Amended LLC defines the operating rules
of Global and the ownership percentage of each member: Edison Nation, Inc. 50%, PPE 25% and Graphene 25%.
Secured Line of Credit Agreement
On the Effective Date, the Company (as
“Guarantor”) entered into a Secured Line of Credit Agreement (the “Credit Agreement”) with Global and
PPE. Under the terms of the Credit Agreement, PPE is to make available to Global a revolving credit loan in a principal aggregate
amount at any one time not to exceed $2,500,000. Upon each drawdown of funds against the credit line, Global shall issue a Promissory
Note (the “Note”) to PPE. The Note shall accrue interest at 3% per annum and have a maturity date of six (6) months.
In the event of a default, any and all amounts due to PPE by Global, including principal and accrued but unpaid interest, shall
increase by forty (40%) percent and the interest shall increase to five (5%) percent (the “Default Interest”).
Security Agreement
On the Effective Date, the Company (as
“Guarantor”) entered into a Security Agreement (the “Security Agreement”) with Global (as “Borrower”)
and PPE (as “Secured Party”), whereby the Company placed 1,800,000 shares of Common Stock (the “Reserve Shares”)
in reserve with its transfer agent in the event of default under the Credit Agreement. In the event of a default that is not cured
by the defined cure period, the PPE may liquidate the Reserve Shares until the Global’s principal, interest and associated
expenses are recovered. The number of Reserve Shares may be increased through the issuance of True-Up shares in the event the
original number of Reserve Shares is insufficient.
Edison Nation Medical Operations
Edison Nation Holdings, LLC formed Edison
Nation Medical (“EN Medical”) in May of 2012 as a partnership with Carolinas Healthcare Systems (now called Atrium).
Atrium is the 2nd largest healthcare system in the US. Carolina Health (Atrium) looked to identify a way to aggregate and commercialize
the healthcare related innovations that were coming from their physicians, nurses, and patients, and Edison Nation offered a platform
to provide that function.
EN Medical built out a separate platform,
leveraging the Edison Nation model to look for ideas that improved patient care and lowered costs. EN collected some great ideas,
but the market shifted and EN found that the licensing model was very difficult as big medical device companies wanted to acquire
companies with sales versus just buying IP and prototypes.
Today, EN Medical operates an online portal
granting hospitals, government agencies and distributors access to its catalog of medical supplies and hand sanitizers.
Other
Financing Notes
On January 10, 2020, the Company entered into a 5% Promissory Note
Agreement with Equity Trust Company on behalf of Rawleigh Ralls (“Ralls”)(“Ralls Financing”) for an aggregate
principal amount of $267,000 (the “Ralls Note”), pursuant to which Ralls purchased the Ralls Note from the Company
for $250,000 and an original issue discount of $17,000, and the Company issued to Ralls a warrant (the “Ralls Warrant”)
to purchase 125,000 shares of the Company’s common stock valued at $86,725 estimated using the Black-Scholes option-valuation
model. The proceeds from the Ralls Note will be used for general working capital needs of the Company. The Company will also issue
33,000 incentive shares to Ralls valued at $79,860 based on the closing stock price on January 10, 2020. The fair value of the
warrants and incentive shares have been recorded as debt discount. The maturity date of the Ralls Note is July 10, 2020. On July
14, 2020, the Company entered into an Amendment to Note Agreement and Common Stock Purchase Warrant (the “Amendment”)
with Equity Trust Company, a Custodian FBO: Rawleigh H. Ralls IRA. Under the terms of the Amendment, the parties amended the terms
of the January 10, 2020 Note Agreement (the “Agreement”) and Common Stock Purchase Warrant (the “Warrant”)
such that; (i) the maturity date of the Agreement was extended to January 10, 2021, (ii) the Original Issuer Discount (“OID”)
shall be increased to $34,000, (iii) the Lender shall be issued 33,000 Additional Incentive Shares and (iv) the Company shall prepare
and file with the United States Securities and Exchange Commission a registration statement on Form S-1 within 30 days of the Effective
Date of the Amendment, that registers a total of 191,000 shares of Common Stock, which such amount of shares is the sum of 125,000
Warrant Shares, the 33,000 Incentive Shares, and 33,000 Additional Incentive Shares. On July 14, 2020, the Company issued the 33,000
Additional Incentive Shares valued at $124,740.
On January 15, 2020, the Company entered into a 5% Promissory Note
Agreement with Paul J. Solit & Julie B. Solit (“Solits”)(“Solit Financing”) for an aggregate principal
amount of $107,000 (the “Solit Note”), pursuant to which the Solits purchased the Solit Note from the Company for $100,000
and an original issue discount of $7,000, and the Company issued to the Solits a warrant (the “Solit Warrant”) to purchase
50,000 shares of the Company’s common stock valued at $31,755 estimated using the Black-Scholes option-valuation model. The
proceeds from the Solit Note will be used for general working capital needs of the Company. The Company will also issue 13,000
incentive shares to the Solits valued at $30,420 based on the closing stock price on January 15, 2020. The fair value of the warrants
and incentive shares have been recorded as debt discount. The maturity date of the Solit Note is July 15, 2020. On July 14, 2020,
the Company entered into an Amendment to Note Agreement and Common Stock Purchase Warrant (the “Amendment”) with Paul
J. Solit and Julie B. Solit. Under the terms of the Amendment, the parties amended the terms of the January 15, 2020 Note Agreement
(the “Agreement”) and Common Stock Purchase Warrant (the “Warrant”) such that; (i) the maturity date of
the Agreement was extended to December 15, 2020, (ii) the Original Issuer Discount (“OID”) shall be increased to $14,000
and (iii) the Lender shall be issued 13,000 Additional Incentive Shares. On July 14, 2020, the Company issued the 13,000 Additional
Incentive Shares valued at $49,140.
On January 17, 2020, the Company entered into a 5% Promissory Note
Agreement with Richard O’Leary (“O’Leary”)(“O’Leary Financing”) for an aggregate principal
amount of $53,500 (the “O’Leary Note”), pursuant to which O’Leary purchased the O’Leary Note from
the Company for $50,000 and an original issue discount of $3,500, and the Company issued to O’Leary a warrant (the “O’Leary
Warrant”) to purchase 25,000 shares of the Company’s common stock valued at $16,797 estimated using the Black-Scholes
option-valuation model. The proceeds from the O’Leary Note will be used for general working capital needs of the Company.
The Company will also issue 6,500 incentive shares to O’Leary valued at $15,535 based on the closing stock price on January
17, 2020. The fair value of the warrants and incentive shares have been recorded as debt discount. The maturity date of the O’Leary
Note is July 17, 2020. On July 14, 2020, the Company entered into an Amendment to Note Agreement and Common Stock Purchase Warrant
(the “Amendment”) with Richard O’Leary. Under the terms of the Amendment, the parties amended the terms of the
January 17, 2020 Note Agreement (the “Agreement”) and Common Stock Purchase Warrant (the “Warrant”) such
that; (i) the maturity date of the Agreement was extended to January 17, 2021, (ii) the Original Issuer Discount (“OID”)
shall be increased to $7,000, (iii) the Lender shall be issued 6,500 Additional Incentive Shares and (iv) the expiration date of
the Warrant shall be extended to June 30, 2021. On July 14, 2020, the Company issued the 6,500 Additional Incentive Shares valued
at $24,570.
On
April 7, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with BHP Capital NY Inc.
(the “Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”) in
the amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes
The Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company
is to issue the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part of the outstanding and unpaid
principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and non-assessable shares of Common
Stock at a conversion price equal to $2.05 per share.
On
April 7, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Jefferson Street Capital,
LLC. (the “Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”)
in the amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes
The Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company
is to issue the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part of the outstanding and unpaid
principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and non-assessable shares of Common
Stock at a conversion price equal to $2.05 per share.
Paycheck
Protection Program
On
April 15, 2020, Edison Nation, Inc. (the “Company”) entered into a loan agreement (“PPP Loan”)
with First Choice Bank under the Paycheck Protection Program (the “PPP”), which is part of the recently enacted Coronavirus
Aid, Relief, and Economic Security Act (“CARES Act”) administered by the United States Small Business Administration
(“SBA”). The Company received proceeds of $789,852 from the PPP Loan. In accordance with the requirements of the PPP,
the Company intends to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00%
interest rate per annum and matures on April 15, 2022 and is subject to the terms and conditions applicable to loans administered
by the SBA under the PPP. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying
expenses as described in the CARES Act.
Greentree
Financing
On
January 23, 2020, the Company entered into a financing transaction (the “Greentree Financing”) by executing a loan
agreement (the “Greentree Loan Agreement”) with Greentree Financial Group, Inc. (“Greentree”), pursuant
to which Greentree purchased a $1,100,000 10% Convertible Promissory Note (the “Greentree Note”) from the Company,
and the Company issued to Greentree a warrant (the “Greentree Warrant”) to purchase 550,000 shares of the Company’s
common stock. The $1,100,000 in proceeds from the Greentree Note will be used for general working capital needs of the Company
and for the repayment of debt. On January 24, 2020, the Company used $588,366 of the proceeds from the Greentree Note to pay off
in full the Labrys Note.
On
January 29, 2020, the Company and the Greentree entered into an Amendment Agreement, amending the Greentree Loan Agreement, the
Greentree Note, and the Greentree Warrant to: (i) correct the effective date set forth in the Greentree Loan Agreement, Greentree
Note, and Greentree Warrant to January 23, 2020, (ii) clarify the terms of the registration right provision in the Greentree Loan
Agreement, and (iii) to ensure that the total number of shares of common stock issued pursuant to the Greentree Loan Agreement,
the Greentree Note, and/or the Greentree Warrant, each as amended, does not exceed 17.99% of the Company’s issued and outstanding
common stock as of January 23, 2020. The Amendment Agreement also contains a liquated damages provision which requires the Company
to pay Greentree an amount in cash equal to $2.50 per share for any amount of shares that Greentree would have received pursuant
to the Greentree Loan Agreement, the Greentree Note, and/or the Greentree Warrant, but does not so receive such shares as a result
of the 17.99% cap described above.
Greentree
Loan Agreement
Upon
execution of the Greentree Loan Agreement, the Company issued to Greentree 100,000 shares of common stock (the “Greentree
Origination Shares”) as an origination fee, plus an additional 60,000 shares of common stock as consideration for advisory
services.
Pursuant
to the Greentree Loan Agreement, the Company agreed to pay certain costs of Greentree, including $15,000 for Greentree’s
legal fees and transfer agent fees resulting from conversion of the Note. The Greentree Loan Agreement also contains representations
and warranties by the Company and Greentree, which the Company believes are customary for transactions of this type. Furthermore,
the Company is subject to certain negative covenants under the Greentree Loan Agreement, which the Company also believes are also
customary for transactions of this type.
The
Greentree Loan Agreement, as amended, also contains a registration rights provision, pursuant to which the Company is required
to prepare and file a registration statement with the SEC under the Securities Act of 1933, as amended, registering a total of
1,200,000 shares of common stock issued to Greentree pursuant to the Greentree Loan Agreement, Greentree Note and Greentree Warrant.
The Company will be required to have such registration statement filed within 30 days of the effective date of the Greentree Loan
Agreement (which, as amended, is January 23, 2020) and declared effective by the SEC within 105 calendar days following the effective
date of the Greentree Loan Agreement. If the Company fails to file or have declared effective the registration statement within
the timeframe set forth in the Greentree Loan Agreement, or certain other events occur as set forth in the Greentree Loan Agreement,
the Company is obligated to pay Greentree an amount of liquidated damages equal to $35,000 per month until such failure is cured.
As of the date of this filing, the Company has failed to have its Registration Statement deemed Effective. In addition
to the registration rights granted to Greentree, the Greentree Loan Agreement contains a “true up” provision, which
requires the Company to issue Greentree additional shares of common stock during the period beginning on the effective date of
the registration statement until the 90th day after the effective date of the registration statement, if the average
of the 15 lowest daily closing prices of the Company’s common stock is less than $2.00.
Greentree
Note
Pursuant
to the Greentree Loan Agreement, the Company agreed to issue and sell to Greentree the Greentree Note, in the principal amount
of $1,100,000. The Greentree Note, as amended, is due and payable October 23, 2020, and is convertible at any time at a price
of $2.00 per share, subject to certain adjustments to the conversion price set forth in the Greentree Note. The Greentree Note
reiterates the registration rights set forth in the Greentree Loan Agreement and the Greentree Warrant. There is no prepayment
penalty on the Greentree Note. If the Greentree Note is not prepaid by the 90th day after the effective date of the Registration
Statement, the Greentree is required to convert the entire amount of principal and interest outstanding on the Greentree Note
at that time, at a price of $2.00 per share, unless an event of default (as such events are described in the Greentree Note) under
the Greentree Note has occurred, in which case the Greentree Note would be mandatorily converted at a price equal to 50% of the
lowest trading price of the common stock for the last 10 trading days immediately prior to, but not including, the date that the
Greentree Note mandatorily converts. The Greentree Note also contains a conversion limitation provision, which prohibits Greentree
from converting the Greentree Note in an amount that would result in the beneficial ownership of greater than 4.9% of the total
issued and outstanding shares of common stock, provided that (i) such conversion limitation may be waived by Greentree with 61
days prior notice, and (ii) Greentree cannot waive the conversion limitation if conversion of the Greentree Note would result
in Greentree having beneficial ownership of greater than 9.9% of the total issued and outstanding shares of common stock.
Greentree
Warrant
Pursuant
to the Greentree Loan Agreement, the Company also issued Greentree a warrant to purchase 550,000 shares of common stock at an
exercise price of $2.00 per share, subject to certain adjustments to the exercise price set forth in the Greentree Warrant. The
Greentree Warrant, as amended, expires on January 23, 2023. If the closing price per share of the common stock reported on the
day immediately preceding an exercise of the Greentree Warrant is greater than $2.00 per share, the Greentree Warrant may be exercised
cashlessly, based on a cashless exercise formula. The Greentree Warrant reiterates the registration rights set forth in the Greentree
Loan Agreement and the Greentree Note. The Greentree Warrant also contains a repurchase provision, which at any time after the
Company’s registration statement is effective and the Company’s common stock has traded at a price over $3.00 share
for 20 consecutive days, gives the Company a 30-day option to repurchase any unexercised portion of the Greentree Warrant at a
price of $1.00 per share.
Corporate
Information
Our
principal executive offices are located at 1 West Broad Street, Suite 1004, Bethlehem, Pennsylvania 18018. Our telephone number
is (484) 893-0060. The address of our website is www.edisonnation.com. The inclusion of our website address in this prospectus
does not include or incorporate by reference the information on our website into this prospectus.
Implications
of Being an Emerging Growth Company
We
are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
For as long as we are an emerging growth company, unlike public companies that are not emerging growth companies under the JOBS
Act, we will not be required to:
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provide
an auditor’s attestation report on management’s assessment of the effectiveness of our system of internal control
over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002 (the “Sarbanes Oxley Act”);
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provide
more than two years of audited financial statements and related management’s discussion and analysis of financial condition
and results of operations, prior to the filing of the Emerging Growth Company’s initial Form 10-K;
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comply
with any new requirements adopted by the Public Company Accounting Oversight Board (the “PCAOB”) requiring mandatory
audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional
information about the audit and the financial statements of the issuer;
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provide
certain disclosure regarding executive compensation required of larger public companies or hold shareholder advisory votes
on the executive compensation required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”); or
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obtain
shareholder approval of any golden parachute payments not previously approved.
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We
will cease to be an emerging growth company upon the earliest of the:
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last
day of the fiscal year in which we have $1.07 billion or more in annual revenues;
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date
on which we become a “large accelerated filer” (the fiscal year-end on which the total market value of our common
equity securities held by non-affiliates is $700 million or more as of June 30);
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date
on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or
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last
day of the fiscal year following the fifth anniversary of our initial public offering.
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In
addition, Section 107 of the JOBS Act provides that an emerging growth company can take advantage of the extended transition period
provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. However, we have
not elected to take advantage of such extended transition period for complying with new or revised accounting standards.
SUMMARY
OF THE OFFERING
This
offering involves a total of 1,725,492 shares of our common stock, which includes: (i) 160,492 shares of common stock underlying
warrants (the “Warrants”) issued to employees of Alexander Capital, L.P. in relation to three separate financing transactions
led by Alexander Capital, L.P. on behalf of the Company, and (ii) 550,000 shares of common stock underlying the Greentree Warrant,
550,000 shares of common stock underlying the Greentree Note, and 160,000 shares of common stock issued to Greentree in
connection with the Greentree Financing, and (iii) 25,000 shares of common stock underlying a warrant and 13,000 shares of
common stock all issued to Richard O’Leary, and (iv) 125,000 shares of common stock underlying a warrant and 66,000 shares
of common stock all issued to Rawleigh H. Ralls, and (v) 50,000 shares of common stock underlying a warrant and 26,000 shares
of common stock all issued to Paul J. Solit and Julie B. Solit.
Common
stock offered by the Selling Shareholders
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1,725,492
shares (1)
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Selling
Shareholders
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See
“Selling Shareholders for Whose Accounts We Are Registering Shares” beginning on page 32.
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Offering
prices
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The
shares offered by this prospectus may be offered and sold at prevailing market prices or such other prices as the Selling
Shareholders may determine.
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Common
stock outstanding before this offering
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9,702,401 shares (2)
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Common
stock outstanding after this offering
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11,162,893 shares (2) (3)
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Terms
of Offering
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The
Selling Shareholders will determine when and how they sell the shares offered in this prospectus, as described in “Plan
of Distribution” beginning on page 31.
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Use
of proceeds
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We
are not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the sale
of the shares by the Selling Shareholders. We will, however, receive the exercise price of the Warrants and the Greentree
Warrant, if and when such warrants are exercised for cash by the holders of such warrants. All of the proceeds from the sale
of common stock offered by this prospectus will go to the Selling Shareholders at the time they offer and sell such shares.
We will bear all costs associated with registering the shares of common stock offered by this prospectus. See “Use
of Proceeds.”
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Risk
factors
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See
“Risk Factors” and the other information included in this prospectus for a discussion of factors you should
carefully consider before deciding to invest in our common stock.
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Market
and Trading Symbol
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Our
shares of common stock are traded on The Nasdaq Capital Market under the symbol “EDNT.”
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Transfer
agent and registrar
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Nevada
Agency & Transfer Company
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(1)
Includes the following shares of common stock issuable upon exercise of outstanding warrants and conversion of the Greentree Note:
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70,500
shares of common stock issuable upon exercise of outstanding Placement Agent Warrants issued to employees of Alexander Capital,
L.P. in connection with the PIPE Financing (defined below), at an exercise price of $2.50 per share; and
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24,366
shares of common stock issuable upon exercise of outstanding Placement Agent Warrants issued to employees of Alexander Capital,
L.P. in connection with the placement of the Company’s Senior Convertible Promissory Notes, at an exercise price of
$2.85 per share; and
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65,626
shares of common stock issuable upon exercise of outstanding Selling Agent Warrants issued to employees of Alexander Capital,
L.P. in connection with the Company’s initial public offering, at an exercise price of $6.00 per share; and
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25,000 shares of common stock issuable upon exercise
of the O’Leary Warrant; and
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125,000 shares of common stock issuable upon
exercise of the Ralls Warrant; and
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50,000 shares of common stock issuable upon exercise
of the Solit Warrant; and
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550,000
shares of common stock issuable upon exercise of the Greentree Warrant; and
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550,000
shares of common stock issuable upon conversion of the Greentree Note.
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(2)
The change in the number of shares of common stock outstanding before this offering and after this offering was a result of the
following issuances:
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550,000
shares of common stock issuable upon exercise of the Greentree Warrant; and
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550,000
shares of common stock issuable upon conversion of the Greentree Note; and
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70,500
shares of common stock issuable upon exercise of outstanding Placement Agent Warrants
issued to employees of Alexander Capital, L.P. in connection with the PIPE Financing
(defined below), at an exercise price of $2.50 per share; and
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24,366
shares of common stock issuable upon exercise of outstanding Placement Agent Warrants
issued to employees of Alexander Capital, L.P. in connection with the placement of the
Company’s Senior Convertible Promissory Notes, at an exercise price of $2.85 per
share; and
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65,626
shares of common stock issuable upon exercise of outstanding Selling Agent Warrants issued
to employees of Alexander Capital, L.P. in connection with the Company’s initial
public offering, at an exercise price of $6.00 per share; and
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25,000 shares of common stock issuable upon exercise
of the O’Leary Warrant; and
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125,000 shares of common stock issuable upon
exercise of the Ralls Warrant; and
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50,000 shares of common stock issuable upon exercise
of the Solit Warrant.
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(3) Shares of our common stock that will
be outstanding after this offering is based on 9,702,401 shares of common stock outstanding as of July 15, 2020,
but excludes:
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290,036
shares of common stock reserved for future issuance under the Edison Nation, Inc.
Omnibus Incentive Plan (the “Plan”); and
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80,000
shares of common stock issuable upon the exercise of options outstanding as of July 13, 2020; and
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285,632
shares of common stock issuable upon conversion of the 4%, 5-year senior convertible notes in connection with the Edison
Nation Holdings, LLC acquisition; and
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990,000
shares of reserved common stock issuable upon exercise of the put option of Edison Nation Holdings, LLC sellers ; and
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240,000
shares of common stock granted but not issued to our directors
as restricted stock units; and
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40,000
shares of common stock granted but not issued to 32 Entertainment, LLC as restricted
stock units; and
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RISK
FACTORS
An
investment in our common stock involves a high degree of risk. Investing in shares of our common stock involves risks. Before
making a decision to invest in shares of our common stock, you should carefully consider the risks that are described in this
section, in our most recent Annual Report on Form 10-K and in the other information that we file from time to time with the SEC
that is incorporated by reference in this prospectus. You should also read the sections entitled “Cautionary Note Regarding
Forward-Looking Statements” on page 4 of this prospectus. The risks described in the documents incorporated by reference
in this prospectus are not the only ones we face. Additional risks not presently known or that we currently deem immaterial could
also materially and adversely affect us. You should consult your own financial and legal advisors as to the risks entailed by
an investment in shares of our common stock and the suitability of investing in our shares in light of your particular circumstances.
If any of the risks contained in or incorporated by reference in this prospectus develop into actual events, our assets, business,
cash flows, condition (financial or otherwise), credit quality, financial performance, liquidity, long-term performance goals,
prospects, and/or results of operations could be materially and adversely affected, the trading price of our common stock could
decline and you may lose all or part of your investment. Some statements in this prospectus, including such statements in the
following risk factors, constitute forward-looking statements. See the section entitled “Cautionary Note Regarding Forward-Looking
Statements.”
Risks
Related to Our Company
We
have a limited operating history and may not be able to operate our business successfully or generate sufficient revenue to make
or sustain distributions to our shareholders.
We
were incorporated on July 18, 2017, and therefore, have a relatively limited operating history. Despite the experience and
track record of our management team in the entertainment and packaging industries, historical results are not indicative of, and
may be substantially different than, the results we achieve in the future. We cannot assure you that we will be able to operate
our business successfully or implement our operating policies and strategies. The results of our operations depend on several
factors, including the level and volatility of interest rates, our success in attracting and retaining motivated and qualified
personnel, the availability of adequate short and long-term financing, conditions in the financial markets, and general economic
conditions. In addition, our future operating results and financial data may vary materially from the historical operating results
and financial data as well as the pro forma operating results and financial data because of a number of factors, including
costs and expenses associated with being a public company.
We
have a history of losses and we may never achieve profitability.
For
the year ended December 31, 2019, our operations lost approximately $13,026,228 of which approximately $8,064,101 was non-cash
and approximately $364,320 related to transaction costs and non-recurring items. For the three months ended March 31, 2020, our
operations lost approximately $2,900,000, of which approximately $2,284,000 was non-cash and approximately $366,000 was related
to transaction costs and other non-recurring items. At December 31, 2019, we had total current assets of $4,955,365 and current
liabilities of $12,973,319 resulting in negative working capital of $8,017,954, of which approximately $4,015,484 related to unsecured
trade payables assumed in our Cloud B acquisition. In February 2019, our consolidating subsidiary, CBAV1, LLC, foreclosed on its
promissory note it held that was secured by Cloud B, Inc.’s assets making any payments of the Cloud B trade payables unlikely.
At December 31, 2019, we had total assets of $23,609,619 and total liabilities of $16,155,187 resulting in stockholders’
equity of $7,454,432. At March 31, 2020, we had total current assets of approximately $4,907,818 and current liabilities of approximately
$8,899,487 resulting in negative working capital of approximately $3,991,669, of which $1,118,751 was related party notes payable
and $530,815 was included in accrued expenses for unissued shares. At March 31, 2020, we had total assets of $23,199,868 and total
liabilities of $11,970,547 resulting in stockholders’ equity of $11,229,321. We may never achieve or sustain profitability.
The
loss of key personnel or the inability of replacements to quickly and successfully perform in their new roles could adversely
affect our business.
We
depend on the leadership and experience of our relatively small number of key executive management personnel, particularly our
Chairman and Chief Executive Officer, Christopher B. Ferguson, our President and Treasurer, Kevin J. Ferguson, and our Chief Financial
Officer, Brett Vroman. The loss of the services of any of these key executives or any of our executive management members could
have a material adverse effect on our business and prospects, as we may not be able to find suitable individuals to replace such
personnel on a timely basis or without incurring increased costs, or at all. Furthermore, if we lose or terminate the services
of one or more of our key employees or if one or more of our current or former executives or key employees joins a competitor
or otherwise competes with us, it could impair our business and our ability to successfully implement our business plan. Additionally,
if we are unable to hire qualified replacements for our executive and other key positions in a timely fashion, our ability to
execute our business plan would be harmed. Even if we can quickly hire qualified replacements, we would expect to experience operational
disruptions and inefficiencies during any transition. We believe that our future success will depend on our continued ability
to attract and retain highly skilled and qualified personnel. There is a high level of competition for experienced, successful
personnel in our industry. Our inability to meet our executive staffing requirements in the future could impair our growth and
harm our business.
Our
financial statements may be materially affected if our estimates prove to be inaccurate as a result of our limited experience
in making critical accounting estimates.
Financial
statements prepared in accordance with GAAP require the use of estimates, judgments, and assumptions that affect the reported
amounts. Actual results may differ materially from these estimates under different assumptions or conditions. These estimates,
judgments, and assumptions are inherently uncertain, and, if they prove to be wrong, then we face the risk that charges to income
will be required. In addition, because we have limited to no operating history and limited experience in making these estimates,
judgments, and assumptions, the risk of future charges to income may be greater than if we had more experience in these areas.
Any such charges could significantly harm our business, financial condition, results of operations, and the price of our securities.
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical
accounting policies — Use of estimates” for a discussion of the accounting estimates, judgments, and
assumptions that we believe are the most critical to an understanding of our business, financial condition, and results of operations.
We
may require additional financing to sustain or grow our operations.
Our
growth will be dependent on our ability to access additional equity and debt capital. Moreover, part of our business strategy
may involve the use of debt financing to increase potential revenues. Our inability in the future to obtain additional equity
capital or a corporate credit facility on attractive terms, or at all, could adversely impact our ability to execute our business
strategy, which could adversely affect our growth prospects and future shareholder returns.
If
we fail to manage our growth, our business and operating results could be harmed.
As
we seek to advance our product lines, we will need to expand our development, manufacturing, marketing, and sales capabilities
or contract with third parties to provide these capabilities for us. We anticipate that a period of significant expansion will
be required to address potential growth and to handle licensing of additional product categories, such as more arts and crafts
focused items. This expansion will place a significant strain on our management, operational, and financial resources. To manage
the expected growth of our operations and personnel, we must establish appropriate and scalable operational and financial systems,
procedures, and controls and establish a qualified finance, administrative, and operations staff. As a public company, we will
have to implement internal controls to comply with government-mandated regulations. Our management may be unable to hire, train,
retain, motivate, and manage the necessary personnel or to identify, manage, and exploit potential strategic relationships and
market opportunities. Our failure to manage growth effectively could have a material and adverse effect on our business, results
of operations, and financial condition.
Our
growth strategy includes pursuing opportunistic acquisitions of additional brands, and we may not find suitable acquisition candidates
or successfully operate or integrate any brands that we may acquire.
As
part of our strategy, we intend to opportunistically acquire new brands and product concepts, just as we acquired Cloud B in October
2018. Although we believe that opportunities for other, future acquisitions may be available from time to time, competition for
acquisition candidates may exist or increase in the future. Consequently, there may be fewer acquisition opportunities available
to us as well as higher acquisition prices. There can be no assurance that we will be able to identify, acquire, manage, or successfully
integrate additional companies, brands, or product concepts without substantial costs, delays, or operational or financial problems.
In the event we are able to acquire additional companies, brands, or other product concepts, the integration and operation of
such acquisitions in addition to the on-going integration and operation of the Company may place significant demands on our management,
which could adversely affect our ability to manage our business. We may be required to obtain additional financing to fund future
acquisitions. There can be no assurance that we will be able to obtain additional financing on acceptable terms or at all.
We
may not realize the anticipated benefits of acquisitions or investments in joint ventures, or those benefits may be delayed or
reduced in their realization.
Acquisitions and
investments have been a component of our growth and the development of our business, and that is likely to continue in the future.
Acquisitions can broaden and diversify our brand holdings and product concepts, and allow us to build additional capabilities
and competencies around our brands. In reviewing potential acquisitions or investments, we target brands, assets or companies
that we believe offer attractive products or offerings, the ability for us to leverage our offerings, opportunities to drive our
brands, competencies, or other synergies.
The combination
of two independent businesses is a complex, costly, and time-consuming process that will require significant management attention
and resources. The integration process may disrupt the businesses and, if implemented ineffectively, would limit the expected
benefits of the acquisition. The failure to meet the challenges involved in integrating businesses and realizing the anticipated
benefits could cause an interruption of, or a loss of momentum in, our activities and could adversely affect our results of operations.
The overall integration of the businesses may result in material unanticipated problems, expenses, liabilities, competitive responses,
loss of customer and other business relationships, and diversion of management’s attention. The difficulties of combining
the operations of the companies include, among others:
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the diversion of management’s attention to integration
matters;
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difficulties in achieving anticipated cost savings, synergies,
business opportunities, and growth prospects from the combination;
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difficulties in the integration of operations and systems;
and
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conforming standards, controls, procedures, accounting and
other policies, business cultures, and compensation structures between the two companies.
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We cannot be certain
that the products and offerings of companies we may acquire, or acquire an interest in, will achieve or maintain popularity with
consumers in the future or that any such acquired companies or investments will allow us to more effectively market our products,
develop our competencies or to grow our business. In some cases, we expect that the integration of the companies that we may acquire
into our operations will create production, marketing and other operating, revenue or cost synergies which will produce greater
revenue growth and profitability and, where applicable, cost savings, operating efficiencies and other advantages. However, we
cannot be certain that these synergies, efficiencies and cost savings will be realized. Even if achieved, these benefits may be
delayed or reduced in their realization. In other cases, we may acquire or invest in companies that we believe have strong and
creative management, in which case we may plan to operate them more autonomously rather than fully integrating them into our operations.
We cannot be certain that the key talented individuals at these companies would continue to work for us after the acquisition
or that they would develop popular and profitable products, entertainment or services in the future. We cannot guarantee that
any acquisition or investment we may make will be successful or beneficial, and acquisitions can consume significant amounts of
management attention and other resources, which may negatively impact other aspects of our business.
An
inability to develop and introduce products in a timely and cost-effective manner may damage our business.
Our
sales and profitability depend on our ability to bring products to market and meet customer demands before they begin to lose
interest in a given product. There is no guarantee that we will be able to manufacture, source, and ship new or continuing products
in a timely manner and on a cost-effective basis to meet constantly changing consumer demands. This risk is heightened by our
customers’ increasingly compressed shipping schedules and the seasonality of our business. Moreover, unforeseen delays or
difficulties in the development process, significant increases in the planned cost of development, and manufacturing delays or
changes in anticipated consumer demand for our products and new brands may cause the introduction date for products to be later
than anticipated. They may also reduce or eliminate the profitability of such products or, in some situations, may cause a product
or new brand introduction to be discontinued.
We
have debt financing arrangements, which could have a material adverse effect on our financial health and our ability to obtain
financing in the future and may impair our ability to react quickly to changes in our business.
Our
exposure to debt financing could limit our ability to satisfy our obligations, limit our ability to operate our business, and
impair our competitive position. For example, it could:
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increase
our vulnerability to adverse economic and industry conditions, including interest rate fluctuations, because a portion of
our borrowings are at variable rates of interest;
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require
us to dedicate future cash flows to the repayment of debt, thereby reducing the availability of cash to fund working capital,
capital expenditures or other general corporate purposes;
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limit
our flexibility in planning for, or reacting to, changes in our business and industry; and
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limit
our ability to obtain additional debt or equity financing due to applicable financial and restrictive covenants contained
in our debt agreements.
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We
may also incur additional indebtedness in the future, which could materially increase the impact of these risks on our financial
condition and results of operations.
In
times of tough economic conditions, the Company has experienced significant distributor inventory corrections reflecting de-stocking
of the supply chain associated with difficult credit markets. Such distributor de-stocking exacerbated sales volume declines pertaining
to weak end user demand and the broader economic recession. The Company’s results may be adversely impacted in future periods
by such customer inventory adjustments. Further, the inability to continue to penetrate new channels of distribution may have
a negative impact on the Company’s future results.
Our
ability to repay our debt depends on many factors beyond our control. If we elect to raise equity capital in the future, our current
shareholders could be subjected to significant dilution. If we are unable to raise capital in the future, we may seek other avenues
to fund the business, including sale/leaseback arrangements or seeking to sell assets of all, or a portion of, our operations.
Payments
on our debt will depend on our ability to generate cash or secure additional financing in the future. This ability, to an extent,
is subject to general economic, financial, competitive, legislative, regulatory, and other factors beyond our control. If our
business does not generate sufficient cash flow from operations and sufficient future financing is not available to us, we may
not be able to repay our debt, operate our business or fund our other liquidity needs. If we cannot meet or refinance our obligations
when they become due, we may be required to attempt to raise capital, reduce expenditures, or take other actions which we may
be unable to successfully complete or, even if successful, could have a material adverse effect on us. If such sources of capital
are not available or not available on sufficiently favorable terms, we may seek other avenues to fund the business, including
sale/leaseback arrangements or seeking to sell assets of all or a portion of our operations. If we decide to raise capital in
the equity markets or take other actions, our shareholders could incur significant dilution or diminished valuations, or if we
are unable to raise capital, our ability to effectively operate our business could be impaired. In addition, if we are successful
in raising capital in the equity markets to repay our indebtedness or for any other purpose in the future, our shareholders could
incur significant dilution.
We
have violated the terms of the PIPE Purchase Agreement and registration rights agreement, which such violation could have a material
adverse effect on our financial health and our ability to obtain financing in the future.
On October 2, 2019, the Company entered
into the PIPE Purchase Agreement, which contains a prohibition on equity sales by the Company, which such prohibition was violated
by the Greentree Financing (defined below). The Company also entered into registration rights agreement in connection with the
PIPE Financing, which required the Company to file a resale registration statement within a prescribed time period. The Company
did not file such a registration statement within the time period required by the registration rights agreement. If those investors
were to have taken action as a result of the Company’s violations, the Company’s results could have been adversely
impacted in future periods, and would have likely harmed the Company’s ability to obtain financing in the future at all.
Our
success will depend on the reliability and performance of third-party distributors, manufacturers, and suppliers.
We
compete with other companies for the production capacity of third-party suppliers for components. Certain of these competing companies
have substantially greater financial and other resources than we have, and we may be at a competitive disadvantage in seeking
to procure production capacity. Our inability to contract with third-party manufacturers and suppliers to provide a sufficient
supply of our products on acceptable terms and on a timely basis could negatively impact our relationships with existing customers
and cause us to lose revenue-generating opportunities with potential customers. We also rely on operators and distributors to
market and distribute our products. If our operators or distributors are unsuccessful, we may miss revenue-generating opportunities
that might otherwise have been recognized.
We
are dependent on a small number of key suppliers and customers. Changes in our relationships with these parties or changes in
the economic environments in which they operate could have a material adverse effect on our business, financial condition, results
of operations, and cash flows.
Our
revenues are concentrated with a small number of customers. We do not have long-term agreements with our customers, and instead
develop our products on an item-by-item basis subject to purchase orders from customers. No assurances can be given that our customers
will continue to submit purchase orders for new products.
To
manufacture our products, we purchase components from independent manufacturers, many of whom are located in Asia. An extended
interruption in the supply of these products or suitable substitute inventory would disrupt our operations, which could have a
material adverse effect on our business, financial condition, and results of operations.
For
a number of our key inventory components, we rely on two China-based suppliers, Pokar Industrial Ltd., and MJR Corporation. These
suppliers have discussed the possibility of entering into a joint venture at an undetermined time in the future, whereby they
would consolidate their operations and conduct such operations from a single location. As we are currently transitioning the manufacturing
of more of our components to these suppliers, our increased dependence on them could have an adverse effect on our business, financial
condition, and operations if the consolidation of their operations results in a diminished capacity to timely produce our components.
We cannot estimate with any certainty the length of time that would be required to establish alternative supply relationships,
or whether the quantity or quality of materials that could be so obtained would be sufficient. Furthermore, we may incur additional
costs in sourcing materials from alternative producers. The disruption of our inventory supply, even in the short term, could
have a material adverse effect on our business, financial condition, and results of operations.
In the first quarter of 2020, the COVID-19
outbreak caused disruptions in our manufacturing operations, which resulted in delays in the shipment of products to certain of
our customers and ultimately, a suspension of our Asian operations in January 2020. A prolonged disruption or any further unforeseen
delay in our operations of the manufacturing, delivery and assembly process within any of our production facilities could continue
to result in delays in the shipment of products to our customers, increased costs and reduced revenue.
Changes
in customer preferences, the inability to maintain mutually beneficial relationships with large customers, inventory reductions
by customers, and the inability to penetrate new channels of distribution could adversely affect the Company’s business.
The
Company has certain significant customers. For the period ended March 31, 2020, the Company’s largest customer comprised
approximately 11% of net sales. The loss or material reduction of business, the lack of success of sales initiatives, or
changes in customer preferences or loyalties for the Company’s products, related to any such significant customer could
have a material adverse impact on the Company’s results of operations and cash flows. In addition, the Company’s major
customers are volume purchasers, a few of which are much larger than the Company and have strong bargaining power with suppliers.
This limits the ability to recover cost increases through higher selling prices. Furthermore, unanticipated inventory adjustments
by these customers can have a negative impact on net sales.
If
customers are dissatisfied with services and switch to competitive services or disconnect for other reasons such as preference
for digital technology products or other technology enhancements not then offered, the Company’s attrition rates may increase.
In periods of increasing attrition rates, recurring revenue and results of operations may be materially adversely affected. The
risk is more pronounced in times of economic uncertainty, as customers may reduce amounts spent on the products and services the
Company provides.
A
significant portion of our business is conducted with customers and suppliers located outside of the United States. Currency,
economic, health related, and other risks associated with our international operations in China and Japan could adversely
affect our operating results.
Our international customers and suppliers
are concentrated in China and Japan. Our revenues from international customers, and our inventory costs from international suppliers
are exposed to the potentially adverse effects of currency exchange rates, local economic conditions, health related conditions,
and other risks associated with doing business in foreign countries. To the extent that our revenues and purchases from international
business partners increase in the future, our exposure to changes in foreign economic conditions and currency fluctuations will
increase.
For example, the imposition of trade
sanctions or other regulations upon China by the United States or the European Union, or the loss of “normal trade
relations” status with China, could significantly increase our cost of products imported into the United States or Europe
and harm our business. In addition, the occurrence of a health-related crisis such as COVID-19, which emerged in China where many
of the Company’s suppliers and customers are located. COVID-19 has been expanding within Asia and globally, such that the
Company’s operations in Asia have been largely suspended since January 2020. Additionally, the suspension of manufacturing
operations by government inspectors in China could result in delays to us in obtaining product and may have a material adverse
effect on our ability to import products from China. Furthermore, Japanese economic policies are subject to rapid change and the
government of Japan may adopt policies which have the effect of hindering private economic activity and greater economic decentralization.
There is no assurance that the government of Japan will not significantly alter its policies from time to time without notice
in a manner which reduces or eliminates any benefits from its present policies of economic reform.
Besides
the risks discussed above, our dependence on foreign customers and suppliers also means that we may be affected by changes in
the relative value of the U.S. Dollar to foreign currencies, including the Chinese Renminbi and Japanese Yen. Although our receipts
from foreign customers and our purchases of foreign products are principally negotiated and paid for in U.S. Dollars, a portion
of our business is denominated in other currencies and changes in the applicable currency exchange rates might negatively affect
the profitability and business prospects of our customers and vendors. This, in turn, might cause such vendors to demand higher
prices, delay shipments, or discontinue selling to us. This also might cause such customers to demand lower prices, delay, or
discontinue purchases of our products or demand other changes to the terms of our relationships. These situations could in turn
ultimately reduce our revenues or increase our costs, which could have a material adverse effect on our business, financial condition,
and results of operations.
Our
business is closely tied to theme park patronage, and factors that negatively impact theme parks may also negatively affect our
ability to generate revenues.
Theme
parks represent a significant portion of our customers. Therefore, factors that may negatively impact the theme park industry
may also negatively impact our future revenues. If theme parks experience reduced patronage, revenues may be reduced as sales
of our products correspondingly decline, or theme parks may stop selling our products altogether. The levels of theme park patronage,
and therefore our revenues, are affected by a number of factors beyond our control, including:
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general
economic conditions;
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levels
of disposable income of theme park patrons;
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downturn
or loss in popularity of the theme park industry in general;
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the
relative popularity of entertainment alternatives to theme parks;
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local
conditions in key markets, including seasonal and weather-related factors;
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increased
transportation costs;
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natural
disasters, acts of terrorism and anti-terrorism efforts;
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changes
or proposed changes to tax laws;
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legal
and regulatory issues affecting the development, operation and licensing of theme parks;
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the
availability and cost of capital to construct, expand or renovate new and existing theme parks;
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the
level of new theme park construction and renovation schedules of existing them parks; and
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competitive
conditions in the theme park industry, including the effect of such conditions on the pricing of our products.
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These
factors significantly impact the demand for our products.
Our
operating results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control, which
could cause fluctuations in the price of our securities.
We
are subject to the following factors that may negatively affect our operating results:
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the
announcement or introduction of new products by our competitors;
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our
ability to upgrade and develop our systems and infrastructure to accommodate growth;
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our
ability to attract and retain key personnel in a timely and cost-effective manner;
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technical
difficulties;
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the
amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations, and infrastructure;
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our
ability to identify and enter into relationships with appropriate and qualified third-party providers for necessary development
and manufacturing services;
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regulation
by federal, state, or local governments;
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general
economic conditions, as well as economic conditions specific to the entertainment, theme park, party items, arts and crafts,
and packaging industries; and
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Various risks related
to health epidemics, pandemics and similar outbreaks, such as the coronavirus disease 2019 (“COVID-19”) pandemic,
which may have material adverse effects on our business, financial position, results of operations and/or cash flows.
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As
a result of our lack of any operating history and the nature of the markets in which we compete, it is difficult for us to forecast
our revenues or earnings accurately. As a strategic response to changes in the competitive environment, we may from time to time
make certain decisions concerning expenditures, pricing, service, or marketing that could have a material and adverse effect on
our business, results of operations, and financial condition. Due to the foregoing factors, our quarterly revenues and operating
results are difficult to forecast.
The
Company’s results of operations could be negatively impacted by inflationary or deflationary economic conditions, which
could affect the ability to obtain raw materials, component parts, freight, energy, labor, and sourced finished goods in a timely
and cost-effective manner.
The
Company’s products are manufactured using both ferrous and non-ferrous metals including, but not limited to, steel, zinc,
copper, brass, aluminum, and nickel. Additionally, the Company uses other commodity-based materials for components and packaging
including, but not limited to, plastics, resins, wood, and corrugated products. The Company’s cost base also reflects significant
elements for freight, energy, and labor. The Company also sources certain finished goods directly from vendors. If the Company
is unable to mitigate any inflationary increases through various customer pricing actions and cost reduction initiatives, its
profitability may be adversely affected.
Conversely,
in the event there is deflation, the Company may experience pressure from its customers to reduce prices, and there can be no
assurance that the Company would be able to reduce its cost base (through negotiations with suppliers or other measures) to offset
any such price concessions which could adversely impact results of operations and cash flows.
Further,
as a result of inflationary or deflationary economic conditions, the Company believes it is possible that a limited number of
suppliers may either cease operations or require additional financial assistance from the Company in order to fulfill their obligations.
In a limited number of circumstances, the magnitude of the Company’s purchases of certain items is of such significance
that a change in established supply relationships with suppliers or increase in the costs of purchased raw materials, component
parts, or finished goods could result in manufacturing interruptions, delays, inefficiencies, or an inability to market products.
Changes in value-added tax rebates, currently available to the Company or to its suppliers, could also increase the costs of the
Company’s manufactured products, as well as purchased products and components, and could adversely affect the Company’s
results.
In
addition, many of the Company’s products incorporate battery technology. As other industries begin to adopt similar battery
technology for use in their products, the increased demand could place capacity constraints on the Company’s supply chain.
In addition, increased demand for battery technology may also increase the costs to the Company for both the battery cells as
well as the underlying raw materials. If the Company is unable to mitigate any possible supply constraints or related increased
costs, its profitably and financial results could be negatively impacted.
Low
demand for new products and the inability to develop and introduce new products at favorable margins could adversely impact the
Company’s performance and prospects for future growth.
The
Company’s competitive advantage is due in part to its ability to develop and introduce new products in a timely manner at
favorable margins. The uncertainties associated with developing and introducing new products, such as market demand and costs
of development and production, may impede the successful development and introduction of new products on a consistent basis. Introduction
of new technology may result in higher costs to the Company than that of the technology replaced. That increase in costs, which
may continue indefinitely or until increased demand and greater availability in the sources of the new technology drive down its
cost, could adversely affect the Company’s results of operations. Market acceptance of the new products introduced in recent
years and scheduled for introduction in future years may not meet sales expectations due to various factors, such as the failure
to accurately predict market demand, end-user preferences, evolving industry standards, or the emergence of new or disruptive
technologies. Moreover, the ultimate success and profitability of the new products may depend on the Company’s ability to
resolve technical and technological challenges in a timely and cost-effective manner, and to achieve manufacturing efficiencies.
The Company’s investments in productive capacity and commitments to fund advertising and product promotions in connection
with these new products could erode profits if those expectations are not met.
We
are increasingly dependent on information technology, and potential cyberattacks, security problems, or other disruption and expanding
social media vehicles present new risks.
We
rely on information technology networks and systems, including the internet, to process, transmit, and store electronic information,
and to manage or support a variety of business processes, including financial transactions and records, billing, and operating
data. We may purchase some of our information technology from vendors, on whom our systems will depend, and we rely on commercially
available systems, software, tools, and monitoring to provide security for processing, transmission, and storage of confidential
operator and other customer information. We depend upon the secure transmission of this information over public networks. Our
networks and storage applications could be subject to unauthorized access by hackers or others through cyberattacks, which are
rapidly evolving and becoming increasingly sophisticated, or by other means, or may be breached due to operator error, malfeasance
or other system disruptions. In some cases, it will be difficult to anticipate or immediately detect such incidents and the damage
they cause. Any significant breakdown, invasion, destruction, interruption, or leakage of information from our systems could harm
our reputation and business.
In
addition, the use of social media could cause us to suffer brand damage or information leakage. Negative posts or comments about
us on any social networking website could damage our or our brands’ reputations. Employees or others might disclose non-public
sensitive information relating to our business through external media channels, including through the use of social media. The
continuing evolution of social media will present us with new challenges and risks.
Changes
in laws or regulations governing our operations, changes in the interpretation thereof or newly enacted laws or regulations and
any failure by us to comply with these laws or regulations, could require changes to certain of our business practices, negatively
impact our operations, cash flow, or financial condition, impose additional costs on us, or otherwise adversely affect our business.
We
are subject to regulation by laws and regulations at the local, state, and federal levels. These laws and regulations, as well
as their interpretation, may change from time to time, and new laws and regulations may be enacted. Accordingly, any change in
these laws or regulations, changes in their interpretation, or newly enacted laws or regulations and any failure by us to comply
with these laws or regulations, could require changes to certain of our business practices, negatively impact our operations,
cash flow or financial condition, impose additional costs on us, or otherwise adversely affect our business.
Article
XIII of our Amended and Restated Articles of Incorporation designates the courts of the State of Nevada as the sole and exclusive
forum for certain types of actions and proceedings that may be initiated by our shareholders, and therefore may limit our shareholders’
ability to choose a forum for disputes with us or our directors, officers, employees, or agents.
Article
XIII of our Amended and Restated Articles of Incorporation provide that, to the fullest extent permitted by law, and unless we
consent to the selection of an alternative forum, the courts of the State of Nevada shall be the sole and exclusive forum for
(a) any derivative action or proceeding brought on behalf of the Company, (b) any action or proceeding asserting a claim of breach
of a fiduciary duty owed by any director or officer of the Company to the Company or the Company’s shareholders, (c) any
action or proceeding asserting a claim against the Company arising pursuant to any provision of the Nevada Revised Statutes or
the Company’s amended and restated articles of incorporation or Second Amended and Restated Bylaws (as either might be amended
from time to time), or (d) any action or proceeding asserting a claim against the Company governed by the internal affairs doctrine.
We
believe the choice-of-forum provision in our Amended and Restated Articles of Incorporation provide will help provide for the
orderly, efficient, and cost-effective resolution of Nevada-law issues affecting us by designating courts located in the State
of Nevada (our state of incorporation) as the exclusive forum for cases involving such issues. However, this provision may limit
a shareholder’s ability to bring a claim in a judicial forum that it believes to be favorable for disputes with us or our
directors, officers, employees, or agents, which may discourage such actions against us and our directors, officers, employees,
and agents. While there is no Nevada case law addressing the enforceability of this type of provision, Nevada courts have on prior
occasion found persuasive authority in Delaware case law in the absence of Nevada statutory or case law specifically addressing
an issue of corporate law. The Court of Chancery of the State of Delaware ruled in June 2013 that choice-of-forum provisions of
a type similar to those included in our Amended and Restated Articles of Incorporation provide are not facially invalid under
corporate law and constitute valid and enforceable contractual forum selection clauses. However, if a court were to find the choice-of-forum
provision in our Amended and Restated Articles of Incorporation provide inapplicable to, or unenforceable in respect of, one or
more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in
other jurisdictions, which could adversely affect our business, financial condition, or results of operations.
We
could face substantial competition, which could reduce our market share and negatively impact our net revenue.
There
are a number of companies that manufacture and distribute products similar to ours. Many of our anticipated competitors are significantly
larger than we are and have considerably greater financial, technical, marketing, and other resources than we do. Some competitors
may have a lower cost of funds and access to funding sources that are not available to us. We cannot assure you that the competitive
pressures we face will not have a material adverse effect on our business, financial condition, and results of operations.
If
we fail to protect our intellectual property rights, competitors may be able to use our technology, which could weaken our competitive
position, reduce our net revenue, and increase our costs.
Our
long-term success will depend to some degree on our ability to protect the proprietary technology that we have developed or may
develop or acquire in the future. Patent applications can take many years to issue, and we can provide no assurance that
any such patents would be issued. If we are denied any or all of these patents, we may not be able to successfully prevent our
competitors from imitating our products or using some or all of the processes that are the subject of such patent applications.
Such imitation may lead to increased competition within the finite market for products such as ours. Even if our pending patents
were to be issued, our intellectual property rights may not be sufficiently comprehensive to prevent our competitors from developing
similar competitive products. Although we may aggressively pursue anyone whom we reasonably believe is infringing upon our intellectual
property rights, initiating and maintaining suits against third parties that may infringe upon our intellectual property rights
will require substantial financial resources, especially given our lack of patent registrations and applications. We may not have
the financial resources to bring such suits, and if we do bring such suits, we may not prevail. Regardless of our success in any
such actions, we could incur significant expenses in connection with such suits.
Third-party
claims of infringement against us could adversely affect our ability to market our products and require us to redesign our products
or seek licenses from third parties.
Especially
given that we produce products for licensed properties, we are susceptible to intellectual property lawsuits that could cause
us to incur substantial costs, pay substantial damages, or prohibit us from distributing our products. Whether a product infringes
a patent involves complex legal and factual issues, the determination of which is often uncertain. In addition, because patent
applications can take many years to issue, there may be applications now pending of which we are unaware, which later may
result in issued patents that our products may infringe. If any of our products infringe a valid patent, we could be prevented
from distributing that product unless and until we can obtain a license or redesign it to avoid infringement. A license may not
be available or may require us to pay substantial royalties. We also may not be successful in any attempt to redesign the product
to avoid any infringement. Infringement and other intellectual property claims, with or without merit, can be expensive and time-consuming
to litigate, and we may not have the financial and human resources to defend ourselves against any infringement suits that may
be brought against us.
Our
brands are important assets of our businesses and violation of our trademark rights by imitators, or the failure of our licensees
or vendors to comply with our product quality, manufacturing requirements, marketing standards, and other requirements could negatively
impact revenues and brand reputation.
Our
trademarks have a reputation for quality and value and are important to our success and competitive position. Unauthorized use
of our trademark rights may not only erode sales of our products, but may also cause significant damage to our brand name and
reputation, interfere with our ability to effectively represent ourselves to our customers, contractors, suppliers, and/or licensees,
and increase litigation costs. Similarly, failure by licensees or vendors to adhere to our standards of quality and other contractual
requirements could result in loss of revenue, increased litigation, and/or damage to our reputation and business. There can be
no assurance that our ongoing efforts to protect our brand and trademark rights and ensure compliance with our licensing and vendor
agreements will prevent all violations.
Defects
in our products could reduce our revenue, increase our costs, burden our engineering, and marketing resources, involve us in litigation
and adversely affect us.
Our
success will depend on our ability to avoid, detect, and correct defects in our products. We may not be able to maintain products
that are free from defects. Although we have taken steps to prevent defects, our products could suffer such defects. The occurrence
of such defects or malfunctions could result in physical harm to the patrons of our customers and the subsequent termination of
agreements, cancellation of orders, product returns, and diversion of our resources. Even if our customers do not suffer financial
losses, customers may replace our products if they do not perform according to expectations. Any of these occurrences could also
result in the loss of or delay in market acceptance of our products and/or loss of sales. In addition, the occurrence of defects
in our products may give rise to claims for lost revenues and related litigation by our customers and may subject us to investigation
or other disciplinary action by regulatory authorities that could include suspension or revocation of our ability to do business
in certain jurisdictions.
Low
demand for new products and the inability to develop and introduce new products at favorable margins could adversely impact our
performance and prospects for future growth.
Our
competitive advantage is due in part to our ability to develop and introduce new products in a timely manner at favorable margins.
The uncertainties associated with developing and introducing new products, such as market demand and costs of development and
production, may impede the successful development and introduction of new products on a consistent basis. Introduction of new
technology may result in higher costs to us than that of the technology replaced. That increase in costs, which may continue indefinitely
or until increased demand and greater availability in the sources of the new technology drive down its cost, could adversely affect
our results of operations. Market acceptance of the new products introduced in recent years and scheduled for introduction in
future years may not meet sales expectations due to various factors, such as the failure to accurately predict market demand,
end-user preferences, evolving industry standards, or the emergence of new or disruptive technologies. Moreover, the ultimate
success and profitability of the new products may depend on our ability to resolve technical and technological challenges in a
timely and cost-effective manner, and to achieve manufacturing efficiencies. Our investments in productive capacity and commitments
to fund advertising and product promotions in connection with these new products could erode profits if those expectations are
not met.
Our
products could be recalled.
The
Consumer Product Safety Commission or other applicable regulatory bodies may require the recall, repair or replacement of our
products if those products are found not to be in compliance with applicable standards or regulations. A recall could increase
costs and adversely impact our reputation.
Our
business operations have been and may continue to be materially and adversely affected by the outbreak of the novel respiratory
illness coronavirus (“COVID-19”).
On
March 11, 2020, the World Health Organization declared the outbreak of the novel respiratory illness COVID-19 a pandemic. The
new strain of COVID-19 is considered to be highly contagious and poses a serious public health threat. The outbreak of COVID-19
emerged in China, where many of the Company’s suppliers and customers are located. COVID-19 has been expanding within Asia
and globally, such that the Company’s operations in Asia have been largely suspended since January 2020.
Any
outbreak of such epidemic illness or other adverse public health developments may materially and adversely affect the global economy,
our markets and our business. In the first quarter of 2020, the COVID-19 outbreak has caused disruptions in our manufacturing
operations, which have resulted in delays in the shipment of products to certain of our customers and ultimately, a suspension
of our Asian operations in January 2020. A prolonged disruption or any further unforeseen delay in our operations of the manufacturing,
delivery and assembly process within any of our production facilities could continue to result in delays in the shipment of products
to our customers, increased costs and reduced revenue.
We
cannot foresee whether the outbreak of COVID-19 will be effectively contained, nor can we predict the severity and duration of
its impact. If the outbreak of COVID-19 is not effectively and timely controlled, our business operations and financial condition
may be materially and adversely affected as a result of the deteriorating market outlook for theme parks and consumer sales, the slowdown in
regional and national economic growth, weakened liquidity and financial condition of our customers or other factors that we cannot
foresee. Any of these factors and other factors beyond our control could have an adverse effect on the overall business environment,
cause uncertainties in the regions where we conduct business, cause our business to suffer in ways that we cannot predict and
materially and adversely impact our business, financial condition and results of operations.
We
face potential business disruptions and related risks resulting from the recent outbreak of the novel coronavirus, which could
have a material adverse effect on our business, financial condition and results of operations.
In
December 2019, a novel strain of coronavirus, or COVID-19, was reported to have surfaced in Wuhan, China. The COVID-19 outbreak
has grown into a global pandemic that has impacted Asia, United States, Europe and other countries throughout the world. Financial
markets have been experiencing extreme fluctuations that may cause a contraction in available liquidity globally as important
segments of the credit markets react to the development. The pandemic may lead to a decline in business and consumer confidence.
The global outbreak of COVID-19 continues to rapidly evolve. As a result, businesses have closed and limits have been placed on
travel. The extent to which COVID-19 may impact our business, such as the ultimate geographic spread of the disease, the duration
of the outbreak, travel restrictions and social distancing in the United States and other countries, business closures or business
disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease.
We
are monitoring the potential impact of the COVID-19 outbreak, and if COVID-19 continues to spread globally, including in the United
States, we may experience disruptions that could severely impact the development of our product candidates, including:
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delays
or difficulties in reopening of theme parks and water parks in the United States, Asia and Europe;
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the
uncertainty that our contractors, suppliers, and other business partners may be prevented
from conducting business activities for an unknown period of time; and
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the
impact of social distancing on theme parks; and
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delays
in receiving approval from local regulatory authorities to initiate our planned clinical trials; and
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the
undetermined costs to theme parks in reopening to remain within local, state and federal guidelines that may ultimately effect
our sales; and
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the
majority of our retail customers have been unable to sell our products in their stores due to government-mandated closures
and have temporarily reduced orders for our products;
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the
pandemic has reduced foot traffic in the stores where our products are sold that remain open, and the global economic impact
of the pandemic has reduced consumer demand for our products generally;
and
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in
the event a communicable illness, such as COVID-19, was contracted at, or that an outbreak
of a communicable illness originated within, one of our customer theme parks, they may suffer reputational damage that could
adversely affect guest attendance and ticket sales and adversely affect our results; and
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Quarantines,
shelter-in-place and similar government orders, or the perception that such orders, shutdowns or other restrictions on the conduct
of business operations could occur, related to COVID-19 or other infectious diseases could impact personnel at third-party suppliers
in the United States and other countries, or the availability or cost of materials, which would disrupt our supply chain. Any
manufacturing supply interruption of materials could adversely affect our ability to conduct ongoing and future research and testing
activities.
The
spread of COVID-19, which has caused a broad impact globally, may materially affect us economically. While the potential economic
impact brought by, and the duration of, COVID-19 may be difficult to assess or predict, a widespread pandemic could result in
significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively
affect our liquidity. In addition, a recession or market correction resulting from the spread of COVID-19 could materially affect
our business and the value of our common stock.
Risks
Associated with an Investment in our Common Stock
Our
executive officers, directors, and principal shareholders maintain the ability to control substantially all matters submitted
to shareholders for approval.
As of July 15, 2020, our executive officers, directors, and shareholders
who owned more than 5% of our outstanding common stock, in the aggregate, beneficially own 4,517,771 shares of common stock representing
approximately 39.43% of our outstanding capital stock. As a result, if these shareholders were to choose to act together, they
would be able to control substantially all matters submitted to our shareholders for approval, as well as our management and affairs.
For example, these persons, if they choose to act together, would control the election of directors and approval of any merger,
consolidation or sale of all or substantially all of our assets. This concentration of voting power could delay or prevent an acquisition
of us on terms that other shareholders may desire.
The
market price of our shares may fluctuate significantly.
The
capital and credit markets have recently experienced a period of extreme volatility and disruption. The market price and liquidity
of the market for shares may be significantly affected by numerous factors, some of which are beyond our control and may not be
directly related to our operating performance. Some of the factors that could negatively affect the market price of our shares
include:
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our
actual or projected operating results, financial condition, cash flows, and liquidity, or changes in business strategy or
prospects;
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equity
issuances by us, or share resales by our shareholders, or the perception that such issuances or resales may occur;
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loss
of a major funding source;
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actual
or anticipated accounting problems;
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publication
of research reports about us, or the industries in which we operate;
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changes
in market valuations of similar companies;
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adverse
market reaction to any indebtedness we incur in the future;
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speculation
in the press or investment community;
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price
and volume fluctuations in the overall stock market from time to time;
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general
market and economic conditions, trends including inflationary concerns, and the current state of the credit and capital markets;
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significant
volatility in the market price and trading volume of securities of companies in our sector, which are not necessarily related
to the operating performance of these companies;
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changes
in law, regulatory policies or tax guidelines, or interpretations thereof;
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any
shortfall in revenue or net income or any increase in losses from levels expected by investors or securities analysts;
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operating
performance of companies comparable to us;
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short-selling
pressure with respect to shares of our shares generally;
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uncertainty
surrounding the strength of the United States economic recovery; and
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concerns
regarding the United Kingdom’s exit from the European Union.
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As
noted above, market factors unrelated to our performance could also negatively impact the market price of our shares. One of the
factors that investors may consider in deciding whether to buy or sell our shares is our distribution rate as a percentage
of our share price relative to market interest rates. If market interest rates increase, prospective investors may demand a higher
distribution rate or seek alternative investments paying higher dividends or interest. As a result, interest rate fluctuations
and conditions in the capital markets can affect the market value of our shares. For instance, if interest rates rise, it is likely
that the market price of our shares will decrease as market rates on interest-bearing securities increase.
Shares
eligible for future sale may have adverse effects on our share price.
Sales
of substantial amounts of shares or the perception that such sales could occur may adversely affect the prevailing market price
for our shares. We may issue additional shares in subsequent public offerings or private placements to make new investments or
for other purposes. We are not required to offer any such shares to existing shareholders on a preemptive basis. Therefore, it
may not be possible for existing shareholders to participate in such future share issuances, which may dilute the existing shareholders’
interests in us.
If
we take advantage of specified reduced disclosure requirements applicable to an “emerging growth company” under the
JOBS Act, the information that we provide to shareholders may be different than they might receive from other public companies.
As
a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company”
under the JOBS Act. As an emerging growth company, we may take advantage of specified reduced disclosure and other requirements
that are otherwise applicable generally to public companies. These provisions include:
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only
two years of audited financial statements in addition to any required unaudited interim financial statements with correspondingly
reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
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reduced
disclosure about our executive compensation arrangements;
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no
non-binding advisory votes on executive compensation or golden parachute arrangements; and
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exemption
from the auditor attestation requirement in the assessment of our internal control over financial reporting.
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We
may take advantage of these exemptions for up to five years or such earlier time that we are no longer an emerging growth
company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenues, we have more
than $700 million in market value of our stock held by non-affiliates, or we issue more than $1 billion of non-convertible
debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We may elect to take
advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders
may be different than you might receive from other public reporting companies in which you hold equity interests.
If
we fail to comply with the rules and regulations under the Sarbanes-Oxley Act, our operating results, our ability to operate our
business and investors’ views of us may be harmed.
Section 404
of the Sarbanes-Oxley Act requires public companies to conduct an annual review and evaluation of their internal controls and
attestations of the effectiveness of internal controls by independent auditors. Ensuring that we have adequate internal financial
and accounting controls and procedures in place so that we can produce accurate financial statements on a timely basis is a costly
and time-consuming effort that will need to be evaluated frequently. As of December 31, 2019, the Company’s Principal
Executive Officer and Principal Financial and Accounting Officer have concluded that, as of the end of such period, 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. Our failure to maintain the effectiveness of our internal controls in accordance
with the requirements of the Sarbanes-Oxley Act could have a material adverse effect on our business. We could lose investor confidence
in the accuracy and completeness of our financial reports, which could have an adverse effect on the price of our common stock.
In addition, our efforts to comply with the rules and regulations under the Sarbanes-Oxley or new or changed laws, regulations,
and standards may differ from the activities intended by regulatory or governing bodies due to ambiguities related to practice.
Regulatory authorities may investigate transactions disclosed in our “Management’s Discussion and Analysis of Financial
Condition and Results of Operations,” and if legal proceedings are initiated against us, it may harm our business.
We
do not anticipate paying any cash dividends on our capital stock in the foreseeable future.
We
currently intend to retain all of our future earnings to finance the growth and development of our business, and therefore, we
do not anticipate paying any cash dividends on our capital stock in the foreseeable future. We believe it is likely that our board
of directors will continue to conclude, that it is in the best interests of the Company and its shareholders to retain all earnings
(if any) for the development of our business. In addition, the terms of any future debt agreements may preclude us from paying
dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for the foreseeable
future.
The
rights of the holders of common stock may be impaired by the potential issuance of preferred stock.
Although
we have no present intention to issue any shares of preferred stock or to create any series of preferred stock, we may issue such
shares in the future. If we were to issue shares of preferred stock, the rights of the holders of common stock could be impaired
by such issuance of preferred stock. Pursuant to the Articles of Merger, filed with the Nevada Secretary of State on September
7, 2019, our board of directors has the right, without shareholder approval, to issue preferred stock with voting, dividend, conversion,
liquidation, or other rights which could adversely affect the voting power and equity interest of the holders of common stock,
which could be issued with the right to more than one vote per share, and could be utilized as a method of discouraging, delaying,
or preventing a change of control. The possible negative impact on takeover attempts as a result of the issuance of such preferred
stock could also adversely affect the price of our common stock.
If
securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, our
stock price, and trading volume could decline.
The
trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish
about us or our business. Securities and industry analysts do not currently, and may never, publish research on us. If no or too
few securities or industry analysts commence coverage of us, the trading price for our stock would likely be negatively impacted.
In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our stock
or publish inaccurate or unfavorable research about our business, our stock price would likely decline. If one or more of these
analysts cease coverage of us or fail to publish reports on us regularly, demand for our stock could decrease, which might cause
our stock price and trading volume to decline.
Risk
Related to this Offering
Future
sales of additional shares of our common stock or securities convertible into shares of our common stock may dilute our shareholders’
ownership in us and may adversely affect us or the trading price of our common stock.
We
are generally not restricted from issuing additional shares of our common stock up to the authorized number of shares set forth
in our charter. We may issue additional shares of our common stock or securities convertible into our common stock in the future
pursuant to current or future employee stock incentive plans, employee stock grants, or in connection with future acquisitions
or financings. We cannot predict the size of any such future issuances or the effect, if any, that any such future issuances will
have on the trading price of our common stock. Any such future issuances of shares of our common stock or securities convertible
into common stock may have a dilutive effect on the holders of our common stock and could have a material negative effect on the
trading price of our common stock.
Future
sales of shares of our common stock could lower the trading price of our common stock, and any additional capital raised by us
through the sale of additional equity or convertible debt securities may dilute our shareholders’ ownership in us and may
adversely affect us or the trading price of our common stock.
We
may issue additional shares of common stock or other securities in primary offerings and the Selling Shareholders may resell shares
of our common stock in subsequent secondary offerings. We cannot predict the size of additional issuances or future resales of
shares of our common stock or convertible securities, the offering price in any such issuance or resale or the effect, if any,
that additional issuances or future resales will have on the trading price of our common stock. Additional issuances and resales
of substantial amounts of our common stock or convertible securities, or the perception that such additional issuances or resales
could occur, may adversely affect prevailing trading prices for our common stock.
The
trading price of our common stock could be volatile.
The
trading price of our common stock may be volatile and could be subject to wide fluctuations in price in response to various factors,
some of which are beyond our control. In addition, if the market for stocks in our industry, or the stock market in general, experiences
a loss of investor confidence, the trading price of our common stock could decline for reasons unrelated to our business and operations.
If the foregoing occurs, it could cause our stock price to fall and may expose us to lawsuits that, even if unsuccessful, could
be costly to defend and a distraction to management, which could materially adversely affect our assets, business, cash flows,
condition (financial or otherwise), credit quality, financial performance, liquidity, long-term performance goals, prospects,
and results of operations.
Because
the risk factors referred to above, as well as other risks not mentioned above, could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us, you should not place undue reliance on any such
forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made. We undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement
is made or reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us
to predict which ones will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which
any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking
statements.
USE
OF PROCEEDS
We
are not selling any of the shares of common stock being offered by this prospectus and will receive no proceeds from the sale
of the shares by the Selling Shareholders. We will, however, receive the exercise price of the Warrants, if and when such warrants
are exercised for cash by the holders of such warrants. All of the proceeds from the sale of common stock offered by this prospectus
will go to the Selling Shareholders at the time they offer and sell such shares.
We
will pay the expenses of registration of the shares of our common stock covered by this prospectus, including legal and accounting
fees.
PRIVATE
PLACEMENT OF EQUITY SECURITIES
PIPE
Financing
In
October 2019, the Company sold a total of 1,175,000 shares of common stock at a purchase price of $2.00 per share (the “PIPE
Shares”) to accredited investors in a series of four closings. The aggregate amount sold in the private placement (the “PIPE
Financing”) was $2,350,000.
As
discussed further below, the Company issued warrants to the placement agent of a value equal to six percent (6%) of the aggregate
number of shares of common stock sold to purchasers in the PIPE Financing. The warrants are exercisable at $2.50 per share (125%
of the offering price).
Registration
Rights Agreement
In
connection with the above-referenced private placement, we and the investors in the PIPE Financing entered into a Registration
Rights Agreement on October 2, 2019 (the “PIPE Registration Rights Agreement”) providing for the registration for
resale of the common stock pursuant to a registration statement to be filed with the Commission, which this registration statement
is intended to fulfill. We agreed to use our best efforts to cause this registration statement to be declared effective as soon
as possible, but in no event later than 90 days of the closing of the PIPE Financing (or 120 days in the event of a full review
of the registration statement by the SEC Commission), and to keep this registration statement continuously effective for a period
that extends from the first date on which the SEC Commission issues an order of effectiveness in relation to this registration
statement until such date that all registrable securities covered by this registration statement have been sold thereunder or
pursuant to Rule 144 or may be sold without volume or manner-of-sale restrictions pursuant to Rule 144 and without the requirement
for the Company to be in compliance with the current public information under Rule 144 and, as determined by our counsel pursuant
to a written opinion letter to such effect we did not meet the deadline for filing and effectiveness of the PIPE Registration
Rights Agreement. If we do not meet our obligations with respect to the effectiveness of this registration statement, we must
pay, on a monthly basis, to each investor party to the PIPE Registration Rights Agreement an amount in cash, as partial liquidated
damages, equal to 1% of the aggregate amount invested by each of them in the PIPE Financing (increasing to 1.5% following the
2nd month anniversary), up to a maximum of 8% of the aggregate investment amount for each of them. The PIPE Registration
Rights Agreement prohibits us from filing any other registration statements until all the securities registrable under the PIPE
Registration Rights Agreement are registered pursuant to a registration statement that is declared effective by the SEC. The 90-day
period has elapsed and the Company is subject to the foregoing penalties. As of July 6, 2020, none of the investors in
the PIPE Financing have taken adverse action as a result of such violations.
Placement
Agent Agreement
Pursuant
to an engagement letter dated May 2, 2019, as amended on August 6, 2019, between us and Alexander Capital, L.P. (“Alexander”),
for a period of 120 days from the date of the agreement, we engaged Alexander to serve as our exclusive placement agent with respect
to private placements of the Company’s equity securities. The engagement entitled Alexander to a cash fee of 9% of the gross
proceeds received by us from the sale of our equity securities, a non-accountable expense allowance of 1% of the gross proceeds
received by us from the sale of our equity securities, reimbursement of Alexander’s legal expenses in an amount equal to
$15,000, as well as reimbursement for Alexander’s reasonable out of pocket expenses. We have paid Alexander from the proceeds
of the PIPE Financing. We also issued to Alexander 70,500 Warrants to purchase up to a total of 6% of the shares of common stock
sold in the PIPE Financing. The Warrants are exercisable at $2.50 per share (125% of the offering price). The Company notes that
the number of Warrants issued in the PIPE Financing was erroneously reported as 126,000 Warrants in the Company’s Current
Report on Form 8-K filed with the SEC on October 4, 2019 (and amended on October 8, 2019). The placement agent agreement contains
customary representations, warranties and covenants of the parties and indemnification provisions under which we have agreed to
indemnify Alexander against certain liabilities.
DIVIDEND
POLICY
We
have not historically declared dividends on our common stock, and we do not currently intend to pay dividends on our common
stock. The declaration, amount, and payment of any future dividends on shares of our common stock, if any, will be at the sole
discretion of our board of directors, out of funds legally available for dividends. As a Nevada corporation, we are not permitted
to pay dividends if, after giving effect to such payment, we would not be able to pay our debts as they become due in the usual
course of business or our total assets would be less than the sum of our total liabilities plus any amounts needed to satisfy
any preferential rights if we were dissolving.
Our
ability to pay dividends to our shareholders in the future will depend upon our liquidity and capital requirements, as well as
our earnings and financial condition, the general economic climate, contractual restrictions, our ability to service any equity
or debt obligations senior to our common stock, and other factors deemed relevant by our board of directors.
DETERMINATION
OF OFFERING PRICE
The
prices at which the shares of common stock are covered by this prospectus may actually be sold will be determined by the prevailing
public market price for shares of our common stock, by negotiations between the Selling Shareholders and buyers of our common
stock in private transactions or as otherwise described in “Plan of Distribution.”
MARKET
FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market
Information
On
May 3, 2018, our common stock began trading on The Nasdaq Capital Market under the symbol of “XSPL”, which was subsequently
changed to “EDNT” on September 13, 2018.
Holders
of Record
The
Company had approximately 762 holders of record of our common stock as of July 15, 2020.
Securities
Authorized for Issuance under Equity Compensation Plans
Plan Category
|
|
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
|
|
|
Weighted-average
exercise price of
outstanding options,
warrants and rights
|
|
|
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
|
|
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
Equity compensation plans approved by
shareholders (1)(2)
|
|
|
80,000
|
|
|
$
|
7.01
|
|
|
|
290,036
|
|
Equity compensation plans not approved by
shareholders (1)
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Total
|
|
|
80,000
|
|
|
$
|
7.01
|
|
|
|
290,036
|
|
(1)
|
The
information presented in this table is as of July 15, 2020.
|
(2)
|
We
originally adopted the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”)
in December 2017, which was amended on February 9, 2018, provides for up to 1,764,705
(290,036 remaining as of July 15, 2020) shares of common stock to be issued
as stock-based incentives. Stock incentive awards under the Plan can be in the form of
stock options, restricted stock units, performance awards, and restricted stock
that are made to employees, directors, and service providers. Awards are subject to forfeiture
until vesting conditions have been satisfied under the terms of the award. We believe
awards to our executive officers help align the interests of management and our shareholders
and reward our executive officers for improved Company performance.
|
PLAN
OF DISTRIBUTION
Each
Selling Shareholder and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of
their securities covered hereby on The Nasdaq Capital Market or any other stock exchange, market or trading facility on which
the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. The Company will not receive
any of the proceeds from the sale by the Selling Shareholders. A Selling Shareholder may use any one or more of the following
methods when selling securities:
|
●
|
ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
|
|
●
|
block
trades in which the broker-dealer will attempt to sell the securities as agent but may
position and resell a portion of the block as principal to facilitate the transaction;
|
|
●
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
|
|
●
|
an
exchange distribution in accordance with the rules of the applicable exchange;
|
|
●
|
privately
negotiated transactions;
|
|
●
|
settlement
of short sales;
|
|
●
|
in
transactions through broker-dealers that agree with the Selling Shareholders to sell
a specified number of such securities at a stipulated price per security;
|
|
●
|
through
the writing or settlement of options or other hedging transactions, whether through an
options exchange or otherwise;
|
|
●
|
a
combination of any such methods of sale; or
|
|
●
|
any
other method permitted pursuant to applicable law.
|
The
Selling Shareholders may also sell securities under Rule 144 or any other exemption from registration under the Securities Act,
if available, rather than under this prospectus.
Broker-dealers
engaged by the Selling Shareholders may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive
commissions or discounts from the Selling Shareholders (or, if any broker-dealer acts as agent for the purchaser of securities,
from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an
agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2440; and in the case of a
principal transaction a markup or markdown in compliance with FINRA IM-2440.
In
connection with the sale of the securities or interests therein, the Selling Shareholders may enter into hedging transactions
with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of
hedging the positions they assume. The Selling Shareholders may also sell securities short and deliver these securities to close
out their short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The Selling
Shareholders may also enter into option or other transactions with broker-dealers or other financial institutions or create one
or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered
by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus
(as supplemented or amended to reflect such transaction).
The
Selling Shareholders and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters”
within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers
or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts
under the Securities Act. Each Selling Shareholder has informed the Company that it does not have any written or oral agreement
or understanding, directly or indirectly, with any person to distribute the securities.
The
Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The
Company has agreed to indemnify the Selling Shareholders against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
We
agreed to keep this prospectus effective until the earlier of (i) the date on which the securities may be freely resold by
the Selling Shareholders without registration and without regard to any volume or manner-of-sale limitations by reason of Rule
144, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the
Securities Act or any other rule of similar effect, or (ii) all of the securities have been sold pursuant to this prospectus
or Rule 144 under the Securities Act or any other rule of similar effect, under circumstances in which any legend borne by such
securities relating to restrictions on transferability thereof, under the Securities Act or otherwise, is removed. The resale
securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws.
In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified
for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied
with.
Under
applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not
simultaneously engage in market making activities with respect to the securities for the applicable restricted period, as defined
in Regulation M, prior to the commencement of the distribution. In addition, the Selling Shareholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of the securities by the Selling Shareholders or any other person. We will make copies of this prospectus
available to the Selling Shareholders and have informed them of the need to deliver a copy of this prospectus to each purchaser
of the securities at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
SELLING
SHAREHOLDERS FOR WHOSE ACCOUNTS WE ARE REGISTERING SHARES
This prospectus covers the resale from
time to time by the selling shareholders and future shareholders identified in the table below of up to 1,725,492 shares of our
common stock, which were issued in various transactions exempt from registration under the Securities Act, as follows:
|
●
|
265,000
of the shares registered hereby for resale are common stock previously issued to such selling shareholders; and
|
|
|
|
|
●
|
550,000
of the shares registered hereby are issuable upon conversion of the Convertible Note, which we sold to Greentree Financial
Group, Inc. on January 23, 2020. Please see Note 5 — Debt within the Company’s financial statements for the three months
ended March 31, 2020 for additional information; and
|
|
|
|
|
●
|
550,000
of the shares registered hereby are issuable upon the exercise of the warrant issued to Greentree Financial Group, Inc. on
January 23, 2020. Please see Note 5 — Debt within the Company’s financial statements for the three months
ended March 31, 2020 for additional information; and
|
|
|
|
|
●
|
67,744
of the shares registered hereby are issuable upon the exercise of the warrants issued to Christopher Carlin; and
|
|
|
|
|
●
|
51,128
of the shares registered hereby are issuable upon the exercise of the warrants issued to Jonathan Gazdak; and
|
|
|
|
|
●
|
20,358
of the shares registered hereby are issuable upon the exercise of the warrants issued to Joseph Amato; and
|
|
|
|
|
●
|
20,358
of the shares registered hereby are issuable upon the exercise of the warrant issued to Rocco Guidicipietro; and
|
|
|
|
|
●
|
904
of the shares registered hereby are issuable upon the exercise of the warrants issued
to Bari Latterman; and
|
|
|
|
|
●
|
25,000 of the shares registered hereby are issuable
upon the exercise of the warrant issued to Richard O’Leary; and
|
|
|
|
|
●
|
125,000 of the shares registered hereby are issuable
upon the exercise of the warrant issued to Rawleigh H. Ralls; and
|
|
|
|
|
●
|
50,000 of the shares registered hereby are issuable
upon the exercise of the warrant issued to Paul J. Solit and Julie B. Solit.
|
The
shares to be offered by the Selling Shareholders named in this prospectus are “restricted” securities under applicable
federal and state securities laws and are being registered under the Securities Act to give those Selling Shareholders the opportunity
to publicly sell these shares, if they elect to do so. The registration of these shares does not require that any of the shares
be offered or sold by the Selling Shareholders. We are registering the shares in order to permit the Selling Shareholders to offer
the shares for resale from time to time. For additional information regarding these shares, see “Private Placement of
Securities” above.
The
table below lists the Selling Shareholders and other information regarding the beneficial ownership of shares of common stock
by each of the Selling Shareholders. The first column in the table below lists the name of each Selling Shareholder. The second
column lists the number of shares of common stock beneficially owned by each Selling Shareholder, based on its ownership of the
shares of common stock, as of July 15, 2020.
The
fourth column lists the shares of common stock being offered by this prospectus by the Selling Shareholders.
In
accordance with the terms of a registration rights agreement between the Company and the Selling Shareholders, this prospectus
generally covers the resale of all shares of common stock held by the Selling Shareholders. The fourth column assumes the sale
of all of the shares offered by the Selling Shareholders pursuant to this prospectus.
The
Selling Shareholders may sell all, some or none of their shares in this offering. See “Plan of Distribution.”
Stockholder
|
|
Beneficial
Ownership Before Offering
(ii)
|
|
|
Percentage
of Common Stock Owned Before Offering (ii)
|
|
|
Shares
of Common Stock Included
in
Prospectus
|
|
|
Beneficial
Ownership After the Offering
(iii)
|
|
|
Percentage
of
Common
Stock
Owned
After
the Offering
(iii)
|
|
Greentree
Financial Group, Inc. (iv)
|
|
|
1,260,000
|
|
|
|
12.99
|
%
|
|
|
1,260,000
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Christopher
Carlin (v)
|
|
|
67,744
|
|
|
|
*
|
%
|
|
|
67,744
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Jonathan
Gazdak (vi)
|
|
|
51,128
|
|
|
|
*
|
%
|
|
|
51,128
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Joseph
Amato (vii)
|
|
|
20,358
|
|
|
|
*
|
%
|
|
|
20,358
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Rocco
Guidicipietro (viii)
|
|
|
20,358
|
|
|
|
*
|
%
|
|
|
20,358
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Bari
Latterman (ix)
|
|
|
904
|
|
|
|
*
|
%
|
|
|
904
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Richard
O’Leary (x)
|
|
|
38,000
|
|
|
|
*
|
%
|
|
|
38,000
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Rawleigh
H. Ralls (xi)
|
|
|
191,000
|
|
|
|
1.97
|
%
|
|
|
191,000
|
|
|
|
0
|
|
|
|
0.00
|
%
|
Paul
J. Solit and Julie B. Solit (xii)
|
|
|
76,000
|
|
|
|
*
|
%
|
|
|
76,000
|
|
|
|
0
|
|
|
|
0.00
|
%
|
TOTAL
|
|
|
1,725,492
|
|
|
|
17.78
|
%
|
|
|
1,725,492
|
|
|
|
0
|
|
|
|
0.00
|
%
|
*
Less than 1%
(i)
These columns represent the aggregate maximum number and percentage of shares that the selling stockholders can own at one time
(and therefore, offer for resale at any one time).
(ii)
Based on 9,702,401 shares of common stock outstanding as of July 15, 2020; and including 160,492 shares of our common stock
issuable upon the exercise of the warrants issued to employees of Alexander Capital, LP; 550,000 shares of our common stock
issuable upon conversion of the Greentree Note; 550,000 shares of our common stock issuable upon exercise of the Greentree
Warrant and 200,000 shares of common stock issuable to multiple holders in connection with financing transactions, which are
all outstanding as of July 15, 2020; but excluding 240,000 shares of common stock issued to our directors as restricted stock
units, 53,333 shares issuable under an option granted to one of our executives,1,764,705 (290,036 remaining as of July 15,
2020) shares of our common stock reserved for future issuance under our equity compensation plans; 80,000 shares of our
common stock issuable upon the exercise of options outstanding as of July 15, 2020; 285,632 shares of common stock issuable
upon conversion of the 4%, 5-year senior convertible notes in connection with the EN acquisition; 990,000 shares reserved in
exchange for the cancellation of certain non-voting membership interest in Edison Nation Holdings, LLC; 40,000 shares of
common stock granted but not issued to 32 Entertainment, LLC as restricted stock units.
(iii)
Assumes that all securities registered will be sold.
(iv)
Includes 550,000 shares issuable upon conversion of the Greentree Note, 550,000 shares issuable upon exercise of the
Greentree Warrant, 100,000 shares issued in connection with the Greentree Financing and 60,000 shares issued in connection
for the Greentree advisory services. Please see Note 5 — Debt within the Company’s financial statements for the three months
ended March 31, 2020 for additional information.
(v)
Includes 27,676 shares of common stock issuable upon exercise of the warrant issued on April 29, 2018, with an exercise price
of $6.00 per share, 10,105 shares of common stock issuable upon exercise of the warrant issued on May 13, 2019, with an exercise
price of $2.85 per share and 29,963 shares of common stock issuable upon exercise of the warrant issued on November 25, 2019,
with an exercise price of $2.50 per share.
(vi)
Includes 20,548 shares of common stock issuable upon exercise of the warrant issued on April 29, 2018, with an exercise price
of $6.00 per share, 7,668 shares of common stock issuable upon exercise of the warrant issued on May 13, 2019, with an exercise
price of $2.85 per share and 22,913 shares of common stock issuable upon exercise of the warrant issued on November 25, 2019,
with an exercise price of $2.50 per share.
(vii)
Includes 8,500 shares of common stock issuable upon exercise of the warrant issued on April 29, 2018, with an exercise price of
$6.00 per share, 3,045 shares of common stock issuable upon exercise of the warrant issued on May 13, 2019, with an exercise
price of $2.85 per share and includes 8,812 shares of common stock issuable upon exercise of the warrant issued on November 25,
2019, with an exercise price of $2.50 per share.
(viii)
Includes 8,500 shares of common stock issuable upon exercise of the warrant issued on April 29, 2018, with an exercise price of
$6.00 per share, 3,045 shares of common stock issuable upon exercise of the warrant issued on May 13, 2019, with an exercise
price of $2.85 per share and 8,812 shares of common stock issuable upon exercise of the warrant issued on November 25, 2019, with
an exercise price of $2.50 per share.
(ix)
Includes 402 shares of common stock issuable upon exercise of the warrant issued on April 29, 2018, with an exercise price of
$6.00 per share and 503 shares of common stock issuable upon exercise of the warrant issued on May 13, 2019, with an exercise
price of $2.85 per share.
(x)
Includes 6,500 shares of common stock issued as Incentive shares in the January 17, 2020 financing transaction, 6,500 shares of
common stock issued as Additional Incentive shares under the Amendment to the January 17, 2020 financing transaction and 25,000
shares of common stock issuable upon exercise of the warrant issued on January 17, 2020.
(xi)
Includes 33,000 shares of common stock issued as Incentive shares in the January 10, 2020 financing transaction, 33,000 shares
of common stock issued as Additional Incentive shares under the Amendment to the January 10, 2020 financing transaction and 125,000
shares of common stock issuable upon exercise of the warrant issued on January 10, 2020.
(xii)
Includes 13,000 shares of common stock issued as Incentive shares in the January 15, 2020 financing transaction, 13,000 shares
of common stock issued as Additional Incentive shares under the Amendment to the January 15, 2020 financing transaction and 50,000
shares of common stock issuable upon exercise of the warrant issued on January 15, 2020.
Relationship
with Selling Shareholders
Except
as disclosed in the table above, to our knowledge, none of the Selling Shareholders had any position, office, or other material
relationship with us or any of our affiliates within the past three years.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF
FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The
following discussion and analysis of our financial condition and results of operations for the three months ended March 31,
2020 and 2019 and years ended December 31, 2019 and 2018 should be read in conjunction with the information
included under “Business,” “Selected Consolidated Financial Data” and our consolidated financial statements
and the accompanying notes included elsewhere in this registration statement. The discussion and analysis below are based on comparisons
between our historical financial data for different periods and include certain forward-looking statements about our business,
operations and financial performance. These forward-looking statements are subject to risks, uncertainties, assumptions and other
factors described in “Risk Factors.” Our actual results may differ materially from those expressed in, or implied
by, those forward-looking statements. See “Special Note Regarding Forward-Looking Statements.”
Overview
Formed
in July 2017 under the laws of the State of Nevada, Edison Nation, Inc. seeks to be involved with every step of the consumer product
life cycle- from ideation, to research and development, manufacturing, sales, packaging and fulfillment. The Company also seeks
to raise awareness of the Edison Nation brand name as a diversified consumer products business through a number of media channels.
As
of March 31, 2020, Edison Nation, Inc. had six wholly-owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Scalematix,
LLC (“Scalematix”), Ferguson Containers, Inc. (“Fergco”), CBAV1, LLC (“CB1”), Pirasta, LLC
(“Pirasta”) and Edison Nation Holdings, LLC. Edison Nation, Inc. owns 50% of Best Party Concepts, LLC. Edison Nation
Holdings, LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single member of
Safe TV Shop, LLC.
COVID-19
COVID-19
has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of
activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease,
and through business and transportation shutdowns and restrictions on people’s movement and congregation.
As
a result of the pandemic, we have experienced, and continue to experience, weakened demand for our traditional products. Many
of our customers have been unable to sell our products in their stores and theme parks due to government-mandated closures and
have deferred or significantly reduced orders for our products. We expect these trends to continue until such closures are significantly
curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where our products are sold that remain
open, and the global economic impact of the pandemic has temporarily reduced consumer demand for our products as they focus on
purchasing essential goods.
In
the United States and Asia, many of our key accounts remain closed or are operating at significantly reduced volumes. As a result,
we have made the strategic decision to expand our operations through our Edison Nation Medical (“Ed Med”) division.
Through Ed Med, the Company wholesales Personal Protective Equipment (“PPE”) products through an online portal for
hospitals, government agencies and distributors.
Given
these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in fiscal 2020 occurred in the first
quarter of 2020 and resulted in a net sales decline as compared to the first quarter of 2019.
In
addition, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19. As a
result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results. Even if
we are able to find alternate sources for such products, they may cost more and cause delays in our supply chain, which could
adversely impact our profitability and financial condition.
We
have taken actions to protect our employees in response to the pandemic, including closing our corporate offices and requiring
our office employees to work from home. At our distribution centers, certain practices are in effect to safeguard workers, including
a staggered work schedule, and we are continuing to monitor direction from local and national governments carefully. Additionally,
our two retail locations have been closed until further notice.
As
a result of the impact of COVID-19 on our financial results, and the anticipated future impact of the pandemic, we have implemented
cost control measures and cash management actions, including:
●
Furloughing a significant portion of our employees; and
●
Implementing 20% salary reductions across our executive team and other members of upper level management; and
●
Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and
●
Proactively managing working capital, including reducing incoming inventory to align with anticipated sales.
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations are based on our consolidated
financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States
of America, or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date
of the consolidated financial statements as well as the reported expenses during the reporting periods. The accounting estimates
that require our most significant, difficult and subjective judgments have an impact on revenue recognition, the determination
of share-based compensation and financial instruments. We evaluate our estimates and judgments on an ongoing basis. Actual results
may differ materially from these estimates under different assumptions or conditions.
Our
significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere
in this prospectus
Components
of our Results of Operations
Revenues
We
sell consumer products across a variety of categories, including toys, plush, homewares and electronics, to retailers, distributors
and manufacturers. We also sell consumer products directly to consumers through e-commerce channels.
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.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses consist of selling, marketing, advertising, payroll, administrative, finance and professional
expenses.
Rental
Income
We
earn rental income from a month-to-month lease on a portion of the building located in Washington, New Jersey that we own.
Interest
Expense, Net
Interest
expense includes the cost of our borrowings under our debt arrangements.
Results
of Operation for the three months ended March 31, 2020 versus March 31, 2019
The
following table sets forth information comparing the components of net loss for the three months ended March 31, 2020
and 2019:
|
|
Three
Months Ended March 31,
|
|
|
Period
over Period Change
|
|
|
|
2020
|
|
|
2019
|
|
|
$
|
|
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
3,667,110
|
|
|
$
|
5,738,534
|
|
|
$
|
(2,071,424
|
)
|
|
|
-36.10
|
%
|
Cost of revenues
|
|
|
2,418,412
|
|
|
|
3,945,558
|
|
|
|
(1,527,146
|
)
|
|
|
-38.71
|
%
|
Gross
profit
|
|
|
1,248,698
|
|
|
|
1,792,976
|
|
|
|
(544,278
|
)
|
|
|
-30.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
4,192,713
|
|
|
|
3,049,188
|
|
|
|
1,143,525
|
|
|
|
37.50
|
%
|
Operating loss
|
|
|
(2,944,015
|
)
|
|
|
(1,256,212
|
)
|
|
|
1,687,803
|
|
|
|
134.36
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense)
income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
25,704
|
|
|
|
25,704
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Interest expense
|
|
|
(723,957
|
)
|
|
|
(124,694
|
)
|
|
|
(599,263
|
)
|
|
|
480.59
|
%
|
Other
income
|
|
|
4,911,760
|
|
|
|
-
|
|
|
|
4,911,760
|
|
|
|
100.00
|
%
|
Total
other income (expense)
|
|
|
4,213,507
|
|
|
|
(98,990
|
)
|
|
|
4,312,497
|
|
|
|
4,356.50
|
%
|
Income
(loss) before income taxes
|
|
|
1,269,492
|
|
|
|
(1,355,202
|
)
|
|
|
2,624,694
|
|
|
|
193.68
|
%
|
Income tax
expense
|
|
|
-
|
|
|
|
23,195
|
|
|
|
(23,195
|
)
|
|
|
-100.00
|
%
|
Net
income (loss)
|
|
|
1,269,492
|
|
|
|
(1,378,397
|
)
|
|
|
2,647,889
|
|
|
|
192.10
|
%
|
Net
(loss) income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
56,893
|
|
|
|
(56,893
|
)
|
|
|
-100.00
|
%
|
Net
income (loss) attributable to Edison Nation, Inc.
|
|
$
|
1,269,492
|
|
|
$
|
(1,435,290
|
)
|
|
$
|
2,704,782
|
|
|
|
188.45
|
%
|
Revenue
For the three months ended March 31, 2020,
revenues decreased by $2,071,424 or 36.10%, as compared to the three months ended March 31, 2019. The decrease was primarily the
result of decrease in business operations due to the COVID-19 pandemic in China and the US. The full impact of the COVID-19 outbreak
to the Company’s operations remains uncertain. Some of our larger customers, such as amusement parks remain closed or operating
in a limited capacity. After operating at lower than planned production levels during most of the first quarter due to COVID-19,
the Company’s third-party manufacturing facilities in China are currently operating at planned capacity for this time of year.
Manufacturing and warehouse partners outside of China are operating at varying levels of productivity depending on local government
and safety considerations, with some markets operating at lower than normal production levels while other facilities have been
closed entirely. The COVID-19 situation continues to be fluid, but we currently expect all manufacturing facilities to reopen
in the second quarter, based upon our understanding of local governments directions at this time.
Cost of Revenues
For the three months ended March 31, 2020,
cost of revenues decreased by $1,527,146 or 38.71%, as compared to the three months ended March 31, 2019. The decrease was primarily
attributable to the decrease in total consolidated revenues.
Gross Profit
For the three months ended March 31, 2020,
gross profit decreased by $544,278, or 30.36%, as compared to the three months ended March 31, 2019. The decrease was primarily
a result of the decrease in revenues. For the three months ended March 31, 2020, gross margin increased to 34.05%, as compared
to 31.24% for the three months ended March 31, 2019. The increase in gross margin was due to product mix of goods sold to customers
through our Ed Roses business and our Cloud B branded products
Operating Expenses
Selling, general and administrative expenses
were $4,192,713 and $3,049,188 for the three months ended March 31, 2020 and 2019, respectively, representing an increase of $1,143,525,
or 37.50%. The increase was primarily the result of an increase in stock-based compensation of approximately $1,100,000, selling
fees related to Amazon of approximately $250,000 of selling expenses offset by a reduction in investor relations expense of approximately
$150,000.
Rental Income
Rental
income was $25,704 for both the three months ended March 31, 2020 and 2019.
Interest expense
Interest
expense was $723,957 for the three months ended March 31, 2020 versus $124,694 in the previous three months ended March 31, 2019.
The increase in interest expense was related to increased borrowings of debt during 2019.
Income tax expense
Income
tax expense was $0 for the three months ended March 31, 2020, a decrease of $23,195 or 100.00%, compared to an expense of $23,195
for the three months ended March 31, 2019. The decrease was primarily due to the decrease in income from our foreign operations
with no offset for income in the United States.
Non-GAAP Measures
In addition to the required GAAP presentations,
we use certain non-GAAP performance measures as we believe these measures improve the understanding of our operational results.
We continually evaluate the usefulness, relevance, limitations, and calculation of our reported non-GAAP performance measures to
determine how best to provide relevant information to the public and thus such reported measures could change.
EBITDA
and Adjusted EBITDA
The
Company defines EBITDA as net loss before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA
as EBITDA, further adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in
our evaluation of our ongoing operating performance from period to period. These items will include stock-based compensation,
restructuring and severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains that the
Company does not believe reflects the underlying business performance.
For the three months ended March 31, 2020
and 2019, EBITDA and Adjusted EBITDA consisted of the following:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Net income (loss)
|
|
$
|
1,269,492
|
|
|
$
|
(1,378,397
|
)
|
Interest expense, net
|
|
|
723,957
|
|
|
|
124,696
|
|
Income tax gain (expense)
|
|
|
|
|
|
|
23,195
|
|
Depreciation and amortization
|
|
|
316,298
|
|
|
|
301,383
|
|
EBITDA
|
|
|
2,309,747
|
|
|
|
(929,123
|
)
|
Stock-based compensation
|
|
|
1,319,511
|
|
|
|
309,919
|
|
Other non-cash stock-based charges
|
|
|
-
|
|
|
|
52,500
|
|
Restructuring and severance costs
|
|
|
242,136
|
|
|
|
36,385
|
|
Transaction and acquisition costs
|
|
|
82,736
|
|
|
|
223,538
|
|
Other non-recurring costs
|
|
|
40,860
|
|
|
|
104,174
|
|
Gain on divestiture
|
|
|
(4,911,760
|
)
|
|
|
-
|
|
Adjusted EBITDA
|
|
$
|
(916,770
|
)
|
|
$
|
(202,607
|
)
|
EBITDA
and Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). Management believes that because Adjusted EBITDA excludes (a) certain
non-cash expenses (such as depreciation, amortization and stock-based compensation) and (b) expenses that are not reflective
of the Company’s core operating results over time (such as restructuring costs, litigation or dispute settlement charges
or gains, and transaction-related costs), this measure provides investors with additional useful information to measure the Company’s
financial performance, particularly with respect to changes in performance from period to period. The Company’s management
uses EBITDA and Adjusted EBITDA (a) as a measure of operating performance, (b) for planning and forecasting in future periods,
and (c) in communications with the Company’s board of directors concerning the Company’s financial performance. The
Company’s presentation of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of
other companies due to different methods of calculation and should not be used by investors as a substitute or alternative to
net income or any measure of financial performance calculated and presented in accordance with U.S. GAAP. Instead, management
believes EBITDA and Adjusted EBITDA should be used to supplement the Company’s financial measures derived in accordance
with U.S. GAAP to provide a more complete understanding of the trends affecting the business.
Although
Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has
limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for, or more meaningful
than, amounts determined in accordance with U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical tool
are (a) they do not reflect the Company’s interest income and expense, or the requirements necessary to service interest
or principal payments on the Company’s debt, (b) they do not reflect future requirements for capital expenditures or contractual
commitments, and (c) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized
will often have to be replaced in the future, and non-GAAP measures do not reflect any cash requirements for such replacements.
Results
of Operation for the years ended December 31, 2019 versus December 31, 2018
The
following table sets forth information comparing the components of net loss for the years ended December 31, 2019 and 2018:
|
|
Years Ended December 31,
|
|
|
Period over Period Change
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Revenues, net
|
|
$
|
19,629,062
|
|
|
$
|
16,502,209
|
|
|
$
|
3,126,853
|
|
|
|
18.95
|
%
|
Cost of revenues
|
|
|
12,822,450
|
|
|
|
11,425,619
|
|
|
|
1,396,831
|
|
|
|
12.23
|
%
|
Gross profit
|
|
|
6,806,612
|
|
|
|
5,076,590
|
|
|
|
1,730,022
|
|
|
|
34.08
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
15,909,840
|
|
|
|
9,718,286
|
|
|
|
6,191,554
|
|
|
|
63.71
|
%
|
Impairment
|
|
|
4,443,000
|
|
|
|
-
|
|
|
|
4,443,000
|
|
|
|
100.00
|
%
|
Gain on change in fair value of earnout liability
|
|
|
(520,000
|
)
|
|
|
-
|
|
|
|
(520,000
|
)
|
|
|
-100.00
|
%
|
Total operating expenses
|
|
|
19,832,840
|
|
|
|
9,718,286
|
|
|
|
10,114,554
|
|
|
|
104.08
|
%
|
Operating (loss) income
|
|
|
(13,026,228
|
)
|
|
|
(4,641,696
|
)
|
|
|
(8,384,532
|
)
|
|
|
180.64
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
102,815
|
|
|
|
102,815
|
|
|
|
-
|
|
|
|
0.00
|
%
|
Interest expense
|
|
|
(1,298,168
|
)
|
|
|
(501,221
|
)
|
|
|
(796,947
|
)
|
|
|
159.00
|
%
|
Other income
|
|
|
3,054
|
|
|
|
-
|
|
|
|
3,054
|
|
|
|
100.00
|
%
|
Total other (expense) income
|
|
|
(1,192,299
|
)
|
|
|
(398,406
|
)
|
|
|
(793,893
|
)
|
|
|
199.27
|
%
|
(Loss) income before income taxes
|
|
|
(14,218,527
|
)
|
|
|
(5,040,102
|
)
|
|
|
(9,178,425
|
)
|
|
|
182.11
|
%
|
Income tax (benefit) expense
|
|
|
(19,547
|
)
|
|
|
303,915
|
|
|
|
323,462
|
|
|
|
106.43
|
%
|
Net loss
|
|
$
|
(14,198,980
|
)
|
|
$
|
(5,344,017
|
)
|
|
$
|
(8,854,963
|
)
|
|
|
165.70
|
%
|
Net loss attributable to noncontrolling
interests
|
|
$
|
(1,269,274
|
)
|
|
$
|
(13,891
|
)
|
|
$
|
(1,255,383
|
)
|
|
|
9,037.38
|
%
|
Net loss attributable to Edison
Nation, Inc.
|
|
$
|
(12,929,706
|
)
|
|
$
|
(5,330,126
|
)
|
|
$
|
(7,599,580
|
)
|
|
|
142.58
|
%
|
Revenue
For
the year ended December 31, 2019, revenues increased by $3,126,853 or 18.95%, as compared to the year ended December 31, 2018.
The increase was primarily attributable to new business in connection with our acquisitions in 2018. The increase includes licensing
related revenues of approximately $176,000 related to our acquisition of Edison Nation Holdings, LLC and product revenues of approximately
$3,578,000 related to our acquisition of Cloud B, Inc.
Cost
of Revenues
For
the year ended December 31, 2019, cost of revenues increased by $1,396,831 or 12.23%, as compared to the year ended December 31,
2018. The increase was primarily attributable to the increase in total consolidated revenues. The percentage increase of cost
of revenues as compared to the revenue increase was lower due to higher margins on our licensing related revenues and Cloud B
branded product revenues.
Gross
Profit
For
the year ended December 31, 2019, gross profit increased by $1,730,022, or 34.08%, as compared to the year ended December 31,
2018. The increase was primarily a result of the increase in revenues and increased margins due to sales of Cloud B products with
higher product margins.
Operating
Expenses
Selling,
general and administrative expenses were $15,909,840 and $9,718,065 for the year ended December 31, 2019 and 2018, respectively,
representing an increase of $6,191,554, or 63.71%. The increase was primarily attributable to payroll and related costs of $1,905,342,
travel of $219,793, freight and postage of 191,364, depreciation and amortization of 846,925, professional fees of $2,005,757,
rent expense of $231,508, computer and internet expenses of 90,269, marketing and advertising of $144,886, insurance of $51,505,
selling expense of $885,338 and trade show expense of $100,290. The expense was offset by a decrease in stock-based compensation
expense of $1,172,773.
Impairment
Impairment
charges of $4,443,000 relate to an impairment charge related to our annual impairment assessment. The amount recognized for impairment
is equal to the difference between the carrying value and the asset’s fair value. The impairment was a result of decreased
profitability as compared to anticipated profitability in our businesses acquired in 2018.
Gain
on Change in Fair Value of Earnout
A
gain of $520,000 was recognized related to a change in fair value of the earnout liability. The decrease in the earnout is related
to decreased revenues as compared to anticipated revenues in our Cloud B business in 2019 and going forward.
Rental
Income
Rental
income was $102,815 for both the years ended December 31, 2019 and 2018.
Interest
expense
Interest
expense was $1,298,168 for the year ended December 31, 2019 versus $501,221 in the previous year ended December 31, 2018. The
increase in interest expense was related to increased borrowings of debt during 2019.
Income
tax expense
Income
tax benefit was $19,547 for the year ended December 31, 2019, an increase of $323,462 or 106.43%, compared to an expense of $303,915
for the year ended December 31, 2018. The change from expense to benefit was primarily due to losses in our foreign operations
in fiscal 2019.
Non-GAAP
Measures
EBITDA
and Adjusted EBITDA
The
Company defines EBITDA as net loss before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA
as EBITDA, further adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in
our evaluation of our ongoing operating performance from period to period. These items will include stock-based compensation,
restructuring and severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains that the
Company does not believe reflects the underlying business performance.
For
the years ended December 31, 2019 and 2018, EBITDA and Adjusted EBITDA consisted of the following:
|
|
For
the Years Ended
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Net (loss) income
|
|
$
|
(14,198,980
|
)
|
|
$
|
(5,344,017
|
)
|
Interest expense, net
|
|
|
1,298,168
|
|
|
|
501,221
|
|
Income tax (benefit) expense
|
|
|
(19,547
|
)
|
|
|
303,915
|
|
Depreciation and amortization
|
|
|
1,321,186
|
|
|
|
487,878
|
|
EBITDA
|
|
|
(11,599,173
|
)
|
|
|
(4,050,990
|
)
|
Stock-based compensation
|
|
|
2,299,915
|
|
|
|
2,025,994
|
|
Other noncash stock-based charges
|
|
|
-
|
|
|
|
1,222,172
|
|
Impairment
|
|
|
4,443,000
|
|
|
|
-
|
|
Restructuring and severance costs
|
|
|
446,114
|
|
|
|
148,167
|
|
Transaction and acquisition costs
|
|
|
447,908
|
|
|
|
689,103
|
|
Other non-recurring costs
|
|
|
1,520,777
|
|
|
|
62,686
|
|
Adjusted EBITDA
|
|
$
|
(2,441,459
|
)
|
|
$
|
97,132
|
|
EBITDA
and Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”). Management believes that because Adjusted EBITDA excludes (a) certain
non-cash expenses (such as depreciation, amortization and stock-based compensation) and (b) expenses that are not reflective of
the Company’s core operating results over time (such as restructuring costs, litigation or dispute settlement charges or
gains, and transaction-related costs), this measure provides investors with additional useful information to measure the Company’s
financial performance, particularly with respect to changes in performance from period to period. The Company’s management
uses EBITDA and Adjusted EBITDA (a) as a measure of operating performance, (b) for planning and forecasting in future periods,
and (c) in communications with the Company’s board of directors concerning the Company’s financial performance. The
Company’s presentation of EBITDA and Adjusted EBITDA are not necessarily comparable to other similarly titled captions of
other companies due to different methods of calculation and should not be used by investors as a substitute or alternative to
net income or any measure of financial performance calculated and presented in accordance with U.S. GAAP. Instead, management
believes EBITDA and Adjusted EBITDA should be used to supplement the Company’s financial measures derived in accordance
with U.S. GAAP to provide a more complete understanding of the trends affecting the business.
Although
Adjusted EBITDA is frequently used by investors and securities analysts in their evaluations of companies, Adjusted EBITDA has
limitations as an analytical tool, and investors should not consider it in isolation or as a substitute for, or more meaningful
than, amounts determined in accordance with U.S. GAAP. Some of the limitations to using non-GAAP measures as an analytical tool
are (a) they do not reflect the Company’s interest income and expense, or the requirements necessary to service interest
or principal payments on the Company’s debt, (b) they do not reflect future requirements for capital expenditures or contractual
commitments, and (c) although depreciation and amortization charges are non-cash charges, the assets being depreciated and amortized
will often have to be replaced in the future, and non-GAAP measures do not reflect any cash requirements for such replacements.
Liquidity
and Capital Resources
On May 2, 2018, we completed our IPO raising
$6,562,600 in gross proceeds. The Company received approximately $5,315,176 in net proceeds after deducting discounts and commissions
and other offering expenses.
For the year ended December 31, 2019, our
operations lost approximately $13,026,228 of which approximately $8,064,101 was non-cash and approximately $364,320 related to
transaction costs and non-recurring items. For the three months ended March 31, 2020, our operations lost approximately $2,900,000,
of which approximately $2,284,000 was non-cash and approximately $366,000 was related to transaction costs and other non-recurring
items.
At December 31, 2019, we had total current
assets of $4,955,365 and current liabilities of $12,973,319 resulting in negative working capital of $8,017,954, of which approximately
$4,015,484 related to unsecured trade payables assumed in our Cloud B acquisition. In February 2019, our consolidating subsidiary,
CBAV1, LLC, foreclosed on its promissory note it held that was secured by Cloud B, Inc.’s assets making any payments of
the Cloud B trade payables unlikely. At December 31, 2019, we had total assets of $23,609,619 and total liabilities of $16,155,187
resulting in stockholders’ equity of $7,454,432.
At March 31, 2020, we had
total current assets of approximately $4,907,818 and current liabilities of approximately $8,899,487 resulting in negative working
capital of approximately $3,991,669, of which $1,118,751 was related party notes payable and $530,815 was included in accrued
expenses for unissued shares. At March 31, 2020, we had total assets of $23,199,868 and total liabilities of $11,970,547 resulting
in stockholders’ equity of $11,229,321.
At December 31, 2019 and March 31, 2020, we had $3,282,021 and $2,667,513
of outstanding notes payable due to our related parties of which $1,686,352 and $1,118,751 was the current portion, respectively.
These notes arose as part of the consideration paid in our acquisition of SRM, Fergco and Edison Nation.
At December 31, 2019 and March 31, 2020,
we had a cash and cash equivalents balance of $412,719 and $532,062, respectively. The Company believes that the funds available
to it are adequate to meet its working capital needs, debt service and capital requirements for the next 12 months from the date
of this filing.
Management has considered possible mitigating
factors within our management plan on our ability to continue for at least a year from the date these financial statements are
filed. The following items are management plans to alleviate any going concern issues:
|
●
|
Subsequent to March 31, 2020, the Company raised $1,089,853
through loan agreements.
|
|
|
|
|
●
|
Raise further capital through the sale of addition equity.
|
|
|
|
|
●
|
Borrow money under debt securities.
|
|
|
|
|
●
|
The deferral of payments to related party debt holders for
both principal of $1,118,751 and related interest expense.
|
|
|
|
|
●
|
Annual cost saving initiatives related to synergies and the
elimination of redundant costs of approximately $1,500,000.
|
|
|
|
|
●
|
Possible sale of certain brands to other manufacturers.
|
|
|
|
|
●
|
Edison Nation Medical’s procurement of Personal Protective
Equipment (“PPE”) and subsequent sale to governmental agencies, educational facilities, medical facilities and
distributors.
|
|
|
|
|
●
|
Entry into joint ventures or total/partial acquisitions of
operational entities to expand the sale of PPE through Edison Nation Medical
|
Our operating needs include the planned
costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital
requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize
our products and services, competing technological and market developments, and the need to enter into collaborations with other
companies or acquire other companies or technologies to enhance or complement our product and service offerings.
Cash Flows
During the years ended December 31, 2019
and 2018 and three months ended March 31, 2020, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
Net cash used in operating activities for
the year ended December 31, 2019 was $5,036,455, which included a net loss of $14,198,980 that included $334,929 of cash provided
by changes in operating assets and liabilities which was offset by stock-based compensation of $2,229,915, depreciation and amortization
of $1,316,501 and amortization of debt issuance costs of $944,437.
Net cash used in operating activities for
the year ended December 31, 2018 was $2,776,003, which included a net loss of $5,344,017, that included $1,512,500 of cash used
by changes in operating assets and liabilities which was offset by stock-based compensation of $3,386,494, depreciation and amortization
of $487,878 and amortization of debt issuance costs of $300,277.
Net cash used in operating activities for
the three months ended March 31, 2020 was $1,153,505 which included net income of $1,269,492 that included $204,493 of cash provided
by changes in operating assets and liabilities, stock-based compensation of $1,319,511, depreciation and amortization of $316,299,
amortization of financing costs of $570,636 and amortization of right of use assets of $77,823 which was offset by a gain on divestiture
of a subsidiary of $4,911,760.
Cash Flows from Investing Activities
Net cash used in investing activities was
$159,938, $1,414,021 and $31,918 for the years ended December 31, 2019, December 31, 2018 and three months ended March 31, 2020,
respectively. Cash used in investing activities was attributable the purchase of property and equipment.
Cash Flows from Financing Activities
Cash provided by financing activities for the year ended December
31, 2019 totaled $3,556,381, which related mostly to borrowings from notes payable.
Cash provided by financing activities for the year ended December
31, 2018 was $5,685,487, which related mostly to cash received of $5,315,176 from net proceeds from the Company’s initial
public offering and net borrowings of $469,755 under our debt instruments.
Cash provided by financing activities for
the three months ended March 31, 2020 totaled $1,304,766 which related mostly to borrowings under convertible notes and borrowings
under notes payable.
Off-Balance Sheet Arrangements
We
did not have, during the periods presented, and we do not currently have, any relationships with any organizations or financial
partnerships, such as structured finance or special purpose entities, that would have been established for the purpose of facilitating
off-balance sheet arrangements or other contractually narrow or limited purposes.
Critical
Accounting Policies and Significant Judgments and Estimates
Our
management’s discussion and analysis of our financial condition and results of operations are based on our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States, or GAAP. The preparation
of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingent assets and liabilities as of the date of the financial statements as well as the reported expenses
during the reporting periods. The accounting estimates that require our most significant, difficult, and subjective judgments
have an impact on revenue recognition, the determination of share-based compensation, and financial instruments. We evaluate our
estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions
or conditions.
Our significant accounting policies are
more fully described in Note 2 to our annual financial statements included elsewhere in this registration statement.
Changes
in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
BUSINESS
Overview
Formed
in July 2017 under the laws of the State of Nevada, Edison Nation, Inc. seeks to be involved with every step of the consumer product
life cycle- from ideation, to research and development, manufacturing, sales, packaging and fulfillment. The Company also seeks
to raise awareness of the Edison Nation brand name as a diversified consumer products business through a number of media channels.
The
first stage of development for any consumer product is the impetus to turn an idea into a salable commodity. Considered to be
the “go-to” resource for independent innovators with great consumer product invention ideas, Edison Nation maintains
a consumer-facing online presence whereby innovators can submit ideas for consideration by us. If an idea is successfully chosen,
Edison Nation will apply its proprietary, web-enabled new product development (“NPD”) and commercialization platform
that can take a product from idea through e-commerce final sale in a matter of months versus a year or more for capital intensive
and inefficient new product development protocols traditionally used by legacy manufacturers serving “big box” retailers.
Edison Nation presently engages with over 180,000 registered online innovators and entrepreneurs interested in accessing the Company’s
NPD platform to bring innovative, new products to market focusing on high-interest, high-velocity consumer categories. The Company
generates revenue from its web presence by charging a fee for each idea submission, and also through subscription-based plans
for innovators that wish to submit high volumes of ideas.
Since
its inception, Edison Nation has received over 200,000 idea submissions, with products selling in excess of $250 million at retail
through the management of over 300 client product campaigns with distribution across diverse channels including e-commerce, mass
merchandisers, specialty product chains, entertainment venues, national drug chains, and tele-shopping. These clients include
many of the largest manufacturers and retailers in the world including Amazon, Bed Bath and Beyond, HSN, Rite Aid, P&G, and
Black & Decker. The Company generates revenue from licensing agreements with such manufacturers and retailers, which such
agreements are entered into when innovators submit their ideas through Edison Nation’s web portal. Occasionally, the Company
also generates revenue from innovators that wish to use the Company’s product development resources, but license or distribute
products themselves.
Edison
Nation has a number of internally developed brands “EN Brands” which act as a launchpad for new innovative items that
have matriculated through the innovation portal. These EN Brands include Cloud B, Pirasta, Uber Mom, Best Party Concepts, Lily
and Grey, Sol and Salud, Trillion Trees, Eco Quest, Smarter Specs, Barkley Lane, and Ngenious Fun. Additionally, the Company offers
a partnership model for entrepreneurs and businesses that are seeking to elevate their existing brands. Recent partnerships for
Edison Nation include 4Keeps Roses and Mother K. Within the partnership model, the Company seeks to identify new lines of distribution
and provide innovation through development of new item that enhance the brands overall image and consumer adoption,
In
addition to developing products for its EN Brands, the Company develops and manufactures products for well-known brands in the
entertainment and theme park industry. For over 20 years, the Company has developed, manufactured and supplied the entertainment
and amusement park industry with exclusive products that are often only available to consumers inside venues such as Disney Parks
and Resorts, Disney Stores, Universal Resorts, Sea World, Sesame Place, Busch Gardens, Merlin Entertainment and Madison Square
Garden. For the customers listed above, The Company has developed products for core brands such as Harry Potter, Frozen, Marvel,
and Star Wars.
Once
most consumer products are ideated, developed, manufactured, and possibly even licensed, they must be packaged and distributed.
Therefore, we lease a packaging and logistics center in Alpha, New Jersey. The Company generates revenue from the sale of custom
packaging for many of the products that have run through our NPD or in-house product development process. The Company also sells
packaging products to a number of other entities that are not related to the Company’s product development process, including
pharmaceutical and e-commerce companies. When packaging of products is complete, we typically ship products using our own trucks
rather than relying on a common carrier. For packaging products, the Company does not have long-term agreements with customers,
and instead manufactures and sells its packaging products subject to purchase orders from its customers.
Once
a product is ready for distribution, consumer awareness must be raised in order to the sell the product. Accordingly, the Company
has begun to pursue a three-prong media strategy. First, the Company is seeking to re-release episodes of the ‘Everyday
Edisons’ television program, while simultaneously seeking a distribution partner for forthcoming episodes. The Company intends
to generate revenue from the Everyday Edisons brand by entering into a contract with a broadcast network or online streaming service.
Second, the Company is developing a proprietary e-learning platform. The Company intends to generate revenue from the e-learning
platform through the sale of subscription-based plans. Third, the Company is seeking to expand its web presence by acquiring or
creating other innovator-facing internet media properties. The Company intends to generate revenue from such internet media through
the display of paid advertisements on its properties.
Market
Strategy
The
process for developing and launching consumer products has changed significantly in recent years. Previously, Fortune 500 and
other companies maintained multimillion-dollar research and development divisions to develop and launch products to be sold primarily
on retail shelves and supported by large television and print advertising investment. The emergence of e-commerce giants, including
Amazon.com, has caused retail shelf space to no longer be a requirement to launch a new product. Crowdfunding sites like Kickstarter
enable solo entrepreneurs to inexpensively produce an advertising video and quickly introduce a new product to many millions of
potential customers, and to quickly gain those customers for a low cost of acquisition relative to the cost and time required
in prior years as expensive advertising investment is no longer required to gain market awareness. For example, according to Statista.com,
crowdfunded sales of products will exceed $18.9 billion in 2021. The consumer shift away from brick and mortar retailers toward
e-commerce has resulted in the bankruptcy or downsizing of many iconic retailers which sold toys, including Toys R Us, Sears,
Kmart, and K-B Toys, with the resultant loss in shelf space and available locations helping to drive our market opportunity. By
utilizing the opportunities to market products over the internet, rather than through traditional, commercial channels, we believe
we can reach a much broader market for our brands and products.
Leveraging
Evolving Market Opportunities for Growth
The
Company believes that its anticipated growth will be driven by five macroeconomic factors:
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The
significant growth of ecommerce (14% compound annual growth rate, estimated to reach
$4.9 trillion by 2021 (eMarketer 2018));
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The
increasing velocity of “brick and mortar” retail closures, now surpassing
Great Recession levels (Cushman & Wakefield/Moody’s Analytics 2018);
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Product
innovation and immediate delivery gratification driving consumer desire for next-generation
products with distinctive sets of features and benefits without a reliance on brand awareness
and familiarity;
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The
marriage of media-based entertainment and consumer goods
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The
rapid adoption of crowdsourcing to expedite successful new product launches; and
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The
opportunity to market products over the internet and television, rather than through
traditional, commercial channels, to reach a much broader, higher qualified target market
for brands, and products.
|
In
addition, we intend to acquire more small brands that have achieved approximately $1 million in retail sales over the trailing
twelve-month period with a track record of generating free cash flow. By leveraging our expertise in helping companies launch
thousands of new products and our ability to create unique, customized packaging, we will seek to elevate the value of these acquired
brands by improving each part of their launch process, based on our own marketing methodologies.
We
believe our acquisition strategy will allow us to acquire small brands using a combination of shares of our common stock, cash
and other consideration, such as earn-outs. We intend to use our acquisition strategy in order to acquire up to ten or more small
brands per year for the next three years. In situations where we deem that a brand is not a “fit” for acquisition
or partnership, we may provide the brand with certain manufacturing or consulting services that will assist the brand to achieve
its goals.
One
example of a brand that we have recently acquired is Cloud B, Inc. (“Cloud B”), a leading manufacturer of products
and accessories that help parents and children sleep better. Cloud B distributes its products nationally and in over 100 countries
worldwide.
Founded
in 2002 and acquired by Edison Nation in October 2018, Cloud B’s highly regarded, award-winning products are developed in
consultation with an advisory board of pediatricians and specialists. Cloud B recently won the Toy of the Year award from The
Toy Association. Cloud B’s best-known products are Twilight Turtle™ and Sleep Sheep™.
Cloud
B’s products can be purchased online (through its own e-commerce site and other online retailers), in specialty boutiques,
gift stores, and worldwide at major retailers including Barnes & Noble, Bloomingdale’s, Dillard’s, Nordstrom,
Von Maur, Harrods, and Fnac in France.
Immediate
synergies include expanding Edison Nation’s West Coast footprint by leveraging Cloud B’s sizable distribution, sales
and fulfillment operations. The initial focus for Cloud B has been to optimize existing product performance while helping to develop
new product lines leveraging the Edison Nation NPD platform. In addition, Cloud B is leveraging Edison Nation’s Hong Kong-based
manufacturer sourcing and management capabilities, as well as the Company’s marketing and packaging resources.
Business
One
Company Initiative
During
the first quarter of 2019, the Company began the process of consolidating all of its operating companies into distinct business
units, which allows the Company to focus on growing sales and leveraging operations. The units consist of:
●
Innovate. The Edison Nation New Product Development (“NPD”) platform helps inventors go from idea to reality.
This is accomplished by optimizing the Company’s new product election process through deeper analytics to predict success
on platforms like crowdfunding and web marketplaces like Amazon. The Company drives brand awareness of the platform by producing
content for inventors and innovators on media platforms including our own Everyday Edison’s television show.
●
Build and Launch. Distributed by geography, industry skillset and expertise in the development process to ensure efficient
product build and launch our teams of product designers and developers take the product from the concept to the consumers hand.
The bulk of the Company’s operations are part of this business unit, and the Company will continue to develop this unit
to meet the needs of our product launch schedule.
●
Sell. Our omni-channel sales effort is divided into three groups: (1) business-to-business revenue opportunities including
traditional brick and mortar retailers, (2) online market places and direct-to-consumer revenue opportunities, and (3) our NiTRO
Team (Near Term Revenue Opportunities). NiTRO, identifies brands and products lines that would benefit from being part of Edison
Nation.
Innovate:
The Edison Nation New Product Development & Commercialization Platform
New
product ideas have little value without the ability and skill required to commercialize them. The considerable investment and
executional “know how” needed to initiate a process - from idea to product distribution - has always been a challenge
for the individual innovator. Edison Nation’s web presence is designed to take advantage of online marketplace and crowdfunding
momentum for our future growth mitigating new product development risk while allowing for optimized product monetization based
on a product’s likelihood to succeed. To that end, Edison Nation empowers and enables innovators and entrepreneurs to develop
and launch products, gain consumer adoption and achieve commercial scale efficiently at little to no cost.
The
cornerstone of Edison Nation’s competitive advantage is its NPD platform, which is designed to optimize product licensing
and commercialization through best-in-class digital technologies, sourcing / manufacturing expertise and one of the largest sets
of go-to-market solutions. The NPD platform can take a product from idea through ecommerce final sale in a matter of months versus
a year or more for capital intensive and inefficient new product development protocols traditionally used by legacy manufacturers
serving “big box” retailers.
Product
Submission Aggregation
Interested
innovators enter the Edison Nation web site to register for a free account by providing one’s name and email address. The
member then creates a username and password to use on the site. Once registered, the member is provided with their own unique,
password protected dashboard by which they can begin submitting ideas and join online member forums to learn about industry trends,
common questions, engage in member chats, and stay informed of the latest happenings at Edison Nation. They can also track the
review progress of ideas they submit through their dashboard.
Edison
Nation accepts ideas through a secure online submission process. Once a member explores the active searches in different product
categories being run on the platform for potential licensees seeking new product ideas to be commercialized, the member can submit
their new product ideas for processing. Edison Nation regularly works with different companies and retailers in various product
categories to help them find new product ideas.
Registered
members pay $25 to submit an idea. This submission fee covers a portion of the cost to review each idea submitted to the platform.
There are no additional fees after the submission fee.
Although
the platform might not have an active search that matches the innovator’s idea, the Edison Nation Licensing Team hosts an
ongoing search for new consumer product ideas in all categories.
“Insider
Membership” is Edison Nation’s premium level of membership. Insiders receive feedback on all their ideas submitted
and gain access to online features that aren’t available to registered members. In addition, Insiders pay $20 for each idea submitted
(20% discount vs. a registered member), can opt-in ideas for free, as well as receive other benefits. An annual membership costs
$99, or $9.25 / month automatically debited from a credit card each month. Also included online is feedback to the innovator on
the status of each stage of the process and notification when ideas are not selected to move forward during any stage in the review
process.
Insiders
also have access to the Insider Licensing Program (the “ILP”). The primary benefit of the ILP is having the Edison
Nation Licensing Team working directly on an innovator’s behalf to help secure a licensing agreement with one of the company’s
manufacturing partners. If an idea is selected for commercialization by a retail partner, Edison Nation will invest in any necessary
patent applications, filings and maintenance. The innovator’s name is included on any patent or patent application that
Edison Nation files on the member’s behalf after the idea has been selected.
In
addition to the above member programs, Edison Nation ASOTV (“As Seen on TV”) Team hosts a search for new products
suitable for marketing via DRTV (“Direct Response TV”) and subsequent distribution in national retail chains
including mass merchandisers, specialty retail, drug chains and department stores.
Product
Submission Review
Led
by the Company’s Licensing Team (which has over 150 years of combined experience in a variety of industries and product
categories), all ideas submitted by innovators through the Company’s website are reviewed and assessed through an 8-stage
process. Edison Nation’s product idea review process is confidential with non-disclosure agreements executed with every
participating registered or “Insider” member.
The
NPD platform’s database of over 85,000 product ideas helps determine which inventions have a substantial market opportunity
quickly through proprietary algorithms that have been developed incorporating continuous learning from marketplace experience
and changes in category requirements.
Selected
ideas are assessed by the Licensing Team based on nine key factors: competing products, uniqueness, retail pricing, liability &
safety, marketability, manufacturing cost, patentability, consumer relevant features and benefits, and potential for commercialization.
The
time required to review ideas depends upon different variables, such as: the number of searches concurrently running on Edison
Nation platform, idea volume and complexity of the search, how many presentation dates to licensees are pending, the date an idea
is submitted, etc.
Presentation
dates to potential licensees are usually set a few weeks following the close of the search. After the presentation has been given
to a licensing / retail partner, the partner has 45 days to 6 months to select ideas on which they will move forward.
The
ILP incorporates a four-stage process:
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Stage
#1 — Preliminary Review: The Licensing Team performs a preliminary review to ensure an invention meets the
program criteria. Factors that might stall an idea from moving forward include: an invention is cost-prohibitive, has engineering
challenges, and/or major players in the marketplace have already launched products like it. If none of these apply, an idea
will be approved and move on to the preparation phase.
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Stage
#2 — Preparation: The Licensing Team performs a best partner review. Edison Nation’s retail and manufacturing
contacts are assessed, and the team begins to plan which licensors would be the best fit for an idea. A gap analysis and visits
the store shelves are executed to gain greater understanding of marketplace potential.
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Stage
#3 — Pitching: At this phase, an idea can become a “Finalist.” The Licensing Team begins to proactively
pitch an idea to potential licensees using a proprietary presentation system. When a company expresses interest, the team
proceeds into term sheets and negotiations while staying in constant contact with the prospect until the best possible deal
is struck for the innovator.
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Stage
#4 — Outcome: In the end, the market decides what products will be successful. There are no guarantees. If
for some reason Edison Nation is not successful in finding a licensing partner, a complete debrief is given to the Insider.
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Due
to the public nature of licensing, Edison Nation only accepts ideas from Insiders that are patented or patent-pending. A valid
provisional patent application is required. The cost of submitting an idea to the ILP is $100, and a member must be an “Insider”
to be considered.
The
Edison Nation ASOTV new product development process follows a six-stage protocol appropriate for the broadcast-based sales channel.
For more information regarding the ASOTV process, the Edison Nation NPD platform, its features and member benefits, visit https://app.edisonnation.com/faq.
Acquisition
of Intellectual Property
Once
an innovator’s idea is judged to be a potentially viable, commercial product and selected for potential commercialization,
the Company acquires intellectual property rights from the innovator.
Once
an innovator’s intellectual property is secured, the innovator’s product idea can then either be licensed to a manufacturer
or retailer or developed and marketed directly by Edison Nation. In either case, Edison Nation serves as the point-of-contact
with the innovator for term sheets, royalty negotiation and concluding licensing agreements. Edison Nation also maintains contact
with the innovator to keep them engaged during product development.
In
general, innovators are paid a percentage of the Company’s revenue from the commercialization of the innovator’s intellectual
property. This percentage varies with the Company’s investment in the development of the intellectual property, including
whether the Company decides to license the innovator’s idea for commercialization or instead, to directly develop and market
the innovator’s idea.
Build
and Launch: Product Design and Development
With
product design, product prototyping and creation of marketing assets all resourced with expert Edison Nation in-house capabilities,
we have made protracted, high-cost, high-risk research and development models obsolete.
Edison
Nation custom designs most products in-house for specific customers and their needs. We utilize our existing tooling to produce
samples and prototypes for customer reviews, refinement and approval, as well as our in-house packaging design and fabrication
resources.
The
Company’s design and product development professionals are dedicated to the commercialization and marketability of new product
concepts advanced through the company’s NPD platform and for licensors / partners like Disney World and Universal Studios.
No
matter the product, Edison Nation’s objective is to optimize its marketability, function, value and appearance for the benefit
of the consumer end user. From concept and prototyping, through design-for-manufacture, special attention is paid to a product’s
utility, ease of use, lowest cost bill of materials, and how it “communicates” its features and benefits through design.
The
combined experience and expertise of the Company’s team spans many high-demand categories including household items, small
appliances, kitchenware, and toys. The Company’s in-house capabilities are complimented by third-party engineering and prototyping
contractors, and category-specific expert resources within select manufacturers.
Manufacturing,
Materials, and Logistics
To
provide greater flexibility in the manufacturing and delivery of products, and as part of a continuing effort to reduce manufacturing
costs, Edison Nation has concentrated production of most of the Company’s products in third-party manufacturers located
in China and Hong Kong. The Company maintains a fully staffed Hong Kong office for sourcing, overseeing manufacturing and quality
assurance.
Edison
Nation’s contracted manufacturing base continues to expand, from two manufacturing facilities as of October 31, 2018 to
a total of five manufacturing facilities as of February 12, 2020. These include three manufacturers required to produce Cloud
B children’s sleep products. Based on anticipated manufacturing requirements, this footprint may expand significantly by
the end of 2019. The Company also continues to explore more efficient and expert manufacturing partners to gain greater economies
of scale, potential consolidation, and cost savings on an on-going basis.
Products
are also purchased from unrelated enterprises with specific expertise in the design, development, and manufacture those specialty
products.
We
base our production schedules on customer orders and forecasts, considering historical trends, results of market research, and
current market information. Actual shipments of ordered products and order cancellation rates are affected by consumer acceptance
of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers
and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability
or excess inventory in a product line.
Most
of our raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Sell:
Paths to Market
Edison
Nation partners with many of the biggest and most well-known online entities, consumer products companies and retailers. They
use the Company’s platform as a “think engine” to develop targeted products, significantly reduce research and
development expense, and expedite time to market.
Each
potential licensee of an innovator’s idea publishes an exclusive page on the Edison Nation web site with innovation goals
and timeline for their search. Appropriate new product ideas are submitted in 100% confidence with all intellectual property safely
guarded.
Once
the search concludes, Edison Nation presents each with the best patent protected, or patentable ideas that can be selected for
development.
Licensing
partners and customers include Amazon, Bed, Bath & Beyond, Church & Dwight, Black & Decker, HSN, Worthington Industries,
Pampered Chef, Boston America Corp., Walmart, Target, PetSmart, “As Seen on TV,” Sunbeam, Home Depot, and Apothecary
Products.
Online
Marketplace and Crowdfunding
Edison
Nation has established a commercialization path to include the development and management of crowdfunding campaigns. This is evolving
to be a engine for future growth. The benefits of crowdfunding include increased product testing efficiency, decreased financial
risk, and the ability to get closer to the end consumer, simultaneously.
The
ability for consumers to re-order product not only gauges marketplace demand, but it can also be leveraged as a quantitative “proof
point” for potential sales to licensees. Most importantly, the money pledged for orders can be used to finance manufacturing
and ecommerce launch marketing costs as negative working capital.
Sales,
Marketing, and Advertising
Our
Omni-channel sales effort is divided into three groups: (1) business-to-business revenue opportunities including traditional brick
and mortar retailers, (2) online market places and direct-to-consumer revenue opportunities, and (3) our NiTRO Team (Near Term
Revenue Opportunities). NiTRO, identifies brands and products lines that would benefit from being part of Edison Nation.
Edison
Nation’s business to business team sells products through a diverse network of manufacturers, distributors and retailers.
New customer prospects are gained through outbound sales calls, trade show participation, web searches, referrals from existing
customers.
The
online team for the company has expertise in selling products on platforms such as the Amazon marketplace as well as portals like
Walmart.com and “crowd-funded” websites such as Kickstarter and Indiegogo.
The
NiTRO team identifies small, unique brands that could benefit from becoming part of a larger consumer products organization with
more resources. The team seeks to negotiate a mutually beneficial agreement whereby the respective branded products become part
of Edison Nation’s portfolio of consumer products.
Media
Strategy
In
order to expand the Company’s universe of registered innovators and entrepreneurs submitting ideas on the Edison Nation
NPD web platform, the Company has entered a global agreement for distribution of two existing 13-episode seasons of the Company’s
Everyday Edison TV series with a leading digital media service company. The series will be available in its original English version
as well as voiceover adaptations in German, French, and Spanish. Distribution is planned for Europe and the Middle East through
digital content providers such as Amazon Prime Video.
Sources
of Revenue
The
Company pursues the following six sources of sales volume:
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Our
branded products sold through traditional retail channels of distribution and other channels of business to business distribution;
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Our
branded products sold through direct to consumer platforms such as the Amazon marketplace as well as portals like Walmart.com
and “crowd-funded” websites such as Kickstarter and Indiegogo;
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Custom
products and packaging solutions that the Company develops and manufactures for partners
such as Disney, Marvel, Madison Square Garden, and Universal Studios;
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Member
idea submission and ILP program fees: $25 per submission (registered members); $20 per submission (Insider members); $100
per submission (ILP members);
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Licensing
agents: We match an innovator’s intellectual property with vertical product category leaders in a licensing structure
whereby the innovator can earn up to 50% of the contracted licensing fee. Product categories include kitchenware, small appliances,
toys, pet care, baby products, health & beauty aids, entertainment venue merchandise, and housewares; and
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Product
principals: We work with innovators directly, providing such innovators direct access to all of Edison Nation’s
resources. Depending on case-by-case factors, innovators may receive a range of up to 35% - 50% of profits.
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Employees
As
of July 15, 2020, we had 45 total employees, 44 of whom were full-time employees. None of our employees are
represented by a union or parties to a collective bargaining agreement. We believe our employee relations to be in good standing.
Properties
The
following table summarizes pertinent details of our properties as of June 30, 2020:
Location
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Owned
or
Leased
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Lease
Expiration
|
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Type
of Property
|
1
West Broad Street, Suite 1004 Bethlehem, PA 18018
|
|
Leased
|
|
July
31, 2022
|
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Principal
Executive Office
|
909
New Brunswick Avenue Phillipsburg, NJ 08865
|
|
Leased
|
|
Month-to-Month
|
|
Office
Space
|
20
Industrial Road Alpha, NJ 08865
|
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Leased
|
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Month-to-Month
|
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Packaging
and Logistics Center
|
520
Elliot Street, Charlotte, NC 28202
|
|
Leased
|
|
Month-to-Month
|
|
Office
Space
|
660
West Fairbanks Avenue, Suite 1 Winter Park, FL 32789
|
|
Leased
|
|
September
30, 2020
|
|
Office
Space
|
150
West Walnut Street Gardena, CA
|
|
Leased
|
|
October
31, 2021
|
|
Office
Space and Warehouse
|
51
South Lincoln Avenue Washington, NJ 07882
|
|
Owned
|
|
Month-to-Month
|
|
Rental
Property
|
Penninsula
Centre 67 Mody Road, 11th Floor Room 1112 Tsimshatsui East, Kowloon, Hong Kong
|
|
Leased
|
|
July
22, 2020
|
|
Office
Space
|
Legal
Proceedings
From
time to time, we may be subject to various legal proceedings and claims that are routine and incidental to our business. Although
some of these legal proceedings may result in adverse decisions or settlements, management believes that the final disposition
of such matters will not have a material adverse effect on our business, financial position, results of operations or cash flows.
MANAGEMENT
Directors
and Executive Officers
The
following table sets forth information about our directors and executive officers.
Name
|
|
Age
|
|
Position(s)
|
Executive Officers
|
|
|
|
|
Christopher B. Ferguson
|
|
51
|
|
Chief Executive Officer and Chairman
|
Kevin Ferguson
|
|
59
|
|
President and Treasurer
|
Brett Vroman
|
|
39
|
|
Chief Financial Officer and Corporate Secretary
|
Bruce Bennett
|
|
61
|
|
Executive Vice President and Chief Product Officer
|
|
|
|
|
|
Non-Employee Directors
|
|
|
|
|
Frank Jennings (1)(2)(3)
|
|
48
|
|
Director
|
Louis Foreman
|
|
51
|
|
Director
|
Kevin O’Donnell (1)(2)(3)
|
|
44
|
|
Director
|
Mary Ann Halford (1)(2)(3)
|
|
55
|
|
Director
|
(1)
Member of the Audit Committee
(2)
Member of the Compensation Committee
(3)
Member of the Corporate Governance and Nominating Committee
Executive
Officers
Christopher
B. Ferguson has acted as our Chief Executive Officer, as well as Chairman of our board of directors since July 2017. From
July 2013 until July 2017, Mr. Ferguson served as Chief Executive Officer of SRM and Fergco. In 2010, Mr. Ferguson co-founded
a company in the fiber network industry, FTE Networks. Inc. (FTNW:NYSEAMERICAN), and served as CEO of the company until June 2013.
In August 2001, Mr. Ferguson co-founded Mercer Staffing, and acted as its president until December 2007. In June 1995, Mr. Ferguson
founded The Florio Group, a private equity investment company, with former New Jersey governor James J. Florio. From June 1995
to October 2001, Mr. Ferguson served as Managing Director of The Florio Group. From May 1995 until August 1999, Mr. Ferguson also
acted as Chief Financial Officer for Cabot Marsh Corporation, a healthcare consulting firm. Mr. Ferguson holds a Bachelor of Arts
degree from Villanova University and a Juris Doctor degree from Widener University School of Law. Mr. Ferguson offers executive
decision-making and risk assessment skills as a result of his previous experiences and services as Chief Executive Officer of
a public company. Our nominating and corporate governance committee and board of directors considered Mr. Ferguson’s 12
years of experience as a founder and senior executive officer of public and private corporations, and his current services as
our Chief Executive Officer and determined that his vast experience in the role as a leader and executive and his direct involvement
and understanding of both SRM and Fergco’s ongoing operations should facilitate the board of directors in its evaluation
of strategic initiatives and operational performance.
Kevin
J. Ferguson has acted as our President and Treasurer since July 2017 and acted as a member of our board of directors
from July 2017 until April 2019. Mr. Ferguson acted as a member of the board of directors of Fergco from June 1995
until July 2017 and was employed as Fergco’s president from June 1999 to July 2017. Between June 1995
and May 1999, he worked as head of sales for Fergco. Mr. Ferguson holds a Bachelor of Science degree in business administration
from Villanova University.
Brett
Vroman has served as our Chief Financial Officer since June 2019 and previously served as our Controller from May 2018
through May 2019. Prior to joining the Company, from October 2014 to May 2018, Mr. Vroman was Director of Financial Reporting
at Avantor, Inc., a global manufacturer and distributor of high-quality products, services and solutions to customers and suppliers
in the life science, advanced technology and applied materials industries. From March 2011 to October 2014, Mr. Vroman was employed
as an Assurance Senior Manager at BDO USA, LLP, a public accounting, tax, consulting and business advisory firm and from December
2005 to February 2011, Mr. Vroman last held the position of Audit Manager at Smart and Associates, LLP, a business advisory and
consulting firm. Mr. Vroman is a certified public accountant and holds a Bachelor of Science in Accounting from York College of
Pennsylvania.
Bruce
R. Bennett has been our Executive Vice President and Chief Product Officer since July 2017. From January 1998
to June 2017, Mr. Bennett was employed as president of SRM, where he focused largely on the company’s product
sourcing between China and the company’s various entertainment industry customers, such as Disney, Universal Studios, Six
Flags, SeaWorld and Madison Square Garden. Mr. Bennett started at SRM in 1984, as assistant to the president, and worked
his way up to the role of Vice President of Sales and Marketing prior to being named president of the company in January 1998.
Non-Employee
Directors
Frank
Jennings has been a member of our board of directors since June 2018 and brings over 26 years of experience in business
development and management of sales professionals in a variety of technology-adjacent industries. From August 2014 to present,
Mr. Jennings has been employed as the Vice President of Sales, North America by Doctor on Demand, Inc., a telemedicine provider.
From August 2011 to August 2014, he was employed as Assistant Vice President of New Business Development by Castlight Health,
a technology company focused on employee health benefits solutions. Mr. Jennings holds a Bachelor of Arts from Ohio State University.
Mr. Jenning’s service in both operational and leadership roles provides a significant benefit to our audit, nominating and
corporate governance, and compensation committees, as well as to our board of directors.
Louis
Foreman has been a member of our board of directors since March 2019, and has served as the Preferred Designee and a member
of the Board of Managers of Edison Nation Holdings, LLC, a wholly owned subsidiary of the Company, since September 2018. From
May 2005 to the present, Mr. Foreman has worked as the Creator and Executive Producer of the television show Everyday Edisons.
In addition to his role as a founder of the Edison Nation brand, from November 2001 to the present, Mr. Foreman has served as
the Chief Executive Officer of Enventys Partners, an integrated product development firm. From May 2012 to the present, Mr. Foreman
has also served as Chief Executive Officer of Edison Nation Medical, a healthcare innovation portal. From June 2010 to December
2017, Mr. Foreman served as President of the Intellectual Property Owners Education Foundation, a non-profit organization devoted
to educational and charitable activities designed to promote the value of intellectual property rights. Mr. Foreman holds a Bachelor
of Arts degree in Economics from the University of Illinois at Urbana-Champaign. His experience in prior leadership roles as well
as his operational experience as founder of Edison Nation provide a significant benefit to our board of directors.
Kevin
J. O’Donnell has been a member of our board of directors since March 2019, and founded PopTop Partners, LLC, a boutique
investment firm specializing in small to mid-market companies with an emphasis on the retail and restaurant sector in April 2011,
and continues to serve as the firm’s Managing Partner to the present day. Mr. O’Donnell brings close to 20 years of
strategic corporate growth, financial structuring, and business development initiatives to emerging growth companies. From May
2007 to June 2010, Mr. O’Donnell served as the Founder/President of KOR Capital, LLC, a private equity and consulting firm
specializing in turn around management of mid-market companies. From December 1999 to February 2007, Mr. O’Donnell was a
Co-Founder and Principal of ALS, LLC, a human resources management organization. Mr. O’Donnell holds a Bachelor of Arts
from the University of Central Florida. Mr. O’Donnell’s service in both operational and leadership roles provides
a significant benefit to our audit, nominating and corporate governance, and compensation committees, as well as to our board
of directors.
Mary Ann Halford has
served as a member of our board of directors since April 2020. From December 2017 to the present, Mary Ann Halford has served
as a Senior Advisor with OC&C Strategy Consultants, supporting the growth and development of their media and entertainment
practice in the U.S. In addition, from May 2017 to the present, Ms. Halford has been an Executive in Residence with Progress Partners,
a media and tech financial advisory business, supporting the firm on advising clients as well as supporting the development their
recent Progress Ventures raise. From March 2012 to April 2017, Ms. Halford served initially as a Managing Director and then
a Senior Managing Director at FTI Consulting’s TMT Group where she significantly expanded the firm’s media and entertainment
practice globally with a focus on broadcasters and content companies. Ms. Halford’s clients included RTL, CME, MediaWorks,
Fox, Disney, Media General, TEGNA, Cox, Raycom, Townsquare, NBC/Universal, Gray Broadcasting, Pearl TV, as well as private equity
firms investing in the industry. In addition, Ms. Halford has founded and developed two consulting firms, BizWorks360 and Global
Media Strategies, working with clients such as Viacom, Scholastic Corporation, HIT Entertainment, National Public Media, Rainbow
Media, Gaiam, The Weinstein Company, amongst others. On the operational side, Ms. Halford built out the digital operations for
ITN Networks from 2008 – 2009 and from 1997 through 2002, Ms. Halford built and developed the platform for the Fox International
Channels Group. In addition, from 2007 through 2014, Ms. Halford served on the Board of Directors of Triton Digital. Ms.
Halford received her Bachelor of Arts degree in Government and Economics from Georgetown University and her Master’s in
Business Administration from Harvard University.
Family
Relationships
Other
than Messrs. Christopher B. Ferguson and Kevin J. Ferguson, who are brothers, there are no family relationships among any of our
executive officers or directors.
Corporate
Governance Overview
We
are committed to having sound corporate governance principles, which are essential to running our business efficiently and maintaining
our integrity in the marketplace. We understand that corporate governance practices change and evolve over time, and we seek to
adopt and use practices that we believe will be of value to our shareholders and will positively aid in the governance of the
Company. To that end, we regularly review our corporate governance policies and practices and compare them to the practices of
other peer institutions and public companies. We will continue to monitor emerging developments in corporate governance and enhance
our policies and procedures when required or when our Board determines that it would benefit our Company and our shareholders.
In
this section, we describe the roles and responsibilities of our board of directors and its committees and describe our
corporate governance policies, procedures and related documents. The charters of the audit, nominating and corporate
governance, and compensation committees of our board of directors, our Corporate Governance Guidelines and Code of Business
Conduct and Ethics can be accessed electronically under the “Governance” link on the Investor Relations page of
our website at https://www.edisonnation.com. (The inclusion of our website address in this section does not include or
incorporate by reference the information on our website into this prospectus.) We will also provide a copy of the audit and
compensation committee charters, our Corporate Governance Guidelines and our Code of Business Conduct and Ethics without
charge upon written request sent to our Investor Relations department at Investor Relations, 1 West Broad Street, Suite 1004,
Bethlehem, Pennsylvania 18018 or (484) 893-0060.
Board
Composition and Leadership Structure
Five (5) directors comprise our board of directors:
Christopher B. Ferguson, Louis Foreman, Frank Jennings, Kevin J. O’Donnell and Mary Ann Halford.
Christopher
Ferguson serves as our Chief Executive Officer and our Chairman. Although the roles of our Chief Executive Officer and Chairman
of our board of directors are currently performed by the same person, we do not have a policy regarding the separation of these
roles, as our board of directors believes that it is in the best interests of the Company and our shareholders to make that determination
from time to time based upon the position and direction of the Company and the membership of our board of directors.
Our
board of directors has determined that our leadership structure is appropriate for the Company and our shareholders as it helps
to ensure that the board of directors and management act with a common purpose and provides a single, clear chain of command to
execute our strategic initiatives and business plans. In addition, our board of directors believes that a combined role of Chief
Executive Officer and Chairman is better positioned to act as a bridge between management and our board of directors, facilitating
the regular flow of information. Our board of directors also believes that it is advantageous to have a Chairman with an extensive
knowledge of our industry.
Director
Independence
Applicable
Nasdaq rules require a majority of a listed company’s board of directors to be comprised of independent directors within
one (1) year of listing. In addition, Nasdaq rules require that, subject to specified exceptions, each member of a listed company’s
audit, compensation and nominating and corporate governance committees be independent, and that audit committee members also satisfy
independence criteria set forth in Rule 10A-3 under the Exchange Act. The Nasdaq independence definition includes a series of
objective tests, such as that the director is not, and has not been for at least three (3) years, one of our employees, that neither
the director nor any of his family members has engaged in various types of business dealings with us and that the director is
not associated with the holders of more than five percent (5%) of our common stock. In addition, under applicable Nasdaq rules,
a director will only qualify as an “independent director” if, in the opinion of the listed company’s board of
directors, that person does not have a relationship that would interfere with the exercise of independent judgment in carrying
out the responsibilities of a director.
Our
board of directors has undertaken a review of the independence of each director. Based on information provided by each director
concerning his background, employment and affiliations, our board of directors has determined that Messrs. Frank Jennings, Kevin
O’Donnell and Toper Taylor and independent do not have relationships that would interfere with the exercise of independent
judgment in carrying out the responsibilities of a director and that each of these directors is “independent” as that
term is defined under the listing standards of Nasdaq. In making such determination, our board of directors considered the relationships
that each such non-employee director has with our Company and all other facts and circumstances that our board of directors deemed
relevant in determining his independence, including the beneficial ownership of our capital stock by each non-employee director.
Board’s
Role in Risk Oversight and Management
Our
board of directors, as a whole and through its committees, is responsible for the oversight of risk management, while our management
is responsible for the day-to-day management of risks faced by us. The board of directors receives regular reports from members
of senior management on areas of material risk to the Company, including operational, financial, legal, regulatory, strategic
and reputational risks as more fully discussed in the section titled “Risk Factors” appearing elsewhere in this prospectus.
In its risk oversight role, our board of directors has the responsibility to satisfy itself that the risk management processes
designed and implemented by management are adequate and functioning as designed.
Committees
of Our Board of Directors
Our
board of directors has established an audit committee, a compensation committee, and a nominating and corporate governance committee.
The composition and responsibilities of each committee of our board of directors are described below. Members serve on these committees
until their resignation or until otherwise determined by our board of directors. Our board of directors may establish other committees
as it deems necessary or appropriate from time to time.
Although
each committee is directly responsible for evaluating certain enumerated risks and overseeing the management of such risks, the
entire board of directors is generally responsible for and is regularly informed through committee reports about such risks and
any corresponding remediation efforts designed to mitigate such risks. In addition, appropriate committees of the board of directors
receive reports from senior management within the organization in order to enable the board of directors to understand risk identification,
risk management and risk mitigation strategies. When a committee receives such a report, the chairman of the relevant committee
reports on the discussion to the full board of directors during the committee reports portion of the next board of directors meeting.
This enables the board of directors and its committees to coordinate the risk oversight role.
Audit
Committee
The members of our audit committee are Frank
Jennings, Kevin J. O’Donnell and Mary Ann Halford. Mr. O’Donnell chairs the audit committee. The audit
committee’s main function is to oversee our accounting and financial reporting processes, internal systems of control, independent
registered public accounting firm relationships and the audits of our financial statements. The committee’s responsibilities
include, among other things:
|
●
|
appointing,
approving the compensation of and assessing the independence of our registered public
accounting firm;
|
|
●
|
overseeing
the work of our independent registered public accounting firm, including through the
receipt and consideration of reports from such firm;
|
|
●
|
reviewing
and discussing with management and the independent registered public accounting firm
our annual and quarterly financial statements and related disclosures;
|
|
●
|
monitoring
our internal control over financial reporting, disclosure controls and procedures and
code of business conduct and ethics;
|
|
●
|
overseeing
our internal audit function;
|
|
●
|
overseeing
our risk assessment and risk management policies;
|
|
●
|
establishing
policies regarding hiring employees from the independent registered public accounting
firm and procedures for the receipt and retention of accounting related complaints and
concerns;
|
|
●
|
meeting
independently with our internal auditing staff, independent registered public accounting
firm and management;
|
|
●
|
reviewing
and approving or ratifying any related person transactions; and
|
|
●
|
preparing
the audit committee report required by SEC rules.
|
All
audit and non-audit services, other than de minimis non-audit services, to be provided to us by our independent
registered public accounting firm must be approved in advance by our audit committee.
Nominating
and Corporate Governance Committee
The members of our nominating and corporate
governance committee are Frank Jennings, Kevin J. O’Donnell and Mary Ann Halford. Ms. Halford chairs the nominating
and corporate governance committee. This committee’s responsibilities include, among other things:
|
●
|
identifying
and evaluating candidates, including the nomination of incumbent directors for reelection
and nominees recommended by shareholders, to serve on our board of directors;
|
|
●
|
considering
and making recommendations to our board of directors regarding the composition and chairmanship
of the committees of our board of directors;
|
|
●
|
developing
and recommending to our board of directors corporate governance principles, codes of
conduct and compliance mechanisms; and
|
|
●
|
overseeing
periodic evaluations of the board of directors’ performance, including committees
of the board of directors.
|
When
evaluating director candidates, the nominating and corporate governance committee may consider several factors, including relevant
experience, independence, commitment, compatibility with the Chief Executive Officer and the board of directors culture, prominence
and understanding of the Company’s business, as well as any other factors the corporate governance and nominating committee
deems relevant at the time. The corporate governance and nominating committee makes a recommendation to the full board of directors
as to any person it believes should be nominated by our board of directors, and our board of directors determines the nominees
after considering the recommendation and report of the corporate governance and nominating committee.
Any
director or executive officer of the Company may recommend a candidate to the nominating and corporate governance committee for
its consideration. The nominating and corporate governance committee will also consider nominees to our board of directors recommended
by shareholders if shareholders comply with the advance notice requirements in our Second Amended and Restated Bylaws. Our Second
Amended and Restated Bylaws provide that a shareholder who wishes to nominate a person for election as a director at a meeting
of shareholders must deliver timely written notice to our Corporate Secretary at the following address:
Board
of Directors
c/o Corporate
Secretary
Edison
Nation, Inc.
1
West Broad Street, Suite 1004
Bethlehem,
Pennsylvania 18018
This
notice must contain, as to each nominee, all of the information relating to such person as would be required to be disclosed in
a proxy statement meeting the requirements of Regulation 14A under the Exchange Act and certain other information, including:
the name and address of the shareholder delivering the notice as it appears on our books; the class and number of shares owned
beneficially and of record by such shareholder; information about derivative instruments beneficially owned by such shareholder
and any opportunity to profit or share in any profit derived from any increase or decrease in the value of the shares of our stock;
any proxy, contract, arrangement, understanding or relationship pursuant to which such shareholder has a right to vote any shares
of our stock; any short interest in any of our securities held by such shareholder; any rights to dividends on shares of our stock
owned beneficially or of record by such shareholder that are separated or separable from the underlying shares of stock; any proportionate
interest in shares of our stock or derivative instruments held by a general or limited partnership in which such shareholder is,
or owns a beneficial interest in, the general partner; any performance-related fees to which such shareholder is entitled based
on the value of our securities; any arrangement or understanding between such shareholder and the proposed nominee; and whether
such shareholder intends to deliver a solicitation notice, as more fully described in our Second Amended and Restated Bylaws.
The foregoing summary does not include all requirements a shareholder must satisfy in order to nominate a candidate to our board
of directors. Shareholders who wish to recommend a nominee to our board of directors should carefully read our Second Amended
and Restated Bylaws, which are available at www.edisonnation.com. (The inclusion of our website address in this prospectus does
not include or incorporate by reference the information on our website into this prospectus.)
Compensation
Committee
The members of our compensation committee
are Frank Jennings, Kevin J. O’Donnell and Mary Ann Halford. Mr. Jennings chairs the compensation committee.
The primary purpose of our compensation committee is to discharge the responsibilities of our board of directors in overseeing
our compensation policies, plans and programs and to review and determine the compensation to be paid to our executive officers,
directors and other senior management, as appropriate. Specific responsibilities of our compensation committee include, among
other things:
|
●
|
reviewing
and recommending corporate goals and objectives relevant to the compensation of our Chief
Executive Officer and other executive officers;
|
|
●
|
making
recommendations to our board of directors with respect to, the compensation level of
our executive officers;
|
|
●
|
reviewing
and recommending to our board of directors employment agreements and significant arrangements
or transactions with executive officers;
|
|
●
|
reviewing
and recommending to our board of directors with respect to director compensation; and
|
|
●
|
overseeing
and administering our equity-based incentive plan or plans.
|
Each
member of our compensation committee is a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange
Act and an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the
“Code.”
With
respect to director compensation, our compensation committee is responsible for reviewing the compensation paid to members of
the board of directors and recommending modifications to the compensation of members of the board of directors that the compensation
committee determines are appropriate and advisable to the board of directors for its approval from time to time. In this regard,
the compensation committee may request that management report to the compensation committee periodically on the status of the
compensation of board of directors in relation to other similarly situated companies.
In
determining compensation for our executive officers, the compensation committee typically considers, but is not required to accept,
the recommendations of our Chief Executive Officer regarding the performance and proposed base salary and bonus and equity awards
for the other executive officers, as well as himself. The compensation committee may also request the assistance of our Chief
Financial Officer in evaluating the financial, accounting and tax implications of various compensation awards paid to the executive
officers. However, our Chief Financial Officer does not determine the amounts or types of compensation paid to the executive officers.
Our Chief Executive Officer and certain of our other executive officers may attend compensation committee meetings, as requested
by the compensation committee. None of our executive officers, including our Chief Executive Officer, attend any portion of the
compensation committee meetings during which the executive officer’s compensation is established and approved.
Compensation
Committee Interlocks and Insider Participation
Not
applicable to smaller reporting companies.
Compensation
Committee Report
Not
applicable to smaller reporting companies.
Board
Diversity
Our
nominating and corporate governance committee is responsible for reviewing with board of directors, on an annual basis, the appropriate
characteristics, skills and experience required for the board of directors as a whole and its individual members. In evaluating
the suitability of individual candidates (both new candidates and current members), the nominating and corporate governance committee,
in recommending candidates for election, and the board of directors, in approving (and, in the case of vacancies, appointing)
such candidates, will take into account many factors, including the following:
|
●
|
personal
and professional integrity, ethics and values;
|
|
●
|
experience
in corporate management, such as serving as an officer or former officer of a publicly-held
company;
|
|
●
|
development
or commercialization experience in large consumer products companies;
|
|
●
|
experience
as a board member or executive officer of another publicly-held company;
|
|
●
|
strong
finance experience;
|
|
●
|
diversity
of expertise and experience in substantive matters pertaining to our business relative
to other board members;
|
|
●
|
diversity
of background and perspective, including with respect to age, gender, race, place of
residence and specialized experience;
|
|
●
|
conflicts
of interest; and
|
|
●
|
practical
and mature business judgment.
|
Currently,
our board of directors evaluates each individual in the context of the board of directors as a whole, with the objective of assembling
a group that can best maximize the success of the business and represent shareholder interests through the exercise of sound judgment
using its diversity of experience in these various areas.
Director
Nomination Process
Our
board of directors believes that its directors should have the highest professional and personal ethics and values, consistent
with the Company’s longstanding values and standards. They should have broad experience at the policy-making level in business,
government or civic organizations. They should be committed to enhancing shareholder value and should have sufficient time to
carry out their duties and to provide insight and practical wisdom based on their own unique experience. Each director must represent
the interests of all shareholders. When considering potential director candidates, our board of directors also considers the candidate’s
independence, character, judgment, diversity, age, skills, including financial literacy, and experience in the context of our
needs and those of our board of directors. Our board of directors believe that diversity is an important attribute of the members
who comprise our board of directors and that the members should represent an array of backgrounds and experiences and should be
capable of articulating a variety of viewpoints. Our board of directors priority in selecting board members is the identification
of persons who will further the interests of our shareholders through his or her record of professional and personal experiences
and expertise relevant to our business.
Shareholder
Nominations to the Board of Directors
Article
II, Section 2.5 of our Second Amended and Restated Bylaws provides that our board of directors will accept for consideration submissions
from shareholders of recommendations for the nomination of directors. Acceptance of a recommendation for consideration does not
imply that the board of directors will nominate the recommended candidate. Director nominations by a shareholder or group of shareholders
for consideration by our shareholders at our annual meeting of shareholders, or at a special meeting of our shareholders that
includes on its agenda the election of one or more directors, may only be made pursuant to Article II, Section 2.5 of our Second
Amended and Restated Bylaws or as otherwise provided by law. Nominations pursuant to our Second Amended and Restated Bylaws are
made by delivering to our Corporate Secretary, within the time frame described in our Second Amended and Restated Bylaws, all
of the materials and information that our bylaws require for director nominations by shareholders.
No
person shall be eligible to serve as a director of the Company unless nominated in accordance with the procedures set forth in
Article II, Section 2.5 of our Second Amended and Restated Bylaws and any nominee proposed by a shareholder not nominated in accordance
with Article II, Section 2.5 shall not be considered or acted upon for execution at such meeting. Shareholders’ notice for
any proposals requested to be included in our prospectus pursuant to Rule 14a-8 under the Exchange Act (including director nominations),
must be made in accordance with that rule.
Role
of Board in Risk Oversight Process
Our
board of directors has responsibility for the oversight of the Company’s risk management processes and, either as a whole
or through its committees, regularly discusses with management our major risk exposures, their potential impact on our business
and the steps we take to manage them. The risk oversight process includes receiving regular reports from our committees and members
of senior management to enable our board of directors to understand the company’s risk identification, risk management and
risk mitigation strategies with respect to areas of potential material risk, including operations, finance, legal, regulatory,
strategic and reputational risk.
The
audit committee reviews information regarding liquidity and operations and oversees our management of financial risks. Periodically,
the audit committee reviews our policies with respect to risk assessment, risk management, loss prevention and regulatory compliance.
Oversight by the audit committee includes direct communication with our external auditors, and discussions with management regarding
significant risk exposures and the actions management has taken to limit, monitor or control such exposures. The compensation
committee is responsible for assessing whether any of our compensation policies or programs has the potential to encourage excessive
risk-taking. The nominating and corporate governance committee manages risks associated with the independence of the board, corporate
disclosure practices, and potential conflicts of interest. While each committee is responsible for evaluating certain risks and
overseeing the management of such risks, the entire board is regularly informed through committee reports about such risks. Matters
of significant strategic risk are considered by our board of directors as a whole.
Code
of Business Conduct and Ethics
We
have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our
principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar
functions. A current copy of the code is posted on the Corporate Governance section of our website, www.edisonnation.com. In addition,
we post on our website all disclosures that are required by law or the listing standards of the Nasdaq Capital Market concerning
any amendments to, or waivers from, any provision of the code. (Reference to our website address does not constitute incorporation
by reference of the information contained at or available through our website, and you should not consider it to be a part of
this prospectus.)
EXECUTIVE
COMPENSATION
As
an emerging growth company under the JOBS Act, we have opted to comply with the executive compensation disclosure rules applicable
to “smaller reporting companies” as such term is defined in the rules promulgated under the Securities Act, which
permit us to limit reporting of executive compensation to our principal executive officer and our two (2) other most highly compensated
named executive officers.
Summary
Compensation Table
The
following table provides information regarding the compensation awarded to or earned during 2019 and 2018, as applicable,
by our named executive officers.
Name
and Principal Position
|
|
Year
|
|
|
Salary
($)
|
|
|
Bonus
($)
|
|
|
Stock
Awards
($)(1)
|
|
|
Options
Awards
($)(2)
|
|
|
All
Other
Compensation
($)
|
|
|
Total
($)
|
|
Christopher
B. Ferguson
|
|
|
2019
|
|
|
|
175,000
|
(4)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
Chief
Executive Officer
|
|
|
2018
|
|
|
|
120,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
120,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Philip
Anderson (3)
|
|
|
2019
|
|
|
|
105,769
|
|
|
|
—
|
|
|
|
65,626
|
|
|
|
—
|
|
|
|
59,245
|
|
|
|
230,640
|
|
Chief
Strategy Officer, former Chief Financial Officer
|
|
|
2018
|
|
|
|
141,346
|
|
|
|
—
|
|
|
|
15,000
|
|
|
|
340,606
|
|
|
|
59,245
|
|
|
|
556,197
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bruce
Bennett
|
|
|
2019
|
|
|
|
170,019
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8,844
|
|
|
|
178,863
|
|
EVP
and Chief Product Officer
|
|
|
2018
|
|
|
|
170,019
|
|
|
|
1,000
|
|
|
|
15,000
|
|
|
|
—
|
|
|
|
8,844
|
|
|
|
194,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brett
Vroman
|
|
|
2019
|
|
|
|
180,000
|
(5)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
180,000
|
|
Chief
Financial Officer and Corporate Secretary
|
|
|
2018
|
|
|
|
100,769
|
|
|
|
1,500
|
|
|
|
15,000
|
|
|
|
186,418
|
|
|
|
—
|
|
|
|
303,687
|
|
(1)
The dollar amounts shown in this column represent the fair value of shares on their respective grant dates. The grant date fair
value was computed in accordance with ASC 718. Refer to Note 14 to the consolidated audited financial statements in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 and contained herein for a discussion of the relevant
assumption used to determine the grant date fair value of these awards.
(2)
The dollar amounts shown in this column represent the fair value of shares on their respective grant dates. The grant date fair
value was computed in accordance with ASC 718. Refer to Note 14 to the consolidated audited financial statements in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 and contained herein for a discussion of the relevant
assumption used to determine the grant date fair value of these awards.
(3) Mr. Anderson received $59,254 and $52,254,
respectively, for his services as a consultant before his employment by the Company. On June 7, 2019, Mr. Anderson changed roles
from the Company’s Chief Financial Officer to its Chief Strategy Officer. On December 2, 2019, Mr. Anderson separated from
any employment with the Company.
(4) Mr. Ferguson was only paid $112,385
during 2019 and the remaining $62,615 has been voluntarily deferred until an undetermined future date.
(5) Mr. Vroman served as the Company’s Controller until June 6,
2019 and was appointed Chief Financial Officer on June 7, 2019. Mr. Vroman was only paid $160,000 during 2019 and the remaining
$20,000 has been voluntarily deferred until an undetermined future date.
(6) Mr. Bennett received $8,844 for both
2019 and 2018, respectively, as an allowance for his automobile.
Narrative
to Summary Compensation Table
General
During
2019 and 2018, we compensated our named executive officers through a combination of base salary, cash bonuses and
other benefits including car allowances. Each of our named executive officers has substantial responsibilities in connection with
the day-to-day operations of our Company. Since we were recently formed, the amounts indicated in the table above reflect compensation
paid or accrued directly by our operating subsidiaries for these individuals prior to the formation of the Company.
Base
Salary
The
base salaries of our named executive officers were historically reviewed and set annually by the board of directors of SRM and
Fergco; base salaries were also reviewed upon the promotion of an executive officer to a new position or another change in job
responsibility. In establishing base salaries for our named executive officers for 2018, 2019 and into the future, our compensation
committee relied and will continue to rely on external market data and peer data obtained from outside sources. In addition to
considering the information obtained from such sources, our compensation committee will consider:
|
●
|
each
named executive officer’s scope of responsibility;
|
|
●
|
each
named executive officer’s years of experience and experience in our industry;
|
|
●
|
the
types and amount of the elements of compensation to be paid to each named executive officer;
|
|
●
|
our
financial performance and performance with respect to other aspects of our operations, such as our growth and profitability;
and
|
|
●
|
each
named executive officer’s individual performance and contributions to our performance, including leadership and team-work.
|
Cash
Bonuses
Our
named executive officers are also eligible to receive an annual cash bonus as a percentage of base salary based on our achievement
of various metrics. Annual incentive awards are intended to recognize and reward those named executive officers who contribute
meaningfully to our performance for the year. These bonuses are subject to the discretion of the compensation committee each year
as to whether and in what amounts they will be paid.
Stock
Awards
Our stock incentive awards are issued
under the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”) originally adopted by our board of directors in
December 2017 and amended and restated on September 6, 2018. The Plan provides for up to 1,764,705 (290,036 remaining
as of July 15, 2020) shares of our common stock, or approximately 15% of our outstanding shares calculated on a fully diluted
basis, to be issued as stock-based incentives. Stock incentive awards under the Plan can be in the form of stock options, restricted
stock units, performance awards and restricted stock that are made to employees, directors and service providers. Awards
are subject to forfeiture until vesting conditions have been satisfied under the terms of the award. We believe awards to our
executive officers help align the interests of management and our shareholders and reward our executive officers for improved
Company performance.
Section 162(m)
of the Code
Section 162(m) of the Code generally limits
the corporate tax deduction for compensation in excess of $1 million that is paid to our named executive officers.
Section 162(m) of the Code was amended by the Tax Cut and Jobs Act of 2018 so that the exceptions for payment of “performance-based
compensation” or commissions have been eliminated. However, because we recently became a publicly-held corporation in connection
with an initial public offering, the $1 million annual deduction limit does not apply during a limited “transition period”
for compensation paid under our Plan. This relief applies to stock incentive awards of that are outstanding as well as future awards
granted with respect to shares available under the Plan. The compensation committee intends to continue to rely on the transition
relief until it expires at our annual meeting of shareholders in 2020 or, if sooner, when the shares currently available for awards
at the time of the initial public offering have been depleted.
Employment
Agreements
On
September 26, 2018, the Company entered into written employment agreements with Christopher B. Ferguson, its Chief Executive
Officer. The Company has generally employed its executive officers “at will” and did not previously have written employment
agreements with Messrs. Ferguson.
Mr. Ferguson’s
Employment Agreement provides for a term of 3 years terminable at will by either party, an annual base salary of $175,000
per year and an annual discretionary bonus of up to 100% of his base salary based on performance criteria determined by the Company’s
board of directors. Mr. Ferguson will also receive the normal benefits available to the Company’s executives. If Mr. Ferguson’s
employment is terminated by the Company without Cause (as defined in Mr. Ferguson’s Employment Agreement) or by Mr. Ferguson
as a result of a material breach by the Company, Mr. Ferguson will be entitled to payment of an amount equal to 6 months
of his base salary and continuation of benefits for 6 months following the termination. Mr. Ferguson’s Employment
Agreement also contains certain restrictive covenants, including indefinite confidentiality, a one year restriction from directly
or indirectly owning or participating in a Competing Business (as defined in Mr. Ferguson’s Employment Agreement),
and an 18-month restriction on solicitation of employees, customers, and suppliers of the Company.
In
Mr. Vroman’s capacity as the Company’s Controller, Brett Vroman had previously entered into an Employment Agreement
with the Company on October 5, 2018 (the “Vroman Employment Agreement”). As a result of Mr. Vroman’s appointment
as Chief Financial Officer, Mr. Vroman and the Company amended the Vroman Employment Agreement on June 6, 2019 (the “Vroman
Amendment”).
The
Vroman Employment Agreement provides for a term of 3 years terminable at will by either party, as well as an annual discretionary
bonus of up to 50% of his base salary based on performance criteria determined by the Board. Mr. Vroman will also receive the
normal benefits available to the Company’s executives. If Mr. Vroman’s employment is terminated by the Company without
Cause (as defined in the Vroman Employment Agreement) or by Mr. Vroman as a result of a material breach by the Company, Mr. Vroman
will be entitled to payment of an amount equal to 6 months of his base salary and continuation of benefits for 6 months following
the termination. The Vroman Employment Agreement also contains certain restrictive covenants, including indefinite confidentiality,
a one year restriction from directly or indirectly owning or participating in a Competing Business (as defined in the Vroman Employment
Agreement), and an 18-month restriction on solicitation of employees, customers, and suppliers of the Company.
The
Vroman Amendment provides that Mr. Vroman’s base salary shall be increased to $200,000 for the remainder of the term of
the Vroman Employment Agreement. Additionally, Mr. Vroman has agreed to surrender certain Stock Options (defined under the Vroman
Employment Agreement) previously awarded for 50,000 restricted stock units under the Plan. The restricted stock units will become
vested upon Mr. Vroman’s completion of services specified in the Amendment or, if sooner, upon a change in control of the
Company (as described in the Plan) or Mr. Vroman’s death. Mr. Vroman’s restricted stock units will be subject to the
further terms of the Incentive Plan.
Outstanding Equity Awards at July 15, 2020
The following table provides information
with respect to holdings of unvested options and stock awards held by our named executive officers, at July 15, 2020.
|
|
Option
Awards
|
|
Name
|
|
Number
of
securities
underlying
unexercised
option
exercisable
(#)
|
|
|
Number
of
securities
underlying
unexercised
option
unexercisable
(#)
|
|
|
Option
exercise price
($)
|
|
|
Option
expiration
date
|
|
Christopher B. Ferguson
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Philip Anderson (1)
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Bruce Bennett
|
|
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Brett Vroman
|
|
|
53,333
|
|
|
|
26,667
|
|
|
$
|
7.01
|
|
|
|
9/26/2023
|
|
(1)
Mr. Anderson previously held 210,000 options pursuant to his original employment agreement with the Company, which were surrendered
to the Company on January 7, 2020 in exchange for the issuance of 100,000 shares of our restricted common stock, pursuant to Mr.
Anderson’s Separation and Release Agreement, dated June 7, 2019, which was further amended by that certain Amendment and
Release Agreement between the Company and Mr. Anderson, dated December 2, 2019.
Non-Employee
Director Compensation
We
do not have a formal policy with respect to compensation payable to our non-employee directors for service as directors. The table
below shows the equity and other compensation granted to our non-employee directors during fiscal 2019:
Name
|
|
Fees Earned
or Paid in
Cash ($)
|
|
|
Stock
Awards
($)(1)(2)
|
|
|
Option
Awards
($)(1)(2)
|
|
|
All Other
Compensation ($)
|
|
|
Total ($)
|
|
Louis Foreman
|
|
|
-
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
100,000
|
|
Frank Jennings
|
|
|
40,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,000
|
|
Kevin O’Donnell
|
|
|
40,000
|
|
|
|
100,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,000
|
|
Toper Taylor
|
|
|
20,000
|
|
|
|
120,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
140,000
|
|
|
(1)
|
On April 14, 2020, Toper Taylor provided notice of his intention
to resign as a member of the Board of Directors (the “Board”) of Edison Nation, Inc. (the “Company”),
effective as of April 14, 2020 (the “Taylor Resignation”). Mr. Taylor served as the chairman of the Board’s
nominating and corporate governance committee and as a member of the Board’s audit committee and compensation committee.
Mr. Taylor’s resignation was not in connection with any known disagreement with the Company on any matter relating to
the Company’s operations, policies, or practices.
|
|
|
|
|
(2)
|
On November 15, 2019, in lieu of granting the Options, the
Company granted the board of directors restricted stock units of 20,000 shares which vested immediately. In addition, on November
15, 2019, the Company granted each non-employee director restricted stock units of 30,000 shares, which vested on January
1, 2020.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Policies
and Procedures for Related Person Transactions
Our
board of directors has adopted written policies and procedures for the review of any transaction, arrangement or relationship
in which we are a participant, the amount involved exceeds $120,000 and one of our executive officers, directors, director nominees
or 5% shareholders, or their immediate family members, each of whom we refer to as a “related person,” has a direct
or indirect material interest.
If
a related person proposes to enter into such a transaction, arrangement or relationship, which we refer to as a “related
person transaction,” the related person must report the proposed related person transaction to our Chief Financial Officer.
The policy calls for the proposed related person transaction to be reviewed and, if deemed appropriate, approved by our audit
committee. Whenever practicable, the reporting, review and approval will occur prior to entry into the transaction. If advance
review and approval is not practicable, the committee will review, and, in its discretion, may ratify the related person transaction.
The policy also permits the chairman of the committee to review and, if deemed appropriate, approve proposed related person transactions
that arise between committee meetings, subject to ratification by the committee at its next meeting. Any related person transactions
that are ongoing in nature will be reviewed annually.
A
related person transaction reviewed under the policy will be considered approved or ratified if it is authorized by the committee
after full disclosure of the related person’s interest in the transaction. As appropriate for the circumstances, the committee
will review and consider:
|
●
|
the
related person’s interest in the related person transaction;
|
|
●
|
the
approximate dollar value of the amount involved in the related person transaction;
|
|
●
|
the
approximate dollar value of the amount of the related person’s interest in the
transaction without regard to the amount of any profit or loss;
|
|
●
|
whether
the transaction was undertaken in the ordinary course of our business;
|
|
●
|
whether
the terms of the transaction are no less favorable to us than terms that could have been
reached with an unrelated third party; and
|
|
●
|
the
purpose of, and the potential benefits to us of, the transaction.
|
The
audit committee may approve or ratify the transaction only if the committee determines that, under all of the circumstances, the
transaction is in our best interests. The committee may impose any conditions on the related person transaction that it deems
appropriate.
In
addition to the transactions that are excluded by the instructions to the SEC’s related person transaction disclosure rule,
our board of directors has determined that the following transactions do not create a material direct or indirect interest on
behalf of related persons and, therefore, are not related person transactions for purposes of this policy:
|
●
|
interests
arising solely from the related person’s position as an executive officer of another
entity (whether or not the person is also a director of such entity) that is a participant
in the transaction, where (i) the related person and all other related persons own in
the aggregate less than a 10% equity interest in such entity, (ii) the related person
and his or her immediate family members are not involved in the negotiation of the terms
of the transaction and do not receive any special benefits as a result of the transaction,
and (iii) the amount involved in the transaction is less than the greater of
$200,000 or 5% of the annual gross revenues of the company receiving payment under the
transaction; and
|
|
●
|
a
transaction that is specifically contemplated by provisions of our articles of incorporation,
as amended and restated, or Second Amended and Restated Bylaws.
|
The
policy provides that transactions involving compensation of executive officers shall be reviewed and approved by the compensation
committee in the manner specified in its charter.
We
have a written policy regarding the review and approval of related person transactions. With respect to such transactions, it
is our policy for our board of directors to consider the nature of and business reason for such transactions, how the terms of
such transactions compared to those which might be obtained from unaffiliated third parties and whether such transactions were
otherwise fair to and in the best interests of, or not contrary to, our best interests. In addition, all related person transactions
required prior approval, or later ratification, by our board of directors.
Related
Party Transactions
NL Penn Capital, LP and SRM Entertainment
Group LLC
On December 31, 2018, the Company completed
the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn Capital, LP in exchange for the satisfaction
of $470,000 due from related party. Accordingly, the consolidated financial statements of the Company reflect the accounting of
the combined acquired subsidiary at historical carrying values, except that equity reflects a distribution for the excess of consideration
paid over the net carrying amount of assets.
On December 31, 2018, the Company completed
the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC from NL Penn Capital, LP in exchange for
the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial statements of the Company reflect
the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects a distribution for
the excess of consideration paid over the net carrying amount of assets.
As of March 31, 2020, December 31,
2019 and December 31, 2018, due to related party consists of net amounts due to SRM Entertainment Group LLC (“SRM
LLC”) and NL Penn Capital, LP, which are both majority owned by Chris Ferguson, our Chairman and Chief Executive
Officer. The amount due to related parties is related to the acquisitions of Pirasta, LLC and Best Party Concepts, LLC offset
by operating expenses that were paid by SRM LLC and Edison Nation on behalf of SRM LLC and NL Penn Capital, LP. As of March
31, 2020, December 31, 2019 and December 31, 2018, the net amount due to related parties was $9,138, $17,253 and $140,682,
respectively. Such amounts are due currently.
Service
Agreement
On August 1, 2018, the Company entered
into a one-year letter agreement with Enventys Partners, LLC, a North Carolina limited liability company (“Enventys”),
whereby Enventys agreed to provide services to the Company as an independent contractor in the areas of product development and
crowdfunding campaign marketing. During the term of the Enventys Agreement, the Company shall pay Enventys a fixed fee of $15,000
per month for product development assistance, including design research, mechanical engineering and quality control planning.
Depending on the success of each campaign, the Company may also pay Enventys a commission of up to ten percent of the total funds
raised in the applicable campaign. Louis Foreman, who is a member of the Company’s board of directors, is also the Chief
Executive Officer and the largest equity holder of Enventys. We incurred fees of approximately $97,500 related to the services
performed by Enventys for the twelve months ended December 31, 2019, respectively. In April 2019, the Company and Enventys terminated
the letter agreement, such that no further payments are due from the Company to Enventys.
Stock
Option and Other Compensation Plans
On September 6, 2018, the Company’s
board of directors approved an amendment and restatement of the Company’s omnibus incentive plan solely to reflect the Company’s
name change to Edison Nation, Inc. Thus, the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”) which remains
effective as of February 9, 2018, provides for the issuance of up to 1,764,705 (290,936 remaining as of July 15,
2020) shares of common stock to help align the interests of management and our shareholders and reward our executive officers
for improved Company performance. Stock incentive awards under the Plan can be in the form of stock options, restricted stock
units, performance awards and restricted stock that are made to employees, directors and service providers. Awards are subject
to forfeiture until vesting conditions have been satisfied under the terms of the award. The exercise price of stock options are
equal to the fair market value of the underlying Company common stock on the date of grant.
On
September 26, 2018, the Compensation Committee of the board of directors approved the terms of compensation to be paid to non-employee
directors for fiscal year 2018. Compensation for non-employee directors includes an annual retainer of $20,000, an annual committee
meeting fee of $5,000, if such director chairs a committee of the board of directors, and an award of options to purchase 20,000
shares of the Company’s common stock (the “Options”). The restricted stock underlying such Options were to vest
one year after the grant date. However, the Options were never granted. Accordingly, On November 15, 2019, in lieu of granting
the Options, the Company granted each member of the board of directors restricted stock units of 20,000 shares which vested immediately,
except for Toper Taylor who received 30,000 shares in November 2019, related to the share amounts due to him under the terms of
his agreement with us. In addition, the Company granted each non-employee director restricted stock units of 30,000 shares,
which vested on January 1, 2020.
PRINCIPAL
SHAREHOLDERS
Security
Ownership of Management and Certain Beneficial Owners
The
following table sets forth the beneficial ownership of our Common Stock as of July 15, 2020 by:
|
●
|
each
shareholder known by us to beneficially own more than 5% of our outstanding Common Stock;
|
|
●
|
each
of our directors;
|
|
●
|
each
of our named executive officers; and
|
|
●
|
all
of our directors and executive officers as a group.
|
We
have determined beneficial ownership in accordance with the rules of the SEC. These rules generally provide that a person is the
beneficial owner of securities if such person has or shares the power to vote or direct the voting of securities, or to dispose
or direct the disposition of securities. A security holder is also deemed to be, as of any date, the beneficial owner of all securities
that such security holder has the right to acquire within 60 days after such date through (i) the exercise of any option or warrant,
(ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement, or (iv) the
automatic termination of a trust, discretionary account or similar arrangement. Except as disclosed in the footnotes to this table
and subject to applicable community property laws, we believe that each person identified in the table has sole voting and investment
power over all of the shares shown opposite such person’s name.
The percentage of beneficial ownership is based on 11,456,226 shares
of our Common Stock outstanding as of July 15, 2020, which includes 9,702,401 shares of common stock outstanding, 240,000 shares
of common stock issued to our directors as restricted stock units, 53,333 shares issuable under an option granted to one of our
executives, 160,492 shares of our common stock issuable upon the exercise of the warrants issued to employees of Alexander Capital,
LP; 550,000 shares of our common stock issuable upon conversion of the Greentree Note; 550,000 shares of our common stock issuable
upon exercise of the Greentree Warrant; 25,000 shares of our common stock issuable upon exercise of the O’Leary Warrant;
125,000 shares of our common stock issuable upon exercise of the Ralls Warrant; 50,000 shares of our common stock issuable upon
exercise of the Solit Warrant, which are all outstanding as of July 13, 2020 and excludes:
|
●
|
1,764,705 (290,036 remaining
as of July 15, 2020) shares of common stock reserved for future issuance under the Edison
Nation, Inc. Omnibus Incentive Plan (the “Plan”); and
|
|
●
|
80,000 shares of common
stock issuable upon the exercise of options outstanding as of July 15, 2020; and
|
|
●
|
285,632 shares of common stock issuable upon conversion of
the 4%, 5-year senior convertible notes in connection with the Edison Nation Holdings, LLC acquisition; and
|
|
●
|
990,000 shares of reserved common stock issuable upon exercise of the put option of Edison
Nation Holdings, LLC sellers; and
|
|
●
|
40,000
shares of common stock granted but not issued to 32 Entertainment, LLC as restricted stock units.
|
Name of Beneficial Owner
|
|
Number of
Shares
|
|
|
Percentage
|
|
5% Shareholders (1)
|
|
|
|
|
|
|
|
|
Tiburon Opportunity Fund LP
|
|
|
600,000
|
|
|
|
5.24
|
%
|
Greentree Financial Group, Inc. (2)
|
|
|
1,260,000
|
|
|
|
11.00
|
%
|
Lelainya D. Ferguson (3)
|
|
|
1,455,750
|
|
|
|
12.71
|
%
|
Executive Officers and Directors
|
|
|
|
|
|
|
|
|
Christopher B. Ferguson (4)
|
|
|
1,779,950
|
|
|
|
15.54
|
%
|
Kevin Ferguson (5)
|
|
|
313,500
|
|
|
|
2.74
|
%
|
Brett Vroman (6)
|
|
|
56,333
|
|
|
|
*
|
%
|
Bruce Bennett
|
|
|
3,500
|
|
|
|
*
|
%
|
Frank Jennings (7)
|
|
|
51,300
|
|
|
|
*
|
%
|
Louis Foreman (8)
|
|
|
372,288
|
|
|
|
3.25
|
%
|
Kevin O’Donnell (9)
|
|
|
50,900
|
|
|
|
*
|
%
|
Mary Ann Halford (10)
|
|
|
30,000
|
|
|
|
*
|
%
|
Total Executive Officers and Directors
|
|
|
2,657,771
|
|
|
|
23.20
|
%
|
*Represents
beneficial ownership of less than one percent (1%).
(1)
The address for each shareholder listed in the table above is: c/o Edison Nation, Inc. 1 West Broad Street, Suite 1004, Bethlehem,
Pennsylvania 18018.
(2)
Includes 550,000 shares of common stock issuable upon conversion of the Greentree Note; 550,000 shares of our common stock
issuable upon exercise of the Greentree Warrant, 100,000 origination shares in connection with the Greentree financing and
60,000 shares issued for advisory services.
(3)
Includes 1,455,750 shares held jointly with Mrs. Ferguson’s spouse, Christopher B. Ferguson.
(4)
Includes 1,455,750 shares held by Mr. Ferguson’s spouse, Lelainya D. Ferguson, 13,000 shares held by FergcoBros, LLC and
300,000 shares individually. Mr. Ferguson person disclaims beneficial ownership of the shares held in the name of FergcoBros,
LLC.
(5)
Includes 13,000 shares held by FergcoBros, LLC and 300,500 shares individually by Mr. ferguson. Mr. Ferguson person disclaims
beneficial ownership of the shares held in the name of FergcoBros, LLC.
(6) Includes 3,000 shares held by Mr. Vroman
and 53,333 shares issuable under the option held by Mr. Vroman.
(7)
Includes 50,000 shares issued to Mr. Jennings as Director’s compensation, 350 shares held by Mr. Jennings’ spouse,
200 shares held by Mr. Jennings’ son 100 shares held by Mr. Jennings’ children, respectively.
(8)
The indicated ownership is based solely upon a Schedule 13G filed with the SEC by Mr. Foreman on September 21, 2019. This total
includes 278,542 shares indirectly held by Mr. Foreman through Venture Six LLC (the “Venture Six Shares”) and 50,000
shares issued to Mr. Foreman as Director’s compensation Mr. Foreman is the managing member of Venture Six LLC and disclaims
beneficial ownership of the Venture Six Shares reported.
(9)
Includes 50,000 shares issued to Mr. O’Donnell as Director’s compensation and 575 shares held by Mr. O’Donnell’s
children.
(10) Includes 30,000 shares issued to Ms. Halford as Director’s
compensation.
DESCRIPTION
OF CAPITAL STOCK
General
The
following description of our capital stock and provisions of our amended and restated articles of incorporation and Second Amended
and Restated Bylaws are summaries and are qualified by reference to such amended and restated articles of incorporation and bylaws
that will be in effect upon the closing of this offering. By becoming a shareholder in our Company, you will be deemed to have
notice of and consented to these provisions of our amended and restated articles of incorporation and Second Amended and Restated
Bylaws.
We have two authorized classes of stock: common
stock (250,000,000 shares authorized) and preferred stock (30,000,000 shares authorized).
Common
Stock
Holders
of our common stock are entitled to one vote for each share held on all matters submitted to a vote of shareholders and do not
have cumulative voting rights. An election of directors by our shareholders shall be determined by a plurality of the votes cast
by the shareholders entitled to vote on the election. Holders of common stock are entitled to receive proportionately any dividends
as may be declared by our board of directors, subject to any preferential dividend rights of outstanding preferred stock.
In
the event of our liquidation or dissolution, the holders of common stock are entitled to receive proportionately all assets available
for distribution to shareholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding
preferred stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. The rights, preferences
and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares
of any series of preferred stock that we may designate and issue in the future.
As of July 15, 2020 there were 9,702,401
shares of our Common Stock outstanding, which excludes:
|
●
|
290,036
shares of common stock reserved for future issuance under the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”);
|
|
●
|
80,000
shares of common stock issuable upon the exercise of options outstanding as of July 15,
2020;
|
|
●
|
285,632
shares of common stock issuable upon conversion of the 5%, 5-year senior convertible notes in connection with the Edison Nation
Holdings, LLC acquisition;
|
|
●
|
990,000
shares of reserved common stock issuable upon exercise of the put option of Edison Nation Holdings, LLC sellers;
|
|
●
|
240,000 shares of common stock issued to our
directors as restricted stock units;
|
|
●
|
53,333 shares issuable under an option granted
to one of our executives;
|
|
●
|
65,626
shares of common stock issuable upon exercise of the Selling Agent Warrants issued in connection with the company’s
initial public offering;
|
|
●
|
24,366
shares of common stock issuable upon exercise of the Placement Agent Warrants in connection with the May 2019 Notes;
|
|
●
|
70,500
shares of common stock issuable upon exercise of the Placement Agent Warrants in connection with the PIPE financing;
|
|
●
|
550,000
shares of common stock issuable upon conversion of the Greentree Note;
|
|
●
|
550,000
shares of common stock issuable upon exercise of the Greentree Warrant;
|
|
●
|
200,000 shares of common stock issuable upon
the exercise of warrants in connection with various financings.
|
|
●
|
40,000
shares of common stock granted but not issued to 32 Entertainment, LLC as restricted stock units.
|
Preferred
Stock
Under our amended and restated articles of
incorporation, we have 30,000,000 shares of preferred stock authorized presently. However, our board of directors has the
authority, without further action by the stockholders, to issue up to that number of shares of preferred stock in one or more
series, to establish from time to time the number of shares to be included in each such series, to fix the rights, preferences
and privileges of the shares of each wholly unissued series and any qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series, but not below the number of shares of such series then outstanding.
Our board of directors may authorize the issuance of preferred stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of the common stock. The issuance of preferred stock, while providing flexibility
in connection with possible acquisitions and other corporate purposes, could, among other things, have the effect of delaying,
deferring or preventing a change in control of the company and may adversely affect the market price of our common stock and the
voting and other rights of the holders of our common stock.
On March 25, 2020, Edison Nation, Inc.
(the “Company”) filed a certificate of amendment to the Company’s articles of incorporation with the Secretary
of State of the State of Nevada in order to: (i) increase the number of shares of the Company’s authorized preferred stock,
par value $0.001 per share, from 0 shares to 30,000,000 shares of preferred stock; (ii) clarify the application of the forum selection
clause in the Company’s amended and restated articles of incorporation, specifically that such clause does not apply to
federal causes of actions arising under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended
(the “Exchange Act”); and (iii) include affirmative changes to correspond to the Company’s First Amended and
Restated Bylaws, confirming that the Company’s shareholders may vote by written consent.
Anti-Takeover
Provisions
We
are governed by the provisions of Nevada Revised Statutes 78.378 to 78.3793 because we are incorporated in Nevada, which prohibits
a person who owns in excess of ten percent (10%) of our outstanding voting stock from merging, consolidating or combining with
us for a period of three years after the date of the transaction in which the person acquired in excess of ten percent (10%)
of our outstanding voting stock, unless the merger, consolidation or combination is approved in a prescribed manner. Any provision
in our amended and restated articles of incorporation or our Second Amended and Restated Bylaws or Nevada law that has the effect
of delaying or deterring a change in control could limit the opportunity for our Shareholders to receive a premium for their shares
of our common stock, and could also affect the price that some investors are willing to pay for our common stock.
Removal
of Directors
A
director may be removed only for cause and only by the affirmative vote of the holders of at least 75% of the votes that all our
shareholders would be entitled to cast in an annual election of directors. Any vacancy on our board of directors, including a
vacancy resulting from an enlargement of our board of directors, may be filled only by vote of a majority of our directors then
in office.
Authorized
but Unissued Shares
The
authorized but unissued shares of our common stock are available for future issuance without shareholder approval, subject to
any limitations imposed by the listing standards of The Nasdaq Capital Market. These additional shares may be used for a variety
of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved
common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy
contest, tender offer, merger or otherwise.
Warrants
As of July 15, 2020, there were 910,492
shares of our common stock issuable upon exercise of outstanding Warrants, including the 550,000 shares of common stock underlying
the Greentree Warrant and 160,492 shares of common stock underlying the Alexander Warrants.
Options
As
of July 15, 2020, there were 80,000 shares of our common stock issuable upon exercise of outstanding stock options pursuant
to our equity plans with a weighted average exercise price of $7.01 per share.
In
addition, as of July 15, 2020, there were 990,000 shares of reserved common stock issuable upon exercise of the put option
of EN sellers.
Restricted
Stock Units
As of July 15, 2020, there were 240,000
shares of our common stock granted but not issued to our directors as Restricted Stock Units and 40,000 shares of our common
stock granted but not issued to 32 Entertainment, LLC as Restricted Stock Units.
Registration
Rights
On
September 4, 2018, as part of the closing of our acquisition of all of the voting membership interests of Edison Nation Holdings,
LLC, we entered into a registration rights agreement certain members of Edison Nation Holdings, LLC, which provided those members
with demand and piggyback registration rights in respect of any registrable shares of the Company’s common stock received
pursuant to the terms of that certain Membership Interest Purchase Agreement (the “Purchase Agreement”) by and among
us, Edison Nation Holdings, LLC and its members dated June 29, 2018.
See
the section entitled “Recent Developments—32 Entertainment, LLC Financing” relating to the registration
rights granted to investors in the Greentree Financing.
See
the section entitled “Private Placement of Securities--Registration Rights” relating to the registration rights
granted to investors in the PIPE Financing.
See
the section entitled “Recent Developments—Greentree Financing” relating to the registration rights granted
to investors in the Greentree Financing.
Transfer
Agent and Registrar
The
transfer agent and registrar for our common stock is Nevada Agency & Transfer Company, which is located at 50 W. Liberty Street,
#880, Reno, Nevada 89501 and the telephone number is (775) 322-0626.
The
Nasdaq Capital Market
Our
common stock trades on The Nasdaq Capital Market under the symbol “EDNT.”
LEGAL
MATTERS
The validity of the shares of common stock
offered hereby and certain other legal matters will be passed upon for us by Lucosky Brookman LLP, New York, NY.
EXPERTS
The financial statements of Edison Nation,
Inc. as of December 31, 2019 and 2018 appearing in this prospectus and Registration Statement, have been audited
by Marcum LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein,
and are included in reliance upon such report, given on the authority of such firm as experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We
have filed with the SEC a Registration Statement on Form S-1 under the Securities Act, with respect to the shares of common stock
being offered by this prospectus. This prospectus does not contain all of the information in the Registration Statement and its
exhibits. For further information with respect to Edison Nation, Inc. and the common stock offered by this prospectus, we refer
you to the Registration Statement and its exhibits. Statements contained in this prospectus as to the contents of any contract
or any other document referred to are not necessarily complete, and in each instance, we refer you to the copy of the contract
or other document filed as an exhibit to the Registration Statement. Each of these statements is qualified in all respects by
this reference.
You
can read our SEC filings, including the registration statement, over the Internet at the SEC’s website at http://www.sec.gov.
We
are subject to the information reporting requirements of the Exchange Act, and we will file reports, proxy statements and other
information with the SEC. These reports, proxy statements and other information will be available for inspection and copying at
the public reference room and website of the SEC referred to above. We also maintain a website at www.edisonnation.com, at which
you may access these materials free of charge as soon as reasonably practicable after they are electronically filed with, or furnished
to, the SEC. The information contained in, or that can be accessed through, our website is not part of this prospectus.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
Certain
information about us is “incorporated by reference” to reports and exhibits that we file with the SEC that are not
included in this prospectus. We disclose important information to you by referring you to those documents. Any statement contained
in this prospectus or a document incorporated or deemed to be incorporated by reference into this prospectus will be deemed to
be modified or superseded for purposes of this prospectus to the extent that a statement contained in this prospectus or any other
subsequently filed document that is deemed to be incorporated by reference into this prospectus modifies or supersedes such statement.
Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this
prospectus. We incorporate by reference the documents listed below that we have filed with the SEC:
|
●
|
Annual
Report on Form 10-K for the fiscal year ended December 31, 2019 as well as the Amended
Annual report for the fiscal year December 31, 2019 on Form 10-K/A filed on June 4, 2020;
|
|
●
|
Quarterly
Reports on Form 10-Q for the quarters ended March
31, 2019, June
30, 2019, September
30, 2019 and March
31, 2020;
|
|
●
|
Current
Reports on Form 8-K, filed on March
13, 2019, March
29, 2019, May
10, 2019, May
17, 2019, June
11, 2019, June
19, 2019, June
20, 2019, July
29, 2019, August
29, 2019, October
4, 2019, October
8, 2019, and January
29, 2020, February 21, 2020, March 12, 2020, March 26, 2020, April 17, 2020, April 27, 2020, May 13, 2020 and May 26, 2020 as well as the Current Report on Form 8-K/A filed on October 8, 2019; and
|
|
●
|
Definitive
Proxy Statement on Schedule 14A, filed on April 30, 2019.
|
All
documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, on or after the date of this
prospectus and prior to the termination of this offering are also incorporated herein by reference and will automatically update
and, to the extent described above, supersede information contained or incorporated by reference in this prospectus and previously
filed documents that are incorporated by reference in this prospectus. However, anything herein to the contrary notwithstanding,
no document, exhibit or information or portion thereof that we have “furnished” or may in the future “furnish”
to (rather than “file” with) the SEC, including, without limitation, any document, exhibit or information filed pursuant
to Item 2.02, Item 7.01 and certain exhibits furnished pursuant to Item 9.01 of our Current Reports on Form 8-K, shall be incorporated
by reference into this prospectus.
You
may request a copy of any of the reports or documents incorporated by reference into this prospectus, at no cost (other than exhibits
and schedules to such filings, unless such exhibits or schedules are specifically incorporated by reference into this prospectus
supplement and the accompanying prospectus), by writing or calling us at the following address: Investor Relations, 1 West Broad
Street, Suite 1004, Bethlehem, Pennsylvania 18018 or (484) 893-0060.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
PART
I
INDEX
TO FINANCIAL STATEMENTS
|
|
Page
|
Unaudited Condensed Consolidated Financial Statements for the Three Months Ended
March 31, 2020 and 2019
|
|
F-2
|
Condensed Consolidated Balance Sheets as of March 31, 2020 (Unaudited) and
December 31, 2019
|
|
F-2
|
Condensed Consolidated Statements of Operations for the three
months ended March 31, 2020 and 2019 (Unaudited)
|
|
F-3
|
Condensed Consolidated Statements of Changes in Shareholders’
Equity for the three months ended March 31, 2020 and 2019 (Unaudited)
|
|
F-4 - F-5
|
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2020 and 2019 (Unaudited)
|
|
F-6
|
Notes to Condensed Consolidated Financial Statements
|
|
F-7 - F-22
|
Audited Consolidated Financial Statements for the Years Ended December 31, 2019
and 2018
|
|
F-23
|
Report of Independent Registered Public Accounting Firm
|
|
F-23
|
Consolidated Balance Sheets as of December 31, 2019 and 2018
|
|
F-24
|
Consolidated Statements of Operations for the years ended December 31, 2019 and 2018
|
|
F-25
|
Consolidated Statement of Changes in Shareholders’ Equity (Deficit) for the years ended December 31, 2019 and 2018
|
|
F-26
|
Consolidated Statements of Cash Flows for the years ended December 31, 2019 and 2018
|
|
F-27
|
Notes to Consolidated Financial Statements
|
|
F-28 - F-53
|
Edison
Nation, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
March
31,
2020
(Unaudited)
|
|
|
December
31,
2019
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
532,062
|
|
|
$
|
412,719
|
|
Accounts receivable, net
|
|
|
2,043,739
|
|
|
|
2,108,099
|
|
Inventory
|
|
|
1,300,136
|
|
|
|
1,369,225
|
|
Prepaid expenses and other current assets
|
|
|
883,992
|
|
|
|
917,433
|
|
Income tax receivable
|
|
|
147,889
|
|
|
|
147,889
|
|
Total current assets
|
|
|
4,907,818
|
|
|
|
4,955,365
|
|
Property and equipment, net
|
|
|
922,861
|
|
|
|
931,968
|
|
Right of use assets, net
|
|
|
654,277
|
|
|
|
732,100
|
|
Intangible assets, net
|
|
|
11,322,789
|
|
|
|
11,598,063
|
|
Goodwill
|
|
|
5,392,123
|
|
|
|
5,392,123
|
|
Total assets
|
|
$
|
23,199,868
|
|
|
$
|
23,609,619
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
3,176,725
|
|
|
$
|
7,397,650
|
|
Accrued expenses and other current liabilities
|
|
|
1,978,295
|
|
|
|
1,594,669
|
|
Deferred revenues
|
|
|
154,489
|
|
|
|
159,591
|
|
Current portion of operating leases liabilities
|
|
|
282,689
|
|
|
|
272,215
|
|
Income tax payable
|
|
|
8,446
|
|
|
|
22,919
|
|
Line of credit, net of debt issuance costs of $0 and $15,573, respectively
|
|
|
585,430
|
|
|
|
456,995
|
|
Current portion of convertible notes payable, net of debt issuance costs
of $855,555
|
|
|
244,445
|
|
|
|
-
|
|
Current portion of notes payable, net of debt issuance costs of $245,819
and $212,848, respectively
|
|
|
1,341,079
|
|
|
|
1,365,675
|
|
Current portion of notes payable – related parties
|
|
|
1,118,751
|
|
|
|
1,686,352
|
|
Due to related party
|
|
|
9,138
|
|
|
|
17,253
|
|
Total current liabilities
|
|
|
8,899,487
|
|
|
|
12,973,319
|
|
Operating leases liabilities –net of current portion
|
|
|
396,962
|
|
|
|
482,212
|
|
Convertible notes payable – related parties, net of current portion, net of debt discount
of $341,667 and $366,666, respectively
|
|
|
1,086,494
|
|
|
|
1,061,495
|
|
Notes payable, net of current portion
|
|
|
38,842
|
|
|
|
42,492
|
|
Notes payable – related parties, net of current portion
|
|
|
1,548,762
|
|
|
|
1,595,669
|
|
Total liabilities
|
|
|
11,970,547
|
|
|
|
16,155,187
|
|
Commitments and Contingencies (Note 7)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity
|
|
|
|
|
|
|
|
|
Preferred stock, $0.001 par value, 30,000,000 shares authorized; 0 and 0 shares issued and outstanding as of March
31, 2020 and December 31, 2019, respectively
|
|
$
|
-
|
|
|
$
|
-
|
|
Common stock, $0.001 par value, 250,000,000 shares authorized; 8,676,501 and 8,015,756 shares issued and outstanding
as of March 31, 2020 and December 31, 2019, respectively
|
|
|
8,677
|
|
|
|
8,016
|
|
Additional paid-in-capital
|
|
|
28,790,704
|
|
|
|
26,259,575
|
|
Accumulated deficit
|
|
|
(17,225,970
|
)
|
|
|
(18,495,461
|
)
|
Total stockholders’ equity attributable to Edison Nation, Inc.
|
|
|
11,573,411
|
|
|
|
7,772,130
|
|
Noncontrolling interests
|
|
|
(344,090
|
)
|
|
|
(317,698
|
)
|
Total stockholders’ equity
|
|
|
11,229,321
|
|
|
|
7,454,432
|
|
Total liabilities and stockholders’ equity
|
|
$
|
23,199,868
|
|
|
$
|
23,609,619
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three
Months Ended
March 31,
|
|
|
|
2020
(Unaudited)
|
|
|
2019
(Unaudited)
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
3,667,110
|
|
|
$
|
5,738,534
|
|
Cost
of revenues
|
|
|
2,418,412
|
|
|
|
3,945,558
|
|
Gross
profit
|
|
|
1,248,698
|
|
|
|
1,792,976
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
4,192,713
|
|
|
|
3,049,188
|
|
Operating
loss
|
|
|
(2,944,015
|
)
|
|
|
(1,256,212
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
25,704
|
|
|
|
25,704
|
|
Interest
expense
|
|
|
(723,957
|
)
|
|
|
(124,694
|
)
|
Gain
on divestiture
|
|
|
4,911,760
|
|
|
|
-
|
|
Total
other income (expense)
|
|
|
4,213,507
|
|
|
|
(98,990
|
)
|
Income
(loss) before income taxes
|
|
|
1,269,492
|
|
|
|
(1,355,202
|
)
|
Income
tax expense
|
|
|
-
|
|
|
|
23,195
|
|
Net
income (loss)
|
|
$
|
1,269,492
|
|
|
$
|
(1,378,397
|
)
|
Net
(loss) income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
56,893
|
|
Net
income (loss) attributable to Edison Nation, Inc.
|
|
|
1,269,492
|
|
|
|
(1,435,290
|
)
|
Net
income (loss) per share - basic
|
|
$
|
0.16
|
|
|
$
|
(0.25
|
)
|
Net
income (loss) per share - diluted
|
|
$
|
0.13
|
|
|
$
|
(0.25
|
)
|
Weighted
average number of common shares outstanding – basic
|
|
|
8,181,470
|
|
|
|
5,661,380
|
|
Weighted
average number of common shares outstanding – diluted
|
|
|
9.637,421
|
|
|
|
5,661,380
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(DEFICIT)
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2020
|
|
|
8,015,756
|
|
|
$
|
8,016
|
|
|
$
|
26,259,576
|
|
|
$
|
(18,495,462
|
)
|
|
$
|
(317,698
|
)
|
|
$
|
7,454,432
|
|
Issuance
of common stock to noteholders
|
|
|
160,000
|
|
|
|
160
|
|
|
|
201,164
|
|
|
|
-
|
|
|
|
-
|
|
|
|
201,324
|
|
Returned
common stock from noteholder
|
|
|
(153,005
|
)
|
|
|
(153
|
)
|
|
|
153
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of common stock to consultants
|
|
|
653,750
|
|
|
|
654
|
|
|
|
562,109
|
|
|
|
-
|
|
|
|
-
|
|
|
|
562,763
|
|
Issuance
of warrants to noteholders and beneficial conversion option
|
|
|
-
|
|
|
|
-
|
|
|
|
1,018,953
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,018,953
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
748,749
|
|
|
|
-
|
|
|
|
-
|
|
|
|
748,749
|
|
Divestiture
of Cloud B
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(26,392
|
)
|
|
|
(26,392
|
)
|
Net
income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,269,492
|
|
|
|
-
|
|
|
|
1,269,492
|
|
Balance,
March 31, 2020 (Unaudited)
|
|
|
8,676,501
|
|
|
$
|
8,677
|
|
|
$
|
28,790,704
|
|
|
$
|
(17,225,970
|
)
|
|
$
|
(344,090
|
)
|
|
$
|
11,229,321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2019
|
|
|
5,654,830
|
|
|
$
|
5,655
|
|
|
$
|
20,548,164
|
|
|
$
|
(5,565,756
|
)
|
|
$
|
951,576
|
|
|
$
|
15,939,639
|
|
Issuance
of common stock to note holders
|
|
|
15,000
|
|
|
|
15
|
|
|
|
74,085
|
|
|
|
-
|
|
|
|
-
|
|
|
|
74,100
|
|
Issuance
of common stock to vendors for services
|
|
|
10,500
|
|
|
|
10
|
|
|
|
52,490
|
|
|
|
-
|
|
|
|
-
|
|
|
|
52,500
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
184,419
|
|
|
|
-
|
|
|
|
56,983
|
|
|
|
184,419
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,435,290
|
)
|
|
|
-
|
|
|
|
(1,378,397
|
)
|
Balance,
March 31, 2019 (Unaudited)
|
|
|
5,680,330
|
|
|
$
|
5,680
|
|
|
$
|
20,859,158
|
|
|
$
|
(7,001,046
|
)
|
|
$
|
1,008,469
|
|
|
$
|
14,872,261
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Three
Months Ended March 31,
|
|
|
|
2020
(Unaudited)
|
|
|
2019
(Unaudited)
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net
income (loss) attributable to Edison Nation, Inc.
|
|
$
|
1,269,492
|
|
|
$
|
(1,435,290
|
)
|
Net
income attributable to noncontrolling interests
|
|
|
-
|
|
|
|
56,893
|
|
Net
income (loss)
|
|
|
1,269,492
|
|
|
|
(1,378,397
|
)
|
Adjustments
to reconcile net (income) loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
316,299
|
|
|
|
301,383
|
|
Amortization
of financing costs
|
|
|
570,636
|
|
|
|
56,022
|
|
Stock-based
compensation
|
|
|
1,319,511
|
|
|
|
362,419
|
|
Amortization
of right of use asset
|
|
|
77,823
|
|
|
|
77,704
|
|
Gain
on divestiture
|
|
|
(4,911,760
|
)
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
64,359
|
|
|
|
(776,057
|
)
|
Inventory
|
|
|
69,089
|
|
|
|
(437,635
|
)
|
Prepaid
expenses and other current assets
|
|
|
33,441
|
|
|
|
(1,004,133
|
)
|
Accounts
payable
|
|
|
(215,320
|
)
|
|
|
840,943
|
|
Accrued
expenses and other current liabilities
|
|
|
335,815
|
|
|
|
381,714
|
|
Operating
lease liabilities
|
|
|
(74,776
|
)
|
|
|
(73,473
|
)
|
Due
from related party
|
|
|
(8,115
|
)
|
|
|
(42,686
|
)
|
Net
cash used in operating activities
|
|
|
(1,153,505
|
)
|
|
|
(1,692,196
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(31,918
|
)
|
|
|
(72,955
|
)
|
Net
cash used in investing activities
|
|
|
(31,918
|
)
|
|
|
(72,955
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
borrowings under line of credit
|
|
|
112,862
|
|
|
|
(15,035
|
)
|
Borrowings
under convertible notes payable
|
|
|
1,100,000
|
|
|
|
-
|
|
Borrowings
under notes payable
|
|
|
950,000
|
|
|
|
500,000
|
|
Repayments
under notes payable
|
|
|
(672,773
|
)
|
|
|
(3,336
|
)
|
Repayments
under notes payable- related parties
|
|
|
(14,508
|
)
|
|
|
(27,263
|
)
|
Fees
paid for financing costs
|
|
|
(170,815
|
)
|
|
|
(22,500
|
)
|
Net
cash provided by financing activities
|
|
|
1,304,766
|
|
|
|
431,866
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
119,343
|
|
|
|
(1,333,285
|
)
|
Cash
and cash equivalents - beginning of period
|
|
|
412,719
|
|
|
|
2,052,731
|
|
Cash
and cash equivalents - end of period
|
|
$
|
532,062
|
|
|
|
719,446
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
127,504
|
|
|
$
|
52,640
|
|
Income
taxes
|
|
$
|
-
|
|
|
$
|
235,275
|
|
Noncash
investing and financing activity:
|
|
|
|
|
|
|
|
|
Shares
issued to note holders
|
|
$
|
368,000
|
|
|
$
|
74,100
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Basis of Presentation and
Nature of Operations
The condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X of the United States Securities and Exchange
Commission (the “SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual
financial statements. The condensed consolidated financial statements include the accounts of the Company and its wholly-owned
and majority-owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. In the opinion
of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments
necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2020
and the results of operations, changes in stockholders’ equity, and cash flows for the periods presented. The
results of operations for the three months ended March 31, 2020 are not necessarily indicative of the operating
results for the full fiscal year or any future period.
These condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2019. The Company’s accounting policies are described
in the Notes to Consolidated Financial Statements in its Annual Report on Form 10-K for the year ended December 31, 2019,
and updated, as necessary, in this Quarterly Report on Form 10-Q.
As used herein, the terms the “Company,”
“Edison Nation” “we,” “us,” “our” and similar refer to Edison Nation, Inc., a
Nevada corporation incorporated on July 18, 2017 under the laws of the State of Nevada as Idea Lab X Products, Inc. and also formerly
known as Xspand Products Lab, Inc. prior to its name change on September 12, 2018, and/or its wholly-owned and majority-owned
operating subsidiaries, and/or where applicable, its management.
Edison Nation is a vertically-integrated,
end-to-end, consumer product research & development, manufacturing, sales and fulfillment company. The Company’s proprietary
web-enabled platform provides a low risk, high reward platform and process to connect innovators of new product ideas with potential
licensees.
As of March 31, 2020, Edison Nation,
Inc. had six wholly-owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Scalematix, LLC
(“Scalematix”), Ferguson Containers, Inc. (“Fergco”), CBAV1, LLC (“CB1”), Pirasta, LLC
(‘Pirasta”) and Edison Nation Holdings, LLC. Edison Nation, Inc. owns 50% of Best Party Concepts, LLC. Edison
Nation Holdings, LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single
member of Safe TV Shop, LLC.
Liquidity
For the three months ended March 31, 2020,
our operations lost approximately $2,900,000, of which approximately $2,284,000 was non-cash and approximately $366,000 was related
to transaction costs and other non-recurring items
At March 31, 2020, we had total current
assets of approximately $4,907,818 and current liabilities of approximately $8,899,487 resulting in negative working capital of
approximately $3,991,669, of which $1,118,751 was related party notes payable and $530,815 was included in accrued expenses for
unissued shares. At March 31, 2020, we had total assets of $23,199,868 and total liabilities of $11,970,547 resulting in stockholders’
equity of $11,229,321.
The foregoing factors raise substantial
doubt about the Company’s ability to continue as a going concern for at least the next twelve months from the date of issuance
of these condensed financial statements. The ability to continue as a going concern is dependent upon the Company’s ability
to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable
operations from the sale of its products.
The condensed financial statements do not
include any adjustments that might be necessary if the Company is unable to continue as a going concern. The following is additional
information on our operating losses and working capital:
The Company’s operating loss for
the three months ended March 31, 2020 included $2,284,269 related to depreciation, amortization (including amortization for financing
costs and right of use asset) and stock-based compensation. In addition, approximately $365,732 was related to transaction costs,
restructuring charges and other non-recurring and redundant costs which are being removed or reduced.
Management has considered possible mitigating
factors within our management plan on our ability to continue for at least a year from the date these financial statements are
filed. The following items are management plans to alleviate any going concern issues for at least the next twelve months from
the date these condensed financial statements are available:
|
●
|
Subsequent
to March 31, 2020, the Company raised $1,089,853 through loan agreements.
|
|
|
|
|
●
|
Raise
further capital through the sale of addition equity.
|
|
|
|
|
●
|
Borrow
money under debt securities.
|
|
|
|
|
●
|
The
deferral of payments to related party debt holders for both principal of $1,118,751 and related interest expense.
|
|
|
|
|
●
|
Annual
cost saving initiatives related to synergies and the elimination of redundant costs of approximately $1,500,000.
|
|
|
|
|
●
|
Possible
sale of certain brands to other manufacturers.
|
|
|
|
|
●
|
Edison
Nation Medical’s procurement of Personal Protective Equipment (“PPE”) and subsequent sale to governmental
agencies, educational facilities, medical facilities and distributors.
|
|
|
|
|
●
|
Entry
into joint ventures or total/partial acquisitions of operational entities to expand the sale of PPE through Edison Nation
Medical
|
Our operating needs include the planned
costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital
requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize
our products and services, competing technological and market developments, and the need to enter into collaborations with other
companies or acquire other companies or technologies to enhance or complement our product and service offerings.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of Edison Nation, Inc. and its wholly-owned and majority owned subsidiaries.
All intercompany balances and transactions have been eliminated.
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the
financial statements.
The
Company’s significant estimates used in these financial statements include, but are not limited to, accounts receivable
reserves, the valuation allowance related to the Company’s deferred tax assets, the recoverability and useful lives of long-lived
assets, debt conversion features, stock-based compensation, certain assumptions related to the valuation of the reserved shares
and the assets acquired and liabilities assumed related to the Company’s acquisitions. 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.
Reclassifications
Certain
reclassifications have been made to prior year amounts to conform to current year presentation.
Cash
and Cash Equivalents
The Company has cash on
deposit in several financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“FDIC”)
insurance limits. The Company has not experienced losses in such accounts and periodically evaluates the creditworthiness of its
financial institutions. The Company reduces its credit risk by placing its cash and cash equivalents with major financial institutions.
The Company had approximately $532,000 of cash and cash equivalents at March 31, 2020 of which approximately $249,000 was held
in foreign bank accounts not covered by FDIC insurance limits as of March 31, 2020.
Accounts Receivable
No customers represented
more than 10% of total accounts receivable.
Inventory
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.
Revenue
Recognition
Generally,
the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five step process
outlined in the Accounting Standards Codification (“ASC”) 606:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probable that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct, or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step 5 – Satisfaction of the Performance
Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods or services are transferred to a customer.
The Company satisfies each of its performance obligations by transferring control of the promised good or service underlying that
performance obligation to the customer. Control is the ability to direct the use of and obtain substantially all of the remaining
benefits from an asset. It includes the ability to prevent other entities from directing the use of and obtaining the benefits
from an asset. Indicators that control has passed to the customer include: a present obligation to pay; physical possession of
the asset; legal title; risks and rewards of ownership; and acceptance of the asset(s). Performance obligations can be satisfied
at a point in time or over time.
Substantially
all of the Company’s revenues continue to be recognized when control of the goods are transferred to the customer, which
is upon shipment of the finished goods to the customer. All sales have fixed pricing and there are currently no material variable
components included in the Company’s revenue. Additionally, the Company will issue credits for defective merchandise, historically
these credits for defective merchandise have not been material. Based on the Company’s analysis of the new revenue standards,
revenue recognition from the sale of finished goods to customers, which represents substantially all of the Company’s revenues,
was not impacted by the adoption of the new revenue standards.
Disaggregation
of Revenue
The
Company’s primary revenue streams include the sale and/or licensing of consumer goods and packaging materials for innovative
products. The Company’s licensing business is not material and has not been separately disaggregated for segment purposes.
The disaggregated Company’s revenues for the three months ended March 31, 2020 and 2019 were as follows:
|
|
For
the Three Months
Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
3,626,901
|
|
|
$
|
5,637,350
|
|
Service
revenues
|
|
|
-
|
|
|
|
25,597
|
|
Licensing
revenues
|
|
|
40,209
|
|
|
|
75,587
|
|
Total
revenues, net
|
|
$
|
3,667,110
|
|
|
$
|
5,738,534
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
For the three months ended
March 31, 2020 and 2019, the following customer represented more than 10% of total net revenues:
|
|
For
the Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Customer
A
|
|
|
11
|
%
|
|
|
*-
|
%
|
Customer
B
|
|
|
*
|
%
|
|
|
23
|
%
|
*
Customer did not represent greater than 10% of total net revenue.
For
the three months ended March 31, 2020 and 2019, the following geographical regions represented more than 10% of total net revenues:
|
|
For
the Three Months Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
North
America
|
|
|
82
|
%
|
|
|
77
|
%
|
Europe
|
|
|
17
|
%
|
|
|
19
|
%
|
*
Region did not represent greater than 10% of total net revenue.
Fair
Value of Financial Instruments
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, accrued expenses
and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amount of
the Company’s notes payable approximates fair value because the effective yields on these obligations, which include contractual
interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns
for instruments of similar credit risk. The loan held for investment was acquired at fair value, which resulted in a discount.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Sequencing Policy
Under ASC 815-40-35, the Company follows
a sequencing policy whereby, in the event that reclassification of contracts from equity to assets or liabilities is necessary
pursuant to ASC 815 due to the Company’s inability to demonstrate it has sufficient authorized shares as a result of certain
securities with a potentially indeterminable number of shares, shares will be allocated on the basis of the earliest issuance
date of potentially dilutive instruments, with the earliest grants receiving the first allocation of shares. Pursuant to ASC 815,
issuance of securities to the Company’s employees or directors are not subject to the sequencing policy.
Foreign Currency Translation
The Company uses the United States dollar
as its functional and reporting currency since the majority of the Company’s revenues, expenses, assets and liabilities
are in the United States. Assets and liabilities in foreign currencies are translated using the exchange rate at the balance sheet
date, while revenue and expense accounts are translated at the average exchange rates prevailing during the year. Equity accounts
are translated at historical exchange rates. Gains and losses from foreign currency transactions and translation for the three
months ended March 31, 2020 and 2019 and the cumulative translation gains and losses as of March 31, 2020
and December 31, 2019 were not material.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Net
Earnings or Loss per Share
Basic
net income (loss) per common share is computed by dividing net loss 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, 2020, the Company included 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 dilutive.
|
|
March
31,
|
|
|
|
2020
|
|
Shares
reserved in exchange for the cancellation of certain non-voting membership interest in Edison Nation Holdings, LLC
|
|
|
990,000
|
|
Convertible
shares under notes payable
|
|
|
550,000
|
|
Warrants
for noteholders
|
|
|
800,000
|
|
Restricted
stock units
|
|
|
210,000
|
|
Shares
to be issued
|
|
|
215,000
|
|
Total
|
|
|
2,765,000
|
|
As
of March 31, 2020, the Company excluded the common stock equivalents summarized below, which entitled 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.
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Selling Agent Warrants
|
|
|
160,492
|
|
|
|
65,626
|
|
Shares reserved in exchange for the cancellation of certain non-voting membership interest
in Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
990,000
|
|
Options
|
|
|
80,000
|
|
|
|
290,000
|
|
Convertible shares under notes payable
|
|
|
285,632
|
|
|
|
285,632
|
|
Shares to be issued
|
|
|
-
|
|
|
|
12,500
|
|
Total
|
|
$
|
526,124
|
|
|
$
|
1,643,758
|
|
Net
earnings per share data for the three months ended March 31, 2020 and 2019 were computed as follows:
|
|
March 31, 2020
|
|
|
March 31, 2019
|
|
|
|
Basic
|
|
|
Diluted
|
|
|
Basic
|
|
|
Diluted
|
|
Net income (loss) attributable to Edison Nation, Inc.
|
|
$
|
1,269,492
|
|
|
$
|
1,269,492
|
|
|
$
|
(1,435,290
|
)
|
|
$
|
(1,435,290
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding- basic
|
|
|
8,181,470
|
|
|
|
8,181,470
|
|
|
|
5,661,380
|
|
|
|
5,661,380
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options and other share-based awards
|
|
|
-
|
|
|
|
210,000
|
|
|
|
-
|
|
|
|
-
|
|
Shares reserved
|
|
|
-
|
|
|
|
990,000
|
|
|
|
-
|
|
|
|
-
|
|
Warrants for noteholders
|
|
|
-
|
|
|
|
81,807
|
|
|
|
-
|
|
|
|
-
|
|
Convertible shares under notes payable
|
|
|
-
|
|
|
|
46,337
|
|
|
|
-
|
|
|
|
-
|
|
Shares to be issued
|
|
|
-
|
|
|
|
127,807
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
8,181,470
|
|
|
|
9,637,421
|
|
|
|
5,661,380
|
|
|
|
5,661,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Edison Nation, Inc. per share
|
|
$
|
0.16
|
|
|
$
|
0.13
|
|
|
$
|
(0.25
|
)
|
|
$
|
(0.25
|
)
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Recent
Accounting Pronouncements
In
August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles – Goodwill and Other
– Internal-Use Software (Subtopic 350-40), new accounting guidance that addresses the accounting for implementation costs
associated with a hosted service. The guidance provides that implementation costs be evaluated for capitalization using the same
criteria as that used for internal-use software development costs, with amortization expense being recorded in the same income
statement expense line as the hosted service costs and over the expected term of the hosting arrangement. This guidance is effective
for public business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years,
with early adoption permitted. The guidance will be applied either retrospectively or prospectively to all implementation costs
incurred after the date of adoption. The Company adopted this accounting guidance in the first quarter of 2020 and the adoption
did not have a material impact on the Company’s consolidated financial statements and related disclosures.
In
August 2018, the FASB issued new accounting guidance that eliminates, adds and modifies certain disclosure requirements for fair
value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used
to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual
reporting periods beginning after December 15, 2019; early adoption is permitted. The Company adopted this accounting guidance
in the first quarter of 2020 and the adoption did not have a material impact on the Company’s consolidated financial statements
and related disclosures.
In
October 2018, the FASB issued new accounting guidance for Variable Interest Entities, which requires indirect interests held through
related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision
makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting
periods during the year ending December 31, 2020. Early adoption is permitted. The Company adopted this accounting guidance in
the first quarter of 2020 and the adoption did not have a material impact on the Company’s consolidated financial statements
and related disclosures.
In
July 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): Part 1 – Accounting for Certain
Financial Instruments with Down Round Features and Part 2 – Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with Scope Exception
(“ASU No. 2017-11”). Part 1 of ASU No. 2017-11 addresses the complexity of accounting for certain financial instruments
with down round features. Down round features are provisions in certain equity-linked instruments (or embedded features) that
result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates
cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire instrument or conversion option. Part II of ASU No. 2017-11 addresses
the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending
content in the FASB Accounting Standards Codification®. This pending content is the result of the indefinite deferral of accounting
requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable
noncontrolling interests. For public business entities, the amendments in Part I of this update are effective for fiscal years,
and interim periods within those fiscal years, beginning after December 15, 2018. The amendments in Part II of this update do
not require any transition guidance because those amendments do not have an accounting effect. The Company adopted this accounting
guidance in the first quarter of 2020 and the adoption did not have a material impact on the Company’s consolidated financial
statements and related disclosures.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Subsequent
Events
The
Company has evaluated subsequent events through the date which the financial statements were issued. Based upon such evaluation,
except for items described in Note 8 and Note 10, the Company did not identify any recognized or non-recognized subsequent events
that would have required adjustment or disclosure in the financial statements.
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 deploys resources on a
consolidated level to all brands of the Company and therefore the Company only identifies one reportable operating segment with
multiple product offerings.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
3 — Acquisition and Divestitures
Divestiture
of Subsidiary
On
February 17, 2020, the Company divested its Cloud B, Inc. subsidiary and entered into an Agreement for the Purchase and Sale of
Cloud B, Inc.(the “Purchase Agreement”), with Pearl 33 Holdings, LLC (the “Buyer”), pursuant to which
the Buyer purchased from the Company (and the Company sold and assigned) 80,065 shares of common stock of Cloud B (the “Cloud
B Shares”) for $1, constituting a 72.15% ownership interest in Cloud B, based on 110,964 shares of Cloud B’s common
stock outstanding as of February 17, 2020. In accordance with the agreement, all of the liabilities of Cloud B were assumed by
Pearl 33.
On
February 17, 2020, the Company entered into an indemnification agreement with Pearl 33 Holdings, LLC in connection with the divestiture
of Cloud B, Inc., whereby pursuant to such agreement the Company is limited to the issuance of 150,000 shares of the Company’s
common stock to the Buyer for indemnification of claims against Cloud B Inc. The Company has recorded $405,000 related to the
fair value of the 150,000 shares of common stock which will be issued to the Buyer.
The
table below shows the assets and liabilities that the Company was relieved of in the transaction:
|
|
February 17,
2020
|
|
Accounts payable
|
|
|
4,005,605
|
|
Accrued Expenses
|
|
|
370,289
|
|
Income Tax Payable
|
|
|
14,473
|
|
Notes Payable
|
|
|
900,000
|
|
Non-Controlling Interest
|
|
|
26,393
|
|
Shares to be issued to Buyer
|
|
|
(405,000
|
)
|
Gain on divestiture
|
|
$
|
4,911,760
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
4 — Inventory
As
of March 31, 2020 and December 31, 2019, inventory consisted of the following:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Raw materials
|
|
$
|
66,654
|
|
|
$
|
49,232
|
|
Finished goods
|
|
|
1,333,481
|
|
|
|
1,319,993
|
|
Reserve for obsolescence
|
|
|
(100,000
|
)
|
|
|
-
|
|
Total inventory
|
|
$
|
1,300,135
|
|
|
$
|
1,369,225
|
|
Note
5 — Debt
As
of March 31, 2020 and December 31, 2019, debt consisted of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
Line
of credit:
|
|
|
|
|
|
|
|
|
Lines
of credit
|
|
$
|
585,430
|
|
|
$
|
472,567
|
|
Debt
issuance costs
|
|
|
-
|
|
|
|
(15,573
|
)
|
Total
lines of credit
|
|
|
585,430
|
|
|
|
456,995
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable:
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable
|
|
|
1,428,161
|
|
|
|
1,428,161
|
|
Debt
issuance costs
|
|
|
(341,667
|
)
|
|
|
(366,666
|
)
|
Total
long-term senior convertible notes payable
|
|
|
1,086,494
|
|
|
|
1,061,495
|
|
Less:
current portion of long-term notes payable
|
|
|
-
|
|
|
|
-
|
|
Noncurrent
portion of long-term convertible notes payable
|
|
|
1,086,494
|
|
|
|
1,061,495
|
|
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
1,625,740
|
|
|
|
1,321,015
|
|
Debt
issuance costs
|
|
|
(245,819
|
)
|
|
|
(212,848
|
)
|
Total
long-term debt
|
|
|
1,379,921
|
|
|
|
1,108,433
|
|
Less:
current portion of long-term debt
|
|
|
(1,341,079
|
)
|
|
|
(1,278,789
|
)
|
Noncurrent
portion of long-term debt
|
|
|
38,842
|
|
|
|
42,492
|
|
|
|
|
|
|
|
|
|
|
Notes
payable – related parties:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
2,667,513
|
|
|
|
3,282,021
|
|
Less:
current portion of long-term debt – related parties
|
|
|
(1,118,751
|
)
|
|
|
(1,686,352
|
)
|
Noncurrent
portion of long-term debt – related parties
|
|
$
|
1,548,762
|
|
|
$
|
1,595,669
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable:
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable
|
|
|
1,100,000
|
|
|
|
-
|
|
Debt
issuance costs
|
|
|
(855,555
|
)
|
|
|
-
|
|
Total
long-term senior convertible notes payable
|
|
|
244,445
|
|
|
|
-
|
|
Less:
current portion of long-term notes payable
|
|
|
244,445
|
|
|
|
-
|
|
Noncurrent
portion of long-term convertible notes payable
|
|
|
-
|
|
|
|
-
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
5 — Debt — (Continued)
Convertible
Notes Payable
On
January 23, 2020, Edison Nation, Inc. (the “Company”) entered into a $1,100,000 loan agreement the (“Loan Agreement”)
with Greentree Financial Group, Inc. (the “Investor”), pursuant to which the Investor purchased a 10% Convertible
Promissory Note (the “Note”) from the Company, and the Company issued to the Investor a three year warrant (the “Warrant”)
to purchase 550,000 shares of the Company’s common stock, $0.001 per share (“Common Stock”). The Note is convertible
at any time at a price of $2.00 per share, subject to certain adjustments to the conversion price set forth in the Note. The Note
reiterates the registration rights set forth in the Loan Agreement and the Warrant. There is no prepayment penalty on the Note.
If the Note is not prepaid by the 90th day after the effective date of the Registration Statement, the Investor is required
to convert the entire amount of principal and interest outstanding on the Note at that time, at a price of $2.00 per share, unless
an event of default (as such events are described in the Note) under the Note has occurred, in which case the Note would be mandatorily
converted at a price equal to 50% of the lowest trading price of the Common Stock for the last 10 trading days immediately prior
to, but not including, the date that the Note mandatorily converts. In the event that the average of the 15 lowest closing prices
for the Company’s common stock on NASDAQ or other primary trading market for the Company’s common stock (the average
of such lowest closing prices being herein referred to, the “True-up Price”) during the period beginning on the effective
date of the Registration Statement and ending on the 90th day after the effective date of the Registration Statement
(the “Subsequent Pricing Period”) is less than $2.00 per share, then the Company will issue the Lender additional
shares of the Company’s common stock (the “True-up Shares”) within three days. No value has been assigned to
the True-up Shares due to the contingency of an effective Registration Statement. The warrant has an exercise price of $2.00 per
share, subject to certain adjustments to the exercise price set forth in the Warrant. The Warrant, as amended, expires on January
23, 2023. If the closing price per share of the Common Stock reported on the day immediately preceding an exercise of the Warrant
is greater than $2.00 per share, the Warrant may be exercised cashlessly, based on a cashless exercise formula. The Warrant
reiterates the registration rights set forth in the Loan Agreement and the Note. The Warrant also contains a repurchase provision,
which at any time after the Registration Statement is effective and the Common Stock has traded at a price over $3.00 share for
20 consecutive days, gives the Company a 30-day option to repurchase any unexercised portion of the Warrant at a price of $1.00
per share. The $1,100,000 of proceeds from the Note will be used for general working capital purposes and for the repayment of
debt. On January 24, 2020, the Company used $588,366 of the proceeds from the Note to pay off in full the 12% Convertible Promissory
Note held by Labrys Fund, LP. Upon execution of the Loan Agreement, the Company issued to the Investor 100,000 shares of Common
Stock (the “Origination Shares”) as an origination fee, plus an additional 60,000 shares of Common Stock as consideration
for advisory services. Pursuant to the Loan Agreement, the Company agreed to issue and sell to the Investor the Note, in the principal
amount of $1,100,000.
On
January 29, 2020, the Company and Greentree Financial Group, Inc. (the “Investor”), entered into an Amendment Agreement,
amending the January 22, 2020 Loan Agreement, the Note, and the Warrant to: (i) correct the effective date set forth in the Loan
Agreement, Note and Warrant to January 23, 2020 and the due date to October 23, 2020, (ii) clarify the terms of the registration
right provision in the Loan Agreement such that the Company was required to register a total of 1,500,000 shares of Common Stock,
which such amount of shares is the sum of 550,000 shares of Common Stock issuable upon conversion of the Note, 550,000 Warrant
Shares, the 100,000 Origination Shares, and 300,000 shares of Common Stock to account for changes to the conversion and/or exercise
price under the Note and Warrant, and (iii) to ensure that the total number of shares of Common Stock issued pursuant to the Loan
Agreement, the Note, and/or the Warrant, each as amended, does not exceed 17.99% of the Company’s issued and outstanding
Common Stock as of January 23, 2020. The Company is subject to a $35,000 penalty on a monthly basis if a registration statement
is not effective after 105 days from January 23, 2020. The Company recognized a beneficial conversion option of $586,785 related
to the 550,000 shares of Common Stock issuable upon conversion of the Note, a debt discount of $296,891 based on the relative
fair value related to the 550,000 Warrant Shares, a debt discount of $201,324 based on the relative fair value related to the
160,000 Origination and Advisory Shares.
Promissory
Notes
On
January 2, 2020, the Company entered into that certain Loan Agreement with Tiburon Opportunity Fund (the “Lender”),
dated January 2, 2020 (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, the Lender agreed to loan
the Company $400,000. The Loan is interest bearing at the rate of 1.5% per month through the term of the Loan. Additionally, the
Loan Agreement provides that the Company shall pay the Lender the entire unpaid principal and all accrued interest upon thirty
days’ notice to the Company, but in any event, the notice shall not be sooner than June 1, 2020. On April 24, 2020, the
Company and Lender entered into a Debt Conversion Agreement whereby the Lender was given the right and elected to exercise that
right to convert principal and interest of $424,000 of funds loaned to the Company into shares of the Company’s common stock.
The fair value of the Company’s common stock was $2.08 on the date of conversion and the conversion price was $2.00 per
share for a total of 212,000 shares of restricted common stock issued by the Company.
On
January 2, 2020, Ed Roses, LLC (the “Partnership”) entered into a Loan Agreement (the “Agreement”) with
Sook Hyun Lee (the “Lender”). Under the terms of the Agreement, the Lender agreed to lend $150,000 to the Partnership
for general working capital. The Loan is due on April 15, 2020 (the “Maturity Date”) and accrues interest at 15% per
annum. The Agreement shall automatically renew at the Maturity date for successive 90-day periods unless written notice is remitted
by either party. On the Maturity date, the Partnership shall pay the Lender all unpaid principal and interest and a $30,000 commitment
fee. The Lender shall have a collateral interest in the accounts receivable of the Partnership, including but not limited to 7
Eleven receivables. As collateral, Edison Nation, Inc. placed 75,000 shares of common stock in reserve.
On
January 10, 2020, the Company entered into a 5% Promissory Note Agreement with Equity Trust Company on behalf of Rawleigh Ralls
(“Ralls”) for an aggregate principal amount of $267,000 (the “Ralls Note”), pursuant to which Ralls purchased
the Ralls Note from the Company for $250,000 and an original issue discount of $17,000, and the Company issued to Ralls a warrant
(the “Ralls Warrant”) to purchase 125,000 shares of the Company’s common stock valued at $86,725 estimated using
the Black-Scholes option-valuation model. The proceeds from the Ralls Note will be used for general working capital needs of the
Company. The Company will also issue 33,000 incentive shares to Ralls valued at $79,860 based on the closing stock price on January
10, 2020. The fair value of the warrants and incentive shares have been recorded as debt discount. The maturity date of the Ralls
Note is July 10, 2020. The Ralls Note was amended on July 14, 2020. Please see Note 10 — Subsequent Events for
further information.
On
January 15, 2020, the Company entered into a 5% Promissory Note Agreement with Paul J. Solit & Julie B. Solit (“Solits”)
for an aggregate principal amount of $107,000 (the “Solit Note”), pursuant to which the Solits purchased the Solit
Note from the Company for $100,000 and an original issue discount of $7,000, and the Company issued to the Solits a warrant (the
“Solit Warrant”) to purchase 50,000 shares of the Company’s common stock valued at $31,755 estimated using the
Black-Scholes option-valuation model. The proceeds from the Solit Note will be used for general working capital needs of the Company.
The Company will also issue 13,000 incentive shares to the Solits valued at $30,420 based on the closing stock price on January
15, 2020. The fair value of the warrants and incentive shares have been recorded as debt discount. The maturity date of the Solit
Note is July 15, 2020. The Solit Note was amended on July 14, 2020. Please see Note 10 — Subsequent Events for
further information.
On
January 17, 2020, the Company entered into a 5% Promissory Note Agreement with Richard O’Leary (“O’Leary”)
for an aggregate principal amount of $53,500 (the “O’Leary Note”), pursuant to which O’Leary purchased
the O’Leary Note from the Company for $50,000 and an original issue discount of $3,500, and the Company issued to O’Leary
a warrant (the “O’Leary Warrant”) to purchase 25,000 shares of the Company’s common stock valued at $16,797
estimated using the Black-Scholes option-valuation model. The proceeds from the O’Leary Note will be used for general working
capital needs of the Company. The Company will also issue 6,500 incentive shares to O’Leary valued at $15,535 based on the
closing stock price on January 17, 2020. The fair value of the warrants and incentive shares have been recorded as debt discount.
The maturity date of the O’Leary Note is July 17, 2020. The O’Leary Note was amended on July 14, 2020. Please see Note 10 — Subsequent Events
for further information.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
5 — Debt — (Continued)
On
March 6, 2019, Edison Nation, Inc. (the “Company”) entered into a securities purchase agreement (the “SPA”)
with an accredited investor (the “Investor”) pursuant to which the Investor purchased a 2% unsecured, senior convertible
promissory note (the “Note”) from the Company. The Note was in the amount of $560,000 with an original issue discount
of $60,000. The Company issued 15,000 shares of its common stock (“Common Stock”) valued at $74,100 based on the share
price on the date of issuance to the Investor as additional consideration for the purchase of the Note. The Under the terms of
the SPA, the Investor will have piggyback registration rights in the event the Company files a Form S-1 or Form S-3 within six
months from March 6, 2019, as well as a pro rata right of first refusal in respect of participation in any debt or equity financings
undertaken by the Company during the 18 months following March 6, 2019. The Company is also subject to certain customary negative
covenants under the SPA, including but not limited to, the requirement to maintain its corporate existence and assets subject
to certain exceptions, and to not to make any offers or sales of any security under circumstances that would have the effect of
establishing rights or otherwise benefitting other investors in a manner more favorable in any material respect than those rights
and benefits established in favor of the Investor under the terms of the SPA and the Note. The maturity date of the Note is six
months from March 6, 2019. All principal amounts and the interest thereon are convertible into shares Common Stock only in the
event that an Event of Default occurs. On January 24, 2020, the Company paid the Investor $588,366 to pay the Note in full.
Receivables Financing and Inventory
On February 21, 2020, the Company entered
into a receivables financing arrangement for certain receivables of the Company not to exceed $1,250,000 at any one time. The
agreement allows for borrowings up to 85% of the outstanding receivable based on the credit quality of the customer. The fee is
between 1% and 2% of the total invoices financed.
In April 2019, we entered into a receivables
financing arrangement for certain receivables of the Company. The agreement allows for borrowings up to 80% of the outstanding
receivable based on the credit quality of the customer. The fee is between 1% and 2% of the total invoices financed.
On November 12, 2019, the Company entered
into a Receivables Purchase Agreement with a financial institution (the “Receivables Purchase Agreement”), whereby
the Company agreed to the sale of $225,000 of receivables for $200,000. The proceeds were used for general working capital.
On November 18, 2019, the Company entered
into a Future Receivables Purchase Agreement with a financial institution (the “Future Receivables Purchase Agreement”),
whereby the Company agreed to the sale of $337,500 of receivables for $250,000. The proceeds were used to fund our receivables
for overseas distributors. Christopher B. Ferguson, our Chairman and Chief Executive Officer, personally guaranteed the prompt
and complete performance of the Company’s obligations under the Future Receivables Purchase Agreement.
The
scheduled maturities of the debt for the next five years as of December 31, 2019, are as follows:
For the Years Ended December 31,
|
|
Amount
|
|
2020 (excluding the three
months ended March 31, 2020)
|
|
$
|
3,737,443
|
|
2021
|
|
|
206,760
|
|
2022
|
|
|
1,419,285
|
|
2023
|
|
|
1,440,278
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
6,803,766
|
|
Less: debt discount
|
|
|
(595,088
|
)
|
|
|
$
|
6,208,678
|
|
For the three months ended March 31, 2020,
interest expense was $723,957 of which $76,634 was related party interest expense. For the three months ended March 31, 2019,
interest expense was $125,073 of which $80,262 was related party interest expense.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
6 — Income Taxes
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
For
the Three Months
Ended
March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Tax at federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
U.S. income subject to valuation allowance
|
|
|
-21.0
|
%
|
|
|
-21.0
|
%
|
State and local income taxes
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign income not subject to U.S. federal tax
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign tax
|
|
|
0.0
|
%
|
|
|
-1.7
|
%
|
Nondeductible expenses
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
-0.0
|
%
|
Effective income tax rate
|
|
|
0.0
|
%
|
|
|
-1.7
|
%
|
The
Company has determined that the gain on divestiture of $4,911,760 is a taxable transaction to the Company. The tax provision of
approximately $1,030,000 would be offset by the utilization of the Company’s net operating loss carryforwards. The Company
has sufficient net operating losses carryforwards to cover any tax liabilities generated due to the divestment of Cloud B, Inc.
The Company does not have any deferred income tax expense from the gain due to the Company recording a full valuation allowance
against all net operating losses in prior periods.
Note 7 — Related Party Transactions
NL Penn Capital, LP and SRM Entertainment
Group LLC
As of March 31, 2020 and December 31, 2019,
due to related party consists of net amounts due to SRM Entertainment Group LLC (“SRM LLC”) and NL Penn Capital, LP
(“NL Penn”), the majority owner of both, which are owned by Chris Ferguson, our Chairman and Chief Executive Officer.
The amount due to related parties is related to the acquisitions of Pirasta, LLC and Best Party Concepts, LLC offset by operating
expenses that were paid by SRM and Edison Nation on behalf of SRM LLC and NL Penn. As of March 31, 2020 and December 31, 2019,
the net amount due to related parties was $9,138 and $17,253, respectively. Such amounts are due currently.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
8 — Commitments and Contingencies
Operating Lease
The Company has entered into non-cancellable
operating leases for office, warehouse, and distribution facilities, with original lease periods expiring through 2021. In addition
to minimum rent, certain of the leases require payment of real estate taxes, insurance, common area maintenance charges, and other
executory costs. Differences between rent expense and rent paid are recognized as adjustments to operating lease right-of-use
assets on the consolidated balance sheets.
As of March 31, 2020, the Company recorded
operating lease liabilities of $482,212 and right of use assets for operating leases of $654,277. During the three months ended
March 31, 2020, operating cash outflows relating to operating lease liabilities was $74,776 and the expense for right of use assets
for operating leases was $77,823. As of March 31, 2020, the Company’s operating leases had a weighted-average remaining
term of 3.7 years and weighted-average discount rate of 4.5%. Excluded from the measurement of operating lease liabilities and
operating lease right-of-use assets were certain office, warehouse and distribution contracts that either qualify for the short-term
lease recognition exception.
On June 6, 2018, the Company’s wholly
owned subsidiary, Best Party Concepts, LLC, entered into a lease for office space in Newtown, PA, which expired on May 30, 2020
and was not renewed.
Total rent expense for the three months
ended March 31, 2020 and 2019 was $146,287 and $144,433, respectively. Rent expense is included in general and administrative
expense on the consolidated statements of operations.
Rental Income
Fergco leases a portion of the building
located in Washington, New Jersey that it owns under a month to month lease. Total rental income related to the leased space for
both the three months ended March 31, 2020 and 2019 was $25,704 and $25,704, respectively, and is included in other income on
the consolidated statements of operations.
Legal Contingencies
The Company is involved in claims and litigation
in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are not
covered by insurance. For certain pending matters, accruals have not been established because such matters have not progressed
sufficiently through discovery, and/or development of important factual information and legal information is insufficient to enable
the Company to estimate a range of possible loss, if any. An adverse determination in one or more of these pending matters could
have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
We are, and may in the future become, subject
to various legal proceedings and claims that arise in or outside the ordinary course of business.
On April 14, 2020, Oceanside Traders, LLC
(“Plaintiff”) filed a complaint against Cloud B, Inc. and Edison Nation, Inc. (together the “Defendants”)
with the Superior Court of Ocean County, New Jersey alleging a breach of contract in that the Defendants failed to pay Plaintiff
for goods sold in the amount of $141,007 plus $138,180 for overpayments and $279,187 for lost profits for a total of $443,383.
A default judgment was entered against Edison Nation in the case in the amount of $284,248.91. The same day the default judgment
was entered, the Company filed a motion to vacate on the grounds that Edison Nation was not properly served with the complaint.
On July 15, 2019, the Company received
correspondence from the staff of the Arkansas Securities Commissioner in connection with the state’s notice filing requirements
for offerings exempt under Tier 2 of Regulation A, Section 18(b)(3) of the Security Act, such as the Company’s Form 1-A.
The Company has resolved the matter with the Arkansas Securities Department for $1,100.
On March 13, 2019, Rosenberg Fortuna &
Laitman LLP and Mark Principe (together the “Plaintiffs”) filed a complaint against Safe TV Shop, LLC (the “Defendant”)
with the Supreme Court of the State of New York, County of Nassau alleging a breach of indemnification arising out of the use
of a certain packaging material. On February 12, 2020, the parties entered a Stipulation and Settlement and Consent Agreement,
whereby the Plaintiff entered into a Consent Judgment in the amount of $50,000. The Company has accrued $50,000 for the amount
of the judgment, but there have been no operations by the Plaintiff since the date of acquisition by the Company.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
9 — Stockholders’ Equity
Preferred Stock
On March 25, 2020, the Company filed a
certificate of amendment to the Company’s articles of incorporation with the Secretary of State of the State of Nevada in
order to: (i) increase the number of shares of the Company’s authorized preferred stock, par value $0.001 per share, from
0 shares to 30,000,000 shares of preferred stock; (ii) clarify the application of the forum selection clause in the Company’s
amended and restated articles of incorporation, specifically that such clause does not apply to federal causes of actions arising
under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended (the “Exchange Act”);
and (iii) include affirmative changes to correspond to the Company’s First Amended and Restated Bylaws, confirming that
the Company’s shareholders may vote by written consent. As of March 31, 2020 and December 31, 2019, there were 0 and 0 shares
of common stock issued and outstanding, respectively.
Stock-Based Compensation
On September 6, 2018, the Company’s
board of directors approved an amendment and restatement of the Company’s omnibus incentive plan solely to reflect the Company’s
name change to Edison Nation, Inc. Thus, the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”) which remains
effective as of February 9, 2018, provides for the issuance of up to 1,764,705 shares of common stock to help align the interests
of management and our stockholders and reward our executive officers for improved Company performance. Stock incentive
awards under the Plan can be in the form of stock options, restricted stock units, performance awards and restricted stock that
are made to employees, directors and service providers. Awards are subject to forfeiture until vesting conditions have been satisfied
under the terms of the award. The exercise price of stock options are equal to the fair market value of the underlying Company
common stock on the date of grant.
The following table summarizes stock option
award activity for the three months ended March 31, 2020:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance, January 1, 2020
|
|
|
80,000
|
|
|
$
|
7.01
|
|
|
|
3.7
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance, March 31, 2020
|
|
|
80,000
|
|
|
$
|
7.01
|
|
|
|
3.5
|
|
|
|
-
|
|
Exercisable, March 31, 2020
|
|
|
53,333
|
|
|
$
|
7.01
|
|
|
|
3.5
|
|
|
|
-
|
|
As
of March 31, 2020, there were 26,667 unvested options to purchase shares of the Company’s common stock or $46,605 of total
unrecognized equity-based compensation expense that the Company expected to recognize over a remaining weighted-average period
of 1 year.
From
time to time, the Company grants shares of common stock to consultants and non-employee vendors for services performed. The awards
are valued at the market value of the underlying common stock at the date of grant and vest based on the terms of the contract
which is usually upon grant.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
10 — Subsequent Events
On
April 7, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with BHP Capital NY Inc.
(the “Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”) in
the amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes
The Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company
issued the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part of the outstanding and unpaid
principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and non-assessable shares of Common
Stock at a conversion price equal to $2.05 per share.
On April 7, 2020,
the Company entered into a Securities Purchase Agreement (the “Agreement”) with Jefferson Street Capital, LLC. (the
“Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”) in the
amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes The
Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company issued the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part of the outstanding and unpaid
principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and non-assessable shares of Common
Stock at a conversion price equal to $2.05 per share.
On April 13, 2020, we issued 12,500 shares
of 12,500 shares of our common stock valued at $31,625 to Caro Partners, LLC for consulting services.
On April 15, 2020, Edison Nation, Inc.
(the “Company”) entered into a loan agreement (“PPP Loan”) with First Choice Bank under the Paycheck Protection
Program (the “PPP”), which is part of the recently enacted Coronavirus Aid, Relief, and Economic Security Act (“CARES
Act”) administered by the United States Small Business Administration (“SBA”). The Company received proceeds
of $789,852 from the PPP Loan. In accordance with the requirements of the PPP, the Company intends to use proceeds from the PPP
Loan primarily for payroll costs, subject to thresholds, rent and utilities. The PPP Loan has a 1.00% interest rate per annum
and matures on April 15, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under the
PPP. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses as described
in the CARES Act.
On April 24, 2020, the Company entered
into a Consulting Agreement (the “Agreement”) with Tiburon (the “Consultant”). Under the terms of the
Agreement, the Consultant is to provide business development services and consultation related to potential trade financing opportunities.
The Agreement has a term of six (6) months. The Consultant is to be compensated ten thousand (10,000) shares of common stock upon
execution of the Agreement and then shall receive six (6) additional monthly payments of eight thousand (8,000) shares of restricted
common stock per month beginning on May 24, 2020 and ending on October 24, 2020.
On April 24, 2020, we issued 10,700 shares
of our common stock valued at $18,725 to BHP Capital NY Inc. as origination shares as per the terms of the Securities Purchase
Agreement dated April 7, 2020.
On April 24, 2020, we issued 10,700 shares
of our common stock valued at $18,725 to Jefferson Street Capital, LLC as origination shares as per the terms of the Securities
Purchase Agreement dated April 7, 2020.
On May 7, 2020, the Company entered into
a Purchase of Inventory and Repurchase Agreement (the “Agreement”) with Fergco Bros, LLC (“Purchaser”).
Under the terms of the Agreement, the Company assigned its rights, title and interest to inventory relating to its Edison Nation
Medical customer, Orange County, CA (the “Inventory”) for payment in the amount of $100.000. The Company shall have
the right to repurchase the Inventory for $105,000 in whole or periodioc installments by May 15, 2020. The Agreement was amended
on May 15, 2020, to extend the repurchase date to June 30, 2020. On June 12, 2020, the Company made payment in the amount of $105,000
as payment in full.
On May 13, 2020, the Company’s wholly
owned subsidiary, Ferguson Containers, Inc., entered into a Distributor Agreement with Marrone Bio Innovations, LLC (“Marrone”)
for the distribution of Marrone’s Jet-Oxide 15% peroxyacetic acid-based sanitizer/disinfectant.
May 17, 2020, the Company entered into
an Amendment to Purchase of Inventory and Repurchase Agreement with the Purchasers-Assignees dated May 17, 2020. Under the terms
of the Amendment, the repurchase date was extended to June 30, 2020 and the Company confirmed that of the Purchaser-Assignees
is entitled to receive 10,000 shares of common stock.
On May 19, 2020, the Company entered into an Amendment (the “Amendment”)
to the Senior Secured Note (the “Note”) issued by the Company to 32 Entertainment, LLC (the “Lender”) dated
December 4, 2019. Under the terms of the Amendment, the Company issued the Lender an Amended Subordinate Secured Note (the “Replacement
Note”) in the principal amount of $200,000 that accrues interest at 16% annually and matures on May 21, 2021. On May 28,
2020, the Company paid $50,000 toward the principal plus interest in the amount of $6,250 for a total of $56,250. The Lender shall
also receive 40,000 restricted stock units and surrender the warrant issued to the Lender in the December 4, 2019 financing transaction.
On May 20, 2020 (the “Effective Date”),
Edison Nation, Inc. (the “Company”) entered into an Agreement and Plan of Share Exchange (the “Share Exchange
Agreement”) with PPE Brickell Supplies, LLC, a Florida limited liability company (“PPE”), and Graphene Holdings,
LLC, a Wyoming limited liability company (“Graphene”, and together with PPE, the “Sellers”), whereby the
Company purchased 25 membership units of Global Clean Supplies, LLC, a Nevada limited liability company (“Global”)
from each of PPE and Graphene, for a total of fifty (50) units, representing fifty percent (50%) of the issued and outstanding
units of Global (the “Purchase Units”).
On May 20, 2020, the Company entered into
an Amended Limited Liability Company Agreement of Global (the “Amended LLC Agreement”). The Amended LLC Agreement
amends the original Limited Liability Company Agreement of Global, dated May 13, 2020. The Amended LLC defines the operating rules
of Global and the ownership percentage of each member: Edison Nation, Inc. 50%, PPE 25% and Graphene 25%.
On May 21, 2020, the Company issued 200,000
shares of common stock valued at $466,000 to PPE Brickell Supplies, LLC as per the terms of the Agreement and Plan of Share Exchange
dated May 20, 2020.
On May 21, 2020, the Company issued 50,000
shares of common stock valued at $116,500 to Graphene Holdings, LLC as per the terms of the Agreement and Plan of Share Exchange
dated May 20, 2020.
On May 21, 2020, the Company issued 50,000
shares of common stock valued at $116,500 to a Consultant for consulting services related to the Agreement and Plan of Share Exchange
dated May 20, 2020.
On May 22, 2020, the Company issued 200,000 shares of common
stock valued at $488,000 to Graphene Holdings as per the terms of the Agreement and Plan of Share Exchange dated May 20, 2020.
On June 30, 2020, the Company issued 212,000
shares of common stock valued at $440,960 to Tiburon Opportunity Fund in satisfaction of a note payable.
On June 30, 2020, the Company issued 150,000 shares
of common stock valued at $405,000 to a designee of the Buyer of the Company’s former subsidiary, Cloud B, Inc.
On June 30, 2020, the Company issued 33,000
shares of common stock valued at $79,860 as incentive shares in connection with the Ralls financing.
On June 30, 2020, the Company issued 13,000
shares of common stock valued at $30,420 as incentive shares in connection with the Solit financing.
On July 2, 2020, the Company issued 6,500
shares of common stock valued at $15,535 as incentive shares in connection with the O’Leary financing.
On July 6, 2020, the Company issued 25,000
shares of common stock valued at $61,000 to a Consultant for consulting services.
On July 14, 2020, the Company entered into an Amendment to Note
Agreement and Common Stock Purchase Warrant (the “Amendment”) with Richard O’Leary. Under the terms of the Amendment,
the parties amended the terms of the January 17, 2020 Note Agreement (the “Agreement”) and Common Stock Purchase Warrant
(the “Warrant”) such that; (i) the maturity date of the Agreement was extended to January 17, 2021, (ii) the Original
Issuer Discount (“OID”) shall be increased to $7,000, (iii) the Lender shall be issued 6,500 Additional Incentive Shares
and (iv) the expiration date of the Warrant shall be extended to June 30, 2021. On July 14, 2020, the Company issued the 6,500
Additional Incentive Shares valued at $24,570.
On July 14, 2020, the Company entered into an Amendment to Note
Agreement and Common Stock Purchase Warrant (the “Amendment”) with Equity Trust Company, a Custodian FBO: Rawleigh
H. Ralls IRA. Under the terms of the Amendment, the parties amended the terms of the January 10, 2020 Note Agreement (the “Agreement”)
and Common Stock Purchase Warrant (the “Warrant”) such that; (i) the maturity date of the Agreement was extended to
January 10, 2021, (ii) the Original Issuer Discount (“OID”) shall be increased to $34,000, (iii) the Lender shall be
issued 33,000 Additional Incentive Shares and (iv) the Company shall prepare and file with the United States Securities and Exchange
Commission a registration statement on Form S-1 within 30 days of the Effective Date of the Amendment, that registers a total of
191,000 shares of Common Stock, which such amount of shares is the sum of 125,000 Warrant Shares, the 33,000 Incentive Shares,
and 33,000 Additional Incentive Shares. On July 14, 2020, the Company issued the 33,000 Additional Incentive Shares valued at $124,740.
On July 14, 2020, the Company entered into an Amendment to Note
Agreement and Common Stock Purchase Warrant (the “Amendment”) with Paul J. Solit and Julie B. Solit. Under the terms
of the Amendment, the parties amended the terms of the January 15, 2020 Note Agreement (the “Agreement”) and Common
Stock Purchase Warrant (the “Warrant”) such that; (i) the maturity date of the Agreement was extended to December 15,
2020, (ii) the Original Issuer Discount (“OID”) shall be increased to $14,000 and (iii) the Lender shall be issued
13,000 Additional Incentive Shares. On July 14, 2020, the Company issued the 13,000 Additional Incentive Shares valued at $49,140.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Stockholders and Board of Directors of
Edison
Nation, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Edison Nation, Inc. (the “Company”) as of December 31,
2019 and 2018, the related consolidated statements of operations, changes in stockholders’ equity (deficit) and cash flows
for each of the two years in the period ended December 31, 2019, and the related notes (collectively referred to as the “financial
statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position
of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the two years
in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
Explanatory
Paragraph – Changes in Accounting Principles
ASU
No.2016-02
As
discussed in Note 2 to the consolidated financial statements, the Company changed its method of accounting for leases in 2019
due to the adoption of Accounting Standards update (“ASU”) No. 2016-02, Leases (Topic 842), as amended, effective
January 1, 2019, using the modified retrospective approach.
Basis
for Opinion
These
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission
and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial
reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not
for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence
regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles
used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audits provide a reasonable basis for our opinion.
/s/
Marcum LLP
|
|
|
|
Marcum
llp
|
|
We
have served as the Company’s auditor since 2017.
New
York, NY
May
29, 2020
Edison
Nation, Inc. and Subsidiaries
CONSOLIDATED
BALANCE SHEETS
|
|
December
31,
2019
|
|
|
December
31,
2018
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
412,719
|
|
|
$
|
2,052,731
|
|
Accounts
receivable, net
|
|
|
2,108,099
|
|
|
|
1,877,351
|
|
Inventory
|
|
|
1,369,225
|
|
|
|
923,707
|
|
Prepaid
expenses and other current assets
|
|
|
917,433
|
|
|
|
611,695
|
|
Income
tax receivable
|
|
|
147,889
|
|
|
|
-
|
|
Total
current assets
|
|
|
4,955,365
|
|
|
|
5,465,484
|
|
Property
and equipment, net
|
|
|
931,968
|
|
|
|
998,863
|
|
Right
of use assets, net
|
|
|
732,100
|
|
|
|
-
|
|
Intangible
assets, net
|
|
|
11,598,063
|
|
|
|
12,687,731
|
|
Goodwill
|
|
|
5,392,123
|
|
|
|
9,736,510
|
|
Total
assets
|
|
$
|
23,609,619
|
|
|
$
|
28,888,588
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
7,397,650
|
|
|
$
|
5,519,159
|
|
Accrued
expenses and other current liabilities
|
|
|
1,594,669
|
|
|
|
1,135,551
|
|
Deferred
revenues
|
|
|
159,591
|
|
|
|
175,956
|
|
Current
portion of operating leases liabilities
|
|
|
272,215
|
|
|
|
-
|
|
Income
tax payable
|
|
|
22,919
|
|
|
|
129,511
|
|
Line
of credit, net of debt issuance costs of $15,573 and $30,000, respectively
|
|
|
456,995
|
|
|
|
531,804
|
|
Current
portion of notes payable, net of debt issuance costs of $212,848 and $0, respectively
|
|
|
1,365,675
|
|
|
|
313,572
|
|
Current
portion of notes payable – related parties
|
|
|
1,686,352
|
|
|
|
932,701
|
|
Due
to related party
|
|
|
17,253
|
|
|
|
140,682
|
|
Total
current liabilities
|
|
|
12,973,319
|
|
|
|
8,878,936
|
|
Contingent
consideration
|
|
|
-
|
|
|
|
520,000
|
|
Operating
leases liabilities –net of current portion
|
|
|
482,212
|
|
|
|
-
|
|
Convertible
notes payable – related parties, net of current portion, net of debt discount of
$366,666 and $466,667, respectively
|
|
|
1,061,495
|
|
|
|
961,494
|
|
Notes
payable, net of current portion
|
|
|
42,492
|
|
|
|
56,688
|
|
Notes
payable – related parties, net of current portion
|
|
|
1,595,669
|
|
|
|
2,531,490
|
|
Deferred
tax liability
|
|
|
-
|
|
|
|
341
|
|
Total
liabilities
|
|
$
|
16,155,187
|
|
|
$
|
12,948,949
|
|
Commitments
and Contingencies (Note 14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity
|
|
|
|
|
|
|
|
|
Common
stock, $0.001 par value, 250,000,000 shares authorized; 8,015,756 and 5,654,830 shares issued and outstanding as of December
31, 2019 and 2018, respectively
|
|
$
|
8,016
|
|
|
$
|
5,655
|
|
Additional
paid-in-capital
|
|
|
26,259,575
|
|
|
|
20,548,164
|
|
Accumulated
deficit
|
|
|
(18,495,461
|
)
|
|
|
(5,565,756
|
)
|
Total
stockholders’ equity attributable to Edison Nation, Inc.
|
|
|
7,772,130
|
|
|
|
14,988,063
|
|
Noncontrolling
interests
|
|
|
(317,698
|
)
|
|
|
951,576
|
|
Total
stockholders’ equity
|
|
|
7,454,432
|
|
|
|
15,939,639
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
23,609,619
|
|
|
$
|
28,888,588
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues,
net
|
|
$
|
19,629,062
|
|
|
$
|
16,502,209
|
|
Cost
of revenues
|
|
|
12,822,450
|
|
|
|
11,425,619
|
|
Gross
profit
|
|
|
6,806,612
|
|
|
|
5,076,590
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
15,909,840
|
|
|
|
9,718,286
|
|
Gain on change in fair value of earnout liability
|
|
|
(520,000
|
)
|
|
|
-
|
|
Impairment
of goodwill
|
|
|
4,443,000
|
|
|
|
-
|
|
Total
operating expenses
|
|
|
19,832,840
|
|
|
|
9,718,286
|
|
Operating
loss
|
|
|
(13,026,228
|
)
|
|
|
(4,641,696
|
)
|
|
|
|
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
|
|
|
|
Rental
income
|
|
|
102,815
|
|
|
|
102,815
|
|
Interest
expense
|
|
|
(1,298,168
|
)
|
|
|
(501,221
|
)
|
Other
income
|
|
|
3,054
|
|
|
|
-
|
|
Total
other expense
|
|
|
(1,192,299
|
)
|
|
|
(398,406
|
)
|
Loss
before income taxes
|
|
|
(14,218,527
|
)
|
|
|
(5,040,102
|
)
|
Income
tax (benefit) expense
|
|
|
(19,547
|
)
|
|
|
303,915
|
|
Net
loss
|
|
|
(14,198,980
|
)
|
|
|
(5,344,017
|
)
|
Net
loss attributable to noncontrolling interests
|
|
|
(1,269,274
|
)
|
|
|
(13,891
|
)
|
Net
loss attributable to Edison Nation, Inc.
|
|
|
(12,929,706
|
)
|
|
|
(5,330,126
|
)
|
Net
loss per share - basic and diluted
|
|
$
|
(2.36
|
)
|
|
$
|
(1.28
|
)
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
6,026,049
|
|
|
|
4,157,054
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
January 1, 2018
|
|
|
3,000,000
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
(235,630
|
)
|
|
$
|
-
|
|
|
$
|
(232,630
|
)
|
Sale
of common stock – investors in the IPO, net of offering costs of $1,247,424
|
|
|
1,312,520
|
|
|
|
1,313
|
|
|
|
5,313,863
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,315,176
|
|
Issuance
of common stock to employees
|
|
|
103,636
|
|
|
|
104
|
|
|
|
559,395
|
|
|
|
-
|
|
|
|
-
|
|
|
|
559,499
|
|
Issuance
of common stock to note holders
|
|
|
33,500
|
|
|
|
33
|
|
|
|
167,467
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167,500
|
|
Issuance
of common stock to vendors for services
|
|
|
158,797
|
|
|
|
159
|
|
|
|
800,841
|
|
|
|
-
|
|
|
|
-
|
|
|
|
801,000
|
|
Acquisition
of Edison Nation Holdings, LLC – issuance of common stock to satisfy indebtedness
|
|
|
557,084
|
|
|
|
557
|
|
|
|
3,383,728
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,384,285
|
|
Acquisition
of Cloud B, Inc. – issuance of common stock
|
|
|
489,293
|
|
|
|
489
|
|
|
|
2,663,711
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,664,200
|
|
Acquisition
of Cloud B, Inc. – noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,158,000
|
|
|
|
1,158,000
|
|
Acquisition
of Best Party Concepts, LLC – deemed distribution and noncontrolling interest
|
|
|
-
|
|
|
|
-
|
|
|
|
(692,533
|
)
|
|
|
-
|
|
|
|
(192,533
|
)
|
|
|
(885,066
|
)
|
Acquisition
of Pirasta, LLC – deemed distribution
|
|
|
-
|
|
|
|
-
|
|
|
|
(188,552
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(188,552
|
)
|
Beneficial
conversion option on indebtedness related to acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Shares
reserved for future issuance of common stock to sellers of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
6,014,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,014,250
|
|
Stock-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
2,025,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,025,994
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,330,126
|
)
|
|
|
(13,891
|
)
|
|
|
(5,344,017
|
)
|
Balance,
December 31, 2018
|
|
|
5,654,830
|
|
|
|
5,655
|
|
|
|
20,548,164
|
|
|
|
(5,565,756
|
)
|
|
|
951,576
|
|
|
|
15,939,639
|
|
Sale
of common stock – investors, net of offering costs of $310,697
|
|
|
1,175,000
|
|
|
|
1,175
|
|
|
|
2,038,128
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,039,303
|
|
Issuance
of common stock for services
|
|
|
291,736
|
|
|
|
292
|
|
|
|
738,008
|
|
|
|
|
|
|
|
|
|
|
|
738,300
|
|
Issuance
of common stock to note holders
|
|
|
286,005
|
|
|
|
286
|
|
|
|
386,994
|
|
|
|
-
|
|
|
|
-
|
|
|
|
387,280
|
|
Issuance
of common stock to employees
|
|
|
3,000
|
|
|
|
3
|
|
|
|
8,847
|
|
|
|
-
|
|
|
|
-
|
|
|
|
8,850
|
|
Issuance
of common stock – Uber Mom in connection with acquisition of assets
|
|
|
45,000
|
|
|
|
45
|
|
|
|
98,568
|
|
|
|
-
|
|
|
|
-
|
|
|
|
98,613
|
|
Issuance
of common stock upon the conversion of debt
|
|
|
560,185
|
|
|
|
560
|
|
|
|
1,119,810
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,120,370
|
|
Issuance
of warrants – note holders
|
|
|
-
|
|
|
|
-
|
|
|
|
72,936
|
|
|
|
-
|
|
|
|
-
|
|
|
|
72,936
|
|
Share-based
compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,248,121
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,248,121
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(12,929,706
|
)
|
|
|
(1,269,274
|
)
|
|
|
(14,198,980
|
)
|
Balance,
December 31, 2019
|
|
|
8,015,756
|
|
|
$
|
8,016
|
|
|
$
|
26,259,576
|
|
|
$
|
(18,495,462
|
)
|
|
$
|
(317,698
|
)
|
|
$
|
7,454,432
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Years
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cash
Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net
loss attributable to Edison Nation, Inc.
|
|
$
|
(12,929,706
|
)
|
|
$
|
(5,330,126
|
)
|
Net
loss attributable to noncontrolling interests
|
|
|
(1,269,274
|
)
|
|
|
(13,891
|
)
|
Net
loss
|
|
|
(14,198,980
|
)
|
|
|
(5,344,017
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
1,316,501
|
|
|
|
487,878
|
|
Amortization
of debt issuance costs
|
|
|
944,437
|
|
|
|
300,277
|
|
Stock-based
compensation
|
|
|
2,299,915
|
|
|
|
3,386,493
|
|
Change
in fair value of earnout
|
|
|
(520,000
|
)
|
|
|
-
|
|
Impairment
of goodwill
|
|
|
4,443,000
|
|
|
|
-
|
|
Deferred
tax liability
|
|
|
(341
|
)
|
|
|
(33,868
|
)
|
Amortization
of right of use asset
|
|
|
295,106
|
|
|
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(230,748
|
)
|
|
|
590
|
|
Inventory
|
|
|
(445,518
|
)
|
|
|
59,309
|
|
Prepaid
expenses and other current assets
|
|
|
(704,626
|
)
|
|
|
(353,440
|
)
|
Accounts
payable
|
|
|
1,878,491
|
|
|
|
(1,408,184
|
)
|
Accrued
expenses and other current liabilities
|
|
|
282,516
|
|
|
|
636,881
|
|
Operating
lease liabilities
|
|
|
(272,779
|
)
|
|
|
-
|
|
Due
from related party
|
|
|
(123,429
|
)
|
|
|
(507,922
|
)
|
Net
cash used in operating activities
|
|
|
(5,036,455
|
)
|
|
|
(2,776,003
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(159,938
|
)
|
|
|
(141,440
|
)
|
Acquisitions,
net of cash
|
|
|
-
|
|
|
|
(772,581
|
)
|
Purchase
of loan held for investment
|
|
|
-
|
|
|
|
(500,000
|
)
|
Net
cash used in investing activities
|
|
|
(159,938
|
)
|
|
|
(1,414,021
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Net
borrowings under line of credit
|
|
|
-
|
|
|
|
531,804
|
|
Borrowings
under convertible notes payable
|
|
|
1,111,111
|
|
|
|
-
|
|
Borrowings
under notes payable
|
|
|
2,482,500
|
|
|
|
718,559
|
|
Repayments
under line of credit
|
|
|
(90,382
|
)
|
|
|
-
|
|
Repayments
under notes payable
|
|
|
(1,231,744
|
)
|
|
|
(648,299
|
)
|
Repayments
under notes payable – related parties
|
|
|
(182,170
|
)
|
|
|
(132,309
|
)
|
Fees
paid for financing costs
|
|
|
(581,496
|
)
|
|
|
(99,444
|
)
|
Net
proceeds from issuance of common stock – net of offering costs of $310,697
|
|
|
2,048,562
|
|
|
|
5,315,176
|
|
Net
cash provided by financing activities
|
|
|
3,556,381
|
|
|
|
5,685,487
|
|
Net
(decrease) increase in cash and cash equivalents
|
|
|
(1,640,012
|
)
|
|
|
1,495,463
|
|
Cash
and cash equivalents - beginning of year
|
|
|
2,052,731
|
|
|
|
557,268
|
|
Cash
and cash equivalents - end of year
|
|
$
|
412,719
|
|
|
$
|
2,052,731
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
260,444
|
|
|
$
|
103,865
|
|
Income
taxes
|
|
$
|
235,275
|
|
|
$
|
265,015
|
|
Shares
issued to note holders
|
|
$
|
-
|
|
|
$
|
167,500
|
|
Shares
issued for the acquisition of Edison Nation Holdings, LLC
|
|
$
|
-
|
|
|
$
|
3,384,285
|
|
Shares
issued for the asset acquisition of Uber Mom
|
|
$
|
98,613
|
|
|
$
|
-
|
|
Shares
reserved for the acquisition of Edison Nation Holdings, LLC
|
|
$
|
-
|
|
|
$
|
6,014,250
|
|
Shares
issued for the acquisition of Cloud B, Inc.
|
|
$
|
-
|
|
|
$
|
2,664,200
|
|
Borrowings
under note payable for the purchase of property and equipment
|
|
$
|
-
|
|
|
$
|
73,559
|
|
Issuance
of 5%, 5-year senior convertible notes for the acquisition of Edison Nation Holdings, LLC, net of debt discount for conversion
feature
|
|
$
|
-
|
|
|
$
|
1,428,161
|
|
Change
in fair value of earnout
|
|
$
|
(520,000
|
)
|
|
$
|
520,000
|
|
Satisfaction
of due from related party for acquisition of Best Party Concepts, LLC
|
|
$
|
-
|
|
|
$
|
500,000
|
|
Deemed
distribution to shareholder for acquisition of Best Party Concepts, LLC
|
|
$
|
-
|
|
|
$
|
692,533
|
|
Satisfaction
of due from related party for acquisition of Pirasta, LLC
|
|
$
|
-
|
|
|
$
|
470,000
|
|
Deemed
distribution to shareholder for acquisitions of Pirasta, LLC
|
|
$
|
-
|
|
|
$
|
188,552
|
|
Right
of use assets
|
|
$
|
943,997
|
|
|
$
|
-
|
|
Operating
lease liabilities
|
|
$
|
943,997
|
|
|
$
|
-
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Basis of Presentation and Nature of Operations
As
used herein, the terms the “Company,” “Edison Nation” “we,” “us,” “our”
and similar refer to Edison Nation, Inc., a Nevada corporation incorporated on July 18, 2017 under the laws of the State of Nevada
as Idea Lab X Products, Inc. and also formerly known as Xspand Products Lab, Inc. prior to its name change on September 12, 2018,
and/or its wholly-owned and majority-owned operating subsidiaries, and/or where applicable, its management.
Edison
Nation is a vertically-integrated, end-to-end, consumer product research & development, manufacturing, sales and fulfillment
company. The Company’s proprietary web-enabled platform provides a low risk, high reward platform and process to connect
innovators of new product ideas with potential licensees.
As
of December 31, 2019, Edison Nation, Inc. had five wholly-owned subsidiaries: S.R.M. Entertainment Limited (“SRM”),
Ferguson Containers, Inc. (“Fergco”), CBAV1, LLC (“CB1”), Pirasta, LLC and Edison Nation Holdings, LLC.
Edison Nation, Inc. owns 72.15% of Cloud B, Inc., 50% of Best Party Concepts, LLC and 50% of Ed Roses, LLC. Edison Nation Holdings,
LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single member of Safe TV Shop,
LLC. Cloud B, Inc. owns 100% of Cloud B UK and Cloud B Australia.
August
23, 2019, the Company formed Ed Roses, LLC, a 50% joint venture with 4Keeps Roses, Inc., to distribute preserved roses, flowers
and associated gift products.
On
November 6, 2019, the Company issued 22,500 shares of our common stock and paid $52,352 in cash to acquire the assets of Uber
Mom, LLC, which was the approximate value of Uber Mom, LLC’s inventory.
Liquidity
For the year ended December 31, 2019, our
operations lost approximately $13,026,228 of which approximately $8,064,101 was non-cash and approximately $364,320 related to
transaction costs and non-recurring items.
At December 31, 2019, we had total current
assets of $4,955,365 and current liabilities of $12,973,319 resulting in negative working capital of $8,017,954, of which approximately
$4,015,484 related to unsecured trade payables assumed in our Cloud B acquisition. In February 2019, our consolidating subsidiary,
CBAV1, LLC, foreclosed on its promissory note it held that was secured by Cloud B, Inc.’s assets making any payments of
the Cloud B trade payables unlikely. At December 31, 2019, we had total assets of $23,609,619 and total liabilities of $16,155,187
resulting in stockholders’ equity of $7,454,432.
The foregoing factors raise substantial
doubt about the Company’s ability to continue as a going concern for at least the next twelve months from the date of issuance
of these financial statements. The ability to continue as a going concern is dependent upon the Company’s ability to attract
significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations
from the sale of its products.
The
consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue
as a going concern. The following is additional information on our operating losses and working capital:
The
Company’s operating loss for the year ended December 31, 2019 included $3,621,101 related to depreciation, amortization
and stock-based compensation. In addition, approximately $2,414,799 was related to transaction costs, restructuring charges and
other non-recurring and redundant costs which are being removed or reduced. The negative working capital includes approximately
$4,015,484 related to unsecured trade payables in our Cloud B acquisition. In addition, our outstanding balances under notes payable
includes $900,000 related to Cloud B. CB1 owns the senior secured position on the promissory note to Cloud B in the amount of
$2,270,000. In February 2019, CB1, pursuant to an Article 9 foreclosure action, perfected its secured UCC interest in all the
assets of Cloud B to partially satisfy the outstanding balance on the note and thereby making any payments of such Cloud B trade
payables and notes unlikely in the future. In addition, SRM was an unsecured creditor in the amount of approximately $1,700,000
which is not included in the $4,015,484 due to intercompany elimination but at this time remains unpaid. The total liabilities
of approximately $7,100,000, of which $1,700,000, or net of $5,400,000, has been eliminated in consolidation, are not expected
to be satisfied due to the foreclosure.
On
October 2, 2019, the Company entered into a Share Purchase Agreement (the “PIPE Purchase Agreement”) with certain
accredited investors (collectively, the “Investors”) for the private placement of 1,175,000 shares of the Company’s
common stock, $0.001 par value per share, at a purchase price of $2.00 per share (the “PIPE Transaction”). In a series
of three closings conducted in October 2019, the Company received net proceeds of $2,039,303 which consisted of $2,350,000 of
gross proceeds offset by $310,697 of fees to placement agent and their lawyers. Alexander Capital, LP (“Alexander Capital”),
a FINRA registered broker dealer, acted as placement agent with respect to the PIPE Transaction. In connection with the PIPE Transaction,
Alexander Capital received a commission of $141,000, a debt restructuring fee of $64,208, a debt conversion fee of 15,889, a placement
fee of $33,600 and warrants to purchase 70,500 shares of the Company’s common stock, at an exercise price of $2.50 per share
(the “Placement Agent Warrants”). In connection with the PIPE transaction, the convertible notes entered into on May
13, 2019 were also converted at $2.00 per share into 560,185 shares of the Company’s common stock.
Management
has considered possible mitigating factors within our management plan on our ability to continue for at least a year from the
date these financial statements are filed. The following items are management plans to alleviate any going concern issues:
|
●
|
Cloud
B liabilities are unlikely to be paid due to CB1 holding the senior secured position and its rights under the foreclosure
to the remaining assets of the entity to satisfy the outstanding obligation.
|
|
|
|
|
●
|
Raise
further capital through the sale of addition equity
|
|
|
|
|
●
|
Borrow
money under debt securities.
|
|
|
|
|
●
|
The
deferral of payments to related party debt holders for both principal of $455,099 and related interest expense.
|
|
|
|
|
●
|
Cost
saving initiatives related to synergies and the elimination of redundant costs of approximately $1,500,000.
|
|
|
|
|
●
|
Possible
sale of certain brands to other manufacturers.
|
|
|
|
|
●
|
Entry into other business opportunities through
the Company’s Edison Nation Medical division.
|
Note
2 — Summary of Significant Accounting Policies
Principles
of Consolidation
The
consolidated financial statements include the accounts of Edison Nation, Inc. and its wholly-owned and majority owned subsidiaries.
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and are presented in US dollars. All intercompany balances and transactions
have been eliminated.
Reclassifications
Certain
amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation.
Such reclassifications had no effect on the previously reported net loss, Stockholders’ equity or cash flows.
Use
of Estimates
Preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the
financial statements.
The
Company’s significant estimates used in these financial statements include, but are not limited to, accounts receivable
reserves, the valuation allowance related to the Company’s deferred tax assets, the recoverability and useful lives of long-lived
assets, debt conversion features, stock-based compensation, certain assumptions related to the valuation of the reserved shares
and the assets acquired and liabilities assumed related to the Company’s acquisitions. 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.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents
in the consolidated financial statements.
The
Company has cash on deposits in several financial institutions which, at times, may be in excess of Federal Deposit Insurance
Corporation (“FDIC”) insurance limits. The Company has not experienced losses in such accounts and periodically evaluates
the creditworthiness of its financial institutions. The Company reduces its credit risk by placing its cash and cash equivalents
with major financial institutions. The Company had approximately $178,485 uninsured at December 31, 2019 of which all $178,485
was held in foreign bank accounts not covered by FDIC insurance limits as of December 31, 2019.
Accounts
Receivable
Accounts
receivable are carried at their contractual amounts, less an estimate for uncollectible amounts. As of December 31, 2019 and 2018,
the allowance for uncollectable amounts was not material. 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.
As
of December 31, 2019, no customers represented more than 10% of total accounts receivable.
Inventory
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.
Loan
Held for Investment
Loan
held for investment is reported on the balance sheet at the acquired cost which approximates the fair value, which resulted in
a discount. The acquired loan had evidence of deterioration of credit quality and for which it was probable, at the time of our
acquisition, that the Company would be unable to collect all contractually required payments. For these loans, the excess of the
undiscounted contractual cash flows over the undiscounted cash flows estimated by us at the time of acquisition was not accreted
into income (nonaccretable discount). The amount representing the excess of cash flows estimated by us at acquisition over the
purchase price was accreted into purchase discount earned over the life of the applicable loans (accretable discount). The nonaccretable
discount was not accreted into income. If cash flows could not be reasonably estimated for any loan, and collection was not probable,
the cost recovery method of accounting was used. Under the cost recovery method, any amounts received were applied against the
recorded amount of such loans.
Subsequent
to acquisition, if cash flow projections improved, and it was determined that the amount and timing of the cash flows related
to the nonaccretable discount was reasonably estimable and collection was probable, the corresponding decrease in the nonaccretable
discount was transferred to the accretable discount and was accreted into interest income over the remaining life of any such
loan on the interest method. If cash flow projections deteriorated subsequent to acquisition, the decline was accounted for through
the allowance for loan losses. Depending on the timing of an acquisition, the initial allocation of discount generally is made
primarily to nonaccretable discount until the Company is able to assess any cash flows expected to be collected over the purchase
price which are then transferred to accretable discount.
Property
and Equipment, Net
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.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
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 operations 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.
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. The Company did not record any impairment charges related to long-lived assets during
the years ended December 31, 2019 and 2018.
Goodwill
and Intangible Assets
We
record intangible assets based on their fair value on the date of acquisition. 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.
We perform an impairment assessment of goodwill on an annual basis, 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.
We
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, we assess 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 our goodwill and other indefinite-lived intangible assets
are impaired, a quantitative impairment analysis would be performed to determine if impairment is required. We 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, require our management to make certain assumptions and estimates
regarding certain industry trends and future profitability of our 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, our business plan for the future and estimated results of future operations. Future
events could cause us to conclude that impairment indicators exist, and, therefore, that goodwill may be impaired.
Intangible
assets include the cost of patents or patent rights (hereinafter, collectively “patents”) and trademarks. Patent and
trademark costs are amortized utilizing the straight-line method over their remaining economic useful lives. Costs incurred related
to patents prior to issuance are included in prepaid patent expense until the time the patent is issued and amortization begins
or until management determines it is no longer likely the patent will be issued and amounts are expensed. Edison Nation 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 a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is
recorded.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Revenue
Recognition
Generally,
the Company considers all revenues as arising from contracts with customers. Revenue is recognized based on the five-step process
outlined in the Accounting Standards Codification (“ASC”) 606:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probably that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct, or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step
5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods
or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of
the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use
of and obtain substantially all of the remaining benefits from an asset. It includes the ability to prevent other entities from
directing the use of and obtaining the benefits from an asset. Indicators that control has passed to the customer include: a present
obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the asset(s).
Performance obligations can be satisfied at a point in time or over time.
Substantially
all of the Company’s revenues continue to be recognized when control of the goods are transferred to the customer, which
is upon shipment of the finished goods to the customer. All sales have fixed pricing and there are currently no material variable
components included in the Company’s revenue. Additionally, the Company will issue credits for defective merchandise, historically
these credits for defective merchandise have not been material. Based on the Company’s analysis of the new revenue standards,
revenue recognition from the sale of finished goods to customers, which represents substantially all of the Company’s revenues,
was not impacted by the adoption of the new revenue standards.
Disaggregation
of Revenue
The Company’s primary revenue streams
include the sale and/or licensing of consumer goods and packaging materials for innovative products. The Company’s licensing
business is not material and has not been separately disaggregated for segment purposes. The disaggregated Company’s revenues
for the years ended December 31, 2019 and 2018 was as follows:
|
|
For
the Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$
|
19,184,428
|
|
|
$
|
16,037,221
|
|
Service
revenues
|
|
|
-
|
|
|
|
197,068
|
|
Licensing
revenues
|
|
|
444,634
|
|
|
|
267,920
|
|
Total
revenues, net
|
|
$
|
19,629,062
|
|
|
$
|
16,502,209
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
For
the years ended December 31, 2019 and 2018, the following customers represented more than 10% of total net revenues:
|
|
For
the years ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Customer:
|
|
|
|
|
|
|
Customer
A
|
|
|
14
|
%
|
|
|
21
|
%
|
For
the years ended December 31, 2019 and 2018, the following geographical regions represented more than 10% of total net revenues:
|
|
For
the Years Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Region:
|
|
|
|
|
|
|
North
America
|
|
|
76
|
%
|
|
|
80
|
%
|
Asia-Pacific
|
|
|
9
|
%
|
|
|
13
|
%
|
Europe
|
|
|
15
|
%
|
|
|
7
|
%
|
Cost
of Revenues
Cost
of revenues includes freight charges, purchasing and receiving costs, depreciation and inspection costs.
Shipping
and Handling Costs
Shipping
and handling costs include inbound freight costs and the cost to ship product to the customer and are included in cost of sales.
Fair
Value of Financial Instruments
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, accrued expenses
and other current liabilities approximate fair values due to the short-term nature of these instruments. The carrying amount of
the Company’s notes payable approximates fair value because the effective yields on these obligations, which include contractual
interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns
for instruments of similar credit risk. The loan held for investment was acquired at fair value, which resulted in a discount.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
The
following changes in level 3 instruments for the year ended December 31, 2019 are presented below:
|
|
Contingent
Consideration
Earnout
|
|
Balance,
January 1, 2019
|
|
$
|
(520,000
|
)
|
Change
in fair value of earnout
|
|
|
520,000
|
|
Balance,
December 31, 2019
|
|
$
|
-
|
|
Foreign
Currency Translation
The
Company uses the United States dollar as its functional and reporting currency since the majority of the Company’s revenues,
expenses, assets and liabilities are in the United States. Assets and liabilities in foreign currencies are translated using the
exchange rate at the balance sheet date, while revenue and expense accounts are translated at the average exchange rates prevailing
during the year. Equity accounts are translated at historical exchange rates. Gains and losses from foreign currency transactions
and translation for the years ended December 31, 2019 and 2018 and the cumulative translation gains and losses as of December
31, 2019 and 2018 were not material.
Income
Taxes
The
Company accounts for income taxes under the provisions of the Financial Accounting Standards Board (“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 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 consolidated
financial statements as of December 31, 2019 and 2018. 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 statements of operations.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
Net
Earnings or Loss 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 December 31, 2019,
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.
|
|
|
December 31,
|
|
|
|
|
2019
|
|
Selling Agent Warrants
|
|
|
160,492
|
|
Shares reserved in exchange for the cancellation
of certain non-voting membership interest in Edison Nation Holdings, LLC
|
|
|
990,000
|
|
Options
|
|
|
80,000
|
|
Convertible shares under notes payable
|
|
|
285,632
|
|
Warrants for
noteholders
|
|
|
50,000
|
|
Restricted
stock units
|
|
|
210,000
|
|
Shares to be
issued to consultants
|
|
|
412,500
|
|
Total
|
|
|
2,188,624
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
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.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02) which amends the existing accounting standards
for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes
to lessor accounting. This accounting guidance is effective for fiscal years, and interim periods within those years, beginning
after December 15, 2018, with early adoption permitted. Additionally, this accounting guidance requires a modified retrospective
transition approach for all leases existing at, or entered into after the date of initial application, with an option to use certain
transition relief. In July 2018, the FASB issued a practical expedient that would allow entities the option to apply the provisions
of the new lease guidance at the effective date of adoption without adjusting the comparative periods presented. The Company adopted
this standard in the first quarter of 2019 and the adoption had the following impact on the Company’s results and consolidated
financial statements:
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies — (Continued)
The
Company has elected the “package of practical expedients” and as a result is not required to reassess its prior accounting
conclusions about lease identification, lease classification and initial direct costs for lease contracts that exist as of the
transition date. However, the Company has not elected the use of hindsight for determining the reasonably certain lease term.
The
new lease standard also provides practical expedients and policy elections for an entity’s ongoing accounting. The Company
has elected the practical expedient to not separate lease and non-lease components for all of its leases. The Company has elected
the short-term lease recognition exemption, which results in no recognition of right-of-use assets and lease liabilities for existing
short-term leases at transition.
Upon
adoption on January 1, 2019, the Company recognized right of use assets for operating leases and operating lease liabilities that
have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum
lease payments. The right of use asset for operating leases is based on the lease liability. The Company did not have any deferred
rent or material prepaid rent.
The
cumulative effect of initially applying the new lease accounting standard as of January 1, 2019 is as follows:
|
|
January
1,
2019
|
|
|
Cumulative
Effect
Adjustment
|
|
|
January
1,
2019, as
adjusted
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Right
of use assets – operating leases
|
|
$
|
-
|
|
|
$
|
943,997
|
|
|
$
|
943,997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of operating lease liabilities
|
|
$
|
-
|
|
|
$
|
261,866
|
|
|
$
|
261,866
|
|
Operating
lease liabilities, net of current portion
|
|
$
|
-
|
|
|
$
|
682,131
|
|
|
$
|
682,131
|
|
The
adoption of the standard did not result in any material changes to the recognition of operating lease expenses in the Company’s
consolidated statements of operations.
In
January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04), “Simplifying the Test for Goodwill
Impairment”, which removes Step 2 from the goodwill impairment test. ASU 2017-04 requires that if a reporting unit’s
carrying value exceeds its fair value, an impairment charge would be recognized for the excess amount, not to exceed the carrying
amount of goodwill. ASU 2017-04 will be effective for interim and annual reporting periods beginning after December 15, 2019.
Early application is permitted after January 1, 2017. The Company early adopted ASU 2017-04 in the third quarter of 2018. The
Company recognized an impairment charge of $4,443,000 under the simplified test for goodwill impairment.
In
June 2018, the FASB issued an amendment to the accounting guidance related to accounting for employee share-based payments which
clarifies that an entity should recognize excess tax benefits in the period in which the amount of the deduction is determined.
This amendment is effective for annual periods beginning after December 15, 2018. The Company adopted this accounting guidance
in the first quarter of 2019 with no impact on our financial statements.
In
August 2018, the FASB issued new accounting guidance that addresses the accounting for implementation costs associated with a
hosted service. The guidance provides that implementation costs be evaluated for capitalization using the same criteria as that
used for internal-use software development costs, with amortization expense being recorded in the same income statement expense
line as the hosted service costs and over the expected term of the hosting arrangement. This guidance is effective for public
business entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early
adoption permitted. The guidance will be applied either retrospectively or prospectively to all implementation costs incurred
after the date of adoption. We have not yet adopted this accounting guidance and are currently evaluating the effect this accounting
guidance will have on our financial statements.
In
August 2018, the FASB issued new accounting guidance that eliminates, adds and modifies certain disclosure requirements for fair
value measurements. Among the changes, an entity will no longer be required to disclose the amount of and reasons for transfers
between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose the range and weighted average used
to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual
reporting periods beginning after December 15, 2019; early adoption is permitted. Since this accounting guidance only revises
disclosure requirements, it will not have a material impact on the Company’s consolidated financial statements.
In
October 2018, the FASB issued new accounting guidance for Variable Interest Entities, which requires indirect interests held through
related parties in common control arrangements be considered on a proportional basis for determining whether fees paid to decision
makers and service providers are variable interests. The guidance is effective for the Company’s interim and annual reporting
periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that the
adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
Subsequent
Events
The
Company has evaluated subsequent events through the date which the financial statements were issued. Based upon the evaluation,
except for items described in Note 16, the Company did not identify any recognized or non-recognized subsequent events that would
have required adjustment or disclosure in the financial statements.
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 deploys resources on a
consolidated level to all brands of the Company and therefore the Company only identifies one reportable operating segment with
multiple product offerings.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
3 — Acquisition
On
September 4, 2018, the Company completed the acquisition of all of the voting membership interest of Edison Nation Holdings, LLC
for a total purchase price of $12,820,978 comprising of (i) $950,000 cash (ii) the assumption of the remaining balance of the
senior convertible debt through the issuance to the holders of 4%, 5-year senior convertible notes (the “New Convertible
Notes”), in the aggregate principal and interest amount of the sum of $1,428,161, less debt discount of $500,000 for the
approximate fair value of the conversion feature, which are convertible into approximately 285,632 shares of the Company’s
common stock, at the option of the holder of such New Convertible Notes (subject to certain adjustments as provided in the Membership
Interest Purchase Agreement (the “Purchase Agreement”) among the Company and Edison Nation Holdings, LLC and Edison
Nation Holdings, LLC members dated June 29, 2018 and the terms of the New Convertible Notes), (iii) the reservation of 990,000
shares of the Company’s common stock that may be issued in exchange for the redemption of certain non-voting membership
interests of EN that will be created specifically in connection with the transaction contemplated by the Purchase Agreement (which
exchange obligations may be instead satisfied in cash instead of shares of common stock, in the Company’s sole discretion),
and (iv) the issuance of 557,084 shares or $3,760,317 of the Company’s common stock in full satisfaction of the indebtedness
represented by promissory notes payable by EN to Venture Six, LLC and Wesley Jones.
The
activity of Edison Nation Holdings, LLC included in the Company’s consolidated statements of operations from the date of
acquisition was net sales of $267,920 and net loss of $197,485.
On
October 29, 2018, the Company completed the acquisition of 72.15% of the outstanding capital stock of Cloud B, Inc. in exchange
for 489,293 shares of restricted common stock of the Company. In addition, the Company entered into an Earn Out Agreement with
the Cloud B Sellers, whereby, beginning in 2019, the Company will pay the Cloud B Sellers an annual amount equal to 8% multiplied
by the annual gross sales of Cloud B, as reduced by the total gross sales generated by Cloud B in 2018. The Earn Out Agreement
expires on December 31, 2021. In February 2019, CBAVI, LLC foreclosed on the Promissory Note it held that was secured by Cloud
B, Inc.’s assets. After the foreclosure, there likely will be no assets to distribute to other creditors. In addition, the
fair value of the earnout originally valued at $520,000 was reduced to $0 with an adjustment to change in fair value in the Company’s
Consolidated Statements of Operations.
The
activity of Cloud B, Inc. included in the Company’s consolidated statements of operations from the date of acquisition was
net sales of $1,512,328 and net loss of $44,408.
On
December 31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn
Capital, LP in exchange for the satisfaction of $470,000 due from related party. Accordingly, the consolidated financial statements
of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects
a distribution for the excess of consideration paid over the net carrying amount of assets.
The
activity of Pirasta, LLC included in the Company’s consolidated statements of operations from the date of acquisition to
December 31, 2018 was not material.
On
December 31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC
from NL Penn Capital, LP in exchange for the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial
statements of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that
equity reflects a distribution for the excess of consideration paid over the net carrying amount of assets. NL Penn Capital, LP
is owned by Christopher B. Ferguson, our Chairman and Chief Executive Officer.
The
activity of Best Party Concepts, LLC included in the Company’s consolidated statements of operations from the date of acquisition
to December 31, 2018 was not material.
On
November 6, 2019, the Company issued 45,000 shares of our common stock to acquire the assets of Uber Mom, LLC for $52,352, which
was the approximate value of Uber Mom, LLC’s inventory.
The
activity of Uber Mom included in the Company’s consolidated statements of operations from the date of acquisition to December
31, 2019 was not material.
Joint
Venture
On
August 23, 2019, the Company formed Ed Roses, LLC, a 50% joint venture with 4Keeps Roses, Inc., to distribute preserved roses,
flowers and associated gift products.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
3 — Acquisition — (Continued)
The following table summarizes the
aggregate purchase price consideration paid for acquisitions during 2019:
|
|
Uber Mom
|
|
Cash paid
|
|
$
|
52,352
|
|
Fair value of issued shares
|
|
|
98,613
|
|
Purchase consideration
|
|
$
|
150,965
|
|
The following table summarizes the
aggregate purchase price consideration paid for acquisitions during 2018:
|
|
Edison
Nation
|
|
|
|
|
|
|
|
|
Best
Party
|
|
|
|
Holdings,
LLC
|
|
|
Cloud
B, Inc.
|
|
|
Pirasta,
LLC
|
|
|
Concepts,
LLC
|
|
Cash
paid
|
|
|
950,000
|
|
|
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value
of issued shares
|
|
|
3,384,285
|
|
|
|
2,664,200
|
|
|
|
-
|
|
|
|
-
|
|
Fair value
of reserved shares
|
|
|
6,014,250
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance
of debt
|
|
|
1,428,161
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Settlement
of due from related party
|
|
|
-
|
|
|
|
-
|
|
|
|
470,000
|
|
|
|
500,000
|
|
Fair value
of contingent consideration
|
|
|
-
|
|
|
|
520,000
|
|
|
|
-
|
|
|
|
-
|
|
Adjustment
to purchase price – earnout
|
|
|
|
|
|
|
(520,000
|
)
|
|
|
|
|
|
|
|
|
Purchase
consideration
|
|
$
|
11,776,696
|
|
|
$
|
2,664,200
|
|
|
$
|
470,000
|
|
|
$
|
500,000
|
|
The
Company believes that these combinations will further strengthen its future growth opportunities while also increasing product
diversification. The Company accounted for these acquisitions 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 during 2018 at the date of
acquisition:
|
|
Edison
Nation
|
|
|
|
|
|
|
|
|
Best
Party
|
|
|
|
Holdings,
LLC
|
|
|
Cloud
B, Inc.
|
|
|
Pirasta,
LLC
|
|
|
Concepts,
LLC
|
|
Cash
and cash equivalents
|
|
$
|
68,681
|
|
|
$
|
104,744
|
|
|
$
|
3,629
|
|
|
$
|
365
|
|
Accounts
receivable
|
|
|
15,958
|
|
|
|
636,755
|
|
|
|
7,696
|
|
|
|
6,906
|
|
Inventory
|
|
|
-
|
|
|
|
566,500
|
|
|
|
36,537
|
|
|
|
139,918
|
|
Other
assets
|
|
|
39,691
|
|
|
|
172,747
|
|
|
|
-
|
|
|
|
4.356
|
|
Property
and equipment
|
|
|
1,852
|
|
|
|
53,345
|
|
|
|
-
|
|
|
|
10,931
|
|
Goodwill
|
|
|
5,497,242
|
|
|
|
3,364,432
|
|
|
|
354,836
|
|
|
|
-
|
|
Intangible
assets
|
|
|
6,400,000
|
|
|
|
6,600,000
|
|
|
|
-
|
|
|
|
-
|
|
Total
assets acquired
|
|
|
12,023,424
|
|
|
|
11,498,523
|
|
|
|
402,698
|
|
|
|
162,476
|
|
Debt
|
|
|
-
|
|
|
|
1,400,000
|
|
|
|
-
|
|
|
|
-
|
|
Accounts
payable
|
|
|
227,025
|
|
|
|
5,748,797
|
|
|
|
2,052
|
|
|
|
34,041
|
|
Accrued
expenses and other liabilities
|
|
|
19,703
|
|
|
|
527,526
|
|
|
|
119,198
|
|
|
|
513,502
|
|
Total
liabilities assumed
|
|
|
246,728
|
|
|
|
7,676,323
|
|
|
|
121,250
|
|
|
|
547,543
|
|
Noncontrolling
interest
|
|
|
-
|
|
|
|
1,158,000
|
|
|
|
-
|
|
|
|
(192,534
|
)
|
Distribution
to shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
(188,552
|
)
|
|
|
(692,533
|
)
|
|
|
$
|
11,776,696
|
|
|
$
|
2,664,200
|
|
|
$
|
470,000
|
|
|
$
|
500,000
|
|
The noncontrolling interest was valued
based on the fair value of consideration paid to the Cloud B Sellers.
The
following table summarizes the preliminary purchase price allocation of fair values of the assets acquired and liabilities assumed
during 2019 at the date of acquisition:
|
|
Uber Mom
|
|
Inventory
|
|
$
|
52,352
|
|
Goodwill
|
|
|
98,613
|
|
Total assets acquired
|
|
$
|
150,965
|
|
The
following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated
results of the Company for the entire years ending December 31, 2018:
|
|
Years
Ended
December
31,
|
|
|
|
2018
|
|
|
|
|
|
Revenues,
net
|
|
$
|
20,988,594
|
|
Cost
of revenues
|
|
|
13,566,605
|
|
Gross
profit
|
|
|
7,421,989
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Selling,
general and administrative
|
|
|
13,144,691
|
|
Operating
(loss) income
|
|
|
(5,722,702
|
)
|
|
|
|
|
|
Other
(expense) income:
|
|
|
|
|
Other
(expense) income
|
|
|
(398,406
|
)
|
(Loss)
income before income taxes
|
|
|
(6,121,108
|
)
|
Income
tax expense
|
|
|
304,298
|
|
Net
(loss) income
|
|
$
|
(6,425,406
|
)
|
Net
(loss) income attributable to noncontrolling interests
|
|
|
(415,466
|
)
|
Net
(loss) income attributable to Edison Nation, Inc.
|
|
|
(6,009,940
|
)
|
Net
(loss) income per share - basic and diluted
|
|
$
|
(1.09
|
)
|
Weighted
average number of common shares outstanding – basic and diluted
|
|
|
5,513,706
|
|
In
connection with the acquisitions the Company will no longer present multiple segments for packaging materials and consumer goods
segment as resources will be deployed on a consolidated level and all entities will operate cross functionally as one team to
bring products to market.
Note
4 — Accounts Receivable
As
of December 31, 2019 and 2018, accounts receivable consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Accounts
receivable
|
|
$
|
2,185,859
|
|
|
$
|
1,889,112
|
|
Less:
Allowance for doubtful accounts
|
|
|
(77,760
|
)
|
|
|
(11,761
|
)
|
Total
accounts receivable, net
|
|
$
|
2,108,099
|
|
|
$
|
1,877,351
|
|
Note
5 — Inventory
As
of December 31, 2019 and 2018, inventory consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw
materials
|
|
$
|
49,232
|
|
|
$
|
48,576
|
|
Finished
goods
|
|
|
1,319,993
|
|
|
|
875,131
|
|
Total
inventory
|
|
$
|
1,369,225
|
|
|
$
|
923,707
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
6 — Prepaid expenses and other current assets
As
of December 31, 2019 and 2018, accrued expenses and other current liabilities consisted of the following:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deposits on inventory
|
|
$
|
680,792
|
|
|
$
|
133,073
|
|
Deposits
|
|
|
11,409
|
|
|
|
66,862
|
|
Prepaid insurance
|
|
|
46,848
|
|
|
|
59,892
|
|
Accrued revenue
|
|
|
18,966
|
|
|
|
36,657
|
|
Prepaid consulting fees
|
|
|
137,328
|
|
|
|
251,000
|
|
Other
|
|
|
22,090
|
|
|
|
64,211
|
|
Total prepaid expenses and other current assets
|
|
$
|
917,433
|
|
|
$
|
611,695
|
|
Note
7 — Property and equipment, net
As
of December 31, 2019 and 2018, property and equipment consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Land
|
|
$
|
79,100
|
|
|
$
|
79,100
|
|
Buildings
– rental property
|
|
|
445,635
|
|
|
|
427,704
|
|
Building
improvements
|
|
|
766,859
|
|
|
|
760,017
|
|
Equipment
and machinery
|
|
|
3,917,080
|
|
|
|
3,929,332
|
|
Furniture
and fixtures
|
|
|
387,836
|
|
|
|
322,157
|
|
Computer
software
|
|
|
23,518
|
|
|
|
23,518
|
|
Molds
|
|
|
4,651,889
|
|
|
|
4,589,153
|
|
Vehicles
|
|
|
521,962
|
|
|
|
502,960
|
|
|
|
|
10,793,879
|
|
|
|
10,633,941
|
|
Less:
accumulated depreciation
|
|
|
(9,861,911
|
)
|
|
|
(9,635,078
|
)
|
Total
property and equipment, net
|
|
$
|
931,968
|
|
|
$
|
998,863
|
|
Depreciation
expense for the years ended December 31, 2019 and 2018 was $231,518 and $175,609, respectively.
Note
8 — Goodwill
The
changes in the carrying amount of goodwill for the year ended December 31, 2019 consisted of the following:
|
|
Total
|
|
Balance, January 1, 2018
|
|
$
|
-
|
|
Acquisitions
|
|
|
9,736,510
|
|
Balance, January 1, 2019
|
|
$
|
9,736,510
|
|
Acquisition of Uber Mom
|
|
|
98,613
|
|
Impairment
|
|
|
(4,443,000
|
)
|
Balance, December 31, 2019
|
|
$
|
5,392,123
|
|
The Company recorded an impairment charge
of $4,443,000 related to our annual impairment assessment. The impairment was a result of decreased profitability as compared
to anticipated profitability in our businesses acquired in 2018. The Company utilized the simplified test for goodwill impairment.
The amount recognized for impairment is equal to the difference between the carrying value and the asset’s fair value. The
valuation methods used in the quantitative fair value assessment was a discounted cash flow method and required management to
make certain assumptions and estimates regarding certain industry trends and future profitability of our reporting units.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
9 — Intangible assets, net
As
of December 31, 2019, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
|
Accumulated
|
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
|
Amortization
|
|
|
|
Amount
|
|
Finite
lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
15
years
|
|
|
|
13.8
years
|
|
|
$
|
4,270,000
|
|
|
$
|
339,556
|
|
|
$
|
3,930,444
|
|
Developed
technology
|
|
|
7
years
|
|
|
|
5.7
years
|
|
|
|
3,800,000
|
|
|
|
697,619
|
|
|
|
3,102,381
|
|
Membership
network
|
|
|
7
years
|
|
|
|
5.7
years
|
|
|
|
1,740,000
|
|
|
|
331,429
|
|
|
|
1,408,571
|
|
Non-compete
agreements
|
|
|
2
years
|
|
|
|
.7
years
|
|
|
|
50,000
|
|
|
|
33,333
|
|
|
|
16,667
|
|
Total
finite lived intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
9,860,000
|
|
|
$
|
1,401,937
|
|
|
$
|
8,458,063
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite
lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
Indefinite
|
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total
indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total
intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
13,000,000
|
|
|
$
|
1,401,937
|
|
|
$
|
11,598,063
|
|
As
of December 31, 2018, intangible assets consisted of the following:
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
|
|
|
|
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
Finite
lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
|
15
years
|
|
|
|
14.8
years
|
|
|
$
|
4,270,000
|
|
|
$
|
61,555
|
|
|
$
|
4,208,445
|
|
Developed
technology
|
|
|
7
years
|
|
|
|
6.7
years
|
|
|
|
3,800,000
|
|
|
|
159,524
|
|
|
|
3,640,476
|
|
Membership
network
|
|
|
7
years
|
|
|
|
6.7
years
|
|
|
|
1,740,000
|
|
|
|
82,857
|
|
|
|
1,657,143
|
|
Non-compete
agreements
|
|
|
2
years
|
|
|
|
1.7
years
|
|
|
|
50,000
|
|
|
|
8,333
|
|
|
|
41,667
|
|
Total
finite lived intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
9,860,000
|
|
|
$
|
312,269
|
|
|
$
|
9,547,731
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Indefinite
lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
and tradenames
|
|
|
Indefinite
|
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total
indefinite lived intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
3,140,000
|
|
|
$
|
-
|
|
|
$
|
3,140,000
|
|
Total
intangible assets
|
|
|
|
|
|
|
|
|
|
$
|
13,000,000
|
|
|
$
|
312,269
|
|
|
$
|
12,687,731
|
|
Amortization
expense for the years ended December 31, 2019 and 2018 was $1,089,668 and $312,269, respectively.
The
estimated future amortization of intangibles subject to amortization at December 31, 2019 was as follows:
For
the Years Ended December 31,
|
|
|
Amount
|
|
2020
|
|
$
|
1,092,762
|
|
2021
|
|
|
1,076,095
|
|
2022
|
|
|
1,076,095
|
|
2023
|
|
|
1,076,095
|
|
2024
|
|
|
1,076,095
|
|
Thereafter
|
|
$
|
3,060,921
|
|
Note
10 — Accrued expenses and other current liabilities
As
of December 31, 2019 and 2018, accrued expenses and other current liabilities consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued
taxes - other
|
|
$
|
261,396
|
|
|
$
|
259,559
|
|
Accrued
payroll and benefits
|
|
|
482,719
|
|
|
|
175,336
|
|
Accrued
professional fees
|
|
|
201,318
|
|
|
|
133,261
|
|
Customer
deposits
|
|
|
13,212
|
|
|
|
35,094
|
|
Accrued
interest
|
|
|
341,559
|
|
|
|
269,782
|
|
Accrued
legal contingencies
|
|
|
240,105
|
|
|
|
-
|
|
Other
|
|
|
54,359
|
|
|
|
262,519
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
1,594,668
|
|
|
$
|
1,135,551
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Debt
As
of December 31, 2019 and December 31, 2018, debt consisted of the following:
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Line
of credit:
|
|
|
|
|
|
|
|
|
Asset
backed line of credit
|
|
$
|
472,567
|
|
|
$
|
561,804
|
|
Debt
issuance costs
|
|
|
(15,573
|
)
|
|
|
(30,000
|
)
|
Total
line of credit
|
|
|
456,995
|
|
|
|
531,804
|
|
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable:
|
|
|
|
|
|
|
|
|
Senior
convertible notes payable
|
|
|
1,428,161
|
|
|
|
1,428,161
|
|
Debt
issuance costs
|
|
|
(366,666
|
)
|
|
|
(466,667
|
)
|
Total
long-term senior convertible notes payable
|
|
|
1,061,495
|
|
|
|
961,494
|
|
Less:
current portion of long-term notes payable
|
|
|
-
|
|
|
|
-
|
|
Noncurrent
portion of long-term convertible notes payable
|
|
|
1,061,495
|
|
|
|
961,494
|
|
|
|
|
|
|
|
|
|
|
Notes
payable:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
1,621,015
|
|
|
|
370,250
|
|
Debt
issuance costs
|
|
|
(212,848
|
)
|
|
|
-
|
|
Total
long-term debt
|
|
|
1,408,167
|
|
|
|
370,250
|
|
Less:
current portion of long-term debt
|
|
|
(1,365,675
|
)
|
|
|
(313,572
|
)
|
Noncurrent
portion of long-term debt
|
|
|
42,492
|
|
|
|
56,678
|
|
|
|
|
|
|
|
|
|
|
Notes
payable – related parties:
|
|
|
|
|
|
|
|
|
Notes
payable
|
|
|
3,282,021
|
|
|
|
3,464,191
|
|
Less:
current portion of long-term debt – related parties
|
|
|
(1,686,352
|
)
|
|
|
(932,701
|
)
|
Noncurrent
portion of long-term debt – related parties
|
|
$
|
1,595,669
|
|
|
$
|
2,531,490
|
|
Line
of Credit
On
December 27, 2018, the Company entered into credit agreement providing for an asset backed line of credit of $1,000,000. The credit
agreement contains a revolving maturity date which is subject to an annual review by the lender. The credit agreement is collateralized
by substantially all of the assets of Ferguson Containers, Inc. The interest rate was 8.5% as of December 31, 2019. The agreement
contains certain covenants and definition. As of December 31, 2019, the Company was not in compliance with certain covenants under
the line of credit. Subsequently, the Company repaid the line of credit in full from the use of funds from the Bayview factoring
agreement.
Long-term
Convertible Notes Payable – Related Parties
On
September 4, 2018, in connection with the acquisition of EN, the Company issued five senior convertible notes payable aggregating
$1,428,161. The notes have an effective interest rate of four percent (4%) per annum. The Company is required to make semi-annual
interest payments on June 30th and December 31st of each year. The notes have an option to convert at a conversion price of $5.00.
Prepayments are not allowed under the notes without the prior written consent of applicable holders of a note until the second
anniversary of the effective date of the note, after which time the notes may be prepaid without penalty at any time upon sixty
(60) days’ written notice to the holders. The holders have piggyback registration rights. If the conversion option is not
elected by the holder, all outstanding principal and interest is due on September 4, 2023. The Company recorded a debt discount
of $500,000 related to the beneficial conversion feature that will be amortized over five (5) years to interest expense.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Debt — (Continued)
Notes
Payable
The
Company borrowed funds under two separate notes, aggregating $645,000, in February 2018 and March 2018. In addition, the Company
issued the 20,000 and 13,500 shares to the holders of the notes payable, respectively. The fair value of the shares issued was
$167,500 which was recorded as a debt discount and fully amortized through interest expense. As of December 31, 2019, both holders
of the notes were paid in full.
On
September 7, 2018, the Company borrowed $73,559 related to the purchase of a commercial delivery vehicle. The note bears interest
at a rate of 4.5% per annum. The monthly payments under the note are $1,371 commencing on October 6, 2018 and maturing on September
6, 2023. The loan is collaterized by the commercial delivery vehicle having the approximate value of $75,000.
On
December 1, 2016, Cloud B, Inc. entered into a Loan Agreement with an outside associate of CEO Linda Suh. The loan was in the
amount of $300,000. This loan was for a period of six (6) months and bears no interest and therefore no monthly interest payments.
A Loan Amendment and Extension Agreement was entered into on June 1, 2017, extending the maturity of the loan until December 31,
2017. This loan remains outstanding. No collateral was provided by the Company for any of the above-referenced loans.
On
May 16, 2019, the Company entered into a non-interest bearing promissory note of $300,000, with an original issue discount of
$50,000. The Company issued 20,000 shares of its common stock to the note holder as additional consideration for the purchase
of the note. The Company recorded $62,000 as a debt discount as of December 31, 2019 related to the value of the shares issued.
The note matured on November 16, 2019 and was paid in full.
On
June 14, 2019, the Company entered into that certain Loan Agreement with Tiburon Opportunity Fund (the “Lender”),
dated June 14, 2019 (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, the Lender agreed to loan
the Company $250,000. The Loan is interest bearing at the rate of 1.5% per month through the term of the Loan. Additionally, the
Loan Agreement provides that the Company shall pay the Lender the entire unpaid principal and all accrued interest upon thirty
days’ notice to the Company, but in any event, the notice shall not be sooner than August 11, 2019. The Loan proceeds are
being used to fund general working capital needs of the Company. If the Company defaults on the performance of any obligation
under the Loan Agreement, the Lender may declare the principal amount of the Loan owing under the Loan Agreement at the time of
default to be immediately due and payable. Furthermore, the Loan Agreement grants the Lender a collateral interest in certain
accounts receivable of SRM Entertainment Ltd., a subsidiary of the Company. The outstanding principal and interest on the note
was repaid on December 27, 2019.
On
August 26, 2019, the Company entered into a securities purchase agreement with Labrys Fund, LP (the “Investor”) pursuant
to which the Investor purchased a 12% Convertible Promissory Note (the “Note”) from the Company. Unless there is a
specific Event of Default (as such term is defined in the Note) or the Note remains unpaid by the Maturity Date, then the Investor
shall not have the ability to convert the principal and interest under the Notes into shares of the Company’s common stock.
The Company agreed to issue and sell to the Investor the Note, in the principal amount of $560,000, with an original issue discount
in the amount of $60,000. The Note is due and payable February 26, 2020 (the “Maturity Date”). Additionally, the Company
issued 181,005 shares of Common Stock to the Investor as a commitment fee, of which 153,005 shares of Common Stock must be returned
to the Company in the event the Note is fully paid and satisfied prior to the Maturity Date.
On
January 24, 2020, the Company repaid the Labrys Note in full. Upon repayment of the Labrys Note, Labrys returned to the Company
for cancellation the 153,005 shares of Common Stock that had been originally issued to as a portion of the commitment fee paid
in connection with the Labrys Note, and allowed the Company to cancel the reservation of the 875,000 shares of Common Stock that
had been reserved pursuant to the Labrys SPA and Labrys Note.
On
December 4, 2019, the Company entered into a Senior Secured Note Agreement (the “32E Loan Agreement”) with 32 Entertainment
LLC (“32E”), pursuant to which 32E agreed to loan the Company $250,000 (the “Loan”). The Loan is interest
bearing at the rate of 10.0% per annum through the term of the Loan. The Company issued 10,000 shares of common stock to 32E in
connection with the 32E Loan Agreement. In addition, the Company issued a warrant (the “32E Warrant”) to purchase
50,000 shares of the Company’s common stock. Under the terms of the 32E Loan Agreement, the Company entered into a registration
rights agreement whereby the Company agreed to register the shares and file this registration statement on a Form S-1 with the
SEC. The Company was required to have such registrations statement declared effective by the SEC within 90 calendar days. The
Loan proceeds are being used to fund general working capital needs of the Company. If the Company defaults on the performance
of any obligation under the Loan Agreement, 32E may declare the principal amount of the Loan owing under the 32E Loan Agreement
at the time of default to be immediately due and payable. Interest is due in March, June and September. The outstanding principal
and interest on the note are due on December 4, 2020. On May 19, 2020, the 32E Loan Agreement was amended to change the due date
on the outstanding principal and interest to May 31, 2020.
Notes
Payable – Related Parties
On
September 30, 2018, in connection with the acquisition of SRM and Fergco, the Company issued two notes payable aggregating $2,996,500.
One note was issued to NL Penn Capital, L.P, in relation to the acquisition of SRM in the amount of $2,120,000 and the other note
was issued to the stockholders of Fergco in the amount of $876,500. The notes bear interest at a rate of six percent (6%) per
annum and have an effective interest rate of six percent (6%) per annum. The Company is required to make monthly payments comprised
of principal and interest beginning in January 2018 that are amortized over ten (10) years, with a balloon payment of all outstanding
principal and interest due at the respective maturity dates of $677,698, due on December 1, 2020, and $1,249,043, due on December
1, 2022. NL Penn Capital, L.P. has from time to time agreed to defer payments due under the note. The former stockholders of Fergco
have agreed to defer all payments due under the note and the deferred amount is due on demand.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Debt — (Continued)
On
April 24, 2014, Cloud B, Inc. entered into two Shareholder Loan Agreements. One shareholder loan was from former shareholder,
Board Member, and CEO of Cloud B, Inc. prior to the acquisition on October 29, 2018, Linda Suh in the amount of $100,000. This
loan bears interest at a rate of 7.0% per annum for the first twelve (12) months and 8.0% per annum thereafter. The Company is
required to make monthly interest only payments. Interest payments on this loan have been paid through November 2018. The other
shareholder loan was from former shareholder and Board Member of Cloud B, Inc. prior to the acquisition on October 29, 2018, John
Royan in the amount of $500,000. This loan bears interest at a rate of 7.0% per annum for the first six (6) months and 8.0% per
annum for the next six (6) months. The Company was required to make monthly interest only payments through May 2015, with the
loan becoming due and payable on May 28, 2015. This loan remains outstanding with the last interest payment made in July 2015.
Convertible
Notes
On
March 6, 2019, Edison Nation entered into a securities purchase agreement (the “FirstFire SPA”) with an accredited
investor (the “Investor”) pursuant to which the Investor purchased a 2% unsecured, senior convertible promissory note
(the “FirstFire Note”) from the Company. The FirstFire Note was in the amount of $560,000 with an original issue discount
of $60,000. The Company issued 15,000 shares of its common stock valued at $74,100 based on the share price on the date of issuance
to the Investor as additional consideration for the purchase of the FirstFire Note. The Under the terms of the FirstFire SPA,
the Investor will have “piggyback” registration rights in the event the Company files a Form S-1 or Form S-3 within
six months from March 6, 2019, as well as a pro rata right of first refusal in respect of participation in any debt or equity
financings undertaken by the Company during the 18 months following March 6, 2019. The Company is also subject to certain customary
negative covenants under the FirstFire SPA, including but not limited to, the requirement to maintain its corporate existence
and assets subject to certain exceptions, and to not to make any offers or sales of any security under circumstances that would
have the effect of establishing rights or otherwise benefitting other investors in a manner more favorable in any material respect
than those rights and benefits established in favor of the Investor under the terms of the FirstFire SPA and the FirstFire Note.
The maturity date of the FirstFire Note is six months from March 6, 2019. All principal amounts and the interest thereon are convertible
into shares of the Company’s common stock only in the event that an event of default occurs.
On
June 17, 2019, the Company entered into that certain Settlement and Release Agreement with the Investor (the “Settlement
Agreement”) whereby the Company and the Investor agreed to terminate the FirstFire SPA, FirstFire Note, and all other documents
entered into in connection therewith. Pursuant to the terms of the Settlement Agreement, the Company paid $566,000 and issued
15,000 shares of restricted common stock to the Investor (the “Settlement Amount”). Upon receipt of the Settlement
Amount, the Investor and the Company have agreed to terminate the FirstFire SPA, FirstFire Note, and all other documents entered
into in connection therewith, and to release, waive, and forever discharge the other party from, including, but not limited to,
any claim, right, or legal action, whether past, current, or future, which may arise directly or indirectly out of such documents.
On
May 13, 2019, the Company entered into a securities purchase agreement (the “May 2019 SPA”) with certain accredited
investors (the “Investors”) pursuant to which the Investors purchased Senior Convertible Promissory Notes (the “May
2019 Notes”) from the Company. The use of proceeds from the May 2019 Notes was used for general working capital and to fund
new product launches. Unless there is a specific Event of Default (as such term is defined in the May 2019 Notes), the Investors
shall not have the ability to convert the principal and interest under the May 2019 Notes into shares of common stock. Pursuant
to the May 2019 SPA, the Company agreed to sell to the Investors the May 2019 Notes, in the aggregate principal amount of $1,111,111,
which are convertible into shares of common stock. Additionally, the Company will issue an additional 20,000 shares of common
stock to the Investors as additional consideration for the purchase of the May 2019 Notes. Under the terms of the May 2019 SPA,
the Investors have piggyback registration rights in the event the Company files a Form S-1 or Form S-3 within six months of May
13, 2019. The Company is also subject to certain customary negative covenants under the May 2019 SPA, including but not limited
to, the requirement to maintain its corporate existence and assets subject to certain exceptions, and to not to make any offers
or sales of any security under circumstances that would have the effect of establishing rights or otherwise benefitting other
investors in a manner more favorable in any material respect than those rights and benefits established in favor of the Investors
under the terms of the May 2019 SPA and the May 2019 Notes.
As
issued on May 13, 2019, the principal amount of the May 2019 Notes is $1,111,111, with an original issue discount in the amount
of $111,111. The maturity date of the May 2019 Notes is November 13, 2019. The per share conversion price into which the principal
amount and interest under the May 2019 Notes may be converted is equal to 80% multiplied by the lowest traded price of our common
stock during the 20 consecutive trading days preceding the date of conversion. The conversion price may be adjusted in connection
with certain material corporate events, and the Company is subject to cash penalties in the event that the Company fails to timely
deliver certificates for shares of common stock issuable upon conversion of May 2019 Notes. The May 2019 Notes contain a cap,
such that the total number of shares of Common Stock issuable under the May 2019 Notes are limited to 19.99% of the Company’s
outstanding shares of common stock as of May 13, 2019. The Company issued 20,000 shares of its common stock to the note holders
as additional consideration for the purchase of the notes in July 2019.
So
long as an Event of Default has not occurred under the terms of the May 2019 Notes, the Company may prepay the May 2019 Notes
at any time, given not less than three trading days’ notice. If the Company exercises its right to prepay the May 2019 Notes
at any time within the initial 180 days following May 13, 2019, the prepayment amount to be paid by the Company shall be an amount
in cash equal to the sum of 115% multiplied by the principal on the May 2019 Notes then outstanding, plus all accrued and unpaid
interest, including unpaid default interest, if any.
Alexander
Capital placed the notes and received warrants to purchase 24,366 shares of the Company’s common stock, at an exercise price
of $2.85 per share. The notes were converted into 560,185 shares of common stock in November 2019 at $2.00 per share.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Debt — (Continued)
Receivables
Financing and Inventory
In
April 2019, we entered into a receivables financing arrangement for certain receivables of the Company. The agreement allows for
borrowings up to 80% of the outstanding receivable based on the credit quality of the customer. The fee is between 1% and 2% of
the total invoices financed.
On
November 12, 2019, the Company entered into a Receivables Purchase Agreement with a financial institution (the “Receivables
Purchase Agreement”), whereby the Company agreed to the sell of $225,000 of receivables for $200,000. The proceeds were
used for general working capital.
On
November 18, 2019, the Company entered into a Future Receivables Purchase Agreement with a financial institution (the “Future
Receivables Purchase Agreement”), whereby the Company agreed to the sell of $337,500 of receivables for $250,000. The proceeds
were used to fund our receivables for overseas distributors. Christopher B. Ferguson, our Chairman and Chief Executive Officer,
personally guaranteed the prompt and complete performance of the Company’s obligations under the Future Receivables Purchase
Agreement.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Debt — (Continued)
The
scheduled maturities of the debt for the next five years as of December 31, 2019, are as follows:
For
the Years Ended December 31,
|
|
Amount
|
|
2020
|
|
$
|
3,737,443
|
|
2021
|
|
|
206,760
|
|
2022
|
|
|
1,419,285
|
|
2023
|
|
|
1,440,278
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
$
|
6,803,766
|
|
Less: debt
discount
|
|
|
(595,088
|
)
|
|
|
$
|
6,208,678
|
|
For
the year ended December 31, 2019, interest expense was $1,298,168 of which $320,781 was related party interest expense. For the
year ended December 31, 2018 interest expense was $501,221.
Note
12 — Income Taxes
Edison
Nation, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from Fergco,
Edison Nation Holdings, LLC, Edison Nation, LLC, Safe TV Shop, LLC, Everyday Edisons, LLC and Pirasta, LLC based upon Edison Nation,
Inc.’s economic interest in those entities. Cloud B, Inc. is taxed as a corporation and pays corporate federal, state and
local taxes on its income. The Company has three foreign entities of which only SRM has operations, SRM is an entity subject to
the Hong Kong, China tax regime. The Hong Kong tax returns remain subject to examination by local taxing authorities beginning
with the tax year ended December 31, 2011.
Cloud B, Inc. was a Subchapter S pass-through
entity for income tax purposes prior to its acquisition by the Company on October 29, 2018. Accordingly, Cloud B, Inc. was not
subject to income taxes prior to the acquisition and therefore the tax provision related to the United States income is only for
the post-acquisition period.
Edison
Nation Holdings, LLC and its subsidiaries are disregarded limited liability corporation entities for income tax purposes. Accordingly,
EN was not subject to income taxes prior to the acquisition on September 4, 2018 and the results of operations were not material
therefore the tax provision related to the United States income is only for the post-acquisition period.
United
States and foreign components of income before income taxes were as follows:
|
|
For
the Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
United
States
|
|
$
|
(14,210,716
|
)
|
|
$
|
(5,828,261
|
)
|
Foreign
|
|
|
(7,811
|
)
|
|
|
788,159
|
|
Income
before income taxes
|
|
$
|
(14,218,527
|
)
|
|
$
|
(5,040,102
|
)
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
12 — Income Taxes – (Continued)
The
tax effects of temporary differences that give rise to deferred tax assets or liabilities are presented below:
|
|
For
the Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
|
Stock-based
compensation
|
|
$
|
987,747
|
|
|
$
|
682,115
|
|
Goodwill
and intangible assets
|
|
|
-
|
|
|
|
19,410
|
|
Operating
lease liabilities
|
|
|
158,430
|
|
|
|
-
|
|
Net
operating loss carryforwards
|
|
|
2,324,863
|
|
|
|
493,063
|
|
Less:
valuation allowance
|
|
|
(2,424,196
|
)
|
|
|
(1,194,587
|
)
|
Net
deferred tax assets
|
|
$
|
1,046,844
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Right
of use assets
|
|
|
(153,741
|
)
|
|
|
-
|
|
Goodwill
and intangible assets
|
|
|
(811,000
|
)
|
|
|
-
|
|
Property
and equipment
|
|
$
|
(82,103
|
)
|
|
$
|
341
|
|
Net
deferred tax liabilities
|
|
$
|
(1,046,844
|
)
|
|
$
|
341
|
|
Net
deferred tax liabilities
|
|
$
|
-
|
|
|
$
|
341
|
|
As
of December 31, 2019 and 2018, the Company had $9,675,770 and $2,223,498 of federal net operating loss carryforwards and $7,532,274
and $0 of state net operating loss carryforwards for income tax purposes, respectively. In connection with the IPO the Company
does not believe the ownership change resulted in the loss of past net operating loss carryforwards. The above net operating loss
carryforwards may be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar
state provisions if the Company experiences one or more ownership changes. The Company believes the goodwill acquired in the Edison
Nation Holdings acquisition is deductible for tax purposes. The Company evaluates its ability to realize deferred tax assets on
a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax
asset may not be realized. As of December 31, 2019 and 2018, the Company has recorded a net deferred tax asset of $3,471,040 and
$1,194,587, respectively. However, these net deferred tax assets will only be utilized to the extent the Company generates sufficient
taxable income. As of December 31, 2019, and 2018, the Company established a valuation allowance in the amount of $2,424,196 and
$1,194,587, respectively, against the net deferred tax asset as it is not more likely than not that it is realizable based on
current available evidence.
The
income tax provision (benefit) consists of the following:
|
|
For
the Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Current:
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
10,185
|
|
Foreign
|
|
|
3,166
|
|
|
|
292,491
|
|
State
and local
|
|
|
(22,372
|
)
|
|
|
35,107
|
|
Total
current
|
|
$
|
(19,206
|
)
|
|
$
|
337,783
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(896,468
|
)
|
|
$
|
(722,975
|
)
|
Foreign
|
|
|
(341
|
)
|
|
|
(2,316
|
)
|
State
and local
|
|
|
(333,141
|
)
|
|
|
(10,102
|
)
|
Less:
valuation allowance
|
|
|
1,229,609
|
|
|
|
701,525
|
|
Total
deferred
|
|
$
|
(341
|
)
|
|
$
|
(33,868
|
)
|
Income
tax provision (benefit)
|
|
$
|
19,547
|
|
|
$
|
303,915
|
|
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
12 — Income Taxes – (Continued)
A
reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
|
|
For
the Years
Ended
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Tax
at federal statutory rate
|
|
|
21.0
|
%
|
|
|
21.0
|
%
|
Effect
of U.S. tax law change
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
U.S.
income attributable to pass-through entity
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
U.S.
income subject to valuation allowance
|
|
|
-14.6
|
%
|
|
|
-20.5
|
%
|
State
and local income taxes
|
|
|
0.2
|
%
|
|
|
0.0
|
%
|
Foreign
income not subject to U.S. federal tax
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Foreign
tax
|
|
|
0.0
|
%
|
|
|
-6.3
|
%
|
Nondeductible
expenses
|
|
|
-6.5
|
%
|
|
|
0.0
|
%
|
Other
|
|
|
0.0
|
%
|
|
|
-0.2
|
%
|
Effective
income tax rate
|
|
|
0.1
|
%
|
|
|
-6.0
|
%
|
The
statutory federal income tax rate differs from the Company’s effective tax rate due to the valuation allowance related to
deferred tax assets and net operating losses and foreign income taxes in Hong Kong.
Note
13 — Related Party Transactions
NL
Penn Capital, LP and SRM Entertainment Group LLC
On
December 31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn
Capital, LP in exchange for the satisfaction of $470,000 due from related party. Accordingly, the consolidated financial statements
of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that equity reflects
a distribution for the excess of consideration paid over the net carrying amount of assets.
On
December 31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC
from NL Penn Capital, LP in exchange for the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial
statements of the Company reflect the accounting of the combined acquired subsidiary at historical carrying values, except that
equity reflects a distribution for the excess of consideration paid over the net carrying amount of assets.
As
of December 31, 2019 and December 31, 2018, the net amounts due to related parties consists of net amounts due to SRM Entertainment
Group LLC (“SRM LLC”) and NL Penn Capital, LP, which are both majority owned by Chris Ferguson, our Chairman and Chief
Executive Officer. The amount due to related parties is related to the acquisitions of Pirasta, LLC and Best Party Concepts, LLC
offset by operating expenses that were paid by SRM and Edison Nation on behalf of SRM LLC and NL Penn Capital, LP. As of December
31, 2019 and December 31, 2018, the net amount due to related parties was $17,253 and $140,682, respectively. Such amounts are
due currently.
Enventys
Partners, LLC
On
August 1, 2018, the Company entered into a one-year letter agreement with Enventys Partners, LLC, a North Carolina limited liability
company (“Enventys”), whereby Enventys agreed to provide services to the Company as an independent contractor in the
areas of product development and crowdfunding campaign marketing. During the term of the Enventys Agreement, the Company shall
pay Enventys a fixed fee of $15,000 per month for product development assistance, including design research, mechanical engineering
and quality control planning. Depending on the success of each campaign, the Company may also pay Enventys a commission of up
to ten percent of the total funds raised in the applicable campaign. Louis Foreman, who is a member of the Company’s board
of director, is also the Chief Executive Officer and the largest equity holder of Enventys. We incurred fees of approximately
$97,500 related to the services performed by Enventys for the year ended December 31, 2019. During 2019, the Company and Enventys
agreed to the cancellation of the agreement.
In
addition, during 2019 we engaged Enventys to design our website and incurred fees of $10,000 related to website development for
the Ferguson Containers website.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
14 — Commitments and Contingencies
Operating
Lease
The
Company has entered into non-cancellable operating leases for office, warehouse, and distribution facilities, with original lease
periods expiring through 2021. In addition to minimum rent, certain of the leases require payment of real estate taxes, insurance,
common area maintenance charges, and other executory costs. Differences between rent expense and rent paid are recognized as adjustments
to operating lease right-of-use assets on the consolidated balance sheets.
On
June 6, 2018, the Company’s wholly owned subsidiary, Best Party Concepts, LLC, entered into a lease for office space in
Newtown, PA, which shall expire on May 30, 2020. Monthly lease payments are approximately $1,880 for a total of approximately
$22,560 for the total term of the lease.
On
August 8, 2016, SRM entered into a lease for office space in Kowloon, Hong Kong. On August 8, 2018, SRM extended its lease for
office space in Kowloon, Hong Kong so that the lease will now expire on August 7, 2020. Monthly lease payments are approximately
$6,400 for a total of approximately $154,000 for the total term of the lease.
On
November 1, 2018, the Company’s wholly owned subsidiary, Cloud B, Inc., entered into a lease for office and warehouse space
in Gardena, CA, which shall expire on October 31, 2021. Monthly lease payments are approximately $16,175 for a total of approximately
$582,300 for the total term of the lease.
On
October 1, 2018, the Company entered into a lease for office space in Winter Park, Florida, which expires on September 30, 2020.
Monthly lease payments are approximately $1,887 for a total of approximately $45,288 for the total term of the lease.
On
July 1, 2019, the Company entered into a lease for office space in Bethlehem, Pennsylvania, which expires on July 31, 2020. Monthly
lease payments are $2,415 for a total of approximately $89,000 for the total term of the lease.
Total
rent expense for the years ended December 31, 2019 and 2018 was $451,711 and $343,253, respectively. Rent expense is included
in general and administrative expense on the consolidated statements of operations.
The
following is a reconciliation of future undiscounted cash flows to the operating liabilities, and the related right of use assets,
included in our Condensed Consolidated Balance Sheets as of December 31, 2019:
|
|
December
31,
2019
|
|
2020
|
|
|
315,660
|
|
2021
|
|
|
267,249
|
|
2022
|
|
|
96,288
|
|
2023
|
|
|
78,648
|
|
2024
|
|
|
52,432
|
|
2025
and thereafter
|
|
|
-
|
|
Total
future lease payments
|
|
|
810,277
|
|
Less:
imputed interest
|
|
|
(55,850
|
)
|
Present
value of future operating lease payments
|
|
|
754,427
|
|
Less:
current portion of operating lease liabilities
|
|
|
(272,215
|
)
|
Operating
lease liabilities, net of current portion
|
|
|
482,212
|
|
Right
of use assets – operating leases, net
|
|
|
732,100
|
|
Rental
Income
Fergco
leases a portion of the building located in Washington, New Jersey that it owns under a month to month lease. Total rental income
related to the leased space for both the years ended December 31, 2019 and 2018 was $102,815 and $102,815, respectively, and is
included in other income on the consolidated statements of operations.
Consulting
Agreements
On
September 12, 2019, the Company entered into a Consulting Agreement (the “Agreement”) with a Consultant for general
corporate governance. Under the terms of the Agreement, the Consultant is to be compensated 50,000 shares of common stock upon
execution of the Agreement and 50,000 shares at the six-month anniversary of the Agreement. The Agreement has a term of one year.
On
September 12, 2019, the Company entered into a Consulting Agreement (the “Agreement”) with a Consultant for sales
fulfillment, procurement and quality control. Under the terms of the Agreement, the Consultant is to be compensated $33,333 per
month, a minimum bonus of $100,000 at the 90 day anniversary of the Agreement, 300,000 shares of common stock upon the execution
of the Agreement and additional shares of common stock based up certain revenue and operational targets. The Agreement has a term
of 5 years and can be terminated by either party after the 3-year anniversary of the Agreement.
Legal
Contingencies
The
Company is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including
claims for punitive damages, which are not covered by insurance. For certain pending matters, accruals have not been established
because such matters have not progressed sufficiently through discovery, and/or development of important factual information and
legal information is insufficient to enable the Company to estimate a range of possible loss, if any. An adverse determination
in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results
of operations or cash flows.
We
are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course
of business.
On April 14, 2020, Oceanside Traders, LLC
(“Plaintiff”) filed a complaint against Cloud B, Inc. and Edison Nation, Inc. (together the “Defendants”)
with the Superior Court of Ocean County, New Jersey alleging a breach of contract in that the Defendants failed to pay Plaintiff
for goods sold in the amount of $141,007 plus $138,180 for overpayments and $279,187 for lost profits for a total of $443,383.
The parties are currently in settlement discussions, and the Company has accrued $190,105 for anticipated settlement costs.
On
July 15, 2019, the Company received correspondence from the staff of the Arkansas Securities Commissioner in connection with the
state’s notice filing requirements for offerings exempt under Tier 2 of Regulation A, Section 18(b)(3) of the Security Act,
such as the Company’s Form 1-A. The Company has resolved the matter with the Arkansas Securities Department for $1,100.
On
March 13, 2019, Rosenberg Fortuna & Laitman LLP and Mark Principe (together the “Plaintiffs”) filed a complaint
against Safe TV Shop, LLC (the “Defendant”) with the Supreme Court of the State of New York, County of Nassau alleging
a breach of indemnification arising out of the use of a certain packaging material. On February 12, 2020, the parties entered
a Stipulation and Settlement and Consent Agreement, whereby the Plaintiff entered into a Consent Judgment in the amount of $50,000.
The Company has accrued $50,000 for the amount of the judgment, but there have been no operations by the Plaintiff since the date
of acquisition by the Company.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
15 — Stockholders’ Equity
Common
Stock
The
Company issued 1,312,520 shares of common stock related to the IPO, at a public offering price of $5.00 per share in August 2018.
The Company received gross proceeds of $6,562,600 and net proceeds of $5,315,176 after deducting underwriter commissions and expenses
of $714,802, legal fees of $157,358, escrow closing fees of $4,000 and other direct offering expenses which together aggregate
$1,204,030. As of December 31, 2019 and 2018, there were 8,015,756 and 5,654,930 shares of common stock issued and outstanding,
respectively.
On
October 2, 2019, Edison Nation, Inc. (the “Company”) entered into a Share Purchase Agreement (the “PIPE Purchase
Agreement”) with certain accredited investors (collectively, the “Investors”) for the private placement of 1,175,000
shares of the Company’s common stock, $0.001 par value per share, at a purchase price of $2.00 per share (the “PIPE
Transaction”). The PIPE Purchase Agreement contained certain closing conditions relating to the sale of securities, representations
and warranties by the Company and the Investors, as well as covenants of the Company and the Investors (including indemnification
from the Company in the event of breaches of its representations and warranties), all of which the Company believes are customary
for transactions of this type.
Stock-Based
Compensation
On
September 6, 2018, the Company’s board of directors approved an amendment and restatement of the Company’s omnibus
incentive plan solely to reflect the Company’s name change to Edison Nation, Inc. Thus, the Edison Nation, Inc. Omnibus
Incentive Plan (the “Plan”) which remains effective as of February 9, 2018, provides for the issuance of up to 1,764,705
shares of common stock to help align the interests of management and our stockholders and reward our executive officers for improved
Company performance. Stock incentive awards under the Plan can be in the form of stock options, restricted stock units, performance
awards and restricted stock that are made to employees, directors and service providers. Awards are subject to forfeiture until
vesting conditions have been satisfied under the terms of the award. The exercise price of stock options are equal to the fair
market value of the underlying Company common stock on the date of grant.
|
|
For
the Twelve Months
Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Stock option awards
|
|
$
|
175,675
|
|
|
$
|
304,745
|
|
Non-employee awards
|
|
|
1,564,670
|
|
|
|
2,329,874
|
|
Restricted stock unit awards
|
|
|
447,300
|
|
|
|
559,499
|
|
Phantom stock
awards
|
|
|
112,270
|
|
|
|
54,048
|
|
|
|
$
|
2,299,915
|
|
|
$
|
3,248,166
|
|
The
stock-based compensation is included in selling, general and administrative expense for the twelve months ended December 31, 2019
and 2018.
For
the year ended December 31, 2018, the Company recorded stock-based compensation expense of $3,248,166, of which 1,721,250, related
to the assumption of certain consulting agreements which were satisfied by the principal stockholder of SRM transferring 344,250
shares to the consultants.
The
following table summarizes stock option award activity during 2019:
|
|
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Remaining
Contractual
Life
in
Years
|
|
|
Aggregate
Intrinsic
Value
|
|
Balance,
January 1, 2019
|
|
|
290,000
|
|
|
$
|
5.55
|
|
|
|
4.2
|
|
|
|
-
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
(210,000
|
)
|
|
|
5.00
|
|
|
|
-
|
|
|
|
-
|
|
Balance,
December 31, 2019
|
|
|
80,000
|
|
|
|
7.01
|
|
|
|
3.7
|
|
|
|
-
|
|
Exercisable,
December 31, 2019
|
|
|
53,333
|
|
|
|
7.01
|
|
|
|
3.7
|
|
|
|
-
|
|
As
of December 31, 2019, there were 26,667 unvested options to purchase shares of the Company’s common stock or $46,605 of
total unrecognized equity-based compensation expense that the Company expected to recognize over a remaining weighted-average
period of 1 year.
From
time to time, the Company grants shares of common stock to consultants and non-employee vendors for services performed. The awards
are valued at the market value of the underlying common stock at the date of grant and vest based on the terms of the contract
which is usually upon grant.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
15 — Stockholders’ Equity – (Continued)
Pipe
Financing
On
October 2, 2019, Edison Nation, Inc. (the “Company”) entered into a Share Purchase Agreement (the “PIPE Purchase
Agreement”) with certain accredited investors (collectively, the “Investors”) for the private placement of 1,175,000
shares of the Company’s common stock, $0.001 par value per share, at a purchase price of $2.00 per share (the “PIPE
Transaction”). The PIPE Purchase Agreement contained certain closing conditions relating to the sale of securities, representations
and warranties by the Company and the Investors, as well as covenants of the Company and the Investors (including indemnification
from the Company in the event of breaches of its representations and warranties), all of which the Company believes are customary
for transactions of this type.
In
a series of three closings conducted in October 2019, the Company received net proceeds of $2,039,303 which consisted of $2,350,000
of gross proceeds offset by $310,697 of fees to placement agent and their lawyers. Alexander Capital, LP (“Alexander Capital”),
a FINRA registered broker dealer, acted as placement agent with respect to the PIPE Transaction. In connection with the PIPE Transaction,
Alexander Capital received a commission of $141,000, a debt restructuring fee of $64,208, a debt conversion fee of 15,889, a placement
fee of $33,600 and warrants to purchase 70,500 shares of the Company’s common stock, at an exercise price of $2.50 per share
(the “Placement Agent Warrants”).
In
connection with the PIPE Purchase Agreement, the Company entered into Registration Rights Agreements with each of the Investors
(the “Registration Rights Agreement”), pursuant to which the Company is required to prepare and file a registration
statement (the “Registration Statement”) with the United States Securities and Exchange Commission (the “SEC”)
under the Securities Act of 1933, as amended, covering the resale of the shares of common stock issued to the Investors under
the PIPE Purchase Agreement, as well as the Placement Agent Warrants. The Company will be required to have such Registration Statement
declared effective by the SEC within 90 calendar days (or 120 calendar days in the event of a “full review” by the
SEC) following the applicable closing date of the PIPE Transaction. The registration statement was not filed or declared effective
within the timeframe set forth in the Registration Rights Agreements, and the Company is obligated to pay the Investors an amount
equal to 1% of the total purchase price of the common stock per month (up to a maximum of 8% in the aggregate) until such failure
is cured. The Registration Rights Agreement also contains mutual indemnifications by the Company and each Investor, which the
Company believes are customary for transactions of this type.
In
connection with the PIPE transaction, the convertible notes entered into on May 13, 2019 were also converted at $2.00 per share
into 560,185 shares of the Company’s common stock.
In
addition, the Company issued warrants to the placement agent in the PIPE Financing of a value equal to six percent (6%) of the
aggregate number of PIPE Shares, whereby the exercise price is 125% of the price at which the shares were issued in such offering.
Selling
Agent Agreement
In
connection with the IPO, the Company agreed to issue to the selling agent in the IPO, warrants to purchase a number of shares
of the common stock equal to 5.0% of the total shares of common stock sold in any closing of the IPO, excluding shares purchased
by investors sourced via alternative funding platforms (the “Selling Agent Warrants”). The Selling Agent Warrants
are exercisable commencing on the qualification date of the IPO and have a term of 5 years. The Selling Agent Warrants are not
redeemable by the Company. The exercise price for the Selling Agent Warrants is 20% greater than the IPO offering price, or $6.00
per share. On August 16, 2018, the Company issued 65,626 of Selling Agent Warrants that are exercisable for 65,626 shares of the
Company’s common stock.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
16 — Subsequent Events
On
January 2, 2020, the Company entered into that certain Loan Agreement with Tiburon Opportunity Fund (the “Lender”),
dated January 2, 2020 (the “Loan Agreement”). Pursuant to the terms of the Loan Agreement, the Lender agreed to loan
the Company $400,000. The Loan is interest bearing at the rate of 1.5% per month through the term of the Loan. Additionally, the
Loan Agreement provides that the Company shall pay the Lender the entire unpaid principal and all accrued interest upon thirty
days’ notice to the Company, but in any event, the notice shall not be sooner than June 1, 2020. On April 24, 2020 the Company
and Lender entered into a Debt Conversion Agreement whereby the Lender elected to convert $400,000 of funds loaned to the Company
into shares of the Company’s common stock. The conversion price was $2.00 per share for a total of 200,000 shares of restricted
common stock issued by the Company.
On
January 2, 2020, the Company, through its partnership with ED Roses, LLC (the “Borrower”), entered into a Loan Agreement
(the “Agreement”) with Sook Hyun Lee (the “Lender”). Under the terms of the Agreement, the Lender agrees
to loan $150,000 to the Borrower in return for $180,000 ($150,000 principal plus $30,000 commitment fee). The loan accrues interest
at 15% per annum and matures on April 15, 2020. The Lender shall receive a collateral interest in the accounts receivable of the
Borrower including, but not limited to the 7 Eleven receivables. The Company shall place 75,000 shares of common stock in reserve
as collateral.
On
January 10, 2020, the Company entered into a 5% Promissory Note Agreement with Equity Trust Company on behalf of Rawleigh Ralls
(“Ralls”) for an aggregate principal amount of $267,000 (the “Ralls Note”), pursuant to which Ralls purchased
the Ralls Note from the Company for $250,000, and the Company issued to Ralls a warrant (the “Ralls Warrant”) to purchase
125,000 shares of the Company’s common stock. The proceeds from the Ralls Note will be used for general working capital
needs of the Company. The Company will also issue 33,000 incentive shares to Ralls. The maturity date of the Ralls Note is July
10, 2020.
On
January 13, 2020, we issued 50,000 shares of our common stock valued at $100,000 to Ridgewood LLC, a consultant for strategic
consulting services for assistance with sales on Amazon.com.
On
January 15, 2020, the Company entered into a 5% Promissory Note Agreement with Paul J. Solit & Julie B. Solit (“Solits”)
for an aggregate principal amount of $107,000 (the “Solit Note”), pursuant to which the Solits purchased the Solit
Note from the Company for $100,000, and the Company issued to the Solits a warrant (the “Solit Warrant”) to purchase
50,000 shares of the Company’s common stock. The proceeds from the Solit Note will be used for general working capital needs
of the Company. The Company will also issue 13,000 incentive shares to O’Leary. The maturity date of the Solit Note is July
15, 2020.
On
January 17, 2020, the Company entered into a 5% Promissory Note Agreement with Richard O’Leary (“O’Leary”)
for an aggregate principal amount of $53,500 (the “O’Leary Note”), pursuant to which O’Leary purchased
the O’Leary Note from the Company for $50,000, and the Company issued to O’Leary a warrant (the “O’Leary
Warrant”) to purchase 25,000 shares of the Company’s common stock. The proceeds from the O’Leary Note will be
used for general working capital needs of the Company. The Company will also issue 6,500 incentive shares to O’Leary. The
maturity date of the O’Leary Note is July 17, 2020.
On
January 23, 2020, Edison Nation, Inc. (the “Company”) entered into a $1,100,000 loan agreement the (“Loan Agreement”)
with Greentree Financial Group, Inc. (the “Investor”), pursuant to which the Investor purchased a 10% Convertible
Promissory Note (the “Note”) from the Company, and the Company issued to the Investor a warrant (the “Warrant”)
to purchase 550,000 shares of the Company’s common stock, $0.001 per share (“Common Stock”). The $1,100,000
of proceeds from the Note will be used for general working capital purposes and for the repayment of debt. On January 24, 2020,
the Company used $588,366.44 of the proceeds from the Note to pay off in full the 12% Convertible Promissory Note held by Labrys
Fund, LP. Upon execution of the Loan Agreement, the Company issued to the Investor 100,000 shares of Common Stock (the “Origination
Shares”) as an origination fee, plus an additional 60,000 shares of Common Stock as consideration for advisory services.
Pursuant to the Loan Agreement, the Company agreed to issue and sell to the Investor the Note, in the principal amount of $1,100,000.
The Note, as amended, is due and payable October 23, 2020 (the “Maturity Date”) and is convertible at any time at
a price of $2.00 per share. Pursuant to the Loan Agreement, the Company also issued the Investor a warrant to purchase 550,000
shares of Common Stock at an exercise price of $2.00 per share, subject to certain adjustments to the exercise price set forth
in the Warrant. The Warrant, as amended, expires on January 23, 2023.
Edison
Nation, Inc. and Subsidiaries
NOTES
TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note
16 — Subsequent Events – (Continued)
On
January 24, 2020, the Company repaid the Labrys Note in full. Upon repayment of the Labrys Note, Labrys Fund, LP returned to the
Company for cancellation the 153,005 shares of Common Stock that had been originally issued to as a portion of the commitment
fee paid in connection with the Labrys Note, and allowed the Company to cancel the reservation of the 875,000 shares of Common
Stock that had been reserved pursuant to the Labrys SPA and Labrys Note.
On
January 29, 2020, the Company and Greentree Financial Group, Inc. (the “Investor”), entered into an Amendment Agreement,
amending the January 22, 2020 Loan Agreement, the Note, and the Warrant to: (i) correct the effective date set forth in the Loan
Agreement, Note and Warrant to January 23, 2020, (ii) clarify the terms of the registration right provision in the Loan Agreement,
and (iii) to ensure that the total number of shares of Common Stock issued pursuant to the Loan Agreement, the Note, and/or the
Warrant, each as amended, does not exceed 17.99% of the Company’s issued and outstanding Common Stock as of January 23,
2020.
On
February 7, 2020, we issued 15,000 shares of our common stock to MZHCI, LLC valued at $40,350 in connection with the satisfaction
of outstanding amounts due under a settlement agreement.
On
February 17, 2020, the Company entered into that certain Agreement for the Purchase and Sale of Cloud B, Inc.(the “Purchase
Agreement”), with Pearl 33 Holdings, LLC (the “Buyer”), pursuant to which the Buyer purchased from the Company
(and the Company sold and assigned) 80,065 shares of common stock of Cloud B (the “Cloud B Shares”) for $1.00, constituting
a 72.15% ownership interest in Cloud B, based on 110,964 shares of Cloud B’s common stock outstanding as of February 17,
2020. Pursuant to that certain Release Agreement by and between the Company and the Buyer included as an exhibit to the Purchase
Agreement, the Buyer agreed to release any and all claims against the Company, and its officers, directors or affiliates arising
from the Purchase Agreement or the purchase, sale, and assignment of the Cloud B Shares. Pursuant to that certain Indemnification
Agreement by and between the Company and the Buyer included as an exhibit to the Purchase Agreement, the Company agreed to indemnify,
defend and hold harmless the Buyer, and its owners, managers and representatives arising from any events that occurred prior to
the purchase, sale, and assignment of the Cloud B Shares to the Buyer. The Company’s indemnification obligations pursuant
to such Indemnification Agreement are limited to the issuance of 150,000 shares of the Company’s common stock to the Buyer.
On
March 11, 2020, the Company and its wholly owned subsidiary, Scalematix, LLC, entered into an Asset Purchase Agreement (the “Agreement”)
with HMNRTH, LLC (the “Seller”) and TCBM Holdings, LLC (the “Owner”) (together Seller and Owner the “Selling
Parties”) for the purchase of certain assets in the health wellness industry and related consumer products industry. Under
the terms of the Agreement, Buyer is to remit $70,850 via wire transfer at Closing and shall issue to a representative of the
Selling Parties Two Hundred Thirty-Eight Thousand Seven Hundred and Fifty (238,750) shares of restricted common stock. The shares
were issued on March 16, 2020 and valued at $477,500.
In
addition, the Selling Parties shall have the right to additional earn out compensation based upon the following metrics: (i) at
such time as the purchased assets achieve cumulative revenue of $2,500,000, the Selling Parties shall earn One Hundred Twenty-Five
Thousand (125,000) shares of common stock; and (ii) at such time as the purchased assets achieve cumulative revenue of $5,000,000,
the Selling Parties shall earn One Hundred Twenty-Five Thousand (125,000) shares of common stock. The transaction closed on March
11, 2020.
On
March 16, 2020, the Company issued 300,000 shares of our common stock valued at $600,000 to a Consultant as per the terms of the
Consulting Agreement dated September 12, 2019.
On
March 16, 2020, the Company issued 50,000 shares of our common stock valued at $100,000 to a Consultant as per the terms of the
Consulting Agreement dated September 12, 2019.
On
March 25, 2020, Edison Nation, Inc. (the “Company”) filed a certificate of amendment to the Company’s articles
of incorporation with the Secretary of State of the State of Nevada in order to: (i) increase the number of shares of the Company’s
authorized preferred stock, par value $0.001 per share, from 0 shares to 30,000,000 shares of preferred stock; (ii) clarify the
application of the forum selection clause in the Company’s amended and restated articles of incorporation, specifically
that such clause does not apply to federal causes of actions arising under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended (the “Exchange Act”); and (iii) include affirmative changes to correspond to the
Company’s First Amended and Restated Bylaws, confirming that the Company’s shareholders may vote by written consent.
On
April 7, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with BHP Capital NY Inc.
(the “Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”) in
the amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes
The Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company
is to issue the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part
of the outstanding and unpaid principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and
non-assessable shares of Common Stock at a conversion price equal to $2.05 per share.
On
April 7, 2020, the Company entered into a Securities Purchase Agreement (the “Agreement”) with Jefferson Street Capital,
LLC. (the “Investor”) wherein the Company issued the Investor a Convertible Promissory Note (the “Note”)
in the amount of $168,000 ($18,000 OID). The $150,000 of proceeds from the Note will be used for general working capital purposes
The Note has a term of six (6) months, is due on October 7, 2020 and has a one-time interest charge of 2%. In addition, the Company
is to issue the Investor 10,700 shares of Common Stock (the “Origination Shares”) as an origination fee. The transaction
closed on April 9, 2020. The Investor shall have the right at any time to convert all or any part
of the outstanding and unpaid principal, interest, fees, or any other obligation owed pursuant to this Note into fully paid and
non-assessable shares of Common Stock at a conversion price equal to $2.05 per share.
On
April 13, 2020, we issued 12,500 shares of 12,500 shares of our common stock valued at $31,625 to Caro Partners, LLC for consulting
services.
On
April 15, 2020, Edison Nation, Inc. (the “Company”) entered into a loan agreement (“PPP Loan”) with First
Choice Bank under the Paycheck Protection Program (the “PPP”), which is part of the recently enacted Coronavirus Aid,
Relief, and Economic Security Act (“CARES Act”) administered by the United States Small Business Administration (“SBA”).
The Company received proceeds of $789,852 from the PPP Loan. In accordance with the requirements of the PPP, the Company intends
to use proceeds from the PPP Loan primarily for payroll costs, rent and utilities. The PPP Loan has a 1.00% interest rate per
annum and matures on April 15, 2022 and is subject to the terms and conditions applicable to loans administered by the SBA under
the PPP. Under the terms of the PPP, certain amounts of the PPP Loan may be forgiven if they are used for qualifying expenses
as described in the CARES Act.
On
April 24, 2020, the Company entered into a Consulting Agreement (the “Agreement”) with Tiburon (the “Consultant”).
Under the terms of the Agreement, the Consultant is to provide business development services and consultation related to potential
trade financing opportunities. The Agreement has a term of six (6) months. The Consultant is to be compensated ten thousand (10,000)
shares of common stock upon execution of the Agreement and then shall receive six (6) additional monthly payments of eight thousand
(8,000) shares of restricted common stock per month beginning on May 24, 2020 and ending on October 24, 2020.
On
April 24, 2020, we issued 10,700 shares of our common stock valued at $21,935 to BHP Capital NY Inc. as origination shares as
per the terms of the Securities Purchase Agreement dated April 7, 2020.
On
April 24, 2020, we issued 10,700 shares of our common stock valued at $21,935 to Jefferson Street Capital, LLC as origination
shares as per the terms of the Securities Purchase Agreement dated April 7, 2020.
On
May 7, 2020, the Company entered into a Purchase of Inventory and Repurchase Agreement (the “Agreement”) with Fergco
Bros, LLC (“Purchaser”). Under the terms of the Agreement, the Company assigned its rights, title and interest to
inventory relating to its Edison Nation Medical customer, Orange County, CA (the “Inventory”) for payment in the amount
of $100.000. The Company shall have the right to repurchase the Inventory for $105,000 in whole or periodioc installments by May
15, 2020. The Agreement was amended on May 15, 2020, to extend the repurchase date to June 30, 2020.
On May 13, 2020, the Company’s wholly
owned subsidiary, Ferguson Containers, Inc., entered into a Distributor Agreement with Marrone Bio Innovations, LLC (“Marrone”)
for the distribution of Marrone’s Jet-Oxide 15% peroxyacetic acid-based sanitizer/disinfectant.
May
17, 2020, the Company entered into an Amendment to Purchase of Inventory and Repurchase Agreement with the Purchasers-Assignees
dated May 17, 2020. Under the terms of the Amendment, the repurchase date was extended to June 30, 2020 and the Company confirmed
that of the Purchaser-Assignees is entitled to receive 10,000 shares of common stock.
On
May 19, 2020, the Company entered into an Amendment (the “Amendment”) to the Senior Secured Note (the “Note”)
issued by the Company to 32 Entertainment, LLC (the “Lender”) dated December 4, 2019. Under the terms of the Amendment,
the Company issued the Lender an Amended Subordinate Secured Note (the “Replacement Note”) in the principal amount
of $200,000 that accrues interest at 16% annually and matures on May 21, 2020. On or before May 28, 2020, the Company shall prepay
$50,000 toward the principal plus interest in the amount of $6,250 for a total of $56,250. The Lender shall also receive 40,000
restricted stock units and surrender the warrant issued to the Lender in the December 4, 2019 financing transaction.
On May 20, 2020 (the “Effective Date”),
Edison Nation, Inc. (the “Company”) entered into an Agreement and Plan of Share Exchange (the “Share Exchange
Agreement”) with PPE Brickell Supplies, LLC, a Florida limited liability company (“PPE”), and Graphene Holdings,
LLC, a Wyoming limited liability company (“Graphene”, and together with PPE, the “Sellers”), whereby the
Company purchased 25 membership units of Global Clean Supplies, LLC, a Nevada limited liability company (“Global”)
from each of PPE and Graphene, for a total of fifty (50) units, representing fifty percent (50%) of the issued and outstanding
units of Global (the “Purchase Units”).
On May 20, 2020, the Company entered into
an Amended Limited Liability Company Agreement of Global (the “Amended LLC Agreement”). The Amended LLC Agreement
amends the original Limited Liability Company Agreement of Global, dated May 13, 2020. The Amended LLC defines the operating rules
of Global and the ownership percentage of each member: Edison Nation, Inc. 50%, PPE 25% and Graphene 25%.
On
May 21, 2020, the Company issued 200,000 shares of common stock valued at $456,000 to PPE Brickell Supplies, LLC as per the terms
of the Agreement and Plan of Share Exchange dated May 20, 2020.
On
May 21, 2020, the Company issued 50,000 shares of common stock valued at $114,000 to Graphene Holdings, LLC as per the terms of
the Agreement and Plan of Share Exchange dated May 20, 2020.
On
May 21, 2020, the Company issued 50,000 shares of common stock valued at $114,000 to a Consultant for consulting services related
to the Agreement and Plan of Share Exchange dated May 20, 2020.
On
May 22, 2020, the Company issued 200,000 shares of common stock valued at $466,000 to Graphene Holdings as per the terms of the
Agreement and Plan of Share Exchange dated May 20, 2020.
1,725,492 Shares
PROSPECTUS
,
2020
Through
and including , 2020 (the 25th day
after the date of this offering), all dealers effecting transactions in these securities, whether or not participating in this
offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus
when acting as an underwriter and with respect to an unsold allotment or subscription.
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
Item
13. Other Expenses of Issuance and Distribution
The
following table sets forth the costs and expenses payable in connection with the sale and distribution of the securities being
registered. All amounts are estimated except the SEC registration fees. Except as otherwise noted, all the expenses below will
be paid by us.
SEC Registration Fees
|
|
$
|
870.08
|
|
Legal Fees and Expenses
|
|
|
100,000
|
|
Accounting Fees and Expenses
|
|
|
20,000.00
|
|
Printing and Related Expenses
|
|
|
10,000.00
|
|
Miscellaneous
|
|
|
5,000.00
|
|
Total
|
|
$
|
135,870.08
|
|
*
Estimated expenses not presently known.
Item 14.
Indemnification of Directors and Officers
Our
Second Amended and Restated Bylaws, subject to the provisions of Nevada Law, contain provisions which allow the corporation to
indemnify any person against liabilities and other expenses incurred as the result of defending or administering any pending or
anticipated legal issue in connection with service to us if it is determined that person acted in good faith and in a manner which
he reasonably believed was in the best interest of the corporation. Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling persons, we have been advised that in the opinion of
the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
The
indemnification rights set forth above shall not be exclusive of any other right which an indemnified person may have or hereafter
acquire under any statute, provision of our amended and restated articles of incorporation, our Second Amended and Restated Bylaws,
agreement, vote of shareholders or disinterested directors or otherwise.
We
maintain standard policies of insurance that provide coverage (1) to our directors and officers against loss rising from claims
made by reason of breach of duty or other wrongful act, and (2) to us with respect to indemnification payments that we may make
to such directors and officers.
The
proposed form of underwriting agreement filed as Exhibit 1.1 to this Registration Statement will provide for indemnification of
our directors and officers by the underwriter party thereto against certain liabilities. See “Undertakings”
below for a description of the SEC’s position regarding such indemnification provisions.
Item 15.
Recent Sales of Unregistered Securities
We
claimed exemption from registration under the Securities Act for the sales and issuances of securities in the following transactions
under Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder, in that such sales and issuances did not
involve a public offering, or under Rule 701 promulgated under the Securities Act, in that they were offered and sold either pursuant
to written compensatory plans or pursuant to a written contract relating to compensation, as provided by Rule 701. All of the
purchasers of unregistered securities for which we relied on Section 4(a)(2) and/or Regulation D represented that they were accredited
investors as defined under the Securities Act. We claimed such exemption on the basis that (a) the purchasers in each case represented
that they intended to acquire the securities for investment only and not with a view to the distribution thereof and that they
either received adequate information about the registrant or had access, through employment or other relationships, to such information
and (b) appropriate legends were affixed to the stock certificates issued in such transactions.
Issuance of common stock - 2018
On
May 4, 2018, we issued 13,500 shares of our common stock valued at $67,500 related to the borrowing of funds under a note payable.
On
August 23, 2018, we issued 20,000 shares of our common stock valued at $100,000 related to the borrowing of funds under a note
payable.
On
September 4, 2018, we issued 557,084 shares of our common stock valued at $3,384,285 related to the acquisition of Edison Nation
Holdings, LLC.
On
December 27, 2018, we issued 489,293 shares of our common stock valued at $2,664,200 related to the acquisition of Cloud B, Inc.
Issuance of common stock – Quarter
ended March 31, 2020
On January 23, 2020, we issued 160,000
shares of our common stock to Greentree valued at $374,400 in connection with the Greentree Financing.
On March 16, 2020,
we issued 238,750 shares of common stock valued at $477,500 as per the terms of the Asset Purchase Agreement dated March 11, 2020.
Issuance of common stock – Quarter
ended June 30, 2020
On April 24, 2020, we issued 10,700 shares
of our common stock valued at $21,935 to BHP Capital NY Inc. as origination shares as per the terms of the Securities Purchase
Agreement dated April 7, 2020.
On April 24, 2020, we issued 10,700 shares
of our common stock valued at $21,935 to Jefferson Street Capital, LLC as origination shares as per the terms of the Securities
Purchase Agreement dated April 7, 2020.
On May 21, 2020, the Company issued 200,000
shares of common stock valued at $456,000 to PPE Brickell Supplies, LLC as per the terms of the Agreement and Plan of Share Exchange
dated May 20, 2020.
On May 21, 2020, the Company issued 50,000
shares of common stock valued at $114,000 to Graphene Holdings, LLC as per the terms of the Agreement and Plan of Share Exchange
dated May 20, 2020.
On May 21, 2020, the Company issued 50,000
shares of common stock valued at $114,000 to a Consultant for consulting services.
On June 30, 2020, the Company issued 212,000
shares of common stock valued at $440,960 to Tiburon Opportunity Fund in satisfaction of a note payable.
On June 30, 2020, the Company issued 150,000 shares
of common stock valued at $405,000 to a designee of the Buyer of the Company’s former subsidiary, Cloud B, Inc.
On June 30, 2020, the Company issued 33,000
shares of common stock valued at $79,860 as incentive shares in connection with the Ralls financing.
On June 30, 2020, the Company issued 13,000
shares of common stock valued at $30,420 as incentive shares in connection with the Solit financing.
On July 2, 2020, the Company issued 6,500
shares of common stock valued at $15,535 as incentive shares in connection with the O’Leary financing.
On July 6, 2020, the Company issued 25,000
shares of common stock valued at $61,000 to a Consultant for consulting services.
On July 14, 2020, the Company issued 6,500
shares of common stock valued at $24,570 as Additional Incentive shares in connection with the O’Leary financing.
On July 14, 2020, the Company issued 33,000
shares of common stock valued at $124,740 as Additional Incentive shares in connection with the Ralls financing.
On July 14, 2020, the Company issued 13,000
shares of common stock valued at $49,140 as Additional Incentive shares in connection with the Solit financing.
Issuance of common stock – Quarter
ended September 30, 2020
On July 2, 2020, the Company issued 6,500
shares of common stock valued at $15,535 as incentive shares in connection with the O’Leary financing.
On July 6, 2020, the Company issued 25,000
shares of common stock valued at $61,000 to a Consultant for consulting services.
Issuance of common stock - 2019
On
March 6, 2019, we issued 15,000 shares of our common stock valued at $74,100 related to the borrowing of funds under a note payable.
On
May 24, 2019, we issued 20,000 shares of our common stock valued at $62,000 to a note holder related to the borrowing of funds.
On
June 18, 2019, we issued 15,000 shares of our common stock valued at $37,200 to a note holder to satisfy a portion of the payoff
of one of our notes.
On
July 16, 2019, we issued 20,000 shares of our common stock valued at $70,920 to note holders related to the borrowing of funds.
On
August 26, 2019, we issued 181,005 shares of our common stock, of which 153,005 shares were reserved shares which were returnable
upon repayment, valued at $713,159.70 to a note holder related to the borrowing of funds. These shares were returned in 2020 and
are no longer outstanding.
On
November 4, 2019, we issued 15,000 shares of our common stock valued at $29,880 to one of our note holders related to our borrowing
of funds.
On
November 21, 2019, we issued 1,175,000 shares of our common stock to investors at a purchase price of $2.00 per share in connection
with the PIPE Transaction.
On
December 5, 2019, we issued 45,000 shares of our common stock valued at $90,000 related to the acquisition of the assets of Uber
Mom, LLC.
On
December 19, 2019, we issued 10,000 shares of our common stock valued at $20,000 to 32 Entertainment, LLC, related to the borrowing
of funds.
On
December 31, 2019, we issued 10,000 shares of our common stock valued at $20,000 to Joseph Tropea, a note holder, related to the
borrowing of funds.
Issuance of common stock under the Company’s
Equity Compensation Plan:
On
May 8, 2018, we issued 61,900 shares of our common stock valued at $306,000 to various employees.
On
August 17, 2018, we issued 50,000 shares of our common stock valued at $250,000 to a consultant for services provided.
On
September 10, 2018, we issued 20,000 shares of our common stock valued at $100,000 to a consultant for services performed.
On
September 20, 2018, we issued 5,000 shares of our common stock valued at $25,000 to a consultant for services performed.
On
October 23, 2018, we issued 10,000 shares of our common stock valued at $50,000 to a consultant for services performed.
On
November 6, 2018, we issued 2,000 shares of our common stock valued at $10,000 to a consultant for services performed.
On
December 21, 2018, we issued 50,000 shares of our common stock valued at $251,000 to a consultant for services performed.
On
December 27, 2018, we issued 18,797 shares of our common stock valued at $100,000 to a consultant for services performed.
On
December 27, 2018, we issued 41,736 shares of our common stock valued at $250,000 to 2 employees.
On
December 28, 2018, we issued 3,000 shares of our common stock valued at $15,000 to a consultant for services performed.
On
March 13, 2019, we issued 10,500 shares of our common stock valued at $52,500 to two consultants for services performed.
On
May 6, 2019, we issued 12,500 shares of our common stock valued at $47,625 to an innovator for the licensing of their product.
On
May 24, 2019, we issued 10,000 shares of our common stock valued at $30,000 to a consultant for strategic consulting services.
On
July 16, 2019, we issued 25,000 shares of our common stock valued at $98,500 to a consultant for strategic consulting services.
On
July 16, 2019, we issued 50,000 shares of our common stock valued at $197,000 to a consultant for investor relations services.
On
September 4, 2019, we issued 17,000 shares of our common stock under our plan valued at $54,250 to consultants for strategic consulting
services.
On
September 4, 2019, we issued 3,000 shares of our common stock under our plan valued at $8,850 to an employee.
On
December 17, 2019, we issued 10,000 shares of our common stock valued at $20,000 to a consultant for strategic consulting services
for our Amazon.com business.
On
January 7, 2020, we issued 100,000 shares of our common stock valued at $200,000 to Phil Anderson, former Chief Strategic Officer,
for satisfaction of surrendering his outstanding options.
On
January 7, 2020, we issued 32,813 shares of our common stock valued at $65,626 to Phil Anderson, our former Chief Financial Officer
and Chief Strategic Officer, for satisfaction of his remaining payments under his strategic consulting contract.
On
December 31, 2019, we issued 23,923 shares of our common stock valued at $47,846 to 4 Keeps Roses, Inc, related to the joint venture
of Ed Roses, LLC.
On
January 13, 2020, we issued 50,000 shares of our common stock valued at $100,000 to Ridgewood LLC, a consultant for strategic
consulting services for assistance with sales on Amazon.com.
On
February 7, 2020, we issued 15,000 shares of our common stock to MZHCI, LLC valued at $40,350 in connection with the satisfaction
of outstanding amounts due under a settlement agreement.
On March 16, 2020, the Company issued 300,000
shares of our common stock valued at $600,000 to a Consultant as per the terms of the Consulting Agreement dated September 12,
2019.
On March 16, 2020, the Company issued 50,000
shares of our common stock valued at $100,000 to a Consultant as per the terms of the Consulting Agreement dated September 12,
2019.
On April 13, 2020, we issued 12,500 shares
of 12,500 shares of our common stock valued at $31,625 to Caro Partners, LLC for consulting services.
On May 22, 2020, the Company issued 200,000
shares of common stock valued at $466,000 to Graphene Holdings as per the terms of the Agreement and Plan of Share Exchange dated
May 20, 2020.
Item 16.
Exhibits and Financial Statement Schedules
Exhibit
|
|
|
|
Incorporated
By Reference
to
|
|
Filed
|
Number
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Filing
Date
|
|
Herewith
|
3.1
|
|
Articles
of Merger, filed with the Secretary of State of Nevada effective September 7, 2018
|
|
8-K
|
|
3.1
|
|
September
12, 2018
|
|
|
3.2
|
|
Second
Amended and Restated Bylaws of Edison Nation, Inc.
|
|
8-K
|
|
3.2
|
|
September
12, 2018
|
|
|
3.3
|
|
Second
Amended and Restated Articles of Incorporation of Edison Nation, Inc.
|
|
8-K
|
|
3.1
|
|
March
26, 2020
|
|
|
5.1
|
|
Legal opinion of Lucosky Brookman LLP
|
|
|
|
|
|
|
|
*
|
10.1
|
|
Form
of Senior Convertible Promissory Note
|
|
8-K
|
|
2.1
|
|
July
6, 2018
|
|
|
10.1
|
|
Membership
Interest Purchase Agreement dated June 29, 2018
|
|
8-K
|
|
10.1
|
|
July
6, 2018
|
|
|
10.2
|
|
Fifth
Amended and Restated Operating Agreement of Edison Nation Holdings, LLC, dated September 4, 2018
|
|
8-K
|
|
10.2
|
|
September
6, 2018
|
|
|
10.3
|
|
Registration
Rights Agreement dated September 4, 2018
|
|
8-K
|
|
10.3
|
|
September
6, 2018
|
|
|
10.4+
|
|
Amended
and Restated Edison Nation, Inc. Omnibus Incentive Plan
|
|
8-K
|
|
3.3
|
|
September
12, 2018
|
|
|
10.5+
|
|
Employment
Agreement, by and between Edison Nation, Inc. and Christopher Ferguson, dated September 26, 2018
|
|
8-K
|
|
10.1
|
|
October
5, 2018
|
|
+
|
10.6+
|
|
Employment
Agreement, by and between Edison Nation, Inc. and Phil Anderson, dated September 26, 2018
|
|
8-K
|
|
10.2
|
|
October
5, 2018
|
|
+
|
10.7
|
|
Stock
Purchase Agreement, dated October 24, 2018
|
|
8-K
|
|
10.1
|
|
October
30, 2018
|
|
|
10.8
|
|
Securities
Purchase Agreement, dated March 6, 2019
|
|
8-K
|
|
10.1
|
|
March
13, 2019
|
|
|
10.9
|
|
Senior
Convertible Promissory Note, dated March 6, 2019
|
|
8-K
|
|
10.2
|
|
March
13, 2019
|
|
|
10.10
|
|
Pledge
Agreement, dated March 12, 2019
|
|
8-K
|
|
10.3
|
|
March
13, 2019
|
|
|
10.11
|
|
Form
of Securities Purchase Agreement dated May 13, 2019
|
|
8-K
|
|
10.1
|
|
May
17, 2019
|
|
|
10.12
|
|
Form
of Senior Convertible Promissory Note dated May 13, 2019
|
|
8-K
|
|
10.2
|
|
May
17, 2019
|
|
|
10.13
|
|
Settlement
and Release Agreement dated June 17, 2019 with FirstFire Global Opportunities Fund, LLC
|
|
8-K
|
|
10.1
|
|
June
19, 2019
|
|
|
10.14
|
|
Loan
Agreement with Tiburon Opportunity Fund, dated June 14, 2019
|
|
8-K
|
|
10.1
|
|
June
20, 2019
|
|
|
10.15
|
|
Operating
Agreement of Ed Roses, LLC, dated August 23, 2019
|
|
S-1
|
|
10.18
|
|
February
12, 2020
|
|
|
10.16
|
|
Securities
Purchase Agreement with Labrys Fund, LP, dated August 26, 2019
|
|
8-K
|
|
10.1
|
|
August
29, 2019
|
|
|
10.17
|
|
12%
Convertible Promissory Note, dated August 26, 2019
|
|
8-K
|
|
10.2
|
|
August
29, 2019
|
|
|
10.18
|
|
Form
of Share Purchase Agreement, dated October 2, 2019
|
|
8-K
|
|
10.1
|
|
October
4, 2019
|
|
|
10.19
|
|
Form
of Registration Rights Agreement, dated October 2, 2019
|
|
8-K
|
|
10.2
|
|
October
4, 2019
|
|
|
10.20
|
|
Uber
Mom Asset Purchase Agreement, dated November 6, 2019
|
|
S-1
|
|
10.23
|
|
February
12, 2020
|
|
|
10.21
|
|
Purchase
of Inventory and Repurchase Agreement with Claudia McFillin and Joseph Tropea, dated November 12, 2019
|
|
S-1
|
|
10.24
|
|
February
12, 2020
|
|
|
10.22
|
|
Future
Receivables Sale and Purchase Agreement with Velocity Group USA Inc., dated November 18, 2019
|
|
S-1
|
|
10.25
|
|
February
12, 2020
|
|
|
10.23
|
|
10%
Senior Secured Note with 32 Entertainment LLC, dated December 4, 2019
|
|
S-1
|
|
10.26
|
|
February
12, 2020
|
|
|
10.24
|
|
Common
Stock Purchase Warrant with 32 Entertainment LLC, dated December 4, 2019
|
|
S-1
|
|
10.27
|
|
February
12, 2020
|
|
|
Exhibit
|
|
|
|
Incorporated
By Reference
to
|
|
Filed
|
Number
|
|
Description
|
|
Form
|
|
Exhibit
|
|
Filing
Date
|
|
Herewith
|
10.25
|
|
Registration
Rights Agreement with 32 Entertainment LLC, dated December 4, 2019
|
|
S-1
|
|
10.28
|
|
February
12, 2020
|
|
|
10.26
|
|
Loan
Agreement with Tiburon Opportunity Fund, dated January 2, 2020
|
|
S-1
|
|
10.29
|
|
February
12, 2020
|
|
|
10.27
|
|
5%
Note Agreement with Equity Trust Company, Custodian FBO: Rawleigh H. Ralls, dated January 10, 2020
|
|
S-1
|
|
10.30
|
|
February
12, 2020
|
|
|
10.28
|
|
Common
Stock Purchase Warrant with Equity Trust Company, Custodian FBO: Rawleigh H. Ralls, dated January 10, 2020
|
|
S-1
|
|
10.31
|
|
February
12, 2020
|
|
|
10.29
|
|
5%
Note Agreement with Paul J. Solit and Julie B. Solit, dated January 15, 2020
|
|
S-1
|
|
10.32
|
|
February
12, 2020
|
|
|
10.30
|
|
Common
Stock Purchase Warrant with Paul J. Solit and Julie B. Solit, dated January 15, 2020
|
|
S-1
|
|
10.33
|
|
February
12, 2020
|
|
|
10.31
|
|
5%
Note Agreement with Richard O’Leary, dated January 17, 2020
|
|
S-1
|
|
10.34
|
|
February
12, 2020
|
|
|
10.32
|
|
Common
Stock Purchase Warrant with Richard O’Leary, dated January 15, 2020
|
|
S-1
|
|
10.35
|
|
February
12, 2020
|
|
|
10.33
|
|
Loan
Agreement with Greentree Financial Group, Inc., dated January 23, 2020
|
|
8-K
|
|
10.1
|
|
January
29, 2020
|
|
|
10.34
|
|
10%
Convertible Promissory Note with Greentree Financial Group, Inc., dated January 23, 2020
|
|
8-K
|
|
10.2
|
|
January
29, 2020
|
|
|
10.35
|
|
Common
Stock Purchase Warrant with Greentree Financial Group, Inc., dated January 23, 2020
|
|
8-K
|
|
10.3
|
|
January
29, 2020
|
|
|
10.36
|
|
Amendment
Agreement with Greentree Financial Group, Inc., dated January 29, 2020
|
|
8-K
|
|
10.4
|
|
January
29, 2020
|
|
|
10.37
|
|
Asset
Purchase Agreement between HMNRTH, LLC, TCBM Holdings, LLC and Edison Nation, Inc. and Scalematix, LLC dated March 11, 2020
|
|
8-K
|
|
10.1
|
|
March
12, 2020
|
|
|
10.38
|
|
Securities
Purchase Agreement between Edison Nation, Inc. and Jefferson Street Capital, LLC dated April 7, 2020
|
|
8-K
|
|
10.3
|
|
April
27, 2020
|
|
|
10.39
|
|
Convertible
Promissory Note between Edison Nation, Inc. and Jefferson Street Capital, LLC dated April 7, 2020
|
|
8-K
|
|
10.4
|
|
April
27, 2020
|
|
|
10.40
|
|
Securities
Purchase Agreement between Edison Nation, Inc. and BHP Capital NY Inc. dated April 7, 2020
|
|
8-K
|
|
10.1
|
|
April
27, 2020
|
|
|
10.41
|
|
Convertible
Promissory Note between Edison Nation, Inc. and BHP Capital NY Inc dated April 7, 2020
|
|
8-K
|
|
10.2
|
|
April
27, 2020
|
|
|
10.42
|
|
Promissory
Note Small Business Administration-Paycheck Protection Program dated April 15, 2020
|
|
8-K
|
|
10.8
|
|
April
27, 2020
|
|
|
10.43
|
|
Consulting
Agreement between Edison Nation, Inc. and Tiburon dated April 24, 2020
|
|
8-K
|
|
10.5
|
|
April
27, 2020
|
|
|
10.44
|
|
Debt
Conversion Agreement between Edison Nation, Inc. and Tiburon Opportunity Fund dated April 24, 2020
|
|
8-K
|
|
10.6
|
|
April
27, 2020
|
|
|
10.45
|
|
Distributor Agreement between Edison Nation Holdings, LLC and Marrone Bio Innovations, Inc. dated May 13, 2020
|
|
10-K
|
|
10.45
|
|
May
29, 2020
|
|
|
10.46
|
|
Secured
Line of Credit Agreement between Global Solutions, LLC, Edison Nation, Inc. and PPE Brickell Supplies, LLC dated May 20, 2020
|
|
8-K
|
|
10.1
|
|
May
26, 2020
|
|
|
10.47
|
|
Security
Agreement between Global Solutions, LLC, Edison Nation, Inc. and PPE Brickell Supplies, LLC dated May 20, 2020
|
|
8-K
|
|
10.2
|
|
May
26, 2020
|
|
|
10.48
|
|
Agreement
and Plan of Share Exchange Agreement between Edison Nation, Inc. PPE Brickell Supplies, LLC and Graphene Holdings, LLC dated
May 20, 2020
|
|
8-K
|
|
10.3
|
|
May
26, 2020
|
|
|
10.49
|
|
Amended
Limited Liability Company Agreement of Global Clean Solutions, LLC dated May 20, 2020
|
|
8-K
|
|
10.4
|
|
May
26, 2020
|
|
|
10.50
|
|
Purchase of Inventory and Repurchase Agreement between Edison Nation, Inc. and Fergco Bros, LLC dated May 7, 2020
|
|
10-K
|
|
10.50
|
|
May
29, 2020
|
|
|
10.51
|
|
Amendment to Purchase of Inventory and Repurchase Agreement between Edison Nation, Inc. and Fergco Bros, LLC dated May 15, 2020
|
|
10-K
|
|
10.51
|
|
May
29, 2020
|
|
|
10.52
|
|
Amendment to Senior Secured Note between Edison Nation, Inc. and 32 Entertainment, LLC dated May 19, 2020
|
|
10-K
|
|
10.52
|
|
May
29, 2020
|
|
|
10.53
|
|
Amended Subordinate Secured Note between Edison Nation, Inc and 32 Entertainment, LLC dated May 19, 2020
|
|
10-K
|
|
10.53
|
|
May
29, 2020
|
|
|
10.54
|
|
Agreement
for the Purchase and Sale of Common Stock of Cloud B, Inc. dated February 17, 2020
|
|
8-K
|
|
10.1
|
|
February
21, 2020
|
|
|
10.55
|
|
Amendment to Note Agreement and Common Stock Purchase Warrant between Edison Nation, Inc. and Richard O’Leary dated July 10, 2020
|
|
|
|
|
|
|
|
*
|
10.56
|
|
Amendment to Note Agreement and Common Stock Purchase Warrant between Edison Nation, Inc. and Equity Trust Company, a Custodian FBO: Rawleigh H. Ralls IRA dated July 10, 2020
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*
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10.57
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Amendment to Note Agreement and Common Stock Purchase Warrant between Edison Nation, Inc. and Paul J. Solit and Julie B. Solit dated July 10, 2020
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*
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21.1
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List
of Significant Subsidiaries
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S-1
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21.1
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February
12, 2020
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23.1
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Consent of Marcum llp
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*
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31.1
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Chief
Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.2
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Chief
Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.1**
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Certifications
of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
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101.INS*
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XBRL
Instance Document
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*
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101.SCH*
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XBRL
Taxonomy Extension Schema Document
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*
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101.CAL*
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XBRL
Taxonomy Extension Calculation Linkbase Document
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*
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101.DEF*
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XBRL
Taxonomy Extension Definition Linkbase Document
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*
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101.LAB*
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XBRL
Taxonomy Extension Label Linkbase Document
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*
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101.PRE*
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XBRL
Taxonomy Extension Presentation Linkbase Document
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*
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*
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Filed
herewith.
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**
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Furnished
herewith.
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+
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Denotes
a management compensatory plan, contract or arrangement
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(b)
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Financial
statement schedules.
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No
financial statement schedules are provided because the information called for is not required or is shown in the consolidated
financial statements or related notes.
Item 17.
Undertakings
(a)
The undersigned registrant hereby undertakes:
(1)
To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i)
To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii)
To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high
end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate
offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.
(iii)
To include any material information with respect to the plan of distribution not previously disclosed in the registration statement
or any material change to such information in the registration statement;
(2)
That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
(3)
To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold
at the termination of the offering.
(4)
That, for the purpose of determining liability under the Securities Act to any purchaser, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or
other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement
as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement
or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference
into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of
contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus
that was part of the registration statement or made in any such document immediately prior to such date of first use.
Insofar
as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will
be governed by the final adjudication of such issue.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, we have duly caused this Registration Statement on Form S-1 to be signed on
its behalf by the undersigned, thereunto duly authorized, in Bethlehem, Pennsylvania, on July 15, 2020.
|
EDISON
NATION, INC.
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By:
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/s/
Christopher B. Ferguson
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Christopher
B. Ferguson
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Chief
Executive Officer
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POWER
OF ATTORNEY
KNOW
ALL PERSONS BY THESE PRESENTS, that each person whose individual signature appears below hereby authorizes and appoints Christopher
B. Ferguson and Brett Vroman, and each of them, with full power of substitution and resubstitution and full power to act without
the other, as his true and lawful attorney-in-fact and agent to act in his name, place and stead and to execute in the name and
on behalf of each person, individually and in each capacity stated below, and to file any and all amendments to this Registration
Statement on Form S-1, and to file the same, with all exhibits thereto, and other documents in connection therewith,
with the SEC, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each
and every act and thing, ratifying and confirming all that said attorneys-in-fact and agents or any of them or their or his substitute
or substitutes may lawfully do or cause to be done by virtue thereof.
Pursuant
to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities
and on the dates indicated.
Signature
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Title
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Date
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/s/
Christopher B. Ferguson
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Chief
Executive Officer and Chairman of the Board of Directors
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July
15, 2020
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Christopher
B. Ferguson
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(Principal
Executive Officer)
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/s/
Brett Vroman
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Chief
Financial Officer
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|
July
15, 2020
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Brett
Vroman
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(Principal
Financial Officer and Principal Accounting Officer)
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/s/
Louis Foreman
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Director
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July
15, 2020
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Louis
Foreman
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/s/
Frank Jennings
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Director
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July
15, 2020
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Frank
Jennings
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/s/
Mary Ann Halford
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Director
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July
15, 2020
|
Mary
Ann Halford
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/s/
Kevin J. O’Donnell
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Director
|
|
July
15, 2020
|
Kevin
J. O’Donnell
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