Edison Nation, Inc. (formerly known
as Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
September 30,
2019
(Unaudited)
|
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,214,303
|
|
|
$
|
2,052,731
|
|
Accounts receivable, net
|
|
|
1,889,706
|
|
|
|
1,877,351
|
|
Inventory
|
|
|
1,106,077
|
|
|
|
923,707
|
|
Prepaid expenses and other current assets
|
|
|
996,968
|
|
|
|
611,695
|
|
Income tax receivable
|
|
|
31,563
|
|
|
|
-
|
|
Total current assets
|
|
|
5,238,617
|
|
|
|
5,465,484
|
|
Property and equipment, net
|
|
|
974,850
|
|
|
|
998,863
|
|
Right of use assets – operating leases, net
|
|
|
810,017
|
|
|
|
-
|
|
Intangible assets, net
|
|
|
11,873,337
|
|
|
|
12,687,731
|
|
Goodwill
|
|
|
9,736,510
|
|
|
|
9,736,510
|
|
Total assets
|
|
$
|
28,633,331
|
|
|
$
|
28,888,588
|
|
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ equity
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
6,932,584
|
|
|
$
|
5,519,159
|
|
Accrued expenses and other current liabilities
|
|
|
1,849,003
|
|
|
|
1,135,551
|
|
Deferred revenues
|
|
|
175,956
|
|
|
|
175,956
|
|
Current portion of operating lease liabilities
|
|
|
292,800
|
|
|
|
-
|
|
Income tax payable
|
|
|
-
|
|
|
|
129,511
|
|
Line of credit, net of debt issuance costs of $19,466 and $31,145, respectively
|
|
|
452,087
|
|
|
|
531,804
|
|
Current portion of notes payable, net of debt issuance costs of $153,793 and $0, respectively
|
|
|
1,270,243
|
|
|
|
313,572
|
|
Current portion of notes payable – related parties
|
|
|
1,039,330
|
|
|
|
932,701
|
|
Due to related party
|
|
|
22,896
|
|
|
|
140,682
|
|
Total current liabilities
|
|
|
12,034,900
|
|
|
|
8,878,936
|
|
Contingent consideration
|
|
|
520,000
|
|
|
|
520,000
|
|
Operating lease liabilities, net of current portion
|
|
|
534,817
|
|
|
|
-
|
|
Convertible notes payable – related parties, net of debt discount of $439,819 and $466,667 related to the conversion feature, respectively
|
|
|
2,099,455
|
|
|
|
961,494
|
|
Notes payable, net of current portion
|
|
|
46,101
|
|
|
|
56,688
|
|
Notes payable – related parties, net of current portion
|
|
|
2,342,249
|
|
|
|
2,531,490
|
|
Deferred tax liability
|
|
|
341
|
|
|
|
341
|
|
Total liabilities
|
|
|
17,577,863
|
|
|
|
12,948,949
|
|
Commitments and contingencies (Note 8)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity
|
|
|
|
|
|
|
|
|
Common stock, $0.001 par value, 250,000,000 shares authorized; 6,033,835 and 5,654,830 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively
|
|
|
6,034
|
|
|
|
5,655
|
|
Additional paid-in-capital
|
|
|
21,448,280
|
|
|
|
20,548,164
|
|
Accumulated deficit
|
|
|
(11,318,564
|
)
|
|
|
(5,565,756
|
)
|
Total stockholders’ equity attributable to Edison Nation, Inc.
|
|
|
10,135,750
|
|
|
|
14,988,063
|
|
Noncontrolling interests
|
|
|
919,718
|
|
|
|
951,576
|
|
Total stockholders’ equity
|
|
|
11,055,468
|
|
|
|
15,939,639
|
|
Total liabilities and stockholders’ equity
|
|
$
|
28,633,331
|
|
|
$
|
28,888,588
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues, net
|
|
$
|
3,532,645
|
|
|
$
|
4,940,188
|
|
|
$
|
15,239,434
|
|
|
$
|
12,758,715
|
|
Cost of revenues
|
|
|
2,544,058
|
|
|
|
3,637,000
|
|
|
|
10,413,868
|
|
|
|
9,090,215
|
|
Gross profit
|
|
|
988,587
|
|
|
|
1,303,188
|
|
|
|
4,825,566
|
|
|
|
3,668,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,296,323
|
|
|
|
2,065,655
|
|
|
|
9,738,107
|
|
|
|
6,276,830
|
|
Operating loss
|
|
|
(2,307,736
|
)
|
|
|
(762,467
|
)
|
|
|
(4,912,541
|
)
|
|
|
(2,608,330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
25,704
|
|
|
|
25,704
|
|
|
|
77,111
|
|
|
|
77,111
|
|
Change in fair value of put option contract
|
|
|
-
|
|
|
|
(732,600
|
)
|
|
|
-
|
|
|
|
(732,600
|
)
|
Interest expense
|
|
|
(349,172
|
)
|
|
|
(42,130
|
)
|
|
|
(875,036
|
)
|
|
|
(407,267
|
)
|
Total other (expense) income
|
|
|
(323,468
|
)
|
|
|
(749,026
|
)
|
|
|
(797,925
|
)
|
|
|
(1,062,756
|
)
|
Loss before income taxes
|
|
|
(2,631,204
|
)
|
|
|
(1,511,493
|
)
|
|
|
(5,710,466
|
)
|
|
|
(3,671,086
|
)
|
Income tax expense
|
|
|
-
|
|
|
|
167,813
|
|
|
|
74,200
|
|
|
|
312,186
|
|
Net loss
|
|
$
|
(2,631,204
|
)
|
|
$
|
(1,679,306
|
)
|
|
$
|
(5,784,666
|
)
|
|
$
|
(3,983,272
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
(49,103
|
)
|
|
|
-
|
|
|
|
(31,858
|
)
|
|
|
-
|
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(2,582,101
|
)
|
|
$
|
(1,679,306
|
)
|
|
$
|
(5,752,808
|
)
|
|
$
|
(3,983,272
|
)
|
Net loss per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- basic and diluted
|
|
$
|
(0.44
|
)
|
|
$
|
(0.37
|
)
|
|
$
|
(1.00
|
)
|
|
$
|
(1.11
|
)
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
5,834,167
|
|
|
|
4,560,607
|
|
|
|
5,733,379
|
|
|
|
3,577,942
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY
|
|
For
the Three Months Ended September 30, 2019 and 2018
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
(Deficit)
|
|
Balance, July 1, 2019
|
|
|
5,737,830
|
|
|
$
|
5,738
|
|
|
$
|
21,136,912
|
|
|
$
|
(8,736,463
|
)
|
|
$
|
968,821
|
|
|
$
|
13,375,008
|
|
Issuance of common stock to
note holders
|
|
|
201,005
|
|
|
|
201
|
|
|
|
136,279
|
|
|
|
-
|
|
|
|
-
|
|
|
|
136,480
|
|
Issuance of common stock to
employees
|
|
|
3,000
|
|
|
|
3
|
|
|
|
8,847
|
|
|
|
|
|
|
|
|
|
|
|
8,850
|
|
Issuance of common stock to
vendors for services
|
|
|
92,000
|
|
|
|
92
|
|
|
|
252,908
|
|
|
|
-
|
|
|
|
-
|
|
|
|
253,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
(86,666
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(86,666
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,582,101
|
)
|
|
|
(49,103
|
)
|
|
|
(2,631,204
|
)
|
Balance, September 30,
2019
|
|
|
6,033,835
|
|
|
$
|
6,034
|
|
|
$
|
21,448,280
|
|
|
$
|
(11,318,564
|
)
|
|
$
|
919,718
|
|
|
$
|
11,055,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, July 1, 2018
|
|
|
4,368,930
|
|
|
$
|
4,369
|
|
|
$
|
7,551,951
|
|
|
$
|
(2,539,596
|
)
|
|
$
|
-
|
|
|
$
|
5,016,724
|
|
Sale of common stock –
investors in the IPO
|
|
|
18,290
|
|
|
|
18
|
|
|
|
(18
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock to
employees
|
|
|
700
|
|
|
|
1
|
|
|
|
3,499
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,500
|
|
Issuance of common stock to
note holders
|
|
|
20,000
|
|
|
|
20
|
|
|
|
(20
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Issuance of common stock to
vendors for services
|
|
|
75,000
|
|
|
|
75
|
|
|
|
374,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,000
|
|
Issuance of common stock to
satisfy indebtedness related to acquisition of Edison Nation, Holdings, LLC
|
|
|
557,084
|
|
|
|
557
|
|
|
|
3,759,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,760,317
|
|
Beneficial conversion option
on indebtedness related to acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
260,826
|
|
|
|
-
|
|
|
|
-
|
|
|
|
260,826
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,679,306
|
)
|
|
|
-
|
|
|
|
(1,679,306
|
)
|
Balance, September 30,
2018
|
|
|
5,040,004
|
|
|
$
|
5,040
|
|
|
$
|
12,450,923
|
|
|
$
|
(4,218,902
|
)
|
|
|
-
|
|
|
$
|
8,237,061
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED CONSOLIDATED STATEMENT OF CHANGES
IN STOCKHOLDERS’ EQUITY
|
|
For
the Nine Months Ended September 30, 2019 and 2018
|
|
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Interest
|
|
|
Equity
(Deficit)
|
|
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
|
|
|
251,004
|
|
|
|
251
|
|
|
|
309,529
|
|
|
|
-
|
|
|
|
-
|
|
|
|
309,780
|
|
Issuance of common stock to
employees
|
|
|
3,000
|
|
|
|
3
|
|
|
|
8,847
|
|
|
|
|
|
|
|
|
|
|
|
8,850
|
|
Issuance of common stock to
vendors for services
|
|
|
125,000
|
|
|
|
125
|
|
|
|
394,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
394,125
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
187,740
|
|
|
|
-
|
|
|
|
-
|
|
|
|
187,740
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,752,808
|
)
|
|
|
(31,858
|
)
|
|
|
(5,784,666
|
)
|
Balance, September 30,
2019
|
|
|
6,033,835
|
|
|
$
|
6,034
|
|
|
$
|
21,448,280
|
|
|
$
|
(11,318,564
|
)
|
|
$
|
919,718
|
|
|
$
|
11,055,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1, 2018
|
|
|
3,000,000
|
|
|
$
|
3,000
|
|
|
$
|
-
|
|
|
$
|
(235,630
|
)
|
|
$
|
-
|
|
|
$
|
(232,630
|
)
|
Sale of common stock –
investors in the IPO
|
|
|
1,312,520
|
|
|
|
1,313
|
|
|
|
5,357,257
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,358,570
|
|
Issuance of common stock to
employees
|
|
|
61,900
|
|
|
|
62
|
|
|
|
309,438
|
|
|
|
-
|
|
|
|
-
|
|
|
|
309,500
|
|
Issuance of common stock to
note holders
|
|
|
33,500
|
|
|
|
33
|
|
|
|
167,467
|
|
|
|
-
|
|
|
|
-
|
|
|
|
167,500
|
|
Issuance of common stock to
vendors for services
|
|
|
75,000
|
|
|
|
75
|
|
|
|
374,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,000
|
|
Issuance of common stock to
satisfy indebtedness related to acquisition of Edison Nation, Holdings, LLC
|
|
|
557,084
|
|
|
|
557
|
|
|
|
3,759,760
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,760,317
|
|
Beneficial conversion option
on indebtedness related to acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
500,000
|
|
Stock-based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,982,076
|
|
|
|
|
|
|
|
|
|
|
|
1,982,076
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,983,272
|
)
|
|
|
-
|
|
|
|
(3,983,272
|
)
|
Balance, September 30,
2018
|
|
|
5,040,004
|
|
|
$
|
5,040
|
|
|
$
|
12,450,923
|
|
|
$
|
(4,218,902
|
)
|
|
|
-
|
|
|
$
|
8,237,061
|
|
The accompanying notes are an integral part
of these consolidated financial statements.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF
CASH FLOWS
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Cash Flow from Operating Activities
|
|
|
|
|
|
|
|
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(5,752,808
|
)
|
|
$
|
(3,983,272
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
(31,858
|
)
|
|
|
-
|
|
Net loss
|
|
|
(5,784,666
|
)
|
|
|
(3,983,272
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
952,019
|
|
|
|
120,004
|
|
Amortization of financing costs
|
|
|
658,126
|
|
|
|
266,944
|
|
Stock-based compensation
|
|
|
876,585
|
|
|
|
2,666,576
|
|
Amortization of right of use asset
|
|
|
217,189
|
|
|
|
-
|
|
Change in fair value of put option contract
|
|
|
-
|
|
|
|
732,600
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(12,355
|
)
|
|
|
(1,402,277
|
)
|
Inventory
|
|
|
(182,370
|
)
|
|
|
39,974
|
|
Prepaid expenses and other current assets
|
|
|
(667,836
|
)
|
|
|
(1,011,586
|
)
|
Accounts payable
|
|
|
1,413,425
|
|
|
|
55,194
|
|
Accrued expenses and other current liabilities
|
|
|
549,072
|
|
|
|
780,564
|
|
Repayment of operating lease liabilities
|
|
|
(199,589
|
)
|
|
|
-
|
|
Due from related party
|
|
|
(117,786
|
)
|
|
|
(472,352
|
)
|
Net cash used in operating activities
|
|
|
(2,298,186
|
)
|
|
|
(2,207,631
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(113,612
|
)
|
|
|
(121,186
|
)
|
Acquisition of Edison Nation Holdings, LLC and Subsidiaries, net of cash received
|
|
|
-
|
|
|
|
(881,318
|
)
|
Purchase of loan held for investment
|
|
|
-
|
|
|
|
(500,000
|
)
|
Net cash used in investing activities
|
|
|
(113,612
|
)
|
|
|
(1,502,504
|
)
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities
|
|
|
|
|
|
|
|
|
Borrowings under lines of credit
|
|
|
249,370
|
|
|
|
-
|
|
Borrowings under convertible notes payable
|
|
|
1,111,111
|
|
|
|
-
|
|
Borrowings under notes payable
|
|
|
1,670,000
|
|
|
|
718,559
|
|
Repayments under lines of credit
|
|
|
(340,766
|
)
|
|
|
-
|
|
Repayments under notes payable
|
|
|
(570,587
|
)
|
|
|
(645,000
|
)
|
Repayments under notes payable – related parties
|
|
|
(82,612
|
)
|
|
|
(118,779
|
)
|
Net proceeds from sale of common stock
|
|
|
-
|
|
|
|
5,358,570
|
|
Fees paid for financing costs
|
|
|
(463,146
|
)
|
|
|
(99,444
|
)
|
Net cash provided by financing activities
|
|
|
1,573,370
|
|
|
|
5,213,906
|
|
Net (decrease) increase in cash and cash equivalents
|
|
|
(838,428
|
)
|
|
|
1,503,771
|
|
Cash and cash equivalents - beginning of period
|
|
|
2,052,731
|
|
|
|
557,268
|
|
Cash and cash equivalents - end of period
|
|
$
|
1,214,303
|
|
|
|
2,061,039
|
|
|
|
|
|
|
|
|
|
|
Supplemental Disclosures of Cash Flow Information
|
|
|
|
|
|
|
|
|
Cash paid during the period for:
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
145,324
|
|
|
$
|
93,044
|
|
Income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
Noncash investing and financing activity:
|
|
|
|
|
|
|
|
|
Shares issued to note holders
|
|
$
|
309,780
|
|
|
$
|
167,500
|
|
Shares issued for the acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
3,760,317
|
|
Shares reserved in exchange for the cancellation of certain non-voting membership interests related to acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
6,682,500
|
|
Borrowings under note payable for the purchase of property and equipment
|
|
|
-
|
|
|
|
73,559
|
|
Issuance of 4%, 5 year senior convertible notes for the acquisition of Edison Nation Holdings, LLC
|
|
|
-
|
|
|
|
1,428,161
|
|
The accompanying notes are
an integral part of these consolidated financial statements.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, 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 September 30, 2019
and the results of operations, changes in stockholders’ equity, and cash flows for the periods presented. The results of
operations for the three and nine months ended September 30, 2019 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, 2018. 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, 2018, 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.
Edison Nation is a vertically-integrated,
end-to-end, consumer product research and 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 September 30, 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 (“EN”). Edison Nation, Inc. owns 72.15%
of Cloud B, Inc. (“Cloud B”), 50% of Best Party Concepts, LLC and 50% of Ed Roses, LLC. EN 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 owns 100% of
Cloud B Limited (UK) and Cloud B Pty (Australia).
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.
Liquidity
For the three and nine months ended September
30, 2019, our operations lost $2,307,736 and $4,912,541, respectively. At September 30, 2019, we had total current assets of approximately
$5,200,000 and current liabilities of approximately $12,000,000 resulting in negative working capital of approximately $6,800,000.
At September 30, 2019, we had total assets of approximately $28,600,000 and total liabilities of approximately $17,600,000 resulting
in stockholders’ equity of approximately $11,000,000.
The foregoing factors raised initial concerns
about the Company’s ability to continue as a going concern. 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 three and nine months ended September 30, 2019 included $486,546 and $1,828,604 related to depreciation, amortization and stock-based
compensation. In addition, approximately $100,000 and $1,200,000, respectively, 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
$3,800,000 related to unsecured trade payables in our Cloud B acquisition. In addition, our outstanding balances under notes payable
includes $0.9 million 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 $3,800,000 but at this time remains unpaid. The total liabilities of approximately $6,400,000, of
which $1,700,000, or net of $4,700,000, 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:
|
·
|
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 additional equity;
|
|
·
|
Borrow money under debt securities;
|
|
·
|
The deferral of payments to related party debt holders for both principal of approximately
$1,000,000 and related interest expense;
|
|
·
|
Cost saving initiatives related to synergies and the elimination
of redundant costs of approximately $500,000, of which approximately $153,000 impacted the three months ended September 30,
2019; and
|
|
·
|
Possible sale of certain brands to other manufacturers.
|
Edison Nation, Inc. (formerly known as
Xspand Products Lab, 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 $627,000 uninsured cash at September 30, 2019 of which approximately $198,000 was held in foreign bank
accounts not covered by FDIC insurance limits as of September 30, 2019.
Accounts Receivable
As of September 30, 2019, the following
customers represented more than 10% of total accounts receivable:
|
|
September 30,
|
|
|
|
2019
|
|
Customer A
|
|
|
15
|
%
|
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. (formerly known as
Xspand Products Lab, 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. 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 and nine
months ended September 30, 2019 and 2018 were as follows:
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product sales
|
|
$
|
3,499,116
|
|
|
$
|
4,858,055
|
|
|
$
|
14,982,117
|
|
|
$
|
12,676,582
|
|
Service
|
|
|
19,442
|
|
|
|
-
|
|
|
|
67,753
|
|
|
|
-
|
|
Licensing
|
|
|
14,087
|
|
|
|
82,133
|
|
|
|
189,564
|
|
|
|
82,133
|
|
Total revenues, net
|
|
$
|
3,532,645
|
|
|
$
|
4,940,188
|
|
|
$
|
15,239,434
|
|
|
$
|
12,758,715
|
|
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant Accounting Policies
— (Continued)
For the three and nine months ended September
30, 2019 and 2018, the following customer represented more than 10% of total net revenues:
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Customer:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer A
|
|
|
11
|
%
|
|
|
23
|
%
|
|
|
22
|
%
|
|
|
10
|
%
|
Customer B
|
|
|
*
|
|
|
|
*
|
|
|
|
*
|
|
|
|
17
|
%
|
* Customer did not represent greater than
10% of total net revenue.
For the three and nine months ended September
30, 2019 and 2018, the following geographical regions represented more than 10% of total net revenues:
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Region:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
|
86
|
%
|
|
|
84
|
%
|
|
|
78
|
%
|
|
|
81
|
%
|
Asia-Pacific
|
|
|
*
|
|
|
|
11
|
%
|
|
|
*
|
|
|
|
15
|
%
|
Europe
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
|
|
*
|
|
* 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. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant
Accounting Policies — (Continued)
As of September 30, 2019, the book value
and estimated fair value of the Company’s level 3 instruments was as follows:
|
|
September 30, 2019
|
|
|
|
Book Value
|
|
|
Estimated
Fair Value
|
|
Contingent consideration
|
|
$
|
(520,000
|
)
|
|
$
|
(520,000
|
)
|
The following changes in level 3 instruments
for the three months ended September 30, 2019 are presented below:
|
|
Contingent
Consideration –
Earnout
|
|
Balance, July 1, 2019
|
|
$
|
(520,000
|
)
|
Change in fair value
|
|
|
-
|
|
Balance, September 30, 2019
|
|
$
|
(520,000
|
)
|
The following changes in level 3 instruments
for the nine months ended September 30, 2019 are presented below:
|
|
Contingent
Consideration –
Earnout
|
|
Balance, December 31, 2018
|
|
$
|
(520,000
|
)
|
Change in fair value
|
|
|
-
|
|
Balance, September 30, 2019
|
|
$
|
(520,000
|
)
|
There were no changes to the underlying
assumptions used in determining the fair value of the contingent consideration liability for the three and nine months ended September
30, 2019. There was no contingent consideration as of September 30, 2018.
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
and nine months ended September 30, 2019 and 2018 and the cumulative translation gains and losses as of September 30, 2019 and
December 31, 2018 were not material.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, 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 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 September 30, 2018, there were no common stock equivalents outstanding. As of September
30, 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.
|
|
September 30,
|
|
|
|
2019
|
|
Selling Agent Warrants
|
|
|
89,992
|
|
Shares reserved in exchange for the cancellation of certain non-voting membership interest in Edison Nation Holdings, LLC
|
|
|
990,000
|
|
Options
|
|
|
290,000
|
|
Convertible shares under notes payable
|
|
|
285,632
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,655,624
|
|
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Summary of Significant
Accounting Policies — (Continued)
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 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 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. We have adopted this accounting guidance effective January 1, 2019, with no impact on our financial
statements as there were no excess tax benefits to be recognized due to our net operating losses.
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.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, 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. (formerly known as
Xspand Products Lab, 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 (“EN”) 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 EN and EN’s 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.
On October 29, 2018, the Company completed
the acquisition of 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 a majority of the stockholders of Cloud B (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.
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.
NL Penn Capital, LP is owned by Christopher B. Ferguson, our
Chairman and Chief Executive Officer.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Acquisition — (Continued)
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 three
and nine months ended September 30, 2018:
|
|
Three Months
Ended
September 30,
2018
|
|
|
Nine Months
Ended
September 30,
2018
|
|
Revenues, net
|
|
$
|
6,547,012
|
|
|
$
|
16,740,554
|
|
Cost of revenues
|
|
|
4,426,614
|
|
|
|
10,989,040
|
|
Gross profit
|
|
|
2,120,398
|
|
|
|
5,741,514
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,810,146
|
|
|
|
10,227,429
|
|
Operating loss
|
|
|
(1,689,748
|
)
|
|
|
(4,475,915
|
)
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
Other (expense) income
|
|
|
88,910
|
|
|
|
(330,162
|
)
|
Loss before income taxes
|
|
|
(1,600,838
|
)
|
|
|
(4,806,077
|
)
|
Income tax expense
|
|
|
182,669
|
|
|
|
327,042
|
|
Net loss
|
|
$
|
(1,783,507
|
)
|
|
$
|
(5,133,119
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
(89,527
|
)
|
|
|
(370,417
|
)
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(1,693,979
|
)
|
|
$
|
(4,762,701
|
)
|
Net loss per share - basic and diluted
|
|
$
|
(0.31
|
)
|
|
$
|
(0.98
|
)
|
Weighted average number of common shares outstanding – basic and diluted
|
|
|
5,471,921
|
|
|
|
4,835,681
|
|
Note 4 — Inventory
As of September 30, 2019 and December 31,
2018, inventory consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
46,884
|
|
|
$
|
48,576
|
|
Finished goods
|
|
|
1,059,193
|
|
|
|
875,131
|
|
Total inventory
|
|
$
|
1,106,077
|
|
|
$
|
923,707
|
|
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Intangible assets, net
As of September 30, 2019, intangible assets
consisted of the following:
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
Amount
|
|
Finite lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
15 years
|
|
14.8 years
|
|
$
|
4,270,000
|
|
|
$
|
268,389
|
|
|
$
|
4,001,611
|
|
Developed technology
|
|
7 years
|
|
6.7 years
|
|
$
|
3,800,000
|
|
|
|
561,905
|
|
|
|
3,238,095
|
|
Membership network
|
|
7 years
|
|
6.7 years
|
|
$
|
1,740,000
|
|
|
|
269,286
|
|
|
|
1,470,714
|
|
Non-compete agreements
|
|
2 years
|
|
1.7 years
|
|
$
|
50,000
|
|
|
|
27,083
|
|
|
|
22,917
|
|
Total finite lived intangible assets
|
|
|
|
|
|
$
|
9,860,000
|
|
|
$
|
1,126,663
|
|
|
$
|
8,733,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
1,126,663
|
|
|
$
|
11,873,337
|
|
As of December 31, 2018, intangible assets
consisted of the following:
|
|
|
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net Carrying
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
|
|
The estimated future amortization of intangibles
subject to amortization at September 30, 2019 was as follows:
For the Years Ended December 31,
|
|
Amount
|
|
2019 (excluding the nine months ended September 30, 2019)
|
|
$
|
275,274
|
|
2020
|
|
|
1,092,762
|
|
2021
|
|
|
1,076,095
|
|
2022
|
|
|
1,076,095
|
|
2023
|
|
|
1,076,095
|
|
Thereafter
|
|
|
4,137,016
|
|
|
|
$
|
8,733,337
|
|
Amortization expense for the three months
ended September 30, 2019 and 2018 was $275,274 and $0, respectively. Amortization expense for the nine months ended September 30,
2019 and 2018 was $814,394 and $0, respectively.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Debt
As of September 30, 2019 and December 31,
2018, debt consisted of the following:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Line of credit:
|
|
|
|
|
|
|
|
|
Asset backed line of credit
|
|
$
|
471,553
|
|
|
$
|
561,804
|
|
Debt issuance costs
|
|
|
(19,466
|
)
|
|
|
(30,000
|
)
|
Total line of credit
|
|
|
452,087
|
|
|
|
531,804
|
|
|
|
|
|
|
|
|
|
|
Senior convertible notes payable:
|
|
|
|
|
|
|
|
|
Senior convertible notes payable
|
|
|
2,539,273
|
|
|
|
1,428,161
|
|
Debt issuance costs
|
|
|
(439,818
|
)
|
|
|
(466,667
|
)
|
Total long-term senior convertible notes payable
|
|
|
2,099,455
|
|
|
|
961,494
|
|
Less: current portion of long-term notes payable
|
|
|
-
|
|
|
|
-
|
|
Noncurrent portion of long-term convertible notes payable
|
|
|
2,099,455
|
|
|
|
961,494
|
|
|
|
|
|
|
|
|
|
|
Notes payable:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
1,470,137
|
|
|
|
370,250
|
|
Debt issuance costs
|
|
|
(153,793
|
)
|
|
|
-
|
|
Total long-term debt
|
|
|
1,316,344
|
|
|
|
370,250
|
|
Less: current portion of long-term debt
|
|
|
(1,270,243
|
)
|
|
|
(313,572
|
)
|
Noncurrent portion of long-term debt
|
|
|
46,101
|
|
|
|
56,678
|
|
|
|
|
|
|
|
|
|
|
Notes payable – related parties:
|
|
|
|
|
|
|
|
|
Notes payable
|
|
|
3,381,579
|
|
|
|
3,464,191
|
|
Less: current portion of long-term debt – related parties
|
|
|
(1,039,330
|
)
|
|
|
(932,701
|
)
|
Noncurrent portion of long-term debt – related parties
|
|
$
|
2,342,249
|
|
|
$
|
2,531,490
|
|
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. The FirstFire note was paid in full in May 2019.
On May 13, 2019, the Company entered into
a series of 2% senior secured, senior convertible promissory notes of $1,111,111 with an original issue discount of $111,111.
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. The Company accrued $78,800 as a debt discount as of September 30, 2019 related to the value of the shares to be
issued. The notes are convertible upon default and mature on November 13, 2019. Under the terms of the notes, the note holders
will have “piggyback” registration rights. 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 October 2019 at $2.00 per share.
Receivables Financing
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.
Notes Payable
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 September 30, 2019 related to the value of the shares issued. The note matures on November 16, 2019.
On June 11, 2019, the Company entered into
1.5% promissory note of $250,000. The interest and principal is due upon 30 days’ notice from the Lender, which cannot be
issued before August 11, 2019. The Lender has not exercised their option for repayment yet.
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.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Debt — (Continued)
The scheduled maturities of the debt for
the next five years as of December 31, 2018, are as follows:
For the Years Ended December 31,
|
|
Amount
|
|
2019
|
|
$
|
2,175,092
|
|
2020
|
|
|
828,426
|
|
2021
|
|
|
871,916
|
|
2022
|
|
|
218,266
|
|
2023
|
|
|
1,229,569
|
|
Thereafter
|
|
|
2,539,273
|
|
|
|
|
7,862,542
|
|
Less: debt discount
|
|
|
(613,077
|
)
|
|
|
$
|
7,249,465
|
|
For the three and nine months ended September
30, 2019, interest expense was $349,172 and $875,036, of which $78,475 and $238,111 was related party interest expense, respectively.
For the three and nine months ended September 30, 2018, interest expense was $42,130 and $407,267, of which $42,714 and $145,656
was related party interest expense, respectively.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — 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 September 30, 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 September 30, 2019 and December 31,
2018, the net amount due to related parties was $22,896 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 $22,000 and $97,500 related to the services
performed by Enventys for the three and months ended September 30, 2019, respectively. During 2019, the Company and Enventys agreed
to the cancellation of the agreement.
Edison Nation, Inc. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Commitments and Contingencies
Operating Leases
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 September 30, 2019, the Company
has operating lease liabilities of $827,617 and right of use assets for operating leases of $810,017. During the three and nine
months ended September 30, 2019, operating cash outflows relating to operating lease liabilities was $78,303 and $225,249, respectively,
and the expense for right of use assets for operating leases was $75,414 and $217,189, respectively. As of September 30, 2019,
the Company's operating leases had a weighted-average remaining term of 3.3 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 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 July 1, 2019, the Company entered into
a lease for office space in Bethlehem, Pennsylvania. 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 three and nine
months ended September 30, 2019 was $128,256 and $410,759, respectively. Total rent expense for the three and nine months ended
September 30, 2018 was $65,244 and $211,780, respectively. Rent expense is included in general and administrative expense on the
Company’s condensed 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 September 30, 2019:
|
|
September 30,
2019
|
|
2019 (excluding the nine months ended September 30, 2019)
|
|
|
82,230
|
|
2020
|
|
|
315,660
|
|
2021
|
|
|
267,249
|
|
2022
|
|
|
96,288
|
|
2023
|
|
|
78,648
|
|
2024 and thereafter
|
|
|
52,430
|
|
Total future lease payments
|
|
|
892,505
|
|
Less: imputed interest
|
|
|
(64,888
|
)
|
Present value of future operating lease payments
|
|
|
827,617
|
|
Less: current portion of operating lease liabilities
|
|
|
(292,800
|
)
|
Operating lease liabilities, net of current portion
|
|
|
534,817
|
|
Right of use assets – operating leases, net
|
|
|
810,017
|
|
Rental Income
Fergco leases a portion of the building
located in Washington, New Jersey that it owns under a month to month lease. Rental income related to the leased space for both
the three months ended September 30, 2019 and 2018 was $25,704, respectively. Rental income related to the leased space for both
the nine months ended September 30, 2019 and 2018 was $77,111, respectively. Rental income 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 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.
Edison Nation, Inc. (formerly known
as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Stockholders’ Equity
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 represents total stock
compensation expense by award type related to stock performance awards, restricted stock units, stock options and awards made to
non-employees, for the three and nine months ended September 30, 2019 and 2018:
|
|
For the Three Months
Ended September 30,
|
|
|
For the Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Stock option awards
|
|
$
|
15,535
|
|
|
$
|
260,826
|
|
|
$
|
160,140
|
|
|
$
|
260,826
|
|
Non-employee awards
|
|
|
151,750
|
|
|
|
375,000
|
|
|
|
615,050
|
|
|
|
2,096,250
|
|
Restricted stock unit awards
|
|
|
8,850
|
|
|
|
3,500
|
|
|
|
8,850
|
|
|
|
309,500
|
|
Phantom stock awards
|
|
|
(8,038
|
)
|
|
|
-
|
|
|
|
92,545
|
|
|
|
-
|
|
|
|
$
|
168,097
|
|
|
$
|
639,326
|
|
|
$
|
876,585
|
|
|
$
|
2,666,576
|
|
The stock-based compensation is included
in selling, general and administrative expense for the three and nine months ended September 30, 2019 and 2018, respectively.
Stock option awards
The following table summarizes stock option
award activity for the nine months ended September 30, 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
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Balance, September 30, 2019
|
|
|
290,000
|
|
|
$
|
5.55
|
|
|
|
3.5
|
|
|
|
-
|
|
Exercisable, September 30, 2019
|
|
|
263,333
|
|
|
$
|
5.41
|
|
|
|
3.5
|
|
|
|
-
|
|
As of September 30, 2019, there was 26,667
unvested options to purchase shares of the Company’s common stock or $62,139 of total unrecognized equity-based compensation
expense that the Company expected to recognize over a remaining weighted-average period of 1 year.
Non-employee awards
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. (formerly known as
Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Subsequent Events
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 contains 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. If the registration statement is not filed or declared effective within the timeframe set forth in the Registration
Rights Agreements, 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.
On November 6, 2019, the Company acquired
the assets of Uber Mom, LLC for $52,352, which was the approximate value of Uber Mom, LLC inventory, and 22,500 shares of our
common stock.
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Overview
Edison Nation: End-to-end product innovation,
development and commercialization
Edison Nation is a vertically-integrated,
end-to-end, consumer product research and development, manufacturing, sales and fulfillment company.
The Company is the aggregation of five
wholly owned subsidiaries whose operations and go-to-market strategy are vertically integrated under the Edison Nation corporate
umbrella.
During the first quarter of 2019, Edison
Nation rolled out its “One Company” initiative to integrate the acquired businesses into one cohesive operation.
Edison Nation’s cornerstone business
driver is its proprietary web-enabled new product development and licensing platform (www.edisonnation.com) that provides a low
risk, high reward process to connect innovators of new product ideas with potential licensing partners.
Considered to be the “go-to”
resource for independent innovators with great consumer product invention ideas, Edison Nation engages with over 140,000 registered
online innovators and entrepreneurs to bring innovative, new products to market focusing on high-interest, high-velocity consumer
categories.
Since its inception, Edison Nation has
received over 100,000 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 ecommerce, 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.
Edison Nation also creates, manufactures
and markets its own products, in addition to products for the infant / toddler market under the Cloud B consumer brand name, innovative
party products under the Best Party Concepts brand, and premium branded coloring activities under the Pirasta brand. Recently the
company launched product lines for 911 Help Now, Master Sous and Smarter Specs. In addition, the Company leverages its vertically
integrated resources and capabilities to create licensed consumer products for large entertainment theme park enterprises, like
Disney World and Universal Studios as well as custom packaging solutions for large and small U. S. based companies.
Business Model
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 business model is
designed to take advantage of online marketplace and crowdfunding momentum for our future growth, in order to mitigate 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 Edison Nation New Product Development
& Commercialization Platform
Indeed, the cornerstone of Edison Nation’s
competitive advantage is its proprietary and web-enabled new product development (“NPD”) and commercialization platform.
The 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.
The Company’s web-enabled NPD platform
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. This unique set of resources and capabilities have proven to be
a reliable catalyst for sales success.
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.
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, ask and seek answers to 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 are not 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,
the Edison Nation ASOTV (“As Seen on TV”) Team hosts a search for new products suitable for marketing via DRTV
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 NPD 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 NPD
Licensing Team based on nine key factors: competing products, uniqueness, retail pricing, liability & safety, marketability,
manufacturing cost, patentability, consumer relevant features and benefits, and commercial-ability.
The time required to review ideas depends
upon different variables, such as: the number of searches concurrently running on the Edison Nation platform, idea volume and complexity
of the search, how many presentation dates to licensees are pending, and the date an idea is submitted.
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 Insider Licensing Program (ILP program) incorporates a four-stage
process:
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·
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Stage #1 — Preliminary Review: The NPD 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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|
·
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Stage #2 — Preparation: The NPD 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 NPD 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.
|
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 Insider Licensing Program 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.
One Company Initiative
During the first quarter of 2019, Edison
Nation began the process to consolidate all operating companies businesses into distinct business units of Edison Nation, which
allows the Company to focus on growing sales and leveraging operations. The units consist of:
• Innovate. The Edison Nation Platform.
Responsible for the innovation platform that helps innovators go from idea to reality. This is accomplished by optimizing new product
election processes through deeper analytics to predict success on platforms like crowdfunding and web market places like Amazon,
while simultaneously driving brand awareness of the platform by producing content for innovators and innovators on media platforms
including our own Everyday Edison’s television show.
• Build and launch. Consolidating
our teams of product designers and developers who take the product from the concept to the consumers hand. These are distributed
by geography, industry skillset and expertise in the development process to ensure efficient product build and launch. The bulk
of 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. The team seeks to a find a mutually beneficial
transaction to accomplish that goal.
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, like Enventys
Partners, and category-specific expert resources within select manufacturers.
Paths to Market
After an innovator’s idea has been
selected and then developed, Edison Nation’s NPD and commercialization platform - powered by team of experienced licensing
experts and backed by our scalable manufacturing and fulfillment supply chain infrastructure - provides innovators with a clear
and unencumbered set of paths to market.
Matching the Innovation with the
Licensing Community
Edison Nation partners with many of the
biggest and most well-known 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 a 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.
Manufacturing, Materials and Logistics
Once a product’s path to market is
successfully identified, Edison Nation produces and commercializes the product either through (1) licensing partnerships, or (2)
through a direct-to-market path via ecommerce or traditional retail distribution.
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 major facilities to 4 to-date. These include two 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.
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. The team seeks to a find a mutually beneficial transaction
to accomplish that goal.
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.
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 aggressively pursues the following three sources
of sales volume:
|
·
|
Our branded products sold through traditional retail channels of distribution and other channels of business to business distribution.
|
|
·
|
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.
|
|
·
|
Custom products and packaging solutions that the Company develops and manufactures for partners such as Disney, Marvel, Madison Square Garden and Universal Studios.
|
|
·
|
Member idea submission and ILP program fees: $25 per submission (registered members); $20 per submission (Insider members); $100 per submission (ILP members)
|
|
·
|
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.
|
|
·
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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.
|
Market Overview
The process for developing and launching
consumer products has changed significantly in recent years. Previously, Fortune 500 and specialty consumer product companies funded
multimillion-dollar NPD divisions to develop and launch products. These products were sold primarily on “big box” retail
shelves supported by large marketing investments.
The emergence of ecommerce giants, including
Amazon and Walmart.com, has disrupted traditional NPD and commercialization paths and has accelerated a consumer shift away from
“brick and mortar” retailers. The result has been the bankruptcy or downsizing of many iconic retailers, including
Toys R Us, JC Penney, Macy’s, Sears, Kmart, Office Depot, Family Dollar, and K-B Toys, with a commensurate loss of shelf
space and accessible locations.
Moreover, crowdfunding sites, like Kickstarter
and Indiegogo, have also disrupted NPD process cycles and are now “main stream.” In fact, as of October 2018, Kickstarter’s
cumulative pledged funding exceeded $3.9 billion according to Kickstarter published data. Statista.com estimates that crowdfunded
sales of products will exceed $18.9 billion by 2021.
These crowdfunding sites have enabled individual
innovators and entrepreneurs to design, prototype and market unique products to millions of potential customers with significantly
lower acquisition costs when compared to the capital and time required by legacy NPD processes.
Leveraging Evolving Market Opportunities for Growth
The Company believes that its anticipated
growth will be driven by five macro factors including:
|
·
|
The significant growth of ecommerce (14% CAGR, estimated to reach $4.9 trillion by 2021 (eMarketer 2018);
|
|
·
|
The increasing velocity of “brick and mortar” retail closures, now surpassing Great Recession levels (Cushman & Wakefield / Moody’s Analytics 2018);
|
|
·
|
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;
|
|
·
|
The rapid adoption of crowdsourcing to expedite successful new product launches; and
|
|
·
|
Utilizing the opportunities to market products over the internet, rather than through traditional, commercial channels, to reach a much broader, higher qualified target market for brands and products.
|
In addition, we believe that by leveraging
our expertise in helping companies launch thousands of new products and our ability to create unique, customized packaging, we
intend to acquire 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. In addition, 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 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 is Cloud B (www.cloudb.com),
a leading manufacturer of products and accessories that help parents and children sleep better. The Company 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. The Company 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
on-line (through its own ecommerce site and other online e-tailers), in specialty boutiques, gift stores, and worldwide at major
retailers including Barnes & Noble, Bloomingdales, Dillard’s, Nordstrom, Von Maur, Harrods of London, and FNAC in France.
Immediate synergies from the Company’s
acquisition of Cloud B include expanding Edison Nation’s West coast footprint by leveraging Cloud B’s sizeable distribution,
sales and fulfillment operations. In addition, Cloud B is leveraging the Edison Nation proprietary NPD platform, Hong Kong-based
manufacturer sourcing and management capabilities, and marketing and packaging resources.
The Company’s primary focus since
the Cloud B acquisition has been to optimize existing product performance, while helping to develop new product lines leveraging
the Edison Nation NPD platform.
Factors Which May Influence Future
Results of Operations
The following is a description of factors
that may influence our future results of operations, and which we believe are important to an understanding of our business and
results of operations.
Edison Nation Holdings, LLC Transaction
On September 4, 2018, the Company completed
the acquisition of all of the voting membership interest of EN for a total purchase price of $11,776,696 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 for the New Convertible Notes’ 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, (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 Edison Nation 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 the Cloud B Sellers. 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 (“CB1”), 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, CB1, 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.
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 and an award of options to purchase 20,000 shares
of the Company’s common stock. The restricted stock underlying such options will vest one year after the grant date. However,
the options have not yet been granted. In addition, the chair of each of the board’s committees shall receive an annual committee
meeting fee of $5,000.
Acquisition of Pirsata, 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.
Acquisition of Uber Mom, LLC
On November 6, 2019, the Company acquired
the assets of Uber Mom, LLC for $52,352, which was the approximate value of Uber Mom, LLC inventory, and 22,500 shares of our common
stock.
Securities Purchase Agreements
On March 6, 2019, Edison Nation, Inc. (the
“Company”) entered into the FirstFire with an accredited investor (the “Investor”) pursuant to which the
Investor purchased the FirstFire Note. 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 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 Note is six months from March 6, 2019. All principal
amounts and the interest thereon are convertible into shares of common stock only in the event that an Event of Default (as defined
in the FirstFire Note) occurs. The FirstFire Note was paid in full in May 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 May 13, 2019, the Company entered into
a series of 2% senior secured, senior convertible promissory notes of $1,111,111 with an original issue discount of $111,111. 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. The Company accrued $78,800 as a debt discount as of September 30, 2019 related to the value of the shares to be
issued. The notes are convertible upon default and mature on November 13, 2019. Under the terms of the notes, the note holders
will have “piggyback” registration rights. 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. All of the notes were converted into a total of
560,185 shares of our common stock in October 2019 at $2.00 per share.
Receivables Financing
In April 2019, we entered into a receivables
financing arrangement for certain receivables of the Company. The agreement allows for borrowing 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 invoice financed.
Private Investment in Public Entity
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 contains 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. If the registration statement is not filed or declared effective within the timeframe set forth in the Registration
Rights Agreements, 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.
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 Quarterly Report on Form 10-Q.
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 Operations
Three Months Ended September 30,
2019 versus Three Months Ended September 30, 2018
The following table sets forth information
comparing the components of net (loss) income for the three months ended September 30, 2019 and 2018:
|
|
Three Months Ended September 30,
|
|
|
Period over Period Change
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Revenues, net
|
|
$
|
3,532,645
|
|
|
$
|
4,940,188
|
|
|
$
|
(1,407,543
|
)
|
|
|
-28.5
|
%
|
Cost of revenues
|
|
|
2,544,058
|
|
|
|
3,637,000
|
|
|
|
(1,092,942
|
)
|
|
|
-30.1
|
%
|
Gross profit
|
|
|
988,587
|
|
|
|
1,303,188
|
|
|
|
(314,601
|
)
|
|
|
-24.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
3,296,323
|
|
|
|
2,065,655
|
|
|
|
1,230,668
|
|
|
|
59.6
|
%
|
Operating loss
|
|
|
(2,307,736
|
)
|
|
|
(762,467
|
)
|
|
|
(1,545,269
|
)
|
|
|
202.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
25,704
|
|
|
|
25,704
|
|
|
|
-
|
|
|
|
0.0
|
%
|
Change in fair value of put option contract
|
|
|
-
|
|
|
|
(732,600
|
)
|
|
|
732,600
|
|
|
|
-100.0
|
%
|
Interest expense
|
|
|
(349,172
|
)
|
|
|
(42,130
|
)
|
|
|
(307,042
|
)
|
|
|
728.8
|
%
|
Total expense
|
|
|
(323,468
|
)
|
|
|
(749,026
|
)
|
|
|
425,558
|
|
|
|
-56.8
|
%
|
Loss before income taxes
|
|
|
(2,631,204
|
)
|
|
|
(1,511,493
|
)
|
|
|
(1,119,711
|
)
|
|
|
74.1
|
%
|
Income tax expense
|
|
|
-
|
|
|
|
167,813
|
|
|
|
(167,813
|
)
|
|
|
-100.0
|
%
|
Net loss
|
|
|
(2,631,204
|
)
|
|
|
(1,679,306
|
)
|
|
|
(951,898
|
)
|
|
|
56.7
|
%
|
Net loss attributable to noncontrolling interests
|
|
|
(49,103
|
)
|
|
|
-
|
|
|
|
(49,103
|
)
|
|
|
na
|
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(2,582,101
|
)
|
|
$
|
(1,679,306
|
)
|
|
$
|
(902,795
|
)
|
|
|
53.8
|
%
|
Revenue
For the three months ended September 30,
2019, revenues decreased by $1,407,543 or 28.5%, as compared to the three months ended September 30, 2018. The decrease was primarily
attributable to the timing of payments for the fulfilment of orders as well as a decrease in the Company’s theme park product
sales due to a few factors, including, the relocation of one of our China factories; the impact of Hong Kong park attendance due
to the recent China protests which have also disrupted the Company’s Hong Kong operations in general; slowed purchase orders
from customers due to the China tariffs and requests by customers to quote key items made in America; and delayed shipments due
to changes in quality control standards at a large customer, which has since been resolved with the customer.
Cost of Revenues
For the three months ended September 30,
2019, cost of revenues decreased by $1,092,942 or 30.1%, as compared to the three months ended September 30, 2018. The decrease
was primarily attributable to the decrease in total consolidated revenues.
Gross Profit
For the three months ended September 30,
2019, gross profit decreased by $314,601, or 24.1%, as compared to the three months ended September 30, 2018. The decrease was
primarily a result of the decrease in revenues. For the three months ended September 30, 2019, gross profit percentage increased
to 28.0%, as compared to 26.4% for the three months ended September 30, 2018. The increase in gross margin was due to product mix
of goods sold to customers.
Operating Expenses
Selling, general and administrative expenses
were $3,296,323 and $2,065,655 for the three months ended September 30, 2019 and 2018, respectively, representing an increase of
$1,230,668, or 59.6%. The increase was primarily the result of additional operating expense related to EN and Cloud B. The largest
increases included wages and benefits of approximately $462,000, depreciation and amortization of approximately $280,000, professional
fees of approximately $690,000, travel of approximately $66,000 offset by a decrease of stock-based compensation of $1,204,000.
Rental Income
Rental income was $25,704 for both the
three months ended September 30, 2019 and 2018.
Interest expense
Interest expense was $349,172 for the three
months ended September 30, 2019 versus $42,130 in the previous three months ended September 30, 2018. 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 September 30, 2019, a decrease of $167,813, compared to $167,813 for the three months ended September 30, 2018. The
decrease was primarily due to losses in our operations.
Nine Months Ended September 30, 2019
versus Nine Months Ended September 30, 2018
The following table sets forth information
comparing the components of net (loss) income for the nine months ended September 30, 2019 and 2018:
|
|
Nine Months Ended September 30,
|
|
|
Period over Period Change
|
|
|
|
2019
|
|
|
2018
|
|
|
$
|
|
|
%
|
|
Revenues, net
|
|
$
|
15,239,434
|
|
|
$
|
12,758,715
|
|
|
$
|
2,480,719
|
|
|
|
19.4
|
%
|
Cost of revenues
|
|
|
10,413,868
|
|
|
|
9,090,215
|
|
|
|
1,323,653
|
|
|
|
14.6
|
%
|
Gross profit
|
|
|
4,825,566
|
|
|
|
3,668,500
|
|
|
|
1,157,066
|
|
|
|
31.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
9,738,107
|
|
|
|
6,276,830
|
|
|
|
3,461,277
|
|
|
|
55.1
|
%
|
Operating loss
|
|
|
(4,912,541
|
)
|
|
|
(2,608,330
|
)
|
|
|
(2,304,211
|
)
|
|
|
88.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (expense) income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental income
|
|
|
77,111
|
|
|
|
77,111
|
|
|
|
-
|
|
|
|
na
|
%
|
Change in fair value of put option contract
|
|
|
-
|
|
|
|
(732,600
|
)
|
|
|
732,600
|
|
|
|
-100.0
|
%
|
Interest expense
|
|
|
(875,036
|
)
|
|
|
(407,267
|
)
|
|
|
(467,769
|
)
|
|
|
114.9
|
%
|
Total other expense
|
|
|
(797,925
|
)
|
|
|
(1,062,756
|
)
|
|
|
264,831
|
|
|
|
-24.9
|
%
|
Loss before income taxes
|
|
|
(5,710,466
|
)
|
|
|
(3,671,086
|
)
|
|
|
(2,039,380
|
)
|
|
|
55.6
|
%
|
Income tax expense
|
|
|
74,200
|
|
|
|
312,186
|
|
|
|
(237,986
|
)
|
|
|
-76.2
|
%
|
Net loss
|
|
|
(5,784,666
|
)
|
|
|
(3,983,272
|
)
|
|
|
(1,801,394
|
)
|
|
|
45.2
|
%
|
Net income attributable to noncontrolling interests
|
|
|
(31,858
|
)
|
|
|
-
|
|
|
|
(31,858
|
)
|
|
|
na
|
|
Net loss attributable to Edison Nation, Inc.
|
|
$
|
(5,752,808
|
)
|
|
$
|
(3,983,272
|
)
|
|
$
|
(1,769,536
|
)
|
|
|
44.4
|
%
|
Revenue
For the nine months ended September 30,
2019, revenues increased by $2,480,719 or 19.4%, as compared to the nine months ended September 30, 2018. The increase was primarily
attributable to new business in connection with our acquisitions in 2018. The increase includes licensing related revenues related
to our acquisition of EN and product revenues related to our acquisition of Cloud B.
Cost of Revenues
For the nine months ended September 30,
2019, cost of revenues increased by $1,323,653 or 14.6%, as compared to the nine months ended September 30, 2018. The increase
was primarily attributable to the increase in total consolidated revenues.
Gross Profit
For the nine months ended September 30,
2019, gross profit increased by $1,157,066, or 31.5%, as compared to the nine months ended September 30, 2018. The increase was
primarily a result of the increase in revenues. For the nine months ended September 30, 2019, gross profit percentage increased
to 31.7%, as compared to 28.8% for the nine months ended September 30, 2018. The increase in gross margin was due mostly to favorable
product mix of goods sold to customers related to our Cloud B acquisition.
Operating Expenses
Selling, general and administrative expenses
were $9,738,107 and $6,276,830 for the nine months ended September 30, 2019 and 2018, respectively, representing an increase of
$3,461,277, or 55.1%. The increase was primarily the result of operating expense incurred related to Edison Nation Holdings, LLC
and Cloud B, Inc. The largest increases included wages and benefits of approximately $1,528,000, depreciation and amortization
of approximately $839,000, professional fees of approximately $1,617,000, travel of approximately $186,000, rent of approximately
$195,000 offset by a decrease of stock-based compensation of approximately $2,515,000.
Rental Income
Rental income was $77,111 for both the
nine months ended September 30, 2019 and 2018.
Interest expense
Interest expense was $875,036, an increase
of 114.9%, for the nine months ended September 30, 2019 versus $407,267 in the previous nine months ended September 30, 2018. The
increase in interest expense was related to increased borrowings of debt during 2019.
Income tax expense
Income tax expense was $74,200 for the
nine months ended September 30, 2019, a decrease of $237,986 or 76.2%, compared to $312,186 for the nine months ended September
30, 2018. The decrease was primarily due to the decrease in income from our foreign operations related to management fees as well
as net operating losses for our domestic operations.
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 three and nine months ended September
30, 2019 and 2018, EBITDA and Adjusted EBITDA consisted of the following:
|
|
Three Months
Ended September 30,
|
|
|
Nine Months
Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net (loss) income
|
|
$
|
(2,631,204
|
)
|
|
$
|
(1,679,306
|
)
|
|
$
|
(5,784,666
|
)
|
|
$
|
(3,983,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
349,172
|
|
|
|
42,130
|
|
|
|
875,036
|
|
|
|
407,267
|
|
Income tax expense
|
|
|
-
|
|
|
|
167,813
|
|
|
|
74,200
|
|
|
|
312,186
|
|
Depreciation and amortization
|
|
|
318,449
|
|
|
|
40,742
|
|
|
|
952,019
|
|
|
|
120,003
|
|
EBITDA
|
|
|
(1,963,583
|
)
|
|
|
(1,428,621
|
)
|
|
|
(3,883,411
|
)
|
|
|
(3,143,816
|
)
|
Stock-based compensation
|
|
|
168,097
|
|
|
|
639,326
|
|
|
|
876,585
|
|
|
|
2,666,576
|
|
Change in fair value of put option contract
|
|
|
|
|
|
|
732,600
|
|
|
|
|
|
|
|
732,600
|
|
Restructuring and severance costs
|
|
|
153,182
|
|
|
|
9,000
|
|
|
|
324,164
|
|
|
|
27,000
|
|
Transaction and acquisition costs
|
|
|
224,370
|
|
|
|
84,980
|
|
|
|
447,908
|
|
|
|
239,682
|
|
Other non-recurring costs
|
|
|
100,772
|
|
|
|
-
|
|
|
|
724,137
|
|
|
|
42,686
|
|
Adjusted EBITDA
|
|
$
|
(1,317,162
|
)
|
|
$
|
37,285
|
|
|
$
|
(1,510,617
|
)
|
|
$
|
564,728
|
|
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
For the three and nine months ended September
30, 2019, our operations lost $2,307,736 and $4,912,541, respectively. At September 30, 2019, we had total current assets of approximately
$5,200,000 and current liabilities of approximately $12,000,000 resulting in negative working capital of approximately $6,800,000.
At September 30, 2019, we had total assets of approximately $28,600,000 and total liabilities of approximately $17,600,000 resulting
in stockholders’ equity of approximately $11,000,000.
The foregoing factors raised initial concerns
about the Company’s ability to continue as a going concern. 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 included
$486,546 and $1,828,604 related to depreciation, amortization and stock-based compensation. In addition, approximately $100,000
and $1,200,000, respectively, 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 $3,800,000 related to unsecured trade payables
in our Cloud B acquisition. In addition, our outstanding balances under notes payable includes $0.9 million related to Cloud B.
CB1 owns the senior secured position on the promissory note to Cloud B, Inc. 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, 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. In addition, SRM was an unsecured creditor in the amount of approximately $1,700,000 which is not included in the $3,800,000
but at this time remains unpaid. The total liabilities of approximately $6,400,000, of which $1,700,000, or net of $4,700,000,
has been eliminated in consolidation, are not expected to be satisfied due to the foreclosure.
On October 2, 2019, Edison Nation, Inc.
(the “Company”) entered into a Share Purchase Agreement (the “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 additional equity;
|
|
·
|
Borrow money under debt securities;
|
|
·
|
The deferral of payments to related party debt holders for both principal of approximately
$1,000,000 and related interest expense;
|
|
·
|
Cost saving initiatives related to synergies and the elimination
of redundant costs of approximately $500,000, of which approximately $153,000 impacted the three months ended September 30,
2019; and
|
|
·
|
Possible sale of certain brands to other manufacturers.
|
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 nine months ended September 30, 2019 and 2018, our
sources and uses of cash were as follows:
Cash Flows from Operating Activities
Net cash used in operating activities for
the nine months ended September 30, 2019 was $2,298,186, which included a net loss of $5,784,666. That net loss included $782,561
of cash provided by changes in operating assets and liabilities, which were offset by stock-based compensation of $876,585, depreciation
and amortization of $952,019, amortization of debt issuance costs of $658,126 and amortization of right of use assets of $217,189.
Net cash used in operating activities for the nine months ended September 30, 2018 was $2,207,631, which included a net loss of
$3,983,272. That net loss included $2,010,483 of cash used by changes in operating assets and liabilities which was offset by stock-based
compensation of $2,666,576 and amortization of debt issuance costs of $266,944.
Cash Flows from Investing Activities
Cash used in investing activities for the
nine months ended September 30, 2019 was $113,612 which related to the purchase of property and equipment. Cash used in investing
activities for the nine months ended September 30, 2018 was $1,502,504 which related to the purchase of a loan held for investment
of $500,000, the acquisition of EN and its subsidiaries and the purchase of property and equipment of $121,186.
Cash Flows from Financing Activities
Cash provided by financing activities for
the nine months ended September 30, 2019 was $1,573,370 which related mostly to net cash received borrowings under new debt instruments
offset by repayments. Cash provided by financing activities for the nine months ended September 30, 2018 was $5,213,906 which related
to borrowings under two 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.