UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from_____to _____
Commission file number: 001-38448
EDISON NATION, INC.
(Exact Name of Registrant as Specified in Its Charter)
Nevada
(State or Other Jurisdiction
of Incorporation or Organization)
909 New Brunswick Ave
Phillipsburg, New Jersey
(Address of Principal Executive Offices)
82-2199200
(I.R.S. Employer
Identification No.)
08865
(Zip Code)
(610) 829-1039
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of exchange on which registered
Nasdaq
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.
¨ Yes x No
¨ Yes x No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or Section 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
x Yes ¨ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ¨
Non-accelerated filer x
Accelerated filer ¨
Smaller Reporting Company x
Emerging Growth Company x
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
¨ Yes x No
As of June 29, 2018, the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market value of the registrant’s common stock held by
non-affiliates of the registrant was $10,636,586, based on the closing sales price of $7.77 per share as reported on The Nasdaq Capital Market.
As of April 12, 2019, there were 5,680,330 shares of the registrant’s common stock outstanding.
Documents incorporated by reference: Portions of the Registrant’s Definitive Proxy Statement relating to the 2019 Annual Meeting of Shareholders, which will be filed within
120 days after December 31, 2018, are incorporated by reference into Part III of this Annual Report on Form 10-K.
EDISON NATION, INC.
(formerly known as Xspand Products Lab, Inc.)
TABLE OF CONTENTS
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits
Signatures
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USE OF MARKET AND INDUSTRY DATA
This Annual Report on Form 10-K includes market and industry data that we have obtained from third-party sources, including industry publications, as well as industry
data prepared by our management on the basis of its knowledge of and experience in the industries in which we operate (including our management’s estimates and assumptions
relating to such industries based on that knowledge). Management has developed its knowledge of such industries through its experience and participation in these industries.
While our management believes the third-party sources referred to in this Annual Report on Form 10-K are reliable, neither we nor our management have independently
verified any of the data from such sources referred to in this Annual Report on Form 10-K or ascertained the underlying economic assumptions relied upon by such sources.
Furthermore, internally prepared and third-party market prospective information, in particular, are estimates only and there will usually be differences between the prospective
and actual results, because events and circumstances frequently do not occur as expected, and those differences may be material. Also, references in this Annual Report on
Form 10-K to any publications, reports, surveys or articles prepared by third parties should not be construed as depicting the complete findings of the entire publication, report,
survey or article. The information in any such publication, report, survey or article is not incorporated by reference in this Annual Report on Form 10-K.
Solely for convenience, we refer to trademarks in this Annual Report on Form 10-K without the ® or the ™ or symbols, but such references are not intended to indicate
that we will not assert, to the fullest extent under applicable law, our rights to our own trademarks. Other service marks, trademarks and trade names referred to in this Annual
Report on Form 10-K, if any, are the property of their respective owners, although for presentational convenience we may not use the ® or the ™ symbols to identify such
trademarks.
OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this Annual Report on Form 10-K, the terms “Edison Nation” “we,” “us,” “our,” the “Company” and similar terms refer to
Edison Nation, Inc., a Nevada corporation formerly known as Xspand Products Lab, Inc. and Idea Lab Products, Inc., and all of our subsidiaries and affiliates.
Unless otherwise indicated, all share and per share information contained herein gives effect to the 1:33333 reverse stock split of our common stock, which was effective
February 14, 2018.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the period ended December 31, 2018 (the “Annual Report”) contains forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements relate to future events
(including, without limitation, the terms, timing and closing of our proposed acquisitions or our future financial performance. We have attempted to identify forward-looking
statements by using terminology such as “anticipates,” “believes,” “expects,” “can,” “continue,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,”
“predict,” “should” or “will” or the negative of these terms or other comparable terminology. These statements are only predictions; uncertainties and other factors may cause
our actual results, levels of activity, performance or achievements to be materially different from any future results, levels or activity, performance or achievements expressed or
implied by these forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Our expectations are as of the date this Annual Report is filed, and we do not intend to update any of the forward-
looking statements after the date this Annual Report is filed to confirm these statements to actual results, unless required by law.
You should not place undue reliance on forward looking statements. The cautionary statements set forth in this Annual Report identify important factors which you should
consider in evaluating our forward-looking statements. These factors include, among other things:
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Our ability to effectively execute our business plan;
Our ability to manage our expansion, growth and operating expenses;
Our ability to protect our brands and reputation;
Our ability to repay our debts;
Our ability to rely on third-party suppliers outside of the United States;
Our ability to evaluate and measure our business, prospects and performance metrics;
Our ability to compete and succeed in a highly competitive and evolving industry; and
Our ability to respond and adapt to changes in technology and customer behavior.
This Annual Report on Form 10-K also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other industry
data. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. We have not independently verified the
statistical and other industry data generated by independent parties and contained in this Annual Report and, accordingly, we cannot guarantee their accuracy or completeness,
though we do generally believe the data to be reliable. In addition, projections, assumptions and estimates of our future performance and the future performance of the industries
in which we operate are necessarily subject to a high degree of uncertainty and risk due to a variety of factors. Our actual results could differ materially from those anticipated in
the forward-looking statements for many reasons, including, but not limited to, the possibility that we may fail to preserve our expertise in consumer product development; that
existing and potential distribution partners may opt to work with, or favor the products of, competitors if our competitors offer more favorable products or pricing terms; that
we may be unable to maintain or grow sources of revenue; that we may be unable maintain profitability; that we may be unable to attract and retain key personnel; or that we
may not be able to effectively manage, or to increase, our relationships with customers; that we may have unexpected increases in costs and expenses. These and other factors
could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
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ITEM 1. BUSINESS
Edison Nation: End-to-end product innovation, development and commercialization
PART I
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.
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 for the infant / toddler market under the Cloud b consumer brand name. 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.
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 mitigating new product development
risk while allowing for optimized product monetization based on a product’s likelihood to succeed.
To that end, Edison Nation empowers and enables innovators and entrepreneurs to develop and launch products, gain consumer adoption and achieve commercial scale
efficiently at little to no cost.
The 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.
Product Submission Aggregation
Interested innovators enter the Edison Nation web site to register for a free account by providing one’s name and email address. The member then creates a username and
password to use on the site. Once registered, the member is provided with their own unique, password protected dashboard by which they can begin submitting ideas and join
online member forums to learn about industry trends, common questions, engage in member chats, and stay informed of the latest happenings at Edison Nation. They can also
track the review progress of ideas they submit through their dashboard.
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Edison Nation accepts ideas through a secure online submission process. Once a member explores the active searches in different product categories being run on the platform
for potential licensees seeking new product ideas to be commercialized, the member can submit their new product ideas for processing. Edison Nation regularly works with
different companies and retailers in various product categories to help them find new product ideas.
Registered members pay $25 to submit an idea. This submission fee covers a portion of the cost to review each idea submitted to the platform. There are no additional fees after
the submission fee.
Although the platform might not have an active search that matches the innovator’s idea, the Edison Nation Licensing Team hosts an ongoing search for new consumer product
ideas in all categories.
“Insider Membership” is Edison Nation’s premium level of membership. Insiders receive feedback on all their ideas submitted and gain access to online features that aren't
available to registered members. In addition, Insiders pay $20 for each idea submitted (20% discount vs. a registered member), can opt-in ideas for free, as well as receive other
benefits. An annual membership costs $99, or $9.25 / month automatically debited from a credit card each month. Also included online is feedback to the innovator on the
status of each stage of the process and notification when ideas are not selected to move forward during any stage in the review process.
Insiders also have access to the Insider Licensing Program (the “ILP”). The primary benefit of the ILP is having the Edison Nation Licensing team working directly on an
innovator’s behalf to help secure a licensing agreement with one of the company’s manufacturing partners. If an idea is selected for commercialization by a retail partner, Edison
Nation will invest in any necessary patent applications, filings and maintenance. The innovator’s name is included on any patent or patent application that Edison Nation files on
the member’s behalf after the idea has been selected.
In addition to the above member programs, Edison Nation ASOTV (“As Seen on TV”) Team hosts a search for new products suitable for marketing via DRTV 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 Edison Nation platform, idea volume and
complexity of the search, how many presentation dates to licensees are pending, the date an idea is submitted, etc.
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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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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.
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.
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.
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.
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.
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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 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.
Crowdfunding
Edison Nation has established a commercialization path to include the development and management of crowdfunding campaigns. This is evolving to be a strong engine for
future growth.
The benefits of crowdfunding include increased product testing efficiency, decrease 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.
Edison Nation’s experience with crowdfunding is extensive and with significant success. To date, our crowdfunding strategic partner, Enventys, has executed approximately
600 crowdfunding campaigns with an estimated average revenue of up to $250,000 per campaign, with online consumer acquisition leading to such revenue lasting only 30
days. The average cost of a crowdfunding campaign run by Edison Nation is as low as approximately $25,000.
One recent example of a successful Kickstarter campaign run by the Company is last year’s introduction of the MasterSous, 8-in-1 Smart Cooker. This Wi-Fi-connected multi-
cooker can sous vide, deep fry, simmer, sear, sauté, boil, steam and slow cook while autonomously stirring food. The owner can use the MasterSous mobile app to remotely
adjust cooking times and control the automatic stirring mechanism that keeps food in constant motion for even cooking.
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The successful Kickstarter crowdfunding campaign for the 8-in-1 Smart Cooker resulted in approximately $200,000 in deferred revenue to Edison Nation (300%+ than
anticipated) from 738 backers. The 8-in-1 Smart Cooker product is now in production funded by the revenue gained (negative capital) in the Kickstarter campaign.
The product will be available to consumers in October 2019.
Manufacturing, Materials and Logistics
Once a product’s path to market is successfully identified, Edison Nation produces and commercializes the product either through (i) licensing partnerships, or (ii) 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 and one for the MasterSous kitchen appliance. 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
Edison Nation 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 and “crowd-funded” websites such as Kickstarter and Indiegogo.
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 three sources of sales volume:
· Member idea submission and ILP program fees: $25 per submission (registered members); $20 per submission (Insider members); $100 per submission (ILP members)
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Licensing agents: We match an innovator’s intellectual property with vertical product category leaders in a licensing structure whereby the innovator can earn up to 50%
of the contracted licensing fee. Product categories include kitchenware, small appliances, toys, pet care, baby products, health & beauty aids, entertainment venue
merchandise, and housewares.
Product principals: We work with innovators directly, providing such innovators direct access to all of Edison Nation’s resources. Depending on case-by-case factors,
innovators may receive a range of up to 35% - 50% of profits.
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Licensed product manufacturers: We work with licensing partners such as Disney, Marvel, Madison Square Garden and Universal Studios.
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:
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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.
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Immediate synergies 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.
Initial focus since acquisition has been to optimize existing product performance, while helping to develop new product lines leveraging the Edison Nation NPD platform.
Competition and Industry Background
In terms of the Company’s consumer products business, competition is intensifying due to trends towards shorter life cycles for the development, production and marketability
of consumer products. Competition is also intensifying due to the availability of online-only distributors, including Amazon.com, which can promote a wide variety of
consumer products and represent a wide variety of manufacturers at low cost and limited overhead.
Edison Nation’s competitive set includes other online inventor platforms (e.g., InventHelp, Quirky, Mako Design + Invent, Davison, and Invention City). Each of these
companies operate different types of business models that combine different consulting, development and service fees, and royalty structures.
Edison Nation was originally founded by the creators of the Emmy Award winning PBS television show, Everyday Edisons. One of the original founders, Louis Freeman, is
currently a member of the Edison Nation Inc. board of directors. The Company’s model differs significantly from others in the inventor space in that it assumes the considerable
financial risk, manpower and time required to monetize a product, from concept selection through sale. A portion of the commercialized product’s net profit is shared with the
inventor through a variety of forms of licensing agreements.
The Company also competes with large manufacturing companies who develop and commercialize their own products in categories in which Edison Nation currently
participates. However, we also are increasing the Company’s “co-op-etition” footprint with companies, like Black & Decker, who not only compete in product development but
also have become active “cooperative” participants on the Edison Nation online innovation platform.
Customers
We sell our products to a diverse network of customers. Domestically, we sell our products to specialty retailers, mass-market retailers and e-commerce sites. Internationally, we
sell our products directly to similar retailers and distributors. One customer, Walt Disney World, represented 21% and 31% of our revenues for 2018 and 2017, respectively.
Intellectual Property
We believe that Edison Nation’s intellectual property rights have significant value in the marketplace, and that in order to maintain a competitive advantage in the marketplace,
that we must continue to develop and maintain the proprietary aspects of our technologies. We rely on a combination of patent, trademark, trade secret, copyright and other
intellectual property rights and measures to protect our intellectual property.
We seek protection on our products in as many countries as practical, through registered trademarks, copyrights and patents to the extent that such protection is available, cost
effective and valuable to our products and brands. We also rely on other forms of intellectual property rights and measures, including trade secrets and nondisclosure
agreements, to maintain and protect proprietary aspects of our products and technologies. We require our employees and consultants to execute confidentiality agreements in
connection with their employment or consulting relationships with us. We also require our employees and consultants to disclose and assign to us all inventions conceived
during the term of their employment or engagement which relate to our business.
Although we believe we are sufficiently protected, the failure to obtain or the loss of some of these intellectual property rights could have an adverse effect on our business,
financial condition and results of operations.
11
Seasonality
The consumer products business is highly seasonal with consumers making a large percentage of purchases during the traditional holiday season.
These seasonal purchasing patterns and requisite production lead times create risk to our business associated with the underproduction of popular consumer products and the
overproduction of less popular consumer products that do not match consumer demand.
These factors increase the risk that the Company may not be able to meet demand for certain products at peak demand times or that our own inventory levels may be adversely
impacted by the need to pre-build products before orders are placed. Additionally, as retailers manage their inventories, we may experience cyclical ordering patterns for
products and product lines that may cause our sales to vary significantly from period to period.
E-commerce has partially reduced traditional seasonality to moderate seasonality. We intend to expand this flattening of traditional seasonality from e-commerce channels to
our business as well, including through the continued emergence of crowd-funded “micro brands” that we believe will further delink demand for our products and services from
historical demand fluctuation.
Government Regulations and Environmental Quality
Our products sold in the United States are subject to the provisions of the Consumer Product Safety Act, as amended by the Consumer Product Safety Improvement Act of 2008,
the Federal Hazardous Substances Act, and the Consumer Product Safety Improvement Act of 2008, and may also be subject to the requirements of the Flammable Fabrics Act
or the Food, Drug, and Cosmetics Act and the regulations promulgated pursuant to such statutes. These statutes and the related regulations ban from the market consumer
products that fail to comply with applicable product safety laws, regulations, and standards. The Consumer Product Safety Commission may require the recall, repurchase,
replacement, or repair of any such banned products or products that otherwise create a substantial risk of injury and may seek penalties for regulatory noncompliance under
certain circumstances. Similar laws exist in some states. We believe that we are in substantial compliance with these laws and regulations. Our products sold worldwide are
subject to the provisions of similar laws and regulations in many jurisdictions, including the European Union and Canada. We believe that we are in substantial compliance with
these laws and regulations.
We maintain a quality control program to help ensure compliance with applicable product safety requirements. Nonetheless, we may in the future experience, issues in products
that result in recalls, withdrawals, or replacements of products. A product recall could have a material adverse effect on our results of operations and financial condition,
depending on the product affected by the recall and the extent of the recall efforts required.
Our advertising is subject to the Federal Trade Commission Act, The Children’s Television Act of 1990, the rules and regulations promulgated by the Federal Trade
Commission, and the Federal Communications Commission, as well as laws of certain countries that regulate advertising and advertising to children. In addition, our web-based
products and services and other online and digital communications activity are or may be subject to US and foreign privacy-related regulations, including the US Children’s
Online Privacy Protection Act of 1998 and the EU Data Protection Directive (Directive 95/46/EC) and related national regulations. We believe that we are in substantial
compliance with these laws and regulations.
Our worldwide operations are subject to the requirements of various environmental laws and regulations in the jurisdictions where those operations are located. We believe that
we are in substantial compliance with these laws and regulations. Our operations are from time to time the subject of investigations, conferences, discussions, and negotiations
with various federal, state and local environmental agencies within and outside the United States with respect to the discharge or cleanup of hazardous waste. We are not aware
of any material cleanup liabilities.
Furthermore, we are subject to various other federal, state, local and international laws and regulations applicable to its business. We believe that we are in substantial
compliance with these laws and regulations.
Employees
As of December 31, 2018, we had 54 total employees, 52 of whom were full-time employees. None of our employees are represented by a union or parties to a collective
bargaining agreement. We believe our employee relations to be in good standing.
12
Our History
We were incorporated on July 18, 2017 under the laws of the State of Nevada as Idea Lab X Products, Inc. We changed our name to Xspand Products Lab, Inc. on September
12, 2017, and again to Edison Nation, Inc. on September 7, 2018.
As of December 31, 2018, Edison Nation, Inc. had five wholly owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Ferguson Containers, Inc. (“Fergco”), CBAV1,
LLC (“CB1”), Pirasta, LLC, and Edison Nation Holdings, LLC. Edison Nation, Inc. owns 72.15% of Cloud B, Inc. and 50% of Best Party Concepts, LLC. Additionally Edison
Nation Holdings, LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single member of Safe TV Shop, LLC. Cloud B,
Inc. owns 100% of Cloud B UK and Cloud B Australia.
On September 30, 2017, SRM and Fergco were acquired by the Company in exchange for an aggregate of 3,000,000 shares of the Company common stock and notes payable
aggregating $2,996,500. This transaction between entities under common control resulted in a change in reporting entity and required retrospective combination of the entities
for all periods presented, as if the combination had been in effect since the inception of common control. Accordingly, the consolidated financial statements of the Company
reflect the accounting of the combined acquired subsidiaries at historical carrying values, except that equity reflects the equity of the Company.
On May 2, 2018, we completed our IPO raising $6,562,600 in gross proceeds. The Company received approximately $5,315,176 in net proceeds after deducting discounts and
commissions and other offering expenses.
On May 14, 2018, we formed CB1 under the laws of the State of Nevada. CB1 was formed for the purpose of purchasing a promissory note from a bank, at a discount from face
value, of a company in financial difficulty. As such, CB1 does not currently have operations, only holds the foregoing note.
On September 4, 2018, the Company completed the acquisition of all of the voting membership interest of Edison Nation Holdings, LLC for a total purchase price of
$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, 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 Edison Nation 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.
On October 29, 2018, the Company entered into a Stock Purchase Agreement with a majority of the stockholders (the “Cloud B Sellers”) of Cloud B, Inc., a California
corporation (“Cloud B”). Pursuant to the terms of such Stock Purchase Agreement, the Company purchased 72.15% of the outstanding capital stock of Cloud B in exchange for
489,293 shares of restricted common stock of the Company. In addition, the Company entered into an Earn Out Agreement with the Cloud B Sellers, whereby, beginning in
2019, the Company will pay the Cloud B Sellers an annual amount equal to 8% multiplied by the incremental gross sales of Cloud B over its 2018 gross sales level (the “Earn
Out Agreement”). The Earn Out Agreement expires on December 31, 2021.
Segment Information
We identify our reportable segments according to how the business activities are managed and evaluated, for which discrete financial information is available and is regularly
reviewed by our Chief Operating Decision Maker (“CODM”), Christopher B. Ferguson, to allocate resources and assess performance.
In the fourth quarter of 2018, we revised our reportable segments in connection with the acquisition of Edison Nation Holdings, LLC and Cloud B, Inc. In connection with both
of these acquisitions and our existing business the Company will be a vertically-integrated, end-to-end, consumer product research and development, manufacturing, sales and
fulfillment company. The CODM reviews financial performance and allocates resources at a consolidated level on a regular basis, therefore we have determined we have one
reportable segment consisting of multiple product offerings.
13
Corporate Information
Our principal executive offices are located at 909 New Brunswick Avenue, Phillipsburg, New Jersey 08865. Our telephone number is (610) 829-1039.
Available Information
Our website, www.edisonnation.com, provides access, without charge, to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission (“SEC”). The
information provided on our website is not part of this Annual Report and is therefore not incorporated by reference unless such information is otherwise specifically referenced
elsewhere in this Annual Report. The SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding
our company that we file electronically with the SEC.
ITEM 1A. RISK FACTORS
Not applicable to smaller reporting companies.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The following table summarizes pertinent details of our properties as of December 31, 2018:
Location
909 New Brunswick Avenue
Phillipsburg, NJ 08865
20 Industrial Road
Alpha, NJ 08865
520 Elliot Street, Charlotte, NC 28202
660 West Fairbanks Avenue, Suite 1
Winter Park, FL 32789
532 Durham Road, Suite 101A
Newtown, PA 18940
500 Fifth Avenue, Suite 2240
New York, NY 10110
150 West Walnut Street
Gardena, CA
51 South Lincoln Avenue
Washington, NJ 07882
Penninsula Centre
67 Mody Road, 11th Floor Room 1112
Tsimshatsui East, Kowloon, Hong Kong
Owned or Leased
Lease Expiration
Type of Property
Leased
Leased
Leased
Leased
Leased
Leased
Leased
Owned
Leased
Month-to-Month
Principal Executive Office
Month-to-Month
Packaging and Logistics Center
Month-to-Month
September 30, 2020
Office Space
Office Space
May 31, 2020
Office Space
Month-to-Month
Office Space
October 31, 2021
Office Space
N/A
Rental Property
August 7, 2020
Office Space
We believe that our facilities are adequate for our needs for the foreseeable future and believe that we should be able to renew any of the above leases or secure similar property
without an adverse impact on our operations.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is party to legal actions that are routine and incidental to its business. However, based upon available information and in consultation with
legal counsel, management does not expect the ultimate disposition of any or a combination of these actions to have a material adverse effect on the Company’s assets, business,
cash flow, condition (financial or otherwise), liquidity, prospects and\or results of operations.
14
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
On May 3, 2018, our common stock began trading on the Nasdaq under the symbol of “XSPL” and was subsequently changed to “EDNT” on September 13, 2018. Prior to May
3, 2018, there was no public market for our stock.
Holders of Record
The Company had approximately 337 holders of record of our common stock as of March 29, 2019.
Dividends
We have not historically declared dividends on our common stock and we do not currently intend to pay dividends on our common stock. The declaration, amount and payment
of any future dividends on shares of our common stock, if any, will be at the sole discretion of our board of directors.
Securities Authorized for Issuance under Equity Compensation Plans
Plan Category
Equity compensation plans approved by
stockholders (1)(2)
Equity compensation plans not approved by
stockholders (1)
Total
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a)
Weighted-average
exercise price of
outstanding options,
warrants and rights
(b)
290,000 $
— $
290,000 $
15
Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c)
5.55
—
5.55
1,474,705
—
1,474,705
(1) The information presented in this table is as of December 31, 2018.
(2) We originally adopted the Edison Nation, Inc. Omnibus Incentive Plan (the “Plan”) in December 2017, which provides for up to 1,764,705 shares of our common stock to be
issued as stock-based incentives. Stock incentive awards under the Plan can be in the form of stock options, restricted stock units, performance awards and restricted stock
that are made to employees, directors and service providers. Awards are subject to forfeiture until vesting conditions have been satisfied under the terms of the award. We
believe awards to our executive officers help align the interests of management and our stockholders and reward our executive officers for improved Company performance.
Recent Sales of Unregistered Securities; Uses of Proceeds from Registered Securities
The following shares were issued and restricted under Rule 144 of the Exchange Act:
On May 4, 2018, we issued 13,500 shares of our common stock valued at $67,500 related to the borrowing of funds under a note payable; on May 8, 2018, we issued 61,900
shares of our common stock valued at $306,000 to various employees; on August 17, 2018, we issued 50,000 shares of our common stock valued at $250,000 to a consultant
for services provided; on August 23, 2018, we issued 20,000 shares of our common stock valued at $100,000 related to the borrowing of funds under a note payable; on
September 4, 2018, we issued 557,084 shares of our common stock valued at $3,384,285 related to the acquisition of Edison Nation Holdings, LLC; on September 10, 2018,
we issued 20,000 shares of our common stock valued at $100,000 to a consultant for services performed; on September 20, 2018, we issued 5,000 shares of our common stock
valued at $25,000 to a consultant for services performed; on October 23, 2018, we issued 10,000 shares of our common stock valued at $50,000 to a consultant for services
performed; on November 6, 2018, we issued 2,000 shares of our common stock valued at $10,000 to a consultant for services performed; on December 21, 2018, we issued
50,000 shares of our common stock valued at $251,000 to a consultant for services performed; on December 27, 2018, we issued 489,293 shares of our common stock valued
at $2,664,200 related to the acquisition of Cloud B, Inc.; on December 27, 2018, we issued 18,797 shares of our common stock valued at $100,000 to a consultant for services
performed; on December 27, 2018, we issued 41,736 shares of our common stock valued at $250,000 to 2 employees; and on December 28, 2018, we issued 3,000 shares of
our common stock valued at $15,000 to a consultant for services performed.
Use of Proceeds
None.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
None.
ITEM 6. SELECTED FINANCIAL DATA
Not required for smaller reporting company.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes
thereto included elsewhere in this Annual Report. This discussion and analysis contains forward-looking statements that are based upon current expectations and involve risks,
assumptions and uncertainties.
Overview
Edison Nation is a vertically-integrated, end-to-end, consumer product research & development, manufacturing, sales and fulfillment company. The Company’s proprietary
web-enabled platform provides a low risk, high reward platform and process to connect innovators of new product ideas with potential licensees.
As of December 31, 2018, Edison Nation, Inc. had five wholly owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Ferguson Containers, Inc. (“Fergco”), CBAV1,
LLC (“CB1”), Pirasta, LLC, and Edison Nation Holdings, LLC. Edison Nation, Inc. owns 72.15% of Cloud B, Inc. and 50% of Best Party Concepts, LLC. Edison Nation
Holdings, LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single member of Safe TV Shop, LLC. Cloud B, Inc. owns
100% of Cloud B UK and Cloud B Australia.
Summary
On May 2, 2018, we completed our IPO raising $6,562,600 in gross proceeds. The Company received approximately $5,315,176 in net proceeds after deducting discounts and
commissions and other offering expenses.
16
Factors Which May Influence Future Results of Operations
The following is a description of factors which 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 Edison Nation Holdings, LLC 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, 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 Edison Nation 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 a majority of the stockholders (the “Cloud B Sellers”) of Cloud B, Inc., a California
corporation (“Cloud B”). Pursuant to the terms of such Stock Purchase Agreement, the Company purchased 72.15% of the outstanding capital stock of Cloud B in exchange for
489,293 shares of restricted common stock of the Company. In addition, the Company entered into an Earn Out Agreement with the Cloud B Sellers, whereby, beginning in
2019, the Company will pay the Cloud B Sellers an annual amount equal to 8% multiplied by the incremental gross sales of Cloud B over its 2018 gross sales level. The Earn
Out Agreement expires on December 31, 2021.
Operating Lease
On October 1, 2018, the Company entered into a lease for office space in Winter Park, Florida which expires on September 30, 2020. Monthly lease payments are
approximately $1,887 for a total of approximately $45,288 for the total term of the lease.
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. In addition, the chair of each of the board’s committees shall receive an annual committee
meeting fee of $5,000.
Executive Compensation Agreements
On September 26, 2018, the Company entered into written employment agreements with Christopher B. Ferguson, its Chief Executive Officer, and Philip Anderson, its Chief
Financial Officer and Corporate Secretary (each, an “Employment Agreement”). The Company has generally employed its executive officers “at will” and did not previously
have written employment agreements with Messrs. Ferguson and Anderson.
Mr. Ferguson’s Employment Agreement provides for a term of 3 years terminable at will by either party, an annual base salary of $175,000 per year and an annual discretionary
bonus of up to 100% of his base salary based on performance criteria determined by the Company’s board of directors. Mr. Ferguson will also receive the normal benefits
available to the Company’s executives. If Mr. Ferguson’s employment is terminated by the Company without Cause (as defined in Mr. Ferguson’s Employment Agreement) or
by Mr. Ferguson as a result of a material breach by the Company, Mr. Ferguson will be entitled to payment of an amount equal to 6 months of his base salary and continuation
of benefits for 6 months following the termination. Mr. Ferguson’s Employment Agreement also contains certain restrictive covenants, including indefinite confidentiality, a one
year restriction from directly or indirectly owning or participating in a Competing Business (as defined in Mr. Ferguson’s Employment Agreement), and an 18-month restriction
on solicitation of employees, customers, and suppliers of the Company.
17
Mr. Anderson’s Employment Agreement provides for a term of 3 years terminable at will by either party, an annual base salary of $250,000 per year and an annual
discretionary bonus of up to 100% of his base salary based on performance criteria determined by the Board. Mr. Anderson will also receive the normal benefits available to the
Company’s executives. Under Mr. Anderson’s Employment Agreement and pursuant to the Company’s employee stock option program, the Company confirmed that it had
previously granted Mr. Anderson options to purchase 210,000 shares of Common Stock at an exercise price equal to $5.00 per share (the “Anderson Options”). The Anderson
Options vest according to the vesting schedule set forth in the Non-Qualified Option Agreement described therein. If Mr. Anderson’s employment is terminated by the
Company without Cause (as defined in Mr. Anderson’s Employment Agreement) or by Mr. Anderson as a result of a material breach by the Company, Mr. Anderson will be
entitled to payment of an amount equal to 6 months of his base salary and continuation of benefits for 6 months following the termination. Mr. Anderson’s Employment
Agreement also contains certain restrictive covenants, including indefinite confidentiality, a one year restriction from directly or indirectly owning or participating in a
Competing Business (as defined in Mr. Anderson’s Employment Agreement), and an 18-month restriction on solicitation of employees, customers, and suppliers of the
Company.
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 Annual Report.
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.
18
Results of Operations
Year Ended December 31, 2018 versus Year Ended December 31, 2017
The following table sets forth information comparing the components of net (loss) income for the years ended December 31, 2018 and 2017:
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative
Operating (loss) income
Other (expense) income:
Rental income
Interest (expense) income
Total other (expense) income
(Loss) income before income taxes
Income tax expense (benefit)
Net (loss) income
Net (loss) income attributable to noncontrolling interests
Net (loss) income attributable to Edison Nation, Inc.
Revenue
Years Ended December 31,
2017
2018
Period over Period Change
$
%
$
$
16,502,209
11,425,619
5,076,590
14,960,450 $
11,017,625
3,942,825
1,541,759
407,994
1,133,765
9,718,286
(4,641,696)
2,379,104
1,563,721
7,339,722
(6,205,417)
102,815
(501,221)
(398,406)
(5,040,102)
303,915
(5,344,017)
(13,891)
(5,330,126) $
102,815
-
102,815
1,666,536
133,105
1,533,431
-
1,533,431 $
-
(501,221)
(501,221)
(6,706,638)
170,810
(6,877,448)
(13,891)
(6,863,557)
$
10.3%
3.7%
28.8%
308.5%
-396.8%
0.0%
na
-487.5%
-402.4%
128.3%
-448.5%
na
-447.6%
For the year ended December 31, 2018, revenues increased by $1,541,759 or 10.3%, as compared to the year ended December 31, 2017. The increase was primarily attributable
to new business in connection with our acquisitions in 2018. The increase includes licensing related revenues of $267,920 related to our acquisition of Edison Nation Holdings,
LLC and product revenues of $1,512,328 related to our acquisition of Cloud B, Inc.
Cost of Revenues
For the year ended December 31, 2018, cost of revenues increased by $407,994 or 3.7%, as compared to the year ended December 31, 2017. The increase was primarily
attributable to the increase in total consolidated revenues. The percentage increase of cost of revenues as compared to the revenue increase was lower due to increases in
licensing related revenues of $267,920 and service related revenue of $197,068 due to our acquisitions in 2018.
Gross Profit
For the year ended December 31, 2018, gross profit increased by $1,133,765, or 28.8%, as compared to the year ended December 31, 2018. The increase was primarily a result
of the increase in revenues. For the year ended December 31, 2018, gross margin increased to 30.8%, as compared to 26.4% for the year ended December 31, 2017. The
increase is primarily a result of the increase in licensing and service revenues.
Operating Expenses
Selling, general and administrative expenses were $9,718,065 and $2,383,104 for the year ended December 31, 2018 and 2017, respectively, representing an increase of
$7,334,961, or 307.8%. The increase was primarily attributable to stock-based compensation expense of $3,248,166 ($3,386,494 reported in additional paid in capital includes
$251,000 for issuance of stock for prepaid investor relations offset by $112,672 for the change in fair value of liability classified awards) of which $1,721,250, related to the
assumption of certain consulting agreements which were satisfied by the principal stockholder of SRM transferring 344,250 shares to the consultants, stock-based compensation
expense of $304,745 related to the issuance of 290,000 options granted to employees, other non-cash stock charges of $559,499 and $550,000 related to the issuance of
common stock to employees and consultants for services performed, respectively, and $112,673 of stock-compensation related to liability classified awards. Other costs include
new operating expenses in connection with the acquisitions in 2018 of $1,069,323, payroll related costs of $1,037,690 due to increased headcount, professional fees of
$1,022,614, investor relations costs of $326,500, travel costs of $225,542, and other indirect costs incurred related to the the Company’s Regulation A initial public offering
(“IPO”). The Company expects operating expenses to continue to increase as a public company and due to the Company’s expected future growth.
Rental Income
Rental income was $102,815 for both the years ended December 31, 2018 and 2017.
19
Interest expense
Interest expense was $501,221 for the year ended December 31, 2018 versus none in the previous year ended December 31, 2017. The increase in interest expense was related
to increased borrowings of debt during 2018.
Income tax expense
Income tax expense was $303,915 for the year ended December 31, 2018, an increase of $170,810 or 128.3%, compared to $133,105 for the year ended December 31, 2017.
The increase was primarily due to the increase in income from our foreign operations with no offset for income in the United States.
Non-GAAP Measures
EBITDA and Adjusted EBITDA
The Company defines EBITDA as net income (loss) before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA as EBITDA, further
adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in our evaluation of our ongoing operating performance from period to
period. These items will include stock-based compensation, restructuring and severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains
that the Company does not believe reflects the underlying business performance.
For the years ended December 31, 2018 and 2017, EBITDA and Adjusted EBITDA consisted of the following:
Net (loss) income
Interest expense, net
Income tax expense
Depreciation and amortization
EBITDA
Stock-based compensation
Other noncash stock-based charges
Restructuring and severance costs
Transaction and acquisition costs
Other non-recurring costs
Adjusted EBITDA
For the Years Ended
December 31,
2018
2017
$
(5,330,126) $
1,428,381
501,221
303,915
487,878
(4,050,990)
2,025,994
1,222,172
148,167
689,103
62,686
97,132 $
(3,671)
64,655
152,990
1,642,355
-
-
-
-
-
1,642,355
$
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.
20
Liquidity and Capital Resources
For the year ended December 31, 2018, our operations lost approximately $4,600,000 of which approximately $3,700,000 was non-cash and approximately $900,000 related to
transaction costs and non-recurring items.
At December 31, 2018, we had total current assets of $5,465,484 and current liabilities of $8,878,936 resulting in negative working capital of $3,413,452, of which
approximately $3,800,000 related to unsecured trade payables assumed in our Cloud B acquisition. In February 2019, our consolidating subsidiary, CBAV1, LLC, foreclosed
on its promissory note it held that was secured by Cloud B, Inc.’s assets making any payments of the Cloud B trade payables unlikely. At December 31, 2018, we had total
assets of $28,888,588 and total liabilities of $12,948,949 resulting in stockholders’ equity of $15,939,639.
At December 31, 2018, we had $4,425,685 of outstanding notes payable due to our related parties of which $932,701 was the current portion. These notes arose as part of the
consideration paid in our acquisition of SRM, Fergco and Edison Nation.
On May 2, 2018, we completed our IPO raising $6,562,600 in gross proceeds. The Company received approximately $5,315,176 in net proceeds after deducting discounts and
commissions and other offering expenses. At December 31, 2018, we had a cash and cash equivalents balance of $2,052,731. The Company believes that the funds available to
it are adequate to meet its working capital needs, debt service and capital requirements for the next 12 months from the date of this filing.
Management has considered possible mitigating factors within our management plan on our ability to continue for at least a year from the date these financial statements are
filed. The following items are management plans to alleviate any going concern issues:
·
·
·
·
·
Raise further capital through the sale of addition equity
Borrow money under debt securities.
The deferral of payments to related party debt holders for both principal of $932,701 and related interest expense ($239,885 in 2018).
Cost saving initiatives related to synergies and the elimination of redundant costs of approximately $500,000
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 years ended December 31, 2018 and 2017, our sources and uses of cash were as follows:
Cash Flows from Operating Activities
Net cash used in operating activities for the year ended December 31, 2018 was $2,776,003 which included a net loss of $5,344,017 that included $1,512,050 of cash used by
changes in operating assets and liabilities which was offset by stock-based compensation of $3,386,494, depreciation and amortization of $455,799 and amortization of debt
issuance costs of $300,277 Net cash provided by operating activities for the year ended December 31, 2017 was $1,086,601, which included cash provided by net income of
$1,428,381, which was partially offset by $499,545 of cash used in changes in operating assets and liabilities.
Cash Flows from Investing Activities
Net cash used in investing activities was $1,414,021 and $39,151 for the years ended December 31, 2018 and 2017, respectively. Cash used in investing activities was mostly
attributable to the acquisition of Edison Nation Holdings, LLC net of cash acquired from all acquisition completed in 2018 and the purchase of a loan held for investment for
$500,000 and the purchase of property and equipment of $141,440.
Cash Flows from Financing Activities
Cash provided by financing activities for the years ended December 31, 2018 totaled $5,685,487 which related mostly to cash received of $5,315,176 from net proceeds from
the Company’s initial public offering and net borrowings of $469,755 under our debt instruments. Cash used in financing activities for the years ended December 31, 2017 was
$3,029,720 which related to the payment of dividends.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018 and 2017
Consolidated Statement of Changes in Stockholders’ Equity (Deficit) for the years ended December 31, 2018 and 2017
Consolidated Statements of Cash Flows for the years ended December 31, 2018 and 2017
Notes to Consolidated Financial Statements
22
Page
Number
23
24
25
26
27
28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Edison Nation, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) (the “Company”) as of December 31,
2018 and 2017 , the related consolidated statements of operations , stockholders’ equity (deficit) and cash flows for each of the two years in the period ended December 31,
2018, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the two years in the period ended December 31,
2018, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
/s/ Marcum LLP
Marcum llp
We have served as the Company’s auditor since 2017.
New York, NY
April 16, 2019
23
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
2018
December 31,
2017
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Inventory
Prepaid expenses and other current assets
Due from related party
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Total assets
Liabilities and stockholders' equity (deficit)
Current liabilities:
Accounts payable
Accrued expenses and other current liabilities
Deferred revenues
Income tax payable
Line of credit, net of debt issuance costs of $30,000
Current portion of long-term debt
Current portion of long-term debt – related parties
Due to related party
Total current liabilities
Contingent consideration
Long-term senior convertible debt – related parties, net of debt discount of $466,667 related to the conversion feature
Long-term debt, net of current portion
Long-term debt – related parties, net of current portion
Deferred tax liability
Total liabilities
Commitments and contingencies (Note 10)
Stockholders' equity (deficit)
Common stock, $0.001 par value, 250,000,000 shares authorized; 5,654,830 and 3,000,000 shares issued and outstanding as
of December 31, 2018 and 2017, respectively
Additional paid-in-capital
Accumulated deficit
Total stockholders’ equity (deficit) attributable to Edison Nation, Inc.
Noncontrolling interests
Total stockholders’ equity
Total liabilities and stockholders’ equity (deficit)
$
$
$
$
$
$
2,052,731 $
1,877,351
923,707
611,695
-
5,465,484
998,863
12,687,731
9,736,510
28,888,588 $
5,519,159 $
1,135,551
175,956
129,511
531,804
313,572
932,701
140,682
8,878,936
520,000
961,494
56,688
2,531,490
341
12,948,949 $
5,655 $
20,548,164
(5,565,756)
14,988,063
951,576
15,939,639
28,888,588 $
557,268
1,430,236
240,061
41,461
834,897
3,103,923
966,904
-
-
4,070,827
1,135,039
80,964
-
56,745
-
-
225,553
-
1,498,301
-
-
2,770,947
-
34,209
4,303,457
3,000
-
(235,630)
(232,630)
-
(232,630)
4,070,827
The accompanying notes are an integral part of these consolidated financial statements.
24
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative
Operating (loss) income
Other (expense) income:
Rental income
Interest (expense) income
Total other (expense) income
(Loss) income before income taxes
Income tax expense
Net (loss) income
Net (loss) income attributable to noncontrolling interests
Net (loss) income attributable to Edison Nation, Inc.
Net (loss) income per share - basic and diluted
Weighted average number of common shares outstanding – basic and diluted
Years Ended December 31,
2018
2017
$
16,502,209 $
11,425,619
5,076,590
14,960,450
11,017,625
3,942,825
9,718,286
(4,641,696)
102,815
(501,221)
(398,406)
(5,040,102)
303,915
(5,344,017) $
(13,891)
(5,330,126)
(1.28) $
4,157,054
2,379,104
1,563,721
102,815
-
106,815
1,666,536
133,105
1,533,431
-
1,533,431
0.51
3,000,000
$
$
The accompanying notes are an integral part of these consolidated financial statements.
25
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
Common Stock
Shares
Amount
Additional
Paid-in
Capital
Accumulated Noncontrolling
Deficit
Interest
Total
Stockholders’
Equity
Balance, December 31, 2016
3,000,000 $
3,000 $
746,526 $
514,133 $
- $
1,263,659
Dividends
Net income
Balance, December 31, 2017
-
-
3,000,000
-
-
3,000
(746,526)
-
-
(2,283,194)
1,533,431
(235,630)
Sale of common stock – investors in the IPO, net of offering costs of
$1,247,424
Issuance of common stock to employees
Issuance of common stock to note holders
Issuance of common stock to vendors for services
Acquisition of Edison Nation Holdings, LLC – issuance of common
stock to satisfy indebtedness
Acquisition of Cloud B, Inc. – issuance of common stock
Acquisition of Cloud B, Inc. – noncontrolling interest
Acquisition of Best Party Concepts, LLC – deemed distribution and
noncontrolling interest
Acquisition of Pirasta, LLC – deemed distribution
Beneficial conversion option on indebtedness related to acquisition of
Edison Nation Holdings, LLC
Shares reserved for future issuance of common stock to sellers of Edison
Nation Holdings, LLC
Stock-based compensation
1,312,520
103,636
33,500
158,797
1,313 5,313,863
559,395
167,467
800,841
104
33
159
557,084
489,293
-
557 3,383,728
489 2,663,711
-
-
-
-
-
-
-
-
(692,533)
(188,552)
-
500,000
- 6,014,250
-
-
-
-
-
-
-
(3,029,720)
1,533,431
(232,630)
5,315,176
559,499
167,500
801,000
-
-
1,158,000
3,384,285
2,664,200
1,158,000
(192,533)
-
(885,066)
(188,552)
-
500,000
-
6,014,250
-
-
-
-
-
-
-
-
-
-
-
Net loss
Balance, December 31, 2018
-
-
5,654,830 $
-
- 2,025,994
(5,330,126)
-
-
5,655 $ 20,548,164 $ (5,565,756) $
2,025,994
-
(13,891)
(5,344,017)
951,576 $ 15,939,639
The accompanying notes are an integral part of these consolidated financial statements.
26
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2017
2018
Cash Flow from Operating Activities
Net (loss) income attributable to Edison Nation, Inc.
Net loss attributable to noncontrolling interests
Net (loss) income
Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
Depreciation and amortization
Amortization of financing costs
Stock-based compensation
Deferred taxes
Changes in assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Accounts payable
Accrued expenses and other current liabilities
Due from related party
Net cash (used in) provided by operating activities
Cash Flows from Investing Activities
Purchases of property and equipment
Acquisitions, net of cash
Purchase of loan held for investment
Net cash used in investing activities
Cash Flows from Financing Activities
Borrowings under line of credit
Borrowings under long-term debt
Repayments under long-term debt
Repayments under long-term debt – related parties
Net proceeds from sale of common stock
Fees paid for financing costs
Dividends paid
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of year
Cash and cash equivalents - end of year
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest
Income taxes
Shares issued to note holders
Shares issued for the acquisition of Edison Nation Holdings, LLC
Shares issued for the acquisition of Cloud B, Inc.
Shares reserved in exchange for the cancellation of certain non-voting membership interests related to acquisition of Edison
Nation Holdings, LLC
Borrowings under note payable for the purchase of property and equipment
Issuance of 4%, 5 year senior convertible notes for the acquisition of Edison Nation Holdings, LLC, net of debt discount for
conversion feature
Earnout for acquisition of Cloud B, Inc.
Satisfaction of due from related party for acquisition of Best Party Concepts, LLC
Deemed distribution to shareholder for acquisition of Best Party Concepts, LLC
Satisfaction of due from related party for acquisition of Pirasta, LLC
Deemed distribution to shareholder for acquisitions of Pirasta, LLC
The accompanying notes are an integral part of these consolidated financial statements.
27
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(5,330,126) $
(13,891)
(5,344,017)
487,878
300,277
3,386,493
(33,868)
590
59,309
(353,440)
(1,408,184)
636,881
(507,922)
(2,776,003)
(141,440)
(772,581)
(500,000)
(1,414,021)
531,804
718,559
(648,299)
(132,309)
5,315,176
(99,444)
-
5,685,487
1,495,463
557,268
2,052,731 $
103,865 $
265,015 $
167,500 $
3,384,285 $
2,664,200 $
6,014,250 $
73,559 $
1,428,161 $
520,000 $
500,000 $
692,533 $
470,000 $
188,552 $
1,533,431
-
1,533,431
188,283
-
-
28,399
68,469
(75,550)
693
291,615
23,347
(967,301)
1,091,386
(39,151)
-
(39,151)
-
-
-
-
-
(3,029,720)
(3,029,720)
(1,977,485)
2,534,753
557,268
-
64,465
-
-
-
-
-
-
-
-
-
-
-
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
As used herein, the terms the “Company,” “Edison Nation” “we,” “us,” “our” and similar refer to Edison Nation, Inc., a Nevada corporation incorporated on July 18, 2017 under
the laws of the State of Nevada as Idea Lab X Products, Inc. and also formerly known as Xspand Products Lab, Inc. prior to its name change on September 12, 2018, and/or its
wholly-owned and majority-owned operating subsidiaries, and/or where applicable, its management.
Edison Nation is a vertically-integrated, end-to-end, consumer product research & development, manufacturing, sales and fulfillment company. The Company’s proprietary
web-enabled platform provides a low risk, high reward platform and process to connect innovators of new product ideas with potential licensees.
As of December 31, 2018, Edison Nation, Inc. had five wholly-owned subsidiaries: S.R.M. Entertainment Limited (“SRM”), Ferguson Containers, Inc. (“Fergco”), CBAV1,
LLC (“CB1”), Pirasta, LLC and Edison Nation Holdings, LLC. Edison Nation, Inc. owns 72.15% of Cloud B, Inc. and 50% of Best Party Concepts, LLC. Edison Nation
Holdings, LLC is the single member of Edison Nation, LLC and Everyday Edisons, LLC. Edison Nation, LLC is the single member of Safe TV Shop, LLC. Cloud B, Inc. owns
100% of Cloud B UK and Cloud B Australia.
On February 14, 2018, the Company effected a one-for-3.333333 reverse stock split of its issued and outstanding shares of common stock. All share information has been
retroactively restated to reflect the aforementioned reverse stock split.
Liquidity
For the year ended December 31, 2018, our operations lost approximately $4,600,000 of which approximately $3,700,000 was non-cash and approximately $900,000 related to
transaction costs and non-recurring items.
At December 31, 2018, we had total current assets of $5,465,484 and current liabilities of $8,878,936 resulting in negative working capital of $3,413,452, of which
approximately $3,800,000 related to unsecured trade payables assumed in our Cloud B acquisition. In February 2019, our consolidating subsidiary, CBAV1, LLC, foreclosed
on its promissory note it held that was secured by Cloud B, Inc.’s assets making any payments of the Cloud B trade payables unlikely. At December 31, 2018, we had total
assets of $28,888,588 and total liabilities of $12,948,949 resulting in stockholders’ equity of $15,939,639.
The foregoing factors raised substantial doubt 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.
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:
·
·
·
·
·
Raise further capital through the sale of addition equity
Borrow money under debt securities.
The deferral of payments to related party debt holders for both principal of $932,701 and related interest expense ($239,885 in 2018).
Cost saving initiatives related to synergies and the elimination of redundant costs of approximately $500,000
Possible sale of certain brands to other manufacturers.
Note 2 — Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of Edison Nation, Inc. and its wholly-owned and majority owned subsidiaries. The accompanying consolidated
financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are presented in US
dollars. All intercompany balances and transactions have been eliminated.
Reclassifications
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no
effect on the previously reported net loss, shareholders’ equity or cash flows.
Use of Estimates
Preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the reported amounts of
assets, liabilities, revenues and expenses, together with amounts disclosed in the related notes to the financial statements.
The Company’s significant estimates used in these financial statements include, but are not limited to, accounts receivable reserves, the valuation allowance related to the
Company’s deferred tax assets, the recoverability and useful lives of long-lived assets, debt conversion features, stock-based compensation, certain assumptions related to the
valuation of the reserved shares and the assets acquired and liabilities assumed related to the Company’s acquisitions. Certain of the Company’s estimates could be affected by
external conditions, including those unique to the Company and general economic conditions. It is reasonably possible that these external factors could have an effect on the
Company’s estimates and could cause actual results to differ from those estimates.
28
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)
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents in the consolidated financial
statements.
The Company has cash on deposits in several financial institutions which, at times, may be in excess of Federal Deposit Insurance Corporation (“FDIC”) insurance limits. The
Company has not experienced losses in such accounts and periodically evaluates the creditworthiness of its financial institutions. The Company reduces its credit risk by
placing its cash and cash equivalents with major financial institutions. The Company had approximately $1,450,000 uninsured at December 31, 2018 of which approximately
$583,000 was held in foreign bank accounts not covered by FDIC insurance limits as of December 31, 2018.
Accounts Receivable
Accounts receivable are carried at their contractual amounts, less an estimate for uncollectible amounts. As of December 31, 2018 and 2017, the allowance for uncollectable
amounts was not material. Management estimates the allowance for bad debts based on existing economic conditions, historical experience, the financial conditions of the
customers, and the amount and age of past due accounts. Receivables are considered past due if full payment is not received by the contractual due date. Past due accounts are
generally written off against the allowance for bad debts only after all collection attempts have been exhausted.
As of December 31, 2018, the following customers represented more than 10% of total accounts receivable:
Customer A
Customer B
Inventory
December 31,
2018
12%
11%
Inventory is recorded at the lower of cost or net realizable value on a first-in, first-out basis. The Company reduces the carrying value of inventories for those items that are
potentially excess, obsolete, or slow moving based on changes in customer demand, technology developments, or other economic factors.
Loan Held for Investment
Loan held for investment is reported on the balance sheet at the acquired cost which approximates the fair value, which resulted in a discount. The acquired loan had evidence of
deterioration of credit quality and for which it was probable, at the time of our acquisition, that the Company would be unable to collect all contractually required payments. For
these loans, the excess of the undiscounted contractual cash flows over the undiscounted cash flows estimated by us at the time of acquisition was not accreted into income
(nonaccretable discount). The amount representing the excess of cash flows estimated by us at acquisition over the purchase price was accreted into purchase discount earned
over the life of the applicable loans (accretable discount). The nonaccretable discount was not accreted into income. If cash flows could not be reasonably estimated for any
loan, and collection was not probable, the cost recovery method of accounting was used. Under the cost recovery method, any amounts received were applied against the
recorded amount of such loans.
Subsequent to acquisition, if cash flow projections improved, and it was determined that the amount and timing of the cash flows related to the nonaccretable discount was
reasonably estimable and collection was probable, the corresponding decrease in the nonaccretable discount was transferred to the accretable discount and was accreted into
interest income over the remaining life of any such loan on the interest method. If cash flow projections deteriorated subsequent to acquisition, the decline was accounted for
through the allowance for loan losses. Depending on the timing of an acquisition, the initial allocation of discount generally is made primarily to nonaccretable discount until the
Company is able to assess any cash flows expected to be collected over the purchase price which are then transferred to accretable discount.
On June 4, 2018, the Company purchased a promissory note for $500,000 from a bank at a discount of $1,700,000 from the face value of $2,270,000 of a company in financial
difficulty. On October 29, 2018, the Company purchased 72.15% of the outstanding capital stock of the Company as described Note 3. The loan held for investment has been
eliminated in consolidation as of December 31, 2018.
Property and Equipment, Net
Property and equipment are stated at cost, net of accumulated depreciation and amortization, which is recorded commencing at the in-service date using the straight-line method
over the estimated useful lives of the assets, as follows: 3 to 5 years for office equipment, 5 to 7 years for furniture and fixtures, 6 to 10 years for machinery and equipment, 10
to 15 years for building improvements, 5 years for software, 5 years for molds, 5 to 7 years for vehicles and 40 years for buildings.
29
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)
When fixed assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is included in the
statements of operations for the respective period. Minor additions and repairs are expensed in the period incurred. Major additions and repairs which extend the useful life of
existing assets are capitalized and depreciated using the straight-line method over their remaining estimated useful lives.
Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The
Company assesses the recoverability of its long-lived assets using undiscounted cash flows. If an asset is found to be impaired, the amount recognized for impairment is equal to
the difference between the carrying value and the asset’s fair value. The Company did not record any impairment charges related to long-lived assets during the years ended
December 31, 2018 and 2017.
Goodwill and Intangible Assets
We record intangible assets based on their fair value on the date of acquisition. Goodwill is recorded for the difference between the fair value of the purchase consideration over
the fair value of the net identifiable tangible and intangible assets acquired. We perform an impairment assessment of goodwill on an annual basis, or whenever impairment
indicators exist. In the absence of any impairment indicators, goodwill is assessed for impairment during the fourth quarter of each fiscal year. Judgments regarding the
existence of impairment indicators are based on market conditions and operational performance of the business.
We may assess our goodwill for impairment initially using a qualitative approach to determine whether it is more likely than not that the fair value of these assets is greater than
their carrying value. When performing a qualitative test, we assess various factors including industry and market conditions, macroeconomic conditions and performance of our
businesses. If the results of the qualitative assessment indicate that it is more likely than not that our goodwill and other indefinite-lived intangible assets are impaired, a
quantitative impairment analysis would be performed to determine if impairment is required. We may also elect to perform a quantitative analysis of goodwill initially rather
than using a qualitative approach.
The impairment testing for goodwill is performed at the reporting unit level. The valuation methods used in the quantitative fair value assessment, discounted cash flow and
market multiples method, require our management to make certain assumptions and estimates regarding certain industry trends and future profitability of our reporting units. If
the fair value of a reporting unit exceeds the related carrying value, the reporting unit's goodwill is considered not to be impaired and no further testing is performed. If the
carrying value of a reporting unit exceeds its fair value, an impairment loss is recorded for the difference. The valuation of goodwill is affected by, among other things, our
business plan for the future and estimated results of future operations. Future events could cause us to conclude that impairment indicators exist, and, therefore, that goodwill
may be impaired.
Intangible assets include the cost of patents or patent rights (hereinafter, collectively “patents”) and trademarks. Patent and trademark costs are amortized utilizing the straight-
line method over their remaining economic useful lives. Costs incurred related to patents prior to issuance are included in prepaid patent expense until the time the patent is
issued and amortization begins or until management determines it is no longer likely the patent will be issued and amounts are expensed. Edison Nation reviews long-lived
assets and intangible assets for potential impairment annually and when events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. In
the event the expected undiscounted future cash flows resulting from the use of the asset is less than the carrying amount of the asset, an impairment loss is recorded equal to the
excess of the asset’s carrying value over its fair value. If an asset is determined to be impaired, the loss is measured based on quoted market prices in active markets, if
available. If quoted market prices are not available, the estimate of fair value is based on various valuation techniques, including a discounted value of estimated future cash
flows. In the event that management decides to no longer allocate resources to a patent portfolio, an impairment loss equal to the remaining carrying value of the asset is
recorded.
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:
30
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 1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved the contract and are committed to perform their
respective obligations, (b) the entity can identify each party’s rights regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods
or services to be transferred, (d) the contract has commercial substance and it is probably that the entity will collect substantially all of the consideration to which it will be
entitled in exchange for the goods or services that will be transferred to the customer.
Step 2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance obligations each promise to transfer to the
customer either (a) goods or services that are distinct, or (b) a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the
customer. To the extent a contract includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are capable of
being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted for as a combined performance obligation.
Step 3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize as revenue the amount of the transaction price that
is allocated to the performance obligation. The contract terms are used to determine the transaction price. Generally, all contracts include fixed consideration. If a contract did
include variable consideration, the Company would determine the amount of variable consideration that should be included in the transaction price based on expected value
method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue
under the contract would not occur.
Step 4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate the transaction price to each performance obligation in the
contract. If the contract only has one performance obligation, the entire transaction price will be applied to that obligation. If the contract has multiple performance obligations,
the transaction price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step 5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods or services are transferred to a customer. The
Company satisfies each of its performance obligations by transferring control of the promised good or service underlying that performance obligation to the customer. Control
is the ability to direct the use of, and obtain substantially all of the remaining benefits from an asset. It includes the ability to prevent other entities from directing the use of, and
obtaining the benefits from an asset. Indicators that control has passed to the customer include: a present obligation to pay; physical possession of the asset; legal title; risks and
rewards of ownership; and acceptance of the asset(s). Performance obligations can be satisfied at a point in time or over time.
Substantially all of the Company’s revenues continue to be recognized when control of the goods are transferred to the customer, which is upon shipment of the finished goods
to the customer. All sales have fixed pricing and there are currently no material variable components included in the Company’s revenue. Additionally, the Company will issue
credits for defective merchandise, historically these credits for defective merchandise have not been material. Based on the Company’s analysis of the new revenue standards,
revenue recognition from the sale of finished goods to customers, which represents substantially all of the Company’s revenues, was not impacted by the adoption of the new
revenue standards.
Disaggregation of Revenue
The Company’s primary revenue streams include the sale and/or licensing of consumer goods and packaging materials for innovative products. The Company’s licensing
business is not material and has not been separately disaggregated for segment purposes. The disaggregated Company’s revenues for the years ended December 31, 2018 and
2017 was as follows:
Revenues:
Product sales
Service revenues
Licensing revenues
Total revenues, net
31
For the Years
Ended December 31,
2018
2017
$
$
16,037,221 $
197,068
267,920
16,502,209 $
14,960,450
-
14,960,450
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 years ended December 31, 2018 and 2017, the following customers represented more than 10% of total net revenues:
Customer A
* Customer did not represent greater than 10% of total net revenue.
For the years ended December 31, 2018 and 2017, the following geographical regions represented more than 10% of total net revenues:
North America
Asia-Pacific
Cost of Revenues
For the years ended
December 31,
2018
2017
21%
31%
For the Years
Ended December 31,
2018
2017
80%
13%
83%
13%
Cost of revenues includes freight charges, purchasing and receiving costs, depreciation and inspection costs.
Shipping and Handling Costs
Shipping and handling costs include inbound freight costs and the cost to ship product to the customer and are included in cost of sales.
Fair Value of Financial Instruments
The Company measures the fair value of financial assets and liabilities based on the guidance of ASC 820 “Fair Value Measurements and Disclosures” (“ASC 820”) which
defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to
measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example, cash flow modeling inputs based on assumptions)
The carrying amounts of the Company’s financial instruments, such as cash, accounts receivable, accounts payable, accrued expenses and other current liabilities approximate
fair values due to the short-term nature of these instruments. The carrying amount of the Company’s notes payable approximates fair value because the effective yields on these
obligations, which include contractual interest rates, taken together with other features such as concurrent issuance of warrants, are comparable to rates of returns for instruments
of similar credit risk. The loan held for investment was acquired at fair value, which resulted in a discount.
32
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 December 31, 2018, the book value and estimated fair value of the Company’s level 3 instruments was as follows:
Loan held for investment
Contingent consideration
The following changes in level 3 instruments for the year ended December 31, 2018 are presented below:
Balance, January 1, 2018
Purchases
Earnout incurred related to acquisition of Cloud B, Inc.
Acquisition of Cloud B, Inc. – eliminated in consolidation
Balance, December 31, 2018
Foreign Currency Translation
December 31, 2018
Book Value
Estimated
Fair Value
$
$
- $
(520,000) $
-
(520,000)
Loan Held
For
Investment
Contingent
Consideration –
Earnout
$
$
- $
500,000
-
(500,000)
- $
-
-
520,000
-
(520,000)
The Company uses the United States dollar as its functional and reporting currency since the majority of the Company’s revenues, expenses, assets and liabilities are in the
United States. Assets and liabilities in foreign currencies are translated using the exchange rate at the balance sheet date, while revenue and expense accounts are translated at
the average exchange rates prevailing during the year. Equity accounts are translated at historical exchange rates. Gains and losses from foreign currency transactions and
translation for the years ended December 31, 2018 and 2017 and the cumulative translation gains and losses as of December 31, 2018 and 2017 were not material.
Income Taxes
The Company accounts for income taxes under the provisions of the Financial Accounting Standards Board (“FASB”) ASC Topic 740 “Income Taxes” (“ASC Topic 740”).
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of items that have been included or excluded in the financial statements or
tax returns. Deferred tax assets and liabilities are determined on the basis of the difference between the tax basis of assets and liabilities and their respective financial reporting
amounts (“temporary differences”) at enacted tax rates in effect for the years in which the temporary differences are expected to reverse.
The Company utilizes a recognition threshold and measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a
tax return.
Management has evaluated and concluded that there were no material uncertain tax positions requiring recognition in the Company’s consolidated financial statements as of
December 31, 2018 and 2017. The Company does not expect any significant changes in its unrecognized tax benefits within twelve months of the reporting date.
The Company’s policy is to classify assessments, if any, for tax related interest as interest expense and penalties as general and administrative expenses in the statements of
operations.
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJA”) was signed into law. This legislation significantly changes U.S. tax law by, among other things, lowering
corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. The TCJA permanently
reduced the U.S. corporate income tax rate from 34% to 21%, effective January 1, 2018.
33
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) income per common share is computed by dividing net (loss) income by the weighted average number of vested common shares outstanding during the period.
Diluted net income per common share is computed by dividing net income by the weighted average number vested of common shares, plus the net impact of common shares
(computed using the treasury stock method), if dilutive, resulting from the exercise of dilutive securities. In periods when losses are reported, the weighted-average number of
common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As of December 31, 2017, there were no common stock
equivalents outstanding. As of December 31, 2018, 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.
Selling Agent Warrants
Shares reserved in exchange for the cancellation of certain non-voting membership interest in Edison Nation Holdings, LLC
Options
Convertible shares under notes payable
Shares to be issued to innovator
Total
34
December 31,
2018
65,626
990,000
290,000
285,632
12,500
1,643,758
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)
Deferred Financing Costs
Deferred financing costs include debt discounts and debt issuance costs related to a recognized debt liability and are presented in the balance sheet as a direct deduction from
the carrying value of the debt liability. Amortization of deferred financing costs are included as a component of interest expense. Deferred financing costs are amortized using
the straight-line method over the term of the recognized debt liability which approximates the effective interest method.
Recent Accounting Pronouncements
In January 2018, the FASB issued Accounting Standards Update No. 2017-01(“ASU 2017-01”), Business Combinations (Topic 805): Clarifying the Definition of a Business.
The standard clarifies the definition of a business with the objective of providing guidance when evaluating whether transactions should be accounted for as acquisitions (or
disposals) of assets or businesses. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2017. The Company adopted this
standard in the first quarter of 2018 and the adoption did not have an impact on the Company’s results or consolidated financial statements.
In February 2018, the FASB issued Accounting Standards Update No. 2018-02 (“ASU 2018-02”), Income Statement -Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The standard provides for a reclassification from accumulated other comprehensive
earnings (“AOCE”) to retained earnings, of disproportionate income tax effects arising from the impact of the Tax Cuts and Jobs Act of 2017. For public companies, this
standard is effective for annual reporting periods beginning after December 15, 2018. Early adoption is permitted. The Company adopted ASU 2018-02 in the first quarter of
2018 and the adoption of this standard did not have an impact on the Company’s results or consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (ASC 230) – Classification of Certain Cash Receipts and Cash Payments. The new guidance is
intended to reduce diversity in practice across all industries, in how certain transactions are classified in the statement of cash flows. ASU 2016-15 was effective for public
companies for fiscal years beginning after December 15, 2017. The Company adopted this standard in 2018 and the adoption of this standard did not have an impact on the
Company’s statement of cash flows for the years ended December 31, 2018 and 2017.
In October 2016, the FASB issued Accounting Standards Update No. 2016-16 (ASU 2016-16), Accounting for Income Taxes: Intra-Entity Transfers of Assets Other Than
Inventory. For public companies, this standard was effective for annual reporting periods beginning after December 15, 2017, and early adoption is permitted. The standard
requires that the income tax impact of intra-entity sales and transfers of property, except for inventory, be recognized when the transfer occurs requiring any deferred taxes not
yet recognized on intra-entity transfers to be recorded to retained earnings. The Company adopted this standard in the first quarter of 2018 and the adoption did not have an
impact on the Company’s results or consolidated financial statements.
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. We have not yet adopted this standard and are currently evaluating the effect this standard will have on our financial statements.
35
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)
In January 2017, the FASB issued Accounting Standards Update No. 2017-04 (ASU 2017-04), “Simplifying the Test for Goodwill Impairment”, which removes Step 2 from
the goodwill impairment test. ASU 2017-04 requires that if a reporting unit’s carrying value exceeds its fair value, an impairment charge would be recognized for the excess
amount, not to exceed the carrying amount of goodwill. ASU 2017-04 will be effective for interim and annual reporting periods beginning after December 15, 2019. Early
application is permitted after January 1, 2017. The Company early adopted ASU 2017-04 in the third quarter of 2018 with no impact on our financial statements.
In May 2017, the FASB issued accounting guidance on determining which changes to the terms or conditions of share-based payment awards require an entity to apply
modification accounting. This pronouncement is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early
adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. We have adopted this accounting guidance
effective January 1, 2018, with no impact on our financial statements as there were no changes to the terms or conditions of share-based payment awards.
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 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 addresses the accounting for implementation costs associated with a hosted service. The guidance provides that
implementation costs be evaluated for capitalization using the same criteria as that used for internal-use software development costs, with amortization expense being recorded
in the same income statement expense line as the hosted service costs and over the expected term of the hosting arrangement. This guidance is effective for public business
entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted. The guidance will be applied either
retrospectively or prospectively to all implementation costs incurred after the date of adoption. We have not yet adopted this accounting guidance and are currently evaluating
the effect this accounting guidance will have on our financial statements.
In August 2018, the FASB issued new accounting guidance that eliminates, adds and modifies certain disclosure requirements for fair value measurements. Among the changes,
an entity will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but will be required to disclose
the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting
periods beginning after December 15, 2019; early adoption is permitted. Since this accounting guidance only revises disclosure requirements, it will not have a material impact
on the Company’s consolidated financial statements.
In October 2018, the FASB issued new accounting guidance for Variable Interest Entities, which requires indirect interests held through related parties in common control
arrangements be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. The guidance is effective
for the Company’s interim and annual reporting periods during the year ending December 31, 2020. Early adoption is permitted. The Company currently does not believe that
the adoption of this accounting guidance will have a material impact on its consolidated financial statements and related disclosures.
Subsequent Events
The Company has evaluated subsequent events through the date which the financial statements were issued. Based upon the evaluation, except for items described in Note 13,
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.
36
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Acquisition
On September 30, 2017, the Company completed the acquisitions of SRM and Fergco in exchange for an aggregate of 3,000,000 shares of the Company common stock and
notes payable aggregating $2,996,500. This transaction between entities under common control resulted in a change in reporting entity and required retrospective combination
of the entities for all periods presented, as if the combination had been in effect since the inception of common control. Accordingly, the consolidated financial statements of the
Company reflect the accounting of the combined acquired subsidiaries at historical carrying values, except that equity reflects the equity of the Company.
On September 4, 2018, the Company completed the acquisition of all of the voting membership interest of Edison Nation Holdings, LLC for a total purchase price of
$12,820,978 comprising of (i) $950,000 cash (ii) the assumption of the remaining balance of the senior convertible debt through the issuance to the holders of 4%, 5-year senior
convertible notes (the “New Convertible Notes”), in the aggregate principal and interest amount of the sum of $1,428,161, less debt discount of $500,000 for the approximate
fair value of the conversion feature, which are convertible into approximately 285,632 shares of the Company’s common stock, at the option of the holder of such New
Convertible Notes (subject to certain adjustments as provided in the Membership Interest Purchase Agreement (the “Purchase Agreement”) among the Company and Edison
Nation Holdings, LLC and Edison Nation Holdings, LLC members dated June 29, 2018 and the terms of the New Convertible Notes), (iii) the reservation of 990,000 shares of
the Company’s common stock that may be issued in exchange for the redemption of certain non-voting membership interests of EN that will be created specifically in
connection with the transaction contemplated by the Purchase Agreement (which exchange obligations may be instead satisfied in cash instead of shares of common stock, in
the Company’s sole discretion), and (iv) the issuance of 557,084 shares or $3,760,317 of the Company’s common stock in full satisfaction of the indebtedness represented by
promissory notes payable by EN to Venture Six, LLC and Wesley Jones.
The activity of Edison Nation Holdings, LLC included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2018 was net sales of
$267,920 and net loss of $197,485.
On October 29, 2018, the Company completed the acquisition of 72.15% of the outstanding capital stock of Cloud B, Inc. in exchange for 489,293 shares of restricted common
stock of the Company. In addition, the Company entered into an Earn Out Agreement with the Cloud B Sellers, whereby, beginning in 2019, the Company will pay the Cloud B
Sellers an annual amount equal to 8% multiplied by the annual gross sales of Cloud B, as reduced by the total gross sales generated by Cloud B in 2018. The Earn Out
Agreement expires on December 31, 2021.
The activity of Cloud B, Inc. included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2018 was net sales of $1,512,328 and
net loss of $44,408.
On December 31, 2018, the Company completed the acquisition of all of the voting membership interest of Pirasta, LLC from NL Penn Capital, LP in exchange for the
satisfaction of $470,000 due from related party. Accordingly, the consolidated financial statements of the Company reflect the accounting of the combined acquired subsidiary
at historical carrying values, except that equity reflects a distribution for the excess of consideration paid over the net carrying amount of assets.
The activity of Pirasta, LLC included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2018 was not material.
On December 31, 2018, the Company completed the acquisition of 50% of the voting membership interest of Best Party Concepts, LLC from NL Penn Capital, LP in exchange
for the satisfaction of $500,000 due from related party. Accordingly, the consolidated financial statements of the Company reflect the accounting of the combined acquired
subsidiary at historical carrying values, except that equity reflects a distribution for the excess of consideration paid over the net carrying amount of assets.
The activity of Best Party Concepts, LLC included in the Company’s consolidated statements of operations from the acquisition date to December 31, 2018 was not material
37
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Acquisition — (Continued)
The following table summarizes the aggregate purchase price consideration paid:
Cash paid
Fair value of issued shares
Fair value of reserved shares
Issuance of debt
Settlement of due from related party
Fair value of contingent consideration
Purchase consideration
Edison Nation
Holdings, LLC
Cloud B, Inc.
950,000
3,384,285
6,014,250
1,428,161
-
-
11,776,696
- $
2,664,200
-
-
-
520,000
3,184,200
Best Party
Pirasta, LLC Concepts, LLC
-
-
-
-
500,000
-
500,000
- $
-
-
-
470,000
-
470,000
The Company believes that this combination will further strengthen its future growth opportunities while also increasing product diversification. The Company accounted for
this acquisition as a business combination under the acquisition method of accounting. The following table summarizes the preliminary purchase price allocation of fair values
of the assets acquired and liabilities assumed at the date of acquisition:
Cash and cash equivalents
Accounts receivable
Inventory
Other assets
Property and equipment
Goodwill
Intangible assets
Total assets acquired
Debt
Accounts payable
Accrued expenses and other liabilities
Total liabilities assumed
Noncontrolling interest
Distribution to shareholder
$
Edison Nation
Holdings, LLC
68,681
$
15,958
-
39,691
1,852
5,497,242
6,400,000
12,023,424
-
227,025
19,703
246,728
-
-
11,776,696
Cloud B, Inc.
104,744 $
636,755
566,500
172,747
53,345
3,884,432
6,600,000
12,018,523
1,400,000
5,748,797
527,526
7,676,323
1,158,000
-
3,184,200
Best Party
Pirasta, LLC Concepts, LLC
365
6,906
139,918
4.356
10,931
-
-
162,476
-
34,041
513,502
547,543
(192,534)
(692,533)
500,000
3,629 $
7,696
36,537
-
-
354,836
-
402,698
-
2,052
119,198
121,250
-
(188,552)
470,000
The noncontrolling interest was valued based on the fair value of consideration paid to the Cloud B Sellers.
The following represents the pro forma consolidated income statement as if the acquisitions had been included in the consolidated results of the Company for the entire years
ending December 31, 2018 and 2017:
Revenues, net
Cost of revenues
Gross profit
Operating expenses:
Selling, general and administrative
Operating (loss) income
Other (expense) income:
Other (expense) income
(Loss) income before income taxes
Income tax expense
Net (loss) income
Net (loss) income attributable to noncontrolling interests
Net (loss) income attributable to Edison Nation, Inc.
Net (loss) income per share - basic and diluted
Weighted average number of common shares outstanding – basic and diluted
Years Ended December 31,
2017
2018
$
20,988,594 $
13,566,605
7,421,989
24,402,376
16,289,352
8,113,024
13,144,691
(5,722,702)
8,890,638
(777,614)
(398,406)
(6,249,968)
304,298
(6,554,266) $
(415,466)
(6,138,801)
(1.09) $
5,654,930
(325,017)
(452,597)
135,570
(588,167)
(506,616)
(81,551)
(0.02)
4,046,377
$
$
In connection with the acquisitions the Company will no longer present multiple segments for packaging materials and consumer goods segment as resources will be deployed
on a consolidated level and all entities will operate cross functionally as one team to bring products to market.
Note 4 — Accounts Receivable
As of December 31, 2018 and 2017, accounts receivable consisted of the following:
Accounts receivable
Less: Allowance for doubtful accounts
Total accounts receivable, net
Note 5 — Inventory
December 31,
2018
December 31,
2017
$
$
1,889,112 $
(11,761)
1,877,351 $
1,441,997
(11,761)
1,430,236
As of December 31, 2018 and 2017, inventory consisted of the following:
Raw materials
Finished goods
Total inventory
38
December 31,
2018
December 31,
2017
$
$
48,576 $
875,131
923,707 $
30,410
209,651
240,061
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 6 — Property and equipment, net
As of December 31, 2018 and 2017, property and equipment consisted of the following:
Land
Buildings – rental property
Building improvements
Equipment and machinery
Furniture and fixtures
Computer software
Molds
Vehicles
Less: accumulated depreciation
Total property and equipment, net
Depreciation expense for the years ended December 31, 2018 and 2017 was $175,609 and $188,283, respectively.
Note 7 — Goodwill
The changes in the carrying amount of goodwill for the year ended December 31, 2018 consisted of the following:
Balance, January 1, 2018
Acquisitions
Balance, December 31, 2018
The Company had no goodwill until which time it closed on its 2018 acquisitions.
39
December 31,
2018
December 31,
2017
79,100 $
427,704
760,017
3,929,332
322,157
23,518
4,589,153
502,960
10,633,941
(9,635,078)
998,863 $
79,100
427,704
745,685
3,899,040
280,124
23,518
4,552,374
404,759
10,412,304
(9,445,400)
966,904
$
$
$
Total
-
9,736,510
9,736,510
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 8 — Intangible assets, net
As of December 31, 2018, intangible assets consisted of the following:
Definite lived intangible assets:
Customer relationships
Developed technology
Membership network
Non-compete agreements
Total definite lived intangible assets
Indefinite lived intangible assets:
Trademarks and tradenames
Total indefinite lived intangible assets
Total intangible assets
Useful
Life
Weighted
Average
Remaining Life
Gross
Carrying
Amount
For the Years
Ended December 31,
Accumulated
Amortization
Net
Amount
15 years
7 years
7 years
2 years
Indefinite
14.8 years $
6.7 years $
6.7 years $
1.7 years $
$
4,270,000 $
3,800,000
1,740,000
50,000
9,860,000 $
61,556 $
159,524
82,857
8,333
312,270 $
4,208,444
3,640,476
1,657,143
41,667
9,547,730
$
$
3,140,000 $
3,140,000 $
13,000,000 $
- $
- $
312,270 $
3,140,000
3,140,000
12,687,730
Amortization expense for the years ended December 31, 2018 and 2017 was $312,270 and $0, respectively.
The estimated future amortization of intangibles subject to amortization at December 31, 2018 was as follows:
For the Years Ended December 31,
2019
2020
2021
2022
2023
Thereafter
Note 9 — Accrued expenses and other current liabilities
As of December 31, 2018 and 2017, accrued expenses and other current liabilities consisted of the following:
Accrued other taxes
Accrued payroll and benefits
Accrued professional fees
Customer deposits
Accrued interest
Other
Total accrued expenses and other current liabilities
40
$
Amount
1,101,095
1,092,762
1,076,095
1,076,095
1,076,095
4,125,588
9,547,730
December 31,
2018
December 31,
2017
$
$
259,559 $
175,336
133,261
35,094
269,782
262,519
1,135,551 $
55,413
8,703
16,848
-
-
-
80,964
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Debt
As of December 31, 2018 and 2017, debt consisted of the following:
Line of credit:
Asset backed line of credit
Debt issuance costs
Total line of credit
Long-term senior convertible debt:
Senior convertible notes payable
Debt issuance costs
Total long-term senior convertible debt
Long-term debt:
Notes payable
Less: current portion of long-term debt
Noncurrent portion of long-term debt
Long-term debt – related parties:
Notes payable
Less: current portion of long-term debt – related parties
Noncurrent portion of long-term debt – related parties
Line of Credit
December 31,
2018
December 31,
2017
$
561,804 $
(30,000)
531,804
1,428,161
(466,667)
961,494
370,250
(313,572)
56,688
-
-
-
-
-
-
-
-
-
3,464,191
(932,701)
2,531,490 $
2,996,500
(225,553)
2,770,947
$
On December 27, 2018, the Company entered into credit agreement providing for an asset backed line of credit of $1,000,000. The credit agreement contains a revolving
maturity date which is subject to an annual review by the lender, The credit agreement is collateralized by substantially all of the assets of Ferguson Containers, Inc. The interest
rate was 8.5% as of December 31, 2018. The agreement contains certain covenants and definition. The Company was in compliance with all covenants as of December 31,
2018.
Long-term Convertible Notes Payable – Related Parties
On September 4, 2018, in connection with the acquisition of EN, the Company issued five senior convertible notes payable aggregating $1,428,161. The notes have an effective
interest rate of four percent (4%) per annum. The Company is required to make semi-annual interest payments on June 30th and December 31st of each year. The notes have an
option to convert at a conversion price of $5.00. Prepayments are not allowed under the notes without the prior written consent of applicable holders of a note until the second
anniversary of the effective date of the note, after which time the notes may be prepaid without penalty at any time upon sixty (60) days’ written notice to the holders. The
holders have piggyback registration rights. If the conversion option is not elected by the holder, all outstanding principal and interest is due on September 4, 2023. The Company
recorded a debt discount of $500,000 related to the beneficial conversion feature that will be amortized over five (5) years to interest expense.
Notes Payable
The Company borrowed funds under two separate notes, aggregating $645,000, in February 2018 and March 2018. As of December 31, 2018, both holders of the notes were
paid in full. In addition, the Company issued the 20,000 and 13,500 shares to the holders of the notes payable, respectively. The fair value of the shares issued was $167,500
which was recorded as a debt discount and fully amortized through interest expense.
On September 7, 2018, the Company borrowed $73,559 related to the purchase of a commercial delivery vehicle. The note bears interest at a rate of 4.5% per annum. The
monthly payments under the note are $1,371 commencing on October 6, 2018 and maturing on September 6, 2023. The loan is collaterized by the commercial delivery vehicle
having the approximate value of $75,000.
On December 1, 2016, Cloud B, Inc. entered into a Loan Agreement with an outside associate of CEO Linda Suh. The loan was in the amount of $300,000. This loan was for a
period of six (6) months and bears no interest and therefore no monthly interest payments. A Loan Amendment and Extension Agreement was entered into on June 1, 2017,
extending the maturity of the loan until December 31, 2017. This loan remains outstanding. No collateral was provided by the Company for any of the above-referenced loans.
Notes Payable – Related Parties
On September 30, 2018, in connection with the acquisition of SRM and Fergco, the Company issued two notes payable aggregating $2,996,500. One note was issued to NL
Penn Capital, L.P, in relation to the acquisition of SRM in the amount of $2,120,000 and the other note was issued to the stockholders of Fergco in the amount of $876,500. The
notes bear interest at a rate of six percent (6%) per annum and have an effective interest rate of six percent (6%) per annum. The Company is required to make monthly
payments comprised of principal and interest beginning in January 2018 that are amortized over ten (10) years, with a balloon payment of all outstanding principal and interest
due at the respective maturity dates ($677,698 due on December 1, 2020 and $1,249,043 due on December 1, 2022).
41
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Debt — (Continued)
On April 24, 2014, Cloud B, Inc. entered into two Shareholder Loan Agreements. One shareholder loan was from former shareholder, Board Member, and CEO of Cloud B,
Inc. prior to the acquisition on October 29, 2018, Linda Suh in the amount of $100,000. This loan bears interest at a rate of 7.0% per annum for the first twelve (12) months and
8.0% per annum thereafter. The Company is required to make monthly interest only payments. Interest payments on this loan have been paid through November 2018. The
other shareholder loan was from former shareholder and Board Member of Cloud B, Inc. prior to the acquisition on October 29, 2018, John Royan in the amount of $500,000.
This loan bears interest at a rate of 7.0% per annum for the first six (6) months and 8.0% per annum for the next six (6) months. The Company was required to make monthly
interest only payments through May 2015, with the loan becoming due and payable on May 28, 2015. This loan remains outstanding with the last interest payment made in July
2015.
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,
2018
2019
2020
2021
2022
Thereafter
Less: debt discount
Amount
1,778,077
239,461
254,230
704,296
1,420,190
1,428,162
5,824,416
(496,667)
5,327,749
$
$
For the year ended December 31, 2018, interest expense was $501,221 of which $239,885 was related party interest expense. For the year ended December 31, 2017 interest
income was $4,000.
Note 11 — Income Taxes
Edison Nation, Inc. is taxed as a corporation and pays corporate federal, state and local taxes on income allocated to it from Fergco, Edison Nation Holdings, LLC, Edison
Nation, LLC, Safe TV Shop, LLC, Everyday Edisons, LLC and Pirasta, LLC based upon Edison Nation, Inc.’s economic interest in those entities. Cloud B, Inc. is taxed as a
corporation and pays corporate federal, state and local taxes on its income. The Company has three foreign entities of which only SRM has operations, SRM is an entity subject
to the Hong Kong, China tax regime. The Hong Kong tax returns remain subject to examination by local taxing authorities beginning with the tax year ended December 31,
2011.
Cloud B, Inc. was a Subchapter S pass-through entity for income tax purposes prior to its acquisition by the Company on October 29, 2018. Accordingly, Cloud B, Inc. was not
subject to income taxes prior to the acquisition and therefore the tax provision related to the United States income is only for the period from October 29, 2018 to December 31,
2018.
Edison Nation Holdings, LLC and its subsidiaries are disregarded limited liability corporation entities for income tax purposes. Accordingly, EN was not subject to income
taxes prior to the acquisition on September 4, 2018 and the results of operations were not material therefore the tax provision related to the United States income is only for the
period from September 4, 2018 to December 31, 2018.
Fergco was a Subchapter S pass-through entity for income tax purposes prior to its acquisition by the Company on September 30, 2017. Accordingly, Fergco was not subject to
income taxes prior to the acquisition and therefore the tax provision related to the United States income is only for the period from October 1, 2017 to December 31, 2017.
United States and foreign components of income before income taxes were as follows:
United States
Foreign
Income before income taxes
42
For the Years
Ended December 31,
2018
2017
(5,828,261)
788,159
(5,040,102) $
49,097
1,617,439
1,666,536
$
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Income Taxes – (Continued)
The tax effects of temporary differences that give rise to deferred tax assets or liabilities are presented below:
Deferred tax assets:
Stock-based compensation
Goodwill and intangible assets
Net operating loss carryforwards
Less: valuation allowance
Net deferred tax assets
Deferred tax liabilities:
Property and equipment
Net deferred tax liabilities
Net deferred tax liabilities
For the Years
Ended December 31,
2018
2017
$
$
$
$
$
682,115 $
19,410
493,063
(1,194,587)
- $
341 $
341 $
341 $
-
-
50,524
(50,524)
-
34,209
34,209
34,209
As of December 31, 2018 and 2017, the Company had $1,820,685 and $240,591 of federal and state net operating loss carryforwards for income tax purposes. In connection
with the IPO the Company does not believe the ownership change resulted in the loss of past net operating loss carryforwards. The above net operating loss carryforwards may
be subject to an annual limitation under Section 382 and 383 of the Internal Revenue Code of 1986, and similar state provisions if the Company experiences one or more
ownership changes. The Company believes the goodwill acquired in the Edison Nation Holdings acquisition is deductible for tax purposes. The Company evaluates its ability to
realize deferred tax assets on a quarterly basis and establishes a valuation allowance when it is more likely than not that all or a portion of a deferred tax asset may not be
realized. As of December 31, 2018 and 2017, the Company recognized a deferred tax asset of $1,194,587 and $50,524, respectively. However, these deferred tax assets will be
utilized upon the Company generating taxable income. As of December 31, 2018 and 2017, the Company established a full valuation allowance in the amount of $1,194,587
and $50,524, respectively, against the deferred tax asset.
The income tax provision (benefit) consists of the following:
Current:
Federal
Foreign
State and local
Total current
Deferred:
Federal
Foreign
State and local
Total deferred
Income tax provision (benefit)
For the Years
Ended December 31,
2018
2017
10,185 $
292,491
35,107
337,783 $
(21,450) $
(2,316)
(10,102)
(33,868) $
303,915 $
27,513
71,125
6,069
104,707
23,249
(3,153)
8,302
28,398
133,105
$
$
$
$
$
43
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Income Taxes – (Continued)
A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows:
Tax at federal statutory rate
Effect of U.S. tax law change
U.S. income attributable to pass-through entity
U.S. income subject to valuation allowance
State and local income taxes
Foreign income not subject to U.S. federal tax
Foreign tax
Other
Effective income tax rate
For the Years
Ended December 31,
2018
2017
21.0%
0.0%
0.0%
-20.5%
0.0%
0.0%
-6.3%
-0.2%
-6.0%
34.0%
-0.9%
-4.4%
4.9%
0.9%
-33.0%
4.1%
2.4%
8.0%
The statutory federal income tax rate differs from the Company’s effective tax rate due to the valuation allowance related to deferred tax assets and net operating losses and
foreign income taxes in Hong Kong.
Note 12 — Related Party Transactions
NL Penn Capital, LP and SRM Entertainment Group LLC
As of December 31, 2018 and 2017, due to related party consists of net amounts due to SRM Entertainment Group LLC (“SRM LLC”) and NL Penn Capital, LP (“NL Penn”),
the majority owner of SRM Entertainment Group LLC, which are owned by Chris Ferguson, Chief Executive Officer. The amount due to related parties is related to the
acquisition of Pirasta, LLC and Best Party Concepts, LLC offset by operating expenses that were paid by SRM on behalf of SRM LLC and NL Penn. As of December 31, 2018
and 2017, the net amount due to related parties was $140,682 and due from related parties was $834,897, 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 has been nominated to be voted upon as a board member of the Company at the Company’s next annual meeting, is also
the Chief Executive Officer and the largest equity holder of Enventys. We incurred fees of approximately $130,000 related to the services performed by Enventys for the year
ended December 31, 2018.
44
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 13 — Commitments and Contingencies
Operating Lease
On August 8, 2016, SRM entered into a lease for office space in Kowloon, Hong Kong. On August 8, 2018, SRM extended its lease for office space in Kowloon, Hong Kong so
that the lease will now expire on August 7, 2020. Monthly lease payments are approximately $6,400 for a total of approximately $154,000 for the total term of the lease.
The Company leases certain office space from an entity affiliated through common ownership under operating lease agreement. The operating lease requires base monthly
payments of $3,333 plus the Company’s share of the facilities operating expenses as defined in the lease agreement through May 2017. The lease agreement contains four
successive five year renewal options with 5% base rent escalations at the end of each extension period.
On October 1, 2018, the Company entered into a lease for office space in Winter Park, Florida which expires on September 30, 2020. Monthly lease payments are
approximately $1,887 for a total of approximately $45,288 for the total term of the lease.
Minimum annual rental commitments for operating leases of continuing operations having initial or remaining noncancellable lease terms in excess of one year are as follows:
Total rent expense for the years ended December 31, 2018 and 2017 was $343,253 and $191,405, respectively. Rent expense is included in general and administrative expense
on the consolidated statements of operations.
Rental Income
Fergco leases a portion of the building located in Washington, New Jersey that it owns under a month to month lease. Total rental income related to the leased space for both the
years ended December 31, 2018 and 2017 was $102,815, respectively, and is included in other income on the consolidated statements of operations.
Legal Contingencies
The Company is involved in claims and litigation in the ordinary course of business, some of which seek monetary damages, including claims for punitive damages, which are
not covered by insurance. For certain pending matters, accruals have not been established because such matters have not progressed sufficiently through discovery, and/or
development of important factual information and legal information is insufficient to enable the Company to estimate a range of possible loss, if any. An adverse determination
in one or more of these pending matters could have an adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
We are, and may in the future become, subject to various legal proceedings and claims that arise in or outside the ordinary course of business.
45
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Stockholders’ Equity
Common Stock
The Company issued 1,312,520 shares of common stock related to the IPO, at a public offering price of $5.00 per share in August 2018. The Company received gross proceeds
of $6,562,600 and net proceeds of $5,315,176 after deducting underwriter commissions and expenses of $714,802, legal fees of $157,358, escrow closing fees of $4,000 and
other direct offering expenses which together aggregate $1,204,030.
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 fair value of the option grants was estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table.
Weighted average fair value of option granted
Risk-free interest rate
Expected term in years
Volatility
Dividend rate
The following table summarizes stock option award activity during 2018:
Balance, January 1, 2018
Granted
Balance, December 31, 2018
Exercisable, December 31, 2018
2018
$
1.82
2.2%
2.5
50.0%
0.0%
Weighted
Average
Exercise
Price
Remaining
Contractual
Life in
Years
Aggregate
Intrinsic Value
-
5.55
5.55
5.32
-
4.2
4.2
4.1
-
-
-
-
Shares
- $
290,000
290,000 $
166,667 $
As of December 31, 2018, there was 123,333 unvested options to purchase common units of Edison Nation, Inc. or $222,279 of total unrecognized equity-based compensation
expense that the Company expected to recognize over a remaining weighted-average period of 1.4 years. The Company recorded stock-based compensation expense of
$2,025,994, of which 1,721,250, related to the assumption of certain consulting agreements which were satisfied by the principal stockholder of SRM transferring 344,250
shares to the consultants, for the year ended December 31, 2018. No compensation expense was recorded for the year ended December 31, 2017.
Selling Agent Agreement
In connection with the IPO, the Company agreed to issue to the selling agent in the IPO, warrants to purchase a number of shares of the common stock equal to 5.0% of the total
shares of common stock sold in any closing of the IPO, excluding shares purchased by investors sourced via alternative funding platforms (the “Selling Agent Warrants”). The
Selling Agent Warrants are exercisable commencing on the qualification date of the IPO and have a term of 5 years. The Selling Agent Warrants are not redeemable by the
Company. The exercise price for the Selling Agent Warrants is 20% greater than the IPO offering price, or $6.00 per share. On August 16, 2018, the Company issued 65,626 of
Selling Agent Warrants that are exercisable for 65,626 shares of the Company’s common stock.
46
Edison Nation, Inc. (formerly known as Xspand Products Lab, Inc.) and Subsidiaries
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Subsequent Events
Foreclosure of Cloud B, Inc.
In February 2019, CBAV1, LLC foreclosed on the Promissory Note it held that was secured by Cloud B, Inc.’s assets. After the foreclosure, there likely will be no assets to
distribute to other creditors.
Issuance of Common Shares
In March 2019, the Company issued 10,500 shares of common stock to consultants for services performed.
First Fire Note Payable
On March 6, 2019, Edison Nation, Inc. (the “Company”) entered into a securities purchase agreement (the “SPA”) with an accredited investor (the “Investor”) pursuant to which
the Investor purchased a 2% unsecured, senior convertible promissory note (the “Note”) from the Company.
The Company issued 15,000 shares of its common stock, par value $0.001 per share (“Common Stock”) to the Investor as additional consideration for the purchase of the Note.
Under the terms of the SPA, the Investor will have piggyback registration rights in the event the Company files a Form S-1 or Form S-3 within six months from March 6, 2019,
as well as a pro rata right of first refusal in respect of participation in any debt or equity financings undertaken by the Company during the 18 months following March 6, 2019.
The Company is also subject to certain customary negative covenants under the SPA, including but not limited to, the requirement to maintain its corporate existence and assets
subject to certain exceptions, and to not to make any offers or sales of any security under circumstances that would have the effect of establishing rights or otherwise benefitting
other investors in a manner more favorable in any material respect than those rights and benefits established in favor of the Investor under the terms of the SPA and the Note.
As issued on March 6, 2019, the principal amount of the Note is $560,000, with an original issue discount in the amount of $60,000. The maturity date of the Note is six months
from March 6, 2019. As stated above, all principal amounts and the interest thereon are convertible into shares Common Stock only in the event that an Event of Default occurs.
47
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Principal Executive Officer and Principal Financial and Accounting Officer has evaluated the
effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period
covered by this report. Based on such evaluation, the Company’s Principal Executive Officer and Principal Financial and Accounting Officer have concluded that, as of the end
of such period, the Company’s disclosure controls and procedures were not effective to provide reasonable assurance that information that it is required to disclose in reports
that the Company files with the SEC is recorded, processed, summarized and reported within the time periods specified by the Exchange Act rules and regulations.
Management’s Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) under Exchange Act.
Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that a misstatement of our financial statements would
be prevented or detected. Under the supervision of our Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of our
internal control over financial reporting as of December 31, 2018 using the criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (“COSO”) (2013 Framework).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. In our assessment of the effectiveness of internal control over
financial reporting as of December 31, 2018, we determined that, there were control deficiencies existing that constituted a material weakness.
Our Chief Executive Officer and Chief Financial Officer concluded that the Company did maintain effective internal control over financial reporting as of December 31, 2018
based on criteria established in Internal Control — Integrated Framework issued by COSO (2013 Framework).
This Annual Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal controls over financial reporting
because this is not required of the Company pursuant to Regulation S-K Item 308(b).
Changes in Internal Control over Financial Reporting
During the year ended December 31, 2018, there were no changes in our internal control over financial reporting that materially affected, or that are reasonably likely to
materially affect, our internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Securities Exchange Act of 1934. Under the supervision and with the participation of management, including our principal executive officer, we have not completed
an evaluation of the effectiveness of our internal control over financial reporting based on the 2013 framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the “COSO Framework”). Based on this evaluation under the COSO Framework, management
concluded that our internal control over financial reporting was not effective as of December 31, 2018.
48
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only
reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material
misstatements may not be prevented or detected on a timely basis by internal control over financial reporting.
However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not
eliminate, this risk.
As of December 31, 2018, management has not completed an effective assessment of the Company’s internal control over financial reporting based on the 2013 Committee of
Sponsoring Organizations (COSO) framework. Management has concluded that as of December 31, 2018, our internal control over financial reporting was not effective to
detect the inappropriate application of U.S. GAAP. Management identified the following material weaknesses set forth below in our internal control over financial reporting.
1. We did not perform an effective risk assessment or monitor internal controls over financial reporting.
2. With the acquisitions of Edison Nation Holdings, LLC and Cloud B, Inc., there are risks related to the timing and accuracy of the integration of information from various
accounting and ERP systems. The Company has experienced delays in receiving information in a timely manner from its subsidiaries.
3. Due to the demands of integrating the accounting and finance functions, along with turnover in the accounting department, the impact of new accounting standards were
not completed on a timely basis.
In 2019, the Company has engaged an outside consultant to assist in monitoring and testing our internal controls. The Company expects improvements to be made on the
integration of information issues in 2019 as we plan to move towards one accounting and a single ERP system. The Company is continuing to further remediate the material
weakness identified above as its resources permit.
We are not required by current SEC rules to include, and do not include, an auditor’s attestation report regarding our internal controls over financial reporting. Accordingly, our
registered public accounting firm has not attested to management’s reports on our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
49
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
PART III
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s Definitive Proxy Statement for the 2019 Annual Meeting
of Shareholders which will be filed with the SEC within 120 days of December 31, 2018.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s Definitive Proxy Statement for the 2019 Annual Meeting
of Shareholders which will be filed with the SEC within 120 days of December 31, 2018.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s Definitive Proxy Statement for the 2019 Annual Meeting
of Shareholders which will be filed with the SEC within 120 days of December 31, 2018.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s Definitive Proxy Statement for the 2019 Annual Meeting
of Shareholders which will be filed with the SEC within 120 days of December 31, 2018.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by this Item will be presented in, and is incorporated herein by reference to, the Company’s Definitive Proxy Statement for the 2019 Annual Meeting
of Shareholders which will be filed with the SEC within 120 days of December 31, 2018.
50
ITEM 15. EXHIBITS
PART IV
Exhibit
Number
3.1
3.2
10.1
10.1
10.2
10.3
10.4+
10.5+
10.6+
10.7
10.8
10.9
10.10
21.1*
31.1*
31.2*
32.1**
Description
Articles of Merger, filed with the Secretary of State of Nevada effective September 7, 2018
Second Amended and Restated Bylaws of Edison Nation, Inc.
Form of Senior Convertible Promissory Note
Membership Interest Purchase Agreement dated June 29, 2018
Fifth Amended and Restated Operating Agreement of Edison Nation Holdings, LLC, dated
September 4, 2018
Registration Rights Agreement dated September 4, 2018
Amended and Restated Edison Nation, Inc. Omnibus Incentive Plan
Employment Agreement, by and between Edison Nation, Inc. and Christopher Ferguson,
dated September 26, 2018
Employment Agreement, by and between Edison Nation, Inc. and Phil Anderson, dated
September 26, 2018
Stock Purchase Agreement, dated October 24, 2018
Securities Purchase Agreement, dated March 6, 2019
Senior Convertible Promissory Note, dated March 6, 2019
Pledge Agreement, dated March 12, 2019
List of Significant Subsidiaries
Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Label Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
*
Filed herewith.
** Furnished herewith.
+ Denotes a management compensatory plan, contract or arrangement
51
Incorporated By Reference
to
Form Exhibit
8-K
3.1
Filing Date
September 12,
2018
September 12,
2018
July 6, 2018
July 6, 2018
September 6,
2018
September 6,
2018
September 12,
2018
3.2
2.1
10.1
10.2
10.3
3.3
10.1
October 5, 2018
10.2
October 5, 2018
10.1
10.1
10.2
10.3
October 30, 2018
March 13, 2019
March 13, 2019
March 13, 2019
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
8-K
File/Furnished
Herewith
+
+
*
*
*
**
*
*
*
*
*
*
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Date: April 16, 2019
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
EDISON NATION, INC.
By:
/s/ Christopher B. Ferguson
Christopher B. Ferguson
Chairman and Chief Executive Officer
(Principal Executive Officer)
Signature
Title
/s/ Christopher B. Ferguson
Christopher B. Ferguson
Chief Executive Officer and Chairman of the Board of Directors
(Principal Executive Officer)
/s/ Philip Anderson
Philip Anderson
/s/ Kevin J. Ferguson
Kevin J. Ferguson
/s/ Louis Foreman
Louis Foreman
/s/ Frank Jennings
Frank Jennings
/s/ John Marchese
John Marchese
/s/ Michael Palleschi
Michael Palleschi
/s/ Kevin J. O’Donnell
Kevin J. O’Donnell
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
Director, President and Treasurer
Director
Director
Director
Director
Director
52
Date
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
April 16, 2019
EXHIBIT 21.1
LIST OF SUBSIDIARIES
Ferguson Containers, Inc.
S.R.M. Entertainment Limited
Edison Nation Holdings, LLC
Edison Nation, LLC
Safe TV Shop, LLC
Everyday Edisons, LLC
Cloud B, Inc.
Cloud B Limited
Cloud B Party Limited
Pirasta, LLC
Best Party Concepts, LLC
CBAV1, LLC
EDISON NATION, INC.
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Christopher B. Ferguson, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Edison Nation, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 16, 2019
/s/ Christopher B. Ferguson
Christopher B. Ferguson
Chief Executive Officer
(Principal Executive Officer)
EDISON NATION, INC.
CERTIFICATION PURSUANT TO RULE 13a-14 OR 15d-14 OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED,
AS ADOPTED PURSUANT TO SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.2
I, Philip Anderson, certify that:
1.
2.
3.
4.
I have reviewed this Annual Report on Form 10-K of Edison Nation, Inc.;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period
in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter
(the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal
control over financial reporting; and
5.
The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s
auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over
financial reporting.
Date: April 16, 2019
/s/ Philip Anderson
Philip Anderson
Chief Financial Officer
(Principal Financial and Accounting Officer)
EDISON NATION, INC.
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED
PURSUANT TO
SECTION 906 OF THE
SARBANES-OXLEY
ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report on Form 10-K for the year ended December 31, 2018, as filed with the Securities and Exchange Commission on the date hereof
(the “Report”), of Edison Nation, Inc. (the “Company”), each of the undersigned officers of the Company hereby certify, in their capacity as an executive officer of the
Company, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to the best of their knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: April 16, 2019
Date: April 16, 2019
/s/ Christopher B. Ferguson
Christopher B. Ferguson
Chief Executive Officer
(Principal Executive Officer)
/s/ Philip Anderson
Philip Anderson
Chief Financial Officer
(Principal Financial an Accounting Officer)