VINCO VENTURES, INC. Overview
The Company is the aggregation of six wholly owned subsidiaries whose operations
and go-to-market strategy are vertically integrated under the
During the first quarter of 2019,
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,
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, andBlack & 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, likeDisney World andUniversal Studios .Edison Nation also creates, manufactures and markets its own products including the infant / toddler market under the Cloud b consumer brand name, innovative party products under the Best Party Concepts brand, and premium branded coloring activities under the Pirasta brand. Recently the company launched product lines for 911 Help Now,Master Sous and Smarter Specs. In addition, the Company leverages its vertically integrated resources and capabilities to create licensed consumer products for large entertainment theme park enterprises, likeDisney World andUniversal Studios as well as custom packaging solutions for large and small U. S. Based companies. COVID-19 COVID-19 has caused and continues to cause significant loss of life and disruption to the global economy, including the curtailment of activities by businesses and consumers in much of the world as governments and others seek to limit the spread of the disease, and through business and transportation shutdowns and restrictions on people's movement and congregation. As a result of the pandemic, we have experienced, and continue to experience, weakened demand for our traditional products. Many of our customers have been unable to sell our products in their stores and theme parks due to government-mandated closures and have deferred or significantly reduced orders for our products. We expect these trends to continue until such closures are significantly curtailed or lifted. In addition, the pandemic has reduced foot traffic in the stores where our products are sold that remain open, and the global economic impact of the pandemic has temporarily reduced consumer demand for our products as they focus on purchasing essential goods. Inthe United States andAsia , many of our key accounts remain closed or are operating at significantly reduced volumes. As a result, we have made the strategic decision to expand our operations through our Edison Nation Medical ("Ed Med") division. Through Ed Med, the Company wholesales Personal Protective Equipment ("PPE") products through an online portal for hospitals, government agencies and distributors.
Given these factors, the Company anticipates that the greatest impact from the COVID-19 pandemic in fiscal 2020 occurred in the first quarter of 2020 and resulted in a net sales decline as compared to the first quarter of 2019.
In addition, certain of our suppliers and the manufacturers of certain of our products were adversely impacted by COVID-19. As a result, we faced delays or difficulty sourcing products, which negatively affected our business and financial results. Even if we are able to find alternate sources for such products, they may cost more and cause delays in our supply chain, which could adversely impact our profitability and financial condition. 24
We have taken actions to protect our employees in response to the pandemic, including closing our corporate offices and requiring our office employees to work from home. At our distribution centers, certain practices are in effect to safeguard workers, including a staggered work schedule, and we are continuing to monitor direction from local and national governments carefully. Additionally, our two retail locations have been closed until further notice.
As a result of the impact of COVID-19 on our financial results, and the anticipated future impact of the pandemic, we have implemented cost control measures and cash management actions, including:
? Furloughing a significant portion of our employees; and
? Implementing 20% salary reductions across our executive team and other members of upper level management; and
? Executing reductions in operating expenses, planned inventory levels and non-product development capital expenditures; and
? Proactively managing working capital, including reducing incoming inventory to align with anticipated sales.
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 marketplaces 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.
Indeed, the cornerstone ofEdison Nation's competitive advantage is its proprietary and web-enabled new product development ("NPD") and commercialization platform. The platform can take a product from idea through ecommerce final sale in a matter of months versus a year or more for capital intensive and inefficient new product development protocols traditionally used by legacy manufacturers serving "big box" retailers. The Company's web-enabled NPD platform is designed to optimize product licensing and commercialization through best-in-class digital technologies, sourcing / manufacturing expertise and one of the largest sets of go-to-market solutions. This unique set of resources and capabilities have proven to be a reliable catalyst for sales success. In order to expand the Company's universe of registered innovators and entrepreneurs submitting ideas on the Edison Nation NPD web platform, the Company has entered a global agreement for distribution of two existing 13-episode seasons of the Company's Everyday Edison TV series with a leading digital media service company. The series will be available in its original English version as well as voiceover adaptations in German, French, and Spanish. Distribution is planned forEurope and theMiddle East through digital content providers such as Amazon Prime Video.
Product Submission Aggregation
Interested innovators enter theEdison 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 atEdison Nation . They can also track the review progress of ideas they submit through their dashboard. 25 [[Image Removed]]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
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" isEdison 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 theEdison 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 thatEdison 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. [[Image Removed]] 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 potential for commercialization. The time required to review ideas depends upon different variables, such as: the number of searches concurrently running onEdison Nation platform, idea volume and complexity of the search, how many presentation dates to licensees are pending, the date an idea is submitted, etc. 26 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:
? 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.
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
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 byEdison Nation . In either case,Edison Nation serves as the point-of-contact with the innovator for term sheets, royalty negotiation and concluding licensing agreements.Edison Nation also maintains contact with the innovator to keep them engaged during product development. In general, innovators are paid a percentage of the Company's revenue from the commercialization of the innovator's intellectual property. This percentage varies with the Company's investment in the development of the intellectual property, including whether the Company decides to license the innovator's idea for commercialization or instead, to directly develop and market the innovator's idea. One Company Initiative
During the first quarter of 2019,
? Innovate. The Edison Nation Platform. Responsible for the innovation platform that helps inventors go from idea to reality. This is accomplished by optimizing new product election process through deeper analytics to predict success on platforms like web marketplaces like Amazon. Driving brand awareness of the platform by producing content for inventors and innovators on media platforms including our own Everyday Edison's television show. ? Build and launch. Consolidating our teams of product designers and developers who take the product from the concept to the consumers hand. These are distributed by geography, industry skillset and expertise in the development process to ensure efficient product build and launch. The bulk of operations are part of this business unit, and the company will continue to develop this unit to meet the needs of our product launch schedule. ? Sell. Our Omni-channel sales effort is divided into three groups; (1) business-to-business revenue opportunities including traditional brick and mortar retailers (2) online market places and direct-to-consumer revenue opportunities, and (3) our NiTRO Team (Near Term Revenue Opportunities). NiTRO, identifies brands and products lines that would benefit from being part ofEdison Nation . The team seeks to a find a mutually beneficial transaction to accomplish that goal.
Product Design and Development
With product design, product prototyping and creation of marketing assets all
resourced with expert
Edison Nation 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 likeDisney World andUniversal Studios . 27 No matter the product,Edison Nation's objective is to optimize its marketability, function, value and appearance for the benefit of the consumer end user. From concept and prototyping, through design-for-manufacture, special attention is paid to a product's utility, ease of use, lowest cost bill of materials, and how it "communicates" its features and benefits through design. The combined experience and expertise of the Company's team spans many high-demand categories including household items, small appliances, kitchenware, and toys. The company's in-house capabilities are complimented by third-party engineering and prototyping contractors and category-specific expert resources within select manufacturers. 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
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 theEdison 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,
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. 28
Manufacturing, Materials and Logistics
Once a product's path to market is successfully identified,
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 inChina andHong Kong . The Company maintains a fully staffedHong 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 three manufacturers required to produce Cloud b children's sleep products. Based on anticipated manufacturing requirements, this footprint may expand significantly by the end of 2019. The Company also continues to explore more efficient and expert manufacturing partners to gain greater economies of scale, potential consolidation, and cost savings on an on-going basis.
Products are also purchased from unrelated enterprises with specific expertise in the design, development, and manufacture those specialty products.
We base our production schedules on customer orders and forecasts, considering historical trends, results of market research, and current market information. Actual shipments of ordered products and order cancellation rates are affected by consumer acceptance of product lines, strength of competing products, marketing strategies of retailers, changes in buying patterns of both retailers and consumers, and overall economic conditions. Unexpected changes in these factors could result in a lack of product availability or excess inventory
in a product line.
Most of our raw materials are available from numerous suppliers but may be subject to fluctuations in price.
Sales, Marketing and Advertising
Our Omni-channel sales effort is divided into three groups; (1) business-to-business revenue opportunities including traditional brick and mortar retailers (2) online market places and direct-to-consumer revenue opportunities, and (3) our NiTRO Team (Near Term Revenue Opportunities). NiTRO, identifies brands and products lines that would benefit from being part ofEdison Nation . The team seeks to a find a mutually beneficial transaction to accomplish that goal.
Edison Nation's business to business team sells products through a diverse network of manufacturers, distributors and retailers. New customer prospects are gained through outbound sales calls, trade show participation, web searches, referrals from existing customers.
The online team for the company has expertise in selling products on platforms
such as the Amazon marketplace as well as portals like
The NiTRO team identifies small, unique brands that could benefit from becoming part of a larger consumer products organization with more resources. The team seeks to negotiate a mutually beneficial agreement whereby the respective branded products become part ofEdison Nation's portfolio of consumer products. In order to expand the Company's universe of registered innovators and entrepreneurs submitting ideas on the Edison Nation NPD web platform, the Company has entered a global agreement for distribution of two existing 13-episode seasons of the Company's Everyday Edison TV series with a leading digital media service company. The series will be available in its original English version as well as voiceover adaptations in German, French, and Spanish. Distribution is planned forEurope and theMiddle East through digital content providers such as Amazon Prime Video. Sources of Revenue
The Company aggressively pursues the following three sources of sales volume:
? Our branded products sold through traditional retail channels of distribution
and other channels of business to business distribution.
? Our branded products sold through direct to consumer platforms such as the
Amazon marketplace as well as portals like
websites such as Kickstarter and
? Custom products and packaging solutions that the Company develops and
manufactures for partners such as
? Member idea submission and ILP program fees:
members);
members)
? Licensing agents: We match an innovator's intellectual property with vertical
product category leaders in a licensing structure whereby the innovator can
earn up to 50% of the contracted licensing fee. Product categories include
kitchenware, small appliances, toys, pet care, baby products, health & beauty
aids, entertainment venue merchandise, and housewares.
? Product principals: We work with innovators directly, providing such
innovators direct access to all of
case-by-case factors, innovators may receive a range of up to 35% - 50% of
profits.
29
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 andWalmart.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
These crowdfunding sites have enabled individual innovators and entrepreneurs to design, prototype and market unique products to millions of potential customers with significantly lower acquisition costs when compared to the capital and time required by legacy NPD processes.
Leveraging Evolving Market Opportunities for Growth
The Company believes that its anticipated growth will be driven by five macro factors including:
? The significant growth of ecommerce (14% CAGR, estimated to reach$4.9 trillion by 2021 (eMarketer 2018);
? The increasing velocity of "brick and mortar" retail closures, now surpassing
Great Recession levels (Cushman & Wakefield /
? 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.
30
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.Cloud B, Inc. Transaction OnOctober 29, 2018 , the Company entered into a Stock Purchase Agreement with a majority of the stockholders (the "Cloud B Sellers") ofCloud B, Inc. , aCalifornia corporation ("Cloud B"). Pursuant to the terms of such Stock Purchase Agreement, the Company purchased 72.15% of the outstanding capital stock ofCloud 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 theCloud B Sellers an annual amount equal to 8% multiplied by the incremental gross sales ofCloud B over its 2018 gross sales level. The Company does not anticipate any amounts to be paid under the Earn Out Agreement. The Earn Out Agreement expires onDecember 31, 2021 . OnFebruary 17, 2020 , the Company divested its interest inCloud B, Inc. but maintained ownership of the intangible assets of the brand Cloud B through its senior secured position on the note.
OnMarch 11, 2020 , the Company issued 238,750 shares of our common stock to acquire the assets ofHMNRTH, LLC . The Company owes$70,850 to the principals ofHMNRTH, LLC . The transaction was treated as an asset purchase and not accounted for as a business combination due to the limited inputs, processes and outputs.
Edison Nation Medical Operations
Edison Nation Holdings, LLC formedEdison Nation Medica ("EN Medical") in May of 2012. It was a partnership betweenEdison Nation andCarolinas Healthcare Systems (now called Atrium). Atrium is the 2nd largest healthcare system in the US.Carolina Health (Atrium) wanted a way to aggregate and commercialize the healthcare related innovations that were coming from their physicians, nurses, and patients, andEdison Nation offered a platform to provide that function. EN Medical built out a separate platform, leveraging theEdison Nation model to look for ideas that improved patient care and lowered costs. EN collected some great ideas, but the market shifted and EN found that the licensing model was very difficult as big medical device companies wanted to acquire companies with sales versus just buying IP and prototypes.
Today, EN Medical operates an online portal granting hospitals, government agencies and distributors access to its catalog of medical supplies and hand sanitizers. EN Medical's website is located at www.edisonnationmedical.com.
31
Non-Employee Director Compensation
OnSeptember 26, 2018 , the Compensation Committee of the board of directors approved the terms of compensation to be paid to non-employee directors for fiscal year 2018. Compensation for non-employee directors includes an annual retainer of$15,000 , an annual committee meeting fee of$5,000 , if such director chairs a committee of the board of directors, and an award of options to purchase 20,000 shares of the Company's common stock (the "Options"). The restricted stock underlying such Options were to vest one year after the grant date. However, the Options were never granted. Accordingly, onNovember 15, 2019 , in lieu of granting the Options, the Company granted the board of directors restricted stock units of 20,000 shares which vested immediately. In addition, onNovember 15, 2019 , the Company granted each non-employee director restricted stock units of 30,000 shares, which vested
onJanuary 1, 2020 . Receivables Financing OnFebruary 21, 2020 , the Company entered into a receivables financing arrangement for certain receivables of the Company not to exceed$1,250,000 at any one time. The agreement allows for borrowings up to 85% of the outstanding receivable based on the credit quality of the customer. The fee is between 1% and 2% of the total invoices financed. InApril 2019 , we entered into a receivables financing arrangement for certain receivables of the Company. The agreement allows for borrowing up to 80% of the outstanding receivable based on the credit quality of the customer. The fee is between 1% and 2% of the total invoice financed.
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 inthe United States of America , or GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as the reported expenses during the reporting periods. The accounting estimates that require our most significant, difficult and subjective judgments have an impact on revenue recognition, the determination of share-based compensation and financial instruments. We evaluate our estimates and judgments on an ongoing basis. Actual results may differ materially from these estimates under different assumptions or conditions. Our significant accounting policies are more fully described in Note 2 to our consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.
Components of our Results of Operations
Revenues We sell consumer products across a variety of categories, including toys, plush, homewares and electronics, to retailers, distributors and manufacturers. We also sell consumer products directly to consumers through e-commerce channels. Cost of Revenues Our cost of revenues includes inventory costs, materials and supplies costs, internal labor costs and related benefits, subcontractor costs, depreciation, overhead and shipping and handling costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of selling, marketing, advertising, payroll, administrative, finance and professional expenses.
Rental Income
We earn rental income from a month-to-month lease on a portion of the building
located in
Interest Expense, Net
Interest expense includes the cost of our borrowings under our debt arrangements.
32 Results of Operations
Three Months Ended
The following table sets forth information comparing the components of net
(loss) income for the three months ended
Three Months Ended March 31, Period over Period Change
2020 2019 $ %
Revenues, net $ 3,667,110 $ 5,738,534 $ (2,071,424 ) -36.10 %
Cost of revenues 2,418,412 3,945,558 (1,527,146 ) -38.71 %
Gross profit 1,248,698 1,792,976 (544,278 ) -30.36 %
Operating expenses:
Selling, general and
administrative 4,192,713 3,049,188 1,143,525 37.50 %
Operating (loss) (2,944,015 ) (1,256,212 ) (1,687,803 ) 134.36 %
Other (expense) income:
Rental income 25,704 25,704 - 0.0 %
Interest (expense) (723,957 ) (124,694 ) (599,263 ) 480.59 %
Gain on divestirure 4,911,760 - 4,911,760 100.00 %
Total other income (expense),
net 4,213,507 (98,990 ) 4,312,497 4,356.50 %
Income (loss) before income
taxes 1,269,492 (1,355,202 ) 2,624,694 193.68 %
Income tax expense - 23,195 (23,195 ) -100.00 %
Net income (loss) 1,269,492 (1,378,397 ) 2,647,889 192.10 %
Net income attributable to
noncontrolling interests - 56,893 (56,893 ) -100.00 %
Net income (loss) attributable
to Edison Nation, Inc. $ 1,269,492 $ (1,435,290 ) $ 2,704,782 188.44 % Revenue
For the three months endedMarch 31, 2020 , revenues decreased by$2,071,424 or 36.10%, as compared to the three months endedMarch 31, 2019 . The decrease was primarily the result of decrease in business operations due to the COVID-19 pandemic inChina and the US. The full impact of the COVID-19 outbreak to the Company's operations remains uncertain. Some of our larger customers, such as amusement parks remain closed or operating in a limited capacity. After operating at lower than planned production levels during most of the first quarter due to COVID-19, the Company's third-party manufacturing facilities inChina are currently operating at planned capacity for this time of year. Manufacturing and warehouse partners outside ofChina are operating at varying levels of productivity depending on local government and safety considerations, with some markets operating at lower than normal production levels while other facilities have been closed entirely. The COVID-19 situation continues to be fluid, but we currently expect all manufacturing facilities to reopen in the third quarter, based upon our understanding of local governments directions
at this time. Cost of Revenues
For the three months ended
Gross Profit For the three months endedMarch 31, 2020 , gross profit decreased by$544,278 , or 30.36%, as compared to the three months endedMarch 31, 2019 . The decrease was primarily a result of the decrease in revenues. For the three months endedMarch 31, 2020 , gross margin increased to 34.05%, as compared to 31.24% for the three months endedMarch 31, 2019 . The increase in gross margin was due to product mix of goods sold to customers through ourEd Roses business and ourCloud B branded products. Operating Expenses
Selling, general and administrative expenses were$4,192,713 and$3,049,188 for the three months endedMarch 31, 2020 and 2019, respectively, representing an increase of$1,143,525 , or 37.50%. The increase was primarily the result of an increase in stock-based compensation of approximately$1,100,000 , selling fees related to Amazon of approximately$250,000 of selling expenses offset by a reduction in investor relations expense of approximately$150,000 . Rental Income
Rental income was
33 Interest expense
Interest expense was
Income tax expense Income tax expense was$0 for the three months endedMarch 31, 2020 , a decrease of$23,195 or 100.00%, compared to an expense of$23,195 for the three months endedMarch 31, 2019 . The decrease was primarily due to the decrease in income from our foreign operations with no offset for income inthe United States .
Non-GAAP Measures
EBITDA and Adjusted EBITDA
The Company defines EBITDA as net loss before interest, taxes and depreciation and amortization. The Company defines Adjusted EBITDA as EBITDA, further adjusted to eliminate the impact of certain non-recurring items and other items that we do not consider in our evaluation of our ongoing operating performance from period to period. These items will include stock-based compensation, restructuring and severance costs, transaction costs, acquisition costs, certain other non-recurring charges and gains that the Company does not believe reflects the underlying business performance. For the three months endedMarch 31, 2020 and 2019, EBITDA and Adjusted EBITDA consisted of the following: For the Three Months Ended March 31, 2020 2019 Net income (loss)$ 1,269,492 $ (1,378,397 ) Interest expense, net 723,957 124,696 Income tax gain (expense) - 23,195 Depreciation and amortization 316,298 301,383 EBITDA 2,309,747 (929,123 ) Stock-based compensation 1,319,511 309,919 Other non-cash stock-based charges - 52,500 Restructuring and severance costs 242,136 36,385
Transaction and acquisition costs 82,736 223,538 Other non-recurring costs
40,860 104,174
Gain on divestiture (4,911,760 ) -
Adjusted EBITDA $ (916,770 ) $ (202,607 ) EBITDA and Adjusted EBITDA is a financial measure that is not calculated in accordance with accounting principles generally accepted inthe 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 withU.S. GAAP. Instead, management believes EBITDA and Adjusted EBITDA should be used to supplement the Company's financial measures derived in accordance withU.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 withU.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. 34
Liquidity and Capital Resources
For the three months endedMarch 31, 2020 , our operations lost approximately$2,900,000 , of which approximately$2,284,000 was non-cash and approximately$366,000 was related to transaction costs and other non-recurring items AtMarch 31, 2020 , we had total current assets of approximately$4,907,818 and current liabilities of approximately$8,899,487 resulting in negative working capital of approximately$3,991,669 , of which$1,118,751 was related party notes payable and$530,815 was included in accrued expenses for unissued shares. AtMarch 31, 2020 , we had total assets of$23,199,868 and total liabilities of$11,970,547 resulting in stockholders' equity of$11,229,321 . The foregoing factors raise substantial doubt about the Company's ability to continue as a going concern for at least the next twelve months from the date of issuance of these condensed financial statements. The ability to continue as a going concern is dependent upon the Company's ability to attract significant new sources of capital, attain a reasonable threshold of operating efficiencies and achieve profitable operations from the sale of its products. The condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. The following is additional information on our operating losses and working capital: The Company's operating loss for the three months endedMarch 31, 2020 included$2,284,269 related to depreciation, amortization (including amortization for financing costs and right of use assets) and stock-based compensation. In addition, approximately$365,732 was related to transaction costs, restructuring charges and other non-recurring and redundant costs which are being removed
or reduced.
Management has considered possible mitigating factors within our management plan
on our ability to continue for at least a year from the date these financial
statements are filed. The following items are management plans to alleviate any
going concern issues for at least the next twelve months from the date these
condensed financial statements are available:
? Subsequent to March 31, 2020 , the Company raised $1,089,853 through loan
agreements.
? Raise further capital through the sale of addition equity.
? Borrow money under debt securities.
? The deferral of payments to related party debt holders for both principal
of
? Annual cost saving initiatives related to synergies and the elimination of
redundant costs of approximately $1,500,000 .
? Possible sale of certain brands to other manufacturers.
? Edison Nation Medical's procurement of Personal Protective Equipment
("PPE") and subsequent sale to governmental agencies, educational
facilities, medical facilities and distributors.
? Entry into joint ventures or total/partial acquisitions of operational
entities to expand the sale of PPE through Edison Nation Medical
Our operating needs include the planned costs to operate our business, including
amounts required to fund working capital and capital expenditures. Our future
capital requirements and the adequacy of our available funds will depend on many
factors, including our ability to successfully commercialize our products and
services, competing technological and market developments, and the need to enter
into collaborations with other companies or acquire other companies or
technologies to enhance or complement our product and service offerings.
Cash Flows
During the three months ended
Cash Flows from Operating Activities
Net cash used in operating activities for the three months endedMarch 31, 2020 was$1,153,505 which included net income of$1,269,492 that included$204,493 of cash provided by changes in operating assets and liabilities, stock-based compensation of$1,319,511 , depreciation and amortization of$316,299 , amortization of financing costs of$570,636 and amortization of right of use assets of$77,823 which was offset by a gain on divestiture of a subsidiary of$4,911,760 ,. Net cash used in operating activities for the three months endedMarch 31, 2019 was$1,692,196 which included a net loss of$1,378,397 that included$1,111,327 of cash used by changes in operating assets and liabilities which was offset by stock-based compensation of$362,419 , depreciation and amortization of$301,383 , amortization of debt issuance costs of$56,022 and amortization of right of use assets of 77,704.
Cash Flows from Investing Activities
Net cash used in investing activities was
Cash Flows from Financing Activities
Cash provided by financing activities for the three months endedMarch 31, 2020 totaled$1,304,766 which related mostly to borrowings under convertible notes and borrowings under notes payable. Cash provided by financing activities for the three months endedMarch 31, 2019 totaled$431,866 which related mostly to net cash received borrowings under new debt instruments offset by repayments.
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.
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