For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts receivableReceivable and Accounts receivable other
Receivable OtherAccounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of June 30, 2022 and September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did not have2021, we had an allowance at December 31, 2017.
In addition,for doubtful accounts of $18,156 and $3,633, respectively.Merchant Receivable and Reserve
The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors and negotiate the fee based on the market. The arrangement with the payment processors requires that the Company may, from time to time, enter into contracts wherepay a portionfee between 2.6% and 5.0% of the consideration provided bytransaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 to 5 days prior to reimbursement to the customer in exchangeCompany, as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically with notice from the processors. At June 30, 2022, the receivable from payment processors included approximately $298,659 for the Company's serviceswaiting period amount and is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivablerecorded as accounts receivable other, and usein the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a private entity).
Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the financial statements.
Marketable Securities
At the time of acquisition, a marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-sale securities are carried at fair value on theaccompanying condensed consolidated balance sheets statements of financial condition with changes in fair value recorded in the accumulated other comprehensive income component of shareholders’ equity in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Code (“ASC”) 320-10. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income on the Company’s consolidated statements of operations.
Investment Other Securities
For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting in accordance with ASC 325-10. Under the cost method, dividends received from the investment are recorded as dividend income within non-operating income.
Other-than-Temporary Impairment
The Company’s management periodically assesses its marketable securities and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statement of operations. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations.
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (which(portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. Prepaid Inventory represents deposits made with third party manufacturers in order to begin production of an order for product. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show boothsmanufacturing equipment and equipment, automobiles and three years for manufacturer’s moldssoftware, computer, and plates, three years for computer, furniture and equipment, and three yearsequipment. The useful life for software.leasehold improvements are over the term of the lease, or the remaining economic life of the asset, whichever is shorter. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statementstatements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
Value AccountingThe Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the assetcarrying value is valuedassigned at fair value. For investment other securities, it will value the asset using the cost method of accounting. Any changes in fair value for marketable securities during a given period will be recorded as aan unrealized gain or loss in other comprehensive income, unless a decline is determined to be other-than-temporary.the consolidated statement of operations. For investment other securities we usewithout a readily determinable fair value, the Company may elect to estimate its fair value at cost method and compareless impairment plus or minus changes resulting from observable price changes.
Goodwill
Goodwill represents the excess of cost of an acquired business over the fair value of the identifiable tangible and intangible assets acquired and liabilities assumed in a business combination. Identifiable intangible assets acquired in business combinations are recorded based on their fair values at the date of acquisition. Goodwill is not subject to costamortization but must be evaluated for impairment annually. The Company tests for goodwill impairment annually or whenever events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
In performing a goodwill test, the Company performs a qualitative evaluation and if necessary, a quantitative evaluation. Factors considered in orderthe qualitative test include specific operating results as well as new events and circumstances. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to the respective fair value. The Company determines the fair value of the business using a combination of income- based and market-based approaches and incorporates assumptions it believes market participants would utilize. The income-based approach utilizes discounted cash flows while the market-based approach utilizes market multiples. These approaches are dependent upon internally developed forecasts that are based upon annual budgets and longer-range strategic plans. The Company uses discount rates that are commensurate with the risks and uncertainty inherent in the respective acquired business and in the internally developed forecasts. The Company has analyzed a variety of factors on its business to determine if there isa circumstance could trigger an other-than-temporary impairment.
impairment loss. See Note 5 for further information on the impairment testing procedures performed.Intangible Assets
The Company'sCompany’s intangible assets consist of trademarks and other intellectual property, all of which are accounted for ASCin accordance with Accounting Standards Codification (ASC) Topic 350,Intangibles – Goodwill and Other. TheOther. Prior to December 31, 2021, the Company employsemployed the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We performThe Company performed an annual impairment analysis at as of August 1 annuallyof each fiscal year on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our350-30-35-18. The annual impairment analysis includesincluded a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we reviewthe Company reviewed events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, wethe Company would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts,the business, associated with the intangible assets. In addition, intangible assets will bewere tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. EventsThe Company analyzed a variety of factors on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, has determined that are assessed include contracts acquired is it more likely than not that an impairment loss has occurred. See Note 5 more further information on the impairment testing procedures performed at December 31, 2021 and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. InCompany’s decision to change from indefinite to definite lived status for its trademarks. The Company now accounts for its trademarks in accordance with Accounting Standards Codification (ASC) Topic 360, Property, Plant and Equipment. The Company began amortizing its trademarks over 20 years beginning January 1, 2022 and will perform impairment tests as prescribed by ASC 360-10-35-21, definite lived intangibles are reviewed annually or more frequently if360, which states that impairment testing should be completed whenever events or changes in circumstances indicate that the assets mightasset’s carrying value may not be impaired, to assess whether theirrecoverable. If there are indications that the asset’s carrying value may not be recoverable, there are two further steps involved in long-lived asset impairment testing. Step I of the impairment test, as per ASC 360, involves estimating the Recoverable Amount of the Asset Group and determining the potential for impairment. Step II of the impairment test, as per ASC 360, if necessary, involves quantifying the fair value exceeds their carrying value.
In Conjunctionof the asset group. The Company notes that there are no indications of impairment related to its trademarks as of June 30, 2022.Contingent Liability
A significant component of the purchase price consideration for the Company’s acquisition of Cure Based Development includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 6. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.
Paycheck Protection Program Loan
On April 27, 2020, we received a loan in the principal amount of $1,456,100 (the “SBA Loan”) in consideration of a Promissory Note, under the Paycheck Protection Program (“PPP”), which was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The Company used the SBA Loan for qualifying expenses and on May 17, 2021 it received notice from the SBA that the loan had been forgiven. The Company subsequently booked a $1,466,113 gain for unpaid principal and accrued interest.
Revenue Recognition
Under ASC 606,Revenue from Contracts with any acquisitions,Customers, the Company refersrecognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01in determining ifreceive in exchange for those goods. The Company recognizes revenues following the five-step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company meets that obligation when it has shipped products which have been ordered to the customer. The Company has reviewed its various revenue streams for its other contracts under the five-step approach. At June 30, 2022, the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classificationhas no unfulfilled performance obligations.
Allocation of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potential assets and liabilities for valuation including the determination of intangible asset values.
Common stock
Level Brands was a private company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that included the issuance of common stock to an unrelated party at a specified price. Transaction PriceIn the event, however, there had not been a recent and significant equity financing transaction or the nature of theCompany’s current business has significantly changed subsequent to an equity financing, we used valuation techniques,model, it does not have contracts with customers which included discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stockhave multiple elements as revenue is valueddriven purely by the market since that date.
Revenue Recognition
The Company's policy in relation toonline product sales
is to recognize revenue when persuasive evidence of an arrangement exists, shipping has occurred or
service obligations have been satisfied, the sales price is fixed or determinable and collection is probable. purchase order-based product sales.Revenue Recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to theits customer obtains control, which is upon shipping.shipping (and is typically FOB shipping) which is when our performance obligation is met. Net sales are comprised of gross revenues less expected product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons.promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although,The Company currently offers a 60-day, money back guarantee
Disaggregated Revenue
The Company’s product revenue is generated primarily through two sales channels, E-commerce sales (formerly referred to as consumer sales) and wholesale sales. The Company believes that these categories appropriately reflect how the Company does not have a formal return policy, from time to time the Company will allow customers to return certain products. nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we disposedescription of the returned product, adjust inventoryCompany’s principal revenue generating activities are as follows:
| - | E-commerce sales - consumer products sold through the Company’s online and telephonic channels. Revenue is recognized when control of the merchandise is transferred to the customer, which generally occurs upon shipment. Payment is typically due prior to the date of shipment; and |
| | |
| - | Wholesale sales - products sold to the Company’s wholesale customers for subsequent resale. Revenue is recognized when control of the goods is transferred to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and can typically be 30 days from the date control over the product is transferred to the customer. |
Contract liabilities represent unearned revenues and record expenseare presented as appropriate. There were no allowances for sales returns duringdeferred revenue or customer deposits on the three months ended December 31, 2017 and 2016.
condensed consolidated balance sheets.The Company also enters into various license agreements that provide revenues based on royalties ashas no material contract assets nor contract liabilities at June 30, 2022.
The following tables represent a percentagedisaggregation of revenue by sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred license revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred license revenue at the time the payment is received. Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed.
channel:| | | Three Months | | | | | | | Three Months | | | | | |
| | | Ended | | | | | | | Ended | | | | | |
| | | June 30, | | | | | | | June 30, | | | | | |
| | | 2022 | | | % of total | | | 2021 | | | % of total | |
| | | | | | | | | | | | | | | | | |
Wholesale sales | | $ | 2,079,592 | | | | 24.2 | % | | $ | 2,740,523 | | | | 26.0 | % |
E-commerce sales | | | 6,513,301 | | | | 75.8 | % | | | 7,820,000 | | | | 74.0 | % |
Total Net Sales | | $ | 8,592,893 | | | | 100.0 | % | | $ | 10,560,523 | | | | 100.0 | % |
| | | Nine Months | | | | | | | Nine Months | | | | | |
| | | Ended | | | | | | | Ended | | | | | |
| | | June 30, | | | | | | | June 30, | | | | | |
| | | 2022 | | | % of total | | | 2021 | | | % of total | |
| | | | | | | | | | | | | | | | | |
Wholesale sales | | $ | 7,382,880 | | | | 26.8 | % | | $ | 9,049,068 | | | | 26.1 | % |
E-commerce sales | | | 20,160,721 | | | | 73.2 | % | | | 25,638,368 | | | | 73.9 | % |
Total Net Sales | | $ | 27,543,601 | | | | 100.0 | % | | $ | 34,687,436 | | | | 100.0 | % |
Cost of Sales
OurThe Company’s cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our professionalthe Company’s products divisions,sales, and includes labor and third partyfor its service providers for our licensing and entertainment divisions.
In our professional products division,sales. For the Company’s product sales, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale, if any, and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These costsexpenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their recoverablenet realizable value.Advertising Costs
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $194,000 and $30,000 in advertising and related marketing and promotional costs included in operating expenses during the three months ended December 31, 2017 and 2016, respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnershipAs of October 1, 2019, CBDI and Paw CBD were wholly owned subsidiaries and are disregarded entities for federaltax purposes and state income tax purposes. As such, the Parent Company’s partnershiptheir entire share in theof taxable income or loss of BPU wasis included in the tax return of the Parent Company. Beginning in AprilCompany and as of 2017, the Parent Company acquired the remaining interest in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. Level H&WMarch 15, 2021, Therapeutics is also a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB Accounting Standards Codification (“ASC”),ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses theinsidethe inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of December 31, 2017 and 2016, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $8,347,313an $8,644,186 uninsured balance at December 31, 2017June 30, 2022 and a $4,728$23,508,953 uninsured balance at September 30, 2017.
2021.Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company had sales to threedid not have any customers that individually represented over 10%a significant amount of total netour sales for the three and nine months ended December 31, 2017. Such customers represented 37%, 13%, and 37% of net sales. Net sales to such customers reported in the entertainment divisions were approximately $254,000, $92,000 and $254,000, respectively. The aggregate accounts receivable of such customers represented 79% of the Company’s total accounts receivable at December 31, 2017. June 30, 2022.
Stock-Based Compensation
The Company had two customers whose revenue collectively represented approximately 88% of the Company’s net salesaccounts for the three months ended December 31, 2016.
Debt Issuance Costs
Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. Amortization of debt issuance costs are included as a component of interest expense in accordance with ASU 2015-03. All debt obligations were satisfied in fiscal 2017 and all amortization costs had been recognized in interest expense in fiscal 2017 (see Notes 7 and 8).
Stock-Based Compensation
We account for ourits stock compensation under the ASC -718-10-30 “Compensation718-10-30,Compensation - Stock Compensation”Compensation using the fair value basedvalue-based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity'sentity’s equity instruments or that may be settled by the issuance of those equity instruments.
We useThe Company uses the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718 and the standard became effective October 1, 2017, we elected to change our accounting principle to recognizeThe Company recognizes forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
Earnings (Loss) Per Share
The Company uses ASC 260-10, “Earnings260-10, Earnings Per Share”Share for calculating the basic and diluted lossincome (loss) per share. The Company computes basic lossincome (loss) per share by dividing net lossincome (loss) and net lossincome (loss) attributable to common shareholders, after deducting preferred stock dividends, by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
At December 31, 2017Liquidity and 2016, 855,476 and 597,476 potential shares, respectively, were excluded fromGoing Concern Considerations
The accompanying financial statements have been prepared assuming that the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
Deferred IPO costs
In following the guidance under ASC 340-10-S99-1, IPO costs directly attributable to an offering of equity securities were deferred and charged against the gross proceeds of the offeringCompany will continue as a
reductiongoing concern. The Company experienced a loss of
additional paid-in capital during$59,939,934 for the
threenine months ended
December 31, 2017. These costs included legal fees relatedJune 30, 2022. Excluding one time non-cash goodwill and intangibles impairment charges of $48,959,721, the Company's loss was $10,980,213, resulting in working capital of $14,133,054.While the Company is taking strong action, believes in the viability of its strategy and path to profitability, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to support the Company’s daily operations for the twelve months subsequent to the registration draftingissuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and counsel, independent audit costs directly relatedthe ability to acquire additional funding. These and other factors raise potential concern about the registrationCompany’s ability to continue as a going concern within twelve months after the date that the quarterly financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and offering, SEC filingclassification of assets or the amounts and print related costs, exchange listing costs, and IPO roadshow related costs.
classification of liabilities that may result in the Company not being able to continue as a going concernNew Accounting Standards
In May 2014, August 2015 and May 2016, December 2019, the FASB issued ASU 2014-09,
Revenue from Contracts with Customers,2019-12, Income Taxes, Simplifying the Accounting for Income Taxes (Topic 740). The ASU eliminates certain exceptions to the guidance in Accounting Standards Codification (ASC or Codification) 740 related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and ASU 2015-14Revenue from Contracts with Customers, Deferralthe recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customersfranchise taxes and supersedes most current revenue recognitionenacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance under US GAAP, including industry-specific guidance. It also requiresclarifies that single-member limited liability companies and similar disregarded entities that are not subject to disclose both quantitative and qualitative information that enableincome tax are not required to recognize an allocation of consolidated income tax expense in their separate financial statements, usersbut they could elect to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.Subsequently, the FASB has issued the following standards related todo so. ASU 2014-09: ASU No. 2016-08,Revenue from Contracts with Customers(Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10,
Revenue from Contracts with Customers(Topic 606):Identifying Performance Obligations and Licensing(“ASU 2016-10”); ASU No. 2016-12,Revenue from Contracts with Customers(Topic 606):Narrow-Scope Improvements and Practical Expedients(“ASU 2016-12”); and ASU No. 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers(“ASU 2016-20”).
The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity. The Company will adopt this standard in the first quarter of fiscal 2019.
In February 2016, the FASB issued ASU 2016-02,Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-022019-12 is effective for fiscal years andbeginning after December 15, 2020, including interim periods beginning after December 15, 2018.within those fiscal years. The Company is assessingadoption of this standard had no material impact on the impact, if any, of implementing this guidance on itsCompany's consolidated financial position, results of operationsstatements and liquidity.
disclosures.
In August 2016, the FASB issued ASU 2016-15,Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In March 2015 Level Brands formed BPU, a North Carolina limited liability company, and contributed $250,000 in exchange for its member interest. In April 2015 BPU entered into a Contribution Agreement with Beauty & Pinups, Inc., a New York corporation ("BPUNY"), and two members. Under the terms of the Contribution Agreement, BPUNY and its founder contributed the business and certain assets, including the trademark “Beauty & Pin Ups” and its variants, certain other intellectual property and certain inventory to BPU in exchange for a (i) 22% membership interest for two members, and (ii) $150,000 in cash. At closing we assumed $277,500 of BPUNY's accounts payable to its product vendor, which bore interest at 6% annually. The payable was paid off in April 2016. The fair value of the noncontrolling membership interest issued was based on the value of the initial contribution of $250,000 made by Level Brands. The total consideration paid was allocated to the net assets acquired based on relative fair values of those net assets as of the transaction date, in accordance with the Fair Value Measurement topic of the FASB ASC 820. The fair value is comprised of the cash, accounts payable acquired, non-controlling interest and a minimal amount of inventory, all in aggregate valued at $486,760.
I’M1 was formed in California in September 2016. IM1 Holdings was the initial member of IM'1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. The shares were valued by the Company based upon assumptions and other information provided by management, and used three approaches available when valuing a closely held business interest: the cost approach, the income approach and the market approach. Consequently, the market approach was deemed most appropriate, as it considers values established by non-controlling buyers and sellers of interests in the Company as evidenced by implied pricing in rounds of financing. In addition, given the limited data and outlook, the backsolve method was applied to assign values to the common equity, options and warrants after giving consideration to the preference of the convertible debt holders. The valuation determined the price per share of $0.85 which put the value of the 583,000 shares at $495,550. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $971,667.
EE1 was formed in California in March 2016. EE1 Holdings was the initial member of EE1 Holdings. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. We used the same valuation from the Company of $0.85 per share which put the value of the 283,000 shares at $240,550. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $471,667.
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company may,has, from time to time, enterentered into contracts where a portion of the consideration provided by the customer in exchange for the Company'sCompany’s services iswas common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will recordrecorded the receivable as accounts receivable other, and useused the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the companyCompany will value it, and the underlying revenue, on the estimated fair value of the services provided. In determining fair value of marketable securities and investment other securities, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible and consider counterparty credit risk in our assessment of fair value. The Company determines the fair value of marketable securities and investment other securities based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
| ● | Level 1 Inputs: Unadjusted quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date. |
| | |
| ● | Level 2 Inputs: Other than quoted prices included in Level 1 inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability. |
| | |
| ● | Level 3 Inputs: Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. |
Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument will bewas classified as an asset on the consolidated balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privateprivately held entity).
For the three months ended June 30, 2022 and 2021, the Company recorded $0 and $2,852, respectively, and for the nine months ended June 30, 2022 and 2021 the Company recorded $(33,350) and $545,562 respectively, of realized and unrealized gain (loss) on marketable and other securities, including impairments. The realized loss in the first quarter of fiscal 2022 was a result of marking the Company’s holdings of 1,042,193 shares of Isodiol International, Inc. (“Isodiol”) down to zero after Isodiol was delisted from the TSX during December 2021. The gain in the prior year was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero based on prior information related to the company’s performance and COVID-19 impacts.
In September 2020, the Company purchased a membership interest in Adara Sponsor LLC for $250,000, which along with proceeds from other investors was utilized as an investment in Adara Acquisition Corporation (“Adara”), a newly organized blank check company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization or similar business combination (a “SPAC”). On January 13, 2021, the Company executed second tranche subscriptions agreements and funded the remaining $750,000 commitment into Adara Sponsor, LLC. Certain affiliates of the Company have also invested in Adara Sponsor, LLC. On February 9, 2021, the public shares of Adara began trading on the NYSE. Commencing March 24, 2021, holders of the 11,500,000 units sold in the Adara’s initial public offering could elect to separately trade shares of the Adara Class A common stock and warrants included in the units. The shares of Class A common stock and warrants that were separated now trade on NYSE American LLC under the symbols “ADRA” and “ADRA WS”, respectively. On June 30, 2022, the Company’s implied, indirect ownership in Adara represented 4.4% (633,988 shares) and 10.1% (1 million) of the warrants. As of April 2017, June 30, 2022, ADRA stock closed at $9.89 while ADRA WS closed at $0.18. On June 22, 2022, the Company received 2,500,000 sharesexecuted a transfer agreement with affiliates of common stock, of an OTC-quoted company underAdara Sponsor, LLC whereby the terms of its agreement for servicesCompany's interest would be transferred to the OTC-quoted company, which was valued at $650,000 based onaffiliates of Adara Sponsor, LLC upon Adara's acquisition of Allliance Entertainment, Inc. (the "Target") in consideration of the trading price onCompany's original purchase price. As a result of the OTC MarketsSEC litigation against our former CEO, the dayTarget provided a demand to Adara that it required cbdMD and Mr. Sumichrast to dispose of issuance, which was $0.26 per share. The shares were restrictedour interests in Adara Sponsor, LLC as indicated under Securities Acta condition of 1933 and may not be resold without registration under the Securities Act of 1933 or an exemption therefrom. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange.
As of proceeding with any business combination. On June 30, 2017 the trading price on the OTC Markets was $0.03 and the Company23, 2022, Adara announced it had
exchanged the 2,500,000 shares of common stockentered into business combination agreements with the
issuer for 65 shares of preferred stock. The 65 shares of preferred stock issued were each convertible using the lesser of either $0.26 per share or the 30 day trading average, that would provideTarget subject to a number of
shares equalconditions to
closing, including shareholder SEC approval. There are no assurances the
valuebusiness combination will be completed. If the business combination is not completed, Adara will continue to pursue other targets for a potential business combination.Adara’s focus of $10,000 per share. The Company classified the preferred stock as Level 3 for fair value measurement purposes as there were no observable inputs. The preferred shares also contained a put optiontargets to pursue for the holder for the stated
value per share. The Company determined that the value of the preferred shares was $475,000, which was an approximation of fair market value. On July 31, 2017 the Company sold the preferred sharesbusiness combination are expected to a related party for $475,000; $200,000 in cash and a short term note receivable for $275,000. As a result, the Company recorded an other-than-temporary impairment on securities for the year ended September 30, 2017 of $175,000be in the consolidated statementconsumer products industry including business in the health and wellness, ecommerce, discretionary spending, information technology sectors and related channels of operations.
On June 23, 2017, I’M1 and EE1 in aggregate exerciseddistribution. While Adara is currently a
warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in Investment Other Securities. The common stock was issued tolisted company, the Company’s
subsidiaries I’M1investment is in Adara Sponsor, LLC and
EE1. The customer is a private entity andconsequently the
stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share. The Company has classified this
common stockinvestment as Level
3 for fair value measurement purposes as there are
no observable inputs.
In valuingOn April 7, 2022, CBD Industries, LLC entered into an asset sale agreement to sell substantially all its manufacturing assets to a subsidiary of Steady State, LLC ("Steady State"). The equipment sale is initially valued at approximately $1.8 million for accounting purposes, the stocksale price consisting of products to be provided to the Company usedunder the fair valuemanufacturing and supply agreement and $1.4 million of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests (“NCI”). In August 2017,which the Company also provided referral services for kathy Ireland® WorldWide and this customer. As compensationinvested into Steady State in the Company receivedform of an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the common stock and determined there was not an impairment for the period ended December 31, 2017.
On September 19, 2017, I’M1 and EE1 in aggregate exercised a warrant for 56,552 shares of common stock for services delivered to a customer and accounted for this in Investment Other Securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $56,552, which was based on all 2017 financing transactions of the customer set at $1.00 per share,equity investment consistent with the
most recent third party transaction in August 2017.terms of Steady State's recently completed series C financing. The Company has classified this
common stockinvestment as Level
3 for fair value measurement purposes as there are
no observable
inputs. inputs and has included in noncurrent assets on the accompanying condensed consolidated balance sheets as the company intends to hold this investment for longer than a year.In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months.
In November 2017, the Company completed services in relation to an agreement with SG Blocks, Inc. As payment for these services, SG Blocks issued 50,000 shares of its common stock to Level Brands. The customer is a publicly traded entity and the stock was valued based on the trading price at the day the services were determined delivered, which was $5.09 per share for an aggregate value of $254,500. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange. The common stock is held as available for sale, and at December 31, 2017, the shares were $5.98 per share, and we recorded $44,500 as other comprehensive income on the Company consolidated financial statements.
In December 2017, the Company completed advisory services in relation to an agreement with Kure Corp, a related party, which it entered into in August 2017. As payment for these services, Kure Corp issued 400,000 shares of its stock to Level Brands. The customer is a private entity and the stock was valued at $200,000, which was based on financing activities by Kure Corp in September 2017 in which shares were valued at $0.50 per share. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions.
On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from a current customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPO offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The customer is a private entity. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stockboth investments, the Company used the value paid, which was the price offered to all third party-party investors.
The Company also assessed the common stock of Adara and determined there was not an impairment for the period ended June 30, 2022.The table below summarizessummarized the assets valued at fair value as of December 31, 2017:
June 30, 2022:| | | In Active | | | | | | | | | | | | | |
| | | Markets for | | | Significant Other | | | Significant | | | | | |
| | | Identical Assets | | | Observable | | | Unobservable | | | | | |
| | | and Liabilities | | | Inputs | | | Inputs | | | | | |
| | | (Level 1) | | | (Level 2) | | | (Level 3) | | | Total | |
Investment other securities | | $ | - | | | $ | - | | | $ | 1,000,000 | | | $ | 1,000,000 | |
| | | | | | | | | | | | | | | | | |
Balance at September 30, 2021 | | | 33,351 | | | | 0 | | | | 1,000,000 | | | | 1,033,351 | |
Change in value of equities | | | (33,351 | ) | | | 0 | | | | 0 | | | | (33,351 | ) |
Additional Investment | | | - | | | | - | | | | - | | | | - | |
Balance at December 31, 2021 | | $ | 0 | | | $ | 0 | | | $ | 1,000,000 | | | $ | 1,000,000 | |
Change in value of equities | | | - | | | | - | | | | - | | | | - | |
Additional Investment | | | - | | | | - | | | | - | | | | | |
Balance at March 31, 2022 | | $ | 0 | | | $ | 0 | | | $ | 1,000,000 | | | $ | 1,000,000 | |
Change in value of equities | | | - | | | | - | | | | - | | | | - | |
Additional Investment | | | 0 | | | | 0 | | | | 1,400,000 | | | | 1,400,000 | |
Balance at June 30, 2022 | | $ | 0 | | | $ | 0 | | | $ | 2,400,000 | | | $ | 2,400,000 | |
| | In Active Markets for Identical Assets and Liabilities (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total Fair Value at December 31, 2017 |
| | | | | |
| Marketable securities | $299,000 | - | $- | $299,000 |
| Investment other securities | - | - | $1,359,112 | $1,359,112 |
| | | | | |
| | | | | |
| Balance at September 30, 2017 | $- | $- | $859,112 | $859,112 |
| Receipt of equity investment upon completion of contract | $254,500 | $- | $- | $254,500 |
| Receipt of equity investment upon completion of contract | $- | $- | $200,000 | $200,000 |
| Purchase of preferred shares, convertible into common stock | $- | $- | $300,000 | $300,000 |
| Change in value of equity, other comprehensive income | $44,500 | $- | $- | $44,500 |
| Balance at December 31, 2017 | $299,000 | $- | $1,359,112 | $1,658,112 |
Inventory at December 31, 2017June 30, 2022 and September 30, 20172021 consists of the following:
| | | June 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
Finished Goods | | $ | 3,083,043 | | | $ | 3,362,897 | |
Inventory Components | | | 1,314,646 | | | | 1,729,176 | |
Inventory Reserve | | | (79,485 | ) | | | (70,206 | ) |
Inventory prepaid | | | 548,580 | | | | 551,519 | |
Total Inventory | | $ | 4,866,783 | | | $ | 5,573,386 | |
Abnormal amounts of idle facility expense, freight, handling costs, scrap and wasted material (spoilage) are expensed in the period they are in incurred and no material expenses related to these items occurred in the three months ended June 30, 2022.
| | | |
| | | |
| Finished goods | $383,036 | $375,459 |
| Inventory components | 210,113 | 212,738 |
| Inventory reserve | - | - |
| Total | $593,149 | $588,197 |
At September 30, 2017, the Company determined that inventory was impaired by approximately $67,000.
NOTE 5 4– PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2017June 30, 2022 and September 30, 20172021 consist of the following:
| | | |
| | | |
| Computers and equipment | $39,926 | $37,261 |
| Show booth and equipment | 49,123 | 171,986 |
| Manufacturers’ molds and plates | 34,200 | 34,200 |
| | 123,249 | 243,447 |
| Less accumulated depreciation | (67,124) | (107,971) |
| Net property and equipment | $56,125 | $135,476 |
| | | June 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
Computers, furniture and equipment | | $ | 861,731 | | | $ | 549,910 | |
Manufacturing equipment | | | 284,275 | | | | 2,968,838 | |
Leasehold improvements | | | 487,081 | | | | 870,621 | |
Automobiles | | | 35,979 | | | | 35,979 | |
| | | | 1,669,066 | | | | 4,425,348 | |
Less accumulated depreciation | | | (893,589 | ) | | | (1,863,774 | ) |
Property and equipment, net | | $ | 775,477 | | | $ | 2,561,574 | |
Depreciation expense related to property and equipment was $13,756$158,555 and $9,189$246,532 for the periodsthree months ended June 30, 2022 and 2021, respectively and was $770,335 and $719,856 for the nine months ended June 30, 2022 and 2021, respectively. During the quarter, the Company sold substantially all the assets of its manufacturing facility and as a result the gross investment and accumulated depreciation was removed from the balance sheet, reducing net PP&E.
NOTE 5– GOODWILL AND INTANGIBLE ASSETS
Goodwill
The Company had goodwill at December 31, 2017 and 2016, respectively. In the three months ended December 31, 2017 we recorded a one time loss 2021 of $69,511 on the disposal of a show booth that is no longer in use.
NOTE 6 – INTANGIBLE ASSETS
On April 13, 2015, BPU acquired from BPUNY certain assets, including the trademark "Beauty & Pin Ups" and its variants and certain other intellectual property and assumed $277,500 of BPUNY's accounts payable to its product vendor, which was paid off in April 2016.
On January 6, 2017, the Company acquired 51% ownership in I’M1 from I’M1 Holdings. I’M1’s assets include the trademark "I’M1” and its variants and certain other intellectual property. Specifically, a licensing agreement with kathy ireland® Worldwide and an advisory agreement for services with kathy ireland® Worldwide. The licensing agreement provides the rights to use of the tradename for business and licensing purposes, this is the baseline of the business and will be required as long as the business is operating. Our capability for renewals of these agreements are extremely likely as the agreements are with a related party. We also believe the existence of this agreement does not have limits on the time it will contribute to the generation of cash flows for I’M1 and therefore we have identified these as indefinite-lived intangible assets.
On January 6, 2017, the Company acquired 51% ownership in EE1 from EE1 Holdings. EE1’s assets include the trademark "EE1” and its variants and certain other intellectual property. Specifically, a production deal agreement with BMG Rights Management US and an advisory agreement for services with kathy ireland® Worldwide. We believe the production deal agreement and the advisory agreement do not have limits on the time they will contribute to the generation of cash flows for EE1 and therefore we have identified these as indefinite-lived intangible assets.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725. In addition, the Company agreed to pay $65,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef" and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $11,847 for the three months ended December 31, 2017.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750. In addition, the Company agreed to pay $40,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin Du Jour," and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $6,713 for the three months ended December 31, 2017.
In September 2017, the Company entered into an exclusive seven year license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 are due in equal installments on January 1 of subsequent years until the license fee is paid, and are classified as long term liabilities related party as of December 31, 2017. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. The license and associated intellectual property is being amortized over the term of the agreement and we have amortized $30,000 for the three months ended December 31, 2017.
Intangible assets as of December 31, 2017 and September 30, 2017 consisted of the following:
| | | |
| | | |
| Trademark and other intellectual property related to BPU | $486,760 | $486,760 |
| Trademark and other intellectual property related to I’M1 | 971,667 | 971,667 |
| Trademark and other intellectual property related to EE1 | 471,667 | 471,667 |
Trademark, tradename and other intellectual property related to kathy ireland®Health & Wellness™, net | 800,000 | 830,000 |
| Cash, warrants and stock issued related to the Wholesale license agreement with Chef Andre Carthen, net | 295,298 | 307,146 |
| Cash, warrants and stock issued related to the Wholesale license agreement with Nicholas Walker, net | 166,333 | 173,047 |
| Total | $3,191,725 | $3,240,287 |
| | | |
In September 2017 the Company acquired three definite lived intangible assets, all with a seven year life.
Future amortization schedule:
| | | | | | | |
| Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™ | $800,000 | $90,000 | $120,000 | $120,000 | $120,000 | $120,000 | $230,000 |
| Cash, warrant and stock issued related to the Wholesale license agreement with Chef Andre Carthen | $295,298 | $32,446 | $44,294 | $44,294 | $44,294 | $44,294 | $85,676 |
| Cash, warrant and stock issued related to the Wholesale license agreement with Nicholas Walker | $166,333 | $17,402 | $24,950 | $24,950 | $24,950 | $24,950 | $48,297 |
$56,670,970. The Company performs
ana Step 0 goodwill impairment analysis at
August 1least annually
on the indefinite-lived intangible assets following the steps laid out in ASC
350-30-35-18.350-20-35-3C. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of
goodwill. From time to time the
Company also evaluates goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, the Company performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, the Company determined that goodwill was impaired by $13,898,285. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. The Company performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. The Company has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022.Intangible Assets
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark “cbdMD” and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as the Company creates and distributes products and continue to build this brand. The Company believed the trademark did not have limits on the time it would contribute to the generation of cash flows and therefore identified these as indefinite lived intangible assets.
In September 2019, the Company purchased the rights to the trademark name HempMD for $50,000. This trademark will be used in the marketing and branding of certain products to be released under this brand name. At the time of acquisition, the Company believes the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore has identified these as indefinite-lived intangible assets.
In July 2021, the Company completed the acquisition of DCO and acquired certain assets, including the trade name, domains and certain other intellectual property. The tradename will be used in marketing and branding of the website. The Company believes the trade name has a 10 year life. In addition intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment lossto the trade name, DCO has been incurreda technology platform used to market to its customer and the Company evaluates believes it has a 4 year life.
As of December 31, 2021, the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company has performed a qualitativere-assessed the “cbdMD” and quantitative analysis“HempMD” trademarks and for the years ended September 30, 2017 and 2016 there has been no impairment. The Company hashave determined that no event or circumstances indicate likeliness of an impairmentthe trademarks should be classified as of December 31, 2017.
The Company performs an impairment analysis at August 1 annually on the definite lived intangible assets
with useful lives of 20 years versus indefinite lived intangible assets. The Company used a variety of factors in determining the reclassifications and have made the reclassifications following guidance prescribed by ASC 350-30-35-17, which states that when a reporting entity subsequently determines that in indefinite-lived intangible asset has a finite useful life, the reporting entity should test the asset for impairment as an indefinite lived asset prior to commencing amortization. As of December 31, 2021, the Company has prepared a tradename impairment analysis in accordance with ASC 350 and has determined that the “cbdMD” trademark was impaired by $4,285,000. The Company has recorded this impairment charge as a reduction in the carrying value of the intangible assets on its condensed consolidated balance sheets with the corresponding impairment expense recorded on its condensed consolidated statements of operations. The Company began amortizing the trademarks over their useful lives of 20 years as of January 2022.Intangible assets as of June 30, 2022 and September 30, 2021 consisted of the following:
| | | June 30, | | | September 30, | |
| | | 2022 | | | 2021 | |
Trademark related to cbdMD | | $ | 17,300,000 | | | $ | 21,585,000 | |
Trademark for HempMD | | | 50,000 | | | | 50,000 | |
Technology Relief from Royalty related to DirectCBDOnline.com | | | 667,844 | | | | 667,844 | |
Tradename related to DirectCBDOnline.com | | | 749,567 | | | | 749,567 | |
Amortization of definite lived intangible assets: | | | (655,508 | ) | | | (48,482 | ) |
Total | | $ | 18,111,903 | | | $ | 23,003,929 | |
Amortization expense related to definite lived intangible assets was $277,354 and $0 for the three months ended June 30, 2022 and 2021, respectively and was $607,025 and $0for the nine months ended June 30, 2022 and 2021, respectively.
NOTE 6– CONTINGENT CONSIDERATION
As consideration for the Mergers, described in Note 1, the Company had a contractual obligation to issue 15,250,000 shares of its common stock, after approval by its shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions, and the unrestricted voting rights to 8,750,000 tranche of shares will also vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 Earnout Shares can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the steps laidClosing Date.
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change ininternal and external market factors.
The initial two tranches totaling 15,250,000 shares were valued using a market approach method and included the use of the asset, marketfollowing inputs: share price changesupon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the asset, or other eventssecond tranche also included an input for a discount for lack of voting rights during the vest periods.
The Merger Agreement also provides that impactan additional 15,250,000 Earnout Shares would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (each a “marking period”): the completion of 12,24,42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:
Aggregate Net Revenues | | Shares Issued/ Each $ of Aggregate Net Revenue Ratio | |
| | | |
$1 - $20,000,000 | | .190625 | |
$20,000,001 - $60,000,000 | | .0953125 | |
$60,000,001 - $140,000,000 | | .04765625 | |
$140,000,001 - $300,000,000 | | .23828125 | |
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior marking periods.
The issuance of the initial 15,250,000 shares and the 15,250,000 Earnout Shares were approved by the Company’s shareholders in April 2019. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of $ 53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the asset. If an indicator is present we then perform a quantitative analysis to determine ifshares in the carrying amount of $53,215,163 was reclassified from the asset is recoverable. This is done by comparingcontingent liability to additional paid in capital on the total undiscounted future cash flowsconsolidated balance sheet.The third quarter of the long-lived assetthird marketing period ended on September 30, 2021 and based on the measurement criteria an additional 466,713 Earnout Shares were earned and issued in December 2021. These shares decreased in value by $366,841 during the quarter through the time of issuance and had a value of $405,000, which was reclassified from the contingent liability to its carrying amount. Ifadditional paid in capital on the total undiscounted future cash flows exceed the carrying amountconsolidated balance sheet. The fourth quarter of the asset,third marketing period ended on December 31, 2021 and based on the carrying amount is deemed recoverablemeasurement criteria an additional 444,243 Earnout Shares were earned and an impairment is not recorded. Ifissued in March 2022. These shares increased in value by $41,914 during the carrying amountquarter through the time of issuance and had a long-lived asset is deemedvalue of $325,000, which was reclassified from the contingent liability to be unrecoverable, an impairment loss needs to be estimated. In order to calculateadditional paid in capital on the impairment loss, the Fair Valueconsolidated balance sheet. The fifth quarter of the asset must be determined. Fair Value referenced here is determined usingthird marketing period ended on March 31, 2022 and based on the guidance in FASB ASC Topic 820. After assessing indicators for impairment, the Company determined that a quantitative analysis was not needed as of December 31, 2017.
NOTE 7 – CONVERTIBLE PROMISSORY NOTES
On October 4, 2016measurement criteria an additional 458,877 Earnout Shares were earned and
October 24, 2016, the Company issued in
aggregate $2,125,000May 2022. These shares decreased in value by $90,792during the quarter through the time of
8% Convertible Promissory Notesissuance and had a value of $178,000, which was reclassified from the contingent liability to
accredited investors. additional paid in capital on the consolidated balance sheet.The securities consist of 8% Convertible Notes with warrants to purchase 141,676 shares of the Company’s stock (the “Notes”). The warrants havethird marking period was originally an exercise price of $7.80. The Warrants expire in September18 month period commencing on January 1, 2021 and are exercisable beginning the earlier of: (i) immediately after the IPO Closing; or (ii) July 1, 2017.
Effective ending on June 30, 2017, 2022 (the Company converted“Third Marking Period End Date”), after which time the $2,125,000 principal amountdetermination of convertible promissory notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
The Company accounted for the initial issuance of these Notes in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. The Black-Scholes value of the warrants, $5,159, associated with the issuance was recorded as a discount to debt and was amortized into interest expense. In addition, the issuance of
any remaining Earnout Shares would be made pursuant to the
Notesterms of the Merger Agreement. On March 31, 2021 the Company entered into Addendum No.1 to the Merger Agreement (“Addendum No.1”) with the holders of the remaining Earnout Rights which amended the measurement periods within the third marking period to change the determination of the aggregate net revenues within the third marking period to a quarterly basis for each of the six fiscal quarters within the third marking period, beginning with the quarter ended March 31, 2021, instead of following Third Marking Period End Date. This change in the measurement date, however, has no effect on the number of remaining Earnout Shares issuable under the Earnout Rights and
warrants were assessed andno effect on the earnout targets; Addendum No.1 simply changes the physical issuance date(s) of the remaining Earnout Shares, if in fact, such shares are earned pursuant to the terms of the Merger Agreement. Addendum No.1 did
not contain an embedded beneficial conversion feature as change any of the
effective conversion price was not less thanterms of the
relativefourth marking period (as that term is defined in the Merger Agreement). This change did not impact the fair value of the
instrument. We also had feescontingent liability. The value of
$200,800the contingent liability was $702,000 and $9,440,000 at June 30, 2022 and September 30, 2021, respectively. At June 30, 2022, up to 4,338,302 remaining Earnout Shares are subject to issuance by the Company.
As part of the Twenty Two acquisition in July 2021, the Company has a contractual obligation to issue up to an additional 200,000 shares of its common stock as additional consideration, dependent upon the acquisition entity meeting future revenue targets. Under GAAP the Company is required to record a non-cash contingent liability associated with the financing, which was recorded as a debt discountTwenty Two Earnout Shares and is being amortized overat the termdate of the Notes. We haveacquisition, recorded no interest expense relateda total contingent liability of $488,561. Under GAAP the Company is obligated to these amounts forreassess the three months ended December 31, 2017.
NOTE 8 – LINE OF CREDIT
In August 2015, we entered intoobligations associated with the Twenty Two Earnout Shares on a one year $1,000,000 revolving line of credit agreement with LBGLOC, LLC, a related party. Underquarterly basis and, in the termsevent its estimate of the agreement, we pay interest on any amounts available for advance at the rate of 10% per annum. We granted LBGLOC, LLC a blanket security agreement on our assets as collateral for amounts advanced under the credit line. As additional consideration for granting the credit line, we issued the lender 16,000 shares of common stock, valued at $32,000 and was recorded as a debt discount and amortized over the termfair value of the note.
The agreement was renewed forcontingent consideration changes, the Company will record increases or decreases in the fair value as an additional one year period on September 1, 2016. As additional consideration for renewingadjustment to earnings. In particular, changes in the credit line, we issuedmarket price of the lender 14,000 shares ofCompany’s common stock, which was valued at $105,000 based on the most recent equity financing in February 2016, and was recorded as a debt discount and was being amortized over the termis one of the note.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the outstanding principal balance of the line of creditinputs used in determining the amount of $593,797, together with the accrued interest of $179,380non-cash contingent liability, will result in increases or decreases in this liability and positively or negatively impact the Company’s net loss or profit for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. Theperiod. At September 30, 2021, the Company recorded a loss on extinguishmentdecrease in value of $8,750 which was recorded as interest expensethe contingent liability of $73,561 related to a decrease in the consolidated statement of operations. In this transaction, the Company issued 195,740 shares of common stock.
The outstanding balances due under the agreements were $0 at both December 31, 2017 and September 30, 2017.
NOTE 9 – RELATED PARTY TRANSACTIONS
In November 2016 we issued 20,000 sharesmarket price of our common stock, valued at $17,000which adjusted the total contingent liability related to Best Buddies International asthe Twenty Two Earnout Shares to $416,000. At December 31, 2021, the Company recorded a charitable contribution. Best Buddies International is an affiliatedecrease in value of the contingent liability of $255,000 related to a memberdecrease in the market price of our boardcommon stock, which adjusted the total contingent liability related to the Twenty Two Earnout Shares to $161,000. At March 30, 2022 the Company recorded a decrease in value of directors.
On January 1, 2017, we entered intothe contingent liability of $148,000 related to a sublease agreement for office space with Kure Corp. (“Kure”). The lease is for one year anddecrease in the space was to be used by our subsidiary BPU. A shareholder of Kure is Stone Street Capital, LLC, an affiliatemarket price of our CEO and Chairman and our CEO and Chairman wascommon stock, which adjusted the past Chairmantotal contingent liability related to the Twenty Two Earnout Shares to $13,000. At June 30, 2022, the Company recorded a decrease in value of Kure and is alsothe contingent liability of $13,000 related to a shareholder of Kure.
In February 2017 we entered into a master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuant to which we have engaged the company to provide non-exclusive strategic advisory services to us under a term expiring in February 2025. Under the terms of this agreement, Ms. Ireland servesdecrease in the
non-executive positions as our Chairman Emeritus and Chief Brand Strategist. The agreement also provides that kathy ireland® Worldwide will provide input to us on various aspectsmarket price of our
corporate strategies and branding, provides accesscommon stock, which adjusted the total contingent liability related to
us the Twenty Two Earnout Shares to $0.In November of its in-house design team to assist us in developing our brands. As compensation under the agreement we agreed to pay kathy ireland® Worldwide a nominal monthly fee. We are also responsible for the payment of expenses incurred by Ms. Ireland or kathy ireland® Worldwide in providing these services to our company.
On February 8, 20172021 the Company entered into a one year advisory agreementcontractual obligation to issue up to 120,000 RSUs to an employee. During the twelve month period ending December 31, 2022, the employee shall receive RSUs that are dependent upon a minimum $3 million and up to $8 million of net sales generated by the employee through accounts established and opened by the employee. The shares will be subject to meeting the minimum $3 million of net sales as well as to calculations including volume-weighted average stock price minimum and maximum. As of December 31, 2021 the estimated revenue target to be met by the employee through December 31, 2022 was below the minimum threshold for earning RSUs, and therefore, the Company recorded a zero liability related to this contingent liability at December 31, 2021. During the three months ended March31,2022,the employee resigned their position with Mr. Tommy Meharey pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of I’M1. We have agreed to pay Mr. Meharey a fee of $15,000 per month for his services. We are negotiating and expect to execute a new agreement with multi-year terms.
On February 8, 2017 the Company. As such, this contractual obligation was terminated. In April 2022, the Company entered into a one year advisory agreement with Mr. Nic Mendoza pursuantcontractual obligation to which he provides advisory and consulting servicesissue up to us, including serving as co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a fee of $10,000 per month for his services. We are negotiating and expect to execute a new agreement with multi-year terms.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Stephen Roseberry pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1 and I’M1. We have agreed to pay Mr. Roseberry a fee of $1.00 per month for his services. We are negotiating and expect to execute a new agreement with multi-year terms.
In February 2017 the Company entered into an advisory agreement with Mr. Jon Carrasco, expiring in February 2019, pursuant to which he provides advisory and consulting services to us, including serving as Global Creative Director of EE1 and I’M1. We have agreed to pay Mr. Carassco a fee of $1.00 per month for his services. We are negotiating and expect to execute a new agreement with multi-year terms.
In February 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $68,550 for its services, which was recorded as consulting/advisory revenue. Sandbox LLC is an affiliate of a member of our board of directors.
In March 2017, our subsidiary I’M1 entered into a consulting agreement with Kure. In this agreement I’M1 provided services delivered in two phases. The first phase was delivered by March 31, 2017 which included a social media blitz and marketing and branding support and strategies for $200,000. The second phase was delivered by June 22, 2017 which included modeling impressions for the brand and extension of publicity to other media outlets for $400,000. In addition, in March 2017, I’M1 entered into a separate licensing agreement for 10 years with Kure under which we will receive royalties based on gross sales of Kure products with the I’M1 brand.
On June 6, 2017, pursuant100,000 options to an agreement dated May 15, 2017, the Company converted the line of credit with LBGLOC LLC, which included the outstanding principal balance of $593,797 and the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II LLC is an affiliate of our CEO and Chairman and received 94,475 shares of common stock in this transaction.
Effective June 30, 2017, the Company converted the $2,125,000 principal amount of convertible promissory notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. One note holder, Stone Street Partners Opportunity Fund II LLC is an affiliate of our CEO and Chairman and received a total of 26,836 shares.
In June 2017, the Company earned a referral fee from kathy ireland® WorldWide after establishing a business meeting resulting in a new license agreement for kathy ireland® WorldWide. The referral fee was paid out of 200,000 options issued to kathy ireland® WorldWide from the new client, which were exercised and transferred to the Company.employee. The shares are
subject to meeting a minimum direct to consumer revenue of $12.0 million for the December 2022 calendar quarter. The Company is not expecting to meet this revenue metric for the December 2022 calendar quarter and has therefore valued
this liability at
$114,000, which was derived after assessing the value$0 as of
our services provided and determining a per share value of $0.57. The warrant was exercisedJune 30, 2022. NOTE 7– RELATED PARTY TRANSACTIONS
As noted in June 2017 and the shares issued toNote 2, the Company, in August 2017.
In June 2017, Kure purchased products from our subsidiary BPU for resale in their stores. The total purchase was $97,850. Our CEO and Chairman is the past Chairman of Kure and is also a shareholder of Kure.
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company. The accredited investors Stone Street Partners LLC and Stone Street Partners Opportunity Fund II LLC are affiliates of our CEO and Chairman.
On July 31 2017, the Company sold preferred shares it had received as payment for services to a customer. The preferred shares were sold to a related party. The preferred shares were originally valued as marketable securities at $650,000 and were sold for $475,000, an approximation of fair market value, which was paid $200,000 in cash and a short term note of $275,000 at 3% interest, which is in note receivable related party as of December 31, 2017. The Company recorded an impairment of $175,000 for the year ended September 30, 2017 (see Note 3).
On August 1, 2017, the Company entered into an additional advisory agreement with Kure, in which the Company would act as an advisor regarding business strategy involving (1) conversion of Kure franchises into company stores, (2) conversion of Kure debt and preferred shares into common share of Kure and (3) preparation steps required and a strategy to position for a possible Reg A+ offering. The services are to be delivered in two phases, the first deliverables of items 1 and 2 above were delivered by September 30, 2017 and 3 is to be delivered by June 30, 2018. The Company was paid $200,000 in Kure stock for the first deliverables and will be paid $200,000 in cash for the second deliverable.
In August 2017, EE1 entered into a representation agreement with Romero Britto and Britto Central, Inc. under which it was appointed as exclusive licensing consultant to license certain intellectual property in entertainment industry category, which includes theatre, film, art, dance, opera, music, literary, publishing, television and radio, worldwide except for South America. Under the terms of the agreement, EE1 will identify and introduce Britto to potential license opportunities, negotiate terms of license agreements, and implement and administer each eligible license agreement entered. As compensation for our services, EE1 is entitled to receive 35% of the net proceeds received under any license, and following the termination or expiration of the agreement, 15% of the net proceeds of eligible licenses. The President of Britto Central, Inc is the spouse of a member of our board of directors.
In September 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $64,475 for its services, which were recorded as consulting/advisory revenue. EE1 engaged Sterling Winters Company to assist with this service and incurred a cost of sales for that service of $35,421. Sandbox LLC is an affiliate of a member of our board of directors.
On September 1, 2017, the Company entered into a license agreement with kathy ireland® Worldwide for certain use of kathy ireland trademark, likeness, videos, photos and other visual presentations for the Company’s IPO and associated roadshow. The Company paid $100,000 for this agreement.
In September 2017 EE1 created a marketing campaign for a customer and worked through their approved vendor, Sandbox LLC, to deliver services. Under the terms of the oral agreement, EE1 was paid $550,000 for its services from Sandbox. Sandbox LLC is an affiliate of a member of our board of directors. EE1 engaged Sterling Winters Company to assist with this campaign and incurred expenses of $250,000. Sterling Winters Company is a subsidiary of kathy ireland® Worldwide.
On September 8, 2017, the Company extended its Master Advisory and Consulting Agreement, executed in February 2017, with kathy ireland® Worldwide to February 2025.
On December 11, 2017, the Company entered into a service agreement with Kure to facilitate the “Vape Pod” transaction with the modular building systems vendor, SG Blocks, Inc., which is also a customer of our company. Under the terms of this agreement we also agreed to facilitate the introduction to third parties in connection with Kure Corp.'s initiative to establish Vape Pod's at U.S. military base retail locations and advising and aid in site selection for Kure retail stores on military bases and adjoining convenience stores, gas stations, and other similar retail properties utilizing Kure Corp.'s retail Vape Pod concept, among other services. As compensation for this recent agreement, we were issued 400,000 shares of Kure Corp.'s common stock which was valued at $200,000 (see Note 3).
On December 11, 2017 Level Brands also entered into a Revolving Line of Credit Loan Agreement with Kure Corp., pursuant to which we agreed to lend Kure Corp. up to $500,000 to be used for the purchase of prefabricated intermodal container building systems. This credit line was provided in connection with Kure Corp.'s recent Master Purchase Agreement with SG Blocks, Inc. for the purchase of 100 repurposed shipping containers for its Kure Vape Pod™ initiative. Under the terms of the Revolving Line of Credit Loan Agreement, Kure Corp. issued us a $500,000 principal amount secured promissory note, which bears interest at 8% per annum, and which matures on the earlier of one year from the issuance date or when Kure Corp. receives gross proceeds of at least $2,000,000 from the salenumber of its equity securities. As collateral for the repayment of the loan, pursuant to a Security Agreement we were granted a first position security interest in Kure Corp.'s inventory, accounts and accounts receivable. Our CEO and Chairman is the past Chairman of Kure Corp. and currently a minority shareholder of Kure Corp. Level Brands is also a shareholder of Kure Corp. At December 31, 2017 the outstanding balance due under the agreement was $0 and the revolving line of credit has not been utilized.
affiliates have invested into Adara through Adara Sponsor.
23
On December 21, 2017, the Company entered into a sublease agreement with a related party for office space for its subsidiary BPU. The initial lease period is for six months and then changes to a month to month lease. The space includes office and warehouse space and will cost $3,000 per month.
As we engage in providing services to customers, at times we will utilized related parties to assist in delivery of the services. For the period ended December 31, 2017 we incurred related party cost of sales of approximately $126,000 and $53,000 of marketing related expense. We had no related party costs of sales for the period ended December 31, 2016.
NOTE 10 8– SHAREHOLDERS’ SHAREHOLDERS’ EQUITY
Preferred Stock – We areThe Company is authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. In October 2019, the Company designated 5,000,000 of these shares as 8.0% Series A Cumulative Convertible Preferred Stock. Our preferred8.0% Series A Cumulative Convertible Preferred Stock ranks senior to our common stock does not have any preference,for liquidation or dividend provisions. Noprovisions and holders are entitled to receive cumulative cash dividends at an annual rate of 8.0% payable monthly in arrears for the prior month. The Company reviewed ASC 480 – Distinguishing Liabilities from Equity in order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 5,000,000 shares of 8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at June 30, 2022 and September 30, 2021.
The total amount of preferred stock have been issued.
dividends declared and paid were $1,000,501 and $560,281, respectively, for the three months ended June 30, 2022 and 2021. The total amount of dividends declared and paid were $3,001,503 and $1,220,610 for the nine months ended June 30, 2022 and June 30, 2021, respectively.Common Stock – We areThe Company is authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 7,798,92859,946,090 and 5,792,26157,783,340 shares of common stock issued and outstanding at December 31, 2017June 30, 2022 and September 30, 2017,2021, respectively.
Preferred stock transactions:
The Company had no preferred stock transactions in the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
On November 17, 2017, December 8, 2020, the Company completed an IPOa follow-on firm commitment underwritten public offering of 2,000,0002,300,000 shares of its common stock8.0% Series A Cumulative Convertible Preferred Stock for aggregate gross proceeds of $12.0$17.25 million. The Company received approximately $10.9$15.8 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses paid by us.
commissions. The Company also issued to the selling agentrepresentative of the underwriters warrants to purchase in aggregate 100,000150,502 shares of common stock with an exercise price of $7.50.$3.74. The warrants were valued at $171,600$254,950 and expire on September 27, 2022.December 8, 2025.Common stock transactions:
In the threenine months ended December 31, 2017:
On November 17, 2017, June 30, 2022:In May 2022, the Company completed an IPO of 2,000,000issued 458,887 shares of itsrestricted common stock for aggregate gross proceeds of $12.0 million.
in connection with the Earnout Shares as referenced in Note 6.In November 2017, weMarch 2022 the Company issued 6,667444,243 shares of ourrestricted common stock in connection with the Earnout Shares as referenced in Note 6.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
On December 28, 2021, the Company issued 466,713 shares of restricted common stock in connection with the Earnout Shares as referenced in Note 6.
In October 2021, the Company issued 25,000 shares of restricted common stock to an executive officer of the Company, subject to vesting on January 1, 2022.
In the nine months ended June 30, 2021:
In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
In May 2021, the Company issued 562,278 common shares in connection with the Earnout Shares as referenced in Note 6.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.
In March 2021, the Company issued 180,000 shares of restricted common stock to a professional athlete to completely satisfy a $800,000 obligation due between July and December of 2021. The Company recorded a total prepaid expense of $649,800 in conjunction with the issuances of shares and intends to amortize this over the term of the athlete’s agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest onefourth on June 30, 2021, one fourth, on September 30, 2021, onefourth on December 31, 2021, and onefourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In March 2021, the Company issued 3,348,520 shares of common stock in connection with the Earnout Shares as referenced in Note 6.
In February 2021 as partial compensation pursuant to the terms of a Personal Services Agreement for the endorsement of the Company’s products, the Company issued 40,000 common shares. The Company recorded a total prepaid expense of $155,200 in conjunction with the issuance of shares.
In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.
In October 2020 the Company issued 50,000 of restricted stock awards to an executive officer, subject to a multi-year vesting schedule with a minimum one year before the first tranche vests as noted below in Note 9.
Stock option transactions:
In the nine months ended June 30, 2022:
In May 2022, the Company granted a new executive an aggregate of 405,000 common stock options. The options vest equally over 1,2, and 3 years from the grant date. The options have a strike price $0.84 and a five year term. The total expense of these options totaled $176,985 and will be amortized over the term of the vesting periods.
In April 2022, the Company issued 200,000 options to a consultant as part of an advisory agreement under the Company's Equity Compensation Plan. Fifty thousand of the shares vested upon the grant, 50,000 vest and 6 months from the effective date and 100,000 upon renewal of the consulting agreement in March 2023. The options have a consulting agreement.strike price of $1 and five year term. The shares were valued at $37,002, based ontotal expense of these options totaled $131,300 and will be amortized over the trading price upon issuance and expensed as contract compensation.
term of the vesting periods.In the three months ended December 31, 2016:
Per terms in the Operating Agreement of BPU, April 2022, the Company
can redeem the 10% membership interest of Sigan Industries Group (“Sigan”) for $110,000 at any time before April 13, 2017. On October 14, 2016, Sigan entered intoissued 100,000 common stock options to an
agreement withemployee that vest upon the Company
achieving certain direct to
transfer their 10% member interestconsumer revenue growth targets for
129,412 sharesthe quarter ended December 2022. The options have a $1 strike price. The Company performs analysis on these options and as of
June 30, 2020 0 expense was ascribed to these options.In March 2022, the Company’s common stock.
In October 2016 we issued 38,358 sharesCompany granted its board of our stock to six individuals and entities upon the cashless exercise of 70,067 placement agents warrants previously granted to T.R. Winston & Co LLC and its affiliates.
In November 2016 we issued Stone Street Partners, LLCdirectors an aggregate of 76,000 shares of our120,000 common stock valued at $570,000 as compensation for services, which had been accrued and expensed at September 30, 2016.options. The stock was valued at the time based on the most recent equity financing from February 2016 which was priced at what isoptions vested immediately, have a post reverse splitstrike price of $7.50.
$0.818 and a five-year term. The Company has recorded a total prepaid expense of $57,000 and intends to amortize the expense over the 12-month board term.In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution.
Stock option transactions:
No options were issued in January 2022, the three months ended December 31, 2017.
In the three months ended December 31, 2016:
On October 1, 2016 weCompany granted an aggregate of
14,300130,000 common stock options to
twoa group of 9 employees. These options vest upon grant and the Company has recorded an expense for these options of $79,500 for the three months ended June 30, 2022In October 2021, the Company granted an aggregate of 75,000 common stock options to an executive officer. These options vest on October 1, 2022. The Company has recorded an expense for these options of $23,025 and $46,050 for the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
In June 2021, the Company entered into a consulting arrangement with an industry professional. As part of the agreement, the Company issued 50,000 options and recorded total prepaid expenses of $125,250 and intends to amortize over the 12-month vesting term.
In April 2021, the Company issued 750,000 common stock options to an executive officer in conjunction with an Amended and Restated Executive Employment Agreement. The common stock options vest in three equal tranches, the first of which vests on January 1, 2022; the second on January 1, 2023; and the third on January 1, 2024, both under the Corporations 2021 Equity Compensation Plan. The Company has recorded an expense of $195,346 for the three months ended June 30, 2021 for these options.
In March 2021, the Company granted its board of directors an aggregate of 150,000 common stock options. The options vested immediately, have a strike price of $4.40 and a five-year term. The Company has recorded a total prepaid expense of $395,850 and intends to amortize the expense over the 12-month board term.
In January 2021, the Company granted an aggregate of 80,000 common stock options to three employees. The options vest 16% immediately, 42% January 1, 2017 in three equal tranches, the first on April 15, 2021, the second on April 15, 2022 and 42% January 1, 2018. The optionsthe third on April 14, 2023 and have an exercise price of $7.50$3.10 per share and a term of five10 years. We haveThe Company has recorded an expense of $66,967 for the options of $53 and $418 respectively for the three months ended December 31, 2017 and 2016.
On June 30, 2021 for these options.In October 1, 2016 we2020, the Company granted an aggregate of 171,500350,000 common stock options to two employees.an executive officer. The options vest ratably through Januaryin three equal tranches, the first on October 1, 2018. The options2021, the second on October 1, 2022 and the third on October 1, 2023, and have an exercise price of $7.50$3,50, $5.00, and $6.50 per share and a term of six5 years. We haveThe Company has recorded an expense for thethese options of $4,802 and $4,802 respectively$31,054 for both the three months ended December 31, 2017 2021 and 2016.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended December 31, 2017 and 2016:
| | | |
| Exercise price | - | $7.50 |
| Risk free interest rate | - | 1.14% - 1.42% |
| Volatility | - | 54.69% - 60.39% |
| Expected term | - | 5 - 7 years |
| Dividend yield | - | None |
2020, respectively.The expected volatility rate was estimated based on comparison toa weighted average mix of the volatilityvolatilities of the Company and a peer group of companies in the similar industry.industries. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. Under ASU 2016-09 which amendsThe pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, the Company electedwill adjust the estimated forfeiture rate to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.its actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the three months ended June 30, 2022 and 2021:
| | | June 30, | | | June 30, | |
| | | 2022 | | | 2021 | |
Weighted average exercise price | | 0.844 -1.0000 | | | $ | 3.91 | |
Risk free interest rate | | | 2.56% - 2.83% | | | | 0.16% - 0.85% | |
Volatility | | | 101.23 | % - 102.00 | | | 100.72% - 105.43% | |
Expected term (in years) | | | 2.5 - 4 | | | | 2.5 - 6.2 | |
Dividend yield | | None | | | None | |
On November 17, 2017 Transactions:The Company has no warrant transactions during the three and nine months ended June 30, 2022.
In the nine months ended June 30, 2021:
In December 2020 in relation to the IPO, wefollow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, the Company issued to the selling agentrepresentative of the underwriters warrants to purchase in aggregate 100,000150,502 shares of common stock with an exercise price of $7.50.$3.74. The warrants expire on September 27, 2022.
On October 1, 2016, the board approved the strike price adjustment for certain placement agent warrants totaling 20,067 from a strike price of $8.75 to $5.00. On October 26, 2016, 38,358 shares were issued, upon a cashless exercise of the 20,067 warrants above and another 50,000 warrants, at a strike price of $2.75, which had been issued to a placement agent for prior services related to previous private placements of our securities.
On October 4, 2016 and October 24, 2016, we issued in aggregate, warrants exercisable into 141,676 shares of common stock with an exercise price of $7.80. The warrants expire on September 30, 2021. The warrants were issued in conjunction with the Company’s 8% convertible notes, described in Note 7.
December 8, 2025.The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the periodsnine months ended December 31, 2017 June 30, 2022 and 2016:
2021:| | | June 30, | |
| | | 2021 | |
Weighted average exercise price | | $ | 3.74 | |
Risk free interest rate | | | 0.39 | % |
Volatility | | | 103.42 | % |
Expected term (in years) | | | 2.8 | |
Dividend yield | | None | |
| | | |
| Exercise price | $7.50 | $7.80 |
| Risk free interest rate | 2.06% | 1.22% - 1.27%
|
| Volatility | 43.12% | 52.77% - 54.49% |
| Expected term | 5 years
| 5 years |
| Dividend yield | None
| None |
NOTE 11 9– STOCK-BASED STOCK BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of Directors of Level Brands, Inc.the Company approved the 2015 Equity Compensation Plan (“(“2015Plan”). The 2015Plan initially made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the 2015Plan shall automatically increase on the first trading day of January October each calendar year during the term of the 2015Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in December September of the immediately preceding calendarfiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock.
We account On April 19, 2019, shareholders approved an amendment to the 2015 Plan and increased the number of shares available for issuance under the 2015 Plan to 2,000,000 and retained the annual evergreen increase provision of the plan.On January 8, 2021, the Company’s Board of Directors approved the 2021 Equity Compensation Plan (the “2021 Plan”) and it was subsequently approved by its shareholders at its annual meeting held on March 12, 2021. The purpose of the 2021 Plan is to advance the interests of the Company by providing an incentive to attract, retain and motivate highly qualified and competent persons who are important to it and upon whose efforts and judgment the success of the Company is largely dependent. The 2021 Plan made 5,000,000 common shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The 2021 Plan also contains an “evergreen formula” pursuant to which the number of shares of common stock available for issuance under the 2021 Plan will automatically increase on October 1 of each calendar year during the term of the 2021 Plan, beginning with calendar year 2022, by an amount equal to 1.0% of the total number of shares of common stock outstanding on September 30 of such calendar year, up to a maximum of 250,000 shares.
The Company accounts for stock-based compensation using the provisions of FASB ASC 718. FASB ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the Compensation, Corporate Governance and Nominating Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of ourthe Company’s stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a ten-yearfive-to-ten-year term and generally vest over have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options – :
The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model which usesfor equity awards with time-based vesting provisions granted during the assumptions described above.
year.The following table summarizes stock option activity under both plans for the Plan:
| | | Weighted-average exercise price | Weighted-average remaining contractual term (in years)
| Aggregate intrinsic value (in thousands) |
| Outstanding at September 30, 2017 | 333,300 | 5.83 | | |
| Granted | — | — | | |
| Exercised | — | — | | |
| Forfeited | 20,000 | 2.00 | | |
| Outstanding at December 31, 2017 | 313,300 | $6.07 | 5.4 | $— |
| | | | | |
| Exercisable at December 31, 2017 | 285,800 | $5.72 | — | $— |
nine months ended June 30, 2022:| | | | | | | | | | | Weighted-average | | | | | |
| | | | | | | | | | | remaining | | | Aggregate | |
| | | | | | | Weighted-average | | | contractual term | | | intrinsic value | |
| | | Number of shares | | | exercise price | | | (in years) | | | (in thousands) | |
Outstanding at September 30, 2021 | | | 2,702,500 | | | $ | 4.42 | | | | 5.13 | | | $ | - | |
Granted | | | 1,030,000 | | | | 0.99 | | | | | | | | - | |
Exercised | | | - | | | | - | | | | | | | | | |
Forfeited | | | (930,000 | ) | | | 3.59 | | | | | | | | | |
Outstanding at June 30, 2022 | | | 2,802,500 | | | | 3.43 | | | | 3.39 | | | | - | |
| | | | | | | | | | | | | | | | | |
Exercisable at June 30, 2022 | | | 1,822,500 | | | $ | 4.19 | | | | 4.63 | | | $ | - | |
As of December 31, 2017,June 30, 2022, there was approximately $37,207$419,241 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 8 months.
2.8 years.Restricted Stock Award transactions:
On October 1, 2016 In the nine months ended June 30, 2022:
In June 2022, the Company issued 230,000400,000 shares of restricted common stock in connection with the Separation Agreement with a former executive officer in which the former employee forfeited 500,000 shares of unvested restricted stock awards and 500,000 unvested options. These shares are subject to vest one-half on July 1, 2022 and the balance January 1, 2023. The fair market value of these shares totaled $172,000 and will be amortized over the vesting periods. The forfeited RSUs and options had an unrecognized value of $799,572 and $555,286, respectively. The Company recognized contra-expense of $880,428 and $604,714 for the forfeited RSUs and options, respectively, related to the previously amortized expense for these RSUs and options.
In May 2022 the Company issued 125,000 shares of restricted common stock to an executive office of the Company as part of a new hire compensation package.
In May 2022 the Company issued 5,000 of restricted common stock to an employee of the Company. The stock award was valued at the fair market price $3,350 of and expensed upon issuance.
In March 2022, the Company issued 20,000 of restricted stock awards to the Company’s board of directors. The shares vest quarterly onefourth on June 30, 2022, one fourth, on September 30, 2022, onefourth on December 31, 2022, and onefourth on March 31, 2023. The stock awards were valued at the fair market price of $16,360 upon issuance and will amortize over the individual vesting periods.
In January 2022, the Company issued 30,000 shares of restricted stock awards to six employees. The stock awards were valued at the fair market price of $29,250 and vested at the grant date.
In January 2022, the Company issued 320,000 shares to a professional athlete in conjunction with an amendment to the athlete’s sponsorship agreement as referenced in Note 11. The stock grant was valuated at the fair market price of $336,000 upon issuance and will be amortized over the remaining term of the agreement.
In November 2021, the Company issued 120,000 shares of restricted stock awards to an employee, subject to certain revenue performances metrics through December 2022, as referenced in Note 6. These shares were forfeited during January 2022.
In October 2021 the Company issued 5,000 shares of restricted stock awards to an employee, which vested immediately upon issuance.
In October 2021 the Company issued 25,000 shares of restricted stock awards to an executive officer, subject to a four-month vesting schedule.
In the nine months ended June 30, 2021:
In June 2021, the Company issued 25,000 shares of restricted stock awards in connection with a consulting arrangement with an industry professional. The Company recorded a total prepaid expense of $80,500 in conjunction with the issuance of shares and intends to amortize this over the term of the agreement.
In April 2021, the Company issued 750,000 shares of restricted common stock to an executive officer, subject to a multi-year vesting schedule as noted below in Note 9.
In April 2021, the Company entered into an endorsement agreement with a professional athlete. As part of the endorsement agreement, the Company issued 40,000 common shares of restricted common stock. The Company recorded $143,600 prepaid expense and amortized over the term of the agreement.
In March 2021, the Company issued 27,000 of restricted stock awards to the Company’s board of directors. Two thousand of the shares vested at the time of the grant, while the balance vest onefourth on June 30, 2021, one fourth, on September 30, 2021, onefourth on December 31, 2021, and onefourth on March 31, 2022. The stock awards were valued at the fair market price of $118,800 upon issuance and will amortize over the individual vesting periods.
In January 2021 the Company issued 167,500 of restricted stock awards to an aggregate of 15 employees. A majority vested immediately with the balance vesting by April 6, 2021. The stock awards were valued at the fair market price of $494,125 upon issuance and amortized over the individual vesting periods.
In October 2020, the Company issued 50,000 of restricted stock awards to board members.an executive officer. The restricted stock awards vest Januaryvests in three equal tranches, the first of which vests on October 1, 2018. The stock awards are2021, on the second on October 1, 2022 and the third on October 1, 2023 and were valued at fair market value upon issuance at $195,500 and$100,000 which will be amortized over the vesting period. We
The Company recognized $39,101$(593,617) and $641,267 of restricted stock based compensation expense for the three months ended December 31, 2017 June 30, 2022 and 2016,2021, respectively. The Company recognized $242,382 and $1,218,110 of restricted stock compensation expense for the nine months ended June 30, 2022 and 2021, respectively.
Transactions involving ourthe Company equity-classified warrants for the nine months ended June 30, 2022 and 2021 are summarized as follows:
| | | Weighted-average
exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) |
| Outstanding at September 30, 2017 | 212,176 | $6.53 | | |
| Issued | 100,000 | 7.50 | | |
| Exercised | — | — | | |
| Forfeited | — | — | | |
| Outstanding at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— |
| | | | | |
| Exercisable at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— |
| | | | | | | | | | | Weighted-average | | | | | |
| | | | | | | | | | | remaining | | | Aggregate | |
| | | | | | | Weighted-average | | | contractual term | | | intrinsic value | |
| | | Number of shares | | | exercise price | | | (in years) | | | (in thousands) | |
Outstanding at September 30, 2021 | | | 660,417 | | | $ | 4.60 | | | | 3.05 | | | $ | - | |
Granted | | | - | | | | - | | | | | | | | - | |
Exercised | | | - | | | | - | | | | | | | | | |
Forfeited | | | - | | | | - | | | | | | | | | |
Outstanding at June 30, 2022 | | | 660,417 | | | | 4.60 | | | | 2.79 | | | | - | |
| | | | | | | | | | | | | | | | | |
Exercisable at June 30, 2022 | | | 660,417 | | | $ | 4.60 | | | | - | | | $ | - | |
The following table summarizes outstanding common stock purchase warrants as of December 31, 2017:
| | | | | | | Weighted-average | | |
| | | Number of shares | | | exercise price | | Expiration |
Exercisable at $4.00 per share | | | 70,500 | | | | 4.00 | | September 2022 |
Exercisable at $7.50 per share | | | 100,000 | | | | 7.50 | | October 2022 |
Exercisable at $4.375 per share | | | 51,429 | | | | 4.375 | | September 2023 |
Exercisable at $7.50 per share | | | 60,000 | | | | 7.50 | | May 2024 |
Exercisable at $3.9125 per share | | | 47,822 | | | | 3.9125 | | October 2024 |
Exercisable at $1.25 per share | | | 36,682 | | | | 1.25 | | January 2025 |
Exercisable at $3.74 per share | | | 150,502 | | | | 3.74 | | December 2025 |
Exercisable at $3.75 per share | | | 143,482 | | | | 3.75 | | June 2026 |
| | | | 660,417 | | | $ | 4.60 | | |
| | | Weighted-average exercise price | |
| | | | |
| Exercisable at $7.80 per share | 141,676 | $7.80 | September 2021 |
| Exercisable at $4.00 per share | 70,500 | $4.00 | September 2022 |
| Exercisable at $7.50 per share | 100,000 | $7.50 | October 2022 |
| | 312,176 | 6.84 | |
NOTE 13 11–COMMITMENTS AND CONTINGENCIES
Wholesale License Agreement
In September 2017 weMay 2019, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through December 31, 2022 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirements to provide production days for advertising creation and attendance of meet and greets. The potential payments, if all services are provided, in aggregate is $4,900,000 and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000. In light of the impact of COVID-19 on events, the Company and professional athlete mutually agreed to suspend payments from March 2020 through June 2020. Effective July 1, 2020, the parties entered into a wholesale licensenew endorsement agreement amending certain of the contract terms which superseded the original agreement. Under the current endorsement agreement potential payments to the professional athlete are as follows from July 2020 to December 2022 – up to $2,867,000 to be paid in common stock in three issuances, based on a Volume Weighed Average Price (“VWAP”) calculation, of which the last two issuances can be paid in cash at the Company’s option - $1,400,000 paid in July 2020, $800,000 paid between July 2021 and December 2021, and $667,000 paid between July 2022 and December 2022. The Company will make monthly cash payments as follows from: July 2020 to December 2020 - $40,000, from January 2021 to June 2021 - $50,000, from July 2021 to December 2021 - $75,000, from January 2022 to June 2022 - $85,000, and from July 2022 to December 2022 - $100,000. In March 2021, the parties entered into an additional amendment to the endorsement agreement whereby the Company issued the professional athlete 180,000 common shares to completely satisfy the $800,000 payment options between July 2021 and December 2021. The Company has recorded expense of $422,309 and $253,700 for the three months ended December 31, 2021 and 2020, respectively. In January of 2022, the parties entered into an additional amendment to the endorsement agreement, whereby the Company has foregone certain rights to logo wearing during events while retaining other performance of the athlete through December 2024. In exchange for change in obligations and term, the parties re-amortized the balance owed during 2022 through 2024, including issuing 320,000 of the Company’s common stock as part of the total compensation.
In April 2022, effective February 2022, the Company entered into an endorsement agreement with kathy ireland® Worldwidea professional athlete. The term of the agreement is through February 2025 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, requirement to provide production days for advertising creation and attendance at meet and greets. The potential base payments, if all services are provided is $1,500,000 over the term of the agreement, in addition to some incentives for sales directly influenced by the athlete.
As previously disclosed, during June of 2022, the Company's CEO resigned from the board of directors and his role as an executive for the Company in June of 2022 under the terms of a separation agreement with the Company.
NOTE 12– NOTE PAYABLE
In July 2019, the Company entered into a loan arrangement in the amount of $249,100 for a line of equipment, as part of the sale of manufacturing equipment during April 2022, the balance of this loan was paid off resulting in a balance of $0 as of June 30, 2022. In January 2020, the Company entered into a loan arrangement for $35,660 for equipment, of which $5,051 is a long term note payable at June 30, 2022. Payments are for 48 months and have a financing rate of 6.2%, which requires a monthly payment of $841.
NOTE 13– PAYCHECK PROTECTION PROGRAM LOAN
In April 2020, the Company applied for an unsecured loan pursuant to the PPP administered by and authorized by the CARES Act. Section 1106 of the Act provides for forgiveness of up to the full principal amount of qualifying loans guaranteed under the Paycheck Protection Program. On April 27, 2020, the Company received the loan from Truist Bank (the “Lender”) in the principal amount of $1,456,100. The SBA Loan is evidenced by a promissory note issued by the Company to the Lender. During May of 2021, the Company received notice from the SBA the loan principal and any accrued interest was completely forgiven.
NOTE 14– LEASES
The Company has lease agreements for its corporate offices and warehouse with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the consolidated balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. The Company determines whether an arrangement is a lease at inception and classify it as finance or operating. All of the Company’s leases are classified as operating leases. The Company’s leases do not contain any residual value guarantees. During the June 2022 quarter, the Company exited its laboratory facility as all R&D is conducted in its corporate offices. This lease expired in December 2022, and as a result we were grantedincurred an exclusive, royalty freeexit fee of $80,000 tied to the landlord's right to license, assignholdover rent which was booked as an offset to gain on the sold assets for the quarter ending June 30, 2022.
Right-of-use lease assets and usecorresponding lease liabilities are recognized at commencement date based on the kathy ireland® Health & Wellness™ trademark,present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, the Company determined an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and all trade names, trademarkspayments as of the lease commencement date to determine the present value of future lease payments. The Company’s lease terms may include options to extend or terminate the lease.
In addition to the monthly base amounts in the lease agreements, the Company is required to pay real estate taxes, insurance and service markscommon area maintenance expenses during the lease terms.
Lease costs on operating leases are recognized on a straight-line basis over the lease term and included as a selling, general and administrative expense in the condensed consolidated statements of operations.
Components of operating lease costs are summarized as follows:
| | | Three Months | | | Nine Months | |
| | | Ended | | | Ended | |
| | | June 30, | | | June 30, | |
| | | 2022 | | | 2022 | |
Total Operating Lease Costs | | $ | 336,474 | | | $ | 1,059,732 | |
Supplemental cash flow information related to operating leases is summarized as follows:
| | | Three Months | | | Nine Months | |
| | | Ended | | | Ended | |
| | | June 30, | | | June 30, | |
| | | 2022 | | | 2022 | |
Cash paid for amounts included in the measurement of operating lease liabilities | | $ | 339,194 | | | $ | 1,068,620 | |
As of June 30, 2022, our operating leases had a weighted average remaining lease term of 4.38 years and a weighted average discount rate of 4.66%.
For the year ended September 30, | | | | |
2022 | | $ | 337,267 | |
2023 | | | 1,380,204 | |
2024 | | | 1,421,610 | |
2025 | | | 1,159,949 | |
Thereafter | | | 1,372,862 | |
Total future lease payments | | | 5,671,892 | |
Less interest | | | (534,340 | ) |
Total lease liabilities | | $ | 5,137,552 | |
Future minimum aggregate lease payments under operating leases as of June 30, 2022 are summarized as follows:
NOTE 15– EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
| | | Three Months Ended | | | Nine Months Ended | |
| | | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
Basic: | | | | | | | | | | | | | | | | |
Net loss continuing operations | | $ | (31,634,143 | ) | | $ | 1,537,288 | | | $ | (55,453,289 | ) | | $ | (20,368,808 | ) |
Preferred dividends paid | | | 1,000,501 | | | | 560,281 | | | | 3,001,503 | | | | 1,220,610 | |
Net (loss) income continuing operations adjusted for preferred dividend | | | (32,634,644 | ) | | | 977,007 | | | | (58,454,792 | ) | | | (21,589,418 | ) |
Net (loss) income attributable to cbdMD Inc. common shareholders | | | (32,634,644 | ) | | | 977,007 | | | | (58,454,792 | ) | | | (21,589,418 | ) |
| | | | | | | | | | | | | | | | | |
Diluted: | | | | | | | | | | | | | | | | |
Net (loss) income continuing operations | | | (32,634,644 | ) | | | 977,007 | | | | (58,454,792 | ) | | | (21,589,418 | ) |
Net (loss) income continuing operations | | | (32,634,644 | ) | | | 977,007 | | | | (58,454,792 | ) | | | (21,589,418 | ) |
| | | | | | | | | | | | | | | | | |
Shares used in computing basic earnings per share | | | 59,316,762 | | | | 56,676,326 | | | | 59,229,208 | | | | 54,089,263 | |
Effect of dilutive securities: | | | | | | | | | | | | | | | | |
Options | | | 0 | | | | 64,833 | | | | 0 | | | | 0 | |
Warrants | | | 0 | | | | 22,884 | | | | 0 | | | | 0 | |
Convertible preferred shares | | | 0 | | | | 4,667,600 | | | | 0 | | | | 0 | |
Shares used in computing diluted earnings per share | | | 59,316,762 | | | | 61,431,643 | | | | 59,229,208 | | | | 54,089,263 | |
| | | | | | | | | | | | | | | | | |
Earnings per share Basic: | | | | | | | | | | | | | | | | |
Continued operations | | | (0.55 | ) | | | 0.02 | | | | (0.99 | ) | | | (0.40 | ) |
Basic earnings per share | | | (0.55 | ) | | | 0.02 | | | | (0.99 | ) | | | (0.40 | ) |
| | | | | | | | | | | | | | | | | |
Earnings per share Diluted: | | | | | | | - | | | | - | | | | | |
Continued operations | | | (0.55 | ) | | | 0.02 | | | | (0.99 | ) | | | (0.40 | ) |
Diluted earnings per share | | | (0.55 | ) | | | 0.02 | | | | (0.99 | ) | | | (0.40 | ) |
At June 30, 2022, 4,888,667potential shares underlying options, unvested RSUs and warrants as well as 8,335,000 convertible preferred shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
NOTE 16– INCOME TAXES
On November 17, 2017, the Company completed an IPO of its common stock. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. On October 2, 2018, the Company completed a follow-on firm commitment underwritten public offering of its common stock. On May 16, 2019, the Company completed an additional follow-on firm commitment underwritten public offering of its common stock. On October 16, 2019, the Company completed a follow-on firm commitment underwritten public offering of its 8.0% Series A Cumulative Convertible Preferred Stock. On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of its common stock. Management has determined that an ownership change has occurred under Internal Revenue Code (IRC) Section 382 resulting in limitations on the utilization of Company’s federal and state NOL carryovers.
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 1). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with healthbook-tax basis of certain assets and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
As compensation under this agreement, we agreed to pay kathy ireland® Worldwide a marketing feeliabilities of $840,000, of which $480,000 was paid by December 31, 2017. The balance is payable in three equal annual installments beginning January 1, 2019, subject to acceleration. Under the terms of this agreement, we also agreed to pay kathy ireland® Worldwide a royalty of 33 1/3% of our net proceeds under any sublicense agreements we may enter into for this intellectual property.
The initial term of this wholesale license agreement expires in September 2024, and we have the right to renew it for an additional three year period by paying an additional marketing fee of $360,000.
NOTE 14 – SEGMENT INFORMATION
The Company operates through its four subsidiaries in three business segments: the Professional Products, the Licensing, and the Entertainment divisions. The Professional Products division is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products. The Licensing division is designed to establish brands via licensing of select products / categories and encompasses our two subsidiaries with a focus on health and wellness products and men’s lifestyle products. The Entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms. The corporate parent also will generate revenue from time to time, thru advisory consulting agreements. This revenue is similar to the Entertainment divisions’ revenue process and we have allocated revenue from corporate to the Entertainment division for segment presentation.
The Professional Products division operated for the full year in fiscal 2017 and 2016. The Licensing and Entertainment divisions were both acquired in January 2017.
The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued.
Condensed summary segment information follows for the three months ended December 31, 2017 and 2016.
Three months ended December 31, 2017
| | Three Months Ended September 30, 2016 |
| | Professional Product Division | | | |
| Net Sales | $29,070 | $37,162 | $366,979 | $433,211 |
| Net Sales related party | $- | $- | $254,545 | $254,545 |
| Income (loss) from Operations before Overhead | $(360,753) | $(360,109) | $242,553 | $(478,309) |
| Allocated Corporate Overhead (a) | 49,930 | 41,554 | 694,989 | 786,474 |
| Net Loss | $(410,683) | $(401,663) | $(452,436) | $(1,264,782) |
| | | | | |
| Assets | $4,587,741 | $5,792,671 | $4,918,581 | $15,298,993 |
Three months ended December 31, 2016
| | Three Months Ended September 30, 2016 |
| | Professional Product Division | | | |
| Net Sales | $199,837 | $- | $- | $199,837 |
| Income (loss) from Operations before Overhead | $(458,347) | $- | $- | $(458,347) |
| Allocated Corporate Overhead (a) | 239,156 | | | 239,156 |
| Net Loss | $(697,495) | $- | $- | $(697,495) |
| | | | | |
| Assets | $2,688,852 | - | - | $2,688,852 |
(a)
The Company began allocating corporate overhead to the business segments in April 2017. We have allocated overhead on a proforma basis for the period ended December 31, 2017 and 2016 above for comparison purposes.
NOTE 15 – INCOME TAXES
The Company has adopted the provisions of ASU 2016-09 as of the beginning of the current fiscal year (October 01, 2017) which requires recognition through opening retained earnings of any pre-adoption date NOL carryforwards from nonqualified stock options and other employee share-based payments (e.g., restricted shares and share appreciation rights), as well as recognition of all income tax effects from share-based payments arising on or after October 1, 2017 (our adoption date) in income tax expense. The impact of the adoption of ASU 2016-09 was immaterial.
approximately $4.6 million.The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles which cannot be offset by deferred tax assets.
On November 17, 2017, the Company completed an initial public offering (the “IPO”(“naked credits”). The Company conducted a preliminary Section 382 analysis and determined an ownership change likely occurred upon the IPO. Management has determined that the Company's federal and state NOL carryovers established up through the date of the ownership change may be subject to an annual limitation. The Company is in the process of determining the annual limitation.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. The Company has revalued itsdetermined that using the general methodology for calculating income taxes during an interim period for the quarters ending December 31, 2019, March 31, 2020, and June 30, 2020, provided for a wide range of potential annual effective rates. Therefore, the Company had calculated the tax provision on a discrete basis under ASC 740-270-30- 36(b) for the quarters ending December 31, 2019, March 31, 2020, and June 30, 2020. At September 30, 2021 the Company recorded a net deferred tax assetsasset of zero as the cumulative net deferred tax asset had a full valuation on it and liabilities atthere was not enough positive evidence that would warrant recognizing the date of enactment and the result was a reductionbenefit of the net deferred tax liability and a tax provision benefit of $12,000 which was reflected in the quarter ending December 31, 2017 financial statements.
NOTE 16 – SUBSEQUENT EVENTS
On December 30, 2017 Level Brands, Inc. entered into a License Agreement with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company which is a developer ofpharmaceutical grade phytochemical compounds and a manufacture and developer of phytoceutical consumer products. The agreement was amended on January 19, 2018. With this agreement, the Company will receive equity positions in Isodiol International as compensation for its services. The amount of equity received upon execution of the License Agreement will be 1,679,321 shares of Isodiol International's common stock, which is equal to $2 million.asset. In addition, the Company will receive each quarter such amountnet indefinite lived deferred tax items were a deferred tax asset so there was not any recognition of shares as shall equal $750,000 for services each quarter. The License Agreement is included on Form 8-K filed with the SEC on January 5, 2018 and January 22, 2018. With this agreement,a deferred tax liability related to indefinite lived deferred tax liabilities. At June 30, 2022, the Company has begun assessingdetermined the impact relatedsame circumstances to the Investment Company Actbe true and therefore recorded a net deferred tax asset of 1940 as we believe in our period ending March 31, 2018 we will exceed the 45% threshold related to assets held which are securities. We will assess the income threshold of 45% in the period ending March 31, 2018 to determine if we also exceed the 45% threshold related to income being derived from securities. If these thresholds are exceeded, zero.NOTE 17– SUBSEQUENT EVENTS
On August 1, 2022, the Company would be deemedsuccessfully made the transition from Oracle Netsuite to Acumatica for its ERP system. During the past year, Oracle terminated our license agreement and requested we find an investment company, and that is not the Company’s focus or intention. The Company has begun working on a plan to liquidate, in an orderly fashion, assets as well as review business strategy to mitigate this issue, if it is determined these thresholds are exceeded.
alternative ERP solution.On January 19, 2018 the base compensation of theAugust 9, 2022, T. Ronan Kennedy, our Chief ExecutiveFinancial Officer and Chief FinancialOperating Officer, of Level Brands, Inc., was increased. The Compensation Committeeappointed interim principal executive officer.
Effective August 9, 2022, Dr. Sybil Swift, a key employee of the BoardCompany, was appointed to serve on the board of Directors approveddirectors, filling a vacancy on the increasesboard, in each of their base compensation to $270,000 annually for Mr. Sumichrast and $180,000 annually for Mr. Elliott, retroactively effective foraccordance with the pay period beginning January 1, 2018. In addition, the Compensation Committee awarded Mr. Sumichrast and Mr. Elliott cash bonuses of $240,000 and $100,000, respectively. The Compensation Committeebylaws of the BoardCompany. Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of DirectorscbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is presently negotiatingcurrently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors. She shall receive a restricted stock grant of 5,000 shares of our common stock and five options to purchase 30,000 shares of our common stock, exercisable at $0.568 per share. The restricted stock grant and options vest on the date of issuance. In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.
As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as amended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of new employment agreementsthe Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer). Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with each executive.
On January 30, 2018, Level Brands,the terms of the Merger Agreement, as amended,
its Wholesale License Agreement (the “Agreement”) executed on September 8, 2017 with kathy Ireland® WorldWide related to exclusive rights towe determined that the
kathy Ireland® Health & Wellness™ trademarks. The amendment accountednet revenues for the
Company exercising its optionJune 30, 2022 quarter within the third marking period were $8,592,893 and on
a three year extensionAugust 9, 2022 we issued the members an aggregate of 409,505 shares of our common stock. The recipients were accredited investors and
amending the
payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts dueissuances were exempt from registration under the
Agreement, $320,000Securities Act of 1933, as amended, in reliance on
the latteran exemption provided by Section 4(a)(2) of
January 1, 2019 or 30 days after the receipt by the Companythat act.MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of our financial condition and results of operations for the first quarter of fiscal 2018three and nine months ended June 30, 2022 and the first quarter of fiscal 2017three and nine months ended June 30, 2021 should be read in conjunction with the unaudited condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties such as our plans, objectives, expectations and intentions.
Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 20172021 10-K, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
Overview
Level Brands strivesOur Company
General
We own and operate the nationally recognized CBD (cannabidiol) brands cbdMD, Paw CBD and cbdMD Botanicals. We believe that we are an industry leader producing and distributing broad spectrum CBD products and now full spectrum CBD products. Our mission is to be anenhance our customer’s overall quality of life while bringing CBD education, awareness and accessibility of high quality and effective products to all. We source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in the United States. Our innovative licensing,broad spectrum formula utilizes one of the purest hemp extracts, containing CBD, CBG and CBN, while eliminating the presence of tetrahydrocannabinol (THC). Non-THC is defined as below the level of detection using validated scientific analytical methods. Our full spectrum products contain a variety of cannabinoids and terpenes in addition to CBD while maintaining trace amounts of THC that falls within the limits set in the 2018 Farm Bill. In addition to our core brands, we also operate cbdMD Therapeutics, LLC to capture the Company’s ongoing investments in science related to its existing and future products, including research and development activities for therapeutic applications
Our cbdMD brand of products includes high-grade, premium CBD products, including CBD tinctures, CBD gummies, CBD topicals, CBD capsules, CBD bath bombs, and CBD sleep aids.
Our Paw CBD brand of products includes veterinarian-formulated products including tinctures, chews, topicals products in varying strengths and formulas. Paw CBD products have undergone the National Animal Safety Council’s rigorous audit and meet their Quality Seal standard.
Our cbdMD Botanicals brand of beauty and skincare products features facial oil and serum, toners, moisturizers, clear skin, facial masks, exfoliants and body care. cbdMD Botanicals is dedicated to creating clean CBD skin care products combining the best of Mother Nature with the precision of scientific innovation. All of our products are 100% cruelty-free and have no parabens, sulfates, or gluten – just pure botanical ingredients carefully crafted into gentle beauty products for all skin types.
cbdMD, Paw CBD and cbdMD Botanicals products are distributed through our e-commerce websites, third party e-commerce sites, select distributors and marketing and brand management company with a focus on lifestyle-based products. We champion a bold, unconventional image, and social consciousness for our company and our brands. Working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chairman, CEO and Chief Designer of
kathy ireland® Worldwide, we seek to secure strategic licenses and joint venture partnerships for our brands,partners as well as a variety of brick-and-mortar retailers. In addition, we operate a CBD marketplace through directcbdonline.com, our own e-commerce website.Recent Developments
During the first quarter of 2022 we eliminated a number of product lines and SKUs as we work to streamline line our offering to higher velocity products and eliminate slow moving and aging SKUs.
During January 2022 we completed a renewal of our NSF cGMP quality certification and are now NSF 455 cGMP certified. Additionally, we earned the prestigious NSF product certification for our soft gel products and received the NSF certified for Sport for our 500mg and 1000mg sleep softgels and 1500mg and 3000mg soft gels.
During the second quarter of 2022 we took steps to right size our cost structure to our current revenue base and worked to remove over $10 million of annualized costs. We achieved this through a combination of reductions in payroll, renegotiating freight rates, rationalizing marketing expenses, reducing regulatory spend, exited our lab and overall tightening of all expenditures. We started enacting these steps during the second quarter resulting in sequential reductions in operating costs in both the second and third quarters of 2022. We expect continued roll off of expenses during the fourth quarter from the full quarter benefit of adjustments made during the third quarter coupled with additional rationalization we are working on.
During April 2022, in an effort to reduce costs, we sold our manufacturing equipment and outsourced certain products previously produced in-house. This change had a significant reduction in our fixed labor and overhead, positively impacting cost of goods sold, and increased flexibility in our supply chain and was part of our overall cost structure rationalization plan.
During May 2022 our Co-CEO and cbdMD brand Founder retired and we hired a new President.
The Company's management mandate is to achieve profitability and increase revenue by the end of the calendar year. Significant headway was made on cost controls over the last two quarter and we believe additional opportunities to improve our cost structure exist: we are working to lower our facility costs, we are taking further opportunities to improve freight rates, and we continue to reassess our marketing costs and make improvements to our product portfolio. In addition to these efforts, the Company continues to invest in a strong pipeline of accretive revenue opportunities.
Growth Strategies
We continued to pursue many strategies to grow our revenues and expand the portfolioscope of brands through strategic acquisitions.
We operate our business in four business units, including:
fiscal 2022 and beyond: | Licensing
division
| Founded in 2017 and first conceptualized bykathy ireland® Worldwide, I'M1 is a lifestyle brand established to capitalize on potentially lucrative licensing and co-branding opportunities with products focused on millennials.
| |
| |
● | Product Innovation:Our goal is to provide our customers superior functional based products with greater efficacy, absorption and claims. Weregularly assess and evaluate our product portfolio, and devote resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. We have a robust pipeline of products set to launch during fiscal 2022. In February 2022 we launched our line of functional gummies and curcumin capsules, followed by an initial rollout of several full spectrum gummies starting in March 2022 and a 2018 Farm Act compliant hemp extracted Delta 9 product assortment in April 2022, and our mood and focus products in May 2022. |
| | | |
| Entertainment
division
● | Also foundedExpand our revenue channels:We continued to pursue relationships with a number of key traditional retail accounts and believe our top brand awareness, and effective marketing position us as the CBD partner for key traditional retail accounts as this channel has continued to normalize. During the second quarter we added a number of our top selling ingestible SKUs throughout GNC’s retail footprint. We continue to have discussions with key retailers and have expanded our sales organization to include deep channel-specific experience, and expect to have additional announcement in 2017, EE1 was established to serve as a producer and marketer of experiential entertainment including recordings, film, TV, web and live events, and entertainment experiences. EE1 also provides brand management services including creative development and marketing, brand strategy, and distribution support. | calendar 2022. |
| | | |
| kathy ireland®
Health &
Wellness
● | International Expansion:We continue to explore sales into markets outside of the United States. Our newestproducts are currently available in 31countries. We generally partner with local wholesalers and local legal counsel who can help navigate the laws and regulatory requirements within their jurisdiction. We continue to pursue key wholesale accounts in a number of international markets and are gaining market share in Central America through our sanitary registration approvals. We are also expanding our E-commerce business unit Level Health & Wellness was establishedto consumers in September 2017,the United Kingdom (U.K.). In March 2021, we officially filed our Novel Food Application with the United Kingdom’s Food Standards Agency (“FSA”) and has an exclusive license to the kathy ireland® Health & Wellness™ brand. Its goal is to create a brand which will include a wide variety of licensed European Union’s (“E.U.”) Food Safety Agency (“EFSA”). In March 2022, we received notice that the products and services, targeted to both Baby Boomerswe submitted have been validated in the UK as well as millennials. This unit began operating in fiscal 2018. | the EU. based warehouse. During August 2021 we signed an exclusive agreement to enter the Israeli Market with IM Cannabis Corp. a multi-country operator in the medical and adult- use recreational cannabis sector with operations in Israel, Germany and Canada. In March 2022, the Israeli Health Ministry announced it has begun the process of exempting CBD from its banned substances list and will be permitting CBD to be included into food and cosmetic products. We anticipate additional international announcements before the end of the calendar year. |
| | | |
"Beauty belongs
| ● | Expand our Additional Brands:During fiscal 2021 we took additional steps to everyone"grow the Paw CBD business which included advertising on TV,introducing our Paw CBD rewards program and introducing a Paw CBD subscription program which offers additional savings to customers that enroll in the service. During 2021 we launched cbdMD Botanicals as a separate brand and continue to build out the product portfolio and distribution channels. |
| Professional
products
division
| Beauty & Pin-Ups, |
| ● | Maintain our first business unit is a professional hair care linesponsorships toward targeted segments:We have had significant success with attracting high profile sponsors and influencers andexpect to continue to assess the segments we have covered with a social consciencefocus on maintaining key sponsorships and launched its products in 2015. We offer quality hair care products, including shampoos, conditioners, styling aidesinfluencers which are producing the largest visibility and a patented styling tool, through an expanding professional salon distribution network.responsiveness. |
| | |
| ● | Acquisitions:We seek to acquire (i) brands that we believe we can optimize through our internal digital marketing agency and fulfillment platform to increase our total addressable market or (ii) technology or intellectual property that will further enhance our product portfolio and create product differentiation. We may acquire brands directly or through joint ventures if opportunities arise that we believe are in our best interest. In assessing potential acquisitions or investments, we expect to primarily utilize our internal resources to evaluate growth potential, the strength of the target brand, offerings of the target, as well as possible efficiencies to gain. We believe that this approach will allow us to effectively screen consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. We are currently not a party to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio. |
Our business model is designed with the goal of maximizing the value of our brands through entry into license agreements with partners that are responsible for the design, manufacturing and distribution of our licensed products. We promote our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, which we expect will allow our customers to interact with each of our brands, in addition to the products themselves, will be critical to our success.
We began reporting our revenues by segment during the second quarter of fiscal 2017 following our acquisitions of I'M1 and EE1. The Company reports in three business segments: the Professional Products, the Licensing, and the Entertainment divisions. The Professional Products division today is comprised of Beauty and Pin-Ups and is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products. The Licensing division is comprised of two of our business units focused on establishing licensing contracts in two areas: men’s lifestyle products branded under I’M1 (grooming, personal care, cologne, accessories, jewelry and apparel) and health and wellness related products branded under kathy ireland® Health & Wellness™, which began operations in December 2017. The Entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms as well as engage in brand management services. The corporate parent also will generate revenue from time to time, thru advisory consulting agreements. This revenue is similar to the Entertainment divisions’ revenue process and we have allocated revenue from corporate to the Entertainment division for segment presentation.
In November 2017 we completed our initial public offering raising $12,000,000 in gross proceeds through the sale of our common stock. Utilizing a portion of the proceeds from this recently completed initial public offering we expect to devote significant assets and efforts to the marketing, development and promotion of our brands.
Sales
The following tables provide certain selected consolidated financial information for the periods presented:
| | | | Change |
| | | | |
| | | | |
| Sales | $448,793 | $422,173 | |
| Sales related party | 254,545 | - | |
| Total gross sales | $703,338 | $422,173 | |
| Allowances | (15,582) | (222,336) | |
| Net sales | $433,211 | $199,837 | |
| Net sales related party | 254,545 | - | |
| Total net sales | $687,756 | $199,837 | |
| Costs of sales | 228,124 | 162,746 | |
| Gross profit as a percentage of net sales | 66.8% | 18.6% | |
| Operating expenses | 1,687,644
| 600,266 | |
| Other expenses | 69,770
| 132,320 | |
| Net loss | $(1,264,782)
| $(697,495)
| |
| Net loss attributable to Level Brands, Inc. common shareholders | $(1,132,928) | $(634,479)
| |
| | | Three Months Ended June 30, | |
| | | 2022 | | | 2021 | | | Change | |
Total net sales | | $ | 8,592,893 | | | $ | 10,560,523 | | | $ | (1,967,630 | ) |
Cost of sales | | | 2,660,185 | | | | 3,370,952 | | | | (710,767 | ) |
Gross profit as a percentage of net sales | | | 69.0 | % | | | 68.1 | % | | | 1.0 | % |
Operating expenses | | | 8,282,931 | | | | 13,865,191 | | | | (5,582,260 | ) |
Impairment of goodwill and other intangible assets | | | 30,776,436 | | | | - | | | | 30,776,436 | |
Operating income from operations | | | (33,126,659 | ) | | | (6,675,620 | ) | | | (26,451,039 | ) |
(Increase) decrease on contingent liability | | | 1,943,000 | | | | 6,871,000 | | | | (4,928,000 | ) |
Net (loss) income before taxes | | | (31,634,143 | ) | | | 1,640,288 | | | | (33,274,431 | ) |
Net (loss) income attributable to cbdMD Inc. common shareholders | | $ | (32,634,644 | ) | | $ | 977,007 | | | $ | (33,611,651 | ) |
| | | Nine Months Ended June 30, | |
| | | 2022 | | | 2021 | | | Change | |
Total net sales | | $ | 27,543,601 | | | $ | 34,687,436 | | | $ | (7,143,835 | ) |
Cost of sales | | | 10,176,085 | | | | 10,444,353 | | | | (268,268 | ) |
Gross profit as a percentage of net sales | | | 63.1 | % | | | 69.9 | % | | | -6.8 | % |
Operating expenses | | | 31,690,915 | | | | 36,846,371 | | | | (5,155,456 | ) |
Impairment of goodwill and other intangible assets | | | 48,959,721 | | | | - | | | | 48,959,721 | |
Operating income from operations | | | (63,283,120 | ) | | | (12,603,288 | ) | | | (50,679,832 | ) |
(Increase) decrease on contingent liability | | | 8,246,000 | | | | (10,500,000 | ) | | | 18,746,000 | |
Net loss before taxes | | | (55,453,289 | ) | | | (21,133,808 | ) | | | (34,319,481 | ) |
Net loss attributable to cbdMD Inc. common shareholders | | $ | (58,454,792 | ) | | $ | (21,589,418 | ) | | $ | (36,865,374 | ) |
We record product sales primarily through two main delivery channels, direct to consumers via our E-commerce sales and direct to wholesalers utilizing our internal sales team. The following table provides information on the contribution of net sales by segmenttype of sale to our total net sales.
��
| | | | | |
| | | | | |
| | | | | |
| Professional products division | $29,070 | 4.2% | $199,837 | 100% |
| Licensing division | 37,162 | 5.4% | 0 | |
| Entertainment division | 621,524 | 90.4% | 0 | |
| Total net sales | $687,756 | 100% | $199,837 | 100% |
With the new operations in fiscal 2017 of our two new subsidiaries, I’M1 and EE1, the overall business strategy was expanded to not only include new business lines that generate revenues from new sources (licensing, royalty, and advisory) but also a different approach, in some cases, regarding the type of payments we would accept. | | | Three Months | | | | | | | Three Months | | | | | |
| | | Ended | | | | | | | Ended | | | | | |
| | | June 30, | | | | | | | June 30, | | | | | |
| | | 2022 | | | % of total | | | 2021 | | | % of total | |
Wholesale sales | | $ | 2,079,592 | | | | 24.2 | % | | $ | 2,740,523 | | | | 26.0 | % |
E-commerce sales | | | 6,513,301 | | | | 75.8 | % | | | 7,820,000 | | | | 74.0 | % |
Total Net Sales | | $ | 8,592,893 | | | | | | | $ | 10,560,523 | | | | | |
| | | Nine Months | | | | | | | Nine Months | | | | | |
| | | Ended | | | | | | | Ended | | | | | |
| | | June 30, | | | | | | | June 30, | | | | | |
| | | 2022 | | | % of total | | | 2021 | | | % of total | |
| | | | | | | | | | | | | | | | | |
Wholesale sales | | $ | 7,382,880 | | | | 26.8 | % | | $ | 9,049,068 | | | | 26.1 | % |
E-commerce sales | | | 20,160,721 | | | | 73.2 | % | | | 25,638,368 | | | | 73.9 | % |
Total Net Sales | | $ | 27,543,601 | | | | | | | $ | 34,687,436 | | | | | |
Net Sales
We have entered into agreements where we have accepted common stock, options or warrants (an equity position). This practice has an impact on immediate cash flow and these equities could be subject to adjustment which could result in future period losses. In the first quarter of fiscal 2018, of ourhad total net sales of $687,756 we have received compensation in the form of equity positions totaling $454,500,$8,592,893 and we did not receive any equity positions in the first quarter of fiscal 2017.
Professional products division
Net sales$10,560,523 for the professional products division for the firstthree months ended June 30, 2022 and 2021, respectively, resulting in a quarter over quarter decrease in net sales of fiscal 2018decreased 85.5%as compared to the first quarter of fiscal 2017.$1,967,631 or 18.6%. This decrease is attributable to a decrease of $1.3 million in e-commerce sales and a decrease of $0.66 million in wholesale sales quarter over quarter. While management is disappointed with the year over year net sales decrease, the revenue is generally in line with macro competitive trends in the overall CBD industry. Sequentially, the Company's revenue declined 11%. Our Wholesale declined approximately $661,000, in-part related to revenue associated with a pipeline fill during the second quarter, as well as additional orders on the books that were delayed at the end of the quarter. We have successfully implemented a $1.0 million reduction in marketing expenses, while e-commerce remained consistent with our previous calendar quarter. We believe the current macro inflationary environment is impacting discretionary spending with consumers as well as wholesale customers. We continue to work on a pipeline of opportunities both domestically and internationally and believe we will see revenue growth in the coming quarters.We had total net sales of $27,543,599 and $34,687,436 for the nine months ended June 30, 2022 and 2021 respectively, resulting in a year over year decrease in net sales of $7.1 million, primarily attributable to primary reliance upon one distribution channel combined with an ineffective post launch support effort.a $1.7 million, or 20.4% reduction in wholesale sales and reduction in e-commerce sales of $5.5 million. We have made a strategic decisioncontinue to increase our distributors and have added twoinvest in new distributors in the first quarter of fiscal 2018, and are targeting to add additional distributors while also assessing other sales channels including large retail and online channels as well as licensing opportunities. In addition, we have added independent sales representatives and revamped our education team and process. We believe these changes will support the product line and sales process better, although no assurance can be given asrelationships and work to when and if our product line will receive more acceptance inexpand the marketplace.
As is customary in the wholesale distribution of hair care and beauty products, we provide our distributors an allowance against the sales price for advertising and distribution, damaged good, product development allowance, and a discount if paid within a prescribedlife time frame, which is typically 2% if paid within 10 days. These allowances were 34.9% and 52.6%, respectively, of gross salesvalue of our professional products division for the first quarter of fiscal 2018 and the first quarter of fiscal 2017. The large increase in the first quarter of fiscal 2017 is related to discounting of hair irons to our distribution channel in an effort to offer incentives to customers and move historical products as we prepared and launched three new products in fiscal 2017 as well as a rollout of a discounted sample sized product with our entrance into a new sales channel.
Licensing division
The licensing division began operating in January 2017, and enters into various license agreements that can provide revenues based on minimum royalties and advertising/marketing fees and additional revenues based on a percentage of defined sales. Minimum royalty and advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on our consolidated balance sheets as deferred license revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected on our consolidated balance sheet in deferred license revenue at the time the payment is received. In regard to revenue for advisory and promotional services provided through a consulting agreement, we record revenue when the services are provided and the customer is invoiced at agreed upon rates and terms in the agreement. In the first quarter of fiscal 2018, this division recorded net sales of $37,162.
Entertainment division
The entertainment division began operating in January 2017, and enters into advisory agreements for brand management services as well as agreements to produce entertainment related events, which include production assistance for television and music recording agreements. In regard to sales for advisory and production related services, we record revenue when the services are provided and the customer is invoiced at agreed upon rates and terms in the agreement. In several of our agreements, for our services we have accepted common stock, options or warrants (an equity position) from our customer. In the first quarter of fiscal 2018, this division recorded net sales of $366,979, of which $254,500 was received as an equity position. Additional revenue earned at the corporate level for advisory agreements is included in the entertainment division for segment reporting. These advisory agreements are related to referral fee arrangements and advisory agreements with services provided by the corporate entity, Level Brands. For the first quarter of fiscal 2018 revenue from these contracts was $254,545, of which $200,000 was received as an equity position.
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third party providers, and freight for our professional products divisions, and includes labor and third party service providers for our licensing and entertainment divisions.product sales. Our cost of sales as a percentage of net sales was 33.2%31.0% and 31.9% for three months ended June 30, 2022 and 2021, respectively and 36.9% and 30.1% for the nine months ended June 30, 2022 and 2021, respectively. Year over year, the reduction in our cost of sales for the June 30, 2022 quarter is a result of operational gains from the elimination of overhead and lower freight costs that were partially offset by increase in unabsorbed overhead resulting from the $1.9 million drop in revenues. The decrease in our cost of sales for the nine months ended June 30, 2022 over prior year is also the result of operational gains from the elimination of overhead and lower freight costs, partially offset by an increase in unabsorbed overhead resulting from the $7.4 million drop in revenues, as well as a one-time charge of $878,142 related to the rationalization of a number of SKUs and product lines during the first quarter of fiscal 2018 as compared to 81.4% in2022.
The changes made during the first quarter of fiscal 2017. In order to explain the change in cost of sales we must account for the two new divisionslast quarters have eliminated significant fixed overhead and lookwere aimed at each division separately to see the cumulative impact.
In our professional products division, cost of sales was 64%lowering overall costs and 81.4% of its net sales for the first quarter of fiscal 2018 and the first quarter of fiscal 2017, respectively. Cost of sales variances are primarily related to two key impacts. First, allowances from this division have varied significantly based on the product line being new and various advertising and promotional packages have been used to promote the products at initial launch. Second, in fiscal 2017 we moved into an online channel and conducted our first online promotion to create more brand visibility, and with this provided significant discount pricing on a new packaged item specifically for that channel. In addition, we have added two new distributors at the end of fiscal 2017 and although not at the same level as previously, we had promotional packages for these new launches. As we continue to refine our operations, we expectmaking our cost of sales to decrease, thereby increasing our gross profit, as we expect to be able to not offer as many promotional packages, manage the production of our product linessale more efficiently by procuring materials usedvariable in our process with better pricing as well as having a more effective inventory management control process.
In our licensing division, cost of sales for the first quarter of fiscal 2018 was 183% of its net sales. For this current period, we incurred a high cost of sales as we laid groundwork on social media and production items to increase visibility of our licensed brands, I’M1 and kathy ireland® Health & Wellness™, whichnature we believe can be used in the future to support the brand and future contracts. We expect this division to have a low cost of sales as the business is structured in a manner that the licensee (our customer) incur the significant costs and revenues associated with the sale of licensed products. We recognize the associated royalty fees on a net basis. When we are involved in providing advisory services, we allocate the utilized internal resources costs to our cost of sales.
In our entertainment division, cost of sales for the first quarter of fiscal 2018 was 24.4% of its net sales. The cost of sales for this division will vary based upon the type of projects in which it is involved. For instance, its cost of sales is expected to be less for advisory services, which utilize internal resources, as compared to television production services which require the use of external facilities and personnel, which increases our cost. As a result, our gross margin for the entertainment division will vary from period to period.
ultimately more predictable.Operating expenses
Our principal operating expenses include wages,staff related expenses, advertising travel, rent, professional service fees, and(which includes expenses related to industry distribution and trade shows. Ourshows), sponsorships, affiliate commissions, merchant fees, technology, travel, rent, professional service fees, and business insurance expenses.
Consolidated Operating Expenses
The following tables provide information on our operating expenses for the three and nine months ended June 30, 2022 and 2021:
| | | Three Months | | | Three Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 2,874,938 | | | $ | 4,455,640 | | | $ | (1,580,702 | ) |
Accounting/legal expense | | | 262,307 | | | | 237,357 | | | | 24,950 | |
Professional outside services | | | 237,877 | | | | 304,570 | | | | (66,693 | ) |
Advertising/marketing/social media/events/tradeshows | | | 3,415,575 | | | | 4,796,929 | | | | (1,381,354 | ) |
Sponsorships | | | 227,084 | | | | 520,208 | | | | (293,124 | ) |
Affiliate commissions | | | 287,026 | | | | 482,026 | | | | (195,000 | ) |
Merchant fees | | | 255,956 | | | | 496,963 | | | | (241,007 | ) |
R&D and regulatory | | | 113,751 | | | | 674,874 | | | | (561,123 | ) |
Non-cash stock compensation | | | (938,285 | ) | | | 959,319 | | | | (1,897,604 | ) |
Intangibles Amortization | | | 277,354 | | | | - | | | | 277,354 | |
Depreciation | | | 158,556 | | | | 246,533 | | | | (87,977 | ) |
All other expenses | | | 1,110,792 | | | | 690,772 | | | | 420,020 | |
Totals | | $ | 8,282,931 | | | $ | 13,865,191 | | | $ | (5,582,260 | ) |
| | | Nine Months | | | Nine Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 10,119,111 | | | $ | 12,076,025 | | | $ | (1,956,914 | ) |
Accounting/legal expense | | | 828,016 | | | | 772,921 | | | | 55,095 | |
Professional outside services | | | 648,764 | | | | 899,195 | | | | (250,431 | ) |
Advertising/marketing/social media/events/tradeshows | | | 11,839,584 | | | | 11,856,233 | | | | (16,649 | ) |
Sponsorships | | | 1,012,767 | | | | 1,629,637 | | | | (616,870 | ) |
Affiliate commissions | | | 853,559 | | | | 1,354,102 | | | | (500,543 | ) |
Merchant fees | | | 751,328 | | | | 1,618,100 | | | | (866,772 | ) |
R&D and regulatory | | | 550,268 | | | | 1,060,605 | | | | (510,337 | ) |
Non-cash stock compensation | | | 851,517 | | | | 2,049,326 | | | | (1,197,809 | ) |
Intangibles Amortization | | | 607,025 | | | | - | | | | 607,025 | |
Depreciation | | | 770,336 | | | | 719,856 | | | | 50,480 | |
All other expenses | | | 2,858,641 | | | | 2,810,371 | | | | 48,270 | |
Totals | | $ | 31,690,915 | | | $ | 36,846,371 | | | $ | (5,155,456 | ) |
Our overall operating expenses decreased by $5,582,260 or 40% three months ended June 30, 2022 over the three months ended June 30, 2021 and decreased $5,155,456 or 14% for the nine months ended June 30, 2022 versus the nine months ended June 30, 2021. The quarter over quarter decrease was primarily driven by management's ongoing efforts to reduce our cost structure including decreases in staff related expenses ($1.58 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.89 million) well as a merchant processing fees ($241,000) attributable to (i) on boarding new processors during the third quarter of 2021 at much lower rates as well as (ii) lower volume, reduction in stock expense ($1,897,142) which includes $1,485,142 of contra-expense for stock compensation related to forfeited RSUs and options, and R&D and regulatory spend ($561,000). These decreases were offset by an increase in other expenses ($420,000) and an increase in the amortization of intangibles ($277,000) that increased this quarter as we began amortizing our trade names as referenced in Note 5. The reduction of $3.67 million for the nine months ended June 30, 2022 versus June 30, 2021 is due to $1,687,644an reduction in compensation ($1.9 million), advertising, marketing, sponsorships and affiliate commission expenses ($1.13 million), merchant fees ($867,000), and R&D and Regulatory ($510,000), partially offset by increase in stock compensation ($287,000) as well as depreciation and amortization ($862,000).
Excluding non-cash depreciation, intangible amortization, and non-cash stock expenses, we reduced our adjusted operating expenses from $12.7 million to $8.8 million for the three months ended June 30, 2021 and June 30, 2022 respectively and from $34.1 million to $29.2 million the nine months ended June 30, 2021 and June 30, 2022 respectively.
While our goal is to continue to improve year-over-year performance, management is also very much focused on improving the sequential performance and cash flow of the business. Excluding the stock compensation expense reversal of $1,485,142 related to forfeited RSUs and stock options, sequentially we reduced our expenses by $1.68 million. We reduced marketing expense by over $1.0 million while increasing traffic to our websites. Marketing costs will continue to come down during the fourth quarter as we rationalize expiring influencer contracts and focus on the most profitable customer acquisition and retention activities. In the third quarter of 2022, we took further steps to reduce our overall headcount, including the outsourcing of our production facility, resulting in a reduction of of 16 positions (105 employees by June 30, 2022). These steps coupled with the full quarter benefit of reductions during the second quarter of fiscal 2022 resulted in over $608,000 in sequential payroll cost savings. Since the reductions occurred over the course of the quarter, we expect to realize additional savings during the fourth quarter of fiscal 2022 as we benefit from a full quarter of savings. We are active in working to rightsize our corporate office and warehouse and believe significant additional savings exist should we be successful in our efforts. We continue to pursue all avenues that will help lower our costs while maintaining our quality, efficacy and service for our customers; position us for revenue growth; and promote a culture of performance and success.
Corporate overhead
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to the operating business unit, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) professional outside services; (iv) travel and entertainment expenses; (v) rent; (vi) business insurance; and (vii) non-cash stock compensation expense.
The following tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:
| | | Three Months | | | Three Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 288,570 | | | $ | 432,844 | | | $ | (144,274 | ) |
Accounting/Legal expense | | | 195,056 | | | | 190,199 | | | | 4,857 | |
Professional outside services | | | 119,330 | | | | 100,370 | | | | 18,960 | |
Travel expense | | | 2,526 | | | | 6,972 | | | | (4,446 | ) |
Business insurance | | | 167,387 | | | | 155,838 | | | | 11,549 | |
Non-cash stock compensation | | | (938,285 | ) | | | 959,319 | | | | (1,897,604 | ) |
Totals | | $ | (165,417 | ) | | $ | 1,845,542 | | | $ | (2,010,959 | ) |
| | | Nine Months | | | Nine Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 917,144 | | | $ | 1,283,240 | | | $ | (366,096 | ) |
Accounting/legal expense | | | 578,356 | | | | 655,939 | | | | (77,584 | ) |
Professional outside services | | | 282,030 | | | | 272,055 | | | | 9,975 | |
Travel expense | | | 3,933 | | | | 6,974 | | | | (3,041 | ) |
Business insurance | | | 530,742 | | | | 425,704 | | | | 105,038 | |
Non-cash stock compensation | | | 851,517 | | | | 2,049,326 | | | | (1,197,809 | ) |
Totals | | $ | 3,163,721 | | | $ | 4,693,238 | | | $ | (1,529,517 | ) |
Excluding the $1,485,142 contra-expense for stock compensation related to forfeited RSUs and stock options, our corporate operating expenses are down quarter over quarter and year over year as a result of our ongoing efforts to reduce our cost structure across the board.
The corporate operating expenses are primarily related to the ongoing public company related activities.
Therapeutics Overhead
Included in our consolidated operating expenses are expenses associated with Therapeutics including staff related expenses and R&D and regulatory expenses. The Therapeutic operating expenses include research and development activities for therapeutic applications.
The following tables provide information on our approximate corporate overhead for the three and nine months ended June 30, 2022 and 2021:
| | | Three Months | | | Three Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 80,346 | | | $ | 90,041 | | | $ | (9,695 | ) |
Accounting/legal expense | | | 3,119 | | | $ | - | | | | 3,119 | |
R&D and Regulatory | | | 112,364 | | | | 615,497 | | | | (503,133 | ) |
Totals | | $ | 195,829 | | | $ | 705,538 | | | $ | (509,709 | ) |
| | | Nine Months | | | Nine Months | | | | | |
| | | Ended | | | Ended | | | | | |
| | | June 30, | | | June 30, | | | | | |
| | | 2022 | | | 2021 | | | Change | |
Staff related expense | | $ | 251,787 | | | $ | 90,041 | | | $ | 161,746 | |
Accounting/legal expense | | | 3,119 | | | $ | - | | | | 3,119 | |
R&D and Regulatory | | | 482,579 | | | | 615,497 | | | | (132,918 | ) |
Totals | | $ | 737,485 | | | $ | 705,538 | | | $ | 31,947 | |
The Therapeutic operating expenses include research and development activities for therapeutic applications. This division was formed during the third quarter of fiscal 2021. Our human and pet clinical studies remain underway and we anticipate initial results during the fourth quarter of 2022 and the first quarter of fiscal 2018 from $600,2662023.
Goodwill Impairment
We had goodwill at December 31, 2021 of $56,670,970. We perform a Step 0 goodwill impairment analysis annually following the steps laid out in ASC 350-20-35-3C. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of goodwill. From time to time we also evaluate goodwill impairment on a quarterly basis if any triggering events have occurred that would require such analysis. For the three months ended December 31, 2021, we performed a Step 0 goodwill impairment analysis on consolidated goodwill and determined that a triggering event had occurred to necessitate performing the quantitative impairment test. After performing the quantitative impairment test in accordance with ASC 350-20-35-3C, we determined that goodwill was impaired by $13,898,285. We recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of December 31, 2021. We performed the same analysis as of June 30, 2022 and determined that goodwill was impaired by $30,776,436. We has recorded this impairment to reduce total goodwill on its condensed consolidated balance sheets and has recorded the corresponding impairment expense on its condensed consolidated statement of operations as of June 30, 2022.
Other income and other non-operating expenses
We also record income and expenses associated with non-operating items. The material components of those are set forth below.
Realized and unrealized gain (loss) on marketable and other securities
We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized and unrealized gain (loss) on marketable securities. For the three months ended June 30, 2022 and 2021, we recorded $0 and $2,852, respectively, and for the firstnine months ended June 30, 2022 and 2021 we recorded $(33,350) and $545,562, respectively, including impairments. The realized loss in 2022 was a result of our shares in Isodiol being delisted while the realized gain in 2021 was driven by the sale of our investment in Formula Four Beverages, Inc. that was previously written to zero in the prior year based on prior information related to the company’s performance and COVID-19 impacts.
Restructuring expenses
During the quarter the Company entered into a separating agreement with its former CEO. The Company booked a onetime restructuring charge of $602,000 related to the cash payments required by separation agreement. This expense was booked as outside of operating expenses and included in a one of our other expenses outside of operating income.
Gain on the sale of assets
As mentioned in Note 2, the Company sold it manufacturing assets during the quarter for a total value of $1.8 million. The Company realized a net book gain of $88,000 after the net depreciated value and expenses associated with the sale.
Decrease in contingent liability
As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in this report, the earn-out provision for the Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non- cash other income. The value of the non-cash contingent liability was $702,000 at June 30, 2022, as compared to $16,200,000 at September 30, 2021, respectively. First quarter adjustment to the the contingent liability comprised of $366,841 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in December 2021, while the remaining $5,329,159 is associated with the decrease in the remaining contingent shares as of December 31, 2021. Second quarter adjustment to the contingent liability comprised of $41,916 associated with the decrease of the value of the Third Marking Period shares prior to their issuance in March 2022, while the remaining $246,915 is associated with the decrease in the remaining contingent shares as of March 31, 2022.During the third quarter of fiscal 2017,2022 we had a decrease in value of $1,943,000 to the contingent liability which is recorded as other income in our consolidated statement of operations for the third quarter of fiscal year 2022. The decrease in value is comprised of $90,792 associated with an increase of $1,087,378 or 181.15%. This increasethe value of the Fourth Marking Period shares prior to their issuance in May 2022, while the remaining $1,839,2072 is directly related toassociated with the changesdecrease in the companyremaining contingent shares as it increased from one operating business subsidiary to fourof June 30, 2022. We utilize both a market approach and builta Monte Carlo simulation in valuing the infrastructure to supportcontingent liability and a key input in both of those methods is the overall company from a growth perspective as well as to operate as a public entity. Specifically, duringstock price. The main driver of the first quarterchange in the value of fiscal 2018the contingent liability was the decrease of our common stock price, which was $0.44 at June 30, 2022 as compared to the first quarter of fiscal 2017 our staff related expenses increased approximately $458,000 as we added executive management, and other staff over our new licensing and entertainment divisions, and other staff support. In addition, our accounting and legal expenses increased by approximately $189,000 as we have ongoing needs and costs associated with being a public company as well as additional professional fees related to various contracts we undertake. In addition, during the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, expenses related to social media, public relations, advertising and marketing process, tradeshows, and promotions increased approximately $259,000, our travel and entertainment expenses increased approximately $23,000, and our rent expense increased $10,000. The increase during first quarter of fiscal 2018 was partially offset by certain decreases in operating expenses during such period as our professional outside services related to product formulation, design, marketing and tradeshow expenses decreased approximately by $48,000 and commissions paid to an outside sales consultant decreased approximately $15,000. During the first quarter of fiscal 2018 we had an increase in non-cash expense of $7,441 related to the issuance of restricted stock awards to our board members as well as for options issued to employees.
Professional products division
Operating expenses in the professional products division were approximately $289,000 for the first quarter of fiscal 2018 as compared to $480,000 for the first quarter of fiscal 2017, a decrease of 39.8%. Operating expenses for these periods, respectively, include staff related expenses which were approximately $113,000 and $140,000, accounting and legal expenses of approximately $35,000 and $97,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $17,000 and $27,000, travel and entertainment expenses of approximately $13,000 and $39,000, professional outside services related to product formulation, design, and marketing expenses of approximately $2,100 and $71,000, and commissions paid to an outside sales consultant of approximately $0 and $14,700 respectively. The overall decrease in operating expenses is related to management shift to a more structured approach as the strategy for this business unit was reviewed and repositioned to expand beyond a single channel focus.
Licensing division
Operating expenses in the licensing division were approximately $336,000 for the first quarter of fiscal 2018. Operating expenses include staff related expenses of $36,000, accounting and legal expenses of approximately $124,000, expenses related to social media, public relations, advertising, marketing and tradeshow of approximately $116,000. In addition, we allocated internal management fees from corporate of $50,000 to this division.$2.08 at September 30, 2021. We expect to continue to allocate corporate management fees to this division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Entertainment division
Operating expensesrecord changes in the
entertainment division were approximately $282,000non-cash contingent liability through the balance of the earnout period.As described in Note 6 to the notes to the consolidated financial statements appearing elsewhere in the report, the earn-out provision for the first quarterTwenty Two Earnout Shares is accounted for and recorded as a contingent liability with increases in the liability recorded as non-cash other expense and decreases in the liability recorded as non-cash other income. The value of fiscal 2018. Operating expenses include staff related expenses of $36,000, accounting and legal expenses of approximately $84,000, and expenses related to social media, public relations, advertising, marketing and tradeshows of approximately $108,000. In addition, we allocated internal management fees from corporate of $50,000 to this division. As with our licensing division, we expect to continue to allocate corporate management fees to this division in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Corporate overhead
Corporate overhead operating expenses were approximately $907,000 for the first quarter of fiscal 2018non-cash contingent liability was $0 at June 30, 2022 as compared to $107,000 for the first quarter of fiscal 2017, an increase of 747%. Operating expenses for these periods, respectively, include staff related expenses which were approximately $466,000 and $52,000, accounting and legal expenses of approximately $98,000 and $55,000, expenses related to social media, public relations, advertising, marketing, promotions and tradeshow of approximately $100,000 and $2,800, charitable expenses of approximately $59,000 and $22,000, travel related expenses of approximately $46,000 and $1,000, business insurance expense of approximately $39,000 and $1,800, and stock compensation expense of approximately $56,000 and $49,000.
Interest expense and other non-operating expenses
Our interest expense decreased to $259 for the first quarter of fiscal 2018 from $132,320 for the first quarter of fiscal 2017. The decrease was related to $0 borrowings in the first quarter of fiscal 2018 under the 8% convertible promissory notes issued and sold in October 2016. The 8% convertible promissory notes were converted to equity as of June$416,000 at September 30, 2017.
In some cases, we may, from time to time, enter into contracts where all or a portion of the consideration provided by the customer in exchange for our services and the value of the consideration provided could decline and require an impairment charge to be recorded in non-operating income in the consolidated statement of operations.
Net loss and net loss attributable to our common shareholders
Our net loss for the first quarter of fiscal 2018 increased 81% to $(1,264,782) as compared to a net loss of $(697,495) in the first quarter of fiscal 2017. At December 31, 2017 and 2016, we owned 100% and 88%, respectively, of the membership interests of Beauty & Pin-Ups and 100% of the membership interest in Level H&W. At December 31, 2017 we owned 100% of the voting interests in each of I'M1 and EE1 and 51% membership interest in each of I’M1 and EE1. As such we account for the noncontrolling interest in each of I’M1 and EE1 based on their gains or losses. Based on the noncontrolling interest for these entities, this can have a negative impact on the gains or losses to our shareholders. After allocating a portion of the net gain to the noncontrolling interests in accordance with generally accepted accounting principles, our net loss increased 79% for the first quarter of fiscal 2018 from the first quarter of fiscal 2017.
2021 respectively.Liquidity and capital resources
Capital ResourcesWe had cash and cash equivalents on hand of $8,817,856$9,553,670 and working capital of $11,282,711$14,133,054 at December 31, 2017June 30, 2022 as compared to cash and cash equivalents on hand of $284,246$26,411,424 and working capital of $2,170,154$29,595,214 at September 30, 2017.2021. Our current assets increased 226%decreased approximately 45.6% at December 31, 2017June 30, 2022 from September 30, 2017, and2021, which is primarily attributable to an increase of cash, marketable and other securities, prepaid expenses, and offset by a decrease in all accounts receivables, note receivable related party, and deferred IPO costs.cash used to fund operations. Our current liabilities decreased 49.5%by 17.2% at December 31, 2017June 30, 2022 from September 30, 2017. This decrease2021, and is primarily attributable to decreases in accounts payable and accrued expenses which was offset by an increase in deferred revenue. Both the changes in our current assets and current liabilities are also reflective of the further development of our business during the first quarter of fiscal 2018 and the impact of completion of an initial public offering. In November 2017 we completed an IPO and as of December 31, 2017 we have recorded $954,421 of deferred IPO costs which were directly attributable to the offering and have been charged against the gross proceeds of the offering as a reduction of additional paid-in capital. In July 2017 we sold, to a related party, an equity position in a customer that we had received as compensation for services and we received a portion in cash and the balance as a short term note receivable for $275,000.
expenses.During the first quarter of fiscal 2018three and nine months ended June 30, 2022 we used cash primarily to fund our operating loss in addition to increases in our marketable and other securities. We offer net 30 day terms and our receivables generally turn every 41 days.
operations.We do not have any commitments for capital expenditures. We have sufficienta commitment for cumulative cash dividends at an annual rate of 8% payable monthly in arrears for the prior month to our preferred shareholders. We have multiple endorsement or sponsorship agreements for varying time periods up through December 2022 and provide for financial commitments from the Company based on performance/participation (see Note 11 Commitments and Contingencies).
While the Company is taking strong action and believes that it can execute it's strategy and path to profitability within it's balance sheet, and in its ability to raise additional funds, there can be no assurances to that effect. The Company’s working capital position may not be sufficient to fund oursupport the Company’s daily operations for the twelve months subsequent to the issuance of these quarterly financial statements. The Company’s ability to continue as a going concern is dependent upon its ability to improve profitability and the ability to fund our expected growth.
acquire additional funding. These and other factors raise potential concern about the Company’s ability to continue as a going concern within twelve months after the date that the quarterly financial statements are issued. These financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result in the Company not being able to continue as a going concernOur goal from a liquidity perspective however, is to use operating cash flows to fund day to day operations. To date,operations and we have not met this goal as cash flow from operations has been a net use of $1,820,919$3.7 million and $528,637$4.6 million (excluding the reclassification of $939,826 of the SBA loan to short term liabilities) for the firstthree months ended June 30, 2022 and 2021, respectively and $16.8 million and $8.3 million for the nine months ended June 30, 2022 and 2021, respectively. Management believes the quarterly cash consumption will continue to improve in subsequent quarters and we have sufficient capital to execute our plan to profitability.
Adjusted EBITDA
Adjusted EBITDA for the three and nine months ended June 30, 2022 and June 30, 2021 is as follows:
| | | Three months | | | Three months | | | Nine Months | | | Nine Months | |
| | | Ended | | | Ended | | | Ended | | | Ended | |
| | | June 30, | | | June 30, | | | June 30, | | | June 30, | |
| | | 2022 | | | 2021 | | | 2022 | | | 2021 | |
(Unaudited) | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
GAAP (loss) from operations | | $ | (33,126,659 | ) | | $ | (6,675,620 | ) | | $ | (63,283,120 | ) | | $ | (12,603,288 | ) |
Adjustments: | | | | | | | | | | | | | | | | |
Depreciation & Amortization | | | 435,910 | | | | 246,533 | | | | 1,377,361 | | | | 719,856 | |
Employee and director stock compensation (1) | | | (938,285) | | | | 959,319 | | | | 851,517 | | | | 2,049,326 | |
Other non-cash stock compensation for services (2) | | | - | | | | 28,650 | | | | - | | | | 97,721 | |
Inventory adjustment(3) | | | - | | | | 50,000 | | | | 878,142 | | | | 50,000 | |
Write down of legacy accounts receivable (4) | | | - | | | | - | | | | - | | | | - | |
Impairment of Goodwill and other intangible assets (5) | | | 30,776,436 | | | | | | | | 48,805,436 | | | | - | |
Accrual for severance | | | 107,261 | | | | - | | | | 129,761 | | | | 703,022 | |
Accrual / expenses for discretionary bonus | | | - | | | | 150,000 | | | | 150,000 | | | | 450,000 | |
Non-GAAP adjusted (loss) from operations | | $ | (2,745,337 | ) | | $ | (5,241,118 | ) | | $ | (11,090,9031 | ) | | $ | (8,533,363 | ) |
| | | | | | | | | | | | | | | | | |
(1) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. |
(2) Represents non-cash expense related to options, warrants, restricted stock expenses that have been amortized during the period. |
(3) Represents an operating expense related to inventory loss related to regulatory changes impacting labels and packaging and obsolete/expired inventory. |
(4) Write down of legacy accounts receivable. |
(5) Represents non-cash goodwill impairment of $13,744,000 and impairment of the cbdMD trademark of $4,285,000. |
Adjusted EBITDA for the quarter ending June 2022 improved by over $2.5 million over prior year as a result of over $4.0 million in improvement operating costs that were partially offset by a reduction in revenue and corresponding gross profit. Year to date Adjusted EBITDA declined by $2.5 million mostly related to a reduction in gross profit that was partially offset by reduction in operating costs. This is the fourth consecutive quarter of fiscal 2018Adjusted EBITDA improvement and a $1 million improvement over the first quarterprior sequential quarter. Management expects continuous improvement in future quarters as a result of fiscal 2017, respectively. We continue to assess all areas of operations for costongoing improvements in operating costs and efficiencies as we continue to mature.
Related Parties
As described in Note 9 to our consolidated financial statements appearing elsewhere in this report, we have engaged in significant number of related party transactions. As indicated previously, we are a party to multiple agreements withkathy ireland® Worldwide, its principals and its affiliates, therefore as the companies work together on various opportunities, we at times have leveraged the kathy ireland® Worldwide enterprise to assist with delivery and in some cases to engage through them with customers. Due to the significance of these transactions we have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements. In addition, our CEO is an affiliate of a company who is a customer of ours and who continues to conduct ongoing business with us. These transactions also are reported as sales with related parties (see Note 9 Related Party Transactions in the consolidated financial statements for more information).
improving revenue.Critical accounting policies
The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“US GAAP”)GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 20172021 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
Recent accounting pronouncements
In May 2014, August 2015Please see Note 1 – Organization and May 2016,Summary of Significant Accounting Policies appearing in the Financial Accounting Standards Board (FASB) issued ASU 2014-09,
Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enableconsolidated financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption.Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08,Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations(“ASU 2016-08”); ASU No. 2016-10,Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing(“ASU 2016-10”); ASU No. 2016-12,Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients(“ASU 2016-12”); and ASU No. 2016-20,Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers(“ASU 2016-20”).
We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity. We will adopt this standard in the first quarter of fiscal 2019.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendmentsincluded in this update provided guidancereport for information on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity.
accounting pronouncements.Off balance sheet arrangements
As of the date of this report, we do not have anyno undisclosed off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance“off-balance sheet arrangement"arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
Evaluation of Disclosure Controls and Procedures
. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under theSecurities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our Chief Executive Officerinterim principal executive officer and our Chief Financial Officer havehas concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our Chief Executive Officerinterim principal executive officer and our Chief Financial Officer, to allow timely decisions regarding required disclosure.Changes in Internal Control overOver Financial Reporting.
During the three months ended December 31, 2017, the Company made the following remediationReporting. There were no changes related toin our internal controlscontrol over financial reporting during our most recent fiscal quarter that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting. These changes are
we have hired a new Controller as●
we have engaged competent external experts to assist with financial statement review processes to ensure a complete and thorough review process.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are materially dependent upon our relationships with kathy ireland® Worldwide and certaindesire to take advantage of its affiliates. Our advisory agreements with certainthe “safe harbor” provisions of these affiliates have expiredthe Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by their terms. If we are unable to enter into new advisory agreements with these individuals, we would be deprived of their services. In that event, our business could be materially adversely impacted.
In February 2017 we entered into one year advisory agreements with certain affiliates ofkathy ireland® Worldwide, including Messrs. Stephen Roseberry, Tommy Meharey and Nic Mendoza, pursuant to which they provide various management and advisory services to us, including key operational roles at I’M1 and EE1. These agreements have expired by their terms. In addition, the master advisory and consulting agreementwith kathy ireland® Worldwide on which we are materially dependent provides that the agreement is immediately terminable bykathy ireland® Worldwide if any officers are terminated or resign, including Mr. Roseberry in his role as President and co-Managing Director of I'M1 and EE1. Each of Messrs. Roseberry, Meharey and Mendoza continues to provide services to us and we are in discussions with each of them regarding the terms of multi-year agreements with us. While we expect to sign new agreements with each of them in the near future, in the event we are unable to enter into new advisory agreements with one or more of them, our business and operations could be materially impacted.
In addition to the other information set forth in this report, you should carefully considerreference the risk factors discusseddisclosed in Part I, Item 1A inof our 2017 10-K and our subsequent filings with the SEC which could materially affect our business, financial condition or future results.
2021 10-K.ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In November 2017Except for those unregistered securities previously disclosed in reports filed with the SEC during the period covered by this report, we issued 6,667have not sold any securities without registration under the Securities Act during the period covered by this report.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our Company’s operations.
ITEM 5. OTHER INFORMATION.
On August 9, 2022, T. Ronan Kennedy, our Chief Financial Officer and Chief Operating Officer, was appointed interim principal executive officer.
Effective August 9, 2022, Dr. Sybil Swift, a key employee of the Company, was appointed to serve on the board of directors, filling a vacancy on the board, in accordance with the bylaws of the Company. Dr. Swift has served as the Company’s Vice President for Scientific & Regulatory Affairs and the co-chair of cbdMD Therapeutics, LLC, since March of 2021. She initially joined the Company as a Regulatory Consultant in Jan 2021. Prior to joining the Company, from Jan 2020 to Dec 2020, Dr. Swift was the Senior Vice President for Scientific & Regulatory Affairs at the Natural Products Association. Dr. Swift served in multiple roles during her 5 years within the U.S. Food and Drug Administration's Office of Dietary Supplement Programs; the last role was the Associate Director for Research and Strategy. As Associate Director, Dr. Swift directed the office’s research portfolio and was responsible for ensuring alignment between its science, research, compliance, enforcement, and policy initiatives. Dr. Swift was also the co-chair of the Botanical Safety Consortium, a collaboration between scientists from government agencies, academia and industry. Dr. Swift earned her Ph.D. in Nutrition has and M.S. in Kinesiology at Texas A&M University. She is currently a member of the American Society for Nutrition, the Global Retailer & Manufacturer Alliance (GRMA), the Natural Products Association (NPA) ComPLI Committee, the Council for Federal Cannabis Regulation's (CFCR) SRAC. Dr. Swift is not considered an “independent director” within the meaning of Section 803 of the NYSE American Company Guide. As an employee director, she will not be appointed to any committee of our board of directors. She shall receive a restricted stock grant of 5,000 shares of our common stock valuedand five options to purchase 30,000 shares of our common stock, exercisable at $37,002$0.568 per share. The restricted stock grant and options vest on the date of issuance. In keeping with the Company’s stated commitment to increase diversity on the board which it believes supports the Company’s core values and is an essential measure of sound governance and critical to a well-functioning board, the board of directors recognizes that Dr. Swift is a minority.
As previously reported, on December 20, 2018 we closed that certain Merger Agreement, as compensationamended, by and among our company, our subsidiaries and Cure Based Development, LLC (“Cure Based Development”). Pursuant to the terms of the Merger Agreement, as partial merger consideration CBD Holding, LLC (“CBDH”), the then sole member of Cure Based Development, was entitled to receive (the “Earnout Rights”) up to 15,250,000 additional shares of our common stock (the “Earnout Shares”) upon the satisfaction of certain aggregate net revenue criteria within 60 months (marking periods) following the Closing Date. The possible issuance of the Earnout Shares was approved by our shareholders in April 2019. In February 2020 CBDH distributed the Earnout Rights to its members which included affiliates of Martin A. Sumichrast (our former officer and director) and R. Scott Coffman (a current member of our board of directors and former officer). Following the completion of the June 30, 2022 quarter within the third marking period, and in accordance with the terms of the Merger Agreement, as amended, we determined that the net revenues for services to us.the June 30, 2022 quarter within the third marking period were $8,592,892 and on August 9, 2022 we issued the members an aggregate of 409,505 shares of our common stock. The recipient was a sophisticated or otherwiserecipients were accredited investor with access to businessinvestors and financial information on our company. The issuance wasthe issuances were exempt from registration under the Securities Act of 1933, as amended, in reliance on an exemption provided by Section 4(a)(2) of that act.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company’s operations.
ITEM 5. OTHER INFORMATION.
On January 30, 2018, Level Brands, amended its Wholesale License Agreement (the “Agreement”) executed on September 8, 2017 with kathy Ireland ® WorldWide Inc. related to exclusive rights to the kathy ireland Health & Wellness™ trademarks. The amendment reflected our exerciseTable of the option on a three year extension and amendment of the payment terms related to this extension as follows: to pay $400,000 within five days of executing the amendment and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by us of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. In addition, royalty payments to kathy ireland ® WorldWide for the additional three year extension are set at 35% of net proceeds. The foregoing description of the terms of this agreement is qualified in its entirety by reference to the agreement, a copy of which is filed as Exhibit 10.68 to this report..
| | | | | Incorporated by Reference | | Filed or Furnished |
No. | | Exhibit Description | | Form | | Date Filed | | Number | | Herewith |
2.1 | | Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC | | 8-K | | 12/3/18 | | 2.1 | | |
| | | | | | | | | | | |
2.2 | | Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC | | 10-Q | | 2/14/19 | | 2.2 | | |
| | | | | | | | | | | |
2.3 | | Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC | | 10-Q | | 2/14/19 | | 2.3 | | |
| | | | | | | | | | | |
2.4 | | Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC | | 10-Q | | 2/14/19 | | 2.4 | | |
| | | | | | | | | | | |
2.5 | | Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC | | 10-Q | | 2/14/19 | | 2.5 | | |
| | | | | | | | | | | |
2.6 | | Addendum No. 1 to Agreement and Plan of Merger dated March 31, 2021 | | 8-K | | 4/1/21 | | 10.1 | | |
| | | | | | | | | | | |
3.1 | | Articles of Incorporation | | 1-A | | 9/18/17 | | 2.1 | | |
| | | | | | | | | | | |
3.2 | | Articles of Amendment to the Articles of Incorporation – filed April 22, 2015 | | 1-A | | 9/18/17 | | 2.2 | | |
| | | | | | | | | | | |
3.3 | | Articles of Amendment to the Articles of Incorporation – filed June 22, 2015 | | 1-A | | 9/18/17 | | 2.3 | | |
| | | | | | | | | | | |
3.4 | | Articles of Amendment to the Articles of Incorporation – filed November 17, 2016 | | 1-A | | 9/18/17 | | 2.4 | | |
| | | | | | | | | | | |
3.5 | | Articles of Amendment to the Articles of Incorporation – filed December 5, 2016 | | 1-A | | 9/18/17 | | 2.5 | | |
| | | | | | | | | | | |
3.6 | | Articles of Amendment to Articles of Incorporation | | 8-K | | 4/29/19 | | 3.7 | | |
| | | | | | | | | | | |
3.7 | | Articles of Amendment to the Articles of Incorporation including the Certificate of Designations, Rights and Preferences of the 8.0% Series A Cumulative Convertible Preferred Stock | | 8-A | | 10/11/19 | | 3.1(f) | | |
| | | | | | | | | | | |
3.8 | | Bylaws, As amended | | 1-A | | 9/18/17 | | 2.6 | | |
| | | | | | | | | | | |
10.21 | | Equipment Purchase Agreement dated April 7, 2022 + | | 10-Q | | 5/13/22 | | 10.21 | | |
| | | | | | | | | | | |
| 10.22 | | Membership Interest Transfer Agreement effective June 22, 2022 | | | | | | | | Filed |
| | | | | | | | | | | |
| 31.1 | | Certification of Principal Executive Officer (Section 302) | | | | | | | | Filed |
| | | | | | | | | | | |
| 31.2 | | Certification of Principal Financial Officer (Section 302) | | | | | | | | Filed |
| | | | | | | | | | | |
32.1 | | Certification of Principal Executive Officer and Principal Financial Officer (Section 906) | | | | | | | | Filed |
No.101.INS | | DescriptionInline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | Filed |
101.SCH | | Agreement dated August 1, 2017 by and between Level Brands, Inc. and Kure Corp. (incorporated by reference to Exhibit 10.62 to the Current Report on Form 8-K as filed on December 12, 2017)Inline XBRL Taxonomy Extension Schema Document | Filed |
101.CAL | | Agreement dated November 30, 2017 by and between Level Brands, Inc. and Kure Corp. (incorporated by reference to Exhibit 10.63 to the Current Report on Form 8-K as filed on December 12, 2017)Inline XBRL Taxonomy Extension Calculation Linkbase Document | Filed |
101.DEF | | Revolving Line of Credit Loan Agreement dated December 11, 2017 by and between Level Brands, Inc. and Kure Corp. (incorporated by reference to Exhibit 10.64 to the Current Report on Form 8-K as filed on December 12, 2017)Inline XBRL Taxonomy Extension Definition Linkbase Document | Filed |
101.LAB | | Security Agreement dated December 11, 2017 by and between Level Brands, Inc. and Kure Corp. (incorporated by reference to Exhibit 10.65 to the Current Report on Form 8-K as filed on December 12, 2017)Inline XBRL Taxonomy Extension Label Linkbase Document | Filed |
101.PRE | | Promissory Note in the principal amount of $500,000 dated December 11, 2017 due from Kure Corp. (incorporated by reference to Exhibit 10.66 to the Current Report on Form 8-K as filed on December 12, 2017) |
| | License Agreement dated December 30, 2017 by and between Level Brands, Inc. and Isodiol International, Inc. (incorporated by reference to Exhibit 10.67 to the Current Report on Form 8-K as filed on January 5, 2018) |
| | Amendment dated January 30, 2018 to Wholesale License Agreement between Level Brands, Inc. and kathy Ireland ® WorldWide Inc. * |
| | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer * |
| | Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial Officer* |
| | Section 1350 Certification of Chief Executive Officer and Chief Financial Officer* |
101.INS | | XBRL Instance Document* |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase *Document | Filed |
101.LAB104 | | Cover Page Interactive Data File (embedded within the Inline XBRL Taxonomy Extension Label Linkbase * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase * |
101.SCH | | XBRL Taxonomy Extension Schema * |
———————
* | Document and include in Exhibit 101) | Filed herewith |
+ Exhibits and/or schedules have been omitted. The Company hereby agrees to furnish to the staff of the Securities and Exchange Commission upon request any omitted information.
SIGNATURES
Pursuant to the requirements 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.
| | LEVEL BRANDS,cbdMD, INC. | |
| | | |
February 14, 2018 | By: | /s/ Martin A. Sumichrast | |
| | | Martin A. Sumichrast, Chief Executive Officer, principal executive officer | |
February 14, 2018August 11, 2022 | By: | /s/ Mark S. ElliottT. Ronan Kennedy | |
| | | Mark S. Elliott, Chief OperatingT. Ronan Kennedy, interim Principal Executive Officer | |
| | | |
| | | |
| August 11, 2022 | By: | /s/ T. Ronan Kennedy | |
| | T. Ronan Kennedy, Chief Financial Officer, | |
| | principal financial and accounting officer | |
