UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
(Mark One)
☑
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended DecemberMarch 31, 2017
2020
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from________from ___________ to ___________________
Commission File Numberfile number 001-38299
———————
LEVEL BRANDS,cbdMD, INC.
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
———————Charter)
| North Carolina | | 47-3414576 |
(State or other jurisdictionOther Jurisdiction of incorporation Incorporation or organization)Organization | ( | I.R.S. Employer Identification No.) |
| | |
| 8845 Red Oak Blvd, Charlotte, NC | | 28217 |
| Address of Principal Executive Offices | | Zip Code |
704-445-3060
Registrant’s Telephone Number, Including Area Code
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
Securities registered pursuant to Section 12(b) of the Act:
4521 Sharon Road, Suite 407, Charlotte, NCTitle of each class | 28211Trading Symbol(s) | Name of each exchange on which registered |
(Address of principal executive offices)common | (Zip Code)YCBD | NYSE American |
| 8% Series A Cumulative Convertible Preferred Stock | YCBD PR A | NYSE American |
(704) 445-5800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant:registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES Yes ☑ NO No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES Yes ☑ NO No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | | Accelerated filer ☐ |
Non-accelerated filer ☐☑ | | Smaller reporting company ☑ |
| | | Emerging growth company ☑ |
If an emerging growth company, indicate by checkmarkcheck mark if the registrant has elected not elected to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the Securities Act:Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESYes ☐ NO No ☑
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer'sissuer’s classes of common stock, as of the latest practicable date. 8,028,928
51,335,648 shares of common stock are issued and outstanding as of February 1, 2018.May11,2020.
TABLE OF CONTENTS
| | | Page |
| | | No |
| | | |
| | PART I - FINANCIALI-FINANCIAL INFORMATION | |
| | | |
| ITEM 1. | Financial Statements. | 3
4 |
| | | |
| ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations. | 3035 |
| | | |
| ITEM 3. | Quantitative and Qualitative Disclosures About Market Risk. | 3744 |
| | | |
| ITEM 4. | Controls and Procedures. | 3744 |
| | | |
| | PART II - OTHER INFORMATION | |
| | | |
| ITEM 1. | Legal Proceedings. | 3845 |
| | | |
| ITEM 1A. | Risk Factors. | 3845 |
| | | |
| ITEM 2. | Unregistered Sales of Equity Securities and Use of Proceeds. | 3846 |
| | | |
| ITEM 3. | Defaults Upon Senior Securities. | 3846 |
| | | |
| ITEM 4. | Mine Safety Disclosures. | 3846 |
| | | |
| ITEM 5. | Other Information. | 3846 |
| | | |
| ITEM 6. | Exhibits. | 39
47 |
OTHER PERTINENT INFORMATION
Unless the context otherwise indicates, when used in this report, the terms Level Brands,the “Company,” “cbdMD, “we,” “us, “our” and similar terms refer to Level Brands,cbdMD, Inc., a North Carolina corporation formerly known as Level Beauty Group,Brands, Inc., and our subsidiaries Beauty and Pinups,CBD Industries LLC, a North Carolina limited liability company formerly known as cbdMD LLC, which we refer to as “Beauty & Pin-Ups”“CBDI”, I | M 1, LLC,Paw CBD, Inc., a California limited liability company,recently formed North Carolina corporation which we refer to as “I’M1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1” and Level H&W, LLC, a recently formed North Carolina limited liability company.“Paw CBD”. In addition, “fiscal 2016”"fiscal 2019" refers to the year ended September 30, 2016, "fiscal 2017"2019, “fiscal 2020” refers to the year ended September 30, 2017, "fiscal 2018" refers to the year ending September 30, 2018, "first2020, and "second quarter of 2017"2019" refers to the three months ended DecemberMarch 31, 20162019 and "first"second quarter of 2018"2020" refers to the three months ended DecemberMarch 31, 2017.2020.
Unless otherwise indicated, all share and per share information contained herein gives pro forma effect to the 1:5 reverse stock split of our common stock, which was effective December 5, 2016.We maintain a corporate website atwww.cbdmd.com. The information contained on our websites atwww.levelbrands.comcorporate website andwww.beautyandpinups.com our various social media platforms are not part of this report.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:
| ● | our material dependence on our relationships withkathy ireland®Worldwide and certain of its affiliates;● the impact and the unknown related to the COVID-19 pandemic; ● the impact of changes in the fair value of our contingent liabilities associated with the Earnout Shares; ● the possible need to raise additional capital in the future; ● dilution to our shareholders upon the issuance of the Earnout Shares; ● changes in state laws, costs associated with compliance with applicable laws and potential uncertain changes to regulations impacting our industry; ● risks associated with any future failure to satisfy the NYSE American LLC continued listing standards; ● terms of and provisions of our 8.0% Series A Cumulative Convertible Preferred Stock; ● risks associated with developing a liquid market for our 8.0% Series A Cumulative Convertible Preferred Stock and possible future volatility in its trading price and the trading price of our common stock; ● risks associated with our status as an emerging growth company; ● risks associated with control by our executive officers, directors and affiliates; ● risks associated with unfavorable research reports; ● the accounting treatment of securities we accept as partial compensation for services; ● our ability to liquidate securities we accept as partial compensation for services; ● the lack of long-term contracts for the purchase of our products; ● our ability to protect our intellectual property; ● additional operational risks associated with our CBD business; ● dilution to our shareholders from the issuance of additional shares of common stock by us, the conversion of shares of our 8.0% Series A Cumulative Convertible Preferred Stock and/or the exercise of outstanding options and warrants; and ● risks associated with our articles of incorporation, bylaws and North Carolina law. |
| ● | our limited operating history; |
| ● | the limited operating histories of our subsidiaries; |
| ● | our history of losses; |
| ● | risks associated with any failure by us to maintain an effective system of internal control over financial reporting; |
| ● | the terms of various agreements withkathy ireland®Worldwide and possible impacts on our management's abilities to make certain decisions regarding the operations of our company;
|
| ● | our dependence on consumer spending patterns; |
| ● | our history on reliance on sales from a limited number of customers, including a related party; |
| ● | risks associated with our failure to effectively promote our brands; |
| ● | our ability to identify and successfully acquire additional brands and trademarks; |
| ● | the operating agreements of our I'M1 and EE1 subsidiaries; |
| ● | the accounting treatment of securities we accept as partial compensation for services; |
| ● | our ability to liquidate those securities and the possible impact of the Investment Company Act of 1940; |
| ● | the possible need to raise additional capital in the future; |
| ● | terms of the contracts with third parties in each of our divisions; |
| ● | possible conflicts of interest withkathy ireland®Worldwide;
|
| ● | possible litigation involving our licensed products; |
| ● | our ability to effectively compete and our dependence on market acceptance of our brands; |
| ● | the lack of long-term contracts for the purchase of products from our professional products division; |
| ● | our ability to protect our intellectual property; |
| ● | additional operational risks associated with our professional products division; |
| ● | risks associated with developing a liquid market for our common stock and possible future volatility in its trading price; |
| ● | risks associated with any future failure to satisfy the NYSE American LLC continued listing standards; |
| ● | dilution to our shareholders from the exercise of outstanding options and warrants and the vesting of restricted stock awards; |
| ● | risks associated with our status as an emerging growth company; |
| ● | risks associated with control by our executive officers, directors and affiliates; |
| ● | risks associated with unfavorable research reports; |
| ● | risks associated with our status as a public company; and |
| ● | risks associated with North Carolina law. |
Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 20172019 as filed with the Securities and Exchange Commission (the “SEC”) on December 26, 2017 (the "201718, 2019, as amended on January 24, 2020 (collectively, the "2019 10-K"). as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.
PART 1 - FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
LEVEL BRANDS,cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBERMARCH 31, 20172020 AND SEPTEMBER 30, 20172019
| | | | | |
| | | | | |
| | | | |
| Assets | | |
| | | |
| Current assets: | | |
| Cash and cash equivalents | $8,817,856 | $284,246 | $14,835,699 | $4,689,966 |
| Accounts receivable | 65,728 | 141,462 | 662,531 | 1,425,697 |
| Accounts receivable -- related party | - | 712,325 | |
| Accounts receivable other | 50,052 | 12,440 | - | 160,137 |
| Accounts receivable other – related party | 290,909 | 236,364 | |
| Accounts receivable – discontinued operations | | 791,998 | 1,080,000 |
| Marketable securities | 299,000 | - | 83,375 | 198,538 |
| Investment other securities | 1,159,112 | 859,112 | - | 600,000 |
| Investment other securities – related party | 200,000 | - | |
| Note receivable – related party | 268,373 | 276,375 | |
| Deposits | | 28,365 | 6,850 |
| Merchant reserve | | 280,322 | 519,569 |
| Inventory | 593,149 | 588,197 | 6,571,696 | 4,301,586 |
| Deferred initial public offering costs | - | 497,735 | |
| Inventory prepaid | | 517,309 | 903,458 |
| Deferred issuance costs | | - | 93,954 |
| Prepaid software | | 167,852 | 206,587 |
| Prepaid equipment deposits | | 115,555 | 868,589 |
| Prepaid expenses and other current assets | 306,964 | 85,420 | 830,565 | 688,104 |
| Total current assets | 12,051,143 | 3,693,676 | 24,885,267 | 15,743,035 |
| | | |
| Other assets: | | |
| Property and equipment, net | 56,125 | 135,476 | 3,224,446 | 1,715,557 |
| Operating lease assets | | 7,413,256 | - |
| Deposits for facilities | | 755,383 | 754,533 |
| Intangible assets, net | 3,191,725 | 3,240,287 | 21,635,000 |
| Goodwill | | 54,669,997 |
| Total other assets | 3,247,850 | 3,375,763 | 87,698,082 | 78,775,087 |
| | | |
| Total assets | $15,298,993 | $7,069,439 | $112,583,349 | $94,518,122 |
See Notes to Condensed Consolidated Financial Statements
3
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2017 AND SEPTEMBER 30, 2017
(continued)
| Liabilities and shareholders' (deficit) equity | | |
| | | |
| Current liabilities: | | |
| Accounts payable | $168,645 | $397,601 |
| Accounts payable related party | 8,199 | 67,879 |
| Deferred revenue | 49,125 | 41,417 |
Accrued payroll
| 364,515
| -
|
| Accrued expenses | 165,148
| 123,823 |
| Accrued expenses to related party | 12,800 | 892,805 |
| Total current liabilities | 768,432 | 1,523,525 |
| | | |
| Long term liabilities | | |
| Long term liabilities, to related party | 360,000 | 360,000 |
| Deferred tax liability | 15,000 | 37,000 |
| Total long term liabilities | 375,000 | 397,000 |
| | | |
| Total liabilities | 1,143,432 | 1,920,525 |
| | | |
| Level Brands, Inc. shareholders' equity: | | |
| Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding | - | - |
| Common stock, authorized 150,000,000 shares, $0.001 par value, | | |
| 7,798,928 and 5,792,261 shares issued and outstanding, respectively | 7,799 | 5,792 |
| Accumulated other comprehensive income | 33,500 | - |
| Additional paid in capital | 20,699,403 | 10,463,480 |
| Accumulated deficit | (7,390,350) | (6,257,421) |
| Total Level Brands, Inc. shareholders' equity | 13,350,352 | 4,211,851 |
| Non-controlling interest | 805,209 | 937,063 |
| Total shareholders' equity (deficit) | 14,155,561 | 5,148,914 |
| | | |
| Total liabilities and shareholders' equity (deficit) | $15,298,993 | $7,069,439 |
See Notes to Condensed Consolidated Financial Statements
4
LEVEL BRANDS,cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSBALANCE SHEETS
FOR THE THREE MONTHS ENDED DECEMBERMARCH 31, 20172020 AND 2016SEPTEMBER 30, 2019
(Unaudited)(continued)
| | | |
| | | |
| | | |
| | | |
| 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 | 459,632 | 37,091 |
| Operating expenses | 1,687,644
| 600,266 |
| Loss from operations | (1,228,012) | (563,175) |
Loss on disposal of property and equipment
| (69,511) | |
| Interest expense | 259 | 132,320 |
| Loss before provision for income taxes | (1,297,782) | (695,495) |
| Benefit (Provision) for income taxes | 33,000 | (2,000) |
| Net loss | (1,264,782) | (697,495) |
| Net loss attributable to non-controlling interest | (131,854) | (63,016) |
| | | |
| Net loss attributable to Level Brands, Inc. common shareholders | $(1,132,928) | $(634,479) |
| | | |
| Loss per share, basic and diluted | $(0.16) | $(0.18) |
| Weighted average number of shares outstanding | 6,911,871 | 3,485,950 |
| | | |
| | | |
| | | |
| Liabilities and shareholders' equity | | |
| | | |
| Current liabilities: | | |
| Accounts payable | $3,506,663 | $3,021,271 |
| Accrued expenses | 1,044,992 | 681,269 |
| Operating leases – short term liabilities | 1,076,907 | - |
| Note payable | 163,858 | - |
| Customer deposit – related party | - | 7,339 |
| Total current liabilities | 5,792,420 | 3,709,878 |
| | | |
| Long term liabilities: | | |
| Long term liabilities | - | 363,960 |
| Note payable | 205,732 | - |
| Operating leases - long term liabilities | 6,607,553 | - |
| Contingent liability | 7,820,000 | 50,600,000 |
| Deferred tax liability | - | 2,240,300 |
| Total long term liabilities | 14,633,285 | 53,204,260 |
| | | |
| Total liabilities | 20,425,705 | 56,914,138 |
| | | |
| cbdMD, Inc. shareholders' equity: | | |
| Preferred stock, authorized 50,000,000 shares, $0.001 par value, 500,000 and 0 shares issued and outstanding, respectively | 500 | - |
| Common stock, authorized 150,000,000 shares, $0.001 par value, | | |
| 51,335,648 and 27,720,356 shares issued and outstanding, respectively | 51,336 | 27,720 |
| Additional paid in capital | 124,082,811 | 97,186,524 |
| Accumulated deficit | (31,977,003) | (59,610,260) |
| Total cbdMD, Inc. shareholders' equity | 92,157,644 | 37,603,984 |
| | | |
| | | |
| Total liabilities and shareholders' equity | $112,583,349 | $94,518,122 |
See Notes to Condensed Consolidated Financial Statements
5
LEVEL BRANDS,
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBERMARCH 31, 20172020 AND 20162019
(Unaudited)
| | | |
| | | |
| | | |
| | | |
| Net loss | $(1,264,782) | $(697,495) |
| Other Comprehensive Income: | | |
| Net Unrealized Gain on Marketable Securities, net of tax | 33,500
| - |
| Comprehensive Loss | $(1,231,282) | $(697,495) |
| | | |
| Comprehensive loss attributable to non-controlling interest | $(131,854) | $(63,016) |
| Comprehensive loss attributable to Level Brands, Inc. common shareholders | $(1,099,428) | $(634,479) |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total Gross Sales | $9,703,800 | $7,752,478 | $20,116,291 | $8,436,207 |
| Allowances | (304,764) | (2,115,900) | (569,019) | (2,333,942) |
| Total Net Sales | 9,399,036 | 5,636,578 | 19,547,272 | 6,102,265 |
| Cost of sales | 2,732,076 | 1,914,716 | 6,432,613 | 2,080,027 |
| | | | | |
Gross Profit | 6,666,960 | 3,721,862 | 13,114,659 | 4,022,238 |
| | | | | |
| Operating expenses | 12,267,637 | 5,749,463 | 24,827,934 | 7,141,274 |
Income (Loss) from operations | (5,600,677) | (2,027,601) | (11,713,275) | (3,119,036) |
| Realized and Unrealized gain (loss) on marketable securities | (53,152) | 9,524 | (115,162) | (64,640) |
| Impairment on investment other securities | (600,000) | - | (600,000) | - |
| Impairment accounts receivable other | (160,000) | - | (160,000) | - |
| (Increase) decrease on contingent liability | 21,261,994 | (30,914,074) | 38,160,000 | (30,914,074) |
| Interest income | 35,607 | 6,274 | 42,875 | 43,959 |
| Income (loss) before provision for income taxes | 14,883,772 | (32,925,877) | 25,614,438 | (34,053,791) |
| | | | | |
Benefit for income taxes | - | 1,075,000 | 2,240,300 | 1,208,000 |
| Net Income (Loss) from continuing operations | 14,883,772 | (31,850,877) | 27,854,738 | (32,845,791) |
| Net Income (Loss) from discontinued operations, net of tax (Note 15) | - | 603 | (41,202) | (1,193,345) |
| Net Income (Loss) | 14,883,772 | (31,850,274) | 27,813,536 | (34,039,136) |
Net (Loss) attributable to noncontrolling interest | - | (58,536) | - | (137,685) |
| Preferred dividends | 100,016 | - | 166,750 | - |
| | | | | |
| Net Income (Loss) attributable to cbdMD, Inc. common shareholders | $14,783,756 | $(31,791,738) | $27,646,786 | $(33,901,451) |
| | | | | |
| Net Income (Loss) per share: | | | | |
| Basic earnings per share | $0.41 | $(3.13) | $0.76 | $(3.35) |
| Diluted earnings per share | $0.40 | $- | $0.74 | $- |
| | | | | |
| Weighted average number of shares Basic: | 36,503,005 | 10,160,947 | 36,503,005 | 10,107,144 |
| Weighted average number of shares Diluted: | 37,336,505 | 10,160,947 | 37,336,505 | 10,107,144 |
See Notes to Condensed Consolidated Financial Statements
6
LEVEL BRANDS,
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF CASH FLOWSCOMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND SIX MONTHS ENDED DECEMBERMARCH 31, 20172020 AND 20162019
(unaudited)(Unaudited)
| | Three Months Ended December 31, | Three Months Ended December 31, |
| | | |
| | | |
| Cash flows from operating activities: | | |
| Net loss | $(1,264,782) | $(697,495) |
| Adjustments to reconcile net loss to net | | |
| cash used by operating activities: | | |
| Stock based compensation | 17,114 | 9,672 |
| Restricted stock expense | 39,100 | 39,101 |
| Issuance of stock / warrants for service | 37,002 | - |
| Amortization of debt issue costs | - | 79,774 |
| Depreciation and amortization | 61,067
| 9,189 |
| Loss on sale of property and equipment | 69,511
| 4,000 |
| Common stock issued as charitable contribution | - | 17,000 |
| Non-cash consideration received for services | (454,503) | - |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 75,734 | 2,620 |
| Accounts receivable – related party | 712,325 | - |
| Other accounts receivable | (37,612) | - |
| Other accounts receivable – related party | (54,545) | - |
| Note receivable – related party | 8,002 | - |
| Inventory | (4,952) | (19,572) |
| Prepaid expenses and other current assets | (221,545)
| 26,832 |
| Accounts payable and accrued expenses | 162,142 | (49,739) |
| Accounts payable and accrued expenses – related party | (939,685) | - |
| Interest Payable | - | 47,981 |
| Deferred revenue | 7,708 | - |
| Deferred tax liability | (33,000) | 2,000 |
| Cash used by operating activities | (1,820,919) | (528,637) |
| | | |
| Cash flows from investing activities: | | |
| Purchase of investment other securities | (300,000) | - |
| Purchase of property and equipment | (2,665) | (7,034) |
| Cash used by investing activities | (302,665) | (7,034) |
| | | |
| Cash flows from financing activities: | | |
| Proceeds from issuance of common stock | 10,927,535 | - |
| Proceeds from convertible note | - | 2,125,000 |
| Debt issuance costs | - | (200,800) |
| Repayment of line of credit | - | (300,000) |
| Deferred issuance costs | (270,341) | - |
| Cash provided by financing activities | 10,657,194 | 1,624,200 |
| Net increase (decrease) in cash | 8,533,610 | 1,088,529 |
| Cash and cash equivalents, beginning of period | 284,246 | 34,258 |
| Cash and cash equivalents, end of period | $8,817,856 | $1,122,787 |
| | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Net Income (Loss) | $14,883,772 | $(31,850,274) | $27,813,536 | $(34,039,136) |
| Comprehensive Income (Loss) | 14,883,772 | (31,850,274) | 27,813,536 | (34,039,136) |
| | | | | |
| Comprehensive Income (loss) attributable to non-controlling interest | - | (58,536) | - | (137,685) |
| Preferred dividends | (100,016) | - | (166,750) | - |
| Comprehensive Income (Loss) attributable to cbdMD, Inc. common shareholders | $14,783,756 | $(31,791,738) | $27,646,786 | $(33,901,451) |
See Notes to Condensed Consolidated Financial Statements
7
LEVEL BRANDS,
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR THREESIX MONTHS ENDED DECEMBERMARCH 31, 20172020 AND 20162019
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
| | Three Months ended December 31, | Three Months Ended December 31, |
| | | |
| | | |
| Cash Payments for: | | |
| Interest expense | $259 | $4,565 |
| | | |
| Non-cash financial activities: | | |
| Warrants issued to IPO selling agent | $171,600 | $- |
| IPO costs incurred but unpaid as of quarter end | 14,745 | - |
| Common stock issued for services | - | 570,000 |
| Warrants issued with convertible notes | - | 5,159 |
| Noncontrolling interest transfer | - | 338,556 |
| Strike price adjustment on placement agent warrants | - | 31,505 |
| Common stock issued for warrant exercise | - | 85,950 |
| Equity issued to purchase membership interest in subsidiary | - | 110,000 |
| | | |
| | Six Months Ended March 31, | Six Months Ended March 31, |
| | | |
| Cash flows from operating activities: | | |
| Net income (loss) | $27,813,536 | $(34,039,136) |
| Adjustments to reconcile net income (loss) to net | | |
| cash used by operating activities: | | |
| Stock based compensation | 972,225 | 163,148 |
| Restricted stock expense | 138,000 | - |
| Issuance of stock / warrants for service | 28,250 | 19,313 |
| Impairment on discontinued operations asset | 38,002 | - |
| Depreciation and amortization | 287,457 | 171,356 |
| Gain on settlement of Note | - | (20,000) |
| Other than temporary impairment other securities and other accounts receivable | 760,000 | - |
| Increase/(Decrease) in contingent liability | (38,160,000) | 30,914,074 |
| Realized and unrealized loss of marketable securities | 115,162 | 1,207,617 |
| Non-cash lease expense | 585,020 | - |
| Merchant reserve settlement | 132,657 | - |
| Non-cash consideration received for services | - | (470,000) |
| Changes in operating assets and liabilities: | | |
| Accounts receivable | 763,303 | 32,156 |
| Accounts receivable – related party | - | 204,902 |
| Other accounts receivable | - | (137,043) |
| Note receivable | - | (18,000) |
| Note receivable – related party | - | 156,147 |
| Deposits | (22,365) | - |
| Merchant reserve | 106,590 | (199,907) |
| Inventory | (2,270,110) | (1,194,186) |
| Prepaid inventory | 386,149 | - |
| Prepaid expenses and other current assets | 649,308 | 168,041 |
| Marketable securities | - | 440,211 |
| Accounts payable and accrued expenses | 849,113 | 43,076 |
| Accounts payable and accrued expenses – related party | - | (393,016) |
| Operating lease liability | (496,834) | - |
| Note payable | 175,124 | - |
| Deferred revenue / customer deposits | (7,339) | (303,125) |
| Cash provided by discontinued operations | 250,000 | - |
| Deferred tax liability | (2,240,300) | (1,208,000) |
| Cash used by operating activities | (9,147,052) | (4,462,372) |
| | | |
| Cash flows from investing activities: | | |
| Net cash used for merger | - | (1,177,867) |
| Purchase of intangible assets | - | (79,999) |
| Purchase of property and equipment | (1,796,346) | (102,204) |
| Cash used by investing activities | (1,796,346) | (1,360,070) |
| | | |
| Cash flows from financing activities: | | |
| Proceeds from issuance of common stock | 16,771,756 | 6,356,997 |
| Proceeds from issuance of preferred stock | 4,421,928 | - |
| Preferred dividend distribution | (166,750) | - |
| Deferred issuance costs | 62,197 | (177,521) |
| Cash provided by financing activities | 21,089,131 | 6,179,476 |
| Net increase (decrease) in cash | 10,145,733 | 357,034 |
| Cash and cash equivalents, beginning of period | 4,689,966 | 4,282,553 |
| Cash and cash equivalents, end of period | $14,835,699 | $4,639,587 |
See Notes to Condensed Consolidated Financial Statements
8
LEVEL BRANDS,
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED MARCH 31, 2020 AND 2019
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
| | Six Months ended March 31, | Six Months Ended March 31, |
| | | |
| | | |
| Cash Payments for: | | |
| Interest expense | $17,097 | $23,938 |
| | | |
| Non-cash financial activities: | | |
| Warrants issued to secondary selling agent | $524,113 | $86,092 |
| Stock received for prior period services, adjusted for other accounts receivable write down prior to receipt | $- | $1,352,000 |
| Adoption of ASU 2016-01 | $- | $2,512,539 |
See Notes to Condensed Consolidated Financial Statements
9
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2020
| | | | | | | | | |
| | | | | | | |
| | | | | | | | | |
| Balance, September 30, 2019 | 27,720,356 | 27,720 | ��- | - | 97,186,524 | - | (59,610,260) | 37,603,984 |
| Issuance of Preferred stock | - | - | 500,000 | 500 | 4,421,428 | - | - | 4,421,928 |
| Issuance of options for share based compensation | - | - | | | 542,574 | - | - | 542,574 |
| Issuance of stock costs | - | - | | | (31,757) | - | - | (31,757) |
| Issuance of restricted stock for share based compensation | - | - | - | - | 138,000 | - | - | 138,000 |
| Preferred dividend | - | - | - | - | - | - | (66,734) | (66,734) |
| Adoption of ASU 2016-02 | - | - | - | - | - | - | (13,528) | (13,528) |
| Net Income (loss) | - | - | | | - | - | 12,929,763 | 12,929,763 |
| Balance, December 31, 2019 | 27,720,356 | 27,720 | 500,000 | 500 | 102,256,769 | - | (46,760,759) | 55,524,230 |
| Issuance of common stock | 23,590,292 | 23,591 | - | - | 21,368,166 | - | - | 21,391,757 |
| Issuance of options for share based compensation | - | - | - | - | 429,651 | - | - | 429,651 |
| Issuance of stock/warrants for services | 25,000 | 25 | - | - | 28,225 | - | - | 28,250 |
| Preferred dividend | - | - | - | - | - | - | (100,016) | (100,016) |
| Net Income (loss) | - | - | - | - | - | - | 14,883,772 | 14,883,772 |
| Balance, March 31, 2020 | 51,335,648 | 51,336 | 500,000 | 500 | 124,082,811 | - | (31,977,003) | 92,157,644 |
See Notes to Condensed Consolidated Financial Statements
10
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019
| | | | | | | |
| | | | | | | | |
| Balance, September 30, 2018 | 8,123,928 | 8,124 | 21,781,095 | (2,512,539) | (6,669,495) | 1,411,972 | 14,019,155 |
| Issuance of common stock | 1,971,428 | 1,971 | 6,355,027 | - | - | - | 6,356,998 |
| Issuance of options for share based compensation | - | - | 143,673 | - | - | - | 143,673 |
| Issuance of stock costs | - | - | (205,569) | - | - | - | (205,569) |
| Adoption of ASU 2016-01 | - | - | - | 2,512,539 | (2,512,539) | - | - |
| Net loss | - | - | - | - | (2,109,715) | (79,149) | (2,188,864) |
| Balance, December 31, 2018 | 10,095,356 | 10,095 | 28,074,224 | - | (11,291,749) | 1,332,823 | 18,125,391 |
| Issuance of options for share based compensation | - | - | 19,475 | - | - | - | 19,475 |
| Issuance of stock and warrants for services | 75,000 | 75 | 289,675 | - | - | - | 289,750 |
| Net loss | - | - | - | - | (31,791,738) | (58,536) | (31,850,274) |
| Balance, March 31, 2019 | 10,170,356 | 10,170 | 28,383,374 | - | (43,083,487) | 1,274,287 | (13,415,656) |
See Notes to Condensed Consolidated Financial Statements
11
cbdMD, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREESIX MONTHS ENDED DECEMBERMARCH 31, 20172020 AND 20162019
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Business
Level Brands,cbdMD, Inc. ("Level Brands"cbdMD", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. and on May 1, 2019 we changed the name of our Company to “cbdMD, Inc.”. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.
On December 20, 2018 the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, cbdMD LLC survived and operates the prior business of Cure Based Development. On April 10, 2019, cbdMD LLC was renamed to CBD Industries LLC (“CBDI”). As consideration for the Mergers, the Company had a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement, as well as to issue another 15,250,000 shares of our common stock in the future upon earnout goals being within the next 5 years. The Company’s shareholders approved the issuance of the 15,250,000 shares of common stock and they were issued to members of Cure Based Development on April 19, 2019. CBDI producesand distributesvarious high-grade, premium cannabidiol oil (“CBD”) products under the cbdMD brand. CBD is a natural substance produced from the hemp plant and the products manufactured by CBDI are non psychoactive as they do not contain tetrahydrocannabinol (THC).
On October 22, 2019, cbdMD, Inc. filed Articles of Incorporation with the Secretary of State of North Carolina to form a new wholly-owned subsidiary, Paw CBD, Inc. (“Paw CBD”), in conjunction with the organization of its animal health division. In the third quarter of fiscal 2019 cbdMD, Inc. launched its new CBD pet brand, Paw CBD. Following the initial positive response to the brand from retailers and consumers, cbdMD, Inc. organized Paw CBD, Inc. as a separate wholly-owned subsidiary in an effort to take advantage of its early mover status in the CBD animal health industry.
Effective September 30, 2019, the Company abandoned and ceased operations of four business subsidiaries: Encore Endeavor 1, LLC (“EE1”), I’M1, LLC (“IM1”), Beauty and Pin Ups, LLC (“BPU”) and Level H&W, LLC (“Level H&W”). Therefore, the results of operations related to these subsidiaries for the Company are reported as discontinued operations.
The accompanying unaudited interim condensed consolidated financial statements of Level BrandscbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2017.2019 (“2019 10-K”). In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal year 20172019 as reported in the Form2019 10-K have been omitted.
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a North Carolina limited liability company, and contributed $250,000 in exchange for our member interest. As of September 30, 2017 we own 100% interest in BPU. BPU manufactures, markets and sells an array of beauty and personal care products, including hair care and hair treatments, as well as beauty tools. The Company's products are sold to the professional salon segment, principally through distributors to professional salons in the North America.
I’M1, LLC. (“I’M1”) was formed in California in September 2016. IM1 Holdings, LLC, a California limited liability company, (“IM1 Holdings”) was the initial member of I’M1. 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. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that focuses on providing millennial-inspired lifestyle products under the I’M1 brand. I’M1 has entered into an exclusive wholesale license agreement with kathy ireland® Worldwide in connection with the use of the intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California in March 2016. EE1 Holdings, LLC, a California limited liability company, (“EE1 Holdings") was the initial member of EE1. 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. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. EE1 is a company and brand, which is designed to serve as a brand management company and producer and marketer of multiple entertainment distribution platforms under the EE1 brand.
Level H&W, LLC (“Level H&W”) was formed in North Carolina in October 2017 and began operations in fiscal 2018; we own 100% interest in Level H&W. The Company signed an agreement with kathy ireland® Worldwide to retain exclusive rights to the intellectual property and other rights in connection with kathy ireland® Health & Wellness™ and its associated trademarks and tradenames. The Company focuses on establishing licensing arrangements under the kathy ireland® Health & Wellness™ brand. The agreement is a seven year agreement with a three year option to extend by the Company. The Company agreed to pay $840,000 over the license term of seven years, of which $480,000 was paid by January 1, 2018, and $120,000 is to be paid on January 1 of subsequent years until paid in full. The agreement can be extended for an additional three years by paying an upfront additional $360,000 upon agreement extension. The Company will pay kathy ireland® Worldwide 33 1/3% of net proceeds we receive under any sublicense agreements we may enter into for this intellectual property as royalties, with credit being applied for any payments made toward the $840,000.
On November 17, 2017, the Company completed an initial public offering (the “IPO”) of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million. The Company received approximately $10.9 million in net proceeds after deducting expenses and commissions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries BPUCBDI and Level H&W.Paw CBD. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).
Reclassifications
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net loss, shareholders’ equity or cash flows.
Use of Estimates
The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”),GAAP, and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, trade support costs, certain assumptions related to the valuation of investments other securities, common stock issued prior to the Company’s initial public offering (the “IPO”), acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities.liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.
The Company is continuing to monitor data related to impact of the COVID-19 pandemic and at this time, based upon the available data, does not believe there would be an impact on inputs used for estimates and assumptions.
Cash and Cash Equivalents
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 receivable and Accounts receivable other
Accounts 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 September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did notMarch 31, 2020, we have an allowance for doubtful accounts of $14,318, and had an allowance of $7,286 at December 31, 2017.September 30, 2019.
In addition, the Company has and may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services 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 receivable as accounts receivable other, and use 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 investmenta marketable security (when the customer is a publicpublicly traded entity) or as an investment other security (when the customer is a private entity).
Accounts receivableReceivable 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 the 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 ImpairmentMerchant Reserve
The Company’s managementCompany primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors, and will negotiate the fee based on the market. The arrangement with the payment processors requires that the Company pay a fee between 4.0% - 5.2% of the transaction amounts processed. Pursuant to this agreement, there can be a waiting period between 2 - 5 days prior to reimbursement to the Company, and as well as a calculated reserve which some payment processors hold back. Fees and reserves can change periodically assesses its marketable securitieswith notice from the processors. At March 31, 2020, the receivable from payment processors included approximately $160,013 for the waiting period amount and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment lossis recorded as accounts receivable in the accompanying consolidated statement of operations. Ifbalance sheet and $280,322 for 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 securityreserve amount for a lengthtotal receivable 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. $440,335.
Inventory
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.
Customer Deposits
Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.
Property and Equipment
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, three years for manufacturer’s molds and plates,automobiles, three years for computer, furniture and equipment, and three years for software.software, and leasehold improvements are over the term of the lease. 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.
Fair value accounting
The 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 impacting the operations or cash flows of the business acquired. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of the business to determine if there is an other-than-temporary impairment.the respective fair value. The Company determines the fair value of its acquired 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.
Intangible Assets
The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with ASC Topic 350,Intangibles – Goodwill and Other.Other. The Company employs 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 perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. 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 the intangible assets. If a quantitative analysis is necessary, we 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 be 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 has analyzed a variety of factors in light of the known impact to date of the COVID-19 pandemic on its business to determine if a circumstance could trigger an impairment loss, and, at this time and based on the information presently known, does not believe it is more likely that are assessed include contracts acquired and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.an impairment loss has been incurred.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite lived intangibles 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.
In Conjunctionconjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01in2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potentialacquired assets and assumed liabilities for valuation in a business combination, including the determination of intangible asset values.values and contingent liabilities.
Common stockContingent liability
Level Brands was a private company until November 2017 and as such there was no marketA 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 8. 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.
The Company recognized both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its common stock. Previously, we valued a share of common stockConsolidated Balance Sheets. These contingent liabilities were recorded at fair value upon the acquisition date and are remeasured quarterly based on recent financing transactions that included the issuance of common stock to an unrelated party at a specified price. In the event, however, there had not been a recent and significant equity financing transaction or the naturereassessed fair value as of the business has significantly changed subsequent to an equity financing, we used valuation techniques, which included discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimatingend of that quarterly reporting period. Additionally, as the fixed shares were issued on April 19, 2019, the value of our common stock. On November 17, 2017,the shares at that time, in the amount of $53,215,163, was reclassified from contingent liability to additional paid in capital on the balance sheet. In addition the first marking period for the Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to those shares is recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the shares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the balance sheet.
For the three months ended March 31, 2020, the contingent liabilities associated with the business combination were decreased by $21,261,994 to reflect their reassessed fair values as of March 31, 2020. This decrease is reflective of a change in value of the variable number of shares from December 31, 2019, including the change in value of the Earnout Shares from December 31, 2019 until issued February 27, 2020. In December 2019, the Company completed its IPO, thus our stockupdated the forecasts for performance of the post-acquisition entity based on current trends and performance that would impact the estimated likelihood that the revenue targets disclosed in Note 8 would be met. The primary catalyst for the $21,261,994 decrease in contingent liabilities is valued by the market since that date.change in the Company’s common share price between March 31, 2020 and December 31, 2019. These increases or decreases to the contingent liabilities are reflected within Other Income (Expenses) on the consolidated statements of operations.
Revenue Recognition
The Company's policyCompany adopted ASC 606,Revenue from Contracts with Customersusing the modified retrospective method beginning with our quarter ended December 31, 2018. The adoption of the new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product or the services have been rendered. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to any of its revenue streams, no adjustment to retained earnings was required upon adoption.
Under ASC 606, the Company recognizes revenues when its customer obtains control of promised goods or services, in relationan amount that reflects the consideration which it expects to receive 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. For our CBD products, 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.
The below table summarizes amounts related to future performance obligations under fixed contractual arrangements as of March 31, 2020:
| | | |
| | | |
| Future performance obligations | $0 | $0 |
Allocation of transaction price
In our current business model we do not have contracts with customers which have multiple elements as revenue is driven purely by online product sales or purchase order based product sales. However, at times in the past, the Company had entered into contracts with customers wherein there were multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is to recognize revenue when persuasive evidenceachieved by estimating the standalone selling price of an arrangement exists, shipping has occurredeach element, which is the price at which we sell a promised good or service obligationsseparately to a customer.
In circumstances where we have been satisfied,not historically sold relevant products or services on a standalone basis, the salesCompany utilizes the most situationally appropriate method of estimating standalone selling price. These methods include (i) an adjusted market assessment approach, wherein we refer to prices from our competitors for similar goods or serves and adjust those prices as necessary to reflect our typical costs and margins, (ii) an expected cost plus margin approach, wherein we forecast the costs that we will incur in satisfying the identified performance obligation and adding an appropriate margin to such costs, and (iii) a residual approach, wherein we adjust the total transaction price is fixedto remove all observable standalone selling prices of other goods or determinableservices included in the contract and collection is probable. allocate the entirety of the remaining contract amount to the remaining obligation.
Revenue recognition
The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, 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 does not have a formal return policy, from time to time the Company will allow customers to return certain products. 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 dispose of the returned product, adjust inventory and record expense as appropriate. There were no allowances for sales returns during the three months ended December 31, 2017 and 2016.
The Company also enters into various license agreements that provide revenues based on royalties ascurrently offers a percentage of 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.30 day, money back guarantee.
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists,the customer has accepted services have been rendered, and collectability is reasonably assured.the Company has a right to payment. 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.
Disaggregated Revenue
Our product revenue is generated primarily through two sales channels, consumer (E-commerce) and wholesale channels. We also generate service related sales, although this type of revenue is not a primary focus. We believe that these categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors.
A description of our principal revenue generating activities are as follows:
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Consumer (E-commerce) sales - consumer products sold through our 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.
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Wholesale sales - products sold to our 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.
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Service related sales – services provided to organizations typically consulting services related to branding, marketing, or advisory. Revenue is recognized when services are delivered to the customer, in accordance with the terms of the applicable agreement. Payment terms vary and typically are based on deliverables and agreed upon timelines.
The following table represents a disaggregation of revenue by sales channel:
| | Three Months ended March 31, 2020 | | Three Months ended March 31, 2019 | |
| Wholesale product sales | $2,617,860 | 27.9% | $1,375,045 | 24.4% |
| Consumer product sales | 6,781,176 | 72.1% | 4,261,533 | 75.6% |
| Service related sales | - | 0% | - | 0% |
| Total net sales | $9,399,036 | | $5,636,578 | |
| | Six Months ended March 31, 2020 | | Six Months ended March 31, 2019 | |
| Wholesale product sales | $5,885,981 | 30.1% | $1,375,045 | 22.5% |
| Consumer product sales | 13,661,291 | 69.9% | 4,727,220 | 77.5% |
| Service related sales | - | 0% | - | 0% |
| Total net sales | $19,547,272 | | $6,102,265 | |
Contract Balances
Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.
We have no contract assets and contract liabilities at March 31, 2020.
Cost of Sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our professional products divisions,sales, and includes labor and third party service providers for our licensing and entertainment divisions.Inservice sales. For our professional products division,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$3,398,777 and $30,000$1,475,696 in advertising and related marketing and promotional costs included in operating expenses during the three months ended DecemberMarch 31, 20172020 and 2016,2019, respectively. The Company incurred approximately $5,809,498 and $1,557,838 in advertising and related marketing and promotional costs included in operating expenses during the six months ended March 31, 2020 and 2019, 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.
Income Taxes
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 partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April of 2017, the Parent Company acquired the remaining interestinterests 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. CBDI, Paw CBD, and Level H&W is aare wholly owned subsidiarysubsidiaries and is aare disregarded entityentities for tax purposes and itstheir 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 DecemberMarch 31, 20172020 and 2016,2019, 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.
Concentrations
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 $8,347,313$14,344,758 uninsured balance at DecemberMarch 31, 20172020 and a $4,728$4,097,190 uninsured balance at September 30, 2017.2019.
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 six months ended DecemberMarch 31, 2017. Such2020. We have three customers represented 37%, 13%,whose aggregate accounts receivable balance was approximately 69% of the combined total accounts receivable and 37%accounts receivable discontinued operations as of net sales. Net sales to such customers reported inMarch 31, 2020, of which one customer is from the entertainment divisions werediscontinued operations and accounts for approximately $254,000, $92,000 and $254,000, respectively.51%. The aggregate accounts receivable balance of such customers represented 79%approximately 51% of the Company’s total accounts receivable at December 31, 2017. The Company had two customers whose revenue collectively represented approximately 88%as of the Company’s net sales for the three months ended December 31, 2016.September 30, 2019.
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 our stock compensation under the ASC -718-10-30 “Compensation718-10-30,Compensation - Stock Compensation” Compensationusing the fair value 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's equity instruments or that may be settled by the issuance of those equity instruments.
We use 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.
Net LossEarnings (Loss) Per Share
The Company uses ASC 260-10, “EarningsEarnings Per Share” Sharefor 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, 2017 and 2016, 855,476 and 597,476 potential shares, respectively, were excluded from 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 offering as a reduction of additional paid-in capital during the three months ended December 31, 2017. These costs included legal fees related to the registration drafting and counsel, independent audit costs directly related to the registration and offering, SEC filing and print related costs, exchange listing costs, and IPO roadshow related costs.
New Accounting Standards
On October 1, 2019, the Company adopted ASU No. 2016-02, Leases, and all subsequently issued clarifying guidance. Under the new guidance, lessees are required to recognize assets and lease liabilities for the rights and obligations created by leased assets previously classified as operating leases. In May 2014, August 2015 and May 2016,July 2018, the FASB issued ASU 2014-09,Revenue from Contracts with Customers, and ASU 2015-14Revenue from Contracts with Customers, Deferral of the Effective Date, respectively,No. 2018-11, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model forpermitted entities to use in accounting for revenue arising from contractsrecord the impact of adoption using a modified retrospective method 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 enable 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 cumulativeany cumulative-effect as an adjustment to retained earnings (accumulated deficit) as opposed to restating comparative periods for the effects of applying the new standard. The Company elected this transition approach; therefore, the Company’s prior period reported results are not restated to include the impact of this adoption. We also elected the practical expedient permitted under the transition guidance which permits companies not to reassess prior conclusions on lease identification, historical lease classification and initial direct costs.In connection with the adoption of the new guidance, the Company recognized an operating lease asset for $7,704,109 and operating lease liability of $7,950,803 and a reduction of retained earnings of $13,528 in its balance sheet as of December 31, 2019, with no impact to its results of operations and cash flows. The difference between the yearleased assets and lease liabilities represents the net position of adoption.existing prepaid rent and deferred rent liabilities balance, resulting from historical straight-lining of operating leases, which were effectively reclassified upon adoption to reduce the measurement of the leased assets.
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”).
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,August 2018, the FASB issued ASU 2016-02,LeasesNo. 2018-13, Fair Value Measurement (Topic 820). The purpose of ASU 2016-02 is to establish the principles to report transparentmodifies, removes, and economically neutral information about the assets and liabilities that arise from leases. This guidance resultsadds several disclosure requirements on fair value measurements 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.Topic 820, Fair Value Measurement. The ASU 2016-022018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is assessingevaluating the impact, if any, of implementing this guidanceeffect ASU 2018-13 will have on its consolidated financial position, resultsstatements and disclosures and has not yet determined the effect of operations and liquidity.the standard on its ongoing financial reporting at this time.
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.
NOTE 2 – ACQUISITIONS
In March 2015 Level Brands formed BPU, aOn December 20, 2018 (the “Closing”), the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, both North Carolina limited liability company,companies, completed a two-step merger (the “Merger Agreement”) with Cure Based Development. The Merger Agreement provided that AcqCo LLC merged with and contributed $250,000 in exchange for its member interest. In April 2015 BPU entered into a Contribution AgreementCure Based Development with Beauty & Pinups, Inc., a New York corporation ("BPUNY"Cure Based Development as the surviving entity (the “Merger”), and two members. Underimmediately thereafter Cure Based Development merged with and into cbdMD LLC with cbdMD LLC as the termssurviving entity (the “Secondary Merger” and collectively with the Merger, the “Mergers”). cbdMD LLC was renamed on April 10, 2019 to CBDI and has continued as a wholly-owned subsidiary of the Contribution Agreement, BPUNYCompany and its founder contributedmaintains the business and certain assets, includingoperations of Cure Based Development pre-closing. As consideration for the trademark “Beauty & Pin Ups” and its variants, certain other intellectual property and certain inventoryMerger, the Company had a contractual obligation, after approval by our shareholders, 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 583,000issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which represents 51%unrestricted voting rights to 8,750,000 of the interest in I’M1.shares vest over a five year period and are subject to a voting proxy agreement. 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 283,000Merger Agreement also provides that an additional 15,250,000 shares of our common stock which represents 51%can be issued upon the satisfaction of aggregate net revenue criteria by CBDI, within 60 months following the Closing. The net revenue criteria are: $20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million (See Note 8 for more information).
The initial 15,250,000 shares were approved by our shareholders and issued on April 19, 2019. On February 27, 2020, 5,127,792 shares were issued upon satisfaction of aggregate net revenue criteria per the Merger Agreement.
The Company owns 100% of the equity interest in EE1. We usedof CBDI. The valuation and purchase price allocation for the same valuationMergers was finalized at September 30, 2019.
The following table presents the final purchase price allocation:
| Consideration | $74,353,483 |
| |
| Assets acquired: | |
| Cash and cash equivalents | $1,822,331 |
| Accounts receivable | 850,921 |
| Inventory | 1,054,926 |
| Other current assets | 38,745 |
| Property and equipment, net | 723,223 |
| Intangible assets | 21,585,000 |
| Goodwill | 54,669,997 |
| Total assets acquired | 80,745,143 |
| |
| Liabilities assumed: | |
| Accounts payable | 257,081 |
| Notes payable – related party | 764,300 |
| Customer deposits - related party | 265,000 |
| Accrued expenses | 460,979 |
| Deferred tax liability | 4,644,300 |
| Total Liabilities assumed | 6,391,660 |
| |
| Net Assets Acquired | $74,353,483 |
The goodwill generated from this transaction can be attributed to the benefits the Company expects to realize from the growth strategies the acquired Company of $0.85 per share which puthad developed and 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 allocatingentry into an emerging market with high growth potential. See Note 8 regarding contingent liability.
In connection with the purchase price allocation, the Company recorded a deferred tax liability of approximately $4,644,000, with a corresponding increase to goodwill, for the tax effect of the acquired intangible assets from Cure Base Development. This liability was recorded as there will be no future tax deductions related to the tradenameacquired intangibles, and intellectual property valued at $471,667.we have identified these as indefinite-lived intangible assets.
The Company also acquired estimated net operating loss carryforwards of approximately $1,996,000, Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited to an annual limit if a change in ownership of a company occurs.
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services 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 receivable as accounts receivable other, and use 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 company will value it, and the underlying revenue, on the estimated fair value of the services provided. Where an accounts receivable other 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 privateprivately held entity).
As of April 2017, the Company received 2,500,000 shares of common stock, of an OTC-quoted company under the terms of its agreement for services to the OTC-quoted company, which was valued at $650,000 based on the trading price on the OTC Markets the day of issuance, which was $0.26 per share. The shares were restricted as indicated under Securities Act 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 June 30, 2017 the trading price on the OTC Markets was $0.03 and the Company had exchanged the 2,500,000 shares of common stock 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 provide a number of shares equal to the value 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 option 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 shares 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 $175,000 in the consolidated statement of operations.
On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in Investment Other Securities.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 $912,000, which was based on its recent financing in June 2017 at $0.57 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 the fair value 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,cbdMD, and also distributed shares valued at $223,440 to its non-controlling interests (“NCI”).interests. In August 2017, the Company also provided referral services for kathy Ireland® WorldWideWorldwide and this customer. As compensation the Company received 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, with the most recent third party transaction in August 2017. 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 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 currentthis customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPOinitial public 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 stock the Company used the value paid, which was the price offered to all third party investors. Subsequently, the Company has recently met with other investors of the customer and has indicated desire to sell the equity interest of the Company. As of September 30, 2019, based on conversations with other investors, the market for this equity, and potential selling prices negotiated, the Company determined that the value at September 30, 2019 was $600,000 and an impairment of $502,560 was appropriate for the year ended September 30, 2019. In November 2019, the Company entered into an option to sell the shares by June 30, 2020 to a third party for $600,000. The option required the buyer to provide a non refundable deposit of $30,000. Based upon updates received from the customer during the three months ended March 31, 2020, the Company has determined that it is likely to not realize a return on this asset and has made the determination to take a full impairment of $600,000 at March 31, 2020.
In December 2017, the Company completed services per an advisory services agreement with Kure Corp (“Kure”), formerly a related party. As payment for these services, Kure issued 800,000 shares of its stock to the Company. The customer was a private entity and the stock was valued at $400,000, which was based on financing activities by Kure in September 2017 in which shares were valued at $0.50 per share. The Company had classified this common stock, cumulative value of $400,000, as Level 3 for fair value measurement purposes as there were 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 April 30, 2018, Kure. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company (“Isodiol”). Details can be reviewed in our 2018 Form 10-K previously filed. As a result of this merger we received the first issuance of 380,952 shares from Isodiol and valued them based on the trading price on April 30, 2018 of $0.63 per share which totaled $240,000. We also removed the value of the Kure equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure equity will not be received until the future issuances based on earn out goals, we recorded an accounts receivable other of $160,000 as of December 31, 2018. On March 31, 2019, Isodiol spun off Kure to its original shareholders by issuing back all original Kure stock. As a result of the spin off, the Company received 800,000 shares of Kure stock which we valued at the $160,000, and as Kure is private, when the shares are received they will be treated as a Level 3 stock and will be accounted for as the $160,000 accounts receivable other. In light of the difficulties of the vaping industry, Kure Corp’s ability to continue to raise capital, and uncertainty for future strategy, the Company has assessed the value of the common stock to be received and made the determination to take a full impairment of the $160,000 against the other accounts receivable at March 31, 2020.
17On December 30, 2017 the Company entered into an Agreement with Isodiol which is a developer ofpharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products.As payment for these services, the Company has received 1,226,435 shares of Isodiol common stock between December 31, 2017 and January 2019. The Company also received 38,095 shares of Isodiol stock upon Isodiol’s acquisition of Kure Corp, giving the Company a total of 1,264,530 shares. At March 31, 2020, the Company has 1,042,193 shares valued at $83,375.
The table below summarizes the assets valued at fair value as of DecemberMarch 31, 2017:2020:
| | 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 | 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 March 31, 2020 |
| | | |
| Marketable securities | $299,000 | - | $- | $299,000 | $83,375 | - | $- | $83,375 |
| Investment other securities | - | $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 |
| | | | | |
| Balance at September 30, 2019 | $198,538 | $- | $600,000 | $798,538 |
| Change in value of equities | $(62,011) | $- | $- | $(62,011) |
| Balance at December 31, 2019 | $136,527 | $- | $600,000 | $736,527 |
| Change in value of equities | $(53,152) | $- | $(600,000) | $(653,152) |
| Balance at March 31, 2020 | $83,375 | $- | $- | $83,375 |
NOTE 4 – INVENTORY
Inventory at DecemberMarch 31, 20172020 and September 30, 20172019 consists of the following:
| | | | | |
| | | | |
| Finished goods | $383,036 | $375,459 | $2,518,633 | $3,050,120 |
| Inventory components | 210,113 | 212,738 | 4,053,063 | 1,251,466 |
| Inventory reserve | - | |
| Inventory prepaid | | 517,309 | 903,458 |
| Total | $593,149 | $588,197 | $7,089,005 | $5,205,044 |
At September 30, 2017, the Company determined that inventory was impaired by approximately $67,000.
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at DecemberMarch 31, 20172020 and September 30, 20172019 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 |
| | | |
| | | |
| Computers, furniture and equipment | $280,925 | $131,077 |
| Manufacturing equipment | 2,591,440 | 1,375,986 |
| Leasehold improvements | 806,998 | 375,954 |
| Automobiles | 24,892 | 24,892 |
| | 3,704,255 | 1,907,909 |
| Less accumulated depreciation | (479,809) | (192,352) |
| Net property and equipment | $3,224,446 | $1,715,557 |
Depreciation expense for continuing operations related to property and equipment was $13,756$174,206 and $9,189$49,936 for the periods ended December 31, 2017 and 2016, respectively. In the three months ended DecemberMarch 31, 2017 we recorded a one time loss of $69,511 on2020 and 2019, respectively and was $287,457 and $54,039 for the disposal of a show booth that is no longer in use.six months ended March 31, 2020 and 2019, respectively. Depreciation expense for discontinued operations related to property and equipment was $2,938 and $7,654 for the three and six months ended March 31, 2019, respectively.
NOTE 6 – INTANGIBLE ASSETS
With the Mergers of Cure Based Development, the Company made a strategic shift toward the CBD business and all entities and their associated intangibles were assessed during the year ended September 30, 2019 with that focus and their ability to support that business line.
On April 13, 2015, BPUDecember 20, 2018, the Company completed the Mergers with Cure Based Development and 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”"cbdMD" 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, thistrademark is the baselinecornerstone of the businessthis subsidiary and will be requiredis key 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 create and distribute products and continue to build this brand. We also believe the existence of this agreementtrademark does not have limits on the time it will contribute to the generation of cash flows and therefore we have identified these as indefinite-lived intangible assets (see Note 2 for I’M1more information).
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. We believe the trademark does not have limits on the time it will contribute to the generation of cash flows 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 DecemberMarch 31, 20172020 and September 30, 20172019 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 |
The Company performs an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. 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 the intangible assets. 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 loss has been incurred and the Company evaluates 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 qualitative and quantitative analysis and for the years ended September 30, 2017 and 2016 there has been no impairment. The Company has determined that no event or circumstances indicate likeliness of an impairment as of December 31, 2017.
The Company performs an impairment analysis at August 1 annually on the definite lived intangible assets following the steps laid out in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change in the use of the asset, market price changes in the asset, or other events that impact the value of the asset. If an indicator is present we then perform a quantitative analysis to determine if the carrying amount of the asset is recoverable. This is done by comparing the total undiscounted future cash flows of the long-lived asset to its carrying amount. If the total undiscounted future cash flows exceed the carrying amount of the asset, the carrying amount is deemed recoverable and an impairment is not recorded. If the carrying amount of a long-lived asset is deemed to be unrecoverable, an impairment loss needs to be estimated. In order to calculate the impairment loss, the Fair Value of the asset must be determined. Fair Value referenced here is determined using 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.
| | | |
| | | |
| Trademark related to cbdMD | $21,585,000 | $21.585,000 |
| Trademark for HempMD | 50,000 | 50,000 |
| Total | $21,635,000 | $21,635,000 |
NOTE 7 – CONVERTIBLE PROMISSORY NOTES
On October 4, 2016 and October 24, 2016, the Company issued in aggregate $2,125,000 of 8% Convertible Promissory Notes to accredited investors. The securities consist of 8% Convertible Notes with warrants to purchase 141,676 shares of the Company’s stock (the “Notes”). The warrants have an exercise price of $7.80. The Warrants expire in September 2021 and are exercisable beginning the earlier of: (i) immediately after the IPO Closing; or (ii) July 1, 2017.
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. In this transaction, the Company issued 570,254 shares of common stock.PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
The following unaudited pro-forma data summarizes the results of operations for the three and six months ended March 31, 2020 and 2019, as if the Mergers with Cure Based Development had been completed on October 1, 2017. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mergers had taken place on October 1, 2017. The pro-forma financial information represents the continuing operations only.
| Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 |
| | |
| Net revenues | $N/A* | $N/A* |
| Operating income (loss) | $N/A* | $N/A* |
| Net income (loss) | $N/A* | $N/A* |
| Net loss per share – basic and fully diluted | $N/A* | $N/A* |
| Six Months Ended March 31, 2020 | Six Months Ended March 31, 2019 |
| | |
| Net revenues | $N/A* | $9,185,693 |
| Operating income (loss) | $N/A* | $(4,320,089) |
| Net income (loss) | $N/A* | $(35,298,514) |
| Net loss per share – basic and fully diluted | $N/A* | $(1.39) |
* All entities were consolidated effective December 21, 2018 therefore, the results of operations are included in these condensed financial statements.
For the per share calculation prior to April 2019, it is being assumed that the shares to be issued contractually under the Merger Agreement, upon shareholder approval, were issued at the beginning of each period. This would account for an additional 6,500,000 shares issued directly to the members of Cure Based Development and another 8,750,000 shares issued which would have a voting proxy and leak out on voting rights over a 5 year period.
NOTE 8 – CONTINGENT LIABILITY
As consideration for the Mergers, described in Note 2, the Company had a contractual obligation to issue 15,250,000 shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, 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 shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“Earn Out”).
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 internal and external market factors.
The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon 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 second tranche also included an input for a discount for lack of voting rights during the vest periods.
The Merger Agreement also provides that an additional 15,250,000 shares (“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 | | ..023828125 |
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 initial 15,250,000 shares and the Earnout Shares were approved by our shareholders and the initial issuanceshares were issued on April 19, 2019. The initial shares were issued upon shareholder approval on April 19, 2019 and had a carrying value of these Notes in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. The Black-Scholes$53,215,163. Additionally, as the 15,250,000 initial shares were issued, the value of the warrants, $5,159, associated withshares in the issuanceamount of $53,215,163 was recorded asreclassified from the contingent liability to additional paid in capital on the balance sheet.
The 15,250,000 Earnout Shares which would be issued in the future, upon the satisfaction of net revenue criteria have been valued using a discount to debtMonte Carlo Simulation. Inputs used included: stock price, volatility, interest rates, revenue projections, and was amortized into interest expense. In addition, the issuancelikelihood of the Notes and warrants were assessed and did not contain an embedded beneficial conversion feature as the effective conversion price was not less than the relative fairobtaining revenue projections, amongst others.
The value of the instrument. We also had fees of $200,800 associated withcontingent liability was $33,701,994 and $50,600,000 at December 31, 2019 and September 30, 2019, respectively, and represents the financing, whichEarnout Shares. The first Marking Period for the Earnout Shares was recorded as a debt discountDecember 31, 2019 and is being amortized over the termbased on measurement criteria, 5,127,792 shares were issued on February 27, 2020. The value of the Notes. We have recorded no interest expenseissued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 from December 31, 2019 related to these amountsthose shares is recorded in the Statement of Operations for the three months ended DecemberMarch 31, 2017.
NOTE 8 – LINE OF CREDIT
In August 2015, we entered into a one year $1,000,000 revolving line of credit agreement with LBGLOC, LLC, a related party. Under2020. Additionally, as the terms5,127,792 Earnout Shares were issued on February 27, 2020, the value 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 term of the note.
The agreement was renewed for an additional one year period on September 1, 2016. As additional consideration for renewing the credit line, we issued the lender 14,000 shares of 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 term 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 credit in the amount of $593,797, together with$4,620,000 was reclassified from the accrued interestcontingent liability to additional paid in capital on the balance sheet. The remaining Earnout Shares for future evaluation were valued at $7,820,000 on March 31, 2020 as compared to $22,157,491 at December 31, 2019, a decrease of $179,380 for a total payoff amount$14,337,491. The decrease in value of $773,177 into common shares$6,924,503 and $14,337,491 combined represent the decrease of the Company at a pricetotal contingent liability of $3.95 per share.$21,261,994 and is recorded in the Statement of Operations for the three months ended March 31, 2020. The Company recordedutilized both a loss on extinguishmentmarket approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of $8,750those methods is the stock price. The main driver of the decrease in the value of the Earnout Shares within the contingent liability was the decrease of the Company’s stock price, which was recorded$0.93 at March 31, 2020 as interest expense incompared to $2.26 on December 31, 2019 and the consolidated statementissuance on February 27, 2020 of operations. In this transaction, the Company issued 195,740 shares of common stock.Earnout Shares for the first marking period.
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 2016On December 20, 2018, with the closing of the Merger Agreement with Cure Based Development, we issued 20,000 sharesrecognized the following related party transactions which happened prior to the Mergers:
Cure Based Development received $90,000 from Verdure Holdings LLC for future orders of our common stock valuedthe Company’s products. Verdure Holdings LLC, at $17,000 to Best Buddies International as a charitable contribution. Best Buddies International isthat time, was an affiliate of a memberthe CEO of our board of directors.Cure Based Development. This amount has been adjusted based on sales to Verdure Holdings subsequent to the mergers and is recorded as customer deposits - related party on the accompanying balance sheet and was $0 and 7,339 at March 31, 2020 and September 30, 2019, respectively.
On January 1, 2017, weCure Based Development entered into a sublease agreementlease for office space, with Kure Corp. (“Kure”). The lease is for one yearwhich also provides administrative and the space was to be used by our subsidiary BPU. A shareholder of Kure is Stone Street Capital, LLC,IT services, from an affiliate of ourthe CEO of Cure Based Development. The lease was a month to month lease for $9,166 per month and Chairman and our CEO and Chairman was the past Chairman of Kure and is also a shareholder of Kure.ended September 2019.
In February 2017 we entered intoCure Based Development leases its manufacturing facility from an entity partially owned by an individual who now has a master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuantcontractual right 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 serves 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 aspects of our corporate strategies and branding, provides access to us 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, 2017 the Company entered into a one year advisory agreement 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 entered into a one year advisory agreement with Mr. Nic Mendoza pursuant to which he provides advisory and consulting services 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, pursuant 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 as part of the Mergers. The current lease was entered into on December 15, 2018 and ends December 15, 2021 and has been amended at an annual base rent rate of $199,200 allowing for a price of $3.95 per share. One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II LLC3% annual increase. In addition, common area maintenance rent is an affiliate of our CEO and Chairman and received 94,475 shares of common stock in this transaction.set at $25,200 annually.
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. The shares are valued at $114,000, which was derived after assessing the value of our services provided and determining a per share value of $0.57. The warrant was exercised in June 2017 and the shares issued to 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 sale 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.
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 – SHAREHOLDERS’ EQUITY
Preferred Stock – We are 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 Equityin order to determine the appropriate accounting treatment for the preferred stock and determined that the preferred stock should be treated as equity. There were 500,000 shares of preferred stock have been issued.8.0% Series A Cumulative Convertible Preferred Stock issued and outstanding at March 31, 2020.
The total amount of dividends declared and paid were $100,016 and $100,016, respectively, for the three months ended March 31, 2020. The total amount of dividends declared and paid were $166,750 and $166,750, respectively, for the six months ended March 31, 2020.
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 7,798,92851,335,648 and 5,792,26127,720,356 shares of common stock issued and outstanding at DecemberMarch 31, 20172020 and September 30, 2017,2019, respectively.
Preferred stock transactions:
In the three and six months ended March 31, 2020:
On November 17, 2017,October 16, 2019, the Company completed an IPOa follow-on firm commitment underwritten public offering of 2,000,000500,000 shares of its common stock 8.0% Series A Cumulative Convertible Preferred Stockfor aggregate gross proceeds of $12.0 million.$5,000,000. The Company received approximately $10.9$4.5 million in netgross proceeds after deducting underwriting discounts and commissions and other offering expenses paid by us.commissions. The Company also issued to the selling agent warrants to purchase in aggregate 100,00047,923 shares of common stock with an exercise price of $7.50.$3.9125. The warrants were valued at $171,600$178,513 and expire on September 27, 2022.October 10, 2024. No preferred stock was issued in the three and six months ended March 31, 2019.
Common stock transactions:
In the three and six months ended DecemberMarch 31, 2017:2020:
On January 14, 2020, the Company completed a follow-on firm commitment underwritten public offering of 18,400,000 shares of its common stockfor aggregate gross proceeds of $18,400,000. The Company received approximately $16.9 million in net proceeds after deducting underwriting discounts and commissions. The Company also issued to the selling agent warrants to purchase in aggregate 480,000 shares of common stock with an exercise price of $1.25. The warrants were valued at $345,600 and expire on January 14, 2025.
In February 2020, we issued 25,000 shares of our common stock to an investor relations firm for services. The shares were valued at $28,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending January 2021.
In February 2020, we issued 5,000 shares of our common stock to an employee. The shares were valued at $5,650, based on the trading price upon issuance, and was expensed as stock based compensation expense.
In the three and six months ended March 31, 2019:
On November 17, 2017,October 2, 2018, the Company completed an IPOa follow-on firm commitment underwritten public offering of 2,000,0001,971,428 shares of its common stock for aggregate gross proceeds of $12.0approximately $6.9 million. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The Company also issued to representatives of the underwriters warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants were valued at $86,092 and expire on September 28, 2023.
In November 2017,January 2019, we issued 6,66725,000 shares of our common stock to an individual as part of a consulting agreement.investment banking firm for general financial advisory services. The shares were valued at $37,002,$77,250, based on the trading price upon issuance, and is being amortized and expensed as contract compensation.professional services over the service period ending December 2019.
In the three months ended December 31, 2016:
Per terms in the Operating Agreement of BPU, 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 into an agreement with the Company to transfer their 10% member interest for 129,412 shares of the Company’s common stock.
In October 2016January 2019, we issued 38,358 shares 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, LLC an aggregate of 76,00050,000 shares of our common stock to an investment banking firm for general advisory and investment bank services. The shares were valued at $570,000 as compensation for services, which had been accrued and expensed at September 30, 2016. The stock was valued at the time$212,500, based on the most recent equity financing from February 2016 which was priced at whattrading price upon issuance, and is a post reverse split price of $7.50.
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies Internationalbeing amortized and expensed as a charitable contribution.professional services over the service period ending April 2020.
Stock option transactions:
No options were issued inIn the three and six months ended DecemberMarch 31, 2017.2020:
In the three months ended December 31, 2016:
On October 1, 20162019 we granted an aggregate of 14,300280,000 common stock options to two employees.executives. The options vest 16% immediately, 42%1/3 on January 1, 2017 and 42%2020, 1/3 on January 1, 2018. The options2021 and 1/3 on January 1, 2022, have an exercise price of $7.50$3.15 per share and a term of five years. We have recorded an expense for the options of $53$71,540 and $418 respectively$262,316 for the three and six months ended DecemberMarch 31, 2017 and 2016.2020, respectively.
On October 1, 2016In February 2020, we granted an aggregate of 171,50030,000 common stock options to two employees.an employee. The options vest ratably through January 1, 2018. The options1/3 at grant, 1/3 on February 7, 2021, and 1/3 on February 7, 2022, have an exercise price of $7.50$3.15 per share and a term of sixfive years. We have recorded an expense for the options of $4,802 and $4,802 respectively$6,312 for the three months ended DecemberMarch 31, 2017 and 2016.2020.
The following table summarizes the inputs used for the Black-Scholes pricing model on theNo options were issued in the three and six months ended DecemberMarch 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 |
The expected volatility rate was estimated based on comparison to the volatility of 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, we will adjust the Company electedestimated 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.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 six months ended March 31, 2020 and 2019:
| | 2020 | 2019 |
| Exercise price | $3.15 | - |
| Risk free interest rate | 1.41% - 1.64% | - |
| Volatility | 95.96% - 99.03% | - |
| Expected term | 3 - 5 years | - |
| Dividend yield | None | - |
Warrant transactions:
On November 17, 2017In the three and six months ended March 31, 2020:
In October 2019 in relation to the IPO,follow-on firm commitment underwritten public offering of the 8.0% Series A Cumulative Convertible Preferred Stock, we issued to the selling agentrepresentative of the underwriters warrants to purchase in aggregate 100,00047,923 shares of common stock with an exercise price of $7.50.$3.9125. The warrants expire on September 27, 2022.October 10, 2024.
On October 1, 2016,In January 2020 in relation to 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 exercisefollow-on firm commitment underwritten public offering of the 20,067 warrants above and another 50,000 warrants, at a strike price of $2.75, which had beenCompany’s common stock, we issued to a placement agent for prior services relatedthe representative of the underwriters warrants to previous private placements of our securities.
On October 4, 2016 and October 24, 2016, we issuedpurchase in aggregate warrants exercisable into 141,676480,000 shares of common stock with an exercise price of $7.80.$1.25. The warrants expire on January 14, 2025.
In the three and six months ended March 31, 2019:
On October 2, 2018 in relation to the follow-on firm commitment underwritten offering, we issued to the representative of the underwriters warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants expire on September 30, 2021. The warrants were issued in conjunction with the Company’s 8% convertible notes, described in Note 7.28, 2023.
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the periodssix months ended DecemberMarch 31, 20172020 and 2016:2019:
| | | |
| 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 |
| | 2020 | 2019 |
| Exercise price | $1.25 - $3.9125 | $4.375 |
| Risk free interest rate | 1.48% - 1.63% | 2.90% |
| Volatility | 95.36% - 96.85% | 70.61% |
| Expected term | 5 years | 5 years |
| Dividend yield | None | None |
NOTE 11 – 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 (“Plan”). The Plan 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 Plan shall automatically increase on the first trading day of January each calendarour fiscal year during the term of the Plan, 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 DecemberSeptember of the immediately preceding calendarfiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the Plan and increased the amount of shares available for issuance under the Plan to 2,000,000 and retained the annual evergreen increase provision of the plan.
We account 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 CompensationCompensation. 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 our 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 overhave 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 the Plan:
| | | Weighted-average exercise price | Weighted-average remaining contractual term (in years)
| Aggregate intrinsic value (in thousands) | | 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 | | |
| Outstanding at September 30, 2019 | | 1,219,650 | 6.07 | |
| Granted | — | | 310,000 | 3.15 | |
| Exercised | — | | - | |
| Forfeited | 20,000 | 2.00 | | 14,650 | 5.70 | |
| Outstanding at December 31, 2017 | 313,300 | $6.07 | 5.4 | $— | |
| Outstanding at March 31, 2020 | | 1,515,000 | $5.48 | 7.17 | $— |
| | | |
| Exercisable at December 31, 2017 | 285,800 | $5.72 | — | $— | |
| Exercisable at March 31, 2020 | | 898,334 | $5.28 | 6.80 | $— |
As of DecemberMarch 31, 2017,2020, there was approximately $37,207$1,171,704 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 8 months.2.0 years.
Restricted Stock Award transactions:
On October 1, 2016In May 2019 the Company issued 230,00057,500 restricted stock awards in aggregate to board members.eleven employees. The restricted stock awards vestvested January 1, 2018.2020. The stock awards arewere valued at fair market upon issuance at $195,500$368,000 and amortized over the vesting period. We recognized $39,101$0 and $138,000 of stock based compensation expense for the three and six months ended DecemberMarch 31, 2017 and 2016,2020, respectively.
NOTE 12 – WARRANTS
Transactions involving our equity-classified warrants are summarized as follows:
| | | Weighted-average
exercise price | Weighted- average remaining contractual term (in years) | Aggregate intrinsic value (in thousands) | | 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 | | |
| Outstanding at September 30, 2019 | | 423,605 | $6.64 | |
| Issued | 100,000 | 7.50 | | 527,923 | 1.49 | |
| Exercised | — | | - | |
| Forfeited | — | | - | |
| Outstanding at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— | |
| Outstanding at March 31, 2020 | | 951,528 | $3.78 | 3.77 | $— |
| | | |
| Exercisable at December 31, 2017 | 312,176 | $6.84 | 4.3 | $— | |
| Exercisable at March 31, 2020 | | 423,605 | $6.64 | 2.53 | $— |
The following table summarizes outstanding common stock purchase warrants as of DecemberMarch 31, 2017:2020:
| | | Weighted-average exercise price | | | Weighted-average exercise price | Expiration |
| | | | | |
| Exercisable at $7.80 per share | 141,676 | $7.80 | September 2021 | 141,676 | $7.80 | September 2021 |
| Exercisable at $4.00 per share | 70,500 | $4.00 | September 2022 | 70,500 | $4.00 | September 2022 |
| Exercisable at $7.50 per share | 100,000 | $7.50 | October 2022 | 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 | | 47,000 | $3.9125 | October 2024 |
| Exercisable at $1.25 per share | | 480,000 | $1.25 | January 2025 |
| | 312,176 | 6.84 | | 951,528 | 3.78 | |
NOTE 13 – COMMITMENTS AND CONTINGENCIES
Wholesale License AgreementIn May 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, provide production days for advertising creation and attend 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, we have mutually agreed to suspend payments at minimum from April 2020 until June 2020 and will determine if a contract amendment is warranted based on the professional league’s future direction. We have recorded expense of $116,667 and $283,334 for the three and six months ended March 31, 2020.
In September 2017 we2019, the Company entered into a wholesale licensesponsorship agreement with kathy ireland® Worldwide under which we were grantedLife Time, Inc, an exclusive, royalty free right to license, assignoperator of fitness clubs, facilities and useevents. The term of the kathy ireland® Health & Wellness™ trademark,agreement is through December 31, 2022 and all trade names, trademarks and service marks relatedis tied to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when usedCompany being the exclusive CBD company and performance of Life Time Inc. regarding advertisement, marketing and display within facilities and at identified events. The potential payments, if all commitments are met, in conjunction with healthaggregate is $4,900,000 and wellness as well as Ms. Ireland's likeness, videos, photographsis to be paid for the period ending: December 2019 - $1,125,555, December 2020 - $1,258,148, December 2021 - $1,258,148 and other visual representations connected with kathy ireland® Health & Wellness™.December 2022 - $1,258,149. In light of the impact of COVID-19 on the operation of fitness clubs, facilities and events, we have mutually agreed to suspend payments at minimum from April 202 until June 2020 and will determine if a contract amendment is warranted based on the opening of Life Time Inc. facilities and decisions on Life Time Inc. hosted events. We have recorded expense of $208,000 and $1,173,000 for the three and six months ended March 31, 2020.
As compensation under thisIn October 2019, the Company entered into a sponsorship agreement with Feld Motor Sports to be an official sponsor of the Monster Energy Cup events through 2021, the United States AMA Supercross and FIM World Championship events through 2021, and US Supercross Futures event through 2021. The sponsorship includes various media, marketing, and promotion activities. The payments in aggregate are $1,750,000 and is to be paid for the period ending: December 2019 - $150,000, December 2020 - $800,000 and December 2021 - $800,000. In light of the impact of COVID-19 on the events, we have provided notice of termination for the entire agreement and have agreed to pay kathy ireland® Worldwide a marketing feemake three monthly payments of $840,000,$77,430 from April 2020 to June 2020 for services provided in the quarter ending March 31, 2020. We have recorded expense of which $480,000 was paid by December$465,625 and $528,625 for the three and six months ended March 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 $360,000.2020.
NOTE 14 – SEGMENT INFORMATIONNOTE PAYABLE
The Company operates through its four subsidiaries in three business segments: the Professional Products, the Licensing,In July 2019, we entered into a loan arrangement for $249,100 for a line of equipment, of which $172,051 is a long term note payable at March 31, 2020. Payments are for 60 months and the Entertainment divisions. The Professional Products divisionhave a financing rate of 7.01 %, which requires a monthly payment of $4,905. In January 2020, we entered into a loan arrangement for $35,660 for equipment, of which $25,448 is designed to be an innovativea long term note payable at March 31, 2020. Payments are for 48 months and cutting-edge producer and marketerhave a financing rate of quality hair care and other beauty products. The Licensing division is designed to establish brands via licensing6.2%, which requires a monthly payment 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.$783.93.
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 – DISCONTINUED OPERATIONS
Effective September 30, 2019, the Company ceased operations of four business subsidiaries: EE1, IM1, BPU and Level H&W. These subsidiaries accounted for our licensing, entertainment, and products segments prior to fiscal 2019 and the Company determined that these business units are not able to provide support or value to the CBD business, which the Company is now strategically focused on.
Therefore, the Company classified the operating results of these subsidiaries as discontinued operations, net of tax in the Consolidated Statements of Operations.
The following table shows the summary operating results of the discontinued operations for the three and six months ended March 31, 2020 and 2019:
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Total Gross Sales | $- | $37,958 | $- | $821,691 |
| Allowances | - | (1,184) | - | (1,576) |
| Total Net Sales | - | 36,774 | - | 820,115 |
| Cost of sales | - | 219,947 | - | 545,643 |
| | | | | |
Gross Profit | - | (183,173) | - | 274,473 |
| | | | | |
| Operating expenses | - | 189,870 | 41,202 | 342,999 |
Income (Loss) from operations | - | (373,043) | (41,202) | (68,526) |
| Realized and Unrealized gain (loss) on marketable securities | - | 361,835 | - | (1,142,978) |
| Interest income (expense) | - | 11,811 | - | 18,159 |
| Income (loss) before provision for income taxes | - | 603 | (41,202) | (1,193,345) |
| | | | | |
Benefit (Provision) for income taxes | - | - | - | - |
| Net Income (Loss) | | 603 | (41,202) | (1,193,345) |
Net Gain (Loss) attributable to noncontrolling interest | - | (58,536) | - | (137,685) |
The following table shows the summary assets and liabilities of the discontinued operations as of March 31, 2020 and September 30, 2019.
| | | |
| | | |
| Assets | | |
| | | |
| Current assets: | | |
| Cash and cash equivalents | $- | $- |
| Accounts receivable | 791,998 | 1,080,000 |
| Total current assets included as part of discontinued operations | 791,998 | 1,080,000 |
| | | |
| Other assets: | | |
| Total other assets included as part of discontinued operations | - | - |
| | | |
| Total assets included as part of discontinued operations | $791,998 | $1,080,000 |
| Liabilities | | |
| | |
| Current liabilities: | | |
| Accounts payable | $- | $- |
| Total current assets included as part of discontinued operations | - | - |
| | |
| Long term liabilities: | | |
| Total long term liabilities as part of discontinued operations | - | - |
| | |
| Total liabilities included as part of discontinued operations | $- | $- |
The following table shows the significant cash flow items from discontinued operations for the six months ended March 31,:
| | | |
| Depreciation/ amortization | $- | $19,992 |
| Realized/unrealized (gain) loss on securities expenditures | $- | $1,142,978 |
| Impairment on discontinued operations assets | $(38,002) | $- |
| Non cash consideration received for services | $- | $(470,000) |
At September 30, 2019, EE1 had an accounts receivable for prior services delivered to two customers in aggregate of $1,080,000 of which $1,000,000 was from a related party at the time. At March 31, 2020 the balance on the accounts receivable is $791,998, which reflects payments made and an impairment of $38,002. As of March 31, 2020, one customer has breached their formal agreement on payments, with an accounts receivable balance of $750,000, and on April 29, 2020, the Company filed a lawsuit for collection of this amount and legal fees. The customer is Sandbox Properties LLC and is an affiliate of Kathy Ireland and kathy ireland Worldwide. As of March 31, 2020, we believe this amount will be collected in full.
As two of the subsidiaries, EE1 and IM1, had minority interests (non-controlling interests) and all parties agreed to transfer the non- controlling interest to the Company, we have reclassified the non-controlling interest balance of $(482,648) to additional paid in capital as of September 30, 2019.
NOTE 16 – LEASES
We have lease agreements for our corporate, warehouse and laboratory offices with lease periods expiring between 2021 and 2026. ASC 842 requires the recognition of leasing arrangements on the balance sheet as right-of-use assets and liabilities pertaining to the rights and obligations created by the leased assets. We determine whether an arrangement is a lease at inception and classify it as finance or operating. All of our leases are classified as operating leases. Our leases do not contain any residual value guarantees.
Right-of-use lease assets and corresponding lease liabilities are recognized at commencement date based on the present value of lease payments over the expected lease term. Since the interest rate implicit in our lease arrangements is not readily determinable, we determine an incremental borrowing rate for each lease based on the approximate interest rate on a collateralized basis with similar remaining terms and payments as of the lease commencement date to determine the present value of future lease payments. Our 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 common area maintenance expenses during the lease terms, which are variable lease costs.
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:
| | | |
| | | |
| Operating lease costs | $382,433 | $764,866 |
| Variable lease costs | 25,791 | 48,891 |
| Total operating lease costs | $408,224 | $813,757 |
Supplemental cash flow information related to operating leases is summarized as follows:
| | | |
| | | |
| Cash paid for amounts included in the measurement of operating lease liabilities | $357,922 | $676,681 |
As of March 31, 2020, our operating leases had a weighted average remaining lease term of 6.13 years and a weighted average discount rate of 4.66%. Future minimum aggregate lease payments under operating leases as of March 31, 2020 are summarized as follows:
| For the year ended September 30, | |
| 2020 (remaining six months) | $718,122 |
| 2021 | 1,452,434 |
| 2022 | 1,392,837 |
| 2023 | 1,380,204 |
| 2024 | 1,421,610 |
| Thereafter | 2,532,811 |
| Total future lease payments | 8,898,018 |
| Less interest | (1,213,558) |
| Total lease liabilities | $7,684,460 |
Future minimum lease payments (including interest) under non-cancelable operating leases as of September 30, 2019 are summarized as follows:
| For the year ended September 30, | |
| 2020 | $1,394,806 |
| 2021 | 1,452,434 |
| 2022 | 1,392,837 |
| 2023 | 1,380,204 |
| 2024 | 1,421,610 |
| Thereafter | 2,532,811 |
| Total obligations and commitments | $9,574,702 |
NOTE 17 – EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per share for the following periods:
| | | |
| | | | | |
| Basic: | | | | |
| Net income (loss) continuing operations | $14,883,772 | $(31,850,877) | $27,854,738 | $(32,845,791) |
| Net income (loss) discontinued operations | - | 59,139 | (41,202) | (1,055,660) |
| Net income (loss) attributable to cbdMD, Inc. common shareholders | 14,883,772 | (31,791,738) | 27,813,536 | (33,901,451) |
| | | | | |
| Preferred dividends paid | 100,016 | - | 166,750 | - |
| Diluted: | | | | |
| Net income (loss) continuing operations adjusted for preferred dividend | 14,783,756 | - | 27,687,988 | - |
| Net income(loss) adjusted for preferred dividend | 14,783,756 | - | 27,646,786 | - |
| | | | | |
| Shares used in computing basic earnings per share | 36,503,005 | 10,160,947 | 36,503,005 | 10,107,144 |
| Effect of dilutive securities: | | | | |
| Options | - | - | - | - |
| Warrants | - | - | - | - |
| Convertible preferred shares | 833,500 | - | 833,500 | - |
| Shares used in computing diluted earnings per share | 37,336,505 | 10,160,947 | 37,336,505 | 10,107,144 |
| | | | | |
| Earnings per share Basic: | | | | |
| Continued operations | 0.41 | (3.13) | 0.76 | (3.24) |
| Discontinued operations | (0.00) | (0.00) | (0.00) | (0.11) |
| Basic earnings per share | 0.41 | (3.13) | 0.76 | (3.35) |
| | | | | |
| Earnings per share Diluted: | | | | |
| Continued operations | 0.40 | - | 0.74 | - |
| Discontinued operations | - | - | (0.00) | - |
| Diluted earnings per share | 0.40 | - | 0.74 | - |
At the three and six months ended March 31, 2019, 833,255 potential shares underlying options and warrants, were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
NOTE 18 – 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 a 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 the Company's federal and state NOL carryovers established up through the date of each of these ownership changes may be subject to an annual limitation; however, this limitation is not material to these condensed consolidated financial statements.
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $4.6 million.
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.
The Company hashad 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 its deferred tax assets and liabilities atdetermined that using the date of enactment and the result was a reduction of the net deferred tax liability and a tax provision benefit of $12,000 which was reflected ingeneral methodology for calculating income taxes during an interim period for the quarter ending December 31, 2017 financial statements.2019, provided for a wide range of potential annual effective rates. Therefore, the Company has calculated the tax provision on a discrete basis under ASC 740-270-30-36(b) for the quarter ending December 31, 2019. Given available information to date and the most probable scenario given the facts and circumstances, management’s expectation is that the Company will generate enough indefinite life deferred tax assets from post-merger NOLs to reduce the naked credits to zero during the year, and continue to record a valuation allowance on remaining DTAs. As a result, the Company decreased the deferred tax liability from $2,240,300 to $0 and a recorded a deferred tax benefit of $2,240,300 for the quarter ending December 31, 2019. The Company recorded $0 income tax provision for the quarter ending March 31, 2020.
NOTE 1619 – 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. In addition, the Company will receive each quarter such amount 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, the Company has begun assessing the impact related to the Investment Company Act 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, the Company would be deemed an investment company, and that is not the Company’s focus or intention. The Company has begun workinganalyzed its operations subsequent to March 31, 2020 to the date these unaudited condensed consolidated financial statements were issued, and with the rapid spread of COVID-19 around the world and the continuously evolving responses to the pandemic, we have witnessed the significant and growing negative impact of COVID-19 on the global economic and operating environment. We find that the impact of COVID-19 on the Company is unknown at this time and the financial consequences of this situation cause uncertainty as to the future and its effects on the economy and the Company. However, we are monitoring the rapidly evolving situation and its potential impacts on our financial condition, liquidity, operations, suppliers, industry and workforce.
On March 27, 2020, Congress passed and the President of the United States signed into law the Coronavirus Aid, Relief, and Economic Security Act, which is commonly known as the CARES Actwhich provides a planstimulus package to liquidate,certain business and individuals affected by the novel COVID-19 emergency. The Company is currently evaluating how these provisions in an orderly fashion, assets as well as review business strategy to mitigate this issue, if it is determined these thresholds are exceeded.the CARES Act will impact its financial position, results of operations and cash flows.
On January 19, 2018In April 2020, the base compensationCompany applied for an unsecured loan in the amount of approximately $1.5 million pursuant to the Paycheck Protection Program administered by the United States Small Business Administration and authorized by the Keeping American Workers Employed and Paid Act, which is part of the Chief Executive Officer and Chief Financial Officer of Level Brands, Inc., was increased. The Compensation CommitteeCARES Act.Section 1106 of the BoardAct provides for forgiveness of Directors approvedup to the increases in eachfull principal amount of their base compensation to $270,000 annually for Mr. Sumichrast and $180,000 annually for Mr. Elliott, retroactively effective forqualifying loans guaranteed under the pay period beginning January 1, 2018. In addition,Paycheck Protection Program.The Company received the Compensation Committee awarded Mr. Sumichrast and Mr. Elliott cash bonuses of $240,000 and $100,000, respectively. The Compensation Committee of the Board of Directors is presently negotiating the terms of new employment agreements with each executive.loan proceeds on April 27, 2020.
On January 30, 2018, Level Brands, amended its Wholesale License Agreement (the “Agreement”) executed on September 8, 2017 with kathy Ireland® WorldWide related to exclusive rights to the kathy Ireland® Health & Wellness™ trademarks. The amendment accounted for the Company exercising its option on a three year extension 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 due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company 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.
ITEM 2.
MANAGEMENT'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 quartersecond quarters of fiscal 20182020 and the first quarter of fiscal 20172019 should be read in conjunction with the 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 20172019 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
Business
Level Brands strivesThrough our subsidiary, CBDI, we produceand distributevarious high-grade, premium CBD products, including tinctures, capsules, gummies, bath bombs and topical creams. In the third quarter of fiscal 2019, we launched a line of pet related CBD products under our Paw CBD brand which includes tinctures, treats, and balms, with additional products under development. In October 2019, following the initial positive response to bethe Paw CBD brand from retailers and consumers, we organized Paw CBD as a separate wholly-owned subsidiary in an innovative licensing, marketingeffort to take advantage of its early mover status in the CBD animal health industry. With over 40 SKU’s of premium pet CBD products for dogs, cats 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 ofkathy ireland® Worldwide,horses, we seek to secure strategic licenses and joint venture partnerships for our brands, as well asare seeking to grow the portfolio of brands through strategic acquisitions.Paw CBD into a leading brand.
We operateeither manufacture our businesspremium line of products at our Charlotte, NC facility or work with third party manufacturers. We only source cannabinoids, including CBD, which are extracted from non-GMO hemp grown on farms in four business units, including:the United States. We utilize a manufacturing process which creates hybrid broad-spectrum concentrations including CBD, other cannabinoids, and various other compounds, which we believe creates a superior product, while eliminating tetrahydrocannabinol (THC) content.
| 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.
| |
|
|
| | |
| Entertainment
division
| Also founded 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. | |
| | |
| kathy ireland®
Health &
Wellness
| Our newest business unit Level Health & Wellness was established in September 2017, and has an exclusive license to thekathy ireland® Health & Wellness™ brand. Its goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. This unit began operating in fiscal 2018.
| |
| | |
"Beauty belongs to everyone"
| Professional
products
division
| Beauty & Pin-Ups, our first business unit is a professional hair care line with a social conscience and launched its products in 2015. We offer quality hair care products, including shampoos, conditioners, styling aides and a patented styling tool, through an expanding professional salon distribution network. | |
Since December 2018, we have significantly increased the number of locations cbdMD products are available in, and with the building momentum of retailer acceptance subsequent to the passage of the Farm Bill, we are pursuing multiple opportunities to expand our product distribution as we continue to work to build cbdMD into a top recognized brand in the industry. We also continue to utilize partnerships and sponsorships with professional athletes as a way to gain brand recognition.
The Impact of the COVID-19 Pandemic on our Company
Our
On March 11, 2020, the World Health Organization declared the current coronavirus (“COVID-19”) outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restrictions on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have begun to have a significant adverse impact upon many sectors of the economy, including retail commerce.
In response to these measures, the “stay at home” order issued by the Governor of the State of North Carolina where our business model is designed withlocated, and for the goal of maximizing the valueprotection of our brands through entry into license agreements with partners that are responsible for the design,employees and customers, we have temporarily closed our corporate office and altered work schedules at our manufacturing and distribution ofwarehouse facilities. In addition, our licensed products. We promotesenior management and our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, whichoffice personnel are working remotely. To date these adjustments have not adversely impacted our ability to operate our company. In mid March we expect will allowtook steps to increase production to build up our customersfinished goods inventory as well as purchased additional raw material inventory items thereby allowing us to interact with each of our brands, in additionmaintain production if supply chain interruptions were to the products themselves, will be critical to our success.
We began reporting our revenues by segment duringhappen. During the second quarter of fiscal 2017 following2020 we experienced an impact on our acquisitionswholesale sales to our brick and mortar customers as many of I'M1the stores have been temporarily closed. In response, we have increased our efforts regarding campaigns 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 designedmarketing reach 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 ofsupport 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 isonline sales efforts by upping our initiatives with associated relevant messaging to become a producer and marketer of multiple entertainment distribution platformsconnect with our consumer base as well as engageincreased website content and various offerings and changes to make online ordering more effective (auto reorder capability, giveaways, free shipping, etc.). The impact of COVID-19 on the quarter ended March 31, 2020 has been a small decline in brand management services. The corporate parent alsoour wholesale sales with relatively no impact to our online sales. We continue to assess the situation on a daily basis, but we are unable to predict when and how quickly we will generate revenue from timebe able 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.resume regular operations.
In November 2017
During this time, we completedhave implemented several measures that we believe will ensure sufficient liquidity and support the business for the next several months. Specific measures, among other things, include the following:
●
Negotiating with our initial public offering raising $12,000,000landlords to receive temporary rent deferrals on our facilities;
●
Negotiating with our vendors to defer payments;
●
Suspending sponsorship and affiliate agreements;
●
Shifting sales focus efforts to our online consumer sales while the wholesale sales environment is impacted;
●
Ensuring we had sufficient inventory levels, (both raw and finished goods) allowing us to continue to fulfill orders in gross proceeds through the saleevent we must shut down our manufacturing facility or supply chains were impacted; and
●
Furloughing employees in areas impacted (wholesale sales, warehouse, marketing and events)
To further bolster our working capital, onApril 27, 2020, we received a loan in the principal amount of our common stock. Utilizing$1,456,100 (the “SBA Loan”), under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a portion offocus on payroll. As a qualifying business as defined by the SBA, we are using the proceeds from this loan to primarily help maintain our payroll as we navigate our business with a focus on returning to normal operations.
The term of the Note is two years, though it may be payable sooner in connection with an event of default under the Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. We intend to use the SBA Loan for qualifying expenses and to apply for forgiveness of the SBA Loan in accordance with the terms of the CARES Act.
As the adverse impact of COVID-19 on our company, industry, and country continues, our ability to meet customer demands for products may be impaired or, similarly, our customers may experience adverse business consequences due to the COVID-19 pandemic. Reduced demand for products or impaired ability to meet customer demand (including as a result of disruptions at our transportation service providers, third-party manufacturing partners or vendors) could have a material adverse effect on our business, operations and financial performance.
While we are not able to estimate the ultimate impact of the COVID-19 pandemic on our financial condition and future results of operations, depending on the prolonged impact of the COVID-19 outbreak, this situation may have a significant adverse effect on our reported results of operations for our third fiscal quarter of 2020 and possibly beyond.The extent to which the coronavirus impacts our results and financial condition, however, will depend on future developments, which are highly uncertain and cannot be predicted, including new information that may emerge and the actions to contain and treat its impacts, among others.
Growth Strategies and Outlook
We continue to pursue the following strategies to grow our revenues and expand our business and operations in the balance of fiscal 2020 and beyond:
●
Increase our base of product offerings: We currently have a broad offering of CBD products, including topicals, tinctures, gummies, bath bombs, vape oils, capsules, and pet products and continue to evaluate additional offerings within these categories as well as new ways to provide CBD in a manner that meets consumer demands. To that end we are devoting resources to ongoing research and development processes with the goal of expanding our product offerings to meet these expanding consumer demands. In addition, on April 8, 2020 we announced that in the coming weeks, we would offer third party manufactured single use alcohol-based hand sanitizers (which will not contain CBD) free with the purchase of cbdMD products, while supplies last. This has been accomplished. In addition, we also announced that in the coming 60 days from date of the announcement that we intend to begin manufacturing of our own branded alcohol-based hand sanitizer products (which will not contain CBD) pursuant to the authorization provided in the FDA’s Temporary Policy for Preparation of Certain Alcohol-Based Hand Sanitizer Products During the Public Health Emergency (COVID-19) Guidance for Industry, which was issued on March 27, 2020. We have begun the manufacturing and marketing process and expect the product to be available in May 2020. We also have other new products and bundled packages which will be available starting in May 2020 as well as several products in the research and development phase with targeted roll-out during 2020;
●
Expand our sales channels: As the market continues to evolve, we are expanding our sales channels. During fiscal 2019, we moved from a 100% online sales channel to working with wholesalers and retail channels. Big box retailers are beginning to explore CBD products and we believe this will provide another significant opportunity. In addition, sales channels for the pet line include expanding to not only retail stores but veterinary and pet care professionals;
●
Expand our recently completed initial public offeringformed CBD animal health division: With the formation in October 2019 of Paw CBD as a separate wholly-owned subsidiary, we have committed resources to branding and marketing the Paw CBD product line, which we believe will enable us to more effectively target new sales channels as well as utilize our marketing efforts in a more defined manner that we believe will generate other sales opportunities;
●
Expand our sponsorships toward targeted segments:We have had significant success with attracting high profile sponsors and influencers and expect to continue to assess the segments we have covered with a focus on activation of the sponsorships and influencers which are producing the largest visibility and responsiveness; and
●
Acquisitions.We may also choose to further build and maintain our brand portfolio by acquiring additional brands directly or through joint ventures if opportunities arise that we believe are in our best interests. As we are in an emerging market, opportunities could be present as companies establish strong brands and begin to obtain large market share. In assessing potential acquisitions or investments, we expect to devote significant assetsutilize our internal resources to primarily 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 not a party, however at this time, 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.
As a consumer goods manufacturer, we strive to meet or exceed the FDAs Good Manufacturing Practice (GMP) guidelines. Good Manufacturing Practices (GMPs) are guidelines that provide a system of processes, procedures and documentation to assure a product has the identity, strength, composition, quality and purity that appear on its label. These GMP requirements are listed in Section 8 of NSF/ANSI 173 which is the only American National Standard in the dietary supplement industry developed in accordance with the FDA’s 21 CFR part 111.
With our growth and evolution, challenges could exist and we must continue to review processes and controls and adapt our day to day GMP policies and practices as our manufacturing volume increases. We are dedicated to providing the highest quality CBD consumer goods on the market and therefore will continue to focus substantial efforts on GMP compliance. Our manufacturing facility and warehouse operations are fully GMP compliant and NSF GMP registered. NSF GMP registration verifies that the facility is audited twice annually for quality and safety in compliance with Federal Regulations for dietary supplements good manufacturing practices. We have applied for an additional third-party certification from the U.S. Hemp Authority and are awaiting scheduling of the audit. Additionally, we have secured third party contract manufacturing from FDA registered facilities which are independently GMP certified and subject to the marketing, developmentcontinuing independent audit and promotion ofcertification, to handle our brands.increased manufacturing needs.
Results of operations
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 March 31, | Six Months Ended March 31, |
| | | | | | | |
| | | | | | | |
| Total net sales | $9,399,036 | $5,636,578 | 3,762,458 | $19,547,272 | $6,102,265 | 13,445,007 |
| Cost of sales | 2,732,076 | 1,914,716 | 817,360 | 6,432,613 | 2,080,027 | 4,352,586 |
| Gross profit as a percentage of net sales | 70.9% | 66.0% | 4.1% | 67.0% | 65.9% | 1.1% |
| Operating expenses | 12,267,637 | 5,749,464 | 6,518,173 | 24,827,934 | 7,141,276 | 17,686,658 |
| (Increase) decrease on contingent liability | 21,261,994 | (30,914,074) | 168.8% | 38,160,000 | (30,914,074) | 223.4% |
| Net income (loss) before taxes | 14,883,772 | (32,925,877) | 145.2% | 25,614,438 | (33,978,793) | 175.4% |
| Net income (loss) attributable to cbdMD, Inc. common shareholders | $14,783,756 | $(31,791,738) | 146.5% | $27,646,786 | $(33,901,451) | 181.5% |
Sales
We record product sales primarily through two main delivery channels, direct to consumers via online capabilities (E-commerce) and direct to wholesalers utilizing our internal sales team. In addition, we record revenue upon delivery of services (consulting, marketing and brand strategy). The following table provides information on the contribution of net sales by segmenttype of sale to our total net sales.
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| | | | | |
| | | | | |
| | | | | |
| 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. 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 our net sales of $687,756 we have received compensation in the form of equity positions totaling $454,500, and we did not receive any equity positions in the first quarter of fiscal 2017.
| | Three months ended March 31, 2020 | | Three months ended March 31, 2019 | |
| | | | | |
| Wholesale sales | $2,617,860 | 27.9% | $1,375,045 | 24.4% |
| Consumer sales | 6,781,176 | 72.1% | 4,261,533 | 75.6% |
| Service oriented sales | - | 0% | - | 0% |
| Total net sales | $9,399,036 | | $5,636,578 | |
Professional products division| | Six months ended March 31, 2020 | | Six months ended March 31, 2019 | |
| | | | | |
| Wholesale sales | $5,885,981 | 30.1% | $1,375,045 | 22.5% |
| Consumer sales | 13,661,291 | 69.9% | 4,727,220 | 77.5% |
| Service oriented sales | - | 0% | - | 0% |
| Total net sales | $19,547,272 | | $6,102,265 | |
Net sales for the professional products division for the first quarter of fiscal 2018decreased 85.5%as compared to the first quarter of fiscal 2017. This decrease is primarily attributable to primary reliance upon one distribution channel combined with an ineffective post launch support effort. We have made a strategic decision to increase our distributors and have added two 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 as to when and if our product line will receive more acceptance in 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 prescribed time frame, which is typically 2% if paid within 10 days. These allowances were 34.9% and 52.6%, respectively, of gross sales 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.
Cost of sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, manufacturing overhead, third-party providers, and outbound freight for our professional products divisions,product sales (consumer and wholesale sales), and includes labor and third party service providers for our licensingservice sales.The following table provides information on the cost of sales to our net sales for the three and entertainment divisions. Oursix months ended March 31, 2020 and 2019:
| | Three months ended March 31, 2020 | Three months ended March 31, 2019 | |
| | | | |
| Product sales | $2,732,076 | $1,893,927 | $838,149 |
| Service related sales | - | 20,789 | (20,789) |
| Total cost of sales | $2,732,076 | $1,914,716 | $817,360 |
| | | | |
| | Six months ended March 31, 2020 | Six months ended March 31, 2019 | |
| | | | |
| Product sales | $6,432,613 | $2,040,767 | $4,391,846 |
| Service related sales | - | 39,260 | (39,260) |
| Total cost of sales | $6,432,613 | $2,080,027 | $4,352,586 |
In our product sales, our cost of sales as a percentage of sales was 29.0% and 33.9% for the three months ended March 31, 2020 and 2019, respectively, and was 32.9% and 34.0% for the six months ended March 31, 2020 ad 2019, respectively. The change reflects the growth and maturation of the business and its manufacturing process, and changes in the cost of raw materials as we continue to evaluate key vendors to work with and leverage volume purchasing as we grow as well as additional product offerings which continue to impact our cost of production. During the three months ended March 31, 2020 we had a inventory adjustment which decreased our cost of sales for the same period, without this adjustment our cost of sales as a percentage of sales would have been 33.1% and 34.8% for the three and six months ended March 31, 2020. We expect product sales will maintain cost of sales as a percentage of net sales, was 33.2% in the first quarter of fiscal 2018between 25% and 40%, as compared to 81.4% in the first quarter of fiscal 2017. In order to explain the change in cost of sales we must account for the two new divisions and look at each division separately to see the cumulative impact.
In our professional products division, cost of sales was 64% 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 refinemanage our operations, we expect ouroverall 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 lines more efficiently by procuring materials used 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 mediamanufacturing and production items to increase visibility of our licensed brands, I’M1 and kathy ireland® Health & Wellness™, which 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.production.
Operating expenses
Our principal operating expenses include wages,staff related expense, advertising travel, rent, professional service fees, and(which includes expenses related to industry distribution and trade shows.shows), sponsorships, affiliate commissions, merchant fees, travel, rent, professional service fees, and business insurance expense. Our operating expenses on a consolidated basis increased to $1,687,644 forapproximately 110% and 245% in the first quarter of fiscal 2018three and six months ended March 31, 2020 from $600,266 in for the first quarter of fiscal 2017, an increase of $1,087,378 or 181.15%. This increasesame periods ended March 31, 2019, respectively, and is directly related to the changesMergers on December 20, 2018 and the significant growth and ramp up of that business.
The following table provides information on our approximate operating expenses for the three and six months ended March 31, 2020 and 2019:
| | | | |
| | | | |
| | | | |
| Staff related expense | $3,969,976 | $2,220,790 | $1,749,186 |
| Accounting/legal expense | 382,673 | 226,628 | 156,045 |
| Professional outside services | 329,019 | 427,271 | (98,252) |
| Advertising/marketing/social media/events/tradeshows | 3,398,776 | 1,475,695 | 1,923,081 |
| Sponsorships | 1,442,472 | - | 1,442,472 |
| Affiliate commissions | 385,341 | 477,838 | (92,497) |
| Merchant fees | 674,469 | 372,363 | 302,106 |
| Technology | 280,899 | 34,648 | 246,251 |
| Travel expense | 164,325 | 129,281 | 35,044 |
| Rent | 394,598 | 112,510 | 282,088 |
| Business insurance | 121,202 | 94,498 | 26,704 |
| Non-cash stock compensation | 435,301 | 19,475 | 415,826 |
| All other expenses | 288,586 | 158,467 | 130,119 |
| Totals | $12,267,637 | $5,749,464 | $6,518,173 |
| | | | |
| | | | |
| | | | |
| Staff related expense | $7,902,979 | $2,515,330 | $5,387,649 |
| Accounting/legal expense | 726,093 | 537,821 | 188,272 |
| Professional outside services | 842,104 | 681,636 | 160,468 |
| Advertising/marketing/social media/events/tradeshows | 5,809,498 | 1,557,837 | 4,251,661 |
| Sponsorships | 3,572,308 | - | 3,572,308 |
| Affiliate commissions | 929,608 | 477,838 | 451,770 |
| Merchant fees | 1,415,462 | 403,808 | 1,011,654 |
| Technology | 540,895 | 46,788 | 494,107 |
| Travel expense | 369,043 | 136,351 | 232,692 |
| Rent | 744,191 | 174,215 | 569,976 |
| Business insurance | 265,663 | 157,362 | 108,301 |
| Non-cash stock compensation | 1,115,875 | 163,148 | 952,727 |
| All other expenses | 594,215 | 289,142 | 305,073 |
| Totals | $24,827,934 | $7,141,276 | $17,686,658 |
The increase in staff related expense is a direct result of the company as it increased from one operating business subsidiarybuild out of the CBDI team. The increase in professional outside services is related to fourthe use of outside agencies and built the infrastructurefirms to support the overall company from a growth perspective as well as to operate as a public entity. Specifically, during the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017while we built 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.infrastructure. The increase during first quarterin advertising/marketing, sponsorships, affiliate commissions, technology, and travel are a result 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, marketingexecution on the business strategy and tradeshow expenses decreased approximately by $48,000 and commissions paid to an outside sales consultant decreased approximately $15,000. Duringbuilding of the first quarter of fiscal 2018 we had anCBD brand while increasing market share. The increase in merchant fees is a direct result of increased business through our E-commerce site. The non-cash stock compensation expense of $7,441 related toreflects the issuancevalue of restricted stock awards to our board membersand options as well as for options issued to employees.they vest.
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 decreasesignificant increase in operating expenses is related to management shift to a more structured approachthe Mergers as well as the strategy for thisramping up of the CBDI business, unit was reviewedwhich included increased staff hiring, a full blown sales, advertising 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. 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 expenses in the entertainment division were approximately $282,000 for the first quarter of fiscal 2018. Operating expenses include staff related expenses of $36,000, accounting and legal expenses of approximately $84,000,process and expenses related to social media, public relations, advertising, marketinginfrastructure expansion. With an established business foundation and tradeshowsinfrastructure, we are now focused on activation 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 expectassets 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 bybuild our senior management to this division. The corporate charges eliminate upon consolidation of our financial statements.
Corporate overheadbrand while we transition with a focus on overall execution and profitability.
Corporate overhead and allocation of management fees to our segments
Included in our consolidated operating expenses were approximately $907,000 forare expenses associated with our corporate overhead which are not allocated to the first quarter of fiscal 2018 as compared to $107,000 for the first quarter of fiscal 2017, an increase of 747%. Operating expenses for these periods, respectively, includeoperating business unit, including (i) staff related expenses which were approximately $466,000 and $52,000,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 table provides information on our approximate corporate overhead for three and six months ended March 31, 2020 and 2019:
| | | | |
| | | | |
| | | | |
| Staff related expense | $292,833 | $553,595 | $(260,762) |
| Accounting/legal expense | 163,878 | 224,335 | (60,457) |
| Professional outside services | 144,522 | 240,722 | (96,200) |
| Travel expense | 4,160 | 37,031 | (32,871) |
| Business insurance | 108,748 | 80,628 | 28,120 |
| Non-cash stock compensation | 435,301 | 19,475 | 415,826 |
| Totals | $1,149,442 | $1,155,786 | $(6,344) |
| | | | |
| | | | |
| | | | |
| Staff related expense | $710,240 | $765,802 | $(55,562) |
| Accounting/legal expense | 435,892 | 535,528 | (99,636) |
| Professional outside services | 320,030 | 486,141 | (166,111) |
| Travel expense | 22,684 | 43,956 | (21,272) |
| Business insurance | 182,465 | 140,814 | 41,651 |
| Non-cash stock compensation | 1,115,875 | 163,148 | 952,727 |
| Totals | $2,787,186 | $2,135,389 | $651,797 |
The overall increase in corporate operating expenses of approximately $98,000 and $55,000, expensesis related to social media,the maturation of the entire organization and ongoing public relations, advertising, marketing, promotions and tradeshow of approximately $100,000 and $2,800, charitable expenses of approximately $59,000 and $22,000, travelcompany 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.expenses.
Interest expenseOther income 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 30, 2017.Interest income (expense)
In some cases, we may, from time to time, enter into contracts where all or a portionOur interest income (expense) was $35,607 and $6,274 for the three months ended March 31, 2020 and 2019, respectively. For the six months ended March 31, 2020 and 2019, our interest income (expense) was $42,875 and $43,959, respectively.
Contingent liability
As consideration for the Mergers, under the terms of the considerationMerger Agreement, we had a contractual obligation to issue 15,250,000 initial shares of our common stock (the “Initial Shares”), after approval by our shareholders, to the members of Cure Based Development, to be issued in two tranches 6,500,000 shares and 8,750,000 shares, both of which are subject to leak out provisions. The unrestricted voting rights to 8,750,000 tranche of shares vest over a five year period and until those voting rights vest are subject to voting proxy agreements. As of March 31, 2020, unrestricted voting rights to 2,187,500 shares have vested and those shares are no longer subject to voting proxy agreements. The Merger Agreement also provided that an additional 15,250,000 Earnout Shares of our common stock can be issued upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the customerclosing date of the Mergers.
The Initial Shares and Earnout Shares were approved by our shareholders and the Initial Shares were issued on April 19, 2019. The Initial Shares value at April 19, 2019 was $53,215,163, and with the issuance of the Initial Shares, the contingent liability related to the Initial Shares was reclassified to shareholders’ equity by $53,215,163.
The earn out provision is accounted for and recorded as a contingent liability with increases in exchangethe liability recorded as a non cash other expense and decreases in the liability recorded as a non cash other income. The first marking period for our servicesthe Earnout Shares was December 31, 2019 and based on measurement criteria, 5,127,792 shares were earned and issued on February 27, 2020. The value of the issued Earnout Shares as of February 27, 2020 was $4,620,000 and the decrease in value of $6,924,503 related to those shares is recorded in the Statement of Operations for the three months ended March 31, 2020. Additionally, as the 5,127,792 Earnout Shares were issued on February 27, 2020, the value of the consideration provided could declineshares in the amount of $4,620,000 was reclassified from the contingent liability to additional paid in capital on the balance sheet. The remaining Earnout Shares for future evaluations represent the contingent liability and require an impairment chargewere valued at $7,820,000 at March 31, 2020, as compared to be$22,157,491 at December 31, 2019, a decrease of $14,337,491. The decrease in value of $6,924,503 and $14,337,491 combined represent the decrease of the total contingent liability of $21,261,994 and is recorded in non-operatingas other income in the consolidatedStatement of Operations for the three months ended March 31, 2020. The Company utilizes both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the decrease in the value of the contingent liability was the decrease of the Company’s stock price, which was $0.93 at March 31, 2020 as compared to $2.26 on December 31, 2019 and the issuance on February 27, 202 of the Earnout Shares for the first marking period.
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 March 31, 2020 and 2019 we recorded $(53,152) and $9,524 of realized and unrealized gain (loss) on marketable and other securities. For the six months ended March 31, 2020 and 2019 we recorded $(115,162) and $(64,640) of realized and unrealized gain (loss) on marketable and other securities. The discontinued operations recorded a realized and unrealized gain (loss) of $361,835 and $(1,142,978), for the three and six months ended March 31, 2019, which is included in the net income (loss) from discontinued operations on the statement of operations.
Net lossFor the three and net loss attributablesix months ended March 31, 2020 we had an impairment on other securities of $600,000 as well as an impairment of $160,000 against other account receivable representing an investment other security that was to our common shareholdersbe received. (see Note 3 Marketable Securities and Investment Other Securities in the consolidated financial statements for more information).
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.
Liquidity and capital resourcesCapital Resources
We had cash and cash equivalents on hand of $8,817,856$14,835,699 and working capital of $11,282,711$19,092,846 at DecemberMarch 31, 20172020 as compared to cash on hand of $284,246$4,689,966 and working capital of $2,170,154$12,033,157 at September 30, 2017.2019. Our current assets increased 226%approximately 58.1% at DecemberMarch 31, 20172020 from September 30, 2017,2019, and is primarily attributable to an increase ofin cash marketable and other securities, prepaid expenses, andinventory, offset by a decrease in all accounts receivables, note receivable, related party,marketable and deferred IPO costs.other securities, merchant reserve, prepaid expenses, and assets from discontinued operations. Our current liabilities decreased 49.5%increased approximately 56.1% at DecemberMarch 31, 20172020 from September 30, 2017.2019. This decreaseincrease is primarily attributable to decreasesincreases in accounts payable, and accrued expenses, which was offset by an increase in deferred revenue. Both the changes in our current assetsnote payable 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 aoperating lease short term note receivable for $275,000.
During the first quarter of fiscal 2018three and six months ended March 31, 2020 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 a 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 13 Commitments and Contingencies). We have sufficient working capital to fund our operations and to fund our expected growth.operations.
Our 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$9,147,052 and $528,637$4,462,372 for the first quarter of fiscal 2018six months ended March 31, 2020 and the first quarter of fiscal 2017,2019, respectively. We continue to assess all areas of operations for cost improvements and efficiencies as we continue to mature.
On October 16, 2019 we closed a follow-on firm commitment underwritten public offering of shares of our 8.0% Series A Convertible Preferred Stock resulting in total net proceeds to us of $4,525,100. On January 15, 2020, we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $16,928,100. We are using the net proceeds from the offerings for brand development and expansion, advertising, marketing, and general working capital. In addition, as described earlier in this section, in April 2020 we received a PPP Loan of $1,456,100
Related Parties
As described in Note 9 in notes 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 weWe 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 partiesstatements (see Note 9 Related Party Transactions in the consolidated financial statements for more information).
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 20172019 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 amendmentsincluded in these ASUs are effectivethis report 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.information on accounting pronouncements.
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 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. We are assessing the impact, if any, of implementing this guidance on our consolidated financial position, results of operations and liquidity.
Off balance sheet arrangements
As of the date of this report, we do not have any 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 sheet 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.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 4.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities 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 Chiefco-Chief Executive OfficerOfficers and our Chief Financial Officer have 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 Chiefco-Chief Executive OfficerOfficers and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
Changes in Internal Control overOver Financial Reporting.ReportingDuring the three months ended December 31, 2017, the Company made the following remediation. 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
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we have hired a new Controller as of September 1, 2017, who is now assessing, with the CFO, all internal requirements and processes to ensure GAAP compliance. We continue to assess hiring other sufficient competent staff to analyze and report financial transactions in compliance with GAAP in a timely manner; and
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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.
None.As previously disclosed, effective November 8, 2019 we and certain of our subsidiaries (collectively, the “Level Parties”) entered into a Settlement Agreement and Mutual General Release Agreement with EEI Holdings, LLC, IM1 Holdings, LLC, Sandbox Properties, LLC (“Sandbox), kathy ireland Worldwide, Inc., B&B Bandwidth LLC, Erik Sterling and Jason Winters (collectively, the “kiWW Parties”), the terms of which provided, in part, that the parties agreed to transfer the accounts receivable of EE1 and the minority interest of both EE1 and IM1 to us and we agreed to have all rights to certain past contracts or customers for those entities assigned to the minority holders. Sandbox is affiliated with and managed by executives of kathy ireland Worldwide, Inc. As consideration, Sandbox was obligated to cause a total payment of $1,000,000 to be made to us, with $83,333.34 due on or before November 14, 2019 and the remaining amount due in equal installments of $83,334.34 by the 15th day of each month. On February 26, 2020, after notice of Sandbox’s non-payment of $83,333.34 due on February 15, 2020 and Sandbox’ continued failure to make such payment, we notified the kiWW Parties of a default. Upon this default, under the terms of the agreement the kiWW Parties are obligated to pay us 10% interest on the amount due and an administrative fee of $5,000.
The Settlement Agreement and Mutual General Release Agreement also contains a confidentiality clause limiting our ability to disclose certain terms of the agreement, including Sandbox’s obligation to pay us $1,000,000. On February 26, 2020 we also notified the kiWW Parties that the default triggered a reportable event by us. We reached this conclusion given the material amount owed to us by the kiWW Parties.
On April 29, 2020, we filed a lawsuit in the Superior Court of the State of California in and for Los Angeles Central District (Case No. 20STCV16290) against the kiWW Parties and certain of their affiliates asserting fraud, breach of written contract, fraudulent inducement, breach of agreement, negligent misrepresentation, breach of fiduciary duty, theft, violation of California Penal Code § 496(c), fraudulent conveyance, unjust enrichment and constructive trust. We are seeking actual, compensatory and consequential damages, together with an order violating defendants’ fraudulent transfers.
ITEM 1A. RISK FACTORS.
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 of our 2019 Form 10-K.
The coronavirus global pandemic has caused a significant disruption in retail commerce and may have a material adverse impact upon our 2017 10-Kfinancial condition and results of operations.
On March 11, 2020, the World Health Organization declared the current COVID-19 outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19 within the United States, federal, state and local governments throughout the country have imposed varying degrees of restriction on social and commercial activity to promote social distancing in an effort to slow the spread of the illness. These measures have had a significant adverse impact upon many sectors of the economy, including retail commerce. As a result of these circumstances, we have temporarily closed our subsequent filings withcorporate office and have altered work schedules at our warehouse and manufacturing facilities. In addition, many of our office personnel are working remotely. We are unable to predict when and how quickly we will be able to resume regular operations. While we are not able to estimate the SECfull impact of the COVID-19 outbreak on our financial condition and results of operations, we expect that this situation will have a significant adverse impact on the Company’s results of operations for the third fiscal quarter of 2020 and possibly beyond. Should these conditions persist for a prolonged period beyond the third quarter, this may have a material adverse impact on our ultimate financial condition and liquidity.
Major disruptions to our logistics capability or to the operations of our key vendors or customers could have a material adverse impact on our operations.
Conditions caused by the COVID-19 pandemic could adversely affect our customers’ ability or willingness to purchase our products or services, delay prospective customers’ purchasing decisions, adversely impact our ability to provide or deliver products and on-site services to our customers, delay the provisioning of our offerings, or lengthen payment terms, all of which could adversely affect our future sales, operating results and overall financial performance.
A recession or long-term market correction as a result of COVID-19 could have a material impact on our business
While the potential economic impact brought by COVID-19 may be difficult to assess or predict, the pandemic has resulted in significant disruption of global financial markets, and a recession or long-term market correction resulting from the spread of COVID-19 could materially impact the value of our common stock, impact our access to capital and affect our business financial condition or future results.in the near and long-term.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In November 2017 we issued 6,667 shares of our common stock valued at $37,002 as compensation for services to us. The recipient was a sophisticated or otherwise accredited investor with access to business and financial information on our company. The issuance was exempt from registration under the Securities Act of 1933 in reliance on an exemption provided by Section 4(a)(2) of that act.None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable to our company’sCompany’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 toIn April 2020 following our 2020 annual meeting of shareholders, our board of directors approved the kathy ireland Health & Wellness™ trademarks. The amendment reflected our exerciseconsolidation of two previously constituted Board committees, the option onCompensation Committee and the Nominating and Corporate Governance Committee, into one consolidated committee titled the Compensation, Nominating and Corporate Governance Committee. In connection therewith, the Board adopted 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,new committee charter, a copy of which is filed as Exhibit 10.68posted on our corporate website atwww.cbdmd.com. Following this action, the following independent directors were appointed to this report.the committees of the Board, to serve at the pleasure of the board of directors:
.
| Director | Audit Committee Member | Compensation, Corporate Governance and Nominating Committee Member |
| | |
| Bakari Sellers | ✓ | ✓* |
| Peter J. Ghiloni | ✓ | ✓ |
| Scott G. Stephen | ✓ | ✓ |
| William F. Raines, III | ✓* | ✓ |
denotes Committee chairperson.
ITEM 6. EXHIBITS.
No. | | Description |
| | 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) |
| | 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) |
| | 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) |
| | 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) |
| | 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 | | XBRL Taxonomy Extension Presentation Linkbase * |
101.LAB | | XBRL Taxonomy Extension Label Linkbase * |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase * |
101.SCH | | XBRL Taxonomy Extension Schema * |
| |
| | Incorporated by Reference | | Filed or Furnished |
| No. | | Exhibit Description | | Form | | Date Filed | | Number | | Herewith |
| | | | 8-K | | 12/3/2018 | | 2.1 | | |
| | | | 10-Q | | 02/14/2019 | | 2.2 | | |
| | | | 10-Q | | 02/14/2019 | | 2.3 | | |
| | | | 10-Q | | 02/14/2019 | | 2.4 | | |
| | | | 10-Q | | 02/14/2019 | | 2.5 | | |
| | | | 1-A | | 9/18/17 | | 2.1 | | |
| | | | 1-A | | 9/18/17 | | 2.2 | | |
| | | | 1-A | | 9/18/17 | | 2.3 | | |
| | | | 1-A | | 9/18/17 | | 2.4 | | |
| | | | 1-A | | 9/18/17 | | 2.5 | | |
| | | | 1-A | | 9/18/17 | | 2.6 | | |
| | | | 8-K | | 2/28/20 | | 10.1 | | |
| | | | | | | | | | Filed |
| | | | | | | | | | Filed |
| | | | | | | | | | Filed |
| | | | | | | | | | Filed |
| 101 INS | | XBRL Instance Document | | | | | | | | Filed |
| 101 SCH | | XBRL Taxonomy Extension Schema | | | | | | | | Filed |
| 101 CAL | | XBRL Taxonomy Extension Calculation Linkbase | | | | | | | | Filed |
| 101 LAB | | XBRL Taxonomy Extension Label Linkbase | | | | | | | | Filed |
| 101 PRE | | XBRL Taxonomy Extension Presentation Linkbase | | | | | | | | Filed |
| 101 DEF | | XBRL Taxonomy Extension Definition Linkbase | | | | | | | | Filed |
———————
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, 2018May 15, 2020 | By: | /s/ Martin A. Sumichrast |
| | | Martin A. Sumichrast, ChiefCo-Chief Executive Officer, principalco-principal executive officer |
February 14, 2018 | | |
| May 15, 2020 | By: | /s/ Raymond S. Coffman |
| | Raymond S. Coffman, Co-Chief Executive Officer, co-principal executive officer |
| May 15, 2020 | By: | /s/ Mark S. Elliott |
| | | Mark S. Elliott, Chief Operating Officer, Chief Financial Officer, principal financial and accounting officer |
