NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Organization and Nature of Business
cbdMD,
Inc. ("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. On April 22, 2019, following approval by our shareholders at
the 2019 annual meeting held on April 19, 2019, we filed Articles
of Amendment to our Articles of Incorporation changing the name of
our company to “cbdMD, Inc.” effective May 1, 2019. We
operate from our offices located in Charlotte, North Carolina. Our
fiscal year end is established as September 30.
The accompanying unaudited interim condensed consolidated financial
statements of cbdMD have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“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, 2018. 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 2018 as reported in the Form
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,
2018, we own 100% interest in BPU. BPU’s initial business
focus was to manufacture, market and sell an array of beauty and
personal care products, including hair care and hair treatments, as
well as beauty tools. The Company's products historically have been
sold to the professional salon market, principally through
distributors to professional salons in the North America and has
expanded its focus to retailers, online segments and licensing
opportunities. BPU no longer manufactures products and has focused
on licensing agreements.
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 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. Level H&W focuses on
establishing licensing arrangements under the kathy ireland®
Health & Wellness™ brand. The agreement initially was 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 was to be paid on January 1 of subsequent years until paid
in full. 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. In January
2018, the Company, amended its wholesale license agreement with
kathy Ireland® Worldwide. 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. The Company capitalized the cost into
intangibles and is amortizing them over the term of the licensing
agreement. In December 2018, the Company agreed to and paid the
balance owed as final payment at a reduced price of
$300,000.
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. On October 2, 2018, the Company
completed a secondary public offering of 1,971,428 shares of its
common stock for aggregate gross proceeds of approximately $6.9
million. The Company received approximately $6.3 million in net
proceeds after deducting underwriting discounts and commissions and
other offering expenses payable by us.
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
has 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. CBDI produces
and distributes
various high-grade, premium cannibidiol 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
pyschoactive as they do not contain tetrahydrocannibinol
(THC).
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 CBDI, BPU and Level H&W. 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).
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”),
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, marketable securities, common stock, 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, contingent liability and, hence consideration for the
Mergers is a material estimate. Actual results could differ from
these estimates.
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 March 31, 2019 we have
an allowance for doubtful accounts of $15,595, and had no allowance
at September 30, 2018.
In addition, 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. Where an accounts
receivable is settled with the receipt of the common stock or other
instrument, the common stock or other instrument will be classified
as
an asset on the balance sheet as either an investment marketable
security (when the customer is a publicly traded entity) or as an
investment other security (when the customer is a private
entity).
Accounts receivable and accounts receivable other items that
involve a related party are indicated as such on the face of the
financial statements.
Receivable and Merchant Reserve
The Company primarily sells its products through the internet and
has an arrangement to process customer payments with third-party
payment processors. The arrangement with the payment processor
requires that the Company pays a fee of between 5.95% - 6.95% of
the transaction amounts processed. Pursuant to this agreement,
there is a waiting period between 4 -14 days prior to reimbursement
to the Company, as well as a calculated reserve which the payment
processor holds back. Fees and reserves can change periodically
with notice from the processors. At March 31, 2019, the receivable
from payment processors included approximately $343,230 for the
waiting period amount and is recorded as accounts receivable in the
accompanying consolidated balance sheet and $626,160 for the
reserve amount for a total receivable of $969,390.
Marketable Securities
Marketable securities that are equity securities are carried at
fair value on the consolidated balance sheets with changes in fair
value recorded as an unrealized gain or (loss) in the Statements of
Operations in the period of the change. Upon the disposition of a
marketable security, the Company records a realized gain or (loss)
on the Company’s consolidated statements of operations.
On October 1, 2018, as a result of the adoption of ASU 2016-01
–
Financial
Instruments
, the Company
reclassified $2,512,539 of net unrealized losses on marketable
securities, that were formerly classified as available-for-sale
securities before the adoption of the new standard, from
Accumulated Other Comprehensive Loss to Accumulated
Deficit.
Investment Other Securities
For equity investments where the Company neither controls nor has
significant influence over the investee and which are
non-marketable, the investments are accounted for using the cost
method of accounting in accordance with ASC 325-10. Under the cost
method, dividends received from the investment are recorded as
dividend income within non-operating income.
Other-than-Temporary Impairment
The Company’s management periodically assesses its investment
other securities, which are held at cost less impairment, for any
unrealized losses that may be other-than-temporary and require
recognition of an impairment loss in the consolidated statement of
operations. If the carrying value 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 carrying value, the financial condition and prospects
of the security’s issuer and the Company’s ability and
intent to hold the security for a length of time sufficient to
allow for recovery. If the impairment is considered
other-than-temporary, an impairment charge is recorded in
non-operating income in the consolidated statements of
operations.
Inventory
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 (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. 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 maintenance and repairs are charged
to operating expense 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 booths and equipment, three to four years for
manufacturer’s molds and plates, computers, furniture and
equipment, leasehold improvements, and software. 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 statement 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
asset is valued 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 an unrealized gain or loss in the
Statement of Operations. For investment other securities we use the
cost method and hold the securities at cost less impairment. The
company periodically compares the fair value of the investment
other security to cost in order to determine if there is an
other-than-temporary impairment that should be
recorded.
Intangible Assets
The Company's intangible assets consist of trademarks, goodwill,
and other intellectual property, which are accounted for in
accordance with ASC Topic 350, Intangibles – Goodwill and
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,
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.
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, finite 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 conjunction with any acquisitions, the Company refers to ASC-805
as amended by Accounting Standards Update (“ASU”)
2017-01 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 an asset purchase. Additionally, the Company refers
to the aforementioned guidance in reviewing all acquired assets and
assumed liabilities for valuation in a business combination,
including the determination of intangible asset
values.
Contingent liability
A significant component of the purchase price consideration for the
Company’s acquisition of CBDI 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 9. 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 recognizes both the fixed number of shares to be
issued, and the variable number of shares to be potentially issued,
as contingent liabilities on its Consolidated Balance Sheets. These
contingent liabilities are recorded at fair value upon the
acquisition date and are remeasured quarterly based on the
reassessed fair value as of the end of that quarterly reporting
period.
For the three months ending March 31, 2019, the contingent
liabilities associated with the business combination were increased
by $30,914,074 to reflect their reassessed fair values as of March
31, 2019. For the three months ended March 31, 2019, the Company
made no material adjustments to the forecasted performance of the
post-acquisition entity that would impact the estimated likelihood
that the revenue targets disclosed in Note 9 would be met. The
primary catalyst for the $30,914,074 increase in contingent
liabilities is the change in the Company’s share price
between December 31, 2018 and March 31, 2019. These increases or
reductions to the contingent liabilities are reflected within Other
Expenses on the Consolidated Statements of Operations.
Common stock
The Company was a private company until November 2017 and as such
there was no market for the shares of its common stock. Previously,
we valued a share of common stock based on recent financing
transactions that included the issuance of common stock to an
unrelated party at a specified price. In the event, however, there
had not been a recent and significant equity financing transaction,
or the nature of the business had 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
estimating the value of our common stock. On November 17, 2017, the
Company completed its IPO, thus our stock has been valued by the
market since that date.
Revenue Recognition
The Company adopted ASC 606,
Revenue from Contracts with
Customers
using the modified
retrospective method beginning with our quarter ending 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, the services have been
rendered, or the usage-based royalty has been earned. 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 the ASC 606, the Company recognizes revenues when its
customer obtains control of promised goods or services, in an
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. The Company has reviewed
its various revenue streams for its existing contracts under the
five-step approach. The Company has entered into various license
agreements that provide revenues based on guarantee minimum royalty
payments with additional royalty revenues based on a percentage of
defined sales. Guaranteed minimum royalty payments (fixed revenue)
are recognized on a straight-line basis over the term of the
contract, as defined in each license agreement. Earned royalties
and earned royalties in excess of the fixed revenue (variable
revenue) are recognized as income during the period corresponding
to the licensee’s sales. Earned royalties in excess of fixed
revenue are only recognized when the Company is reasonably certain
that the guaranteed minimums payments for the period will be
exceeded.
The below table summarizes amounts related to future performance
obligations under fixed contractual arrangements as of March 31,
2019:
|
|
|
|
|
|
|
|
|
Future
performance obligations
|
$
0
|
$
0
|
Allocation of transaction price
At times, the Company enters into contracts with customers wherein
there are 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
achieved by estimating the standalone selling price of each
element, which is the price at which we sell a promised good or
service separately to a customer.
In circumstances where we have not historically sold relevant
products or services on a standalone basis, the Company 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 to remove all observable standalone selling prices of other
goods or services included in the contract and 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. Net sales are comprised of gross revenues
less 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. 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 currently the Company does
not have a formal return policy and historically our returns have
been immaterial, in connection with the Mergers with Cure Based
Development we are evaluating implementation of a formal
refund/return policy.
The Company also enters into various license agreements that
provide revenues based on royalties as 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 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 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.
Licensing for trademarks are considered symbolic licenses, which
contain the characteristics of a right-to-access license since the
customer is simultaneously receiving the Intellectual Property and
benefiting from it throughout the license period. As such, the
Company primarily records revenue from licenses on a straight-line
basis over the license period as the performance obligation is
satisfied over time.
In regard to sales for services provided, the Company records
revenue when the customer has accepted services and 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 segment reporting categorizes Company activity into the
following broad transaction types: product sales, licensing
arrangements and advisory services. We believe that these segment
categories appropriately reflect how the nature, amount, timing and
uncertainty of revenue and cash flows are impacted by economic
factors. See Note 15 – Segment Information, for disaggregated
presentation of revenue.
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.
The below table summarize the net change in contract assets and
contract liabilities from October 1, 2018 to March 31,
2019:
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
$
37,500
|
-
|
$
115,625
|
$
153,125
|
|
Billed
during three months ended December 31, 2018
|
75,000
|
265,000
|
-
|
340,000
|
|
Earned
during three months ended December 31, 2018
|
(68,750
)
|
-
|
(115,625
)
|
(184,375
)
|
|
Balance
at December 31, 2018
|
$
43,750
|
$
265,000
|
-
|
$
308,750
|
|
Amount
returned during three months ended March 31, 2019
|
|
(175,000
)
|
|
(175,000
)
|
|
Billed
during three months ended March 31, 2019
|
-
|
-
|
10,000
|
10,000
|
|
Earned
during three months ended March 31, 2019
|
(18,750
)
|
-
|
(1,667
)
|
(20,417
)
|
|
Balance
at March 31, 2019
|
$
25,000
|
$
90,000
|
$
8,333
|
$
123,333
|
Cost of Sales
Our cost of sales includes costs associated with distribution, fill
and labor expense, components, manufacturing overhead, and outbound
freight for our products divisions, and includes labor, third-party
service providers, and amortization expense related to intellectual
property for our licensing and entertainment
divisions.
In
our products division, cost of sales also includes the cost of
refurbishing products returned by customers that will be offered
for resale and the cost of inventory write-downs associated with
adjustments of held inventories to their net realizable value.
These expenses 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 net realizable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing
and promotional costs as incurred. The Company incurred
approximately $1,559,000 and $248,000 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended March 31, 2019 and 2018,
respectively. The Company incurred approximately $1,775,000 and
$581,000 in advertising and related marketing and promotional costs
included in operating expenses during the six months ended March
31, 2019 and 2018, 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 2017, the Parent Company
acquired the remaining interests 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 and Level H&W are wholly
owned subsidiaries and are disregarded entities for tax purposes
and their 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 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 the 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 March 31, 2019 and 2018, 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 $741,300 uninsured balance at March 31, 2019 and
a $0 uninsured balance at September 30, 2018. Funds which are not
subject to coverage or loss under FDIC were $3,355,000 and
$4,003,003 at March 31, 2019 and September 30, 2018,
respectively.
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
did not have any customers that represented a significant amount of
our sales for the three and six months ended March 31, 2019,
respectively. The Company had sales to one customer that
individually represented approximately 89% and 73% of total net
sales for the three and six months ended March 31, 2018,
respectively. The aggregate accounts receivable of such customers
represented approximately 73% of the Company’s total accounts
receivable at March 31, 2018.
Stock-Based Compensation
We account for our stock compensation under the ASC
718-10-30,
Compensation - Stock
Compensation
using 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, which became effective October 1, 2017, we elected 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.
Net Income (Loss) Per Share
The Company uses ASC 260-10,
Earnings Per Share
for calculating the basic and diluted
income (loss) per share. The Company computes basic income (loss)
per share by dividing net income (loss) and net income (loss)
attributable to common shareholders 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 the three and six months ended March 31, 2019, 833,255 potential
shares were excluded from the shares used to calculate diluted loss
per share as their inclusion would reduce net loss per
share.
New Accounting Standards
In May 2014, August 2015 and May 2016, the 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 enable
financial statements users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers. 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 amendments in these ASUs are effective for
annual periods beginning after December 15, 2017, and interim
periods therein. Early adoption is permitted for annual periods
beginning after December 15, 2016. These ASUs may be applied
retrospectively to all prior periods presented, or retrospectively
with a cumulative adjustment to retained earnings in the year of
adoption. The new revenue standards became effective for the
Company on October 1, 2018 and were adopted using the modified
retrospective method. 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, the
services have been rendered, or the royalty has been received. As
the Company did not identify any accounting changes that impacted
the amount of reported revenues with respect to its product
revenues, no adjustment to retained earnings was required upon
adoption.
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. The Company does have a 3 year lease for a
manufacturing facility and is assessing the impact of implementing
this guidance on its consolidated financial position, results of
operations and liquidity.
In August 2018, the FASB issued ASU No.
2018-13,
Fair Value Measurement (Topic
820).
The ASU modifies,
removes, and adds several disclosure requirements on fair value
measurements in Topic 820, Fair Value Measurement. The ASU 2018-13
is effective for all entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 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 evaluating
the effect ASU 2018-13 will have on its consolidated financial
statements and disclosures and has not yet determined the effect of
the standard on its ongoing financial reporting at this
time.
NOTE 2 – ACQUISITIONS
On
December 20, 2018 (the “Closing”), the Company, and its
newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC,
both North Carolina limited liability companies, completed a
two-step merger (the “Merger Agreement”) with Cure
Based Development, LLC, a Nevada limited liability company
(“Cure Based Development”). The Merger Agreement
provided that AcqCo LLC merge with and into Cure Based Development
with Cure Based Development as the surviving entity (the
“Merger”), and immediately thereafter Cure Based
Development merged with and into cbdMD LLC with cbdMD LLC as the
surviving entity (the “Secondary Merger” and
collectively with the Merger, the “Mergers”). cbdMD LLC
was renamed on April 10, 2019 to CBD Industries LLC and has
continued as a wholly-owned subsidiary of the Company and maintains
the operations of Cure Based Development pre-closing. As
consideration for the Merger, the Company has 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. The Merger
Agreement also provides that an additional 15,250,000 shares of our
common stock 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 9 for more
information).
As discussed in Note 17, the initial 15,250,000 shares were
approved by our shareholders to be issued as of April 19,
2019.
The Company owns 100% of the equity interest of CBDI. The valuation
and purchase price allocation for the Mergers remains preliminary
and will be finalized by September 30, 2019.
During the three months ended March 31, 2019, the Company
identified equipment valued at $114,275 that was improperly
classified in the initial purchase price allocation. The purchase
price allocation was adjusted by increasing Property and equipment,
net and reducing Goodwill by this amount.
The following table presents the preliminary 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
|
55,144,269
|
|
Total assets acquired
|
81,219,415
|
|
|
|
|
Liabilities assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
471,551
|
|
Deferred
tax liability
|
5,108,000
|
|
Total Liabilities assumed
|
6,865,932
|
|
|
|
|
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 had developed and the entry into an
emerging market with high growth potential. See Note 9 regarding
contingent liability.
In connection with the purchase price allocation, the Company
recorded a deferred tax liability of approximately $5,108,000, 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 acquired intangibles, and 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 if a change in
ownership of a company occurs. The Company will perform an analysis
to determine if a change of ownership under IRC Section 382 had
occurred and if so, determine the expiration and limitations of use
of the NOLs.
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, using the estimated fair value of the
services provided. Where an accounts receivable is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument will be classified as an asset on the balance
sheet as either an investment marketable security (when the
customer is a public entity) or as an investment other security
(when the customer is a private entity).
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. 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, and also distributed
shares valued at $223,440 to its non-controlling interests. In
August 2017, the Company also provided referral services for kathy
Ireland® Worldwide 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 investment and determined there was not an impairment
for the period ended March 31, 2019.
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. The Company assessed the investment and determined there
was not an impairment for the period ended March 31,
2019.
In November 2017, the Company completed services in relation to an
agreement with SG Blocks, Inc. (NASDAQ: SGBX).
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. From November 7, 2018 thru December 13,
2018, the Company sold the 50,000 shares held and recorded a
realized loss on marketable securities of $25,673 as of December
31, 2018 in the consolidated statement of operations. The Company
no longer has this equity position.
In December 2017, the Company completed services per an advisory
services agreement with Kure Corp, formerly a related party. As
payment for these services, Kure Corp issued 800,000 shares of its
stock to Level Brands. The customer was a private entity and the
stock was valued at $400,000, which was based on financing
activities by Kure Corp in September 2017 in which shares were
valued at $0.50 per share. The Company 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 Corp. merged with
Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F),
a Canadian company. Details can be reviewed in our 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
have 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 will receive 800,000 shares of
Kure stock valued at $160,000 and as Kure is private, the shares
will be treated as a Level 3 stock and will be accounted for
against the $160,000 accounts receivable other. The Company has
determined that the 800,000 shares have a fair market value over
$160,000. The Company has assessed the common stock and determined
there was not an indication of an other-than-temporary impairment
at March 31, 2019.
On December 21, 2017, the Company purchased 300 shares of preferred
stock in a private offering from a prior customer for $300,000. The
preferred shares are convertible into common stock at a 20%
discount of a defined subsequent financing, or an IPO offering of a
minimum $15 million, or at a company valuation of $45 million
whichever is the least. The customer is a private entity. The
Company has classified this common stock as Level 3 for fair value
measurement purposes as there are no observable inputs. In valuing
the stock the Company used the value paid, which was the price
offered to all third party investors. As of March 31, 2019, the
Company has determined there is no impairment on the value of the
shares of stock.
On December 30, 2017 the Company entered into anAgreement with
Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F),
a Canadian company which is a developer of
pharmaceutical 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. During the three
months ended March 31, 2019 we sold 110,636 shares of Isodiol stock
and recorded a realized loss of $185,834. As of March 31, 2019 we
have 1,153,894 shares of Isodiol stock. At March 31, 2019 the
Isodiol shares were valued at $1.19 per share, and we recorded
$557,193 and $(996,110) as unrealized gain (loss) on the
Company’s consolidated financial statements for the three and
six months ended March 31, 2019, respectively. This investment is
accounted for as a cost method investment.
On June 26, 2018 Level Brands entered into an Agreement with Boston
Therapeutics, Inc. (OTC: BTHE), a pharmaceutical company focused on
the development, manufacturing and commercialization of novel
compounds to address unmet medical needs in diabetes.
The
agreement involved a licensing agreement and required the Company
to create IP for a branding / marketing campaign.
As payment for these services, Boston
Therapeutics agreed to pay $850,000, of which $450,000 was issued
as a note due no later than December 31, 2019 and $400,000 to be
paid thru the issuance of BTI common stock based on the trading
price at the agreement date ($0.075). As the stock has not been
issued, we have recorded an unrealized gain (loss) of $53,333 and
($186,667) for the three and six month periods ended March 31,
2019, respectively based on a trading price of $0.04 at March 31,
2019.
The table below summarizes the assets valued at fair value as of
March 31, 2019:
|
|
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, 2019
|
|
|
|
|
|
|
|
Marketable
securities
|
$
1,373,133
|
-
|
$
-
|
$
1,373,133
|
|
Investment
other securities
|
-
|
-
|
$
1,159,112
|
$
1,159,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
$
1,050,961
|
$
-
|
$
1,159,112
|
$
2,210,073
|
|
Sale
of equities
|
$
(200,000
)
|
$
-
|
$
-
|
$
(200,000
)
|
|
Change
in value of equities
|
$
(132,303
)
|
$
-
|
$
-
|
$
(132,303
)
|
|
Balance
at December 31, 2018
|
$
718,658
|
$
-
|
$
1,159,112
|
$
1,877,770
|
|
Sale
of equities
|
$
(103,998
)
|
$
-
|
$
-
|
$
(103,998
)
|
|
Receipt
of equity investment upon completion of services
|
$
470,000
|
$
-
|
$
-
|
$
470,000
|
|
Change
in value of equities
|
$
288,473
|
$
-
|
$
-
|
$
288,473
|
|
Balance
at March 31, 2019
|
$
1,373,133
|
$
-
|
$
1,159,112
|
$
2,532,245
|
NOTE 4 – INVENTORY
Inventory at March 31, 2019 and September 30, 2018 consists of the
following:
|
|
|
|
|
|
|
|
|
Finished
goods
|
$
1,062,562
|
$
18,531
|
|
Inventory
components
|
1,002,903
|
104,692
|
|
Inventory
prepaid
|
306,870
|
-
|
|
Total
|
$
2,372,335
|
$
123,223
|
At March 31, 2019, the Company determined that inventory related to
BPU was impaired by approximately $139,217, as the BPU inventory
balance was adjusted to zero as we no longer manufacture or intend
to sell BPU products. During the year ended September 30, 2018, the
Company determined that inventory was impaired by approximately
$262,000. Impairment charges were recorded within operating
expenses for the respective periods.
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at March 31, 2019 and
September 30, 2018 consist of the following:
|
|
|
|
|
|
|
|
|
Computers,
furniture and equipment
|
$
39,926
|
$
59,770
|
|
Show
booth and equipment
|
-
|
49,123
|
|
Manufacturing
equipment
|
659,771
|
-
|
|
Leasehold
improvements
|
175,293
|
-
|
|
Automobiles
|
24,893
|
-
|
|
Manufactures’
molds and plates
|
-
|
34,200
|
|
|
899,883
|
143,093
|
|
Less
accumulated depreciation
|
(82,470
)
|
(89,613
)
|
|
Net
property and equipment
|
$
817,413
|
$
53,480
|
Depreciation expense related to property and equipment was $50,951
and $8,558 for the three months ended March 31, 2019 and 2018,
respectively. Depreciation expense related to property and
equipment was $61,693 and $22,314 for the six months ended March
31, 2019 and 2018, respectively. During the three months ended
December 31, 2017 we recorded a one-time loss of $69,311 on the
disposal of a show booth that is no longer in use.
NOTE 6 – INTANGIBLE ASSETS
On April 13, 2015, BPU acquired from BPUNY certain assets,
including the trademark "Beauty & Pin Ups" and its variants and
certain other intellectual property and assumed $277,500 of BPUNY's
accounts payable to its product vendor, which was paid off in April
2016.
On January 6, 2017, the Company acquired 51% ownership in
I’M1 from I’M1 Holdings. I’M1’s assets
include the trademark "I’M1” and its variants and
certain other intellectual property. Specifically, a licensing
agreement with kathy ireland® Worldwide and an advisory
agreement for services with kathy ireland® Worldwide. The
licensing agreement provides the rights to use of the tradename for
business and licensing purposes, this is the baseline of the
business and will be required as long as the business is operating.
Our capability for renewals of these agreements are extremely
likely as the agreements are with a related party.
We also believe the existence of this
agreement does not have limits on the time it will contribute to
the generation of cash flows for I’M1 and therefore
we have identified these as
indefinite-lived intangible assets.
On January 6, 2017, the Company acquired 51% ownership in EE1 from
EE1 Holdings. EE1’s assets include the trademark "EE1”
and its variants and certain other intellectual property.
Specifically, a production deal agreement with BMG Rights
Management US and an advisory agreement for services with kathy
ireland® Worldwide. We believe the production deal agreement
and the advisory agreement do not have limits on the time they will
contribute to the generation of cash flows for EE1 and therefore we
have identified these as indefinite-lived intangible
assets.
On September 8, 2017, the Company entered into a seven year
wholesale license agreement with Andre Carthen and issued 45,500
shares of common stock, valued at $179,725. In addition, the
Company agreed to pay $65,000 in cash within 30 days completion of
its initial public offering and also issued warrants to purchase
45,500 shares of common stock at a strike price of $4.00. The
warrants were valued at $65,338. Under the terms of this
nonexclusive agreement, we have the right to use, assign and
sublicense the marks, intellectual property and other rights in
connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef"
and all trade names, trademarks and service marks related to this
intellectual property for the purpose of entering into sublicense
agreements with third parties for the manufacture, marketing and
sale of products utilizing these marks.
In December 2018, the parties amended the
agreement to remove the annual minimum guarantee in return for a
one time payment of $70,000. We are amortizing the capitalized
value of the cash, warrants and common stock over the seven year
term of the agreement and have amortized $12,088 and $11,073 for
the three months ended March 31, 2019 and 2018, respectively, and
have amortized $26,205 and $22,147 for the six months ended March
31, 2019 and 2018, respectively.
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. In December
2018, the parties amended the agreement to remove the annual
minimum guarantee in return for a one time payment of $10,000. We
are amortizing the capitalized value of the cash, warrants and
common stock over the seven year term of the agreement and have
amortized $6,382 and $6,237 for the three months ended March 31,
2019 and 2018, respectively, and have amortized $13,055 and $12,475
for the six months ended March 31, 2019 and 2018,
respectively.
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 was due
in equal installments on January 1 of subsequent years until the
license fee is paid, and were 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™. In January 2018, the
Company amended its wholesale license agreement with kathy
Ireland® Worldwide. 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: royalty
payments to kathy ireland® Worldwide for the three year
extension would be set at 35% of net proceeds, 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.
On December 20, 2018, both parties agreed to
reduce the final amount owed to $300,000 if paid within 5 days,
which was paid immediately. We are amortizing the asset over the
ten year term of the agreement and have amortized $29,031 and
$30,000 for the three months ended March 31, 2019 and 2018,
respectively, and have amortized $58,064 and $60,000 for the six
months ended March 31, 2019 and 2018,
respectively.
On December 20, 2018, the Company completed the Mergers with Cure
Based Development and acquired certain assets, including the
trademark "cbdMD" and its variants and certain other intellectual
property. The trademark is the cornerstone of this subsidiary and
is key as we create and distribute products and continue to build
this brand. 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 (see Note 2 for more information).
Intangible assets as of March 31, 2019 and September 30, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
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
and other intellectual property related to cbdMD
|
21,585,000
|
-
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland®Health & Wellness™, net
|
1,016,130
|
1,074,194
|
|
Wholesale
license agreement with Chef Andre Carthen, net
|
305,871
|
262,077
|
|
Wholesale
license agreement with Nicholas Walker, net
|
144,566
|
147,620
|
|
Trademark
and other intellectual property related to BPU
|
234,421
|
246,760
|
|
Total
|
$
24,729,322
|
$
3,173,985
|
|
|
|
|
The Company has four definite lived intangible assets, which have
seven or ten year lives.
Future amortization schedule:
|
Intangible
|
|
|
|
|
|
|
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
1,016,130
|
$
58,065
|
$
116,129
|
$
116,129
|
$
116,129
|
$
116,129
|
$
493,549
|
|
Wholesale
license agreement with Chef Andre Carthen
|
$
305,871
|
$
28,233
|
$
56,468
|
$
56,468
|
56,468
|
$
56,468
|
$
51,766
|
|
Wholesale
license agreement with Nicholas Walker
|
$
144,566
|
$
13,345
|
$
26,689
|
$
26,689
|
$
26,689
|
$
26,689
|
$
24,465
|
|
Trademark
and intellectual property related to BPU
|
$
234,421
|
$
12,337
|
$
24,676
|
$
24,676
|
$
24,676
|
$
24,676
|
$
123,380
|
The Company performs an impairment analysis at August 1 annually on
the
indefinite-lived intangible
assets following the guidance 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, 2018 and there was no
impairment.
The Company performed a qualitative and quantitative analysis for
the year ended September 30, 2018 accounting for the performance of
BPU and the business shift in relation to its original business
model and current focus on licensing and determined that an
impairment was required. As a result, the Company recorded an
impairment charge of $240,000 as impairment to intangibles under
the BPU segment for the year ended of September 30, 2018. No other
impairments were identified. Based upon the anticipated changes to
BPU’s business model, the Company had determined that it was
appropriate to reclassify the remaining carrying value of this
intangible asset to a definite-lived asset. The Company began
amortizing this asset beginning the first quarter of 2019. This
reclassification was accounted for as a prospective change in
estimate.
The Company has determined that no event or circumstances indicate
likeliness of an impairment as of March 31, 2019 for the current
indefinite-lived intangible assets.
The Company also performs an impairment analysis at August 1
annually on the definite lived intangible assets following the
guidance 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 March 31,
2019.
NOTE 7 – PROMISSORY NOTE
On December 20, 2018, as part of the Mergers with Cure Based
Development, the Company converted an outstanding liability held by
Cure Based Development and issued in aggregate a $184,300
Promissory Note to Edge of Business, LLC, an entity controlled by
the CEO of cbdMD. The liability was converted into an 18 month 6%
promissory note. The note is interest only for the first 12 months
and thereafter payable in six equal and consecutive monthly
installments of principal and interest.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a $20,000 note payable to an
individual, who is the owner of CBD Now, LLC. CBD Now, LLC
who now has a contractual right to
receive shares of the company as part of the Merger. The note is
due on February 20, 2019, but also includes an option for the note
holder to elect to extend the maturity date to February 20, 2020.
The note bears interest at a rate of 12%. The note was paid off on
February 20, 2019.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a $60,000 note payable to an
individual
who now has a
contractual right to receive shares of the company as part of the
Merger. The note is due on March 5, 2019, but also includes an
option for the note holder to elect to extend the maturity date to
March 5, 2020. The note bears interest at a rate of 12%. As of
March 31, 2019, $60,000 of the note payable was outstanding and is
recorded as a note payable – related
party.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a $500,000 note payable to an
individual who now has a contractual right to receive shares of the
company as part of the Merger. The note is due on March 31,
2019, but also includes an option for the note holder to elect to
extend the maturity date to March 31, 2020, and the extension has
been exercised at minimum through June 30, 2019. The note bears
interest at a rate of 12% and interest is paid monthly. As of March
31, 2019, $500,000 of the note payable was outstanding and is
recorded as a note payable – related party.
NOTE 8 – 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, 2019 and
2018, 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.
|
|
Three
Months Ended March 31, 2019
|
Three
Months Ended March 31, 2018
|
|
|
|
|
|
Net
revenues
|
$
N/A*
|
$
3,661,686
|
|
Operating
income (loss)
|
$
N/A*
|
$
1,728,190
|
|
Net
income (loss)
|
$
N/A*
|
$
1,751,144
|
|
Net
loss per share – basic and fully diluted
|
$
N/A*
|
$
0.08
|
|
|
Six Months Ended March 31, 2019
|
Six Months Ended March 31, 2018
|
|
|
|
|
|
Net
revenues
|
$
10,005,809
|
$
4,349,796
|
|
Operating
income (loss)
|
$
(4,388,615
)
|
$
231,246
|
|
Net
income (loss)
|
$
(33,109,651
)
|
$
217,431
|
|
Net
loss per share – basic and fully diluted
|
$
(1.31
)
|
$
0.01
|
* 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, it is being assumed that the shares
to be issued contractually under the Merger Agreement, upon
shareholder approval, have been issued. 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 9 – CONTINGENT LIABILITY
On
December 20, 2018 (the “Closing Date”), the Company,
and its newly organized wholly-owned subsidiaries AcqCo, LLC and
cbdMD LLC, both North Carolina limited liability companies,
completed the Mergers with Cure Based Development. The Merger
Agreement provided that AcqCo LLC merge with and into Cure Based
Development with Cure Based Development as the surviving entity
(the “Merger”), and immediately thereafter Cure Based
Development merged with and into cbdMD LLC with cbdMD LLC as the
surviving entity (the “Secondary Merger” and
collectively with the Merger, the “Mergers”). cbdMD LLC
was renamed to CBD Industries LLC on April 10, 2019. CBD Industries
LLC has continued as a wholly-owned subsidiary of the Company and
maintains the operations of Cure Based Development
pre-closing.
As
consideration for the Merger, the Company has 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 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 (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.
As discussed in Note 17, the initial 15,250,000 shares and Earnout
shares were approved by our shareholders as of April 19,
2019.
The issuance of the Earnout Shares is also subject to prior
shareholder approval.
The 15,250,000 shares which would be issued in the future, upon the
satisfaction of net revenue criteria have been valued using a Monte
Carlo Simulation. Inputs used included: stock price, volatility,
interest rates, revenue projections, and likelihood of obtaining
revenue projections, amongst others.
The value of the contingent liability is $102,267,557 at March 31,
2019, as compared to $71,353,483 at December 31, 2018. The increase
of $30,914,074 is recorded in the Statement of Operations. The
Company utilized 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
increase in the value of the contingent liability was the increase
of the Company’s stock price, which was $4.42 at March 31,
2019 as compared to $3.09 on December 31, 2018.
NOTE 10 – RELATED PARTY TRANSACTIONS
On July 31, 2017, the Company sold preferred shares it had received
from a customer as payment for services 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 included in note receivable
related party as of September 30, 2018. The short term note was
extended on August 1, 2018, and the outstanding principal of
$155,400 at 5% interest was paid in full on November 15,
2018.
On August 1, 2017, the Company entered into an additional advisory
agreement with Kure Corp., 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 Corp.
debt and preferred shares into common share of Kure Corp. 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 item 3 was delivered by June
30, 2018. The Company was paid $200,000 in Kure Corp. stock for the
first deliverables and was paid $145,500 in cash for the second
deliverable.
On September 8, 2017, the Company extended its Master Advisory and
Consulting Agreement, executed in February 2017, with kathy
ireland® Worldwide to February 2025.
In September 2017, the Company entered into an exclusive seven year
wholesale 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. 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™. Royalties are paid at
33 1/3% of net proceeds with the license fee being a credit against
royalties. On January 30, 2018, the Company amended its wholesale
license agreement with kathy Ireland® Worldwide. 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: royalty payments to kathy ireland® Worldwide for
the three year extension would be set at 35% of net proceeds, 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. On December 20, 2018, both parties agreed to reduce the
final amount owed to $300,000 if paid within 5 days, which was paid
immediately.
On December 11, 2017, the Company entered into a service agreement
with Kure Corp., then a related party, 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 Marketable
Securities and Other Investment Securities).
In June 2018, per our agreement with kathy ireland® Worldwide,
the company earned a referral fee of $150,000 for facilitating a
business opportunity which led to a new license agreement for kathy
ireland® Worldwide. The Company is to receive 50% of all
royalty revenue earned ongoing via the new business
contract.
In April 2018 through June 2018, EE1 engaged in five separate
statements of work for various marketing campaigns, production
processes, and documentary related services for Sandbox LLC. Under
the terms of the agreements, EE1 earned in the range of $200,000 to
$250,000 for each statement of work, from Sandbox LLC. Sandbox LLC
is an affiliate of a former member of our board of
directors.
In September 2018, B&B Bandwidth purchased products from our
subsidiary BPU for resale. The total purchase was $332,985. B&B
Bandwidth management are affiliates of kathy ireland®
Worldwide.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we recognized the following related party
transactions which happened prior to the Mergers:
Cure
Based Development has received $90,000 from Verdure Holdings LLC
for future orders of the Company’s products. Verdure Holdings
LLC is an affiliate of the CEO of cbdMD. This amount is recorded as
customer deposits - related party on the accompanying balance
sheet.
Cure
Based Development entered a lease for office space, which also
provides administrative and IT services, from an affiliate of the
CEO of cbdMD. The lease is a month to month lease for $9,166 per
month.
Cure
Based Development leases its manufacturing facility from an entity
partially owned by an individual who now has a contractual right to
receive shares of the company as part of the Merger. The current
lease was entered into on December 15, 2018 and is for three years
at an annual base rent rate of $151,200 allowing for a 3% annual
increase. In addition, common area maintenance rent is set at
$25,200 annually.
As we engage in providing services to customers, at times we will
utilize related parties, typically as a part of our agreement with
kathy ireland® Worldwide, to assist in delivery of the
services. For the three months ended March 31, 2019 and 2018 we
incurred related party cost of sales of approximately $0 and
$146,000, respectively. For the six months ended March 31, 2019,
and 2018 we incurred related party cost of sales of approximately
$161,500 and $272,000, respectively
NOTE 11 – SHAREHOLDERS’ EQUITY
Preferred Stock – We are authorized to issue 50,000,000
shares of preferred stock, par value $0.001 per share. Our
preferred stock does not have any preference, liquidation, or
dividend provisions. No shares of preferred stock have been
issued.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 10,170,356
and 8,123,928 shares of common stock issued and outstanding at
March 31, 2019 and September 30, 2018, respectively.
Common stock transactions:
In the three and six months ended March 31, 2019:
On October 2, 2018, the Company completed a secondary public
offering of 1,971,428 shares of its common stock for aggregate
gross proceeds of approximately $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 the selling
agent 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 January 2019, we issued 25,000 shares of our common stock to an
investment banking firm for general financial advisory services.
The shares were valued at $77,250, based on the trading price upon
issuance, and is being amortized and expensed as professional
services over the service period ending December 2019.
In January 2019, we issued 50,000 shares of our common stock to an
investment banking firm for general advisory and investment bank
services. The shares were valued at $212,500, based on the trading
price upon issuance, and is being amortized and expensed as
professional services over the service period ending April
2020.
In the three and six months ended March 31, 2018:
On November 17, 2017, the Company completed an IPO of 2,000,000
shares of its common stock for aggregate gross proceeds of $12.0
million.
In November 2017, we issued 6,667 shares of our common stock to an
individual as part of a consulting agreement. The shares were
valued at $37,002, based on the trading price upon issuance and
expensed as contract compensation.
In January 2018, we issued 230,000 shares of our common stock,
which were granted as restricted stock awards on October 1, 2016 to
board members. The restricted stock awards vested on January 1,
2018. The shares were valued at fair market value upon issuance at
$195,500 and amortized over the vesting period and expensed as
stock compensation.
In March 2018, we issued 5,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$20,000, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending June 2018.
Stock option transactions:
No options were issued in the three and six months ended March 31,
2019.
No options were issued in the three and six months ended March 31,
2018.
Warrant transactions:
In the three and six months ended March 31, 2019:
On October 2, 2018 in relation to the secondary offering, we issued
to the selling agent warrants to purchase in aggregate 51,429
shares of common stock with an exercise price of $4.375. The
warrants expire on September 28, 2023.
In the three and six months ended March 31, 2018:
On November 17, 2017 in relation to the IPO, we issued to the
selling agent warrants to purchase in aggregate 100,000 shares of
common stock with an exercise price of $7.50. The warrants expire
on October 27, 2022.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the three
months ended March 31, 2019 and 2018:
|
|
|
|
|
Exercise
price
|
$
4.375
|
$
7.50
|
|
Risk
free interest rate
|
2.90
%
|
2.06
%
|
|
Volatility
|
70.61
%
|
43.12
%
|
|
Expected
term
|
5 years
|
5 years
|
|
Dividend
yield
|
None
|
None
|
NOTE 12 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of 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 calendar 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 December of the immediately
preceding calendar 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 increase calculation.
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 Compensation
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-year term and generally vest over 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 for equity awards with time-based vesting provisions granted
during the year.
The following table summarizes stock option activity under the
Plan:
|
|
|
Weighted-averageexerciseprice
|
Weighted-averageremainingcontractual
term(in years)
|
Aggregateintrinsicvalue
(inthousands)
|
|
Outstanding
at September 30, 2018
|
469,650
|
5.13
|
|
|
|
Granted
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at March 31, 2019
|
469,650
|
$
5.13
|
6.48
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2019
|
444,650
|
$
5.13
|
6.50
|
$
—
|
As of March 31, 2019, there was approximately $6,492 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 1 month.
Restricted Stock Award transactions:
On October 1, 2016 the Company issued 230,000 restricted stock
awards in aggregate to board members. The restricted stock awards
vested January 1, 2018. The stock awards are valued at fair market
upon issuance at $195,500 and amortized over the vesting period. We
recognized $0 and $39,100 of stock based compensation expense for
the three and six months ended March 31, 2018,
respectively.
NOTE 13 – WARRANTS
Transactions involving our equity-classified warrants are
summarized as follows:
|
|
|
Weighted-averageexerciseprice
|
Weighted-
averageremainingcontractualterm
(in years)
|
Aggregateintrinsicvalue
(inthousands)
|
|
Outstanding
at September 30, 2018
|
312,176
|
$
6.84
|
|
|
|
Issued
|
51,429
|
4.375
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at March 31, 2019
|
363,605
|
$
6.49
|
3.26
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at March 31, 2019
|
363,605
|
$
6.49
|
3.26
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of March 31, 2019:
|
|
|
Weighted-averageexerciseprice
|
Expiration
|
|
|
|
|
|
|
Exercisable
at $7.80 per share
|
141,676
|
$
7.80
|
September
2021
|
|
Exercisable
at $4.00 per share
|
70,500
|
$
4.00
|
September
2022
|
|
Exercisable
at $7.50 per share
|
100,000
|
$
7.50
|
October
2022
|
|
Exercisable
at $4.375 per share
|
51,429
|
$
4.375
|
September
2023
|
|
|
363,605
|
6.49
|
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
In September 2017 we entered into a wholesale license agreement
with kathy ireland® Worldwide under which 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™.
As compensation under this agreement, we agreed to pay kathy
ireland® Worldwide a marketing fee of $840,000, of which
$480,000 was paid by December 31, 2017. The balance was 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.
In January 2018, the Company, amended its wholesale license
agreement with kathy Ireland® Worldwide. 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. This amount is classified as
accrued expense to related party as of September 30, 2018. In
addition, royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net proceeds. The
license fee paid is credited against any royalties to be paid. In
December 2018, the Company agreed to and paid the balance owed as
final payment at a reduced price of $300,000.
NOTE
15 – SEGMENT INFORMATION
The Company operates through its five subsidiaries in three
business segments: the products, licensing, and entertainment
divisions. The products division is designed to be an innovative
and cutting-edge producer and marketer of various products,
currently encompassing the CBD sector. The licensing division is
designed to establish brands via licensing of select products /
categories and encompasses our two subsidiaries with a focus on
health and wellness products and men’s lifestyle products.
The entertainment division’s focus is to become a producer
and marketer of multiple entertainment distribution platforms and
provide brand management services. The corporate parent also will
generate revenue from time to time, through advisory consulting
agreements. This revenue is similar to the entertainment
divisions’ revenue process and we have allocated revenue from
corporate to the entertainment division for segment
presentation.
The products division operated for the full year in fiscal 2018 and
2017. The licensing and entertainment divisions were both acquired
in January 2017. The Company’s results for the product
division in the first two quarters of fiscal 2019 include cbdMD LLC
from the Closing Date of the Mergers with Cure Based Development,
on December 20, 2018.
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 and six
months ended March 31, 2019 and 2018.
|
Three
months ended March 31, 2019:
|
|
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
5,647,553
|
$
5,189
|
$
20,609
|
$
5,673,351
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Total
Net Sales
|
$
5,647,553
|
$
5,189
|
$
20,609
|
$
5,673,351
|
|
Income
(loss) from Operations before Overhead
|
$
(910,143
)
|
$
301,459
|
$
(131,169
)
|
$
(739,853
)
|
|
Allocated
Corporate Overhead (a)
|
(30,968,951
)
|
(28,457
)
|
(113,013
)
|
(31,110,421
)
|
|
Net
Income (Loss)
|
$
(31,879,094
)
|
$
273,002
|
$
(244,182
)
|
$
(31,850,274
)
|
|
Three
months ended March 31, 2018:
|
|
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
29,672
|
$
2,781,714
|
$
214,979
|
$
3,026,365
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
54,545
|
$
54,545
|
|
Total
Net Sales
|
$
29,672
|
$
2,781,714
|
$
269,524
|
$
3,080,910
|
|
Income
(loss) from Operations before Overhead
|
$
(267,144
)
|
$
2,226,001
|
$
(156,874
)
|
$
1,814,283
|
|
Allocated
Corporate Overhead (a)
|
1,802
|
116,311
|
40,950
|
159,062
|
|
Net
Income (Loss)
|
$
(268,946
)
|
$
2,109,690
|
$
(197,824
)
|
$
1,642,920
|
|
|
|
|
|
|
|
Six
months ended March 31, 2019:
|
|
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
6,122,620
|
$
533,743
|
$
266,018
|
$
6,922,381
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Total
Net Sales
|
$
6,122,620
|
$
533,743
|
$
266,018
|
$
6,922,381
|
|
Income
(loss) from Operations before Overhead
|
$
(846,305
)
|
$
(845,125
)
|
$
(229,052
)
|
$
(1,920,482
)
|
|
Allocated
Corporate Overhead (a)
|
(28,407,899
)
|
(2,476,476
)
|
(1,234,279
)
|
(32,118,654
)
|
|
Net
Income (Loss)
|
$
(29,254,204
)
|
$
(3,321,601
)
|
$
(1,463,331
)
|
$
(34,039,136
)
|
|
|
|
|
|
|
|
Assets
|
$
85,084,141
|
$
6,199,693
|
$
3,573,556
|
$
94,857,390
|
|
|
|
|
|
|
|
Six
months ended March 31, 2018:
|
|
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
58,742
|
$
2,818,875
|
$
581,959
|
$
3,459,576
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
309,090
|
$
309,090
|
|
Total
Net Sales
|
$
58,742
|
$
2,818,875
|
$
891,049
|
$
3,768,666
|
|
Income
(loss) from Operations before Overhead
|
$
(627,898
)
|
$
1,865,892
|
$
33,602
|
$
1,271,596
|
|
Allocated
Corporate Overhead (a)
|
18,770
|
540,826
|
333,862
|
893,458
|
|
Net
Income (Loss)
|
$
(646,668
)
|
$
1,325,066
|
$
(300,260
)
|
$
378,138
|
|
|
|
|
|
|
|
Assets
|
$
3,990,753
|
$
7,893,823
|
$
3,866,450
|
$
15,751,026
|
|
|
|
|
|
|
(a)
The
Company began allocating corporate overhead to the business
segments in April 2017. We have allocated overhead on a proforma
basis for the three and six months ended March 31, 2019 and 2018,
respectively, above for comparison purposes.
NOTE 16 – INCOME TAXES
On November 17, 2017, the Company completed an IPO. 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 at 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 is reflected
in the nine months ending June 30, 2018 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 $5.1 million.
The Company has a valuation allowance against the net deferred tax
assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles which cannot be offset by
deferred tax assets and the deferred tax liabilities that resulted
from the merger with Cure Based Development. The net deferred tax
liability was reduced during the three and six months ending March
31, 2019 by approximately $1,075000 and $1,208,000, respectively,
mainly due to the tax effected post merger, post law change
NOL’s which have an indefinite life and can offset indefinite
life deferred tax liabilities.
NOTE 17 – SUBSEQUENT EVENTS
On April 19, 2019, following approval by our shareholders at the
2019 annual meeting held on April 19, 2019, we filed Articles of
Amendment to our Articles of Incorporation changing the name of our
company to “cbdMD, Inc.” effective May 1, 2019.
Concurrent with the name change, the CUSIP number of our common
stock will be changed to 12482W1018 and the symbol for our common
stock which is listed on the NYSE American will be changed to
“YCBD.” In addition, the shareholders of Level Brands,
Inc. approved the issuance of an aggregate of 15,250,000 shares of
our common stock pursuant to the rights granted as consideration
for the mergers which closed on December 20, 2018 pursuant to the
terms of the Agreement and Plan of Merger dated December 3, 2018 by
and among our company, our wholly-owned subsidiaries and Cure Based
Development, LLC. These shares were issued on April 22,
2019.
From April 26 to April 30, 2019, the Company added additional
sponsorships, for the cbdMD brand, that will extend our
representation in the professional sports arena. These sponsorships
increase our visibility and are with multiple entities or
individuals and is expected to add to our advertising spend over
the next three and half years by an aggregate amount of $6.4
million.
On May
9, the Company issued options to its board of directors as part of
the annual compensation plan. Six independent directors received in
aggregate 120,000 options with an exercise price of $5.41 that
expire in ten years.
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 second quarters of fiscal 2019 and fiscal 2018
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 2018 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
We
operate our business in five business units,
including:
|
|
Level H&W was established in September 2017 and has an
exclusive license to the
kathy
ireland
® Health &
Wellness™ brand. Its goal is to create a brand which will
include a wide variety of licensed products and services, targeted
to both Baby Boomers as well as millennials. This unit began
operating in fiscal 2018.
|
|
|
Founded in early 2017 and first conceptualized
by
kathy
ireland
® Worldwide, I'M1
is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
|
|
|
Also
founded in early 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.
|
|
"
Beauty
belongs to everyone
"
|
Beauty
& Pin-Ups, our first business unit is a 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 retailers and
online outlets and are expanding into licensing
opportunities.
|
|
|
Our newest business unit, CBD Industries, was
established in December 2018 in connection with the Mergers with
Cure Based Development LLC. In connection with the Mergers, we
acquired the cbdMD brand. CBD Industries produces
and
distributes
various high-grade,
premium CBD products under the cbdMD brand, including: tinctures,
capsules, gummies, bath bombs, vape oils, topical creams and animal
treats and oils.
|
Our
business model is designed with the goal of maximizing the value of
our brands through either acquisition of strategic brands with a
portfolio of products or entry into license agreements with
partners that are responsible for the design, manufacturing and
distribution of our licensed products. We promote our brands across
multiple channels, including print, television and social media. We
believe that this “omnichannel” (or multi-channel)
approach, which we expect will allow our customers to interact with
each of our brands, in addition to the products themselves, will be
critical to our success.
Recent Developments
As
described elsewhere in this report, on December 20, 2018 we
completed the Mergers with Cure Based Development and its historic
operations are now conducted by cbdMD, our subsidiary. Prior to the
Mergers, Cure Based Development, which was founded in 2017,
reported revenues of $3,280,009 and a net loss of $353,561 for the
eight months ended August 31, 2018. On the closing of the Mergers,
and in order to ensure the continuity of the operations, Mr. R.
Scott Coffman and Ms. Caryn Dunayer, Cure Based Development’s
CEO and President, respectively, joined cbdMD and Mr. Coffman
joined our board of directors. Our consolidated balance sheet at
March 31, 2019, appearing elsewhere in this report, reflects the
impact of the Mergers, and our consolidated statement of operations
for the three and six months ended March 31, 2019 also appearing
elsewhere in this report includes the results of cbdMD beginning on
the Mergers closing date.
As
consideration in the Mergers, the members of Cure Based Development
received the contractual rights to receive shares of our common
stock following shareholder approval as described elsewhere in this
report. On April 19, 2019 at our 2019 annual meeting the
shareholders of Level Brands, Inc. approved the issuance of an
aggregate of 15,250,000 shares of our common stock, representing
the First Tranche Shares and the Second Tranche Shares, as well as
the possible issuance of an additional 15,250,000 Earnout Shares
(as those terms are defined in the Merger Agreement). The issuance
of the shares will constitute a change of control under the rules
and regulations of the NYSE American and we were required to file
and meet the initial listing standard of the NYSE American, which
the Company has done and received acceptance from the NYSE. In
addition the shareholders approved the change of our
company’s name from Level Brands, Inc. to cbdMD, Inc. The
name change has been filed with all appropriate agencies and became
effective May 1, 2019.
Growth Strategies and Outlook
The
Company expanded its business operations over the past two years to
include capabilities in licensing and branding services and most
recently with the strategic acquisition of the cbdMD brand, to be a
manufacturer and distributor of products in an emerging market
space.
We
are pursuing the following strategies to continue to grow our
revenues and expand our business and operations during the balance
of fiscal 2019:
●
With
the recent strategic acquisition of the cbdMD brand and the passage
of the Farm Bill which removed CBD as a Schedule 1 controlled
substance, we must continue to expand visibility and distribution
in this emerging space and capitalize on the current positioning of
the brand to build it into the top recognized brand in the sector.
We expect to do this by:
o
Expanding
distribution to larger wholesalers as this will now be possible
with the Farm Bill passage;
o
Continue
to identify and develop CBD product offerings that fit into the
mainstream for consumption based on market research and trends;
and
o
Continue
development of all advertising, media and sales
channels.
●
Increase our base of licensed offerings: We
believe that in building a strong brand, we must begin with
intellectual property. The development of quality intellectual
property (“IP”), is frequently one of the most
expensive ongoing costs in a licensing operation. The unique kathy
ireland® Worldwide “blueprint” for IP development,
allows us economies of scale, which is a foundation for the
licensing business under the Company which can bring virtually
unlimited products and services of quality, through the appropriate
distribution channels to meet the demands of our targeted
customers.
We expect to
continue to grow our base of licensed products
by:
o
Innovating and identifying market trends through
an ongoing effort based on research of products, tracking buying
and demand trends and subsequently identifying the right
manufacturer for fulfillment
.;
and
o
Identifying
new product offerings in response to evolving customer demands in
our targeted areas, that meet our criteria, and with our branding
support could increase our reach to new customers.
Results of operations
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Three
Months Ended March 31,
|
Six
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
$
5,673,351
|
$
3,026,365
|
87.5
%
|
$
6,992,381
|
$
3,459,576
|
102.1
%
|
|
Net
sales related party
|
-
|
54,545
|
(100.0
)%
|
-
|
309,090
|
(100.0
)%
|
|
Total
net sales
|
$
5,673,351
|
$
3,080,910
|
84.1
%
|
$
6,992,381
|
$
3,768,666
|
85.5
%
|
|
Cost
of sales
|
2,134,662
|
523,821
|
307.5
%
|
2,625,670
|
751,945
|
249.2
%
|
|
Gross
profit as a percentage of net sales
|
62.4
|
83.1
|
(20.7
)%
|
62.1
|
80.1
|
(18.0
)%
|
|
Operating
expenses
|
5,939,334
|
937,123
|
533.8
%
|
7,484,275
|
2,624,768
|
185.1
%
|
|
(Increase)
decrease on contingent liability
|
(30,914,074
|
-
|
(100.0
)%
|
(30,914,074
|
-
|
(100
)%
|
|
Net
income (loss) before taxes
|
(32,925,274
|
1,619,920
|
(2132.5
)%
|
(35,247,136
|
322,138
|
(1104.2
)%
|
|
Net
income (loss) attributable to cbdMD, Inc. common
shareholders
|
$
(31,791,738
|
1,404,397
|
326.4
%
|
$
(33,901,451
|
$
271,469
|
125.9
%
|
Sales
We
began reporting our revenues by segment during the second quarter
of fiscal 2017 following our acquisitions of I'M1 and EE1. The
following table provides information on the contribution of net
sales by segment to our total net sales.
|
|
Three
Months Ended March 31, 2019
|
|
Three
Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
5,189
|
0.1
%
|
$
2,781,714
|
90.3
%
|
|
Entertainment
division
|
$
20,609
|
0.4
%
|
$
269,524
|
8.7
%
|
|
Products
division
|
$
5,647,553
|
99.5
%
|
$
29,672
|
1.0
%
|
|
Total
net sales
|
$
5,673,351
|
|
$
3,080,910
|
|
|
|
Six
Months Ended March 31, 2019
|
|
Six
Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
533,743
|
7.7
%
|
$
2,818,875
|
74.8
%
|
|
Entertainment
division
|
$
266,018
|
3.8
%
|
$
891,049
|
23.7
%
|
|
Products
division
|
$
6,122,620
|
88.5
%
|
$
58,742
|
1.5
%
|
|
Total
net sales
|
$
6,922,381
|
|
$
3,768,666
|
|
The
increase in net sales attributable to our products division in the
three and six months ended March 31, 2019 is due to the acquisition
of the cbdMD brand on December 20, 2018 and the continuing growth
of this emerging business.
The
decrease in net sales attributable to our entertainment and
licensing divisions in the three and six months ended March 31,
2019 is primarily associated with a change in business focus as the
Company integrates the new emerging business sector associated with
our brand cbdMD and assesses overall strategy for integration of
all business units.
As
described elsewhere in this report, from time to time we accept
equity positions as compensation for our services. The following
table provides information for the three and six months ended March
31, 2019 and 2018 regarding the amount of our total net sales in
each of those periods for which we received an equity position in
lieu of cash.
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
$
0
|
0
%
|
$
2,750,000
|
89.2
%
|
Six
Months Ended March 31,
|
|
|
|
|
|
|
|
|
$
470,000
|
$
3,204,500
|
85.0
%
|
With
the business focus shifting with our cbdMD brand, accepting of
equity positions as compensation should be rare. This practice has
had an adverse impact on our cash flow from operations and holding
these securities could subject our company to additional valuation
impacts in future periods as a result of the need to value these
holdings on a quarterly basis.
Cost of sales
Our
cost of sales includes labor, third party service providers and
amortization for IP for our licensing and entertainment divisions
and costs associated with distribution, manufacturing, third party
fill and labor expense, components, and freight for our products
divisions. The following table provides information on the
percentage of our cost of sales to our net sales for each segment
for the three and six months ended March 31, 2019 and
2018:
|
|
Three
Months Ended March 31,
|
Six
Months Ended March 31,
|
|
Licensing
division
|
|
|
|
|
|
Entertainment
division
|
559.4
%
|
6.9
%
|
33.8
%
|
9.3
%
|
|
Products
division
|
315.8
%
|
77.2
%
|
93.5
%
|
39.2
%
|
|
|
36.1
%
|
408.8
%
|
35.9
%
|
238.2
%
|
The
increase in cost of sales as a percentage of sales for our
licensing division in the three and six months ended March 31, 2019
is attributable to the loss of one major contract and its
associated revenue and transition costs during that process. The
percentage is not reflective of the financial impact as the cost of
sales for the three months ended March 31, 2019 totaled
approximately $29,000 against sales of approximately $5,000.
Currently we are assessing the integration strategy and viability
of how this division can provide internal support for our cbdMD
brand within our products division.
For the three and six months ended March 31, 2019, the
entertainment division provided television production services,
which involve a higher cost of sales and finalized services related
to the recording production, which will not generate sales until
future distribution processes begin. Overall, the cost of sales as
a percentage of sales for our entertainment division will vary
based upon the type of projects in which it is involved. Currently
we are assessing the integration strategy and viability of how this
division can provide internal support for our cbdMD brand within
our products division.
In
our products division, the significant decrease in the cost of
sales as a percentage of sales in the three and six months ended
March 31, 2019 is related to the acquisition of the cbdMD brand on
December 20, 2018, and the overall impact of its growing revenues
in this division as well as the low cost of sales this business
has, which was approximately 36%. We expect this division to
maintain cost of sales as a percentage of net sales, between 25%
and 40%, as we manage our overall cost for manufacturing and
production. The significant cost of sales in the fiscal 2018
periods on a percentage basis is primarily related to inventory
impairments, as a result of net realizable value and excess
inventory calculations all related to the hair care
products.
Operating expenses
Our principal operating expenses include wages,
advertising, travel, rent, professional service fees, and expenses
related to industry distribution and trade shows. Our operating
expenses on a consolidated basis increased approximately 533.8% and
185.1% in the three and six months ended March 31, 2019 from the
same periods in 2018, respectively. The significant increase is
attributable to the merger of the cbdMD brand as well as the ramp
up of this business as reflected in the tables below.
This included increases in: (i) staff
related expenses; (ii) accounting and legal expenses; (iii) travel
and entertainment expenses, (iv) expenses related to social media,
public relations, advertising and marketing process, tradeshows and
promotions; (v) affiliate and influencer commissions; (vi)
outside services related to investor
relations, transfer agent, other public company support costs;
(vii) rent expense; (viii) insurance expense; and (ix) non-cash
stock compensation expense, offset by a decrease in the allocation
of corporate management fees which are described in greater detail
later in this report.
We
acquired I’M1 and EE1 in January 2017, Level H&W did not
commence operations until December 2017, and cbdMD was acquired
December 2018. Accordingly, we did not incur operating expenses for
these business units during the entirety of the comparable periods.
The additional changes in our expenses is directly related to the
operational changes in our company as we grew from one operating
business segment to three, built the infrastructure to support the
overall company from a growth perspective, and completed our
initial public offering and transaction to a public company traded
on the NYSE American, and established processes as well as a
business focus to gain efficiencies with a focus on
results.
The
following table provides information on our approximate operating
expenses for each segment for the three and six months ended March
31, 2019 and 2018:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
38,412
|
$
363,000
|
$
(324,588
)
|
|
Entertainment
division
|
$
78,949
|
$
218,000
|
$
(139,051
)
|
|
Products
division
|
$
4,423,315
|
$
168,000
|
$
4,255,315
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
108,700
|
$
694,000
|
$
(585,300
)
|
|
Entertainment
division
|
$
212,335
|
$
508,000
|
$
(295,665
)
|
|
Products
division
|
$
4,662,391
|
$
473,000
|
$
4,189,391
|
Operating
expenses attributable to our licensing and entertainment divisions
for the three and six months ended March 31, 2019 and 2018,
included: (i) accounting and legal expenses; (ii) expenses related
to social media, public relations, advertising, marketing,
promotions and tradeshows; and (iii) professional outside services.
The overall decrease in operating expenses is related to a shift in
business focus of the company and an ongoing assessment of an
integration strategy and viability of how these divisions can
provide internal support for our cbdMD brand within our products
division.
Operating
expenses attributable to our products division for the three and
six months ended March 31, 2019 and 2018, included: (i) staff
related expenses; (ii) accounting and legal expenses; (iii) travel
and entertainment expenses, (iv) expenses related to social media,
public relations, advertising and marketing process, tradeshows and
promotions; (v) affiliate and influencer commissions; (vi) outside
services related to investor relations, transfer agent, other
public company support costs; (vii) rent expense; and (viii)
insurance expense.
The
significant increase in operating expenses for the Products
division, is related to the merger of CBDI and its operations as
well as the ramping up of the overall business, which included
increased staff hiring, a full blown advertising and marketing
process and expenses related to infrastructure
expansion.
Corporate overhead and allocation of management fees to our
segments
Included
in our consolidated operating expenses are expenses associated with
our corporate overhead which are not allocated to a specific
segment of our operations, including (i) staff related expenses;
(ii) accounting and legal expenses; (iii) expenses related to
social media, public relations, advertising, marketing, promotions
and tradeshows; (iv) travel and entertainment expenses; (v)
professional outside services; (vi) rent; (vii) non-cash stock
compensation expense; (viii) business insurance expense; and (ix)
interest expense. The non-cash stock compensation expenses for the
three months ended March 31, 2019 and 2018 were approximately
$19,000 and $14,000, respectively and for the six months ended
March 31, 2019 and 2018 were approximately $163,000 and $70,000,
respectively.
The
following table provides information on our approximate corporate
overhead for the three and six months ended March 31, 2019 and
2018:
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
$
1,288,000
|
$
|
$
571,000
|
717,000
|
Six
Months Ended March 31,
|
|
|
|
|
|
|
|
$
2,469,000
|
$
|
$
1,475,000
|
994,000
|
The
overall increase in corporate operating expenses is related to the
maturation of the entire organization and structuring related to
its day to day operation including special events (merger and
secondary offering activity) and ongoing public company related
expenses.
Historically,
we have allocated a portion of our corporate overhead to our
segments in the form of a management fee. These allocations are
included in the operating expenses by segment in the earlier table.
As set forth above, these internal corporate charges eliminate upon
consolidation of our financial statements. The following table
provides information on the allocation of management fees to our
segments for the three and six months ended March 31, 2019 and
2018:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
0
|
$
234,000
|
$
(234,000
)
|
|
Entertainment
division
|
$
0
|
$
117,000
|
$
(117,000
)
|
|
Products
division
|
$
0
|
$
39,000
|
$
(39,000
)
|
|
|
Six
Months Ended March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
25,000
|
$
284,000
|
$
(259,000
)
|
|
Entertainment
division
|
$
25,000
|
$
167,000
|
$
(142,000
)
|
|
Products
division
|
$
25,000
|
$
79,000
|
$
(54,000
)
|
We
are currently assessing our overall integration strategy and
approach and have not created allocations for the three months
ended March 31, 2019.
Other income and other non-operating expenses
Interest income (expense)
Our
interest income (expense) was $18,086 and $2,045 for the three
months ended March 31, 2019 and 2018, respectively. For the six
months ended March 31, 2019 and 2018, our interest income (expense)
was $62,119 and $3,920, respectively.
Contingent liability
As
consideration for the Merger, the Company has 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 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 initial 15,250,000 shares and
earnout shares were approved by our shareholders as of April 19,
2019.
The
contractual obligations and earn out provision are accounted for
and recorded as a contingent liability with increases in the
liability recorded as a non cash other expense and decreases in the
liability recorded as a non cash other income. The value of the
contingent liability is $102,267,557 at March 31, 2019, as compared
to $71,353,483 at December 31, 2018. The increase of $30,914,074 is
recorded as an expense in the Statement of Operations. 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 increase in the
value of the contingent liability was the increase of the
Company’s stock price, which was $4.42 at March 31, 2019 as
compared to $3.09 on December 31, 2018.
Realized gain (loss) on marketable securities
We
value investments in marketable securities at fair value and record
a gain or loss upon sale at each period in realized gain (loss) on
marketable securities. For the three and six months ended March 31,
2019, we recorded a loss of $185,834 and $211,507 for the sale of
securities we held (see Note 3 Marketable Securities and Other
Investment Securities). We did not have any sale of securities in
the three and six months ended March 31, 2018.
Unrealized gain (loss) on marketable securities
On October 1, 2018, as a result of the adoption of
ASU 2016-01 –
Financial
Instruments
, the Company now
records changes in fair value of equities held as unrealized gains
(losses) on marketable securities in the statement of
operations.
We
value investments in marketable securities at fair value and record
an unrealized gain or loss within the statements of operations, a
non-cash entry, at each period beginning October 1, 2018 and prior
to that recorded unrealized gain or loss in other comprehensive
income (loss). For the three and six months ended March 31, 2019,
we recorded an unrealized gain (loss) net of taxes, of $557,193 and
$(996,110), respectively. For the three and six months ended March
31, 2018, we recorded $33,500 and $(630,077) of other comprehensive
income (loss), net of taxes, respectively.
Net income (loss) and net income (loss) attributable to our common
shareholders
Our
net loss for the three and six months ending March 31, 2019
increased 2,038.6% to $31,850,274 and 9101.8% to $34,039,136,
respectively, as compared to net income of $1,642,920 and $378,138
in the three and six months ended March 31, 2018, respectively. At
March 31, 2019 and 2018, we owned 100% of the membership interests
of Beauty & Pin-Ups and 100% of the membership interest in
Level H&W. At March 31, 2019 we owned 100% of the membership
interest of CBDI. At March 31, 2019 and 2018 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 2,363.7% and
12,588.2% for the three and six months ended March 31, 2019 from
the same periods in fiscal 2018.
Liquidity and Capital Resources
We
had cash and cash equivalents on hand of $4,639,587 and working
capital of $12,272,931 at March 31, 2019 as compared to cash on
hand of $4,282,553 and working capital of $10,820,192 at September
30, 2018. Our current assets increased approximately 19.9% at March
31, 2019 from September 30, 2018, and is primarily attributable to
an increase of cash, accounts receivable, merchant reserve,
marketable securities, prepaid expenses, and inventory, offset by a
decrease in accounts receivable other, notes receivable, and
deferred issuance costs. Our current liabilities increased
approximately 92.9% at March 31, 2019 from September 30, 2018. This
increase is primarily attributable to increases in accounts
payable, notes payable, customer deposits, and accrued expenses,
offset by decreases in deferred revenue. Both the changes in our
current assets and current liabilities are also reflective of the
further development of our business during fiscal 2019 as well as
the Mergers of Cure Based Development. In July 2017 we sold, to a
related party, an equity position in a customer that we had
received as compensation for services and we received a portion in
cash and the balance as a short term note receivable for $275,000.
As of September 30, 2018, the note balance was $156,147, the note
was paid in full in November 2018.
During
the three and six months ended March 31, 2019 we used cash
primarily to fund our operations in addition to increases in our
accounts receivable, and merchant reserve.
We
do not have any commitments for capital expenditures. We have
sufficient working capital to fund our operations and to fund our
expected growth.
Our
goal from a liquidity perspective is to use operating cash flows to
fund day to day operations and we have generated the income to meet
this goal, however as we have accepted equity as compensation in
many of our engagements, we have not met this goal as cash flow
from operations has been a net use of $4,462,372 and $3,552,831 for
the six months ended March 31, 2019 and 2018,
respectively.
On November 16, 2017 we closed an IPO and raised net proceeds of
$10,932,535. On October 2, 2018 we closed a follow-on firm
underwritten public offering of shares of our common stock
resulting in total net proceeds to us of $6,356,998. We are using
the net proceeds from the offering for brand development and
expansion, acquisitions and general working capital.
Related Parties
As described in Note 10 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
with
kathy
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. In addition, with the Mergers with
Cure Based Development we acquired liabilities from related party
transactions between it and its members in the form of financing
notes and leases, which are described in Note 10. Due to the
significance of these transactions we have reported transactions
with related parties within the consolidated financial statements
as well as within the notes to the consolidated financial
statements. These transactions also are reported as sales with
related parties (see Note 10 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”) 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 2018 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
Please
see Note 1 –Organization and Summary of Significant
Accounting Policies appearing in the consolidated financial
statements included in this report for information on accounting
pronouncements.
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.
I
TEM
3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable for a smaller reporting company.
Evaluation of Disclosure
Controls and Procedures
. We
maintain “disclosure controls and procedures” as such
term is defined in Rule 13a-15(e) under 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 Chief Executive Officer 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 Chief
Executive Officer and our Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting.
During the three months ended March
31, 2019, the Company made the following remediation changes
related to internal controls over financial reporting that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. These changes
are:
●
In
response to the identified material weakness associated with our
Form 10Q/A for the period ended December 31, 2018, our management,
with the oversight of the Audit Committee of the Board of
Directors, formalized a review process which includes the CFO and
VP of Finance, whereby each new accounting standard will be
assessed and documented as to it’s impact on the
Company’s financial statements and the effective date of
those standards that require adoption. We believe this new control
will help ensure timely adoption of applicable new accounting
standards.