CBDMD, INC.
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For
the quarterly period ended June 30, 2019
or
☐
TRANSITION
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the transition period from ___________ to ___________
Commission file number
001-38299
cbdMD, INC.
(Exact Name of Registrant as Specified in its Charter)
|
North Carolina
|
|
47-3414576
|
|
State or Other Jurisdiction of Incorporation or
Organization
|
|
I.R.S. Employer Identification No.
|
|
8845 Red Oak Blvd, Charlotte, NC
|
|
28217
|
|
Address of Principal Executive Offices
|
|
Zip Code
|
704-445-3060
Registrant’s Telephone Number, Including Area
Code
4521 Sharon Rd, suite 450 Charlotte, NC 8211
Former Name, Former Address and Former Fiscal Year, if Changed
Since Last Report
Securities registered pursuant to Section 12(b) of the
Act:
|
Title of each class
|
Trading Symbol(s)
|
Name of each exchange on which registered
|
|
common
|
YCBD
|
NYSE American
|
Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
☑
No ☐
Indicate by check mark whether the registrant has
submitted electronically every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit such
files). Yes
☑
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer
☑
|
Smaller reporting company
☑
|
|
|
Emerging growth company
☑
|
If
an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No
☑
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
27,720,356
shares of common stock are issued and outstanding as of August 14,
2019
TABLE OF CONTENTS
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Page
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No
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PART I-FINANCIAL INFORMATION
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4
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37
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45
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45
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PART II - OTHER INFORMATION
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46
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46
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46
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46
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46
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46
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47
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OTHER PERTINENT INFORMATION
Unless
the context otherwise indicates, when used in this report, the
terms cbdMD,” “we,” “us, “our”
and similar terms refer to cbdMD, Inc., a North Carolina
corporation formerly known as Level Brands, Inc, and our
subsidiaries CBD Industries, LLC, formally known as cbdMD LLC, a
North Carolina limited liability company which we refer to as
“CBDI”, Beauty and Pinups, LLC, a North Carolina
limited liability company which we refer to as “BPU”, I
| M 1, LLC, a California limited liability company, which we refer
to as “I’M1”, Encore Endeavor 1 LLC, a California
limited liability company which we refer to as “EE1”
and Level H&W, LLC, a North Carolina limited liability company,
which we refer to as “Level H&W”. In addition,
“fiscal 2018" refers to the year ended September 30, 2018,
"fiscal 2019" refers to the year ending September 30, 2019, "third
quarter of 2018" refers to the three months ended June 30, 2018 and
"third quarter of 2019" refers to the three months ended June 30,
2019.
The
information contained on our websites at
www.cbdmd.com
,
www.beautyandpinups.com
,
www.im1men.com
, and www.encoreendeavor1.com
are not part of this report
.
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These forward-looking
statements that relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance or achievements to differ materially from any
future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Words
such as, but not limited to, “believe,”
“expect,” “anticipate,”
“estimate,” “intend,” “plan,”
“targets,” “likely,” “aim,”
“will,” “would,” “could,” and
similar expressions or phrases identify forward-looking statements.
We have based these forward-looking statements largely on our
current expectations and future events and financial trends that we
believe may affect our financial condition, results of operation,
business strategy and financial needs. Forward-looking statements
include, but are not limited to, statements about:
●
our ability to successfully integrate the
operations of Cure Based Development following the
Mergers;
●
our
limited operating history;
●
the
limited operating histories of our subsidiaries;
●
our
history of losses;
●
the evolving and highly competitive market in
which cbdMD operates;
●
the evolution of the laws and regulations
impacting cbdMD
●
the terms of various agreements with
kathy
ireland®
Worldwide and
possible impacts on our management's abilities to make certain
decisions regarding the operations of our
Company;
●
our
dependence on consumer spending patterns;
●
our
history on reliance on sales from a limited number of customers,
including related parties;
●
risks
associated with our failure to effectively promote our
brands;
●
our
ability to identify and successfully acquire additional brands and
trademarks;
●
the
operating agreements of our I'M1 and EE1 subsidiaries;
●
the
accounting treatment of securities we accept as partial
compensation for services;
●
our
ability to liquidate securities we accept as partial compensation
for services;
●
the
possible need to raise additional capital in the
future;
●
terms
of the contracts with third parties in each of our
divisions;
●
possible conflicts of interest with
kathy
ireland®
Worldwide;
●
possible
litigation involving our licensed or manufactured
products;
●
our
ability to effectively compete and our dependence on market
acceptance of our brands;
●
the
lack of long-term contracts for the purchase of products from our
products division;
●
our
ability to protect our intellectual property;
●
additional
operational risks associated with our products
division;
●
risks
associated with volatility in the market price of our common
stock;
●
risks
associated with any future failure to satisfy the NYSE American LLC
continued listing standards;
●
dilution
to our shareholders from the issuance of additional shares of
common stock by us and/or the exercise of outstanding options and
warrants;
●
risks
associated with our status as an emerging growth
company;
●
risks
associated with control by our executive officers, directors and
affiliates;
●
risks
associated with our failure to maintain an effective system of
internal control over financial reporting;
●
risks
associated with unfavorable research reports; and
●
risks
associated with our articles of incorporation, bylaws and North
Carolina law.
Most
of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should
carefully review this report in its entirety, including the risks
described in Part II, Item 1A. Risk Factors appearing later in this
report, Part I, Item 1A. - Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2018 as filed
with the Securities and Exchange Commission (the “SEC”)
on December 12, 2018 (the "2018 10-K") and our Quarterly Report on
Form 10-Q for the period ended March 31, 2019 as filed with the SEC
on May 15, 2019 as well as our other filings with the SEC. Except
for our ongoing obligations to disclose material information under
the Federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated
events.
3
PART 1 - FINANCIAL INFORMATION
I
TEM 1. FINANCIAL STATEMENTS.
c
bdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND SEPTEMBER 30, 2018
|
|
(Unaudited)
|
|
|
|
June 30,
|
September 30,
|
|
|
2019
|
2018
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
11,633,213
|
$
4,282,553
|
|
Accounts
receivable
|
562,800
|
307,874
|
|
Accounts
receivable - related party
|
1,103,628
|
1,537,863
|
|
Accounts
receivable other
|
276,795
|
1,743,874
|
|
Deposits
|
6,850
|
-
|
|
Merchant
reserve
|
626,160
|
-
|
|
Marketable
securities
|
880,132
|
1,050,961
|
|
Investment
other securities
|
1,159,112
|
1,159,112
|
|
Note
receivable
|
486,000
|
459,000
|
|
Note
receivable - related party
|
-
|
156,147
|
|
Inventory
|
3,116,458
|
123,223
|
|
Inventory
prepaid
|
643,649
|
-
|
|
Deferred
issuance costs
|
-
|
28,049
|
|
Prepaid
consulting agreement
|
-
|
200,000
|
|
Prepaid
rent
|
60,000
|
180,000
|
|
Prepaid
services with stock
|
198,000
|
-
|
|
Prepaid
equipment - deposit
|
889,673
|
-
|
|
Prepaid
expenses and other current assets
|
543,607
|
561,491
|
|
Total current assets
|
22,186,077
|
11,790,147
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
1,016,757
|
53,480
|
|
Goodwill
|
55,133,697
|
-
|
|
Intangible
assets, net
|
22,572,097
|
3,173,985
|
|
Total other assets
|
78,722,551
|
3,227,465
|
|
|
|
|
|
Total assets
|
$
100,908,628
|
$
15,017,612
|
See
Notes to Condensed Consolidated Financial Statements
4
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND SEPTEMBER 30, 2018
(continued)
|
|
(Unaudited)
|
|
|
|
June
30,
|
September
30,
|
|
|
2019
|
2018
|
|
Liabilities and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
1,886,395
|
$
473,717
|
|
Accounts
payable - related party
|
-
|
7,860
|
|
Deferred
revenue
|
4,585
|
161,458
|
|
Customer
deposit - related party
|
34,404
|
-
|
|
Accrued
payroll
|
326,537
|
-
|
|
Accrued
expenses
|
77,985
|
6,920
|
|
Accrued
expenses - related party
|
-
|
320,000
|
|
Total current liabilities
|
2,329,906
|
969,955
|
|
|
|
|
|
Long
term liabilities
|
|
|
|
Other
long term liabilities
|
-
|
7,502
|
|
Contingent
liability
|
70,600,000
|
-
|
|
Deferred
tax liability
|
2,833,000
|
21,000
|
|
Total
long term liabilities
|
73,433,000
|
28,502
|
|
|
|
|
|
Total liabilities
|
75,762,906
|
998,457
|
|
|
|
|
|
cbdMD,
Inc. shareholders' equity (deficit):
|
|
|
|
Preferred
stock, authorized 50,000,000 shares, $0.001 par value, no shares
issued and outstanding
|
-
|
-
|
|
Common
stock, authorized 150,000,000 shares, $0.001 par
value,
|
|
|
|
27,720,356
and 8,123,928 shares issued and outstanding,
respectively
|
27,720
|
8,124
|
|
Additional
paid in capital
|
96,130,158
|
21,781,095
|
|
Accumulated
other comprehensive income (loss)
|
-
|
(2,512,539
)
|
|
Accumulated
deficit
|
(70,782,736
)
|
(6,669,497
)
|
|
Total cbdMD, Inc. shareholders' equity
|
25,375,142
|
12,607,183
|
|
Non-controlling
interest
|
(229,420
)
|
1,411,972
|
|
Total shareholders' equity
|
25,145,722
|
14,019,155
|
|
|
|
|
|
Total liabilities and shareholders' equity
|
$
100,908,628
|
$
15,017,612
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
5
c
bdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2019 AND
2018
(Unaudited)
|
|
Three months
|
Three months
|
Nine months
|
Nine months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
June 30,
2019
|
June 30,
2018
|
June 30,
2019
|
June 30,
2018
|
|
|
|
|
|
|
|
Sales
|
$
9,784,199
|
$
1,851,116
|
$
19,042,098
|
$
5,440,653
|
|
Sales
related party
|
-
|
1,350,000
|
-
|
1,550,000
|
|
Total
Gross Sales
|
9,784,199
|
3,201,116
|
19,042,098
|
6,990,653
|
|
Allowances
|
(1,739,863
)
|
(2,686
)
|
(4,075,381
)
|
(23,558
)
|
|
Net
sales
|
8,044,336
|
1,848,430
|
14,966,717
|
5,417,095
|
|
Net sales related party
|
-
|
1,350,000
|
-
|
1,550,000
|
|
Total Net Sales
|
8,044,336
|
3,198,430
|
14,966,717
|
6,967,095
|
|
Cost of sales
|
2,959,198
|
1,106,706
|
5,584,868
|
1,858,651
|
|
|
|
|
|
|
|
Gross
Profit
|
5,085,138
|
2,091,724
|
9,381,849
|
5,108,444
|
|
|
|
|
|
|
|
Operating
expenses excluding impairment losses
|
11,230,914
|
1,464,239
|
18,680,857
|
4,089,006
|
|
Impairment
of intangible assets
|
2,114,334
|
-
|
2,114,334
|
-
|
|
Operating
expenses
|
13,345,248
|
1,464,239
|
20,795,190
|
4,089,006
|
|
Income
(
Loss) from
operations
|
(8,260,110
)
|
627,485
|
(11,413,341
)
|
1,019,438
|
|
Realized
and Unrealized gain (loss) on marketable
securities
|
(497,451
)
|
-
|
(1,705,069
)
|
-
|
|
(Increase)
of contingent liability
|
(21,547,606
)
|
-
|
(52,461,680
)
|
-
|
|
Gain
(loss) on disposal of property and equipment
|
-
|
-
|
(34,333
)
|
(69,311
)
|
|
Interest income (expense)
|
14,211
|
(232
)
|
76,330
|
(737
)
|
|
Income (loss) before provision for income taxes
|
(30,290,956
)
|
627,253
|
(65,538,093
)
|
949,390
|
|
|
|
|
|
|
|
Benefit
(Provision) for income
taxes
|
1,088,000
|
(62,000
)
|
2,296,000
|
(6,000
)
|
|
Net Income (Loss)
|
(29,202,956
)
|
565,253
|
(63,242,093
)
|
943,390
|
|
Net Gain (Loss) attributable to
noncontrolling
interest
|
(1,503,707
)
|
359,179
|
(1,641,391
)
|
465,848
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to cbdMD, Inc. common
shareholders
|
$
(27,699,249
)
|
$
206,074
|
$
(61,600,702
)
|
$
477,542
|
|
|
|
|
|
|
|
Net Income (Loss) per share:
|
|
|
|
|
|
Basic
|
$
(1.19
)
|
$
0.03
|
$
(4.22
)
|
$
0.06
|
|
Diluted
|
$
-
|
$
0.03
|
$
-
|
$
0.06
|
|
|
|
|
|
|
|
Weighted
average number of shares Basic:
|
23,193,793
|
8,075,341
|
14,585,619
|
7,614,621
|
|
Weighted
average number of shares Diluted:
|
|
8,092,931
|
|
7,637,012
|
See
Notes to Condensed Consolidated Financial Statements
6
c
bdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2019 AND
2018
(Unaudited)
|
|
Three months
|
Three months
|
Nine months
|
Nine months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
June 30,
2019
|
June 30,
2018
|
June 30,
2019
|
June 30,
2018
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
(29,202,956
)
|
$
565,253
|
$
(63,242,093
)
|
$
943,390
|
|
Other
Comprehensive Income:
|
|
|
|
|
|
Net
Unrealized Gain (Loss) on Marketable Securities, net of
tax
|
-
|
(1,326,727
)
|
-
|
(1,923,304
)
|
|
Comprehensive Income (Loss)
|
(29,202,956
)
|
(761,474
)
|
(63,242,093
)
|
(979,914
)
|
|
|
|
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
(1,503,707
)
|
359,179
|
(1,641,391
)
|
465,848
|
|
Comprehensive Income (Loss) attributable to cbdMD, Inc. common
shareholders
|
$
(27,699,249
)
|
$
(1,120,653
)
|
$
(61,600,702
)
|
$
(1,445,762
)
|
See
Notes to Condensed Consolidated Financial Statements
7
c
bdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(unaudited)
|
|
Nine
Months
Ended
June
30,
|
Nine
Months
Ended
June
30,
|
|
|
2019
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$
(63,242,093
)
|
$
943,390
|
|
Adjustments to reconcile net loss to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
2,022,812
|
386,719
|
|
Restricted
stock expense
|
92,000
|
39,100
|
|
Issuance
of stock / warrants for service
|
289,750
|
478,002
|
|
Intangible
impairment
|
2,114,334
|
-
|
|
Inventory
impairment
|
-
|
102,124
|
|
Depreciation
and amortization
|
272,121
|
169,788
|
|
Gain
on settlement of Note
|
(20,000
)
|
-
|
|
Increase/(Decrease)
in contingent liability
|
52,461,680
|
-
|
|
Realized
and unrealized loss of marketable securities
|
1,705,069
|
-
|
|
Loss
on sale of property and equipment
|
-
|
69,311
|
|
Non-cash
consideration received for services
|
(470,000
)
|
(3,404,502
)
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
399,074
|
(45,502
)
|
|
Accounts
receivable – related party
|
204,902
|
(637,675
)
|
|
Other
accounts receivable
|
(298,754
)
|
(1,204,003
)
|
|
Other
accounts receivable – related party
|
|
236,364
|
|
Note
receivable
|
(27,000
)
|
(450,000
)
|
|
Note
receivable – related party
|
156,147
|
114,802
|
|
Merchant
reserve
|
(199,907
)
|
-
|
|
Inventory
|
(2,581,958
)
|
10,340
|
|
Prepaid
expenses and other current assets
|
(717,894
)
|
(980,952
)
|
|
Marketable
securities
|
701,593
|
-
|
|
Accounts
payable and accrued expenses
|
1,073,211
|
(324,785
)
|
|
Accounts
payable and accrued expenses – related party
|
(313,591
)
|
(470,905
)
|
|
|
|
|
|
Deferred
revenue / customer deposits
|
(380,804
)
|
121,916
|
|
Deferred
tax liability
|
(2,296,000
)
|
6,000
|
|
Cash
used by operating activities
|
(9,055,308
)
|
(4,840,368
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Net
cash used for merger
|
(1,167,295
)
|
-
|
|
Purchase
of investment other securities
|
-
|
(300,000
)
|
|
Purchase
of intangible assets
|
(79,999
)
|
(360,000
)
|
|
Purchase
of property and equipment
|
(359,421
)
|
(2,465
)
|
|
Cash
used by investing activities
|
(1,606,715
)
|
(662,465
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
19,009,897
|
10,927,535
|
|
Note
Payable-related party
|
(764,300
)
|
-
|
|
Deferred
issuance costs
|
(232,914
)
|
(285,086
)
|
|
Cash
provided by financing activities
|
18,012,683
|
10,642,449
|
|
Net
increase (decrease) in cash
|
7,350,660
|
5,139,616
|
|
Cash
and cash equivalents, beginning of period
|
4,282,553
|
284,246
|
|
Cash and cash equivalents, end of period
|
$
11,633,213
|
$
5,423,862
|
See
Notes to Condensed Consolidated Financial Statements
8
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
|
|
Nine Months
Ended
June 30,
|
Nine Months
Ended
June 30,
|
|
|
2019
|
2018
|
|
|
|
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
36,418
|
$
505
|
|
|
|
|
|
Non-cash
financial activities:
|
|
|
|
Warrants
issued to secondary selling agent
|
$
309,592
|
$
171,600
|
|
Equity
investment exchange to be issued in the future
|
$
-
|
$
160,000
|
|
Stock
received for prior period services, adjusted for other accounts
receivable write down prior to receipt
|
$
1,352,000
|
$
-
|
|
Adoption
of ASU 2016-01
|
$
2,512,539
|
$
-
|
See
Notes to Condensed Consolidated Financial Statements
9
c
bdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2019
|
|
Common Stock
|
Additional Paid in
|
Other Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Interest
|
Total
|
|
Balance, September 30, 2018
|
8,123,928
|
8,124
|
21,781,095
|
(2,512,539
)
|
(6,669,495
)
|
1,411,972
|
14,019,155
|
|
Issuance of
common stock
|
1,971,428
|
1,971
|
6,355,027
|
-
|
-
|
-
|
6,356,998
|
|
Issuance of
options for share based compensation
|
-
|
-
|
143,673
|
-
|
-
|
-
|
143,673
|
|
Issuance of
stock costs
|
-
|
-
|
(205,569
)
|
-
|
-
|
-
|
(205,569
)
|
|
Adoption of
ASU 2016-01
|
-
|
-
|
-
|
2,512,539
|
(2,512,539
)
|
-
|
-
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(2,109,715
)
|
(79,149
)
|
(2,188,864
)
|
|
Balance, December 31, 2018
|
10,095,356
|
10,095
|
28,074,224
|
-
|
(11,291,749
)
|
1,332,823
|
18,125,391
|
|
Issuance of
options for share based compensation
|
-
|
-
|
19,475
|
-
|
-
|
-
|
19,475
|
|
Issuance of
stock and warrants for services
|
75,000
|
75
|
289,675
|
-
|
-
|
-
|
289,750
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(31,791,738
)
|
(58,536
)
|
(31,850,274
)
|
|
Balance, March 31, 2019
|
10,170,356
|
10,170
|
28,383,374
|
-
|
(43,083,487
)
|
1,274,287
|
(13,415,658
)
|
|
Issuance of
common stock for merger
|
15,250,000
|
15,250
|
53,199,913
|
-
|
-
|
-
|
53,215,163
|
|
Issuance of
common stock
|
2,300,000
|
2,300
|
12,650,600
|
-
|
-
|
-
|
12,652,900
|
|
Issuance of
options for share based compensation
|
-
|
-
|
1,859,664
|
-
|
-
|
-
|
1,859,664
|
|
Issuance of
stock costs
|
-
|
-
|
(55,393
)
|
-
|
-
|
-
|
(55,393
)
|
|
Issuance of
stock and warrants for services
|
|
|
92,000
|
-
|
-
|
-
|
92,000
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(27,699,249
)
|
(1,503,707
)
|
(29,202,956
)
|
|
Balance, June 30, 2019
|
27,720,356
|
27,720
|
96,130,158
|
-
|
(70,782,736
)
|
(229,420
)
|
25,145,722
|
See
Notes to Condensed Consolidated Financial Statements
10
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018
|
|
Common Stock
|
Additional Paid in
|
Other Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Interest
|
Total
|
|
Balance, September 30, 2017
|
5,792,261
|
5,792
|
10,463,480
|
-
|
(6,257,421
)
|
937,063
|
5,148,914
|
|
Issuance of
common stock
|
2,000,000
|
2,000
|
9,971,114
|
-
|
-
|
-
|
9,973,114
|
|
Issuance of
options for share based compensation
|
-
|
-
|
17,114
|
-
|
-
|
-
|
17,114
|
|
Issuance of
stock for deferred IPO costs
|
-
|
-
|
171,600
|
-
|
-
|
-
|
171,600
|
|
Issuance of
stock and warrants for services
|
6,667
|
7
|
36,995
|
-
|
-
|
-
|
37,002
|
|
Issuance of
restricted stock for share based compensation
|
-
|
-
|
39,100
|
-
|
-
|
-
|
39,100
|
|
Other
Comprehensive income (loss)
|
-
|
-
|
-
|
33,500
|
-
|
-
|
33,500
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,132,928
)
|
(131,855
)
|
(1,264,783
)
|
|
Balance, December 31, 2017
|
7,798,928
|
7,799
|
20,699,403
|
33,500
|
(7,390,349
)
|
805,208
|
14,155,561
|
|
Issuance of
common stock
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
|
Issuance of
options for share based compensation
|
-
|
-
|
13,952
|
-
|
-
|
-
|
13,952
|
|
Issuance of
stock and warrants for services
|
235,000
|
235
|
19,765
|
-
|
-
|
-
|
20,000
|
|
Other
Comprehensive income (loss)
|
-
|
-
|
-
|
(630,077
)
|
-
|
-
|
(630,077
)
|
|
Net
income
|
-
|
-
|
-
|
-
|
1,404,397
|
238,523
|
1,642,920
|
|
Balance, March 31, 2018
|
8,033,928
|
8,034
|
20,733,120
|
(596,577
)
|
(5,985,952
)
|
1,043,731
|
15,202,356
|
|
Issuance of
options for share based compensation
|
-
|
-
|
355,653
|
-
|
-
|
-
|
355,653
|
|
Issuance of
stock and warrants for services
|
85,000
|
85
|
420,915
|
-
|
-
|
-
|
421,000
|
|
Other
Comprehensive income (loss)
|
-
|
-
|
-
|
(1,326,727
)
|
-
|
-
|
(1,326,727
)
|
|
Net
income
|
-
|
-
|
-
|
-
|
206,073
|
359,180
|
565,253
|
|
Balance, June 30, 2018
|
8,118,928
|
8,119
|
21,509,688
|
(1,923,304
)
|
(5,779,879
)
|
1,402,911
|
15,217,535
|
See
Notes to Condensed Consolidated Financial Statements
11
c
bdMD , INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 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
(“2018 10-K”). In the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of consolidated financial position and the
consolidated results of operations for the interim periods
presented have been reflected herein. Notes to the financial
statements which would substantially duplicate the disclosure
contained in the audited consolidated financial statements for
fiscal year 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.
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 May 15, 2019, the Company
completed a secondary public offering of 2,300,000 shares of its
common stock for aggregate gross proceeds of $13.8 million. The
Company received approximately $12.5 million in net proceeds after
deducting underwriting discounts and commissions and other
estimated offering expenses payable by us.
12
On
December 20, 2018 the Company, and its newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, completed a two-step merger
(the “Mergers”) with Cure Based Development, LLC, a
Nevada limited liability company (“Cure Based
Development”). Upon completion of the Mergers, cbdMD LLC
survived and operates the prior business of Cure Based Development.
On April 10, 2019, cbdMD LLC was renamed to CBD Industries LLC
(“CBDI”). As consideration for the Mergers, the Company
had a contractual obligation, after approval by our shareholders,
to issue 15,250,000 shares of our common stock to the members of
Cure Based Development, of which 8,750,000 of the shares will vest
over a five year period and are subject to a voting proxy
agreement, as well as to issue another 15,250,000 shares of our
common stock in the future upon earnout goals being within the next
5 years. The Company’s shareholders approved the issuance of
the 15,250,000 shares of common stock and they were issued to
members of Cure Based Development on April 19, 2019. CBDI 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 June 30, 2019, we have
an allowance for doubtful accounts of $14,689, 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 a marketable security
(when the customer is a publicly traded entity) or as an investment
other security (when the customer is a private
entity).
13
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 processors
requires that the Company pay a fee between 5.95% - 6.95% of the
transaction amounts processed. Pursuant to this agreement, there is
a waiting period between 2 - 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 June 30, 2019, the receivable
from payment processors included approximately $205,761 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 $831,921.
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, which is without a readily determinable fair value,
the Company may elect to estimate its fair value at cost less
impairment plus or minus changes resulting from observable price
changes.
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.
14
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
carrying value is assigned at fair value. Any changes in fair
value for marketable securities during a given period will be
recorded as an unrealized gain or loss in the consolidated
statement of operations. For investment other securities without a
readily determinable fair value, the Company may elect to estimate
its fair value at cost less impairment plus or minus changes
resulting from observable price changes.
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 Cure Based Development includes a
fixed number of future shares to be issued as well as a variable
number of future shares to be issued based upon the
post-acquisition entity reaching certain specified future revenue
targets, as further described in Note 8. The Company made a
determination of the fair value of the contingent liabilities as
part of the valuation of the assets acquired and liabilities
assumed in the business combination.
15
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 ended June 30, 2019, the contingent
liabilities associated with the business combination were increased
by $21,547,606 to reflect their reassessed fair values as of June
30, 2019. This increase is reflective of a change in value from
march 31, 2019 of the fixed shares issued on April 19, 2019, and
the variable number of shares on June 30, 2019. Additionally, as
the fixed shares were issued on April 19, 2019, the value of the
shares in the amount of $53,215,163 was reclassified from the
contingent liability to additional paid in capital on the balance
sheet. For the three months ended June 30, 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 8 would be met. The
primary catalyst for the $21,547,606 increase in contingent
liabilities is the change in the Company’s share price
between March 31, 2019 and June 30, 2019. These increases or
reductions to the contingent liabilities are reflected within Other
Expenses on the consolidated statements of operations.
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 June 30,
2019:
|
|
Remainder of fiscal 2019
|
2020 and thereafter
|
|
|
|
|
|
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.
16
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, 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 14 – 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.
17
The below table summarize the net change in contract assets and
contract liabilities from October 1, 2018 to June 30,
2019:
|
|
Entertainment
|
Products
|
Licensing
|
Total
|
|
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
|
|
Billed
during three months ended June 30, 2019
|
-
|
-
|
-
|
-
|
|
Earned
during three months ended June 30, 2019
|
(18,750
)
|
(55,596
)
|
(1,667
)
|
(76,013
)
|
|
Balance
at June 30, 2019
|
$
6,250
|
$
34,404
|
$
6,666
|
$
47,320
|
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 division, 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 $2,604,000 and $443,000 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended June 30, 2019 and 2018, respectively.
The Company incurred approximately $4,411,000 and $1,036,000 in
advertising and related marketing and promotional costs included in
operating expenses during the nine months ended June 30, 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.
18
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 June 30, 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 $10,007,079 uninsured balance at June 30, 2019
and a $0 uninsured balance at September 30, 2018. Funds which are
not subject to coverage or loss under FDIC were $7,577 and
$4,003,003 at June 30, 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 nine months ended June 30, 2019,
respectively. The Company had sales to three customers that
collectively represented approximately 89% and 80% of total net
sales for the three and nine months ended June 30, 2018,
respectively. The aggregate accounts receivable of such customers
represented approximately 83% of the Company’s total accounts
receivable and a long term note receivable at June 30,
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 policy 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.
19
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 nine months ended June 30, 2019, 1,623,255 shares
that will be potentially issued in the future 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.
20
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 8 for more
information).
The initial 15,250,000 shares were approved by our shareholders and
issued on 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 that was improperly excluded from the
identified assets acquired in the Mergers. The fair value of this
equipment was determined to be $114,275. The purchase price
allocation was adjusted by increasing Property and equipment, net
and reducing Goodwill by this amount.
During the three months ended June 30, 2019, the Company identified
interest overly accrued valued at $10,572 that was in the initial
purchase price allocation. The purchase price allocation was
adjusted by decreasing goodwill and accrued expenses 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
|
55,133,697
|
|
Total assets acquired
|
81,208,843
|
|
|
|
|
Liabilities assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
460,979
|
|
Deferred
tax liability
|
5,108,000
|
|
Total Liabilities assumed
|
6,855,360
|
|
|
|
|
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 8 regarding
contingent liability.
21
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.
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 a 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, cbdMD, 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 June 30, 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 June 30,
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 the Company. 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 the Company. 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 impairment at June 30,
2019.
22
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 June 30, 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 an Agreement 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. At June 30, 2019,
the Company has 1,042,193 shares valued at
$880,132.
On June 26, 2018 the Company 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 $(106,667)
and ($293,333) for the three and nine month periods ended June 30,
2019, respectively based on a trading price of $0.02 at June 30,
2019. At June 30, 2019, the carrying value is
$106,667.
The table below summarizes the assets valued at fair value as of
June 30, 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
June 30,
2019
|
|
|
|
|
|
|
|
Marketable
securities
|
$
880,132
|
-
|
$
-
|
$
880,132
|
|
Investment
other securities
|
-
|
-
|
$
1,159,112
|
$
1,159,112
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
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
|
|
Sale
of equities
|
$
(132,924
)
|
$
-
|
$
-
|
$
(132,924
)
|
|
Change
in value of equities
|
$
(360,077
)
|
$
-
|
$
-
|
$
(360,077
)
|
|
Balance
at June 30, 2019
|
$
880,132
|
$
-
|
$
1,159,112
|
$
2,039,244
|
23
NOTE 4 – INVENTORY
Inventory at June 30, 2019 and September 30, 2018 consists of the
following:
|
|
June 30,
|
September 30,
|
|
|
2019
|
2018
|
|
Finished
goods
|
$
1,665,037
|
$
18,531
|
|
Inventory
components
|
1,451,420
|
104,692
|
|
Inventory
prepaid
|
643,649
|
-
|
|
Total
|
$
3,760,107
|
$
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 June 30, 2019 and
September 30, 2018 consist of the following:
|
|
June 30,
|
September 30,
|
|
|
2019
|
2018
|
|
Computers,
furniture and equipment
|
$
39,927
|
$
59,770
|
|
Show
booth and equipment
|
-
|
49,123
|
|
Manufacturing
equipment
|
822,691
|
-
|
|
Leasehold
improvements
|
269,591
|
-
|
|
Automobiles
|
24,892
|
-
|
|
Manufactures’
molds and plates
|
-
|
34,200
|
|
|
1,157,101
|
143,093
|
|
Less
accumulated depreciation
|
(140,344
)
|
(89,613
)
|
|
Net
property and equipment
|
$
1,016,757
|
$
53,480
|
Depreciation expense related to property and equipment was $57,874
and $8,443 for the three months ended June 30, 2019 and 2018,
respectively. Depreciation expense related to property and
equipment was $119,566 and $30,757 for the nine months ended June
30, 2019 and 2018, respectively.
NOTE 6 – INTANGIBLE ASSETS
With the Mergers of Cure Based Development, the Company has made a
strategic shift toward the CBD business and all entities and their
associated intangibles were being assessed during the three months
ended June 30, 2019 with that focus and their ability to support
that business line.
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. At June 30, 2019, the Company recorded an impairment charge
for the full carrying value of $234,422 (see below).
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.
The rights
associated with this licensing agreement have been identified as
indefinite-lived intangible assets. At June 30, 2019, the Company
recorded an impairment charge for the full carrying value of
$971,667 (see below).
24
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. The rights associated with these
agreements have been identified as indefinite-lived intangible
assets. At June 30, 2019, the Company recorded an impairment charge
for the full carrying value of $471,667 (see below).
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 $0 and $11,073 for the
three months ended June 30, 2019 and 2018, respectively, and have
amortized $26,205 and $33,219 for the nine months ended June 30,
2019 and 2018, respectively. As of June 30, 2019, the Company
recorded an impairment charge for the full carrying value of
$296,460 (see below).
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 $0 and $6,237 for the three months ended June 30, 2019
and 2018, respectively, and have amortized $13,055 and $18,712 for
the nine months ended June 30, 2019 and 2018, respectively. As of
June 30, 2019, the Company recorded an impairment charge for the
full carrying value of $140,118 (see below).
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. 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 $29,032 and $27,097 for the three months ended
June 30, 2019 and 2018, respectively, and have amortized $87,096
and $57,096 for the nine months ended June 30, 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).
25
Intangible assets as of June 30, 2019 and September 30, 2018
consisted of the following:
|
|
June 30,
|
September 30,
|
|
|
2019
|
2018
|
|
Trademark
and other intellectual property related to I’M1
|
$
-
|
$
971,667
|
|
Trademark
and other intellectual property related to EE1
|
-
|
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
|
987,097
|
1,074,194
|
|
Wholesale
license agreement with Chef Andre Carthen, net
|
-
|
262,077
|
|
Wholesale
license agreement with Nicholas Walker, net
|
-
|
147,620
|
|
Trademark
and other intellectual property related to BPU
|
-
|
246,760
|
|
Total
|
$
22,572,097
|
$
3,173,985
|
The Company has one definite lived intangible asset, which has a
ten year life.
Future amortization schedule:
|
Intangible
|
Total unamortized cost
|
2019
|
2020
|
2021
|
2022
|
2023
|
thereafter
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
987,097
|
$
29,033
|
$
116,129
|
$
116,129
|
$
116,129
|
$
116,129
|
$
493,548
|
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
performed a qualitative analysis during the three months ended June
30, 2019. As the business focus of the Company has shifted to the
CBD business, all other subsidiaries were being assessed to
determine how they can support the CBD business. Therefore, the
brand management and men’s lifestyle businesses will not
continue to function as they have historically and the intangible
assets (trademarks, logos, etc.) will not be used to promote and
build the business as they have in the past, thus we have
determined that a full impairment was required. As a result, the
Company recorded an impairment charge during the three months ended
June 30, 2019 for the indefinite-lived intangible assets of
$471,667 under EE1 and an impairment charge of $971,667 under
I’M1, respectively.
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 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.
26
As previously indicated, the Company has made a strategic shift
toward the CBD business and all entities were being assessed during
the three months ended June 30, 2019 with that focus and their
ability to support that business line. As such the definite lived
intangible assets for BPU as well as the two wholesale license
agreements with Nicolas Walker and Andre Carthen do not fit into
the strategic direction and the value associated with future cash
flows as it relates to these assets may not be positive. As a
result, the Company recorded an impairment charge during the three
months ended June 30, 2019 for the definite lived intangible assets
of $234,422 for the BPU trademark/logo, and $296,460 and $140,118
for the two wholesale license agreements.
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. .
NOTE 7 – PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro-forma data summarizes the results of
operations for the three and nine months ended June 30, 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
June 30,
2019
|
Three Months Ended
June 30,
2018
|
|
|
|
|
|
Net
sales
|
$
N/A*
|
$
4,817,417
|
|
Operating
income (loss)
|
$
N/A*
|
$
1,011,470
|
|
Net
income (loss)
|
$
N/A*
|
$
949,470
|
|
Net
income per share – average weighted shares
|
$
N/A*
|
$
0.04
|
|
Net
income per share – fully diluted
|
$
N/A*
|
$
0.04
|
|
|
Nine Months Ended
June 30,
2019
|
Nine Months Ended
June 30,
2018
|
|
|
|
|
|
Net
sales
|
$
18,050,145
|
$
9,167,212
|
|
Operating
income (loss)
|
$
(12,614,392
)
|
$
1,172,901
|
|
Net
income (loss)
|
$
(64,501,470
)
|
$
1,166,901
|
|
Net
income (loss) per share – average weighted
shares
|
$
(2.78
)
|
$
0.05
|
|
Net
income per share – fully diluted
|
$
|
$
0.05
|
* All entities were consolidated effective December 21, 2018
therefore, the results of operations are included in these
condensed financial statements.
For the per share calculation prior to April 2019, it is being
assumed that the shares to be issued contractually under the Merger
Agreement, upon shareholder approval, were issued at the beginning
of each period. This would account for an additional 6,500,000
shares issued directly to the members of Cure Based Development and
another 8,750,000 shares issued which would have a voting proxy and
leak out on voting rights over a 5 year period.
NOTE 8 – CONTINGENT LIABILITY
As
consideration for the Mergers, described in Note 2, the Company 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”).
27
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.
The initial 15,250,000 shares and Earnout Shares were approved by
our shareholders and the initial shares were issued on April 19,
2019.
The 15,250,000 Earnout Shares which would be issued in the future,
upon the satisfaction of net revenue criteria have been valued
using a 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 was $102,267,557 at March 31,
2019 and was comprised of $50,842,557 for the initial 15,250,000
shares and $51,425,000 for the Earnout Shares. The initial shares
were issued upon shareholder approval on April 19, 2019 and,
therefore, that component of the contingent liability was revalued
as of that date. The value of the initial shares as of April 19,
2019 was $53,215,163 and the increase of $2,372,606 is recorded in
the Statement of Operations for the three months ended June 30,
2019. Additionally, as the 15,250,000 initial shares were issued on
April 19, 2019, the value of the shares in the amount of
$53,215,163 was reclassified from the contingent liability to
additional paid in capital on the balance sheet. The Earnout Shares
were valued at $70,600,000 on June 30, 2019 as compared to
$51,425,000 at March 31, 2019. The increase of $19,175,000 is
recorded in the Statement of Operations for the three months ended
June 30, 2019. 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 Earnout Shares within
the contingent liability was the increase of the Company’s
stock price, which was $5.90 at June 30, 2019 as compared to $4.42
on March 31, 2019.
NOTE 9 – 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.
28
On August 1, 2017, the Company entered into an additional advisory
agreement with Kure Corp., then a related party, 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 Cure Based Development. This
amount is recorded as customer deposits - related party on the
accompanying balance sheet.
29
Cure
Based Development entered a lease for office space, which also
provides administrative and IT services, from an affiliate of the
CEO of Cure Based Development. 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 Mergers. 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 June 30, 2019 and 2018 we
incurred related party cost of sales of approximately $0 and
$745,000, respectively. For the nine months ended June 30, 2019,
and 2018 we incurred related party cost of sales of approximately
$161,500 and $1,228,000, respectively
NOTE 10 – 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 27,720,356
and 8,123,928 shares of common stock issued and outstanding at June
30, 2019 and September 30, 2018, respectively.
Common stock transactions:
In the three and nine months ended June 30, 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 April 2019, we issued 15,250,000 shares or our common stock as
consideration for the Mergers with 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.
In May 2019, the Company completed a secondary public offering of
2,300,000 shares of its common stock for aggregate gross proceeds
of $13.8 million. The Company received approximately $12.5 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 60,000 shares of common stock with an exercise price
of $7.50. The warrants were valued at $223,500 and expire on May
15, 2024.
In
the three and nine months ended June 30, 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.
30
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.
In May 2018, we issued 60,000 shares of our common stock to an
investment banking firm for general financial advisory and
investment banking services. The shares were valued at $303,000,
based on the trading price upon issuance, and is being amortized
and expensed as professional services over the service period
ending April 2019.
In June 2018, we issued 25,000 shares of our common stock to a
broker dealer for business advisory services. The shares were
valued at $118,000, based on the trading price upon issuance, and
is being amortized and expensed as professional services over the
service period ending December 2019.
Stock option transactions:
In the three and nine months ended June 30, 2019:
In May 2019 we granted per the annual board compensation plan, an
aggregate of 120,000 common stock options to six independent
directors. The options vest immediately, have an exercise price of
$5.41 per share and a term of ten years. We have recorded an
expense for the options of $562,440 for the three and nine months
ending June 30, 2019.
In May 2019 we granted an aggregate of 610,000 common stock options
to twelve employees. The options vary in amounts issued and vesting
tiers, which include no vesting with an exercise price of $6.40,
vesting at May 15, 2020 with an exercise price of $7.00, vesting at
May 15, 2021 with an exercise price of $7.50, and vesting at May
15, 2022 with an exercise price of $7.50. The options have a term
of ten years. We have recorded an expense for the options of
$1,290,732 for the three and nine months ended June 30,
2019.
In the three and nine months ended June 30, 2018:
On May 14, 2018 we granted an aggregate of 50,000 common stock
options to an employee. The options vest 50% November 14, 2018 and
50% May 14, 2019. The options have an exercise price of $5.27 per
share and a term of seven years. We have recorded an expense for
the options of $38,950 for the three and nine months ended June 30,
2018.
On May 29, 2018 we granted an aggregate of 150,000 common stock
options to an employee. The options vest 50% immediately and 50%
January 1, 2019. The options have an exercise price of $4.78 per
share and a term of ten years. We have recorded an expense for the
options of $302,750 for the three and nine months ended June 30,
2018.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the nine
months ended June 30, 2019 and 2018:
|
|
2019
|
|
2018
|
|
Exercise price
|
$5.41 – $7.50
|
|
$4.78
- $5.27
|
|
Risk free interest rate
|
2.41%
- 2.47%
|
|
2.77%
- 2.96%
|
|
Volatility
|
89.60% - 90.68%
|
|
57.76%
- 64.74%
|
|
Expected term
|
10 years
|
|
7 -
10 years
|
|
Dividend yield
|
None
|
|
None
|
31
Warrant transactions:
In the three and nine months ended June 30, 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 May 2019 in relation to the secondary offering, we issued to the
selling agent warrants to purchase in aggregate 60,000 shares of
common stock with an exercise price of $7.50. The warrants expire
on May 15, 2024.
In the three and nine months ended June 30, 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 nine
months ended June 30, 2019 and 2018:
|
|
2019
|
|
2018
|
|
Exercise price
|
$4.375 - $7.50
|
|
$7.50
|
|
Risk free interest rate
|
2.15% - 2.90%
|
|
2.06%
|
|
Volatility
|
70.61% - 75.03%
|
|
43.12%
|
|
Expected term
|
5 years
|
|
5 years
|
|
Dividend yield
|
None
|
|
None
|
NOTE 11 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of 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 our fiscal year during the term of the Plan,
beginning with calendar year 2016, by an amount equal to one
percent (1%) of the total number of shares of common stock
outstanding on the last trading day in September of the immediately
preceding fiscal year, but in no event shall any such annual
increase exceed 100,000 shares of common stock. On April 19, 2019,
shareholders approved an amendment to the Plan and increased the
amount of shares available for issuance under the Plan to 2,000,000
and retained the annual evergreen increase provision of the
plan.
We account for stock-based compensation using the provisions of
FASB ASC 718. FASB ASC 718 codification requires
companies to recognize the fair value of stock-based compensation
expense in the financial statements based on the grant date fair
value of the options. We have only awarded stock options since
December 2015. All options are approved by the 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.
32
The following table summarizes stock option activity under the
Plan:
|
|
Number of shares
|
Weighted-average exercise price
|
Weighted-averager emaining contractual term (in years)
|
Aggregate intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2018
|
469,650
|
5.13
|
|
|
|
Granted
|
730,000
|
6.69
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at June 30, 2019
|
1,199,650
|
$
6.08
|
8.46
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2019
|
789,650
|
$
5.50
|
7.71
|
$
—
|
As of June 30, 2019, there was approximately $1,908,258 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 2.8 years.
Restricted Stock Award transactions:
In May 2019 the Company issued 57,500 restricted stock awards in
aggregate to eleven employees. The restricted stock awards vest
January 1, 2020. The stock awards are valued at fair market upon
issuance at $368,000 and amortized over the vesting period. We
recognized $92,000 of stock based compensation expense for the
three and nine months ended June 30, 2019.
NOTE 12 – WARRANTS
Transactions involving our equity-classified warrants are
summarized as follows:
|
|
Number of shares
|
Weighted-average exercise price
|
Weighted-
average remaining contractual term (in years)
|
Aggregate intrinsic value (in thousands)
|
|
Outstanding
at September 30, 2018
|
312,176
|
$
6.84
|
-
|
-
|
|
Issued
|
111,429
|
6.06
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at June 30, 2019
|
423,605
|
$
6.64
|
3.28
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2019
|
423,605
|
$
6.64
|
3.28
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of June 30, 2019:
|
|
Number of shares
|
Weighted-average exercise price
|
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
|
|
Exercisable
at $7.50 per share
|
60,000
|
$
7.50
|
May
2024
|
|
|
423,605
|
6.64
|
|
33
NOTE 13 – 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.
In May 2019, the Company entered into an endorsement agreement with
a professional athlete. The term of the agreement is through
December 31, 2022 and is tied to performance of the athlete in so
many professional events annually, and also includes promotion of
the Company via social media, wearing of logo during competition,
provide production days for advertising creation and attend meet
and greets. The potential payments, if all services are provided,
in aggregate is $4,9 million and is paid based on the services
above for the period ending: December 2019 - $400,000, December
2020 - $800,000, December 2021 - $1,800,000, and December 2022 -
$1,900,000.
NOTE
14 – 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 CBDI 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
nine months ended June 30, 2019 and 2018.
34
Three months ended June 30, 2019:
|
Three
months ended June 30, 2019:
|
|
|||
|
|
Products Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
8,020,870
|
$
3,353
|
$
20,113
|
$
8,044,336
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Total
Net Sales
|
$
8,020,870
|
$
3,353
|
$
20,113
|
$
8,044,336
|
|
Income
(loss) from Operations before Overhead
|
$
(3,295,322
)
|
$
( 1,492,865
)
|
$
(542,341
)
|
$
(5,330,528
)
|
|
Allocated
Corporate Overhead (a)
|
(23,802,791
)
|
(9,950
)
|
(59,687
)
|
(23,872,428
)
|
|
Net
Income (Loss)
|
$
(27,098,113
)
|
$
(1,502,815
)
|
$
(602,028
)
|
$
(29,202,956
)
|
Three months ended June 30, 2018:
|
|
Products Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
27,205
|
$
1,629,835
|
$
191,390
|
$
1,848,430
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
1,350,000
|
$
1,350,000
|
|
Total
Net Sales
|
$
27,205
|
$
1,629,835
|
$
1,541,390
|
$
3,198,430
|
|
Income
(loss) from Operations before Overhead
|
$
(123,394
)
|
$
1,001,079
|
$
346,540
|
$
1,224,225
|
|
Allocated
Corporate Overhead (a)
|
5,605
|
335,795
|
317,572
|
658,972
|
|
Net
Income (Loss)
|
$
(128,999
)
|
$
665,284
|
$
28,968
|
$
565,253
|
Nine months ended June 30, 2019:
|
|
Products Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
14,143,490
|
$
537,096
|
$
286,131
|
$
14,966,717
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Total
Net Sales
|
$
14,143,490
|
$
533,743
|
$
266,018
|
$
14,966,717
|
|
Income
(loss) from Operations before Overhead
|
$
(4,141,628
)
|
$
(2,337,990
)
|
$
(771,392
)
|
$
(7,251,010
)
|
|
Allocated
Corporate Overhead (a)
|
(52,911,357
)
|
(2,009,298
)
|
(1,070,428
)
|
(55,991,083
)
|
|
Net
Income (Loss)
|
$
(57,052,985
)
|
$
(4,347,288
)
|
$
(1,841,820
)
|
$
(63,242,093
)
|
|
|
|
|
|
|
|
Assets
|
$
89,871,337
|
$
7,032,178
|
$
4,005,113
|
$
100,908,628
|
Nine months ended June 30, 2018:
|
|
Products Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
85,945
|
$
4,248,711
|
$
1,082,439
|
$
5,417,095
|
|
Net
Sales related party
|
$
-
|
$
200,000
|
$
1,350,000
|
$
1,550,000
|
|
Total
Net Sales
|
$
85,945
|
$
4,448,711
|
$
2,432,439
|
$
6,967,095
|
|
Income
(loss) from Operations before Overhead
|
$
(751,293
)
|
$
2,866,972
|
$
380,143
|
$
2,495,822
|
|
Allocated
Corporate Overhead (a)
|
19,151
|
991,277
|
542,004
|
1,552,432
|
|
Net
Income (Loss)
|
$
(770,444
)
|
$
1,875,695
|
$
(161,861
)
|
$
943,390
|
|
|
|
|
|
|
|
Assets
|
$
3,669,414
|
$
7,737,134
|
$
5,063,736
|
$
16,470,284
|
(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 nine months ended June 30, 2019 and 2018,
respectively, above for comparison purposes.
35
NOTE 15 – INCOME TAXES
On November 17, 2017, the Company completed an IPO. The Company
conducted a Section 382 analysis and determined an ownership change
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;
however, this limitation is not material to these condensed
consolidated financial statements.
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.
Management
evaluates its net deferred tax asset / liability each reporting
period. As a result of this evaluation, management establishes a
valuation allowance for any deferred tax assets for which we
believe it is more likely than not that they will not be realized.
As a result of this evaluation, the net deferred tax liability was
adjusted by approximately $1,088,000 and $2,296,000 for the three
and nine months ended June 30, 2019,
respectively.
NOTE 16 – SUBSEQUENT EVENTS
In July 2019, the Company signed a lease for a new corporate office
consisting of approximately 50,000 square feet. The lease is from
August 1, 2019 thru December 31, 2026. The monthly base rent for
the first year is $76,041 and will increase annually by
approximately 3%. The rent includes a fully furnished facility
which at the end of the lease will become the property of the
Company, as long as no default occurred.
36
I
TEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of
operations for the third 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, our Quarterly Report on Form
10-Q for the period ended March 31, 2019, 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
The
Company operates through its five subsidiaries in three business
segments: the products, licensing, and entertainment divisions. The
products division encompasses CBDI and Beauty & Pin-Ups, the
licensing division encompasses kathy ireland ® Health &
Wellness and IM1, and the Entertainment division is comprised of
EE1:
|
Our newest business unit, CBDI, was established in
December 2018 as part of the Mergers with Cure Based Development
LLC. In connection with the Mergers, we acquired the cbdMD brand.
CBDI 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.
|
|
|
|
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
& Pin-Ups, our first business unit is a hair care line with a
social conscience and launched its products in 2015. We offered
quality hair care products, including shampoos, conditioners,
styling aides and a patented styling tool, through retailers and
online outlets and expanded into licensing
opportunities.
|
37
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.
Growth Strategies and Outlook
●
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.
o
Extend distribution
in the retail space. We have secured placement in stores carrying
our brand from approximately 600 to 3,000 doors since January 2019
and see more opportunity as the big box players evaluate carrying
CBD products.
With
our current strategy being executed we have had significant revenue
growth period over period. With continued acceleration in the
sector and the potential changes with retailers, our goals
include:
o
Surpass $5 million
in monthly net sales by March 31, 2020
o
Surpass $10 million
in monthly net sales by December 31, 2020
o
Operational
positive cash flow in 2
nd
quarter of fiscal
2021
Results of operations
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Three Months Ended June 30,
|
Nine Months Ended June 30,
|
||||
|
|
2019
|
2018
|
change
|
2019
|
2018
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
(unaudited)
|
(unaudited)
|
|
|
Net
sales
|
$
8,044,336
|
$
1,848,430
|
335.2
%
|
$
14,966,717
|
$
5,417,095
|
176.3
%
|
|
Net sales
related party
|
-
|
1,350,000
|
(100.0
)%
|
-
|
1,550,000
|
(100.0
)%
|
|
Total net
sales
|
$
8,044,336
|
$
3,198,430
|
151.5
%
|
$
14,966,717
|
$
6,967,095
|
114.8
%
|
|
Cost of
sales
|
2,959,198
|
1,106,706
|
167.4
%
|
5,584,868
|
1,858,651
|
200.4
%
|
|
Gross profit
as a percentage of net sales
|
63.2
%
|
65.4
%
|
(2.2
)%
|
62.7
%
|
73.3
%
|
(10.6
)%
|
|
Operating
expenses
|
13,345,248
|
1,464,239
|
811.4
%
|
20,795,190
|
4,089,006
|
408.5
%
|
|
(Increase)
decrease of contingent liability
|
(21,547,606
)
|
-
|
(100.0
)%
|
(52,461,680
)
|
-
|
(100
)%
|
|
Net income
(loss) before taxes
|
(30,290,956
)
|
627,253
|
(4929.1
)%
|
(65,538,093
)
|
943,390
|
(7047.0
)%
|
|
Net income
(loss) attributable to cbdMD, Inc. common
shareholders
|
$
(27,699,249
)
|
$
206,074
|
(13541.4
)%
|
$
(61,600,702
)
|
$
477,542
|
12999
%
|
Sales
The
following table provides information on the contribution of net
sales by segment to our total net sales.
|
|
Three Months
Ended
June 30,
2019
|
% of total
|
Three Months
Ended
June 30,
2018
|
% of total
|
|
|
|
|
|
|
|
Licensing
division
|
$
3,353
|
0.05
%
|
$
1,629,835
|
50.9
%
|
|
Entertainment
division
|
$
20,113
|
0.25
%
|
$
1,541,390
|
48.2
%
|
|
Products
division
|
$
8,020,870
|
99.7
%
|
$
27,205
|
0.9
%
|
|
Total
net sales
|
$
8,044,336
|
|
$
3,198,430
|
|
38
|
|
Nine Months
Ended
June 30,
2019
|
% of total
|
Nine Months
Ended
June 30,
2018
|
% of total
|
|
|
|
|
|
|
|
Licensing
division
|
$
537,096
|
3.6
%
|
$
4,448,711
|
63.9
%
|
|
Entertainment
division
|
$
286,131
|
1..9
%
|
$
2,432,439
|
34.9
%
|
|
Products
division
|
$
14,143,490
|
94.5
%
|
$
85,945
|
1.2
%
|
|
Total
net sales
|
$
14,966,717
|
|
$
6,967,095
|
|
The
increase in net sales attributable to our products division in the
three and nine months ended June 30, 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 nine months ended June 30,
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 nine months ended June
30, 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 June 30,
|
|||
|
2019
|
2018
|
||
|
Amount
|
% total net sales
|
Amount
|
% total net sales
|
|
|
|
|
|
|
$
0
|
0
%
|
$
1,150,000
|
35.9
%
|
|
Nine Months Ended June 30,
|
|||
|
2019
|
2018
|
||
|
Amount
|
% total net sales
|
Amount
|
% total net sales
|
|
|
|
|
|
|
$
470,000
|
3.1
%
|
$
4,154,500
|
59.6
%
|
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 nine months ended June 30, 2019 and
2018:
|
|
Three Months Ended June 30,
|
Nine Months Ended June 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Licensing
division
|
865.9
%
|
11.0
%
|
39.1
%
|
9.9
%
|
|
Entertainment
division
|
68.9
%
|
58.9
%
|
91.8
%
|
51.7
%
|
|
Products
division
|
36.4
%
|
70.2
%
|
36.1
%
|
185.0
%
|
The
increase in cost of sales as a percentage of sales for our
licensing division in the three and nine months ended June 30, 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 June 30, 2019 totaled
approximately $29,000 against sales of approximately $3,000.
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.
39
For
the three and nine months ended June 30, 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 nine months ended
June 30, 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 of this business.
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
business.
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 803.8% and
397.1% in the three and nine months ended June 30, 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. In addition, we had a non-cash one time
impairment charge related to the non CBD business segments, which
was approximately $2,114,000.
The
following table provides information on our approximate operating
expenses for each segment for the three and nine months ended June
30, 2019 and 2018:
|
|
Three Months Ended June 30,
|
|
|
|
|
2019
|
2018
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
991,896
|
$
450,000
|
$
541,896
|
|
Entertainment
division
|
$
548,594
|
$
287,000
|
$
261,594
|
|
Products
division
|
$
8,387,406
|
$
126,000
|
$
8,261,406
|
|
|
Nine Months Ended June 30,
|
|
|
|
|
2019
|
2018
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
1,101,346
|
$
1,145,000
|
$
(43,654
)
|
|
Entertainment
division
|
$
761,502
|
$
795,000
|
$
(33,498
)
|
|
Products
division
|
$
13,120,786
|
$
583,000
|
$
12,537,786
|
Operating
expenses attributable to our licensing and entertainment divisions
for the three and nine months ended June 30, 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.
In addition, during the three and nine months ended June 30, 2019,
we recorded a one time impairment on intangible assets of $971,667
for the licensing division and $461,667 for the entertainment
division. 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
nine months ended June 30, 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.
40
The
significant increase in operating expenses for the Products
division, is related to the Mergers of Cure Based Development and
CBDI’s operations as well as the ramping up of the overall
business, which included increased staff hiring, a full blown
sales, 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 June 30, 2019 and 2018 were approximately
$1,951,664 and $356,000, respectively and for the nine months ended
June 30, 2019 and 2018 were approximately $2,114,811 and $426,000,
respectively.
The
following table provides information on our approximate corporate
overhead for the three and nine months ended June 30, 2019 and
2018:
|
Three Months Ended June 30,
|
|
|
|
2019
|
2018
|
change
|
|
$
2,980,000
|
$
1,080,000
|
$
1,900,000
|
|
Nine Months Ended June 30,
|
|
|
|
2019
|
2018
|
change
|
|
$
5,468,000
|
$
2,556,000
|
$
2,912,000
|
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 nine months ended June 30, 2019 and
2018:
|
|
Three Months Ended June 30,
|
|
|
|
|
2019
|
2018
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
0
|
$
290,000
|
$
(290,000
)
|
|
Entertainment
division
|
$
0
|
$
145,000
|
$
(145,000
)
|
|
Products
division
|
$
0
|
$
48,000
|
$
(48,000
)
|
|
|
Nine Months Ended June 30,
|
|
|
|
|
2019
|
2018
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
25,000
|
$
574,000
|
$
(549,000
)
|
|
Entertainment
division
|
$
25,000
|
$
312,000
|
$
(287,000
)
|
|
Products
division
|
$
25,000
|
$
128,000
|
$
(103,000
)
|
We
are currently assessing our overall integration strategy and
approach and have not created allocations for the three months
ended June 30, 2019.
41
Other income and other non-operating expenses
Interest income (expense)
Our
interest income (expense) was $14,211 and $(232) for the three
months ended June 30, 2019 and 2018, respectively. For the nine
months ended June 30, 2019 and 2018, our interest income (expense)
was $76,330 and $(737), respectively.
Contingent liability
As
consideration for the Mergers, the Company had a contractual
obligation to issue 15,250,000 shares of our common stock, after
approval by our shareholders, to the members of Cure Based
Development, issued in two tranches 6,500,000 and 8,750,000, both
of which are subject to leak out provisions, and the 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 and the initial
shares were issued on April 19, 2019.
The
initial shares value at April 19, 2019 was $53,215,163, this
represented a $2,372,606 increase in value from March 31, 2019, of
which this increase was recorded as an expense in the Statement of
Operations. With the issuance of the initial shares, the contingent
liability related to the initial shares was reclassified to
shareholders’ equity by $53,215,163.
The
earn out provision is accounted for and recorded as a contingent
liability with increases in 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 $70,600,000
at June 30, 2019, as compared to $51,425,000 at March 31, 2019. The
increase of $19,175,000 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 $5.90 at
June 30, 2019 as compared to $4.42 on March 31, 2019.
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 nine months ended June 30,
2019, we recorded a loss of $38,592 and $250,099 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 nine months ended June 30, 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 nine months ended June 30, 2019,
we recorded an unrealized gain (loss) net of taxes, of $(454,409)
and $(1,450,519), respectively. For the three and nine months ended
June 30, 2018, we recorded $(1,326,727) and $(1,923,304) 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 nine months ending June 30, 2019
increased 5,265.3% to $29,202,956 and 6,802.9% to $63,242,093,
respectively, as compared to net income of $565,253 and $943,390 in
the three and nine months ended June 30, 2018, respectively. At
June 30, 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 June 30, 2019 we owned 100% of the membership
interest of CBDI. At June 30, 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 13,534.2%
and 12,996.5% for the three and nine months ended June 30, 2019
from the same periods in fiscal 2018.
42
Liquidity and Capital Resources
We
had cash and cash equivalents on hand of $11,633,213 and working
capital of $19,856,171 at June 30, 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 88.2% at June 30,
2019 from September 30, 2018, and is primarily attributable to an
increase of cash, prepaid expenses, inventory, and prepaid
inventory, offset by a decrease in accounts receivable, accounts
receivable other, marketable securities, notes receivable, and
deferred issuance costs. Our current liabilities increased
approximately 140.2% at June 30, 2019 from September 30, 2018. This
increase is primarily attributable to increases in accounts
payable, customer deposits, and accrued expenses, offset by
decreases in notes payable and 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 nine months ended June 30, 2019 we used cash
primarily to fund our operations.
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 $9,819,608 and $4,840,368 for
the nine months ended June 30, 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. On May 15,
2019 we closed a follow-on firm underwritten public offering of
shares of our common stock resulting in total net proceeds to us of
$12,650,600. We are using the net proceeds from the offering for
brand development and expansion, advertising, marketing,
acquisitions and general working capital.
Related Parties
As described in Note 9 to our consolidated
financial statements appearing elsewhere in this report, we have
engaged in significant number of related party transactions. As
indicated previously, we are a party to multiple agreements
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. 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. Applicable
transactions also are reported as sales with related parties (see
Note 9 Related Party Transactions in the consolidated financial
statements for more information).
Critical accounting policies
The
preparation of financial statements and related disclosures in
conformity with 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.
43
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.
44
I
TEM
3.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
I
TEM 4. CONTROLS AND
PROCEDURES
Evaluation of Disclosure
Controls and Procedures
. We
maintain “disclosure controls and procedures” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934. In designing and evaluating our disclosure controls and
procedures, our management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Based on their evaluation as of the end of the
period covered by this report, our co-Chief Executive Officers 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
co-Chief Executive Officers and our Chief Financial Officer, to
allow timely decisions regarding required
disclosure.
Changes in Internal Control
Over Financial Reporting
. In
the quarter ending June 30, 2019, the Company implemented an
automated perpetual inventory system and is continuing to review
all processes to ensure proper support of our internal control over
financial reporting. Other than implementation of this system,
there were no changes in our internal control over financial
reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
45
PART II - OTHER INFORMATION
I
TEM 1. LEGAL
PROCEEDINGS.
None.
except as previously reported.
I
TEM 1A. RISK FACTORS.
We desire to take advantage of the “safe harbor”
provisions of the Private Securities Litigation Reform Act of 1995.
Accordingly, we incorporate by reference the risk factors disclosed
in Part I, Item 1A of our 2018 Form 10-K and in Part II, Item 1A.
of our Quarterly Report on Form 10-Q for the period ended March 31,
2019.
I
TEM 2. UNREGISTERED SALES OF EQUITY
SECURITIES AND USE OF PROCEEDS.
None.
except as previously reported.
I
TEM 3. DEFAULTS UPON SENIOR
SECURITIES.
None.
I
TEM 4. MINE SAFETY
DISCLOSURES.
Not
applicable to our Company’s operations.
I
TEM 5. OTHER
INFORMATION.
In June
2018, EE1, a subsidiary of the Company, entered into agreements
with an affiliate of Mr. Erik Sterling, a former board of director
of the Company and the CFO of kathy ireland® Worldwide.
The agreements were for services to be provided at an aggregate
price of $1,200,000, all to be paid by December 2018. All
services were completed, delivered and accepted and an initial
payment of $200,000 was made in December 2018, and an agreement
specifying the final payment of $1,000,000 was to be paid to the
Company by May 1, 2019. After failing to make the May 1, 2019
payment, a new payment plan which included obligations to make
payments on each of June 30, 2019 and August 15, 2019.
Subsequent, the June 30, 2019 payment has not been made. The
Company is pursuing payment of this amount and has engaged counsel
to assist it in collection of this obligation.
On
August 7, 2019 the Company's board of directors approved an
amendment to the Company's 2015 Equity Compensation Plan (the
"Plan") pursuant to the provisions thereof (i) changing the name of
the Plan to cbdMD, Inc. 2015 Equity Compensation Plan to reflect
the current corporate name of the Company, and (ii) changing the
date the automatic evergreen increase is determined to the first
trading day of October each calendar year during the term of the
Plan, beginning in 2019, to coincide with the Company's fiscal
year.
46
I
TEM 6. EXHIBITS.
|
|
|
|
|
Incorporated by Reference
|
|
Filed or Furnished
|
||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
Herewith
|
|
|
Merger Agreement dated December 3, 2018 by and among Level Brands,
Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development,
LLC
|
|
8-K
|
|
12/3/2018
|
|
2.1
|
|
|
|
|
|
Articles of Merger dated December 20, 2018 as filed with the
Secretary of State of Nevada merging AcqCo, LLC with and into Cure
Based Development, LLC
|
|
10-Q
|
|
02/14/2019
|
|
2.2
|
|
|
|
|
|
Articles of Merger dated December 20, 2018 as filed with the
Secretary of State of North Carolina merging AcqCo, LLC with and
into Cure Based Development, LLC
|
|
10-Q
|
|
02/14/2019
|
|
2.3
|
|
|
|
|
|
Articles of Merger dated December 20, 2018 as filed with the
Secretary of State of Nevada merging Cure Based Development, LLC
with an into cbdMD LLC
|
|
10-Q
|
|
02/14/2019
|
|
2.4
|
|
|
|
|
|
Articles of Merger dated December 20, 2018 as filed with the
Secretary of State of North Carolina merging Cure Based
Development, LLC with an into cbdMD LLC
|
|
10-Q
|
|
02/14/2019
|
|
2.5
|
|
|
|
|
|
Certificate of Incorporation
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation
– filed April 22, 2015
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation
– filed June 22, 2015
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation
– filed November 17, 2016
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
|
|
|
Certificate of Amendment to the Certificate of Incorporation
– filed December 5, 2016
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
|
|
|
Amended and Restated Bylaws
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
|
|
|
Office Lease, dated July 11, 2019
|
|
|
|
|
|
|
|
Filed
|
|
|
|
Certification of co-Principal Executive Officer
(Section 302)
|
|
|
|
|
|
|
|
Filed
|
|
|
|
Certification of co-Principal Executive Officer
(Section 302)
|
|
|
|
|
|
|
|
Filed
|
|
|
|
Certification of Principal Financial Officer
(Section 302)
|
|
|
|
|
|
|
|
Filed
|
|
|
|
Certification of Principal Executive Officer and Principal
Financial Officer (Section 906)
|
|
|
|
|
|
|
|
Filed
|
|
|
101 INS
|
|
XBRL Instance Document
|
|
|
|
|
|
|
|
Filed
|
|
101 SCH
|
|
XBRL Taxonomy Extension Schema
|
|
|
|
|
|
|
|
Filed
|
|
101 CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
|
|
Filed
|
47
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
cbdMD, INC.
|
|
|
|
|
|
|
August 14, 2019
|
By:
|
/s/ Martin A. Sumichrast
|
|
|
|
Martin A. Sumichrast, Co-Chief Executive Officer, principal
executive officer
|
|
|
|
|
|
August 14, 2019
|
By:
|
/s/ Raymond S. Coffman
|
|
|
|
Raymond S. Coffman, Co-Chief Executive Officer, principal executive
officer
|
|
August 14, 2019
|
By:
|
/s/ Mark S. Elliott
|
|
|
|
Mark S. Elliott, Chief Operating Officer, Chief Financial Officer,
principal financial and accounting officer
|
48
TABLE OF CONTENTS
Part 1 - Financial InformationItem 1. Financial StatementsNote 1 Organization and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 Marketable Securities and Investment Other SecuritiesNote 4 InventoryNote 5 Property and EquipmentNote 6 Intangible AssetsNote 7 Pro Forma Financial Information (unaudited)Note 8 Contingent LiabilityNote 9 Related Party TransactionsNote 10 Shareholders EquityNote 11 Stock-based CompensationNote 12 WarrantsNote 13 Commitments and ContingenciesNote 14 Segment InformationNote 15 Income TaxesNote 16 Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits