Level Brands, Inc. (including cbdMD LLC) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2018 (three months ended December 31, 2018), compared with the same period in 2017. The registrant is Level Brands, Inc.; cbdMD became a wholly owned subsidiary when the company acquired Cure Based Development on December 20, 2018.
Financial performance and liquidity
- Revenue: Net sales were $1.249 million, up 81.6% from $687,756. Reported results include cbdMD only from December 20; cbdMD contributed approximately $465,000 of sales from December 21–31. Unaudited pro forma net revenue, assuming the acquisition occurred October 1, 2017, was $4.409 million for the quarter; the filing cautions this is illustrative, not actual reported revenue.
- Profitability: Gross profit was $757,842, with a 60.7% gross margin versus $459,632 and 66.8% a year earlier. Operating expenses were $1.545 million and operating loss was $787,099. Net loss was $690,239; net loss attributable to Level Brands common shareholders was $584,385, or $0.06 per share, compared with $1.133 million, or $0.16 per share, in the prior-year quarter.
- Cash flow: Operating activities used $1.163 million, compared with $1.821 million used a year earlier. Investing activities used $1.268 million, including $1.178 million of net cash used for the merger. Financing activities provided $6.179 million, principally from the October 2018 share offering. Cash increased to $8.032 million from $4.283 million at September 30, 2018.
- Liquidity: Working capital was $13.960 million, versus $10.820 million at September 30, 2018. Current assets were $15.732 million and current liabilities $1.772 million. Management said working capital was sufficient to fund operations and expected growth.
- Debt and major liabilities: The balance sheet included $580,000 of current related-party notes payable and $184,300 of long-term related-party notes. The largest reported liability was a $71.353 million contingent liability for merger share consideration and earnout obligations; it is not conventional funded debt. Total liabilities were $78.312 million.
- Other balance-sheet items: Total assets were $96.437 million, including $55.259 million of goodwill and $24.785 million of intangible assets, largely recorded in the merger. The purchase-price allocation remained preliminary. The company reported a $1.553 million unrealized loss on marketable securities in other comprehensive income and a $80,173 realized loss on securities sold.
Changes versus the prior comparable quarter
- Sales increased, with growth across licensing and products; entertainment sales declined as a one-time prior-year contract was not replaced. The cbdMD acquisition contributed only a partial-quarter of sales to reported results.
- Net loss attributable to common shareholders narrowed by approximately $549,000. Operating expenses declined in aggregate, although corporate overhead increased, and gross margin fell by 6.2 percentage points.
- The October 2018 follow-on offering raised approximately $6.357 million net and increased shares outstanding. At December 31, 2018, 10,095,356 shares were outstanding; 10,170,356 were outstanding as of February 10, 2019.
- Comprehensive loss attributable to common shareholders widened to $2.083 million from $1.099 million, primarily reflecting the period’s unrealized securities losses.
Outlook, commentary, risks, and unusual items
- Outlook: No consolidated revenue or earnings forecast was provided. Management’s stated priorities include expanding cbdMD wholesale distribution and product offerings, developing advertising and sales channels, growing licensed products, and pursuing cross-selling opportunities. Management cited expected cost-of-sales ranges of 25%–40% for products, 10%–30% for licensing, and 45%–75% for entertainment, depending on project mix.
- Merger and dilution: After shareholder approval, the merger agreement requires issuance of 15.25 million shares, subject to stated vesting, voting-proxy, and leak-out provisions. It also permits up to 15.25 million additional shares based on revenue targets over 60 months. The company expected a shareholder vote at its March 29, 2019 annual meeting and said the initial issuance would require it to meet NYSE American initial listing standards. Approval and continued listing were not assured.
- Merger accounting uncertainty: The $74.353 million contingent consideration valuation uses significant Level 3 assumptions; changes in assumptions may materially affect reported liabilities, goodwill, and intangible assets. The purchase-price allocation was preliminary and expected to be finalized by September 30, 2019.
- CBD risks: Management highlighted cbdMD’s limited operating history, intense and potentially increasing competition, and evolving federal and state regulation. The Farm Bill removed hemp from the federal controlled-substance definition, but FDA authority over products containing CBD remains; regulatory changes or compliance costs could affect operations.
- Cash conversion and concentration: The company said accepting equity as payment can adversely affect operating cash flow and expose results to market-value changes. Equity received for services represented 37.6% of quarterly net sales. Two customers together represented approximately 56% of quarterly net sales.
- Related parties and unusual items: The filing describes multiple related-party arrangements, including acquired notes and leases, and ongoing relationships involving kathy ireland Worldwide and its affiliates. The company paid a reduced $300,000 final fee under its health-and-wellness license agreement during the quarter. It reported no legal proceedings and no material off-balance-sheet arrangements.
- Controls: Management concluded disclosure controls and procedures were effective as of quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether shareholders approved the merger share issuances, and whether Level Brands met NYSE American initial listing standards following any issuance.
- Actual cbdMD results after consolidation for a full quarter, including revenue growth, margins, cash generation, customer concentration, and integration costs.
- Final merger purchase-price allocation and the assumptions underlying goodwill, intangible assets, and the $74.353 million contingent liability.
- Performance against the earnout revenue thresholds and the resulting potential share issuance and dilution.
- Whether CBD-related regulation, FDA actions, competition, or payment-processor reserves and fees materially affect sales, costs, or liquidity.
- How much of future revenue is collected in cash rather than securities, and the continuing impact of related-party transactions.