Filing identity and reporting period
The supplied filing is a Level Brands, Inc. Form 10-Q for the quarter ended June 30, 2018, covering the three and nine months ended June 30, 2018, compared with the same periods in 2017. This conflicts with the request metadata identifying cbdMD, Inc. and 2017 Q3; verify the issuer and period before relying on this summary.
Level Brands reported professional beauty products, licensing and entertainment businesses. Its growth strategy emphasized expanding licensed offerings, cross-selling brands and developing entertainment and brand-management engagements.
Financial results and liquidity
| Metric | Three months ended June 30, 2018 | Nine months ended June 30, 2018 |
|---|---|---|
| Total net sales, including related-party sales | $3.198 million; up 78.9% | $6.967 million; up 105.2% |
| Gross profit | $2.092 million | $5.108 million |
| Gross margin | 65.4%, versus 85.4% | 73.3%, versus 75.8% |
| Operating income | $627,485; down 12.2% | $1.019 million, versus $36,245 |
| Net income attributable to common shareholders | $206,074, versus a $210,690 loss | $477,542, versus a $1.400 million loss |
- Comprehensive loss attributable to common shareholders was $1.121 million for the quarter and $1.446 million year to date, primarily reflecting unrealized losses on marketable securities. The nine-month unrealized securities loss was $1.923 million.
- Operating cash flow was negative $4.840 million for the nine months; investing cash flow was negative $662,465 and financing cash flow was positive $10.642 million. Cash increased to $5.424 million from $284,246 at September 30, 2017. Financing was primarily IPO proceeds.
- At June 30, current assets were $12.521 million and current liabilities $1.202 million, yielding reported working capital of $11.319 million. Total liabilities were $1.253 million. The filing reports no outstanding debt; prior convertible notes and line-of-credit balances had been converted or repaid.
- Total assets were $16.470 million. Cash included $5.055 million above FDIC-insured limits.
Material changes and business drivers
- Quarterly licensing revenue was $1.630 million and entertainment revenue $1.541 million; professional products contributed just $27,205. For the nine months, licensing generated $4.449 million, entertainment $2.432 million and professional products $85,945.
- Management attributed licensing growth chiefly to two Health & Wellness agreements. Professional-products sales fell 90.7% for the quarter and 90.1% year to date, as the company changed distributors and tested retail, online and licensing channels. It said two retailers were testing products and expected initial licensed-product rollouts in summer 2018, without assurance of market acceptance.
- Quarterly gross margin declined to 65.4%, largely reflecting a changed revenue mix, higher entertainment project costs and weak professional-products sales and inventory charges. Operating expenses increased 71.5% in the quarter and 61.2% year to date, including higher advertising, public-company, staffing and stock-compensation costs.
- The company raised approximately $10.9 million net in its November 2017 IPO. Common shares outstanding increased to 8,118,928 at June 30, 2018 from 5,792,261 at September 30, 2017.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance was provided. Management said working capital was sufficient to fund operations and expected growth, while acknowledging operating cash use and the cash-flow impact of accepting equity as compensation.
- Equity received for services totaled approximately $1.150 million in the quarter and $4.155 million year to date. Such consideration does not provide immediate cash and can fluctuate in value; Isodiol share-price declines drove substantial other comprehensive losses.
- Three customers accounted for approximately 89% of quarterly and 80% of year-to-date sales. The filing also reports related-party sales of $1.350 million for the quarter and $1.550 million year to date, and significant use of related parties in service delivery.
- The company disclosed that it had exceeded one or both Investment Company Act asset or revenue thresholds in at least one of the preceding four fiscal quarters. It said it was below both tests at June 30 and intended to limit equity compensation; failure to remain within applicable limits could materially impair its business.
- Other risks include dependence on kathy ireland Worldwide and related agreements, customer concentration, limited operating history and prior losses, securities valuation and liquidity, and reliance on continued licensing and brand acceptance. A $155,400 related-party note receivable was extended to December 31, 2018. Management reported disclosure controls were effective and no material quarterly change in internal control.
- Related-party licensing terms include $320,000 payable on the later of January 1, 2019 or 30 days after reaching $5 million in net sublicense proceeds, plus royalties. The company also disclosed a five-year Gravocore license announced after quarter-end, with annual brand participation fees and an 8% royalty on net sales.
Most important facts to verify
- Confirm this filing belongs to the intended issuer and period: the document is for Level Brands, Inc., not cbdMD, Inc., and reports June 30, 2018.
- Assess how much reported revenue and future cash generation depend on concentrated customers, related parties and noncash securities compensation.
- Review the valuation, realizability and concentration of Isodiol and other securities, and the effect of further price changes on equity and cash-generation capacity.
- Monitor the Investment Company Act thresholds, the extended related-party note repayment and the terms and performance of major licensing arrangements.
- Track the professional-products turnaround, segment margins, operating cash use and dilution from issued shares, options and warrants.