Business context and reporting period
Important filing-identity clarification: The supplied filing is Level Brands, Inc.’s Form 10-K, not a CBDmd, Inc. filing. It reports the fiscal year ended September 30, 2018 (with comparison to fiscal 2017); “2017 Q4” in the request does not match the filing period. Level Brands operated lifestyle licensing and entertainment businesses and Beauty & Pin-Ups products. It announced a proposed acquisition of Cure Based Development, owner of the cbdMD brand, on December 3, 2018, after year-end.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Total net sales | $8.42 million | $4.47 million |
| Gross profit; gross margin | $5.75 million; 68.2% | $3.12 million; 69.7% |
| Operating expenses | $5.63 million | $3.36 million |
| Income (loss) from operations | $117,099 | $(239,291) |
| Net income (loss), consolidated | $62,834 | $(1.39) million |
| Net loss attributable to Level Brands common shareholders | $(412,075), or $(0.05) per share | $(1.74) million, or $(0.38) per share |
| Cash used by operating activities | $(5.57) million | $(2.33) million |
| Cash and cash equivalents at year-end | $4.28 million | $284,246 |
| Working capital at year-end | $10.82 million | $2.17 million |
| Total liabilities at year-end | $998,457 | $1.92 million |
Sales by division in FY 2018 were licensing $5.21 million (61.9%), entertainment $2.78 million (33.0%), and products $428,731 (5.1%). The filing attributes most licensing growth to two Level H&W agreements, which generated approximately $5.1 million in revenue. The products division’s sales fell substantially; management cites a distributor change and testing new retail and online channels.
Operating cash flow was negative despite reported consolidated net income, reflecting, among other factors, non-cash compensation for services and increases in receivables. The company raised approximately $10.9 million net in its November 2017 IPO. Subsequent to year-end, its October 2018 offering generated approximately $6.3 million net. No material debt was outstanding at September 30, 2018; prior convertible notes and a related-party line of credit had been converted to equity in 2017.
Material changes versus the prior period
- Total net sales rose approximately 88%, while gross margin declined 1.5 percentage points.
- Licensing and entertainment became larger contributors as newer divisions expanded; products revenue contracted, and the company recorded $502,000 of related impairment charges, including inventory and marketing materials and an intangible asset.
- Operating expenses rose approximately 68%, including higher public-company, staffing, marketing, and stock-compensation costs. Interest expense declined to $955 from $500,627, largely because debt had been converted into shares in FY 2017.
- Marketable securities and other equity received as compensation remained significant. The company recorded a $2.51 million after-tax unrealized loss in other comprehensive income in FY 2018; this is distinct from net loss attributable to common shareholders.
Outlook, risks, contingencies, and unusual items
- Management’s FY 2019 priorities include expanding licensed offerings, cross-selling, developing EE1 entertainment projects, and pursuing acquisitions. The filing provides no quantified revenue or earnings guidance and cautions that these plans may not succeed.
- The proposed Cure Based Development merger was subject to shareholder approval and other conditions, including federal legislation permanently declassifying CBD under federal law. The filing says closing was uncertain. Consideration included 15.525 million shares, expected to represent approximately 60% of post-issuance shares, plus up to 15.525 million additional earnout shares. A $2 million, one-year, 6% secured loan to Cure Based Development was made after signing. A closing would change control and require the combined company to meet NYSE American initial listing standards.
- Revenue and receivables were concentrated: three customers represented 75% of FY 2018 net sales and 92% of accounts receivable and other receivables at year-end. Related-party sales were $1.99 million, and management disclosed material dependence on Kathy Ireland Worldwide and affiliates.
- Equity compensation for services creates cash-flow, valuation, liquidity, and potential Investment Company Act risks. Management disclosed that the company exceeded relevant exemptive thresholds in March 2018 and was taking steps to remain below them.
- The company reported a net loss attributable to common shareholders, a history of losses, dependence on a limited customer base, potential dilution, and risks to exchange listing. It reported no pending or threatened litigation. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Confirm the issuer and period: this is Level Brands’ FY 2018 10-K, not a cbdMD 10-K or a 2017 fourth-quarter filing.
- Review the audited financial statements and revenue-recognition notes to reconcile the MD&A sales presentation with the statements, including the distinction between $6.43 million of net sales and $1.99 million of related-party net sales.
- Reconcile the filing’s statement that $5.10 million of FY 2018 net sales was compensated in equity (60.6% of total net sales) with the cash-flow statement’s $3.40 million of non-cash consideration received for services.
- Assess the collectability and liquidity of receivables and equity securities, the $2.51 million unrealized securities loss, and the effect of non-cash compensation on cash generation.
- Verify the merger’s closing status, shareholder approvals, CBD legal conditions, share issuance and earnout terms, the secured loan, and any resulting NYSE American listing requirements.