Filing identity and reporting period
The supplied filing is Level Brands, Inc.’s Form 10-Q for the quarter ended March 31, 2018, not a filing identified as cbdMD, Inc. The company’s fiscal year ends September 30; this is its second fiscal quarter. Amounts are in U.S. dollars.
Business context
Level Brands operated professional beauty products, licensing, and entertainment/brand-management businesses. Its licensing portfolio included I’M1 and the kathy ireland Health & Wellness brand. The company said its business model depends significantly on its relationship with kathy ireland Worldwide.
Financial performance and liquidity
| Metric | Three months ended March 31, 2018 | Six months ended March 31, 2018 | Comparable 2017 period |
|---|---|---|---|
| Total net sales, including related-party sales | $3.081 million | $3.769 million | $1.409 million and $1.608 million |
| Gross profit / margin | $2.557 million / 83.1% | $3.017 million / 80.1% | $1.010 million / 71.7%; $1.047 million / 65.1% |
| Operating income (loss) | $1.620 million | $392,000 | $(72,000); $(636,000) |
| Net income (loss) attributable to Level Brands common shareholders | $1.404 million | $271,000 | $(555,000); $(1.190) million |
Quarterly total net sales rose 119.6% year over year; six-month sales rose 135.1%. Growth was concentrated in licensing, including $2.75 million of quarterly revenue from a Health & Wellness engagement. The professional products division’s sales fell 92.1% for the quarter and 89.8% for the six months, amid a distributor transition and testing of new channels. Gross margin improvement reflected the greater contribution from licensing and entertainment, rather than a broad-based improvement across all divisions.
- Cash flow: Cash used in operations was $3.553 million for the six months, versus $1.284 million used a year earlier. Investing activities used $662,000; financing provided $10.642 million, principally from the IPO.
- Cash and liquidity: Cash was $6.711 million at March 31, 2018, versus $284,000 at September 30, 2017. Working capital was $11.960 million. Current assets were $12.180 million and current liabilities $220,000.
- Debt: No convertible-note or line-of-credit balance remained outstanding. Total liabilities were $549,000, including $329,000 of long-term related-party liabilities.
- Equity and securities: The November 2017 IPO raised $12.0 million gross and approximately $10.9 million net. The company held $1.658 million of marketable securities and $1.559 million of other securities. Six-month unrealized losses on marketable securities were $597,000, recorded in other comprehensive income (loss).
- Other items: Inventory impairment was approximately $102,000 for the six months. A $69,000 loss on disposal of a show booth was recorded in the first fiscal quarter.
Changes, outlook, risks, and contingencies
Management said it had sufficient working capital to fund operations and expected growth, but reported that operations consumed cash. A substantial portion of service revenue was accepted in securities rather than cash: $2.75 million in the quarter and $3.205 million in the six-month period. The filing warns that securities values can decline and that equity-based compensation affects cash generation.
At March 31, the company said it had exceeded specified Investment Company Act asset and revenue thresholds, principally because of the Isodiol agreement, and might be an inadvertent investment company. It planned to reduce securities holdings and limit accepting equity compensation to return below the relevant thresholds within one year. Failure could bring regulatory penalties, contract-enforcement and rescission risks, and significant disruption to its business.
Revenue concentration was high: one customer represented approximately 89% of quarterly and 73% of six-month net sales, and 73% of accounts receivable at March 31. The company also disclosed numerous related-party arrangements, including licensing, advisory, service, and financing relationships. The Health & Wellness license requires royalties of 33⅓% of net proceeds, increased to 35% for its three-year extension; $320,000 remained payable under the amended arrangement, subject to stated timing conditions.
Management planned to expand licensed offerings and cross-selling, develop entertainment projects, and transition Beauty & Pin-Ups into new retail, online, and licensing channels. It expected product rollouts in summer 2018 but gave no quantified revenue or earnings guidance and cautioned that market acceptance was uncertain. The filing reported effective disclosure controls and no material change in internal control during the quarter; it listed no legal proceedings.
Important facts for investors to verify
- Confirm the issuer and filing period: this document is Level Brands’ 10-Q for March 31, 2018, not a cbdMD filing.
- Assess whether reported earnings and revenue growth are repeatable, given the large, concentrated licensing engagement and substantial securities received instead of cash.
- Track cash conversion, operating cash use, and the liquidity or realizable value of the company’s marketable and private securities.
- Monitor the company’s progress in addressing Investment Company Act thresholds and the consequences if it cannot do so within the stated period.
- Review customer concentration, related-party arrangements, and the royalty and payment obligations under the kathy ireland Health & Wellness license.