Business context and reporting period
This filing is for Level Brands, Inc., not cbdMD, Inc.; the company and issuer named in the request do not match. It covers the quarter ended December 31, 2017, Level Brands’ first quarter of fiscal 2018, and compares results with the quarter ended December 31, 2016. Level Brands operates professional beauty products, licensing, and entertainment businesses; licensing and entertainment were acquired in January 2017.
Financial results and liquidity
- Revenue: Net sales were $687,756, versus $199,837, an increase of about 244%. Of current-quarter sales, $254,545 was related-party revenue. The company also received $454,500 of its compensation in equity securities rather than cash.
- Profit and margins: Gross profit was $459,632, or 66.8% of net sales, compared with $37,091, or 18.6%. Operating expenses rose to $1,687,644 from $600,266. Net loss widened to $1,264,782 from $697,495; loss attributable to Level Brands common shareholders was $1,132,928, versus $634,479. Basic and diluted loss per share was $0.16, versus $0.18, with a higher weighted-average share count.
- Cash flow: Operating activities used $1,820,919, compared with $528,637 used a year earlier. Investing activities used $302,665, including a $300,000 securities purchase. Financing provided $10,657,194, principally from the IPO. Cash at quarter-end was $8,817,856, up from $284,246 at September 30, 2017.
- Liquidity and debt: Working capital was $11,282,711, versus $2,170,154 at September 30, 2017. Total current liabilities were $768,432; total liabilities were $1,143,432. The company reported no outstanding balance on its former convertible notes or line of credit. It had $360,000 of long-term related-party liabilities associated with its health and wellness license.
- Capital and assets: The November 2017 IPO raised $12.0 million gross and approximately $10.9 million net. Shares outstanding increased to 7,798,928 at December 31, 2017 from 5,792,261 at September 30; 8,028,928 were outstanding February 1, 2018. Total assets were $15,298,993 and shareholders’ equity was $14,155,561.
Material changes versus the prior period
- Sales growth reflects the addition of licensing and entertainment activity, which contributed 95.8% of reported net sales in the current quarter; professional-products sales fell 85.5%, from $199,837 to $29,070.
- The filing attributes the increase in operating expenses to expansion from one operating subsidiary to four, added staff and public-company costs, and higher marketing and promotional spending. Interest expense fell to $259 from $132,320 after the debt was converted to equity in fiscal 2017.
- The reported gross margin improved substantially, but the mix of businesses changed. Licensing had cost of sales equal to 183% of its net sales in the quarter, which management attributed to upfront brand-building activity.
Outlook, commentary, risks, and unusual items
- Management said available working capital was sufficient to fund operations and expected growth, while noting that operating cash flow remained negative. It planned to invest IPO proceeds in marketing, brand development, and promotion; the filing gives no quantitative revenue or earnings guidance.
- Management described steps to address weak professional-products sales, including adding distributors and sales representatives, revising education efforts, and assessing retail, online, and licensing channels. It cautioned that improved market acceptance was not assured.
- Customer concentration is significant: three customers each exceeded 10% of quarterly net sales, represented 37%, 13%, and 37% of sales, and together accounted for 79% of accounts receivable. Related-party dealings and dependence on Kathy Ireland Worldwide and affiliates are also prominent risks.
- Related-party transactions include sales and service arrangements, securities received as compensation, and a $500,000 revolving credit commitment to Kure Corp. The Kure facility had not been drawn at quarter-end; the CEO and chairman was a past chairman and minority shareholder of Kure.
- The company recorded a $69,511 loss on disposal of an unused show booth. It reported $8,347,313 of cash above FDIC-insured limits. Some investment valuations rely on unobservable inputs, and the filing warns that equity received for services may decline in value.
- A subsequent Isodiol license agreement provides shares valued at $2 million and quarterly equity compensation of $750,000 for services. Management warned that the resulting securities holdings could cause the company to exceed the Investment Company Act’s 45% asset threshold; it was assessing the issue and possible steps to reduce the risk.
- The January 2018 extension of the health and wellness license required a $400,000 payment and provides for another $320,000 payment subject to timing conditions; royalty on net proceeds for the extension is 35%. Certain advisory agreements had expired, and management was negotiating replacements.
- Management reported disclosure controls were effective and described hiring a controller and engaging outside experts to strengthen financial reporting processes. No legal proceedings were reported.
Important facts for investors to verify
- Confirm issuer identity: this filing is for Level Brands, Inc., not cbdMD, Inc.
- Reconcile the filing’s revenue presentation: the statements show $687,756 total net sales, while the segment discussion reports $366,979 of entertainment-division sales plus $254,545 of corporate-related-party sales; segment tables also present figures that differ from portions of the narrative.
- Assess the cash conversion and sustainability of revenue, particularly the $454,500 of equity-based compensation and ongoing operating cash burn.
- Review customer and related-party concentration, contract terms, and the status of expired or renewed advisory agreements.
- Monitor the Isodiol securities and management’s Investment Company Act assessment, as well as dilution from issued shares and outstanding options and warrants.