cbdMD, Inc. - Quarter Report: 2019 March (Form 10-Q)

    UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended March 31, 2019

or

For the transition period from ___________ to ___________

Commission file number                                                  001-38299

                                                  

cbdMD, INC.

(Exact Name of Registrant as Specified in its Charter)

North Carolina		47-3414576
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.
4521 Sharon Rd, suite 450, Charlotte, NC		28211
Address of Principal Executive Offices		Zip Code

704-362-6286

Registrant’s Telephone Number, Including Area Code

 

                                                              Not Applicable                                                     

Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☑     No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes ☑    No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☑	Smaller reporting company ☑
Emerging growth company ☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes ☐    No ☑ 

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.   Yes ¨    No ¨ 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
common	YCBD	NYSE American

 

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

25,420,356 shares of common stock are issued and outstanding as of May 10, 2019

 

TABLE OF CONTENTS

 

	PART I-FINANCIAL INFORMATION	Page No.
ITEM 1.	Financial Statements.	5
ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	38
ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk.	46
ITEM 4.	Controls and Procedures.	46
	PART II - OTHER INFORMATION
ITEM 1.	Legal Proceedings.	47
ITEM 1A.	Risk Factors.	47
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	49
ITEM 3.	Defaults Upon Senior Securities.	49
ITEM 4.	Mine Safety Disclosures.	49
ITEM 5.	Other Information	49
ITEM 6.	Exhibits	50

 

 OTHER PERTINENT INFORMATION

 

Unless the context otherwise indicates, when used in this report, the terms cbdMD,” “we,” “us, “our” and similar terms refer to cbdMD, Inc., a North Carolina corporation formerly known as Level Brands, Inc, and initially formed as Level Beauty Group, Inc., and our subsidiaries CBD Industries, LLC, formally known as cbdMD LLC, a North Carolina limited liability company which we refer to as “CBDI”, Beauty and Pinups, LLC, a North Carolina limited liability company which we refer to as “BPU”, I | M 1, LLC, a California limited liability company, which we refer to as “I’M1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1” and Level H&W, LLC, a North Carolina limited liability company, which we refer to as “Level H&W”. In addition, “fiscal 2018" refers to the year ended September 30, 2018, "fiscal 2019" refers to the year ending September 30, 2019, "second quarter of 2018" refers to the three months ended March 31, 2018 and "second quarter of 2019" refers to the three months ended March 31, 2019.

 

The information contained on our websites at www.levelbrands.com, www.cbdmd.com, www.beautyandpinups.com, www.im1men.com, and www.encoreendeavor1.com are not part of this report.

 

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements that relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Words such as, but not limited to, “believe,” “expect,” “anticipate,” “estimate,” “intend,” “plan,” “targets,” “likely,” “aim,” “will,” “would,” “could,” and similar expressions or phrases identify forward-looking statements. We have based these forward-looking statements largely on our current expectations and future events and financial trends that we believe may affect our financial condition, results of operation, business strategy and financial needs. Forward-looking statements include, but are not limited to, statements about:

 

 

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report in its entirety, including the risks described in Part II, Item 1A. Risk Factors appearing later in this report, Part I, Item 1A. - Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2018 as filed with the Securities and Exchange Commission on December 12, 2018 (the "2018 10-K") as well as our other filings with the SEC. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events.

 

 

 

PART 1 - FINANCIAL INFORMATION

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019 AND SEPTEMBER 30, 2018

	(Unaudited)
	March 31,	September 30,
	2019	2018
Assets
Current assets:
Cash and cash equivalents	$4,639,587	$4,282,553
Accounts receivable	694,390	307,874
Accounts receivable - related party	1,338,956	1,537,863
Accounts receivable other	380,917	1,743,874
Merchant reserve	626,160	-
Marketable securities	1,373,133	1,050,961
Investment other securities	1,159,112	1,159,112
Note receivable	477,000	459,000
Note receivable - related party	-	156,147
Inventory	2,065,465	123,223
Inventory prepaid	306,870	-
Deferred issuance costs	-	28,049
Prepaid consulting agreement	50,000	200,000
Prepaid rent	108,000	180,000
Prepaid services with stock	270,437	-
Prepaid expenses and other current assets	654,196	561,491
Total current assets	14,144,223	11,790,147
Other assets:
Property and equipment, net	817,413	53,480
Goodwill	55,144,269	-
Intangible assets, net	24,729,322	3,173,985
Total other assets	80,691,004	3,227,465
Total assets	$94,835,227	$15,017,612

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

MARCH 31, 2019 AND SEPTEMBER 30, 2018

(continued)

 

	(Unaudited)
	March 31,	September 30,
	2019	2018
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable	$852,537	$473,717
Accounts payable - related party	-	7,860
Deferred revenue	33,333	161,458
Note payable – related parties	561,770	-
Customer deposit - related party	90,000	-
Accrued payroll	287,906	-
Accrued expenses	27,481	6,920
Accrued expenses - related party	18,265	320,000
Total current liabilities	1,871,292	969,955
Long term liabilities
Other long term liabilities	6,734	7,502
Contingent liability	102,267,557	-
Long term liabilities - to related party	184,300	-
Deferred tax liability	3,921,000	21,000
Total long term liabilities	106,379,591	28,502
Total liabilities	108,250,883	998,457
cbdMD, Inc. shareholders' equity (deficit):
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding	-	-
Common stock, authorized 150,000,000 shares, $0.001 par value,
10,170,356 and 8,123,928 shares issued and outstanding, respectively	10,170	8,124
Additional paid in capital	28,383,374	21,781,095
Accumulated other comprehensive income (loss)	-	(2,512,539)
Accumulated deficit	(43,083,487)	(6,669,497)
Total cbdMD, Inc. shareholders' equity (deficit)	(14,689,943)	12,607,183
Non-controlling interest	1,274,287	1,411,972
Total shareholders' equity (deficit)	(13,415,656)	14,019,155
Total liabilities and shareholders' equity (deficit)	$94,835,227	$15,017,612

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

 

	Three months	Three months	Six months	Six months
	Ended	Ended	Ended	Ended
	March 31, 2019	March 31, 2018	March 31, 2019	March 31, 2018
Sales	$7,790,436	$3,031,654	$9,257,899	$3,480,447
Sales related party	-	54,545	-	309,090
Total Gross Sales	7,790,436	3,086,199	9,257,899	3,789,537
Allowances	(2,117,084)	(5,289)	(2,335,518)	(20,871)
Net sales	5,673,352	3,026,365	6,922,381	3,459,576
Net sales related party	-	54,545	-	309,090
Total Net Sales	5,673,352	3,080,910	6,922,381	3,768,666
Cost of sales	2,134,662	523,821	2,625,670	751,944
Gross Profit	3,538,689	2,557,089	4,296,711	3,016,722
Operating expenses	5,939,343	937,123	7,484,275	2,624,768
Income (Loss) from operations	(2,400,645)	1,619,966	(3,187,564)	391,954
Realized and Unrealized gain (loss) on        marketable securities	371,359	-	(1,207,617)	-
(Increase) decrease on contingent       liability	(30,914,074) )	-	(30,914,074)	-
Gain (loss) on disposal of property and       equipment	-	200	-	(69,311)
Interest income (expense)	18,086	(246)	62,119	(505)
Income (loss) before provision for       income taxes	(32,925,274)	1,619,920	(35,247,136)	322,138
Benefit (Provision) for income taxes	1,075,000	23,000	1,208,000	56,000
Net Income (Loss)	(31,850,274)	1,642,920	(34,039,136)	378,138
Net Gain (Loss) attributable to     noncontrolling interest	(58,536)	238,523	(137,685)	106,669
Net Income (Loss) attributable to cbdMD, Inc. common shareholders	$(31,791,738)	$1,404,397	$(33,901,451)	$271,469
Net Income (Loss) per share:
Basic	$(3.13)	$0.17	$(3.35)	$0.04
Diluted	$-	$0.17	$-	$0.04
Weighted average number of shares Basic:	10,160,947	8,025,576	10,107,144	7,385,294
Weighted average number of shares Diluted:	10,160,947	8,040,666	10,107,144	7,406,113

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019 AND 2018

(Unaudited)

 

	Three months	Three months	Six months	Six months
	Ended	Ended	Ended	Ended
	March 31, 2019	March 31, 2018	March 31, 2019	March 31, 2018
Net Income (Loss)	$(31,850,274)	$1,642,920	$(34,039,136)	$378,138
Other Comprehensive Income:
Net Unrealized Gain (Loss) on Marketable           Securities, net of tax	-	(641,077)	-	(596,577)
Comprehensive Income (Loss)	(31,850,274)	1,001,843	(34,039,136)	(218,439)
Comprehensive Income (loss) attributable to non-controlling interest	(58,536)	238,253	(137,685)	106,669
Comprehensive Income (Loss) attributable to cbdMD, Inc. common shareholders	$(31,791,738)	$763,590	$(33,901,451)	$(325,108)

 

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018

(unaudited)

	Six Months Ended March 31,	Six Months Ended March 31,
	2019	2018
Cash flows from operating activities:
Net loss	$(34,039,136)	$378,138
Adjustments to reconcile net loss to net
cash used by operating activities:
Stock based compensation	163,148	31,066
Restricted stock expense	-	39,100
Issuance of stock / warrants for service	19,313	57,002
Inventory impairment	-	102,124
Depreciation and amortization	171,356	116,937
Gain on settlement of Note	(20,000)	-
Increase/(Decrease) in contingent liability	30,914,074	-
Realized and unrealized loss of marketable     securities	1,207,617	-
Loss on sale of property and equipment	-	69,311
Non-cash consideration received for services	(470,000)	(2,654,503)
Changes in operating assets and liabilities:
Accounts receivable	32,156	57,767
Accounts receivable – related party	204,902	712,325
Other accounts receivable	(137,043)	(786,112)
Other accounts receivable – related party	-	90,910
Note receivable	(18,000)	-
Note receivable – related party	156,147	6,004
Merchant reserve	(199,907)	-
Inventory	(1,194,186)	449
Prepaid expenses and other current assets	168,041	(382,497)
Marketable securities	440,211	-
Accounts payable and accrued expenses	43,076	(371,255)
Accounts payable and accrued expenses – related party	(393,016)	(1,042,805)
Deferred revenue / customer deposits	(303,125)	79,208
Deferred tax liability	(1,208,000)	(56,000)
Cash used by operating activities	(4,462,372)	(3,552,831)
Cash flows from investing activities:
Net cash used for merger	(1,177,867)	-
Purchase of investment other securities	-	(300,000)
Purchase of intangible assets	(79,999)	(360,000)
Purchase of property and equipment	(102,204)	(2,465)
Cash used by investing activities	(1,360,070)	(662,465)
Cash flows from financing activities:
Proceeds from issuance of common stock	6,356,997	10,927,535
Deferred issuance costs	(177,521)	(285,086)
Cash provided by financing activities	6,179,476	10,642,449
Net increase (decrease) in cash	357,034	6,427,153
Cash and cash equivalents,  beginning of period	4,282,553	284,246
Cash and cash equivalents,  end of period	$4,639,587	$6,711,399

 

 

cbdMD, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018

(unaudited) (continued)

 

Supplemental Disclosures of Cash Flow Information:

	Six Months ended March 31,	Six Months Ended March 31,
	2019	2018
Cash Payments for:
Interest expense	$23,938	$505
Non-cash financial activities:
Warrants issued to secondary selling agent	$86,092	$171,600
Stock received for prior period services, adjusted for other accounts receivable write down prior to receipt	$1,352,000	$-
Adoption of ASU 2016-01	$2,512,539	$-

 

 

 

cbdMD, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2019

 

	Common Stock		Additional Paid in	Other Comprehensive	Accumulated	Non-controlling
	Shares	Amount	Capital	Income(loss)	Deficit	Interest	Total
Balance, September 30, 2018	8,123,928	8,124	21,781,095	(2,512,539)	(6,669,495)	1,411,972	14,019,155
Issuance of common stock	1,971,428	1,971	6,355,027	-	-	-	6,356,998
Issuance of options for share based compensation	-	-	143,673	-	-	-	143,673
Issuance of stock costs	-	-	(205,569)	-	-	-	(205,569)
Adoption of ASU 2016-01	-	-	-	2,512,539	(2,512,539)	-	-
Net loss	-	-	-	-	(2,109,715)	(79,149)	(2,188,864)
Balance, December 31, 2018	10,095,356	10,095	28,074,224	-	(11,291,749)	1,332,823	18,125,391
Issuance of options for share based compensation	-	-	19,475	-	-	-	19,475
Issuance of stock and warrants for services	75,000	75	289,675	-	-	-	289,750
Net loss	-	-	-	-	(31,791,738)	(58,536)	(31,850,274)
Balance, March 31, 2019	10,170,356	10,170	28,383,374	-	(43,083,487)	1,274,287	(13,415,656)

 

 

 

cbdMD, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY

FOR THE THREE AND SIX MONTHS ENDED MARCH 31, 2018

 

	Common Stock		Additional Paid in	Other Comprehensive	Accumulated	Non-controlling
	Shares	Amount	Capital	Income(loss)	Deficit	Interest	Total
Balance, September 30, 2017	5,792,261	5,792	10,463,480	-	(6,257,421)	937,063	5,148,914
Issuance of common stock	2,000,000	2,000	9,971,114	-	-	-	9,973,114
Issuance of options for share based compensation	-	-	17,114	-	-	-	17,114
Issuance of stock for deferred IPO costs	-	-	171,600	-	-	-	171,600
Issuance of stock and warrants for services	6,667	7	36,995	-	-	-	37,002
Issuance of restricted stock for share based compensation	-		39,100	-	-	-	39,100
Other Comprehensive income (loss)	-	-	-	33,500	-	-	33,500
Net loss	-	-	-	-	(1,132,928)	(131,855)	(1,264,783)
Balance, December 31, 2017	7,798,928	7,799	20,694,245	33,500	(7,390,349)	805,208	14,155,561
Issuance of common stock	-	-	-	-	-	-	-
Issuance of options for share based compensation	-	-	13,952	-	-	-	13,952
Issuance of stock and warrants for services	235,000	235	19,765	-	-	-	20,000
Other Comprehensive income (loss)	-	-	-	(630,077)	-	-	(630,077)
Net loss	-	-	-	-	1,404,397	238,523	1,642,920
Balance, March 31, 2018	8,033,928	8,034	20,727,962	(596,577)	(5,985,952)	1,043,731	15,202,356

 

 

 

cbdMD , INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE SIX MONTHS ENDED MARCH 31, 2019 AND 2018

 

NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Nature of Business

 

cbdMD, Inc. ("cbdMD ", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands, Inc. On April 22, 2019, following approval by our shareholders at the 2019 annual meeting held on April 19, 2019, we filed Articles of Amendment to our Articles of Incorporation changing the name of our company to “cbdMD, Inc.” effective May 1, 2019. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30.

 

The accompanying unaudited interim condensed consolidated financial statements of cbdMD have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report filed with the SEC on Form 10-K for the year ended September 30, 2018. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of consolidated financial position and the consolidated results of operations for the interim periods presented have been reflected herein. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited consolidated financial statements for fiscal year 2018 as reported in the Form 10-K have been omitted.

 

In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a North Carolina limited liability company, and contributed $250,000 in exchange for our member interest. As of September 30, 2018, we own 100% interest in BPU. BPU’s initial business focus was to manufacture, market and sell an array of beauty and personal care products, including hair care and hair treatments, as well as beauty tools. The Company's products historically have been sold to the professional salon market, principally through distributors to professional salons in the North America and has expanded its focus to retailers, online segments and licensing opportunities. BPU no longer manufactures products and has focused on licensing agreements.

 

I’M1, LLC. (“I’M1”) was formed in California in September 2016. IM1 Holdings, LLC, a California limited liability company, (“IM1 Holdings”) was the initial member of I’M1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that focuses on providing millennial-inspired lifestyle products under the I’M1 brand. I’M1 has entered into an exclusive wholesale license agreement with kathy ireland® Worldwide in connection with the use of the intellectual property related to this brand.

 

Encore Endeavor 1, LLC (“EE1”) was formed in California in March 2016. EE1 Holdings, LLC, a California limited liability company, (“EE1 Holdings") was the initial member of EE1. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. EE1 is a brand management company and producer and marketer of multiple entertainment distribution platforms under the EE1 brand.

 

Level H&W, LLC (“Level H&W”) was formed in North Carolina in October 2017 and began operations in fiscal 2018; we own 100% interest in Level H&W. The Company signed an agreement with kathy ireland® Worldwide to retain exclusive rights to the intellectual property and other rights in connection with kathy ireland® Health & Wellness™ and its associated trademarks and tradenames. Level H&W focuses on establishing licensing arrangements under the kathy ireland® Health & Wellness™ brand. The agreement initially was a seven year agreement with a three year option to extend by the Company. The Company agreed to pay $840,000 over the license term of seven years, of which $480,000 was paid by January 1, 2018, and $120,000 was to be paid on January 1 of subsequent years until paid in full. The Company will pay kathy ireland® Worldwide 33 1/3% of net proceeds we receive under any sublicense agreements we may enter into for this intellectual property as royalties, with credit being applied for any payments made toward the $840,000. In January 2018, the Company, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The Company capitalized the cost into

intangibles and is amortizing them over the term of the licensing agreement. In December 2018, the Company agreed to and paid the balance owed as final payment at a reduced price of $300,000.

 

 

On November 17, 2017, the Company completed an initial public offering (the “IPO”) of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million. The Company received approximately $10.9 million in net proceeds after deducting expenses and commissions. On October 2, 2018, the Company completed a secondary public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of approximately $6.9 million. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other offering expenses payable by us.

 

On December 20, 2018 the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, completed a two-step merger (the “Mergers”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). Upon completion of the Mergers, cbdMD LLC survived and operates the prior business of Cure Based Development. On April 10, 2019, cbdMD LLC was renamed to CBD Industries LLC (“CBDI”). As consideration for the Mergers, the Company has a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement. CBDI produces and distributes various high-grade, premium cannibidiol oil (“CBD”) products under the cbdMD brand. CBD is a natural substance produced from the hemp plant and the products manufactured by CBDI are non pyschoactive as they do not contain tetrahydrocannibinol (THC).

 

Principles of Consolidation

 

The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries CBDI, BPU and Level H&W. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).

 

Use of Estimates

 

The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, trade support costs, certain assumptions related to the valuation of investments other securities, marketable securities, common stock, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities, contingent liability and, hence consideration for the Mergers is a material estimate. Actual results could differ from these estimates.

 

Cash and Cash Equivalents

 

For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.

 

Accounts receivable and Accounts receivable other

 

Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of the customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of March 31, 2019 we have an allowance for doubtful accounts of $15,595, and had no allowance at September 30, 2018.

 

In addition, the Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as

an asset on the balance sheet as either an investment marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a private entity). 

 

Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the financial statements.

 

 

Receivable and Merchant Reserve

 

The Company primarily sells its products through the internet and has an arrangement to process customer payments with third-party payment processors. The arrangement with the payment processor requires that the Company pays a fee of between 5.95% - 6.95% of the transaction amounts processed. Pursuant to this agreement, there is a waiting period between 4 -14 days prior to reimbursement to the Company, as well as a calculated reserve which the payment processor holds back. Fees and reserves can change periodically with notice from the processors. At March 31, 2019, the receivable from payment processors included approximately $343,230 for the waiting period amount and is recorded as accounts receivable in the accompanying consolidated balance sheet and $626,160 for the reserve amount for a total receivable of $969,390.

 

Marketable Securities

 

Marketable securities that are equity securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded as an unrealized gain or (loss) in the Statements of Operations in the period of the change. Upon the disposition of a marketable security, the Company records a realized gain or (loss) on the Company’s consolidated statements of operations.  On October 1, 2018, as a result of the adoption of ASU 2016-01 – Financial Instruments, the Company reclassified $2,512,539 of net unrealized losses on marketable securities, that were formerly classified as available-for-sale securities before the adoption of the new standard, from Accumulated Other Comprehensive Loss to Accumulated Deficit.

 

Investment Other Securities

 

For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting in accordance with ASC 325-10. Under the cost method, dividends received from the investment are recorded as dividend income within non-operating income. 

 

Other-than-Temporary Impairment

 

The Company’s management periodically assesses its investment other securities, which are held at cost less impairment, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statement of operations. If the carrying value of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its carrying value, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations. 

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, freight-in, and production fill and labor (portions of which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and at a minimum perform a physical inventory count annually near fiscal year end.

 

Customer Deposits

 

Customer deposits consist of payments received in advance of revenue recognition. Revenue is recognized as revenue recognition criteria are met.

 

 

Property and Equipment

 

Property and equipment items are stated at cost less accumulated depreciation. Expenditures for maintenance and repairs are charged to operating expense as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show booths and equipment, three to four years for manufacturer’s molds and plates, computers, furniture and equipment, leasehold improvements, and software. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statement of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.

 

Fair value accounting 

The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

 

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.

 

When the Company records an investment in marketable securities the asset is valued at fair value. For investment other securities, it will value the asset using the cost method of accounting.  Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the Statement of Operations. For investment other securities we use the cost method and hold the securities at cost less impairment. The company periodically compares the fair value of the investment other security to cost in order to determine if there is an other-than-temporary impairment that should be recorded.

 

Intangible Assets

 

The Company's intangible assets consist of trademarks, goodwill, and other intellectual property, which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred.

 

Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, finite lived intangibles are reviewed annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.

 

In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would

have on the classification of the acquisition as a business combination or an asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all acquired assets and assumed liabilities for valuation in a business combination, including the determination of intangible asset values.

 

 

Contingent liability

 

A significant component of the purchase price consideration for the Company’s acquisition of CBDI includes a fixed number of future shares to be issued as well as a variable number of future shares to be issued based upon the post-acquisition entity reaching certain specified future revenue targets, as further described in Note 9. The Company made a determination of the fair value of the contingent liabilities as part of the valuation of the assets acquired and liabilities assumed in the business combination.

 

The Company recognizes both the fixed number of shares to be issued, and the variable number of shares to be potentially issued, as contingent liabilities on its Consolidated Balance Sheets. These contingent liabilities are recorded at fair value upon the acquisition date and are remeasured quarterly based on the reassessed fair value as of the end of that quarterly reporting period.

 

For the three months ending March 31, 2019, the contingent liabilities associated with the business combination were increased by $30,914,074 to reflect their reassessed fair values as of March 31, 2019. For the three months ended March 31, 2019, the Company made no material adjustments to the forecasted performance of the post-acquisition entity that would impact the estimated likelihood that the revenue targets disclosed in Note 9 would be met. The primary catalyst for the $30,914,074 increase in contingent liabilities is the change in the Company’s share price between December 31, 2018 and March 31, 2019. These increases or reductions to the contingent liabilities are reflected within Other Expenses on the Consolidated Statements of Operations.

 

Common stock

 

The Company was a private company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that included the issuance of common stock to an unrelated party at a specified price. In the event, however, there had not been a recent and significant equity financing transaction, or the nature of the business had significantly changed subsequent to an equity financing, we used valuation techniques, which included discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stock has been valued by the market since that date.

 

Revenue Recognition

 

The Company adopted ASC 606, Revenue from Contracts with Customers using the modified retrospective method beginning with our quarter ending December 31, 2018. The adoption of the new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product, the services have been rendered, or the usage-based royalty has been earned. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to any of its revenue streams, no adjustment to retained earnings was required upon adoption.

 

Under the ASC 606, the Company recognizes revenues when its customer obtains control of promised goods or services, in an amount that reflects the consideration which it expects to receive in exchange for those goods. The Company recognizes revenues following the five step model prescribed under ASC 606: (i) identify contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenues when (or as) we satisfy the performance obligation.

 

Performance Obligations

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer. The Company has reviewed its various revenue streams for its existing contracts under the five-step approach. The Company has entered into various license agreements that provide revenues based on guarantee minimum royalty payments with additional royalty revenues based on a percentage of defined sales. Guaranteed minimum royalty payments (fixed revenue) are recognized on a straight-line basis over the term of the contract, as defined in each license agreement. Earned royalties and earned royalties in excess of the fixed revenue (variable revenue) are recognized as income during the period corresponding to the licensee’s sales. Earned royalties in excess of fixed revenue are only recognized when the Company is reasonably certain that the guaranteed minimums payments for the period will be exceeded.

 

The below table summarizes amounts related to future performance obligations under fixed contractual arrangements as of March 31, 2019:

 

	Remainder of fiscal 2019	2020 and thereafter
Future performance obligations	$0	$0

 

 

Allocation of transaction price

 

At times, the Company enters into contracts with customers wherein there are multiple elements that may have disparate revenue recognition patterns. In such instances, the Company must allocate the total transaction price to these various elements. This is achieved by estimating the standalone selling price of each element, which is the price at which we sell a promised good or service separately to a customer.

 

In circumstances where we have not historically sold relevant products or services on a standalone basis, the Company utilizes the most situationally appropriate method of estimating standalone selling price. These methods include (i) an adjusted market assessment approach, wherein we refer to prices from our competitors for similar goods or serves and adjust those prices as necessary to reflect our typical costs and margins, (ii) an expected cost plus margin approach, wherein we forecast the costs

that we will incur in satisfying the identified performance obligation and adding an appropriate margin to such costs, and (iii) a residual approach, wherein we adjust the total transaction price to remove all observable standalone selling prices of other goods or services included in the contract and allocate the entirety of the remaining contract amount to the remaining obligation.

 

Revenue recognition

 

The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is upon shipping. Net sales are comprised of gross revenues less product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although currently the Company does not have a formal return policy and historically our returns have been immaterial, in connection with the Mergers with Cure Based Development we are evaluating implementation of a formal refund/return policy.

 

The Company also enters into various license agreements that provide revenues based on royalties as a percentage of sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement.  Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received.  Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable. Licensing for trademarks are considered symbolic licenses, which contain the characteristics of a right-to-access license since the customer is simultaneously receiving the Intellectual Property and benefiting from it throughout the license period. As such, the Company primarily records revenue from licenses on a straight-line basis over the license period as the performance obligation is satisfied over time.

 

In regard to sales for services provided, the Company records revenue when the customer has accepted services and the Company has a right to payment. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed. 

 

Disaggregated Revenue

 

Our segment reporting categorizes Company activity into the following broad transaction types: product sales, licensing arrangements and advisory services. We believe that these segment categories appropriately reflect how the nature, amount, timing and uncertainty of revenue and cash flows are impacted by economic factors. See Note 15 – Segment Information, for disaggregated presentation of revenue.

 

 

Contract Balances

 

Contract assets represent unbilled receivables and are presented within accounts receivable, net on the condensed consolidated balance sheets. Contract liabilities represent unearned revenues and are presented as deferred revenue or customer deposits on the condensed consolidated balance sheets.

 

The below table summarize the net change in contract assets and contract liabilities from October 1, 2018 to March 31, 2019:

 

	Entertainment	Products	Licensing	Total
Balance at September 30, 2018	$37,500	-	$115,625	$153,125
Billed during three months ended December 31, 2018	75,000	265,000	-	340,000
Earned during three months ended December 31, 2018	(68,750)	-	(115,625)	(184,375)
Balance at December 31, 2018	$43,750	$265,000	-	$308,750
Amount returned during three months ended March 31, 2019		(175,000)		(175,000)
Billed during three months ended March 31, 2019	-	-	10,000	10,000
Earned during three months ended March 31, 2019	(18,750)	-	(1,667)	(20,417)
Balance at March 31, 2019	$25,000	$90,000	$8,333	$123,333

 

 

Cost of Sales

 

Our cost of sales includes costs associated with distribution, fill and labor expense, components, manufacturing overhead, and outbound freight for our products divisions, and includes labor, third-party service providers, and amortization expense related to intellectual property for our licensing and entertainment divisions. In our products division, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These expenses are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.

 

Advertising Costs

 

The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $1,559,000 and $248,000 in advertising and related marketing and promotional costs included in operating expenses during the three months ended March 31, 2019 and 2018, respectively. The Company incurred approximately $1,775,000 and $581,000 in advertising and related marketing and promotional costs included in operating expenses during the six months ended March 31, 2019 and 2018, respectively.

 

 

Shipping and Handling Fees and Costs

 

All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.

 

Income Taxes

 

The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. CBDI and Level H&W are wholly owned subsidiaries and are disregarded entities for tax purposes and their entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.

 

The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized. US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of March 31, 2019 and 2018, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.

 

 

Concentrations

 

Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.

 

The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had a $741,300 uninsured balance at March 31, 2019 and a $0 uninsured balance at September 30, 2018. Funds which are not subject to coverage or loss under FDIC were $3,355,000 and $4,003,003 at March 31, 2019 and September 30, 2018, respectively.

 

Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company did not have any customers that represented a significant amount of our sales for the three and six months ended March 31, 2019, respectively. The Company had sales to one customer that individually represented approximately 89% and 73% of total net sales for the three and six months ended March 31, 2018, respectively. The aggregate accounts receivable of such customers represented approximately 73% of the Company’s total accounts receivable at March 31, 2018.

 

Stock-Based Compensation

 

We account for our stock compensation under the ASC 718-10-30, Compensation - Stock Compensation using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which

an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.

 

We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.

 

Net Income (Loss) Per Share

 

The Company uses ASC 260-10, Earnings Per Share for calculating the basic and diluted income (loss) per share. The Company computes basic income (loss) per share by dividing net income (loss) and net income (loss) attributable to common shareholders by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.

 

At the three and six months ended March 31, 2019, 833,255 potential shares were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.

 

 

New Accounting Standards

 

In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption is permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The new revenue standards became effective for the Company on October 1, 2018 and were adopted using the modified retrospective method. The adoption of the new revenue standards as of October 1, 2018 did not change the Company’s revenue recognition as the majority of its revenues continue to be recognized when the customer takes control of its product, the services have been rendered, or the royalty has been received. As the Company did not identify any accounting changes that impacted the amount of reported revenues with respect to its product revenues, no adjustment to retained earnings was required upon adoption.

 

In February 2016, the FASB issued ASU 2016-02, Leases.  The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company does have a 3 year lease for a manufacturing facility and is assessing the impact of implementing this guidance on its consolidated financial position, results of operations and liquidity.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820). The ASU modifies, removes, and adds several disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The ASU 2018-13 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted upon issuance of ASU 2018-13. An entity is permitted to early adopt any removed or modified disclosures upon issuance of ASU 2018-13 and delay adoption of the additional disclosures until their effective date. The Company is evaluating the effect ASU 2018-13 will have on its consolidated financial statements and disclosures and has not yet determined the effect of the standard on its ongoing financial reporting at this time.

 

 

NOTE 2 – ACQUISITIONS

 

On December 20, 2018 (the “Closing”), the Company, and its newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, both North Carolina limited liability companies, completed a two-step merger (the “Merger Agreement”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). The Merger Agreement provided that AcqCo LLC merge with and into Cure Based Development with Cure Based Development as the surviving entity (the “Merger”), and immediately thereafter Cure Based Development merged with and into cbdMD LLC with cbdMD LLC as the surviving entity (the “Secondary Merger” and collectively with the Merger, the “Mergers”). cbdMD LLC was renamed on April 10, 2019 to CBD Industries LLC and has continued as a wholly-owned subsidiary of the Company and maintains the operations of Cure Based Development pre-closing. As consideration for the Merger, the Company has a contractual obligation, after approval by our shareholders, to issue 15,250,000 shares of our common stock to the members of Cure Based Development, of which 8,750,000 of the shares will vest over a five year period and are subject to a voting proxy agreement. The Merger Agreement also provides that an additional 15,250,000 shares of our common stock can be issued upon the satisfaction of aggregate net revenue criteria by CBDI, within 60 months following the Closing. The net revenue criteria are: $20.0, $40.0, $80.0 and $160.0 million, in aggregate $300.0 million (See Note 9 for more information).

 

As discussed in Note 17, the initial 15,250,000 shares were approved by our shareholders to be issued as of April 19, 2019.

 

The Company owns 100% of the equity interest of CBDI. The valuation and purchase price allocation for the Mergers remains preliminary and will be finalized by September 30, 2019.

 

During the three months ended March 31, 2019, the Company identified equipment valued at $114,275 that was improperly classified in the initial purchase price allocation. The purchase price allocation was adjusted by increasing Property and equipment, net and reducing Goodwill by this amount.

 

The following table presents the preliminary purchase price allocation:

 

Consideration	$74,353,483
Assets acquired:
Cash and cash equivalents	$1,822,331
Accounts receivable	850,921
Inventory	1,054,926
Other current assets	38,745
Property and equipment, net	723,223
Intangible assets	21,585,000
Goodwill	55,144,269
Total assets acquired	81,219,415
Liabilities assumed:
Accounts payable	257,081
Notes payable – related party	764,300
Customer deposits - related party	265,000
Accrued expenses	471,551
Deferred tax liability	5,108,000
Total Liabilities assumed	6,865,932
Net Assets Acquired	$74,353,483

 

The goodwill generated from this transaction can be attributed to the benefits the Company expects to realize from the growth strategies the acquired Company had developed and the entry into an emerging market with high growth potential. See Note 9 regarding contingent liability.

 

In connection with the purchase price allocation, the Company recorded a deferred tax liability of approximately $5,108,000, with a corresponding increase to goodwill, for the tax effect of the acquired intangible assets from Cure Base Development. This liability was recorded as there will be no future tax deductions related to the acquired intangibles, and we have identified these as indefinite-lived intangible assets.

 

The Company also acquired estimated net operating loss carryforwards of approximately $1,996,000, Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. The Company will perform an analysis to determine if a change of ownership under IRC Section 382 had occurred and if so, determine the expiration and limitations of use of the NOLs.

 

 

NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES

 

The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the company will value it, and the underlying revenue, using the estimated fair value of the services provided. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a private entity). 

 

 On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in Investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the fair value of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests. In August 2017, the Company also provided referral services for kathy Ireland® Worldwide and this customer. As compensation the Company received an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the investment and determined there was not an impairment for the period ended March 31, 2019.

 

On September 19, 2017, I’M1 and EE1 in aggregate exercised a warrant for 56,552 shares of common stock for services delivered to a customer and accounted for this in Investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $56,552, which was based on all 2017 financing transactions of the customer set at $1.00 per share, with the most recent third party transaction in August 2017. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months. The Company assessed the investment and determined there was not an impairment for the period ended March 31, 2019.

 

In November 2017, the Company completed services in relation to an agreement with SG Blocks, Inc. (NASDAQ: SGBX). As payment for these services, SG Blocks issued 50,000 shares of its common stock to Level Brands. The customer is a publicly traded entity and the stock was valued based on the trading price at the day the services were determined delivered, which was $5.09 per share for an aggregate value of $254,500. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange. From November 7, 2018 thru December 13, 2018, the Company sold the 50,000 shares held and recorded a realized loss on marketable securities of $25,673 as of December 31, 2018 in the consolidated statement of operations. The Company no longer has this equity position.

 

In December 2017, the Company completed services per an advisory services agreement with Kure Corp, formerly a related party. As payment for these services, Kure Corp issued 800,000 shares of its stock to Level Brands. The customer was a private entity and the stock was valued at $400,000, which was based on financing activities by Kure Corp in September 2017 in which shares were valued at $0.50 per share. The Company had classified this common stock, cumulative value

of $400,000, as Level 3 for fair value measurement purposes as there were no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions. On April 30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. Details can be reviewed in our Form 10-K previously filed. As a result of this merger we received the first issuance of 380,952 shares from Isodiol and valued them based on the trading price on April 30, 2018 of $0.63 per share which totaled $240,000. We also removed the value of the Kure equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure equity will not be received until the future issuances based on earn out goals, we have recorded an accounts receivable other of $160,000 as of December 31, 2018. On March 31, 2019, Isodiol spun off Kure to its original shareholders by issuing back all original Kure stock. As a result of the spin off, the Company will receive 800,000 shares of Kure stock valued at $160,000 and as Kure is private, the shares will be treated as a Level 3 stock and will be accounted for against the $160,000 accounts receivable other. The Company has determined that the 800,000 shares have a fair market value over $160,000. The Company has assessed the common stock and determined there was not an indication of an other-than-temporary impairment at March 31, 2019.

 

On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from a prior customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPO offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The customer is a private entity. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the value paid, which was the price offered to all third party investors. As of March 31, 2019, the Company has determined there is no impairment on the value of the shares of stock.

 

 

On December 30, 2017 the Company entered into anAgreement with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company which is a developer of pharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products. As payment for these services, the Company has received 1,226,435 shares of Isodiol common stock between December 31, 2017 and January 2019. The Company also received 38,095 shares of Isodiol stock upon Isodiol’s acquisition of Kure Corp, giving the Company a total of 1,264,530 shares. During the three months ended March 31, 2019 we sold 110,636 shares of Isodiol stock and recorded a realized loss of $185,834. As of March 31, 2019 we have 1,153,894 shares of Isodiol stock. At March 31, 2019 the Isodiol shares were valued at $1.19 per share, and we recorded $557,193 and $(996,110) as unrealized gain (loss) on the Company’s consolidated financial statements for the three and six months ended March 31, 2019, respectively. This investment is accounted for as a cost method investment.

 

On June 26, 2018 Level Brands entered into an Agreement with Boston Therapeutics, Inc. (OTC: BTHE), a pharmaceutical company focused on the development, manufacturing and commercialization of novel compounds to address unmet medical needs in diabetes. The agreement involved a licensing agreement and required the Company to create IP for a branding / marketing campaign. As payment for these services, Boston Therapeutics agreed to pay $850,000, of which $450,000 was issued as a note due no later than December 31, 2019 and $400,000 to be paid thru the issuance of BTI common stock based on the trading price at the agreement date ($0.075). As the stock has not been issued, we have recorded an unrealized gain (loss) of $53,333 and ($186,667) for the three and six month periods ended March 31, 2019, respectively based on a trading price of $0.04 at March 31, 2019.

 

The table below summarizes the assets valued at fair value as of March 31, 2019:

 

	In Active Markets for Identical Assets and Liabilities (Level 1)	Significant Other Observable Inputs  (Level 2)	Significant Unobservable Inputs  (Level 3)	Total Fair Value at March 31, 2019
Marketable securities	$1,373,133	-	$-	$1,373,133
Investment other securities	-	-	$1,159,112	$1,159,112

 

	Level 1	Level 2	Level 3	Total
Balance at September 30, 2018	$1,050,961	$-	$1,159,112	$2,210,073
Sale of equities	$(200,000)	$-	$-	$(200,000)
Change in value of equities	$(132,303)	$-	$-	$(132,303)
Balance at December 31, 2018	$718,658	$-	$1,159,112	$1,877,770
Sale of equities	$(103,998)	$-	$-	$(103,998)
Receipt of equity investment upon completion of services	$470,000	$-	$-	$470,000
Change in value of equities	$288,473	$-	$-	$288,473
Balance at March 31, 2019	$1,373,133	$-	$1,159,112	$2,532,245

 

 

 

NOTE 4 – INVENTORY

 

Inventory at March 31, 2019 and September 30, 2018 consists of the following:

 

	March 31,	September 30,
	2019	2018
Finished goods	$1,062,562	$18,531
Inventory components	1,002,903	104,692
Inventory prepaid	306,870	-
Total	$2,372,335	$123,223