Loading...
Docoh

cbdMD (YCBD)

Filed: 13 Aug 19, 8:00pm
 
 

  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
☑ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
 
☐ 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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.
 
8845 Red Oak Blvd, Charlotte, NC 28217
Address of Principal Executive Offices Zip Code
 
704-445-3060
Registrant’s Telephone Number, Including Area Code
 
 
4521 Sharon Rd, suite 450 Charlotte, NC 8211
Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each classTrading Symbol(s)Name of each exchange on which registered
commonYCBDNYSE American
 
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 CORPORATE ISSUERS
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
 
27,720,356 shares of common stock are issued and outstanding as of August 14, 2019
  

 
 
 
TABLE OF CONTENTS
 
 
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 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, "third quarter of 2018" refers to the three months ended June 30, 2018 and "third quarter of 2019" refers to the three months ended June 30, 2019.
 
The information contained on our websites at www.cbdmd.com, www.beautyandpinups.com, www.im1men.com, and www.encoreendeavor1.com are not part of this report.
 

 
2
 
 
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:
 
our ability to successfully integrate the operations of Cure Based Development following the Mergers;
● 
our limited operating history;
● 
the limited operating histories of our subsidiaries;
● 
our history of losses;
the evolving and highly competitive market in which cbdMD operates;
the evolution of the laws and regulations impacting cbdMD
● 
the terms of various agreements with kathy ireland® Worldwide and possible impacts on our management's abilities to make certain decisions regarding the operations of our Company;
● 
our dependence on consumer spending patterns;
● 
our history on reliance on sales from a limited number of customers, including related parties;
● 
risks associated with our failure to effectively promote our brands;
● 
our ability to identify and successfully acquire additional brands and trademarks;
● 
the operating agreements of our I'M1 and EE1 subsidiaries;
● 
the accounting treatment of securities we accept as partial compensation for services;
● 
our ability to liquidate securities we accept as partial compensation for services;
● 
the possible need to raise additional capital in the future;
● 
terms of the contracts with third parties in each of our divisions;
● 
possible conflicts of interest with kathy ireland® Worldwide;
● 
possible litigation involving our licensed or manufactured products;
● 
our ability to effectively compete and our dependence on market acceptance of our brands;
● 
the lack of long-term contracts for the purchase of products from our products division;
● 
our ability to protect our intellectual property;
● 
additional operational risks associated with our products division;
● 
risks associated with volatility in the market price of our common stock;
● 
risks associated with any future failure to satisfy the NYSE American LLC continued listing standards;
● 
dilution to our shareholders from the issuance of additional shares of common stock by us and/or the exercise of outstanding options and warrants;
● 
risks associated with our status as an emerging growth company;
● 
risks associated with control by our executive officers, directors and affiliates;
● 
risks associated with our failure to maintain an effective system of internal control over financial reporting;
● 
risks associated with unfavorable research reports; and
● 
risks associated with our articles of incorporation, bylaws and North Carolina law.
 
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 (the “SEC”) on December 12, 2018 (the "2018 10-K") and our Quarterly Report on Form 10-Q for the period ended March 31, 2019 as filed with the SEC on May 15, 2019 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.
  

 
3
 
 
PART 1 - FINANCIAL INFORMATION
 
ITEM 1.  FINANCIAL STATEMENTS.
 
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND SEPTEMBER 30, 2018
 
 
 
(Unaudited)
 
 
 
 
 
 
June 30,
 
 
September 30,
 
 
 
2019
 
 
2018
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
  Cash and cash equivalents
 $11,633,213 
 $4,282,553 
  Accounts receivable
  562,800 
  307,874 
  Accounts receivable - related party
  1,103,628 
  1,537,863 
  Accounts receivable other
  276,795 
  1,743,874 
  Deposits
 6,850
 -
  Merchant reserve
  626,160 
  - 
  Marketable securities
  880,132 
  1,050,961 
  Investment other securities
  1,159,112 
  1,159,112 
  Note receivable
  486,000 
  459,000 
  Note receivable - related party
  - 
  156,147 
  Inventory
  3,116,458 
  123,223 
  Inventory prepaid
  643,649 
  - 
  Deferred issuance costs
  - 
  28,049 
  Prepaid consulting agreement
  - 
  200,000 
  Prepaid rent
  60,000 
  180,000 
  Prepaid services with stock
  198,000 
  - 
  Prepaid equipment - deposit
  889,673 
  - 
  Prepaid expenses and other current assets
  543,607 
  561,491 
Total current assets
  22,186,077 
  11,790,147 
 
    
    
Other assets:
    
    
  Property and equipment, net
  1,016,757 
  53,480 
  Goodwill
  55,133,697 
  - 
  Intangible assets, net
  22,572,097 
  3,173,985 
Total other assets
  78,722,551 
  3,227,465 
 
    
    
Total assets
 $100,908,628 
 $15,017,612 
 
See Notes to Condensed Consolidated Financial Statements
 
4
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2019 AND SEPTEMBER 30, 2018
(continued)
  
 
 
 (Unaudited)
 
 
 
 
 
 
 June 30,
 
 
 September 30,
 
 
 
 2019
 
 
 2018
 
Liabilities and shareholders' equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
  Accounts payable
 $1,886,395 
 $473,717 
  Accounts payable - related party
  - 
  7,860 
  Deferred revenue
  4,585 
  161,458 
  Customer deposit - related party
  34,404 
  - 
  Accrued payroll
  326,537 
  - 
  Accrued expenses
  77,985 
  6,920 
  Accrued expenses - related party
  - 
  320,000 
Total current liabilities
  2,329,906 
  969,955 
 
    
    
Long term liabilities
    
    
  Other long term liabilities
  - 
  7,502 
  Contingent liability
  70,600,000 
  - 
  Deferred tax liability
  2,833,000 
  21,000 
Total long term liabilities
  73,433,000 
  28,502 
 
    
    
Total liabilities
  75,762,906 
  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,
    
    
  27,720,356 and 8,123,928 shares issued and outstanding, respectively
  27,720 
  8,124 
Additional paid in capital
  96,130,158 
  21,781,095 
Accumulated other comprehensive income (loss)
  - 
  (2,512,539)
Accumulated deficit
  (70,782,736)
  (6,669,497)
Total cbdMD, Inc. shareholders' equity
  25,375,142 
  12,607,183 
Non-controlling interest
  (229,420)
  1,411,972 
Total shareholders' equity
  25,145,722 
  14,019,155 
 
    
    
Total liabilities and shareholders' equity
 $100,908,628 
 $15,017,612 
 
    
    
  
See Notes to Condensed Consolidated Financial Statements
 
5
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
 
 
 
Three months
 
 
Three months
 
 
Nine months
 
 
Nine months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
June 30,
2019
 
 
June 30,
2018
 
 
June 30,
2019
 
 
June 30,
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Sales
 $9,784,199 
 $1,851,116 
 $19,042,098 
 $5,440,653 
Sales related party
  - 
  1,350,000 
  - 
  1,550,000 
Total Gross Sales
  9,784,199 
  3,201,116 
  19,042,098 
  6,990,653 
 Allowances
  (1,739,863)
  (2,686)
  (4,075,381)
  (23,558)
    Net sales
  8,044,336 
  1,848,430 
  14,966,717 
  5,417,095 
  Net sales related party
  - 
  1,350,000 
  - 
  1,550,000 
Total Net Sales
  8,044,336 
  3,198,430 
  14,966,717 
  6,967,095 
   Cost of sales
  2,959,198 
  1,106,706 
  5,584,868 
  1,858,651 
 
    
    
    
    
  Gross Profit
  5,085,138 
  2,091,724 
  9,381,849 
  5,108,444 
 
    
    
    
    
Operating expenses excluding impairment losses
  11,230,914 
  1,464,239 
  18,680,857 
  4,089,006 
Impairment of intangible assets
  2,114,334 
  - 
  2,114,334 
  - 
     Operating expenses
  13,345,248 
  1,464,239 
  20,795,190 
  4,089,006 
  Income (Loss) from operations
  (8,260,110)
  627,485 
  (11,413,341)
  1,019,438 
    Realized and Unrealized gain (loss) on  marketable securities
  (497,451)
  - 
  (1,705,069)
  - 
     (Increase) of contingent liability
  (21,547,606)
  - 
  (52,461,680)
  - 
     Gain (loss) on disposal of property and equipment
  - 
  - 
  (34,333)
  (69,311)
   Interest income (expense)
  14,211 
  (232)
  76,330 
  (737)
  Income (loss) before provision for income taxes
  (30,290,956)
  627,253 
  (65,538,093)
  949,390 
 
    
    
    
    
  Benefit (Provision) for income taxes
  1,088,000 
  (62,000)
  2,296,000 
  (6,000)
   Net Income (Loss)
  (29,202,956)
  565,253 
  (63,242,093)
  943,390 
  Net Gain (Loss) attributable to noncontrolling interest
  (1,503,707)
  359,179 
  (1,641,391)
  465,848 
 
    
    
    
    
Net Income (Loss) attributable to cbdMD, Inc. common shareholders
 $(27,699,249)
 $206,074 
 $(61,600,702)
 $477,542 
 
    
    
    
    
Net Income (Loss) per share:
    
    
    
    
  Basic
 $(1.19)
 $0.03 
 $(4.22)
 $0.06 
  Diluted
 $- 
 $0.03 
 $- 
 $0.06 
 
    
    
    
    
 Weighted average number of shares Basic:
  23,193,793 
  8,075,341 
  14,585,619 
  7,614,621 
 Weighted average number of shares Diluted:
    
  8,092,931 
    
  7,637,012 
 
See Notes to Condensed Consolidated Financial Statements
 
6
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(Unaudited)
 
 
 
Three months
 
 
Three months
 
 
Nine months
 
 
Nine months
 
 
 
Ended
 
 
Ended
 
 
Ended
 
 
Ended
 
 
 
June 30,
2019
 
 
June 30,
2018
 
 
June 30,
2019
 
 
June 30,
2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net Income (Loss)
 $(29,202,956)
 $565,253 
 $(63,242,093)
 $943,390 
Other Comprehensive Income:
    
    
    
    
   Net Unrealized Gain (Loss) on Marketable Securities, net of tax
  - 
  (1,326,727)
  - 
  (1,923,304)
  Comprehensive Income (Loss)
  (29,202,956)
  (761,474)
  (63,242,093)
  (979,914)
 
    
    
    
    
Comprehensive Income (loss) attributable to non-controlling interest
  (1,503,707)
  359,179 
  (1,641,391)
  465,848 
Comprehensive Income (Loss) attributable to cbdMD, Inc. common shareholders
 $(27,699,249)
 $(1,120,653)
 $(61,600,702)
 $(1,445,762)
  
See Notes to Condensed Consolidated Financial Statements
 
7
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(unaudited)
 
 
 
Nine Months
Ended
June 30,
 
 
Nine Months
Ended
June 30,
 
 
 
2019
 
 
2018
 
Cash flows from operating activities:
 
 
 
 
 
 
Net loss
 $(63,242,093)
 $943,390 
Adjustments to reconcile net loss to net
    
    
  cash used by operating activities:
    
    
  Stock based compensation
  2,022,812 
  386,719 
  Restricted stock expense
  92,000 
  39,100 
  Issuance of stock / warrants for service
  289,750 
  478,002 
  Intangible impairment
  2,114,334 
  - 
  Inventory impairment
  - 
  102,124 
  Depreciation and amortization
  272,121 
  169,788 
  Gain on settlement of Note
  (20,000)
  - 
  Increase/(Decrease) in contingent liability
  52,461,680 
  - 
  Realized and unrealized loss of marketable securities
  1,705,069 
  - 
  Loss on sale of property and equipment
  - 
  69,311 
  Non-cash consideration received for services
  (470,000)
  (3,404,502)
Changes in operating assets and liabilities:
    
    
  Accounts receivable
  399,074 
  (45,502)
  Accounts receivable – related party
  204,902 
  (637,675)
  Other accounts receivable
  (298,754)
  (1,204,003)
  Other accounts receivable – related party
    
  236,364 
  Note receivable
  (27,000)
  (450,000)
  Note receivable – related party
  156,147 
  114,802 
  Merchant reserve
  (199,907)
  - 
  Inventory
  (2,581,958)
  10,340 
  Prepaid expenses and other current assets
  (717,894)
  (980,952)
  Marketable securities
  701,593 
  - 
  Accounts payable and accrued expenses
  1,073,211 
  (324,785)
  Accounts payable and accrued expenses – related party
  (313,591)
  (470,905)

    
    
  Deferred revenue / customer deposits
  (380,804)
  121,916 
  Deferred tax liability
  (2,296,000)
  6,000 
Cash used by operating activities
  (9,055,308)
  (4,840,368)
 
    
    
Cash flows from investing activities:
    
    
   Net cash used for merger
  (1,167,295)
  - 
   Purchase of investment other securities
  - 
  (300,000)
   Purchase of intangible assets
  (79,999)
  (360,000)
   Purchase of property and equipment
  (359,421)
  (2,465)
Cash used by investing activities
  (1,606,715)
  (662,465)
 
    
    
Cash flows from financing activities:
    
    
   Proceeds from issuance of common stock
  19,009,897 
  10,927,535 
Note Payable-related party
  (764,300)
  -
 
   Deferred issuance costs
  (232,914)
  (285,086)
Cash provided by financing activities
  18,012,683
  10,642,449 
Net increase (decrease) in cash
  7,350,660 
  5,139,616 
Cash and cash equivalents, beginning of period
  4,282,553 
  284,246 
Cash and cash equivalents, end of period
 $11,633,213 
 $5,423,862 
 
See Notes to Condensed Consolidated Financial Statements
 
8
 
 
cbdMD, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2019 AND 2018
(unaudited) (continued)
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
Nine Months
Ended
June 30,
 
 
Nine Months
Ended
June 30,
 
 
 
2019
 
 
2018
 
 
 
 
 
 
 
 
Cash Payments for:
 
 
 
 
 
 
    Interest expense
 $36,418
 $505 
 
    
    
Non-cash financial activities:
    
    
Warrants issued to secondary selling agent
 $309,592 
 $171,600 
Equity investment exchange to be issued in the future
 $- 
 $160,000 
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 
 $- 
  
See Notes to Condensed Consolidated Financial Statements
 
9
 
 
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 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 
  (13,415,658)
Issuance of common stock for merger
  15,250,000 
  15,250 
  53,199,913 
  - 
  - 
  - 
  53,215,163 
Issuance of common stock
  2,300,000 
  2,300 
  12,650,600 
  - 
  - 
  - 
  12,652,900 
Issuance of options for share based compensation
  - 
  - 
  1,859,664 
  - 
  - 
  - 
  1,859,664 
Issuance of stock costs
  - 
  - 
  (55,393)
  - 
  - 
  - 
  (55,393)
Issuance of stock and warrants for services
    
    
  92,000 
  - 
  - 
  - 
  92,000 
Net loss
  - 
  - 
  - 
  - 
  (27,699,249)
  (1,503,707)
  (29,202,956)
Balance, June 30, 2019
  27,720,356
  27,720 
  96,130,158 
  - 
  (70,782,736)
  (229,420)
  25,145,722 
  
See Notes to Condensed Consolidated Financial Statements
 
10
 
 
cbdMD, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 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 
  20,699,403 
  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 income
  - 
  - 
  - 
  - 
  1,404,397 
  238,523 
  1,642,920 
Balance, March 31, 2018
  8,033,928 
  8,034 
  20,733,120 
  (596,577)
  (5,985,952)
  1,043,731 
  15,202,356 
Issuance of options for share based compensation
  - 
  - 
  355,653 
  - 
  - 
  - 
  355,653 
Issuance of stock and warrants for services
  85,000 
  85 
  420,915 
  - 
  - 
  - 
  421,000 
Other Comprehensive income (loss)
  - 
  - 
  - 
  (1,326,727)
  - 
  - 
  (1,326,727)
Net income
  - 
  - 
  - 
  - 
  206,073 
  359,180 
  565,253 
Balance, June 30, 2018
  8,118,928 
  8,119 
  21,509,688 
  (1,923,304)
  (5,779,879)
  1,402,911 
  15,217,535 
  
See Notes to Condensed Consolidated Financial Statements
 
11
 
 
cbdMD , INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE NINE MONTHS ENDED JUNE 30, 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 (“2018 10-K”). 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.
 
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 May 15, 2019, the Company completed a secondary public offering of 2,300,000 shares of its common stock for aggregate gross proceeds of $13.8 million. The Company received approximately $12.5 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
 
 
12
 
 
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 had 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, as well as to issue another 15,250,000 shares of our common stock in the future upon earnout goals being within the next 5 years. The Company’s shareholders approved the issuance of the 15,250,000 shares of common stock and they were issued to members of Cure Based Development on April 19, 2019. 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 June 30, 2019, we have an allowance for doubtful accounts of $14,689, 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 a marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a private entity). 
 
 
13
 
 
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 processors requires that the Company pay a fee between 5.95% - 6.95% of the transaction amounts processed. Pursuant to this agreement, there is a waiting period between 2 - 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 June 30, 2019, the receivable from payment processors included approximately $205,761 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 $831,921.
 
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, which is without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
 
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.
 
 
14
 
 
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 carrying value is assigned at fair value.  Any changes in fair value for marketable securities during a given period will be recorded as an unrealized gain or loss in the consolidated statement of operations. For investment other securities without a readily determinable fair value, the Company may elect to estimate its fair value at cost less impairment plus or minus changes resulting from observable price changes.
 
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 Cure Based Development 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 8. 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.
 
 
15
 
 
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 ended June 30, 2019, the contingent liabilities associated with the business combination were increased by $21,547,606 to reflect their reassessed fair values as of June 30, 2019. This increase is reflective of a change in value from march 31, 2019 of the fixed shares issued on April 19, 2019, and the variable number of shares on June 30, 2019. Additionally, as the fixed shares were issued on April 19, 2019, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the balance sheet. For the three months ended June 30, 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 8 would be met. The primary catalyst for the $21,547,606 increase in contingent liabilities is the change in the Company’s share price between March 31, 2019 and June 30, 2019. These increases or reductions to the contingent liabilities are reflected within Other Expenses on the consolidated statements of operations.
 
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 June 30, 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.
 
 
16
 
 
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, 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 14 – 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.
 
 
17
 
 
The below table summarize the net change in contract assets and contract liabilities from October 1, 2018 to June 30, 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 
Billed during three months ended June 30, 2019
  - 
  - 
  - 
  - 
Earned during three months ended June 30, 2019
  (18,750)
  (55,596)
  (1,667)
  (76,013)
Balance at June 30, 2019
 $6,250 
 $34,404 
 $6,666 
 $47,320 
 
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 division, 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 $2,604,000 and $443,000 in advertising and related marketing and promotional costs included in operating expenses during the three months ended June 30, 2019 and 2018, respectively. The Company incurred approximately $4,411,000 and $1,036,000 in advertising and related marketing and promotional costs included in operating expenses during the nine months ended June 30, 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.
 
 
18
 
 
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 June 30, 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 $10,007,079 uninsured balance at June 30, 2019 and a $0 uninsured balance at September 30, 2018. Funds which are not subject to coverage or loss under FDIC were $7,577 and $4,003,003 at June 30, 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 nine months ended June 30, 2019, respectively. The Company had sales to three customers that collectively represented approximately 89% and 80% of total net sales for the three and nine months ended June 30, 2018, respectively. The aggregate accounts receivable of such customers represented approximately 83% of the Company’s total accounts receivable and a long term note receivable at June 30, 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 policy 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.
 
 
19
 
 
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 nine months ended June 30, 2019, 1,623,255 shares that will be potentially issued in the future 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.
 
 
20
 
 
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 8 for more information).
 
The initial 15,250,000 shares were approved by our shareholders and issued on 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 that was improperly excluded from the identified assets acquired in the Mergers. The fair value of this equipment was determined to be $114,275. The purchase price allocation was adjusted by increasing Property and equipment, net and reducing Goodwill by this amount.
 
During the three months ended June 30, 2019, the Company identified interest overly accrued valued at $10,572 that was in the initial purchase price allocation. The purchase price allocation was adjusted by decreasing goodwill and accrued expenses 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
  55,133,697 
Total assets acquired
  81,208,843 
 
    
Liabilities assumed:
    
   Accounts payable
  257,081 
   Notes payable – related party
  764,300 
   Customer deposits - related party
  265,000 
   Accrued expenses
  460,979 
   Deferred tax liability
  5,108,000 
Total Liabilities assumed
  6,855,360 
 
    
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 8 regarding contingent liability.
 
 
21
 
 
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.
 
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 a 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, cbdMD, 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 June 30, 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 June 30, 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 the Company. 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 the Company. 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 impairment at June 30, 2019.
 
 
22
 
 
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 June 30, 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 an Agreement 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. At June 30, 2019, the Company has 1,042,193 shares valued at $880,132.
 
On June 26, 2018 the Company 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 $(106,667) and ($293,333) for the three and nine month periods ended June 30, 2019, respectively based on a trading price of $0.02 at June 30, 2019. At June 30, 2019, the carrying value is $106,667.
 
The table below summarizes the assets valued at fair value as of June 30, 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
June 30,
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
 $880,132 
  - 
 $- 
 $880,132 
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 
Sale of equities
 $(132,924)
 $- 
 $- 
 $(132,924)
Change in value of equities
 $(360,077)
 $- 
 $- 
 $(360,077)
Balance at June 30, 2019
 $880,132 
 $- 
 $1,159,112 
 $2,039,244 
 
 
23
 
 
NOTE 4 – INVENTORY
 
Inventory at June 30, 2019 and September 30, 2018 consists of the following:
 
 
 
June 30,
 
 
September 30,
 
 
 
2019
 
 
2018
 
Finished goods
 $1,665,037 
 $18,531 
Inventory components
  1,451,420 
  104,692 
Inventory prepaid
  643,649 
  - 
Total
 $3,760,107 
 $123,223 
 
At March 31, 2019, the Company determined that inventory related to BPU was impaired by approximately $139,217, as the BPU inventory balance was adjusted to zero as we no longer manufacture or intend to sell BPU products. During the year ended September 30, 2018, the Company determined that inventory was impaired by approximately $262,000. Impairment charges were recorded within operating expenses for the respective periods.
 
NOTE 5 – PROPERTY AND EQUIPMENT
 
Major classes of property and equipment at June 30, 2019 and September 30, 2018 consist of the following:
 
 
 
June 30,
 
 
September 30,
 
 
 
2019
 
 
2018
 
Computers, furniture and equipment
 $39,927 
 $59,770 
Show booth and equipment
  - 
  49,123 
Manufacturing equipment
  822,691 
  - 
Leasehold improvements
  269,591 
  - 
Automobiles
  24,892 
  - 
Manufactures’ molds and plates
  - 
  34,200 
 
  1,157,101 
  143,093 
Less accumulated depreciation
  (140,344)
  (89,613)
Net property and equipment
 $1,016,757 
 $53,480 
 
Depreciation expense related to property and equipment was $57,874 and $8,443 for the three months ended June 30, 2019 and 2018, respectively. Depreciation expense related to property and equipment was $119,566 and $30,757 for the nine months ended June 30, 2019 and 2018, respectively.
 
NOTE 6 – INTANGIBLE ASSETS
 
With the Mergers of Cure Based Development, the Company has made a strategic shift toward the CBD business and all entities and their associated intangibles were being assessed during the three months ended June 30, 2019 with that focus and their ability to support that business line.
 
On April 13, 2015, BPU acquired from BPUNY certain assets, including the trademark "Beauty & Pin Ups" and its variants and certain other intellectual property and assumed $277,500 of BPUNY's accounts payable to its product vendor, which was paid off in April 2016. At June 30, 2019, the Company recorded an impairment charge for the full carrying value of $234,422 (see below).
 
On January 6, 2017, the Company acquired 51% ownership in I’M1 from I’M1 Holdings. I’M1’s assets include the trademark "I’M1” and its variants and certain other intellectual property. Specifically, a licensing agreement with kathy ireland® Worldwide and an advisory agreement for services with kathy ireland® Worldwide. The licensing agreement provides the rights to use of the tradename for business and licensing purposes, this is the baseline of the business and will be required as long as the business is operating. The rights associated with this licensing agreement have been identified as indefinite-lived intangible assets. At June 30, 2019, the Company recorded an impairment charge for the full carrying value of $971,667 (see below).
 
 
24
 
 
On January 6, 2017, the Company acquired 51% ownership in EE1 from EE1 Holdings. EE1’s assets include the trademark "EE1” and its variants and certain other intellectual property. Specifically, a production deal agreement with BMG Rights Management US and an advisory agreement for services with kathy ireland® Worldwide. The rights associated with these agreements have been identified as indefinite-lived intangible assets. At June 30, 2019, the Company recorded an impairment charge for the full carrying value of $471,667 (see below).
 
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725. In addition, the Company agreed to pay $65,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef" and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. In December 2018, the parties amended the agreement to remove the annual minimum guarantee in return for a one time payment of $70,000. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $0 and $11,073 for the three months ended June 30, 2019 and 2018, respectively, and have amortized $26,205 and $33,219 for the nine months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the Company recorded an impairment charge for the full carrying value of $296,460 (see below).
 
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750. In addition, the Company agreed to pay $40,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin Du Jour," and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. In December 2018, the parties amended the agreement to remove the annual minimum guarantee in return for a one time payment of $10,000. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $0 and $6,237 for the three months ended June 30, 2019 and 2018, respectively, and have amortized $13,055 and $18,712 for the nine months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, the Company recorded an impairment charge for the full carrying value of $140,118 (see below).
 
In September 2017, the Company entered into an exclusive seven year license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 was due in equal installments on January 1 of subsequent years until the license fee is paid. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. 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: royalty payments to kathy ireland® Worldwide for the three year extension would be set at 35% of net proceeds, 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. On December 20, 2018, both parties agreed to reduce the final amount owed to $300,000 if paid within 5 days, which was paid immediately. We are amortizing the asset over the ten year term of the agreement and have amortized $29,032 and $27,097 for the three months ended June 30, 2019 and 2018, respectively, and have amortized $87,096 and $57,096 for the nine months ended June 30, 2019 and 2018, respectively.
 
On December 20, 2018, the Company completed the Mergers with Cure Based Development and acquired certain assets, including the trademark "cbdMD" and its variants and certain other intellectual property. The trademark is the cornerstone of this subsidiary and is key as we create and distribute products and continue to build this brand. We believe the trademark does not have limits on the time it will contribute to the generation of cash flows and therefore we have identified these as indefinite-lived intangible assets (see Note 2 for more information).
 
 
25
 
 
Intangible assets as of June 30, 2019 and September 30, 2018 consisted of the following:
 
 
 
June 30,
 
 
September 30,
 
 
 
2019
 
 
2018
 
Trademark and other intellectual property related to I’M1
 $- 
 $971,667 
Trademark and other intellectual property related to EE1
  - 
  471,667 
Trademark and other intellectual property related to cbdMD
  21,585,000 
  - 
Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™, net
  987,097 
  1,074,194 
Wholesale license agreement with Chef Andre Carthen, net
  - 
  262,077 
Wholesale license agreement with Nicholas Walker, net
  - 
  147,620 
Trademark and other intellectual property related to BPU
  - 
  246,760 
Total
 $22,572,097 
 $3,173,985 
 
The Company has one definite lived intangible asset, which has a ten year life.
 
Future amortization schedule:
 
Intangible
 
Total unamortized cost
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
 
2023
 
 
thereafter
 
Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™
 $987,097 
 $29,033 
 $116,129 
 $116,129 
 $116,129 
 $116,129 
 $493,548 
 
The Company performs an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the guidance 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. 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 and the Company evaluates the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company performed a qualitative analysis during the three months ended June 30, 2019. As the business focus of the Company has shifted to the CBD business, all other subsidiaries were being assessed to determine how they can support the CBD business. Therefore, the brand management and men’s lifestyle businesses will not continue to function as they have historically and the intangible assets (trademarks, logos, etc.) will not be used to promote and build the business as they have in the past, thus we have determined that a full impairment was required. As a result, the Company recorded an impairment charge during the three months ended June 30, 2019 for the indefinite-lived intangible assets of $471,667 under EE1 and an impairment charge of $971,667 under I’M1, respectively.
 
The Company performed a qualitative and quantitative analysis for the year ended September 30, 2018 accounting for the performance of BPU and the business shift in relation to its original business model and current focus on licensing and determined that an impairment was required. As a result, the Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018. No other impairments were identified. Based upon the anticipated changes to BPU’s business model, the Company had determined that it was appropriate to reclassify the remaining carrying value of this intangible asset to a definite-lived asset. The Company began amortizing this asset beginning the first quarter of 2019. This reclassification was accounted for as a prospective change in estimate.
 
The Company also performs an impairment analysis at August 1 annually on the definite lived intangible assets following the guidance in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change in the use of the asset, market price changes in the asset, or other events that impact the value of the asset. If an indicator is present we then perform a quantitative analysis to determine if the carrying amount of the asset is recoverable. This is done by comparing the total undiscounted future cash flows of the long-lived asset to its carrying amount. If the total undiscounted future cash flows exceed the carrying amount of the asset, the carrying amount is deemed recoverable and an impairment is not recorded. If the carrying amount of a long-lived asset is deemed to be unrecoverable, an impairment loss needs to be estimated.
 
 
26
 
 
As previously indicated, the Company has made a strategic shift toward the CBD business and all entities were being assessed during the three months ended June 30, 2019 with that focus and their ability to support that business line. As such the definite lived intangible assets for BPU as well as the two wholesale license agreements with Nicolas Walker and Andre Carthen do not fit into the strategic direction and the value associated with future cash flows as it relates to these assets may not be positive. As a result, the Company recorded an impairment charge during the three months ended June 30, 2019 for the definite lived intangible assets of $234,422 for the BPU trademark/logo, and $296,460 and $140,118 for the two wholesale license agreements.
 
In order to calculate the impairment loss, the fair value of the asset must be determined. Fair value referenced here is determined using the guidance in FASB ASC Topic 820. .
 
NOTE 7 – PRO FORMA FINANCIAL INFORMATION (UNAUDITED)
 
The following unaudited pro-forma data summarizes the results of operations for the three and nine months ended June 30, 2019 and 2018, as if the Mergers with Cure Based Development had been completed on October 1, 2017. The pro-forma financial information is presented for informational purposes only and is not indicative of the results of operations that would have been achieved if the Mergers had taken place on October 1, 2017.
 
 
 
Three Months Ended
June 30,
2019
 
 
Three Months Ended
June 30,
2018
 
 
 
 
 
 
 
 
Net sales
 $N/A* 
 $4,817,417 
Operating income (loss)
 $N/A* 
 $1,011,470 
Net income (loss)
 $N/A* 
 $949,470 
Net income per share – average weighted shares
 $N/A* 
 $0.04 
Net income per share – fully diluted
 $N/A* 
 $0.04 
  
 
 
Nine Months Ended
June 30,
2019
 
 
Nine Months Ended
June 30,
2018
 
 
 
 
 
 
 
 
Net sales
 $18,050,145 
 $9,167,212 
Operating income (loss)
 $(12,614,392)
 $1,172,901 
Net income (loss)
 $(64,501,470)
 $1,166,901 
Net income (loss) per share – average weighted shares
 $(2.78)
 $0.05 
Net income per share – fully diluted
 $  
 $0.05 
 
* All entities were consolidated effective December 21, 2018 therefore, the results of operations are included in these condensed financial statements.
 
For the per share calculation prior to April 2019, it is being assumed that the shares to be issued contractually under the Merger Agreement, upon shareholder approval, were issued at the beginning of each period. This would account for an additional 6,500,000 shares issued directly to the members of Cure Based Development and another 8,750,000 shares issued which would have a voting proxy and leak out on voting rights over a 5 year period.
 
NOTE 8 – CONTINGENT LIABILITY
 
As consideration for the Mergers, described in Note 2, the Company has a contractual obligation to issue 15,250,000 shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the 8,750,000 tranche of shares will also 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 certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“earn out”).
 
 
27
 
 
The contractual obligations and earn out provision are accounted for as a contingent liability and fair value is determined using Level 3 inputs, as estimating the fair value of these contingent liabilities require the use of significant and subjective inputs that may and are likely to change over the duration of the liabilities with related changes in internal and external market factors.
 
The initial two tranches totaling 15,250,000 shares have been valued using a market approach method and included the use of the following inputs: share price upon contractual obligation, discount for lack of marketability to address leak out restrictions, and probability of shareholder disapproval. In addition, the 8,750,000 shares in the second tranche also included an input for a discount for lack of voting rights during the vest periods.
 
The Merger Agreement also provides that an additional 15,250,000 shares (Earnout Shares) would be issued as part of the consideration for the Mergers, upon the satisfaction of certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date as follows, as measured at four intervals (Marking Period): the completion of 12, 24, 42, and 59 calendar months from the Closing Date, and based upon the ratios set forth below:
 
Aggregate Net Revenues
 
Shares Issued / Each $ of Aggregate Net Revenue Ratio
 
 
 
 
 
 $1 - $20,000,000 
  .190625 
 $20,000,001 - $60,000,000 
  .0953125 
 $60,000,001 - $140,000,000 
  .04765625 
 $140,000,001 - $300,000,000 
  .023828125 
 
For clarification purposes, the Aggregate Net Revenues during a Marking Period shall be multiplied by the applicable Shares Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of shares issued as a result of Aggregate Net Revenues during the prior Marking Periods.
 
The initial 15,250,000 shares and Earnout Shares were approved by our shareholders and the initial shares were issued on April 19, 2019.
 
The 15,250,000 Earnout Shares which would be issued in the future, upon the satisfaction of net revenue criteria have been valued using a Monte Carlo Simulation. Inputs used included: stock price, volatility, interest rates, revenue projections, and likelihood of obtaining revenue projections, amongst others.
 
The value of the contingent liability was $102,267,557 at March 31, 2019 and was comprised of $50,842,557 for the initial 15,250,000 shares and $51,425,000 for the Earnout Shares. The initial shares were issued upon shareholder approval on April 19, 2019 and, therefore, that component of the contingent liability was revalued as of that date. The value of the initial shares as of April 19, 2019 was $53,215,163 and the increase of $2,372,606 is recorded in the Statement of Operations for the three months ended June 30, 2019. Additionally, as the 15,250,000 initial shares were issued on April 19, 2019, the value of the shares in the amount of $53,215,163 was reclassified from the contingent liability to additional paid in capital on the balance sheet. The Earnout Shares were valued at $70,600,000 on June 30, 2019 as compared to $51,425,000 at March 31, 2019. The increase of $19,175,000 is recorded in the Statement of Operations for the three months ended June 30, 2019. The Company utilized both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the increase in the value of the Earnout Shares within the contingent liability was the increase of the Company’s stock price, which was $5.90 at June 30, 2019 as compared to $4.42 on March 31, 2019.
 
NOTE 9 – RELATED PARTY TRANSACTIONS
 
On July 31, 2017, the Company sold preferred shares it had received from a customer as payment for services to a related party. The preferred shares were originally valued as marketable securities at $650,000 and were sold for $475,000, an approximation of fair market value, which was paid $200,000 in cash and a short term note of $275,000 at 3% interest, which is included in note receivable related party as of September 30, 2018. The short term note was extended on August 1, 2018, and the outstanding principal of $155,400 at 5% interest was paid in full on November 15, 2018.
 
 
28
 
 
On August 1, 2017, the Company entered into an additional advisory agreement with Kure Corp., then a related party, in which the Company would act as an advisor regarding business strategy involving (1) conversion of Kure franchises into company stores, (2) conversion of Kure Corp. debt and preferred shares into common share of Kure Corp. and (3) preparation steps required and a strategy to position for a possible Reg A+ offering. The services are to be delivered in two phases, the first deliverables of items 1 and 2 above were delivered by September 30, 2017 and item 3 was delivered by June 30, 2018. The Company was paid $200,000 in Kure Corp. stock for the first deliverables and was paid $145,500 in cash for the second deliverable.
 
On September 8, 2017, the Company extended its Master Advisory and Consulting Agreement, executed in February 2017, with kathy ireland® Worldwide to February 2025.
 
In September 2017, the Company entered into an exclusive seven year wholesale license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 are due in equal installments on January 1 of subsequent years until the license fee is paid. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. Royalties are paid at 33 1/3% of net proceeds with the license fee being a credit against royalties. On January 30, 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: royalty payments to kathy ireland® Worldwide for the three year extension would be set at 35% of net proceeds, 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. On December 20, 2018, both parties agreed to reduce the final amount owed to $300,000 if paid within 5 days, which was paid immediately.
 
On December 11, 2017, the Company entered into a service agreement with Kure Corp., then a related party, to facilitate the “Vape Pod” transaction with the modular building systems vendor, SG Blocks, Inc., which is also a customer of our Company. Under the terms of this agreement we also agreed to facilitate the introduction to third parties in connection with Kure Corp.'s initiative to establish Vape Pod's at U.S. military base retail locations and advising and aid in site selection for Kure retail stores on military bases and adjoining convenience stores, gas stations, and other similar retail properties utilizing Kure Corp.'s retail Vape Pod concept, among other services. As compensation for this recent agreement, we were issued 400,000 shares of Kure Corp.'s common stock which was valued at $200,000 (see Note 3 Marketable Securities and Other Investment Securities).
 
In June 2018, per our agreement with kathy ireland® Worldwide, the Company earned a referral fee of $150,000 for facilitating a business opportunity which led to a new license agreement for kathy ireland® Worldwide. The Company is to receive 50% of all royalty revenue earned ongoing via the new business contract.
 
In April 2018 through June 2018, EE1 engaged in five separate statements of work for various marketing campaigns, production processes, and documentary related services for Sandbox LLC. Under the terms of the agreements, EE1 earned in the range of $200,000 to $250,000 for each statement of work, from Sandbox LLC. Sandbox LLC is an affiliate of a former member of our board of directors.
 
In September 2018, B&B Bandwidth purchased products from our subsidiary BPU for resale. The total purchase was $332,985. B&B Bandwidth management are affiliates of kathy ireland® Worldwide.
 
On December 20, 2018, with the closing of the Merger Agreement with Cure Based Development, we recognized the following related party transactions which happened prior to the Mergers:
 
Cure Based Development has received $90,000 from Verdure Holdings LLC for future orders of the Company’s products. Verdure Holdings LLC is an affiliate of the CEO of Cure Based Development. This amount is recorded as customer deposits - related party on the accompanying balance sheet.
 
 
29
 
 
Cure Based Development entered a lease for office space, which also provides administrative and IT services, from an affiliate of the CEO of Cure Based Development. The lease is a month to month lease for $9,166 per month.
 
Cure Based Development leases its manufacturing facility from an entity partially owned by an individual who now has a contractual right to receive shares of the Company as part of the Mergers. The current lease was entered into on December 15, 2018 and is for three years at an annual base rent rate of $151,200 allowing for a 3% annual increase. In addition, common area maintenance rent is set at $25,200 annually.
 
As we engage in providing services to customers, at times we will utilize related parties, typically as a part of our agreement with kathy ireland® Worldwide, to assist in delivery of the services. For the three months ended June 30, 2019 and 2018 we incurred related party cost of sales of approximately $0 and $745,000, respectively. For the nine months ended June 30, 2019, and 2018 we incurred related party cost of sales of approximately $161,500 and $1,228,000, respectively
 
NOTE 10 – SHAREHOLDERS’ EQUITY
 
Preferred Stock – We are authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. Our preferred stock does not have any preference, liquidation, or dividend provisions. No shares of preferred stock have been issued.
 
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 27,720,356 and 8,123,928 shares of common stock issued and outstanding at June 30, 2019 and September 30, 2018, respectively.
 
Common stock transactions:
 
In the three and nine months ended June 30, 2019:
 
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 estimated offering expenses payable by us. The Company also issued to the selling agent warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants were valued at $86,092 and expire on September 28, 2023.
 
In January 2019, we issued 25,000 shares of our common stock to an investment banking firm for general financial advisory services. The shares were valued at $77,250, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
 
In January 2019, we issued 50,000 shares of our common stock to an investment banking firm for general advisory and investment bank services. The shares were valued at $212,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2020.
 
In April 2019, we issued 15,250,000 shares or our common stock as consideration for the Mergers with 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.
 
In May 2019, the Company completed a secondary public offering of 2,300,000 shares of its common stock for aggregate gross proceeds of $13.8 million. The Company received approximately $12.5 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us. The Company also issued to the selling agent warrants to purchase in aggregate 60,000 shares of common stock with an exercise price of $7.50. The warrants were valued at $223,500 and expire on May 15, 2024.
 
In the three and nine months ended June 30, 2018:
 
On November 17, 2017, the Company completed an IPO of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million.
 
 
30
 
 
In November 2017, we issued 6,667 shares of our common stock to an individual as part of a consulting agreement. The shares were valued at $37,002, based on the trading price upon issuance and expensed as contract compensation.
 
In January 2018, we issued 230,000 shares of our common stock, which were granted as restricted stock awards on October 1, 2016 to board members. The restricted stock awards vested on January 1, 2018. The shares were valued at fair market value upon issuance at $195,500 and amortized over the vesting period and expensed as stock compensation.
 
In March 2018, we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $20,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending June 2018.
 
In May 2018, we issued 60,000 shares of our common stock to an investment banking firm for general financial advisory and investment banking services. The shares were valued at $303,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2019.
 
In June 2018, we issued 25,000 shares of our common stock to a broker dealer for business advisory services. The shares were valued at $118,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
 
Stock option transactions:
 
In the three and nine months ended June 30, 2019:
 
In May 2019 we granted per the annual board compensation plan, an aggregate of 120,000 common stock options to six independent directors. The options vest immediately, have an exercise price of $5.41 per share and a term of ten years. We have recorded an expense for the options of $562,440 for the three and nine months ending June 30, 2019.
 
In May 2019 we granted an aggregate of 610,000 common stock options to twelve employees. The options vary in amounts issued and vesting tiers, which include no vesting with an exercise price of $6.40, vesting at May 15, 2020 with an exercise price of $7.00, vesting at May 15, 2021 with an exercise price of $7.50, and vesting at May 15, 2022 with an exercise price of $7.50. The options have a term of ten years. We have recorded an expense for the options of $1,290,732 for the three and nine months ended June 30, 2019.
 
In the three and nine months ended June 30, 2018:
 
On May 14, 2018 we granted an aggregate of 50,000 common stock options to an employee. The options vest 50% November 14, 2018 and 50% May 14, 2019. The options have an exercise price of $5.27 per share and a term of seven years. We have recorded an expense for the options of $38,950 for the three and nine months ended June 30, 2018.
 
On May 29, 2018 we granted an aggregate of 150,000 common stock options to an employee. The options vest 50% immediately and 50% January 1, 2019. The options have an exercise price of $4.78 per share and a term of ten years. We have recorded an expense for the options of $302,750 for the three and nine months ended June 30, 2018.
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the nine months ended June 30, 2019 and 2018:
 
 
2019 
 
2018
Exercise price$5.41 – $7.50
 
$4.78 - $5.27
Risk free interest rate2.41% - 2.47%
 
2.77% - 2.96%
Volatility89.60% - 90.68%
 
57.76% - 64.74%
Expected term10 years
 
7 - 10 years
Dividend yieldNone
 
None
 
 
31
 
 
Warrant transactions:
 
In the three and nine months ended June 30, 2019:
 
On October 2, 2018 in relation to the secondary offering, we issued to the selling agent warrants to purchase in aggregate 51,429 shares of common stock with an exercise price of $4.375. The warrants expire on September 28, 2023.
 
In May 2019 in relation to the secondary offering, we issued to the selling agent warrants to purchase in aggregate 60,000 shares of common stock with an exercise price of $7.50. The warrants expire on May 15, 2024.
 
In the three and nine months ended June 30, 2018:
 
On November 17, 2017 in relation to the IPO, we issued to the selling agent warrants to purchase in aggregate 100,000 shares of common stock with an exercise price of $7.50. The warrants expire on October 27, 2022.
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the nine months ended June 30, 2019 and 2018:
      
 2019
 
2018
Exercise price$4.375 - $7.50
 
$7.50
Risk free interest rate2.15% - 2.90%
 
2.06%
Volatility70.61% - 75.03%
 
43.12%
Expected term5 years
 
5 years
Dividend yieldNone
 
None
 
NOTE 11 – STOCK-BASED COMPENSATION
 
Equity Compensation Plan – On June 2, 2015, the Board of Directors of the Company approved the 2015 Equity Compensation Plan (“Plan”). The Plan made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stocks, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day our fiscal year during the term of the Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in September of the immediately preceding fiscal year, but in no event shall any such annual increase exceed 100,000 shares of common stock. On April 19, 2019, shareholders approved an amendment to the Plan and increased the amount of shares available for issuance under the Plan to 2,000,000 and retained the annual evergreen increase provision of the plan.
 
We account for stock-based compensation using the provisions of FASB ASC 718.  FASB ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the Compensation Committee of the Board of Directors. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of our stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
 
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a ten-year term and generally vest over one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
 
Stock Options – The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
 
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
 
 
32
 
 
The following table summarizes stock option activity under the Plan:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
 
Weighted-averager emaining contractual term (in years)
 
 
Aggregate intrinsic value (in thousands)
 
Outstanding at September 30, 2018
  469,650 
  5.13 
 
 
 
 
 
 
Granted
  730,000 
  6.69 
 
 
 
 
 
 
Exercised
  - 
  - 
 
 
 
 
 
 
Forfeited
  - 
  - 
 
 
 
 
 
 
Outstanding at June 30, 2019
  1,199,650 
 $6.08 
  8.46 
 $ 
 
    
    
    
    
Exercisable at June 30, 2019
  789,650 
 $5.50 
  7.71 
 $ 
 
As of June 30, 2019, there was approximately $1,908,258 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 2.8 years.
 
Restricted Stock Award transactions:
 
In May 2019 the Company issued 57,500 restricted stock awards in aggregate to eleven employees. The restricted stock awards vest January 1, 2020. The stock awards are valued at fair market upon issuance at $368,000 and amortized over the vesting period. We recognized $92,000 of stock based compensation expense for the three and nine months ended June 30, 2019.
 
NOTE 12 – WARRANTS
 
Transactions involving our equity-classified warrants are summarized as follows:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
 
Weighted-
average remaining contractual term (in years)
 
 
Aggregate intrinsic value (in thousands)
 
Outstanding at September 30, 2018
  312,176 
 $6.84 
  - 
  - 
Issued
  111,429 
  6.06 
    
    
Exercised
  - 
  - 
    
    
Forfeited
  - 
  - 
    
    
Outstanding at June 30, 2019
  423,605 
 $6.64 
  3.28 
 $ 
 
    
    
    
    
Exercisable at June 30, 2019
  423,605 
 $6.64 
  3.28 
 $ 
 
The following table summarizes outstanding common stock purchase warrants as of June 30, 2019:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
Expiration
 
 
 
 
 
 
 
 
Exercisable at $7.80 per share
  141,676 
 $7.80 
September 2021
Exercisable at $4.00 per share
  70,500 
 $4.00 
September 2022
Exercisable at $7.50 per share
  100,000 
 $7.50 
October 2022
Exercisable at $4.375 per share
  51,429 
 $4.375 
September 2023
Exercisable at $7.50 per share
  60,000 
 $7.50 
May 2024
 
  423,605 
  6.64 
 
 
 
33
 
  
NOTE 13 – COMMITMENTS AND CONTINGENCIES
 
In September 2017 we entered into a wholesale license agreement with kathy ireland® Worldwide under which we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
 
As compensation under this agreement, we agreed to pay kathy ireland® Worldwide a marketing fee of $840,000, of which $480,000 was paid by December 31, 2017. The balance was payable in three equal annual installments beginning January 1, 2019, subject to acceleration. Under the terms of this agreement, we also agreed to pay kathy ireland® Worldwide a royalty of 33 1/3% of our net proceeds under any sublicense agreements we may enter into for this intellectual property.
 
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. This amount is classified as accrued expense to related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The license fee paid is credited against any royalties to be paid. In December 2018, the Company agreed to and paid the balance owed as final payment at a reduced price of $300,000.
 
In May 2019, the Company entered into an endorsement agreement with a professional athlete. The term of the agreement is through December 31, 2022 and is tied to performance of the athlete in so many professional events annually, and also includes promotion of the Company via social media, wearing of logo during competition, provide production days for advertising creation and attend meet and greets. The potential payments, if all services are provided, in aggregate is $4,9 million and is paid based on the services above for the period ending: December 2019 - $400,000, December 2020 - $800,000, December 2021 - $1,800,000, and December 2022 - $1,900,000.
 
 NOTE 14 – SEGMENT INFORMATION
 
The Company operates through its five subsidiaries in three business segments: the products, licensing, and entertainment divisions. The products division is designed to be an innovative and cutting-edge producer and marketer of various products, currently encompassing the CBD sector. The licensing division is designed to establish brands via licensing of select products / categories and encompasses our two subsidiaries with a focus on health and wellness products and men’s lifestyle products. The entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms and provide brand management services. The corporate parent also will generate revenue from time to time, through advisory consulting agreements. This revenue is similar to the entertainment divisions’ revenue process and we have allocated revenue from corporate to the entertainment division for segment presentation.
 
The products division operated for the full year in fiscal 2018 and 2017. The licensing and entertainment divisions were both acquired in January 2017. The Company’s results for the product division in the first two quarters of fiscal 2019 include CBDI from the Closing Date of the Mergers with Cure Based Development, on December 20, 2018.
 
The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued.
 
Condensed summary segment information follows for the three and nine months ended June 30, 2019 and 2018.
 
 
34
 
 
Three months ended June 30, 2019:
 
Three months ended June 30, 2019:
 
 
 
 
 
Products Division
 
 
Licensing Division
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $8,020,870 
 $3,353 
 $20,113 
 $8,044,336 
Net Sales related party
 $- 
 $- 
 $- 
 $- 
Total Net Sales
 $8,020,870 
 $3,353 
 $20,113 
 $8,044,336 
Income (loss) from Operations before Overhead
 $(3,295,322)
 $( 1,492,865)
 $(542,341)
 $(5,330,528)
Allocated Corporate Overhead (a)
  (23,802,791)
  (9,950)
  (59,687)
  (23,872,428)
Net Income (Loss)
 $(27,098,113)
 $(1,502,815)
 $(602,028)
 $(29,202,956)
 
Three months ended June 30, 2018:
 
 
 
Products Division
 
 
Licensing Division
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $27,205 
 $1,629,835 
 $191,390 
 $1,848,430 
Net Sales related party
 $- 
 $- 
 $1,350,000 
 $1,350,000 
Total Net Sales
 $27,205 
 $1,629,835 
 $1,541,390 
 $3,198,430 
Income (loss) from Operations before Overhead
 $(123,394)
 $1,001,079 
 $346,540 
 $1,224,225 
Allocated Corporate Overhead (a)
  5,605 
  335,795 
  317,572 
  658,972 
Net Income (Loss)
 $(128,999)
 $665,284 
 $28,968 
 $565,253 
 
Nine months ended June 30, 2019:
 
 
 
Products Division
 
 
Licensing Division
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $14,143,490 
 $537,096 
 $286,131 
 $14,966,717 
Net Sales related party
 $- 
 $- 
 $- 
 $- 
Total Net Sales
 $14,143,490 
 $533,743 
 $266,018 
 $14,966,717 
Income (loss) from Operations before Overhead
 $(4,141,628)
 $(2,337,990)
 $(771,392)
 $(7,251,010)
Allocated Corporate Overhead (a)
  (52,911,357)
  (2,009,298)
  (1,070,428)
  (55,991,083)
Net Income (Loss)
 $(57,052,985)
 $(4,347,288)
 $(1,841,820)
 $(63,242,093)
 
    
    
    
    
Assets
 $89,871,337 
 $7,032,178 
 $4,005,113 
 $100,908,628 
 
Nine months ended June 30, 2018:
 
 
 
Products Division
 
 
Licensing Division
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $85,945 
 $4,248,711 
 $1,082,439 
 $5,417,095 
Net Sales related party
 $- 
 $200,000 
 $1,350,000 
 $1,550,000 
Total Net Sales
 $85,945 
 $4,448,711 
 $2,432,439 
 $6,967,095 
Income (loss) from Operations before Overhead
 $(751,293)
 $2,866,972 
 $380,143 
 $2,495,822 
Allocated Corporate Overhead (a)
  19,151 
  991,277 
  542,004 
  1,552,432 
Net Income (Loss)
 $(770,444)
 $1,875,695 
 $(161,861)
 $943,390 
 
    
    
    
    
Assets
 $3,669,414 
 $7,737,134 
 $5,063,736 
 $16,470,284 
 
(a)            
The Company began allocating corporate overhead to the business segments in April 2017. We have allocated overhead on a proforma basis for the three and nine months ended June 30, 2019 and 2018, respectively, above for comparison purposes.
 
35
 
 
NOTE 15 – INCOME TAXES
 
On November 17, 2017, the Company completed an IPO. The Company conducted a Section 382 analysis and determined an ownership change occurred upon the IPO. Management has determined that the Company's federal and state NOL carryovers established up through the date of the ownership change may be subject to an annual limitation; however, this limitation is not material to these condensed consolidated financial statements.
 
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. The Company has revalued its deferred tax assets and liabilities at the date of enactment and the result was a reduction of the net deferred tax liability and a tax provision benefit of $12,000 which is reflected in the nine months ending June 30, 2018 financial statements.
 
On December 20, 2018, the Company completed a two-step merger with Cure Based Development (see Note 2). As a result of the Mergers the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $5.1 million.
 
Management evaluates its net deferred tax asset / liability each reporting period. As a result of this evaluation, management establishes a valuation allowance for any deferred tax assets for which we believe it is more likely than not that they will not be realized. As a result of this evaluation, the net deferred tax liability was adjusted by approximately $1,088,000 and $2,296,000 for the three and nine months ended June 30, 2019, respectively.
 
NOTE 16 – SUBSEQUENT EVENTS
 
In July 2019, the Company signed a lease for a new corporate office consisting of approximately 50,000 square feet. The lease is from August 1, 2019 thru December 31, 2026. The monthly base rent for the first year is $76,041 and will increase annually by approximately 3%. The rent includes a fully furnished facility which at the end of the lease will become the property of the Company, as long as no default occurred.
 
 
36
 
 
ITEM 2. 
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following discussion of our financial condition and results of operations for the third quarters of fiscal 2019 and fiscal 2018 should be read in conjunction with the condensed consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements because of several factors, including those set forth under the Part I, Item 1A, Risk Factors and Business sections in our 2018 10-K, our Quarterly Report on Form 10-Q for the period ended March 31, 2019, this report, and our other filings with the Securities and Exchange Commission. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this report.
 
Overview
 
 
 
Business
 
The Company operates through its five subsidiaries in three business segments: the products, licensing, and entertainment divisions. The products division encompasses CBDI and Beauty & Pin-Ups, the licensing division encompasses kathy ireland ® Health & Wellness and IM1, and the Entertainment division is comprised of EE1:  
 
Our newest business unit, CBDI, was established in December 2018 as part of the Mergers with Cure Based Development LLC. In connection with the Mergers, we acquired the cbdMD brand. CBDI produces and distributes various high-grade, premium CBD products under the cbdMD brand including: tinctures, capsules, gummies, bath bombs, vape oils, topical creams and animal treats and oils.
 
Level H&W was established in September 2017 and has an exclusive license to the kathy ireland® Health & Wellness™ brand. Its goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. This unit began operating in fiscal 2018.
 
Founded in early 2017 and first conceptualized by kathy ireland® Worldwide, I'M1 is a men’s lifestyle brand established to capitalize on potentially lucrative licensing and co-branding opportunities with products focused on millennials.
 
Also founded in early 2017, EE1 was established to serve as a producer and marketer of experiential entertainment including recordings, film, TV, web and live events, and entertainment experiences. EE1 also provides brand management services including creative development and marketing, brand strategy, and distribution support.
 
Beauty & Pin-Ups, our first business unit is a hair care line with a social conscience and launched its products in 2015. We offered quality hair care products, including shampoos, conditioners, styling aides and a patented styling tool, through retailers and online outlets and expanded into licensing opportunities.
 
 
37
 
 
Our business model is designed with the goal of maximizing the value of our brands through either acquisition of strategic brands with a portfolio of products or entry into license agreements with partners that are responsible for the design, manufacturing and distribution of our licensed products. We promote our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, which we expect will allow our customers to interact with each of our brands, in addition to the products themselves, will be critical to our success.
 
Growth Strategies and Outlook
 
With the recent strategic acquisition of the cbdMD brand and the passage of the Farm Bill which removed CBD as a Schedule 1 controlled substance, we must continue to expand visibility and distribution in this emerging space and capitalize on the current positioning of the brand to build it into the top recognized brand in the sector. We expect to do this by:
 
o
Expanding distribution to larger wholesalers as this will now be possible with the Farm Bill passage;
o
Continue to identify and develop CBD product offerings that fit into the mainstream for consumption based on market research and trends; and
o
Continue development of all advertising, media and sales channels.
o
Extend distribution in the retail space. We have secured placement in stores carrying our brand from approximately 600 to 3,000 doors since January 2019 and see more opportunity as the big box players evaluate carrying CBD products.
 
With our current strategy being executed we have had significant revenue growth period over period. With continued acceleration in the sector and the potential changes with retailers, our goals include:
o
Surpass $5 million in monthly net sales by March 31, 2020
o
Surpass $10 million in monthly net sales by December 31, 2020
o
Operational positive cash flow in 2nd quarter of fiscal 2021
 
Results of operations
 
The following tables provide certain selected consolidated financial information for the periods presented:
 
 
 
Three Months Ended June 30,
 
 
Nine Months Ended June 30,
 
 
 
2019
 
 
2018
 
 
change
 
 
2019
 
 
2018
 
 
change
 
 
 
(unaudited)
 
 
(unaudited)
 
 
 
 
 
(unaudited)
 
 
(unaudited)
 
 
 
 
Net sales
 $8,044,336 
 $1,848,430 
  335.2%
 $14,966,717 
 $5,417,095 
  176.3%
Net sales related party
  - 
  1,350,000 
  (100.0)%
  - 
  1,550,000 
  (100.0)%
Total net sales
 $8,044,336 
 $3,198,430 
  151.5%
 $14,966,717 
 $6,967,095 
  114.8%
Cost of sales
  2,959,198 
  1,106,706 
  167.4%
  5,584,868 
  1,858,651 
  200.4%
Gross profit as a percentage of net sales
  63.2%
  65.4%
  (2.2)%
  62.7%
  73.3%
  (10.6)%
Operating expenses
  13,345,248 
  1,464,239 
  811.4%
  20,795,190 
  4,089,006 
  408.5%
(Increase) decrease of contingent liability
  (21,547,606)
  - 
  (100.0)%
  (52,461,680)
  - 
  (100)%
Net income (loss) before taxes
  (30,290,956)
  627,253 
  (4929.1)%
  (65,538,093)
  943,390 
  (7047.0)%
Net income (loss) attributable to cbdMD, Inc. common shareholders
 $(27,699,249)
 $206,074 
  (13541.4)%
 $(61,600,702)
 $477,542 
  12999%
 
Sales
 
The following table provides information on the contribution of net sales by segment to our total net sales.
 
 
 
Three Months
Ended
June 30,
2019
 
 
% of total
 
 
Three Months
Ended
June 30,
2018
 
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $3,353 
  0.05%
 $1,629,835 
  50.9%
Entertainment division
 $20,113 
  0.25%
 $1,541,390 
  48.2%
Products division
 $8,020,870 
  99.7%
 $27,205 
  0.9%
Total net sales
 $8,044,336 
    
 $3,198,430 
    
 
 
38
 
  
 
 
Nine Months
Ended
June 30,
2019
 
 
% of total
 
 
Nine Months
Ended
June 30,
2018
 
 
% of total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $537,096 
  3.6%
 $4,448,711 
  63.9%
Entertainment division
 $286,131 
  1..9%
 $2,432,439 
  34.9%
Products division
 $14,143,490 
  94.5%
 $85,945 
  1.2%
Total net sales
 $14,966,717 
    
 $6,967,095 
    
 
The increase in net sales attributable to our products division in the three and nine months ended June 30, 2019 is due to the acquisition of the cbdMD brand on December 20, 2018 and the continuing growth of this emerging business.
 
The decrease in net sales attributable to our entertainment and licensing divisions in the three and nine months ended June 30, 2019 is primarily associated with a change in business focus as the Company integrates the new emerging business sector associated with our brand cbdMD and assesses overall strategy for integration of all business units.
 
As described elsewhere in this report, from time to time we accept equity positions as compensation for our services. The following table provides information for the three and nine months ended June 30, 2019 and 2018 regarding the amount of our total net sales in each of those periods for which we received an equity position in lieu of cash.
 
 
Three Months Ended June 30,
 
 
2019
 
 
2018
 
 
Amount
 
 
% total net sales
 
 
Amount
 
 
% total net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 $0 
  0%
 $1,150,000 
  35.9%
 
 
Nine Months Ended June 30,
 
 
2019
 
 
2018
 
 
Amount
 
 
% total net sales
 
 
Amount
 
 
% total net sales
 
 
 
 
 
 
 
 
 
 
 
 
 
 $470,000 
  3.1%
 $4,154,500 
  59.6%
 
With the business focus shifting with our cbdMD brand, accepting of equity positions as compensation should be rare. This practice has had an adverse impact on our cash flow from operations and holding these securities could subject our Company to additional valuation impacts in future periods as a result of the need to value these holdings on a quarterly basis.
 
Cost of sales
 
Our cost of sales includes labor, third party service providers and amortization for IP for our licensing and entertainment divisions and costs associated with distribution, manufacturing, third party fill and labor expense, components, and freight for our products divisions. The following table provides information on the percentage of our cost of sales to our net sales for each segment for the three and nine months ended June 30, 2019 and 2018:
 
 
 
  Three Months Ended June 30,   
 
 
Nine Months Ended June 30,
 
 
 
  2019
 
 
  2018
 
 
2019
 
 
2018
 
Licensing division
  865.9%
  11.0%
  39.1%
  9.9%
Entertainment division
  68.9%
  58.9%
  91.8%
  51.7%
Products division
  36.4%
  70.2%
  36.1%
  185.0%
 
The increase in cost of sales as a percentage of sales for our licensing division in the three and nine months ended June 30, 2019 is attributable to the loss of one major contract and its associated revenue and transition costs during that process. The percentage is not reflective of the financial impact as the cost of sales for the three months ended June 30, 2019 totaled approximately $29,000 against sales of approximately $3,000. Currently we are assessing the integration strategy and viability of how this division can provide internal support for our cbdMD brand within our products division.
 
 
39
 
 
For the three and nine months ended June 30, 2019, the entertainment division provided television production services, which involve a higher cost of sales and finalized services related to the recording production, which will not generate sales until future distribution processes begin. Overall, the cost of sales as a percentage of sales for our entertainment division will vary based upon the type of projects in which it is involved. Currently we are assessing the integration strategy and viability of how this division can provide internal support for our cbdMD brand within our products division.
 
In our products division, the significant decrease in the cost of sales as a percentage of sales in the three and nine months ended June 30, 2019 is related to the acquisition of the cbdMD brand on December 20, 2018, and the overall impact of its growing revenues in this division as well as the low cost of sales of this business. We expect this division to maintain cost of sales as a percentage of net sales, between 25% and 40%, as we manage our overall cost for manufacturing and production. The significant cost of sales in the fiscal 2018 periods on a percentage basis is primarily related to inventory impairments, as a result of net realizable value and excess inventory calculations all related to the hair care products business.
 
Operating expenses
 
Our principal operating expenses include wages, advertising, travel, rent, professional service fees, and expenses related to industry distribution and trade shows. Our operating expenses on a consolidated basis increased approximately 803.8% and 397.1% in the three and nine months ended June 30, 2019 from the same periods in 2018, respectively. The significant increase is attributable to the merger of the cbdMD brand as well as the ramp up of this business as reflected in the tables below. This included increases in: (i) staff related expenses; (ii) accounting and legal expenses; (iii) travel and entertainment expenses, (iv) expenses related to social media, public relations, advertising and marketing process, tradeshows and promotions; (v) affiliate and influencer commissions; (vi) outside services related to investor relations, transfer agent, other public company support costs; (vii) rent expense; (viii) insurance expense; and (ix) non-cash stock compensation expense, offset by a decrease in the allocation of corporate management fees which are described in greater detail later in this report. In addition, we had a non-cash one time impairment charge related to the non CBD business segments, which was approximately $2,114,000.
 
The following table provides information on our approximate operating expenses for each segment for the three and nine months ended June 30, 2019 and 2018:
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $991,896 
 $450,000 
 $541,896
Entertainment division
 $548,594 
 $287,000 
 $261,594 
Products division
 $8,387,406 
 $126,000 
 $8,261,406 
 
 
 
Nine Months Ended June 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $1,101,346 
 $1,145,000 
 $(43,654)
Entertainment division
 $761,502 
 $795,000 
 $(33,498)
Products division
 $13,120,786 
 $583,000 
 $12,537,786 
 
Operating expenses attributable to our licensing and entertainment divisions for the three and nine months ended June 30, 2019 and 2018, included: (i) accounting and legal expenses; (ii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshows; and (iii) professional outside services. In addition, during the three and nine months ended June 30, 2019, we recorded a one time impairment on intangible assets of $971,667 for the licensing division and $461,667 for the entertainment division. The overall decrease in operating expenses is related to a shift in business focus of the Company and an ongoing assessment of an integration strategy and viability of how these divisions can provide internal support for our cbdMD brand within our products division.
 
Operating expenses attributable to our products division for the three and nine months ended June 30, 2019 and 2018, included: (i) staff related expenses; (ii) accounting and legal expenses; (iii) travel and entertainment expenses, (iv) expenses related to social media, public relations, advertising and marketing process, tradeshows and promotions; (v) affiliate and influencer commissions; (vi) outside services related to investor relations, transfer agent, other public company support costs; (vii) rent expense; and (viii) insurance expense.
 
 
40
 
 
The significant increase in operating expenses for the Products division, is related to the Mergers of Cure Based Development and CBDI’s operations as well as the ramping up of the overall business, which included increased staff hiring, a full blown sales, advertising and marketing process and expenses related to infrastructure expansion.
 
Corporate overhead and allocation of management fees to our segments
 
Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to a specific segment of our operations, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshows; (iv) travel and entertainment expenses; (v) professional outside services; (vi) rent; (vii) non-cash stock compensation expense; (viii) business insurance expense; and (ix) interest expense. The non-cash stock compensation expenses for the three months ended June 30, 2019 and 2018 were approximately $1,951,664 and $356,000, respectively and for the nine months ended June 30, 2019 and 2018 were approximately $2,114,811 and $426,000, respectively.
 
The following table provides information on our approximate corporate overhead for the three and nine months ended June 30, 2019 and 2018:
 
 
Three Months Ended June 30,
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 $2,980,000 
 $1,080,000 
 $1,900,000 
 
 
Nine Months Ended June 30,
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 $5,468,000 
 $2,556,000 
 $2,912,000 
 
The overall increase in corporate operating expenses is related to the maturation of the entire organization and structuring related to its day to day operation including special events (merger and secondary offering activity) and ongoing public company related expenses.
 
Historically, we have allocated a portion of our corporate overhead to our segments in the form of a management fee. These allocations are included in the operating expenses by segment in the earlier table. As set forth above, these internal corporate charges eliminate upon consolidation of our financial statements. The following table provides information on the allocation of management fees to our segments for the three and nine months ended June 30, 2019 and 2018:
 
 
 
Three Months Ended June 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $0 
 $290,000 
 $(290,000)
Entertainment division
 $0 
 $145,000 
 $(145,000)
Products division
 $0 
 $48,000 
 $(48,000)
 
 
 
Nine Months Ended June 30,
 
 
 
 
 
 
2019
 
 
2018
 
 
change
 
 
 
 
 
 
 
 
 
 
 
Licensing division
 $25,000 
 $574,000 
 $(549,000)
Entertainment division
 $25,000 
 $312,000 
 $(287,000)
Products division
 $25,000 
 $128,000 
 $(103,000)
 
We are currently assessing our overall integration strategy and approach and have not created allocations for the three months ended June 30, 2019.
 
 
41
 
 
Other income and other non-operating expenses
 
Interest income (expense)
 
Our interest income (expense) was $14,211 and $(232) for the three months ended June 30, 2019 and 2018, respectively. For the nine months ended June 30, 2019 and 2018, our interest income (expense) was $76,330 and $(737), respectively.
 
Contingent liability
 
As consideration for the Mergers, the Company had a contractual obligation to issue 15,250,000 shares of our common stock, after approval by our shareholders, to the members of Cure Based Development, issued in two tranches 6,500,000 and 8,750,000, both of which are subject to leak out provisions, and the 8,750,000 tranche of shares will also 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 certain aggregate net revenue criteria by cbdMD within 60 months following the Closing Date (“earn out”). The initial 15,250,000 shares and Earnout Shares were approved by our shareholders and the initial shares were issued on April 19, 2019.
 
The initial shares value at April 19, 2019 was $53,215,163, this represented a $2,372,606 increase in value from March 31, 2019, of which this increase was recorded as an expense in the Statement of Operations. With the issuance of the initial shares, the contingent liability related to the initial shares was reclassified to shareholders’ equity by $53,215,163.
 
The earn out provision is accounted for and recorded as a contingent liability with increases in the liability recorded as a non cash other expense and decreases in the liability recorded as a non cash other income. The value of the contingent liability is $70,600,000 at June 30, 2019, as compared to $51,425,000 at March 31, 2019. The increase of $19,175,000 is recorded as an expense in the Statement of Operations. The Company utilizes both a market approach and a Monte Carlo simulation in valuing the contingent liability and a key input in both of those methods is the stock price. The main driver of the increase in the value of the contingent liability was the increase of the Company’s stock price, which was $5.90 at June 30, 2019 as compared to $4.42 on March 31, 2019.
 
Realized gain (loss) on marketable securities
 
We value investments in marketable securities at fair value and record a gain or loss upon sale at each period in realized gain (loss) on marketable securities. For the three and nine months ended June 30, 2019, we recorded a loss of $38,592 and $250,099 for the sale of securities we held (see Note 3 Marketable Securities and Other Investment Securities). We did not have any sale of securities in the three and nine months ended June 30, 2018.
 
Unrealized gain (loss) on marketable securities
 
On October 1, 2018, as a result of the adoption of ASU 2016-01 – Financial Instruments, the Company now records changes in fair value of equities held as unrealized gains (losses) on marketable securities in the statement of operations.
 
We value investments in marketable securities at fair value and record an unrealized gain or loss within the statements of operations, a non-cash entry, at each period beginning October 1, 2018 and prior to that recorded unrealized gain or loss in other comprehensive income (loss). For the three and nine months ended June 30, 2019, we recorded an unrealized gain (loss) net of taxes, of $(454,409) and $(1,450,519), respectively. For the three and nine months ended June 30, 2018, we recorded $(1,326,727) and $(1,923,304) of other comprehensive income (loss), net of taxes, respectively.
 
Net income (loss) and net income (loss) attributable to our common shareholders
 
Our net loss for the three and nine months ending June 30, 2019 increased 5,265.3% to $29,202,956 and 6,802.9% to $63,242,093, respectively, as compared to net income of $565,253 and $943,390 in the three and nine months ended June 30, 2018, respectively. At June 30, 2019 and 2018, we owned 100% of the membership interests of Beauty & Pin-Ups and 100% of the membership interest in Level H&W. At June 30, 2019 we owned 100% of the membership interest of CBDI. At June 30, 2019 and 2018 we owned 100% of the voting interests in each of I'M1 and EE1 and 51% membership interest in each of I’M1 and EE1. As such we account for the noncontrolling interest in each of I’M1 and EE1 based on their gains or losses. Based on the noncontrolling interest for these entities, this can have a negative impact on the gains or losses to our shareholders. After allocating a portion of the net gain to the noncontrolling interests in accordance with generally accepted accounting principles, our net loss increased 13,534.2% and 12,996.5% for the three and nine months ended June 30, 2019 from the same periods in fiscal 2018.
 
 
42
 
 
Liquidity and Capital Resources
 
 We had cash and cash equivalents on hand of $11,633,213 and working capital of $19,856,171 at June 30, 2019 as compared to cash on hand of $4,282,553 and working capital of $10,820,192 at September 30, 2018. Our current assets increased approximately 88.2% at June 30, 2019 from September 30, 2018, and is primarily attributable to an increase of cash, prepaid expenses, inventory, and prepaid inventory, offset by a decrease in accounts receivable, accounts receivable other, marketable securities, notes receivable, and deferred issuance costs. Our current liabilities increased approximately 140.2% at June 30, 2019 from September 30, 2018. This increase is primarily attributable to increases in accounts payable, customer deposits, and accrued expenses, offset by decreases in notes payable and deferred revenue. Both the changes in our current assets and current liabilities are also reflective of the further development of our business during fiscal 2019 as well as the Mergers of Cure Based Development. In July 2017 we sold, to a related party, an equity position in a customer that we had received as compensation for services and we received a portion in cash and the balance as a short term note receivable for $275,000. As of September 30, 2018, the note balance was $156,147, the note was paid in full in November 2018.
 
During the three and nine months ended June 30, 2019 we used cash primarily to fund our operations.
 
We do not have any commitments for capital expenditures. We have sufficient working capital to fund our operations and to fund our expected growth.
 
Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have generated the income to meet this goal, however as we have accepted equity as compensation in many of our engagements, we have not met this goal as cash flow from operations has been a net use of $9,819,608 and $4,840,368 for the nine months ended June 30, 2019 and 2018, respectively.
 
On November 16, 2017 we closed an IPO and raised net proceeds of $10,932,535. On October 2, 2018 we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $6,356,998. On May 15, 2019 we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total net proceeds to us of $12,650,600. We are using the net proceeds from the offering for brand development and expansion, advertising, marketing, acquisitions and general working capital.
 
Related Parties
 
As described in Note 9 to our consolidated financial statements appearing elsewhere in this report, we have engaged in significant number of related party transactions. As indicated previously, we are a party to multiple agreements with kathy ireland® Worldwide, its principals and its affiliates, therefore as the companies work together on various opportunities, we at times have leveraged the kathy ireland® Worldwide enterprise to assist with delivery and in some cases to engage through them with customers. Due to the significance of these transactions we have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements. Applicable transactions also are reported as sales with related parties (see Note 9 Related Party Transactions in the consolidated financial statements for more information).
 
Critical accounting policies
 
The preparation of financial statements and related disclosures in conformity with US GAAP and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.
 
Please see Part II, Item 7 – Critical Accounting Policies appearing in our 2018 10-K for the critical accounting policies we believe involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.
 
 
43
 
 
Recent accounting pronouncements
 
Please see Note 1 –Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.
 
Off balance sheet arrangements
 
As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
 
 
 
44
 
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for a smaller reporting company.
 
ITEM 4.    CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures. We maintain “disclosure controls and procedures” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934. In designing and evaluating our disclosure controls and procedures, our management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this report, our co-Chief Executive Officers and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective to ensure that the information relating to our company, required to be disclosed in our SEC reports (i) is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to our management, including our co-Chief Executive Officers and our Chief Financial Officer, to allow timely decisions regarding required disclosure.
 
 
Changes in Internal Control Over Financial Reporting. In the quarter ending June 30, 2019, the Company implemented an automated perpetual inventory system and is continuing to review all processes to ensure proper support of our internal control over financial reporting. Other than implementation of this system, there were no changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
  
 
45
 
 
PART II - OTHER INFORMATION
 
ITEM 1.    LEGAL PROCEEDINGS.
 
None. except as previously reported.
 
ITEM 1A.    RISK FACTORS.
 
We desire to take advantage of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. Accordingly, we incorporate by reference the risk factors disclosed in Part I, Item 1A of our 2018 Form 10-K and in Part II, Item 1A. of our Quarterly Report on Form 10-Q for the period ended March 31, 2019.
 
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None. except as previously reported.
 
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES.
 
None.
 
ITEM 4.    MINE SAFETY DISCLOSURES.
 
Not applicable to our Company’s operations.
 
ITEM 5.    OTHER INFORMATION.
 
In June 2018, EE1, a subsidiary of the Company, entered into agreements with an affiliate of Mr. Erik Sterling, a former board of director of the Company and the CFO of kathy ireland® Worldwide.  The agreements were for services to be provided at an aggregate price of $1,200,000, all to be paid by December 2018.  All services were completed, delivered and accepted and an initial payment of $200,000 was made in December 2018, and an agreement specifying the final payment of $1,000,000 was to be paid to the Company by May 1, 2019. After failing to make the May 1, 2019 payment, a new payment plan which included obligations to make payments on each of June 30, 2019 and August 15, 2019.  Subsequent, the June 30, 2019 payment has not been made.  The Company is pursuing payment of this amount and has engaged counsel to assist it in collection of this obligation.
 
On August 7, 2019 the Company's board of directors approved an amendment to the Company's 2015 Equity Compensation Plan (the "Plan") pursuant to the provisions thereof (i) changing the name of the Plan to cbdMD, Inc. 2015 Equity Compensation Plan to reflect the current corporate name of the Company, and (ii) changing the date the automatic evergreen increase is determined to the first trading day of October each calendar year during the term of the Plan, beginning in 2019, to coincide with the Company's fiscal year. 
 
 
46
 
 
ITEM 6.    EXHIBITS.
 
    Incorporated by Reference Filed or Furnished
No. Exhibit Description Form Date Filed Number Herewith
 Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC 8-K 12/3/2018 2.1  
 Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging AcqCo, LLC with and into Cure Based Development, LLC 10-Q 02/14/2019 2.2  
 Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging AcqCo, LLC with and into Cure Based Development, LLC 10-Q 02/14/2019 2.3  
 Articles of Merger dated December 20, 2018 as filed with the Secretary of State of Nevada merging Cure Based Development, LLC with an into cbdMD LLC 10-Q 02/14/2019 2.4  
 Articles of Merger dated December 20, 2018 as filed with the Secretary of State of North Carolina merging Cure Based Development, LLC with an into cbdMD LLC 10-Q 02/14/2019 2.5  
 Certificate of Incorporation 1-A 9/18/17 2.1  
 Certificate of Amendment to the Certificate of Incorporation – filed April 22, 2015 1-A 9/18/17 2.2  
 Certificate of Amendment to the Certificate of Incorporation – filed June 22, 2015 1-A 9/18/17 2.3  
 Certificate of Amendment to the Certificate of Incorporation – filed November 17, 2016 1-A 9/18/17 2.4  
 Certificate of Amendment to the Certificate of Incorporation – filed December 5, 2016 1-A 9/18/17 2.5  
 Amended and Restated Bylaws 1-A 9/18/17 2.6  
 Office Lease, dated July 11, 2019
       Filed
 Certification of co-Principal Executive Officer (Section 302)       Filed
 Certification of co-Principal Executive Officer (Section 302)       Filed
 Certification of Principal Financial Officer (Section 302)       Filed
 Certification of Principal Executive Officer and Principal Financial Officer (Section 906)       Filed
101 INS XBRL Instance Document       Filed
101 SCH XBRL Taxonomy Extension Schema       Filed
101 CAL XBRL Taxonomy Extension Calculation Linkbase       Filed
101 LAB XBRL Taxonomy Extension Label Linkbase       Filed
101 PRE XBRL Taxonomy Extension Presentation Linkbase       Filed
101 DEF XBRL Taxonomy Extension Definition Linkbase       Filed
 
 
47
 
SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 cbdMD, INC.
   
August 14, 2019By:/s/ Martin A. Sumichrast
  Martin A. Sumichrast, Co-Chief Executive Officer, principal executive officer
 
   
August 14, 2019By:/s/ Raymond S. Coffman
  Raymond S. Coffman, Co-Chief Executive Officer, principal executive officer
 
August 14, 2019By:/s/ Mark S. Elliott
  Mark S. Elliott, Chief Operating Officer, Chief Financial Officer, principal financial and accounting officer
 
 
 
 
48