CBDMD, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
W
ashington
, D.C.
20549
FORM 10-K
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(M
ark
O
ne
)
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☑
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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F
or
the fiscal year ended
September 30, 2017
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or
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☐
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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F
or
the transition period
from
_______________
to
_______________
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C
ommission
file number
:
000-____________
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LEVEL BRANDS, INC.
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(
Exact name of
registrant as specified in its charter
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North Carolina
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47-3414576
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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4521 Sharon Road, Suite 407, Charlotte, NC 28211
(Address of principal executive offices)(Zip Code)
Registrant's
telephone number, including area code:
(704) 445-5800
Securities
registered under Section 12(b) of the Act:
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Title
of each class
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Name of
each exchange on which registered
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Common stock, par value $0.001 per share
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NYSE American LLC
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Securities
registered under Section 12(g) of the Act:
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None
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities
Act. ☐ Yes ☑ No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the
Act. ☐ Yes ☑ No
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
and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.4.05 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant
was required to submit and post such
files). ☑ Yes ☐ No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form
10-K. ☑
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.
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Large
accelerated filer
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☐
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Accelerated
filer
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☑
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Emerging
growth company
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☑
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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.
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☐
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Exchange
Act) ☐ Yes ☑ No
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was sold, or the average bid and asked
prices of such common equity, as of the last business day of the
registrant's most recently completed second fiscal quarter. $0 on
March 31, 2017.
Indicate
the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
7,798,928 shares of common stock are issued and outstanding as of
December 13, 2017.
DOCUMENTS INCORPORATED BY REFERENCE
List
hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which
the document is incorporated: (1) Any annual report to security
holders; (2) Any proxy or information statement; and (3) Any
prospectus filed pursuant to Rule 424(b) or (c) under the
Securities Act of 1933. Part III of this report incorporates
information by reference from Level Brands, Inc.'s definitive proxy
statement, which proxy statement is due to be filed with the
Securities and Exchange Commission no later than 120 days after
September 30, 2017.
2
TABLE OF CONTENTS
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Page No.
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Part I
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Item 1.
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Business.
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4
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Item 1A.
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Risk Factors.
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12
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Item 1B.
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Unresolved Staff Comments.
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26
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Item 2.
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Properties.
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26
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Item 3.
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Legal Proceedings.
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26
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Item 4.
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Mine Safety Disclosures.
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26
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Part II
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Item 5.
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Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
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27
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Item 6.
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Selected Financial Data.
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29
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Item 7.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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29
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk.
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39
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Item 8.
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Financial Statements and Supplementary Data.
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40
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Item 9.
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Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
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40
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Item 9A.
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Controls and Procedures.
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40
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Item 9B.
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Other Information.
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Part III
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Item 10.
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Directors, Executive Officers and Corporate
Governance.
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42
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Item 11.
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Executive Compensation.
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42
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
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42
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence.
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42
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Item 14.
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Principal Accounting Fees and Services.
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42
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules.
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| SIGNATURES |
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Unless
the context otherwise indicates, when used in this report, the
terms Level Brands,” “we,” “us,
“our” and similar terms refer to Level Brands, Inc., a
North Carolina corporation formerly known as Level Beauty Group,
Inc., and our subsidiaries Beauty and Pinups, LLC, a North Carolina
limited liability company which we refer to as “Beauty &
Pin-Ups”, 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 newly
formed North Carolina limited liability company. In addition,
“fiscal 2016” refers to the year ended September 30,
2016, "fiscal 2017" refers to the year ended September 30, 2017 and
"fiscal 2018" refers to the year ending September 30,
2018.
Unless otherwise indicated, all share and per
share information contained herein gives pro forma effect to the
1:5 reverse stock split of our common stock, which was effective
December 5, 2016. The information contained on our websites
at
www.levelbrands.com
and
www.beautyandpinups.com
are not part of this
report
.
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Forward-Looking Statements
The statements contained in this Annual Report on Form 10-K that
are not purely historical are considered to be "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995 and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). These forward-looking
statements include, but are not limited to: any projections of
revenues, earnings, or other financial items; any statements of the
strategies, plans and objectives of management for future
operations; any statements concerning proposed new products or
developments; any statements regarding future economic conditions
or performance; any statements of belief; and any statements of
assumptions underlying any of the foregoing. Forward-looking
statements may include the words "may," "will," "estimate,"
"intend," "continue," "believe," "expect" or "anticipate" and any
other similar words. These statements represent our expectations,
beliefs, anticipations, commitments, intentions, and strategies
regarding the future and include, but are not limited to, the risks
and uncertainties outlined in Item 1.A Risk Factors and Item 7.
Management's Discussion and Analysis of Financial Condition and
Results of Operations. Readers are cautioned that actual results
could differ materially from the anticipated results or other
expectations that are expressed in forward-looking statements
within this report. The forward-looking statements included in this
report speak only as of the date hereof, and we undertake no
obligation to publicly update or revise any forward-looking
statement, whether as a result of new information, future events or
otherwise, except as required by law.
ITEM
1.
DESCRIPTION
OF BUSINESS.
Level Brands strives to be an innovative
licensing, marketing and brand management company with a focus on
lifestyle-based products. We champion a bold, unconventional image,
and social consciousness for our company and our brands. Working
closely with our Chairman Emeritus and Chief Brand Strategist,
Kathy Ireland, the Chairman, CEO and Chief Designer of
kathy
ireland
® Worldwide, we
seek to secure strategic licenses and joint venture partnerships
for our brands, as well as to grow the portfolio of brands through
strategic acquisitions. In November 2017 we completed our initial
public offering (“IPO”) raising $12,000,000 in gross
proceeds through the sale of our common stock. We expect to deploy
these proceeds for brand development and expansion, sales and
marketing, and general working capital.
We
operate our business in four business units,
including:
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Licensing
division
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Founded
in 2017
and first conceptualized
by
kathy
ireland
® Worldwide
,
I'M1 is a lifestyle brand established to capitalize on potentially
lucrative licensing and co-branding opportunities with products
focused on millennials.
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Entertainment
division
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Also
founded in 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.
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kathy ireland
®
Health
&
Wellness
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Our newest business unit established in September 2017,
kathy
ireland
® Health &
Wellness' 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.
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"
Beauty
belongs to everyone
"
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Professional
products
division
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Beauty
& Pin-Ups, our first business unit is a professional hair care
line with a social conscience and launched its products in 2015. We
offer quality hair care products, including shampoos, conditioners,
styling aides and a patented styling tool, through an expanding
professional salon distribution network.
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Our
mission is to focus on designing and building the brand with
innovation that customers and business partners can use, exceeding
market needs, creating sustainable cost advantages and fighting
commoditization. We expect that this focus will include aspects of
how we brand, promote, access, incorporate and utilize the
products. We have expanded the United Nations "Millennium
Development Goals" which below are part of our
mission:
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We must eradiate extreme poverty and hunger
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Combat HIV/AIDS, Malaria and other diseases
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Achieve universal primary education
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Ensure environmental sustainability
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Promote gender equality and empower women
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Develop a global partnership for development
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Reduce child mortality
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Stop Human Trafficking
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Improve maternal health
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Bring opportunities of financial stability and healthcare to
American Veterans and their families
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Our strategy
Our business strategy is to maximize the potential
value of our brands primarily through strategic licenses and joint
venture partnerships around the world, as well as to grow the
portfolio of brands through strategic acquisitions. We believe our
business model enables us to use the brand management expertise at
our disposal, through our relationship with
kathy
ireland
® Worldwide, to
continue to grow our portfolio of brands and generate new revenue
streams without significantly changing our infrastructure. We
believe our business model provides numerous benefits,
including:
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potential for financial upside without the significant investment
and management risks and capital demands typically associated with
traditional wholesale operating companies;
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diversification resulting from both broad demographic appeal and
distribution through a range of distribution channels;
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growth opportunity through expansion of existing brands into new
categories, geographic areas and acquisitions; and
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reduced operational risks as inventory and other typical wholesale
operating functions are the responsibilities of our
licensees.
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We
plan to continue to build and maintain our brand portfolio by
developing our existing brands and acquiring additional brands
directly or through joint ventures or partnerships. In assessing
potential acquisitions or joint ventures, we expect to primarily
evaluate the strength of the target brand as well as the expected
viability and sustainability of future royalty streams and its fit
within its targeted segments as well as in segments where we
believe significant opportunity lies. We believe that this focused
approach will allow us to effectively screen a wide pool of
consumer brand candidates and other asset light businesses that
meet our criteria, strategically evaluate targets and efficiently
complete due diligence for potential acquisition. Ms. Ireland, in
her role as Chief Brand Strategist, is expected to provide
significant input to our management in the identification and
evaluation of potential acquisitions or joint
ventures.
Our relationship with
kathy
ireland
® Worldwide
We are
a party to multiple agreements with
kathy ireland
® Worldwide and
principals of that privately held company that are key to our
ability to implement our business strategy and provide services
under the various other third party agreements with licensors,
brands and other partners, including
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In February 2017 we entered into an eight year master advisory and
consulting agreement with
kathy
ireland
® Worldwide, as
amended, pursuant to which it provides us non-exclusive strategic
advisory services, including input to us on various aspects of our
corporate strategies and branding. Their in-house design team
supports our brands and the future licensing partnerships by
providing unified trend direction, guidance and coordination of the
brand image across all
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product categories and focuses on seeking to
forecast the future design and product demands of the our
brand’s customers. Under the terms of this agreement, Ms.
Ireland also serves in the non-executive positions as our Chairman
Emeritus and Chief Brand Strategist. Under the September 2017
amendment to the agreement, the parties also granted each other
certain rights for opportunities introduced by one party to the
other, including rights of first refusal and the payment of
referral fees;
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In January 2017 I’M1 entered into an exclusive, royalty-free
10 year wholesale worldwide license agreement with
kathy
ireland
® Worldwide for
rights to use, assign and sublease certain trademarks, including
I’M1, to allow for the manufacturing, marketing and sale of
products bearing those marks and to sublicense certain of these
rights;
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In February 2017, we entered into one year advisory agreements with
each of Mr. Stephen Roseberry and Mr. Tommy Meharey pursuant to
which they provide advisory and consulting services to us,
including serving as co-Managing Directors of I’M1, devoting
such time to our business as we mutually determine. Mr. Roseberry
is President and a member of the board of directors
of kathy
ireland
® Worldwide and
Mr. Meharey is Vice President and a member of the board of
directors of
kathy
ireland
®
Worldwide.
Mr. Jon Carrasco, who is the Global
Creative Director for
kathy
ireland
® Worldwide, also
serves as Global Creative Director for I’M1, and he is
responsible for developing and facilitating creative strategies for
I’M1 under the terms of a one year advisory agreement entered
into in September 2017. We expect these agreements will be renewed
for multi-year terms prior to the expiration of the terms of the
current agreements;
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In February 2017 we also entered into one year advisory agreements
with each of Mr. Roseberry and Mr. Nic Mendoza pursuant to which
they provide advisory and consulting services to us, including
serving as co-Managing Directors of EE1, devoting such time to our
business as we mutually determine. Mr. Mendoza is Vice President
of
kathy
ireland
® Worldwide. Mr.
Carrasco also serves as Global Creative Director of EE1, and he is
responsible for the development and facilitation of creative
strategies for EE1 under the terms of a one year advisory agreement
entered into in September 2017. We also expect these agreements
will be renewed for multi-year terms prior to the expiration of the
terms of the current agreements; and
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In September 2017 we entered into a seven year 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 has been paid to date, together with a royalty of 33
1/3% of our net proceeds under any sublicense agreements we may
enter into for this intellectual property. We have the right to
renew this license agreement for an additional three year period by
paying an additional marketing fee of $360,000.
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The
foregoing agreements are material to our ability to conduct our
business. The material terms of these agreements are described
later in this report under Note 9 to the notes to our consolidated
financial statements. In addition, in January 2017 we acquired our
ownership interests in both I'M1 and EE1 from an entity controlled
by principals of kathy ireland® Worldwide and their
affiliates. The material terms of these transactions are described
later in this report under Item 1. Our Business – Our History
and Note 2 to the notes to our consolidated financial
statements.
Our business units
Licensing division
I’M1's
goal is to become a leader in multiple categories including
grooming, personal care, cologne, accessories, jewelry and apparel.
I’M1 markets itself as a lifestyle brand for men, who are not
threatened by change
6
and willingly embrace it. Our target customers are men who enjoy a
lifestyle inspired by the rugged chic of an athletic lifestyle,
while giving back to our communities by supporting our Millennium
Development Goals.
Tommy Meharey is the “face” of
I’M1. He is a millennial, Marine, father, and the youngest
board member of
kathy
ireland
®
Worldwide
.
We believe Mr. Meharey embodies the essence of the targeted
I’M1 clientele, and his approachable nature, history of
service to the nation, and family values may be an asset to the
brand. As the voice and inspiration of I’M1, we expect to
leverage Mr. Meharey’s ability to communicate the DNA of
I’M1 to the media, retailers, and our
consumers.
Since
our January 2017 acquisition of the voting interests in this newly
formed entity from affiliates of
kathy ireland
® Worldwide, we have
entered into licensing agreements with a number of entities in our
target categories including men’s fashion and accessories. We
believe that building a powerful brand is a dynamic way to give
companies an edge in increasingly competitive markets.
I’M1’s brand identity goal is to seek to construct
lasting relationships with men who wish to elevate their lives,
through the purchases they make by developing quality products that
they need as a part of their day to day lives. Our current
licensing agreements provide that the manufacturing, development,
distribution and operating costs and expenses of products are borne
by our licensee, and we expect that licensing agreements we enter
into with future partners will be similarly structured. Our
licensing agreements provide for revenues based on royalties as a
percentage of sales by our client and are usually signed for an
initial five to seven year period. The contracts typically also
have a minimum annual guaranteed royalty amount and can also have
an advertising/marketing fee which is paid to us.
We
have developed a standardized form of licensing agreement for use
by I'M1 which contains general terms and conditions under which we
will grant licenses to the I'M1 marks that can be modified to meet
the business terms of each particular product. The standard terms
and conditions include the limitations on the grant of the license
for the marks, use and ownership of our intellectual property and
the ownership of the intellectual property related to the licensed
products, means for conducting brand business and coordinating with
us and other licensees, royalty reporting and accounting
obligations, quality assurance procedures, acceptable display,
labeling and promotional materials, minimum insurance requirements,
termination and confidentiality provisions, a code of conduct for
our licensees and other customary terms and conditions contained in
licensing agreements.
We
have also entered into two joint advisory agreements with EE1. When
the advisory services under a brand management agreement with a
client would span the services particular to both divisions,
specifically where our men’s lifestyle brand can add
additional value to a client regarding men’s modeling,
targeting channels or influencers that overlap with our Licensing
division, both of our subsidiaries will be a party to the agreement
with the client.
In
addition we plan to license our Beauty & Pin-Ups, I’M1
and EE1 brands to both manufacturing and direct-to-retail
licensees. In a traditional license, a manufacturer is granted
rights, at times on an exclusive basis, to a single or small group
of related product categories for a particular item for sale to
multiple accounts within an approved channel of distribution and
territory. In a direct-to-retail license, a single retailer is
granted the right (typically on an exclusive basis) to sell branded
products in a broad range of product categories through its brick
and mortar stores and e-commerce sites.
Entertainment division
EE1 provides brand management and seeks to be an
experiential entertainment company, serving as a
producer and marketer of multiple
entertainment distribution platforms.
Brand management
Under
the scope of its brand management services, EE1 provides input,
strategies and an architecture for corporate brands,
including:
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content creation and promotion through social and standard
media;
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marketing input;
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assisting with influencer marketing programs;
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providing production capability for video and photo support for
brand advertising; and
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assisting with brand extension through licensing
opportunities.
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Since
our January 2017 acquisition of the voting interests in EE1 from
affiliates of
kathy
ireland
® Worldwide, we have entered into representation
and advisory agreements with a number of entities to provide the
services above. In these agreements, we will typically provide a
variety of strategic services designed to help expand, establish,
or reposition a brand. The services are delivered over a defined
timeframe for a contracted fee. In addition we typically receive an
on-going royalty fee, for a negotiated period of time, of sales by
the client.
In
addition to the representation and advisory agreements to which EE1
is a party, we also entered into seven year non-exclusive wholesale
license agreements with two existing brands introduced to us
by kathy ireland
®
Worldwide. Under the terms of these agreements, we have the right
to use, assign and sublicense the marks, intellectual property and
other rights in connection with the brands for the purpose of
entering into sublicense agreements with third parties for the
manufacture, marketing and sale of products utilizing these
marks.
Experiential Entertainment
Experiential
entertainment is also part of EE1's business model. EE1’s
goal is to provide a variety of “all inclusive”
entertainment experiences targeted to millennials which combine
multiple facets of an entertainment experience into one event. EE1
is expected to be able to assess all entertainment distribution
platforms such as recording, film, television, radio, podcasts, web
content, live events including: sports, festivals, fashion shows,
holiday-centric programming, and business-centric programming, to
identify areas of additional opportunity. EE1 intends to pursue
opportunities to build content in every area of the entertainment,
sports, and travel industries - including joining artists in the
recording studio, participating in an artist’s sound check,
VIP back stage artist meet and greets, films, broadcast, live
events including concerts and musical theatre, and fashion
shows.
EE1
is a party to agreements with several entities for projects
including a record album and production services related to two
television shows featuring Kathy Ireland. These agreements are
structured based on the type of entertainment or event produced and
will provide revenue as a fee based on the services contracted and
provided. In some cases, we will also receive on-going royalties
based on sales (for example, album and movie sales).
kathy ireland® Health & Wellness
As
a result of Ms. Ireland's five best selling fitness programs and
her personal focus on health and wellness, we expect to develop a
new brand utilizing these rights. Through licensing arrangements
with third parties which we will seek to obtain, our 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. We believe that licensed products and services under
this brand can benefit from a wide distribution path of grocery,
drug and mass, as well as direct response and online sales. Our
target market sectors for this brand include: complementary and
alternative medicine; wellness lifestyle; real estate; spa
industry; thermal/mineral springs; workplace wellness; beauty at
every age; healthy eating; nutrition and weight loss; wellness
tourism; fitness and mind-body; and preventive and personalized
medicine. Our business plan for this brand, however, is in its
preliminary stages and there are no assurances we will be
successful in developing this brand concept or entering into
agreements for licensed products.
Professional products division
Beauty
& Pin-Ups is designed to be an innovative and cutting-edge
producer and marketer of quality hair care and other beauty
products. It has a brand name that we believe lends itself to
various channels of distribution and licensing including swimsuits,
cosmetics, nails, accessories and more. With an initial launch in
September 2015 of “The Iron”, a unique styling tool,
Beauty & Pin-Ups currently has 11 products,
including:
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Flaunt
-
Silkening
Shampoo
and
Conditioner
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Linger - Style and Sculpting Spray Gel
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Luxe - Leave-in Spray On Revitalizing Conditioner
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Fierce - Firm Hold Finishing Spray
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Lavish - All in 1 Cleansing and Conditioning
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Fearless Hair Rescue Treatment
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8
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Sway - Blow Out Styling Primer Enhanced with Marine
Botanicals
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Valor - Superfine Hair Spray
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Fever - Thermal Protectant
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Rewind - Shampoo and Conditioner
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Stay Dirty - Dry Shampoo
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Beauty & Pin-Ups uses healthy, lavish
ingredients in stylist-tested formulas. All of the products are
cruelty free – (not tested on animals), paraben, phthalate
and sulfate free. We are just as proud of what is
not
in our products as what is in them. We
believe that the result is beautiful, healthy hair. We believe that
the brand is unique in its packaging with classic pin-up imagery on
the bottles that are designed to create a feel of affordable luxury
with a vintage, yet modern feel. Our mission of beauty with a
purpose is inspired by the pin-up who was a symbol of
empowerment… women who were comfortable in their own skin and
defined femininity, yet had a fierce independence and
confidence.
Marketing
We
have an internal team that manages and facilitates our social media
presence and strategy which strives to appeal to a wide audience
with positive messaging that embraces inner beauty and
authenticity. Through high quality visual imagery that engages both
the consumer and the stylist, we seek to convey our message that
beauty belongs to everyone. We use a mix of sales messaging,
ingredient stories, giveaways/contests, and images of hairstyles to
engage customers and increase reach. Our marketing messages and
social media messages are complementary to each other; however
social media is used as much more of a story telling platform. We
aim to be a destination for both the consumer and the stylist to
acquire knowledge about the latest styles and trends in the
industry, and to be inspired.
We
seek to build our brand through our websites, trade shows,
television, digital, and social media. In addition, we seek
editorial coverage for our brands and products not only in
traditional media, but increasingly in digital and social media,
leveraging significant opportunities for
amplification.
We
believe there are marketing opportunities and brand extensions
including swimwear, sunglasses and intimate apparel utilizing the
Beauty & Pin-Ups tradename that we may be able to take
advantage of in future periods. While we have engaged in early
stage discussions with third parties regarding these possible
marketing opportunities and brand extensions, we have not entered
into any agreements as of the date of this report.
Product development
Mr.
Priel Maman, formerly the minority owner of Beauty & Pin-Ups,
was the developer of the original Beauty & Pin-Ups product
line. In our acquisition of the assets of Beauty & Pin-Ups in
2015 we acquired all of the intellectual property associated with
those development efforts. Our products are conceptualized by our
in-house team and utilizing the services of third party contractors
the product formulas are then developed, tested and finalized. The
research and development expense portion of the fees included in
the amounts paid to third party contractors were approximately
$32,825 and $36,750 in fiscal 2017 and fiscal 2016, respectively.
Concurrently a third party contractor also assists also our
in-house team in packaging design and development and production of
marketing materials.
Sales channels
Beauty
& Pin-Ups products have historically been sold primarily
through Beauty Systems Group under a purchase order arrangement.
Beauty Systems Group has approximately 1,265 stores nationwide,
including over 150 franchise stores, and is one of the largest
networks of professional distributor sales consultants in North
America, with almost 1,000 consultants. We also distribute our
products under purchase order arrangements with Paramount Beauty
Distributing Associates, Inc. AMLP, BSG Canada, and recently online
through JCPenney.com. Historically, we have been materially
dependent upon Beauty Systems Group for sales of our Beauty &
Pin-Ups products.
By
the end of calendar year 2017, our goal was to expand our sales
channels to multiple channels of beauty distribution, including
wholesale and professional chain salon distribution as well as
through additional e-commerce channels including from on our
website. In furtherance of this goal, entering fiscal 2018 we have
entered into five
9
year
distribution agreements with East Coast Enterprises, Inc., a
distributor of beauty supply products in the northeast of the
United States and with Century Beauty Supply, a distributor in
Kentucky, Tennessee and Indiana. We are continuing to focus on
extending our distributor channel across the United
States.
Beauty
& Pin-Ups is currently developing a North American sales
support team to build sales for the brand with its distribution
partners. This group is expected to cover all regions of the United
States. In the first quarter of fiscal 2017 we hired a regional
sales manager and as of December 1, 2017 we have hired 12
independent sales representatives.
Manufacturing, warehousing and raw materials
We manufacture our core products for Beauty &
Pin-Ups through hair care and other third-party manufacturers in
the United States and Canada; our flat iron products, foil pods for
the irons, and promotional items (back packs, zipper bags, and
clutch purses) are manufactured by third parties in China on a
purchase order basis. Terms with our China-based manufacturers
typically require 30% to 50% upon order with payment due when
products are ready to ship.
We expect to continue to streamline our
manufacturing processes and identify sourcing opportunities to
improve innovation, increase efficiencies, minimize our impact on
the environment and reduce costs.
The
principal raw materials used in the manufacture of our core
products are essential oils, alcohols and specialty chemicals. We
have engagements with specific organizations that are our
“fillers”; they use the formulas provided to create the
products and fill our packaging so we have a product that can be
distributed to our customers. Our terms typically provide that upon
an order being completed by the filler, balances are due within 30
to 45 days, although in some instances we have been required to
place a deposit of 30% to 50% upon placement of an
order.
We
also purchase packaging components that are manufactured to our
design specifications using our unique brand image. We utilize a
third party firm that specializes in design and rollout of
packaging, labeling, merchandising displays and advertising for our
products.
We
review our supplier base periodically with the specific objectives
of improving quality, increasing innovation and speed-to-market and
reducing costs. In addition, we source within the region of
manufacturing to allow for improved supply chain efficiencies. To
date, we have been able to obtain an adequate supply of essential
raw materials and currently believe we have adequate sources of
supply for virtually all components of our products.
Government regulation
We
and our products are subject to regulation by the Federal Trade
Commission in the United States, as well as by various other
federal, state, local and international regulatory authorities and,
at such time as we expand our distribution outside the United
States, the regulatory authorities in the countries in which our
products may be sold. Such regulations principally relate to the
ingredients, manufacturing, labeling, packaging, marketing,
advertising, shipment, disposal and safety of our products. We
believe that we are in substantial compliance with such
regulations, as well as with applicable federal, state, local and
international and other countries’ rules and regulations
governing the discharge of materials hazardous to the environment
or that relate to climate change.
We
have engaged a third party that specializes in regulation in our
industry to advise us and provide regulatory consulting services
and regulatory and technical support for our product offering in
the United States, Canada and Europe. At such time as we are
successful in expanding our distribution network outside the United
States, we will also be subject to the laws of the countries in
which are products are imported and sold. We expect to expand our
engagement of this third party to include these additional
countries.
Intellectual property rights
In
addition to our license agreement with
kathy ireland
® Worldwide described
elsewhere in this report, our success depends, at least in part, on
our ability to protect our brand names. We rely on a combination of
trademarks, patents, copyrights, trade secrets and know-how,
intellectual property licenses and other contractual rights
(including confidentiality and invention assignment agreements) to
establish and protect our proprietary rights.
We own
the trademark rights used in connection with our brands in the
United States including Beauty & Pin-Ups and EE1 and have a 10
year license for rights to the I’M1 trademark. We have also
filed trademark
10
registrations for
an additional approximately 12 trademarks which we may use in the
future as we launch new products under the Beauty & Pin-Ups
product line or enter into licensing agreements for Beauty &
Pin-Ups, I’M1 and EE1. We consider the protection of our
trademarks to be important to our business.
We own
both U.S., European Union and Chinese design patents on our hair
iron titled “hair iron” and have filed application in
the U.S., Europe and China for design patents for the hair foil,
titled “aluminum foil for hair” under the Chinese
application and “hair foil” under the U.S. and European
Union application. This product is used in conjunction with the
hair iron.
In
connection with the recording master license agreement with McCoo
& Davis, Inc. EE1 will own all intellectual property rights in
the album, any videos, production elements and the master
recordings and in all other forms of media, with the right to
sublicense.
In
addition to www.levelbrands.com, we own multiple domain names that
we may or may not operate in the future. However, as with phone
numbers, we do not have and cannot acquire any property rights in
an Internet address. The regulation of domain names in the United
States and in other countries is also subject to change. Regulatory
bodies could establish additional top-level domains, appoint
additional domain name registrars or modify the requirements for
holding domain names. As a result, we might not be able to maintain
our domain names or obtain comparable domain names, which could
harm our business.
Competition
I’M1’s
competition includes established, well-capitalized companies with
wide consumer recognition such as Armani, Ferragamo, Prada,
Burberry, and Gucci as well as newer brands including Gilt, Me
Undies, Uniqlo, Concepts, Roden and Grey, Machus, Far Fetch and The
Corner. I’M1 is expected to be a younger brand, built to
address the desires of millennials. While we expect we will seek to
address the aspirations of our customers at attainable price points
which we believe may give us a competitive advantage, there are no
assurances we will ever be able to effectively compete within this
sector.
EE1's principal competitors in the entertainment
arena are expected to be large, established multi-national
companies such as The Walt Disney Company, Bertelsmann
Group,
Comcast (owners of
Universal, NBC, Telemundo), and 20th Century Fox. Additional
competitive organizations include independent studios, though the
majority of these agencies do not address
consumers across multiple platforms. Despite the
significant competition in the entertainment industry from larger,
established and well-capitalized companies, we believe it is a
field that welcomes, and is in fact driven, by disruption and we
will seek to leverage the flexibility of a start-up without a large
organizational structure to our advantage. There are no
assurances, however, that we will ever be successful in effectively
competing in this market segment.
There
is vigorous competition within each market where our hair care and
other beauty products are sold. Brand recognition, quality,
performance, availability and price are some of the factors that
impact consumers’ choices among competing products and
brands. Advertising, promotion, merchandising and the pace and
timing of new product introductions also have a significant impact
on consumers’ buying decisions. We compete against a number
of national and international companies, most of which have
substantially greater resources than we do. Our principal
competitors consist of large, well-known, multinational
manufacturers and marketers of hair care and other beauty products,
most of which market and sell their products under multiple brand
names. They include, among others, L’Oreal Professional,
Matrix Essentials, Redken, Paul Mitchell, Sebastian and
Schwartzkopf. We also face competition from a number of independent
brands, as well as some retailers that have developed their own
beauty brands. Certain of our competitors also have ownership
interests in retailers that are customers of ours. There are no
assurances we will ever be able to effectively compete or that we
will develop any widespread brand recognition.
Employees
At
December 13, 2017 we had 11 full-time employees. There are no
collective bargaining agreements covering any of our
employees.
Our history
Our
company was formed under the laws of the state of North Carolina in
March 2015 under the name Level Beauty Group, Inc. In March 2015 we
formed our majority owned subsidiary Beauty & Pin-Ups.
In
11
November 2016 we changed the name of our parent
company to Level Brands, Inc. In December 2016 we effected a 1:5
reverse stock split of our outstanding common stock.
In
April 2015 we entered into a Contribution Agreement with Beauty
& Pinups, Inc., a New York corporation that we refer to as
"BPUNY" and Priel Maman, pursuant to which BPUNY and Mr. Maman
contributed the business and certain assets, including the
trademark “Beauty & Pin Ups” and its variants,
certain other intellectual property and certain inventory to our
Beauty & Pin-Ups subsidiary in exchange for a 12% membership
interest in our subsidiary for Mr. Maman, a 10% membership interest
in our subsidiary for Sigan Industries Group, and $150,000 in cash.
In October 2016, as amended in March 2017, we acquired
Sigan’s membership interest in exchange for 129,412 shares of
our common stock. In April 2017 we acquired the remaining 12%
interest in Beauty & Pin-Ups from Mr. Maman in exchange for
155,294 shares of our common stock. Following this transaction, we
now own 100% of Beauty & Pin-Ups. For additional information on
the terms of these agreements, please see Note 2 to the notes to
our consolidated financial statements appearing elsewhere in this
report.
I’M1
was formed in California in September 2016. IM1 Holdings, LLC, a
California limited liability company, or “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 valued
at $495,550. IM1 Holdings continues to own the Class B non-voting
membership interests of I’M1. For additional information on
the terms of these agreements, please see Note 2 to the notes to
our consolidated financial statements appearing elsewhere in this
report.
EE1
was formed in California in March 2016. EE1 Holdings, LLC, a
California limited liability company, or “EE1 Holdings" was
the initial member of EE1 Holdings. 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 valued
at $240,550. EE1 Holdings continues to own the Class B non-voting
membership interests of EE1. For additional information on the
terms of these agreements, please see Note 2 to the notes to our
consolidated financial statements appearing elsewhere in this
report.
Level
H&W was formed in North Carolina in October 2017. We expect
that this new subsidiary will commence operations in fiscal
2018.
Additional information
We file
annual and quarterly reports on Forms 10-K and 10-Q, current
reports on Form 8-K and other information with the Securities and
Exchange Commission (“SEC” or the
“Commission”). The public may read and copy any
materials that we file with the Commission at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, DC 20549, on
official business days during the hours of 10:00 a.m. to 3:00 p.m.
You may obtain information on the operation of the Public Reference
Room by calling the Commission at 1-800-SEC-0330. The Commission
also maintains an Internet site at
http://www.sec.gov
that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
Commission.
Other
information about Level Brands can be found on our website
www.levelbrands.com
.
Reference in this document to that website address does not
constitute incorporation by reference of the information contained
on the website.
ITEM
1.A
RISK
FACTORS.
Investing in our common stock involves risks. In addition to the
other information contained in this report, you should carefully
consider the following risks before deciding to purchase shares of
our common stock. The occurrence of any of the following risks
might cause you to lose all or a part of your investment. Some
statements in this report, including statements in the following
risk factors, constitute forward-looking statements. Please refer
to “Cautionary Statement Regarding Forward-Looking
Statements” for more information regarding forward-looking
statements.
RISKS RELATED TO OUR OVERALL BUSINESS
Kathy Ireland is not an officer or director of our company. We are
materially dependent upon our relationships with kathy
ireland® Worldwide and certain of its affiliates. If these
advisory agreements or license rights should be terminated or
expire, we would be deprived of the services and our business could
be materially adversely
12
impacted.
While
affiliates of
kathy
ireland
® Worldwide are minority owners of both
I’M1 and EE1, the terms of the operating agreements for those
subsidiaries do not require them to provide any services to us. We
have entered into a non-exclusive advisory agreement with
kathy ireland
®
Worldwide, as amended, which expires in February 2025 under which
we engaged it to provide various consulting and advisory services
to us. Ms. Ireland serves in the non-executive role of Chairman
Emeritus and Chief Brand Strategist to us under this agreement. Ms.
Ireland is not a member of our management or board of directors,
the title Chairman Emeritus is an honorary title and she is not a
founder or co-founder of our company. Ms. Ireland provides services
to us solely under the terms of the non exclusive advisory
agreement. We have also entered into advisory agreements with
additional affiliates of
kathy
ireland
® Worldwide, including Messrs. Roseberry,
Carrasco, Meharey and Mendoza, pursuant to which they provide
various management and advisory services to us, including key
operational roles at I’M1 and EE1. These agreements, which
expire between February 2018 and September 2018, are expected to be
renewed under similar terms prior to the expiration date. None of
these services are provided on an exclusive basis, each of these
individuals may have a conflict of interest in that they have a
long term relationship with Kathy Ireland and have derived
substantial income from
kathy
ireland
® Worldwide and there is no minimum number of
hours which are required to be devoted to us. In addition we have
obtained a royalty free right to license the intellectual property
related to
kathy
ireland
® Health & Wellness. Our business model is
materially dependent upon our continued relationship with
kathy ireland
®
Worldwide, Ms. Ireland and her affiliates, including Messrs.
Roseberry, Carrasco, Meharey and Mendoza. If we should lose access
to those relationships or if the reputation of Ms. Ireland and/or
kathy ireland
®
Worldwide were to be damaged, our results would suffer and there
are no assurances we would be able to continue to operate our
company and develop our brands as presently planned.
Our limited operating history does not afford investors a
sufficient history on which to base an investment
decision.
Level Brands was formed in March 2015. During
fiscal 2016 and fiscal 2015 our net sales were solely from our
professional products division. We began reporting revenues from
our licensing division and our entertainment division during
the second quarter of fiscal 2017. In September 2017, we entered
into wholesale license agreements for three new brands,
including
kathy
ireland
® Health &
Wellness, a newly created brand. There are no assurances we will be
successful in generating net sales in future periods based upon
these new agreements. Our operations are subject to all the risks
inherent in the establishment of a new business enterprise. The
likelihood of success must be considered in light of the problems,
expenses, difficulties, complications and delays that are
frequently encountered in a
newly-formed company. There can be no assurance
that at this time that we will successfully implement our business
plan, operate profitably or will have adequate working capital to
meet our obligations as they become due. Prospective investors must
consider the risks and difficulties frequently encountered by early
stage companies, particularly in rapidly evolving markets. We
cannot be certain that our business strategy will be successful or
that we will successfully address these risks. In the event that we
do not successfully address these risks, our business, prospects,
financial condition, and results of operations could be materially
and adversely affected and we may not have the resources to
continue or expand our business operations.
Our subsidiaries I’M1 and EE1 are new entities with a limited
operating history and we recently entered into a license agreement
licensing the rights to certain intellectual property related to
kathy ireland ® Health & Wellness, a newly created brand
with no operating history, which does not afford investors a
sufficient history on our company which to base an investment
decision.
I’M1 and EE1 are entities formed in
September 2016 and March 2016, respectively. We acquired membership
interests in each of these entities in January 2017. Both entities
are in the early stages of their businesses and we began reporting
revenues from each of these subsidiaries operations in the second
quarter of fiscal 2017. In September 2017 we entered into an
exclusive license agreement to license the trademark and
intellectual property rights for
kathy
ireland
® Health &
Wellness, a newly created brand with no operations. We do not know
when we may begin reporting revenues from this business unit. Our
operations are subject to all the risks inherent in the
establishment of a new business enterprise. The likelihood of
success must be considered in light of the problems, expenses,
difficulties, complications and delays that are frequently
encountered in a newly-formed company. There can be no assurance
that at this time that we will operate profitably or will have
adequate working capital to meet our obligations as they become
due. Prospective investors must consider the risks and difficulties
frequently encountered by early stage companies, particularly in
rapidly evolving markets. We cannot be certain that our business
strategy will be successful or that we will successfully address
these risks. In the event that we do not successfully address these
risks, our business, prospects, financial condition, and results of
operations could be
13
materially
and adversely affected and we may not have the resources to
continue or expand our business operations.
We have a history of losses and there are no assurances we will
report profitable operations in future periods.
We
reported net losses to common shareholders of $1,738,734 and
$3,356,489 for fiscal 2017 and fiscal 2016, respectively. Until
such time, if ever, that we are successful in generating profits
which are sufficient to pay our operating expenses it is likely we
will continue to report losses in future periods.
Further, historically our revenues have been attributable to
sales from our professional products division and we did not
begin reporting revenues from either our licensing division or our
entertainment division until the second quarter of fiscal 2017.
There are no assurances we will generate substantial revenues from
the new businesses or that we will ever generate sufficient
revenues to report profitable operations or a net
profit.
If we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our
financial results. As a result, current and potential shareholders
could lose confidence in our financial reporting, which would harm
our business and the trading price of our stock.
As
described later in this report, our management has determined that,
as of September 30, 2017, we did not maintain effective internal
controls over financial reporting based on criteria set forth by
the Committee of Sponsoring Organizations of the 2013 Treadway
Commission in Internal Control-Integrated Framework as a result of
identified material weaknesses in our internal control over
financial reporting. A material weakness is a deficiency, or a
combination of deficiencies, in internal control over financial
reporting such that there is a reasonable possibility that a
material misstatement of the company's annual or interim financial
statements will not be prevented or detected on a timely basis.
While we have never been required to restate our consolidated
financial statements and expect to remediate the material weakness
during fiscal 2018, the existence of the continuing material
weaknesses in our internal control over financial reporting
increases the risk that a future restatement of our consolidated
financials is possible.
The terms of the various agreements between our company and kathy
ireland® Worldwide contain termination provisions which may
impact management's ability to make certain decisions regarding the
operation of our company
.
The
master advisory and consulting agreement with
kathy ireland
® Worldwide on which
we are materially dependent provides that the
agreement is immediately terminable by
kathy
ireland
® Worldwide if any
officers are terminated or resign, including Mr. Roseberry in his
role as President and co-Managing Director of I'M1 and EE1, or if
additional officers are appointed for each I'M1 and EE1 without the
consent of kathy ireland® Worldwide. The wholesale license
agreement for
kathy
ireland
® Health &
Wellness™ contains the right of
kathy
ireland
® Worldwide to
immediately terminate it
if any officers are terminated or
removed or additional officers are appointed with respect to either
I'M1 or EE1, or if we compete with or invest in business that
compete with
kathy
ireland® Worldwide. We believe our relationship with
kathy ireland
®
Worldwide and its affiliates is good. It is possible, however, that
our management's ability to make certain operational decisions
which it believes are otherwise in the best interests of our
company could be restricted in future periods if these decisions
could result in triggering the rights of
kathy ireland
® Worldwide to
terminate any agreement.
Our business
depends on consumer spending patterns
.
Our
business is sensitive to a number of factors that influence the
levels of consumer spending, including political and economic
conditions such as recessionary environments, the levels of
disposable consumer income, consumer debt, interest rates and
consumer confidence. Reduced consumer spending on beauty products
could have an adverse effect on our operating results in future
periods.
Substantially all of our net sales have been to a limited
number of customers, the loss of any of which would be materially
adverse to our company.
Substantially
all of our net sales in fiscal 2017 and 2016 were attributable to
sales to a limited number of customers. There are no assurances
sales to these customers will continue. While we expect to add
additional customers to our distribution network in the future for
our professional products division, and expand our licensing and
consulting clients in our other divisions, until such time as we
are successful in these efforts, of which there is no assurance,
any significant decrease in sales to any of our customers would
have a material adverse financial effect on our
company.
14
A significant amount of our net sales were from customers who are
identified as related parties, the loss of any of which would be
materially adverse to our company.
A
significant amount of our net sales in fiscal 2017, totaling
$1,731,238, were from customers who are identified as related
parties. There are no assurances sales to these customers will
continue. While we expect to add additional customers in all of our
businesses as we expand our licensing and consulting clients, until
such time as we are successful in these efforts, of which there is
no assurance, any significant decrease in sales to any of our
customers would have a material adverse financial effect on our
company.
If we fail to promote and maintain our brands in the market, our
businesses, operating results, financial condition, and our ability
to attract customers will be materially adversely
affected.
Our
success depends on our ability to create and maintain brand
awareness for our product offerings. This may require a significant
amount of capital to allow us to market our products and establish
brand recognition and customer loyalty. Additionally, many of the
companies offering similar products have already established their
brand identity within the marketplace. We can offer no assurances
that we will be successful in establishing awareness of our brands
allowing us to compete in this market. The importance of brand
recognition will continue to increase because low barriers of entry
to the industries in which we operate may result in an increased
number of direct competitors. To promote our brands, we may be
required to continue to increase our financial commitment to
creating and maintaining brand awareness. We may not generate a
corresponding increase in revenue to justify these
costs.
If we are unable to identify and successfully acquire additional
brands and trademarks, our growth may be limited, and, even if
additional trademarks are acquired, we may not realize anticipated
benefits due to integration or licensing difficulties.
A
component of our growth strategy is the acquisition of additional
brands and trademarks. We generally compete with traditional
apparel and consumer brand companies, other brand management
companies and private equity groups for brand acquisitions.
However, as more of our competitors continue to pursue our brand
management model, competition for specific acquisition targets may
become more acute, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to
find. In addition, even if we successfully acquire additional
trademarks or the rights to use additional trademarks, we may not
be able to achieve or maintain profitability levels that justify
our investment in, or realize planned benefits with respect to,
those additional brands.
Although
we seek to temper our acquisition risks by following acquisition
guidelines relating to the existing strength of the brand, its
diversification benefits to us, its potential licensing scale and
credit worthiness of the licensee base, acquisitions, whether they
be of additional intellectual property (“IP”) assets or
of the companies that own them, entail numerous risks, any of which
could detrimentally affect our results of operations.
Acquisition
of brands or trademarks transactions involve a number of risks and
present financial, managerial and operational challenges,
including: diversion of management’s attention from running
our existing business; unanticipated costs associated with the
target acquisition, appropriately valuing the target acquisition
and analyzing its marketability, increased expenses, including
legal and administrative expenses; integration costs related to the
customer base and business practices of the acquired company with
our own; and adverse effects on our reported operating results due
to possible write-down of goodwill associated with
acquisitions.
When
we acquire IP assets or the companies that own them, our due
diligence reviews are subject to inherent uncertainties and may not
reveal all potential risks. Although we generally attempt to
seek contractual protections through representations, warranties
and indemnities, we cannot be sure that we will obtain such
provisions in our acquisitions or that such provisions will fully
protect us from all unknown, contingent or other liabilities or
costs. Finally, claims against us relating to any acquisition
may necessitate our seeking claims against the seller for which the
seller may not, or may not be able to, indemnify us or that
may exceed the scope, duration or amount of the seller’s
indemnification obligations.
No
assurance can be given with respect to the timing, likelihood or
financial or business effect of any possible transaction. As a
result, there is no guarantee that our shareholders will achieve
greater returns as a result of any future acquisitions we
complete.
15
Each of our I'M1 and EE1 subsidiaries are governed by operating
agreements that require us to distribute amounts to minority
members in certain circumstances. These distributions could reduce
the amount of operating capital we have in future
periods.
Under
the terms of the operating agreements for each of I’M1 and
EE1, Level Brands as the manager of these entities is responsible
for the operations, including the payment of the operating costs.
These costs are then deducted from the “profits” of the
entity and a portion of those amounts, as determined by the
particular operating agreement, will then be distributed to the
members. We own all of the voting interests in I'M1 and EE1.
During fiscal 2017 EE1 made a distribution to its members.
Distributions to the members of I'M1 and EE1 will reduce the amount
of working capital available to us and could adversely impact our
liquidity in future periods.
The value of the equity securities we may accept as compensation
under consulting agreements will be subject to adjustment which
could result in losses to us in future periods. By accepting equity
securities as partial compensation for our services, we may be
adversely impacting our working capital in future
periods.
As
described elsewhere herein, in March 2017 I'M1 entered into a
consulting agreement with a third party under which we accepted
shares of its common stock as partial compensation for the services
to be provided. In May 2017 as compensation under the terms of an
advisory agreement I'M1 and EE1 received a warrant to purchase
shares of the third party’s stock which was exercised in June
2017. Since then we have entered into similar agreements with
additional clients and it is possible we may enter into similar
arrangements with other third parties. By accepting equity
securities as partial compensation for our services in lieu of
cash, we will be incurring expenses to deliver the services without
the corresponding cash payments from our clients. As such, we will
be utilizing a greater portion of our working capital to provide
services with the hope that we may benefit from an increase in the
market value of the equity securities we have received in future
periods. In addition, these securities will be reflected on our
balance sheets in future periods as “marketable
securities” or “investment other securities”. At
the end of each quarter, we will evaluate the carrying value of the
marketable securities or investment other securities for a decrease
in value. We will evaluate the company underlying these marketable
securities or investment other securities to determine whether a
decline in fair value below the amortized cost basis is other than
temporary. If the decline in fair value is judged to be
“other- than- temporary”, the cost basis of the
individual security will be written down to fair value as a new
cost basis and the amount of the write-down is charged to earnings.
As a result of these policies, it is possible that we may recognize
impairments on the carrying value of these securities in future
periods. Any future impairments would adversely affect our
operating results for the corresponding periods in that we would be
required to reduce the carrying value of these
investments.
We may be unable to liquidate securities we accept as partial
compensation under consulting agreements which could adversely
impact our liquidity in future periods.
Our
ability to sell any securities we accept as partial compensation
under consulting agreements is dependent upon a number of factors,
including the existence of a liquid market for the securities and
our compliance with the resale provisions of Federal securities
laws which require us to hold the shares for at least six months,
among other factors. While we expect to generally accept securities
from issuers who are publicly traded or who are expecting to become
a publicly traded company, there are no assurances a liquid market
will exist in such securities at such time as we are able to resell
the shares, or that the price we may receive will be commensurate
with the value of the services we are providing. In that event, we
would not benefit from the expected rise in the market price of the
securities we own as a result of our efforts on behalf of the
client company. In addition, depending upon the terms of our
business relationship with the issuer of the securities, it is
possible that from time to time we could be in possession of
non-public information regarding the issuer which could prohibit us
from disposing of the shares at a time when it is advantageous to
us to do so. If we are unable to readily liquidate any securities
we accept as compensation, we would be deprived of the cash value
of those services and we would be required to write-off the
carrying value of the securities which could adversely impact our
results of operations in future periods.
The Investment Company Act of 1940 will limit the value of
securities we can accept as payment for our business consulting
services which may limit our future revenues.
We
have accepted securities as partial payment for consulting services
to be rendered by I'M1 and may do so again in the future, but only
to the extent that it does not cause us to become classified as an
investment company under the Investment Company Act of 1940.
Although we do not believe we are engaged in the business of
investing, reinvesting or trading in securities, and we do not
currently hold ourselves out to the public as being
16
engaged
in those activities, it is possible that we may be deemed to be an
“inadvertent investment company” under Section
3(a)(1)(C) of the Investment Company Act of 1940, as amended, or
the “ICA”, if more than 40% of our future income and/or
more than 40% of our assets are derived from “investment
securities” (as defined in the ICA), and if we are deemed to
be, or perceived to be, primarily engaged in the business of
investing, reinvesting or trading in securities. If we were deemed
or found to be an investment company by the SEC or a court of law,
then we would face significant consequences and additional
regulatory obligations. For example, registered investment
companies are subject to extensive, restrictive and potentially
adverse regulation relating to, among other things, operating
methods, management, capital structure, dividends and transactions
with affiliates. If it were established that we are an unregistered
investment company, there would be a risk, among other material
adverse consequences, that we could become subject to monetary
penalties or injunctive relief, or both, in an action by the SEC,
that we would be unable to enforce contracts with third parties or
that third parties with whom we have contracts could seek to obtain
rescission of transactions with us undertaken during the period it
was established that we were an unregistered investment company. To
the extent that we are required to reduce the amount of securities
we may accept as payment for consulting services to avoid becoming
an investment company, our ability to maximize our future revenues
from consulting arrangements with potential licensees may be
adversely impacted.
We may require additional capital to finance the acquisition of
additional brands and if we are unable to raise such capital on
beneficial terms or at all this could restrict our
growth.
We
may, in the future, require additional capital to help fund all or
part of potential acquisitions. If, at the time required, we do not
have sufficient cash to finance those additional capital needs, we
will need to raise additional funds through equity and/or debt
financing. We cannot guarantee that, if and when needed, additional
financing will be available to us on acceptable terms or at all.
Further, if additional capital is needed and is either unavailable
or cost prohibitive, our growth may be limited as we may need to
change our business strategy to slow the rate of our expansion
plans. In addition, any additional financing we undertake could
impose additional covenants upon us that restrict our operating
flexibility, and, if we issue equity securities to raise capital or
as acquisition consideration, our existing shareholders may
experience dilution or the new securities may have rights senior to
those of our common stock.
RISKS RELATED TO OUR LICENSING AND ENTERTAINMENT
DIVISIONS
AND OUR HEALTH & WELLNESS BRAND
We are materially dependent upon the wholesale license agreement
with kathy ireland® Worldwide. If this agreement were to be
terminated, we would be unable to continue to operate
I’M1.
In January 2017, I’M1 entered into a 10 year
wholesale license agreement with
kathy
ireland
® Worldwide under
which we were granted exclusive royalty free rights to certain
marks and tradenames associated with the I’M1 brand. This
agreement may be immediately terminated upon notice to us if
I’M1 terminates, removes or replaces officers, if we cease to
be the manager of I’M1 or if we compete with or invest in a
business that competes with
kathy
ireland
® Worldwide. The
restriction on competition against
kathy
ireland
® Worldwide may
limit our ability to enter into licensing agreements in the future
for products which could impact our revenues in future periods.
If
kathy
ireland
® Worldwide should
terminate this wholesale license agreement, our ability to operate
I’M1 under that brand name would cease and, depending upon
the amount of revenues we are then recognizing from that brand, our
results of operations and liquidity in future periods could be
materially adversely impacted.
We
may never generate any significant royalties under the terms of the
wholesale license agreements with either Nicholas Walker or Andre
Carthen.
In
September 2017, we entered into non-exclusive wholesale license
agreements with two parties, each of which have a preexisting
relationship with
kathy
ireland
® Worldwide. We have agreed to pay each of the
licensors certain amounts as consideration for these agreements in
the form of cash and equity. We will incur certain additional costs
in our efforts to attract and secure additional licensed products
for each of these licensors. Our future compensation, if any, will
be in the form of royalties. In order for these non-exclusive
wholesale license agreements to provide an economic benefit to our
company, we will need to generate consistent, meaningful royalties
from products sold or manufactured using the marks of these
licensors. There are no assurances we will be successful in our
efforts to attract sub-licensees or that the costs incurred in
these efforts will not exceed royalties received from these
agreements.
17
The failure of our licensees to adequately produce, market, import
and sell products bearing our brand names in their license
categories, continue their operations, renew their license
agreements or pay their obligations under their license agreements
could result in a decline in our results of
operations.
Our
future revenues from our licensing division will be substantially
dependent on royalty payments made to us under our license
agreements, in addition to compensation under any consulting
agreements we may enter into with the third parties for services by
either our licensing division, our entertainment division, or both.
The failure of our licensees to satisfy their obligations under
these agreements, or their inability to operate successfully or at
all, could result in their breach and/or the early termination of
such agreements, their non-renewal of such agreements or our
decision to amend such, thereby eliminating some or all of that
stream of revenue. It is possible that the milestones to be met
under the terms of licensing agreements may never be achieved which
also could deprive us of additional revenues. There can be no
assurances that we will not lose the licensees under our license
agreements due to their failure to exercise the option to renew or
extend the term of those agreements or the cessation of their
business operations (as a result of their financial difficulties or
otherwise) without equivalent options for replacement. Any of such
failures could reduce the anticipated revenue stream to be
generated by the license agreements. In addition, the failure of
our licensees to meet their production, manufacturing and
distribution requirements, or to be able to continue to import
goods (including, without limitation, as a result of labor strikes
or unrest), could cause a decline in their sales and potentially
decrease the amount of royalty payments (over and above any
guaranteed minimums) due to us. Further, the failure of
our licensees and/or their third party manufacturers, which we do
not control, to adhere to local laws, industry standards and
practices generally accepted in the United States in areas of
worker safety, worker rights of association, social compliance, and
general health and welfare, could result in accidents and practices
that cause disruptions or delays in production and/or substantial
harm to the reputation of our brands, any of which could have a
material adverse effect on our business, financial position,
results of operations and cash flows. A weak economy or
softness in certain sectors including apparel, consumer products,
retail and entertainment could exacerbate this risk. This, in turn,
could decrease our potential revenues and cash
flows.
From time to time we may compete with kathy ireland Worldwide®
in securing advisory or representation agreements with potential
clients for EE1 which may create a conflict of interests for the
managing directors of EE1.
kathy ireland®
Worldwide is an
established company which has significant experience in assisting
companies in the promotion and management of their brands through
licensing and advisory agreements. Affiliates of
kathy ireland
® Worldwide are
responsible for the day to day operations of EE1 and
kathy ireland
® Worldwide. Part of
EE1's business competes with
kathy
ireland
®Worldwide in identifying and securing clients
for its advisory services. For example, both EE1 and
kathy ireland
®Worldwide are
parties to substantial identical representation agreements with
Dada Media, Inc. and David Tutera. These affiliates will be able to
determine which entity, either
kathy ireland
® Worldwide or EE1,
is referred to the potential client.
kathy ireland
® Worldwide has more
experience and resources and there are no assurances that conflicts
of interest which may arise will be resolved in our favor. As a
result, it is possible that we may lose out on potential business
opportunities.
We could become a party to litigation involving our licensed
products which could result in additional costs to us. Certain
licensed products may be more likely to lead to product liability
lawsuits than others, which could expose us to additional unknown
risks.
Although
we are not responsible for the manufacturing, sale or distribution
of licensed products, it is possible our company could be named as
a defendant in litigation related to licensed products. Certain
licensed products may, by virtue of the industry in which they are
sold and the governmental regulations to which they are subject,
such as vaping products, could be more likely to be the subject of
litigation than others. Notwithstanding that our standard form of
license agreements requires the licensee to indemnify us against
ligation involving the licensed products and to maintain product
liability insurance policies, it is possible that a licensee may
fail to maintain this coverage during the term of the license
agreement. While we would then have a right to terminate the
license agreement as a result of this breach of its terms, there
are no assurances we would not be required to expend significant
funds and management time defending our company in any potential
product liability insurance claim. There are no assurances that we
would prevail in any such litigation, which could subject us to
judgments and costs of settlements which could adversely impact our
liquidity and results of operations in future periods.
As a result of the intense competition within our targeted
licensees’ markets and the strength of some of their
competitors, we and our licensees may not be able to compete
successfully.
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Many
of our targeted trademark licenses are for products in the apparel,
fashion accessories, footwear, beauty and fragrance, home products
and décor, consumer electronics and entertainment industries
in which licensees face intense competition from third party brands
and licensees. In general, competitive factors include quality,
price, style, name recognition and service. In addition, various
fads and the limited availability of shelf space could affect
competition for our licensees’ products. Many of our
licensees’ competitors have greater financial, importation,
distribution, marketing and other resources than our licensees and
have achieved significant name recognition for their brand names.
Our licensees may be unable to compete successfully in the markets
for their products, and we may not be able to compete successfully
with respect to our licensing arrangements.
Our business is dependent on market acceptance of our brands and
the potential future products of our licensees bearing these
brands.
Although
some of our targeted licensees might have guaranteed minimum net
sales and minimum royalties to us, a failure of our brands or of
products bearing our brands to achieve or maintain market
acceptance could cause a reduction of our licensing revenue and
could further cause existing licensees not to renew their
agreements. Such failure could also cause the devaluation of our
trademarks, which are our primary intellectual property, or
“IP”, assets, making it more difficult for us to renew
our current licenses upon their expiration or enter into new or
additional licenses for our trademarks. In addition, if such
devaluation of our trademarks were to occur, a material impairment
in the carrying value of one or more of our trademarks could also
occur and be charged as an expense to our operating
results.
The
industries in which we target to compete, including the apparel
industry, are subject to rapidly evolving trends and competition.
In addition, consumer tastes change rapidly. The licensees under
our licensing agreements may not be able to anticipate, gauge or
respond to such changes in a timely manner. Failure of our
licensees to anticipate, identify and capitalize on evolving trends
could result in declining sales of our brands and devaluation of
our trademarks. Continued and substantial marketing efforts, which
may, from time to time, also include our expenditure of significant
additional funds to keep pace with changing consumer demands, are
required to maintain market acceptance of the licensees’
products and to create market acceptance of new products and
categories of products bearing our trademarks; however, these
expenditures may not result in either increased market acceptance
of, or licenses for, our trademarks or increased market acceptance,
or sales, of our licensees’ products. Furthermore, while we
believe that we currently maintain sufficient control over the
products our licensees’ produce under our brand names through
the provision of trend direction and our right to preview and
approve a majority of such products, including their presentation
and packaging, we do not actually design or manufacture products
bearing our marks, and therefore, have more limited control over
such products’ quality and design than would a traditional
product manufacturer.
RISKS
RELATED TO OUR PROFESSIONAL PRODUCTS DIVISION
The majority of our net sales to date in our professional products
division are generated on the basis of purchase orders, rather than
long term purchase commitments; which could adversely affect our
financial position and results of operations.
Our
operating history is not long enough to evaluate the likelihood of
future cancellations or deferments of customer orders related to
product sales in our professional products division. Manufacturers
and distributors are currently contracted on a per order basis. The
lack of long-term purchase commitments creates a risk that product
demand may be reduced if orders are canceled or deferred or, in the
event of unanticipated demand, an inability to timely produce and
deliver our products. We do not have long-term agreements with our
distributors, manufacturers or suppliers and these parties may
disrupt or cancel a purchase order or defer or delay shipments of
our products at any time. Furthermore, because of our inability to
rely on enforceable purchase contracts, and our limited visibility
into future customer demand, actual net sales may be different from
our forecasts, which could adversely affect our financial position
and results of operations.
A decline in the price of, or demand for, any of our business
services or products, would seriously harm our revenues and
operating margins.
Beauty
& Pin-Ups accounted for all of our net sales in fiscal 2016 and
approximately 22% of our net sales in fiscal 2017. We expect to be
reliant on revenues from this division until we are able to begin
generating significant revenues and cash flows from our licensing
division and/or our entertainment division. Consequently,
a
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decline
in the sales of price of, or demand for the Beauty & Pin-Ups
product line would seriously harm our business.
The beauty products business is highly competitive, and if we are
unable to compete effectively our results will suffer.
We
face vigorous competition from companies much larger than ours
throughout the world, including multinational consumer product
companies. Almost all of these competitors have much greater
resources than we do and may be able to respond to changing
business and economic conditions more quickly than us. Competition
in the beauty business is based on pricing of products, innovation,
perceived value, service to the consumer, promotional activities,
advertising, special events, new product introductions, e-commerce
and m-commerce initiatives and other activities. It is difficult
for us to predict the timing and scale of our competitors’
actions in these areas. Our ability to compete also depends on the
continued strength of our brands, our ability to attract and retain
key talent and other personnel, the efficiency of our manufacturing
facilities and distribution network, and our ability to maintain
and protect our intellectual property and those other rights used
in our business. As a new company with limited brand recognition,
there are no assurances we will ever be able to effectively compete
in our target markets.
We may be unable to protect our intellectual property rights and/or
intellectual property rights licensed to us, and may be subject to
intellectual property litigation and infringement claims by third
parties.
We
intend to protect our intellectual property through limited patents
and our unpatented trade secrets and know-how through
confidentiality or license agreements with third parties, employees
and consultants, and by controlling access to and distribution of
our proprietary information. However, this method may not afford
complete protection, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the
United States and unauthorized parties may copy or otherwise obtain
and use our products, processes or technology. Additionally, there
can be no assurance that others will not independently develop
similar know-how and trade secrets. We are also dependent upon the
owners of intellectual property rights licensed to us under various
wholesale license agreements to protect and defend those rights
against third party claims. If third parties take actions that
affect our rights, the value of our intellectual property, similar
proprietary rights or reputation or the licensors who have granted
us certain rights under wholesale license agreements, or we are
unable to protect the intellectual property from infringement or
misappropriation, other companies may be able to offer competitive
products at lower prices, and we may not be able to effectively
compete against these companies. We also face the risk of claims
that we have infringed third parties’ intellectual property
rights. Any claims of intellectual property infringement, even
those without merit, may require us to:
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defend against infringement claims which are expensive and time
consuming;
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cease making, licensing or using products that incorporate the
challenged intellectual property;
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re-design, re-engineer or re-brand our products or packaging;
or
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enter into royalty or licensing agreements in order to obtain the
right to use a third party’s intellectual
property.
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In the
event of claims by third parties for infringement of intellectual
property rights we license from third parties under wholesale
license agreements, we could be liable for costs of defending
allegations of infringement and there are no assurances the
licensors will either adequately defend the licensed intellectual
property rights or that they would prevail in the related
litigation. In that event, we would incur additional costs and may
deprived from generating royalties from these
agreements.
A disruption in operations or our supply chain could adversely
affect our business and financial results.
We
are subject to the risks inherent in manufacturing our products,
including industrial accidents, environmental events, strikes and
other labor disputes, disruptions in supply chain or information
systems, loss or impairment of key manufacturing sites or
suppliers, product quality control, safety, increase in commodity
prices and energy costs, licensing requirements and other
regulatory issues, as well as natural disasters and other external
factors over which we have no control. If such an event were to
occur, it could have an adverse effect on our business and
financial results.
20
We are dependent upon suppliers for our raw materials which we
purchase on a per order basis without long term contracts and our
suppliers are dependent on the continued availability and pricing
of raw materials, either of which could negatively affect our
ability to manage costs and maintain profitable operating
margins.
We
currently purchase our raw materials from suppliers with whom we
have no written purchase contracts. Any supplier and any order may
be terminated or rejected by any supplier at any time. Our reliance
on open orders, no preference or assurances from suppliers, and our
reliance on these suppliers, creates a risk that our supply of raw
materials may be interrupted at any time. We may not be able to
timely source another supplier, resulting in delays and decreased
sales. There are no assurances that we will be able to maintain
adequate stockpiles or that we will be able to acquire and
stockpile raw materials at reasonable costs. Our failure to ensure
a steady supply of raw material or any significant interruption in
the supply of raw materials could have a material adverse effect on
our operations and ability to timely fulfill orders, resulting in
lost orders and revenue.
We rely on third-parties to manufacture and to compound our
products, and we have no control over these manufactures and may
not be able to obtain quality products on a timely basis or in
sufficient quantity.
All
of our products are manufactured or compounded by unaffiliated
third parties. We do not have any long-term contracts with any of
these third parties, and we expect to compete with other companies
for raw materials, production and import capacity. If we experience
significant increased demand, or need to replace an existing
manufacturer, there can be no assurance that additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any manufacturer or
compounder would allocate sufficient capacity to us in order to
meet our requirements. In addition, even if we are able to expand
existing or find new sources, we may encounter delays in production
and added costs as a result of the time it takes to engage third
parties. Any delays, interruption or increased costs in the
manufacturing or compounding of our products could have an adverse
effect on our ability to meet retail customer and consumer demand
for our products and result in lower revenues and net income both
in the short and long-term.
Adverse changes in political and economic policies of the
People’s Republic of China government could negatively affect
the production and cost of certain of our products and damage our
business.
Certain
of our products are currently manufactured in China. Accordingly,
our business, financial condition, results of operations and
prospects are affected significantly by economic, political and
legal developments in China and relationships with the United
States. The PRC economy differs from the economies of most
developed countries in many respects, including:
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the higher level of government involvement and
regulation;
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the early stage of development of the market-oriented sector of the
economy;
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the rapid growth rate;
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the higher rate of inflation;
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tariffs and the higher level of control over foreign exchange;
and
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government control over the allocation of many
resources.
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Although
the PRC government has in recent years implemented measures
emphasizing the utilization of market forces for economic reform,
the PRC government continues to exercise significant control over
economic growth in China through the allocation of resources,
controlling payment of foreign currency-denominated obligations,
setting monetary policy and imposing policies that impact
particular industries or companies in different ways. Any adverse
change in the economic conditions or government policies in China
or relationship with the United States could have a material
adverse effect on tariffs and the cost or availability of our
products and consequently have a material adverse effect on our
business and prospects.
21
Like other distributors and manufacturers of beauty products, we
face an inherent risk of exposure to product liability claims in
the event that the use of the products that we sell results in
injury.
While
we believe we are currently materially compliant with regulations
covering our products, we may be subjected to various product
liability claims, including claims that the products we sell
contain contaminants, are improperly labeled or include inadequate
instructions as to use or inadequate warnings concerning side
effects and interactions with other substances. In addition, we may
be forced to defend lawsuits. While to date we have never been
subject to any product liability claim, given our limited operating
history we cannot predict whether product liability claims will be
brought against us in the future or predict the effect of any
resulting adverse publicity on our business. Moreover, we may not
have adequate resources in the event of a successful claim against
us. If our insurance protection is inadequate and our third-party
vendors do not indemnify us, the successful assertion of product
liability claims against us could result in potentially significant
monetary damages. In addition, interactions of our products with
other similar products, prescription medicines and over-the-counter
drugs have not been fully explored. We may also be exposed to
claims relating to product advertising or product quality. People
may purchase our products expecting certain physical results,
unique to beauty products. If they do not perceive expected results
to occur, such individuals may seek monetary
retribution.
Our business may be adversely affected by unfavorable publicity
within the beauty products market.
We
believe that the beauty products market is significantly affected
by national media attention. As with any retail provider, future
scientific research or publicity may not be favorable to the
industry or to any particular product, and may not be consistent
with earlier favorable research or publicity. Because of our
dependence on consumers’ perceptions, adverse publicity
associated with illness or other adverse effects resulting from the
use of our products or any similar products distributed by other
companies and future reports of research that are perceived as less
favorable or that question earlier research, could have a material
adverse effect on our business, financial condition and results of
operations. We are highly dependent upon consumers’
perceptions of the safety and quality of our products as well as
similar products distributed by other companies. Thus, the mere
publication of reports asserting that beauty products may be
harmful or questioning their efficacy could have a material adverse
effect on our business, financial condition and results of
operations, regardless of whether such reports are scientifically
supported or whether the claimed harmful effects would be present
at the dosages recommended for such products.
Our success is dependent upon the successful introduction of our
new products and success in expanding the demand for existing
brands.
We
believe the growth of our net sales is substantially dependent upon
our ability to introduce our products to the public. Our ability to
meet future obligations is dependent in large measure on the
success of our product sales. Subject to the availability of
sufficient capital and the further establishment of effective
distribution channels, we expect to introduce additional products.
The success of new products is dependent upon a number of factors,
including our ability to formulate products that will appeal to
consumers and respond to market trends in a timely manner. There
can be no assurance that our efforts to formulate new products will
be successful or that consumers will accept our new products. In
addition, products experiencing strong popularity and rapid growth
may not maintain their sales volumes over time.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
There may never be an active market for our common stock, which is
listed on the NYSE American.
Following our
initial public offering in November 2017, there currently is a
limited market for our common stock. Although our common stock is
listed on the NYSE American, trading of our common stock is limited
and sporadic and generally at very low volumes. Further, the price
at which our common stock has traded has been below its initial
public offering price. We expect that the price will continue to
fluctuate significantly in response to various factors, many of
which are beyond our control. The stock market in general, and
securities of small-cap companies in our industry in particular,
has experienced extreme price and volume fluctuations in recent
years. Continued market fluctuations could result in further
volatility in the price at which our common stock may trade, which
could cause its value to decline. A more active market for our
common stock may never develop. As a result, investors must bear
the economic risk of holding their shares of our common stock for
an indefinite period of time.
We are subject to the continued
listing standards of the NYSE American and our failure to satisfy
these criteria may result in delisting of our common
stock
.
22
Our
common stock is listed on the NYSE American. In order to maintain
this listing, we must maintain certain share prices, financial and
share distribution targets, including maintaining a minimum amount
of shareholders’ equity and a minimum number of public
shareholders. In addition to these objective standards, the NYSE
American may delist the securities of any issuer (i) if, in its
opinion, the issuer’s financial condition and/or operating
results appear unsatisfactory; (ii) if it appears that the extent
of public distribution or the aggregate market value of the
security has become so reduced as to make continued listing on the
NYSE American inadvisable; (iii) if the issuer sells or disposes of
principal operating assets or ceases to be an operating company;
(iv) if an issuer fails to comply with the NYSE American’s
listing requirements; (v) if an issuer’s common stock sells
at what the NYSE American considers a “low selling
price” and the issuer fails to correct this via a reverse
split of shares after notification by the NYSE American; or (vi) if
any other event occurs or any condition exists which makes
continued listing on the NYSE America, in its opinion, inadvisable.
If the NYSE American delists our common stock, investors may face
material adverse consequences, including, but not limited to, a
lack of trading market for our securities, reduced liquidity,
decreased analyst coverage of our securities, and an inability for
us to obtain additional financing to fund our
operations.
The issuance of shares upon exercise of our outstanding options,
warrants, and restricted stock options may cause immediate and
substantial dilution to our existing shareholders.
We
presently have options and warrants that if exercised would result
in the issuance of an additional 645,476 shares of our common
stock. We presently have restricted stock awards that when vested
will result in the issuance of an additional 230,000 shares of our
common stock. The issuance of shares upon exercise of warrants and
options and upon the vesting of the restricted stock awards may
result in dilution to the interests of other
shareholders.
The price of our common stock may be volatile, and you could lose
all or part of your investment.
Stock
markets have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading
price of our common stock. In addition, limited trading volume of
our stock may contribute to its future volatility. Price declines
in our common stock could result from general market and economic
conditions, some of which are beyond our control, and a variety of
other factors, including any of the risk factors described in this
report. These broad market and industry factors may harm the market
price of our common stock, regardless of our operating performance,
and could cause you to lose all or part of your investment in our
common stock since you might be unable to sell your shares at or
above the price you paid. Factors that could cause fluctuations in
the market price of our common stock include the
following:
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●
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price and volume fluctuations in the overall stock market from time
to time;
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●
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changes in operating performance and stock market valuations of
other hair care products companies generally;
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●
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sales of shares of our common stock by us or our
shareholders;
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●
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failure of securities analysts to initiate or maintain coverage of
us, changes in financial estimates by securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors;
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●
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the financial projections we may provide to the public, any changes
in those projections or our failure to meet those
projections;
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●
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rumors and market speculation involving us or other companies in
our industry;
|
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●
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actual or anticipated changes in our results of operations or
fluctuations in our results of operations;
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23
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●
|
actual or anticipated developments in our business, our
competitors’ businesses or the competitive landscape
generally;
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●
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litigation involving us, our industry or both, or investigations by
regulators into our operations or those of our
competitors;
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●
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developments or disputes concerning our intellectual property or
other proprietary rights;
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●
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announced or completed acquisitions of businesses or brands by us
or our competitors;
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●
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new laws or regulations or new interpretations of existing laws or
regulations applicable to our business;
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●
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changes in accounting standards, policies, guidelines,
interpretations or principles;
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●
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any significant change in our management; and
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●
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general economic conditions and slow or negative growth of our
markets.
|
In
addition, in the past, following periods of volatility in the
overall market and the market price of a particular company’s
securities, securities class action litigation has often been
instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of
our management’s attention and resources.
We are an “emerging growth company,” and the reduced
reporting requirements applicable to emerging growth companies may
make our common stock less attractive to investors.
We
are an “emerging growth company,” as defined in the
JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies but not
to “emerging growth companies,” including, but not
limited to:
|
●
|
being permitted to provide only two years of audited financial
statements, in addition to any required unaudited interim financial
statements, with correspondingly reduced “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” disclosure;
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●
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not being required to comply with the auditor attestation
requirements in the assessment of our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002, or “Sarbanes-Oxley Act”;
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●
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not being required to comply with any requirement that may be
adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the
auditor’s report providing additional information about the
audit and the financial statements;
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●
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reduced disclosure obligations regarding executive compensation in
our periodic reports and proxy statements; and
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exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved.
|
Investors may find our common stock less
attractive if we choose to rely on these exemptions. If some
investors find our common stock less attractive as a result of any
choices to reduce future disclosure, there may be a less active
trading market for our common stock and the price of our common
stock may be more volatile.
Our executive officers, directors and their affiliates may exert
control over us and may exercise influence over
24
matters subject to shareholder approval.
Our
executive officers and directors, together with their respective
affiliates, beneficially own approximately 21.3% of our outstanding
common stock as of December 13, 2017. Accordingly, these
shareholders, if they act together, may exercise substantial
influence over matters requiring shareholder approval, including
the election of directors and approval of corporate transactions,
such as a merger. This concentration of ownership could have the
effect of delaying or preventing a change in control or otherwise
discourage a potential acquirer from attempting to obtain control
over us, which in turn could have a material adverse effect on the
market value of our common stock.
If securities or industry analysts do not publish research or
publish unfavorable or inaccurate research about our business, our
common stock share price and trading volume could
decline.
An
active trading market for our common stock will depend, in part, on
the research and reports that securities or industry analysts
publish about us or our business. We may be unable to attract or
sustain coverage by well-regarded securities and industry analysts.
If either none or only a limited number of securities or industry
analysts cover us or our business, or if these securities or
industry analysts are not widely respected within the general
investment community, the trading price for our common stock would
be materially and negatively impacted. In the event we obtain
securities or industry analyst coverage, if one or more of the
analysts who cover us or our business downgrade our common stock or
publish inaccurate or unfavorable research about us or our
business, the price of our common stock would likely decline. If
one or more of these analysts cease coverage of us or our business,
or fail to publish reports on us or our business regularly, demand
for our common stock could decrease, which might cause the price of
our common stock and trading volume to decline.
Public company requirements may strain our resources and divert
management’s attention, which could adversely impact our
ability to execute our strategy and harm operating
results.
As
a newly public company, we are subject to the reporting
requirements of the Exchange Act, the Sarbanes-Oxley Act, the
Dodd-Frank Wall Street Reform and Consumer Protection Act, which we
refer to as “Dodd-Frank,” the listing requirements of
the NYSE American and other applicable securities rules and
regulations. Despite recent reforms made possible by the JOBS Act,
compliance with these rules and regulations will nonetheless
increase our legal and financial compliance costs, make some
activities more difficult, time-consuming or costly and increase
demand on our systems and resources, particularly after we are no
longer an “emerging growth company.” While the members
of our board of directors have substantial experience relevant to
our business, they have limited experience with operations as a
public company upon which you can base your prediction of our
future success or failure in complying with public company
requirements. Our management may fail to comply with public company
requirements, or may fail to do so effectively and efficiently,
each would materially and adversely harm our ability to execute our
strategy and, consequently, our operating results.
Furthermore,
as a result of disclosure in filings required of a public company,
our business and financial condition will become more visible,
which may result in threatened or actual litigation, including by
competitors and other third parties. If these claims are
successful, our business and operating results could be harmed, and
even if the claims do not result in litigation or are resolved in
our favor, these claims, and the time and resources necessary to
resolve them, could divert the resources of management and
adversely affect our business, brand and reputation and results of
operations. Our new public company status and these new rules and
regulations may make it more expensive for us to obtain director
and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These factors could also make it more difficult for us to
attract and retain qualified members of the board of directors,
particularly to serve on the audit committee and compensation
committee, and qualified executive officers.
Some provisions of our charter documents and North Carolina law may
have anti-takeover effects that could discourage an acquisition of
us by others, even if an acquisition would be beneficial to our
shareholders and may prevent attempts by our shareholders to
replace or remove our current management.
Provisions
in our articles of incorporation and bylaws, as well as provisions
of North Carolina law, could make it more difficult for a third
party to acquire us or increase the cost of acquiring us, even if
doing so would benefit our shareholders, or remove our current
management. These include provisions that:
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●
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permit our board of directors to issue up to 50,000,000 shares of
preferred stock, with any rights,
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25
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preferences and privileges as they may designate; |
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●
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provide that all vacancies on our board of directors, including as
a result of newly created directorships, may, except as otherwise
required by law, be filled by the affirmative vote of a majority of
directors then in office, even if less than a quorum;
and
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●
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do not provide for cumulative voting rights, thereby allowing the
holders of a majority of the shares of common stock entitled to
vote in any election of directors to elect all of the directors
standing for election.
|
These
provisions may frustrate or prevent any attempts by our
shareholders to replace or remove our current management by making
it more difficult for shareholders to replace members of our board
of directors, who are responsible for appointing the members of our
management. In addition, North Carolina has two primary
anti-takeover statutes, the Shareholder Protection Act and the
Control Share Acquisition Act, which govern the shareholder
approval required for certain business combinations. As permitted
by North Carolina law, we have opted out of both these provisions.
Accordingly, we are not subject to any anti-takeover effects of the
North Carolina Shareholder Protection Act or Control Share
Acquisition Act. Any provision of our articles of incorporation,
bylaws or North Carolina law that has the effect of delaying or
deterring a change in control could limit the opportunity for our
shareholders to receive a premium for their shares of common stock,
and could also affect the price that some investors are willing to
pay for our shares of common stock.
ITEM
1B.
UNRESOLVED
STAFF COMMENTS.
Not
applicable to a smaller reporting company.
ITEM
2.
DESCRIPTION
OF PROPERTY.
Our
headquarters are located in approximately 2,000 square feet in a
modern four-story building in Charlotte, North Carolina which we
sub-lease under a verbal agreement, on a month to month basis with
no further commitments. We currently pay an annual base rental of
approximately $48,000. In 2018 we expect to enter into a longer
term lease either in the same location or an alternate location and
anticipate that our rent will increase. In addition we have
separate office space for our subsidiary Beauty and Pin-Ups located
in approximately 2,400 square feet in the same building in
Charlotte, North Carolina which we sub-lease from a subsidiary of
Kure Corp., a related party, under the terms of an agreement
expiring on January 1, 2018. Under the terms of this agreement, we
currently pay an annual base rental of approximately $82,950. We
will move this subsidiary into new office space in January 2018 and
have negotiated a sublease with Kure Corp. to utilize office and
warehouse space. The lease is for six months and then changes to a
month to month lease. The rate is $3,000 per month.
In
addition we have warehouse space where we store small amount of
product and related items in Charlotte, North Carolina. This space
totals approximately 500 square feet and is on a month to month
arrangement under an oral agreement. Most of our product is stored
at our manufacturers as a part of their services to us or to a
third party logistics company and is charged based on volume of
space needed. We believe that our existing facilities are adequate
to meet our current needs.
ITEM
3.
LEGAL
PROCEEDINGS.
We are
not a party to any pending or threatened litigation.
ITEM
4.
MINE
SAFETY DISCLOSURES.
Not
applicable to our company.
26
ITEM
5.
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.
Since
November 17, 2017 our common stock has been listed on the NYSE
American under the symbol "LEVB." Prior thereto, there was no
market for our common stock. The reported high and low last bid
prices for the common stock are shown below for the periods
indicated. The quotations reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent
actual transactions.
|
|
High
|
Low
|
|
|
|
|
|
Fiscal 2018
|
|
|
|
November 17, 2017
to December 13, 2017
|
$
5.55
|
$
4.57
|
The
last sale price of our common stock as reported on the NYSE
American on December 13, 2017 was $4.70 per share. As of December
13, 2017, there were approximately 216 record owners of our common
stock.
Dividend policy
We
do not currently intend to pay dividends on our common stock. The
declaration, amount and payment of any future dividends on shares
of our common stock, if any, will be at the sole discretion of our
Board, which may take into account general and economic conditions,
our financial condition and results of operations, our available
cash and current and anticipated cash needs, capital requirements,
contractual, legal, tax and regulatory restrictions, the
implications of the payment of dividends by us to our shareholders
or by our subsidiaries to us, and any other factors that our Board
may deem relevant.
Recent sales of unregistered securities
Set
forth below are issuance of equity securities sold by us during
fiscal 2017 that were not registered under the Securities Act.
Except as may be set forth below, all recipients were accredited or
otherwise sophisticated investors who had access to business and
financial information on our company, we did not pay any
commission's or finder's fees and the issuances were exempt from
registration based upon an exemption provided by Section 4(a)(2) of
the Securities Act.
In
October 2016, we sold an aggregate amount of $2,125,000 of our 8%
convertible promissory notes to accredited investors, and in
connection with the issuance of the notes issued warrants to
purchase 141,676 shares of our common stock at an exercise price of
$7.80 per share. In June 2017, the note holders converted the
principal amount of the notes and all accrued interest into 570,254
shares of our common stock. The issuances were exempt from
registration based upon an exemption provided by Section 3(a)(9) of
the Securities Act.
In
October 2016 we also issued 14,667 shares of our common stock
valued at $12,467 to three individuals in connection with our
acquisition of a minority membership interest in Beauty &
Pin-Ups.
In
October 2016 we also issued 38,358 shares of our common stock to
six individuals and entities upon the cashless exercise of a
placement agents warrants previously granted to T.R. Winston &
Co LLC and its affiliates.
In
October 2016 we also granted restricted stock awards of 230,000
shares of our common stock, vesting January 1, 2018, to our Chief
Executive Officer and members of our board of
directors.
In
November 2016 we issued LBGLOC LLC 14,000 shares of our common
stock valued at $105,000 as consideration for renewal of the line
of credit.
27
In
November 2016 we also issued Stone Street Partners, LLC an
aggregate of 76,000 shares of our common stock valued at $570,000
as compensation for services.
In
November 2016 we issued 20,000 shares of our common stock valued at
$17,000 to Best Buddies International as a charitable
contribution.
In
January 2017 we issued an aggregate of 26,667 shares of our common
stock valued at $22,667 as additional compensation to two
employees, including our chief financial
officer.
In
January 2017 we issued EE1 Holdings 283,000 shares of our common
stock valued as $240,550 as consideration for the purchase of the
Class A membership interests in EE1.
In
January 2017 we also issued IM1 Holdings 583,000 shares of our
common stock valued as $495,550 as consideration for the purchase
of the Class A membership interests in
I’M1.
In
March 2017 we issued 114,745 shares of our common stock valued at
$97,533 to three individuals as additional consideration in
connection with our acquisition of a minority membership interest
in Beauty & Pin-Ups.
In
April 2017 we issued the minority owner in Beauty & Pin-Ups
155,294 shares of our common stock valued at $132,000 in exchange
for the remaining 12% member interest in that
subsidiary.
In June
2017 we issued 195,740 shares of our common stock upon the
satisfaction of $593,797 of principal and accrued interest due
under a revolving credit line. The issuance was exempt from
registration based upon an exemption provided by Section 3(a)(9) of
the Securities Act.
In June
2017, we issued and sold an aggregate of 77,000 shares of our
common stock for proceeds of $304,150 to two accredited investors
in a private offering.
In
July 2017, we issued an investor relations firm 5,000 shares of our
common stock, valued at $19,750, as partial compensation for
services to be rendered to us under the terms of an
agreement.
In
July 2017, we issued and sold 133,000 shares of common stock for
proceeds of $525,350. The purchasers were affiliates of our
Chairman and CEO.
In
August, 2017, we issued 19,100 shares of common stock valued at
$75,445 to a firm as compensation for services to us under the
terms of an agreement.
In
August, 2017, we issued 1,500 shares of common stock upon exercise
of options by a past employee.
In
September 2017, we issued 45,500 shares of our common stock valued
at $179,725 as partial compensation under the terms of a wholesale
license agreement, and issued the licensor warrants to purchase an
additional 45,500 shares of our common stock at a strike price of
$4.00 which were valued at $65,338.
In
September 2017, we also issued 25,000 shares of our common stock
valued at $98,750 as partial compensation under the terms of a
wholesale license agreement, and issued the licensor warrants to
purchase an additional 25,000 shares of common stock at a strike
price of $4.00 which were valued at $35,900.
In
October 2017 we issued an aggregate of 7,593 shares of our common
stock valued at $30,000 to three of our independent directors as
compensation for their services.
28
Purchases of equity securities by the issuer and affiliated
purchasers
None.
ITEM
6.
SELECTED
FINANCIAL DATA.
Not
applicable to a smaller reporting company.
ITEM
7.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The
following discussion of our financial condition and results of
operations should be read in conjunction with the 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 as a result of a number of factors,
including those set forth under the Risk Factors, Cautionary Notice
Regarding Forward-Looking Statements and Business sections in this
report. 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. Our future operating results, however,
are impossible to predict and no guaranty or warranty is to be
inferred from those forward-looking statements.
Overview
Formed in March 2015, we are positioning Level
Brands to be an innovative branding and marketing company. We
intend to focus our efforts on lifestyle-based brands and
omni-entertainment experiences. Our goal is to create a bold,
unconventional and socially responsible image and consciousness for
our businesses. Our mission is overseen by our Chairman Emeritus
and Chief Brand Strategist Kathy Ireland. Our business strategy is
to utilize our relationship with
kathy
ireland
® Worldwide in
order to secure strategic licenses and joint venture partnerships
around the world for our brands, as well as to grow the portfolio
of brands through the licensee of third party brands and strategic
acquisitions. Our ability to successfully implement our business
strategy is dependent on our ability to leverage our contractual
arrangement with Ms. Ireland and
kathy
ireland
®
Worldwide.
Our
business model is designed with the goal of maximizing the value of
our brands through 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.
Historically our revenues are attributable to
sales of our Beauty & Pin-Ups brand of products. With the
acquisitions of membership interests in I’M1 and EE1 in
January 2017 we expanded our brand portfolio and our revenue
sources to include revenues from licensing fees, brand management
consulting fees and royalties. Following these acquisitions, the
continued implementation of our business model and the recent
licensing of the rights to the name and intellectual property
rights associated with
kathy
ireland
® Health &
Wellness, we now manage our business in four business units,
including:
|
●
|
the professional products division, which is a producer and
marketer of quality hair care and beauty products. Revenues from
this division are attributable to sales of our Beauty & Pin-Ups
brand of products;
|
|
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|
|
●
|
the licensing division, which is designed to establish a lifestyle
brand through the licensing of select products and categories
targeted primarily to men under the I'M1 brand;
|
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|
|
●
|
the entertainment division, which is focused on producing and
marketing omni-entertainment experiences and providing brand
management services, all under the EE1 brand; and
|
|
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|
|
●
|
kathy ireland
® Health
& Wellness, a newly created brand which is in the early stages
of development.
|
29
We
currently report our operations and revenues in three operating
segments, this information is utilized on a regular basis by our
chief operating decision maker ("CODM") to evaluate performance and
allocate resources. Our Chief Executive Officer has been identified
as the CODM. In identifying our reportable operating segments, we
consider our management structure, the economic characteristics,
processes and services delivered. In future periods we will
aggregate and report revenues from the
kathy ireland
® Health &
Wellness business unit, if any, in our licensing segment as the
economic characteristics, processes and services delivered are
similar.
Utilizing
a portion of the proceeds from our recently completed initial
public offering we expect to devote significant assets and efforts
to the marketing, development and promotion of our
brands. Both our licensing division and our entertainment
division first began generating revenues from contractual
relationships during the second quarter of fiscal 2017. We expect
each of those divisions to continue to expand their client base
going forward through additional licensing and advisory
engagements. During fiscal 2017 we expanded our Beauty &
Pin-Ups product line with the introduction of additional hair care
and beauty products and added additional distributors of the
products for fiscal 2018.
As
we continue to implement our business strategy, however, we expect
to encounter hurdles typically encountered by new companies,
operating in highly competitive environments. By the nature of
licensing agreements, the time between the execution of a licensing
agreement and the launch of the licensed products will vary from
client to client, and it may be some time before we begin
generating royalty revenues. The terms of the various consulting
agreements may also result in inconsistent revenues from period to
period based upon the delivery requirements and timelines of the
services. We believe, however, that over time our business model
will enable us to rapidly grow our revenues while enabling us to
control costs and overhead expenses.
Results of Operations
Sales
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Fiscal 2017
|
Fiscal 2016
|
Change
|
|
Sales
|
$
3,650,480
|
$
2,631,125
|
$
1,019,355
|
|
Sales
related party
|
$
1,731,238
|
-
|
$
1,731,238
|
|
Total
gross sales
|
$
5,381,718
|
$
2,631,125
|
$
2,750,593
|
|
Allowances
|
(906,765
)
|
(599,563
)
|
307,202
|
|
Net
sales
|
$
2,743,715
|
$
2,031,562
|
$
712,153
|
|
Net
sales related party
|
$
1,731,238
|
-
|
$
1,731,238
|
|
Total
net sales
|
$
4,475,953
|
$
2,031,562
|
$
2,444,391
|
|
Costs
of sales
|
$
1,355,381
|
$
1,618,432
|
$
(263,051
)
|
|
Gross
profit as a percentage of net sales
|
69.7
%
|
20.3
%
|
49.4
%
|
|
Operating
expenses
|
$
3,358,863
|
$
4,146,423
|
(787,560
)
|
|
Other
expenses
|
$
1,121,877
|
$
154,977
|
$
966,900
|
|
Net
loss
|
$
(1,361,168
)
|
$
(3,896,270
)
|
$
2,535,102
|
|
Net
loss attributable to Level Brands, Inc. common
shareholders
|
$
(1,755,984
)
|
$
(3,356,489
)
|
$
1,600,505
|
We
began reporting our revenues by segment during the second quarter
of fiscal 2017 following our acquisitions of I'M1 and EE1. The
following table provides information on the contribution of net
sales by segment to our total net sales.
|
|
Fiscal
2017
|
% of
total
|
Fiscal
2016
|
% of
total
|
|
|
|
|
|
|
|
Professional
products division
|
$
970,204
|
21.7
%
|
$
2,031,562
|
100
%
|
|
Licensing
division
|
1,794,582
|
40.1
%
|
0
|
|
|
Entertainment
division
|
1,710,167
|
38.2
%
|
0
|
|
|
Total net
sales
|
$
4,474,953
|
|
$
2,031,562
|
|
30
With
the new operations in fiscal 2017 of our two new subsidiaries,
I’M1 and EE1, the overall business strategy was expanded to
not only include new business lines that generate revenues from new
sources (licensing, royalty, and advisory) but also a different
approach, in some cases, regarding the type of payments we would
accept. We have entered into agreements where we have accepted
common stock, options or warrants (an equity position).
This practice has an impact on immediate cash flow and these
equities could be subject to adjustment which could result in
future period losses. In fiscal 2017, of our net sales of
$4,474,953 we have received compensation in the form of equity
positions totaling $1,932,552.
Professional Products division
Net sales for the Professional Products division
for fiscal 2017
decreased 52.3%
as compared to fiscal 2016. This
decrease is primarily attributable to primary reliance upon one
distribution channel combined with an ineffective post launch
support effort. The year ending September 30, 2016 saw the launch
of the Beauty & Pin-Ups products with initial success, however
the marketing, training, and education support for the distribution
channel did not ramp up effectively or in a timely manner and
therefore we saw a drop in sales through orders from our sales
channel, which led to a significant drop in reorders in fiscal
2017. We have made a strategic decision to increase our
distributors and have added two new distributors entering fiscal
2018, and are targeting to add additional distributors while also
adding other sales channels, including large retail and online
channels. In addition, we have added independent sales
representatives and revamped our education team and process. We
believe these changes will support the product line and sales
process better, although no assurance can be given as to when and
if our product line will receive more acceptance in the
marketplace.
As
is customary in the wholesale distribution of hair care and beauty
products, we provide our distributors an allowance against the
sales price for advertising and distribution, damaged good, product
development allowance, and a discount if paid within a prescribed
time frame, which is typically 2% if paid within 10 days. These
allowances were 48.3% and 22.8%, respectively, of gross sales of
our professional products division for fiscal 2017 and fiscal 2016.
The large increase in the fiscal 2017 periods is related to
discounting of hair irons to our distribution channel in an effort
to offer incentives to customers and move historical products as we
prepared and launched three new products in fiscal 2017 as well as
a rollout of a discounted sample sized product with our entrance
into a new sales channel.
Licensing division
The
Licensing division began operating in January 2017, and enters into
various license agreements that can provide revenues based on
minimum royalties and advertising/marketing fees and additional
revenues based on a percentage of defined sales. Minimum royalty
and 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. 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 our consolidated
balance sheets as deferred license 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 on our consolidated balance sheet in
deferred license revenue at the time the payment is received.
In regard to revenue for advisory and promotional services
provided through a consulting agreement, we record revenue when the
services are provided and the customer is invoiced at agreed upon
rates and terms in the agreement. In several of our agreements, for
our services we have accepted common stock, options or
warrants (an equity position) from our customer. In
fiscal 2017, this division recorded net sales of $1,794,582, of
which $1,133,993 was received as an equity position.
Entertainment division
The
Entertainment division began operating in January 2017, and enters
into advisory agreements for brand management services as well as
agreements to produce entertainment related events, which include
production assistance for television and music recording
agreements. In regard to sales for advisory and production related
services, we record revenue when the services are provided and the
customer is invoiced at agreed upon rates and terms in the
agreement. In several of our agreements, for our services we
have accepted common stock, options or warrants (an equity
position) from our customer. In fiscal 2017, this division recorded
net sales of $1,359,803, of which $483,993 was received as an
equity position. Additional revenue earned at the corporate level
for advisory
31
agreements
is included in the Entertainment division for segment reporting.
These advisory agreements are related to referral fee arrangements
and advisory agreements with services provided by the corporate
entity, Level Brands. For fiscal 2017 revenue from these contracts
was $350,364, of which $314,000 was received as an equity
position.
Cost of sales
Our
cost of sales includes costs associated with distribution, external
fill and labor expense, components, and freight for our
professional products divisions, and includes labor and third party
service providers for our licensing and entertainment divisions.
Our cost of sales as a percentage of net sales was 30.3% in fiscal
2017 as compared to 79.7% in fiscal 2016. In order to explain the
change in cost of sales we must account for the two new divisions
and look at each division separately to see the cumulative
impact.
In
our professional products division, cost of sales was 90.2% and
79.7% of its net sales for fiscal 2017 and fiscal 2016,
respectively. Cost of sales variances are primarily related to two
key impacts. First, allowances from this division have varied
significantly based on the product line being new and various
advertising and promotional packages have been used to promote the
products at initial launch. Second, with the initial Beauty &
Pin-Ups product launch in fiscal 2016, we had incurred
significantly higher shipping and logistics expenses primarily as
the result of minimum orders required by our vendors for our
initial orders, and we also incurred charges for expedited
processing to meet our first order deadlines. In fiscal 2017 we
moved into an online channel and conducted our first online
promotion to create more brand visibility, and with this provided
significant discount pricing on a new packaged item specifically
for that channel. In addition we have added two new distributors at
the end of the year and although not at the same level of fiscal
2016, we had promotional packages for those new launches. As we
continue to refine our operations, we expect our cost of sales to
decrease, thereby increasing our gross profit, as we expect to be
able to not offer as many promotional packages, manage the
production of our product lines more efficiently by procuring
materials used in our process with better pricing as well as having
a more effective inventory management control
process.
In
our licensing division, cost of sales for fiscal 2017 was 2.7% of
its net sales. We expect this division to have a low cost of sales
as the business is structured in a manner that the licensee (our
customer) incur the significant costs and revenues associated with
the sale of licensed products. We recognize the associated royalty
fees on a net basis. When we are involved in providing advisory
services, we allocate the utilized internal resources costs to our
cost of sales.
In
our entertainment division, cost of sales for fiscal 2017 was 31.8%
of its net sales. The cost of sales for this division will vary
based upon the type of projects in which it is involved. For
instance, its cost of sales is expected to be less for advisory
services, which utilize internal resources, as compared to
television production services which require the use of external
facilities and personnel, which increases our cost. As a result,
our gross margin for the entertainment division will vary from
period to period.
Operating expenses
Our
operating expenses include wages, advertising, travel, rent,
professional service fees, and expenses related to industry
distribution and trade shows. Our operating expenses decreased to
$3,358,863 for the year ended September 30, 2017 from $4,146,423 in
fiscal 2016 a decrease of $787,559 or 18.9%. During fiscal 2017 as
compared to fiscal 2016, expenses related to social media, public
relations, advertising and marketing process, tradeshows, and
promotions decreased approximately $362,182, our travel and
entertainment expenses decreased approximately $150,255, our
professional outside services related to product formulation,
design, marketing and tradeshow expenses decreased approximately by
$553,455, our rent expense decreased $56,968, and commissions paid
to an outside sales consultant decreased approximately $137,493.
The decrease during fiscal 2017 was partially offset by certain
increases in operating expenses during such period, mostly due to
costs related to startup of our two new subsidiaries an increase of
$200,000 and accounting and legal costs related to our audits and
the SEC registration process, an increase of $440,681. During
fiscal 2017 as compared to fiscal 2016 our staff related expenses
increased approximately $308,780 as we added executive management
and management over our new licensing and entertainment divisions.
In addition, our accounting and legal expenses increased by
approximately $440,681 as we have engaged independent auditors for
our fiscal audits and quarterly reviews as well as counsel for our
SEC registration process. During fiscal 2017 we had an increase in
non-cash expense of $231,484 related to the issuance of restricted
stock awards to our board members as well as for options issued to
employees.
32
Professional products division
Operating
expenses in the professional products division were approximately
$1,797,000 for fiscal 2017 as compared to $2,867,000 for fiscal
2016, a decrease of 37.3%. Operating expenses for these periods,
respectively, include staff related expenses and management fees
which were approximately $538,000 and $697,000, accounting and
legal expenses of approximately $212,000 and $51,000, expenses
related to social media, public relations, advertising, marketing,
promotions and tradeshow of approximately $270,000 and $683,000,
travel and entertainment expenses of approximately $131,000 and
$273,000, professional outside services related to product
formulation, design, and marketing expenses of approximately
$146,000 and $297,000, and commissions paid to an outside sales
consultant of approximately $38,000 and $176,000 respectively. The
overall decrease in operating expenses is related to management
shift to a more structured approach as the strategy for this
business unit was reviewed and repositioned.
Licensing division
Operating expenses in the licensing division were
approximately $935,000 for fiscal 2017. Operating expenses include
staff related expenses of $91,000, accounting and legal expenses of
approximately $45,000, expenses related to social media, public
relations, and tradeshow of approximately $21,000. We had $100,000
of initial startup costs when the division was started in January
2017. In addition, we had referral fees of $528,000 paid to our
corporate entity for two large contracts and internal management
fees also to corporate of $90,000. W
e expect to continue to
allocate corporate management fees to this division in future
periods, however, the amount of such fees will vary depending upon
the amount of time devoted by our senior management to this
division. The corporate charges eliminate upon consolidation of our
financial statements.
Entertainment division
Operating expenses in the entertainment division
were approximately $580,000 for fiscal 2017. Operating expenses
include staff related expenses of $92,000, accounting and legal
expenses of approximately $39,000. Expenses related to social
media, public relations, and tradeshows of approximately $30,000.
We had $100,000 of initial startup costs when the division was
started in January 2017. In addition, we had referral fees of
$228,000 paid to our corporate entity for one large contract and
internal management fees also to corporate of $90,000. As with our
licensing division,
we expect to continue to allocate
corporate management fees to this division in future periods,
however, the amount of such fees will vary depending upon the
amount of time devoted by our senior management to this division.
The corporate charges eliminate upon
consolidation of our financial statements.
Corporate overhead
Corporate
overhead operating expenses were approximately $1,075,000 for
fiscal 2017 as compared to $1,711,000 for fiscal 2016, a decrease
of 37.2%. Operating expenses for these periods, respectively,
include staff related expenses which were approximately $343,000
and $489,000, accounting and legal expenses of approximately
$276,000 and $81,000, charitable expenses of $22,000 and $225,000,
and stock compensation expense of approximately $243,000 and
$11,000. We also had ended the use of outside consultants in fiscal
2017 and this had related expenses of $(120,000) in fiscal 2017 as
compared to $690,000 in fiscal 2016.
Interest expense and other non-operating expenses
Our
interest expense increased to $500,627 for fiscal 2017 from
$154,978 for fiscal 2016. The increase was related to increased
borrowings under the 8% convertible promissory notes issued and
sold in October 2016. The 8% convertible promissory notes were
converted to equity as of June 30, 2017, and upon conversion we
accelerated the unamortized debt discount and debt issuance fees
and have recorded interest expense of $499,708 in fiscal 2017 of
non-cash charges.
In
addition, we converted the $2,125,000 principal amount of 8%
Convertible Promissory Notes and all accrued interest of $127,500
into our common shares, and we accounted for a conversion
inducement in accordance with ASC 470-20 on the conversion price
reduction from $5.00 to $3.95 per share and recorded a non-cash
debt conversion expense of $446,250 in fiscal 2017. This is a
one-time non-cash charge. We also sold marketable securities we had
received from a customer for services. In this transaction, we
determined that an other-than-temporary impairment on securities of
$175,000 occurred and recorded the loss in the consolidated
statement of operations.
33
In
some cases, we may, from time to time, enter into contracts
where all or a portion of the consideration provided by the
customer in exchange for our services is the value of the
consideration provided could decline and require an impairment
charge to be recorded in non-operating income in the consolidated
statement of operations.
Net loss and net loss attributable to our common
shareholders
Our
net loss for fiscal 2017 decreased 64.4% to $(1,386,168) as
compared to a net loss of $(3,896,270) in fiscal 2016. At September
30, 2017 and 2016, we owned 100% and 78%, respectively, of the
membership interests of Beauty & Pin-Ups and 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 decreased 47.7% for
fiscal 2017 from fiscal 2016.
Liquidity and Capital Resources
We had cash on hand of $284,246 and working
capital of $2,170,154 at September 30, 2017 as compared to cash on
hand of $34,258 and working capital deficit of $947,766 at
September 30, 2016. Our current assets increased 386.2% at
September 30, 2017 from September 30, 2016, and is primarily
attributable to an increase of cash, accounts receivable, note
receivable related party, marketable and other securities, deferred
IPO costs, and offset by a decrease in inventory and prepaid
expenses. Our current liabilities decreased 19.9% at September 30,
2017 from September 30, 2016. This decrease is primarily
attributable to decreases in a line of credit and interest payable
which were all converted to equity in June 2017. These were offset
by increases in accounts payable, deferred revenue and accrued
expenses. Both the changes in our current assets and current
liabilities are also reflective of the further development of our
business during fiscal 2017.
In January 2017, we acquired
membership interests in two new segments, which had an impact on
our current assets as the new segments have generated significant
revenue compared to prior periods, which has increased our accounts
receivables, marketable and other securities (as we have received
from customers their public or private stock as compensation for
services delivered). In November 2017 we completed an IPO and as of
September 30, 2017 we have recorded deferred IPO costs which were
directly attributable to the offering and will be charged against
the gross proceeds of the offering as a reduction of additional
paid-in capital. 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.
During
fiscal 2017 we used cash primarily to fund our operating loss in
addition to increases in our accounts receivable and marketable and
other securities. We offer net 30 day terms and our receivables
generally turn every 41 days.
We
do not have any commitments for capital expenditures. We have been
dependent upon sales of our securities and loans from related
parties to provide working capital for our operations. During
fiscal 2017 and fiscal 2016 we raised net proceeds of $829,500 and
$1,984,747 respectively, from the sale of our
securities.
In
October 2016, we issued and sold the aggregate principal amount of
$2,125,000 of our 8% convertible promissory notes to accredited
investors, and in connection with the issuance of the notes issued
warrants to purchase shares of our common stock. After the offering
costs, we used these proceeds for business development and general
working capital. Effective June 30, 2017, the note holders agreed
to convert the principal amount of $2,125,000 and all accrued
interest of $127,500 into 570,254 shares of our common stock at a
conversion price of $3.95 per share.
We own 51% of the membership interests of each of
I'M1 and EE1 and 100% of Beauty & Pin-Ups at September 30,
2017. We acquired 10% membership interest in Beauty & Pin-Ups
in October 2017 and the remaining 12% membership interest in April
2017. We are the manager, have sole voting interests and fund all
of the operating expenses for each of these entities. Under the
terms of the operating the agreements, the minority owners of each
I'M1 and EE1 are entitled to their pro-rata share of a distribution
of the available cash and adjusted taxable income for each of the
entities. The structure of the operating agreements may increase
our need for cash for operations and could adversely impact our
results of operations in future periods.
In fiscal year 2017,
EE1 distributed $287,550 to its two members for quarterly tax
planning purposes. Of this amount $228,000 was
an
34
investment other security, $116,280 distributed to us and $111,720
distributed to EE1 Holdings. The balance of $59,550 distributed as
cash, $30,370 distributed to us and $29,180 distributed to EE1
Ho
ldings.
In fiscal year 2017,
I’M1 distributed $228,000 to its two members for quarterly
tax planning purposes, the distribution was an investment other
security, $116,280 distributed to us and $111,720 distributed to
IM1 Holdings.
The companies
have determined that going forward, distributions for tax purposes
will be assessed on an annual basis and addressed based on cash
flow and the ability to make these distributions without impacting
the business.
While
we do not have any long-term capital commitments, we do have a
lease commitment which is less than 12 months. 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. To date, we have not met this goal as
cash flow from operations has been a net use of $2,329,841 and
$2,897,254 for the years ended September 30, 2017 and 2016,
respectively. On November 16, 2017 we closed an IPO and raised net
proceeds of $10,932,535. We believe we have sufficient capital to
fully expand our operations to a level which we believe will be
able to fund our operating expenses. In an effort to increase our
revenues, we are focusing on the areas of the business which we
believe have the most opportunity for revenue growth, including
expanding our distribution channels for Beauty & Pin-Ups. In
addition, we continue to assess all areas of operations for cost
improvements and efficiencies and, as indicated in the results of
operations discussed above; we have decreased many of the day to
day business expenses. Our accounting and legal expenses have been
a significant area of increase related to the audit of our
financial statements and costs associated with our initial public
offering. Additionally, during fiscal 2017 we incurred non-cash
expenses of $242,934 related to stock compensation and options,
$310,958 for
amortization of debt discounts and debt issuance fees related to
financings, a one-time non-cash charge of $446,250 of debt
conversion expense related to conversion of the convertible
promissory notes, and a non-cash charge of $175,000 as an other
than temporary impairment on securities.
Initially, our
operational focus was limited to
product development, re-branding and launching new
products under our Beauty & Pin-Ups line. During fiscal 2016 we
expended significant resources in these efforts for this product
line. While we believe we have experienced certain initial
successes with our Beauty & Pin-Ups line, our competitors in
the hair care and beauty products segment are generally better
capitalized than our company and have far greater brand recognition
with consumers and salons. During fiscal 2017, with the
establishment of I’M1 and EE1, we believe we have built a
foundation and are evolving
our business model to a
licensing and branding focused company. We believe we will be able
to use the brand management expertise
at our disposal, through our relationship with
kathy
ireland
® Worldwide, to
continue to grow our portfolio of brands and generate new revenue
streams without significantly changing our infrastructure, thereby
reducing our working capital needs in future
periods.
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, w
e 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. In addition, our CEO is an
affiliate of a company who is a customer of ours and who continues
to conduct ongoing business with us. These 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 U.S. generally accepted accounting principles
(“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 its 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.
35
We believe that the following critical accounting
policies 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.
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
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.
In
addition, we may, from time to time, enter into contracts
where a portion of the consideration provided by the customer in
exchange for our services is a commitment to transfer common stock,
options or warrants to us (an equity position). In these
situations, upon invoicing the customer for the stock or other
instruments, we will record the receivable as accounts receivable
other, and use the value of the stock or other instrument upon
invoicing to determine the value. Where an accounts receivable is
settled with the receipt of the common stock or other instrument,
the common stock or other instrument will be classified as an asset
on the balance sheet as either an investment marketable security
(when the customer is a public entity) or as an investment other
security (when the customer is a private
entity).
Accounts receivable
and accounts receivable other items that involve a related party
are indicated as such on the face of the consolidated financial
statements.
Marketable
Securities
At the
time of acquisition, the marketable security is designated as
available-for-sale as the intent is to hold for a period of time
before selling. Available-for-sale securities are carried at fair
value on the consolidated statements of financial condition with
changes in fair value recorded in the accumulated other
comprehensive income component of shareholders’ equity in the
period of the change in accordance with ASC 320-10. Upon the
disposition of an available-for-sale security, we reclassify the
gain or loss on the security from accumulated other comprehensive
income to non-operating income on our consolidated statements of
operations.
Investment
Other Securities
For
equity investments where we neither control nor have significant
influence over the investee and which are non-marketable, the
investments are accounted for using the cost method of accounting
in accordance with ASC 325-10. Under the cost method, dividends
received from the investment are recorded as dividend income within
non-operating income. For years ended September 30, 2017 and
2016, no such dividends were received.
Other-than-Temporary
Impairment
The
Company’s management periodically assesses its marketable
securities and investment other securities, for any unrealized
losses that may be other-than-temporary and require recognition of
an impairment loss in the consolidated statement of operations. If
the cost of an investment exceeds its fair value, the Company
evaluates, among other factors, general market conditions, the
length of time the security has been in a loss position, the extent
to which the security’s market value is less than its cost,
the financial condition and prospects of the security’s
issuer and the Company’s ability and intent to hold the
security for a length of time sufficient to allow for recovery. If
the impairment is considered other-than-temporary, an impairment
charge is recorded in non-operating income in the consolidated
statements of operations.
Inventory
Inventory is stated
at the lower of cost or net realizable value with cost being
determined on a weighted average basis. The cost of inventory
includes product cost, transportation of product, and production
fill and labor (which we outsource to third party manufacturers).
Write-offs of potentially slow moving or damaged inventory
are
36
recorded
based on management’s analysis of inventory levels,
forecasted future sales volume and pricing and through specific
identification of obsolete or damaged products. Prepaid Inventory
represents deposits made with third party manufacturers in order to
begin production of an order for product. We assess inventory
quarterly for slow moving products and potential impairments and
perform a physical inventory count annually near fiscal year
end.
Fair
value accounting
We
utilize 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 we have 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. Our 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 we
record an investment in marketable securities the asset is valued
at fair value. For investment other securities, it will value the
asset using the cost method of accounting. Any changes in
fair value for marketable securities, during a given period will be
recorded as a gain or loss in other comprehensive income, unless a
decline is determined to be other-than-temporary. For investment
other securities we use the cost method and compare the fair value
to cost in order to determine if there is an other-than-temporary
impairment.
Intangible
Assets
Our
intangible assets consist of trademarks and other intellectual
property, all of which are accounted for in accordance with ASC
350, Intangibles – Goodwill and Other. We employ 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. Events that are assessed include
contracts acquired and lost that are associated with the intangible
assets, as well as the revenues associated with those
contracts.
Intangible assets
with useful limited lives are amortized using the straight-line
method over their estimated period of benefit. In accordance with
ASC 360-10-35-21, definite 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.
37
In
conjunction with any acquisitions, we refer to ASC-805 as amended
by ASU 2017-01 in determining if we are 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
asset purchase. Additionally, we refer to the aforementioned
guidance in reviewing all potential assets and liabilities for
valuation including the determination of intangible asset
values.
Revenue
Recognition
Our
policy on revenue is to recognize revenue when persuasive evidence
of an arrangement exists, shipping has occurred or service
obligations have been satisfied, the sales price is fixed or
determinable and collection is probable. We record 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 expected 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 and coupons. These incentive costs are recognized
at the later of the date on which we recognize the related revenue
or the date on which we offer the incentive. Although, we do not
have a formal return policy, from time to time we will allow
customers to return certain products. A business decision
related to customer returns is made by us and is performed on a
case-by-case basis. We record returns as a reduction in sales and
based on whether we dispose of the returned product, adjust
inventory and record expense as appropriate.
We also
enter 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
our consolidated balance sheets as deferred license 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 our consolidated
balance sheet in deferred license 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.
In
regard to sales for services provided, we record revenue when
persuasive evidence of any agreement exists, services have been
rendered, and collectability is reasonably assured. Based on the
contracted services, revenue is recognized when we invoice
customers for completed services at agreed upon rates or revenue is
recognized over a fixed period of time during which the service is
performed.
Recent Accounting Pronouncements
In May 2014, August 2015 and May 2016, the
Financial Accounting Standards Board (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. 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.
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
38
Improvements to Topic 606, Revenue from Contracts with Customers
(“ASU 2016-20”).
We
are assessing the impact, if any, of implementing this guidance on
our consolidated financial position, results of operations and
liquidity. We will adopt this standard in the first quarter of
fiscal 2019.
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. We are assessing the impact, if any, of
implementing this guidance on our consolidated financial position,
results of operations and liquidity.
In March 2016, the FASB issued ASU 2016-09,
Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting
. The purpose
of ASU 2016-09 is to simplify several aspects of the accounting for
share-based payment transactions, including the income tax
consequences, classification of awards as either equities or
liabilities, and classification of amounts in the statement of cash
flows. ASU 2016-09 is effective for fiscal years and interim
periods beginning after December 15, 2016. We will adopt this
standard in the first quarter of fiscal 2018 and do not expect any
material impact to our financial statements.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic
230), Classification of Certain Cash Receipts and Cash
Payments
. The amendments in
this update provided guidance on eight specific cash flow issues.
This update is to provide specific guidance on each of the eight
issues, thereby reducing the diversity in practice in how certain
transactions are classified in the statement of cash flows. ASU
2016-15 is effective for fiscal years and interim periods beginning
after December 15, 2017. Early adoption is permitted. We are
assessing the impact, if any, of implementing this guidance on our
consolidated financial position, results of operations and
liquidity.
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.
Outlook
Level Brands has expanded its business operations in fiscal 2017 to
include two new divisions through which it now has a committed
focus on licensing and branding services as it moves forward. In
addition we added a third new division at the end of fiscal 2017
which will begin operations in fiscal 2018. This expansion has
positioned Level Brands with licensing segments in men’s
lifestyle and the health and wellness arena. It also has solid
capabilities related to brand management services and has seen
success in early stages by engaging with several
customers.
We believe that in working closely with our Chairman Emeritus and
Chief Brand Strategist, Kathy Ireland, the Chairman, CEO and Chief
Designer of kathy ireland® Worldwide, and leveraging the
expertise and talent of the kiWW team we have opportunity to secure
strategic licenses and joint venture partnerships for our brands,
as well as to grow the portfolio of brands we work with. We expect
to utilize the kiWW “blueprint” and team as we grow our
licensing and branding business with substantial focus on the
millennial generation in areas we believe are key growth segments,
however there can be no assurance that our efforts to expand and
build our revenues will be successful.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
39
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Please
see our Financial Statements beginning on page F-1 of this annual
report.
ITEM
9.
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM
9A.
CONTROLS
AND PROCEDURES.
Evaluation of Disclosure Controls and
Procedures
.
We
maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized, and reported within
the time periods specified in the Securities and Exchange
Commission’s rules and forms and that such information is
accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate, to
allow for timely decisions regarding required disclosure. In
designing and evaluating the disclosure controls and procedures,
management recognizes that any controls and procedures, no matter
how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives, and
management is required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and
procedures.
As
required by Securities and Exchange Commission Rule 13a-15(e), we
carried out an evaluation, under the supervision and with the
participation of the our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that due to a material weakness in our
internal control over financial reporting as described below, our
disclosure controls were not effective at September 30,
2017.
Management’s Report on Internal Control
over Financial Reporting
.
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule
13a-15(f) under the Exchange Act. Our internal control over
financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies
and procedures that:
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•
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pertain
to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
our assets;
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|
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|
|
•
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provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with
generally accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with authorizations
of our management and directors; and
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|
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•
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provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial
statements.
|
Because
of the inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material
misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
40
Our
management, including our CEO and CFO, assessed the effectiveness
of our internal control over financial reporting as of September
30, 2017. In making this assessment, our management used the
criteria set forth by the Committee of Sponsoring Organizations of
the 2013 Treadway Commission (“COSO”) in
Internal Control-Integrated Framework
.
Based on that evaluation, they concluded that, during the period
covered by this report, such internal controls and procedures were
not effective to detect the inappropriate application of US GAAP
rules as more fully described below. This was due to deficiencies
that existed in the design or operation of our internal controls
over financial reporting that adversely affected our internal
controls and that may be considered to be material weaknesses.
Specifically, our review process on our financial statements did
not account for proper classification of items on the consolidated
statement of cash flows and consolidated statement of
shareholders’ equity. We did not have adequate processes with
our internal resources to properly identify the proper
classifications.
A
material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting, such
that there is a reasonable possibility that a material misstatement
of our annual or interim financial statements will not be prevented
or detected on a timely basis.
The
errors arising from the underlying deficiencies were not material
to the consolidated financial statements reported in any interim or
annual period and therefore, did not result in a revision to
previously filed financial statements. However, this control
deficiency could result in misstatements of the aforementioned
accounts and disclosures that would result in a material
misstatement to the annual or interim consolidated financial
statements that would not be prevented or detected in a timely
manner. Accordingly, we have determined that this control
deficiency constitutes a material weakness. Because of this
material weakness, management concluded that we did not maintain
effective internal control over financial reporting as of September
30, 2017, based on criteria described in Internal Control –
Integrated Framework (2013) issued by COSO.
Remediation of the Material Weaknesses in Internal Control Over
Financial Reporting
We are
evaluating the material weakness and are engaged in the planning
for and implementation of remediation efforts to strengthen our
overall internal control. The remediation plan will include the
following actions:
●
We have hired a new
Controller as of September 1, 2017, who is now assessing, with the
CFO, all internal requirements and processes to ensure GAAP
compliance. We will assess hiring other sufficient competent staff
to analyze and report financial transactions in compliance with
GAAP in a timely manner; and
●
we expect to engage
sufficient competent external experts to assist with financial
statement reviews to ensure a complete review process as
needed.
We are
committed to improving our internal control environment and believe
that these remediation efforts will represent significant
improvements in our controls. We have started to implement these
steps, however, some of these steps may take time to be fully
integrated and confirmed to be effective and sustainable.
Additional controls may also be required over time. Until the
remediation steps set forth above are fully implemented and tested,
the material weakness described above will continue to exist.
Management believes that these additional controls will remediate
the material weakness discussed above; however, no assurance can be
given that these changes will remediate the material weakness until
such time that the controls have operated for a sufficient period
of time and their operating effectiveness has been
tested.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting during our last fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
We are
not required by current SEC rules to include, and does not include,
an auditor's attestation report regarding our internal control
systems over financial reporting. Accordingly, our registered
public accounting firm has not attested to management's reports on
our internal control over financial reporting.
ITEM
9B.
Other
Information.
None.
41
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
The
information required by this Item will be contained in our proxy
statement for our 2018 Annual Meeting of Stockholders to be filed
on or prior to January 28, 2018 (the “Proxy Statement”)
and is incorporated herein by this reference.
ITEM
11.
EXECUTIVE
COMPENSATION.
The
information required by this item will be contained in our Proxy
Statement and is incorporated herein by this
reference.
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
The
information required by this item will be contained in our Proxy
Statement and is incorporated herein by this
reference.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
The
information required by this item will be contained in our Proxy
Statement and is incorporated herein by this
reference.
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The
information required by this item will be contained in our Proxy
Statement and is incorporated herein by this
reference.
ITEM
15.
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES.
(a)
(1)
Financial
statements.
The
consolidated financial statements and Report of Independent
Registered Accounting Firm are listed in the “Index to
Financial Statements and Schedules” beginning on page
F-1.
(2) Financial
statement schedules
All
schedules for which provision is made in the applicable accounting
regulations of the SEC are either not required under the related
instructions, are not applicable (and therefore have been omitted),
or the required disclosures are contained in the consolidated
financial statements herein.
(3)
Exhibits.
The
exhibits that are required to be filed or incorporated by reference
herein are listed in the Exhibit Index.
42
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) 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.
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Date:
December 26, 2017
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Level Brands, Inc.
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By:
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/s/
Martin Sumichrast
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Martin A. Sumichrast
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Chief Executive Officer (Principal Executive Officer)
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Date:
December 26, 2017
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Level Brands, Inc.
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By:
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/s/
Mark Elliott
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Mark S. Elliott
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Chief Financial Officer, (Principal Accounting and Financial
Officer)
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POWER OF ATTORNEY
KNOW ALL BY THESE PRESENTS, that each
person
whose signature appears below hereby constitutes and
appoints Mark S. Elliott his true and lawful attorney-in-fact and
agent, with full power of substitution and resubstitution, for him
and in his name, place and stead, in any and all capacities, to
sign any and all amendments and supplements to this report, and to
file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission,
and hereby grants to such attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and
confirming all that said attorney-in-fact and agent, or his
substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
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Name
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Positions
|
|
Date
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/s/ Martin A. Sumichrast
Martin
A. Sumichrast
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Chairman of the Board of Directors, Director
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December 26, 2017
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/s/ Erik Sterling
Erik
Sterling
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Director
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December 26, 2017
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/s/ Anthony K. Shriver
Anthony
K. Shriver
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Director
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December 26, 2017
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/s/ Seymour G.
Siegel
Seymour G. Siegel
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Director
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December 26, 2017
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/s/ Bakari
Sellers
Bakari Sellers
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Director
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December 26, 2017
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/s/ Gregory C.
Morris
Gregory C. Morris
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Director
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December 26, 2017
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43
EXHIBIT INDEX
|
No.
|
|
Description
|
|
|
Articles of Incorporation (incorporated by reference Exhibit 2.1 to
the Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended, as qualified on October 27, 2017 (the "1-A")
|
|
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|
Articles of Amendment to the Articles of Incorporation filed April
22, 2015 (incorporated by reference to Exhibit 2.2 to the
1-A)
|
|
|
|
Articles of Amendment to the Articles of Incorporation filed June
22, 2015 (incorporated by reference to Exhibit 2.3 to the
1-A)
|
|
|
|
Articles of Amendment to the Articles of Incorporation filed
November 17, 2016 (incorporated by reference to Exhibit 2.4 to the
1-A)
|
|
|
|
Articles of Amendment to the Articles of Incorporation filed
December 5, 2016 (incorporated by reference to Exhibit 2.5 to the
1-A)
|
|
|
|
Bylaws, as amended (incorporated by reference to Exhibit 2.6 to the
1-A)
|
|
|
|
Form of 8% convertible promissory note (incorporated by reference
to Exhibit 3.1 to the 1-A)
|
|
|
|
Form of amendment to 8% convertible promissory note and warrant
(incorporated by reference to Exhibit 3.2 to the 1-A)
|
|
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|
Form of placement agent warrant issued in June 2015 private
placement (incorporated by reference to Exhibit 3.3 to the
1-A)
|
|
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|
Form of placement agent warrant issued in December 2015 private
placement (incorporated by reference to Exhibit 3.4 to the
1-A)
|
|
|
|
Form of warrant issued in 8% convertible promissory note offering
(incorporated by reference to Exhibit 3.5 to the 1-A)
|
|
|
|
Form of Selling Agents' Warrant Agreement (incorporated by
reference to Exhibit 3.6 to the 1-A)
|
|
|
|
Form of common stock certificate of the registrant (incorporated by
reference to Exhibit 3.7 to the 1-A)
|
|
|
|
2015 Equity Compensation Plan (incorporated by reference to Exhibit
3.8 to the 1-A) +
|
|
|
|
Form of stock option award under the 2015 Equity Compensation Plan
(incorporated by reference to Exhibit 3.9 to the 1-A)
|
|
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|
Form of
warrant issued to Andre Carthen (incorporated by reference to
Exhibit 3.10 to the 1-A)
|
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Form of warrant issued to Nicholas Walker (incorporated by
reference to Exhibit 3.11 to the 1-A)
|
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Form of Selling Agency Agreement (incorporated by referenced to
Exhibit 1.1 to the 1-A)
|
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Contribution Agreement by and between Beauty & Pin-Ups, Inc.
and Beauty and Pin Ups LLC dated April 13, 2015 (incorporated by
reference to Exhibit 7.1 to the 1-A)
|
|
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|
Operating Agreement of Beauty and Pin Ups LLC, as amended
(incorporated by reference to Exhibit 6.1 to the 1-A)
|
|
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|
Consulting Agreement dated April 13, 2015 by and between Beauty and
Pin Ups LLC and Priel Maman (incorporated by reference to Exhibit
6.2 to the 1-A)
|
|
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|
Management Services Agreement dated April 27, 2015 by and
between
kathy
ireland
® Worldwide and
Level Beauty Group, Inc. (incorporated by reference to Exhibit 6.3
to the 1-A)
|
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|
Advisory Services Agreement dated April 27, 2015 by and between
Stone Street Partners, LLC and Level Beauty Group, Inc.
(incorporated by reference to Exhibit 6.4 to the 1-A)
|
|
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|
Termination Agreement dated October 31, 2016 by and between
kathy
ireland
® Worldwide and
Level Beauty Group, Inc. (incorporated by reference to Exhibit 6.5
to the 1-A)
|
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Termination Agreement dated September 30, 2016 by and between
Siskey Capital, LLC and Level Beauty Group, Inc. (incorporated by
reference to Exhibit 6.6 to the 1-A)
|
|
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|
Revolving Line of Credit Loan Agreement dated August 7, 2015 from
Level Beauty Group, Inc. to LBGLOC, LLC (incorporated by reference
to Exhibit 6.7 to the 1-A)
|
|
|
|
Promissory Note dated August 7, 2015 from Level Beauty Group, Inc.
to LBGLOC LLC (incorporated by reference to Exhibit 6.8 to the
1-A)
|
|
|
|
Security Agreement dated August 7, 2015 from Level Beauty Group,
Inc. to LBGLOC LLC (incorporated by reference to Exhibit 6.9 to the
1-A)
|
|
|
|
Executive Employment Agreement dated January 1, 2017 by and between
Level Brands, Inc. and Martin A. Sumichrast (incorporated by
reference to Exhibit 6.10 to the 1-A) +
|
|
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|
Executive Employment Agreement dated January 2, 2017 by and between
Level Brands, Inc. and Mark S. Elliott (incorporated by reference
to Exhibit 6.11 to the 1-A) +
|
44
|
|
Master Advisory and Consulting Agreement dated February 8, 2017 by
and between Level Brands, Inc. and
kathy
Ireland
® Worldwide
(incorporated by reference to Exhibit 6.12 to the
1-A)
|
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|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Stephen Roseberry (incorporated by reference to
Exhibit 6.13 to the 1-A) +
|
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|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Tommy Meharey (incorporated by reference to
Exhibit 6.14 to the 1-A)+
|
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Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Nicolas Mendoza (incorporated by reference to
Exhibit 6.15 to the 1-A)+
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|
Sublease dated January 1, 2017 by and between Kure Franchise, LLC
and Level Brands, Inc.
(incorporated by reference to Exhibit
6.16 to the 1-A)
|
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|
|
Form of Filler Supply Agreement for Beauty and Pin Ups LLC
(incorporated by reference to Exhibit 6.17 to the 1-A)
|
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|
Wholesale License Agreement dated January 12, 2017 by and
between
kathy ireland
®Worldwide and I'M1, LLC
(incorporated by reference to Exhibit 6.18 to the
1-A)
|
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|
Amended and Restated Limited Liability Company Agreement of I'M1,
LLC effective January 1, 2017 (incorporated by reference to Exhibit
6.19 to the 1-A)
|
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|
Amended and Restated Limited Liability Company Agreement of Encore
Endeavor 1 LLC effective January 1, 2017 (incorporated by reference
to Exhibit 6.20 to the 1-A)
|
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|
Amended and Restated Membership Interest Exchange Agreement dated
March 24, 2017, effective January 6, 2017, by and among IM1
Holdings, LLC, I'M1, LLC and Level Brands, Inc. (incorporated by
reference to Exhibit 7.2 to the 1-A)
|
|
|
|
Amended and Restated Membership Interest Exchange Agreement dated
March 24, 2017, effective January 6, 2017, by and among EE1
Holdings, LLC, Encore Endeavor I LLC and Level Brands, Inc.
(incorporated by reference to Exhibit 7.3 to the 1-A)
|
|
|
|
Form of Indemnification Agreement (incorporated by reference to
Exhibit 6.21 to the 1-A)
|
|
|
|
Charitable Agreement between Beauty & Pin Ups and Best Buddies
International, as amended (incorporated by reference to Exhibit
6.22 to the 1-A)
|
|
|
|
Amendment No. 1 to Transaction Fee Agreement dated March 27, 2017
by and between Level Brands, Inc. and T.R. Winston & Company
LLC (incorporated by reference to Exhibit 6.23 to the
1-A)
|
|
|
|
Form of I'M1 License Agreement (incorporated by reference to
Exhibit 6.24 to the 1-A)
|
|
|
|
Consulting Agreement dated March 20, 2017 by and between I'M1, LLC
and Kure Corp. (incorporated by reference to Exhibit 6.25 to the
1-A)
|
|
|
|
Amended and Restated Consulting Agreement dated March 20, 2017 by
and between I'M1, LLC and NuGene International, Inc. (incorporated
by reference to Exhibit 6.26 to the 1-A)
|
|
|
|
Amendment to Executive Employment Agreement dated April 1, 2017 by
and between Level Brands, Inc. and Martin A. Sumichrast
(incorporated by reference to Exhibit 6.27 to the 1-A)
+
|
|
|
|
Amendment to Swap Agreement dated March 28, 2017 by and among
Beauty and Pin Ups, LLC, Level Brands, Inc. and Dean Gangbar
(incorporated by reference to Exhibit 7.4 to the 1-A)
|
|
|
|
License Agreement dated March 29, 2017 by and among I'M1, LLC, Kure
Corp. and Kure Franchise, LLC (incorporated by reference to Exhibit
6.28 to the 1-A)
|
|
|
|
License Agreement dated March 31, 2017 by and between I'M1, LLC and
NuGene International, Inc. (incorporated by reference to Exhibit
6.29 to the 1-A)
|
|
|
|
Television Series Consulting Agreement dated March 1, 2017 by and
between Multi-Media Productions Inc. and Encore Endeavor 1, LLC
(incorporated by reference to Exhibit 6.30 to the 1-A)
|
|
|
|
Advisory Agreement dated May 9, 2017 by and between Formula Four
Beverages Inc., I'M1, LLC and Encore Endeavor 1, LLC (incorporated
by reference to Exhibit 6.31 to the 1-A)
|
|
|
|
Termination of License Agreement Ab Initio dated June 8, 2017 by
and between I'M1, LLC and NuGene International, Inc. (incorporated
by reference to Exhibit 6.32 to the 1-A)
|
|
|
|
Membership Interest Sale and Purchase Agreement by and among Priel
Maman, Level Brands, Inc. and Beauty and Pin-Ups, LLC dated April
26, 2017 (incorporated by reference to Exhibit 6.33 to the
1-A)
|
|
|
|
Debt Conversion Agreement dated May 15, 2017 by and between Level
Brands, Inc. and LBGLOC, LLC, as amended (incorporated by reference
to Exhibit 6.34 to the 1-A)
|
|
|
|
License Agreement dated March 29, 2017 by and between I'M1, LLC and
Andre Phillipe, Inc. (incorporated by reference to Exhibit 6.35 to
the 1-A)
|
|
|
|
Recording Master License Agreement dated May 23, 2017 by and
between McCoo & Davis, Inc. and Encore Endeavor 1 LLC
(incorporated by reference to Exhibit 6.36 to the 1-A)
|
45
|
|
Form of note conversion agreement (incorporated by reference to
Exhibit 6.37 to the 1-A)
|
|
|
|
Management Consulting Agreement dated July 1, 2017 by and between
Level Brands, Inc. and Market Development Consulting Group, Inc.
(incorporated by reference to Exhibit 6.38 to the 1-A)
|
|
|
|
Amendment No. 1 to Amended and Restated Consulting Agreement dated
July 27, 2017 by and between I'M1, LLC and NuGene International,
Inc. and Irrevocable Proxy (incorporated by reference to Exhibit
6.39 to the 1-A)
|
|
|
|
Stock Purchase and Escrow Agreement dated July 31, 2017 and among
I'M1, LLC, Stone Street Partners, LLC and Pearlman Law Group LLP
(incorporated by reference to Exhibit 6.40 to the 1-A)
|
|
|
|
Promissory Note dated July 31, 2017 in the principal amount of
$275,000 from Stone Street Partners, LLC (incorporated by reference
to Exhibit 6.41 to the 1-A)
|
|
|
|
License Agreement dated June 27, 2017 by and between I'M1, LLC and
Loose Leaf Eyewear and Accessories LLC. (incorporated by reference
to Exhibit 6.42 to the 1-A)
|
|
|
|
Advisory Agreement dated August 9, 2017 by and among Damiva Inc.,
I'M1, LLC and Encore Endeavor 1, LLC (incorporated by reference to
Exhibit 6.43 to the 1-A)
|
|
|
|
Representation Agreement dated August 1, 2017 by and among Encore
Endeavor 1 LLC, Romero Britto and Britto Central, Inc.
(incorporated by reference to Exhibit 6.44 to the 1-A)
|
|
|
|
Amended and Restated Representation Agreement dated September 12,
2017 by and among Encore Endeavor 1 LLC, Dada Media, Inc. and David
Tutera (incorporated by reference to Exhibit 6.45 to the
1-A)
|
|
|
|
Master Services Agreement dated August 24, 2017 by and between
WhoYouKnow LLC d/b/a CrowdfundX and Level Brands, Inc., including
initial Statement of Work of even date therewith (incorporated by
reference to Exhibit 6.46 to the 1-A)
|
|
|
|
Amendment dated September 8, 2017 to Master Advisory and Consulting
Agreement by and between Level Brands, Inc. and
kathy
Ireland
® Worldwide
(incorporated by reference to Exhibit 6.47 to the
1-A)
|
|
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and
kathy
ireland
® Worldwide
(incorporated by reference to Exhibit 6.48 to the
1-A)+
|
|
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Andre Carthen (incorporated by reference to
Exhibit 6.49 to the 1-A)
|
|
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Nicholas Walker (incorporated by reference
to Exhibit 6.50 to the 1-A)
|
|
|
|
Distribution Agreement dated August 29, 2017 by and between Beauty
and Pinups, LLC and East Coast Enterprises, Inc. (incorporated by
reference to Exhibit 6.51 to the 1-A)
|
|
|
|
Advisory Agreement dated September 1, 2017 by and between Level
Brands, Inc. and Jon Carrasco (incorporated by reference to Exhibit
6.52 to the 1-A) +
|
|
|
|
Production Services Agreement dated September 19, 2017 by and
between Multimedia Productions, Inc. and Encore Endeavor 1, LLC
(incorporated by reference to Exhibit 6.53 to the 1-A)
|
|
|
|
License Agreement dated September 8, 2017 by and between Level
Brands, Inc. and
kathy
ireland
® Worldwide
(incorporated by reference to Exhibit 6.54 to the
1-A)
|
|
|
|
Advisory Agreement dated September 22, 2017 by and between SG
Blocks, Inc. and Encore Endeavor 1, LLC (incorporated by reference
to Exhibit 6.55 to the 1-A)
|
|
|
|
Written description of material terms of oral agreement between
Encore Endeavor 1 LLC and Sandbox LLC (incorporated by reference to
Exhibit 6.56 to the 1-A)
|
|
|
|
Agreement
dated August 1, 2017 by and between Level Brands, Inc. and Kure
Corp.*
|
|
|
|
|
Agreement
dated November 30, 2017 by and between Level Brands, Inc. and Kure
Corp. (incorporated by reference to Exhibit 10.62 to the Current
Report on Form 8-K filed December 13, 2017)
|
|
|
Revolving
Line of Credit Loan Agreement dated December 11, 2017 by and
between Level Brands, Inc. and Kure Corp. (incorporated by
reference to Exhibit 10.63 to the Current Report on Form 8-K filed
December 13, 2017)
|
|
|
|
Security
Agreement dated December 11, 2017 by and between Level Brands, Inc.
and Kure Corp. (incorporated by reference to Exhibit 10.64 to the
Current Report on Form 8-K filed December 13, 2017)
|
|
|
|
Promissory
Note in the principal amount of $500,000 dated December 11, 2017
due from Kure Corp. (incorporated by reference to Exhibit 10.65 to
the Current Report on Form 8-K filed December 13,
2017)
|
|
|
|
Sublease dated December, 21, 2017 by and between Kure Franchise, LLC and Level Brands, Inc. * | |
|
|
Code of Business Conduct and Ethics (incorporated by reference to
Exhibit 15.1 to the 1-A)
|
|
|
|
Subsidiaries of the registrant *
|
|
|
|
Consent of
Cherry Bekaert LLP *
|
|
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
*
|
46
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
*
|
|
|
|
Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer*
|
|
|
101.INS
|
|
XBRL INSTANCE DOCUMENT *
|
|
101.SCH
|
|
XBRL TAXONOMY EXTENSION SCHEMA *
|
|
101.CAL
|
|
XBRL TAXONOMY EXTENSION CALCULATION LINKBASE *
|
|
101.DEF
|
|
XBRL TAXONOMY EXTENSION DEFINITION LINKBASE *
|
|
101.LAB
|
|
XBRL TAXONOMY EXTENSION LABEL LINKBASE *
|
|
101.PRE
|
|
XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE *
|
———————
*
filed
herewith.
+
Management contract
or compensatory plan.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the Shareholders
of
Level Brands, Inc.
and subsidiaries
Charlotte, North
Carolina
We have audited the
accompanying consolidated balance sheets of Level Brands, Inc. and
subsidiaries (the “Company”) as of September 30, 2017
and 2016, and the related consolidated statements of operations,
shareholders’ equity, and cash flows for the years then
ended. The Company’s management is responsible for these
consolidated financial statements. Our responsibility is to express
an opinion on these financial statements based on our
audits.
We conducted our
audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material
misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control
over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the
consolidated financial statements referred to above present fairly,
in all material respects, the financial position of the Company as
of September 30, 2017 and 2016, and the results of its operations
and its cash flows for years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Cherry Bekaert LLP
Charlotte, North
Carolina
December 26,
2017
F-1
LEVEL
BRANDS, INC.
SEPTEMBER
30, 2017 AND 2016
|
|
2017
|
2016
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
284,246
|
$
34,258
|
|
Accounts
receivable
|
141,462
|
163,974
|
|
Accounts
receivable- related party
|
712,325
|
-
|
|
Accounts
receivable other
|
12,440
|
-
|
|
Accounts
receivable other – related party
|
236,364
|
-
|
|
Investment
other securities
|
859,112
|
-
|
|
Note
receivable – related party
|
276,375
|
-
|
|
Inventory
|
588,197
|
614,207
|
|
Deferred
initial public offering costs
|
497,735
|
-
|
|
Prepaid
expenses and other current assets
|
85,420
|
143,878
|
|
Total
current assets
|
3,693,676
|
956,317
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
135,476
|
180,281
|
|
Intangible
assets, net
|
3,240,287
|
486,760
|
|
Total
other assets
|
3,375,763
|
667,041
|
|
|
|
|
|
Total
assets
|
$
7,069,439
|
$
1,623,358
|
See Notes to
Consolidated Financial Statements
F-2
LEVEL
BRANDS, INC.
CONSOLIDATED
BALANCE SHEETS
SEPTEMBER
30, 2017 AND 2016
(continued)
|
Liabilities
and shareholders' (deficit) equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
397,601
|
$
206,156
|
|
Accounts
payable related party
|
67,879
|
-
|
|
Deferred
revenue
|
41,417
|
-
|
|
Accrued
expenses
|
123,823
|
787,139
|
|
Accrued
expenses to related party
|
892,805
|
-
|
|
Interest
Payable
|
-
|
113,241
|
|
Line of
credit payable to related party, net of unamortized costs of $0 and
$96,250, respectively
|
-
|
797,547
|
|
Total
current liabilities
|
1,523,525
|
1,904,083
|
|
|
|
|
|
Long term
liabilities
|
|
|
|
Long
term liabilities, to related party
|
360,000
|
-
|
|
Deferred
tax liability
|
37,000
|
12,000
|
|
Total long term
liabilities
|
397,000
|
12,000
|
|
|
|
|
|
Total
liabilities
|
1,920,525
|
1,916,083
|
|
|
|
|
|
Level Brands, Inc.
shareholders' equity:
|
|
|
|
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,
|
|
|
|
5,792,261
and 3,400,834 shares issued and outstanding,
respectively
|
5,792
|
3,401
|
|
Additional paid in
capital
|
10,463,480
|
4,847,362
|
|
Accumulated
deficit
|
(6,257,421
)
|
(4,487,336
)
|
|
Total
Level Brands, Inc. shareholders' equity
|
4,211,851
|
363,427
|
|
Non-controlling
interest
|
937,063
|
(656,152
)
|
|
Total
shareholders' equity (deficit)
|
5,148,914
|
(292,725
)
|
|
|
|
|
|
Total
liabilities and shareholders' equity (deficit)
|
$
7,069,439
|
$
1,623,358
|
|
|
|
|
See Notes to
Consolidated Financial Statements
F-3
LEVEL
BRANDS, INC.
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
2017
|
2016
|
|
|
|
|
|
Sales
|
$
3,650,480
|
$
2,631,125
|
|
Sales
related party
|
1,731,238
|
-
|
|
Total
Gross Sales
|
5,381,718
|
2,631,125
|
|
Allowances
|
(906,765
)
|
(599,563
)
|
|
Net
Sales
|
2,743,715
|
2,031,562
|
|
Net
sales related party
|
1,731,238
|
-
|
|
Total Net Sales
|
4,474,953
|
2,031,562
|
|
Costs
of sales
|
1,355,381
|
1,618,432
|
|
Gross profit
|
3,119,572
|
413,130
|
|
Operating
expenses
|
3,358,863
|
4,146,423
|
|
Loss from
operations
|
(239,291
)
|
(3,733,293
)
|
|
Debt
conversion expense
|
(446,250
)
|
-
|
|
Other
than temporary impairment on marketable securities
|
(175,000
)
|
-
|
|
Interest
expense
|
(500,627
)
|
(154,977
)
|
|
Loss before provision for
income taxes
|
(1,361,168
)
|
(3,888,270
)
|
|
Provision
for income taxes
|
25,000
|
8,000
|
|
Net loss
|
(1,386,168
)
|
(3,896,270
)
|
|
Net
income (loss) attributable to non-controlling interest
|
352,566
|
(539,781
)
|
|
|
|
|
|
Net loss attributable to Level Brands, Inc. common
shareholders
|
$
(1,738,734
)
|
$
(3,356,489
)
|
|
|
|
|
|
Loss per share, basic and diluted
|
$
(0.38
)
|
$
(1.13
)
|
|
Weighted average number of shares outstanding
|
4,524,985
|
2,980,223
|
|
|
|
|
See Notes to
Consolidated Financial Statements
F-4
LEVEL
BRANDS, INC.
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
2017
|
2016
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$
(1,386,168
)
|
$
(3,896,270
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
cash
used by operating activities:
|
|
|
|
Stock
based compensation
|
56,533
|
11,450
|
|
Restricted
stock
|
156,400
|
-
|
|
Amortization
of debt issue costs
|
305,800
|
43,750
|
|
Depreciation
and amortization
|
71,276
|
44,935
|
|
Issuance
of stock / warrants for services
|
627,825
|
-
|
|
Other-than-temporary
impairment on marketable securities
|
175,000
|
-
|
|
Debt
conversion expense
|
446,250
|
-
|
|
Inventory
impairment
|
67,226
|
-
|
|
Accounts
receivable impairment
|
50,000
|
-
|
|
Loss on
sale of property and equipment
|
4,000
|
-
|
|
Common
stock issued as charitable contribution
|
17,000
|
225,000
|
|
Non-cash
consideration received for services provided
|
(1,932,552
)
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable and accounts receivable other
|
(39,928
)
|
(163,823
)
|
|
Accounts
receivable and accounts receivable other- related
party
|
(750,064
)
|
-
|
|
Inventory
|
(41,216
)
|
(519,740
)
|
|
Prepaid
inventory
|
-
|
374,820
|
|
Prepaid
expenses and other current assets
|
58,458
|
78,266
|
|
Accounts
payable and accrued expenses
|
(745,252
)
|
785,916
|
|
Accounts
payable and accrued expenses – related party
|
278,265
|
-
|
|
Interest
Payable
|
184,889
|
110,442
|
|
Deferred
Revenue
|
41,417
|
-
|
|
Deferred
tax liability
|
25,000
|
8,000
|
|
Cash used by
operating activities
|
(2,329,841
)
|
(2,897,254
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Proceeds
from sale of investments to a related party
|
200,000
|
|
|
Deferred
initial public offering costs
|
(39,723
)
|
-
|
|
Purchase
of property and equipment
|
(7,967
)
|
(127,259
)
|
|
Cash used by
investing activities
|
152,310
|
(127,259
)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
829,497
|
1,984,747
|
|
Exercise
of stock options
|
3,002
|
-
|
|
Debt
issuance cost
|
(200,800
)
|
-
|
|
Proceeds
from convertible note
|
2,125,000
|
-
|
|
Proceeds
from line of credit
|
-
|
1,782,814
|
|
Distribution
related party
|
(29,180
)
|
-
|
|
Repayments
of line of credit
|
(300,000
)
|
(1,165,173
)
|
|
Repayment
of note payable shareholder
|
-
|
(90,078
)
|
|
Cash provided by
financing activities
|
2,427,519
|
2,512,310
|
|
Net (decrease)
increase in cash
|
249,988
|
(512,203
)
|
|
Cash and cash
equivalents, beginning of year
|
34,258
|
546,461
|
|
Cash
and cash equivalents, end of year
|
$
284,246
|
$
34,258
|
|
|
|
|
See Notes to
Consolidated Financial Statements
F-5
LEVEL
BRANDS, INC.
CONSOLIDATED
STATEMENT OF CASH FLOWS
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
(continued)
Supplemental
Disclosures of Cash Flow Information:
|
|
2017
|
2016
|
|
|
|
|
|
Cash Payments
for:
|
|
|
|
Interest
expense
|
$
5,210
|
$
1,293
|
|
|
|
|
|
Non-cash financial
activities:
|
|
|
|
Common stock issued
for financing fees
|
$
-
|
$
105,000
|
|
Common stock issued
to purchase membership interest – I’M1
|
971,667
|
-
|
|
Common stock issued
to purchase membership interest – EE1
|
471,668
|
-
|
|
Non-controlling
interest transfer
|
950,242
|
-
|
|
Strike price
adjustment on placement agent warrants
|
31,350
|
-
|
|
Common stock issued
for warrant exercise
|
38
|
-
|
|
Common Stock issued
for conversion of Line of Credit
|
773,177
|
-
|
|
Common Stock issued
for conversion of Promissory Notes
|
2,252,500
|
-
|
|
Deferred IPO costs
acquired via issuance of payables
|
362,817
|
-
|
|
Deferred IPO costs
acquired via issuance of stock/warrants
|
95,195
|
-
|
|
Distributions of
stock to non-controlling interests
|
223,440
|
-
|
|
Stock and warrants
issued for intangible assets
|
379,714
|
-
|
|
Fixed assets
acquired through lease
|
14,983
|
-
|
|
Non-cash proceeds
on sale of fixed assets
|
7,000
|
-
|
|
Intellectual
property issued via issuance of payables
|
945,000
|
-
|
See Notes to
Consolidated Financial Statements
F-6
LEVEL
BRANDS, INC.
CONSOLIDATED
STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
|
|
Preferred
Stock
|
Common
Stock
|
Additional Paid
in
|
Accumulated
|
Non-controlling
|
|
||
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
Interest
|
Total
|
|
Balance, September 30, 2015
|
-
|
-
|
2,653,500
|
$
2,654
|
$
2,521,912
|
$
(1,130,847
)
|
$
(116,371
)
|
$
1,277,348
|
|
Sale of common
stock
|
-
|
-
|
286,667
|
286
|
1,984,461
|
-
|
-
|
1,984,747
|
|
Common stock issued
upon cashless exercise
of
warrants
|
-
|
-
|
416,667
|
417
|
(417
)
|
-
|
-
|
-
|
|
Issuance of common
stock for finance fee
|
-
|
-
|
14,000
|
14
|
104,986
|
-
|
-
|
105,000
|
|
Common stock issued
for charitable contribution
|
-
|
-
|
30,000
|
30
|
224,970
|
-
|
-
|
225,000
|
|
Stock based
compensation
|
-
|
-
|
-
|
-
|
11,450
|
-
|
-
|
11,450
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(3,356,489
)
|
(539,781
)
|
(3,896,270
)
|
|
Balance, September 30, 2016
|
-
|
$
-
|
3,400,834
|
$
3,401
|
$
4,847,362
|
$
(4,487,336
)
|
$
(656,152
)
|
$
(292,725
)
|
|
Issuance of common
stock
|
|
|
494,717
|
494
|
993,054
|
-
|
(164,051
)
|
829,497
|
|
Issuance of options
for share based compensation
|
-
|
-
|
-
|
-
|
56,533
|
-
|
-
|
56,533
|
|
Issuance of stock
and warrants for services
|
-
|
-
|
110,260
|
110
|
627,715
|
-
|
-
|
627,825
|
|
Issuance of stock
for deferred IPO costs
|
-
|
-
|
24,100
|
24
|
95,171
|
-
|
-
|
95,195
|
|
Issuance of
restricted stock for share based compensation
|
-
|
-
|
-
|
-
|
156,400
|
-
|
-
|
156,400
|
|
Issuance of stocks
and warrants for intellectual property acquisition
|
-
|
-
|
70,500
|
71
|
379,643
|
-
|
-
|
379,714
|
|
Issuance of stock
charitable contribution
|
-
|
-
|
20,000
|
20
|
16,980
|
-
|
-
|
17,000
|
|
Exercise of stock
options and warrants
|
-
|
-
|
39,856
|
40
|
2,962
|
|
|
3,002
|
|
Investment in
membership interests acquired
|
-
|
-
|
866,000
|
866
|
735,235
|
-
|
707,234
|
1,443,335
|
|
Change in exercise
price
|
-
|
-
|
-
|
-
|
31,350
|
(31,350
)
|
-
|
-
|
|
Conversion of debt
to equity
|
|
|
765,994
|
766
|
3,471,161
|
|
|
3,471,927
|
|
Acquisition of
non-controlling interests
|
-
|
-
|
-
|
-
|
(950,086
)
|
-
|
950,086
|
-
|
|
Distributions
|
|
|
|
|
-
|
|
(252,620
)
|
(252,620
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(1,738,734
)
|
352,566
|
(1,386,169
)
|
|
Balance, September 30, 2017
|
|
|
5,792,261
|
5,792
|
10,463,480
|
(6,257,421
)
|
937,063
|
5,148,914
|
See Notes to
Consolidated Financial Statements
F-7
LEVEL
BRANDS, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE YEARS ENDED SEPTEMBER 30, 2017 AND 2016
Organization and
Nature of Business – Level Brands, Inc. ("Level Brands",
"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. We strive to
be an innovative branding and marketing company and, through our
subsidiaries, we focus our efforts on lifestyle-based brands. We
operate from our offices located in Charlotte, North Carolina. Our
fiscal year end is established as September 30, therefore our 2017
fiscal reporting period is from October 1, 2016 to September 30,
2017 and our 2016 fiscal reporting period is from October 1, 2015,
to September 30, 2016 (the “periods”).
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, 2016 we owned a 78% member
interest in BPU. In addition, pursuant to the Amended and Restated
Operating Agreement of Beauty & Pin-Ups, we were granted the
right to redeem the 10% membership interest of Sigan Industries
Group (“Sigan”) for $110,000 at any time before April
13, 2017. In October 2016, as amended in March 2017, we acquired
Sigan’s membership interest in exchange for 129,412 shares of
our common stock valued at $110,000. As of March 31, 2017 we owned
an 88% member interest in BPU. In April 2017 we acquired the
remaining 12% membership interest in exchange for 155,294 shares of
our common stock valued at $132,000. As of September 30, 2017 we
owned a 100% member interest in BPU. BPU manufactures, markets and
sells an array of beauty and personal care products, including hair
care and hair treatments, as well as beauty tools. BPU’s
products are sold to the professional segment, principally through
distributors to professional salons in the North
America.
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 plans to provide
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
company and brand, which is designed to serve as 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 will begin operations in fiscal 2018. 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. The Company intends to
establish licensing arrangements under the kathy ireland®
Health & Wellness brand. The agreement is a seven year
agreement with a three year option to extend by the Company. The
Company agreed to pay $840,000 over the license term of seven
years, of which $480,000 is to be paid by January 1, 2018, and
$120,000 paid on January 1 of subsequent years until paid in full.
The agreement can be extended for an additional three years by
paying an upfront additional $360,000 upon agreement extension. The
Company will pay kathy ireland® Worldwide 33 1/3% of net
proceeds we receive under any sublicense agreements we may enter
into for this intellectual property as royalties.
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
underwriting discounts and commissions and other estimated offering
expenses payable by us.
F-8
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 subsidiary BPU. 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).
Reclassifications
Certain amounts
previously presented in the consolidated financial statements have
been reclassified to conform to the current year
presentation. Such reclassifications had no effect on
previously reported net loss, shareholders’ equity or cash
flows
.
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, 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.
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
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 September 30, 2017, management determined an accounts
receivable allowance of $50,000 was appropriate due to possible
uncollectability. We did not have an allowance at September 30,
2016.
In addition, the
Company may, from time to time, enter into contracts where a
portion of the consideration provided by the customer in exchange
for the Company's services is common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company will record the receivable as accounts receivable other,
and use the value of the stock or other instrument upon invoicing
to determine the value. Where an accounts receivable is settled
with the receipt of the common stock or other instrument, the
common stock or other instrument will be classified as an asset on
the balance sheet as either an investment marketable security (when
the customer is a public entity) or as an investment other security
(when the customer is a private entity). As of September 30,
2017, the Company has recorded $859,112 as investment other
securities, and $200,000 as accounts receivable other in relation
to contracts where stock will be issued in consideration for
services provided. As of September 30, 2016, the Company had $0 as
investment other securities and $0 as accounts receivable
other.
Accounts receivable
and accounts receivable other items that involve a related party
are indicated as such on the face of the financial
statements.
F-9
Marketable
Securities
At the time of
acquisition, the marketable security is designated as
available-for-sale as the intent is to hold for a period of time
before selling. Available-for-sale securities are carried at fair
value on the consolidated statements of financial condition with
changes in fair value recorded in the accumulated other
comprehensive income component of shareholders’ equity in the
period of the change in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Code
(“ASC”) 320-10. Upon the disposition of an
available-for-sale security, the Company reclassifies the gain or
loss on the security from accumulated other comprehensive income to
non-operating income on the Company’s consolidated statements
of operations.
Investment
Other Securities
For equity
investments where the Company neither controls nor has significant
influence over the investee and which are non-marketable, the
investments are accounted for using the cost method of accounting
in accordance with ASC 325-10. Under the cost method, dividends
received from the investment are recorded as dividend income within
non-operating income. For years ended September 30, 2017 and
2016, no such dividends were received.
Other-than-Temporary
Impairment
The Company’s
management periodically assesses its marketable securities and
investment other securities, for any unrealized losses that may be
other-than-temporary and require recognition of an impairment loss
in the consolidated statement of operations. If the cost of an
investment exceeds its fair value, the Company evaluates, among
other factors, general market conditions, the length of time the
security has been in a loss position, the extent to which the
security’s market value is less than its cost, the financial
condition and prospects of the security’s issuer and the
Company’s ability and intent to hold the security for a
length of time sufficient to allow for recovery. If the impairment
is considered other-than-temporary, an impairment charge is
recorded in non-operating income in the consolidated statements of
operations.
Inventory
Inventory is stated
at the lower of cost or net realizable value with cost being
determined on a weighted average basis. The cost of inventory
includes product cost, and production fill and labor (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. Prepaid Inventory represents deposits
made with third party manufacturers in order to begin production of
an order for product. We assess inventory quarterly for slow moving
products and potential impairments and perform a physical inventory
count annually near fiscal year end.
Property
and Equipment
Property and
equipment items are stated at cost less accumulated depreciation.
Expenditures for maintenance and repairs are charged to operations
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 years for manufacturer’s molds and plates,
three years for computer, furniture and equipment, and three years
for 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. There were no impairments during the years ended
September 30, 2017 and 2016.
F-10
Fair value accounting
The Company
utilizes accounting standards for fair value, which include the
definition of fair value, the framework for measuring fair value,
and disclosures about fair value measurements. Fair value is a
market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market participant
assumptions in fair value measurements, fair value accounting
standards establish a fair value hierarchy that distinguishes
between market participant assumptions based on market data
obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2
of the hierarchy) and the reporting entity’s own assumptions
about market participant assumptions (unobservable inputs
classified within Level 3 of the hierarchy).
Level 1 inputs
utilize quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access.
Level 2 inputs are inputs other than quoted prices included in
Level 1 that are directly or indirectly observable for the
asset or liability. Level 2 inputs may include quoted prices
for similar assets and liabilities in active markets, as well as
inputs that are observable for the asset or liability. Level 3
inputs are unobservable inputs for the asset or liability, which
are based on an entity’s own assumptions, as there is little,
if any, observable market activity. In instances where the fair
value measurement is based on inputs from different levels of the
fair value hierarchy, the level in the fair value hierarchy within
which the entire fair value measurement falls is based on the
lowest level input that is significant to the fair value
measurement in its entirety. The Company’s assessment of the
significance of a particular input to the fair value measurement in
its entirety requires judgment and considers factors specific to
the asset or liability.
When the Company
records an investment in marketable securities the asset is valued
at fair value. For investment other securities, it will value the
asset using the cost method of accounting. Any changes in
fair value for marketable securities, during a given period will be
recorded as a gain or loss in other comprehensive income, unless a
decline is determined to be other-than-temporary. For investment
other securities we use the cost method and compare the fair value
to cost in order to determine if there is an other-than-temporary
impairment. During the year ended September 30, 2017, the Company
determined that an other-than-temporary impairment on securities of
$175,000 occurred and recorded the loss in the consolidated
statement of operations.
Intangible
Assets
The Company's
intangible assets consist of trademarks and other intellectual
property, all of which are accounted for 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 changesin 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. Events that are assessed include
contracts acquired and lost that are associated with the intangible
assets, as well as the revenues associated with those
contracts.
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, definite 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”) 2017-01in
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
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all potential assets and
liabilities for valuation including the determination of intangible
asset values.
F-11
There were no
impairments on intangible assets during the years ended September
30, 2017 and 2016.
Common
stock
Level Brands was a
private company until November 2017 and as such there was no market
for the shares of its common stock. Previously, we valued a share
of common stock based on recent financing transactions that include
the issuance of common stock to an unrelated party at a specified
price. In the event, however, there was not a recent and
significant equity financing transaction or the nature of the
business has significantly changed subsequent to an equity
financing, we used valuation techniques, which could include
discounted cash flow analysis, comparable company review, and
consultation with third party valuation experts to assist in
estimating the value of our common stock. As a public company as of
November 2017, our stock is valued by the market.
Revenue
Recognition
The Company's
policy on revenue is to recognize revenue when persuasive evidence
of an arrangement exists, shipping has occurred or service
obligations have been satisfied, the sales price is fixed or
determinable and collection is probable. 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 expected
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 and coupons. 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, the Company does not have a
formal return policy, from time to time the Company will allow
customers to return certain products. A business decision
related to customer returns is made by the Company and is performed
on a case-by-case basis. We record returns as a reduction in sales
and based on whether we dispose of the returned product, adjust
inventory and record expense as appropriate. There were no
allowances for sales returns during the years ended September 30,
2017 and 2016.
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 license
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 license 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.
In regard to sales
for services provided, the Company records revenue when persuasive
evidence of any agreement exists, services have been rendered, and
collectability is reasonably assured. 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.
Cost
of Sales
Our cost of sales includes costs associated with
distribution, external fill and labor expense, components, and
freight for our professional products divisions, and includes labor
and third party service providers for our licensing and
entertainment divisions.
In our
professional 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 costs are reflected in the Company’s consolidated
statement 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 recoverable value.
F-12
Advertising
Costs
The Company
expenses all costs of advertising and related marketing and
promotional costs as incurred. The Company incurred approximately
$321,000 and $670,000 in advertising and related marketing and
promotional costs included in operating expenses during the years
ended September 30, 2017 and 2016, respectively.
Shipping
and Handling Fees and Costs
All fees billed to
customers for shipping and handling are classified as a component
of sales. All costs associated with shipping and handling are
classified as a component of cost of goods sold.
Income
Taxes
The Parent Company
is a North Carolina corporation that is treated as a corporation
for federal and state income tax purposes. Prior to April 2017, BPU
was a multi-member limited liability company that was treated as a
partnership for federal and state income tax purposes. As such, the
Parent’s partnership share in the taxable income or loss of
BPU was included in the tax return of the Parent. Beginning in
April of 2017, the Parent acquired the remaining interest 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. 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’s partnership share in the taxable income or loss
of IM1 and EE1 are included in the tax return of the
Parent.
The Parent Company
accounts for income taxes pursuant to the provisions of the
Accounting for Income Taxes topic of the Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”), 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 September 30, 2017 and September 30, 2016,
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
an $4,728 uninsured balance at September 30, 2017 and no uninsured
balances at 2016.
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 had sales to five
customers that individually represented over 10% of total net sales
for the fiscal year ended September 30, 2017. Such customers
represented 21%, 20%, 15%, 15%, and 10% of fiscal 2017 net sales.
Net sales to such customers reported in the professional products,
licensing, and entertainment divisions were approximately $562,000,
$1,744,000 and $1,375,000, respectively. The aggregate accounts
recievable of such customers represented 86% of the Company’s
total accounts receivable at September 30, 2017. The Company had
one customer in its professional products division whose revenue
individually represented 89% of the Company’s net sales for
the year ended September 30, 2016 and whose accounts receivable
balance individually represented 99% of the Company’s total
accounts receivable as of September 30, 2016.
F-13
The Company had no
suppliers from whom the Company made over 10% of their purchases
during the 2017 and 2016 fiscal years.
Debt issuance costs
related to a recognized debt liability are presented in the balance
sheet as a direct deduction from the carrying value of that debt
liability, consistent with debt discounts. Amortization of debt
issuance costs are included as a component of interest expense in
accordance with ASU 2015-03. All debt obligations were satisfied in
fiscal 2017 and all amortization costs had been recognized in
interest expense in fiscal 2017 (see Notes 7 and 8).
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.
Net
Loss Per Share
The Company uses
ASC 260-10, “Earnings Per Share” for calculating the
basic and diluted loss per share. The Company computes basic loss
per share by dividing net loss and net 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 September 30,
2017 and 2016, 545,475 and 110,067 potential shares, respectively,
were excluded from the shares used to calculate diluted loss per
share as their inclusion would reduce net loss per
share.
Deferred
IPO costs
In following the
guidance under ASC 340-10-S99-1, IPO costs directly attributable to
an offering of equity securities have been deferred and charged
against the gross proceeds of the offering as a reduction of
additional paid-in capital. These costs include legal fees related
to the registration drafting and counsel, independent audit costs
directly related to the registration and offering, SEC filing and
print related costs, exchange listing costs, and IPO roadshow
related costs.
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. 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.
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
F-14
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 Company is
assessing the impact, if any, of implementing this guidance on its
consolidated financial position, results of operations and
liquidity. The Company will adopt this standard in the first
quarter of fiscal 2019.
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
asinformation 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 is
assessing the impact, if any, of implementing this guidance on its
consolidated financial position, results of operations and
liquidity.
In March 2016, the
FASB issued ASU 2016-09,
Stock
Compensation: Improvements to Employee Share-Based Payment
Accounting
. The purpose of ASU 2016-09 is to simplify
several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification
of awards as either equities or liabilities, and classification of
amounts in the statement of cash flows. ASU 2016-09 is
effective for fiscal years and interim periods beginning after
December 15, 2016. The Company will adopt this standard in
the first quarter of fiscal 2018 and does not expect any material
impact to its financial statement.
In August 2016, the
FASB issued ASU 2016-15,
Statement
of Cash Flows (Topic 230), Classification of Certain Cash Receipts
and Cash Payments
. The amendments in this update provided
guidance on eight specific cash flow issues. This update is to
provide specific guidance on each of the eight issues, thereby
reducing the diversity in practice in how certain transactions are
classified in the statement of cash flows. ASU 2016-15 is effective
for fiscal years and interim periods beginning after December 15,
2017. Early adoption is permitted. The Company is assessing the
impact, if any, of implementing this guidance on its consolidated
financial position, results of operations and
liquidity.
In March 2015 Level
Brands formed Beauty and Pinups, LLC (“BPU”), a North
Carolina limited liability company, and contributed $250,000 in
exchange for its member interest. In April 2015 BPU entered into a
Contribution Agreement with Beauty & Pinups, Inc., a New York
corporation ("BPUNY"), and two members. Under the terms of the
Contribution Agreement, BPUNY and its founder contributed the
business and certain assets, including the trademark “Beauty
& Pin Ups” and its variants, certain other intellectual
property and certain inventory to BPU in exchange for a (i) 22%
membership interest for two members, and (ii) $150,000 in cash. At
closing we assumed $277,500 of BPUNY's accounts payable to its
product vendor, which bears interest at 6% annually. The payable
was paid off in April 2016. The fair value of the noncontrolling
membership interest issued was based on the value of the initial
contribution of $250,000 made by Level Brands. The total
consideration paid was allocated to the net assets acquired based
on relative fair values of those net assets as of the transaction
date, in accordance with the Fair Value Measurement topic of the
FASB ASC 820. The fair value is comprised of the cash, accounts
payable acquired, non-controlling interest and a minimal amount of
inventory, all in aggregate valued at $486,760.
I’M1 was
formed in California in September 2016. IM1 Holdings, a California
limited liability company was the initial member of IM'1. 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. The shares were valued by the Company based upon
assumptions and other information provided by management, and used
three approaches available when valuing a closely held business
interest: the cost approach, the income approach and the market
approach. Consequently, the market approach was deemed most
appropriate, as it considers values established by non-controlling
buyers and sellers of interests in theCompany as evidenced by
implied pricing in rounds of financing. In addition, given the
limited data and outlook, the backsolve method was applied to
assign values to the common equity, options and warrants after
giving consideration to the preference of the convertible debt
holders. The valuation determined the price per share of $0.85
which put the value of the 583,000 shares at $495,550. IM1 Holdings
continues to own the Class B non-voting membership
interest
F-15
of I’M1. We
accounted for the membership acquired by allocating the purchase
price to the tradename and intellectual property valued at
$971,667.
EE1 was formed in
California in March 2016. EE1 Holdings, a California limited
liability company was the initial member of EE1 Holdings. 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.
We used the same valuation from the Company of $0.85 per share
which put the value of the 283,000 shares at $240,550. EE1 Holdings
continues to own the Class B non-voting membership interests of
EE1. We accounted for the membership acquired by allocating the
purchase price to the tradename and intellectual property valued at
$471,667.
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, on the estimated fair value of the services
provided. Where an accounts receivable is settled with the receipt
of the common stock or other instrument, the common stock or other
instrument will be classified as an asset on the balance sheet as
either an investment marketable security (when the customer is a
public entity) or as an investment other security (when the
customer is a private entity).
As of April 2017,
the Company received 2,500,000 shares of common stock as terms of
its agreement for services, which was valued at $650,000 based on
the trading price on the OTC Markets, Inc. the day of issuance,
which was $0.26 per share. The shares were restricted as indicated
under Securities Act of 1933 and may not be resold without
registration under the Securities Act of 1933 or an exemption
therefrom. 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.
As of June 30, 2017
the trading price on the OTC Markets, Inc. was $0.03 and the
Company had exchanged the 2,500,000 shares of common stock with the
issuer for 65 shares of preferred stock. The 65 shares of preferred
stock issued were each convertible using the lesser of either $0.26
per share or the 30 day trading average, that would provide a
number of shares equal to the value of $10,000 per share. The
Company classified the preferred stock as Level 3 for fair value
measurement purposes as there were no observable inputs. The
preferred shares also contained a put option for the holder for the
stated value per share. The Company determined that the value of
the preferred shares was $475,000, which was an approximation of
fair market value. On July 31, 2017 the Company sold the preferred
shares to a related party for $475,000; $200,000 in cash and a
short term note receivable for $275,000. As a result, the Company
recorded an other-than-temporary impairment on securities for the
year ended September 30, 2017 of $175,000 in the consolidated
statement of operations.
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 shares are not restricted. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used the fair value of the services provided, utilizing
an analysis of vendor specific objective evidence of its selling
price. In August 2017, each of I’M1 and EE1 distributed the
shares to its majority owner, Level Brands, and also distributed
shares valued at $223,440 to its non-controlling interests
(“NCI”). 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 common stock and determined there was not
an impairment for the year ended September 30, 2017.
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
F-16
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 table below
summarizes the assets valued at fair value as of September 30,
2017:
|
|
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
September 30, 2017
|
|
|
|
|
|
|
|
Marketable
securities
|
-
|
-
|
$
-
|
$
-
|
|
Investment other
securities
|
-
|
-
|
$
859,112
|
$
859,112
|
|
|
|
|
|
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Balance at
September 30, 2016
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Receipt of equity
investment upon completion of contracts
|
$
650,000
|
$
-
|
$
912,000
|
$
1,562,000
|
|
Exchange of common
stock for preferred stock
|
$
(650,000
)
|
$
-
|
$
650,000
|
$
-
|
|
Other-than-temporary
impairment on
marketable securities
|
$
-
|
$
-
|
$
(175,000
)
|
$
(175,000
)
|
|
Exchange of
marketable security for cash and note receivable
|
$
-
|
$
-
|
$
(475,000
)
|
$
(475,000
)
|
|
Receipt of equity
investment upon completion of contract
|
$
-
|
$
-
|
$
114,000
|
$
114,000
|
|
Distribute equity
from subsidiaries to Level and NCI
|
$
-
|
$
-
|
$
(223,440
)
|
$
(223,440
)
|
|
Receipt of equity
investment upon completion of contract
|
$
-
|
$
-
|
$
56,552
|
$
56,552
|
|
Balance at
September 30, 2017
|
$
-
|
$
-
|
$
859,112
|
$
859,112
|
Inventory
at September 30, 2017 and 2016 consists of the
following:
|
|
2017
|
2016
|
|
Finished
goods
|
375,459
|
583,349
|
|
Inventory
components
|
$
212,738
|
$
30,858
|
|
Total
|
$
588,197
|
$
614,207
|
At
September 30, 2017, the Company determined that inventory was
impaired by approximately $67,000. This write-off was applied
directly to the affected inventory items and, as such, a reserve
was not deemed necessary at September 30, 2017 or September 30,
2016.
F-17
Major
classes of property and equipment at September 30, 2017 and 2016
consist of the following:
|
|
2017
|
2016
|
|
Computers,
furniture and equipment
|
$
37,261
|
$
14,311
|
|
Show
booth and equipment
|
171,986
|
171,986
|
|
Manufacturers’
molds and plates
|
34,200
|
34,200
|
|
Software
|
-
|
12,000
|
|
|
243,447
|
232,497
|
|
Less
accumulated depreciation
|
(107,971
)
|
(52,216
)
|
|
Net
property and equipment
|
$
135,476
|
$
180,281
|
Depreciation
expense related to property and equipment was $55,755 and $44,935
for the years ended September 30, 2017 and 2016,
respectively
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.
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. Our capability for renewals of these
agreements are extremely likely as the agreements are with a
related party. We also believe the existence of this agreement does
not have limits on the time it will contribute to the generation of
cash flows for I’M1 and therefore we have identified these as
indefinite-lived intangible assets.
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.
We believe the production deal agreement and the advisory agreement
do not have limits on the time they will contribute to the
generation of cash flows for EE1 and therefore we have identified
these as indefinite-lived intangible assets.
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. We are amortizing the capitalized value of the cash,
warrants and common stock over the seven year term of the agreement
and have amortized $2,917 for the year ending September 30, 2017.
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.
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. We are amortizing the capitalized value of the cash,
warrants and common stock over the seven year term of the agreement
and have amortized $1,603 for the year ending September 30, 2017.
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
F-18
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 September 2017,
the Company acquired 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 purchase price of $840,000. The Company has an option
to extend for another three years for an additional price of
$360,000. The license and associated intellectual property is being
amortized over the term of the agreement and we have amortized
$10,000 for the year ending September 30, 2017. Per the agreement,
$480,000 is to be paid prior to January 1, 2018, and this amount
was included in accrued expenses, related party at September 30,
2017. The remaining amount of $360,000 are due in equal
installments on January 1 of subsequent years until the purchase
price is paid, and are classified as long term liabilities, related
party as of the year ended September 30, 2017. 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™.
Intangible assets
as of September 30, 2017 and 2016 consisted of the
following:
|
|
2017
|
2016
|
|
Trademark and other
intellectual property related to BPU
|
$
486,760
|
$
486,760
|
|
Trademark and other
intellectual property related to I’M1
|
971,667
|
-
|
|
Trademark and other
intellectual property related to EE1
|
471,667
|
-
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland®
Health &
Wellness, net
|
830,000
|
-
|
|
Cash, warrants and
stock issued related to the Wholesale license agreement
with
Chef Andre Carthen, net
|
307,146
|
-
|
|
Cash, warrants and
stock issued related to the Wholesale license agreement
with
Nicholas Walker, net
|
173,047
|
-
|
|
Total
|
$
3,240,287
|
$
486,760
|
In September 2017
the Company acquired three definite lived intangible assets, all
with a seven year life.
Future amortization
schedule:
|
Intangible
|
|
Total
unamortized cost
|
2018
|
2019
|
2020
|
2021
|
2022
|
thereafter
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness
|
|
$
830,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
230,000
|
|
Cash, warrant and
stock issued related to the Wholesale license agreement with Chef
Andre Carthen
|
|
$
307,146
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
85,676
|
|
Cash, warrant and
stock issued related to the Wholesale license agreement with
Nicholas Walker
|
|
$
173,047
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
48,297
|
F-19
The Company
performs 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. 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 has performed a qualitative and
quantitative analysis and for the years ended September 30, 2017
and 2016 there has been no impairment.
The Company
performs an impairment analysis at August 1 annually on the
definite lived intangible assets following the steps laid out 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. 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. After assessing indicators for impairment, the
Company determined that a quantitative analysis was not needed as
of September 30, 2017.
In August 2015, we
entered into a one year $1,000,000 revolving line of credit
agreement with LBGLOC, LLC, a related party. Under the terms of the
agreement, we pay interest on any amounts available for advance at
the rate of 10% per annum. We granted LBGLOC, LLC a blanket
security agreement on our assets as collateral for amounts advanced
under the credit line. As additional consideration for granting the
credit line, we issued the lender 16,000 shares of common stock,
valued at $32,000 and was recorded as a debt discount and amortized
over the term of the note.
The agreement was
renewed for an additional one year period on September 1, 2016. As
additional consideration for renewing the credit line, we issued
the lender 14,000 shares of common stock, which was valued at
$105,000 based on the most recent equity financing in February
2016, and was recorded as a debt discount and was being amortized
over the term of the note.
On June 6, 2017,
pursuant to an agreement dated May 15, 2017, the Company converted
the outstanding principal balance of the line of credit in the
amount of $593,797, together with the accrued interest of $179,380
for a total payoff amount of $773,177 into common shares of the
Company at a price of $3.95 per share. The Company recorded a loss
on extinguishment of $8,750 which was recorded as interest expense
in the consolidated statement of operations. In this transaction,
the Company issued 195,740 shares of common stock.
The outstanding
balances due under the agreements were $0 and $893,797 at September
30, 2017 and 2016, respectively.
On October 4, 2016
and October 24, 2016, the Company issued in aggregate $2,125,000 of
8% Convertible Promissory Notes to accredited investors. The
securities consisted of 8% Convertible Notes with warrants to
purchase 141,676 shares of the Company’s stock (the
“Notes”). The Notes may convert upon an IPO resulting
in gross proceeds to the Company of at least $10,000,000, prior to
July 1, 2017, at the option of the investor. The conversion price
for the Notes was $5.00. All Notes converted will be subject to a
12-month lockup post IPO. The warrants have an exercise price of
$7.80. The warrants expire in September 2021 and are exercisable
beginning the earlier of: (i) immediately after the IPO closing; or
(ii) July 1, 2017.
Effective June 30,
2017, the Company converted the $2,125,000 principal amount of
convertible promissory notes and all accrued interest of $127,500
into common shares of the Company at a price of $3.95 per share. In
this transaction, the Company issued 570,254 shares of common
stock.
F-20
The Company
accounted for the initial issuance of these Notes in accordance
with FASB ASC Topic 470-20 “Debt with Conversion and Other
Options”. The Black-Scholes value of the warrants,
$5,159, associated with the issuance was recorded as a discount to
debt and was amortized into interest expense. In addition, the
issuance of the Notes and warrants were assessed and did not
contain an embedded beneficial conversion feature as the effective
conversion price was not less than the relative fair value of the
instrument. We also had fees of $200,800 associated with the
financing, which was recorded as a debt discount and amortized over
the term of the Notes. With the June 30, 2017 conversion of the
Notes, we accelerated the debt discount and have recorded interest
expense related to these amounts of $205,959 for the year ended
September 30, 2017. In addition, we accounted for a conversion
inducement in accordance with ASC 470-20 on the conversion price
reduction from $5.00 to $3.95 per share and recorded a non-cash
debt conversion expense of $446,250 in the consolidated statement
of operations for the year ended September 30, 2017.
Pursuant to the
acquisition of assets from BPUNY described in Note 2, we assumed a
trade payable of $277,500 due to a vendor, which is now a member of
BPU. The trade payable was converted to a note that matured in
April 2016 and interest on the outstanding balance accrued at 6%
per annum. The note was fully paid as of September 30, 2016.
Interest expense was $1,207 for the year ended September 30,
2016.
In April 2015, we
entered into a two year Advisory Services Agreement
(“ASA”) with a shareholder for management, creative and
marketing services. The agreement provides for a monthly fee of
$10,000, which the shareholder has agreed to defer payment of until
the Company has sufficient available cash or upon closing of a
capital raise in excess of $5,000,000. We recorded expense of
$120,000 for the year ended September 30, 2016, which were accrued
during the year. No payments were made for the monthly fees during
the year ended September 30, 2016. On October 1, 2016 the Company
and the shareholder agreed as follows: (1) to terminate the ASA and
all fees owed by providing 36,000 shares of the Company’s
common stock and (2) a lump sum payment of $50,000, which was paid
on November 4, 2016. In addition we issued 40,000 shares of the
Company’s common stock for additional consulting services
which were outside the original scope of service. All shares were
issued on November 15, 2016.
In April 2015, we
entered into a two year consulting agreement with a member of BPU
for creative influence, leadership and direction services. The
agreement provides for a monthly fee of $12,000. As of September
30, 2017 and 2016, we have recorded prepaid expense of $0 and
$10,393 respectively, and have recorded expense for the years then
ended of $77,949 and $144,000, respectively, related to this
agreement.
In April 2015, we
entered into a Management Services Agreement (the
“MSA”) with Kathy Ireland® Worldwide
(“kiWW”) pursuant to which it agreed to provide
management
certain
creative and marketing services. One of our board members is the
CFO for kiWW. As compensation, we generally agreed to pay, a
deferred monthly fee of $10,000, to the extent kiWW is providing
services with respect to BPU, an annual fee of 10% of the gross
margins of BPU after the first $10 million in revenues; and a
$750,000 royalty fee, of which this criteria had not been met for
the year ended September 30, 2016. On October 1, 2016, the Company
and kiWW agreed to terminate the MSA agreement and all fees owed by
providing
a lump sum payment of
$50,000, which was paid on November 3, 2016
.
In April 2015, we
sold to kiWW, an affiliate of one of our board members, a five-year
warrant to purchase 500,000 shares of our common stock at an
exercise price of $1.25 per share for $25,000. Subsequent to this
transaction, kiWW transferred a portion of the warrant to a
third-party. The warrants were exercised in March
2016.
In August 2015, we
entered into an agreement for a one million dollar line of credit
with a 10% annual interest rate with LBGLOC LLC. One of the members
of this LBGLOC LLC was Stone Street Partners Opportunity Fund II
LLC (the “Fund”) of which at the time our Chairman of
the board was the manager and a member of this LLC. The Fund
invested $300,000 toward the line of credit provide by LBGLOC LLC
to the Company. The Fund exited the line of credit on November 23,
2015, when a new unrelated member joined LBGLOC LLC, and the Fund
was paid principal and interest totaling $308,750. The Company
issued 16,000 shares of common stock to LBGLOC LLC as a fee for
setting up the line of credit (see Note 7).
In December 2015,
we engaged T.R Winston & Co., LLC (“TRW”), a
broker-dealer and member of FINRA that is an affiliate of a
shareholder, to serve as our exclusive placement agent in a private
placement of our securities which resulted in gross proceeds to us
of $2,150,000 in February 2016. In this offering, we paid T.R.
Winston & Co., LLC cash commissions of $150,500 and issued its
affiliates four year placement agent warrants to purchase 20,067
shares of our common stock at an
F-21
exercise price of
$8.75 per share, which are exercisable on a cashless basis. In
February 2016 we reduced the exercise price of these warrants to
$5.00 per share. These warrants and the warrants associated with
the June 2015 placement were exercised on a cashless basis in
October 2016.
In January 2016 we
entered into a charitable agreement, as amended, with Best Buddies
International, an affiliate of a member of our board of directors.
Pursuant to the agreement we issued 30,000 shares of our common
stock valued at $225,000 as a charitable contribution.
In July 2016, we
entered into a one year promissory note with a shareholder for
amounts to be advanced as needed at an annual interest rate of 7%.
Our Chairman of the board at the time was a member of the
shareholder. From July through August 18, 2016 the Company was
advanced $303,966 and paid this principal back in full on September
9, 2016. Interest of $3,352 had been accrued by the Company and was
paid on November 23, 2016.
In August 2016, we
renewed an agreement for a one million dollar line of credit with a
10% annual interest rate with LBGLOC LLC. One of the members of
this LLC was Stone Street Partners Opportunity Fund II LLC (the
“Fund”) of which at the time our Chairman of the board
was the manager and a member of this LLC. The Fund invested
$300,000 toward the line of credit provide by LBGLOC LLC to the
company. The Company also issued 14,000 shares of common stock as a
fee to LBGLOC LLC for the renewal of the line of credit. The Fund
exited the line of credit on October 6, 2016 and was paid principal
and interest totaling $302,500, thus reducing the available
borrowing limit on the line of credit to $700,000.
In November 2016 we
issued 20,000 shares of our common stock valued at $17,000 to Best
Buddies International as a charitable contribution. Best Buddies
International is an affiliate of a member of our board of
directors.
On January 1, 2017,
we entered into a sublease agreement for office space with Kure
Corp. (“Kure”). The lease is for one year and the space
was to be used by our subsidiary BPU. A shareholder of Kure is
Stone Street Capital, LLC, an affiliate of our CEO and Chairman and
our CEO and Chairman was the past Chairman of Kure and is also a
shareholder of Kure.
In February 2017 we
entered into a master advisory and consulting agreement with kathy
ireland® Worldwide, as amended, pursuant to which we have
engaged the company to provide non-exclusive strategic advisory
services to us under a term expiring in February 2025. Under the
terms of this agreement, Ms. Ireland serves in the non-executive
positions as our Chairman Emeritus and Chief Brand Strategist. The
agreement also provides that kathy ireland® Worldwide will
provide input to us on various aspects of our corporate strategies
and branding, provides access to us of its in-house design team to
assist us in developing our brands. As compensation under the
agreement we agreed to pay kathy ireland® Worldwide a nominal
monthly fee. We are also responsible for the payment of expenses
incurred by Ms. Ireland or kathy ireland® Worldwide in
providing these services to us.
On February 8, 2017
the Company entered into a one year advisory agreement with Mr.
Tommy Meharey pursuant to which he provides advisory and consulting
services to us, including serving as co-Managing Director of
I’M1. We have agreed to pay Mr. Meharey a fee of $15,000 per
month for his services. We expect these agreements will be renewed
for multi-year terms prior to the expiration of the terms of the
current agreements.
On February 8, 2017
the Company entered into a one year advisory agreement with Mr. Nic
Mendoza pursuant to which he provides advisory and consulting
services to us, including serving as co-Managing Director of EE1.
We have agreed to pay Mr. Mendoza a fee of $10,000 per month for
his services. We expect these agreements will be renewed for
multi-year terms prior to the expiration of the terms of the
current agreements.
On February 8, 2017
the Company entered into a one year advisory agreement with Mr.
Stephen Roseberry pursuant to which he provides advisory and
consulting services to us, including serving as co-Managing
Director of EE1 and I’M1. We have agreed to pay Mr. Roseberry
a fee of $1.00 per month for his services. We expect these
agreements will be renewed for multi-year terms prior to the
expiration of the terms of the current agreements.
In February 2017
the Company entered into a one year advisory agreement with Mr. Jon
Carrasco pursuant to which he provides advisory and consulting
services to us, including serving as Global Creative Director of
EE1 and I’M1. We have agreed to pay Mr. Carassco a fee of
$1.00 per month for his services. We expect these agreements will
be renewed for multi-year terms prior to the expiration of the
terms of the current agreements.
F-22
In February 2017
EE1 arranged, coordinated and booked for Sandbox LLC a travel
related event, arranging for travel and concierge related services.
Under the terms of the oral agreement, EE1 was paid $68,550 for its
services, which was recorded as consulting/advisory revenue.
Sandbox LLC is an affiliate of a member of our board of
directors.
In March 2017, our
subsidiary I’M1 entered into a consulting agreement with
Kure. In this agreement I’M1 provided services delivered in
two phases. The first phase was delivered by March 31, 2017 which
included a social media blitz and marketing and branding support
and strategies for $200,000. The second phase was delivered by June
22, 2017 which included modeling impressions for the brand and
extension of publicity to other media outlets for $400,000. In
addition, in March 2017, I’M1 entered into a separate
licensing agreement for 10 years with Kure under which we will
receive royalties based on gross sales of Kure products with the
I’M1 brand. A shareholder of Kure is Stone Street Capital,
LLC, an affiliate of our CEO and Chairman and our CEO and Chairman
was the past Chairman of Kure and is also a shareholder of
Kure.
On June 6, 2017,
pursuant to an agreement dated May 15, 2017, the Company converted
the line of credit with LBGLOC LLC, which included the outstanding
principal balance of $593,797 and the accrued interest of $179,380
for a total payoff amount of $773,177 into common shares of the
Company at a price of $3.95 per share. One member of LBGLOC LLC,
Stone Street Partners Opportunity Fund II LLC is an affiliate of
our CEO and Chairman and received 94,475 shares of common stock in
this transaction.
Effective June 30,
2017, the Company converted the $2,125,000 principal amount of
convertible promissory notes and all accrued interest of $127,500
into common shares of the Company at a price of $3.95 per share.
One note holder, Stone Street Partners Opportunity Fund II LLC is
an affiliate of our CEO and Chairman and received a total of 26,836
shares.
In June 2017, the
Company earned a referral fee from kiWW after establishing a
business meeting resulting in a new license agreement for kiWW. The
referral fee was paid out of 200,000 options issued to kiWW from
the new client, which were exercised and transferred to the
Company. The shares are valued at $114,000, which was derived after
assessing the value of our services provided and determining a per
share value of $0.57. The warrant was exercised in June 2017 and
the shares issued to the Company in August 2017.
In June 2017, Kure
purchased products from our subsidiary BPU for resale in their
stores. The total purchase was $97,850. Our CEO and Chairman is the
past Chairman of Kure and is also a shareholder of
Kure.
In
July 2017, the Company entered into subscription agreements for
133,000 shares of common stock with two accredited investors in a
private placement, which resulted in gross proceeds of $525,350 to
the Company. The accredited investors Stone Street Partners LLC and
Stone Street Partners Opportunity Fund II LLC are affiliates of our
CEO and Chairman.
On
July 31 2017, the Company sold preferred shares it had received as
payment for services to a customer. The preferred shares were sold
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 in note
receivable related party as of September 30, 2017. The Company
recorded an impairment of $175,000 for the year ended September 30,
2017 (see Note 3).
On August 1, 2017,
the Company entered into an additional advisory agreement with
Kure, 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 debt and preferred shares
into common share of Kure 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 by September 30, 2017 and 3 by June 30, 2018. The
Company will be paid $200,000 in Kure stock for the first
deliverables and $200,000 in cash for the second
deliverable.
In August 2017, EE1
entered into a representation agreement with Romero Britto and
Britto Central, Inc. under which it was appointed as exclusive
licensing consultant to license certain intellectual property in
entertainment industry category, which includes theatre, film, art,
dance, opera, music, literary, publishing, television and radio,
worldwide except for South America. Under the terms of the
agreement, EE1 will identify and introduce Britto to potential
license opportunities, negotiate terms of license agreements, and
implement and administer each eligible license agreement entered.
As compensation for our services, EE1 is entitled to receive 35% of
the net proceeds received under any license, and following the
termination or expiration of
F-23
the agreement, 15%
of the net proceeds of eligible licenses. The President of Britto
Central, Inc is the spouse of a member of our board of
directors.
In September 2017
EE1 arranged, coordinated and booked for Sandbox LLC a travel
related event, arranging for travel and concierge related services.
Under the terms of the oral agreement, EE1 was paid $64,475 for its
services, which were recorded as consulting/advisory revenue. EE1
engaged Sterling Winters Company to assist with this service and
incurred a cost of sales for that service of $35,421 which was
recorded as of September 30, 2017. Sandbox LLC is an affiliate of a
member of our board of directors.
On
September 1, 2017, the Company entered into a license agreement
with kathy ireland® Worldwide for certain use of kathy ireland
trademark, likeness, videos, photos and other visual presentations
for the Company’s IPO and associated roadshow. The Company
agreed to pay $100,000, of which $50,000 has been paid as of
September 30, 2017 and $50,000 will be paid out of proceeds from
the IPO. These amounts are recorded as deferred initial public
offering costs as of September 30, 2017.
In September 2017
EE1 created a marketing campaign for a customer and worked through
their approved vendor, Sandbox LLC, to deliver services. Under the
terms of the oral agreement, EE1 was paid $550,000 for its services
from Sandbox. At September 30, 2017, this entire amount was
recorded in accounts receivable related party. Sandbox LLC is an
affiliate of a member of our board of directors. EE1 engaged
Sterling Winters Company to assist with this campaign and incurred
accrued expenses of $250,000 as of September 30, 2017. Sterling
Winters Company is an affiliate of a member of our board of
directors.
On
September 8, 2017, the Company extended its Master Advisory and
Consulting Agreement, executed in February 2017, with kathy ireland
Worldwide to February 2025.
As
we engage in providing services to customers, at times we will
utilized related parties to assist in delivery of the services. For
the year ended September 30, 2017 we incurred related party cost of
sales of $333,773.
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 5,792,261 and
3,400,834 shares of common stock issued and outstanding at
September 30, 2017 and 2016, respectively.
On
November 11, 2016, majority shareholders of the Corporation, upon
recommendation of the board of directors, approved a reverse stock
split of the Corporation's common stock to be effected at a
specific ratio to be determined by the board of directors in the
future within a range up to one for nine (1:9). On December 2,
2016, the board of directors fixed the ratio of the reverse stock
split at one to five (1:5) and set the effective date as December
5, 2016. All share and per share amounts within these consolidated
financial statements have been retroactively adjusted to give
effect to the reverse split.
Common stock transactions:
Fiscal
year 2017:
Per
terms in the Operating Agreement of BPU, the Company could redeem
the 10% membership interest of Sigan for $110,000 at any time
before April 13, 2017. On October 14, 2016, as amended in March
2017, Sigan entered into an agreement with the Company and
transferred their 10% member interest for 129,412 shares of the
Company’s common stock.
In
October 2016 we issued 38,358 shares of our stock to six
individuals and entities upon the cashless exercise of 70,067
placement agents warrants previously granted to T.R. Winston &
Co LLC and its affiliates.
In
November 2016 we issued Stone Street Partners, LLC an aggregate of
76,000 shares of our common stock valued at $570,000 as
compensation for services, which had been accrued and expensed at
September 30, 2016. The stock was valued
F-24
at
the time based on the most recent equity financing from February
2016 which was priced at what is a post reverse split price of
$7.50.
In
November 2016 we issued 20,000 shares of our common stock valued at
$17,000 to Best Buddies International as a charitable
contribution.
In
January 2017 we issued 26,667 shares of our common stock to two
individuals as part of consulting agreements. The shares were
valued at $22,667, based on the valuation from the Company and
expensed as salary compensation.
In
January 2017, the Company acquired 51% ownership in IM1 in exchange
for 583,000 shares of Level Brands common stock, which was valued
at $495,550.
In
January 2017, the Company acquired 51% ownership in EE1 in exchange
for 283,000 shares of Level Brands common stock, which was valued
at $240,550.
Effective
April 28, 2017, Priel Maman entered into an agreement with the
Company to transfer his 12% member interest in BPU for 155,294
shares of the Company’s common stock, valued at $132,000. The
Company now owns 100% membership interest of BPU.
On
June 6, 2017, pursuant to an agreement dated May 15, 2017, the
Company converted the outstanding line of credit principal balance
of $593,797, together with the accrued interest of $179,380 for a
total conversion amount of $773,177 into common shares of the
Company at a price of $3.95 per share. In this transaction, the
Company issued 195,740 shares of common stock.
Effective
June 30, 2017, the Company converted the $2,125,000 principal
amount of convertible promissory notes and all accrued interest of
$127,500 into common shares of the Company at a price of $3.95 per
share. In this transaction, the Company issued 570,254 shares of
common stock.
On
June 30, 2017, the Company entered into subscription agreements for
77,000 shares of common stock with two accredited investors in a
private placement, which resulted in gross proceeds of $304,150 to
the Company. In this transaction, $201,450 was received on June 30,
2017 and $102,700 was received July 5, 2017.
On
June 30, 2017, the Company entered into an agreement with an
investor relations firm and as part of the compensation issued
5,000 shares of the Company’s common stock for services. The
shares were issued July 5, 2017 and valued at $19,750.
In
July 2017, the Company entered into subscription agreements for
133,000 shares of common stock with two accredited investors in a
private placement, which resulted in gross proceeds of $525,350 to
the Company.
On
August 1, 2017, the Company issued 1,500 shares of common stock
upon exercise of options.
On
August 24, 2017, the Company issued 19,100 shares of common stock
to a vendor for services. The shares were valued at $75,445, and
are included in deferred initial public offering costs as of
September 30, 2017.
On
September 8, 2017, the Company entered into a wholesale license
agreement with Andre Carthen and issued 45,500 shares of common
stock, valued at $179,725.
On
September 8, 2017, the Company entered into a wholesale license
agreement with Nicholas Walker and issued 25,000 shares of common
stock, valued at $98,750.
On
September 30, 2017, the Company issued 7,593 shares in aggregate to
3 independent directors as board compensation. The shares were
valued at $30,000 in aggregate.
Fiscal
year 2016:
We
issued 416,668 shares of common stock upon the cashless exercise of
500,000 warrants.
F-25
We
sold 286,667 shares of common stock in a private placement for
gross proceeds of $2,150,000. Costs of $165,253 were deducted from
the proceeds.
We
issued 14,000 shares of common stock, valued at $105,000, as an
incentive to LBGLOC, LLC to renew a revolving credit agreement. We
issued 30,000 shares of common stock, valued at $225,000, as a
charitable contribution.
Stock option transactions:
On
December 15, 2015 we granted an aggregate of 40,000 common stock
options to two employees. The options vest ratably over three years
on the anniversary of the grant date. The options have an exercise
price of $2.00 per share and a term of six years. We have recorded
an expense for the options of $13,994 and $12,086 respectively for
the years ended September 30, 2017 and 2016.
On
October 1, 2016 we granted an aggregate of 14,300 common stock
options to two employees. The options vest 16% immediately, 42%
January 1, 2017 and 42% January 1, 2018. The options have an
exercise price of $7.50 per share and a term of five years. We have
recorded an expense for the options of $576 for the year ended
September 30, 2017.
On
October 1, 2016 we granted an aggregate of 171,500 common stock
options to two employees. The options vest ratably on January 1,
2018. The options have an exercise price of $7.50 per share and a
term of six years. We have recorded an expense for the options of
$19,208 for the year ended September 30, 2017.
On
May 1, 2017 we granted an aggregate of 100,000 common stock options
to one employee. The options vest 50% immediately and 50% on
January 1, 2018. The options have an exercise price of $4.00 per
share and a term of seven years. We have recorded an expense for
the options of $17,469 for the year ended September 30,
2017.
On
August 31, 2017 we granted an aggregate of 20,000 common stock
options to one employee. The options vest ratably on August 31,
2018. The options have an exercise price of $4.00 per share and a
term of seven years. We have recorded an expense for the options of
$3,753 for the year ended September 30, 2017.
On
September 8, 2017 we granted an aggregate of 7,500 common stock
options to three consultants. The options vest ratably on October
1, 2018. The options have an exercise price of $4.00 per share and
a term of five years. We have recorded an expense for the options
of $897 for the year ended September 30, 2017.
The expected
volatility rate was estimated based on comparison to the volatility
of a peer group of companies in the similar industry. The expected
term used was the full term of the contract for the issuances. The
risk-free interest rate for periods within the contractual life of
the option is based on U.S. Treasury securities. The pre-vesting
forfeiture rate of zero is based upon the experience of the
Company. As required under ASC 718, we will adjust the estimated
forfeiture rate to our actual experience. Management will continue
to assess the assumptions and methodologies used to calculate
estimated fair value of share-based compensation. Circumstances may
change and additional data may become available over time, which
could result in changes to these assumptions and methodologies, and
thereby materially impact our fair value
determination.
The
following table summarizes the inputs used for the Black-Scholes
pricing model on the options issued in the years ended September
30, 2017 and 2016:
|
Year ended September
30,
|
|
|
|
|
2017
|
2016
|
|
Exercise
price
|
$
4.00 - $7.50
|
$
2.00
|
|
Risk
free interest rate
|
1.14 – 2.13
%
|
1.84
%
|
|
Volatility
|
39.44 – 60.39
%
|
61.3
%
|
|
Expected
term
|
5-7
years
|
6
years
|
|
Dividend
yield
|
None
|
None
|
F-26
Warrant transactions:
On
September 8, 2017, the Company entered into a wholesale license
agreement with Andre Carthen and as part of the agreement issued
warrants to purchase 45,500 shares of common stock at a strike
price of $4.00. The warrants were valued at $65,338.
On
September 8, 2017, the Company entered into a wholesale license
agreement with Nicholas Walker and as part of the agreement issued
warrants to purchase 25,000 shares of common stock at a strike
price of $4.00. The warrants were valued at $35,900.
On
October 1, 2016, the board approved the strike price adjustment for
certain placement agent warrants totaling 20,067 from a strike
price of $8.75 to $5.00. On October 26, 2016, 38,358 shares of
common stock were issued, upon a cashless exercise of the 20,067
warrants above and another 50,000 warrants, at a strike price of
$2.75, which had been issued to a placement agent for prior
services related to previous private placements of our
securities.
On
October 4, 2016 and October 24, 2016, we issued in aggregate,
warrants exercisable into 141,676 shares of common stock with an
exercise price of $7.80. The warrants expire on September 30, 2021.
The warrants were issued in conjunction with the Company’s 8%
convertible notes, described in Note 8.
During
February 2016, we issued placement agent warrants exercisable into
20,067 shares of common stock with an exercise price of $8.75. The
warrants expire on February 16, 2020.
The
following table summarizes the inputs used for the Black-Scholes
pricing model on the warrants issued in the years September 30,
2017 and 2016:
Year ended September 30
,
|
|
2017
|
2016
|
|
Exercise
price
|
$
4.00 - $7.80
|
$
8.75
|
|
Risk
free interest rate
|
1.22-1.64
%
|
1.07
%
|
|
Volatility
|
39.41-54.49
%
|
43.34
%
|
|
Expected
term
|
5
years
|
4
years
|
|
Dividend
yield
|
None
|
None
|
Equity
Compensation Plan – On June 2, 2015, the Company’s
board of directors 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 stock, 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 of January each calendar 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 December of the immediately
preceding calendar year, but in no event shall any such annual
increase exceed 100,000 shares of common stock.
We
account for stock-based compensation using the provisions of ASC
718. 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 board of directors until the board
establishes a Compensation Committee. 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.
F-27
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 have vesting terms that cover 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 ended September 30, 2017:
The following table
summarizes stock option activity under the Plan:
|
|
Number of
shares
|
Weighted-average
exercise
price
|
Weighted-average
remaining contractual term (in years)
|
Aggregate
intrinsic value
(in
thousands)
|
|
Outstanding at
September 30, 2015
|
—
|
$
—
|
|
|
|
Granted
|
40,000
|
2.00
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding at
September 30, 2016
|
40,000
|
2.00
|
|
|
|
Granted
|
313,300
|
6.08
|
|
|
|
Exercised
|
(1,500
)
|
|
|
|
|
Forfeited
|
(18,500
)
|
|
|
|
|
Outstanding at
September 30, 2017
|
333,300
|
$
5.83
|
5.3
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2017
|
—
|
$
—
|
—
|
$
—
|
As of September 30,
2017, there was approximately $69,269 of total unrecognized
compensation cost related to non-vested stock options which vest
over a period of approximately 1.25 years.
Restricted Stock Award transactions:
On October 1, 2016,
the Company issued 230,000 restricted stock awards in aggregate to
board members and the Chairman who is also our Chief Executive
Officer. The restricted stock awards vest January 1, 2018. The
stock awards are valued at fair market upon issuance at $195,500
and amortized over the vesting period. We recognized $156,400 of
stock based compensation expense for the year ended September 30,
2017.
F-28
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, 2015
|
550,000
|
$
1.39
|
|
|
|
Issued
|
20,067
|
8.75
|
|
|
|
Exercised
|
(500,000
)
|
1.25
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding at
September 30, 2016
|
70,067
|
4.47
|
|
|
|
Issued
|
212,176
|
6.53
|
|
|
|
Exercised
|
(70,067
)
|
4.47
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding at
September 30, 2017
|
212,176
|
$
6.53
|
4.3
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2017
|
212,176
|
$
6.53
|
4.3
|
$
—
|
The following table
summarizes outstanding common stock purchase warrants as of
September 30, 2017:
|
|
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
|
|
|
212,176
|
6.53
|
|
The Company
operates through its three subsidiaries in three business segments:
the Professional Products, the Licensing, and the Entertainment
divisions. The Professional Products division is designed to be an
innovative and cutting-edge producer and marketer of quality hair
care and other beauty products. The Licensing division is designed
to establish a lifestyle brand via licensing of select products /
categories (grooming, personal care, cologne, accessories, jewelry
and apparel) with a focus on addressing the needs of the men. The
Entertainment division’s focus is to become a producer and
marketer of multiple entertainment distribution platforms. The
corporate parent also will generate revenue from time to time, thru
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 Professional
Products division operated for the full year in fiscal 2017 and
2016. The Licensing and Entertainment divisions were both acquired
in January 2017.
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.
F-29
Condensed summary
segment information follows for the years ended September 30, 2017
and 2016.
|
Year ended
September 30, 2017
|
|
|||
|
|
Professional
Product Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
970,204
|
$
1,794,582
|
$
1,710,167
|
$
4,474,953
|
|
Net Sales related
party
|
$
97,850
|
$
600,000
|
$
1,033,388
|
$
1,731,238
|
|
Income (loss) from
Operations before Overhead
|
$
(1,705,081
)
|
$
637,888
|
$
697,066
|
$
(370,127
)
|
|
Allocated Corporate
Overhead (a)
|
354,362
|
338,808
|
322,871
|
1,016,041
|
|
Net
Loss
|
$
(2,059,443
)
|
$
299,080
|
$
374,195
|
$
(1,386,168
)
|
|
|
|
|
|
|
|
Assets
|
$
3,068,606
|
$
2,603,075
|
$
1,397,758
|
$
7,069,439
|
|
|
|
|
|
|
|
Year ended
September 30, 2016
|
|
|||
|
|
Professional
Product Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
2,031,562
|
$
-
|
$
-
|
$
2,031,562
|
|
Income (loss) from
Operations before Overhead
|
$
(2,461,548
)
|
$
-
|
$
-
|
$
(2,461,548
)
|
|
Allocated Corporate
Overhead (a)
|
1,434,722
|
|
|
1,434,722
|
|
Net
Loss
|
$
(3,896,270
)
|
$
-
|
$
-
|
$
(3,896,270
)
|
|
|
|
|
|
|
|
Assets
|
$
1,623,358
|
-
|
-
|
$
1,623,358
|
(a)
The Company began
allocating corporate overhead to the business segments in April
2017. We have allocated overhead on a proforma basis for the years
ended September 30, 2017 and 2016 above for comparison
purposes.
The
Company generated operating losses for the years ended September
30, 2017 and 2016 on which it has recognized a full valuation
allowance. The Company accounts for its state franchise and minimum
taxes as a component of its general and administrative
expenses.
The
following table presents the components of the provision for income
taxes for the periods presented:
|
|
Years Ended
September 30,
|
|
|
|
2017
|
2016
|
|
Current
|
|
|
|
Federal
|
$
—
|
$
—
|
|
State
|
—
|
—
|
|
Total
current
|
—
|
—
|
|
Deferred
|
|
|
|
Federal
|
24,000
|
7,000
|
|
State
|
1,000
|
1,000
|
|
Total
deferred
|
25,000
|
8,000
|
|
Total
provision
|
$
25,000
|
$
8,000
|
F-30
A
reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate is as follows:
|
|
Years Ended
September 30,
|
|
|
|
2017
|
2016
|
|
Federal statutory
income tax rate
|
34.0
%
|
34.0
%
|
|
State income taxes,
net of federal benefit
|
3.2
|
2.6
|
|
Permanent
differences
|
(2.3
)
|
(2.7
)
|
|
Tax impact of
non-controlling interest
|
21.1
|
(5.0
)
|
|
Change in valuation
allowance
|
(57.8
)
|
(29.1
)
|
|
|
|
|
|
Provision for
income taxes
|
(1.8
)%
|
(0.2
)%
|
Significant
components of the Company's deferred income taxes are shown
below:
|
|
Years Ended
September 30,
|
|
|
|
2017
|
2016
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$
2,304,000
|
$
1,333,000
|
|
Stock
compensation
|
87,000
|
4,000
|
|
Investments
|
32,000
|
-
|
|
Accrued
expenses
|
2,000
|
-
|
|
Management
fees
|
-
|
189,000
|
|
Charitable
contributions
|
10,000
|
5,000
|
|
|
|
|
|
Total deferred tax
assets
|
2,435,000
|
1,531,000
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Prepaid
expenses
|
(31,000
)
|
-
|
|
Management
fees
|
(73,000
)
|
-
|
|
Intangibles
|
(33,000
)
|
(12,000
)
|
|
Fixed
assets
|
(18,000
)
|
(2,000
)
|
|
Total deferred tax
liabilities
|
(155,000
)
|
(14,000
)
|
|
Net deferred tax
assets
|
2,280,000
|
1,517,000
|
|
Valuation
allowance
|
(2,317,000
)
|
(1,529,000
)
|
|
|
|
|
|
Net
deferred tax liability
|
$
(37,000
)
|
$
(12,000
)
|
The
Company has established a valuation allowance against net deferred
tax assets due to the uncertainty that such assets will be
realized. The Company periodically evaluates the recoverability of
the deferred tax assets. At such time as it is determined that it
is more likely than not that deferred tax assets will be
realizable, the valuation allowance will be reduced. The valuation
allowance increased by $788,000 and $1,132,000 as of September 30,
2017 and 2016, respectively. The presentation of the September 30,
2016 valuation allowance in the above schedule changed from
$1,505,000 as presented in the prior year financial statements to
$1,529,000 to properly reflect the valuation
allowance.
At
September 30, 2017, the Company has federal net operating
losses (“NOL”), carryforwards of approximately $6.4
million. The NOL carryforwards begin to expire in
2035.
The
above NOL carryforward may be subject to an annual limitation under
Section 382 and 383 of the Internal Revenue Code of 1986, and
similar state provisions if the Company experienced one or more
ownership changes.
The
Company files income tax returns in the United States, and various
state jurisdictions. The Company’s policy is to recognize
interest expense and penalties related to income tax matters as tax
expense. At September 30, 2017 and 2016, there are no
unrecognized tax benefits, and there are no significant accruals
for interest related to unrecognized tax benefits or tax
penalties.
F-31
The Company
currently leases its office space on a month-to-month basis. The
lease is with an affiliate of our CEO and Chairman. Rent expense
was $135,944 and $108,166 for the years ended September 30, 2017
and 2016, respectively.
Wholesale
License Agreement
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 is to be
paid by January 1, 2018. The balance is 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.
The initial term of
this wholesale license agreement expires in September 2024, and we
have the right to renew it for an additional three year period by
paying an additional marketing fee of $360,000.
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. The
Company received approximately $10.9 million in net proceeds after
deducting underwriting discounts and commissions and other
estimated offering expenses payable by us. The Company also issued
to the underwriter warrants to purchase in aggregate 100,000 shares
of common stock with an exercise price of $7.50. The warrants were
valued at $171,600 and expire on September 27, 2022.
On
December 11, 2017, the Company entered into a service agreement
with Kure to facilitate the “Vape Pod” transaction with
the modular building systems vendor, SG Blocks, Inc., which is also
a client 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.
On
December 11, 2017 Level Brands, Inc. also entered into a Revolving
Line of Credit Loan Agreement with Kure Corp., pursuant to which we
agreed to lend Kure Corp. up to $500,000 to be used for the
purchase of prefabricated intermodal container building systems.
This credit line was provided in connection with Kure Corp.'s
recent Master Purchase Agreement with SG Blocks, Inc. for the
purchase of 100 repurposed shipping containers for its Kure Vape
Pod™ initiative. Under the terms of the Revolving Line of
Credit Loan Agreement, Kure Corp. issued us a $500,000 principal
amount secured promissory note, which bears interest at 8% per
annum, and which matures on the earlier of one year from the
issuance date or when Kure Corp. receives gross proceeds of at
least $2,000,000 from the sale of its equity securities. As
collateral for the repayment of the loan, pursuant to a Security
Agreement we were granted a first position security interest in
Kure Corp.'s inventory, accounts and accounts receivable. Our CEO
and Chairman is the past Chairman of Kure Corp. and currently a
minority shareholder of Kure Corp. Level Brands is also a
shareholder of Kure Corp.
On December 21,
2017, the Company entered into a securities purchase agreement
under a private placement offering and purchased 300 shares of
series A preferred stock of a customer, for an aggregate price of
$300,000.
On December 21,
2017, the Company entered into a sublease agreement with a related
party for office space for its subsidiary BPU. The lease is for six
months initially and then changes to a month to month lease at that
point. The space includes office and warehouse space and will cost
$3,000 per month.
F-32
TABLE OF CONTENTS
Part IItem 1. Description Of BusinessItem 1. A Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. Description Of PropertyItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesNote 1 Organization and Summary Of Significant Accounting PoliciesNote 2 AcquisitionsNote 3 Marketable Securities and Investment Other SecuritiesNote 4 InventoryNote 5 Property and EquipmentNote 6 Intangible AssetsNote 7 Line Of CreditNote 8 Convertible Promissory NotesNote 9 Related Party TransactionsNote 10 Shareholders EquityNote 11 Stock-based CompensationNote 12 WarrantsNote 13 Segment InformationNote 14 Income TaxesNote 15 LeasesNote 16 Commitments and ContingenciesNote 17 Subsequent Events