CBDMD, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
W
ashington
, D.C.
20549
FORM 10-K
(M
ark
O
ne
)
☑
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
F
or
the fiscal year ended
September 30, 2018
or
☐
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
F
or
the transition period
from
_______________
to
_______________
C
ommission
file number
:
001-38299
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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 450, 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
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Securities
registered under Section 12(g) of the Act:
None
(Title
of class)
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
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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☐
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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.
☐
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.
$22,827,346 on March 31, 2018.
Indicate
the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
10,095,356 shares of common stock are issued and outstanding as of
December 01, 2018.
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. None.
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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13
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Item 1B.
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Unresolved Staff Comments.
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24
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Item 2.
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Properties.
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24
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Item 3.
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Legal Proceedings.
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24
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Item 4.
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Mine Safety Disclosures.
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24
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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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25
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Item 6.
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Selected Financial Data.
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25
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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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26
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Item 7A.
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Quantitative and Qualitative Disclosures About Market
Risk.
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32
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Item 8.
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Financial Statements and Supplementary Data.
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32
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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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33
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Item 9A.
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Controls and Procedures.
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33
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Item 9B.
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Other Information.
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34
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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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35
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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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45
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Item 13.
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Certain Relationships and Related Transactions, and Director
Independence.
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47
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Item 14.
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Principal Accounting Fees and Services.
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48
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Part IV
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Item 15.
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Exhibits, Financial Statement Schedules.
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49
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SIGNATURES
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50
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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 North
Carolina limited liability company which we refer to as
“Level H&W.” In addition, "fiscal 2017" refers to
the year ended September 30, 2017, "fiscal 2018" refers to the year
ended September 30, 2018, and “fiscal 2019” refers to
the year ending September 30, 2019.
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. We maintain a corporate website at
www.levelbrands.com
.
The information contained on our corporate website is not part of
this report
.
2
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, or “Exchange Act.”
These forward-looking statements are subject to known and unknown
risks, uncertainties and other factors which may cause actual
results, performance or achievements to be materially different
from any future results, performance or achievements expressed or
implied by such forward-looking statements. These forward-looking
statements were based on various factors and were derived utilizing
numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking
statements. These factors include, but are not limited
to:
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our
material dependence on our relationships with
kathy ireland®
Worldwide and
certain of its affiliates;
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our
limited operating history;
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the
lack of assurance of the closing of the pending transaction with
Cure Based Development and the need to meeting the initial listing
standards of the NYSE American should the transaction ultimately
close;
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the
limited operating histories of our subsidiaries;
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our
history of losses;
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risks
associated with any failure by us to maintain an effective system
of internal control over financial reporting;
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the
terms of various agreements with
kathy ireland®
Worldwide and
possible impacts on our management's abilities to make certain
decisions regarding the operations of our company;
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our
dependence on consumer spending patterns;
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our
history on reliance on sales from a limited number of customers,
including related parties;
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risks
associated with our failure to effectively promote our
brands;
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our
ability to identify and successfully acquire additional brands and
trademarks;
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the
operating agreements of our I'M1 and EE1 subsidiaries;
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the
accounting treatment of securities we accept as partial
compensation for services;
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our
ability to liquidate securities we accept as partial compensation
for services and the possible impact of the 40 Act;
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the
possible need to raise additional capital in the
future;
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terms
of the contracts with third parties in each of our
divisions;
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possible
conflicts of interest with
kathy
ireland®
Worldwide;
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possible
litigation involving our licensed products;
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our
ability to effectively compete and our dependence on market
acceptance of our brands;
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the
lack of long-term contracts for the purchase of products from our
professional products division;
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our
ability to protect our intellectual property;
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additional
operational risks associated with our professional products
division;
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risks
associated with developing a liquid market for our common stock and
possible future volatility in its trading price;
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risks
associated with any future failure to satisfy the NYSE American LLC
continued listing standards;
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dilution
to our shareholders from the issuance of additional shares of
common stock by us and/or the exercise of outstanding options and
warrants;
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risks
associated with our status as an emerging growth
company;
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risks
associated with control by our executive officers, directors and
affiliates;
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risks
associated with future sales of our common stock by existing
shareholders;
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our
failure to maintain an effective system of internal control over
financial reporting;
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risks
associated with unfavorable research reports; and
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risks
associated with our articles of incorporation, bylaws and North
Carolina law.
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Most of
these factors are difficult to predict accurately and are generally
beyond our control. You should consider the areas of risk described
in connection with any forward-looking statements that may be made
herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review this
report and our other filings with the SEC in their entirety. Except
for our ongoing obligations to disclose material information under
the Federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this
report, and you should not rely on these statements without also
considering the risks and uncertainties associated with these
statements and our business.
3
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.
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.
We
operate our business in four business units,
including:
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Level H&W was established in September
2017
and has an exclusive license to the
kathy
ireland
® Health &
Wellness™ brand. Its goal is to create a brand which will
include a wide variety of licensed products and services, targeted
to both Baby Boomers as well as millennials. This unit began
operating in fiscal 2018.
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Founded
in early 2017
and first conceptualized
by
kathy
ireland
® Worldwide
,
I'M1 is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
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Also founded in
early 2017, EE1 was established to serve as a producer and marketer
of experiential entertainment including recordings, film, TV, web
and live events, and entertainment experiences. EE1 also provides
brand management services including creative development and
marketing, brand strategy, and distribution support.
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Beauty &
Pin-Ups, our first business unit is a 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 retailers and online outlets and
are expanding into licensing opportunities.
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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.
4
We
began reporting our revenues by segment during the second quarter
of fiscal 2017 following our acquisitions of I'M1 and EE1. We
report in three business segments: the licensing, the entertainment
and the products divisions. The licensing division is comprised of
two of our business units focused on establishing licensing
contracts in two areas: men’s lifestyle products branded
under I’M1 (grooming, personal care, cologne, accessories,
jewelry and apparel) and Level H&W, which includes health and
wellness related products that we have branded under
kathy ireland
® Health &
Wellness™, which began operations in December 2017. EE1
comprises the entertainment division and its focus is to produce
and market multiple entertainment distribution platforms as well as
engage in brand management services. In addition to revenues
generated in each of these segments, the corporate parent also will
generate revenue from time to time, through advisory consulting
agreements. This revenue is similar to the entertainment
division’s revenue process and we have allocated revenue from
corporate to the entertainment division for segment presentation.
The products division today is comprised of Beauty and Pin-Ups and
is designed to be an innovative and cutting-edge producer and
marketer of quality hair care and other beauty
products.
Recent Developments
On
December 3, 2018 we and our newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with Cure
Based Development, LLC, a Nevada limited liability company
(“Cure Based Development”). The Merger Agreement
provides that, upon the terms and subject to the conditions set
forth therein, upon consummation of a two-step merger, cbdMD LLC
will continue as a wholly-owned subsidiary of our company and will
continue the operations of Cure Based Development pre-closing. Cure
Based Development, a Charlotte, NC-based company formed in August
2017, is owner, operator and manufacturer of nationally recognized
consumer cannabidiol (CBD) brand cbdMD which currently offers a
variety of CBD products from topicals and tinctures to bath bombs
and pet products, manufactured and sold direct to consumers online
via the company website. Cure Based Development also provides
wholesale distribution with retailers currently selling products at
brick-and-mortar locations, compounding pharmacies, salons,
supplement stores, and pet shops. Cure Based Development reported
revenues of $354 and $3,280,009 for the period from inception
through December 31, 2017 and for the eight months ended August 31,
2018, respectively, and a net loss of $323,197 and $353,561 for
those periods.
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, at the effective time of the two-step merger, the
members of Cure Based Development will receive contractual rights
to receive 15,525,000 shares of our common stock, representing
approximately 60% of our outstanding common stock following such
issuance. Assuming the closing of the two-step merger, these
initial shares will be issued as promptly as practicable following
receipt of approval by our shareholders for the possible issuance
of in excess of 19.99% of our presently outstanding common stock in
accordance with the rule of the NYSE American (the
“Shareholder Approval”). The Merger Agreement also
provides that one of the members of Cure Based Development will be
entitled to receive up to an additional 15,525,000 shares of our
common stock as part of the merger consideration, upon Shareholder
Approval and the satisfaction of certain aggregate net revenue
criteria by cbdMD LLC within 60 months following the closing. We
expect to include the proposal for Shareholder Approval of the
issuance of the initial shares as well as the possible future
issuance of the earnout shares in the proxy statement for our 2019
annual meeting of shareholders.
Following the
execution of the Merger Agreement, we lent Cure Based Development
$2,000,000 under the terms of a one year 6% secured promissory
note. At closing Mr. R. Scott Coffman, the CEO and a manager of
Cure Based Development, will be appointed to our Board of Directors
and become the chief executive officer of our cbdMD LLC subsidiary.
If the pending transaction closes, it will result in a change of
control of our company and the combined company will be required to
satisfy NYSE American initial listing standards for the continued
listing of our common stock on the NYSE American following the
closing.
In
addition to other conditions to closing as described in the Merger
Agreement, the completion of the two-step merger is subject to the
approval by the President of the United States of the Agricultural
and Nutrition Act of 2018, or such other titled Federal
legislation, which, when approved, contains a permanent
declassification of cannabidiol (CBD) as a controlled substance
under Federal law. Because this and certain other conditions
precedent to closing are beyond our control, we do not know when,
if ever, that this transaction will be consummated. Additional
information regarding the terms and conditions of the Merger
Agreement is included in our Current Report on Form 8-K as filed
with the SEC on December 4, 2018.
5
Growth Strategies and Outlook
Level
Brands 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. In addition, we added a third
division at the end of fiscal 2017 which began operations in fiscal
2018. This expansion has positioned Level Brands with licensing
segments in millennial men’s lifestyle and the health and
wellness arena, for women and their families at every age. We
believe that Level Brands 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 Chair, CEO and Chief
Designer of kathy ireland® Worldwide, and leveraging the
expertise and talent of the kathy ireland ® Worldwide
executive team, we have opportunity to secure strategic licenses
and joint venture partnerships for our brands, as well as to
continue to grow the portfolio of brands we manage and represent.
We are implementing the kathy ireland® Worldwide
“blueprint” and utilize the kathy ireland®
Worldwide team as we expand our licensing and branding
business.
We are
pursuing the following strategies to continue to grow our revenues
and expand our business and operations in fiscal 2019:
●
Increase our base of licensed
offerings
: We believe that in building a strong brand, we
must begin with intellectual property. The development of quality
IP is frequently one of the most expensive ongoing costs in a
licensing operation. The unique
kathy ireland
® Worldwide
“blueprint” for IP development allows us economies of
scale, which is a foundation for Level Brands to bring virtually
unlimited products and services of quality, through the appropriate
distribution channels to meet the demands of our targeted
customers. With current contracts encompassing products in fashion,
accessories, beverages, personal care, health care, and spirits,
which are already in development or available at brick and mortar
stores and online retailers, we believe we have a foundation to
continue to build upon for additional offerings. We expect to
continue to grow our base of licensed products by:
●
innovating and
identifying market trends through an ongoing effort based on
research of products, tracking buying and demand trends and
subsequently identifying the right manufacturer for fulfillment,
i.e. utilizing cannabidiol (“CBD”) in unique formats
under our
kathy
ireland
® Health & Wellness brand under the terms of
our license agreement with our client Isodiol International Inc.;
and
●
identifying new
product offerings in response to evolving customer demands in our
focused areas, that meet our criteria, and with our branding
support could increase our reach to new customers.
●
Cross-sell opportunities
: With EE1 will
seek to continue to grow its portfolio of brand management
customers by identifying products that fit our criteria for
additional licensing opportunities under our Beauty & Pin-Ups,
I’M1 or
kathy
ireland
® Health & Wellness brands;
●
EE1 entertainment projects:
EE1 will
seek to continue to expand this brand’s offering of
entertainment productions as we assess current projects involving
television and movies for the best financial opportunity as well as
look to expand experiential offerings. Currently EE1 is providing
production services for two television shows and a recording
project of a tribute album of Lennon/McCartney classics by GRAMMY
award winning artists; and
●
Acquisitions.
We may also choose to
further build and maintain our brand portfolio by acquiring
additional brands directly or through joint ventures if
opportunities arise that we believe are in our best interests. In
assessing potential acquisitions or investments, we expect to
primarily evaluate growth industries, the strength of the target
brand as well as the expected viability and sustainability of
future income or royalty streams and its fit within its targeted
segments. We believe that this focused approach will allow us to
effectively screen a wide pool of consumer brand candidates and
strategically evaluate acquisition targets and efficiently complete
due diligence for potential acquisitions. Other than the pending
transaction with Cure Based Development described earlier in this
section, we are not a party to any agreements or understandings
regarding the acquisition of additional brands or companies and
there are no assurances we will be successful in expanding our
brand portfolio.
6
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:
●
potential
for financial upside without the significant investment and
management risks and capital demands typically associated with
traditional wholesale operating companies;
●
diversification
resulting from both broad demographic appeal and distribution
through a range of distribution channels;
●
growth
opportunity through expansion of existing brands into new
categories, geographic areas and acquisitions; and
●
reduced
operational risks as inventory and other typical wholesale
operating functions are the responsibilities of our
licensees.
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, The material terms of these agreements
are described later in this report under Note 9 to the notes to our
consolidated financial statements. These agreements
include:
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 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;
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;
7
In February 2017, we entered into a one year
advisory agreement with Mr. Stephen Roseberry pursuant to which he
provide advisory and consulting services to us, including serving
as co-Managing Director of I’M1 and EE1, devoting such time
to our business as we mutually determine. The agreement was amended
in March 2018 to also include serving as Managing Director of Level
H&W and for the agreement to expire in February 2019 and extend
automatically month to month unless canceled by either party. Mr.
Roseberry is 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 EE1 and he is
responsible for developing and facilitating creative strategies for
I’M1 and EE1 under the terms of an advisory agreement
expiring in February 2019. We expect this agreement will be renewed
prior to the expiration of the terms of the current
agreement;
In February 2017, we entered into one year
advisory agreements with Mr. Tommy Meharey and Mr. Nic Mendoza
pursuant to which they provide advisory and consulting services to
us, including Mr. Meharey serving as co-Managing Director of
I’M1 and Mr. Mendoza serving as co-Managing Director of EE1,
devoting such time to our business as we mutually determine. The
agreements were amended in March 2018 to expire in February 2019
and extend automatically month to month unless canceled by either
party. Mr. Meharey is Vice President and a member of the board of
directors of
kathy
ireland
®
Worldwide and
Mr. Mendoza is a Vice President
of
kathy
ireland
® Worldwide,
and;
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™.
How we generate sales
We
generate sales from a variety of sources, including:
●
our licensing
division, which includes the results of I’M1 and Level
H&W, enters into various license agreements that can provide
revenues based on royalties and advertising/marketing fees and
additional revenues based on a percentage of defined sales as well
as fees for advisory and promotional services;
●
our entertainment
division 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. Additional revenue earned at the
corporate level for advisory agreements is included in the
entertainment division for segment reporting purposes;
and
●
our
products division generates sales through sales of our Beauty &
Pin-Ups brand of products.
Please
see Note 1 – Revenue Recognition appearing in the
consolidated financial statements included in this report for
additional information on how we record sales.
From
time to time we also engage in sales transactions with related
parties which may be material to our results of operations. These
transactions are described in greater detail in Note 9 of our
consolidated financial statements appearing elsewhere in this
report.
We have
entered into agreements where we have accepted common stock,
options or warrants (an equity position) as non-cash compensation
under the terms of various of these agreements. Please see Note 3
of our consolidated financial statements appearing elsewhere in
this report for detailed information on these
transactions.
8
Our business units
Licensing division
Our
licensing division includes the operations of Level H&W and
I’M1.
As described elsewhere in this report, we entered
into a license agreement for the
exclusive license to the
kathy
ireland
® Health &
Wellness™ brand, a newly formed entity. 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. 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. 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 currently have engaged two licensing
agreements in our target categories of wellness lifestyle and
continue to assess other opportunities. 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.
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 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 entities in our target
categories including men’s fashion and
accessories.
We
have developed a standardized form of licensing agreement for all
of our licensing arrangements under all of our businesses, which
contains general terms and conditions under which we will grant
licenses to our licensed 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.
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.
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:
9
•
content
creation and promotion through social and standard
media;
•
marketing
input;
•
assisting
with influencer marketing programs;
•
providing
production capability for video and photo support for brand
advertising; and
•
assisting
with brand extension through licensing opportunities.
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).
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:
| ● |
Flaunt
-
Silkening
Shampoo
and
Conditioner
|
● |
Linger - Style and Sculpting Spray Gel
|
| ● |
Luxe - Leave-in Spray On Revitalizing Conditioner
|
● |
Fierce - Firm Hold Finishing Spray
|
| ● |
Lavish - All in 1 Cleansing and Conditioning
|
● |
Fearless Hair Rescue Treatment
|
| ● |
Sway - Blow Out Styling Primer Enhanced with Marine
Botanicals
|
● |
Valor - Superfine Hair Spray
|
| ● |
Fever - Thermal Protectant
|
● |
Rewind - Shampoo and Conditioner
|
| ● |
Stay Dirty - Dry Shampoo
|
|
|
Marketing
We
have utilized external resources combined with an internal team to
manage and facilitate 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. We
continue to build our brand through our websites, digital, and
social media.
10
We
believe there are licensing 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. We have been able to enter into two
licensing agreements thus far and have put a focus on establishing
additional licensing arrangements going forward and transitioning
the business into a licensing model.
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 were conceptualized by our
in-house team and utilized the services of third party contractors
to help develop the product formulas, test and
finalize.
Sales channels
Beauty
& Pin-Ups products have historically been sold primarily
through distributors into the salon channel. At the beginning of
fiscal 2018 we began distributing our products thru Riley Rose
retail stores and online through JCPenney.com. Our products are
currently available on e-commerce channels including from on our
website.
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.
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.
As we
focus on a licensing model, we expect the manufacturing process to
be handled by the licensee’s in the future.
Intellectual property rights
In
addition to our license agreements 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 registrations for an additional approximately 12
trademarks which we may use in the future under the Beauty &
Pin-Ups line or as we 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.
11
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
Level
H&W’s competition includes companies that manufacture and
produce products focused on health and wellness. This is a broad
market and encompasses companies producing supplements, health and
wellness lifestyle items, spa related products, preventative care
products, nutrition products and more. Our focus on licensing
arrangements in this market we believe will allow us to establish a
broader offering quickly in a cost effective manner, which we
believe may give us some advantages. There are no assurances,
however, that we will ever be successful in effectively competing
in this market segment.
I’M1’s
competition includes established, well-capitalized companies with
wide consumer recognition providing products focused for
men’s grooming, personal care, accessories, and apparel.
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, however 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
entertainment companies
providing broad products / offerings including
film, television, music recordings, and live events. 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. There are no assurances
we will ever be able to effectively compete or that we will develop
any widespread brand recognition.
Employees
At
December 01, 2018 we had 7 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 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.
Additional
information on the terms of material acquisitions may be found in
Note 1 to the notes to our consolidated financial statements
appearing elsewhere in this report.
12
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 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.
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 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 will
expire in February 2019 and at that point extend on a month to
month basis unless cancelled by either party. 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. Until
fiscal 2017, our net sales were solely from our 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 any significant 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.
13
There are no assurances we will close the pending transaction with
Cure Based Development. If we do close the transaction, it will
result in a change of control of our company and we will be
required to meet the NYSE American initial listing standards in
order to maintain the listing of our common
stock
.
As
described earlier in this report, on December 3, 2018 we entered
into the Merger Agreement with Cure Based Development. The closing
of this pending transaction is subject to a number of conditions
precedent including, but not limited to, the approval by the
President of the United States of the Agricultural and Nutrition
Act of 2018, or such other titled Federal legislation, which, when
approved, contains a permanent declassification of cannabidiol
(CBD) as a controlled substance under Federal law. Certain of the
content of the House and Senate versions of this bill has been the
subject of great debate among the members of the House and Senate,
and we do not know when a comprise bill will be approved by both
chambers or if the President of the United States will sign the
final bill. Because the approval of this law is beyond our control,
investors should not place undue reliance on this pending
transaction when evaluating our company, our business, operations
and prospects. In addition, if the pending transaction does close
it will result in a change of control of our company. NYSE
Regulation, Inc. has informally advised us that we will be required
to meet initial listing standards following the closing in order to
maintain the listing of our common stock on the NYSE American.
While we expect to be able to satisfy all of the qualitative and
quantative criteria, there are no assurances our expectations are
correct. In that event, our shareholders would find it more
difficult to buy and sell shares of our common stock which would
adversely impact the market price thereof.
Our subsidiaries I’M1, EE1 and Level H&W 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 previous operating history, which does
not afford investors a sufficient history on our company which to
base an investment decision.
I’M1, EE1, and Level H&W are entities
formed in September 2016, March 2016, and September 2017
respectively. We acquired membership interests in I’M1 and
EE1 in January 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. All of these
entities are in the early stages of their businesses and we began
reporting revenues from I’M1 and EE1 operations in the second
quarter of fiscal 2017 and reported revenues from Level H&W in
the second quarter of fiscal 2018. 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 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 $412,075and
$1,738,734 for fiscal 2018 and fiscal 2017, 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 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.
14
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. 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 2018 and 2017 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 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.
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 2018 and 2017,
totaling $1,992,046 and $1,731,238 respectively, 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.
15
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.
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, no
additional distributions have been made or are currently planned.
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, we have entered into several agreements
with third parties under which we accepted shares of its common
stock as partial compensation for the services to be provided. For
fiscal 2018 and fiscal 2017, the value of these securities
represented 60.6% and 43.2%, respectively, of our total net
revenues. By accepting equity securities as partial compensation
for our services in lieu of cash, we incur expenses to deliver the
services without the corresponding cash payments from our clients.
As such, we utilize 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.
During fiscal 2018 we recognized an other comprehensive loss of
$2,512,539 for loss on these securities, net of taxes. It is
possible that we may continue to 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.
16
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 and, in the event we
are deemed an investment company, the cost and expense to comply
with ‘40 Act regulations could be material.
The Investment Company Act of 1940, or the
“‘40 Act,” regulates certain companies that
invest in, hold or trade securities.
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 engaged in those activities, i
n the past we have accepted securities of our
client companies as partial compensation. The ’40 Act and the
rules thereunder set forth certain asset and revenue thresholds,
which, if exceeded, may require us to register as an investment
company under the ’40 Act. As a result, and principally
related to the value of the securities received by us as part of
our compensation by Isodiol International, Inc. under the terms of
the license agreement we entered into with it in December 2017, at
March 31, 2018 we exceeded the exemptive asset and revenue
thresholds under the ’40 Act. Therefore, at March 31, 2018 we
could be deemed an inadvertent investment company under the
’40 Act. While as of September 30, 2018 we reduced our assets
in connection to this assessment so that we no longer exceeded the
asset threshold, as a part of our agreement with Isodiol we are
entitled to receive additional shares of Isodiol’s securities
on a quarterly basis in an amount equal to $750,000 which can cause
us to continue to exceed the revenue threshold. As it has never
been our intention to be an investment company, we are taking
certain actions to maintain our assets and revenues under the
exemptive thresholds.
In particular,
we will limit the amount of equity we accept as part of our
compensation for services so as to stay under the asset and revenue
thresholds as imposed by the ’40 Act. We may therefore
structure transactions in a less advantageous manner than if we did
not have ’40 Act concerns, or we may avoid otherwise
economically desirable transactions due to those concerns. If we
are unable to maintain our assets and revenues below the exemptive
levels, or if it were otherwise established that we were an
unregistered investment company at any period of time, 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. In addition, in the event we continue to
fall under ’40 Act regulation, we will have significant
ongoing ’40 Act public reporting requirements and regulation
that would increase our administrative and operating costs and
expenses. Further, under certain circumstances the ’40 Act
provides that a contract that is made or whose performance involves
a violation of the ’40 Act is unenforceable by either party
unless a court finds that under the circumstances enforcement would
produce a more equitable result than non-enforcement. As a result,
we would no longer be able to conduct our business as it is
presently conducted which would have a material adverse impact on
our results of operations in future periods.
17
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
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.
18
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.
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.
19
RISKS
RELATED TO OUR PRODUCTS DIVISION
Our revenues from our products division declined 126.3% in fiscal
2018 from fiscal 2017, and 78% of our net sales for this division
in fiscal 2018 represented sales to a related party. We recognized
asset impairments of $502,000 in fiscal 2018 related to this
division.
Net sales from our products division have been
lower in each period in fiscal 2018 as compared to the same periods
in fiscal 2017, with an overall reduction in fiscal 2018 of 126.3%
from fiscal 2017. As a result, during the fourth quarter of fiscal
2018 we recognized an impairment of $502,000, including an
inventory and prepaid marketing supplies write off of $262,000 and
an intangible impairment of $240,000. In addition, 78% of our net
sales in this division occurred in September 2018 and were made to
an entity affiliated with
kathy
ireland
® Worldwide. There
are no assurances net sales in this division will ever return to
prior reported levels, or that we will not recognize additional
impairment charges in future periods.
The majority of our net sales to date in our 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 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.
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:
●
defend
against infringement claims which are expensive and time
consuming;
●
cease
making, licensing or using products that incorporate the challenged
intellectual property;
●
re-design,
re-engineer or re-brand our products or packaging; or
●
enter
into royalty or licensing agreements in order to obtain the right
to use a third party’s intellectual property.
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.
20
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.
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.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
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
.
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 and
warrants 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 833,255 shares of our common
stock. The issuance of shares upon exercise of warrants and options
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:
21
●
price
and volume fluctuations in the overall stock market from time to
time;
●
changes
in operating performance and stock market valuations of other hair
care products companies generally;
●
sales
of shares of our common stock by us or our
shareholders;
●
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;
●
the
financial projections we may provide to the public, any changes in
those projections or our failure to meet those
projections;
●
rumors
and market speculation involving us or other companies in our
industry;
●
actual
or anticipated changes in our results of operations or fluctuations
in our results of operations;
●
actual
or anticipated developments in our business, our competitors’
businesses or the competitive landscape generally;
●
litigation
involving us, our industry or both, or investigations by regulators
into our operations or those of our competitors;
●
developments
or disputes concerning our intellectual property or other
proprietary rights;
●
announced
or completed acquisitions of businesses or brands by us or our
competitors;
●
new
laws or regulations or new interpretations of existing laws or
regulations applicable to our business;
●
changes
in accounting standards, policies, guidelines, interpretations or
principles;
●
any
significant change in our management; and
●
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;
●
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”;
●
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;
●
reduced
disclosure obligations regarding executive compensation in our
periodic reports and proxy statements; and
●
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.
22
Our executive officers, directors and their affiliates may exert
control over us and may exercise influence over matters subject to
shareholder approval.
Our
executive officers and directors, together with their respective
affiliates, beneficially own approximately 22.7% of our outstanding
common stock as of December 01, 2018. 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.
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:
23
●
permit
our board of directors to issue up to 50,000,000 shares of
preferred stock, with any rights, preferences and privileges as
they may designate;
●
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
●
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.
We have additional securities available for issuance, which, if
issued, could adversely affect the rights of the holders of our
common stock.
Our
articles of incorporation, as amended, authorizes the issuance of
150,000,000 shares of our common stock and 50,000,000 shares of
preferred stock. In certain circumstances, the common stock, as
well as the awards available for issuance under our equity
incentive plans, can be issued by our board of directors, without
stockholder approval. Any future issuances of such stock would
further dilute the percentage ownership of us held by holders of
common stock. In addition, the issuance of certain securities,
including pursuant to the terms of our stockholder rights plan, may
be used as an “anti-takeover” device without further
action on the part of our stockholders, and may adversely affect
the holders of the common stock.
In
addition, the issuance of preferred stock may be used as an
“anti-takeover” device and may adversely affect the
holders of the common stock. If our board of directors and
stockholders approved the use of “blank check”
preferred stock, our board of directors would be authorized to
create and issue from time to time, without further stockholder
approval, a certain number of shares of preferred stock, in one or
more series and to establish the number of shares of any series of
preferred stock and to fix the designations, powers, preferences
and rights of the shares of each series and any qualifications,
limitations or restrictions of the shares of each series. The
authority to designate preferred stock may be used to issue series
of preferred stock, or rights to acquire preferred stock, that
could dilute the interest of, or impair the voting power of,
holders of the common stock or could also be used as a method of
determining, delaying or preventing a change of
control.
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 an agreement through
December 2019.
The Agreement included (1) a discount on rent
to $12,000 per month if the full rent was prepaid and (2) a right
of return on payments prorated if the landlord exercised an early
termination of the lease. In April 2018, we made a full prepayment
of $240,000.
We lease office space in
Los Angeles, California which is utilized by our licensing and
brand management divisions under a lease expiring in February 2019
at an annual rate of $88,800.
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.
24
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." The last sale price of our common
stock as reported on the NYSE American on December 01, 2018 was
$4.15 per share. As of December 01, 2018, there were approximately
132 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
All
of our issuances of unregistered securities during our fiscal 2018
were previously disclosed in our Quarterly Reports on Form 10-Q for
our first, second and third quarters of our fiscal year ended
September 30, 2018 and in our current reports on Form 8-K as filed
periodically with the SEC, except for the following:
In July
2018, we issued 5,000 shares of our common stock, valued at $18,500
to a public relations firm for services. The recipient was an
accredited or otherwise sophisticated investor and had access to
business and financial information on our company. The issuance was
exempt from registration under the Securities Act of 1933, as
amended (the “Securities Act”), in reliance on an
exemption provided by Section 4(a)(2) of the Securities
Act.
Purchases of equity securities by the issuer and affiliated
purchasers
None.
ITEM
6.
SELECTED
FINANCIAL DATA.
Not
applicable to a smaller reporting company.
25
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.
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 manage our business in four distinct business units
and report our operations and revenue in three operating
segments:
●
the
licensing division, comprised of:
●
I’M1,
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;
●
Level H&W,
which currently markets products
branded under kathy ireland® Health &
Wellness;
●
the
entertainment division, which is focused on producing and marketing
omni-entertainment experiences and providing brand management
services, all under the EE1 brand; and
●
the
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.
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.
26
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
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
Fiscal 2018
|
Fiscal 2017
|
Change
|
|
Net
sales
|
$
6,428,096
|
$
2,743,715
|
$
3,684,381
|
|
Net
sales related party
|
$
1,992,046
|
1,731,238
|
$
260,808
|
|
Total
net sales
|
$
8,420,142
|
$
4,474,953
|
$
3,945,189
|
|
Costs
of sales
|
$
2,673,272
|
$
1,355,381
|
$
1,317,891
|
|
Gross
profit as a percentage of net sales
|
68.2
%
|
69.7
%
|
(1.5
)%
|
|
Operating
expenses
|
$
5,629,771
|
$
3,358,863
|
$
2,270,908
|
|
Other
income (expenses)
|
$
(70,265
)
|
$
(1,121,877
)
|
$
1,051,612
|
|
Net
income (loss) before taxes
|
$
46,834
|
$
(1,361,168
)
|
$
1,408,002
|
|
Net
loss attributable to Level Brands, Inc. common
shareholders
|
$
(412,075
)
|
$
(1,738,734
)
|
$
1,326,659
|
Sales
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
2018
|
% of
total
|
Fiscal
2017
|
% of
total
|
|
|
|
|
|
|
|
Licensing
division
|
$
5,213,360
|
61.9
%
|
$
1,794,582
|
40.1
%
|
|
Entertainment
division
|
$
2,778,051
|
33.0
%
|
$
1,710,167
|
38.2
%
|
|
Products
division
|
$
428,731
|
5.1
%
|
$
970,204
|
21.7
%
|
|
Total net
sales
|
$
8,420,142
|
|
$
4,474,953
|
|
The
increase in net sales attributable to our licensing division in
fiscal 2018 is due primarily to two significant licensing
agreements entered into with our Level H&W unit which generated
approximately $5,100,000 of revenue in fiscal 2018.
The
increase in net sales attributable to our entertainment division in
fiscal 2018 is due to continued servicing of brand management
engagements with existing customers.
The
decreases in the fiscal 2018 net sales attributable to our products
division is primarily attributable to a strategic decision made at
the end of fiscal 2017 to change our distributors as well as
testing other sales channels, including large retail and online
channels as well as adding licensing opportunities. In fiscal 2018,
we had engaged with two retailers who tested the products in these
new channels, we expanded our online sales process, and we have
also executed our first two license contracts for this division.
Based on results, we are keeping our focus on licensing
opportunities as well as online sales channels going forward. We
believe these areas can support the sales process better and are in
line with our overall strategy, although no assurance can be given
as to the success of this division.
As
described elsewhere in this report, from time to time we accept
equity positions as compensation for our services. The following
table provides information for fiscal 2018 and 2017 regarding the
amount of our total net sales in each of those periods for which we
received an equity position in lieu of cash.
27
|
2018
|
2017
|
||
|
|
|
||
|
Amount
|
% total net
sales
|
Amount
|
% total net
sales
|
|
|
|
|
|
|
$
5,104,500
|
60.6
%
|
$
1,932,552
|
43.2
%
|
While
our management believes this policy could potentially benefit our
company, this practice has had an adverse impact on our cash flow
from operations and holding these securities could subject our
company to additional valuation impacts in future periods as a
result of the need to value these holdings on a quarterly basis.
During fiscal 2018 and 2017, we recorded other comprehensive loss
on these holdings, net of taxes, of $2,512,539 and $0,
respectively.
Cost of sales
Our
cost of sales includes labor, third party service providers and
amortization for IP for our licensing and entertainment divisions
and costs associated with distribution, external fill and labor
expense, components, and freight for our products divisions. The
following table provides information on the percentage of our cost
of sales to our net sales for each segment for fiscal 2018 and
2017:
|
|
2018
|
2017
|
|
|
|
|
|
Licensing
division
|
12.1
%
|
2.7
%
|
|
Entertainment
division
|
53.2
%
|
25.3
%
|
|
Products
division
|
131.6
%
|
90.2
%
|
The increase in cost of sales as a percentage of
sales for our licensing division in the 2018 periods is
attributable to a higher cost of sales as the business is maturing
and we laid groundwork on social media and production items to
increase visibility of our licensed brands, I’M1 and
kathy
ireland
® Health &
Wellness™, which we believe will be used in the future to
support the brand and future contracts. In addition, we entered
into a significant contract for our
kathy
ireland
® Health &
Wellness unit which required significant efforts regarding a
marketing campaign and strategy. We expect this division to have a
cost of sales rate between 10% and 20% as the business is
structured in a manner that the licensee (our customer) incurs 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.
The
cost of sales as a percentage of sales for our entertainment
division will vary based upon the type of projects in which it is
involved. 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, however we expect our cost of sales to be
between 45% and 60% based on the mix of projects we
engage.
In
our products division, the significant increase in the cost of
sales as a percentage of sales in the fiscal 2018 periods is
primarily related to inventory impairments, as a result of net
realizable value and excess inventory calculations and a decrease
in the actual sales as disclosed above. Cost of sales variances are
primarily related to two key factors. First, allowances from this
division have varied significantly based on the product line not
having wide appeal yet and various advertising and promotional
packages have been used to promote the products since initial
launch. Second, 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
specifically for that channel. As we have changed our focus to
online sales and licensing, we expect to reduce the cost of sales
for this division going forward.
Operating expenses
Our
principal operating expenses include wages, advertising, travel,
rent, professional service fees, and expenses related to industry
distribution and trade shows. Our operating expenses on a
consolidated basis increased 67.6% in fiscal 2018 from fiscal 2017.
These increased included increases in: (i) staff related expenses;
(ii) accounting and legal expenses; (iii) travel and entertainment
expenses, (iv) outside services related to investor relations,
transfer agent, other public company support costs; (v) expenses
related to social media, public relations, advertising and
marketing process, tradeshows and promotions; (vi) rent expense;
(v) charitable contributions; (vi) insurance; (vii) non-cash stock
compensation expense; and (viii) allocation of corporate management
fees which are described in greater detail later in this report.
These increases were offset by decreases in: (i) commissions and
(ii) the elimination of one-time new division start-up costs
incurred in fiscal 2017.
28
We
acquired I’M1 and EE1 in January 2017 and Level H&W did
not commence operations until the first quarter of fiscal 2018.
Accordingly, we did not incur operating expenses for these business
units during the entirety of the comparable periods in fiscal 2017.
The additional changes in our expenses in the fiscal 2018 periods
is directly related to the operational changes in our company as we
grew from one operating business segment to three, built the
infrastructure to support the overall company from a growth
perspective, and completed our initial public offering and
transaction to a public company traded on the NYSE
American.
The
following table provides information on our approximate operating
expenses for each segment for fiscal 2018 and 2017:
|
|
2018
|
2017
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
1,487,000
|
$
935,000
|
$
552,000
|
|
Entertainment
division
|
$
1,066,000
|
$
580,000
|
$
486,000
|
|
Products
division
|
$
947,000
|
$
1,797,000
|
$
(850,000
)
|
Operating expenses
attributable to our licensing and entertainment divisions for
fiscal 2018 and 2017, included: (i) staff related expenses; (ii)
accounting and legal expenses; (iii) expenses related to social
media, public relations, advertising, marketing, promotions; (iv)
travel and entertainment and tradeshow; (v) professional outside
services; and (vi) allocated management fees from corporate. The
overall increase in operating expenses is related to the maturation
of the new divisions and expenses related to their day to day
operations growth.
Operating expenses
attributable to our products division for fiscal 2018 and 2017,
included: (i) staff related expenses; (ii) accounting and legal
expenses; (iii) expenses related to social media, public relations,
advertising, marketing, promotions and tradeshows; (iv) travel and
entertainment expenses; (v) professional outside services related
to product formulation, design; (vi) marketing expenses (vii)
commissions paid to an outside sales consultant; (viii) intangible
impairments, and (ix) allocated management fees from corporate. The
overall decrease in operating expenses in this division is related
to management’s shift to a more structured approach and cost
analysis as the strategy for this business unit was reviewed and
repositioned.
Corporate
overhead and allocation of management fees to our
segments
Included in our
consolidated operating expenses are expenses associated with our
corporate overhead which are not allocated to a specific segment of
our operations, including (i) staff related expenses; (ii)
accounting and legal expenses; (iii) expenses related to social
media, public relations, advertising, marketing, promotions and
tradeshows; (iv) travel and entertainment expenses; (v)
professional outside services; (vi) rent; (vii) non-cash stock
compensation expense; (viii) business insurance expense; and (ix)
interest expense. The non-cash stock compensation expenses for
fiscal 2018 and 2017 were approximately $599,000 and $243,000,
respectively.
The
following table provides information on our approximate corporate
overhead for fiscal 2018 and 2017:
|
2018
|
2017
|
change
|
|
$
3,646,000
|
$
1,075,000
|
$
2,571,000
|
The
overall increase in corporate operating expenses is related to the
maturation of the entire organization and structuring related to
its day to day operations and ongoing pubic company related
expenses.
We
allocate a portion of our corporate overhead to our segments in the
form of a management fee. These allocations are included in the
operating expenses by segment in the earlier table. As set forth
above, these internal corporate charges eliminate upon
consolidation of our financial statements. The following table
provides information on the allocation of management fees to our
segments for fiscal 2018 and 2017:
|
|
2018
|
2017
|
change
|
|
|
|
|
|
|
Licensing
division
|
$
857,000
|
$
90,000
|
$
767,000
|
|
Entertainment
division
|
$
453,000
|
$
90,000
|
$
363,000
|
|
Products
division
|
$
175,000
|
$
90,000
|
$
85,000
|
29
We
expect to continue to internally allocate corporate management fees
to our segments in future periods, however, the amount of such fees
will vary depending upon the amount of time devoted by our senior
management to the particular segment and the overall revenue
performance of each segment.
Interest expense and other non-operating expenses
Our
interest expense materially decreased to $955 from $500,627 for
fiscal 2018 as compared to fiscal 2017, which primarily reflects
the conversion of outstanding 8% convertible promissory notes into
shares of our common stock as of June 30, 2017.
In
fiscal 2017, 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. This was a one-time non-cash
charge. 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 and 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. We did not have any impairments to our
marketable or other securities in fiscal 2018 as compared to an
other than temporary impairments of $175,000 in fiscal
2017.
Other comprehensive income (loss)
We
value investments in marketable securities at fair value and record
a gain or loss at each period, in other comprehensive income
(loss), unless a decline is determined to be other-than-temporary.
For fiscal 2018 we recorded other comprehensive loss of
$(2,512,539) as compared to $0 for fiscal 2017.
Net loss and net loss attributable to our common
shareholders
Our
net income for fiscal 2018 was $62,834 as compared to a net loss in
fiscal of 2017 of $(1,386,168) a change of 104.5%. At September 30,
2018 and 2017, we owned 100%, of the membership interests of Beauty
& Pin-Ups and Level H&W 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 income increased 76.3% for fiscal
2018 from fiscal 2017.
Liquidity and Capital Resources
We had cash and cash equivalents on hand of
$4,282,553 and working capital of $10,820,192 at September 30, 2018
as compared to cash on hand of $284,246 and working capital of
$2,170,154 at September 30, 2017. Our current assets increased
approximately 219.2% at September 30, 2018 from September 30, 2017,
and is primarily attributable to an increase of cash, accounts
receivable, accounts receivable other, notes receivable, marketable
and other securities, and prepaid expenses, offset by a decrease in
deferred issuance costs and inventory. Our current liabilities
decreased approximately 36.3% at September 30, 2018 from September
30, 2017. This decrease is primarily attributable to decreases in
accrued expenses, offset by increases in accounts payable and
deferred revenue. Both the changes in our current assets and
current liabilities are also reflective of the further development
of our business during fiscal 2018.
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, accounts receivable other, 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 at September 30, 2017 we had
recorded deferred issuance costs which were directly attributable
to the offering and were 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. As of September 30, 2018, the note balance was $156,147,
the note was paid in full in November 2018.
During
fiscal 2018 we used cash primarily to fund our operations 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 22 days.
30
We do not have any commitments for capital
expenditures.
We have sufficient working capital to fund our
operations and to fund our expected growth.
Our
goal from a liquidity perspective is to use operating cash flows to
fund day to day operations and we have generated the income to meet
this goal, however as we have accepted equity as compensation in
many of our engagements, we have not met this goal as cash flow
from operations has been a net use of $5,573,095 and $2,329,841 for
fiscal 2018 and fiscal 2017, respectively.
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 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.
On November 16, 2017 we closed an IPO and raised net proceeds of
$10,932,535. Subsequent to the end of fiscal 2018, we closed a
follow-on firm
underwritten public
offering of shares of our common stock resulting in total gross
proceeds to us of $6,899,998, before deducting underwriting
discounts, commissions and other offering expenses payable by us.
We are using the net proceeds from the offering for brand
development and expansion, acquisitions and general working
capital.
Additionally, during fiscal 2018 as compared to
fiscal 2017 we incurred non-cash expenses of $598,590 and $242,934,
respectively, related to stock compensation and options, $0 and
$310,958, respectively,
for
amortization of debt discounts and debt issuance fees
related to financings. In addition, in fiscal 2017 we had 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.
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. 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.
31
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.
Marketable
Securities
At the
time of acquisition, a 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 balance sheets with changes in fair value
recorded in the accumulated other comprehensive income (loss)
component of shareholders’ equity in the period of the change
in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (“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 (loss) to non-operating income (loss) on
the Company’s 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, 2018 and
2017, 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.
Recent Accounting Pronouncements
Please see Note 1 –
Organization and
Summary of Significant Accounting Policies
appearing in the consolidated financial statements
included in this report for information on accounting
pronouncements.
Off Balance Sheet Arrangements
As
of the date of this report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors. The term “off-balance sheet arrangement”
generally means any transaction, agreement or other contractual
arrangement to which an entity unconsolidated with us is a party,
under which we have any obligation arising under a guarantee
contract, derivative instrument or variable interest or a retained
or contingent interest in assets transferred to such entity or
similar arrangement that serves as credit, liquidity or market risk
support for such assets.
ITEM
7A.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
ITEM
8.
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA.
Please
see our Financial Statements beginning on page F-1 of this annual
report.
32
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 reports
filed pursuant to the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) 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 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 our disclosure controls were
effective at September 30, 2018.
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:
pertain to the
maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of our
assets;
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
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.
33
Our
management, including our CEO and CFO, assessed the effectiveness
of our internal control over financial reporting as of September
30, 2018. 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
effective.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting during our last fiscal year that has materially affected,
or is reasonably likely to materially affect, our internal control
over financial reporting.
ITEM
9B.
Other
Information.
None.
34
ITEM
10.
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The
following table provides information on our current executive
officers and directors:
|
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
|
|
Martin A. Sumichrast
|
|
52
|
|
Chairman of the Board of Directors, Chief Executive Officer and
President
|
|
Mark S. Elliott
|
|
57
|
|
Chief Financial Officer and Chief Operating Officer
|
|
Erik Sterling
|
|
64
|
|
Director
|
|
Anthony K. Shriver
|
|
53
|
|
Director
|
|
Seymour G. Siegel
|
|
76
|
|
Director
|
|
Bakari Sellers
|
|
34
|
|
Director
|
|
Gregory C. Morris
|
|
57
|
|
Director
|
Martin A.
Sumichrast.
Mr. Sumichrast
has served as a member of the board of directors since April 2015,
and has served as our Chief Executive Officer and President since
September 2016. Since 2012, Mr. Sumichrast has served as Managing
Director of a family office, managing family wealth, which he
formed in March 2012 and subsequently incorporated into Washington
Capital, LLC in December 2012. Since September 2013 he has been a
Managing Member of Stone Street Capital, LLC, a Charlotte, North
Carolina-based private investment company. Stone Street Capital,
LLC manages specific purpose investment entities, as well as
traditional private equity funds. Mr. Sumichrast serves as a
Trustee and Chairman of the Nominating and Governance Committees of
the Barings Global Short Duration High Yield Fund, Inc. (NYSE: BGH)
and the Barings Capital Funds Trust, Inc. From January 2015 until
January 2016, he was also a member of the board of directors of
Social Reality, Inc. (NADASQ:SRAX) and served as a member of the
Audit Committee. From its formation in 2014 until March 1, 2017 he
served as Chairman of the board of directors of Kure Corp., a
privately-held company which is a related party to our company. We
selected Mr. Sumichrast to serve on our board of directors based
upon his significant experience both as an investor and advisor, as
well as his experience as a member of a board of directors of a
listed company.
Mark S.
Elliott
. Mr. Elliott has been
our Chief Financial Officer since October 2016 and our Chief
Operating Officer since January 2017. He has over 30 years of
business experience spanning the financial, retail, consulting and
government sectors and includes time at Fortune 500 and regional
firms. Mr. Elliott began his career in the technology arena and
worked with such Fortune 500 companies as JCPenney and First Union
National Bank within their corporate headquarters. Mr. Elliott
moved into the consulting arena as a regional technology specialist
and eventually moved into senior management as a Director for
Contract Data Services (acquired by Inacom Information Systems).
This position involved all aspects of the business including staff
management, business development, strategy, and managing the
profitability of multiple divisions. Mr. Elliott was a founder and
partner of Premier Alliance Group (now named root9B Holdings, Inc.)
( NASDAQ:RTNB) and was the Chairman and CEO of the company from
2004 to 2013 where he oversaw the strategic direction and operation
of the company. He directed the transformation of the company to a
public market company and successfully oversaw and integrated six
merger and acquisition transactions that strategically positioned
the company. Mr. Elliott has had compliance, financial reporting,
and strategic responsibilities within the company (serving as the
CFO also from 2004 to 2010 and as the Chief Administrative Officer
of the company from 2014 to 2015). Mr. Elliott is also an
independent advisor for Malidan Capital Group a firm specializing
in business restructuring and turn around management consulting.
Mr. Elliott received a Bachelor of Science degree with a
concentration in Computer Science and Management from Marshall
University.
Erik
Sterling
. Mr. Sterling has
served as a member of our board of directors since April 2015. Mr.
Sterling is the founder of Sterling/Winters Company, a brand
building, marketing and management firm established 1978 and now a
wholly-owned subsidiary of
kathy
ireland®
Worldwide.
Today the efforts of Sterling/Winters Company encompass branded
merchandise development, licensing and entertainment programming.
Mr. Sterling also serves as Vice Chairman and Chief Financial
Officer of
kathy
ireland®
Worldwide.
Over the past 22 years, the
kathy
ireland
brand has included
leading manufacturers of furniture, flooring, lighting, bedding,
decorative accessories, wall art, tabletop, window coverings,
precious jewelry, watches, sewing patterns, fashion accessories,
sportswear, women and girls swimwear, active wear, maternity,
intimate apparel, sleepwear, shoes, golf wear, fitness equipment,
publishing, made-for-television movies and specials. Mr. Sterling
serves on the national board of directors for Project Inform, an
HIV/AIDS treatment advocacy group which provides free treatment
information to its subscribers, and holds memberships in the
American Film Institute, Academy of Television Arts & Sciences
and the Hollywood Radio & Television Society. Mr. Sterling
currently serves on the Corporate Governance and Nominating
Committee of our board of directors. We selected Mr. Sterling to
serve on our board of directors because he brings to the board
extensive branding and marketing company experience and brings to
the board significant executive leadership and operational
experience.
35
Anthony K.
Shriver
.
Mr. Shriver has been a member of our board
of directors since June 2015. Mr. Shriver is the Chairman of Best
Buddies® International, a nonprofit 501(c)(3)
organization he founded in 1989 which is dedicated to establishing
a global volunteer movement that creates opportunities for
one-to-one friendships, integrated employment and leadership
development for people with intellectual and developmental
disabilities (IDD). Best Buddies® International has grown from
one original chapter to almost 1,900 middle school, high school,
and college chapters worldwide, engaging participants programs in
each of the 50 United States, and over 50 countries around the
world. Mr. Shriver, who graduated from Georgetown University, has
been recognized for his work on behalf of Best Buddies®
International with diverse international accolades and honorary
degrees.
Mr.
Shriver currently serves on the Compensation Committee of our board
of directors.
We
selected Mr. Shriver to serve on our board of directors based upon
his lifelong commitment to charitable efforts and his dedication to
the principles upon which our company seeks to
operate.
Seymour G.
Siegel.
Mr. Siegel has
been a member of our board of directors since March 2017. Mr.
Siegel, a certified public accountant no longer in practice, has
over 35 years of experience in public accounting and SEC regulatory
matters and has a strong background in mergers and acquisitions,
start-ups, SEC reporting, cost cutting initiatives, profit
enhancements and business operations. Since 2014 he has been
President of Siegel Rich, Inc., a consulting firm. From April 2000
until July 2014, Mr. Siegel was a principal emeritus at Rothstein
Kass & Company, P.C. (now KPMG), an international firm of
accountants and consultants. Mr. Siegel was a founder of Siegel
Rich & Co., CPAs, which eventually merged with what is now
known as WeiserMazars LLP, where he was a senior partner until
selling his interest and co-founding a business advisory firm which
later became a part of Rothstein Kass. He received his Bachelor of
Business Administration from the Baruch School of The City College
of New York. He has been a director and officer of numerous
business, philanthropic and civic organizations. As a professional
director, he has served on the boards of approximately a dozen
public companies over the last 25 years. He was previously a member
of the board of directors and chairman of the audit committees of
Air Industries Group, Inc. (NYSE American: AIRI), root9B
Holdings, Inc. (NASDAQ:RTNB), Hauppauge Digital, Inc.,
Emerging Vision. Inc., Oak Hall Capital Fund, Prime Motor Inns
Limited Partnership, and Noise Cancellation Technologies, Inc. Mr.
Siegel currently serves as chairman of the Audit Committee of our
board of directors and is also a member of the Compensation
Committee of our board of directors. We
selected Mr. Siegel as a member of our board of directors
as a result of his extensive experience in mergers and
acquisitions, public companies and boards, financial reporting and
business advisory services.
Bakari
Sellers
. Mr. Sellers has been a
member of our board of directors since March 2017. Mr. Sellers, an
attorney, has been a member of the Strom Law Firm, LLC, in
Columbia, South Carolina since 2007. Mr. Sellers is a former member
of the South Carolina House of Representative, where he represented
the 90th District beginning in 2006, making history as the youngest
member of the South Carolina state legislature and the youngest
African American elected official in the nation. In 2014, he ran as
the Democratic nominee for Lt. Governor of South Carolina. He has
worked for United States Congressman James Clyburn and former
Atlanta Mayor Shirley Franklin. Earning his undergraduate degree
from Morehouse College, where he served as student body president,
and his law degree from the University of South Carolina, Mr.
Sellers has followed in the footsteps of his father, civil rights
leader Cleveland Sellers, in his tireless commitment to service
taking championing progressive policies to address issues ranging
from education and poverty to preventing domestic violence and
childhood obesity. He has served as a featured speaker at events
for the National Education Association, College Democrats of
America National Convention, the 2008 Democratic National
Convention and, in 2007, delivered the opening keynote address to
the AIPAC Policy Conference in Washington, DC. Mr. Sellers is also
a political commentator at CNN. Mr. Sellers currently serves as
chairman of the Corporate Governance and Nominating Committee of
our board of directors and is also a member of the Audit Committee
of our board of directors. We selected Mr. Sellers as a result of
his leadership experience, commitment to public policy and legal
background.
36
Gregory C.
Morris
.
Mr. Morris has been a member of our board of
directors since March 2017. Mr. Morris has worked in positions
involving finance, investments, benefits, risk management, legal
and human resources for more than 30 years. Since June 2015 he has
served as the Vice President of Human Resources for Healthstat,
Inc., a privately held company providing onsite health clinics and
workplace wellness programs. Prior to that, from January 2013 until
June 2015, he was the Vice President of Administration and
Corporate Secretary at Swisher Hygiene (at that time a
NASDAQ-listed company), leading the human resources, risk
management and legal functions. He was employed by
Snyder’s-Lance, Inc. (NASDAQ: LNCE) for 15 years prior to
joining Swisher Hygiene, Inc., holding the positions of Vice
President-Human Resources and Senior Director – Benefits and
Risk Management. At Snyder’s-Lance, Mr. Morris chaired the
Business Continuity Plan Steering Committee and was a member of the
Corporate Mergers & Acquisitions team. Prior to joining
Snyder’s-Lance, he held various positions with Belk Stores,
Collins & Aikman and Laporte plc. Mr. Morris also served as a
board member for root9B Holdings, Inc. (NASDAQ:RTNB) from 2008
through April, 2017 where he chaired the Compensation Committee and
also served on the Audit Committee. Mr. Morris also served as a
board member for the Second Harvest Food Bank of Metrolina from
2001 to 2016. Mr. Morris received a Bachelor of Science degree in
Accounting from West Virginia University. Mr. Morris
currently serves as chairman of the Compensation Committee of our
board of directors and is also a member of the Audit Committee and
Corporate Governance and Nominating Committee of our board of
directors. We selected Mr. Morris as a member of our board of
directors as a result of his extensive executive level experience
in public companies regarding human resources, accounting,
compliance and compensation matters as well as public board
experience.
There
are no family relationships between any of our directors and
executive officers.
Board of directors
The
board of directors oversees our business affairs and monitors the
performance of management. In accordance with our corporate
governance principles, the board of directors does not involve
itself in day-to-day operations. The directors keep themselves
informed through discussions with the Chairman and Chief Executive
Officer and our Chief Financial Officer/Chief Operating Officer and
by reading the reports and other materials that we send them and by
participating in board of directors and committee meetings.
Directors are elected for a term of one year. Our directors hold
office until their successors have been elected and duly qualified
unless the director resigns or by reason of death or other cause is
unable to serve in the capacity of director. If any director
resigns, dies or is otherwise unable to serve out his or her term,
or if the board increases the number of directors, the board may
fill any vacancy by a vote of a majority of the directors then in
office, although less than a quorum exists. A director elected to
fill a vacancy shall serve for the unexpired term of his or her
predecessor. Vacancies occurring by reason of the removal of
directors without cause may only be filled by vote of the
shareholders.
Board leadership structure and board’s role in risk
oversight
Mr.
Martin A. Sumichrast serves as both our Chief Executive Officer and
Chairman of our board of directors. Messrs. Shriver, Siegel,
Sellers and Morris are each considered an independent director
within the meaning of Section 803 of the NYSE American LLC Company
Guide. We do not have a “lead” independent
director.
Risk
is inherent with every business, and how well a business manages
risk can ultimately determine its success. We face a number of
risks, including credit risk, interest rate risk, liquidity risk,
operational risk, strategic risk and reputation risk. Management is
responsible for the day-to-day management of risks we face, while
the board, as a whole and through its committees, has
responsibility for the oversight of risk management. In its risk
oversight role, the board of directors has the responsibility to
satisfy itself that the risk management process designed and
implemented by management are adequate and functioning as designed.
To do this, the chairman of the board meets regularly with
management to discuss strategy and the risks facing our company.
The Chief Financial Officer attends the board meetings and is
available to address any questions or concerns raised by the board
on risk management and any other matters. The chairman of the board
and independent members of the board work together to provide
strong, independent oversight of our company’s management and
affairs through its standing committees and, when necessary,
special meetings of independent directors.
37
Board
committees
The
board of directors has standing Audit, Compensation, Compensation
and Corporate Governance and Nominating committees. Each committee
has a written charter. The charters are available on our website at
www.levelbrands.com
. All
committee members are independent directors. Information concerning
the current membership and function of each committee is as
follows:
|
Director
|
|
Audit Committee
Member
|
|
Compensation
Committee Member
|
|
Corporate
Governance and Nominating Committee Member
|
|
Anthony
K. Shriver
|
|
|
|
✓
|
|
|
|
Erik
Sterling
|
|
|
|
|
|
|
|
Seymour
G. Siegel
|
|
✓*
|
|
✓
|
|
|
|
Bakari
Sellers
|
|
✓
|
|
|
|
✓*
|
|
Gregory
C. Morris
|
|
✓
|
|
✓*
|
|
✓
|
*
denotes
chairperson.
Audit Committee
The
Audit Committee assists the board in fulfilling its oversight
responsibility relating to:
●
the
integrity of our financial statements;
●
our
compliance with legal and regulatory requirements; and
●
the
qualifications and independence of our independent registered
public accountants.
The
Audit Committee has the ultimate authority to select, evaluate and,
where appropriate, replace the independent auditor, approve all
audit engagement fees and terms, and engage outside advisors,
including its own counsel, as it deems necessary to carry out its
duties. The Audit Committee is also be responsible for performing
other related responsibilities set forth in its
charter.
The
Audit Committee is composed of three directors, Messrs. Siegel,
Sellers and Morris, each of whom has been determined by the board
of directors to be independent within the meaning of Section 803 of
the NYSE American LLC Company Guide. In addition, Mr. Siegel meets
the definition of “audit committee financial expert”
under applicable SEC rules. The Audit Committee met four times
during the fiscal year ended September 30, 2018.
Compensation Committee
The
Compensation Committee assists the board in:
●
determining,
in executive session at which our chief executive officer is not
present, the compensation for our CEO or president, if such person
is acting as the CEO;
●
discharging
its responsibilities for approving and evaluating our officer
compensation plans, policies and programs;
●
reviewing
and recommending to the board regarding compensation to be provided
to our employees and directors; and
●
administering
our equity compensation plan.
The
Compensation Committee is charged with ensuring that our
compensation programs are competitive, designed to attract and
retain highly qualified directors, officers and employees,
encourage high performance, promote accountability and assure that
employee interests are aligned with the interests of our
shareholders. The Compensation Committee is composed of three
directors, Messrs. Morris, Shriver and Siegel, each of whom has
been determined by the board of directors to be independent within
the meaning of Section 803 of the NYSE American LLC Company Guide.
The Compensation Committee met four times during the fiscal year
ended September 30, 2018.
38
Corporate Governance and Nominating Committee
The
Corporate Governance and Nominating Committee:
●
assists
the board in selecting nominees for election to the
board;
●
monitor
the composition of the board;
●
develops
and recommends to the board, and annually reviews, a set of
effective corporate governance policies and procedures applicable
to our company; and
●
regularly
review the overall corporate governance of our company and
recommends improvements to the board as necessary.
The
purpose of the Corporate Governance and Nominating Committee is to
assess the performance of the board and to make recommendations to
the board from time to time, or whenever it shall be called upon to
do so, regarding nominees for the board and to ensure our
compliance with appropriate corporate governance policies and
procedures. The Corporate Governance and Nominating Committee is
composed of two directors, each of whom (Messrs. Sellers and
Morris) have been determined by the board of directors to be
independent within the meaning of Section 803 of the NYSE American
LLC Company Guide. The Corporate Governance and Nominating
Committee met one time during the fiscal year ended September 30,
2018.
Shareholder nominations
Shareholders
who would like to propose a candidate to serve as a member of our
board of directors may do so by submitting the candidate’s
name, resume and biographical information to the attention of our
Corporate Secretary. All proposals for nomination received by the
Corporate Secretary will be presented to the Corporate Governance
and Nominating Committee for appropriate consideration. It is the
policy of the Corporate Governance and Nominating Committee to
consider director candidates recommended by shareholders who appear
to be qualified to serve on our board of directors. The Corporate
Governance and Nominating Committee may choose not to consider an
unsolicited recommendation if no vacancy exists on the board of
directors and the committee does not perceive a need to increase
the size of the board of directors. In order to avoid the
unnecessary use of the Corporate Governance and Nominating
Committee’s resources, the committee will consider only those
director candidates recommended in accordance with the procedures
set forth below. To submit a recommendation of a director candidate
to the Corporate Governance and Nominating Committee, a shareholder
should submit the following information in writing, addressed to
the Corporate Secretary of Level Brands at our main
office:
●
the
name and address of the person recommended as a director
candidate;
●
all
information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors
pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended;
●
the
written consent of the person being recommended as a director
candidate to be named in the proxy statement as a nominee and to
serve as a director if elected;
●
as to the person making the recommendation, the
name and address, as they appear on our books, of such person, and
number of shares of our common stock owned by such person;
provided,
however
, that if the person is
not a registered holder of our common stock, the person should
submit his or her name and address along with a current written
statement from the record holder of the shares that reflects the
recommending person’s beneficial ownership of our common
stock; and
●
a
statement disclosing whether the person making the recommendation
is acting with or on behalf of any other person and, if applicable,
the identity of such person.
39
Code of Ethics and Conduct and Insider Trading Policy
In
January 2017 we adopted a Code of Ethics and Conduct which applies
to our board of directors, our executive officers and our
employees. The Code of Ethics and Conduct outlines the broad
principles of ethical business conduct we adopted, covering subject
areas such as:
●
conflicts
of interest;
●
corporate
opportunities;
●
public
disclosure reporting;
●
confidentiality;
●
protection
of company assets;
●
health
and safety;
●
conflicts
of interest; and
●
compliance
with applicable laws.
A copy of our Code of Ethics and Conduct is
available on our website at
www.levelbrands.com
.
Additionally,
all of our directors, officers, employees and consultants are
subject to our Insider Trading Policy. Our Insider Trading Policy
prohibits the purchase, sale or trade of our securities with the
knowledge of material nonpublic information. In addition, our
Insider Trading Policy prohibits our employees, officers,
directors, and consultants from trading on a short-term basis,
engaging in a short sale of our securities, engaging in
transactions in puts, call or other derivatives tied to our
securities, engaging in hedging transactions, holding any of our
securities in a margin account or otherwise pledging our securities
as collateral for a loan. Any transactions by our directors,
officers, employees and consultants must be first pre-cleared by
our Chief Executive Officer or our Chief Financial Officer in an
effort to assist these individuals from inadvertently violating our
Insider Trading Policy. Our Insider Trading Policy also fixes
certain quarterly and event specific blackout periods.
Compensation of Directors
Non-employee Director Compensation Program
In
December 2016, our board of directors adopted a compensation plan
for our non-employee directors which was amended by the board in
January 2017. This compensation plan, which was in place during a
portion of fiscal 2018, provided that our non-employee directors
would be compensated as follows:
●
an
annual retainer of $10,000 upon joining the board for the first
time, paid with the issuance of stock;
●
an
annual retainer for committee chairpersons of $15,000 for the Audit
Committee Chairman, $5,000 for the Compensation Committee Chairman
and $2,500 for the Corporate Governance and Nominating Committee
Chairman;
●
an
annual retainer for committee members of $6,000 for service on the
Audit Committee, $2,000 for service on the Compensation Committee
and $1,000 for service on the Corporate Governance and Nominating
Committee; and
●
$1,500
for each scheduled board meeting attended.
In
addition, board members were reimbursed for out-of-pocket expenses
related to participation in board and committee
meetings.
In
August 2018, after reviewing the results of an independent
compensation study on public company executive and board
compensation and upon recommendation of the Compensation Committee
of our board of directors, the board of directors adopted a new
compensation program for our non-employee directors for the 2018
board term which began on March 22, 2018 which
includes:
40
|
Annual
retainer (cash)
|
$23,000
|
|
|
|
|
Annual
NSO option grant under our 2015 Equity Compensation Plan, 10 year
term, vesting on date of grant; exercise price equal to fair market
value on date of grant, cashless exercise
|
Options
to purchase 7,000 shares of common stock
|
|
Annual
Board committee retainers (cash):
|
|
||
|
|
Audit
Committee Chair:
|
$15,000
|
|
|
|
Audit
Committee member:
|
$7,500
|
|
|
|
Compensation
Committee Chair:
|
$6,000
|
|
|
|
Compensation
Committee member:
|
$3,000
|
|
|
|
Corporate
Governance and Nominating Committee Chair:
|
$4,000
|
|
|
|
Corporate
Governance and Nominating Committee member:
|
$2,000
|
|
In
addition, board members are reimbursed for out-of-pocket expenses
related to participation in board and committee
meetings.
Fiscal 2018 Director Compensation
The
following table sets forth the compensation paid or earned for the
fiscal year ended September 30, 2018 by our non-employee directors.
Our employee directors do not receive compensation for their
services as directors.
|
Name
|
Fees
earned
or
paid
in
cash
($)
|
Stock
awards
($)
|
Option
awards
($)(1)
|
Non-equity
incentive
plan
compensation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All
other
compensation
($)
|
Total
($)
|
|
Erik
Sterling
|
26,500
|
|
16,030
|
|
|
|
42,530
|
|
Anthony K.
Shriver
|
27,500
|
|
16,030
|
|
|
|
43,530
|
|
Seymour G.
Siegel
|
42,500
|
|
16,030
|
|
|
|
58,530
|
|
Bakari
Sellers
|
36,000
|
|
16,030
|
|
|
|
52,030
|
|
Gregory C.
Morris
|
40,000
|
|
16,030
|
|
|
|
56,030
|
|
(1)
|
Represents
the grant date value of the options granted during the year,
determined in accordance with FASB ASC Topic 718. The assumptions
made in the valuations of the option awards are included in Note 10
of the notes to our consolidated financial statements appearing
elsewhere in this report
.
|
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the
Exchange Act requires our executive officers and
directors, and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the
Securities and Exchange Commission initial statements of beneficial
ownership, reports of changes in ownership and annual reports
concerning their ownership of our common shares and other equity
securities, on Forms 3, 4 and 5 respectively. Executive officers,
directors and greater than 10% stockholders are required by the
Securities and Exchange Commission regulations to furnish us with
copies of all Section 16(a) reports they file.
Based solely
upon a review of Forms 3 and 4 and amendments thereto furnished to
us under Rule 16a-3(d) of the Exchange Act during 2018 and Forms 5
and amendments thereto furnished to us with respect to the year
ended September 30, 2018, as well as any written representation
from a reporting person that no Form 5 is required, we are not
aware that any officer, director or 10% or greater stockholder
failed to file on a timely basis, as disclosed in the
aforementioned Forms, reports required by Section 16(a) of the
Exchange Act during the year ended September 30, 2018
41
ITEM
11.
EXECUTIVE
COMPENSATION.
Summary Compensation Table
The
following table sets forth the compensation paid or earned for the
fiscal years ended September 30, 2018 and 2017 to our named
executive officers, who are comprised of our chief executive
officer and our chief financial officer and chief operating
officer, for each of those years.
|
Name and
principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
(1)
|
Option
Awards
($)
(1)
|
No
equity
incentive
plan
compensation
($)
|
Non-qualified
deferred
compensation
earnings
($)
|
All
other
compensation
($)(2)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
|
|
Martin A.
Sumichrast
|
2018
|
232,500
|
240,000
|
0
|
0
|
0
|
0
|
0
|
472,500
|
|
Chief Executive
Officer
|
2017
(2)
|
90,000
|
0
|
127,500
|
0
|
0
|
0
|
0
|
217,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark S.
Elliott
|
2018
|
165,000
|
100,000
|
0
|
519,000
|
0
|
0
|
0
|
784,000
|
|
Chief Financial
Officer and Chief Operating Officer
|
2017
(2)
|
90,000
|
0
|
17,000
|
35,000
|
0
|
0
|
18,000
|
160,000
|
|
(1)
|
Represents
the grant date value of the options and awards granted during the
years presented, determined in accordance with FASB ASC Topic 718.
The assumptions made in the valuations of the awards are included
in Notes 10 and 11 of the notes to our consolidated financial
statements appearing elsewhere in this report
.
|
|
(2)
|
Stock
and option award information updated to reflect corrected
valuations.
|
Compensation arrangements with Martin A. Sumichrast and Mark S.
Elliott
In
January 2017 we entered into employment agreements with each of Mr.
Sumichrast and Mr. Elliott, the terms of which are substantially
similar, including:
●
the
term of each agreement is for one year and it may be extended for
additional one year periods at our option upon 60 days’
notice;
●
the
executive is entitled to an annual base salary of $120,000. The
agreement initially provided that the compensation due Mr.
Sumichrast is would accrue until the completion of our initial
public offering, after which time all accrued compensation was to
be paid to him. In April 2017 the employment agreement with Mr.
Sumichrast was amended to provide that we begin paying Mr.
Sumichrast his compensation on a current basis;
●
the
executive is entitled to a discretion bonus as determined by our
board of directors;
●
the
executive is entitled to participate in all benefit programs we
offer our employees, and such amount of paid vacation as is
consistent with his position and length of service to
us;
●
the
agreement will terminate upon his death or disability and may be
terminated by us with or without cause, subject to cure periods, or
by the executive at his discretion. The executive is not entitled
to any severance or similar benefits upon a termination of the
agreement; and
●
the
agreement contains customary non-compete, confidentiality and
indemnification provisions.
Following the
expiration in January 2018 of the terms of the 2017 employment
agreements, each of Messrs. Sumichrast and Elliott continued to
provide services to us under those agreements. Pending the
finalization of a new employment agreement with Mr. Sumichrast, in
January 2018, we made the following compensation changes with Mr.
Sumichrast:
●
annual
base salary of $270,000 effective January 1, 2018; and
●
a
discretionary bonus award of $240,000 was set based on the prior
year accomplishments.
In
addition, pending the finalization of a new employment agreement
with Mr. Elliott, in January 2018, we made the following
compensation changes with Mr. Elliott:
●
annual
base salary of $180,000 effective January 1, 2018; and
●
a
discretionary bonus award of $100,000 was set based on the prior
year accomplishments.
42
In
May 2018, the board of directors awarded Mr. Elliott options to
purchase 150,000 shares of our common stock valued at $519,000, of
which options to purchase 75,000 shares vested immediately and
options to purchase the remaining 75,000 shares vest in January
2019.
On
September 6, 2018 we entered into new employment agreements with
each of Mr. Sumichrast and Mr. Elliott, the terms of which are
substantially similar, including:
●
the
initial term of each agreement is for three years, and it may be
extended for additional one year terms by written notice by us at
least 60 days before the expiration of the then current
term;
●
we
agreed to pay Mr. Sumichrast a base salary of $270,000 and Mr.
Elliott an initial base salary of $180,000;
●
each
executive is eligible for a performance bonus, payable in a
combination of cash and awards of common stock, and the performance
bonus will be based upon his relative achievement of annual
performance goals established by our board of directors upon
recommendation of the compensation committee, with input from
senior executive management. As of the date of this prospectus the
board of directors has not established the performance goals. Any
performance bonus stock award will be granted to the executive
pursuant to the terms and conditions of our 2015 Equity
Compensation Plan or such other compensation plan as may be adopted
by our company and our shareholders. In addition, the compensation
committee of the board of directors will review each executive's
performance on an annual basis, and in connection with such annual
review, the executive may be entitled to receive an annual
discretionary bonus in such amount as may be determined by the
board of directors, upon recommendation of the compensation
committee, in its sole discretion;
●
each
executive is also entitled to participate in all benefit programs
we offer our employees, reimbursement for business expenses and
such amount of paid vacation as is consistent with his position and
length of service to us;
●
we may terminate each agreement for "cause", upon
the executive's death or disability, or without cause, and the
executive may terminate the agreement without cause. In each of the
employment agreements,
“cause” is defined to
mean:
●
committing or
participating in an injurious and intentional act of fraud, gross
neglect, misrepresentation, embezzlement or dishonesty against
us;
●
committing or
participating in any other injurious act or omission wantonly,
willfully, recklessly or in a manner which was grossly negligent
against us;
●
engaging in a
criminal enterprise involving moral turpitude;
●
conviction for a
felony under the laws of the United States or any
state;
●
violation of any
Federal or state securities laws, rules or regulations, or any
rules or regulations of any stock exchange or other market on which
our securities may be listed or quoted for trading;
●
violation of our
corporate governance policies which have been formally adopted by
the board of directors; or
●
any assignment of
the agreement in violation of the terms of the
agreement.
●
If
we terminate the agreement for cause, or if it terminates upon the
executive’s death, or if the executive voluntarily terminates
the agreement, neither the executive nor his estate (as the case
may be) is entitled to any severance or other benefits following
the date of termination. If the agreement is terminated upon his
disability, we are obligated to pay him his base salary for three
months. If we terminate the agreement without cause or by a
"constructive termination" of the agreement, we are obligated to
pay him his base salary and provide the benefits he would have
otherwise been entitled to for the balance of the then current term
of the agreement. Constructive termination is defined under the
agreement as the occurrence of one or more of the following events
without the express written consent of the executive: (1) a
material breach of the agreement by our company; (2) failure by a
successor company to assume the obligations under the agreement;
and/or (3) a material change in the executive's duties and
responsibilities as described under the agreement.
43
●
in the event of a “change of control”
of our company, if the executive's employment is terminated by us
without cause within two years of the date of the change of
control, or in the 90 days prior to the change of control at the
request of the acquiror, we are obligated to pay the executive a
lump sum payment equal to the greater of (1) 1.5 times his base
salary or (2) all of his base salary remaining to be paid during
the initial term, plus all unvested stock options and restricted
stock grants will immediately vest and remain exercisable for
twelve months from the date of termination. “Change of
control” is defined as
mean a
change of control
of a nature that would be required to be reported
in response to Item 6(e) of Schedule 14A of Regulation 14A
promulgated under the Exchange Act, whether or not we are in fact
required to comply with that regulation, provided that, without
limitation, such a change in control shall be deemed to have
occurred if
:
●
any
person, other than a trustee or other fiduciary holding securities
under an employee benefit plan of our company or a corporation
owned, directly or indirectly, by our shareholders in substantially
the same proportions as their ownership of our stock, is or becomes
the beneficial owner, directly or indirectly, of our securities
representing more than 50% of the combined voting power of our then
outstanding securities;
●
during
any period of two consecutive years (not including any period prior
to the execution of the employment agreement), individuals who at
the beginning of such period constitute the board of directors and
any new director (other than a director designated by a person who
has entered into an agreement with us to effect a certain
transactions) whose election by the board of directors or
nomination for election by our shareholder’s was approved by
a vote of at least two-thirds of the directors then still in office
who either were directors at the beginning of the period or whose
election or nomination for election was previously so approved,
cease for any reason to constitute a majority;
●
we
enter into an agreement, the consummation of which would result in
the occurrence of a change in control of our company;
●
our
shareholders approve a merger or consolidation of our company with
any other corporation, other than a merger or consolidation which
would result in our voting securities outstanding immediately prior
to it continuing to represent (either by remaining outstanding or
by being converted into voting securities of the surviving entity)
of more than 50% of the combined voting power of the voting
securities our company or such surviving entity outstanding
immediately after such merger or consolidation; or
●
our
shareholders approve a plan of complete liquidation of our company
or an agreement for the sale or disposition by us of all or
substantially all of our assets.
●
the
agreement contains customary non-compete, confidentiality and
indemnification provisions; provided, however, that in the event we
terminate the agreement without cause or if it terminates upon a
change of control, the executive is no longer subject to the
non-compete provisions of the agreement.
44
Outstanding Equity Awards at Year End
The
following table provides information concerning outstanding equity
awards held by each of our named executive officers as of September
30, 2018. Information regarding our 2015 Equity Compensation Plan
appears elsewhere in this prospectus under “
Description of Capital Stock – 2015
Equity Compensation Plan
.”
|
|
OPTION
AWARDS
|
STOCK
AWARDS
|
|||||||
|
Name
|
Number of
securities underlying unexercised options
(#)
exercisable
|
Number of
securities underlying unexercised options
(#)
unexercisable
|
Equity incentive
plan awards: Number of securities underlying unexercised unearned
options
(#)
|
Option exercise
price
($)
|
Option
expiration date
|
Number of shares
or units of stock that have not vested (#)
|
Market value of
shares or units of stock that have not vested ($)
|
Equity incentive
plan awards: Number of unearned shares, units or other rights that
have not vested (#)
|
Equity incentive
plan awards: Market or payout value of unearned shares, units or
other rights that have not vested (#)
|
|
Martin A.
Sumichrast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark S.
Elliott
|
100,000
|
|
|
7.50
|
1/1/2023
|
|
|
|
|
|
|
100,000
|
|
|
4.00
|
5/1/2024
|
|
|
|
|
|
|
75,000
|
|
|
4.78
|
5/29/2028
|
|
|
|
|
|
|
|
75,000
|
|
4.78
|
5/29/2028
|
|
|
|
|
ITEM
12.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS.
At
December 01, 2018, we had 10,095,356 shares of our common stock
issued and outstanding. The following table sets forth information
known to us as of December 01, 2018 relating to the beneficial
ownership of shares of our common stock by:
●
each person who is
known by us to be the beneficial owner of more than 5% of our
outstanding common stock;
●
each director and
nominee;
●
each named
executive officer; and
●
all named executive
officers and directors as a group.
Unless
otherwise indicated, the address of each beneficial owner in the
table set forth below is care of 4521 Sharon Road, Suite 450,
Charlotte, NC 28211. We believe that all persons, unless otherwise
noted, named in the table have sole voting and investment power
with respect to all shares of our common stock shown as being owned
by them. Under securities laws, a person is considered to be the
beneficial owner of securities owned by him (or certain persons
whose ownership is attributed to him) and that can be acquired by
him within 60 days from December 01, 2018, including upon the
exercise of options, warrants or convertible securities. We
determine a beneficial owner’s percentage ownership by
assuming that options, warrants or convertible securities that are
held by him, but not those held by any other person, and which are
exercisable within 60 days of the that date, have been exercised or
converted.
45
|
Name of
Beneficial Owner
|
No. of Shares
Beneficially Owned
|
% of
Class
|
|
|
|
|
|
Martin A.
Sumichrast
(1)(5)
|
746,434
|
7.4
%
|
|
Mark S. Elliott
(2)(5)
|
381,680
|
3.7
%
|
|
Erik Sterling
(3)(5)
|
1,079,667
|
10.7
%
|
|
Anthony K. Shriver
(4)(5)
|
134,500
|
1.3
%
|
|
Seymour G. Siegel
(5)
|
9,531
|
*
|
|
Bakari Sellers
(5)
|
9,531
|
*
|
|
Gregory C. Morris
(5)
|
9,531
|
*
|
|
All officers and
directors as a group (seven persons)
(1)(2)(3)(4)(5)
|
2,370,874
|
22.7
%
|
|
Jason Winters
(5)(6)
|
1,032,667
|
10.2
%
|
|
The Runnels Family
Trust
(7)
|
600,000
|
5.9
%
|
*
Less than
1%
(1)
The
number of shares of our common stock owned by Mr. Sumichrast
includes:
•
475,834
shares owned of record by Stone Street Partners, LLC;
and
•
270,600
shares owned of record by Washington Capital, LLC.
Mr.
Sumichrast in his position at Stone Street Partners, LLC has the
right to direct the vote and disposition of securities owned by
Stone Street Partners, LLC.
Mr.
Sumichrast has voting and dispositive control over securities owned
by Washington Capital LLC. Mr. Sumichrast disclaims beneficial
ownership of the securities held of record by each of these
entities except to the extent of his pecuniary interest
therein.
(2)
The
number of shares of our common stock beneficially owned by Mr.
Elliott includes:
•
1,680
shares held of record by his spouse's retirement account;
and
•
350,000 shares
underlying vested stock options.
(3)
The number of
shares of our common stock beneficially owned by Mr. Sterling
includes:
•
166,667 shares
owned of record by the Sterling Winters Living Trust u/t/d/
December 10, 1993 (the "Trust");
•
583,000 shares
owned of record by IM1 Holdings, LLC, a California limited
liability company ("IM1 Holdings"); and
•
283,000 shares
owned of record by EE1 Holdings, LLC, a California limited
liability company ("EE1 Holdings").
Mr.
Sterling and Mr. Jason Winters are co-Trustees of the Trust and
have shared voting and dispositive control over securities held by
the Trust. The Trust is the manager and a member of each of IM1
Holdings and EE1 Holdings and as manager has voting and dispositive
control over securities held of record by IM1 Holdings and EE1
Holdings. Mr. Sterling disclaims beneficial ownership of the
securities held of record by the Trust, IM1 Holdings and EE1
Holdings except to the extent of his pecuniary interest therein.
See footnote 6.
(4)
The number of
shares of our common stock beneficially owned by Mr. Shriver
includes 50,000 shares held of record by Best Buddies®
International. Mr. Shriver has voting and dispositive control over
securities held of record by Best Buddies® International. He
disclaims beneficial ownership of such securities except to the
extent of his pecuniary interest therein.
(5)
In connection with
our secondary offering which closed in October 2018, our officers
and directors and their affiliated entities entered into lock-up
agreements with Joseph Gunnar & Co., LLC, the sole book running
manager for the offering pursuant to which they each agreed not to
enter into certain transactions involving shares of our common
stock beneficially owned by them, including but not limited to, the
offer, sale, pledge, transfer or other disposition of such shares,
until December 27, 2018, subject to certain
exclusions.
46
(6)
Mr. Winters is
co-Trustee of the Trust. The number of shares of our common stock
beneficially owned by Mr. Winters includes:
•
166,667 shares
owned of record by the Trust;
•
583,000 shares
owned of record by IM1 Holdings; and
•
283,000 shares
owned of record by EE1 Holdings.
Mr.
Winters disclaims beneficial ownership of the securities held of
record by the Trust, IM1 Holdings and EE1 Holdings except to the
extent of his pecuniary interest therein. Mr. Winters address is 39
Princeton Drive, Rancho Mirage, CA 92270. See footnote
3.
(7)
Mr. Runnels, is
co-Trustee of The Runnels Family Trust. Mr. Runnels disclaims
beneficial ownership of the securities held of record by The
Runnels Family Trust except to the extent of his pecuniary interest
therein. Mr. Runnels' address is 2049 Century Park East, Suite 320,
Los Angeles, CA 90067.
Securities Authorized for Issuance under Equity Compensation
Plans
The
following table sets forth securities authorized for issuance under
any equity compensation plans approved by our shareholders as well
as any equity compensation plans not approved by our shareholders
as of September 30, 2018.
|
Plan
category
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted average
exercise price of outstanding options, warrants and rights
($)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column
|
|
|
|
|
|
|
Plans approved by
our shareholders:
|
|
|
|
|
2015 Equity
Compensation Plan
|
469,650
|
5.13
|
845,455
|
|
Plans not approved
by shareholders
|
-
|
-
|
-
|
Please
see Note 11 of the notes to our audited consolidated financial
statements appearing in our 2018 10-K for more information on our
2015 Equity Compensation Plan.
ITEM
13.
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE.
Our
Audit Committee will review any transaction in which we or any of
our directors, nominees for director, executive officers or holders
of more than 5% of our common stock or any of their immediate
family members, is, was or is proposed to be a participant and the
amount involved exceeds the lesser of $120,000 or 1% of our average
total assets at year-end for our last two completed fiscal years.
Our management is responsible for determining whether a transaction
contains the characteristics described above requiring review by
the Audit Committee of our board of directors.
During
the past three years
we have engaged
in a number of related party transactions with our directors,
executive officers, and owners of 10% or more of our common stock
which are described in detail in Note 9 to the notes to
consolidated financial statements which appears elsewhere in this
report.
47
ITEM
14.
PRINCIPAL
ACCOUNTING FEES AND SERVICES.
The
following table shows the fees that were billed for the audit and
other services provided for the fiscal years ended September 30,
2018 and 2017:
|
|
2018
|
2017
|
|
Audit
Fees
|
$
136,750
|
$
151,300
|
|
Audit-Related
Fees
|
28,800
|
-
|
|
Tax
Fees
|
24,525
|
9,675
|
|
All Other
Fees
|
54,850
|
97,370
|
|
Total
|
$
244,925
|
$
258,345
|
Audit Fees
— This category
includes the audit of our annual financial statements and services
that are normally provided by the independent registered public
accounting firm in connection with engagements for those fiscal
years. This category also includes advice on audit and accounting
matters that arose during, or as a result of, the audit or the
review of interim financial statements.
Audit-Related Fees
— This
category consists of assurance and related services by the
independent registered public accounting firm that are reasonably
related to the performance of the audit or review of our financial
statements and are not reported above under “Audit
Fees.” The services for the fees disclosed under this
category include consultation regarding our correspondence with the
Securities and Exchange Commission and other accounting
consulting.
Tax Fees
— This category consists
of professional services rendered by our independent registered
public accounting firm for tax compliance and tax advice. The
services for the fees disclosed under this category include tax
return preparation and technical tax advice.
All Other Fees
— This category
consists of fees for other miscellaneous items.
Our
board of directors has adopted a procedure for pre-approval of all
fees charged by our independent registered public accounting firm.
Under the procedure, the Audit Committee of the board approves the
engagement letter with respect to audit, tax and review services.
Other fees are subject to pre-approval by the Audit Committee of
the board. The audit and tax fees paid to the auditors with respect
to the fiscal year ended September 30, 2018 and 2017 were approved
by the Audit Committee of the board of directors.
48
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.
49
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.
|
|
|
||
|
Date:
December 12, 2018
|
Level Brands, Inc.
|
||
|
|
|
|
|
|
|
By:
|
/s/
Martin Sumichrast
|
|
|
|
|
Martin A. Sumichrast
|
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
|
||
|
Date:
December 12, 2018
|
Level Brands, Inc.
|
||
|
|
|
|
|
|
|
By:
|
/s/
Mark Elliott
|
|
|
|
|
Mark S. Elliott
|
|
|
|
|
Chief Financial Officer, (Principal Accounting and Financial
Officer)
|
|
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.
|
Name
|
|
Positions
|
|
Date
|
|
|
|
|
|
|
|
/s/
Martin A. Sumichrast
|
|
Chairman of the Board of Directors, Director
|
|
December 12, 2018
|
|
Martin A.
Sumichrast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2018
|
|
Erik
Sterling
|
|
|
|
|
|
|
|
|
|
|
|
/s/
Anthony K. Shriver
|
|
Director
|
|
December 12, 2018
|
|
Anthony K.
Shriver
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Seymour G. Siegel
|
|
Director
|
|
December 12, 2018
|
|
Seymour
G. Siegel
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Bakari Sellers
|
|
Director
|
|
December 12, 2018
|
|
Bakari
Sellers
|
|
|
|
|
|
|
|
|
|
|
|
/s/ Gregory C. Morris
|
|
Director
|
|
December 12, 2018
|
|
Gregory
C. Morris
|
|
|
|
|
50
EXHIBIT INDEX
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
Herewith
|
|||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
||
|
|
Underwriting
Agreement
|
|
S-1
|
|
9/26/18
|
|
1.1
|
|
|
||
|
|
Merger
Agreement dated December 3, 2018 by and among Level Brands, Inc.,
AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
|
|
8-K
|
|
12/4/18
|
|
2.1
|
|
|
||
|
|
Articles
of Incorporation
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
||
|
|
Articles
of Amendment to the Articles of Incorporation filed April 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
||
|
|
Articles
of Amendment to the Articles of Incorporation filed June 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
||
|
|
Articles
of Amendment to the Articles of Incorporation filed November 17,
2016
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
||
|
|
Articles
of Amendment to the Articles of Incorporation filed December 5,
2016
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
||
|
|
Bylaws,
as amended
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
||
|
|
Form of placement agent warrant issued in June 2015 private
placement
|
|
1-A
|
|
9/18/17
|
|
3.3
|
|
|
||
|
|
Form of placement agent warrant issued in December 2015 private
placement
|
|
1-A
|
|
9/18/17
|
|
3.4
|
|
|
||
|
|
Form of warrant issued in 8% convertible promissory note
offering
|
|
1-A
|
|
9/18/17
|
|
3.5
|
|
|
||
|
|
Form of selling agents’ warrant issued in November 2017
initial public offering
|
|
1-A/A
|
|
10/12/17
|
|
3.6
|
|
|
||
|
|
Form of common stock certificate of the registrant
|
|
1-A
|
|
9/18/17
|
|
3.7
|
|
|
||
|
|
2015
Equity Compensation Plan
|
|
1-A
|
|
9/18/17
|
|
3.8
|
|
|
||
|
|
Form of
stock option award under 2015 Equity Compensation Plan
+
|
|
1-A
|
|
9/18/17
|
|
3.9
|
|
|
||
|
|
Form of
warrant issued to Andre Carthen
|
|
1-A
|
|
9/18/17
|
|
3.10
|
|
|
||
|
|
Form of
warrant issued to Nicholas Walker
|
|
1-A
|
|
9/18/17
|
|
3.11
|
|
|
||
|
|
Form of
representative’s warrant
|
|
S-1
|
|
9/26/18
|
|
4.10
|
|
|
||
|
|
Contribution Agreement by and between Beauty & Pin-Ups, Inc.
and Beauty and Pin Ups LLC dated April 13, 2015
|
|
1-A
|
|
9/18/17
|
|
7.1
|
|
|
||
|
|
Operating Agreement of Beauty and Pin Ups LLC, as
amended
|
|
1-A
|
|
9/18/17
|
|
6.1
|
|
|
||
|
|
Consulting Agreement dated April 13, 2015 by and between Beauty and
Pin Ups LLC and Priel Maman
|
|
1-A
|
|
9/18/17
|
|
6.2
|
|
|
||
|
|
Management Services Agreement dated April 27, 2015 by and
between
kathy
ireland
® Worldwide and
Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.3
|
|
|
||
|
|
Advisory Services Agreement dated April 27, 2015 by and between
Stone Street Partners, LLC and Level Beauty Group,
Inc.
|
|
1-A
|
|
9/18/17
|
|
6.4
|
|
|
||
|
|
Termination Agreement dated October 31, 2016 by and between
kathy
ireland
® Worldwide and
Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.5
|
|
|
||
|
|
Termination Agreement dated September 30, 2016 by and between
Siskey Capital, LLC and Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.6
|
|
|
||
|
|
Revolving Line of Credit Loan Agreement dated August 7, 2015 from
Level Beauty Group, Inc. to LBGLOC, LLC
|
|
1-A
|
|
9/18/17
|
|
6.7
|
|
|
||
|
|
Promissory Note dated August 7, 2015 from Level Beauty Group, Inc.
to LBGLOC LLC
|
|
1-A
|
|
9/18/17
|
|
6.8
|
|
|
||
|
|
Security Agreement dated August 7, 2015 from Level Beauty Group,
Inc. to LBGLOC LLC
|
|
1-A
|
|
9/18/17
|
|
6.9
|
|
|
||
|
|
Executive Employment Agreement dated January 1, 2017 by and between
Level Brands, Inc. and Martin A. Sumichrast +
|
|
1-A
|
|
9/18/17
|
|
6.10
|
|
|
||
|
|
Executive Employment Agreement dated January 2, 2017 by and between
Level Brands, Inc. and Mark S. Elliott +
|
|
1-A
|
|
9/18/17
|
|
6.11
|
|
|
||
|
|
Master Advisory and Consulting Agreement dated February 8, 2017 by
and between Level Brands, Inc. and
kathy
Ireland
®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.12
|
|
|
||
|
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Stephen Roseberry +
|
|
1-A
|
|
9/18/17
|
|
6.13
|
|
|
||
|
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Tommy Meharey+
|
|
1-A
|
|
9/18/17
|
|
6.14
|
|
|
||
|
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Nicolas Mendoza +
|
|
1-A
|
|
9/18/17
|
|
6.15
|
|
|
||
|
|
Sublease dated January 1, 2017 by and between Kure Franchise, LLC
and Level Brands, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.16
|
|
|
||
|
|
Form of Filler Supply Agreement for Beauty and Pin Ups
LLC
|
|
1-A
|
|
9/18/17
|
|
6.17
|
|
|
||
|
|
Wholesale License Agreement dated January 12, 2017 by and
between
kathy ireland
®Worldwide and I'M1,
LLC
|
|
1-A
|
|
9/18/17
|
|
6.18
|
|
|
||
51
|
|
Amended and Restated Limited Liability Company Agreement of I'M1,
LLC effective January 1, 2017
|
|
1-A
|
|
9/18/17
|
|
6.19
|
|
|
||
|
|
Amended and Restated Limited Liability Company Agreement of Encore
Endeavor 1 LLC effective January 1, 2017
|
|
1-A
|
|
9/18/17
|
|
6.20
|
|
|
||
|
|
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.
|
|
1-A
|
|
9/18/17
|
|
7.2
|
|
|
||
|
|
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.
|
|
1-A
|
|
9/18/17
|
|
7.3
|
|
|
||
|
|
Form of Indemnification Agreement
|
|
1-A
|
|
9/18/17
|
|
6.21
|
|
|
||
|
|
Charitable Agreement between Beauty & Pin Ups and Best Buddies
International, as amended
|
|
1-A
|
|
9/18/17
|
|
6.22
|
|
|
||
|
|
Amendment No. 1 to Transaction Fee Agreement dated March 27, 2017
by and between Level Brands, Inc. and T.R. Winston & Company
LLC
|
|
1-A
|
|
9/18/17
|
|
6.23
|
|
|
||
|
|
Form of I'M1 License Agreement
|
|
1-A
|
|
9/18/17
|
|
6.24
|
|
|
||
|
|
Consulting Agreement dated March 20, 2017 by and between I'M1, LLC
and Kure Corp.
|
|
1-A
|
|
9/18/17
|
|
6.25
|
|
|
||
|
|
Amended and Restated Consulting Agreement dated March 20, 2017 by
and between I'M1, LLC and NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.26
|
|
|
||
|
|
Amendment to Executive Employment Agreement dated April 1, 2017 by
and between Level Brands, Inc. and Martin A. Sumichrast
+
|
|
1-A
|
|
9/18/17
|
|
6.27
|
|
|
||
|
|
Amendment to Swap Agreement dated March 28, 2017 by and among
Beauty and Pin Ups, LLC, Level Brands, Inc. and Dean
Gangbar
|
|
1-A
|
|
9/18/17
|
|
7.4
|
|
|
||
|
|
License Agreement dated March 29, 2017 by and among I'M1, LLC, Kure
Corp. and Kure Franchise, LLC
|
|
1-A
|
|
9/18/17
|
|
6.28
|
|
|
||
|
|
License Agreement dated March 31, 2017 by and between I'M1, LLC and
NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.29
|
|
|
||
|
|
Television Series Consulting Agreement dated March 1, 2017 by and
between Multi-Media Productions Inc. and Encore Endeavor 1,
LLC
|
|
1-A
|
|
9/18/17
|
|
6.30
|
|
|
||
|
|
Advisory Agreement dated May 9, 2017 by and between Formula Four
Beverages Inc., I'M1, LLC and Encore Endeavor 1, LLC
|
|
1-A
|
|
9/18/17
|
|
6.31
|
|
|
||
|
|
Termination of License Agreement Ab Initio dated June 8, 2017 by
and between I'M1, LLC and NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.32
|
|
|
||
|
|
Membership Interest Sale and Purchase Agreement by and among Priel
Maman, Level Brands, Inc. and Beauty and Pin-Ups, LLC dated April
26, 2017
|
|
1-A
|
|
9/18/17
|
|
6.33
|
|
|
||
|
|
Debt Conversion Agreement dated May 15, 2017 by and between Level
Brands, Inc. and LBGLOC, LLC, as amended
|
|
1-A
|
|
9/18/17
|
|
6.34
|
|
|
||
|
|
License Agreement dated March 29, 2017 by and between I'M1, LLC and
Andre Phillipe, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.35
|
|
|
||
|
|
Recording Master License Agreement dated May 23, 2017 by and
between McCoo & Davis, Inc. and Encore Endeavor 1
LLC
|
|
1-A
|
|
9/18/17
|
|
6.36
|
|
|
||
|
|
Form of note conversion agreement
|
|
1-A
|
|
9/18/17
|
|
6.37
|
|
|
||
|
|
Management Consulting Agreement dated July 1, 2017 by and between
Level Brands, Inc. and Market Development Consulting Group,
Inc.
|
|
1-A
|
|
9/18/17
|
|
6.38
|
|
|
||
|
|
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
|
|
1-A
|
|
9/18/17
|
|
6.39
|
|
|
||
|
|
Stock Purchase and Escrow Agreement dated July 31, 2017 and among
I'M1, LLC, Stone Street Partners, LLC and Pearlman Law Group
LLP
|
|
1-A
|
|
9/18/17
|
|
6.40
|
|
|
||
|
|
Promissory Note dated July 31, 2017 in the principal amount of
$275,000 from Stone Street Partners, LLC
|
|
1-A
|
|
9/18/17
|
|
6.41
|
|
|
||
|
|
License Agreement dated June 27, 2017 by and between I'M1, LLC and
Loose Leaf Eyewear and Accessories LLC.
|
|
1-A
|
|
9/18/17
|
|
6.42
|
|
|
||
|
|
Advisory Agreement dated August 9, 2017 by and among Damiva Inc.,
I'M1, LLC and Encore Endeavor 1, LLC
|
|
1-A
|
|
9/18/17
|
|
6.43
|
|
|
||
|
|
Representation Agreement dated August 1, 2017 by and among Encore
Endeavor 1 LLC, Romero Britto and Britto Central, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.44
|
|
|
||
|
|
Amended and Restated Representation Agreement dated September 12,
2017 by and among Encore Endeavor 1 LLC, Dada Media, Inc. and David
Tutera
|
|
1-A
|
|
9/18/17
|
|
6.45
|
|
|
||
|
|
Amendment dated September 8, 2017 to Master Advisory and Consulting
Agreement by and between Level Brands, Inc. and
kathy
Ireland
®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.47
|
|
|
||
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and
kathy
ireland
®
Worldwide+
|
|
1-A
|
|
9/18/17
|
|
6.48
|
|
|
||
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Andre Carthen
|
|
1-A
|
|
9/18/17
|
|
6.49
|
|
|
||
|
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Nicholas Walker
|
|
1-A
|
|
9/18/17
|
|
6.50
|
|
|
||
|
|
Distribution Agreement dated August 29, 2017 by and between Beauty
and Pinups, LLC and East Coast Enterprises, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.51
|
|
|
||
|
|
Advisory Agreement dated September 1, 2017 by and between Level
Brands, Inc. and Jon Carrasco +
|
|
1-A
|
|
9/18/17
|
|
6.52
|
|
|
||
|
|
Production Services Agreement dated September 19, 2017 by and
between Multimedia Productions, Inc. and Encore Endeavor 1,
LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.53
|
|
|
||
|
|
License Agreement dated September 8, 2017 by and between Level
Brands, Inc. and
kathy
ireland
®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.54
|
|
|
||
|
|
Advisory Agreement dated September 22, 2017 by and between SG
Blocks, Inc. and Encore Endeavor 1, LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.55
|
|
|
||
|
|
Written description of material terms of oral agreement between
Encore Endeavor 1 LLC and Sandbox LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.56
|
|
|
||
52
|
|
Agreement
dated August 1, 2017 by and between Level Brands, Inc. and Kure
Corp.
|
|
10-K
|
|
12/26/17
|
|
10.62
|
|
|
||
|
|
Form of
Revolving Line of Credit Loan Agreement dated December 12, 2017 by
and between Level Brands, Inc. and Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.64
|
|
|
||
|
|
Form of
Security Agreement dated December 12, 2017 by and between Level
Brands, Inc. and Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.65
|
|
|
||
|
|
Form of
Promissory Note in the principal amount of $500,000 dated December
12, 2017 due from Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.66
|
|
|
||
|
|
Sublease
dated December 21, 2017 by and between Kure Franchise, LLC and
Level Brands, Inc.
|
|
10-K
|
|
12/26/17
|
|
10.66
|
|
|
||
|
|
License
Agreement dated December 30, 2017 by and between Level Brands, Inc.
and Isodiol International, Inc.
|
|
8-K
|
|
1/5/18
|
|
10.67
|
|
|
||
|
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Nic Mendoza
|
|
10-Q
|
|
5/15/18
|
|
10.69
|
|
|
||
|
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Tommy Meharey
|
|
10-Q
|
|
5/15/18
|
|
10.70
|
|
|
||
|
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Stephen Roseberry
|
|
10-Q
|
|
5/15/18
|
|
10.71
|
|
|
||
|
|
Sublease
effective April 11, 2018 by and between 4
th
Floor Properties
LLC and Level Brands, Inc.
|
|
10-Q
|
|
5/15/18
|
|
10.72
|
|
|
||
|
|
Amendment
to promissory note with Stone Street Partners LLC
|
|
10-Q
|
|
8/14/18
|
|
10.74
|
|
|
||
|
|
License
Agreement
dated June 26, 2018 by and
between Level Brands, Inc. and Boston Therapeutics,
Inc.
|
|
8-K
|
|
6/27/18
|
|
10.73
|
|
|
||
|
|
First
Amendment to License Agreement dated January 19, 2018 by and
between Level Brands, Inc. and Isodiol International,
Inc.
|
|
8-K
|
|
1/22/18
|
|
10.69
|
|
|
||
|
|
Executive
Employment Agreement dated September 6, 2018 by and between Level
Brands, Inc. and Martin A. Sumichrast
|
|
8-K
|
|
9/7/18
|
|
10.75
|
|
|
||
|
|
Executive
Employment Agreement dated September 6, 2018 by and between Level
Brands, Inc. and Mark S. Elliott
|
|
8-K
|
|
9/7/18
|
|
10.76
|
|
|
||
|
|
Secured
Promissory Note dated December 4, 2018 in the principal amount of
$2,000,000 from Cure Based Development LLC
|
|
8-K
|
|
12/4/18
|
|
10.1
|
|
|
||
|
|
Security
Agreement dated December 4, 2018 by and between Level Brands, Inc.
and Cure Based Development, LLC
|
|
8-K
|
|
12/4/18
|
|
10.2
|
|
|
||
|
|
Code of
Business Conduct and Ethics
|
|
1-A
|
|
9/18/17
|
|
15.1
|
|
|
||
|
|
Subsidiaries
of the registrant
|
|
10-K
|
|
12/26/17
|
|
21.1
|
|
|
||
|
|
Consent
of Cherry Bekaert LLP
|
|
|
|
|
|
|
|
Filed
|
||
|
24.1
|
|
Power
of attorney (included on signature page of this
report)
|
|
|
|
|
|
|
|
Filed
|
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
|
|
Filed
|
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
Filed
|
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
|
|
|
|
|
|
|
|
Filed
|
|
|
101
INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
Filed
|
|
|
101 SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
|
|
Filed
|
|
|
101 CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
|
101
DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
||||||||
+
Indicated
management contract or compensatory plan.
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Shareholders of
Level
Brands, Inc. and subsidiaries
Charlotte,
North Carolina
Opinion on the Financial Statements
We have
audited the accompanying consolidated balance sheets of Level
Brands, Inc. and subsidiaries (the “Company”) as of
September 30, 2018 and 2017, and the related consolidated
statements of operations, comprehensive income (loss),
shareholders’ equity, and cash flows for the years then
ended, and the related notes (collectively referred to as the
financial statements). In our opinion, the financial statements
referred to above present fairly, in all material respects, the
financial position of the Company as of September 30, 2018 and
2017, 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.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (“PCAOB”)
and are required to be independent with respect to the Company in
accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and
the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, 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.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
|
/s/
Cherry Bekaert LLP
|
|
|
|
|
|
We have
served as the Company’s auditor since 2016.
|
|
|
|
|
|
Charlotte,
North Carolina
|
|
|
December
12, 2018
|
|
F-1
LEVEL BRANDS, INC.
SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
4,282,553
|
$
284,246
|
|
Accounts
receivable
|
307,874
|
141,462
|
|
Accounts
receivable - related party
|
1,537,863
|
712,325
|
|
Accounts
receivable other
|
1,743,874
|
12,440
|
|
Accounts
receivable other - related party
|
-
|
236,364
|
|
Marketable
securities
|
1,050,961
|
-
|
|
Investment
other securities
|
1,159,112
|
859,112
|
|
Note
receivable
|
459,000
|
-
|
|
Note
receivable - related party
|
156,147
|
276,375
|
|
Inventory
|
123,223
|
588,197
|
|
Deferred
issuance costs
|
28,049
|
497,735
|
|
Prepaid
consulting agreement
|
200,000
|
-
|
|
Prepaid
rent
|
180,000
|
-
|
|
Prepaid
expenses and other current assets
|
561,491
|
85,420
|
|
Total
current assets
|
11,790,147
|
3,693,676
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
53,480
|
135,476
|
|
Intangible
assets, net
|
3,173,985
|
3,240,287
|
|
Total
other assets
|
3,227,465
|
3,375,763
|
|
|
|
|
|
Total
assets
|
$
15,017,612
|
$
7,069,439
|
See
Notes to Consolidated Financial Statements
F-2
LEVEL BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2018 AND 2017
(continued)
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
473,717
|
$
397,601
|
|
Accounts
payable - related party
|
7,860
|
67,879
|
|
Deferred
revenue
|
161,458
|
41,417
|
|
Accrued
expenses
|
6,920
|
123,823
|
|
Accrued
expenses - related party
|
320,000
|
892,805
|
|
Total
current liabilities
|
969,955
|
1,523,525
|
|
|
|
|
|
Long term
liabilities
|
|
|
|
Long
term liabilities
|
7,502
|
-
|
|
Long
term liabilities, to related party
|
-
|
360,000
|
|
Deferred
tax liability
|
21,000
|
37,000
|
|
Total long term
liabilities
|
28,502
|
397,000
|
|
|
|
|
|
Total
liabilities
|
998,457
|
1,920,525
|
|
|
|
|
|
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,
|
|
|
|
8,123,928
and 5,792,261 shares issued and outstanding,
respectively
|
8,124
|
5,792
|
|
Additional paid in
capital
|
21,781,095
|
10,463,480
|
|
Accumulated other
comprehensive income (loss)
|
(2,512,539
)
|
-
|
|
Accumulated
deficit
|
(6,669,497
)
|
(6,257,421
)
|
|
Total
Level Brands, Inc. shareholders' equity
|
12,607,183
|
4,211,851
|
|
Non-controlling
interest
|
1,411,972
|
937,063
|
|
Total
shareholders' equity
|
14,019,155
|
5,148,914
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
15,017,612
|
$
7,069,439
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-3
LEVEL BRANDS, INC.
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
|
|
|
|
Sales
|
$
6,453,173
|
$
3,650,480
|
|
Sales
related party
|
1,992,046
|
1,731,238
|
|
Total
Gross Sales
|
8,445,219
|
5,381,718
|
|
Allowances
|
(25,077
)
|
(906,765
)
|
|
Net
sales
|
6,428,096
|
2,743,715
|
|
Net
sales related party
|
1,992,046
|
1,731,238
|
|
Total Net Sales
|
8,420,142
|
4,474,953
|
|
Costs
of sales
|
2,673,272
|
1,355,381
|
|
Gross profit
|
5,746,870
|
3,119,572
|
|
Operating
expenses
|
5,629,771
|
3,358,863
|
|
Income (loss) from
operations
|
117,099
|
(239,291
)
|
|
Debt
conversion expense
|
-
|
(446,250
)
|
|
Other
than temporary impairment on marketable securities
|
-
|
(175,000
)
|
|
Loss
on disposal of property
|
(69,310
)
|
-
|
|
Interest
expense
|
(955
)
|
(500,627
)
|
|
Income (loss) before provision
for income taxes
|
46,834
|
(1,361,168
)
|
|
Provision
for income taxes
|
16,000
|
25,000
|
|
Net Income (loss)
|
62,834
|
(1,386,168
)
|
|
Net
Income (loss) attributable to non-controlling interest
|
474,909
|
352,566
|
|
|
|
|
|
Net loss attributable to Level Brands, Inc. common
shareholders
|
$
(412,075
)
|
$
(1,738,734
)
|
|
|
|
|
|
Loss per share, basic and diluted
|
$
(0.05
)
|
$
(0.38
)
|
|
Weighted average number of shares outstanding
|
7,742,644
|
4,524,985
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-4
LEVEL BRANDS, INC.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
|
|
|
|
Net
Income (Loss)
|
$
62,834
|
$
(1,386,168
)
|
|
Other
Comprehensive Income:
|
|
|
|
Net
Unrealized Gain (Loss) on Marketable
Securities,
net of tax of $0
|
(2,512,539
)
|
-
|
|
Comprehensive Income (Loss)
|
(2,449,705
)
|
(1,386,168
)
|
|
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
474,909
|
352,566
|
|
Comprehensive Income (Loss) attributable to Level Brands, Inc.
common shareholders
|
$
(2,924,614
)
|
$
(1,738,734
)
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-5
LEVEL BRANDS, INC.
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
2018
|
2017
|
|
Cash
flows from operating activities:
|
|
|
|
Net income
(loss)
|
$
62,834
|
$
(1,386,168
)
|
|
Adjustments
to reconcile net loss to net
|
|
|
|
cash
used by operating activities:
|
|
|
|
Stock
based compensation
|
639,631
|
56,533
|
|
Restricted
stock expense
|
39,100
|
156,400
|
|
Amortization
of debt issue costs
|
-
|
305,800
|
|
Depreciation
and amortization
|
222,546
|
71,276
|
|
Issuance
of stock / warrants for services
|
496,502
|
627,825
|
|
Other-than-temporary
impairment on marketable securities
|
-
|
175,000
|
|
Debt
conversion expense
|
-
|
446,250
|
|
Inventory
/ marketing material impairment
|
262,343
|
67,226
|
|
Intangible
impairment
|
240,000
|
-
|
|
Accounts
receivable impairment
|
-
|
50,000
|
|
Loss on
sale of property and equipment
|
69,311
|
4,000
|
|
Common
stock issued as charitable contribution
|
-
|
17,000
|
|
Non-cash
consideration received for services provided
|
(3,404,502
)
|
(1,932,552
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(499,373
)
|
(27,488
)
|
|
Accounts
receivable - related party
|
(492,577
)
|
(712,325
)
|
|
Other
accounts receivable
|
(1,890,434
)
|
(12,440
)
|
|
Other
accounts receivable – related party
|
236,364
|
(36,364
)
|
|
Note
receivable
|
(459,000
)
|
-
|
|
Note
receivable - related party
|
120,228
|
(1,375
)
|
|
Inventory
|
255,894
|
(41,216
)
|
|
Prepaid
consulting agreement
|
(200,000
)
|
-
|
|
Prepaid
rent
|
(180,000
)
|
-
|
|
Prepaid
expenses and other current assets
|
(529,335
)
|
58,458
|
|
Accounts
payable and accrued expenses
|
285,156
|
(745,252
)
|
|
Accounts
payable and accrued expenses – related party
|
(951,824
)
|
278,265
|
|
Interest
Payable
|
-
|
184,889
|
|
Deferred
Revenue
|
120,041
|
41,417
|
|
Deferred
tax liability
|
(16,000
)
|
25,000
|
|
Cash used by
operating activities
|
(5,573,095
)
|
(2,329,841
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Proceeds
from sale of investments to a related party
|
-
|
200,000
|
|
Purchase
of other investment securities
|
(300,000
)
|
-
|
|
Purchase
of intangible assets
|
(360,000
)
|
-
|
|
Purchase
of property and equipment
|
(23,559
)
|
(7,967
)
|
|
Cash provided by
(used by) investing activities
|
(683,559
)
|
192,033
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
10,927,535
|
829,497
|
|
Exercise
of stock options
|
-
|
3,002
|
|
Deferred
issuance costs
|
(672,574
)
|
(39,723
)
|
|
|
|
|
|
Debt
issuance cost
|
-
|
(200,800
)
|
|
Proceeds
from convertible note
|
-
|
2,125,000
|
|
Distribution
related party
|
-
|
(29,180
)
|
|
Repayments
of line of credit
|
-
|
(300,000
)
|
|
Cash provided by
financing activities
|
10,254,961
|
2,387,796
|
|
Net (decrease)
increase in cash
|
3,998,307
|
249,988
|
|
Cash and cash
equivalents, beginning of year
|
284,246
|
34,258
|
|
Cash
and cash equivalents, end of year
|
$
4,282,553
|
$
284,246
|
See
Notes to Consolidated Financial Statements
F-6
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
(continued)
Supplemental Disclosures of Cash Flow Information:
|
|
2018
|
2017
|
|
|
|
|
|
Cash Payments
for:
|
|
|
|
Interest
expense
|
$
955
|
$
5,210
|
|
|
|
|
|
|
|
|
|
Non-cash financial
activities:
|
|
|
|
Equity investment
exchange to be issued in the future, included in Accounts
receivable other
|
160,000
|
-
|
|
Non-cash financial
activities:
|
|
|
|
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 issuance
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
|
|
Warrants issued to
IPO selling agent
|
171,600
|
-
|
|
|
|
|
See
Notes to Consolidated Financial Statements
F-7
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT)
EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
|
|
Common
Stock
|
Additional Paid
in
|
Other
Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Interest
|
Total
|
|
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
|
|
Issuance of common
stock
|
2,000,000
|
2,000
|
9,971,114
|
-
|
-
|
-
|
9,973,114
|
|
Issuance of options
for share based compensation
|
-
|
-
|
639,631
|
-
|
-
|
-
|
639,631
|
|
Issuance of stock
for deferred IPO costs
|
-
|
-
|
171,600
|
-
|
-
|
-
|
171,600
|
|
Issuance of stock
and warrants for services
|
331,667
|
332
|
496,170
|
-
|
-
|
-
|
496,502
|
|
Issuance of
restricted stock for share based compensation
|
-
|
|
39,100
|
-
|
-
|
-
|
39,100
|
|
Other Comprehensive
income (loss)
|
-
|
-
|
-
|
(2,512,539
)
|
-
|
-
|
(2,512,539
)
|
|
Net
loss
|
-
|
-
|
-
|
-
|
(412,076
)
|
474,909
|
62,834
|
|
Balance, September 30, 2018
|
8,123,928
|
8,124
|
21,781,095
|
(2,512,539
)
|
(6,669,497
)
|
1,411,972
|
14,019,155
|
See
Notes to Consolidated Financial Statements
F-8
LEVEL BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
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 2018
fiscal reporting period is from October 1, 2017 to September 30,
2018 and our 2017 fiscal reporting period is from October 1, 2016,
to September 30, 2017 (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, 2018 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 began 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
establishes licensing arrangements under the kathy ireland®
Health & Wellness brand. The agreement was initially a seven
year agreement with a three year option to extend by the Company.
The Company agreed to pay $840,000 over the license term of seven
years, of which $480,000 was paid in January 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, with credit being
applied for any payments made toward the $840,000.
In January 2018, the Company, amended its wholesale license
agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the agreement, $320,000 on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. In addition, royalty payments
to kathy ireland® Worldwide for the additional three year
extension are set at 35% of net proceeds. The Company capitalized
the cost into intangibles and is amortizing them over the term of
the licensing agreement.
F-9
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.
Principles of Consolidation
The
consolidated financial statements include the accounts of the
Company and its majority owned subsidiaries I’M1 and EE1
and wholly owned subsidiaries BPU and Level H&W. All material
intercompany transactions and balances have been eliminated in
consolidation. The third party ownership of the Company’s
subsidiaries is accounted for as non-controlling interest in the
consolidated financial statements. Changes in the non-controlling
interest are reported in the statement of shareholders’
equity (deficit).
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, certain assumptions related to the valuation of
investments other securities, common stock prior to IPO, 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, 2018.
In
addition, the Company may, from time to time, enter into
contracts where a portion of the consideration provided by the
customer in exchange for the Company's services is common stock,
options or warrants (an equity position). In these
situations, upon invoicing the customer for the stock or other
instruments, the Company will record the receivable as accounts
receivable other, and use the value of the stock or other
instrument upon invoicing to determine the value. Where an accounts
receivable is settled with the receipt of the common stock or other
instrument, the common stock or other instrument will be classified
as an asset on the balance sheet as either an investment marketable
security (when the customer is a publicly traded entity) or as an
investment other security (when the customer is a privately held
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.
F-10
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 balance sheets with changes in fair value
recorded in the accumulated other comprehensive income (loss)
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.
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 statements 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
carrying value, the financial condition and prospects of the
security’s issuer and the Company’s ability and intent
to hold the security for a length of time sufficient to allow for
recovery. If the impairment is considered other-than-temporary, an
impairment charge is recorded in non-operating income in the
consolidated statements of operations.
Inventory
Inventory
is stated at the lower of cost or net realizable value with cost
being determined on a weighted average basis. The cost of inventory
includes product cost, 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. 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 routine 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 statements of operations for the applicable period.
Long-lived assets held and used by the Company are reviewed for
impairment whenever changes in circumstance indicate the carrying
value of an asset may not be recoverable.
Fair value accounting
The
Company utilizes accounting standards for fair value, which include
the definition of fair value, the framework for measuring fair
value, and disclosures about fair value measurements. Fair value is
a market-based measurement, not an entity-specific measurement.
Therefore, a fair value measurement should be determined based on
the assumptions that market participants would use in pricing the
asset or liability. As a basis for considering market participant
assumptions in fair value measurements, fair value accounting
standards establish a fair value hierarchy that distinguishes
between market participant assumptions based on market data
obtained from sources independent of the reporting entity
(observable inputs that are classified within Levels 1 and 2
of the hierarchy) and the reporting entity’s own assumptions
about market participant assumptions (unobservable inputs
classified within Level 3 of the hierarchy).
F-11
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 (loss), 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
The
Company's intangible assets consist of trademarks and other
intellectual property, all of which are accounted for in accordance
with ASC Topic 350, Intangibles – Goodwill and Other. The
Company employs the non-amortization approach to account for
purchased intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC 350-30-35-18.
Our annual impairment analysis includes a qualitative assessment to
determine if it is necessary to perform the quantitative impairment
test. In performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. If a quantitative analysis is necessary, we
would analyze various aspects including number of contracts
acquired and retained as well as revenues from those contracts,
associated with the intangible assets. In addition, intangible
assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred. 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”) 2017-01
in determining if the Company is acquiring any inputs, processes or
outputs and the impact that such factors would have on the
classification of the acquisition as a business combination or
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.
Common
stock
Level
Brands was a privately owned 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,
that there was not a recent and significant equity financing
transaction or the nature of the business had significantly changed
subsequent to an equity financing, we used valuation techniques,
which 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. On November
17, 2017, the Company completed its IPO, thus our stock has been
valued by the market since that date.
F-12
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 typically
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 as of September 30, 2018 and
2017.
The
Company also enters into various license agreements that provide
revenues based on royalties as a percentage of sales and
advertising/marketing fees. The contracts can also have a minimum
royalty, with which this and the advertising/marketing revenue is
recognized on a straight-line basis over the term of each contract
year, as defined, in each license agreement. Royalties exceeding
the defined minimum amounts are recognized as income during the
period corresponding to the licensee’s sales, as are all
royalties that do not have a minimum royalty. Payments received as
consideration of the grant of a license are recognized ratably as
revenue over the term of the license agreement and are reflected on
the Company’s consolidated balance sheets as deferred revenue
at the time payment is received and recognized ratably as revenue
over the term of the license agreement. Similarly,
advanced royalty payments are recognized ratably over the period
indicated by the terms of the license and are reflected in the
Company’s consolidated balance sheet in deferred revenue at
the time the payment is received. Revenue is not
recognized unless collectability is reasonably assured. If
licensing arrangements are terminated prior to the original
licensing period, we will recognize revenue for any contractual
termination fees, unless such amounts are deemed
non-recoverable.
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, third-party
service providers, and amortization expense related to intellectual
property 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
statements of operations when the product is sold and net sales
revenues are recognized or, in the case of inventory write-downs,
when circumstances indicate that the carrying value of inventories
is in excess of their net realizable value.
Advertising Costs
The
Company expenses all costs of advertising and related marketing and
promotional costs as incurred. The Company incurred approximately
$1,059,000 and $352,000 in advertising and related marketing and
promotional costs included in operating expenses during the years
ended September 30, 2018 and 2017, 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.
F-13
Income Taxes
The
Parent Company is a North Carolina corporation that is treated as a
corporation for federal and state income tax purposes. Prior to
April 2017, BPU was a multi-member limited liability company that
was treated as a partnership for federal and state income tax
purposes. As such, the Parent Company’s partnership share in
the taxable income or loss of BPU was included in the tax return of
the Parent Company. Beginning in April 2017, the Parent Company
acquired the remaining interests in BPU. As a result of the
acquisition, BPU became a disregarded entity for tax purposes and
its entire share of taxable income or loss was included in the tax
return of the Parent Company. Level H&W is a wholly owned
subsidiary and is a disregarded entity for tax purposes and its
entire share of taxable income or loss is included in the tax
return of the Parent Company. IM1 and EE1 are multi-member limited
liability companies that are treated as partnerships for federal
and state income tax purposes. As such, the Parent Company’s
partnership share in the taxable income or loss of IM1 and EE1 are
included in the tax return of the Parent Company.
The
Parent Company accounts for income taxes pursuant to the provisions
of the Accounting for Income Taxes topic of the FASB ASC 740 which
requires, among other things, an asset and liability approach to
calculating deferred income taxes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and
liabilities. The Parent Company uses the inside basis approach to
determine deferred tax assets and liabilities associated with its
investment in a consolidated pass-through entity. A valuation
allowance is provided to offset any net deferred tax assets for
which management believes it is more likely than not that the net
deferred asset will not be realized.
US GAAP
requires management to evaluate tax positions taken by the Company
and recognize a tax liability (or asset) if the Company has taken
an uncertain tax position that more likely than not would not be
sustained upon examination by the Internal Revenue Service.
Management has analyzed the tax positions taken by the Company, and
has concluded that as of September 30, 2018 and 2017, 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 $0 uninsured balance at September 30, 2018 and a
$4,728 uninsured balance at September 30, 2017. Funds which are not
subject to coverage or loss under FDIC were $4,003,003 and $0 at
September 30, 2018 and 2017, respectively.
Concentration
of credit risk with respect to receivables is principally limited
to trade receivables with corporate customers that meet specific
credit policies. Management considers these customer receivables to
represent normal business risk. The Company had three customers
whose revenue in total represented 75% of the Company’s net
sales for the year ended September 30, 2018, such customers
represented 51%, 10%, and 14% of net sales. The aggregate accounts
receivable balance of such customers represented 92% of the
Company’s total accounts receivable and other accounts
receivable as of September 30, 2018. The Company had five customers
whose revenue in total represented 83% of the Company’s net
sales for the year ended September 30, 2017 and whose accounts
receivable balance in total represented 86% of the Company’s
total accounts receivable as of September 30, 2017.
The
Company had one service provider from whom the Company made
approximately 23% of their purchases related to cost of sales
during the 2018 fiscal year, and had no service provider from whom
the Company made over 10% of their purchases during the 2017 fiscal
year.
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).
F-14
Stock-Based Compensation
We
account for our stock compensation under ASC -718-10-30
“Compensation - Stock Compensation” using the fair
value based method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. This guidance establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity
instruments.
We use
the Black-Scholes model for measuring the fair value of options and
warrants. The stock based fair value compensation is determined as
of the date of the grant or the date at which the performance of
the services is completed (measurement date) and is recognized over
the vesting periods. Under ASU 2016-09 which amends ASC 718, which
became effective October 1, 2017, we elected to change our
accounting principle to recognize forfeitures when they occur. This
change had no impact on beginning retained earnings as there had
been no forfeitures estimated or incurred in prior
periods.
Net 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 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, 2018 and 2017, 781,826 and 545,475 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. Subsequently, the FASB has issued the following
standards related to ASU 2014-09: ASU No. 2016-08,
Revenue from Contracts with
Customers
(Topic 606): Principal versus Agent Considerations
(“ASU 2016-08”); ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606):
Identifying
Performance Obligations and Licensing
(“ASU
2016-10”); ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients
(“ASU
2016-12”); and ASU No. 2016-20,
Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers
(“ASU
2016-20”). The amendments in these ASUs are effective for
annual periods beginning after December 15, 2017, and interim
periods therein. Early adoption was permitted for annual periods
beginning after December 15, 2016. These ASUs may be applied
retrospectively to all prior periods presented, or retrospectively
with a cumulative adjustment to retained earnings in the year of
adoption. The Company will adopt this standard in the first quarter
of fiscal 2019
retrospectively with a
cumulative adjustment to retained earnings.
The Company in
in process of reviewing all contracts to determine if there is any
impact in implementing this guidance on its consolidated financial
position, results of operations and liquidity.
F-15
In
February 2016, the FASB issued ASU 2016-02,
Leases
. The purpose of ASU
2016-02 is to establish the principles to report transparent and
economically neutral information about the assets and liabilities
that arise from leases. This guidance results in a more faithful
representation of the rights and obligations arising from operating
and capital leases by requiring lessees to recognize the lease
assets and lease liabilities that arise from leases in the
statement of financial position and to disclose qualitative and
quantitative information about lease transactions, such as
information about variable lease payments and options to renew and
terminate leases. ASU 2016-02 is effective for fiscal years and
interim periods beginning after December 15, 2018. The Company is
assessing the impact, if any, of implementing this guidance on its
consolidated financial position, results of operations and
liquidity.
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 January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. ASU 2017-01 clarifies the definition and
provides a more robust framework to use in determining when a set
of assets and activities constitutes a business. ASU 2017-01
is intended to provide guidance when evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 will be effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2017.
In
March 2015 Level Brands formed 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. 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 was comprised of the
cash, accounts payable acquired, non-controlling interest,
intangibles, and a minimal amount of inventory, all in aggregate
valued at $486,760. The Company recorded an impairment charge of
$240,000 as impairment to intangibles under the BPU segment for the
year ended of September 30, 2018, see Note 6 for further
details.
I’M1
was formed in California in September 2016. IM1 Holdings 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
the Company 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 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 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.
F-16
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 other 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 privately held 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 Group, 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 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 due July 31, 2018. 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. The short term note had a
balance of $156,147 at September 30, 2018 and was subsequently
amended with a payoff date of December 31, 2018.
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. 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, 2018.
On
September 19, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 56,552 shares of common stock for services delivered to
a customer and accounted for this in Investment Other Securities.
The common stock was issued to the Company’s subsidiaries
I’M1 and EE1. The customer is a private entity and the stock
was valued at $56,552, which was based on all 2017 financing
transactions of the customer set at $1.00 per share, with the most
recent third party transaction in August 2017. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used factors including financial projections provided
by the issuer and conversations with the issuer management
regarding the Company’s recent results and future plans and
the Company’s financing transactions over the past twelve
months. The Company assessed the common stock and determined there
was not an impairment for the period ended September 30,
2018.
In
November 2017, the Company completed services in relation to an
agreement with SG Blocks, Inc. (NASDAQ: SGBX). As payment for these
services, SG Blocks issued 50,000 shares of its common stock to
Level Brands. The customer is a publicly traded entity and the
stock was valued based on the trading price at the day the services
were determined delivered, which was $5.09 per share for an
aggregate value of $254,500. The Company determined that this
common stock was classified as Level 1 for fair value measurement
purposes as the stock was actively traded on an exchange. The
common stock is held as available for sale, and at September 30,
2018, the shares were $4.00 per share, and we have recorded
$(54,500) as other comprehensive income (loss) on the
Company’s consolidated financial statements for the year
ended September 30, 2018. The Company assessed the common stock and
determined there was not an indication of an other-than-temporary
impairment.
F-17
In
December 2017, the Company completed services per an advisory
services agreement with Kure Corp, then a related party. As payment
for these services, Kure Corp. issued 400,000 shares of its stock
to the Company. The customer was a private entity and the stock was
valued at $200,000, which was based on financing activities by Kure
Corp. in September 2017 in which shares were valued at $0.50 per
share. In addition, in December 2017, the Company engaged and
completed advisory services in relation to an additional agreement
with Kure Corp., for services related to their
“vape-pod” strategy. As payment for these services,
Kure Corp. issued an additional 400,000 shares of its stock to the
Company which the Company received in January 2018. These shares
were also valued at $200,000. The Company had classified this
common stock, cumulative value of $400,000, as Level 3 for fair
value measurement purposes as there were no observable inputs. In
valuing the stock the Company used factors including information
provided by the issuer regarding their recent results and future
plans as well as their most recent financing transactions. On April
30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE:
ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In the merger
agreement, each share of Kure Corp. was valued at $1.00 as the
initial value and is to be exchanged for shares of Isodiol in three
issuances as follows: 1) 30% of the initial value issued on May 1,
2018, the balance of shares issued based on earn out goals as 2)
50% of the initial value to be issued on January 31, 2019 on a
prorata basis based on sales and using the prior 10 day volume
weighted average price of Isodiol shares and 3) 20% of the initial
value to be issued on January 31, 2020 on a prorata basis based on
sales and using the prior 10 day volume weighted average price of
Isodiol shares. We recorded the first issuance of 380,952 shares
based on a trading price on April 30, 2018 of $0.63 per share
valued at $240,000 as a Level 1 for fair value measurement purposes
as the stock is actively traded on an exchange. We also removed the
value of the Kure Corp. equity of $400,000 from our Level 3
investments as part of the exchange described above. As the full
value of the Kure Corp. equity will not be received until the
future issuances based on the above earn out goals, we have
recorded an accounts receivable other of $160,000 as of September
30, 2018. The Company has assessed the other accounts receivable
and determined there is no indication that we will not receive the
full amount. The common stock is held as available for sale, and at
September 30, 2018, after a 1 for 10 reverse split, the trading
price of the shares was $2.88 per share, and we recorded $(130,026)
as other comprehensive income (loss) on the Company’s
consolidated financial statements for the year ended September 30,
2018. The Company also assessed the common stock and determined
there was not an indication of an other-than-temporary
impairment
On
December 21, 2017, the Company purchased 300 shares of preferred
stock in a private offering from a current customer for $300,000.
The preferred shares are convertible into common stock at a 20%
discount of a defined subsequent financing, or an IPO offering of a
minimum $15 million, or at a company valuation of $45 million
whichever is the least. The customer is a privately held entity.
The Company has classified this common stock as Level 3 for fair
value measurement purposes as there are no observable inputs. In
valuing the stock the Company used the value paid, which was the
price offered to all third party investors. As of September 30,
2018, the Company has determined there is no impairment on the
value of the shares of stock.
On
December 30, 2017 Level Brands entered into an Agreement with
Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F),
a Canadian company which is a developer of
pharmaceutical grade phytochemical
compounds and a manufacturer and developer of phytoceutical
consumer products. The agreement required the Company to create a
global branding and marketing campaign, which includes a joint
strategy to develop Isodiol’s brand and products, an
influencer program, and a social and traditional media
strategy.
As payment for these services, Isodiol agreed to
pay $2,000,000 and issued 1,679,321 shares of its common stock to
the Company, based on the trading price on the day of the
agreement, which was $1.1909 per share. These shares were issued on
January 22, 2018. In addition, the Company will provide ongoing
quarterly support of the campaign which includes two branded videos
each quarter, Ms. Ireland’s direct involvement in meetings or
conferences once each quarter, and ongoing social media support by
Ms. Ireland and Level Brands, all the services valued at $750,000
per quarter. This amount will be paid through issuance of Isodiol
stock and the number of shares issued will be determined based on
the trading value of Isodiol stock on the last day of each quarter.
Isodiol made the $750,000 payment for quarterly services for March
31, 2018 through the issuance of shares of common stock, no other
shares have been issued as of September 30, 2018 and thus we have
recorded an accounts receivable other of $1,352,000 as of September
30, 2018. The common stock is held as available for sale, and at
September 30, 2018, after a 1 for 10 reverse split, the shares were
valued at $2.88 per share, and we recorded $(2,157,013) as other
comprehensive income (loss) on the Company’s consolidated
financial statements for the year ended September 30, 2018. The
Company assessed the common stock and based on conversations with
the company regarding its recent acquisitions, position in the CBD
market, current financing events, and overall strategy, determined
there was not an indication of an other-than-temporary
impairment.
F-18
The
table below summarizes the assets valued at fair value as of
September 30, 2018:
|
|
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, 2018
|
|
|
|
|
|
|
|
Marketable
securities
|
$
1,050,961
|
-
|
$
-
|
$
1,050,961
|
|
Investment other
securities
|
-
|
-
|
$
1,159,112
|
$
1,159,112
|
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|
Balance at
September 30, 2017
|
$
-
|
$
-
|
$
859,112
|
$
859,112
|
|
Receipt of equity
investment upon completion of services
|
$
3,004,500
|
$
-
|
$
400,000
|
$
3,404,500
|
|
Purchase of
preferred shares, convertible into common stock
|
$
-
|
$
-
|
$
300,000
|
$
300,000
|
|
Exchange of equity
via owner merger into public company
|
$
240,000
|
$
-
|
$
(400,000
)
|
$
(160,000
)
|
|
Change in value of
equity, other comprehensive income
|
$
(2,193,539
)
|
$
-
|
$
-
|
$
(2,193,539
)
|
|
Balance at
September 30, 2018
|
$
1,050,961
|
$
-
|
$
1,159,112
|
$
2,210,073
|
Inventory at September 30, 2018 and 2017 consists of the
following:
|
|
2018
|
2017
|
|
Finished
goods
|
$
18,531
|
$
375,459
|
|
Inventory
components
|
104,692
|
212,738
|
|
Total
|
$
123,223
|
$
588,197
|
During the year ended September 30, 2018, the Company determined
that inventory was impaired by approximately $262,000. During the
year ended September 30, 2017, the Company determined that
inventory was impaired by approximately $67,000. Impairment charges
were recorded within operating expenses for the respective
periods.
Major classes of property and equipment at September 30, 2018 and
2017 consist of the following:
|
|
2018
|
2017
|
|
Computers,
furniture and equipment
|
$
59,770
|
$
37,261
|
|
Show
booth and equipment
|
49,123
|
171,986
|
|
Manufacturers’
molds and plates
|
34,200
|
34,200
|
|
|
143,093
|
243,447
|
|
Less
accumulated depreciation
|
(89,613
)
|
(107,971
)
|
|
Net
property and equipment
|
$
53,480
|
$
135,476
|
Depreciation expense related to property and equipment was $36,244
and $55,755 for the years ended September 30, 2018 and 2017,
respectively
F-19
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. 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. We are amortizing the capitalized value of
the cash, warrants and common stock over the seven year term of the
agreement and have amortized $45,068 and $2,917 for the years
ending September 30, 2018 and 2017.
On
September 8, 2017, the Company entered into a seven year wholesale
license agreement with Nicholas Walker and issued 25,000 shares of
common stock, valued at $98,750. In addition, the Company agreed to
pay $40,000 in cash within 30 days completion of its initial public
offering and also issued warrants to purchase 25,000 shares of
common stock at a strike price of $4.00. The warrants were valued
at $35,900. Under the terms of this nonexclusive agreement, we have
the right to use, assign and sublicense the marks, intellectual
property and other rights in connection with "Jardin," "Nicholas
Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party,"
"Cultivated by Nicholas Walker," and "Jardin Du Jour," and all
trade names, trademarks and service marks related to this
intellectual property for the purpose of entering into sublicense
agreements with third parties for the manufacture, marketing and
sale of products utilizing these marks. We are amortizing the
capitalized value of the cash, warrants and common stock over the
seven year term of the agreement and have amortized $25,426 and
$1,603 for the years ending September 30, 2018 and
2017.
In
September 2017, the Company entered into an exclusive seven year
license agreement with kathy ireland® Worldwide for the right
to license the mark, intellectual property and other marks in
connection with kathy ireland® Health & Wellness™.
The agreement is for seven years for a license fee of $840,000. The
Company has an option to extend for another three years for an
additional price of $360,000. Per the agreement, $480,000 was paid
prior to January 1, 2018. The remaining amount of $360,000 was due
in equal installments on January 1 of subsequent years until the
license fee is paid, and were classified as long term liabilities
related party as of December 31, 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™. I
n January 2018, the Company amended its wholesale
license agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the Agreement, $320,000, on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. This amount is classified as an
accrued expense to related party as of September 30, 2018. In
addition, royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net
proceeds.
We are amortizing the capitalized value of the
cash over the ten year term of the agreement and have amortized
$115,806 and $0 for the years ending September 30, 2018 and
2017.
F-20
Intangible
assets as of September 30, 2018 and 2017 consisted of the
following:
|
|
September
30,
|
September
30,
|
|
|
2018
|
2017
|
|
Trademark and other
intellectual property related to BPU
|
$
246,760
|
$
486,760
|
|
Trademark and other
intellectual property related to I’M1
|
971,667
|
971,667
|
|
Trademark and other
intellectual property related to EE1
|
471,667
|
471,667
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland®Health & Wellness™, net
|
1,074,194
|
830,000
|
|
Wholesale license
agreement with Chef Andre Carthen, net
|
262,077
|
307,146
|
|
Wholesale license
agreement with Nicholas Walker, net
|
147,620
|
173,047
|
|
Total
|
$
3,173,985
|
$
3,240,287
|
|
|
|
|
The
Company has three definite lived intangible assets, which have
seven or ten year lives.
Future
amortization schedule:
|
Intangible
|
Total
unamortized cost
|
2019
|
2020
|
2021
|
2022
|
2023
|
thereafter
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
1,074,194
|
$
116,129
|
$
116,129
|
$
116,129
|
$
116,129
|
$
116,129
|
$
493,549
|
|
Wholesale license
agreement with Chef Andre Carthen
|
$
262,077
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
40,607
|
|
Wholesale license
agreement with Nicholas Walker
|
$
147,620
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
22,871
|
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 for the year ended September 30, 2017 and
determined there has been no impairment. The Company has performed
a qualitative and quantitative analysis for the year ended
September 30, 2018 accounting for the performance of BPU and the
business shift in relation to its original business model and
current focus on licensing, and has determined that an impairment
is required. As a result, the Company recorded an impairment charge
of $240,000 as impairment to intangibles under the BPU segment for
the year ended of September 30, 2018. No other impairments were
identified. Based upon the anticipated changes to BPU’s
business model, the Company has determined that it is appropriate
to reclassify the remaining carrying value of this intangible asset
to a definite-lived asset. The Company expects to begin amortizing
this asset beginning in the first quarter of 2019. This
reclassification is being accounted for as a prospective change in
estimate.
F-21
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, 2018.
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 at September
30, 2018 and 2017, 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 were
convertible 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.
Effective
June 30, 2017, the Company converted the $2,125,000 principal
amount of 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.
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.
The
outstanding balances due under the Notes was $0 at both September
30, 2018 and 2017.
F-22
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., then a related party. The lease is for one
year and the space was to be used by our subsidiary BPU. This
sublease ended on January 1, 2018.
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 our
company.
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 entered
into a new agreement in March 2018 with the same terms,
however the agreement after one year,
if not renewed, will automatically extend month to month unless
canceled by either party
.
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 entered into a new
agreement in March 2018 with the same terms,
however the agreement after one year, if not
renewed, will automatically extend month to month unless canceled
by either party
.
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 nominal monthly fee for his services. We entered
into a new agreement in March 2018 with the same terms,
however the agreement after one year,
if not renewed, will automatically extend month to month unless
canceled by either party
.
In
February 2017 the Company entered into an advisory agreement with
Mr. Jon Carrasco, expiring in February 2019, 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 nominal monthly fee for his
services.
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 Corp, then a related party. 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 Corp. under which we are to receive
royalties based on gross sales of Kure Corp. products with the
I’M1 brand.
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, then an
affiliate of our CEO and Chairman, received 94,475 shares of common
stock in this transaction.
F-23
Effective
June 30, 2017, the lenders converted the $2,125,000 principal
amount of 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, then 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 kathy ireland®
Worldwide after establishing a business meeting resulting in a new
license agreement for kathy ireland® Worldwide. The referral
fee was paid out of 200,000 options issued to kathy ireland®
Worldwide 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 Corp., then a related party, purchased products from our
subsidiary BPU for resale in their stores. The total purchase was
$97,850.
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 included Stone Street
Partners LLC, an entity controlled by our CEO and Chairman, and
Stone Street Partners Opportunity Fund II LLC, then an affiliate of
our CEO and Chairman.
On July 31, 2017, the Company sold preferred shares it had received
from a customer as payment for services to a related party. The
preferred shares were originally valued as marketable securities at
$650,000 and were sold for $475,000, an approximation of fair
market value, which was paid $200,000 in cash and a short term note
of $275,000 at 3% interest, which is included in note receivable
related party as of September 30, 2018 and September 30, 2017. The
short term note was extended on August 1, 2018, and the outstanding
principal of $155,400 at 5% interest is due December 31, 2018. 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 Corp., then a related party, in which the
Company would act as an advisor regarding business strategy
involving (1) conversion of Kure franchises into company stores,
(2) conversion of Kure Corp. debt and preferred shares into common
share of Kure Corp. and (3) preparation steps required and a
strategy to position for a possible Reg A+ offering. The services
are to be delivered in two phases, the first deliverables of items
1 and 2 above were delivered by September 30, 2017 and item 3 was
delivered in June 2018. The Company was paid $200,000 in Kure Corp.
stock for the first deliverables and was paid $145,500 in cash for
the second deliverable.
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 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. This agreement was mutually terminated in
September 2018.
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. 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
paid $100,000 for this agreement.
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. 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 expenses of
$250,000. Sterling Winters Company is a subsidiary of kathy
ireland® Worldwide.
F-24
On September 8, 2017, the Company extended its Master Advisory and
Consulting Agreement, executed in February 2017, with kathy
ireland® Worldwide to February 2025.
In
September 2017, the Company entered into an exclusive seven year
wholesale license agreement with kathy ireland® Worldwide for
the right to license the mark, intellectual property and other
marks in connection with kathy ireland® Health &
Wellness™. The agreement is for seven years for a license fee
of $840,000. The Company has an option to extend for another three
years for an additional price of $360,000. Per the agreement,
$480,000 was paid prior to January 1, 2018. The remaining amount of
$360,000 are due in equal installments on January 1 of subsequent
years until the license fee is paid. Under this license agreement
with kathy ireland® Worldwide we were granted an exclusive,
royalty free right to license, assign and use the kathy
ireland® Health & Wellness™ trademark, and all trade
names, trademarks and service marks related to the intellectual
property including any derivatives or modifications, goodwill
associated with this intellectual property when used in conjunction
with health and wellness as well as Ms. Ireland's likeness, videos,
photographs and other visual representations connected with kathy
ireland® Health & Wellness™. Royalties are paid at
33 1/3% of net proceeds with the license fee being a credit against
royalties.
On January 30, 2018, the
Company amended its wholesale license agreement with kathy
Ireland® Worldwide. The amendment accounted for the Company
exercising its option on a three year extension and amending the
payment terms related to this extension as follows: to pay $400,000
within 5 days of executing the amendment (which was paid on January
31, 2018), and to pay the final amounts due under the agreement,
$320,000 on the latter of January 1, 2019 or 30 days after the
receipt by the Company of $5,000,000 in net proceeds from
sublicense agreements signed under the health and wellness
trademarks. This amount is classified as an accrued expense related
party as of September 30, 2018. In addition, royalty payments to
kathy ireland® Worldwide for the additional three year
extension are set at 35% of net proceeds.
On December 11, 2017, the Company entered into a service agreement
with Kure Corp., then a related party, to facilitate the
“Vape Pod” transaction with the modular building
systems vendor, SG Blocks, Inc., which is also a customer of our
company. Under the terms of this agreement we also agreed to
facilitate the introduction to third parties in connection with
Kure Corp.'s initiative to establish Vape Pod's at U.S. military
base retail locations and advising and aid in site selection for
Kure retail stores on military bases and adjoining convenience
stores, gas stations, and other similar retail properties utilizing
Kure Corp.'s retail Vape Pod concept, among other services. As
compensation for this recent agreement, we were issued 400,000
shares of Kure Corp.'s common stock which was valued at $200,000
(see Note 3).
On December 11, 2017 the Company 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. The Revolving Line of Credit has never
been utilized and on June 6, 2018, the agreement was
terminated.
On December 21, 2017, the Company entered into a sublease agreement
with a related party for office space for its subsidiary BPU. The
initial lease period is for six months and then changes to a month
to month lease. The space includes office and warehouse space and
will cost $3,000 per month.
On
January 1, 2018, the Company entered into a consulting agreement
with Mr. Craig Brewer, Chairman of Kure Corp., then a related
party, expiring in January 2019, pursuant to which he provides
business consulting services to us, with a primary focus on BPU.
The agreement may be canceled by either party with a 30 day notice.
We have agreed to pay Mr. Brewer a fee of $9,000 per month for his
services. This agreement ended on April 30, 2018.
In June
2018, per our agreement with kathy ireland® Worldwide, the
company earned a referral fee of $150,000 for facilitating a
business opportunity which led to a new license agreement for kathy
ireland® Worldwide. The Company is to receive 50% of all
royalty revenue earned ongoing via the new business
contract.
F-25
In April 2018 through June 2018,
EE1 engaged in five
separate statements of work for various marketing campaigns,
production processes, and documentary related services for Sandbox
LLC. Under the terms of the agreements, EE1 will be paid in the
range of $200,000 to $250,000 for each statement of work, from
Sandbox LLC, all to be paid by December 31, 2018. Sandbox LLC is an
affiliate of a member of our board of directors.
In
September 2018, B&B Bandwidth purchased products from our
subsidiary BPU for resale. The total purchase was $332,985. B&B
Bandwidth management are affiliates of kathy ireland®
Worldwide.
As we engage in providing services to customers, at times we will
utilize related parties, typically as a part of our agreement with
kathy ireland® Worldwide, to assist in delivery of the
services. For the year ended September 30, 2018 and 2017, we
incurred related party cost of sales of $635,710 and $333,773,
respectively.
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 8,123,928
and 5,792,261 shares of common stock issued and outstanding at
September 30, 2018 and 2017, respectively.
Common stock transactions:
Fiscal 2018:
On November 17, 2017, the Company completed an IPO of 2,000,000
shares of its common stock for aggregate gross proceeds of $12.0
million and net proceeds of $10.9 million.
In November 2017, we issued 6,667 shares of our common stock to an
individual as part of a consulting agreement. The shares were
valued at $37,002, based on the trading price upon issuance and
expensed as contract compensation.
In January 2018, we issued 230,000 shares of our common stock,
which were granted as restricted stock awards on October 1, 2016 to
board members. The restricted stock awards vested on January 1,
2018. The shares were valued at fair market value upon issuance at
$195,500 and amortized over the vesting period and expensed as
stock compensation.
In March 2018, we issued 5,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$20,000, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending June 2018.
In May 2018, we issued 60,000 shares of our common stock to an
investment banking firm for general financial advisory and
investment banking services. The shares were valued at $303,000,
based on the trading price upon issuance, and is being amortized
and expensed as professional services over the service period
ending April 2019.
In June 2018, we issued 25,000 shares of our common stock to a
broker dealer for business advisory services. The shares were
valued at $118,000, based on the trading price upon issuance, and
is being amortized and expensed as professional services over the
service period ending December 2019.
In July 2018 we issued 5,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$18,500, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending November 2018.
F-26
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, a broker-dealer and member of FINRA, and its
affiliates.
In November 2016 we issued Stone Street Partners, LLC, a related
party, 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 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, a related party, 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 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 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 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.
F-27
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.
Stock option transactions:
Fiscal year 2018:
On May 14, 2018 we granted an aggregate of 50,000 common stock
options to an employee. The options vest 50% November 14, 2018 and
50% May 14, 2019. The options have an exercise price of $5.27 per
share and a term of seven years. We have recorded an expense for
the options of $38,950 for the fiscal year ended September 30,
2018.
On May 29, 2018 we granted an aggregate of 150,000 common stock
options to an employee. The options vest 50% immediately and 50%
January 1, 2019. The options have an exercise price of $4.78 per
share and a term of ten years. We have recorded an expense for the
options of $302,750 for the fiscal year ended September 30,
2018.
On August 16, 2018 we granted per the annual board compensation
plan, an aggregate of 35,000 common stock options to five
directors. The options vest immediately, have an exercise price of
$3.34 per share and a term of ten years. We have recorded an
expense for the options of $80,150 for the fiscal year ended
September 30, 2018.
Fiscal year 2017:
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.
F-28
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the years
ended September 30, 2018 and 2017:
|
|
2018
|
2017
|
|
Exercise price
|
$3.34
– $5.27
|
$4.00 - $7.50
|
|
Risk free interest rate
|
2.77%
- 2.96%
|
1.14%
- 2.13%
|
|
Volatility
|
57.76%
- 64.74%
|
39.44% - 60.39%
|
|
Expected term
|
7
– 10 years
|
5 - 7 years
|
|
Dividend yield
|
None
|
None
|
Warrant transactions:
Fiscal 2018:
On
November 17, 2017 in relation to the IPO, we issued to the selling
agent warrants to purchase in aggregate 100,000 shares of common
stock with an exercise price of $7.50. The warrants expire on
October 27, 2022. The warrants were valued at $171,600 and recorded
as paid in capital.
Fiscal 2017:
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.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the years
September 30, 2018 and 2017:
|
|
2018
|
2017
|
|
Exercise price
|
$7.50
|
$4.00 - $7.80
|
|
Risk free interest rate
|
2.06%
|
1.22% - 1.64%
|
|
Volatility
|
43.12%
|
39.41% - 54.49%
|
|
Expected term
|
5 years
|
5 years
|
|
Dividend yield
|
None
|
None
|
F-29
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.
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
five to 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.
The
following table summarizes stock option activity under the
Plan:
|
|
Number
ofshares
|
Weighted-averageexerciseprice
|
Weighted-averageremainingcontractual
term(in years)
|
Aggregateintrinsicvalue
(inthousands)
|
|
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
|
|
|
|
Granted
|
235,000
|
4.67
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
(98,650
)
|
6.38
|
|
|
|
Outstanding at
September 30, 2018
|
469,650
|
$
5.13
|
6.9
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2018
|
337,150
|
$
5.22
|
6.4
|
$
—
|
As of
September 30, 2018, there was approximately $169,639 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 0.6
years.
F-30
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 vested January
1, 2018. The stock awards are valued at fair market upon issuance
at $195,500 and amortized over the vesting period. We recognized
$39,100 and $156,400 of stock based compensation expense for the
years ended September 30, 2018 and 2017, respectively.
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, 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
|
|
|
|
Issued
|
100,000
|
7.50
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding at
September 30, 2018
|
312,176
|
$
6.84
|
3.5
|
$
—
|
|
|
|
|
|
|
|
Exercisable at
September 30, 2018
|
312,176
|
$
6.84
|
3.5
|
$
—
|
The
following table summarizes outstanding common stock purchase
warrants as of September 30, 2018:
|
|
Number of
shares
|
Weighted-average
exercise price
|
Expiration
|
|
|
|
|
|
|
Exercisable at
$7.80 per share
|
141,676
|
$
7.80
|
September
2021
|
|
Exercisable at
$7.50 per share
|
100,000
|
$
7.50
|
October
2022
|
|
Exercisable at
$4.00 per share
|
70,500
|
$
4.00
|
September
2022
|
|
|
312,176
|
6.84
|
|
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 products and has expanded into licensing
opportunities. 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.
F-31
The
Professional Products division operated for the full year in fiscal
2018 and 2017. 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.
Condensed
summary segment information follows for the years ended September
30, 2018 and 2017.
|
Year ended
September 30, 2018
|
|
|||
|
|
Three Months
Ended September 30, 2016
|
|||
|
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
95,776
|
$
5,213,360
|
$
1,118,960
|
$
6,428,096
|
|
Net Sales related
party
|
$
332,955
|
$
-
|
$
1,659,091
|
$
1,992,046
|
|
Total Net
Sales
|
$
428,731
|
$
5,213,360
|
$
2,778,051
|
$
8,420,142
|
|
Income (loss) from
Operations before Overhead
|
$
(1,144,557
)
|
$
3,109,601
|
$
233,939
|
$
2,198,983
|
|
Allocated Corporate
Overhead (a)
|
108,767
|
1,322,604
|
704,778
|
2,136,149
|
|
Net Income
(loss)
|
$
(1,253,324
)
|
$
1,786,997
|
$
(470,839
)
|
$
62,834
|
|
|
|
|
|
|
|
Assets
|
$
2,840,222
|
$
7,865,509
|
$
4,491,881
|
$
15,017,612
|
|
Year ended
September 30, 2017
|
|
|||
|
|
Three Months
Ended September 30, 2016
|
|||
|
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
872,354
|
$
1,194,582
|
$
676,779
|
$
2,743,715
|
|
Net Sales related
party
|
$
97,850
|
$
600,000
|
$
1,033,388
|
$
1,731,238
|
|
Total Net
Sales
|
$
970,204
|
$
1,794,582
|
$
1,710,167
|
$
4,474,953
|
|
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 Income
(loss)
|
$
(2,059,443
)
|
$
299,080
|
$
374,195
|
$
(1,386,168
)
|
|
|
|
|
|
|
|
Assets
|
$
3,068,606
|
$
2,603,075
|
$
1,397,758
|
$
7,069,439
|
(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, 2018 and 2017 above for comparison
purposes.
F-32
The Company generated operating losses for the years ended
September 30, 2018 and 2017 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,
|
|
|
|
2018
|
2017
|
|
Current
|
|
|
|
Federal
|
$
—
|
$
—
|
|
State
|
—
|
—
|
|
Total
current
|
—
|
—
|
|
Deferred
|
|
|
|
Federal
|
15,000
|
24,000
|
|
State
|
1,000
|
1,000
|
|
Total
deferred
|
16,000
|
25,000
|
|
Total
provision
|
$
16,000
|
$
25,000
|
A reconciliation of the federal statutory income tax rate to the
Company's effective income tax rate is as follows:
|
|
Years Ended
September 30,
|
|
|
|
2018
|
2017
|
|
Federal statutory
income tax rate
|
24.3
%
|
34.0
%
|
|
State income taxes,
net of federal benefit
|
49.0
|
3.2
|
|
Permanent
differences
|
(384.5
)
|
-
|
|
Tax impact of
federal tax rate change
|
1,708.1
|
-
|
|
Limitation on net
operating losses
|
1,065.8
|
(2.3
)
|
|
Tax impact of
non-controlling interest
|
(246.4
)
|
21.1
|
|
Change in valuation
allowance
|
(2,250.5
)
|
(57.8
)
|
|
|
|
|
|
Provision for
income taxes
|
(34.2
)%
|
(1.8
)%
|
F-33
Significant components of the Company's deferred income taxes are
shown below:
|
|
Years Ended
September 30,
|
|
|
|
2018
|
2017
|
|
Deferred tax
assets:
|
|
|
|
Net operating loss
carryforwards
|
$
1,396,000
|
$
2,304,000
|
|
Stock
compensation
|
139,000
|
87,000
|
|
Investments
|
0
|
32,000
|
|
Accrued
expenses
|
0
|
2,000
|
|
Intangibles
|
42,000
|
0
|
|
Capitalized
expenses
|
7,000
|
-
|
|
Charitable
contributions
|
26,000
|
10,000
|
|
|
|
|
|
Total deferred tax
assets
|
1,610,000
|
2,435,000
|
|
|
|
|
|
Deferred tax
liabilities:
|
|
|
|
Prepaid
expenses
|
(177,000
)
|
(31,000
)
|
|
Management
fees
|
(169,000
)
|
(73,000
)
|
|
Intangibles
|
(21,000
)
|
(33,000
)
|
|
Fixed
assets
|
(1,000
)
|
(18,000
)
|
|
Total deferred tax
liabilities
|
(368,000
)
|
(155,000
)
|
|
Net deferred tax
assets
|
1,242.000
|
2,280,000
|
|
Valuation
allowance
|
(1,263,000
)
|
(2,317,000
)
|
|
|
|
|
|
Net
deferred tax liability
|
$
(21,000
)
|
$
(37,000
)
|
The Company has established a valuation allowance against net
deferred tax assets due to the uncertainty that such assets will be
realized. The deferred tax liabilities that result from indefinite
life intangibles cannot be offset by deferred tax assets. 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.
Under Internal Revenue Code (IRC) Section 382, the use of net
operating loss (“NOL”) carryforwards may be limited if
a change in ownership of a company occurs. During the year ending
September 30, 2018, the company determined that a change of
ownership under IRC Section 382 had occurred during the years
ending September 30, 2017 and 2015. As a result of these ownership
changes, the pre-ownership change NOL carryforwards would be
limited and approximately $2.1 million of such NOLs will expire
before being utilized. Therefore, at September 30, 2018 the Company
reduced the deferred tax asset and related valuation allowance
associated with these NOLs by approximately $0.5 million due to IRC
Section 382.
The total valuation allowance decreased by $1,054,000 and increased
by $788,000 as of September 30, 2018 and 2017,
respectively.
At September 30, 2018, the Company has utilizable NOL
carryforwards of approximately $6.0 million. The federal NOL
carryforwards begin to expire in 2035.
The Company accounts for its state franchise and minimum taxes as a
component of its general and administrative expenses.
On
December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”)
was enacted. As a result of the enactment, the U.S. corporate
tax rate was changed from a progressive bracketed tax rate with the
highest marginal rate of 35% to a flat corporate tax rate of
21%. As the Company has a fiscal year ending September 30, the
blended effective rate is 24.3% for the fiscal year ended September
30, 2018. The Company revalued its deferred tax assets and
liabilities, as well as the valuation allowance, at the date of
enactment and these repricings are reflected gross in the above
presented rate reconciliation. Finally, as the Company
does not own more than 10% of any foreign companies, there is
no impact of IRC Section 965 to the Company as a result of the
TCJA.
F-34
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, 2018 and 2017, there
are no unrecognized tax benefits, and there are no significant
accruals for interest related to unrecognized tax benefits or tax
penalties.
The
Company currently leases its corporate office space
under an agreement through December 2019.
The Agreement included (1) a discount on rent to $12,000 per month
if the full rent was prepaid and (2) a right of return on payments
prorated if the landlord exercised an early termination of the
lease. In April 2018, we made a full prepayment of $240,000. In
addition, the Company has a lease for office space until February
2019 in California for the licensing and brand management
divisions. Rent expense in aggregate was $262,264 and $135,944 for
the years ended September 30, 2018 and 2017,
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 was 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 January 30, 2018, Level Brands, amended its wholesale license
agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the Agreement, $320,000 on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. This amount is classified as an
accrued expense related party as of September 30, 2018. In
addition, royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net
proceeds.
On
October 2, 2018, the Company completed a secondary public offering
of 1,971,428 shares of its common stock for aggregate gross
proceeds of $6,899,998. The Company received approximately $6.3
million in net proceeds after deducting underwriting discounts and
commissions and other estimated offering expenses payable by
us.
On August 1, 2018, the Company extended the term of its original
note receivable of $275,000 with a related party. The outstanding
principal of $155,400 as of September 30, 2018, with 5% interest is
due by December 31, 2018. On November 15 2018, the note was paid in
full.
On
December 3, 2018 the Company and our newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement
and Plan of Merger (the “Merger Agreement”) with Cure
Based Development, LLC, a Nevada limited liability company
(“Cure Based Development”). The Merger Agreement
provides that, upon the terms and subject to the conditions set
forth therein, upon consummation of a two-step merger, cbdMD LLC
will continue as a wholly-owned subsidiary of our company and will
continue the operations of Cure Based Development pre-closing. Cure
Based Development, a Charlotte, NC-based company formed in August
2017, is owner, operator and manufacturer of nationally recognized
consumer cannabidiol (CBD) brand cbdMD which currently offers a
variety of CBD products from topicals and tinctures to bath bombs
and pet products, manufactured and sold direct to consumers online
via the company website. Cure Based Development also provides
wholesale distribution with retailers currently selling products at
brick-and-mortar locations, compounding pharmacies, salons,
supplement stores, and pet shops. Cure Based Development reported
revenues of $354 and $3,280,009 for the period from inception
through December 31, 2017 and for the eight months ended August 31,
2018, respectively, and a net loss of $323,197 and $353,561 for
those periods.
F-35
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, at the effective time of the two-step merger, the
members of Cure Based Development will receive contractual rights
to receive 15,525,000 shares of our common stock, representing
approximately 60% of our outstanding common stock following such
issuance. Assuming the closing of the two-step merger, these
initial shares will be issued as promptly as practicable following
receipt of approval by our shareholders for the possible issuance
of in excess of 19.99% of our presently outstanding common stock in
accordance with the rule of the NYSE American (the
“Shareholder Approval”). The Merger Agreement also
provides that one of the members of Cure Based Development will be
entitled to receive up to an additional 15,525,000 shares of our
common stock as part of the merger consideration, upon Shareholder
Approval and the satisfaction of certain aggregate net revenue
criteria by cbdMD LLC within 60 months following the closing. We
expect to include the proposal for Shareholder Approval of the
issuance of the initial shares as well as the possible future
issuance of the earnout shares in the proxy statement for our 2019
annual meeting of shareholders.
Following the
execution of the Merger Agreement, we lent Cure Based Development
$2,000,000 under the terms of a one year 6% secured promissory
note. At closing Mr. R. Scott Coffman, the CEO and a manager of
Cure Based Development, will be appointed to our Board of Directors
and become the chief executive officer of our cbdMD LLC subsidiary.
If the pending transaction closes, it will result in a change of
control of our company and the combined company will be required to
satisfy NYSE American initial listing standards for the continued
listing of our common stock on the NYSE American following the
closing.
In
addition to other conditions to closing as described in the Merger
Agreement, the completion of the two-step merger is subject to the
approval by the President of the United States of the Agricultural
and Nutrition Act of 2018, or such other titled Federal
legislation, which, when approved, contains a permanent
declassification of cannabidiol (CBD) as a controlled substance
under Federal law. Because this and certain other conditions
precedent to closing are beyond our control, we do not know when,
if ever, that this transaction will be consummated.
F-36
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