CBDMD, INC.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
———————
FORM 10-Q
———————
(Mark One)
☑
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the quarterly period ended December 31, 2017
or
☐
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the transition period from________ to ________
Commission File Number 001-38299
———————
LEVEL BRANDS, INC.
(Exact name of registrant as specified in its charter)
———————
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North Carolina
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47-3414576
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification No.)
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4521 Sharon Road, Suite 407, Charlotte, NC
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28211
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(Address of principal executive offices)
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(Zip Code)
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(704) 445-5800
(Registrant’s telephone number, including area
code)
Not Applicable
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant: (1)
has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90
days. YES
☑
NO
☐
Indicate by check mark whether the registrant has
submitted electronically and posted on its corporate Website, if
any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T
(§232.405 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 whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer
☐
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Accelerated filer
☐
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Non-accelerated filer
☐
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Smaller reporting company
☑
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|
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Emerging growth company
☑
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If an emerging growth company, indicate by
checkmark if the registrant has not elected to use the extended
transition period for complying with any new or revised financial
accounting standards pursuant to Section 7(a)(2)(B) of the
Securities Act:
☐
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange
Act). YES
☐
NO
☑
Indicate
the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 8,028,928 shares
of common stock are issued and outstanding as of February 1,
2018.
TABLE OF CONTENTS
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Page
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No
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PART I - FINANCIAL INFORMATION
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ITEM 1.
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Financial Statements
.
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3
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ITEM 2.
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Management's Discussion and Analysis of Financial Condition and
Results of Operations.
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30
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ITEM 3.
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Quantitative and Qualitative Disclosures About Market
Risk.
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37
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ITEM 4.
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Controls and Procedures.
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37
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PART II - OTHER INFORMATION
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ITEM 1.
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Legal Proceedings.
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38
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ITEM 1A.
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Risk Factors.
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38
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ITEM 2.
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Unregistered Sales of Equity Securities and Use of
Proceeds.
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38
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ITEM 3.
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Defaults Upon Senior Securities.
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38
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ITEM 4.
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Mine Safety Disclosures.
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38
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ITEM 5.
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Other Information.
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38
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ITEM 6.
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Exhibits.
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39
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OTHER PERTINENT INFORMATION
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 recently
formed North Carolina limited liability company. In addition,
“fiscal 2016” refers to the year ended September 30,
2016, "fiscal 2017" refers to the year ended September 30, 2017,
"fiscal 2018" refers to the year ending September 30, 2018, "first
quarter of 2017" refers to the three months ended December 31, 2016
and "first quarter of 2018" refers to the three months ended
December 31, 2017.
Unless otherwise indicated, all share and per
share information contained herein gives pro forma effect to the
1:5 reverse stock split of our common stock, which was effective
December 5, 2016. The information contained on our websites
at
www.levelbrands.com
and
www.beautyandpinups.com
are not part of this
report
.
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION
This
report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). These forward-looking
statements that relate to future events or our future financial
performance and involve known and unknown risks, uncertainties and
other factors that may cause our actual results, levels of
activity, performance or achievements to differ materially from any
future results, levels of activity, performance or achievements
expressed or implied by these forward-looking statements. Words
such as, but not limited to, “believe,”
“expect,” “anticipate,”
“estimate,” “intend,” “plan,”
“targets,” “likely,” “aim,”
“will,” “would,” “could,” and
similar expressions or phrases identify forward-looking statements.
We have based these forward-looking statements largely on our
current expectations and future events and financial trends that we
believe may affect our financial condition, results of operation,
business strategy and financial needs. Forward-looking statements
include, but are not limited to, statements about:
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●
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our material dependence on our relationships with
kathy
ireland®
Worldwide and
certain of its affiliates;
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●
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our limited operating history;
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the limited operating histories of our subsidiaries;
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our history of losses;
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●
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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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●
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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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●
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our history on reliance on sales from a limited number of
customers, including a related party;
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risks associated with our failure to effectively promote our
brands;
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●
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our ability to identify and successfully acquire additional brands
and trademarks;
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●
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the operating agreements of our I'M1 and EE1
subsidiaries;
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●
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the accounting treatment of securities we accept as partial
compensation for services;
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●
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our ability to liquidate those securities and the possible impact
of the Investment Company Act of 1940;
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●
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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 exercise of outstanding
options and warrants and the vesting of restricted stock
awards;
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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 unfavorable research reports;
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risks associated with our status as a public company;
and
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●
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risks associated with 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 in its entirety, including the risks
described in Part I, Item 1A. - Risk Factors in our Annual Report
on Form 10-K for the fiscal year ended September 30, 2017 as filed
with the Securities and Exchange Commission on December 26, 2017
(the "2017 10-K"). 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.
ii
ITEM
1.
FINANCIAL
STATEMENTS.
LEVEL BRANDS, INC.
DECEMBER 31, 2017 AND SEPTEMBER 30, 2017
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(Unaudited)
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December 31,
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September 30,
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2017
|
2017
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Assets
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Current
assets:
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Cash
and cash equivalents
|
$
8,817,856
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$
284,246
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Accounts
receivable
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65,728
|
141,462
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Accounts
receivable -- related party
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-
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712,325
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Accounts
receivable other
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50,052
|
12,440
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Accounts
receivable other – related party
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290,909
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236,364
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Marketable
securities
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299,000
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-
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Investment
other securities
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1,159,112
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859,112
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Investment
other securities – related party
|
200,000
|
-
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Note
receivable – related party
|
268,373
|
276,375
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Inventory
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593,149
|
588,197
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Deferred
initial public offering costs
|
-
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497,735
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Prepaid
expenses and other current assets
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306,964
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85,420
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Total current assets
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12,051,143
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3,693,676
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Other
assets:
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Property
and equipment, net
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56,125
|
135,476
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Intangible
assets, net
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3,191,725
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3,240,287
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Total other assets
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3,247,850
|
3,375,763
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|
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Total assets
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$
15,298,993
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$
7,069,439
|
See
Notes to Condensed Consolidated Financial Statements
3
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2017 AND SEPTEMBER 30, 2017
(continued)
|
Liabilities and shareholders' (deficit) equity
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Current
liabilities:
|
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Accounts
payable
|
$
168,645
|
$
397,601
|
|
Accounts
payable related party
|
8,199
|
67,879
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|
Deferred
revenue
|
49,125
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41,417
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Accrued payroll
|
364,515
|
-
|
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Accrued
expenses
|
165,148
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123,823
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|
Accrued
expenses to related party
|
12,800
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892,805
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Total current liabilities
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768,432
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1,523,525
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Long
term liabilities
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Long
term liabilities, to related party
|
360,000
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360,000
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Deferred
tax liability
|
15,000
|
37,000
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Total
long term liabilities
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375,000
|
397,000
|
|
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Total liabilities
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1,143,432
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1,920,525
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Level
Brands, Inc. shareholders' equity:
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Preferred
stock, authorized 50,000,000 shares, $0.001 par value, no shares
issued and outstanding
|
-
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-
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Common
stock, authorized 150,000,000 shares, $0.001 par
value,
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7,798,928
and 5,792,261 shares issued and outstanding,
respectively
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7,799
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5,792
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Accumulated
other comprehensive income
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33,500
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-
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Additional
paid in capital
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20,699,403
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10,463,480
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Accumulated
deficit
|
(7,390,350
)
|
(6,257,421
)
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Total Level Brands, Inc. shareholders' equity
|
13,350,352
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4,211,851
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Non-controlling
interest
|
805,209
|
937,063
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Total shareholders' equity (deficit)
|
14,155,561
|
5,148,914
|
|
|
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|
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Total liabilities and shareholders' equity (deficit)
|
$
15,298,993
|
$
7,069,439
|
See
Notes to Condensed Consolidated Financial Statements
4
LEVEL BRANDS, INC.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 AND 2016
(Unaudited)
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|
Three
Months Ended
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Three
Months Ended
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December
31,
|
December
31,
|
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2017
|
2016
|
|
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Sales
|
$
448,793
|
$
422,173
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Sales
related party
|
254,545
|
-
|
|
Total
Gross Sales
|
703,338
|
422,173
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Allowances
|
(15,582
)
|
(222,336
)
|
|
|
|
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|
Net
Sales
|
433,211
|
199,837
|
|
Net
sales related party
|
254,545
|
-
|
|
Total Net Sales
|
687,756
|
199,837
|
|
|
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|
|
Costs
of sales
|
228,124
|
162,746
|
|
Gross profit
|
459,632
|
37,091
|
|
Operating
expenses
|
1,687,644
|
600,266
|
|
Loss from
operations
|
(1,228,012
)
|
(563,175
)
|
|
Loss on disposal of property
and equipment
|
(69,511
)
|
|
|
Interest
expense
|
259
|
132,320
|
|
Loss before provision for
income taxes
|
(1,297,782
)
|
(695,495
)
|
|
Benefit
(Provision) for income taxes
|
33,000
|
(2,000
)
|
|
Net loss
|
(1,264,782
)
|
(697,495
)
|
|
Net
loss attributable to non-controlling interest
|
(131,854
)
|
(63,016
)
|
|
|
|
|
|
Net loss attributable to Level Brands, Inc. common
shareholders
|
$
(1,132,928
)
|
$
(634,479
)
|
|
|
|
|
|
Loss per share, basic and diluted
|
$
(0.16
)
|
$
(0.18
)
|
|
Weighted average number of shares outstanding
|
6,911,871
|
3,485,950
|
See
Notes to Condensed Consolidated Financial Statements
5
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 AND 2016
(Unaudited)
|
|
Three Months Ended
|
Three Months Ended
|
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Net
loss
|
$
(1,264,782
)
|
$
(697,495
)
|
|
Other
Comprehensive Income:
|
|
|
|
Net
Unrealized Gain on Marketable Securities, net of tax
|
33,500
|
-
|
|
Comprehensive
Loss
|
$
(1,231,282
)
|
$
(697,495
)
|
|
|
|
|
|
Comprehensive
loss attributable to non-controlling interest
|
$
(131,854
)
|
$
(63,016
)
|
|
Comprehensive
loss attributable to Level Brands, Inc. common
shareholders
|
$
(1,099,428
)
|
$
(634,479
)
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
6
LEVEL BRANDS, INC.
FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 AND 2016
(unaudited)
|
|
Three
Months Ended
December
31,
|
Three
Months Ended
December
31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
Net
loss
|
$
(1,264,782
)
|
$
(697,495
)
|
|
Adjustments to reconcile net loss to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
17,114
|
9,672
|
|
Restricted
stock expense
|
39,100
|
39,101
|
|
Issuance
of stock / warrants for service
|
37,002
|
-
|
|
Amortization
of debt issue costs
|
-
|
79,774
|
|
Depreciation
and amortization
|
61,067
|
9,189
|
|
Loss
on sale of property and equipment
|
69,511
|
4,000
|
|
Common
stock issued as charitable contribution
|
-
|
17,000
|
|
Non-cash
consideration received for services
|
(454,503
)
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
75,734
|
2,620
|
|
Accounts
receivable – related party
|
712,325
|
-
|
|
Other
accounts receivable
|
(37,612
)
|
-
|
|
Other
accounts receivable – related party
|
(54,545
)
|
-
|
|
Note
receivable – related party
|
8,002
|
-
|
|
Inventory
|
(4,952
)
|
(19,572
)
|
|
Prepaid
expenses and other current assets
|
(221,545
)
|
26,832
|
|
Accounts
payable and accrued expenses
|
162,142
|
(49,739
)
|
|
Accounts
payable and accrued expenses – related party
|
(939,685
)
|
-
|
|
Interest
Payable
|
-
|
47,981
|
|
Deferred
revenue
|
7,708
|
-
|
|
Deferred
tax liability
|
(33,000
)
|
2,000
|
|
Cash
used by operating activities
|
(1,820,919
)
|
(528,637
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of investment other securities
|
(300,000
)
|
-
|
|
Purchase
of property and equipment
|
(2,665
)
|
(7,034
)
|
|
Cash
used by investing activities
|
(302,665
)
|
(7,034
)
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
10,927,535
|
-
|
|
Proceeds
from convertible note
|
-
|
2,125,000
|
|
Debt
issuance costs
|
-
|
(200,800
)
|
|
Repayment
of line of credit
|
-
|
(300,000
)
|
|
Deferred
issuance costs
|
(270,341
)
|
-
|
|
Cash
provided by financing activities
|
10,657,194
|
1,624,200
|
|
Net
increase (decrease) in cash
|
8,533,610
|
1,088,529
|
|
Cash
and cash equivalents,
beginning
of period
|
284,246
|
34,258
|
|
Cash and cash equivalents,
end of period
|
$
8,817,856
|
$
1,122,787
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
7
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR THREE MONTHS ENDED DECEMBER 31, 2017 AND
2016
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
|
|
Three Months ended
December 31,
|
Three Months Ended
December 31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
259
|
$
4,565
|
|
|
|
|
|
Non-cash
financial activities:
|
|
|
|
Warrants
issued to IPO selling agent
|
$
171,600
|
$
-
|
|
IPO
costs incurred but unpaid as of quarter end
|
14,745
|
-
|
|
Common
stock issued for services
|
-
|
570,000
|
|
Warrants
issued with convertible notes
|
-
|
5,159
|
|
Noncontrolling
interest transfer
|
-
|
338,556
|
|
Strike
price adjustment on placement agent warrants
|
-
|
31,505
|
|
Common
stock issued for warrant exercise
|
-
|
85,950
|
|
Equity
issued to purchase membership interest in subsidiary
|
-
|
110,000
|
|
|
|
|
See
Notes to Condensed Consolidated Financial Statements
8
LEVEL BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2017 AND 2016
Organization and Nature of Business
Level Brands, Inc. ("Level Brands", "we", "us", “our”,
"Parent Company” or the “Company”) is a North
Carolina corporation formed on March 17, 2015 as Level Beauty
Group, Inc. In November 2016 we changed the name of the Company to
Level Brands Inc. We operate from our offices located in Charlotte,
North Carolina. Our fiscal year end is established as September
30.
The accompanying unaudited interim condensed consolidated financial
statements of Level Brands have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”) and the rules of the Securities and
Exchange Commission (“SEC”) and should be read in
conjunction with the audited consolidated financial statements and
notes thereto contained in the Company’s Annual Report filed
with the SEC on Form 10-K for the year ended September 30, 2017. In
the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of
consolidated financial position and the consolidated results of
operations for the interim periods presented have been reflected
herein. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited consolidated
financial statements for fiscal year 2017 as reported in the Form
10-K have been omitted.
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"),
a North Carolina limited liability company, and contributed
$250,000 in exchange for our member interest. As of September 30,
2017 we own 100% 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. The Company's
products are sold to the professional salon 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 focuses on providing millennial-inspired
lifestyle products under the I’M1 brand. I’M1 has
entered into an exclusive wholesale license agreement with kathy
ireland® Worldwide in connection with the use of the
intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California
in March 2016. EE1 Holdings, LLC, a California limited liability
company, (“EE1 Holdings") was the initial member of EE1. In
January 2017, we acquired all of the Class A voting membership
interests in EE1 from EE1 Holdings in exchange for 283,000 shares
of our common stock, which represents 51% of the interest in EE1.
EE1 Holdings continues to own the Class B non-voting membership
interests of EE1. EE1 is a 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;
we own 100% interest in Level H&W. The Company signed an
agreement with kathy ireland® Worldwide to retain exclusive
rights to the intellectual property and other rights in connection
with kathy ireland® Health & Wellness™ and its
associated trademarks and tradenames. The Company focuses on
establishing licensing arrangements under the kathy ireland®
Health & Wellness™ brand. The agreement is a seven year
agreement with a three year option to extend by the Company. The
Company agreed to pay $840,000 over the license term of seven
years, of which $480,000 was paid by January 1, 2018, and $120,000
is to be 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.
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 expenses and commissions.
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, trade support costs, certain
assumptions related to the valuation of investments other
securities, common stock, acquired intangible and long-lived assets
and the recoverability of intangible and long-lived assets and
income taxes, including deferred tax valuation allowances and
reserves for estimated tax liabilities. Actual results could differ
from these estimates.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly
liquid investments with a maturity of less than three months when
purchased to be cash equivalents.
Accounts receivable and Accounts receivable other
Accounts receivable are stated at cost less an allowance for
doubtful accounts, if applicable. Credit is extended to customers
after an evaluation of customer’s financial condition, and
generally collateral is not required as a condition of credit
extension. Management’s determination of the allowance for
doubtful accounts is based on an evaluation of the receivables,
past experience, current economic conditions, and other risks
inherent in the receivables portfolio. As of September 30, 2017,
management determined an accounts receivable allowance of $50,000
was appropriate due to possible uncollectability. We did not have
an allowance at December 31, 2017.
In addition, the Company may, from time to time, enter into
contracts where a portion of the consideration provided by the
customer in exchange for the Company's services is common stock,
options or warrants (an equity position). In these
situations, upon invoicing the customer for the stock or other
instruments, the Company will record the receivable as accounts
receivable other, and use the value of the stock or other
instrument upon invoicing to determine the value. Where an accounts
receivable is settled with the receipt of the common stock or other
instrument, the common stock or other instrument will be classified
as an asset on the balance sheet as either an investment marketable
security (when the customer is a public entity) or as an investment
other security (when the customer is a private
entity).
Accounts receivable and accounts receivable other items that
involve a related party are indicated as such on the face of the
financial statements.
10
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 statements of financial
condition with changes in fair value recorded in the accumulated
other comprehensive income component of shareholders’ equity
in the period of the change in accordance with Financial Accounting
Standards Board (FASB) Accounting Standards Code
(“ASC”) 320-10. Upon the disposition of an
available-for-sale security, the Company reclassifies the gain or
loss on the security from accumulated other comprehensive income to
non-operating income on the Company’s consolidated statements
of operations.
Investment Other Securities
For equity investments where the Company neither controls nor has
significant influence over the investee and which are
non-marketable, the investments are accounted for using the cost
method of accounting in accordance with ASC 325-10. Under the cost
method, dividends received from the investment are recorded as
dividend income within non-operating income.
Other-than-Temporary Impairment
The Company’s management periodically assesses its marketable
securities and investment other securities, for any unrealized
losses that may be other-than-temporary and require recognition of
an impairment loss in the consolidated statement of operations. If
the cost of an investment exceeds its fair value, the Company
evaluates, among other factors, general market conditions, the
length of time the security has been in a loss position, the extent
to which the security’s market value is less than its cost,
the financial condition and prospects of the security’s
issuer and the Company’s ability and intent to hold the
security for a length of time sufficient to allow for recovery. If
the impairment is considered other-than-temporary, an impairment
charge is recorded in non-operating income in the consolidated
statements of operations.
Inventory
Inventory is stated at the lower of cost or net realizable value
with cost being determined on a weighted average basis. The cost of
inventory includes product cost, freight-in, and production fill
and labor (which we outsource to third party manufacturers).
Write-offs of potentially slow moving or damaged inventory are
recorded based on management’s analysis of inventory levels,
forecasted future sales volume and pricing and through specific
identification of obsolete or damaged products. Prepaid Inventory
represents deposits made with third party manufacturers in order to
begin production of an order for product. We assess inventory
quarterly for slow moving products and potential impairments and
perform a physical inventory count annually near fiscal year
end.
Property and Equipment
Property and equipment items are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged
to operations as incurred. Depreciation is charged to expense over
the estimated useful lives of the assets using the straight-line
method. Generally, the useful lives are five years for show booths
and equipment, three years for manufacturer’s molds and
plates, three years for computer, furniture and equipment, and
three years for software. The cost and accumulated depreciation of
property are eliminated from the accounts upon disposal, and any
resulting gain or loss is included in the consolidated statement of
operations for the applicable period. Long-lived assets held and
used by the Company are reviewed for impairment whenever changes in
circumstance indicate the carrying value of an asset may not be
recoverable.
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).
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, 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 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”)
2017-01in determining if the Company is acquiring any inputs,
processes or outputs and the impact that such factors would have on
the classification of the acquisition as a business combination or
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all potential assets and
liabilities for valuation including the determination of intangible
asset values.
Common stock
Level Brands was a private company until November 2017 and as such
there was no market for the shares of its common stock. Previously,
we valued a share of common stock based on recent financing
transactions that included the issuance of common stock to an
unrelated party at a specified price. In the event, however, there
had not been a recent and significant equity financing transaction
or the nature of the business has significantly changed subsequent
to an equity financing, we used valuation techniques, which
included discounted cash flow analysis, comparable company review,
and consultation with third party valuation experts to assist in
estimating the value of our common stock. On November 17, 2017, the
Company completed its IPO, thus our stock is valued by the market
since that date.
Revenue Recognition
The Company's policy in relation to product sales, is to recognize
revenue when persuasive evidence of an arrangement exists, shipping
has occurred or service obligations have been satisfied, the sales
price is fixed or determinable and collection is probable. The
Company records revenue from the sale of its products when risk of
loss and title to the product are
transferred
to the customer, which is upon shipping. Net sales are comprised of
gross revenues less expected product returns, trade discounts and
customer allowances, which include costs associated with
off-invoice mark-downs and other price reductions, as well as trade
promotions and coupons. These incentive costs are recognized at the
later of the date on which the Company recognizes the related
revenue or the date on which the Company offers the incentive.
Although, the Company does not have a formal return policy, from
time to time the Company will allow customers to return certain
products. A business decision related to customer returns is
made by the Company and is performed on a case-by-case basis. We
record returns as a reduction in sales and based on whether we
dispose of the returned product, adjust inventory and record
expense as appropriate. There were no allowances for sales returns
during the three months ended December 31, 2017 and
2016.
12
The Company also enters into various license agreements that
provide revenues based on royalties as a percentage of sales and
advertising/marketing fees. The contracts can also have a minimum
royalty, with which this and the advertising/marketing revenue is
recognized on a straight-line basis over the term of each contract
year, as defined, in each license agreement. Royalties exceeding
the defined minimum amounts are recognized as income during the
period corresponding to the licensee’s sales, as are all
royalties that do not have a minimum royalty. Payments received as
consideration of the grant of a license are recognized ratably as
revenue over the term of the license agreement and are reflected on
the Company’s consolidated balance sheets as deferred license
revenue at the time payment is received and recognized ratably as
revenue over the term of the license
agreement. Similarly, advanced royalty payments are
recognized ratably over the period indicated by the terms of the
license and are reflected in the Company’s consolidated
balance sheet in deferred license revenue at the time the payment
is received. Revenue is not recognized unless
collectability is reasonably assured. If licensing arrangements are
terminated prior to the original licensing period, we will
recognize revenue for any contractual termination fees, unless such
amounts are deemed non-recoverable.
In regard to sales for services provided, the Company records
revenue when persuasive evidence of any agreement exists, services
have been rendered, and collectability is reasonably assured. Based
on the contracted services, revenue is recognized when the Company
invoices customers for completed services at agreed upon rates or
revenue is recognized over a fixed period of time during which the
service is performed.
Cost of Sales
Our cost of sales includes costs associated with distribution,
external fill and labor expense, components, and freight for our
professional products divisions, and includes labor and third party
service providers for our licensing and entertainment
divisions.
In
our professional products division, cost of sales also includes the
cost of refurbishing products returned by customers that will be
offered for resale and the cost of inventory write-downs associated
with adjustments of held inventories to their net realizable value.
These costs are reflected in the Company’s consolidated
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 recoverable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing
and promotional costs as incurred. The Company incurred
approximately $194,000 and $30,000 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended December 31, 2017 and 2016,
respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are
classified as a component of sales. All costs associated with
shipping and handling are classified as a component of cost of
goods sold.
Income Taxes
The Parent Company is a North Carolina corporation that is treated
as a corporation for federal and state income tax purposes. Prior
to April 2017, BPU was a multi-member limited liability company
that was treated as a partnership for federal and state income tax
purposes. As such, the Parent 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 of 2017, the Parent Company
acquired the remaining interest in BPU. As a result of the
acquisition, BPU became a disregarded entity for tax purposes and
its entire share of taxable income or loss was included in the tax
return of the Parent 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.
13
The Parent Company accounts for income taxes pursuant to the
provisions of the Accounting for Income Taxes topic of the FASB
Accounting Standards Codification (“ASC”), which
requires, among other things, an asset and liability approach to
calculating deferred income taxes. The asset and liability approach
requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and
liabilities. The Parent Company uses theinside 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 December 31, 2017 and 2016, there were no
uncertain tax positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the
consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) covers $250,000 for
substantially all depository accounts. The Company from time to
time may have amounts on deposit in excess of the insured limits.
The Company had a $8,347,313 uninsured balance at December 31, 2017
and a $4,728 uninsured balance at September 30, 2017.
Concentration of credit risk with respect to receivables is
principally limited to trade receivables with corporate customers
that meet specific credit policies. Management considers these
customer receivables to represent normal business risk. The Company
had sales to three customers that individually represented over 10%
of total net sales for the three months ended December 31, 2017.
Such customers represented 37%, 13%, and 37% of net sales. Net
sales to such customers reported in the entertainment divisions
were approximately $254,000, $92,000 and $254,000, respectively.
The aggregate accounts receivable of such customers represented 79%
of the Company’s total accounts receivable at December 31,
2017. The Company had two customers whose revenue collectively
represented approximately 88% of the Company’s net sales for
the three months ended December 31, 2016.
Debt issuance costs related to a recognized debt liability are
presented in the balance sheet as a direct deduction from the
carrying value of that debt liability, consistent with debt
discounts. Amortization of debt issuance costs are included as a
component of interest expense in accordance with ASU 2015-03. All
debt obligations were satisfied in fiscal 2017 and all amortization
costs had been recognized in interest expense in fiscal 2017 (see
Notes 7 and 8).
Stock-Based Compensation
We account for our stock compensation under the ASC -718-10-30
“Compensation - Stock Compensation” using the fair
value based method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. This guidance establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which an
entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity
instruments.
We use the Black-Scholes model for measuring the fair value of
options and warrants. The stock based fair value compensation is
determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is
recognized over the vesting periods. Under ASU 2016-09 which amends
ASC 718 and the standard 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.
14
Net Loss Per Share
The Company uses ASC 260-10, “Earnings Per Share” for
calculating the basic and diluted loss per share. The Company
computes basic loss per share by dividing net loss and net loss
attributable to common shareholders by the weighted average number
of common shares outstanding. Common equivalent shares are excluded
from the computation of net loss per share if their effect is
anti-dilutive.
At December 31, 2017 and 2016, 855,476 and 597,476 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 were
deferred and charged against the gross proceeds of the offering as
a reduction of additional paid-in capital during the three months
ended December 31, 2017. These costs included legal fees related to
the registration drafting and counsel, independent audit costs
directly related to the registration and offering, SEC filing and
print related costs, exchange listing costs, and IPO roadshow
related costs.
New Accounting Standards
In May 2014, August 2015 and May 2016, the FASB issued ASU
2014-09,
Revenue from Contracts with
Customers
, and ASU
2015-14
Revenue from Contracts with
Customers, Deferral of the Effective Date
, respectively, which implement ASC Topic 606. ASC
Topic 606 outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance under US GAAP,
including industry-specific guidance. It also requires entities to
disclose both quantitative and qualitative information that enable
financial statements users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The amendments in these ASUs are
effective for annual periods beginning after December 15, 2017, and
interim periods therein. Early adoption is permitted for annual
periods beginning after December 15, 2016. These ASUs may be
applied retrospectively to all prior periods presented, or
retrospectively with a cumulative adjustment to retained earnings
in the year of adoption.
Subsequently, the FASB has issued the following standards related
to ASU 2014-09: ASU No. 2016-08,
Revenue from Contracts with
Customers
(Topic 606):
Principal versus Agent Considerations (“ASU 2016-08”);
ASU No. 2016-10,
Revenue from Contracts with Customers
(Topic 606):
Identifying Performance
Obligations and Licensing
(“ASU 2016-10”); ASU No.
2016-12,
Revenue from Contracts with
Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients
(“ASU 2016-12”); and ASU No.
2016-20,
Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with
Customers
(“ASU
2016-20”).
The Company is assessing the impact, if any, of implementing this
guidance on its consolidated financial position, results of
operations and liquidity. The Company will adopt this standard in
the first quarter of fiscal 2019.
In February 2016, the FASB issued ASU 2016-02,
Leases
. The purpose of ASU 2016-02 is to establish
the principles to report transparent and economically neutral
information about the assets and liabilities that arise from
leases. This guidance results in a more faithful representation of
the rights and obligations arising from operating and capital
leases by requiring lessees to recognize the lease assets and lease
liabilities that arise from leases in the statement of financial
position and to disclose qualitative and quantitative information
about lease transactions, such 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.
15
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. At closing we
assumed $277,500 of BPUNY's accounts payable to its product vendor,
which bore interest at 6% annually. The payable was paid off in
April 2016. The fair value of the noncontrolling membership
interest issued was based on the value of the initial contribution
of $250,000 made by Level Brands. The total consideration paid was
allocated to the net assets acquired based on relative fair values
of those net assets as of the transaction date, in accordance with
the Fair Value Measurement topic of the FASB ASC 820. The fair
value is comprised of the cash, accounts payable acquired,
non-controlling interest and a minimal amount of inventory, all in
aggregate valued at $486,760.
I’M1 was formed in California in September 2016. IM1 Holdings
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.
The Company may, from time to time, enter into contracts where
a portion of the consideration provided by the customer in exchange
for the Company's services is common stock, options or
warrants (an equity position). In these situations, upon
invoicing the customer for the stock or other instruments, the
Company will record the receivable as accounts receivable other,
and use the value of the stock or other instrument upon invoicing
to determine the value. If there is insufficient data to support
the valuation of the security directly, the company will value it,
and the underlying revenue, on the estimated fair value of the
services provided. Where an accounts receivable is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument will be classified as an asset on the balance
sheet as either an investment marketable security (when the
customer is a public entity) or as an investment other security
(when the customer is a private entity).
As of April 2017, the Company received 2,500,000 shares of common
stock, of an OTC-quoted company under the terms of its agreement
for services to the OTC-quoted company, which was valued at
$650,000 based on the trading price on the OTC Markets 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. 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.
16
On June 23, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 1,600,000 shares of common stock for services delivered
to a customer and accounted for this in Investment Other
Securities. The common stock was issued to the Company’s
subsidiaries I’M1 and EE1. The customer is a private entity
and the stock was valued at $912,000, which was based on its recent
financing in June 2017 at $0.57 per share. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used the fair value of the services provided, utilizing
an analysis of vendor specific objective evidence of its selling
price. In August 2017, each of I’M1 and EE1 distributed the
shares to its majority owner, Level Brands, and also distributed
shares valued at $223,440 to its non-controlling interests
(“NCI”). In August 2017, the Company also provided
referral services for kathy Ireland® WorldWide and this
customer. As compensation the Company received an additional
200,000 shares of common stock valued at $114,000 using the pricing
described above. The Company assessed the common stock and
determined there was not an impairment for the period ended
December 31, 2017.
On September 19, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 56,552 shares of common stock for services delivered to
a customer and accounted for this in Investment Other Securities.
The common stock was issued to the Company’s subsidiaries
I’M1 and EE1. The customer is a private entity and the stock
was valued at $56,552, which was based on all 2017 financing
transactions of the customer set at $1.00 per share, with the most
recent third party transaction in August 2017. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used factors including financial projections provided
by the issuer and 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.
In November 2017, the Company completed services in relation to an
agreement with SG Blocks, Inc. 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 December 31, 2017, the shares were
$5.98 per share, and we recorded $44,500 as other comprehensive
income on the Company consolidated financial
statements.
In December 2017, the Company completed advisory services in
relation to an agreement with Kure Corp, a related party, which it
entered into in August 2017. As payment for these services, Kure
Corp issued 400,000 shares of its stock to Level Brands. The
customer is 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. 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 information provided
by the issuer regarding their recent results and future plans as
well as their most recent financing transactions.
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 private entity. The
Company has classified this common stock as Level 3 for fair value
measurement purposes as there are no observable inputs. In valuing
the stock the Company used the value paid, which was the price
offered to all third party investors.
17
The table below summarizes the assets valued at fair value as of
December 31, 2017:
|
|
In Active Markets for Identical Assets and Liabilities
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total Fair Value at
December 31,
2017
|
|
|
|
|
|
|
|
Marketable
securities
|
$
299,000
|
-
|
$
-
|
$
299,000
|
|
Investment
other securities
|
-
|
-
|
$
1,359,112
|
$
1,359,112
|
|
|
|
|
|
|
|
|
Level 1
|
Level 2
|
Level 3
|
Total
|
|
Balance
at September 30, 2017
|
$
-
|
$
-
|
$
859,112
|
$
859,112
|
|
Receipt
of equity investment upon completion of contract
|
$
254,500
|
$
-
|
$
-
|
$
254,500
|
|
Receipt
of equity investment upon completion of contract
|
$
-
|
$
-
|
$
200,000
|
$
200,000
|
|
Purchase
of preferred shares, convertible into common stock
|
$
-
|
$
-
|
$
300,000
|
$
300,000
|
|
Change
in value of equity, other comprehensive income
|
$
44,500
|
$
-
|
$
-
|
$
44,500
|
|
Balance
at December 31, 2017
|
$
299,000
|
$
-
|
$
1,359,112
|
$
1,658,112
|
Inventory at December 31, 2017 and September 30, 2017 consists of
the following:
|
|
December 31,
|
September 30,
|
|
|
2017
|
2017
|
|
Finished
goods
|
$
383,036
|
$
375,459
|
|
Inventory
components
|
210,113
|
212,738
|
|
Inventory
reserve
|
-
|
-
|
|
Total
|
$
593,149
|
$
588,197
|
At September 30, 2017, the Company determined that inventory was
impaired by approximately $67,000.
Major classes of property and equipment at December 31, 2017 and
September 30, 2017 consist of the following:
|
|
December 31,
|
September 30,
|
|
|
2017
|
2017
|
|
Computers
and equipment
|
$
39,926
|
$
37,261
|
|
Show
booth and equipment
|
49,123
|
171,986
|
|
Manufacturers’
molds and plates
|
34,200
|
34,200
|
|
|
123,249
|
243,447
|
|
Less
accumulated depreciation
|
(67,124
)
|
(107,971
)
|
|
Net
property and equipment
|
$
56,125
|
$
135,476
|
18
Depreciation expense related to property and equipment was $13,756
and $9,189 for the periods ended December 31, 2017 and 2016,
respectively. In the three months ended December 31, 2017 we
recorded a one time loss of $69,511 on the disposal of a show booth
that is no longer in use.
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 $11,847 for the
three months ended December 31, 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
$6,713 for the three months ended December 31, 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 are due
in equal installments on January 1 of subsequent years until the
license fee is paid, and are 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™. The license and
associated intellectual property is being amortized over the term
of the agreement and we have amortized $30,000 for the three months
ended December 31, 2017.
19
Intangible assets as of December 31, 2017 and September 30, 2017
consisted of the following:
|
|
December 31,
|
September 30,
|
|
|
2017
|
2017
|
|
Trademark
and other intellectual property related to BPU
|
$
486,760
|
$
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
|
800,000
|
830,000
|
|
Cash,
warrants and stock issued related to the Wholesale license
agreement with Chef Andre Carthen, net
|
295,298
|
307,146
|
|
Cash,
warrants and stock issued related to the Wholesale license
agreement with Nicholas Walker, net
|
166,333
|
173,047
|
|
Total
|
$
3,191,725
|
$
3,240,287
|
|
|
|
|
In September 2017 the Company acquired three definite lived
intangible assets, all with a seven year life.
Future amortization schedule:
|
Intangible
|
Total unamortized cost
|
2018
|
2019
|
2020
|
2021
|
2022
|
thereafter
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
800,000
|
$
90,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
230,000
|
|
Cash,
warrant and stock issued related to the Wholesale license agreement
with Chef Andre Carthen
|
$
295,298
|
$
32,446
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
85,676
|
|
Cash,
warrant and stock issued related to the Wholesale license agreement
with Nicholas Walker
|
$
166,333
|
$
17,402
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
48,297
|
The Company performs an impairment analysis at August 1 annually on
the indefinite-lived intangible assets following the steps laid out
in ASC 350-30-35-18. Our annual impairment analysis includes a
qualitative assessment to determine if it is necessary to perform
the quantitative impairment test. In performing a qualitative
assessment we review events and circumstances that could affect the
significant inputs used to determine if the fair value is less than
the carrying value of the intangible assets. In addition,
intangible assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred and the Company evaluates the
indefinite-lived intangible assets each reporting period to
determine whether events and circumstances continue to support an
indefinite useful life. The Company has performed a qualitative and
quantitative analysis and for the years ended September 30, 2017
and 2016 there has been no impairment. The Company has determined
that no event or circumstances indicate likeliness of an impairment
as of December 31, 2017.
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 December 31, 2017.
20
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 consist of 8% Convertible
Notes with warrants to purchase 141,676 shares of the
Company’s stock (the “Notes”). The warrants have
an exercise price of $7.80. The Warrants expire in September 2021
and are exercisable beginning the earlier of: (i) immediately after
the IPO Closing; or (ii) July 1, 2017.
Effective June 30, 2017, the Company converted the $2,125,000
principal amount of convertible promissory notes and all accrued
interest of $127,500 into common shares of the Company at a price
of $3.95 per share. In this transaction, the Company issued 570,254
shares of common stock.
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 is
being amortized over the term of the Notes. We have recorded no
interest expense related to these amounts for the three months
ended December 31, 2017.
In August 2015, we entered into a one year $1,000,000 revolving
line of credit agreement with LBGLOC, LLC, a related party. Under
the terms of the agreement, we pay interest on any amounts
available for advance at the rate of 10% per annum. We granted
LBGLOC, LLC a blanket security agreement on our assets as
collateral for amounts advanced under the credit line. As
additional consideration for granting the credit line, we issued
the lender 16,000 shares of common stock, valued at $32,000 and was
recorded as a debt discount and amortized over the term of the
note.
The agreement was renewed for an additional one year period on
September 1, 2016. As additional consideration for renewing the
credit line, we issued the lender 14,000 shares of common stock,
which was valued at $105,000 based on the most recent equity
financing in February 2016, and was recorded as a debt discount and
was being amortized over the term of the note.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the
Company converted the outstanding principal balance of the line of
credit in the amount of $593,797, together with the accrued
interest of $179,380 for a total payoff amount of $773,177 into
common shares of the Company at a price of $3.95 per share. The
Company recorded a loss on extinguishment of $8,750 which was
recorded as interest expense in the consolidated statement of
operations. In this transaction, the Company issued 195,740 shares
of common stock.
The outstanding balances due under the agreements were $0 at both
December 31, 2017 and September 30, 2017.
In November 2016 we issued 20,000 shares of our common stock valued
at $17,000 to Best Buddies International as a charitable
contribution. Best Buddies International is an affiliate of a
member of our board of directors.
On January 1, 2017, we entered into a sublease agreement for office
space with Kure Corp. (“Kure”). The lease is for one
year and the space was to be used by our subsidiary BPU. A
shareholder of Kure is Stone Street Capital, LLC, an affiliate of
our CEO and Chairman and our CEO and Chairman was the past Chairman
of Kure and is also a shareholder of Kure.
In February 2017 we entered into a master advisory and consulting
agreement with kathy ireland® Worldwide, as amended, pursuant
to which we have engaged the company to provide non-exclusive
strategic advisory services to us under a term expiring in February
2025. Under the terms of this agreement, Ms. Ireland serves in the
non-executive positions as our Chairman Emeritus and Chief Brand
Strategist. The agreement also provides that kathy ireland®
Worldwide will provide input to us on various aspects of our
corporate strategies and branding, provides access to us of its
in-house design team to assist us in developing our brands. As
compensation under the agreement we agreed to pay kathy
ireland® Worldwide a nominal monthly fee. We are also
responsible for the payment of expenses incurred by Ms. Ireland or
kathy ireland® Worldwide in providing these services to our
company.
21
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 are
negotiating and expect to execute a new agreement with multi-year
terms.
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 are negotiating and
expect to execute a new agreement with multi-year
terms.
On February 8, 2017 the Company entered into a one year advisory
agreement with Mr. Stephen Roseberry pursuant to which he provides
advisory and consulting services to us, including serving as
co-Managing Director of EE1 and I’M1. We have agreed to pay
Mr. Roseberry a fee of $1.00 per month for his services. We are
negotiating and expect to execute a new agreement with multi-year
terms.
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 fee of $1.00 per month for his
services. We are negotiating and expect to execute a new agreement
with multi-year terms.
In February 2017 EE1 arranged, coordinated and booked for Sandbox
LLC a travel related event, arranging for travel and concierge
related services. Under the terms of the oral agreement, EE1 was
paid $68,550 for its services, which was recorded as
consulting/advisory revenue. Sandbox LLC is an affiliate of a
member of our board of directors.
In March 2017, our subsidiary I’M1 entered into a consulting
agreement with Kure. In this agreement I’M1 provided services
delivered in two phases. The first phase was delivered by March 31,
2017 which included a social media blitz and marketing and branding
support and strategies for $200,000. The second phase was delivered
by June 22, 2017 which included modeling impressions for the brand
and extension of publicity to other media outlets for $400,000. In
addition, in March 2017, I’M1 entered into a separate
licensing agreement for 10 years with Kure under which we will
receive royalties based on gross sales of Kure products with the
I’M1 brand.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the
Company converted the line of credit with LBGLOC LLC, which
included the outstanding principal balance of $593,797 and the
accrued interest of $179,380 for a total payoff amount of $773,177
into common shares of the Company at a price of $3.95 per share.
One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II
LLC is an affiliate of our CEO and Chairman and received 94,475
shares of common stock in this transaction.
Effective June 30, 2017, the Company converted the $2,125,000
principal amount of convertible promissory notes and all accrued
interest of $127,500 into common shares of the Company at a price
of $3.95 per share. One note holder, Stone Street Partners
Opportunity Fund II LLC is an affiliate of our CEO and Chairman and
received a total of 26,836 shares.
In June 2017, the Company earned a referral fee from 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 purchased products from our subsidiary BPU for
resale in their stores. The total purchase was $97,850. Our CEO and
Chairman is the past Chairman of Kure and is also a shareholder of
Kure.
In July 2017, the Company entered into subscription agreements for
133,000 shares of common stock with two accredited investors in a
private placement, which resulted in gross proceeds of $525,350 to
the Company. The accredited investors Stone Street Partners LLC and
Stone Street Partners Opportunity Fund II LLC are affiliates of our
CEO and Chairman.
22
On July 31 2017, the Company sold preferred shares it had received
as payment for services to a customer. The preferred shares were
sold to a related party. The preferred shares were originally
valued as marketable securities at $650,000 and were sold for
$475,000, an approximation of fair market value, which was paid
$200,000 in cash and a short term note of $275,000 at 3% interest,
which is in note receivable related party as of December 31, 2017.
The Company recorded an impairment of $175,000 for the year ended
September 30, 2017 (see Note 3).
On August 1, 2017, the Company entered into an additional advisory
agreement with Kure, in which the Company would act as an advisor
regarding business strategy involving (1) conversion of Kure
franchises into company stores, (2) conversion of Kure debt and
preferred shares into common share of Kure and (3) preparation
steps required and a strategy to position for a possible Reg A+
offering. The services are to be delivered in two phases, the first
deliverables of items 1 and 2 above were delivered by September 30,
2017 and 3 is to be delivered by June 30, 2018. The Company was
paid $200,000 in Kure stock for the first deliverables and will be
paid $200,000 in cash for the second deliverable.
In August 2017, EE1 entered into a representation agreement with
Romero Britto and Britto Central, Inc. under which it was appointed
as exclusive licensing consultant to license certain intellectual
property in entertainment industry category, which includes
theatre, film, art, dance, opera, music, literary, publishing,
television and radio, worldwide except for South America. Under the
terms of the agreement, EE1 will identify and introduce Britto to
potential license opportunities, negotiate terms of license
agreements, and implement and administer each eligible license
agreement entered. As compensation for our services, EE1 is
entitled to receive 35% of the net proceeds received under any
license, and following the termination or expiration of the
agreement, 15% of the net proceeds of eligible licenses. The
President of Britto Central, Inc is the spouse of a member of our
board of directors.
In September 2017 EE1 arranged, coordinated and booked for Sandbox
LLC a travel related event, arranging for travel and concierge
related services. Under the terms of the oral agreement, EE1 was
paid $64,475 for its services, which were recorded as
consulting/advisory revenue. EE1 engaged Sterling Winters Company
to assist with this service and incurred a cost of sales for that
service of $35,421. 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.
On September 8, 2017, the Company extended its Master Advisory and
Consulting Agreement, executed in February 2017, with kathy
ireland® Worldwide to February 2025.
On December 11, 2017, the Company entered into a service agreement
with Kure to facilitate the “Vape Pod” transaction with
the modular building systems vendor, SG Blocks, Inc., which is also
a 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 Level Brands 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. At December 31, 2017 the outstanding
balance due under the agreement was $0 and the revolving line of
credit has not been utilized.
23
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.
As we engage in providing services to customers, at times we will
utilized related parties to assist in delivery of the services. For
the period ended December 31, 2017 we incurred related party cost
of sales of approximately $126,000 and $53,000 of marketing related
expense. We had no related party costs of sales for the period
ended December 31, 2016.
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 7,798,928
and 5,792,261 shares of common stock issued and outstanding at
December 31, 2017 and September 30, 2017,
respectively.
On November 17, 2017, the Company completed an IPO of 2,000,000
shares of its common stock for aggregate gross proceeds of $12.0
million. The Company received approximately $10.9 million in net
proceeds after deducting discounts and commissions and other
offering expenses paid by us.
The
Company also 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 were valued at $171,600 and expire on September
27, 2022.
Common stock transactions:
In the three months ended December 31, 2017:
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.
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 the three months ended December 31, 2016:
Per terms in the Operating Agreement of BPU, the Company can redeem
the 10% membership interest of Sigan Industries Group
(“Sigan”) for $110,000 at any time before April 13,
2017. On October 14, 2016, Sigan entered into an agreement with the
Company to transfer their 10% member interest for 129,412 shares of
the Company’s common stock.
In October 2016 we issued 38,358 shares of our stock to six
individuals and entities upon the cashless exercise of 70,067
placement agents warrants previously granted to T.R. Winston &
Co LLC and its affiliates.
In November 2016 we issued Stone Street Partners, LLC an aggregate
of 76,000 shares of our common stock valued at $570,000 as
compensation for services, which had been accrued and expensed at
September 30, 2016. The stock was valued at the time based on the
most recent equity financing from February 2016 which was priced at
what is a post reverse split price of $7.50.
In November 2016 we issued 20,000 shares of our common stock valued
at $17,000 to Best Buddies International as a charitable
contribution.
Stock option transactions:
No options were issued in the three months ended December 31,
2017.
In the three months ended December 31, 2016:
24
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 $53 and $418 respectively
for the three months ended December 31, 2017 and 2016.
On October 1, 2016 we granted an aggregate of 171,500 common stock
options to two employees. The options vest ratably through 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
$4,802 and $4,802 respectively for the three months ended December
31, 2017 and 2016.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the three
months ended December 31, 2017 and 2016:
|
|
2017
|
2016
|
|
Exercise
price
|
-
|
$
7.50
|
|
Risk
free interest rate
|
-
|
1.14%
- 1.42%
|
|
Volatility
|
-
|
54.69%
- 60.39%
|
|
Expected
term
|
-
|
5 -
7 years
|
|
Dividend
yield
|
-
|
None
|
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.
Under ASU 2016-09
which amends ASC 718, the Company 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. 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.
Warrant transactions:
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 September 27, 2022.
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 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 7.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the periods
ended December 31, 2017 and 2016:
|
|
2017
|
2016
|
|
Exercise
price
|
$
7.50
|
$
7.80
|
|
Risk
free interest rate
|
2.06
%
|
1.22%
- 1.27%
|
|
Volatility
|
43.12
%
|
52.77%
- 54.49%
|
|
Expected
term
|
5
years
|
5
years
|
|
Dividend
yield
|
None
|
None
|
25
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of Level Brands, Inc. approved the 2015 Equity
Compensation Plan (“Plan”). The Plan made 1,175,000
common stock shares, either unissued or reacquired by the Company,
available for awards of options, restricted stocks, other stock
grants, or any combination thereof. The number of shares of common
stock available for issuance under the Plan shall automatically
increase on the first trading day 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
FASB ASC 718. FASB ASC 718 codification requires
companies to recognize the fair value of stock-based compensation
expense in the financial statements based on the grant date fair
value of the options. We have only awarded stock options since
December 2015. All options are approved by the Compensation
Committee of the Board of Directors. Restricted stock awards that
vest in accordance with service conditions are amortized over their
applicable vesting period using the straight-line method. The fair
value of our stock option awards or modifications is estimated at
the date of grant using the Black-Scholes option pricing
model.
Eligible recipients include employees, officers, directors and
consultants who are deemed to have rendered or to be able to render
significant services to the Company or its subsidiaries and who are
deemed to have contributed or to have the potential to contribute
to the success of the Company. Options granted generally have a
ten-year term and generally vest over one to three years from the
date of grant. Certain of the stock options granted under the plan
have been granted pursuant to various stock option agreements. Each
stock option agreement contains specific terms.
Stock Options – The Company currently has awards outstanding
with service conditions and graded-vesting features. We recognize
compensation cost on a straight-line basis over the requisite
service period.
The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model, which uses
the assumptions described above.
The following table summarizes stock option activity under the
Plan:
|
|
Number of shares
|
Weighted-average
exercise price
|
Weighted-average remaining contractual term (in
years)
|
Aggregate intrinsic value
(in thousands)
|
|
Outstanding
at September 30, 2017
|
333,300
|
5.83
|
|
|
|
Granted
|
—
|
—
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
20,000
|
2.00
|
|
|
|
Outstanding
at December 31, 2017
|
313,300
|
$
6.07
|
5.4
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
285,800
|
$
5.72
|
—
|
$
—
|
As of December 31, 2017, there was approximately $37,207 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 8 months.
Restricted Stock Award transactions:
On October 1, 2016 the Company issued 230,000 restricted stock
awards in aggregate to board members. The restricted stock awards
vest January 1, 2018. The stock awards are valued at fair market
upon issuance at $195,500 and amortized over the vesting period. We
recognized $39,101 of stock based compensation expense for the
three months ended December 31, 2017 and 2016,
respectively.
26
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, 2017
|
212,176
|
$
6.53
|
|
|
|
Issued
|
100,000
|
7.50
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding
at December 31, 2017
|
312,176
|
$
6.84
|
4.3
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2017
|
312,176
|
$
6.84
|
4.3
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of December 31, 2017:
|
|
Number of shares
|
Weighted-average
exercise price
|
Expiration
|
|
|
|
|
|
|
Exercisable
at $7.80 per share
|
141,676
|
$
7.80
|
September
2021
|
|
Exercisable
at $4.00 per share
|
70,500
|
$
4.00
|
September
2022
|
|
Exercisable
at $7.50 per share
|
100,000
|
$
7.50
|
October
2022
|
|
|
312,176
|
6.84
|
|
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 December 31, 2017. 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.
The Company operates through its four subsidiaries in three
business segments: the Professional Products, the Licensing, and
the Entertainment divisions. The Professional Products division is
designed to be an innovative and cutting-edge producer and marketer
of quality hair care and other beauty products. The Licensing
division is designed to establish brands via licensing of select
products / categories and encompasses our two subsidiaries with a
focus on health and wellness products and men’s lifestyle
products. The Entertainment division’s focus is to become a
producer and marketer of multiple entertainment distribution
platforms. 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.
27
The Professional Products division operated for the full year in
fiscal 2017 and 2016. The Licensing and Entertainment divisions
were both acquired in January 2017.
The performance of the business is evaluated at the segment level.
Cash, debt and financing matters are managed centrally. These
segments operate as one from an accounting and overall executive
management perspective, though each segment has senior management
in place; however they are differentiated from a marketing and
customer presentation perspective, though cross-selling
opportunities exist and continue to be pursued.
Condensed summary segment information follows for the three months
ended December 31, 2017 and 2016.
Three months ended December 31, 2017
|
|
Three Months Ended September 30, 2016
|
|||
|
|
Professional
Product Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
29,070
|
$
37,162
|
$
366,979
|
$
433,211
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
254,545
|
$
254,545
|
|
Income
(loss) from Operations before Overhead
|
$
(360,753
)
|
$
(360,109
)
|
$
242,553
|
$
(478,309
)
|
|
Allocated
Corporate Overhead (a)
|
49,930
|
41,554
|
694,989
|
786,474
|
|
Net
Loss
|
$
(410,683
)
|
$
(401,663
)
|
$
(452,436
)
|
$
(1,264,782
)
|
|
|
|
|
|
|
|
Assets
|
$
4,587,741
|
$
5,792,671
|
$
4,918,581
|
$
15,298,993
|
Three months ended December 31, 2016
|
|
Three Months Ended September 30, 2016
|
|||
|
|
Professional
Product Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
199,837
|
$
-
|
$
-
|
$
199,837
|
|
Income
(loss) from Operations before Overhead
|
$
(458,347
)
|
$
-
|
$
-
|
$
(458,347
)
|
|
Allocated
Corporate Overhead (a)
|
239,156
|
|
|
239,156
|
|
Net
Loss
|
$
(697,495
)
|
$
-
|
$
-
|
$
(697,495
)
|
|
|
|
|
|
|
|
Assets
|
$
2,688,852
|
-
|
-
|
$
2,688,852
|
(a)
The
Company began allocating corporate overhead to the business
segments in April 2017. We have allocated overhead on a proforma
basis for the period ended December 31, 2017 and 2016 above for
comparison purposes.
The Company has adopted the provisions of ASU 2016-09 as of the
beginning of the current fiscal year (October 01, 2017) which
requires recognition through opening retained earnings of any
pre-adoption date NOL carryforwards from nonqualified stock options
and other employee share-based payments (e.g., restricted shares
and share appreciation rights), as well as recognition of all
income tax effects from share-based payments arising on or after
October 1, 2017 (our adoption date) in income tax expense. The
impact of the adoption of ASU 2016-09 was immaterial.
The Company has a valuation allowance against the net deferred tax
assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles which cannot be offset by
deferred tax assets.
28
On November 17, 2017, the Company completed an initial public
offering (the “IPO”). The Company conducted a
preliminary Section 382 analysis and determined an ownership change
likely occurred upon the IPO. Management has determined that the
Company's federal and state NOL carryovers established up through
the date of the ownership change may be subject to an annual
limitation. The Company is in the process of determining the annual
limitation.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a
result of the enactment, the U.S. corporate tax rate was changed
from a progressive bracketed tax rate with the highest marginal
rate of 35% to a flat corporate tax rate of 21%. The Company has
revalued its deferred tax assets and liabilities at the date of
enactment and the result was a reduction of the net deferred tax
liability and a tax provision benefit of $12,000 which was
reflected in the quarter ending December 31, 2017 financial
statements.
On December 30, 2017 Level Brands, Inc. entered into a License
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 manufacture and developer of
phytoceutical consumer products. The agreement was amended on
January 19, 2018. With this agreement, the Company will receive
equity positions in Isodiol International as compensation for its
services. The amount of equity received upon execution of the
License Agreement will be 1,679,321 shares of Isodiol
International's common stock, which is equal to $2 million. In
addition, the Company will receive each quarter such amount of
shares as shall equal $750,000 for services each quarter. The
License Agreement is included on Form 8-K filed with the SEC on
January 5, 2018 and January 22, 2018. With this agreement, the
Company has begun assessing the impact related to the Investment
Company Act of 1940 as we believe in our period ending March 31,
2018 we will exceed the 45% threshold related to assets held which
are securities. We will assess the income threshold of 45% in the
period ending March 31, 2018 to determine if we also exceed the 45%
threshold related to income being derived from securities. If these
thresholds are exceeded, the Company would be deemed an investment
company, and that is not the Company’s focus or intention.
The Company has begun working on a plan to liquidate, in an orderly
fashion, assets as well as review business strategy to mitigate
this issue, if it is determined these thresholds are
exceeded.
On January 19, 2018 the base compensation of the Chief Executive
Officer and Chief Financial Officer of Level Brands, Inc., was
increased. The Compensation Committee of the Board of Directors
approved the increases in each of their base compensation to
$270,000 annually for Mr. Sumichrast and $180,000 annually for Mr.
Elliott, retroactively effective for the pay period beginning
January 1, 2018. In addition, the Compensation Committee awarded
Mr. Sumichrast and Mr. Elliott cash bonuses of $240,000 and
$100,000, respectively. The Compensation Committee of the Board of
Directors is presently negotiating the terms of new employment
agreements with each executive.
On January 30, 2018, Level Brands, amended its Wholesale License
Agreement (the “Agreement”) executed on September 8,
2017 with kathy Ireland® WorldWide related to exclusive rights
to the kathy Ireland® Health & Wellness
™ trademarks. 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.
29
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The
following discussion of our financial condition and results of
operations for the first quarter of fiscal 2018 and the first
quarter of fiscal 2017 should be read in conjunction with the
condensed consolidated financial statements and the notes to those
statements that are included elsewhere in this report. Our
discussion includes forward-looking statements based upon current
expectations that involve risks and uncertainties, such as our
plans, objectives, expectations and intentions. Actual results and
the timing of events could differ materially from those anticipated
in these forward-looking statements because of several factors,
including those set forth under the Part I, Item 1A, Risk Factors
and Business sections in our 2017 10-K, this report, and our other
filings with the Securities and Exchange Commission. We use words
such as “anticipate,” “estimate,”
“plan,” “project,”
“continuing,” “ongoing,”
“expect,” “believe,” “intend,”
“may,” “will,” “should,”
“could,” and similar expressions to identify
forward-looking statements. In addition, any statements that refer
to projections of our future financial performance, our anticipated
growth and trends in our businesses, and other characterizations of
future events or circumstances are forward-looking statements. Such
statements are based on our current expectations and could be
affected by the uncertainties and risk factors described throughout
this report.
Overview
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:
|
Licensing
division
|
Founded in 2017 and first conceptualized by
kathy
ireland
® Worldwide, I'M1
is a lifestyle brand established to capitalize on potentially
lucrative licensing and co-branding opportunities with products
focused on millennials.
|
|
|
|
|||
|
|
|||
|
|
|
|
|
|
Entertainment
division
|
Also founded in 2017, EE1 was established to serve as a producer
and marketer of experiential entertainment including recordings,
film, TV, web and live events, and entertainment experiences. EE1
also provides brand management services including creative
development and marketing, brand strategy, and distribution
support.
|
|
|
|
|
|
|
|
kathy ireland
®
Health &
Wellness
|
Our newest business unit Level Health & Wellness 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.
|
|
|
|
|
|
|
"
Beauty
belongs to everyone
"
|
Professional
products
division
|
Beauty & Pin-Ups, our first business unit is a professional
hair care line with a social conscience and launched its products
in 2015. We offer quality hair care products, including shampoos,
conditioners, styling aides and a patented styling tool, through an
expanding professional salon distribution network.
|
|
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.
30
We
began reporting our revenues by segment during the second quarter
of fiscal 2017 following our acquisitions of I'M1 and EE1. The
Company reports in three business segments: the Professional
Products, the Licensing, and the Entertainment divisions. The
Professional 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. 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 health and wellness related products branded under
kathy ireland® Health & Wellness™, which began
operations in December 2017. The Entertainment division’s
focus is to become a producer and marketer of multiple
entertainment distribution platforms as well as engage in brand
management services. 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.
In
November 2017 we completed our initial public offering raising
$12,000,000 in gross proceeds through the sale of our common stock.
Utilizing a portion of the proceeds from this recently completed
initial public offering we expect to devote significant assets and
efforts to the marketing, development and promotion of our
brands.
Results of operations
Sales
The
following tables provide certain selected consolidated financial
information for the periods presented:
|
|
First Quarter
2018
|
First Quarter
2017
|
Change
|
|
|
(unaudited)
|
(unaudited)
|
|
|
|
|
|
|
|
Sales
|
$
448,793
|
$
422,173
|
|
|
Sales
related party
|
254,545
|
-
|
|
|
Total
gross sales
|
$
703,338
|
$
422,173
|
|
|
Allowances
|
(15,582
)
|
(222,336
)
|
|
|
Net
sales
|
$
433,211
|
$
199,837
|
|
|
Net
sales related party
|
254,545
|
-
|
|
|
Total
net sales
|
$
687,756
|
$
199,837
|
|
|
Costs
of sales
|
228,124
|
162,746
|
|
|
Gross
profit as a percentage of net sales
|
66.8
%
|
18.6
%
|
|
|
Operating
expenses
|
1,687,644
|
600,266
|
|
|
Other
expenses
|
69,770
|
132,320
|
|
|
Net
loss
|
$
(1,264,782
)
|
$
(697,495
)
|
|
|
Net
loss attributable to Level Brands, Inc. common
shareholders
|
$
(1,132,928
)
|
$
(634,479
)
|
|
The
following table provides information on the contribution of net
sales by segment to our total net sales.
|
|
First Quarter
2018
|
% of total
|
First Quarter
2017
|
% of total
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Professional
products division
|
$
29,070
|
4.2
%
|
$
199,837
|
100
%
|
|
Licensing
division
|
37,162
|
5.4
%
|
0
|
%
|
|
Entertainment
division
|
621,524
|
90.4
%
|
0
|
%
|
|
Total
net sales
|
$
687,756
|
100
%
|
$
199,837
|
100
%
|
With
the new operations in fiscal 2017 of our two new subsidiaries,
I’M1 and EE1, the overall business strategy was expanded to
not only include new business lines that generate revenues from new
sources (licensing, royalty, and advisory) but also a different
approach, in some cases, regarding the type of payments we would
accept. We have entered into agreements where we have accepted
common stock, options or warrants (an equity position).
This practice has an impact on immediate cash flow and these
equities could be subject to adjustment which could result in
future period losses. In the first quarter of fiscal 2018, of our
net sales of $687,756 we have received compensation in the form of
equity positions totaling $454,500, and we did not receive any
equity positions in the first quarter of fiscal 2017.
31
Professional products division
Net sales for the professional products division
for the first quarter of fiscal 2018
decreased 85.5%
as compared to the first quarter of
fiscal 2017. This decrease is primarily attributable to primary
reliance upon one distribution channel combined with an ineffective
post launch support effort. We have made a strategic decision to
increase our distributors and have added two new distributors in
the first quarter of fiscal 2018, and are targeting to add
additional distributors while also assessing other sales channels,
including large retail and online channels as well as licensing
opportunities. In addition, we have added independent sales
representatives and revamped our education team and process. We
believe these changes will support the product line and sales
process better, although no assurance can be given as to when and
if our product line will receive more acceptance in the
marketplace.
As
is customary in the wholesale distribution of hair care and beauty
products, we provide our distributors an allowance against the
sales price for advertising and distribution, damaged good, product
development allowance, and a discount if paid within a prescribed
time frame, which is typically 2% if paid within 10 days. These
allowances were 34.9% and 52.6%, respectively, of gross sales of
our professional products division for the first quarter of fiscal
2018 and the first quarter of fiscal 2017. The large increase in
the first quarter of fiscal 2017 is related to discounting of hair
irons to our distribution channel in an effort to offer incentives
to customers and move historical products as we prepared and
launched three new products in fiscal 2017 as well as a rollout of
a discounted sample sized product with our entrance into a new
sales channel.
Licensing division
The
licensing division began operating in January 2017, and enters into
various license agreements that can provide revenues based on
minimum royalties and advertising/marketing fees and additional
revenues based on a percentage of defined sales. Minimum royalty
and advertising/marketing revenue is recognized on a straight-line
basis over the term of each contract year, as defined, in each
license agreement. Royalties exceeding the defined minimum amounts
are recognized as income during the period corresponding to the
licensee’s sales. Payments received as consideration of the
grant of a license are recognized ratably as revenue over the term
of the license agreement and are reflected on our consolidated
balance sheets as deferred license revenue at the time payment is
received and recognized ratably as revenue over the term of the
license agreement. Similarly, advanced royalty payments
are recognized ratably over the period indicated by the terms of
the license and are reflected on our consolidated balance sheet in
deferred license revenue at the time the payment is received.
In regard to revenue for advisory and promotional services
provided through a consulting agreement, we record revenue when the
services are provided and the customer is invoiced at agreed upon
rates and terms in the agreement. In the first quarter of fiscal
2018, this division recorded net sales of $37,162.
Entertainment division
The
entertainment division began operating in January 2017, and enters
into advisory agreements for brand management services as well as
agreements to produce entertainment related events, which include
production assistance for television and music recording
agreements. In regard to sales for advisory and production related
services, we record revenue when the services are provided and the
customer is invoiced at agreed upon rates and terms in the
agreement. In several of our agreements, for our services we
have accepted common stock, options or warrants (an equity
position) from our customer. In the first quarter of fiscal 2018,
this division recorded net sales of $366,979, of which $254,500 was
received as an equity position. Additional revenue earned at the
corporate level for advisory agreements is included in the
entertainment division for segment reporting. These advisory
agreements are related to referral fee arrangements and advisory
agreements with services provided by the corporate entity, Level
Brands. For the first quarter of fiscal 2018 revenue from these
contracts was $254,545, of which $200,000 was received as an equity
position.
Cost of sales
Our
cost of sales includes costs associated with distribution, external
fill and labor expense, components, and freight for our
professional products divisions, and includes labor and third party
service providers for our licensing and entertainment divisions.
Our cost of sales as a percentage of net sales was 33.2% in the
first quarter of fiscal 2018 as compared to 81.4% in the first
quarter of fiscal 2017. In order to explain the change in cost of
sales we must account for the two new divisions and look at each
division separately to see the cumulative impact.
32
In our professional products division, cost of
sales was 64% and 81.4% of its net sales for the first quarter of
fiscal 2018 and the first quarter of fiscal 2017, respectively.
Cost of sales variances are primarily related to two key impacts.
First, allowances from this division have varied significantly
based on the product line being new and various advertising and
promotional packages have been used to promote the products at
initial launch. Second, in fiscal 2017 we moved into an online
channel and conducted our first online promotion to create more
brand visibility, and with this provided significant discount
pricing on a new packaged item specifically for that channel. In
addition, we have added two new distributors at the end of fiscal
2017 and although not at the same level as previously, we had
promotional packages for these new launches. As we continue to
refine our operations, we expect our cost of sales to decrease,
thereby increasing our gross profit, as we expect to be able to not
offer as many promotional packages, manage the production of our
product lines more efficiently by procuring materials used in our
process with better pricing as well as having a more effective
inventory management control process.
In
our licensing division, cost of sales for the first quarter of
fiscal 2018 was 183% of its net sales. For this current period, we
incurred a high cost of sales as 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 can be used in the future to support the brand and
future contracts. We expect this division to have a low cost of
sales as the business is structured in a manner that the licensee
(our customer) incur the significant costs and revenues associated
with the sale of licensed products. We recognize the associated
royalty fees on a net basis. When we are involved in providing
advisory services, we allocate the utilized internal resources
costs to our cost of sales.
In
our entertainment division, cost of sales for the first quarter of
fiscal 2018 was 24.4% of its net sales. The cost of sales for this
division will vary based upon the type of projects in which it is
involved. For instance, its cost of sales is expected to be less
for advisory services, which utilize internal resources, as
compared to television production services which require the use of
external facilities and personnel, which increases our cost. As a
result, our gross margin for the entertainment division will vary
from period to period.
Operating expenses
Our
operating expenses include wages, advertising, travel, rent,
professional service fees, and expenses related to industry
distribution and trade shows. Our operating expenses increased to
$1,687,644 for the first quarter of fiscal 2018 from $600,266 in
for the first quarter of fiscal 2017, an increase of $1,087,378 or
181.15%. This increase is directly related to the changes in the
company as it increased from one operating business subsidiary to
four and built the infrastructure to support the overall company
from a growth perspective as well as to operate as a public entity.
Specifically, during the first quarter of fiscal 2018 as compared
to the first quarter of fiscal 2017 our staff related expenses
increased approximately $458,000 as we added executive management,
and other staff over our new licensing and entertainment divisions,
and other staff support. In addition, our accounting and legal
expenses increased by approximately $189,000 as we have ongoing
needs and costs associated with being a public company as well as
additional professional fees related to various contracts we
undertake. In addition, during the first quarter of fiscal 2018 as
compared to the first quarter of fiscal 2017, expenses related to
social media, public relations, advertising and marketing process,
tradeshows, and promotions increased approximately $259,000, our
travel and entertainment expenses increased approximately $23,000,
and our rent expense increased $10,000. The increase during first
quarter of fiscal 2018 was partially offset by certain decreases in
operating expenses during such period as our professional outside
services related to product formulation, design, marketing and
tradeshow expenses decreased approximately by $48,000 and
commissions paid to an outside sales consultant decreased
approximately $15,000. During the first quarter of fiscal 2018 we
had an increase in non-cash expense of $7,441 related to the
issuance of restricted stock awards to our board members as well as
for options issued to employees.
Professional products division
Operating
expenses in the professional products division were approximately
$289,000 for the first quarter of fiscal 2018 as compared to
$480,000 for the first quarter of fiscal 2017, a decrease of 39.8%.
Operating expenses for these periods, respectively, include staff
related expenses which were approximately $113,000 and $140,000,
accounting and legal expenses of approximately $35,000 and $97,000,
expenses related to social media, public relations, advertising,
marketing, promotions and tradeshow of approximately $17,000 and
$27,000, travel and entertainment expenses of approximately $13,000
and $39,000, professional outside services related to product
formulation, design, and marketing expenses of approximately $2,100
and $71,000, and commissions paid to an outside sales consultant of
approximately $0 and $14,700 respectively. The overall decrease in
operating expenses is related to management shift to a more
structured approach as the strategy for this business unit was
reviewed and repositioned to expand beyond a single channel
focus.
33
Licensing division
Operating
expenses in the licensing division were approximately $336,000 for
the first quarter of fiscal 2018. Operating expenses include staff
related expenses of $36,000, accounting and legal expenses of
approximately $124,000, expenses related to social media, public
relations, advertising, marketing and tradeshow of approximately
$116,000. In addition, we allocated internal management fees from
corporate of $50,000 to this division. We expect to continue to
allocate corporate management fees to this division in future
periods, however, the amount of such fees will vary depending upon
the amount of time devoted by our senior management to this
division. The corporate charges eliminate upon consolidation of our
financial statements.
Entertainment division
Operating
expenses in the entertainment division were approximately $282,000
for the first quarter of fiscal 2018. Operating expenses include
staff related expenses of $36,000, accounting and legal expenses of
approximately $84,000, and expenses related to social media, public
relations, advertising, marketing and tradeshows of approximately
$108,000. In addition, we allocated internal management fees from
corporate of $50,000 to this division. As with our licensing
division, we expect to continue to allocate corporate management
fees to this division in future periods, however, the amount of
such fees will vary depending upon the amount of time devoted by
our senior management to this division. The corporate charges
eliminate upon consolidation of our financial
statements.
Corporate overhead
Corporate
overhead operating expenses were approximately $907,000 for the
first quarter of fiscal 2018 as compared to $107,000 for the first
quarter of fiscal 2017, an increase of 747%. Operating expenses for
these periods, respectively, include staff related expenses which
were approximately $466,000 and $52,000, accounting and legal
expenses of approximately $98,000 and $55,000, expenses related to
social media, public relations, advertising, marketing, promotions
and tradeshow of approximately $100,000 and $2,800, charitable
expenses of approximately $59,000 and $22,000, travel related
expenses of approximately $46,000 and $1,000, business insurance
expense of approximately $39,000 and $1,800, and stock compensation
expense of approximately $56,000 and $49,000.
Interest expense and other non-operating expenses
Our
interest expense decreased to $259 for the first quarter of fiscal
2018 from $132,320 for the first quarter of fiscal 2017. The
decrease was related to $0 borrowings in the first quarter of
fiscal 2018 under the 8% convertible promissory notes issued and
sold in October 2016. The 8% convertible promissory notes were
converted to equity as of June 30, 2017.
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.
Net loss and net loss attributable to our common
shareholders
Our
net loss for the first quarter of fiscal 2018 increased 81% to
$(1,264,782) as compared to a net loss of $(697,495) in the first
quarter of fiscal 2017. At December 31, 2017 and 2016, we owned
100% and 88%, respectively, of the membership interests of Beauty
& Pin-Ups and 100% of the membership interest in Level H&W.
At December 31, 2017 we owned 100% of the voting interests in each
of I'M1 and EE1 and 51% membership interest in each of I’M1
and EE1. As such we account for the noncontrolling interest in each
of I’M1 and EE1 based on their gains or losses. Based on the
noncontrolling interest for these entities, this can have a
negative impact on the gains or losses to our shareholders. After
allocating a portion of the net gain to the noncontrolling
interests in accordance with generally accepted accounting
principles, our net loss increased 79% for the first quarter of
fiscal 2018 from the first quarter of fiscal 2017.
Liquidity and capital resources
We
had cash on hand of $8,817,856 and working capital of $11,282,711
at December 31, 2017 as compared to cash on hand of $284,246 and
working capital of $2,170,154 at September 30, 2017. Our current
assets increased 226% at December 31, 2017 from September 30, 2017,
and is primarily attributable to an increase of cash, marketable
and other securities, prepaid expenses, and offset by a decrease
in all accounts receivables, note receivable related party,
and deferred IPO costs. Our current liabilities decreased 49.5% at
December 31, 2017 from September 30, 2017. This decrease is
primarily attributable to decreases in accounts payable and accrued
expenses which was offset by an increase in deferred revenue. Both
the changes in our current assets and current liabilities are also
reflective of the further development of our business during the
first quarter of fiscal 2018 and the impact of completion of an
initial public offering. In November 2017 we completed an IPO and
as of December 31, 2017 we have recorded $954,421 of deferred IPO
costs which were directly attributable to the offering and have
been 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.
34
During
the first quarter of fiscal 2018 we used cash primarily to fund our
operating loss in addition to increases in our marketable and other
securities. We offer net 30 day terms and our receivables generally
turn every 41 days.
We
do not have any commitments for capital expenditures. We have
sufficient working capital to fund our operations and to fund our
expected growth.
Our
goal from a liquidity perspective, however, is to use operating
cash flows to fund day to day operations. To date, we have not met
this goal as cash flow from operations has been a net use of
$1,820,919 and $528,637 for the first quarter of fiscal 2018 and
the first quarter of fiscal 2017, respectively. We continue to
assess all areas of operations for cost improvements and
efficiencies as we continue to mature.
Related Parties
As described in Note 9 to our consolidated
financial statements appearing elsewhere in this report, we have
engaged in significant number of related party transactions. As
indicated previously, we are a party to multiple agreements
with
kathy
ireland
® Worldwide, its
principals and its affiliates, therefore as the companies work
together on various opportunities, we at times have leveraged the
kathy ireland® Worldwide enterprise to assist with delivery
and in some cases to engage through them with customers. Due to the
significance of these transactions we have reported transactions
with related parties within the consolidated financial statements
as well as within the notes to the consolidated financial
statements. In addition, our CEO is an affiliate of a company who
is a customer of ours and who continues to conduct ongoing business
with us. These transactions also are reported as sales with related
parties (see Note 9 Related Party Transactions in the consolidated
financial statements for more information).
Critical accounting policies
The
preparation of financial statements and related disclosures in
conformity with U.S. generally accepted accounting principles
(“US GAAP”) and our discussion and analysis of our
financial condition and operating results require our management to
make judgments, assumptions and estimates that affect the amounts
reported in our consolidated financial statements and accompanying
notes. Note 1, “Organization and Summary of Significant
Accounting Policies,” of the Notes to our consolidated
financial statements appearing elsewhere in this report describes
the significant accounting policies and methods used in the
preparation of our consolidated financial statements. Management
bases its estimates on historical experience and on various other
assumptions it believes to be reasonable under the circumstances,
the results of which form the basis for making judgments about the
carrying values of assets and liabilities. Actual results may
differ from these estimates, and such differences may be
material.
Please
see Part II, Item 7 – Critical Accounting Policies appearing
in our 2017 10-K for the critical accounting policies we believe
involve the more significant judgments and estimates used in the
preparation of our consolidated financial statements and are the
most critical to aid you in fully understanding and evaluating our
reported financial results. Management considers these policies
critical because they are both important to the portrayal of our
financial condition and operating results, and they require
management to make judgments and estimates about inherently
uncertain matters.
Recent accounting pronouncements
In May 2014, August 2015 and May 2016, the
Financial Accounting Standards Board (FASB) issued ASU
2014-09,
Revenue from Contracts with
Customers
, and ASU
2015-14
Revenue from Contracts with
Customers, Deferral of the Effective Date
, respectively, which implement ASC Topic 606. ASC
Topic 606 outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance under US GAAP,
including industry-specific guidance. It also requires entities to
disclose both quantitative and qualitative information that enable
financial statements users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers. The amendments in these ASUs are
effective for annual periods beginning after December 15, 2017, and
interim periods therein. Early adoption is permitted for annual
periods beginning after December 15, 2016. These ASUs may be
applied retrospectively to all prior periods presented, or
retrospectively with a cumulative adjustment to retained earnings
in the year of adoption.
35
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”).
We
are assessing the impact, if any, of implementing this guidance on
our consolidated financial position, results of operations and
liquidity. We will adopt this standard in the first quarter of
fiscal 2019.
In February 2016, the FASB issued ASU
2016-02,
Leases
. The purpose of ASU 2016-02 is to establish
the principles to report transparent and economically neutral
information about the assets and liabilities that arise from
leases. This guidance results in a more faithful representation of
the rights and obligations arising from operating and capital
leases by requiring lessees to recognize the lease assets and lease
liabilities that arise from leases in the statement of financial
position and to disclose qualitative and quantitative information
about lease transactions, such as information about variable lease
payments and options to renew and terminate leases. ASU 2016-02 is
effective for fiscal years and interim periods beginning after
December 15, 2018. We are assessing the impact, if any, of
implementing this guidance on our consolidated financial position,
results of operations and liquidity.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flows (Topic
230), Classification of Certain Cash Receipts and Cash
Payments
. The amendments in
this update provided guidance on eight specific cash flow issues.
This update is to provide specific guidance on each of the eight
issues, thereby reducing the diversity in practice in how certain
transactions are classified in the statement of cash flows. ASU
2016-15 is effective for fiscal years and interim periods beginning
after December 15, 2017. Early adoption is permitted. We are
assessing the impact, if any, of implementing this guidance on our
consolidated financial position, results of operations and
liquidity.
Off balance sheet arrangements
As
of the date of this report, we do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current
or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that are material to
investors. The term "off-balance sheet arrangement" generally means
any transaction, agreement or other contractual arrangement to
which an entity unconsolidated with us is a party, under which we
have any obligation arising under a guarantee contract, derivative
instrument or variable interest or a retained or contingent
interest in assets transferred to such entity or similar
arrangement that serves as credit, liquidity or market risk support
for such assets.
36
ITEM
3.
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not
applicable for a smaller reporting company.
ITEM
4.
CONTROLS
AND PROCEDURES
Evaluation of Disclosure
Controls and Procedures
. We
maintain “disclosure controls and procedures” as such
term is defined in Rule 13a-15(e) under the Securities Exchange Act
of 1934. In designing and evaluating our disclosure controls and
procedures, our management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of
disclosure controls and procedures are met. Additionally, in
designing disclosure controls and procedures, our management
necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions. Based on their evaluation as of the end of the
period covered by this report, our Chief Executive Officer and our
Chief Financial Officer have concluded that our disclosure controls
and procedures were effective to ensure that the information
relating to our company, required to be disclosed in our SEC
reports (i) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms, and (ii) is
accumulated and communicated to our management, including our Chief
Executive Officer and our Chief Financial Officer, to allow timely
decisions regarding required disclosure.
Changes in Internal Control
over Financial Reporting.
During the three months ended December 31, 2017,
the Company made the following remediation changes related to
internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. These changes
are
●
we
have hired a new Controller as of September 1, 2017, who is now
assessing, with the CFO, all internal requirements and processes to
ensure GAAP compliance. We continue to assess hiring other
sufficient competent staff to analyze and report financial
transactions in compliance with GAAP in a timely manner;
and
●
we
have engaged competent external experts to assist with financial
statement review processes to ensure a complete and thorough review
process.
37
None.
We are materially dependent upon our relationships with kathy
ireland® Worldwide and certain of its affiliates. Our advisory
agreements with certain of these affiliates have expired by their
terms. If we are unable to enter into new advisory agreements
with these individuals, we would be deprived of their
services. In that event, our business could be materially
adversely impacted.
In February 2017 we entered into one year advisory
agreements with certain affiliates of
kathy
ireland
® Worldwide,
including Messrs. Stephen Roseberry, Tommy Meharey and Nic Mendoza,
pursuant to which they provide various management and advisory
services to us, including key operational roles at I’M1 and
EE1. These agreements have expired by their terms. In
addition, 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. Each of
Messrs. Roseberry, Meharey and Mendoza continues to provide
services to us and we are in discussions with each of them
regarding the terms of multi-year agreements with us. While we
expect to sign new agreements with each of them in the near future,
in the event we are unable to enter into new advisory agreements
with one or more of them, our business and operations could be
materially impacted.
In
addition to the other information set forth in this report, you
should carefully consider the risk factors discussed in Part I,
Item 1A in our 2017 10-K and our subsequent filings with the SEC
which could materially affect our business, financial condition or
future results.
In
November 2017 we issued 6,667 shares of our common stock valued at
$37,002 as compensation for services to us. The recipient was a
sophisticated or otherwise accredited investor with access to
business and financial information on our company. The issuance was
exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided by Section 4(a)(2) of that
act.
None.
Not
applicable to our company’s operations.
On
January 30, 2018, Level Brands, amended its Wholesale License
Agreement (the “Agreement”) executed on September 8,
2017 with kathy Ireland ® WorldWide Inc. related to exclusive
rights to the kathy ireland Health & Wellness™
trademarks. The amendment reflected our exercise of the option on a
three year extension and amendment of the payment terms related to
this extension as follows: to pay $400,000 within five days of
executing the amendment 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 us 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 foregoing description of the terms of this
agreement is qualified in its entirety by reference to the
agreement, a copy of which is filed as Exhibit 10.68 to this
report.
.
38
|
No.
|
|
Description
|
|
|
Agreement dated August 1, 2017 by and between Level Brands, Inc.
and Kure Corp. (incorporated by reference to Exhibit 10.62 to the
Current Report on Form 8-K as filed on December 12,
2017)
|
|
|
|
Agreement dated November 30, 2017 by and between Level Brands, Inc.
and Kure Corp. (incorporated by reference to Exhibit 10.63 to the
Current Report on Form 8-K as filed on December 12,
2017)
|
|
|
|
Revolving Line of Credit Loan Agreement dated December 11, 2017 by
and between Level Brands, Inc. and Kure Corp. (incorporated by
reference to Exhibit 10.64 to the Current Report on Form 8-K as
filed on December 12, 2017)
|
|
|
|
Security Agreement dated December 11, 2017 by and between Level
Brands, Inc. and Kure Corp. (incorporated by reference to Exhibit
10.65 to the Current Report on Form 8-K as filed on December 12,
2017)
|
|
|
|
Promissory Note in the principal amount of $500,000 dated December
11, 2017 due from Kure Corp. (incorporated by reference to Exhibit
10.66 to the Current Report on Form 8-K as filed on December 12,
2017)
|
|
|
|
License Agreement dated December 30, 2017 by and between Level
Brands, Inc. and Isodiol International, Inc. (incorporated by
reference to Exhibit 10.67 to the Current Report on Form 8-K as
filed on January 5, 2018)
|
|
|
|
Amendment dated January 30, 2018 to Wholesale License Agreement
between Level Brands, Inc. and kathy Ireland ® WorldWide Inc.
*
|
|
|
|
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Executive Officer
*
|
|
|
|
Rule 13a-14(a)/ 15d-14(a) Certification of Chief Financial
Officer*
|
|
|
|
Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer*
|
|
|
101.INS
|
|
XBRL Instance Document*
|
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase *
|
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase *
|
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase *
|
|
101.SCH
|
|
XBRL Taxonomy Extension Schema *
|
———————
|
*
|
|
Filed herewith
|
39
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
|
|
LEVEL BRANDS, INC.
|
|
|
|
|
|
|
February 14, 2018
|
By:
|
/s/ Martin A. Sumichrast
|
|
|
|
Martin A. Sumichrast, Chief Executive Officer, principal executive
officer
|
|
February 14, 2018
|
By:
|
/s/ Mark S. Elliott
|
|
|
|
Mark S. Elliott, Chief Operating Officer, Chief Financial Officer,
principal financial and accounting officer
|
40
TABLE OF CONTENTS
Part 1 - Financial InformationItem 1. Financial StatementsNote 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 Convertible Promissory NotesNote 8 Line Of CreditNote 9 Related Party TransactionsNote 10 Shareholders EquityNote 11 Stock-based CompensationNote 12 WarrantsNote 13 Commitments and ContingenciesNote 14 Segment InformationNote 15 Income TaxesNote 16 Subsequent EventsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II - Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits