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 June 30,
2018
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)
|
North Carolina
|
|
47-3414576
|
|
State or Other
Jurisdiction of
Incorporation or Organization
|
|
I.R.S. Employer Identification
No.
|
|
|
|
|
|
4521 Sharon Rd, suite 450, Charlotte, NC
|
|
28211
|
|
Address of Principal Executive
Offices
|
|
Zip Code
|
704-445-5800
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 every Interactive Data File required to be
submitted pursuant to Rule 405 of Regulation S-T
(§ 232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit such
files). Yes
☑
No ☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large accelerated filer ☐
|
Accelerated filer ☐
|
|
Non-accelerated filer ☐
|
Smaller reporting company
☑
|
|
Emerging growth company
☑
|
|
If
an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the
Act). Yes ☐ No
☑
APPLICABLE
ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate
by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court.
Yes ☐ No ☐
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate
the number of shares outstanding of each of the issuer’s
classes of common stock, as of the latest practicable
date.
8,118,928 shares of common stock are issued and outstanding as of
August 09, 2018
|
|
|
Page
|
|
|
|
No
|
|
|
|
|
|
|
PART I-FINANCIAL INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
Financial
Statements
.
|
|
|
|
|
|
|
ITEM
2.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operations.
|
34
|
|
34
|
|
|
|
ITEM
3.
|
Quantitative
and Qualitative Disclosures About Market Risk.
|
44
|
|
|
|
|
|
ITEM
4.
|
Controls
and Procedures.
|
|
|
|
|
|
|
|
PART II - OTHER INFORMATION
|
|
|
|
|
|
|
ITEM
1.
|
Legal
Proceedings.
|
45
|
|
|
|
|
|
ITEM
1A.
|
Risk
Factors.
|
45
|
|
|
|
|
|
ITEM
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
45
|
|
|
|
|
|
ITEM
3.
|
Defaults
Upon Senior Securities.
|
45
|
|
|
|
|
|
ITEM
4.
|
Mine
Safety Disclosures.
|
45
|
|
|
|
|
|
ITEM
5.
|
Other
Information.
|
46
|
|
|
|
|
|
ITEM
6.
|
Exhibits.
|
46
|
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 “BPU”, I
| M 1, LLC, a California limited liability company, which we refer
to as “I’M1”, Encore Endeavor 1 LLC, a California
limited liability company which we refer to as “EE1”
and Level H&W, LLC, a North Carolina limited liability company,
which we refer to as “Level H&W”. In addition,
“fiscal 2017" refers to the year ended September 30, 2017,
"fiscal 2018" refers to the year ending September 30, 2018, "third
quarter of 2017" refers to the three months ended June 30, 2017 and
"third quarter of 2018" refers to the three months ended June 30,
2018.
Unless otherwise indicated, all share and per
share information contained herein gives pro forma effect to the
1:5 reverse stock split of our common stock, which was effective
December 5, 2016. The information contained on our websites
at
www.levelbrands.com,
www.beautyandpinups.com
,
and www.im1men.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:
●
our material dependence on our relationships
with
kathy
ireland®
Worldwide and
certain of its affiliates;
●
our
limited operating history;
●
the
limited operating histories of our subsidiaries;
●
our
history of losses;
●
risks
associated with any failure by us to maintain an effective system
of internal control over financial reporting;
●
the terms of various agreements with
kathy
ireland®
Worldwide and
possible impacts on our management's abilities to make certain
decisions regarding the operations of our
company;
●
our
dependence on consumer spending patterns;
●
our
history on reliance on sales from a limited number of customers,
including related parties;
●
risks
associated with our failure to effectively promote our
brands;
●
our
ability to identify and successfully acquire additional brands and
trademarks;
●
the
operating agreements of our I'M1 and EE1 subsidiaries;
●
the
accounting treatment of securities we accept as partial
compensation for services;
●
our
ability to liquidate those securities;
●
our
status as an inadvertent investment company at March 31, 2018 and
the possible impact of the Investment Company Act of 1940 on our
business, operations and financial condition;
●
the
possible need to raise additional capital in the
future;
●
terms
of the contracts with third parties in each of our
divisions;
●
possible conflicts of interest with
kathy
ireland®
Worldwide;
●
possible
litigation involving our licensed products;
●
our
ability to effectively compete and our dependence on market
acceptance of our brands;
●
the
lack of long-term contracts for the purchase of products from our
professional products division;
●
our
ability to protect our intellectual property;
●
additional
operational risks associated with our professional products
division;
●
risks
associated with developing a liquid market for our common stock and
possible future volatility in its trading price;
●
risks
associated with any future failure to satisfy the NYSE American LLC
continued listing standards;
●
dilution
to our shareholders from the exercise of outstanding options and
warrants and the vesting of restricted stock awards;
●
risks
associated with our status as an emerging growth
company;
●
risks
associated with control by our executive officers, directors and
affiliates;
●
risks
associated with unfavorable research reports;
●
risks
associated with our status as a public company; and
●
risks
associated with North Carolina law.
Most
of these factors are difficult to predict accurately and are
generally beyond our control. You should consider the areas of risk
described in connection with any forward-looking statements that
may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should
carefully review this report in its entirety, including the risks
described in Part II, Item 1A. Risk Factors appearing later in this
report, Part I, Item 1A. - Risk Factors in our Annual Report on
Form 10-K for the fiscal year ended September 30, 2017 as filed
with the Securities and Exchange Commission on December 26, 2017
(the "2017 10-K") as well as our other filings with the SEC. Except
for our ongoing obligations to disclose material information under
the Federal securities laws, we undertake no obligation to release
publicly any revisions to any forward-looking statements, to report
events or to report the occurrence of unanticipated
events.
ii
LEVEL BRANDS, INC.
JUNE 30, 2018 AND SEPTEMBER 30, 2017
|
|
(Unaudited)
|
|
|
|
June 30,
|
September 30,
|
|
|
2018
|
2017
|
|
Assets
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
Cash
and cash equivalents
|
$
5,423,862
|
$
284,246
|
|
Accounts
receivable
|
186,864
|
141,462
|
|
Accounts
receivable - related party
|
1,350,000
|
712,325
|
|
Accounts
receivable other
|
1,376,443
|
12,440
|
|
Accounts
receivable other – related party
|
-
|
236,364
|
|
Marketable
securities
|
1,321,196
|
-
|
|
Investment
- other securities
|
1,159,112
|
859,112
|
|
Note
receivable – related party
|
161,573
|
276,375
|
|
Inventory
|
475,733
|
588,197
|
|
Deferred
initial public offering costs
|
-
|
497,735
|
|
Prepaid
advisory agreements, director fees, and rent
|
750,790
|
-
|
|
Prepaid
expenses and other current assets
|
315,582
|
85,420
|
|
Total current assets
|
12,521,155
|
3,693,676
|
|
|
|
|
|
Other
assets:
|
|
|
|
Property
and equipment, net
|
39,123
|
135,476
|
|
Long
term note receivable
|
450,000
|
-
|
|
Intangible
assets, net
|
3,460,006
|
3,240,287
|
|
Total other assets
|
3,949,129
|
3,375,763
|
|
|
|
|
|
Total assets
|
$
16,470,284
|
$
7,069,439
|
See
Notes to Condensed Consolidated Financial Statements
3
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, 2018 AND SEPTEMBER 30, 2017
(continued)
|
Liabilities and shareholders' (deficit) equity
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
163,042
|
$
397,601
|
|
Accounts
payable - related party
|
529,779
|
67,879
|
|
Deferred
revenue
|
163,333
|
41,417
|
|
Accrued
expenses
|
25,591
|
123,823
|
|
Accrued
expenses - related party
|
320,000
|
892,805
|
|
Total current liabilities
|
1,201,745
|
1,523,525
|
|
|
|
|
|
Long
term liabilities
|
|
|
|
Long
term liabilities - related party
|
-
|
360,000
|
|
Other
long term liability
|
8,004
|
-
|
|
Deferred
tax liability
|
43,000
|
37,000
|
|
Total
long term liabilities
|
51,004
|
397,000
|
|
|
|
|
|
Total liabilities
|
1,252,749
|
1,920,525
|
|
|
|
|
|
Level
Brands, Inc. shareholders' equity:
|
|
|
|
Preferred
stock, authorized 50,000,000 shares, $0.001 par value, no shares
issued and outstanding
|
-
|
-
|
|
Common
stock, authorized 150,000,000 shares, $0.001 par
value,
|
|
|
|
8,118,928
and 5,792,261 shares issued and outstanding,
respectively
|
8,119
|
5,792
|
|
Additional
paid in capital
|
21,509,688
|
10,463,480
|
|
Accumulated
other comprehensive income (loss)
|
(1,923,304
)
|
-
|
|
Accumulated
deficit
|
(5,779,879
)
|
(6,257,421
)
|
|
Total Level Brands, Inc. shareholders' equity
|
13,814,624
|
4,211,851
|
|
Non-controlling
interest
|
1,402,911
|
937,063
|
|
Total shareholders' equity (deficit)
|
15,217,535
|
5,148,914
|
|
|
|
|
|
Total liabilities and shareholders' equity (deficit)
|
$
16,470,284
|
$
7,069,439
|
See
Notes to Condensed Consolidated Financial Statements
4
LEVEL BRANDS, INC.
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018 AND
2017
(Unaudited)
|
|
Three months
|
Three months
|
Nine months
|
Nine months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
June 30,
2018
|
June 30,
2017
|
June 30,
2018
|
June 30,
2017
|
|
|
|
|
|
|
|
Sales
|
$
1,851,116
|
$
1,353,590
|
$
5,440,653
|
$
3,416,862
|
|
Sales
- related party
|
1,350,000
|
514,000
|
1,550,000
|
782,550
|
|
Total
Gross Sales
|
3,201,116
|
1,867,590
|
6,990,653
|
4,199,412
|
|
Allowances
|
(2,686
)
|
(80,581
)
|
(23,558
)
|
(804,025
)
|
|
Net
sales
|
1,848,430
|
1,273,009
|
5,417,095
|
2,612,837
|
|
Net sales - related party
|
1,350,000
|
514,000
|
1,550,000
|
782,550
|
|
Total Net Sales
|
3,198,430
|
1,787,009
|
6,967,095
|
3,395,387
|
|
Cost
of sales
|
1,106,706
|
261,420
|
1,858,651
|
822,556
|
|
|
|
|
|
|
|
Gross
Profit
|
2,091,724
|
1,525,589
|
5,108,444
|
2,572,831
|
|
|
|
|
|
|
|
Operating
expenses
|
1,464,239
|
853,670
|
4,089,006
|
2,536,586
|
|
Income
(
Loss) from
operations
|
627,485
|
671,919
|
1,019,438
|
36,245
|
|
Debt conversion expense
|
-
|
(446,250
)
|
-
|
(446,250
)
|
|
Other
than temporary impairment on
marketable
securities
|
-
|
(175,000
)
|
-
|
(175,000
)
|
|
Gain
(Loss) on disposal of property and
equipment
|
-
|
-
|
(69,311
)
|
-
|
|
Interest expense
|
(232
)
|
(229,220
)
|
(737
)
|
(500,353
)
|
|
Income (Loss) before provision for
income taxes
|
627,253
|
(178,551
)
|
949,390
|
(1,085,358
)
|
|
|
|
|
|
|
|
Benefit (Provision) for income
taxes
|
(62,000
)
|
36,642
|
(6,000
)
|
(42,250
)
|
|
Net Income (Loss)
|
565,253
|
(141,909
)
|
943,390
|
(1,127,608
)
|
|
Net Gain (Loss) attributable to
noncontrolling
interest
|
359,179
|
68,781
|
465,848
|
272,798
|
|
|
|
|
|
|
|
Net Income (Loss) attributable to Level Brands, Inc. common
shareholders
|
$
206,074
|
$
(210,690
)
|
$
477,542
|
$
(1,400,406
)
|
|
|
|
|
|
|
|
Net Income (Loss) per share:
|
|
|
|
|
|
Basic
|
$
0.03
|
$
(0.04
)
|
$
0.06
|
$
(0.34
)
|
|
Diluted
|
$
0.03
|
$
-
|
$
0.06
|
$
-
|
|
|
|
|
|
|
|
Weighted
average number of shares Basic:
|
8,075,341
|
4,686,947
|
7,406,114
|
4,128,541
|
|
Weighted
average number of shares Diluted:
|
8,092,931
|
-
|
7,428,504
|
-
|
See
Notes to Condensed Consolidated Financial Statements
5
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(LOSS)
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018 AND
2017
(Unaudited)
|
|
Three months
|
Three months
|
Nine months
|
Nine months
|
|
|
Ended
|
Ended
|
Ended
|
Ended
|
|
|
June 30,
2018
|
June 30,
2017
|
June 30,
2018
|
June 30,
2017
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
565,253
|
$
(141,909
)
|
$
943,390
|
$
(1,127,608
)
|
|
Other
Comprehensive Income:
|
|
|
|
|
|
Net
Unrealized Gain (Loss) on Marketable
Securities,
net of tax
|
(1,326,727
)
|
-
|
(1,923,304
)
|
-
|
|
Comprehensive Income (Loss)
|
(761,474
)
|
(141,909
)
|
(979,914
)
|
(1,127,608
)
|
|
|
|
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
359,179
|
68,781
|
465,848
|
272,798
|
|
Comprehensive Income (Loss) attributable to Level Brands, Inc.
common shareholders
|
$
(1,120,653
)
|
$
(210,690
)
|
$
(1,445,762
)
|
$
(1,400,406
)
|
See
Notes to Condensed Consolidated Financial Statements
6
LEVEL BRANDS, INC.
FOR THE NINE MONTHS ENDED JUNE 30, 2018 AND 2017
(unaudited)
|
|
Nine Months Ended
June 30,
|
Nine Months Ended
June 30,
|
|
|
2018
|
2017
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
Net
income (loss)
|
$
943,390
|
$
(1,127,608
)
|
|
Adjustments to reconcile net income (loss) to net
|
|
|
|
cash used by operating activities:
|
|
|
|
Stock
based compensation
|
386,719
|
40,453
|
|
Restricted
stock expense
|
39,100
|
117,300
|
|
Amortization
of debt discounts
|
-
|
5,159
|
|
Issuance
of stock / warrants for service
|
478,002
|
592,666
|
|
Amortization
of debt issue costs
|
-
|
305,800
|
|
Depreciation
and amortization
|
169,788
|
42,151
|
|
Inventory
impairment
|
102,124
|
-
|
|
Loss
on sale of property and equipment
|
69,311
|
4,000
|
|
Other-than-temporary
impairment on marketable securities
|
-
|
175,000
|
|
Common
stock issued as charitable contribution
|
-
|
17,000
|
|
Debt
conversion expense
|
-
|
446,250
|
|
Marketable
and Investment Other Securities
|
-
|
(1,562,000
)
|
|
Non-cash
consideration received for services
|
(3,404,502
)
|
-
|
|
Changes in operating assets and liabilities:
|
|
|
|
Accounts
receivable
|
(45,402
)
|
(154,745
)
|
|
Accounts
receivable – related party
|
(637,675
)
|
(114,000
)
|
|
Other
accounts receivable
|
(1,204,003
)
|
-
|
|
Other
accounts receivable – related party
|
236,364
|
-
|
|
Note
receivable
|
(450,000
)
|
|
|
Note
receivable – related party
|
114,802
|
-
|
|
Inventory
|
10,340
|
(109,661
)
|
|
Prepaid
expenses and other current assets
|
(980,952
)
|
67,434
|
|
Accounts
payable and accrued expenses
|
(324,785
)
|
(397,298
)
|
|
Accounts
payable and accrued expenses – related party
|
(470,905
)
|
(39,725
)
|
|
Interest
Payable
|
-
|
184,889
|
|
Deferred
revenue
|
121,916
|
47,333
|
|
Deferred
tax liability
|
6,000
|
42,250
|
|
Cash
used by operating activities
|
(4,840,368
)
|
(1,417,352
)
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
Purchase
of investment other securities
|
(300,000
)
|
-
|
|
Purchase
of intangible assets
|
(360,000
)
|
-
|
|
Purchase
of property and equipment
|
(2,465
)
|
(15,018
)
|
|
Cash
used by investing activities
|
(662,465
)
|
(15,018
)
|
|
Cash flows from financing activities:
|
|
|
|
Proceeds
from issuance of common stock
|
10,927,535
|
201,450
|
|
Proceeds
from convertible note
|
-
|
2,125,000
|
|
Distributions
paid to members’ of EE1
|
-
|
(59,551
)
|
|
Distribution
income
|
-
|
30,363
|
|
Debt
issuance costs
|
-
|
(200,800
)
|
|
Repayment
of line of credit
|
-
|
(300,000
)
|
|
Deferred
issuance costs
|
(285,086
)
|
-
|
|
Cash
provided by financing activities
|
10,642,449
|
1,796,462
|
|
Net
increase (decrease) in cash
|
5,139,616
|
364,092
|
|
Cash
and cash equivalents, beginning of period
|
284,246
|
34,258
|
|
Cash and cash equivalents, end of period
|
$
5,423,862
|
$
398,350
|
See
Notes to Condensed Consolidated Financial Statements
7
LEVEL BRANDS, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED JUNE 30, 2018 AND 2017
(unaudited) (continued)
Supplemental Disclosures of Cash Flow Information:
|
|
Nine Months ended
June 30,
|
Nine Months Ended
June 30,
|
|
|
2018
|
2017
|
|
|
|
|
|
Cash
Payments for:
|
|
|
|
Interest
expense
|
$
505
|
$
5,210
|
|
|
|
|
|
Non-cash
financial activities:
|
|
|
|
|
|
|
|
Warrants
issued to IPO selling agent
|
$
171,600
|
$
-
|
|
Equity
investment exchange to be issued in the future
|
160,000
|
-
|
|
Common
stock issued to purchase membership interest –
I’M1
|
-
|
971,667
|
|
Common
stock issued to purchase membership interest –
EE1
|
-
|
471,667
|
|
Common
stock issued for services
|
-
|
592,666
|
|
Warrants
issued with convertible notes
|
-
|
5,159
|
|
Noncontrolling
interest transfer
|
-
|
856,547
|
|
Equity
issued to purchase membership interest in subsidiary
|
-
|
242,000
|
|
Strike
price adjustment on placement agent warrants
|
|
31,505
|
|
Common
stock issued for warrant exercise
|
|
85,950
|
|
Fixed
asset write off
|
-
|
7,000
|
|
Common
stock issued for conversion of Line of Credit
|
-
|
773,177
|
|
Common
stock issued for conversion of promissory notes
|
-
|
2,252,500
|
See
Notes to Condensed Consolidated Financial Statements
8
LEVEL BRANDS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED JUNE 30, 2018 AND
2017
Organization and Nature of Business
Level Brands, Inc. ("Level Brands", "we", "us", “our”,
"Parent Company” or the “Company”) is a North
Carolina corporation formed on March 17, 2015 as Level Beauty
Group, Inc. In November 2016 we changed the name of the Company to
Level Brands, Inc. We 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 historically have been sold to the professional salon
market, principally through distributors to professional salons in
the North America and has expanded its focus to retailers, online
segments and licensing opportunities.
I’M1, LLC. (“I’M1”) was formed in
California in September 2016. IM1 Holdings, LLC, a California
limited liability company, (“IM1 Holdings”) was the
initial member of I’M1. In January 2017, we acquired all of
the Class A voting membership interests in I’M1 from IM1
Holdings in exchange for 583,000 shares of our common stock, which
represents 51% of the interest in I’M1. IM1 Holdings
continues to own the Class B non-voting membership interest of
I’M1. I’M1 – Ireland Men One is a brand inspired
by Kathy Ireland that focuses on providing millennial-inspired
lifestyle products under the I’M1 brand. I’M1 has
entered into an exclusive wholesale license agreement with kathy
ireland® Worldwide in connection with the use of the
intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California
in March 2016. EE1 Holdings, LLC, a California limited liability
company, (“EE1 Holdings") was the initial member of EE1. In
January 2017, we acquired all of the Class A voting membership
interests in EE1 from EE1 Holdings in exchange for 283,000 shares
of our common stock, which represents 51% of the interest in EE1.
EE1 Holdings continues to own the Class B non-voting membership
interests of EE1. EE1 is a brand management company and producer
and marketer of multiple entertainment distribution platforms under
the EE1 brand.
Level H&W, LLC (“Level H&W”) was formed in
North Carolina in October 2017 and began operations in fiscal 2018;
we own 100% interest in Level H&W. The Company signed an
agreement with kathy ireland® Worldwide to retain exclusive
rights to the intellectual property and other rights in connection
with kathy ireland® Health & Wellness™ and its
associated trademarks and tradenames. Level H&W focuses on
establishing licensing arrangements under the kathy ireland®
Health & Wellness™ brand. The agreement initially was a
seven year agreement with a three year option to extend by the
Company. The Company agreed to pay $840,000 over the license term
of seven years, of which $480,000 was paid by January 1, 2018, and
$120,000 is to be paid on January 1 of subsequent years until paid
in full. The Company will pay kathy ireland® Worldwide 33 1/3%
of net proceeds we receive under any sublicense agreements we may
enter into for this intellectual property as royalties, with credit
being applied for any payments made toward the
$840,000.
In January 2018, the Company, amended its wholesale license
agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and
to
pay the final amounts due under the Agreement, $320,000 on the
latter of January 1, 2019 or 30 days after the receipt by the
Company of $5,000,000 in net proceeds from sublicense agreements
signed under the health and wellness trademarks. In addition,
royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net proceeds. The
Company capitalized the cost into intangibles and is amortizing
them over the term of the licensing agreement.
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).
Use of Estimates
The preparation of the Company's consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States (“US GAAP”),
and requires management to make estimates and assumptions that
affect amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the
periods presented. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined
to be necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to,
allowances for doubtful accounts, inventory valuation reserves,
expected sales returns and allowances, trade support costs, certain
assumptions related to the valuation of investments other
securities, marketable securities, common stock, acquired
intangible and long-lived assets and the recoverability of
intangible and long-lived assets and income taxes, including
deferred tax valuation allowances and reserves for estimated tax
liabilities. 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 of as of June 30, 2018.
In addition, the Company may, from time to time, enter into
contracts where a portion of the consideration provided by the
customer in exchange for the Company's services is common stock,
options or warrants (an equity position). In these
situations, upon invoicing the customer for the stock or other
instruments, the Company will record the receivable as accounts
receivable other, and use the value of the stock or other
instrument upon invoicing to determine the value. Where an accounts
receivable is settled with the receipt of the common stock or other
instrument, the common stock or other instrument will be classified
as an asset on the balance sheet as either an investment marketable
security (when the customer is a publicly traded entity) or as an
investment other security (when the customer is a private
entity).
Accounts receivable and accounts receivable other items that
involve a related party are indicated as such on the face of the
financial statements.
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 with changes in fair value
recorded in the accumulated other comprehensive income (loss)
component of shareholders’ equity in the period of the change
in accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (“ASC”) 320-10. Upon
the disposition of an available-for-sale security, the Company
reclassifies the gain or loss on the security from accumulated
other comprehensive income (loss) to non-operating income (loss) on
the Company’s consolidated statements of
operations.
Investment Other Securities
For equity investments where 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. 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 operating expense as incurred. Depreciation is charged to
expense over the estimated useful lives of the assets using the
straight-line method. Generally, the useful lives are five years
for show booths and equipment, three 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 (loss), unless a decline is determined to be
other-than-temporary. For investment other securities we use the
cost method and compare the fair value to cost in order to
determine if there is an other-than-temporary
impairment.
Intangible Assets
The Company's intangible assets consist of trademarks and other
intellectual property, which are accounted for in accordance with
ASC Topic 350, Intangibles – Goodwill and Other. The Company
employs the non-amortization approach to account for purchased
intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC 350-30-35-18.
Our annual impairment analysis includes a qualitative assessment to
determine if it is necessary to perform the quantitative impairment
test. In performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. If a quantitative analysis is necessary, we
would analyze various aspects including number of contracts
acquired and retained as well as revenues from those contracts,
associated with the intangible assets. In addition, intangible
assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred.
Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated period of benefit. In
accordance with ASC 360-10-35-21, finite lived intangibles are
reviewed annually, or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805
as amended by Accounting Standards Update (“ASU”)
2017-01 in determining if the Company is acquiring any inputs,
processes or outputs and the impact that such factors would have on
the classification of the acquisition as a business combination or
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 had significantly changed subsequent
to an equity financing, we used valuation techniques, which
included discounted cash flow analysis, comparable company review,
and consultation with third party valuation experts to assist in
estimating the value of our common stock. On November 17, 2017, the
Company completed its IPO, thus our stock has been valued by the
market since that date.
12
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 at the
three and nine months ended June 30, 2018.
The Company also enters into various license agreements that
provide revenues based on royalties as a percentage of sales and
advertising/marketing fees. The contracts can also have a minimum
royalty, with which this and the advertising/marketing revenue is
recognized on a straight-line basis over the term of each contract
year, as defined, in each license agreement. Royalties exceeding
the defined minimum amounts are recognized as income during the
period corresponding to the licensee’s sales, as are all
royalties that do not have a minimum royalty. Payments received as
consideration of the grant of a license are recognized ratably as
revenue over the term of the license agreement and are reflected on
the Company’s consolidated balance sheets as deferred revenue
at the time payment is received and recognized ratably as revenue
over the term of the license agreement. Similarly,
advanced royalty payments are recognized ratably over the period
indicated by the terms of the license and are reflected in the
Company’s consolidated balance sheet in deferred revenue at
the time the payment is received. Revenue is not
recognized unless collectability is reasonably assured. If
licensing arrangements are terminated prior to the original
licensing period, we will recognize revenue for any contractual
termination fees, unless such amounts are deemed
non-recoverable.
In regard to sales for services provided, the Company records
revenue when persuasive evidence of any agreement exists, services
have been rendered, and collectability is reasonably assured. Based
on the contracted services, revenue is recognized when the Company
invoices customers for completed services at agreed upon rates or
revenue is recognized over a fixed period of time during which the
service is performed.
Cost of Sales
Our cost of sales includes costs associated with distribution,
external fill and labor expense, components, and freight for our
professional products divisions, and includes labor, third-party
service providers, and amortization expense related to intellectual
property for our licensing and entertainment
divisions.
In
our professional products division, cost of sales also includes the
cost of refurbishing products returned by customers that will be
offered for resale and the cost of inventory write-downs associated
with adjustments of held inventories to their net realizable value.
These costs are reflected in the Company’s consolidated
statements of operations when the product is sold and net sales
revenues are recognized or, in the case of inventory write-downs,
when circumstances indicate that the carrying value of inventories
is in excess of their net realizable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing
and promotional costs as incurred. The Company incurred
approximately $443,000 and $155,000 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended June 30, 2018 and 2017, respectively.
The Company incurred approximately $1,036,000 and $297,000 in
advertising and related marketing and promotional costs included in
operating expenses during the nine months ended June 30, 2018 and
2017, respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are
classified as a component of sales. All costs associated with
shipping and handling are classified as a component of cost of
goods sold.
13
Income Taxes
The Parent Company is a North Carolina corporation that is treated
as a corporation for federal and state income tax purposes. Prior
to April 2017, BPU was a multi-member limited liability company
that was treated as a partnership for federal and state income tax
purposes. As such, the Parent Company’s partnership share in
the taxable income or loss of BPU was included in the tax return of
the Parent Company. Beginning in April 2017, the Parent Company
acquired the remaining interests in BPU. As a result of the
acquisition, BPU became a disregarded entity for tax purposes and
its entire share of taxable income or loss was included in the tax
return of the Parent Company. Level H&W is a wholly owned
subsidiary and is a disregarded entity for tax purposes and its
entire share of taxable income or loss is included in the tax
return of the Parent Company. IM1 and EE1 are multi-member limited
liability companies that are treated as partnerships for federal
and state income tax purposes. As such, the Parent Company’s
partnership share in the taxable income or loss of IM1 and EE1 are
included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the
provisions of the Accounting for Income Taxes topic of the FASB ASC
740 which requires, among other things, an asset and liability
approach to calculating deferred income taxes. The asset and
liability approach requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax
bases of assets and liabilities. The Parent Company uses the inside
basis approach to determine deferred tax assets and liabilities
associated with its investment in a consolidated pass-through
entity. A valuation allowance is provided to offset any net
deferred tax assets for which management believes it is more likely
than not that the net deferred asset will not be
realized.
US GAAP requires management to evaluate tax positions taken by the
Company and recognize a tax liability (or asset) if the Company has
taken an uncertain tax position that more likely than not would not
be sustained upon examination by the Internal Revenue Service.
Management has analyzed the tax positions taken by the Company, and
has concluded that as of June 30, 2018 and 2017, there were no
uncertain tax positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the
consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) covers $250,000 for
substantially all depository accounts. The Company from time to
time may have amounts on deposit in excess of the insured limits.
The Company had a $5,055,085 uninsured balance at June 30, 2018 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 collectively represented
approximately 89% and 80% of total net sales for the three and nine
months ended June 30, 2018, respectively. The aggregate accounts
receivable of such customer represented approximately 83% of the
Company’s total accounts receivable and a long term note
receivable at June 30, 2018. The Company had two and four
customers, respectively, whose revenue collectively represented
approximately 80% and 81% of the Company’s net sales for the
three and nine months ended June 30, 2017,
respectively.
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.
14
We use the Black-Scholes model for measuring the fair value of
options and warrants. The stock based fair value compensation is
determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is
recognized over the vesting periods. Under ASU 2016-09 which amends
ASC 718, which became effective October 1, 2017, we elected to
change our accounting principle to recognize forfeitures when they
occur. This change had no impact on beginning retained earnings as
there had been no forfeitures estimated or incurred in prior
periods.
Net Income (Loss) Per Share
The Company uses ASC 260-10, “Earnings Per Share” for
calculating the basic and diluted income (loss) per share. The
Company computes basic income (loss) per share by dividing net
income (loss) and net income (loss) attributable to common
shareholders by the weighted average number of common shares
outstanding. Common equivalent shares are excluded from the
computation of net loss per share if their effect is
anti-dilutive.
At the three and nine months ended June 30, 2017, 697,476 potential
shares 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. Subsequently, the FASB has issued the
following standards related to ASU 2014-09: ASU
No. 2016-08,
Revenue from Contracts with
Customers
(Topic 606):
Principal versus Agent Considerations (“ASU 2016-08”);
ASU No. 2016-10,
Revenue from Contracts with
Customers
(Topic 606):
Identifying
Performance Obligations and Licensing
(“ASU 2016-10”); ASU No.
2016-12,
Revenue from Contracts with
Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients
(“ASU 2016-12”); and ASU No.
2016-20,
Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with
Customers
(“ASU
2016-20”). The amendments in these ASUs are effective for
annual periods beginning after December 15, 2017, and interim
periods therein. Early adoption is permitted for annual periods
beginning after December 15, 2016. These ASUs may be applied
retrospectively to all prior periods presented, or retrospectively
with a cumulative adjustment to retained earnings in the year of
adoption. Level Brands will adopt this standard in the first
quarter of fiscal 2019 retrospectively with a cumulative adjustment
to retained earnings. The Company in in process of reviewing all
contracts to determine if there is any impact in implementing this
guidance on its consolidated financial position, results of
operations and liquidity.
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 January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. ASU 2017-01 clarifies the definition and
provides a more robust framework to use in determining when a set
of assets and activities constitutes a business. ASU 2017-01
is intended to provide guidance when evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 will be effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2017.
In March 2015 Level Brands formed BPU, a North Carolina limited
liability company, and contributed $250,000 in exchange for its
member interest. In April 2015 BPU entered into a Contribution
Agreement with Beauty & Pinups, Inc., a New York corporation
("BPUNY"), and two members. Under the terms of the Contribution
Agreement, BPUNY and its founder contributed the business and
certain assets, including the trademark “Beauty & Pin
Ups” and its variants, certain other intellectual property
and certain inventory to BPU in exchange for a (i) 22% membership
interest for two members, and (ii) $150,000 in cash. 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, intangibles, 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, using the estimated fair value of the
services provided. Where an accounts receivable is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument will be classified as an asset on the balance
sheet as either an investment marketable security (when the
customer is a public entity) or as an investment other security
(when the customer is a private entity).
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 on 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.
16
As of June 30, 2017, the trading price on the OTC Markets was $0.03
and the Company had exchanged the 2,500,000 shares of common stock
with the issuer for 65 shares of preferred stock. The 65 shares of
preferred stock issued were each
convertible
using the lesser of either $0.26 per share or the 30 day trading
average, that would provide a number of shares equal to the value
of $10,000 per share. The Company classified the preferred stock as
Level 3 for fair value measurement purposes as there were no
observable inputs. The preferred shares also contained a put option
for the holder for the stated value per share. The Company
determined that the value of the preferred shares was $475,000,
which was an approximation of fair market value. On July 31, 2017
the Company sold the preferred shares to a related party for
$475,000; $200,000 in cash and a short term note receivable for
$275,000 due July 31, 2018, which had a balance of $161,573 at June
30, 2018 and was subsequently amended with a payoff date of
December 31, 2018. As a result, the Company recorded an
other-than-temporary impairment on securities for the year ended
September 30, 2017 of $175,000 in the consolidated statement of
operations.
On June 23, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 1,600,000 shares of common stock for services delivered
to a customer and accounted for this in Investment other
securities. The common stock was issued to the Company’s
subsidiaries I’M1 and EE1. The customer is a private entity
and the stock was valued at $912,000, which was based on its recent
financing in June 2017 at $0.57 per share. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used the fair value of the services provided, utilizing
an analysis of vendor specific objective evidence of its selling
price. In August 2017, each of I’M1 and EE1 distributed the
shares to its majority owner, Level Brands, and also distributed
shares valued at $223,440 to its non-controlling interests. In
August 2017, the Company also provided referral services for kathy
Ireland® Worldwide and this customer. As compensation the
Company received an additional 200,000 shares of common stock
valued at $114,000 using the pricing described above. The Company
assessed the common stock and determined there was not an
impairment for the period ended June 30, 2018.
On September 19, 2017, I’M1 and EE1 in aggregate exercised a
warrant for 56,552 shares of common stock for services delivered to
a customer and accounted for this in Investment other securities.
The common stock was issued to the Company’s subsidiaries
I’M1 and EE1. The customer is a private entity and the stock
was valued at $56,552, which was based on all 2017 financing
transactions of the customer set at $1.00 per share, with the most
recent third party transaction in August 2017. The Company has
classified this common stock as Level 3 for fair value measurement
purposes as there are no observable inputs. In valuing the stock
the Company used factors including financial projections provided
by the issuer and conversations with the issuer management
regarding the Company’s recent results and future plans and
the Company’s financing transactions over the past twelve
months. The Company assessed the common stock and determined there
was not an impairment for the period ended June 30,
2018.
In November 2017, the Company completed services in relation to an
agreement with SG Blocks, Inc. (NASDAQ: SGBX).
As payment for these services, SG Blocks issued
50,000 shares of its common stock to Level Brands. The customer is
a publicly traded entity and the stock was valued based on the
trading price at the day the services were determined delivered,
which was $5.09 per share for an aggregate value of $254,500. The
Company determined that this common stock was classified as Level 1
for fair value measurement purposes as the stock was actively
traded on an exchange. The common stock is held as available for
sale, and at March 31, 2018 and June 30, 2018 respectively, the
shares were $4.61 and $5.20 per share, and we have recorded $29,500
and $5,500 as other comprehensive income (loss) on the Company
consolidated financial statements for the three and nine months
ended June 30, 2018. The Company assessed the common stock and
determined there was not an indication of an other-than-temporary
impairment.
In December 2017, the Company completed services per an advisory
services agreement with Kure Corp, a related party. As payment for
these services, Kure Corp issued 400,000 shares of its stock to
Level Brands. The customer was a private entity and the stock was
valued at $200,000, which was based on financing activities by Kure
Corp in September 2017 in which shares were valued at $0.50 per
share. In addition, in December 2017, the Company engaged and
completed advisory services in relation to an additional agreement
with Kure Corp, for services related to their
“vape-pod” strategy. As payment for these services,
Kure Corp issued an additional 400,000 shares of its stock to Level
Brands which the Company received in January 2018. These shares
were also valued at $200,000. The Company had classified this
common stock, cumulative value of $400,000, as Level 3 for fair
value measurement purposes as there were no observable inputs. In
valuing the stock the Company used factors including information
provided by the issuer regarding their recent results and future
plans as well as their most recent financing transactions. On April
30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE:
ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In the merger
agreement, each share of Kure was valued at $1.00 as the initial
value and is to be exchanged for shares of Isodiol in three
issuances as follows: 1) 30% of the initial value issued on May 1,
2018, the balance of shares issued based on earn out goals as 2)
50% of the initial value to be issued on January 31, 2019 on a
prorata basis based on sales and using the prior 10 day volume
weighted average price of Isodiol shares and 3) 20% of the initial
value to be issued on January 31, 2020 on a prorata basis based on
sales and using the prior 10 day volume weighted average price of
Isodiol shares. We recorded the first issuance of 380,952 shares
based on a trading price on April 30, 2018 of $0.63 per share
valued at $240,000 as a Level 1 for fair value measurement purposes
as the stock is actively traded on an exchange. We also removed the
value of the Kure equity of $400,000 from our Level 3 investments
as part of the exchange described above. As the full value of the
Kure equity will not be received until the future issuances based
on the above earn out goals, we have recorded an accounts
receivable other of $160,000 as of June 30, 2018. The Company has
assessed the other accounts receivable and determined there is no
indication that we will not receive the full amount. The common
stock is held as available for sale, and at June 30, 2018, the
shares were $0.36 per share, and we recorded $(102,857) as other
comprehensive income (loss) on the Company consolidated financial
statements for the three and nine months ended June 30, 2018. The
Company also assessed the common stock and determined there was not
an indication of an other-than-temporary impairment.
17
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. As of June 30, 2018, the
Company has determined there is no impairment on the value of the
shares of stock.
On December 30, 2017 Level Brands entered into an Agreement with
Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F),
a Canadian company which is a developer of
pharmaceutical grade
phytochemical compounds and a manufacturer and developer of
phytoceutical consumer products. The agreement required the Company
to create a global branding and marketing campaign, which includes
a joint strategy to develop Isodiol’s brand and products, an
influencer program, and a social and traditional media
strategy.
As payment for these
services, Isodiol agreed to pay $2,000,000 and issued 1,679,321
shares of its common stock to Level Brands, based on the trading
price on the day of the agreement, which was $1.1909 per share.
These shares were issued on January 22, 2018. In addition, the
Company will provide ongoing quarterly support of the campaign
which includes two branded videos each quarter, Ms. Ireland’s
direct involvement in meetings or conferences once each quarter,
and ongoing social media support by Ms. Ireland and Level Brands,
all the services valued at $750,000 per quarter. This amount will
be paid through issuance of Isodiol stock and the number of shares
issued will be determined based on the trading value of Isodiol
stock on the last day of each quarter. Isodiol made the $750,000
payment for quarterly services for March 31, 2018 through the
issuance of shares of common stock. The common stock is held as
available for sale, and at March 31, 2018 and June 30, 2018, the
shares were $0.85 and $0.36 per share, and we recorded $(1,253,370)
and $(1,825,947) as other comprehensive income (loss) on the
Company consolidated financial statements for the three and nine
months ended June 30, 2018. The Company assessed the common stock
and based on conversations with the company regarding its recent
acquisitions, position in the CBD market, current financing events,
and overall strategy, determined there was not an indication of an
other-than-temporary impairment.
The table below summarizes the assets valued at fair value as of
June 30, 2018:
|
|
In Active Markets for Identical Assets and Liabilities
(Level 1)
|
Significant Other Observable Inputs
(Level 2)
|
Significant Unobservable Inputs
(Level 3)
|
Total Fair Value at June 30, 2018
|
|
|
|
|
|
|
|
Marketable
securities
|
$
1,321,196
|
-
|
$
-
|
$
1,321,196
|
|
Investment
other securities
|
-
|
-
|
$
1,159,112
|
$
1,159,112
|
18
|
|
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
|
|
Receipt
of equity investment upon completion of services
|
$
-
|
$
-
|
$
200,000
|
$
200,000
|
|
Receipt
of equity investment upon completion of services
|
$
2,000,000
|
$
-
|
$
-
|
$
2,000,000
|
|
Change
in value of equity, other comprehensive income
|
$
(641,077
)
|
$
-
|
$
-
|
$
(641,077
)
|
|
Balance
at March 31, 2018
|
$
1,657,923
|
$
-
|
$
1,559,112
|
$
3,217,035
|
|
Receipt
of equity investment upon completion of services
|
$
750,000
|
$
-
|
$
-
|
$
750,000
|
|
Exchange
of equity via owner merger into public company
|
$
240,000
|
$
-
|
$
(400,000
)
|
$
(160,000
)
|
|
Change
in value of equity, other comprehensive income
|
$
(1,326,727
)
|
$
-
|
$
-
|
$
(1,326,727
)
|
|
Balance
at June 30, 2018
|
$
1,321,196
|
$
-
|
$
1,159,112
|
$
2,480,308
|
Inventory at June 30, 2018 and September 30, 2017 consists of the
following:
|
|
June 30,
|
September 30,
|
|
|
2018
|
2017
|
|
Finished
goods
|
$
265,555
|
$
375,459
|
|
Inventory
components
|
210,178
|
212,738
|
|
Total
|
$
475,733
|
$
588,197
|
In the nine months ended June 30, 2018, the Company determined that
inventory was impaired by approximately $102,000. During the year
ended September 30, 2017, the Company determined that inventory was
impaired by approximately $67,000. Impairment charges were recorded
within operating expenses for the respective periods.
19
Major classes of property and equipment at June 30, 2018 and
September 30, 2017 consist of the following:
|
|
June 30,
|
September 30,
|
|
|
2018
|
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
|
(84,126
)
|
(107,971
)
|
|
Net
property and equipment
|
$
39,123
|
$
135,476
|
Depreciation expense related to property and equipment was $8,443
and $14,520 for the three months ended June 30, 2018 and 2017,
respectively. Depreciation expense related to property and
equipment was $30,757 and $42,151 for the nine months ended June
30, 2018 and 2017, respectively. During the nine months ended June
30, 2017 we recorded a one-time loss of $69,311 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. We continue to transition this business by exploring retail
sales channels as we are in test cycles with two large retailers
and in discussion with others, are expanding our online sales
channel and have engaged licensing opportunities with our first two
licenses under BPU, and based on this activity the company has
determined that it is not more likely than not that these assets
are impaired.
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 $11,073 and
$33,219 for the three and nine months ended June 30, 2018,
respectively.
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
$6,237 and $18,712 for the three and nine months ended June 30,
2018, respectively.
20
In September 2017, the Company entered into an exclusive seven year
license agreement with kathy ireland® Worldwide for the right
to license the mark, intellectual property and other marks in
connection with kathy ireland® Health & Wellness™.
The agreement is for seven years for a license fee of $840,000. The
Company has an option to extend for another three years for an
additional price of $360,000. Per the agreement, $480,000 was paid
prior to January 1, 2018. The remaining amount of $360,000 was due
in equal installments on January 1 of subsequent years until the
license fee is paid, and were classified as long term liabilities
related party as of December 31, 2017. Under this license agreement
with kathy ireland® Worldwide we were granted an exclusive,
royalty free right to license, assign and use the kathy
ireland® Health & Wellness™ trademark, and all trade
names, trademarks and service marks related to the intellectual
property including any derivatives or modifications, goodwill
associated with this intellectual property when used in conjunction
with health and wellness as well as Ms. Ireland's likeness, videos,
photographs and other visual representations connected with kathy
ireland® Health & Wellness™. In January 2018, the
Company amended its wholesale license agreement with kathy
Ireland® Worldwide. The amendment accounted for the Company
exercising its option on a three year extension and amending the
payment terms related to this extension as follows: to pay $400,000
within 5 days of executing the amendment (which was paid on January
31, 2018), and to pay the final amounts due under the Agreement,
$320,000, on the latter of January 1, 2019 or 30 days after the
receipt by the Company of $5,000,000 in net proceeds from
sublicense agreements signed under the health and wellness
trademarks. This amount is classified as an accrued expense to
related party as of June 30, 2018. In addition, royalty payments to
kathy ireland® Worldwide for the additional three year
extension are set at 35% of net proceeds.
Intangible assets as of June 30, 2018 and September 30, 2017
consisted of the following:
|
|
June 30,
|
September 30,
|
|
|
2018
|
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
|
1,102,903
|
830,000
|
|
Cash,
warrants and stock issued related to the Wholesale license
agreement with Chef Andre Carthen, net
|
273,151
|
307,146
|
|
Cash,
warrants and stock issued related to the Wholesale license
agreement with Nicholas Walker, net
|
153,858
|
173,047
|
|
Total
|
$
3,460,006
|
$
3,240,287
|
|
|
|
|
The Company has three definite lived intangible assets, which have
seven or ten year lives.
Future amortization schedule:
|
Intangible
|
Total
unamortized
cost
|
2018
|
2019
|
2020
|
2021
|
2022
|
thereafter
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
1,102,903
|
$
32,903
|
$
120,000
|
$
120,000
|
$
120,000
|
$
120,000
|
$
590,000
|
|
Cash,
warrant and stock issued related to the Wholesale license agreement
with Chef Andre Carthen
|
$
273,151
|
$
11,074
|
$
44,294
|
$
44,294
|
$
44,294
|
$
44,294
|
$
84,901
|
|
Cash,
warrant and stock issued related to the Wholesale license agreement
with Nicholas Walker
|
$
153,858
|
$
6,237
|
$
24,950
|
$
24,950
|
$
24,950
|
$
24,950
|
$
47,821
|
The Company performs an impairment analysis at August 1 annually on
the indefinite-lived intangible assets following the guidance in
ASC 350-30-35-18. Our annual impairment analysis includes a
qualitative assessment to determine if it is necessary to perform
the quantitative impairment test. In performing a qualitative
assessment, we review events and circumstances that could affect
the significant inputs used to determine if the fair value is less
than the carrying value of the intangible assets. In addition,
intangible assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred and the Company evaluates the
indefinite-lived intangible assets each reporting period to
determine whether events and circumstances continue to support an
indefinite useful life. The Company 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 June 30, 2018.
21
The Company performs an impairment analysis at August 1 annually on
the definite lived intangible assets following the guidance in ASC
360-10-35-21. We first assess if there is an indicator of possible
impairment such as change in the use of the asset, market price
changes in the asset, or other events that impact the value of the
asset. If an indicator is present we then perform a quantitative
analysis to determine if the carrying amount of the asset is
recoverable. This is done by comparing the total undiscounted
future cash flows of the long-lived asset to its carrying amount.
If the total undiscounted future cash flows exceed the carrying
amount of the asset, the carrying amount is deemed recoverable and
an impairment is not recorded. If the carrying amount of a
long-lived asset is deemed to be unrecoverable, an impairment loss
needs to be estimated.
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 June 30,
2018.
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 (the “Notes”) with warrants to purchase 141,676
shares of the Company’s stock. The warrants have an exercise
price of $7.80. The warrants expire in September 2021.
Effective June 30, 2017, the Company converted the 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 and nine
months ended June 30, 2018.
The outstanding balances due under the Notes was $0 at both June
30, 2018 and September 30, 2017.
In August 2015, we entered into a one year $1,000,000 revolving
line of credit agreement with LBGLOC, LLC, a related party. Under
the terms of the agreement, we agreed to 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
lender 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.
22
The outstanding balances due under the agreements were $0 at both
June 30, 2018 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. The lease is for one year and the space was
to be used by our subsidiary BPU. A shareholder of Kure Corp. was
Stone Street Capital, LLC, an affiliate of our CEO and Chairman and
our CEO and Chairman was the past Chairman of Kure Corp. and is
also a shareholder of Kure Corp. This sublease ended on January 1,
2018.
In February 2017 we entered into a master advisory and consulting
agreement with kathy ireland® Worldwide, as amended, pursuant
to which we have engaged the company to provide non-exclusive
strategic advisory services to us under a term expiring in February
2025. Under the terms of this agreement, Ms. Ireland serves in the
non-executive positions as our Chairman Emeritus and Chief Brand
Strategist. The agreement also provides that kathy ireland®
Worldwide will provide input to us on various aspects of our
corporate strategies and branding, provides access to us of its
in-house design team to assist us in developing our brands. As
compensation under the agreement we agreed to pay kathy
ireland® Worldwide a nominal monthly fee. We are also
responsible for the payment of expenses incurred by Ms. Ireland or
kathy ireland® Worldwide in providing these services to our
company.
On February 8, 2017 the Company entered into a one year advisory
agreement with Mr. Tommy Meharey pursuant to which he provides
advisory and consulting services to us, including serving as
co-Managing Director of I’M1. We have agreed to pay Mr.
Meharey a fee of $15,000 per month for his services. We entered
into a new agreement in March 2018 with the same terms, however the
agreement after one year, if not renewed, will automatically extend
month to month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory
agreement with Mr. Nic Mendoza pursuant to which he provides
advisory and consulting services to us, including serving as
co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a
fee of $10,000 per month for his services. We entered into a new
agreement in March 2018 with the same terms, however the agreement
after one year, if not renewed, will automatically extend month to
month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory
agreement with Mr. Stephen Roseberry pursuant to which he provides
advisory and consulting services to us, including serving as
co-Managing Director of EE1 and I’M1. We have agreed to pay
Mr. Roseberry a nominal monthly fee for his services. We entered
into a new agreement in March 2018 with the same terms, however the
agreement after one year, if not renewed, will automatically extend
month to month unless canceled by either party.
In February 2017 the Company entered into an advisory agreement
with Mr. Jon Carrasco, expiring in February 2019, pursuant to which
he provides advisory and consulting services to us, including
serving as Global Creative Director of EE1 and I’M1. We have
agreed to pay Mr. Carassco a nominal monthly fee for his
services.
In February 2017 EE1 arranged, coordinated and booked for Sandbox
LLC a travel related event, arranging for travel and concierge
related services. Under the terms of the oral agreement, EE1 was
paid $68,550 for its services, which was recorded as
consulting/advisory revenue. Sandbox LLC is an affiliate of a
member of our board of directors.
In March 2017, our subsidiary I’M1 entered into a consulting
agreement with Kure Corp. In this agreement I’M1 provided
services delivered in two phases. The first phase was delivered by
March 31, 2017 which included a social media blitz and marketing
and branding support and strategies for $200,000. The second phase
was delivered by June 22, 2017 which included modeling impressions
for the brand and extension of publicity to other media outlets for
$400,000. In addition, in March 2017, I’M1 entered into a
separate licensing agreement for 10 years with Kure Corp. under
which we will receive royalties based on gross sales of Kure Corp.
products with the I’M1 brand.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the
Company converted the line of credit with LBGLOC LLC, which
included the outstanding principal balance of $593,797 and the
accrued interest of $179,380 for a total payoff amount
of
$773,177 into common shares of the Company at a price of $3.95 per
share. One member of LBGLOC LLC, Stone Street Partners Opportunity
Fund II LLC is an affiliate of our CEO and Chairman and received
94,475 shares of common stock in this transaction.
23
Effective June 30, 2017, the lenders 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 Corp. 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 Corp. and is also a
shareholder of Kure Corp.
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 were affiliates of
our CEO and Chairman.
On July 31, 2017, the Company sold preferred shares it had received
from a customer as payment for services to a related party. The
preferred shares were originally valued as marketable securities at
$650,000 and were sold for $475,000, an approximation of fair
market value, which was paid $200,000 in cash and a short term note
of $275,000 at 3% interest, which is included in note receivable
related party as of June 30, 2018 and September 30, 2017. The short
term note was extended on August 1, 2018, and the outstanding
principal of $155,400 at 5% interest is due December 31, 2018. The
Company recorded an impairment of $175,000 for the year ended
September 30, 2017 (see Note 3).
On August 1, 2017, the Company entered into an additional advisory
agreement with Kure Corp., in which the Company would act as an
advisor regarding business strategy involving (1) conversion of
Kure franchises into company stores, (2) conversion of Kure Corp.
debt and preferred shares into common share of Kure Corp. and (3)
preparation steps required and a strategy to position for a
possible Reg A+ offering. The services are to be delivered in two
phases, the first deliverables of items 1 and 2 above were
delivered by September 30, 2017 and 3 is to be delivered by June
30, 2018. The Company was paid $200,000 in Kure Corp. stock for the
first deliverables and was paid $145,500 in cash for the second
deliverable.
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.
24
On September 8, 2017, the Company extended its Master Advisory and
Consulting Agreement, executed in February 2017, with kathy
ireland® Worldwide to February 2025.
In September 2017, the Company entered into an exclusive seven year
wholesale license agreement with kathy ireland® Worldwide for
the right to license the mark, intellectual property and other
marks in connection with kathy ireland® Health &
Wellness™. The agreement is for seven years for a license fee
of $840,000. The Company has an option to extend for another three
years for an additional price of $360,000. Per the agreement,
$480,000 was paid prior to January 1, 2018. The remaining amount of
$360,000 are due in equal installments on January 1 of subsequent
years until the license fee is paid, and were classified as long
term liabilities related party as of December 31, 2017. Under this
license agreement with kathy ireland® Worldwide we were
granted an exclusive, royalty free right to license, assign and use
the kathy ireland® Health & Wellness™ trademark, and
all trade names, trademarks and service marks related to the
intellectual property including any derivatives or modifications,
goodwill associated with this intellectual property when used in
conjunction with health and wellness as well as Ms. Ireland's
likeness, videos, photographs and other visual representations
connected with kathy ireland® Health & Wellness™.
Royalties are paid at 33 1/3% of net proceeds with the license fee
being a credit against royalties.
On January 30, 2018, Level Brands, amended its
wholesale license agreement with kathy Ireland® Worldwide. The
amendment accounted for the Company exercising its option on a
three year extension and amending the payment terms related to this
extension as follows: to pay $400,000 within 5 days of executing
the amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the Agreement, $320,000 on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. This amount is classified as an
accrued expense related party as of June 30, 2018. In addition,
royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net
proceeds.
On December 11, 2017, the Company entered into a service agreement
with Kure Corp. 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. The Revolving Line of Credit has never
been utilized and on June 6, 2018, the agreement was
terminated.
On December 21, 2017, the Company entered into a sublease agreement
with a related party for office space for its subsidiary BPU. The
initial lease period is for six months and then changes to a month
to month lease. The space includes office and warehouse space and
will cost $3,000 per month.
On January 1, 2018, the Company entered into a consulting agreement
with Mr. Craig Brewer, Chairman of Kure Corp., expiring in January
2019, pursuant to which he provides business consulting services to
us, with a primary focus on BPU. The agreement may be canceled by
either party with a 30 day notice. We have agreed to pay Mr. Brewer
a fee of $9,000 per month for his services. This agreement ended on
April 30, 2018.
In June 2018, per our agreement with kathy ireland® Worldwide,
the company earned a referral fee of $150,000 for facilitating a
business opportunity which led to a new license agreement for kathy
ireland® Worldwide. The Company is to receive 50% of all
royalty revenue earned ongoing via the new business
contract.
In April 2018 through June 2018, EE1 engaged in five separate
statements of work for various marketing campaigns, production
processes, and documentary related services for Sandbox LLC. Under
the terms of the agreements, EE1 will be paid in the range of
$200,000 to $250,000 for each statement of work, from Sandbox LLC.
Sandbox LLC is an affiliate of a member of our board of
directors.
25
As we engage in providing services to customers, at times we will
utilize related parties, typically as a part of our agreement with
kathy ireland® Worldwide, to assist in delivery of the
services. For the three and nine months ended June 30, 2018 we
incurred related party cost of sales of approximately $745,000 and
$1,228,000, respectively. We had approximately $5,000 and $42,000,
related party cost of sales respectively for the three and nine
months ended June 30, 2017.
Preferred Stock – We are authorized to issue 50,000,000
shares of preferred stock, par value $0.001 per share. Our
preferred stock does not have any preference, liquidation, or
dividend provisions. No shares of preferred stock have been
issued.
Common Stock – We are authorized to issue 150,000,000 shares
of common stock, par value $0.001 per share. There were 8,118,928
and 5,792,261 shares of common stock issued and outstanding at June
30, 2018 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 and nine months ended June 30, 2018:
On November 17, 2017, the Company completed an IPO of 2,000,000
shares of its common stock for aggregate gross proceeds of $12.0
million.
In November 2017, we issued 6,667 shares of our common stock to an
individual as part of a consulting agreement. The shares were
valued at $37,002, based on the trading price upon issuance and
expensed as contract compensation.
In January 2018, we issued 230,000 shares of our common stock,
which were granted as restricted stock awards on October 1, 2016 to
board members. The restricted stock awards vested on January 1,
2018. The shares were valued at fair market value upon issuance at
$195,500 and amortized over the vesting period and expensed as
stock compensation.
In March 2018, we issued 5,000 shares of our common stock to an
investor relations firm for services. The shares were valued at
$20,000, based on the trading price upon issuance, and is being
amortized and expensed as professional services over the service
period ending June 2018.
In May 2018, we issued 60,000 shares of our common stock to an
investment banking firm for general financial advisory and
investment banking services. The shares were valued at $303,000,
based on the trading price upon issuance, and is being amortized
and expensed as professional services over the service period
ending April 2019.
In June 2018, we issued 25,000 shares of our common stock to a
broker dealer for business advisory services. The shares were
valued at $118,000, based on the trading price upon issuance, and
is being amortized and expensed as professional services over the
service period ending December 2019.
In the three and nine months ended June 30, 2017:
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 a broker-dealer and
its affiliates.
26
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.
In January 2017 we issued 26,667 shares of our common stock to two
individuals as part of consulting agreements. The shares were
valued at $22,667, based on the valuation from the Company and
expensed as salary compensation.
In January 2017, the Company acquired 51% ownership in IM1 in
exchange for 583,000 shares of Level Brands common stock, which was
valued at $495,550.
In January 2017, the Company acquired 51% ownership in EE1 in
exchange for 283,000 shares of Level Brands common stock, which was
valued at $240,550.
Effective April 28, 2017, Priel Maman entered into an agreement
with the Company to transfer his 12% member interest in BPU for
155,294 shares of the Company’s common stock, valued at
$132,000. The Company now owns 100% membership interest of
BPU.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the
lender converted the outstanding line of credit principal balance
of $593,797, together with the accrued interest of $179,380 for a
total conversion amount of $773,177 into common shares of the
Company at a price of $3.95 per share. In this transaction, the
Company issued 195,740 shares of common stock.
Effective June 30, 2017, the lenders converted the $2,125,000
principal amount of convertible promissory notes and all accrued
interest of $127,500 into common shares of the Company at a price
of $3.95 per share. In this transaction, the Company issued 570,254
shares of common stock.
On June 30, 2017, the Company entered into subscription agreements
for 77,000 shares of common stock with two accredited investors in
a private placement, which resulted in gross proceeds of $304,150
to the Company. In this transaction, $102,700 was received
subsequent to June 30, 2017.
On June 30, 2017, the Company entered into an agreement with an
investor relations firm and as part of the compensation issued
5,000 shares of the Company’s common stock for services to be
delivered through an IPO and no later than September 30, 2017. The
shares were issued July 5, 2017 and valued at $19,750.
Stock option transactions:
In the three and nine months ended June 30, 2018.
On May 14, 2018 we granted an aggregate of 50,000 common stock
options to an employee. The options vest 50% November 14, 2018 and
50% May 14, 2019. The options have an exercise price of $5.27 per
share and a term of seven years. We have recorded an expense for
the options of $38,950 for the three and nine months ended June 30,
2018.
On May 29, 2018 we granted an aggregate of 150,000 common stock
options to an employee. The options vest 50% immediately and 50%
January 1, 2019. The options have an exercise price of $4.78 per
share and a term of ten years. We have recorded an expense for the
options of $302,750 for the three and nine months ended June 30,
2018.
In the three and nine months ended June 30, 2017:
On October 1, 2016 we granted an aggregate of 14,300 common stock
options to two employees. The options vest 16% immediately, 42%
January 1, 2017 and 42% January 1, 2018. The options have an
exercise price of $7.50 per share and a term of five years. We have
recorded an expense for the options of $0 and $53, respectively,
for the three and nine months ended June 30, 2018. We have recorded
an expense of $53 and $524 for the three and nine months ended June
30, 2017.
27
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
$0 and $4,802, respectively, for the three and nine months ended
June 30, 2018. We have recorded an expense for the options of
$4,802 and $14,406, respectively, for the three and nine months
ended June 30, 2017.
On May 1, 2017 we granted an aggregate of 100,000 common stock
options to one employee. The options vest 50% immediately and 50%
on January 1, 2018. The options have an exercise price of $4.00 per
share and a term of seven years. We have recorded an expense for
the options of $0 and $4,031, respectively, for the three and nine
months ended June 30, 2018. We have recorded an expense for the
options of $13,438 and $13,438, respectively, for the three and
nine months ended June 30, 2017.
The following table summarizes the inputs used for the
Black-Scholes pricing model on the options issued in the nine
months ended June 30, 2018 and 2017:
|
|
2018
|
2017
|
|
Exercise price
|
$4.78 – $5.27
|
$4.00 - $7.50
|
|
Risk free interest rate
|
2.77%
- 2.96%
|
1.14%
- 2.13%
|
|
Volatility
|
57.76% - 64.74% %
|
54.69% - 60.39
|
|
Expected term
|
7
– 10 years
|
5 - 7 years
|
|
Dividend yield
|
None
|
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:
In the three and nine months ended June 30, 2018:
On November 17, 2017 in relation to the IPO, we issued to the
selling agent warrants to purchase in aggregate 100,000 shares of
common stock with an exercise price of $7.50. The warrants expire
on October 27, 2022.
In the three and nine months ended June 30, 2017:
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 nine
months ended June 30, 2018 and 2017:
|
|
2018
|
2017
|
|
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
|
28
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 ofshares
|
Weighted-average
exerciseprice
|
Weighted-average
remaining
contractual term
(in years)
|
Aggregate
intrinsic
value (in
thousands)
|
|
Outstanding
at September 30, 2017
|
333,300
|
5.83
|
|
|
|
Granted
|
200,000
|
4.90
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
98,650
|
6.38
|
|
|
|
Outstanding
at June 30, 2018
|
434,650
|
$
5.27
|
6.98
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
282,150
|
$
5.53
|
6.35
|
$
—
|
As of June 30, 2018, there was approximately $342,401 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 10 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
vested January 1, 2018. The stock awards are valued at fair market
upon issuance at $195,500 and amortized over the vesting period. We
recognized $0 and $39,100 of stock based compensation expense for
the three and nine months ended June 30, 2018. We recognized
$39,100 and $117,300 of stock based compensation expense for the
three and nine months ended June 30, 2017. (See Note
10).
29
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
intrinsicvalue (inthousands)
|
|
Outstanding
at September 30, 2017
|
212,176
|
$
6.53
|
|
|
|
Issued
|
100,000
|
7.50
|
|
|
|
Exercised
|
—
|
—
|
|
|
|
Forfeited
|
—
|
—
|
|
|
|
Outstanding
at June 30, 2018
|
312,176
|
$
6.84
|
3.80
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at June 30, 2018
|
312,176
|
$
6.84
|
3.80
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of June 30, 2018:
|
|
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
|
|
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.
In January 2018, Level Brands, amended its wholesale license
agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the Agreement, $320,000 on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. This amount is classified as
accrued expense to related party as of June 30, 2018. In addition,
royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net proceeds. The
license fee paid is credited against any royalties to be
paid.
30
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, through advisory consulting agreements. This revenue
is similar to the entertainment divisions’ revenue process
and we have allocated revenue from corporate to the entertainment
division for segment presentation.
The 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 and
nine months ended June 30, 2018 and 2017.
|
Three
months ended June 30, 2018:
|
|
|||
|
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
27,205
|
$
1,629,835
|
$
191,390
|
$
1,848,430
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
1,350,000
|
$
1,350,000
|
|
Total
Net Sales
|
$
27,205
|
$
1,629,835
|
$
1,541,390
|
$
3,198,430
|
|
Income
(loss) from Operations before Overhead
|
$
(123,394
)
|
$
1,001,079
|
$
346,540
|
$
1,224,225
|
|
Allocated
Corporate Overhead (a)
|
5,605
|
335,795
|
317,572
|
658,972
|
|
Net
Income (Loss)
|
$
(128,999
)
|
$
665,284
|
$
28,968
|
$
565,253
|
|
|
|
|
|
|
|
Three
months ended June 30, 2017:
|
|
|||
|
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
291,342
|
$
470,667
|
$
511,000
|
$
1,273,009
|
|
Net
Sales related party
|
$
-
|
$
400,000
|
$
114,000
|
$
514,000
|
|
Total
Net Sales
|
$
291,342
|
$
870,667
|
$
625,000
|
$
1,787,009
|
|
Income
(loss) from Operations before Overhead
|
$
(399,304
)
|
$
41,573
|
$
248,497
|
$
(109,234
)
|
|
Allocated
Corporate Overhead (a)
|
6,507
|
15,233
|
10,935
|
32,675
|
|
Net
Income (Loss)
|
$
(405,811
)
|
$
26,340
|
$
237,562
|
$
(141,909
)
|
31
|
Nine
months ended June 30, 2018:
|
|
|||
|
|
Professional
Product
Division
|
Licensing Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
85,945
|
$
4,248,711
|
$
1,082,439
|
$
5,417,095
|
|
Net
Sales related party
|
$
-
|
$
200,000
|
$
1,350,000
|
$
1,550,000
|
|
Total
Net Sales
|
$
85,945
|
$
4,448,711
|
$
2,432,439
|
$
6,967,095
|
|
Income
(loss) from Operations before Overhead
|
$
(751,293
)
|
$
2,866,972
|
$
380,143
|
$
2,495,822
|
|
Allocated
Corporate Overhead (a)
|
19,151
|
991,277
|
542,004
|
1,552,432
|
|
Net
Income (Loss)
|
$
(770,444
)
|
$
1,875,695
|
$
(161,861
)
|
$
943,390
|
|
|
|
|
|
|
|
Assets
|
$
3,669,414
|
$
7,737,134
|
$
5,063,736
|
$
16,470,284
|
|
Nine
months ended June 30, 2017:
|
|
|||
|
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
|
Net
Sales
|
$
865,890
|
$
1,135,667
|
$
611,280
|
$
2,612,837
|
|
Net
Sales related party
|
$
-
|
$
600,000
|
$
182,550
|
$
782,550
|
|
Total
Net Sales
|
$
865,890
|
$
1,735,667
|
$
793,830
|
$
3,395,387
|
|
Income
(loss) from Operations before Overhead
|
$
(1,272,383
)
|
$
754,962
|
$
181,153
|
$
(336,268
)
|
|
Allocated
Corporate Overhead (a)
|
201,807
|
404,520
|
185,013
|
791,340
|
|
Net
Income (Loss)
|
$
(1,474,190
)
|
$
350,442
|
$
(3,860
)
|
$
1,127,608
)
|
|
|
|
|
|
|
|
Assets
|
$
1,974,553
|
$
1,995,279
|
$
1,138,129
|
$
5,107,961
|
|
|
|
|
|
|
(a)
The
Company began allocating corporate overhead to the business
segments in April 2017. We have allocated overhead on a proforma
basis for the three and nine months ended June 30, 2018 and 2017
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.
On November 17, 2017, the Company completed an 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 is reflected
in the nine months ending June 30, 2018 financial
statements.
32
On August 1, 2018, the Company extended the term of its original
note receivable of $275,000 with a related party. The outstanding
principal of $155,400 as of July 31, 2018, with 5% interest is due
by December 31, 2018.
On July 1, 2018, the Company entered into a marketing and
consulting agreement and as partial compensation issued 5,000
shares of its common stock, The shares were valued at $18,500,
based on the trading price upon issuance, and is being amortized
and expensed as professional services over the service period
ending June 2019.
33
The
following discussion of our financial condition and results of
operations for the third quarters of fiscal 2018 and fiscal 2017
and the nine months then ended 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:
|
Founded in 2017 and first conceptualized by
kathy
ireland
® Worldwide, I'M1
is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
|
|
|
|
|
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.
|
|
|
|
|
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.
|
|
|
|
"
Beauty belongs to
everyone
"
|
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, retailers,
online outlets and are expanding into licensing
opportunities.
|
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.
34
We
began reporting our revenues by segment during the second quarter
of fiscal 2017 following our acquisitions of I'M1 and EE1. We
report in three business segments: the licensing, the entertainment
and the professional products divisions. The licensing division is
comprised of two of our business units focused on establishing
licensing contracts in two areas: men’s lifestyle products
branded under I’M1 (grooming, personal care, cologne,
accessories, jewelry and apparel) and health and wellness related
products branded under kathy ireland® Health &
Wellness™, which began operations in December 2017. EE1
comprises the entertainment division and it’s focus is to
produce and market multiple entertainment distribution platforms as
well as engage in brand management services. In addition to
revenues generated in each of these segments, the corporate parent
also will generate revenue from time to time, through advisory
consulting agreements. This revenue is similar to the entertainment
divisions’ revenue process and we have allocated revenue from
corporate to the entertainment division for segment presentation.
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.
Growth Strategies and Outlook
Level
Brands expanded its business operations in fiscal 2017 to include
two new divisions through which it now has a committed focus on
licensing and branding services. In addition, we added a third
division at the end of fiscal 2017 which began operations in fiscal
2018. This expansion has positioned Level Brands with licensing
segments in millennial men’s lifestyle and the health and
wellness arena, for women and their families at every age. We
believe that Level Brands also has solid capabilities related to
brand management services and has seen success in early stages by
engaging with several customers.
We
believe that in working closely with our Chairman Emeritus and
Chief Brand Strategist, Kathy Ireland, the Chair, CEO and Chief
Designer of kathy ireland® Worldwide, and leveraging the
expertise and talent of the kathy ireland ® Worldwide
executive team, we have opportunity to secure strategic licenses
and joint venture partnerships for our brands, as well as to
continue to grow the portfolio of brands we manage and represent.
We are implementing the kathy ireland® Worldwide
“blueprint” and utilize the kathy ireland®
Worldwide team as we expand our licensing and branding
business.
We
are pursuing the following strategies to continue to grow our
revenues and expand our business and operations during the balance
of fiscal 2018 and into fiscal 2019:
●
Increase
our base of licensed offerings: We believe that in building a
strong brand, we must begin with intellectual property. The
development of quality intellectual property (“IP”), is
frequently one of the most expensive ongoing costs in a licensing
operation. The unique kathy ireland® Worldwide
“blueprint” for IP development, allows us economies of
scale, which is a foundation for Level Brands to bring virtually
unlimited products and services of quality, through the appropriate
distribution channels to meet the demands of our targeted
customers. With current executed contracts encompassing products in
fashion, accessories, beverages, personal care, health care, and
spirits, which are already in development or available at brick and
mortar stores and online retailers, we believe we have a foundation
to continue to build upon for additional offerings. For example,
for our I’M1 brand this will include a wide array of
lifestyle items for millennial men and for our kathy ireland®
Health & Wellness brand this will encompass products and/or
services that appeal to Baby Boomers and Millennials. We expect to
continue to grow our base of licensed products by:
o
Innovating
and identifying market trends through an ongoing effort based on
research of products, tracking buying and demand trends and
subsequently identifying the right manufacturer for fulfillment,
i.e. utilizing cannabidiol (“CBD”) in unique formats
under our kathy ireland® Health & Wellness brand under the
terms of our license agreement with our client Isodiol
International Inc.; and
o
Identifying
new product offerings in response to evolving customer demands in
our focused areas, that meet our criteria, and with our branding
support could increase our reach to new customers.
●
Cross-sell
opportunities: With EE1 continuing to grow its portfolio of brand
management customers, we believe we will continue to have
opportunities to identify products that fit our criteria for
additional licensing opportunities under our Beauty & Pin-Ups,
I’M1 or kathy ireland® Health & Wellness
brands.
●
EE1
will seek to continue to expand this brand’s offering of
entertainment productions (currently providing production services
for two television shows and a recording project of a tribute album
of Lennon/McCartney classics by GRAMMY award winning artists) as we
assess current projects involving television and movies for the
best financial opportunity as well as look to expand experiential
offerings.
35
Results of operations
Sales
The
following tables provide certain selected consolidated financial
information for the periods presented:
Selected Consolidated Financial Data
|
|
Three Months Ended June 30,
|
Nine Months Ended June 30,
|
||||
|
|
2018
|
2017
|
change
|
2018
|
2017
|
change
|
|
|
(unaudited)
|
(unaudited)
|
|
(unaudited)
|
(unaudited)
|
|
|
Net
sales
|
$
1,848,430
|
$
1,273,009
|
45.2
%
|
$
5,417,095
|
$
2,612,837
|
107.3
%
|
|
Net
sales related party
|
1,350,000
|
514,000
|
162.6
%
|
1,550,000
|
782,550
|
98.1
%
|
|
Total
net sales
|
$
3,198,430
|
$
1,787,009
|
78.9
%
|
$
6,967,095
|
$
3,395,387
|
105.2
%
|
|
Cost
of sales
|
1,106,706
|
261,420
|
323.3
%
|
1,858,651
|
822,556
|
125.9
%
|
|
Gross
profit as a percentage of net sales
|
65.4
%
|
85.4
%
|
(20.0
)%
|
73.3
%
|
75.8
%
|
(2.5
)%
|
|
Operating
expenses
|
1,464,239
|
853,670
|
71.5
%
|
4,089,006
|
2,536,586
|
61.2
%
|
|
Operating
income (loss)
|
627,485
|
671,919
|
(12.2
)%
|
1,019,438
|
36,245
|
2712.6
%
|
|
Net
income (loss) attributable to Level Brands, Inc. common
shareholders
|
$
206,074
|
$
(210,690
)
|
197.8
%
|
$
477,542
|
$
(1,400,406
)
|
134.1
%
|
The
following table provides information on the contribution of net
sales by segment to our total net sales.
|
|
Three Months
ended
June 30 2018
|
% of total
|
Three Months
ended
June 30 2017
|
% of total
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
1,629,835
|
50.9
%
|
$
870,667
|
48.7
%
|
|
Entertainment
division
|
1,541,390
|
48.2
%
|
625,000
|
35.0
%
|
|
Professional
products division
|
27,205
|
0.9
%
|
291,342
|
16.3
%
|
|
Total
net sales
|
$
3,198,430
|
100
%
|
$
1,787,009
|
100
%
|
|
|
Nine Months
ended
June 30 2018
|
% of total
|
Nine Months
ended
June 30 2017
|
% of total
|
|
|
(unaudited)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
Licensing
division
|
$
4,448,711
|
63.9
%
|
$
1,735,667
|
51.1
%
|
|
Entertainment
division
|
2,432,439
|
34.9
%
|
793,830
|
23.4
%
|
|
Professional
products division
|
85,945
|
1.2
%
|
865,890
|
25.5
%
|
|
Total
net sales
|
$
6,967,095
|
100
%
|
$
3,395,387
|
100
%
|
With
the new operations in 2017 of our three new subsidiaries,
I’M1, EE1, and Level H&W, 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 fair value adjustment
which could result in future period losses. In the three and nine
months ended June 30, 2018, of our net sales approximately of
$3,198,000 and $6,967,000 respectively, we have received
compensation in the form of equity positions totaling $1,150,000,
and $4,154,500, respectively. In the three and nine months ended
June 30, 2017, of our net sales approximately of $1,787,000 and
$3,395,000, respectively, we received compensation in the form of
equity positions totaling $912,000 and $1,562,000.
36
Licensing division
The
licensing division began operating in January 2017 and enters into
various license agreements that can provide revenues based on
royalties and advertising/marketing fees and additional revenues
based on a percentage of defined sales. This division added the
Health & Wellness unit in October 2017 with initial revenue
being recognized in the three months ended March 31, 2018. 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.
Net sales for the licensing division for the three
and nine months ended June 30, 2018 in
creased 87.2%
and 156.3% as compared to the three
and nine months ended June 30, 2017. The large increase is due
primarily to two significant licensing agreements engaged by the
Health & Wellness unit which generated approximately $1,600,000
and $4,356,000 of revenue in the three and nine months ended June
30, 2018, respectively. In the three and nine months ended June 30,
2018 this division recorded $1,150,000 and $3,900,000,
respectively, of revenue which was an equity position as compared
to $456,000 and $1,106,000 for the three and nine months ended June
30, 2017, respectively.
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. Additional revenue earned at the corporate level
for advisory agreements is included in the entertainment division
for segment reporting.
Net sales for the entertainment division for the
three and nine months ended June 30, 2018 in
creased 146.6%
and 206.4% as compared to the three
and nine months ended June 30, 2017. The increase is due to new
engagements for the division. In the three and nine months ended
June 30, 2018 this division recorded $0 and $454,500, respectively,
of revenue which was received as an equity position as compared to
$456,000 for both the three and nine months ended June 30,
2017.
Professional products division
Net sales for the professional products division
for the three and nine months ended June 30, 2018
de
creased 90.7%
and 90.1% as compared to the three and
nine months ended June 30, 2017. This decrease is primarily
attributable to a strategic decision made at the end of fiscal
2017, to change our distributors as well as also testing other
sales channels, including large retail and online channels and
adding licensing opportunities, all of which we are still
transitioning into. As of the end of June 30, 2018, we have engaged
with two retailers and are testing the products in these new
channels and have also executed our first two license contracts for
this division and expect product rollout to begin in the summer of
2018. 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 9.0%
and 21.7%, respectively, of gross sales of our
professional products division for the three months ended June 30,
2018 and 2017 and were 21.5% and 48.5% for the nine months ended
June 30, 2018 and 2017. The higher allowance in the fiscal 2017
periods is related to discounting of hair irons to our old
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.
37
Cost of sales
Our
cost of sales includes costs associated with distribution, external
fill and labor expense, components, and freight for our
professional products divisions, and includes labor, third party
service providers and amortization for IP for our licensing and
entertainment divisions. Our cost of sales as a percentage of net
sales was 34.6% and 26.7% in the three and nine months ended June
30, 2018, respectively, as compared to 14.6% and 24.2% in the three
and nine months ended June 30, 2017, respectively. In order to
explain the change in cost of sales we must account for the two new
divisions (licensing and entertainment) and look at each of our
three divisions separately to see the cumulative
impact.
In
our licensing division, cost of sales was 11.0% and 9.9% of its net
sales for the three and nine months ended June 30, 2018,
respectively, as compared to 3.5% and 7.5% for the three and nine
months ended June 30, 2017, respectively. For the current periods,
we incurred a higher cost of sales as the business is maturing and
we laid groundwork on social media and production items to increase
visibility of our licensed brands, I’M1 and kathy
ireland® Health & Wellness™, which we believe will
be used in the future to support the brand and future contracts as
well as the amortization of our IP for this division. In addition,
we engaged in a significant contract for our kathy ireland®
Health & Wellness unit which required significant efforts
regarding a marketing campaign and strategy. We expect this
division to have a cost of sales between 10% and 20% as the
business is structured in a manner such that the licensee (our
customer) incurs the significant costs and revenues associated with
the sale of licensed products. We recognize the associated royalty
fees on a net basis. When we are involved in providing advisory
services, we allocate the utilized internal resources costs to our
cost of sales.
In
our entertainment division, cost of sales was 58.9% and 51.7% of
its net sales for the three and nine months ended June 30, 2018,
respectively, as compared to 5.9% and 17.4% for the three and nine
months ended June 30, 2017, respectively. 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, however we expect our cost of sales to be
between 45% and 58% based on the mix of projects we
target.
In
our professional products division, cost of sales was 70.2% and
185.0% of its net sales for the three and nine months ended June
30, 2018, respectively, as compared to 66.7% and 75.6% in the three
and nine months ended June 30, 2017, respectively. The significant
increase in the fiscal 2018 periods on a percentage basis is
primarily related to inventory impairments, as a result of net
realizable value and excess inventory calculations and a decrease
in the actual sales as disclosed above. Cost of sales variances are
primarily related to two key factors. First, allowances from this
division have varied significantly based on the product line not
having wide appeal yet and various advertising and promotional
packages have been used to promote the products since initial
launch. Second, in fiscal 2017 we moved into an online channel and
conducted our first online promotion to create more brand
visibility, and with this provided significant discount pricing on
a new packaged item designed 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 and assess our overall business strategy, we
are assessing ways to decrease our cost of sales.
Operating expenses
Our
major operating expenses include wages, advertising, travel, rent,
professional service fees, and expenses related to industry
distribution and trade shows. Our operating expenses were
approximately $1,464,000 and $854,000 for the three months ended
June 30, 2018 and 2017, an increase of $610,000 or 71.5%. The
operating expenses also included non-cash expenses for stock
compensation and depreciation of approximately $364,000 and $76,000
for the three months ended June 30, 2018 and 2017, respectively.
Specifically, during the three months ended June 30, 2018 as
compared to same period in fiscal 2017 our outside services related
to investor relations, transfer agent, other public company support
entities increased by approximately $47,000, expenses related to
social media, public relations, advertising and marketing process,
tradeshows, and promotions increased approximately $288,000, our
rent expense increased $36,000, our charitable contributions
increased approximately $12,000, our stock compensation expense
increased approximately $294,000, and our business insurance
increased approximately $52,000. These increases were offset by
certain decreases in operating expenses during such period as our
staff related expenses decreased approximately $21,000, our
accounting and legal expenses decreased by approximately $13,000 as
the IPO process was completed, and our travel and entertainment
expenses decreased approximately $35,000.
38
Our
operating expenses were approximately $4,089,000 and $2,536,000 for
the nine months ended June 30, 2018 and 2017, an increase of
$1,553,000 or 61.2%. The operating expenses also included non-cash
expenses for stock compensation and depreciation of approximately
$456,000 and $204,000 for the nine months ended June 30, 2018 and
2017, respectively. Specifically, during the nine months ended June
30, 2018 as compared to same period in fiscal 2017 our staff
related expenses increased approximately $408,000 and our
accounting and legal expenses increased by approximately $77,000.
In addition, during the nine months ended June 30, 2018 as compared
to the same period in fiscal 2017, expenses related to social
media, public relations, advertising and marketing process,
tradeshows, and promotions increased approximately $739,000, our
travel and entertainment expenses increased approximately $13,000,
and our rent expense increased $84,000, our charitable
contributions increased approximately $56,000, our stock
compensation expense increased $268,000, and our business insurance
increased approximately $142,000. These increases were offset by
certain decreases in operating expenses during such period as our
commissions paid to an outside sales consultant decreased
approximately $37,000, as well as we had a decrease of $200,000 of
one time start-up expenses for the new divisions.
The
realignment and change in expenses is directly related to the
changes in the Company as it increased from one operating business
segment to three and built the infrastructure to support the
overall company from a growth perspective as well as completed the
process to become a public entity.
Licensing division
Operating
expenses in the licensing division were approximately $450,000 and
$1,145,000 for the three and nine months ended June 30, 2018,
respectively, as compared to $624,000 and $776,000 for the three
and nine months ended June 30, 2017, a decrease of 27.8% and an
increase of 47.6%, respectively. For fiscal 2017, the licensing
division was formed in January 2017 and therefore was only
operating for six months of the period. In addition, for the
periods ending June 30, 2017, we had referral fees of $528,000 paid
to our corporate entity for two large contracts.
Operating
expenses for the three months ended June 30, 2018 and 2017,
respectively, include staff related expenses which were
approximately $0 and $15,000, accounting and legal expenses of
approximately $0 and $17,000, expenses related to social media,
public relations, advertising, marketing, promotions and tradeshow
of approximately $154,000 and $11,000, travel and entertainment
expenses of approximately $2,000 and $7,000, professional outside
services of approximately $3,000 and $0, and allocated management
fees from corporate of $290,000 and $45,000. Staff related expenses
are now attributed to our cost of sales as we now are 100%
allocated to supporting license agreements for
clients.
Operating expenses for the nine months ended June
30, 2018 and 2017, respectively, include staff related expenses
which were approximately $36,000 and $57,000, accounting and legal
expenses of approximately $130,000 and $25,000, expenses related to
social media, public relations, advertising, marketing, promotions
and tradeshow of approximately $326,000 and $13,000, travel and
entertainment expenses of approximately $18,000 and $7,000,
professional outside services of approximately $6,000 and $0, and
allocated management fees from corporate of $574,000 and $45,000.
The overall change in operating expenses for both the three and
nine months comparative periods is related to the maturation of the
new division and expenses related to its day to day operations
growth.
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 $287,000
and $795,000 for the three and nine months ended June 30, 2018,
respectively, as compared to $339,000 and $475,000 for the three
and nine months ended June 30, 2017, a decrease of 15.5% and an
increase of 67.4%, respectively. For fiscal 2017, the entertainment
division was formed in January 2017 and therefore was only
operating for six months of the period. In addition, for the
periods ending June 30, 2017, we had referral fees of $228,000 paid
to our corporate entity for one large contract.
Operating
expenses for the three months ended June 30, 2018 and 2017,
respectively, include staff related expenses which were
approximately $0 and $30,000, accounting and legal expenses of
approximately $8,000 and $14,000, expenses related to social media,
public relations, advertising, marketing, promotions and tradeshow
of approximately $118,000 and $21,000, travel and entertainment
expenses of approximately $2,000 and $0, professional outside
services of approximately $3,000 and $0, and allocated management
fees from corporate of $145,000 and $45,000. Staff related expenses
are now attributed to our cost of sales as we now are 100%
allocated to service delivery for clients.
39
Operating
expenses for the nine months ended June 30, 2018 and 2017,
respectively, include staff related expenses which were
approximately $36,000 and $58,000, accounting and legal expenses of
approximately $108,000 and $19,000, expenses related to social
media, public relations, advertising, marketing, promotions and
tradeshow of approximately $302,000 and $23,000, travel and
entertainment expenses of approximately $8,000 and $0, professional
outside services of approximately $16,000 and $0, and allocated
management fees from corporate of $312,000 and $45,000. The overall
change in operating expenses for both the three and nine months
comparative periods is related to the maturation of the new
division and expenses related to its day to day operations growth.
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.
Professional products
division
Operating
expenses in the professional products division were approximately
$126,000 and $583,000 for the three and nine months ended June 30,
2018, respectively, as compared to $483,000 and $1,436,000 for the
three and nine months ended June 30, 2017, a decrease of 73.9% and
59.4%, respectively.
Operating
expenses for the three months ended June 30, 2018 and 2017,
respectively, include staff related expenses which were
approximately $21,000 and $125,000, accounting and legal expenses
of approximately $0 and $23,000, expenses related to social media,
public relations, advertising, marketing, promotions and tradeshow
of approximately $31,000 and $123,000, travel and entertainment
expenses of approximately $0 and $46,000, professional outside
services related to product formulation, design, and marketing
expenses of approximately $1,000 and $20,000, commissions paid to
an outside sales consultant of approximately $0 and $1,200, and
allocated management fees from corporate of $48,000 and $45,000,
respectively.
Operating
expenses for the nine months ended June 30, 2018 and 2017,
respectively, include staff related expenses which were
approximately $214,000 and $428,000, accounting and legal expenses
of approximately $39,000 and $176,000, expenses related to social
media, public relations, advertising, marketing, promotions and
tradeshow of approximately $54,000 and $257,000, travel and
entertainment expenses of approximately $14,000 and $107,000,
professional outside services related to product formulation,
design, and marketing expenses of approximately $5,000 and
$133,000, commissions paid to an outside sales consultant of
approximately $2,000 and $38,000, and allocated management fees
from corporate of $128,000 and $45,000, respectively. 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.
The
overall decrease in operating expenses for both the three and nine
months comparative periods is related to management’s shift
to a more structured approach as the strategy for this business
unit was reviewed and repositioned to expand beyond a single
channel focus.
Corporate overhead
Corporate
overhead operating expenses were approximately $1,080,000 and
$2,556,000 for the three and nine months ended June 30, 2018,
respectively, as compared to $284,000 and $695,000 for the three
and nine months ended June 30, 2017, an increase of 280.7% and
268.0%, respectively.
Corporate
operating expenses for the three months ended June 30, 2018 and
2017, respectively, include staff related expenses which were
approximately $220,000 and $93,000, accounting and legal expenses
of approximately $93,000 and $61,000, expenses related to social
media, public relations, advertising, marketing, promotions and
tradeshow of approximately $139,000 and $0, travel and
entertainment expenses of approximately $19,000 and $4,000,
professional outside services of approximately $98,000 and $38,000,
rent of approximately $67,000 and $12,000, a non-cash stock
compensation expense of $356,000 and $61,000, and business
insurance expense of approximately $52,000 and $2,000.
Corporate
operating expenses for the nine months ended June 30, 2018 and
2017, respectively, include staff related expenses which were
approximately $915,000 and $250,000, accounting and legal expenses
of approximately $259,000 and $241,000, expenses related to social
media, public relations, advertising, marketing, promotions and
tradeshow of approximately $303,000 and $3,000, travel and
entertainment expenses of approximately $99,000 and $12,000,
professional outside services of approximately $155,000 and
$52,000, rent of approximately $154,000 and $52,000, a non-cash
stock compensation expense of approximately $426,000 and $158,000,
and business insurance expense of approximately $146,000 and
$5,000.
40
The
overall increase in corporate operating expenses for both the three
and nine months comparative periods is related to the maturation of
the entire organization and structuring related to its day to day
operations.
Interest expense and other non-operating expenses
Our
interest expense decreased to $232 and $737 for the three and nine
months ended June 30, 2018 from approximately $229,000 and $500,000
for the three and nine months ended June 30, 2017. The decrease was
related to $0 borrowings in the three and nine months ended June
30, 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
the three months ended June 30, 2017, we converted the $2,125,000
principal amount of 8% Convertible Promissory Notes and all accrued
interest of $127,500 into our common shares, and we accounted for a
conversion inducement in accordance with ASC 470-20 on the
conversion price reduction from $5.00 to $3.95 per share and
recorded a non-cash debt conversion expense of $446,250 at June 30,
2017. This is a one-time non-cash charge. We also sold marketable
securities we had received from a customer for services. In this
transaction, we determined that an other-than-temporary impairment
on securities of $175,000 occurred and recorded the loss in the
consolidated statement of operations 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. We did not have any impairments in the
three and nine months ended June 30, 2018 or 2017.
Other comprehensive income
(loss)
The
Company values investments in marketable securities at fair value
and records a gain or loss at each period, in other comprehensive
income (loss) unless a decline is determined to be
other-than-temporary. For the three months ended June 30, 2018 and
2017, we recorded other comprehensive income (loss) of $(1,326,727)
and $0, respectively. For the nine months ended June 30, 2018 and
2017, we recorded other comprehensive income (loss) of $(1,923,304)
and $0, respectively.
Net income (loss) and net income (loss) attributable to our common
shareholders
Our
net income for the three and nine months ending June 30, 2018
increased 498.3% to $565,253 and 183.6% to $943,390, respectively,
as compared to a net loss of $141,909 and $1,127,608 in the three
and nine months ended June 30, 2017, respectively. At June 30, 2018
and 2017, we owned 100% of the membership interest of Beauty &
Pin-Ups and 100% of the membership interest in Level H&W. At
June 30, 2018 and 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 income increased approximately 198%
and 134% for the three and nine months ended June 30, 2018 from the
same periods in fiscal 2017.
Liquidity and capital resources
We
had cash on hand of $5,423,862 and working capital of $11,319,410
at June 30, 2018 as compared to cash on hand of $284,246 and
working capital of $2,170,154 at September 30, 2017. Our current
assets increased 238.9% at June 30, 2018 from September 30, 2017,
and is primarily attributable to an increase of cash, all accounts
receivables, marketable and other securities, prepaid expenses, and
offset by a decrease in note receivable related party,
inventory, and deferred IPO costs. Our current liabilities
decreased 21.1% at June 30, 2018 from September 30, 2017. This
decrease is primarily attributable to decreases in accrued expenses
which was offset by an increase in accounts payable and deferred
revenue. Both the changes in our current assets and current
liabilities are also reflective of the further development of our
business during fiscal 2018 and the impact of completion of an
initial public offering. In November 2017 we completed an IPO and
recorded $954,421 of deferred IPO costs which were directly
attributable to the offering and were charged against the gross
proceeds of the offering as a reduction of additional paid-in
capital. In July 2017 we sold, to a related party, an equity
position in a customer that we had received as compensation for
services and we received a portion in cash and the balance as a
short term note receivable for $275,000. As of June 30, 2018, the
note balance is $161,573.
41
During
the three and nine months ending June 30, 2018 we used cash
primarily to fund our operations in addition to increases in our
marketable and other securities. We offer net 30 day terms and our
receivables generally turn approximately every 16
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 is to use operating cash flows to
fund day to day operations and we have generated the income to meet
this goal, however as we have accepted equity as compensation in
many of our engagements, we have not met this goal as cash flow
from operations has been a net use of $4,840,368 and $1,417,352 for
the first nine months of fiscal 2018 and fiscal 2017,
respectively.
Related Parties
As described in Note 9 to our consolidated
financial statements appearing elsewhere in this report, we have
engaged in a 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, the customer was acquired by a non-related public entity
and as of April 30, 2018 is not considered a related party. 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.
42
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 retrospectively with a cumulative adjustment to
retained earnings.
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.
In January 2017, the FASB issued ASU
2017-01,
Business Combinations (Topic
805): Clarifying the Definition of a Business
. ASU 2017-01 clarifies the definition and
provides a more robust framework to use in determining when a set
of assets and activities constitutes a business. ASU 2017-01
is intended to provide guidance when evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. ASU 2017-01 will be effective for fiscal
years, and interim periods within those fiscal years, beginning
after December 15, 2017.
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.
43
Not
applicable for a smaller reporting company.
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
. There were no
changes in our internal control over financial reporting during our
most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal control over
financial reporting.
44
None.
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.
We are subject to the risk of possibly becoming an investment
company under the Investment Company Act of 1940
.
The Investment Company Act of 1940 regulates
certain companies that invest in, hold or trade securities.
Although we do not believe we are engaged in the business of
investing, reinvesting or trading in securities, and we do not
currently hold ourselves out to the public as being engaged in
those activities, in the past we have accepted securities of our
client companies as partial compensation. As a result, and
principally related to the compensation paid to us by Isodiol
International, Inc. under the terms the license agreement we
entered into with it in December 2017, at March 31, 2018 we
exceeded the exemptive asset and revenue thresholds under Section
3(a)(1)(C) of Investment Company Act of 1940. Accordingly, we may
have become an inadvertent investment company. As it has never been
our intent to be an investment company, we have taken certain
actions to bring us back under these exemptive thresholds. While as
of June 30, 2018 our assets no longer exceed the asset threshold,
as a result of our agreement with Isodiol International, Inc.
entered into in December 2017, as compensation we are entitled to
receive additional shares of Isodiol’s securities on a
quarterly basis in an amount equal to $750,000. While at June 30,
2018 we did not exceed either the asset test or the revenue test,
we have exceeded one or both of those during at least one quarter
in the preceding four fiscal quarters
.
We will
continue to limit the amount of equity we accept as compensation
for services provided so as to stay under the income threshold as
indicated in the Investment Company Act of 1940 going forward. As a
result, we may structure transactions in a less advantageous manner
than if we did not have Investment Company Act of 1940 concerns, or
we may avoid otherwise economically desirable transactions due to
those concerns. If we are unable to reduce our assets below the
exemptive level within one year, or if it were otherwise
established that we were an unregistered investment company, there
would be a risk, among other material adverse consequences, that we
could become subject to monetary penalties or injunctive relief, or
both, in an action by the SEC, that we would be unable to enforce
contracts with third parties or that third parties with whom we
have contracts could seek to obtain rescission of transactions with
us undertaken during the period it was established that we were an
unregistered investment company. In addition, we would no longer be
able to conduct our business as it is presently conducted which
would have a material adverse impact on the trading price of our
common stock.
In
May 2018 we issued 60,000 shares of our common stock valued at
$303,000 as compensation to an investment banking firm for general
financial advisory and investment banking services. The recipient
was an accredited investor and the issuance was exempt from
registration under the Securities Act of 1933 in reliance on an
exemption provided Section 4(a)(2) of that act.
In
June 2018 we issued 25,000 shares of our common stock valued at
$118,000 as compensation to a broker dealer for business advisory
services. The recipient was an accredited investor and the issuance
was exempt from registration under the Securities Act of 1933 in
reliance on an exemption provided Section 4(a)(2) of that
act.
None.
Not
applicable to our company’s operations.
45
As previously disclosed, in July 2017 we sold Stone Street
Partners, LLC, an affiliate of our Chief Executive Officer, shares
of shares of a client company’s stock which was issued to us
as partial compensation under the terms of the consulting agreement
with that company. At closing, as partial payment Stone Street
Partners, LLC tendered to us together a $275,000 principal amount
3% promissory note due July 31, 2018. On August 1, 2018, the
Company extended the due date of the remaining outstanding
principal of $155,400 to December 31, 2018 and Stone Street
Partners, LLC tendered a new note to us, a copy of which is filed
as Exhibit 10.74 to this report.
On July 10, 2018, the Company announced a licensing agreement under
its subsidiary I’M1 with Gravocore, the first intelligent,
portable, joint-friendly mounted fitness training machine, launched
in 2017 in an exclusive partnership with Amazon. Under the terms of
the five-year agreement, Gravocore will pay I’M1 annual brand
participation fees, as well as an 8% royalty on net sales of all
licensed products sold under the I’M1 brand.
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
|
||||
|
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
Herewith
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.1
|
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
|
|
3.1(a)
|
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
|
|
3.1(b)
|
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
|
|
3.1(c)
|
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
|
|
3.1(d)
|
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
|
|
3.2
|
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
|
|
10.74
|
|
|
|
|
|
|
|
|
Filed
|
|
|
31.1
|
|
|
|
|
|
|
|
|
Filed
|
|
|
31.2
|
|
|
|
|
|
|
|
|
Filed
|
|
|
32.1
|
|
|
|
|
|
|
|
|
Filed
|
|
|
101 INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
Filed
|
|
101 SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
|
|
Filed
|
|
101 CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101 DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
|
|
|
|
|
|
|
Filed
|
46
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.
|
|
|
|
|
|
|
|
|
August 14, 2018
|
By:
|
/s/ Martin A. Sumichrast
|
|
|
|
|
Martin A. Sumichrast, Chief Executive Officer, principal executive
officer
|
|
|
August 14, 2018
|
By:
|
/s/ Mark S. Elliott
|
|
|
|
|
Mark S. Elliott, Chief Operating Officer, Chief Financial Officer,
principal financial and accounting officer
|
|
47
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