Blueprint
Level Brands, Inc.
4521 Sharon Road, Suite 407
Charlotte, NC 28211
Telephone (704) 362-6345
Mail
stop 4631
'CORRESP'
Division
of Corporation Finance
United
States Securities and Exchange Commission
100 F
Street N.W.
Washington,
DC 20549
Attention:
Pamela A. Long,
Assistant Director
Edward
M. Kelly, Special Counsel
Melinda
J. Hooker, Staff Accountant
Anne M.
McConnell, Staff Accountant
Re:
Level
Brands, Inc. (the "Company")
Amendment
2 to Draft Registration Statement
Ladies
and Gentlemen:
The
Company is in receipt of the staff's letter of comment dated July
25, 2017 on the above-captioned amendment. In furtherance to our
discussions with the staff, following are the Company's responses
to such comments. In accordance with our counsel's discussions with
the staff, we intend to transition the confidentially submitted S-1
to a live filing 1-A and conduct the initial public offering as a
Tier 2 Reg A+ offering. We appreciate the staff's agreement to
review these responses, and the hereinafter set forth proposed
disclosure changes, prior to our filing of the 1-A. In accordance
with our counsel's discussions with the staff, at the time of the
filing of the 1-A we will provide courtesy copies to the staff to
reflect the revisions from the confidentially submitted S-1 to the
1-A to facilitate the staff's review.
Prospectus Summary, page 5
1.
Refer to comment 3 in our May 18, 2017 letter. The marked version
of your amended draft registration statement does not reflect
revisions made in the prospectus summary and elsewhere. For
example, refer to the three bullet points in the second paragraph
on pages 5-6 of the prospectus summary and throughout the business
section. Additionally, the marked version of your amended draft
registration reflects revisions where no revisions are made. For
example, refer to the first paragraph of the risk factor “Our
business is dependent on market acceptance of our
brands…” on page 17. Ensure in future filings that the
marked version reflects accurately where revisions are made and
does not reflect revisions where no revisions are made. If you
require technical assistance, you may contact EDGAR operations at
(202) 551-8900.
RESPONSE:
Subsequent to the
receipt of the above-referenced letter of comment, the Company's
EDGAR filer spoke with representatives at EDGAR Filer Support and
has resolved the software incompatibility which was creating these
continuing issues.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
2 of
11
Results of Operations, page 32
2.
It appears to us that all disclosures related to sales in your
filing, including MD&A and the notes to the financial
statements, should be based on “net sales.” We note
certain disclosures of segment sales, including on page 33,
indicate that they are based on “net sales” but appear
to be based on gross sales. We also note segment disclosures in the
notes to your financial statements are based on gross sales. Please
revise your filing to present “net sales” in total and
by segment. Please also address the specific nature of your sales
allowances and explain to us why you believe any presentation of
gross sales is appropriate.
RESPONSE:
As requested, all
disclosures related to sales in the 1-A, including MD&A and the
notes to the financial statements, appearing in the 1-A when filed
will be based on “net sales.” The 1-A will also present "net
sales" in total by segment and additional disclosure will be added
to address the specific nature of the Company's sales
allowances.
3.
We note your disclosure that during the three months ended March
31, 2017, I’M1 entered into its “first advisory
agreements and delivered strategic marketing and branding services
and recorded revenue during the quarter upon successful completion
of the services.” Please more fully disclose and discuss the
specific terms of the agreements, including the specific services
you provided, the identities of the customers, whether they are
related parties, and the nature of the consideration you received
in return for the services you provided. Please fully address how
you were able to provide these services without incurring any
related cost of sales. In this regard, it is not clear to us how or
why presenting segment disclosures that do not reflect the costs of
generating the related revenues are meaningful or
relevant.
RESPONSE:
The 1-A will
contain the following expanded details related to each advisory
agreement as indicated above in the Business section. The
underlined text below reflects revisions from the text which
appeared in the last S-1 amendment:
Kure
Corp.
Under
the terms of a license agreement dated March 29, 2017, we granted
Kure Corp. a non-transferrable license to use the I'M1 marks solely
for the sale, marketing and distribution of vaping juices and
vaping products through certain specified channels of distribution
in the United States. Kure Corp. is a Charlotte, North
Carolina-based privately held vaping company. Under the terms of
the 10 year license agreement, Kure Corp. is required to begin
shipping the licensed products no later than April 30, 2018. As
compensation we are entitled to a royalty of 5% of the gross sales
of all licensed products. We may internally allocate a portion of
this compensation to EE1 in connection with services related to any
appearances, filming and/or recording by Mr. Tom Meharey to promote
these licensed products. The license agreement may be terminated by
either party upon 30 days notice in the event of a breach of the
agreement by the other party.
On
March 20, 2017 we also entered into a nine month consulting
agreement with Kure Corp. under which we were engaged to provide
assistance in the promotion and advice with respect to the
marketing and branding of the licensed products. As compensation,
Kure Corp. will pay us a total of $600,000 upon the completion of
various of the contracted services under the terms of the
agreement, including $200,000 which was due by March 31, 2017
in exchange for certain social media promotional services and
marketing services which were delivered by March 31, 2017, with the
balance due upon the provisions of additional marketing and
promotional services. The additional services were provided in the
third quarter of fiscal 2017 and all payment obligations for
have been made. Specific services delivered under the
agreement include: 1) production of various images promoting Kure;
2) social media content and distribution; 3) content for press
releases as well as coordinating distribution; and 4) production of
a marketing video. These services were delivered in
coordination with EE1 as our service provider thus keeping our cost
of services nominal. Our Chief Executive Officer is a former
member of the board of directors of Kure Corp. and he continues to
control approximately 3.3% of its outstanding voting
securities.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
3 of
11
NuGene
International, Inc.
On
March 20, 2017 we entered into a nine month consulting agreement
with NuGene International, Inc., a publicly-traded company
(OTCPink:NUGN), that is principally in the business of research,
development, and sales and marketing
“cosmeceutical”
skincare and hair products. Under the terms of the consulting
agreement we were engaged to provide assistance in the promotion of
NuGene International, Inc.'s men's products to create greater
public awareness. These
services specifically included: 1) assistance for social media
content and distribution; 2) content for press releases; and 3)
content for public support statements regarding the product from
brand ambassadors. These services were delivered in
coordination with kiWW under our advisory agreement and with EE1 as
our service providers, thus keeping our cost of services
nominal. As compensation, NuGene International, Inc. issued
us 2,500,000 shares of its common stock valued at approximately
$650,000 to I'M1 upon the execution of the agreement, and will pay
I’M1 an additional $50,000 in cash upon the earlier of the
completion of a financing by NuGene, or June 30, 2017. We have not
yet received payment of the $50,000 and have assessed its
collectability and have determined it is still fully collectible.
Effective June 30, 2017 we exchanged the
2,500,000 shares of common stock for 65 shares of NuGene's Series B
Convertible Preferred Stock which has a stated value of $10,000 per
share. Thereafter, we sold the shares of preferred stock to an
affiliate for an aggregate purchase price of $475,000. The terms of
this transaction are described later in this Offering Circular
under "Certain Relationships and Related Party
Transactions." Additional terms of
this preferred stock are included in Notes 3 and 15 to the notes to
our unaudited consolidated financial statements for the period
ended June 30, 2017 appearing later in this Offering
Circular. NuGene is not a related party.
Formula
Four Beverages Inc.
In May
2017 I'M1 and EE1 entered into a four year advisory agreement with
Formula Four Beverages Inc., a Canadian-based company that supplies
oxygenated beverage products including those under the trade name
OXiGEN. I'M1 and EE1 will jointly advise Formula Four Beverages
Inc. on: 1) various
aspects of corporate branding and work with the company, including
coordinating with other services provider in areas related to
influencer marketing and advertising; 2) assist on media
opportunities; 3) produce a video telling the story and vision of
OXiGEN; and 4) provide strategies to increase its distribution
network. As compensation for the services, Formula Four
Beverages Inc. issued a warrant to purchase 800,000 shares of its
common stock at an aggregate purchase price of $400.00 to each of
I’M1 and EE1, for an aggregate of 1,600,000
shares. For accounting
purposes, we valued the warrant at $0.57 per share based on Formula
Four Beverages recent financing activities. The advisory agreement
provides that the services for which the warrant was issued as
consideration were to be fully performed within 45 days from the
date of the agreement, which services were completed in June 2017
and reflected in our June
30, 2017 financial statements. In addition, I'M1 and EE1 are
entitled to receive royalties ranging from $0.40 to $0.60 per case,
split evenly, based upon the number of cases of OXiGEN related
products, including current and future products, sold annually in
the U.S. above 750,000 cases, for the next four years based upon a
contract year running from May 9 to May 8 of each
year.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
4 of
11
The
royalty payments are due within 45 days after the close of a month.
We are also entitled to be reimbursed for our out of pocket
expenses incurred in performing the services under the advisory
agreement, of which there have been none. In the event of a change
of control of either Formula Four Beverages Inc. or its U.S.
subsidiary Formula Four Beverages (USA) Inc. as defined in the
advisory agreement, upon notice to us we have the right to
immediately terminate the advisory agreement and receive a lump sum
payment equal to the cumulative royalties paid to us over the
previous trailing 12 month period. The advisory agreement, which
may be terminated by either party upon 30 days notice in the event
of a breach, contains customary mutual confidentiality provisions.
Formula Four Beverages has indemnified I'M1 and EE1 in certain
cases and is required to maintain certain insurance coverage naming
I'M1 and EE1 as covered parties. Formula Four Beverages Inc. is not
a related party.
Our cost of goods related to our
advisory agreements are minimal as the efforts related to the
services are not extensive and costly to deliver but more expertise
focused, and we are able to utilize EE1 and our Master Advisory and
Consulting Agreement with kiWW to account for the services.
In utilizing EE1, we incur
intercompany expenses related to our cost of sales, which are
eliminated upon consolidation of our financial
statements.
4.
We note your disclosure that during the three
months ended March 31, 2017, EE1 entered into its first service
related agreements, “encompassing production assistance
related to television shows, event promotion, production and
coordination services which were delivered and revenue recorded
during the quarter upon successful completion.” Please more
fully disclose and discuss the specific terms of the agreements,
including the specific services you provided, the identities of the
customers, whether they are related parties, and the nature of the
consideration you received in return for the services you
provided.
RESPONSE:
The 1-A will
contain the following expanded details related to each service
agreement as indicated above in the Business. The underlined text
below reflects revisions from the text which appeared in the last
S-1 amendment:
Sandbox LLC
In
February 2017 EE1 arranged, coordinated, and booked for
Sandbox LLC via an oral arrangement, its first travel
related event, specifically arranging for
travel and concierge related services, and was paid $68,550. Sandbox LLC is
not a related party.
Multi-Media Productions, Inc.
In
March 2017 EE1 agreed to provide creative and content input and
feedback to Multi-Media Productions, Inc., the producer of
Worldwide Business with kathy ireland® and Modern Living with
kathy ireland®, on those series. As compensation EE1 is to
receive $50,000 per production month for an expected minimum of
four production months. Through June 2017 we have provided services
for two production months, as the series are produced at irregular
intervals, and have received an aggregate of $100,000 for our
services. Multi-Media
Productions, Inc. is not a related party.
Winter Music Festivals LLC
In
April 2017 EE1 and kathy ireland® Worldwide co-produced the
Winter Music Festivals, LLC (a subsidiary of National Event
Company) 2nd Annual MINUS ZERO Winter Sports and Music Festival at
the Stratton Mountain Resort in South Londonderry, Vermont. The
two-day winter sports and musical festival featured three stages of
music, skiing, snowboarding, Rail Jam & Jump presented by
Monster Energy, lodging onsite and free parking. Specifically, EE1 helped promote the
event through press releases, and social media as well as having a
team onsite for the event. For its services in connection
with this event, EE1 received $15,000. Winter Music Festivals LLC is not a
related party.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
5 of
11
Liquidity and Capital Resources, page 38
5.
We note that both the changes in your current assets and current
liabilities are reflective of the further development of your
business during the first six months of fiscal 2017. Given the
substantial changes in these balances, please provide a more robust
discussion regarding the reasons why changes occurred.
RESPONSE:
The following will
be added to Liquidity and Capital Resources in the 1-A when
filed.
In
January 2017, we acquired membership interest in two new segments,
which have generated significant revenue compared to prior periods,
which has increased our accounts receivables and marketable and
other securities assets (as we have received from customers their
public or private stock as compensation for services delivered). In
addition, during the first quarter of 2017 our liabilities
increased approximately $1.6 million based on promissory
convertible notes sold in October 2016; however, these notes were
converted by the holders into shares of our common stock during the
third quarter of 2017. As a result of these conversions, our
liabilities were reduced at June 30, 2017 and we recorded equity
and expenses as required and reflected in our financial notes as of
June 30, 2017.
6.
We note the significant increase in accounts receivable relative to
net sales during the interim period. Please disclose and discuss
how you assess the collectability of accounts receivable at each
balance sheet date.
RESPONSE:
The following
accounts receivable policy will be included in our critical
accounting policies under our results of operations
Accounts
receivable
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 June 30, 2017, all receivables were considered by management
to be fully collectible.
Critical Accounting Policies, page 40
7.
We note your disclosure on page 33 that sales allowances were 57.2%
of gross sales for your professional products division compared to
11.8% for the three months ended March 31, 2017 and 2016 and 55.7%
and 8.7% for the six months ended March 31, 2017 and 2016. We note
that the increases in the fiscal 2017 periods are related to
discounting hair irons to your distribution channel in an effort to
offer incentives to customers and move historical products as you
prepared to launch new products in 2017 as well as a rollout of a
discounted sample sized product as you entered into a new
distribution channel. Given that the valuation of your inventory
may have such a substantial impact on your results, it appears to
us you should update your critical accounting estimate disclosures
to discuss how you value your inventory and when and how you assess
inventory for impairment.
RESPONSE:
The following
accounts receivable policy will be added to our critical accounting
policies under our results of operations:
Inventory
Inventory is stated
at the lower of cost or net realizable value with cost being
determined on a weighted average basis. The cost of inventory
includes product cost, and production fill and labor (which we
outsource to third party manufacturers). Write-offs of potentially
slow moving or damaged inventory are recorded based on
management’s analysis of inventory levels, forecasted future
sales volume and pricing and through specific identification of
obsolete or damaged products. Prepaid Inventory represents deposits
made with third party manufacturers in order to begin production of
an order for product. We assess inventory quarterly for slow moving
products and potential impairments and do a physical inventory
count annually.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
6 of
11
8.
We have read your response to prior comment 2. Given that the
valuation of your common stock has a substantial impact on your
results, it appears to us you should update your critical
accounting estimate disclosures to discuss how you value your
common stock and the factors that impacted your valuations during
the periods presented.
RESPONSE:
The following
policy will be added to our critical accounting policies appearing
in MD&A in the 1-A when filed:
Common stock
Level
Brands is a private company and as such there is no market for the
shares of its common stock. We value a share of common stock based
on recent financing transactions that include the issuance of
common stock at a specified price. In the event, however, there is
not a recent and significant equity financing transaction or the
nature of the business has significantly changed subsequent to an
equity financing, we will use valuation techniques, which could
include discounted cash flow analysis, comparable company review,
and consultation with third party valuation experts to assist in
estimating the value of our common stock.
Intangible Assets, page 40
9.
We have read your response to prior comment 4 and your updated
disclosures. Please identify the circumstances that would require
you to assess intangible assets for impairment other than at an
annual assessment. Please also disclose how you determine fair
value, including the key assumptions used in your most recent
impairment analysis.
RESPONSE:
The following
policy and disclosure will be added to our critical accounting
policies appearing in MD&A in the 1-A when filed:
Intangible assets
Our
intangible assets consist of trademarks and other intellectual
property. We employ the non-amortization approach to account for
purchased intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC 350-30-35-18.
Our annual impairment analysis includes a qualitative assessment to
determine if it is necessary to perform the quantitative impairment
test. In performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. Events and circumstances reviewed include:
status of business with our distributors; review and progress of
our sales strategy; impacts of any financings on the business; any
legal, regulatory, political; or general business factors that
could affect significant inputs used to determine the fair value of
the assets. If a quantitative analysis is necessary, we would
analyze various aspects including number of contracts acquired and
retained as well as revenues from those contracts, associated with
the intangible assets. In addition, intangible assets will be
tested on an interim basis if an event or circumstance indicates
that it is more likely than not that an impairment loss has been
incurred. Events that are assessed include contracts acquired and
lost that are associated with the intangible assets, as well as the
revenues associated with those contracts. Events or circumstances
that are assessed include contracts acquired and lost that are
associated with the intangible assets, as well as the impact on
revenues associated with those contracts, and relationship changes
with our distributors.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
7 of
11
In
conjunction with any acquisitions, we refer to ASC-805 as amended
by ASU 2017-01 in determining if the we are acquiring any inputs,
processes or outputs and the impact that such factors would have on
the classification of the acquisition as a business combination or
asset purchase. Additionally, we refer to the aforementioned
guidance in reviewing all potential assets and liabilities for
valuation including the determination of intangible asset values.
There were no impairments during the three and nine months ended
June 30, 2017 and 2016.
Advisory Agreement with Formula Four Beverages, Inc., page
51
10.
Please disclose when and how you accounted for the consideration
paid by Formula Four. Please also clarify why a four year advisory
agreement would provide that the “services for which the
warrant was issued as consideration were to be fully performed
within 45 days from the date of the agreement.”
RESPONSE:
Under Business in
the S-1 (which such disclosure will be included in the 1-A), we
discuss the specifics of the agreement and have included that the
consideration was recognized at June 30, 2017. For further
clarification, supplementally please be advised that the contract
with Formula Four was signed on May 9, 2017 and had specific items
to be delivered by June 23, 2017, which included social and
standard media promotion, press release promotion, creation of
promotional videos, sales distribution strategy, advise on
influencer opportunities as well as leverage advertising
relationships. These services were delivered on time and the client
signed off on the deliveries, at which time we recorded revenue as
reflected in our June 30, 2017 financial statements. These items
were defined in the contract as the only deliverables tied to the
consideration paid. Additional consideration to be paid is
royalties in the future based on the increased sales by Formula
Four, not for any services delivered by the Company, this is for a
four year period. No other services are to be delivered unless an
addendum is added for additional services.
Note 2 – Acquisitions page F-9; Note 4 – Intangible
Assets, page F-10
11.
We have read your response to prior comment 11. Based on the
disclosures in your filing, it remains unclear to us:
●
how and why your acquisitions of assets related to two recently
formed entities with little or no operations resulted in you
recording significant intangible assets with indefinite lives and
non-controlling interests. More fully explain to us what you
acquired and how determined that what you acquired have indefinite
lives; and
●
how you determined SAB 5G is not applicable.
Please address the terms of each non-controlling interest and
explain why you made a distribution to one of the non-controlling
interests during the interim period.
RESPONSE:
The following are
the responses to the staff's comments:
Transaction
summary:
The
Company conducted a valuation on its shares of stock to determine
the value of the consideration for the transaction. That process
produced a valuation of a share of our stock at $0.85. The
negotiation for the transaction also produced a requirement that a
Wholesale License Agreement and Master Advisory and Consulting
Agreement with kathy ireland World Wide would be put in place with
I’M1 and EE1 and obtained simultaneously with the
transaction. We performed a review of I’M1 and EE1, and
assessed the inputs, processes and outputs for the entities and it
was determined through the assessment that this would be accounted
for as a purchase of assets and not a business combination, and a
membership exchange was transacted.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
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As a
part of the membership exchange:
●
The consideration
of shares for the exchange was defined in the
agreement;
●
The valuation of
the stock provided for the consideration of stock contributed of
$736,000, which represented 51% of I’M1 and EE1;
●
As Level Brands
acquired 51% of each I’M1 and EE1, we used the valuation of
the stock contributed to determine the full asset value -
$736,000/51%, and recorded a full value of intangibles of
$1,443,334;
●
The remainder of
the value of the intangibles was determined as allocation of IM'1
Holdings and EE1 Holdings consideration - of $664k ($1.4M less
$736k); and
●
there were no
assets or liabilities held in I’M1 and EE1 prior to the
exchange.
The
Wholesale License Agreement and Master Advisory and Consulting
Agreements are the baseline of the businesses and we believe they
will be of value to the organization for an unlimited time and will
be instrumental in generating revenue and we see no limit to the
cash flows provided by them, therefore we have classified them as
indefinite-lived intangible assets.
The
Company views the Wholesale License Agreement as a necessity to the
I’M1 business. This agreement is the baseline for the
I’M1 brand and gives us the exclusive rights to use the
trademark as I’M1 is owned by kathy ireland World Wide. The
agreement gives us the capability to immediately move forward in a
much more effective manner, utilizing a brand that has established
a baseline of visibility, utilizing a proven track record and
proprietary process behind it, all of this is attributed to the
Wholesale License Agreement. If we did not have the Wholesale
License Agreement, the I’M1 business would be completely
impacted and we would have to reinvent, reposition and rebuild the
business completely. The Company believes based on the Wholesale
License Agreement being with a related party and our mutual
objectives as shareholders in both I’M1 and Level Brands, the
extension of the Wholesale License Agreement is a simple
formality.
The
Company views the Master Advisory and Consulting Agreement as a
necessity to the EE1 business. In acquiring this asset combined
with the agreement with BMG Rights Management that was in place,
the company has saved significant time, money and effort, which
would have been required to put in place this type capability
provided via the Master Advisory and Consulting Agreement. The
agreement with BMG Rights Management provides an exclusive
agreement and established a key relationship with the largest media
group in the world, which is instrumental for many of the concepts
that EE1 will pursue initially. The combination of these two
agreements allows EE1 to immediately move forward utilizing a
partnership that is established and has a proven track record and
process behind it, to establish recording opportunities. In
addition, we believe the Master Advisory and Consulting Agreement
allows us to expedite our go to market process by utilizing the
skills, services, capabilities, and relationships of kiWW. If we
did not have the Master Advisory and Consulting Agreement, EE1
would have to build all aspects of its capability to deliver its
services as well acquire the expertise to operate this business, as
such it would have to start from scratch and rebuild the business,
if that is even possible. The Company and kiWW are in the process
of formalizing the oral agreement to extend the term of the Master
Advisory and Consulting Agreement from one year to 10 years and we
expect it will be finalized prior to the filing of the 1-A. The
Company believes based on the Master Advisory and Consulting
Agreement being with a related party and our mutual objectives as
shareholders in both I’M1 and EE1 the extension of the
agreement is a simple formality.
Prior
to the membership interest exchange in I’M1 and EE1, the
membership interest for each entity was as follows:
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
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11
|
I’M1
Holdings LLC
|
|
EE1
Holdings LLC
|
|
Member
|
Ownership
|
|
Member
|
Ownership
|
|
Entity
A
|
42%
|
|
Entity
A
|
43%
|
|
Entity
B
|
42%
|
|
Entity
B
|
43%
|
|
Entity
C
|
5%
|
|
Entity
C
|
5%
|
|
Entity
D
|
4%
|
|
Entity
D
|
3%
|
|
Entity
E
|
2%
|
|
Entity
E
|
2%
|
|
Entity
F
|
5%
|
|
Entity
F
|
2%
|
|
Entity
G
|
0%
|
|
Entity
G
|
2%
|
The
ownership level the members above had in Level Brands prior to the
membership exchange is as follows:
Entity
A - 4.5%
Entity
B - 4.5%
There
was no historical cost basis of I’M1 and EE1, the Company
determined that would not be an appropriate value for the shares
exchanged, especially given that shares were defined in the
agreement and would therefore be transferred at $0 value. In
addition, SAB 5G notes that deviations from the use of historical
cost basis are rare, but apply in situations where fair value of
stock issued/assets acquired are objectively measured and
transferor’s ownership following the transaction isn’t
significant. As previously indicated we had a
valuation which was utilized for an objective measurement.
While Entity A and Entity B are significant owners of both IM'1
Holdings and EE1 Holdings, together Entity A and Entity B
collectively only owned 9% of Level Brands prior to the exchange,
which is not considered to be significant to Level Brand’s
ownership. Therefore we have concluded that SAB 5G is not
applicable.
Small
distributions were made for quarterly tax planning purposes for the
non-controlling interests. Distributions are at the discretion of
the Manager as indicated in the Operating Agreements and can only
be made if the Company would not be impacted financially. On July
1, 2017 all parties discussed and agreed going forward, that the
Manager would assess distributions on an annual basis
only.
Note 14 – Subsequent Events, page F-18
12.
We note your disclosure that effective April 28, 2017 you acquired
an additional 12% interest in BPU for 155,294 shares of common
stock. Please disclose how you accounted for the additional
interest you acquired and disclose the fair value of the common
stock you issued.
RESPONSE:
The additional
requested information will be disclosed in the June 30, 2017
financial statements appearing in the 1-A when filed.
In
March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a
North Carolina limited liability company, and contributed $250,000
in exchange for our member interest. As of September 30, 2016 we
owned a 78% member interest in BPU. In addition, pursuant to the
Amended and Restated Operating Agreement of Beauty & Pin-Ups,
we were granted the right to redeem the 10% membership interest of
Sigan Industries Group for $110,000 at any time before April 13,
2017. In October 2016, as amended in March 2017, we acquired Sigan
Industries’ membership interest in exchange for 129,412
shares of our common stock valued at $110,000. As of March 31, 2017
we owned an 88% member interest in BPU. In April 2017 we acquired
the remaining 12% membership interest in exchange for 155,294
shares of our common stock valued at $132,000. As of June 30, 2017
we owned a 100% member interest in BPU. BPU manufactures, markets
and sells an array of beauty and personal care products, including
hair care and hair treatments, as well as beauty tools. The
Company's products are sold to the professional segment,
principally through distributors to professional salons in the
North America.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
10 of
11
13.
In regard to the license agreement you entered into with a customer
in March 2017 that was cancelled by both parties on June 8, 2017,
please disclose if you recognized any revenue and/or have any
outstanding receivables related to this agreement.
RESPONSE:
Supplementally
please be advised that as of the date of the termination ab initio
of the license agreement the licensed marks have not been used, no
licensed products have been created, marketed, sold or distributed
and no revenue, royalties or other compensation have been received
or are due us, and there are no outstanding accounts
receivables.
14.
We note your disclosure that effective June
30, 2017 you converted the $2,125,000 principal amount of
convertible promissory notes and all accrued interest of $127,500
into common stock at a price of $3.95 per share. Based on the
initial conversion terms of the notes, please explain your
accounting for the revised conversion terms, including if this was
considered to be an induced conversion.
RESPONSE:
The additional
requested information set forth below will be disclosed in the June
30, 2017 financial statements appearing in the 1-A when
filed.
On
October 4, 2016 and October 24, 2016, the Company issued in
aggregate $2,125,000 of 8% Convertible Promissory Notes to
accredited investors. The securities consist of 8% Convertible
Notes with warrants to purchase 141,676 shares of the
Company’s stock (the “Notes”). The Notes may
convert upon an initial public offering (“IPO”)
resulting in gross proceeds to the Company of at least $10,000,000,
prior to July 1, 2017, at the option of the investor. The
conversion price for the notes is $5.00. All notes converted will
be subject to a 12-month lockup post IPO. The warrants have an
exercise price of $7.80. The warrants expire in September 2021 and
are exercisable beginning the earlier of: (i) immediately after the
IPO closing; or (ii) July 1, 2017.
Effective June 30,
2017, the Company converted the $2,125,000 principal amount of
convertible promissory notes and all accrued interest of $127,500
into common shares of the Company at a price of $3.95 per share. In
this transaction, the Company issued 570,254 shares of common
stock.
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. With the June 30, 2017
conversion of the notes, we accelerated the debt discount and have
recorded interest expense related to these amounts in aggregate of
$107,457 and $205,959 for the three and nine months ended June 30,
2017, respectively. In addition, we accounted for a conversion
inducement in accordance with ASC 470-20 on the conversion price
reduction from $5.00 to $3.95 per share and recorded a non-cash
debt conversion expense of $446,250 in the consolidated statement
of operations.
Division
of Corporation Finance
United
States Securities and Exchange Commission
August
10, 2017
Page
11 of
11
15.
We note your disclosure that a customer who provided shares of
their stock in consideration for services had not timely filed
their Form 10-Q and that the value of their stock subsequently
dropped significantly. We also note your disclosure that you expect
to record an unrealized loss in a future period and may record a
loss in a future period. Please disclose your accounting policy for
shares you receive in consideration for services, the fair value of
any shares you received, and your subsequent determination of fair
value. Please refer to ASC 820-10-50. In regard to this specific
transaction, please disclose:
●
the terms of the shares you received, including if they are freely
tradable;
●
the fair value of the shares you received and how you determined
that value; and
●
the subsequent decline in the fair value of the shares you received
and how you determined that value.
RESPONSE:
The following
additional requested information will be disclosed in the June 30,
2017 financial statements appearing in the 1-A when
filed.
As of
April 2017, the Company received 2,500,000 shares of common stock
which was valued at $650,000 based on the trading price on the OTC
Markets, Inc. that day, which was $0.26 per share. The shares are
restricted as indicated under Securities Act of 1933 and may not be
resold without registration under the Securities Act of 1933 or an
exemption therefrom. The Company determined that this common stock
was classified as Level 1 for fair value measurement purposes as
the stock was actively traded on an exchange. As of June 30, 2017
the trading price on the OTC Markets, Inc. was $0.03.
Supplementally
please be advised that effective June 30, 2017 the Company
exchanged the 2,500,000 shares of common stock with the issuer for
65 shares of preferred stock. This exchange was completed to
guarantee the value to be received for the services provided was
still $650,000. The 65 shares of preferred stock issued are 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 is still completing its
accounting analysis of the transaction, but expects to classify the
preferred stock as Level 3 for fair value measurement purposes as
there are not observable inputs. In valuing the preferred stock the
Company expects to use factors including the terms of the contract
which commit the issuer to making the Company whole up to a certain
amount, conversations with the issuers management regarding the
Company’s recent results and future plans. The preferred
shares also contain a put option for the holder for the stated
value per share. On July 31, 2017 the Company sold the preferred
shares to a related party for $200,000 in cash and a short term
note for $275,000. In addition, based upon its current analysis the
Company expects to treat this sale as a subsequent event type 1 and
the Company expects to record a loss as other than temporary
impairment on securities as of June 30, 2017 of $175,000. The June
30,2017 consolidated financial statements which will be included in
the 1-A when filed will include the additional disclosure requested
by this comment as well as the final accounting treatment for the
exchange of the common shares for preferred stock and the
subsequent sale of that preferred stock to a related
party.
We
trust the foregoing sufficiently responds to the staff's
comments.
Sincerely,
/s/
Mark S.
Elliott
Mark S.
Elliott
Chief
Financial Officer
cc:
Brian A. Pearlman,
Esq.
Leslie
Marlow, Esq.