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.)
|
Title
of each class
|
Name of
each exchange on which registered
|
Common stock, par value $0.001 per share
|
NYSE American
|
Large
accelerated filer
|
☐
|
Accelerated
filer
|
☐
|
Non-accelerated
filer
|
☐
|
Smaller
reporting company
|
☑
|
Emerging
growth company
|
☑
|
|
|
|
|
Page No.
|
|
Part I
|
|
|
|
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Item 1.
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Business.
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4
|
Item 1A.
|
Risk Factors.
|
13
|
Item 1B.
|
Unresolved Staff Comments.
|
24
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Item 2.
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Properties.
|
24
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Item 3.
|
Legal Proceedings.
|
24
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Item 4.
|
Mine Safety Disclosures.
|
24
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|
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|
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Part II
|
|
|
|
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Item 5.
|
Market for Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities.
|
25
|
Item 6.
|
Selected Financial Data.
|
25
|
Item 7.
|
Management's Discussion and Analysis of Financial Condition and
Results of Operations.
|
26
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Item 7A.
|
Quantitative and Qualitative Disclosures About Market
Risk.
|
32
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Item 8.
|
Financial Statements and Supplementary Data.
|
32
|
Item 9.
|
Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
|
33
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Item 9A.
|
Controls and Procedures.
|
33
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Item 9B.
|
Other Information.
|
34
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|
|
|
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Part III
|
|
|
|
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Item 10.
|
Directors, Executive Officers and Corporate
Governance.
|
35
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Item 11.
|
Executive Compensation.
|
42
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Item 12.
|
Security Ownership of Certain Beneficial Owners and Management and
Related Shareholder Matters.
|
45
|
Item 13.
|
Certain Relationships and Related Transactions, and Director
Independence.
|
47
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Item 14.
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Principal Accounting Fees and Services.
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48
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|
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Part IV
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|
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Item 15.
|
Exhibits, Financial Statement Schedules.
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49
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SIGNATURES
|
|
50
|
|
●
|
our
material dependence on our relationships with kathy ireland® Worldwide and
certain of its affiliates;
|
|
●
|
our
limited operating history;
|
|
●
|
the
lack of assurance of the closing of the pending transaction with
Cure Based Development and the need to meeting the initial listing
standards of the NYSE American should the transaction ultimately
close;
|
|
●
|
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 securities we accept as partial compensation
for services and the possible impact of the 40 Act;
|
|
●
|
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 issuance of additional shares of
common stock by us and/or the exercise of outstanding options and
warrants;
|
|
●
|
risks
associated with our status as an emerging growth
company;
|
|
●
|
risks
associated with control by our executive officers, directors and
affiliates;
|
|
●
|
risks
associated with future sales of our common stock by existing
shareholders;
|
|
●
|
our
failure to maintain an effective system of internal control over
financial reporting;
|
|
●
|
risks
associated with unfavorable research reports; and
|
|
●
|
risks
associated with our articles of incorporation, bylaws and North
Carolina law.
|
![]() |
|
Level H&W was established in September
2017 and has an exclusive license to the kathy
ireland® Health &
Wellness™ brand. Its goal is to create a brand which will
include a wide variety of licensed products and services, targeted
to both Baby Boomers as well as millennials. This unit began
operating in fiscal 2018.
|
|
|
|
![]() |
|
Founded
in early 2017 and first conceptualized
by kathy
ireland® Worldwide,
I'M1 is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
|
|
|
|
![]() |
|
Also founded in
early 2017, EE1 was established to serve as a producer and marketer
of experiential entertainment including recordings, film, TV, web
and live events, and entertainment experiences. EE1 also provides
brand management services including creative development and
marketing, brand strategy, and distribution support.
|
|
|
|
![]() |
|
Beauty &
Pin-Ups, our first business unit is a hair care line with a social
conscience and launched its products in 2015. We offer quality hair
care products, including shampoos, conditioners, styling aides and
a patented styling tool, through retailers and online outlets and
are expanding into licensing opportunities.
|
● |
Flaunt-
Silkening
Shampoo and
Conditioner
|
● |
Linger - Style and Sculpting Spray Gel
|
● |
Luxe - Leave-in Spray On Revitalizing Conditioner
|
● |
Fierce - Firm Hold Finishing Spray
|
● |
Lavish - All in 1 Cleansing and Conditioning
|
● |
Fearless Hair Rescue Treatment
|
● |
Sway - Blow Out Styling Primer Enhanced with Marine
Botanicals
|
● |
Valor - Superfine Hair Spray
|
● |
Fever - Thermal Protectant
|
● |
Rewind - Shampoo and Conditioner
|
● |
Stay Dirty - Dry Shampoo
|
|
|
|
Fiscal 2018
|
Fiscal 2017
|
Change
|
Net
sales
|
$6,428,096
|
$2,743,715
|
$3,684,381
|
Net
sales related party
|
$1,992,046
|
1,731,238
|
$260,808
|
Total
net sales
|
$8,420,142
|
$4,474,953
|
$3,945,189
|
Costs
of sales
|
$2,673,272
|
$1,355,381
|
$1,317,891
|
Gross
profit as a percentage of net sales
|
68.2%
|
69.7%
|
(1.5)%
|
Operating
expenses
|
$5,629,771
|
$3,358,863
|
$2,270,908
|
Other
income (expenses)
|
$(70,265)
|
$(1,121,877)
|
$1,051,612
|
Net
income (loss) before taxes
|
$46,834
|
$(1,361,168)
|
$1,408,002
|
Net
loss attributable to Level Brands, Inc. common
shareholders
|
$(412,075)
|
$(1,738,734)
|
$1,326,659
|
|
Fiscal
2018
|
% of
total
|
Fiscal
2017
|
% of
total
|
|
|
|
|
|
Licensing
division
|
$5,213,360
|
61.9%
|
$1,794,582
|
40.1%
|
Entertainment
division
|
$2,778,051
|
33.0%
|
$1,710,167
|
38.2%
|
Products
division
|
$428,731
|
5.1%
|
$970,204
|
21.7%
|
Total net
sales
|
$8,420,142
|
|
$4,474,953
|
|
2018
|
2017
|
||
|
|
||
Amount
|
% total net
sales
|
Amount
|
% total net
sales
|
|
|
|
|
$5,104,500
|
60.6%
|
$1,932,552
|
43.2%
|
|
2018
|
2017
|
|
|
|
Licensing
division
|
12.1%
|
2.7%
|
Entertainment
division
|
53.2%
|
25.3%
|
Products
division
|
131.6%
|
90.2%
|
|
2018
|
2017
|
change
|
|
|
|
|
Licensing
division
|
$1,487,000
|
$935,000
|
$552,000
|
Entertainment
division
|
$1,066,000
|
$580,000
|
$486,000
|
Products
division
|
$947,000
|
$1,797,000
|
$(850,000)
|
2018
|
2017
|
change
|
$3,646,000
|
$1,075,000
|
$2,571,000
|
|
2018
|
2017
|
change
|
|
|
|
|
Licensing
division
|
$857,000
|
$90,000
|
$767,000
|
Entertainment
division
|
$453,000
|
$90,000
|
$363,000
|
Products
division
|
$175,000
|
$90,000
|
$85,000
|
Name
|
|
Age
|
|
Positions
|
|
|
|
|
|
Martin A. Sumichrast
|
|
52
|
|
Chairman of the Board of Directors, Chief Executive Officer and
President
|
Mark S. Elliott
|
|
57
|
|
Chief Financial Officer and Chief Operating Officer
|
Erik Sterling
|
|
64
|
|
Director
|
Anthony K. Shriver
|
|
53
|
|
Director
|
Seymour G. Siegel
|
|
76
|
|
Director
|
Bakari Sellers
|
|
34
|
|
Director
|
Gregory C. Morris
|
|
57
|
|
Director
|
Director
|
|
Audit Committee
Member
|
|
Compensation
Committee Member
|
|
Corporate
Governance and Nominating Committee Member
|
Anthony
K. Shriver
|
|
|
|
✓
|
|
|
Erik
Sterling
|
|
|
|
|
|
|
Seymour
G. Siegel
|
|
✓*
|
|
✓
|
|
|
Bakari
Sellers
|
|
✓
|
|
|
|
✓*
|
Gregory
C. Morris
|
|
✓
|
|
✓*
|
|
✓
|
Annual
retainer (cash)
|
$23,000
|
|
|
Annual
NSO option grant under our 2015 Equity Compensation Plan, 10 year
term, vesting on date of grant; exercise price equal to fair market
value on date of grant, cashless exercise
|
Options
to purchase 7,000 shares of common stock
|
Annual
Board committee retainers (cash):
|
|
||
|
Audit
Committee Chair:
|
$15,000
|
|
|
Audit
Committee member:
|
$7,500
|
|
|
Compensation
Committee Chair:
|
$6,000
|
|
|
Compensation
Committee member:
|
$3,000
|
|
|
Corporate
Governance and Nominating Committee Chair:
|
$4,000
|
|
|
Corporate
Governance and Nominating Committee member:
|
$2,000
|
Name
|
Fees
earned
or
paid
in
cash
($)
|
Stock
awards
($)
|
Option
awards
($)(1)
|
Non-equity
incentive
plan
compensation
($)
|
Nonqualified
deferred
compensation
earnings
($)
|
All
other
compensation
($)
|
Total
($)
|
Erik
Sterling
|
26,500
|
|
16,030
|
|
|
|
42,530
|
Anthony K.
Shriver
|
27,500
|
|
16,030
|
|
|
|
43,530
|
Seymour G.
Siegel
|
42,500
|
|
16,030
|
|
|
|
58,530
|
Bakari
Sellers
|
36,000
|
|
16,030
|
|
|
|
52,030
|
Gregory C.
Morris
|
40,000
|
|
16,030
|
|
|
|
56,030
|
(1)
|
Represents
the grant date value of the options granted during the year,
determined in accordance with FASB ASC Topic 718. The assumptions
made in the valuations of the option awards are included in Note 10
of the notes to our consolidated financial statements appearing
elsewhere in this report.
|
Name and
principal position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)(1)
|
Option
Awards
($) (1)
|
No
equity
incentive
plan
compensation
($)
|
Non-qualified
deferred
compensation
earnings
($)
|
All
other
compensation
($)(2)
|
Total
($)
|
|
|
|
|
|
|
|
|
|
|
Martin A.
Sumichrast
|
2018
|
232,500
|
240,000
|
0
|
0
|
0
|
0
|
0
|
472,500
|
Chief Executive
Officer
|
2017(2)
|
90,000
|
0
|
127,500
|
0
|
0
|
0
|
0
|
217,500
|
|
|
|
|
|
|
|
|
|
|
Mark S.
Elliott
|
2018
|
165,000
|
100,000
|
0
|
519,000
|
0
|
0
|
0
|
784,000
|
Chief Financial
Officer and Chief Operating Officer
|
2017(2)
|
90,000
|
0
|
17,000
|
35,000
|
0
|
0
|
18,000
|
160,000
|
(1)
|
Represents
the grant date value of the options and awards granted during the
years presented, determined in accordance with FASB ASC Topic 718.
The assumptions made in the valuations of the awards are included
in Notes 10 and 11 of the notes to our consolidated financial
statements appearing elsewhere in this report.
|
(2)
|
Stock
and option award information updated to reflect corrected
valuations.
|
|
OPTION
AWARDS
|
STOCK
AWARDS
|
|||||||
Name
|
Number of
securities underlying unexercised options
(#)
exercisable
|
Number of
securities underlying unexercised options
(#)
unexercisable
|
Equity incentive
plan awards: Number of securities underlying unexercised unearned
options
(#)
|
Option exercise
price
($)
|
Option
expiration date
|
Number of shares
or units of stock that have not vested (#)
|
Market value of
shares or units of stock that have not vested ($)
|
Equity incentive
plan awards: Number of unearned shares, units or other rights that
have not vested (#)
|
Equity incentive
plan awards: Market or payout value of unearned shares, units or
other rights that have not vested (#)
|
Martin A.
Sumichrast
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark S.
Elliott
|
100,000
|
|
|
7.50
|
1/1/2023
|
|
|
|
|
|
100,000
|
|
|
4.00
|
5/1/2024
|
|
|
|
|
|
75,000
|
|
|
4.78
|
5/29/2028
|
|
|
|
|
|
|
75,000
|
|
4.78
|
5/29/2028
|
|
|
|
|
Name of
Beneficial Owner
|
No. of Shares
Beneficially Owned
|
% of
Class
|
|
|
|
Martin A.
Sumichrast (1)(5)
|
746,434
|
7.4%
|
Mark S. Elliott
(2)(5)
|
381,680
|
3.7%
|
Erik Sterling
(3)(5)
|
1,079,667
|
10.7%
|
Anthony K. Shriver
(4)(5)
|
134,500
|
1.3%
|
Seymour G. Siegel
(5)
|
9,531
|
*
|
Bakari Sellers
(5)
|
9,531
|
*
|
Gregory C. Morris
(5)
|
9,531
|
*
|
All officers and
directors as a group (seven persons) (1)(2)(3)(4)(5)
|
2,370,874
|
22.7%
|
Jason Winters
(5)(6)
|
1,032,667
|
10.2%
|
The Runnels Family
Trust (7)
|
600,000
|
5.9%
|
Plan
category
|
Number of
securities to be issued upon exercise of outstanding options,
warrants and rights
|
Weighted average
exercise price of outstanding options, warrants and rights
($)
|
Number of
securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in
column
|
|
|
|
|
Plans approved by
our shareholders:
|
|
|
|
2015 Equity
Compensation Plan
|
469,650
|
5.13
|
845,455
|
Plans not approved
by shareholders
|
-
|
-
|
-
|
|
2018
|
2017
|
Audit
Fees
|
$136,750
|
$151,300
|
Audit-Related
Fees
|
28,800
|
-
|
Tax
Fees
|
24,525
|
9,675
|
All Other
Fees
|
54,850
|
97,370
|
Total
|
$244,925
|
$258,345
|
|
|
||
Date:
December 12, 2018
|
Level Brands, Inc.
|
||
|
|
|
|
|
By:
|
/s/
Martin Sumichrast
|
|
|
|
Martin A. Sumichrast
|
|
|
|
Chief Executive Officer (Principal Executive Officer)
|
|
|
|
||
Date:
December 12, 2018
|
Level Brands, Inc.
|
||
|
|
|
|
|
By:
|
/s/
Mark Elliott
|
|
|
|
Mark S. Elliott
|
|
|
|
Chief Financial Officer, (Principal Accounting and Financial
Officer)
|
|
Name
|
|
Positions
|
|
Date
|
|
|
|
|
|
/s/
Martin A. Sumichrast
|
|
Chairman of the Board of Directors, Director
|
|
December 12, 2018
|
Martin A.
Sumichrast
|
|
|
|
|
|
|
|
|
|
|
|
Director
|
|
December 12, 2018
|
Erik
Sterling
|
|
|
|
|
|
|
|
|
|
/s/
Anthony K. Shriver
|
|
Director
|
|
December 12, 2018
|
Anthony K.
Shriver
|
|
|
|
|
|
|
|
|
|
/s/ Seymour G. Siegel
|
|
Director
|
|
December 12, 2018
|
Seymour
G. Siegel
|
|
|
|
|
|
|
|
|
|
/s/ Bakari Sellers
|
|
Director
|
|
December 12, 2018
|
Bakari
Sellers
|
|
|
|
|
|
|
|
|
|
/s/ Gregory C. Morris
|
|
Director
|
|
December 12, 2018
|
Gregory
C. Morris
|
|
|
|
|
|
|
|
|
Incorporated by Reference
|
|
Filed or
Furnished
Herewith
|
|||||
No.
|
|
Exhibit Description
|
|
Form
|
|
Date Filed
|
|
Number
|
|
||
|
Underwriting
Agreement
|
|
S-1
|
|
9/26/18
|
|
1.1
|
|
|
||
|
Merger
Agreement dated December 3, 2018 by and among Level Brands, Inc.,
AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
|
|
8-K
|
|
12/4/18
|
|
2.1
|
|
|
||
|
Articles
of Incorporation
|
|
1-A
|
|
9/18/17
|
|
2.1
|
|
|
||
|
Articles
of Amendment to the Articles of Incorporation filed April 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.2
|
|
|
||
|
Articles
of Amendment to the Articles of Incorporation filed June 22,
2015
|
|
1-A
|
|
9/18/17
|
|
2.3
|
|
|
||
|
Articles
of Amendment to the Articles of Incorporation filed November 17,
2016
|
|
1-A
|
|
9/18/17
|
|
2.4
|
|
|
||
|
Articles
of Amendment to the Articles of Incorporation filed December 5,
2016
|
|
1-A
|
|
9/18/17
|
|
2.5
|
|
|
||
|
Bylaws,
as amended
|
|
1-A
|
|
9/18/17
|
|
2.6
|
|
|
||
|
Form of placement agent warrant issued in June 2015 private
placement
|
|
1-A
|
|
9/18/17
|
|
3.3
|
|
|
||
|
Form of placement agent warrant issued in December 2015 private
placement
|
|
1-A
|
|
9/18/17
|
|
3.4
|
|
|
||
|
Form of warrant issued in 8% convertible promissory note
offering
|
|
1-A
|
|
9/18/17
|
|
3.5
|
|
|
||
|
Form of selling agents’ warrant issued in November 2017
initial public offering
|
|
1-A/A
|
|
10/12/17
|
|
3.6
|
|
|
||
|
Form of common stock certificate of the registrant
|
|
1-A
|
|
9/18/17
|
|
3.7
|
|
|
||
|
2015
Equity Compensation Plan
|
|
1-A
|
|
9/18/17
|
|
3.8
|
|
|
||
|
Form of
stock option award under 2015 Equity Compensation Plan+
|
|
1-A
|
|
9/18/17
|
|
3.9
|
|
|
||
|
Form of
warrant issued to Andre Carthen
|
|
1-A
|
|
9/18/17
|
|
3.10
|
|
|
||
|
Form of
warrant issued to Nicholas Walker
|
|
1-A
|
|
9/18/17
|
|
3.11
|
|
|
||
|
Form of
representative’s warrant
|
|
S-1
|
|
9/26/18
|
|
4.10
|
|
|
||
|
Contribution Agreement by and between Beauty & Pin-Ups, Inc.
and Beauty and Pin Ups LLC dated April 13, 2015
|
|
1-A
|
|
9/18/17
|
|
7.1
|
|
|
||
|
Operating Agreement of Beauty and Pin Ups LLC, as
amended
|
|
1-A
|
|
9/18/17
|
|
6.1
|
|
|
||
|
Consulting Agreement dated April 13, 2015 by and between Beauty and
Pin Ups LLC and Priel Maman
|
|
1-A
|
|
9/18/17
|
|
6.2
|
|
|
||
|
Management Services Agreement dated April 27, 2015 by and
between kathy
ireland® Worldwide and
Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.3
|
|
|
||
|
Advisory Services Agreement dated April 27, 2015 by and between
Stone Street Partners, LLC and Level Beauty Group,
Inc.
|
|
1-A
|
|
9/18/17
|
|
6.4
|
|
|
||
|
Termination Agreement dated October 31, 2016 by and between
kathy
ireland® Worldwide and
Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.5
|
|
|
||
|
Termination Agreement dated September 30, 2016 by and between
Siskey Capital, LLC and Level Beauty Group, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.6
|
|
|
||
|
Revolving Line of Credit Loan Agreement dated August 7, 2015 from
Level Beauty Group, Inc. to LBGLOC, LLC
|
|
1-A
|
|
9/18/17
|
|
6.7
|
|
|
||
|
Promissory Note dated August 7, 2015 from Level Beauty Group, Inc.
to LBGLOC LLC
|
|
1-A
|
|
9/18/17
|
|
6.8
|
|
|
||
|
Security Agreement dated August 7, 2015 from Level Beauty Group,
Inc. to LBGLOC LLC
|
|
1-A
|
|
9/18/17
|
|
6.9
|
|
|
||
|
Executive Employment Agreement dated January 1, 2017 by and between
Level Brands, Inc. and Martin A. Sumichrast +
|
|
1-A
|
|
9/18/17
|
|
6.10
|
|
|
||
|
Executive Employment Agreement dated January 2, 2017 by and between
Level Brands, Inc. and Mark S. Elliott +
|
|
1-A
|
|
9/18/17
|
|
6.11
|
|
|
||
|
Master Advisory and Consulting Agreement dated February 8, 2017 by
and between Level Brands, Inc. and kathy
Ireland®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.12
|
|
|
||
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Stephen Roseberry +
|
|
1-A
|
|
9/18/17
|
|
6.13
|
|
|
||
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Tommy Meharey+
|
|
1-A
|
|
9/18/17
|
|
6.14
|
|
|
||
|
Advisory Agreement dated February 8, 2017 by and between Level
Brands, Inc. and Nicolas Mendoza +
|
|
1-A
|
|
9/18/17
|
|
6.15
|
|
|
||
|
Sublease dated January 1, 2017 by and between Kure Franchise, LLC
and Level Brands, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.16
|
|
|
||
|
Form of Filler Supply Agreement for Beauty and Pin Ups
LLC
|
|
1-A
|
|
9/18/17
|
|
6.17
|
|
|
||
|
Wholesale License Agreement dated January 12, 2017 by and
between kathy ireland
®Worldwide and I'M1,
LLC
|
|
1-A
|
|
9/18/17
|
|
6.18
|
|
|
|
Amended and Restated Limited Liability Company Agreement of I'M1,
LLC effective January 1, 2017
|
|
1-A
|
|
9/18/17
|
|
6.19
|
|
|
||
|
Amended and Restated Limited Liability Company Agreement of Encore
Endeavor 1 LLC effective January 1, 2017
|
|
1-A
|
|
9/18/17
|
|
6.20
|
|
|
||
|
Amended and Restated Membership Interest Exchange Agreement dated
March 24, 2017, effective January 6, 2017, by and among IM1
Holdings, LLC, I'M1, LLC and Level Brands, Inc.
|
|
1-A
|
|
9/18/17
|
|
7.2
|
|
|
||
|
Amended and Restated Membership Interest Exchange Agreement dated
March 24, 2017, effective January 6, 2017, by and among EE1
Holdings, LLC, Encore Endeavor I LLC and Level Brands,
Inc.
|
|
1-A
|
|
9/18/17
|
|
7.3
|
|
|
||
|
Form of Indemnification Agreement
|
|
1-A
|
|
9/18/17
|
|
6.21
|
|
|
||
|
Charitable Agreement between Beauty & Pin Ups and Best Buddies
International, as amended
|
|
1-A
|
|
9/18/17
|
|
6.22
|
|
|
||
|
Amendment No. 1 to Transaction Fee Agreement dated March 27, 2017
by and between Level Brands, Inc. and T.R. Winston & Company
LLC
|
|
1-A
|
|
9/18/17
|
|
6.23
|
|
|
||
|
Form of I'M1 License Agreement
|
|
1-A
|
|
9/18/17
|
|
6.24
|
|
|
||
|
Consulting Agreement dated March 20, 2017 by and between I'M1, LLC
and Kure Corp.
|
|
1-A
|
|
9/18/17
|
|
6.25
|
|
|
||
|
Amended and Restated Consulting Agreement dated March 20, 2017 by
and between I'M1, LLC and NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.26
|
|
|
||
|
Amendment to Executive Employment Agreement dated April 1, 2017 by
and between Level Brands, Inc. and Martin A. Sumichrast
+
|
|
1-A
|
|
9/18/17
|
|
6.27
|
|
|
||
|
Amendment to Swap Agreement dated March 28, 2017 by and among
Beauty and Pin Ups, LLC, Level Brands, Inc. and Dean
Gangbar
|
|
1-A
|
|
9/18/17
|
|
7.4
|
|
|
||
|
License Agreement dated March 29, 2017 by and among I'M1, LLC, Kure
Corp. and Kure Franchise, LLC
|
|
1-A
|
|
9/18/17
|
|
6.28
|
|
|
||
|
License Agreement dated March 31, 2017 by and between I'M1, LLC and
NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.29
|
|
|
||
|
Television Series Consulting Agreement dated March 1, 2017 by and
between Multi-Media Productions Inc. and Encore Endeavor 1,
LLC
|
|
1-A
|
|
9/18/17
|
|
6.30
|
|
|
||
|
Advisory Agreement dated May 9, 2017 by and between Formula Four
Beverages Inc., I'M1, LLC and Encore Endeavor 1, LLC
|
|
1-A
|
|
9/18/17
|
|
6.31
|
|
|
||
|
Termination of License Agreement Ab Initio dated June 8, 2017 by
and between I'M1, LLC and NuGene International, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.32
|
|
|
||
|
Membership Interest Sale and Purchase Agreement by and among Priel
Maman, Level Brands, Inc. and Beauty and Pin-Ups, LLC dated April
26, 2017
|
|
1-A
|
|
9/18/17
|
|
6.33
|
|
|
||
|
Debt Conversion Agreement dated May 15, 2017 by and between Level
Brands, Inc. and LBGLOC, LLC, as amended
|
|
1-A
|
|
9/18/17
|
|
6.34
|
|
|
||
|
License Agreement dated March 29, 2017 by and between I'M1, LLC and
Andre Phillipe, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.35
|
|
|
||
|
Recording Master License Agreement dated May 23, 2017 by and
between McCoo & Davis, Inc. and Encore Endeavor 1
LLC
|
|
1-A
|
|
9/18/17
|
|
6.36
|
|
|
||
|
Form of note conversion agreement
|
|
1-A
|
|
9/18/17
|
|
6.37
|
|
|
||
|
Management Consulting Agreement dated July 1, 2017 by and between
Level Brands, Inc. and Market Development Consulting Group,
Inc.
|
|
1-A
|
|
9/18/17
|
|
6.38
|
|
|
||
|
Amendment No. 1 to Amended and Restated Consulting Agreement dated
July 27, 2017 by and between I'M1, LLC and NuGene International,
Inc. and Irrevocable Proxy
|
|
1-A
|
|
9/18/17
|
|
6.39
|
|
|
||
|
Stock Purchase and Escrow Agreement dated July 31, 2017 and among
I'M1, LLC, Stone Street Partners, LLC and Pearlman Law Group
LLP
|
|
1-A
|
|
9/18/17
|
|
6.40
|
|
|
||
|
Promissory Note dated July 31, 2017 in the principal amount of
$275,000 from Stone Street Partners, LLC
|
|
1-A
|
|
9/18/17
|
|
6.41
|
|
|
||
|
License Agreement dated June 27, 2017 by and between I'M1, LLC and
Loose Leaf Eyewear and Accessories LLC.
|
|
1-A
|
|
9/18/17
|
|
6.42
|
|
|
||
|
Advisory Agreement dated August 9, 2017 by and among Damiva Inc.,
I'M1, LLC and Encore Endeavor 1, LLC
|
|
1-A
|
|
9/18/17
|
|
6.43
|
|
|
||
|
Representation Agreement dated August 1, 2017 by and among Encore
Endeavor 1 LLC, Romero Britto and Britto Central, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.44
|
|
|
||
|
Amended and Restated Representation Agreement dated September 12,
2017 by and among Encore Endeavor 1 LLC, Dada Media, Inc. and David
Tutera
|
|
1-A
|
|
9/18/17
|
|
6.45
|
|
|
||
|
Amendment dated September 8, 2017 to Master Advisory and Consulting
Agreement by and between Level Brands, Inc. and kathy
Ireland®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.47
|
|
|
||
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and kathy
ireland®
Worldwide+
|
|
1-A
|
|
9/18/17
|
|
6.48
|
|
|
||
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Andre Carthen
|
|
1-A
|
|
9/18/17
|
|
6.49
|
|
|
||
|
Wholesale License Agreement dated September 8, 2017 by and between
Level Brands, Inc. and Nicholas Walker
|
|
1-A
|
|
9/18/17
|
|
6.50
|
|
|
||
|
Distribution Agreement dated August 29, 2017 by and between Beauty
and Pinups, LLC and East Coast Enterprises, Inc.
|
|
1-A
|
|
9/18/17
|
|
6.51
|
|
|
||
|
Advisory Agreement dated September 1, 2017 by and between Level
Brands, Inc. and Jon Carrasco +
|
|
1-A
|
|
9/18/17
|
|
6.52
|
|
|
||
|
Production Services Agreement dated September 19, 2017 by and
between Multimedia Productions, Inc. and Encore Endeavor 1,
LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.53
|
|
|
||
|
License Agreement dated September 8, 2017 by and between Level
Brands, Inc. and kathy
ireland®
Worldwide
|
|
1-A
|
|
9/18/17
|
|
6.54
|
|
|
||
|
Advisory Agreement dated September 22, 2017 by and between SG
Blocks, Inc. and Encore Endeavor 1, LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.55
|
|
|
||
|
Written description of material terms of oral agreement between
Encore Endeavor 1 LLC and Sandbox LLC
|
|
1-A/A
|
|
10/12/17
|
|
6.56
|
|
|
|
Agreement
dated August 1, 2017 by and between Level Brands, Inc. and Kure
Corp.
|
|
10-K
|
|
12/26/17
|
|
10.62
|
|
|
||
|
Form of
Revolving Line of Credit Loan Agreement dated December 12, 2017 by
and between Level Brands, Inc. and Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.64
|
|
|
||
|
Form of
Security Agreement dated December 12, 2017 by and between Level
Brands, Inc. and Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.65
|
|
|
||
|
Form of
Promissory Note in the principal amount of $500,000 dated December
12, 2017 due from Kure Corp.
|
|
8-K
|
|
12/12/17
|
|
10.66
|
|
|
||
|
Sublease
dated December 21, 2017 by and between Kure Franchise, LLC and
Level Brands, Inc.
|
|
10-K
|
|
12/26/17
|
|
10.66
|
|
|
||
|
License
Agreement dated December 30, 2017 by and between Level Brands, Inc.
and Isodiol International, Inc.
|
|
8-K
|
|
1/5/18
|
|
10.67
|
|
|
||
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Nic Mendoza
|
|
10-Q
|
|
5/15/18
|
|
10.69
|
|
|
||
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Tommy Meharey
|
|
10-Q
|
|
5/15/18
|
|
10.70
|
|
|
||
|
Advisory
Agreement dated March 8, 2018 by and between Level Brands, Inc. and
Stephen Roseberry
|
|
10-Q
|
|
5/15/18
|
|
10.71
|
|
|
||
|
Sublease
effective April 11, 2018 by and between 4th Floor Properties
LLC and Level Brands, Inc.
|
|
10-Q
|
|
5/15/18
|
|
10.72
|
|
|
||
|
Amendment
to promissory note with Stone Street Partners LLC
|
|
10-Q
|
|
8/14/18
|
|
10.74
|
|
|
||
|
License
Agreement dated June 26, 2018 by and
between Level Brands, Inc. and Boston Therapeutics,
Inc.
|
|
8-K
|
|
6/27/18
|
|
10.73
|
|
|
||
|
First
Amendment to License Agreement dated January 19, 2018 by and
between Level Brands, Inc. and Isodiol International,
Inc.
|
|
8-K
|
|
1/22/18
|
|
10.69
|
|
|
||
|
Executive
Employment Agreement dated September 6, 2018 by and between Level
Brands, Inc. and Martin A. Sumichrast
|
|
8-K
|
|
9/7/18
|
|
10.75
|
|
|
||
|
Executive
Employment Agreement dated September 6, 2018 by and between Level
Brands, Inc. and Mark S. Elliott
|
|
8-K
|
|
9/7/18
|
|
10.76
|
|
|
||
|
Secured
Promissory Note dated December 4, 2018 in the principal amount of
$2,000,000 from Cure Based Development LLC
|
|
8-K
|
|
12/4/18
|
|
10.1
|
|
|
||
|
Security
Agreement dated December 4, 2018 by and between Level Brands, Inc.
and Cure Based Development, LLC
|
|
8-K
|
|
12/4/18
|
|
10.2
|
|
|
||
|
Code of
Business Conduct and Ethics
|
|
1-A
|
|
9/18/17
|
|
15.1
|
|
|
||
|
Subsidiaries
of the registrant
|
|
10-K
|
|
12/26/17
|
|
21.1
|
|
|
||
|
Consent
of Cherry Bekaert LLP
|
|
|
|
|
|
|
|
Filed
|
||
24.1
|
|
Power
of attorney (included on signature page of this
report)
|
|
|
|
|
|
|
|
Filed
|
|
31.1
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer
|
|
|
|
|
|
|
|
Filed
|
|
31.2
|
|
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial
Officer
|
|
|
|
|
|
|
|
Filed
|
|
32.1
|
|
Section 1350 Certification of Chief Executive Officer and Chief
Financial Officer
|
|
|
|
|
|
|
|
Filed
|
|
101
INS
|
|
XBRL
Instance Document
|
|
|
|
|
|
|
|
Filed
|
|
101 SCH
|
|
XBRL
Taxonomy Extension Schema
|
|
|
|
|
|
|
|
Filed
|
|
101 CAL
|
|
XBRL
Taxonomy Extension Calculation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101
LAB
|
|
XBRL
Taxonomy Extension Label Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101
PRE
|
|
XBRL
Taxonomy Extension Presentation Linkbase
|
|
|
|
|
|
|
|
Filed
|
|
101
DEF
|
|
XBRL
Taxonomy Extension Definition Linkbase
|
|
/s/
Cherry Bekaert LLP
|
|
|
|
We have
served as the Company’s auditor since 2016.
|
|
|
|
Charlotte,
North Carolina
|
|
December
12, 2018
|
|
|
2018
|
2017
|
Assets
|
|
|
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$4,282,553
|
$284,246
|
Accounts
receivable
|
307,874
|
141,462
|
Accounts
receivable - related party
|
1,537,863
|
712,325
|
Accounts
receivable other
|
1,743,874
|
12,440
|
Accounts
receivable other - related party
|
-
|
236,364
|
Marketable
securities
|
1,050,961
|
-
|
Investment
other securities
|
1,159,112
|
859,112
|
Note
receivable
|
459,000
|
-
|
Note
receivable - related party
|
156,147
|
276,375
|
Inventory
|
123,223
|
588,197
|
Deferred
issuance costs
|
28,049
|
497,735
|
Prepaid
consulting agreement
|
200,000
|
-
|
Prepaid
rent
|
180,000
|
-
|
Prepaid
expenses and other current assets
|
561,491
|
85,420
|
Total
current assets
|
11,790,147
|
3,693,676
|
|
|
|
Other
assets:
|
|
|
Property
and equipment, net
|
53,480
|
135,476
|
Intangible
assets, net
|
3,173,985
|
3,240,287
|
Total
other assets
|
3,227,465
|
3,375,763
|
|
|
|
Total
assets
|
$15,017,612
|
$7,069,439
|
Liabilities
and shareholders' equity
|
|
|
|
|
|
Current
liabilities:
|
|
|
Accounts
payable
|
$473,717
|
$397,601
|
Accounts
payable - related party
|
7,860
|
67,879
|
Deferred
revenue
|
161,458
|
41,417
|
Accrued
expenses
|
6,920
|
123,823
|
Accrued
expenses - related party
|
320,000
|
892,805
|
Total
current liabilities
|
969,955
|
1,523,525
|
|
|
|
Long term
liabilities
|
|
|
Long
term liabilities
|
7,502
|
-
|
Long
term liabilities, to related party
|
-
|
360,000
|
Deferred
tax liability
|
21,000
|
37,000
|
Total long term
liabilities
|
28,502
|
397,000
|
|
|
|
Total
liabilities
|
998,457
|
1,920,525
|
|
|
|
Level Brands, Inc.
shareholders' equity:
|
|
|
Preferred stock,
authorized 50,000,000 shares, $0.001 par value, no shares issued
and outstanding
|
-
|
-
|
Common stock,
authorized 150,000,000 shares, $0.001 par value,
|
|
|
8,123,928
and 5,792,261 shares issued and outstanding,
respectively
|
8,124
|
5,792
|
Additional paid in
capital
|
21,781,095
|
10,463,480
|
Accumulated other
comprehensive income (loss)
|
(2,512,539)
|
-
|
Accumulated
deficit
|
(6,669,497)
|
(6,257,421)
|
Total
Level Brands, Inc. shareholders' equity
|
12,607,183
|
4,211,851
|
Non-controlling
interest
|
1,411,972
|
937,063
|
Total
shareholders' equity
|
14,019,155
|
5,148,914
|
|
|
|
Total
liabilities and shareholders' equity
|
$15,017,612
|
$7,069,439
|
|
|
|
|
2018
|
2017
|
|
|
|
Sales
|
$6,453,173
|
$3,650,480
|
Sales
related party
|
1,992,046
|
1,731,238
|
Total
Gross Sales
|
8,445,219
|
5,381,718
|
Allowances
|
(25,077)
|
(906,765)
|
Net
sales
|
6,428,096
|
2,743,715
|
Net
sales related party
|
1,992,046
|
1,731,238
|
Total Net Sales
|
8,420,142
|
4,474,953
|
Costs
of sales
|
2,673,272
|
1,355,381
|
Gross profit
|
5,746,870
|
3,119,572
|
Operating
expenses
|
5,629,771
|
3,358,863
|
Income (loss) from
operations
|
117,099
|
(239,291)
|
Debt
conversion expense
|
-
|
(446,250)
|
Other
than temporary impairment on marketable securities
|
-
|
(175,000)
|
Loss
on disposal of property
|
(69,310)
|
-
|
Interest
expense
|
(955)
|
(500,627)
|
Income (loss) before provision
for income taxes
|
46,834
|
(1,361,168)
|
Provision
for income taxes
|
16,000
|
25,000
|
Net Income (loss)
|
62,834
|
(1,386,168)
|
Net
Income (loss) attributable to non-controlling interest
|
474,909
|
352,566
|
|
|
|
Net loss attributable to Level Brands, Inc. common
shareholders
|
$(412,075)
|
$(1,738,734)
|
|
|
|
Loss per share, basic and diluted
|
$(0.05)
|
$(0.38)
|
Weighted average number of shares outstanding
|
7,742,644
|
4,524,985
|
|
|
|
|
2018
|
2017
|
|
|
|
Net
Income (Loss)
|
$62,834
|
$(1,386,168)
|
Other
Comprehensive Income:
|
|
|
Net
Unrealized Gain (Loss) on Marketable Securities,
net of tax of $0
|
(2,512,539)
|
-
|
Comprehensive Income (Loss)
|
(2,449,705)
|
(1,386,168)
|
|
|
|
Comprehensive
Income (loss) attributable to non-controlling interest
|
474,909
|
352,566
|
Comprehensive Income (Loss) attributable to Level Brands, Inc.
common shareholders
|
$(2,924,614)
|
$(1,738,734)
|
|
|
|
|
2018
|
2017
|
Cash
flows from operating activities:
|
|
|
Net income
(loss)
|
$62,834
|
$(1,386,168)
|
Adjustments
to reconcile net loss to net
|
|
|
cash
used by operating activities:
|
|
|
Stock
based compensation
|
639,631
|
56,533
|
Restricted
stock expense
|
39,100
|
156,400
|
Amortization
of debt issue costs
|
-
|
305,800
|
Depreciation
and amortization
|
222,546
|
71,276
|
Issuance
of stock / warrants for services
|
496,502
|
627,825
|
Other-than-temporary
impairment on marketable securities
|
-
|
175,000
|
Debt
conversion expense
|
-
|
446,250
|
Inventory
/ marketing material impairment
|
262,343
|
67,226
|
Intangible
impairment
|
240,000
|
-
|
Accounts
receivable impairment
|
-
|
50,000
|
Loss on
sale of property and equipment
|
69,311
|
4,000
|
Common
stock issued as charitable contribution
|
-
|
17,000
|
Non-cash
consideration received for services provided
|
(3,404,502)
|
(1,932,552)
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
(499,373)
|
(27,488)
|
Accounts
receivable - related party
|
(492,577)
|
(712,325)
|
Other
accounts receivable
|
(1,890,434)
|
(12,440)
|
Other
accounts receivable – related party
|
236,364
|
(36,364)
|
Note
receivable
|
(459,000)
|
-
|
Note
receivable - related party
|
120,228
|
(1,375)
|
Inventory
|
255,894
|
(41,216)
|
Prepaid
consulting agreement
|
(200,000)
|
-
|
Prepaid
rent
|
(180,000)
|
-
|
Prepaid
expenses and other current assets
|
(529,335)
|
58,458
|
Accounts
payable and accrued expenses
|
285,156
|
(745,252)
|
Accounts
payable and accrued expenses – related party
|
(951,824)
|
278,265
|
Interest
Payable
|
-
|
184,889
|
Deferred
Revenue
|
120,041
|
41,417
|
Deferred
tax liability
|
(16,000)
|
25,000
|
Cash used by
operating activities
|
(5,573,095)
|
(2,329,841)
|
|
|
|
Cash
flows from investing activities:
|
|
|
Proceeds
from sale of investments to a related party
|
-
|
200,000
|
Purchase
of other investment securities
|
(300,000)
|
-
|
Purchase
of intangible assets
|
(360,000)
|
-
|
Purchase
of property and equipment
|
(23,559)
|
(7,967)
|
Cash provided by
(used by) investing activities
|
(683,559)
|
192,033
|
|
|
|
Cash
flows from financing activities:
|
|
|
Proceeds
from issuance of common stock
|
10,927,535
|
829,497
|
Exercise
of stock options
|
-
|
3,002
|
Deferred
issuance costs
|
(672,574)
|
(39,723)
|
|
|
|
Debt
issuance cost
|
-
|
(200,800)
|
Proceeds
from convertible note
|
-
|
2,125,000
|
Distribution
related party
|
-
|
(29,180)
|
Repayments
of line of credit
|
-
|
(300,000)
|
Cash provided by
financing activities
|
10,254,961
|
2,387,796
|
Net (decrease)
increase in cash
|
3,998,307
|
249,988
|
Cash and cash
equivalents, beginning of year
|
284,246
|
34,258
|
Cash
and cash equivalents, end of year
|
$4,282,553
|
$284,246
|
|
2018
|
2017
|
|
|
|
Cash Payments
for:
|
|
|
Interest
expense
|
$955
|
$5,210
|
|
|
|
|
|
|
Non-cash financial
activities:
|
|
|
Equity investment
exchange to be issued in the future, included in Accounts
receivable other
|
160,000
|
-
|
Non-cash financial
activities:
|
|
|
Common stock issued
to purchase membership interest – I’M1
|
-
|
971,667
|
Common stock issued
to purchase membership interest – EE1
|
-
|
471,668
|
Non-controlling
interest transfer
|
-
|
950,242
|
Strike price
adjustment on placement agent warrants
|
-
|
31,350
|
Common stock issued
for warrant exercise
|
-
|
38
|
Common Stock issued
for conversion of Line of Credit
|
-
|
773,177
|
Common Stock issued
for conversion of Promissory Notes
|
-
|
2,252,500
|
Deferred IPO costs
acquired via issuance of payables
|
-
|
362,817
|
Deferred issuance
costs acquired via issuance of stock/warrants
|
-
|
95,195
|
Distributions of
stock to non-controlling interests
|
-
|
223,440
|
Stock and warrants
issued for intangible assets
|
-
|
379,714
|
Fixed assets
acquired through lease
|
-
|
14,983
|
Non-cash proceeds
on sale of fixed assets
|
-
|
7,000
|
Intellectual
property issued via issuance of payables
|
-
|
945,000
|
Warrants issued to
IPO selling agent
|
171,600
|
-
|
|
|
|
|
Common
Stock
|
Additional Paid
in
|
Other
Comprehensive
|
Accumulated
|
Non-controlling
|
|
|
|
Shares
|
Amount
|
Capital
|
Income(loss)
|
Deficit
|
Interest
|
Total
|
Balance, September 30, 2016
|
3,400,834
|
$3,401
|
$4,847,362
|
-
|
$(4,487,336)
|
$(656,152)
|
$(292,725)
|
Issuance of common
stock
|
494,717
|
494
|
993,054
|
-
|
-
|
(164,051)
|
829,497
|
Issuance of options
for share based compensation
|
-
|
-
|
56,533
|
-
|
-
|
-
|
56,533
|
Issuance of stock
and warrants for services
|
110,260
|
110
|
627,715
|
-
|
-
|
-
|
627,825
|
Issuance of stock
for deferred IPO costs
|
24,100
|
24
|
95,171
|
-
|
-
|
-
|
95,195
|
Issuance of
restricted stock for share based compensation
|
-
|
|
156,400
|
-
|
-
|
-
|
156,400
|
Issuance of stocks
and warrants for intellectual property acquisition
|
70,500
|
71
|
379,643
|
-
|
-
|
-
|
379,714
|
Issuance of stock
charitable contribution
|
20,000
|
20
|
16,980
|
-
|
-
|
-
|
17,000
|
Exercise of stock
options and warrants
|
39,856
|
40
|
2,962
|
-
|
|
|
3,002
|
Investment in
membership interests acquired
|
866,000
|
866
|
735,235
|
-
|
-
|
707,234
|
1,443,335
|
Change in exercise
price
|
-
|
-
|
31,350
|
-
|
(31,350)
|
-
|
-
|
Conversion of debt
to equity
|
765,994
|
766
|
3,471,161
|
-
|
|
|
3,471,927
|
Acquisition of
non-controlling interests
|
-
|
-
|
(950,086)
|
-
|
-
|
950,086
|
-
|
Distributions
|
|
|
-
|
-
|
|
(252,620)
|
(252,620)
|
Net
loss
|
-
|
-
|
-
|
-
|
(1,738,734)
|
352,566
|
(1,386,169)
|
Balance, September 30, 2017
|
5,792,261
|
5,792
|
10,463,480
|
-
|
(6,257,421)
|
937,063
|
5,148,914
|
Issuance of common
stock
|
2,000,000
|
2,000
|
9,971,114
|
-
|
-
|
-
|
9,973,114
|
Issuance of options
for share based compensation
|
-
|
-
|
639,631
|
-
|
-
|
-
|
639,631
|
Issuance of stock
for deferred IPO costs
|
-
|
-
|
171,600
|
-
|
-
|
-
|
171,600
|
Issuance of stock
and warrants for services
|
331,667
|
332
|
496,170
|
-
|
-
|
-
|
496,502
|
Issuance of
restricted stock for share based compensation
|
-
|
|
39,100
|
-
|
-
|
-
|
39,100
|
Other Comprehensive
income (loss)
|
-
|
-
|
-
|
(2,512,539)
|
-
|
-
|
(2,512,539)
|
Net
loss
|
-
|
-
|
-
|
-
|
(412,076)
|
474,909
|
62,834
|
Balance, September 30, 2018
|
8,123,928
|
8,124
|
21,781,095
|
(2,512,539)
|
(6,669,497)
|
1,411,972
|
14,019,155
|
|
In Active
Markets for Identical Assets and Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total Fair Value
at September 30, 2018
|
|
|
|
|
|
Marketable
securities
|
$1,050,961
|
-
|
$-
|
$1,050,961
|
Investment other
securities
|
-
|
-
|
$1,159,112
|
$1,159,112
|
|
Level
1
|
Level
2
|
Level
3
|
Total
|
Balance at
September 30, 2017
|
$-
|
$-
|
$859,112
|
$859,112
|
Receipt of equity
investment upon completion of services
|
$3,004,500
|
$-
|
$400,000
|
$3,404,500
|
Purchase of
preferred shares, convertible into common stock
|
$-
|
$-
|
$300,000
|
$300,000
|
Exchange of equity
via owner merger into public company
|
$240,000
|
$-
|
$(400,000)
|
$(160,000)
|
Change in value of
equity, other comprehensive income
|
$(2,193,539)
|
$-
|
$-
|
$(2,193,539)
|
Balance at
September 30, 2018
|
$1,050,961
|
$-
|
$1,159,112
|
$2,210,073
|
|
2018
|
2017
|
Finished
goods
|
$18,531
|
$375,459
|
Inventory
components
|
104,692
|
212,738
|
Total
|
$123,223
|
$588,197
|
|
2018
|
2017
|
Computers,
furniture and equipment
|
$59,770
|
$37,261
|
Show
booth and equipment
|
49,123
|
171,986
|
Manufacturers’
molds and plates
|
34,200
|
34,200
|
|
143,093
|
243,447
|
Less
accumulated depreciation
|
(89,613)
|
(107,971)
|
Net
property and equipment
|
$53,480
|
$135,476
|
|
September
30,
|
September
30,
|
|
2018
|
2017
|
Trademark and other
intellectual property related to BPU
|
$246,760
|
$486,760
|
Trademark and other
intellectual property related to I’M1
|
971,667
|
971,667
|
Trademark and other
intellectual property related to EE1
|
471,667
|
471,667
|
Trademark,
tradename and other intellectual property related to kathy
ireland®Health & Wellness™, net
|
1,074,194
|
830,000
|
Wholesale license
agreement with Chef Andre Carthen, net
|
262,077
|
307,146
|
Wholesale license
agreement with Nicholas Walker, net
|
147,620
|
173,047
|
Total
|
$3,173,985
|
$3,240,287
|
|
|
|
Intangible
|
Total
unamortized cost
|
2019
|
2020
|
2021
|
2022
|
2023
|
thereafter
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$1,074,194
|
$116,129
|
$116,129
|
$116,129
|
$116,129
|
$116,129
|
$493,549
|
Wholesale license
agreement with Chef Andre Carthen
|
$262,077
|
$44,294
|
$44,294
|
$44,294
|
$44,294
|
$44,294
|
$40,607
|
Wholesale license
agreement with Nicholas Walker
|
$147,620
|
$24,950
|
$24,950
|
$24,950
|
$24,950
|
$24,950
|
$22,871
|
|
2018
|
2017
|
Exercise price
|
$3.34
– $5.27
|
$4.00 - $7.50
|
Risk free interest rate
|
2.77%
- 2.96%
|
1.14%
- 2.13%
|
Volatility
|
57.76%
- 64.74%
|
39.44% - 60.39%
|
Expected term
|
7
– 10 years
|
5 - 7 years
|
Dividend yield
|
None
|
None
|
|
2018
|
2017
|
Exercise price
|
$7.50
|
$4.00 - $7.80
|
Risk free interest rate
|
2.06%
|
1.22% - 1.64%
|
Volatility
|
43.12%
|
39.41% - 54.49%
|
Expected term
|
5 years
|
5 years
|
Dividend yield
|
None
|
None
|
|
Number
ofshares
|
Weighted-averageexerciseprice
|
Weighted-averageremainingcontractual
term(in years)
|
Aggregateintrinsicvalue
(inthousands)
|
Outstanding at
September 30, 2016
|
40,000
|
$2.00
|
|
|
Granted
|
313,300
|
6.08
|
|
|
Exercised
|
(1,500)
|
-
|
|
|
Forfeited
|
(18,500)
|
-
|
|
|
Outstanding at
September 30, 2017
|
333,300
|
5.83
|
|
|
Granted
|
235,000
|
4.67
|
|
|
Exercised
|
-
|
-
|
|
|
Forfeited
|
(98,650)
|
6.38
|
|
|
Outstanding at
September 30, 2018
|
469,650
|
$5.13
|
6.9
|
$—
|
|
|
|
|
|
Exercisable at
September 30, 2018
|
337,150
|
$5.22
|
6.4
|
$—
|
|
Number of
shares
|
Weighted-average
exercise price
|
Weighted-
average
remaining contractual term (in years)
|
Aggregate
intrinsic value (in thousands)
|
Outstanding at
September 30, 2016
|
70,067
|
$4.47
|
|
|
Issued
|
212,176
|
6.53
|
|
|
Exercised
|
(70,067)
|
4.47
|
|
|
Forfeited
|
—
|
—
|
|
|
Outstanding at
September 30, 2017
|
212,176
|
6.53
|
|
|
Issued
|
100,000
|
7.50
|
|
|
Exercised
|
—
|
—
|
|
|
Forfeited
|
—
|
—
|
|
|
Outstanding at
September 30, 2018
|
312,176
|
$6.84
|
3.5
|
$—
|
|
|
|
|
|
Exercisable at
September 30, 2018
|
312,176
|
$6.84
|
3.5
|
$—
|
|
Number of
shares
|
Weighted-average
exercise price
|
Expiration
|
|
|
|
|
Exercisable at
$7.80 per share
|
141,676
|
$7.80
|
September
2021
|
Exercisable at
$7.50 per share
|
100,000
|
$7.50
|
October
2022
|
Exercisable at
$4.00 per share
|
70,500
|
$4.00
|
September
2022
|
|
312,176
|
6.84
|
|
Year ended
September 30, 2018
|
|
|||
|
Three Months
Ended September 30, 2016
|
|||
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
Net
Sales
|
$95,776
|
$5,213,360
|
$1,118,960
|
$6,428,096
|
Net Sales related
party
|
$332,955
|
$-
|
$1,659,091
|
$1,992,046
|
Total Net
Sales
|
$428,731
|
$5,213,360
|
$2,778,051
|
$8,420,142
|
Income (loss) from
Operations before Overhead
|
$(1,144,557)
|
$3,109,601
|
$233,939
|
$2,198,983
|
Allocated Corporate
Overhead (a)
|
108,767
|
1,322,604
|
704,778
|
2,136,149
|
Net Income
(loss)
|
$(1,253,324)
|
$1,786,997
|
$(470,839)
|
$62,834
|
|
|
|
|
|
Assets
|
$2,840,222
|
$7,865,509
|
$4,491,881
|
$15,017,612
|
Year ended
September 30, 2017
|
|
|||
|
Three Months
Ended September 30, 2016
|
|||
|
Professional
Product
Division
|
Licensing
Division
|
Entertainment
Division
|
Total
|
Net
Sales
|
$872,354
|
$1,194,582
|
$676,779
|
$2,743,715
|
Net Sales related
party
|
$97,850
|
$600,000
|
$1,033,388
|
$1,731,238
|
Total Net
Sales
|
$970,204
|
$1,794,582
|
$1,710,167
|
$4,474,953
|
Income (loss) from
Operations before Overhead
|
$(1,705,081)
|
$637,888
|
$697,066
|
$(370,127)
|
Allocated Corporate
Overhead (a)
|
354,362
|
338,808
|
322,871
|
1,016,041
|
Net Income
(loss)
|
$(2,059,443)
|
$299,080
|
$374,195
|
$(1,386,168)
|
|
|
|
|
|
Assets
|
$3,068,606
|
$2,603,075
|
$1,397,758
|
$7,069,439
|
|
Years Ended
September 30,
|
|
|
2018
|
2017
|
Current
|
|
|
Federal
|
$—
|
$—
|
State
|
—
|
—
|
Total
current
|
—
|
—
|
Deferred
|
|
|
Federal
|
15,000
|
24,000
|
State
|
1,000
|
1,000
|
Total
deferred
|
16,000
|
25,000
|
Total
provision
|
$16,000
|
$25,000
|
|
Years Ended
September 30,
|
|
|
2018
|
2017
|
Federal statutory
income tax rate
|
24.3%
|
34.0%
|
State income taxes,
net of federal benefit
|
49.0
|
3.2
|
Permanent
differences
|
(384.5)
|
-
|
Tax impact of
federal tax rate change
|
1,708.1
|
-
|
Limitation on net
operating losses
|
1,065.8
|
(2.3)
|
Tax impact of
non-controlling interest
|
(246.4)
|
21.1
|
Change in valuation
allowance
|
(2,250.5)
|
(57.8)
|
|
|
|
Provision for
income taxes
|
(34.2)%
|
(1.8)%
|
|
Years Ended
September 30,
|
|
|
2018
|
2017
|
Deferred tax
assets:
|
|
|
Net operating loss
carryforwards
|
$1,396,000
|
$2,304,000
|
Stock
compensation
|
139,000
|
87,000
|
Investments
|
0
|
32,000
|
Accrued
expenses
|
0
|
2,000
|
Intangibles
|
42,000
|
0
|
Capitalized
expenses
|
7,000
|
-
|
Charitable
contributions
|
26,000
|
10,000
|
|
|
|
Total deferred tax
assets
|
1,610,000
|
2,435,000
|
|
|
|
Deferred tax
liabilities:
|
|
|
Prepaid
expenses
|
(177,000)
|
(31,000)
|
Management
fees
|
(169,000)
|
(73,000)
|
Intangibles
|
(21,000)
|
(33,000)
|
Fixed
assets
|
(1,000)
|
(18,000)
|
Total deferred tax
liabilities
|
(368,000)
|
(155,000)
|
Net deferred tax
assets
|
1,242.000
|
2,280,000
|
Valuation
allowance
|
(1,263,000)
|
(2,317,000)
|
|
|
|
Net
deferred tax liability
|
$(21,000)
|
$(37,000)
|
1.
|
I have reviewed this Annual Report on Form 10-K for the year ended
September 30, 2018 of Level Brands, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
|
4.
|
The registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
|
|
(b)
|
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
|
|
(d)
|
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
|
5.
|
The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
|
|
(a)
|
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
and
|
||
|
(b)
|
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
|
||
|
|
|
||
Dated: December 12, 2018
|
|
/s/ Martin A.
Sumichrast
Martin A. Sumichrast, Chief Executive Officer, principal executive
officer
|
1.
|
I have reviewed this Annual Report on Form 10-K for the year ended
September 30, 2018 of Level Brands, Inc.;
|
2.
|
Based on my knowledge, this report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
|
3.
|
Based on my knowledge, the financial statements, and other
financial information included in this report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the registrant as of, and for, the
periods presented in this report;
|
4.
|
The registrant’s other certifying officer(s) and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and
15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the
registrant and have:
|
|
(a)
|
Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known
to us by others within those entities, particularly during the
period in which this report is being prepared;
|
|
(b)
|
Designed such internal control over financial reporting, or caused
such internal control over financial reporting to be designed under
our supervision, to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles;
|
|
(c)
|
Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about
the effectiveness of the disclosure controls and procedures, as of
the end of the period covered by this report based on such
evaluation; and
|
|
(d)
|
Disclosed in this report any change in the registrant’s
internal control over financial reporting that occurred during the
registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to
materially affect, the registrant’s internal control over
financial reporting; and
|
5.
|
The registrant's other certifying officer(s) and I have disclosed,
based on our most recent evaluation of internal control over
financial reporting, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons
performing the equivalent functions):
|
|
(a)
|
All significant deficiencies and material weaknesses in the design
or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information;
and
|
||
|
(b)
|
Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal control over financial reporting.
|
||
|
|
|
||
Dated: December 12, 2018
|
|
/s/
Mark S. Elliott
Mark S. Elliott, Chief Financial Officer, principal financial and
accounting officer
|
|
|
|
|
December 12, 2018 |
By:
|
/s/ Martin A.
Sumichrast
|
|
|
|
Martin A. Sumichrast |
|
|
|
Chief Executive
Officer, principal executive officer
|
|
|
|
|
|
December 12,
2018
|
By:
|
/s/ Mark S.
Elliott
|
|
|
|
Mark S. Elliott |
|
|
|
Chief Financial Officer, principal financial and accounting officer |
|
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Document and Entity Information - USD ($) |
12 Months Ended | ||
---|---|---|---|
Sep. 30, 2018 |
Dec. 01, 2018 |
Mar. 31, 2018 |
|
Document And Entity Information | |||
Entity Registrant Name | Level Brands, Inc. | ||
Entity Central Index Key | 0001644903 | ||
Document Type | 10-K | ||
Document Period End Date | Sep. 30, 2018 | ||
Amendment Flag | false | ||
Current Fiscal Year End Date | --09-30 | ||
Is Entity a Well-known Seasoned Issuer? | No | ||
Is Entity a Voluntary Filer? | No | ||
Is Entity's Reporting Status Current? | Yes | ||
Entity Filer Category | Non-accelerated Filer | ||
Entity Emerging Growth Company | true | ||
Entity Ex Transition Period | false | ||
Entity Small Business | true | ||
Entity Shell Company | false | ||
Entity Public Float | $ 22,827,346 | ||
Entity Common Stock, Shares Outstanding | 10,095,356 | ||
Document Fiscal Period Focus | FY | ||
Document Fiscal Year Focus | 2018 |
CONSOLIDATED BALANCE SHEETS (Parenthetical) - $ / shares |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Stockholders' Equity | ||
Preferred Stock Shares, Par Value | $ 0.001 | $ 0.001 |
Preferred Stock Shares, Authorized | 50,000,000 | 50,000,000 |
Preferred Stock Shares, Issued | 0 | 0 |
Preferred Stock Shares, Outstanding | 0 | 0 |
Common Stock Shares, Par Value | $ 0.001 | $ 0.001 |
Common Stock Shares, Authorized | 150,000,000 | 150,000,000 |
Common Stock Shares, Issued | 8,123,928 | 5,792,261 |
Common Stock Shares, Outstanding | 8,123,928 | 5,792,261 |
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Income Statement [Abstract] | ||
Net Income (Loss) | $ 62,834 | $ (1,386,168) |
Other Comprehensive Income: | ||
Net Unrealized Gain (Loss) on Marketable Securities, net of tax | (2,512,539) | 0 |
Comprehensive Income (Loss) | (2,449,705) | (1,386,168) |
Comprehensive Income (loss) attributable to non-controlling interest | 474,909 | 352,566 |
Comprehensive Income (Loss) attributable to Level Brands, Inc. common shareholders | $ (2,924,614) | $ (1,738,734) |
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
12 Months Ended |
---|---|
Sep. 30, 2018 | |
Organization And Summary Of Significant Accounting Policies | |
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES | Organization and Nature of Business – Level Brands, Inc. ("Level Brands", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands Inc. We strive to be an innovative branding and marketing company and, through our subsidiaries, we focus our efforts on lifestyle-based brands. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30, therefore our 2018 fiscal reporting period is from October 1, 2017 to September 30, 2018 and our 2017 fiscal reporting period is from October 1, 2016, to September 30, 2017 (the “periods”).
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a North Carolina limited liability company, and contributed $250,000 in exchange for our member interest. As of September 30, 2016 we owned a 78% member interest in BPU. In addition, pursuant to the Amended and Restated Operating Agreement of Beauty & Pin-Ups, we were granted the right to redeem the 10% membership interest of Sigan Industries Group (“Sigan”) for $110,000 at any time before April 13, 2017. In October 2016, as amended in March 2017, we acquired Sigan’s membership interest in exchange for 129,412 shares of our common stock valued at $110,000. As of March 31, 2017 we owned an 88% member interest in BPU. In April 2017 we acquired the remaining 12% membership interest in exchange for 155,294 shares of our common stock valued at $132,000. As of September 30, 2018 we owned a 100% member interest in BPU. BPU manufactures, markets and sells an array of beauty and personal care products, including hair care and hair treatments, as well as beauty tools. BPU’s products are sold to the professional segment, principally through distributors to professional salons in the North America.
I’M1, LLC. (“I’M1”) was formed in California in September 2016. IM1 Holdings, LLC, a California limited liability company, (“IM1 Holdings”) was the initial member of I’M1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that plans to provide millennial-inspired lifestyle products under the I’M1 brand. I’M1 has entered into an exclusive wholesale license agreement with kathy ireland® Worldwide in connection with the use of the intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California in March 2016. EE1 Holdings, LLC, a California limited liability company, (“EE1 Holdings") was the initial member of EE1. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. EE1 is a company and brand, which is designed to serve as a brand management company and producer and marketer of multiple entertainment distribution platforms under the EE1 brand.
Level H&W, LLC (“Level H&W”) was formed in North Carolina in October 2017 and began operations in fiscal 2018. The Company signed an agreement with kathy ireland® Worldwide to retain exclusive rights to the intellectual property and other rights in connection with kathy ireland® Health & Wellness and its associated trademarks and tradenames. The Company establishes licensing arrangements under the kathy ireland® Health & Wellness brand. The agreement was initially a seven year agreement with a three year option to extend by the Company. The Company agreed to pay $840,000 over the license term of seven years, of which $480,000 was paid in January 2018, and $120,000 paid on January 1 of subsequent years until paid in full. The agreement can be extended for an additional three years by paying an upfront additional $360,000 upon agreement extension. The Company will pay kathy ireland® Worldwide 33 1/3% of net proceeds we receive under any sublicense agreements we may enter into for this intellectual property as royalties, with credit being applied for any payments made toward the $840,000.
In January 2018, the Company, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The Company capitalized the cost into intangibles and is amortizing them over the term of the licensing agreement.
On November 17, 2017, the Company completed an initial public offering (the “IPO”) of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million. The Company received approximately $10.9 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries BPU and Level H&W. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).
Reclassifications
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net loss, shareholders’ equity or cash flows.
Use of Estimates
The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, common stock prior to IPO, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities. Actual results could differ from these estimates.
Cash and Cash Equivalents
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
Accounts receivable and Accounts receivable other
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did not have an allowance at September 30, 2018.
In addition, the Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a privately held entity).
Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the consolidated financial statements.
Marketable Securities
At the time of acquisition, the marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-sale securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded in the accumulated other comprehensive income (loss) component of shareholders’ equity in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Code (“ASC”) 320-10. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income on the Company’s consolidated statements of operations.
Investment Other Securities
For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting in accordance with ASC 325-10. Under the cost method, dividends received from the investment are recorded as dividend income within non-operating income.
Other-than-Temporary Impairment
The Company’s management periodically assesses its marketable securities and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statements of operations. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its carrying value, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations.
Inventory
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, and production fill and labor (which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and perform a physical inventory count annually near fiscal year end.
Property and Equipment
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show booths and equipment, three years for manufacturer’s molds and plates, three years for computer, furniture and equipment, and three years for software. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
Fair value accounting The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the asset is valued at fair value. For investment other securities, it will value the asset using the cost method of accounting. Any changes in fair value for marketable securities, during a given period will be recorded as a gain or loss in other comprehensive income (loss), unless a decline is determined to be other-than-temporary. For investment other securities we use the cost method and compare the fair value to cost in order to determine if there is an other-than-temporary impairment.
Intangible Assets
The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Events that are assessed include contracts acquired and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite lived intangibles are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potential assets and liabilities for valuation including the determination of intangible asset values.
Common stock
Level Brands was a privately owned company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that include the issuance of common stock to an unrelated party at a specified price. In the event, however, that there was not a recent and significant equity financing transaction or the nature of the business had significantly changed subsequent to an equity financing, we used valuation techniques, which could include discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stock has been valued by the market since that date.
Revenue Recognition
The Company's policy on revenue is to recognize revenue when persuasive evidence of an arrangement exists, shipping has occurred or service obligations have been satisfied, the sales price is fixed or determinable and collection is probable. The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is typically upon shipping. Net sales are comprised of gross revenues less expected product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although the Company does not have a formal return policy, from time to time the Company will allow customers to return certain products. A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we dispose of the returned product, adjust inventory and record expense as appropriate. There were no allowances for sales returns as of September 30, 2018 and 2017.
The Company also enters into various license agreements that provide revenues based on royalties as a percentage of sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received. Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed.
Cost of Sales
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, and freight for our professional products divisions, and includes labor, third-party service providers, and amortization expense related to intellectual property for our licensing and entertainment divisions. In our professional products division, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These costs are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
Advertising Costs
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $1,059,000 and $352,000 in advertising and related marketing and promotional costs included in operating expenses during the years ended September 30, 2018 and 2017, respectively.
Shipping and Handling Fees and Costs
All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
Income Taxes
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. Level H&W is a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of September 30, 2018 and 2017, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had an $0 uninsured balance at September 30, 2018 and a $4,728 uninsured balance at September 30, 2017. Funds which are not subject to coverage or loss under FDIC were $4,003,003 and $0 at September 30, 2018 and 2017, respectively.
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company had three customers whose revenue in total represented 75% of the Company’s net sales for the year ended September 30, 2018, such customers represented 51%, 10%, and 14% of net sales. The aggregate accounts receivable balance of such customers represented 92% of the Company’s total accounts receivable and other accounts receivable as of September 30, 2018. The Company had five customers whose revenue in total represented 83% of the Company’s net sales for the year ended September 30, 2017 and whose accounts receivable balance in total represented 86% of the Company’s total accounts receivable as of September 30, 2017.
The Company had one service provider from whom the Company made approximately 23% of their purchases related to cost of sales during the 2018 fiscal year, and had no service provider from whom the Company made over 10% of their purchases during the 2017 fiscal year.
Debt Issuance Costs
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 ASC -718-10-30 “Compensation - Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
Net Loss Per Share
The Company uses ASC 260-10, “Earnings Per Share” for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
At September 30, 2018 and 2017, 781,826 and 545,475 potential shares, respectively, were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
Deferred IPO costs
In following the guidance under ASC 340-10-S99-1, IPO costs directly attributable to an offering of equity securities have been deferred and charged against the gross proceeds of the offering as a reduction of additional paid-in capital. These costs include legal fees related to the registration drafting and counsel, independent audit costs directly related to the registration and offering, SEC filing and print related costs, exchange listing costs, and IPO roadshow related costs.
New Accounting Standards
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company will adopt this standard in the first quarter of fiscal 2019 retrospectively with a cumulative adjustment to retained earnings. The Company in in process of reviewing all contracts to determine if there is any impact in implementing this guidance on its consolidated financial position, results of operations and liquidity.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
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2. ACQUISITIONS |
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Acquisitions | |
ACQUISITIONS | In March 2015 Level Brands formed BPU, a North Carolina limited liability company, and contributed $250,000 in exchange for its member interest. In April 2015 BPU entered into a Contribution Agreement with Beauty & Pinups, Inc., a New York corporation ("BPUNY"), and two members. Under the terms of the Contribution Agreement, BPUNY and its founder contributed the business and certain assets, including the trademark “Beauty & Pin Ups” and its variants, certain other intellectual property and certain inventory to BPU in exchange for a (i) 22% membership interest for two members, and (ii) $150,000 in cash. The fair value of the noncontrolling membership interest issued was based on the value of the initial contribution of $250,000 made by Level Brands. The total consideration paid was allocated to the net assets acquired based on relative fair values of those net assets as of the transaction date, in accordance with the Fair Value Measurement topic of the FASB ASC 820. The fair value was comprised of the cash, accounts payable acquired, non-controlling interest, intangibles, and a minimal amount of inventory, all in aggregate valued at $486,760. The Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018, see Note 6 for further details.
I’M1 was formed in California in September 2016. IM1 Holdings was the initial member of IM'1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. The shares were valued by the Company based upon assumptions and other information provided by management and used three approaches available when valuing a closely held business interest: the cost approach, the income approach and the market approach. Consequently, the market approach was deemed most appropriate, as it considers values established by non-controlling buyers and sellers of interests in the Company as evidenced by implied pricing in rounds of financing. In addition, given the limited data and outlook, the backsolve method was applied to assign values to the common equity, options and warrants after giving consideration to the preference of the convertible debt holders. The valuation determined the price per share of $0.85 which put the value of the 583,000 shares at $495,550. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $971,667.
EE1 was formed in California in March 2016. EE1 Holdings was the initial member of EE1 Holdings. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. We used the same valuation from the Company of $0.85 per share which put the value of the 283,000 shares at $240,550. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $471,667.
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MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES | The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the company will value it, and the underlying revenue, on the estimated fair value of the services provided. Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privately held entity).
As of April 2017, the Company received 2,500,000 shares of common stock as terms of its agreement for services, which was valued at $650,000 based on the trading price on the OTC Markets Group, Inc. the day of issuance, which was $0.26 per share. The shares were restricted as indicated under Securities Act of 1933 and may not be resold without registration under the Securities Act of 1933 or an exemption therefrom. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange.
As of June 30, 2017, the trading price on the OTC Markets was $0.03 and the Company had exchanged the 2,500,000 shares of common stock with the issuer for 65 shares of preferred stock. The 65 shares of preferred stock issued were each convertible using the lesser of either $0.26 per share or the 30 day trading average, that would provide a number of shares equal to the value of $10,000 per share. The Company classified the preferred stock as Level 3 for fair value measurement purposes as there were no observable inputs. The preferred shares also contained a put option for the holder for the stated value per share. The Company determined that the value of the preferred shares was $475,000, which was an approximation of fair market value. On July 31, 2017 the Company sold the preferred shares to a related party for $475,000; $200,000 in cash and a short term note receivable for $275,000 due July 31, 2018. As a result, the Company recorded an other-than-temporary impairment on securities for the year ended September 30, 2017 of $175,000 in the consolidated statement of operations. The short term note had a balance of $156,147 at September 30, 2018 and was subsequently amended with a payoff date of December 31, 2018.
On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share, the shares are not restricted. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the fair value of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests. In August 2017, the Company also provided referral services for kathy ireland WorldWide and this customer. As compensation the Company received an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the common stock and determined there was not an impairment for the year ended September 30, 2018.
On September 19, 2017, I’M1 and EE1 in aggregate exercised a warrant for 56,552 shares of common stock for services delivered to a customer and accounted for this in Investment Other Securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $56,552, which was based on all 2017 financing transactions of the customer set at $1.00 per share, with the most recent third party transaction in August 2017. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months. The Company assessed the common stock and determined there was not an impairment for the period ended September 30, 2018.
In November 2017, the Company completed services in relation to an agreement with SG Blocks, Inc. (NASDAQ: SGBX). As payment for these services, SG Blocks issued 50,000 shares of its common stock to Level Brands. The customer is a publicly traded entity and the stock was valued based on the trading price at the day the services were determined delivered, which was $5.09 per share for an aggregate value of $254,500. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange. The common stock is held as available for sale, and at September 30, 2018, the shares were $4.00 per share, and we have recorded $(54,500) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company assessed the common stock and determined there was not an indication of an other-than-temporary impairment.
In December 2017, the Company completed services per an advisory services agreement with Kure Corp, then a related party. As payment for these services, Kure Corp. issued 400,000 shares of its stock to the Company. The customer was a private entity and the stock was valued at $200,000, which was based on financing activities by Kure Corp. in September 2017 in which shares were valued at $0.50 per share. In addition, in December 2017, the Company engaged and completed advisory services in relation to an additional agreement with Kure Corp., for services related to their “vape-pod” strategy. As payment for these services, Kure Corp. issued an additional 400,000 shares of its stock to the Company which the Company received in January 2018. These shares were also valued at $200,000. The Company had classified this common stock, cumulative value of $400,000, as Level 3 for fair value measurement purposes as there were no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions. On April 30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In the merger agreement, each share of Kure Corp. was valued at $1.00 as the initial value and is to be exchanged for shares of Isodiol in three issuances as follows: 1) 30% of the initial value issued on May 1, 2018, the balance of shares issued based on earn out goals as 2) 50% of the initial value to be issued on January 31, 2019 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares and 3) 20% of the initial value to be issued on January 31, 2020 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares. We recorded the first issuance of 380,952 shares based on a trading price on April 30, 2018 of $0.63 per share valued at $240,000 as a Level 1 for fair value measurement purposes as the stock is actively traded on an exchange. We also removed the value of the Kure Corp. equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure Corp. equity will not be received until the future issuances based on the above earn out goals, we have recorded an accounts receivable other of $160,000 as of September 30, 2018. The Company has assessed the other accounts receivable and determined there is no indication that we will not receive the full amount. The common stock is held as available for sale, and at September 30, 2018, after a 1 for 10 reverse split, the trading price of the shares was $2.88 per share, and we recorded $(130,026) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company also assessed the common stock and determined there was not an indication of an other-than-temporary impairment
On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from a current customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPO offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The customer is a privately held entity. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the value paid, which was the price offered to all third party investors. As of September 30, 2018, the Company has determined there is no impairment on the value of the shares of stock.
On December 30, 2017 Level Brands entered into an Agreement with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company which is a developer of pharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products. The agreement required the Company to create a global branding and marketing campaign, which includes a joint strategy to develop Isodiol’s brand and products, an influencer program, and a social and traditional media strategy. As payment for these services, Isodiol agreed to pay $2,000,000 and issued 1,679,321 shares of its common stock to the Company, based on the trading price on the day of the agreement, which was $1.1909 per share. These shares were issued on January 22, 2018. In addition, the Company will provide ongoing quarterly support of the campaign which includes two branded videos each quarter, Ms. Ireland’s direct involvement in meetings or conferences once each quarter, and ongoing social media support by Ms. Ireland and Level Brands, all the services valued at $750,000 per quarter. This amount will be paid through issuance of Isodiol stock and the number of shares issued will be determined based on the trading value of Isodiol stock on the last day of each quarter. Isodiol made the $750,000 payment for quarterly services for March 31, 2018 through the issuance of shares of common stock, no other shares have been issued as of September 30, 2018 and thus we have recorded an accounts receivable other of $1,352,000 as of September 30, 2018. The common stock is held as available for sale, and at September 30, 2018, after a 1 for 10 reverse split, the shares were valued at $2.88 per share, and we recorded $(2,157,013) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company assessed the common stock and based on conversations with the company regarding its recent acquisitions, position in the CBD market, current financing events, and overall strategy, determined there was not an indication of an other-than-temporary impairment.
The table below summarizes the assets valued at fair value as of September 30, 2018:
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4. INVENTORY |
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INVENTORY | Inventory at September 30, 2018 and 2017 consists of the following:
During the year ended September 30, 2018, the Company determined that inventory was impaired by approximately $262,000. During the year ended September 30, 2017, the Company determined that inventory was impaired by approximately $67,000. Impairment charges were recorded within operating expenses for the respective periods.
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5. PROPERTY AND EQUIPMENT |
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PROPERTY AND EQUIPMENT | Major classes of property and equipment at September 30, 2018 and 2017 consist of the following:
Depreciation expense related to property and equipment was $36,244 and $55,755 for the years ended September 30, 2018 and 2017, respectively
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6. INTANGIBLE ASSETS |
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INTANGIBLE ASSETS | On April 13, 2015, BPU acquired from BPUNY certain assets, including the trademark "Beauty & Pin Ups" and its variants and certain other intellectual property and assumed $277,500 of BPUNY's accounts payable to its product vendor, which was paid off in April 2016.
On January 6, 2017, the Company acquired 51% ownership in I’M1 from I’M1 Holdings. I’M1’s assets include the trademark "I’M1” and its variants and certain other intellectual property. Specifically, a licensing agreement with kathy ireland® Worldwide and an advisory agreement for services with kathy ireland® Worldwide. The licensing agreement provides the rights to use of the tradename for business and licensing purposes, this is the baseline of the business and will be required as long as the business is operating. Our capability for renewals of these agreements are extremely likely as the agreements are with a related party. We also believe the existence of this agreement does not have limits on the time it will contribute to the generation of cash flows for I’M1 and therefore we have identified these as indefinite-lived intangible assets.
On January 6, 2017, the Company acquired 51% ownership in EE1 from EE1 Holdings. EE1’s assets include the trademark "EE1” and its variants and certain other intellectual property. Specifically, a production deal agreement with BMG Rights Management US and an advisory agreement for services with kathy ireland® Worldwide. We believe the production deal agreement and the advisory agreement do not have limits on the time they will contribute to the generation of cash flows for EE1 and therefore we have identified these as indefinite-lived intangible assets.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725. In addition, the Company agreed to pay $65,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef" and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $45,068 and $2,917 for the years ending September 30, 2018 and 2017.
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750. In addition, the Company agreed to pay $40,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin Du Jour," and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $25,426 and $1,603 for the years ending September 30, 2018 and 2017.
In September 2017, the Company entered into an exclusive seven year license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 was due in equal installments on January 1 of subsequent years until the license fee is paid, and were classified as long term liabilities related party as of December 31, 2017. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. 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 September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. We are amortizing the capitalized value of the cash over the ten year term of the agreement and have amortized $115,806 and $0 for the years ending September 30, 2018 and 2017.
Intangible assets as of September 30, 2018 and 2017 consisted of the following:
The Company has three definite lived intangible assets, which have seven or ten year lives.
Future amortization schedule:
The Company performs an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred and the Company evaluates the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company has performed a qualitative and quantitative analysis for the year ended September 30, 2017 and determined there has been no impairment. The Company has performed a qualitative and quantitative analysis for the year ended September 30, 2018 accounting for the performance of BPU and the business shift in relation to its original business model and current focus on licensing, and has determined that an impairment is required. As a result, the Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018. No other impairments were identified. Based upon the anticipated changes to BPU’s business model, the Company has determined that it is appropriate to reclassify the remaining carrying value of this intangible asset to a definite-lived asset. The Company expects to begin amortizing this asset beginning in the first quarter of 2019. This reclassification is being accounted for as a prospective change in estimate.
The Company performs an impairment analysis at August 1 annually on the definite lived intangible assets following the steps laid out in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change in the use of the asset, market price changes in the asset, or other events that impact the value of the asset. If an indicator is present we then perform a quantitative analysis to determine if the carrying amount of the asset is recoverable. This is done by comparing the total undiscounted future cash flows of the long-lived asset to its carrying amount. If the total undiscounted future cash flows exceed the carrying amount of the asset, the carrying amount is deemed recoverable and an impairment is not recorded. If the carrying amount of a long-lived asset is deemed to be unrecoverable, an impairment loss needs to be estimated. In order to calculate the impairment loss, the fair value of the asset must be determined. Fair value referenced here is determined using the guidance in FASB ASC Topic 820. After assessing indicators for impairment, the Company determined that a quantitative analysis was not needed as of September 30, 2018. |
7. LINE OF CREDIT |
12 Months Ended |
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Sep. 30, 2018 | |
Line Of Credit | |
LINE OF CREDIT | In August 2015, we entered into a one year $1,000,000 revolving line of credit agreement with LBGLOC, LLC, a related party. Under the terms of the agreement, we pay interest on any amounts available for advance at the rate of 10% per annum. We granted LBGLOC, LLC a blanket security agreement on our assets as collateral for amounts advanced under the credit line. As additional consideration for granting the credit line, we issued the lender 16,000 shares of common stock, valued at $32,000 and was recorded as a debt discount and amortized over the term of the note.
The agreement was renewed for an additional one year period on September 1, 2016. As additional consideration for renewing the credit line, we issued the lender 14,000 shares of common stock, which was valued at $105,000 based on the most recent equity financing in February 2016, and was recorded as a debt discount and was being amortized over the term of the note.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the outstanding principal balance of the line of credit in the amount of $593,797, together with the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. The Company recorded a loss on extinguishment of $8,750 which was recorded as interest expense in the consolidated statement of operations. In this transaction, the Company issued 195,740 shares of common stock.
The outstanding balances due under the agreements were $0 at September 30, 2018 and 2017, respectively.
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8. CONVERTIBLE PROMISSORY NOTES |
12 Months Ended |
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Sep. 30, 2018 | |
Convertible Promissory Notes | |
CONVERTIBLE PROMISSORY NOTES | On October 4, 2016 and October 24, 2016, the Company issued in aggregate $2,125,000 of 8% Convertible Promissory Notes to accredited investors. The securities consisted of 8% Convertible Notes with warrants to purchase 141,676 shares of the Company’s stock (the “Notes”). The Notes were convertible upon an IPO resulting in gross proceeds to the Company of at least $10,000,000, prior to July 1, 2017, at the option of the investor. The conversion price for the Notes was $5.00. All Notes converted will be subject to a 12-month lockup post IPO. The warrants have an exercise price of $7.80. The warrants expire in September 2021.
Effective June 30, 2017, the Company converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
The Company accounted for the initial issuance of these Notes in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”. The Black-Scholes value of the warrants, $5,159, associated with the issuance was recorded as a discount to debt and was amortized into interest expense. In addition, the issuance of the Notes and warrants were assessed and did not contain an embedded beneficial conversion feature as the effective conversion price was not less than the relative fair value of the instrument. We also had fees of $200,800 associated with the financing, which was recorded as a debt discount and amortized over the term of the Notes. With the June 30, 2017 conversion of the Notes, we accelerated the debt discount and have recorded interest expense related to these amounts of $205,959 for the year ended September 30, 2017. In addition, we accounted for a conversion inducement in accordance with ASC 470-20 on the conversion price reduction from $5.00 to $3.95 per share and recorded a non-cash debt conversion expense of $446,250 in the consolidated statement of operations for the year ended September 30, 2017.
The outstanding balances due under the Notes was $0 at both September 30, 2018 and 2017.
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9. RELATED PARTY TRANSACTIONS |
12 Months Ended |
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Sep. 30, 2018 | |
Related Party Transactions [Abstract] | |
RELATED PARTY TRANSACTIONS | In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution. Best Buddies International is an affiliate of a member of our board of directors.
On January 1, 2017, we entered into a sublease agreement for office space with Kure Corp., then a related party. The lease is for one year and the space was to be used by our subsidiary BPU. This sublease ended on January 1, 2018.
In February 2017 we entered into a master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuant to which we have engaged the company to provide non-exclusive strategic advisory services to us under a term expiring in February 2025. Under the terms of this agreement, Ms. Ireland serves in the non-executive positions as our Chairman Emeritus and Chief Brand Strategist. The agreement also provides that kathy ireland® Worldwide will provide input to us on various aspects of our corporate strategies and branding, provides access to us of its in-house design team to assist us in developing our brands. As compensation under the agreement we agreed to pay kathy ireland® Worldwide a nominal monthly fee. We are also responsible for the payment of expenses incurred by Ms. Ireland or kathy ireland® Worldwide in providing these services to our company.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Tommy Meharey pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of I’M1. We have agreed to pay Mr. Meharey a fee of $15,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Nic Mendoza pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a fee of $10,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Stephen Roseberry pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1 and I’M1. We have agreed to pay Mr. Roseberry a nominal monthly fee for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
In February 2017 the Company entered into an advisory agreement with Mr. Jon Carrasco, expiring in February 2019, pursuant to which he provides advisory and consulting services to us including serving as Global Creative Director of EE1 and I’M1. We have agreed to pay Mr. Carassco a nominal monthly fee for his services.
In February 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $68,550 for its services, which was recorded as consulting/advisory revenue. Sandbox LLC is an affiliate of a member of our board of directors.
In March 2017, our subsidiary I’M1 entered into a consulting agreement with Kure Corp, then a related party. In this agreement I’M1 provided services delivered in two phases. The first phase was delivered by March 31, 2017 which included a social media blitz and marketing and branding support and strategies for $200,000. The second phase was delivered by June 22, 2017 which included modeling impressions for the brand and extension of publicity to other media outlets for $400,000. In addition, in March 2017, I’M1 entered into a separate licensing agreement for 10 years with Kure Corp. under which we are to receive royalties based on gross sales of Kure Corp. products with the I’M1 brand.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the line of credit with LBGLOC LLC, which included the outstanding principal balance of $593,797 and the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman, received 94,475 shares of common stock in this transaction.
Effective June 30, 2017, the lenders converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. One note holder, Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman, and received a total of 26,836 shares.
In June 2017, the Company earned a referral fee from kathy ireland® Worldwide after establishing a business meeting resulting in a new license agreement for kathy ireland® Worldwide. The referral fee was paid out of 200,000 options issued to kathy ireland® Worldwide from the new client, which were exercised and transferred to the Company. The shares are valued at $114,000, which was derived after assessing the value of our services provided and determining a per share value of $0.57. The warrant was exercised in June 2017 and the shares issued to the Company in August 2017.
In June 2017, Kure Corp., then a related party, purchased products from our subsidiary BPU for resale in their stores. The total purchase was $97,850.
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company. The accredited investors included Stone Street Partners LLC, an entity controlled by our CEO and Chairman, and Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman.
On July 31, 2017, the Company sold preferred shares it had received from a customer as payment for services to a related party. The preferred shares were originally valued as marketable securities at $650,000 and were sold for $475,000, an approximation of fair market value, which was paid $200,000 in cash and a short term note of $275,000 at 3% interest, which is included in note receivable related party as of September 30, 2018 and September 30, 2017. The short term note was extended on August 1, 2018, and the outstanding principal of $155,400 at 5% interest is due December 31, 2018. The Company recorded an impairment of $175,000 for the year ended September 30, 2017 (see Note 3).
On August 1, 2017, the Company entered into an additional advisory agreement with Kure Corp., then a related party, in which the Company would act as an advisor regarding business strategy involving (1) conversion of Kure franchises into company stores, (2) conversion of Kure Corp. debt and preferred shares into common share of Kure Corp. and (3) preparation steps required and a strategy to position for a possible Reg A+ offering. The services are to be delivered in two phases, the first deliverables of items 1 and 2 above were delivered by September 30, 2017 and item 3 was delivered in June 2018. The Company was paid $200,000 in Kure Corp. stock for the first deliverables and was paid $145,500 in cash for the second deliverable.
In August 2017, EE1 entered into a representation agreement with Romero Britto and Britto Central, Inc. under which it was appointed as exclusive licensing consultant to license certain intellectual property in entertainment industry category, which includes theatre, film, art, dance, opera, music, literary, publishing, television and radio, worldwide except for South America. Under the terms of the agreement, EE1 will identify and introduce Britto to potential license opportunities, negotiate terms of license agreements, and implement and administer each eligible license agreement entered. As compensation for our services, EE1 is entitled to receive 35% of the net proceeds received under any license, and following the termination or expiration of the agreement, 15% of the net proceeds of eligible licenses. The President of Britto Central, Inc is the spouse of a member of our board of directors. This agreement was mutually terminated in September 2018.
In September 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $64,475 for its services, which were recorded as consulting/advisory revenue. EE1 engaged Sterling Winters Company to assist with this service and incurred a cost of sales for that service of $35,421. Sandbox LLC is an affiliate of a member of our board of directors.
On September 1, 2017, the Company entered into a license agreement with kathy ireland® Worldwide for certain use of kathy ireland trademark, likeness, videos, photos and other visual presentations for the Company’s IPO and associated roadshow. The Company paid $100,000 for this agreement.
In September 2017 EE1 created a marketing campaign for a customer and worked through their approved vendor, Sandbox LLC, to deliver services. Under the terms of the oral agreement, EE1 was paid $550,000 for its services from Sandbox. Sandbox LLC is an affiliate of a member of our board of directors. EE1 engaged Sterling Winters Company to assist with this campaign and incurred expenses of $250,000. Sterling Winters Company is a subsidiary of kathy ireland® Worldwide.
On September 8, 2017, the Company extended its Master Advisory and Consulting Agreement, executed in February 2017, with kathy ireland® Worldwide to February 2025.
In September 2017, the Company entered into an exclusive seven year wholesale license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 are due in equal installments on January 1 of subsequent years until the license fee is paid. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. Royalties are paid at 33 1/3% of net proceeds with the license fee being a credit against royalties. On January 30, 2018, the Company amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as an accrued expense related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds.
On December 11, 2017, the Company entered into a service agreement with Kure Corp., then a related party, to facilitate the “Vape Pod” transaction with the modular building systems vendor, SG Blocks, Inc., which is also a customer of our company. Under the terms of this agreement we also agreed to facilitate the introduction to third parties in connection with Kure Corp.'s initiative to establish Vape Pod's at U.S. military base retail locations and advising and aid in site selection for Kure retail stores on military bases and adjoining convenience stores, gas stations, and other similar retail properties utilizing Kure Corp.'s retail Vape Pod concept, among other services. As compensation for this recent agreement, we were issued 400,000 shares of Kure Corp.'s common stock which was valued at $200,000 (see Note 3).
On December 11, 2017 the Company also entered into a Revolving Line of Credit Loan Agreement with Kure Corp. pursuant to which we agreed to lend Kure Corp. up to $500,000 to be used for the purchase of prefabricated intermodal container building systems. This credit line was provided in connection with Kure Corp.'s recent Master Purchase Agreement with SG Blocks, Inc. for the purchase of 100 repurposed shipping containers for its Kure Vape Pod™ initiative. Under the terms of the Revolving Line of Credit Loan Agreement, Kure Corp. issued us a $500,000 principal amount secured promissory note, which bears interest at 8% per annum, and which matures on the earlier of one year from the issuance date or when Kure Corp. receives gross proceeds of at least $2,000,000 from the sale of its equity securities. As collateral for the repayment of the loan, pursuant to a Security Agreement we were granted a first position security interest in Kure Corp.'s inventory, accounts and accounts receivable. Our CEO and Chairman is the past Chairman of Kure Corp. and currently a minority shareholder of Kure Corp. Level Brands is also a shareholder of Kure Corp. The Revolving Line of Credit has never been utilized and on June 6, 2018, the agreement was terminated.
On December 21, 2017, the Company entered into a sublease agreement with a related party for office space for its subsidiary BPU. The initial lease period is for six months and then changes to a month to month lease. The space includes office and warehouse space and will cost $3,000 per month.
On January 1, 2018, the Company entered into a consulting agreement with Mr. Craig Brewer, Chairman of Kure Corp., then a related party, expiring in January 2019, pursuant to which he provides business consulting services to us, with a primary focus on BPU. The agreement may be canceled by either party with a 30 day notice. We have agreed to pay Mr. Brewer a fee of $9,000 per month for his services. This agreement ended on April 30, 2018.
In June 2018, per our agreement with kathy ireland® Worldwide, the company earned a referral fee of $150,000 for facilitating a business opportunity which led to a new license agreement for kathy ireland® Worldwide. The Company is to receive 50% of all royalty revenue earned ongoing via the new business contract.
In April 2018 through June 2018, EE1 engaged in five separate statements of work for various marketing campaigns, production processes, and documentary related services for Sandbox LLC. Under the terms of the agreements, EE1 will be paid in the range of $200,000 to $250,000 for each statement of work, from Sandbox LLC, all to be paid by December 31, 2018. Sandbox LLC is an affiliate of a member of our board of directors.
In September 2018, B&B Bandwidth purchased products from our subsidiary BPU for resale. The total purchase was $332,985. B&B Bandwidth management are affiliates of kathy ireland® Worldwide.
As we engage in providing services to customers, at times we will utilize related parties, typically as a part of our agreement with kathy ireland® Worldwide, to assist in delivery of the services. For the year ended September 30, 2018 and 2017, we incurred related party cost of sales of $635,710 and $333,773, respectively.
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10. SHAREHOLDERS' EQUITY |
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SHAREHOLDERS' EQUITY | Preferred Stock – We are authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. Our preferred stock does not have any preference, liquidation, or dividend provisions. No shares of preferred stock have been issued.
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 8,123,928 and 5,792,261 shares of common stock issued and outstanding at September 30, 2018 and 2017, respectively.
Common stock transactions:
Fiscal 2018:
On November 17, 2017, the Company completed an IPO of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million and net proceeds of $10.9 million.
In November 2017, we issued 6,667 shares of our common stock to an individual as part of a consulting agreement. The shares were valued at $37,002, based on the trading price upon issuance and expensed as contract compensation.
In January 2018, we issued 230,000 shares of our common stock, which were granted as restricted stock awards on October 1, 2016 to board members. The restricted stock awards vested on January 1, 2018. The shares were valued at fair market value upon issuance at $195,500 and amortized over the vesting period and expensed as stock compensation.
In March 2018, we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $20,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending June 2018.
In May 2018, we issued 60,000 shares of our common stock to an investment banking firm for general financial advisory and investment banking services. The shares were valued at $303,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2019.
In June 2018, we issued 25,000 shares of our common stock to a broker dealer for business advisory services. The shares were valued at $118,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
In July 2018 we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $18,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending November 2018.
Fiscal year 2017:
Per terms in the Operating Agreement of BPU, the Company could redeem the 10% membership interest of Sigan for $110,000 at any time before April 13, 2017. On October 14, 2016, as amended in March 2017, Sigan entered into an agreement with the Company and transferred their 10% member interest for 129,412 shares of the Company’s common stock.
In October 2016 we issued 38,358 shares of our stock to six individuals and entities upon the cashless exercise of 70,067 placement agents warrants previously granted to T.R. Winston & Co LLC, a broker-dealer and member of FINRA, and its affiliates.
In November 2016 we issued Stone Street Partners, LLC, a related party, an aggregate of 76,000 shares of our common stock valued at $570,000 as compensation for services, which had been accrued and expensed at September 30, 2016. The stock was valued at the time based on the most recent equity financing from February 2016 which was priced at what is a post reverse split price of $7.50.
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International, a related party, as a charitable contribution.
In January 2017 we issued 26,667 shares of our common stock to two individuals as part of consulting agreements. The shares were valued at $22,667, based on the valuation from the Company and expensed as salary compensation.
In January 2017, the Company acquired 51% ownership in IM1 in exchange for 583,000 shares of common stock, which was valued at $495,550.
In January 2017, the Company acquired 51% ownership in EE1 in exchange for 283,000 shares of common stock, which was valued at $240,550.
Effective April 28, 2017, Priel Maman entered into an agreement with the Company to transfer his 12% member interest in BPU for 155,294 shares of the Company’s common stock, valued at $132,000. The Company now owns 100% membership interest of BPU.
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the outstanding line of credit principal balance of $593,797, together with the accrued interest of $179,380 for a total conversion amount of $773,177 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 195,740 shares of common stock.
Effective June 30, 2017, the Company converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
On June 30, 2017, the Company entered into subscription agreements for 77,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $304,150 to the Company. In this transaction, $201,450 was received on June 30, 2017 and $102,700 was received July 5, 2017.
On June 30, 2017, the Company entered into an agreement with an investor relations firm and as part of the compensation issued 5,000 shares of the Company’s common stock for services. The shares were issued July 5, 2017 and valued at $19,750.
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company.
On August 1, 2017, the Company issued 1,500 shares of common stock upon exercise of options.
On August 24, 2017, the Company issued 19,100 shares of common stock to a vendor for services. The shares were valued at $75,445 and are included in deferred initial public offering costs as of September 30, 2017.
On September 8, 2017, the Company entered into a wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725.
On September 8, 2017, the Company entered into a wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750.
On September 30, 2017, the Company issued 7,593 shares in aggregate to 3 independent directors as board compensation. The shares were valued at $30,000 in aggregate.
Stock option transactions:
Fiscal year 2018:
On May 14, 2018 we granted an aggregate of 50,000 common stock options to an employee. The options vest 50% November 14, 2018 and 50% May 14, 2019. The options have an exercise price of $5.27 per share and a term of seven years. We have recorded an expense for the options of $38,950 for the fiscal year ended September 30, 2018.
On May 29, 2018 we granted an aggregate of 150,000 common stock options to an employee. The options vest 50% immediately and 50% January 1, 2019. The options have an exercise price of $4.78 per share and a term of ten years. We have recorded an expense for the options of $302,750 for the fiscal year ended September 30, 2018.
On August 16, 2018 we granted per the annual board compensation plan, an aggregate of 35,000 common stock options to five directors. The options vest immediately, have an exercise price of $3.34 per share and a term of ten years. We have recorded an expense for the options of $80,150 for the fiscal year ended September 30, 2018.
Fiscal year 2017:
On October 1, 2016 we granted an aggregate of 14,300 common stock options to two employees. The options vest 16% immediately, 42% January 1, 2017 and 42% January 1, 2018. The options have an exercise price of $7.50 per share and a term of five years. We have recorded an expense for the options of $576 for the year ended September 30, 2017.
On October 1, 2016 we granted an aggregate of 171,500 common stock options to two employees. The options vest ratably on January 1, 2018. The options have an exercise price of $7.50 per share and a term of six years. We have recorded an expense for the options of $19,208 for the year ended September 30, 2017.
On May 1, 2017 we granted an aggregate of 100,000 common stock options to one employee. The options vest 50% immediately and 50% on January 1, 2018. The options have an exercise price of $4.00 per share and a term of seven years. We have recorded an expense for the options of $17,469 for the year ended September 30, 2017.
On August 31, 2017 we granted an aggregate of 20,000 common stock options to one employee. The options vest ratably on August 31, 2018. The options have an exercise price of $4.00 per share and a term of seven years. We have recorded an expense for the options of $3,753 for the year ended September 30, 2017.
On September 8, 2017 we granted an aggregate of 7,500 common stock options to three consultants. The options vest ratably on October 1, 2018. The options have an exercise price of $4.00 per share and a term of five years. We have recorded an expense for the options of $897 for the year ended September 30, 2017.
The expected volatility rate was estimated based on comparison to the volatility of a peer group of companies in the similar industry. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the years ended September 30, 2018 and 2017:
Warrant transactions:
Fiscal 2018:
On November 17, 2017 in relation to the IPO, we issued to the selling agent warrants to purchase in aggregate 100,000 shares of common stock with an exercise price of $7.50. The warrants expire on October 27, 2022. The warrants were valued at $171,600 and recorded as paid in capital. Fiscal 2017:
On September 8, 2017, the Company entered into a wholesale license agreement with Andre Carthen and as part of the agreement issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338.
On September 8, 2017, the Company entered into a wholesale license agreement with Nicholas Walker and as part of the agreement issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900.
On October 1, 2016, the board approved the strike price adjustment for certain placement agent warrants totaling 20,067 from a strike price of $8.75 to $5.00. On October 26, 2016, 38,358 shares of common stock were issued, upon a cashless exercise of the 20,067 warrants above and another 50,000 warrants, at a strike price of $2.75, which had been issued to a placement agent for prior services related to previous private placements of our securities.
On October 4, 2016 and October 24, 2016, we issued in aggregate, warrants exercisable into 141,676 shares of common stock with an exercise price of $7.80. The warrants expire on September 30, 2021. The warrants were issued in conjunction with the Company’s 8% convertible notes, described in Note 8.
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the years September 30, 2018 and 2017:
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11. STOCK-BASED COMPENSATION |
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STOCK-BASED COMPENSATION | Equity Compensation Plan – On June 2, 2015, the Company’s board of directors approved the 2015 Equity Compensation Plan (“Plan”). The Plan made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stock, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 100,000 shares of common stock.
We account for stock-based compensation using the provisions of ASC 718. ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the board of directors until the board establishes a Compensation Committee. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of our stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five to ten year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
Stock Options – The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
The following table summarizes stock option activity under the Plan:
As of September 30, 2018, there was approximately $169,639 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 0.6 years.
Restricted Stock Award transactions:
On October 1, 2016, the Company issued 230,000 restricted stock awards in aggregate to board members and the Chairman who is also our Chief Executive Officer. The restricted stock awards vested January 1, 2018. The stock awards are valued at fair market upon issuance at $195,500 and amortized over the vesting period. We recognized $39,100 and $156,400 of stock based compensation expense for the years ended September 30, 2018 and 2017, respectively.
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12. WARRANTS |
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WARRANTS | Transactions involving our equity-classified warrants are summarized as follows:
The following table summarizes outstanding common stock purchase warrants as of September 30, 2018:
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13. SEGMENT INFORMATION |
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SEGMENT INFORMATION | The Company operates through its three subsidiaries in three business segments: the Professional Products, the Licensing, and the Entertainment divisions. The Professional Products division is designed to be an innovative and cutting-edge producer and marketer of quality hair care products and has expanded into licensing opportunities. The Licensing division is designed to establish a lifestyle brand via licensing of select products / categories (grooming, personal care, cologne, accessories, jewelry and apparel) with a focus on addressing the needs of the men. The Entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms. The corporate parent also will generate revenue from time to time, thru advisory consulting agreements. This revenue is similar to the Entertainment divisions’ revenue process and we have allocated revenue from corporate to the Entertainment division for segment presentation.
The Professional Products division operated for the full year in fiscal 2018 and 2017. The Licensing and Entertainment divisions were both acquired in January 2017.
The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued.
Condensed summary segment information follows for the years ended September 30, 2018 and 2017.
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14. INCOME TAXES |
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INCOME TAXES | The Company generated operating losses for the years ended September 30, 2018 and 2017 on which it has recognized a full valuation allowance. The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
The following table presents the components of the provision for income taxes for the periods presented:
A reconciliation of the federal statutory income tax rate to the Company's effective income tax rate is as follows:
Significant components of the Company's deferred income taxes are shown below:
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.
Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.
The total valuation allowance decreased by $1,054,000 and increased by $788,000 as of September 30, 2018 and 2017, respectively.
At September 30, 2018, the Company has utilizable NOL carryforwards of approximately $6.0 million. The federal NOL carryforwards begin to expire in 2035.
The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted. As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. As the Company has a fiscal year ending September 30, the blended effective rate is 24.3% for the fiscal year ended September 30, 2018. The Company revalued its deferred tax assets and liabilities, as well as the valuation allowance, at the date of enactment and these repricings are reflected gross in the above presented rate reconciliation. Finally, as the Company does not own more than 10% of any foreign companies, there is no impact of IRC Section 965 to the Company as a result of the TCJA.
The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2018 and 2017, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
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15. LEASES |
12 Months Ended |
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Sep. 30, 2018 | |
Leases [Abstract] | |
LEASES | The Company currently leases its corporate office space under an agreement through December 2019. The Agreement included (1) a discount on rent to $12,000 per month if the full rent was prepaid and (2) a right of return on payments prorated if the landlord exercised an early termination of the lease. In April 2018, we made a full prepayment of $240,000. In addition, the Company has a lease for office space until February 2019 in California for the licensing and brand management divisions. Rent expense in aggregate was $262,264 and $135,944 for the years ended September 30, 2018 and 2017, respectively.
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16. COMMITMENTS AND CONTINGENCIES |
12 Months Ended |
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Sep. 30, 2018 | |
Commitments And Contingencies | |
COMMITMENTS AND CONTINGENCIES | Wholesale License Agreement
In September 2017 we entered into a wholesale license agreement with kathy ireland® Worldwide under which we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
As compensation under this agreement, we agreed to pay kathy ireland® Worldwide a marketing fee of $840,000, of which $480,000 was paid by January 1, 2018. The balance is payable in three equal annual installments beginning January 1, 2019, subject to acceleration. Under the terms of this agreement, we also agreed to pay kathy ireland® Worldwide a royalty of 33 1/3% of our net proceeds under any sublicense agreements we may enter into for this intellectual property.
The initial term of this wholesale license agreement expires in September 2024, and we have the right to renew it for an additional three year period by paying an additional marketing fee of $360,000.
On January 30, 2018, Level Brands, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as an accrued expense related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds.
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17. SUBSEQUENT EVENTS |
12 Months Ended |
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Sep. 30, 2018 | |
Subsequent Events [Abstract] | |
SUBSEQUENT EVENTS | On October 2, 2018, the Company completed a secondary public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of $6,899,998. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
On August 1, 2018, the Company extended the term of its original note receivable of $275,000 with a related party. The outstanding principal of $155,400 as of September 30, 2018, with 5% interest is due by December 31, 2018. On November 15 2018, the note was paid in full.
On December 3, 2018 the Company and our newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, upon consummation of a two-step merger, cbdMD LLC will continue as a wholly-owned subsidiary of our company and will continue the operations of Cure Based Development pre-closing. Cure Based Development, a Charlotte, NC-based company formed in August 2017, is owner, operator and manufacturer of nationally recognized consumer cannabidiol (CBD) brand cbdMD which currently offers a variety of CBD products from topicals and tinctures to bath bombs and pet products, manufactured and sold direct to consumers online via the company website. Cure Based Development also provides wholesale distribution with retailers currently selling products at brick-and-mortar locations, compounding pharmacies, salons, supplement stores, and pet shops. Cure Based Development reported revenues of $354 and $3,280,009 for the period from inception through December 31, 2017 and for the eight months ended August 31, 2018, respectively, and a net loss of $323,197 and $353,561 for those periods.
Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the two-step merger, the members of Cure Based Development will receive contractual rights to receive 15,525,000 shares of our common stock, representing approximately 60% of our outstanding common stock following such issuance. Assuming the closing of the two-step merger, these initial shares will be issued as promptly as practicable following receipt of approval by our shareholders for the possible issuance of in excess of 19.99% of our presently outstanding common stock in accordance with the rule of the NYSE American (the “Shareholder Approval”). The Merger Agreement also provides that one of the members of Cure Based Development will be entitled to receive up to an additional 15,525,000 shares of our common stock as part of the merger consideration, upon Shareholder Approval and the satisfaction of certain aggregate net revenue criteria by cbdMD LLC within 60 months following the closing. We expect to include the proposal for Shareholder Approval of the issuance of the initial shares as well as the possible future issuance of the earnout shares in the proxy statement for our 2019 annual meeting of shareholders.
Following the execution of the Merger Agreement, we lent Cure Based Development $2,000,000 under the terms of a one year 6% secured promissory note. At closing Mr. R. Scott Coffman, the CEO and a manager of Cure Based Development, will be appointed to our Board of Directors and become the chief executive officer of our cbdMD LLC subsidiary. If the pending transaction closes, it will result in a change of control of our company and the combined company will be required to satisfy NYSE American initial listing standards for the continued listing of our common stock on the NYSE American following the closing.
In addition to other conditions to closing as described in the Merger Agreement, the completion of the two-step merger is subject to the approval by the President of the United States of the Agricultural and Nutrition Act of 2018, or such other titled Federal legislation, which, when approved, contains a permanent declassification of cannabidiol (CBD) as a controlled substance under Federal law. Because this and certain other conditions precedent to closing are beyond our control, we do not know when, if ever, that this transaction will be consummated.
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
12 Months Ended |
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Sep. 30, 2018 | |
Organization And Summary Of Significant Accounting Policies Policies Abstract | |
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).
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Reclassifications | Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation. Such reclassifications had no effect on previously reported net loss, shareholders’ equity or cash flows.
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Use of Estimates | The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, common stock prior to IPO, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities. Actual results could differ from these estimates.
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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.
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Accounts receivable and Accounts receivable other | Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did not have an allowance at September 30, 2018.
In addition, the Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position). In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a privately held entity).
Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the consolidated financial statements.
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Marketable Securities | At the time of acquisition, the marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-sale securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded in the accumulated other comprehensive income (loss) component of shareholders’ equity in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Code (“ASC”) 320-10. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income on the Company’s consolidated statements of operations.
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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.
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Other-than-Temporary Impairment | The Company’s management periodically assesses its marketable securities and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statements of operations. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its carrying value, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations.
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Inventory | Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, and production fill and labor (which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and perform a physical inventory count annually near fiscal year end.
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Property and Equipment | Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show booths and equipment, three years for manufacturer’s molds and plates, three years for computer, furniture and equipment, and three years for software. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
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Fair value accounting | The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
When the Company records an investment in marketable securities the asset is valued at fair value. For investment other securities, it will value the asset using the cost method of accounting. Any changes in fair value for marketable securities, during a given period will be recorded as a gain or loss in other comprehensive income (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.
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Intangible Assets | The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Events that are assessed include contracts acquired and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite lived intangibles are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.
In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potential assets and liabilities for valuation including the determination of intangible asset values.
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Common stock | Level Brands was a privately owned company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that include the issuance of common stock to an unrelated party at a specified price. In the event, however, that there was not a recent and significant equity financing transaction or the nature of the business had significantly changed subsequent to an equity financing, we used valuation techniques, which could include discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stock has been valued by the market since that date.
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Revenue Recognition | The Company's policy on revenue is to recognize revenue when persuasive evidence of an arrangement exists, shipping has occurred or service obligations have been satisfied, the sales price is fixed or determinable and collection is probable. The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is typically upon shipping. Net sales are comprised of gross revenues less expected product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although the Company does not have a formal return policy, from time to time the Company will allow customers to return certain products. A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we dispose of the returned product, adjust inventory and record expense as appropriate. There were no allowances for sales returns as of September 30, 2018 and 2017.
The Company also enters into various license agreements that provide revenues based on royalties as a percentage of sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement. Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received. Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed.
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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.
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Advertising Costs | The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $1,059,000 and $352,000 in advertising and related marketing and promotional costs included in operating expenses during the years ended September 30, 2018 and 2017, respectively.
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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.
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Income Taxes | The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. Level H&W is a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of September 30, 2018 and 2017, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
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Concentrations | Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had an $0 uninsured balance at September 30, 2018 and a $4,728 uninsured balance at September 30, 2017. Funds which are not subject to coverage or loss under FDIC were $4,003,003 and $0 at September 30, 2018 and 2017, respectively.
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company had three customers whose revenue in total represented 75% of the Company’s net sales for the year ended September 30, 2018, such customers represented 51%, 10%, and 14% of net sales. The aggregate accounts receivable balance of such customers represented 92% of the Company’s total accounts receivable and other accounts receivable as of September 30, 2018. The Company had five customers whose revenue in total represented 83% of the Company’s net sales for the year ended September 30, 2017 and whose accounts receivable balance in total represented 86% of the Company’s total accounts receivable as of September 30, 2017.
The Company had one service provider from whom the Company made approximately 23% of their purchases related to cost of sales during the 2018 fiscal year, and had no service provider from whom the Company made over 10% of their purchases during the 2017 fiscal year.
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Debt Issuance Costs | 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).
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Stock-Based Compensation | We account for our stock compensation under ASC -718-10-30 “Compensation - Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
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Net Loss Per Share | The Company uses ASC 260-10, “Earnings Per Share” for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
At September 30, 2018 and 2017, 781,826 and 545,475 potential shares, respectively, were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
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Deferred IPO costs | In following the guidance under ASC 340-10-S99-1, IPO costs directly attributable to an offering of equity securities have been deferred and charged against the gross proceeds of the offering as a reduction of additional paid-in capital. These costs include legal fees related to the registration drafting and counsel, independent audit costs directly related to the registration and offering, SEC filing and print related costs, exchange listing costs, and IPO roadshow related costs.
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New Accounting Standards | In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company will adopt this standard in the first quarter of fiscal 2019 retrospectively with a cumulative adjustment to retained earnings. The Company in in process of reviewing all contracts to determine if there is any impact in implementing this guidance on its consolidated financial position, results of operations and liquidity.
In February 2016, the FASB issued ASU 2016-02, Leases. The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
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3. MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES (Tables) |
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Marketable Securities And Investment Other Securities Tables Abstract | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets valued at fair value |
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4. INVENTORY (Tables) |
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Inventory |
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5. PROPERTY AND EQUIPMENT (Tables) |
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property And Equipment Tables Abstract | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Major classes of property and equipment |
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6. INTANGIBLE ASSETS (Tables) |
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Intangible assets |
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Future amortization schedule |
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10. SHAREHOLDERS' EQUITY (Tables) |
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Shareholders Equity Tables Abstract | |||||||||||||||||||||||||||||||||||||||||||
Fair value assumptions | The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the years ended September 30, 2018 and 2017:
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the years September 30, 2018 and 2017:
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11. STOCK-BASED COMPENSATION (Tables) |
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Stock option activity |
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12. WARRANTS (Tables) |
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Warrants Tables Abstract | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of warants |
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Outstanding common stock purchase warrants |
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13. SEGMENT INFORMATION (Tables) |
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Segment information |
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14. INCOME TAXES (Tables) |
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Components of provision for income taxes |
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Reconciliation of effective income tax rate |
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Significant components of deferred income taxes |
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Organization And Summary Of Significant Accounting Policies Details Narrative Abstract | ||
Accounts receivable allowance | $ 0 | $ 50,000 |
Advertising costs | 1,059,000 | 352,000 |
Uninsured balance | $ 0 | $ 4,728 |
Shares excluded | 781,826 | 545,475 |
3. MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES (Details) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Marketable securities | $ 1,050,961 | |
Investment other securities | 1,159,112 | $ 859,112 |
In Active Markets for Identical Assets and Liabilities (Level 1) | ||
Marketable securities | 1,050,961 | |
Investment other securities | 0 | |
Significant Other Observable Inputs (Level 2) | ||
Marketable securities | 0 | |
Investment other securities | 0 | |
Significant Unobservable Inputs (Level 3) | ||
Marketable securities | 0 | |
Investment other securities | $ 1,159,112 |
3. MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Marketable Securities And Investment Other Securities Details Narrative Abstract | ||
Other than temporary impairment | $ 0 | $ (175,000) |
4. INVENTORY (Details) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Inventory Details Abstract | ||
Finished goods | $ 18,531 | $ 375,459 |
Inventory components | 104,692 | 212,738 |
Inventory | $ 123,223 | $ 588,197 |
4. INVENTORY (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
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Inventory Details Narrative Abstract | ||
Inventory impairment | $ 262,000 | $ 67,000 |
5. PROPERTY AND EQUIPMENT (Details) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Property and equipment, gross | $ 143,093 | $ 243,447 |
Less accumulated depreciation | (89,613) | (107,971) |
Net property and equipment | 53,480 | 135,476 |
Computers, furniture and equipment | ||
Property and equipment, gross | 59,770 | 37,261 |
Show booth and equipment | ||
Property and equipment, gross | 49,123 | 171,986 |
Manufacturers molds and plates | ||
Property and equipment, gross | $ 34,200 | $ 34,200 |
5. PROPERTY AND EQUIPMENT (Details Narrative) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Property And Equipment Details Narrative Abstract | ||
Depreciation expense | $ 36,244 | $ 55,755 |
6. INTANGIBLE ASSETS (Details) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Intangible assets | $ 3,173,985 | $ 3,240,287 |
Trademark and other intellectual property related to BPU | ||
Intangible assets | 246,760 | 486,760 |
Trademark and other intellectual property related to IM1 | ||
Intangible assets | 971,667 | 971,667 |
Trademark and other intellectual property related to EE1 | ||
Intangible assets | 471,667 | 471,667 |
Trademark, tradename and other intellectual property related to kathy ireland Health & Wellness, net | ||
Intangible assets | 1,074,194 | 830,000 |
Cash, warrants and stock issued related to the Wholesale license agreement with Chef Andre Carthen, net | ||
Intangible assets | 262,077 | 307,146 |
Cash, warrants and stock issued related to the Wholesale license agreement with Nicholas Walker, net | ||
Intangible assets | $ 147,620 | $ 173,047 |
6. INTANGIBLE ASSETS (Details 1) |
Sep. 30, 2018
USD ($)
|
---|---|
Trademark, tradename and other intellectual property related to kathy ireland Health & Wellness, net | |
Unamortized | $ 1,074,194 |
2019 | 116,129 |
2020 | 116,129 |
2021 | 116,129 |
2022 | 116,129 |
2023 | 116,129 |
Thereafter | 493,549 |
Cash, warrants and stock issued related to the Wholesale license agreement with Chef Andre Carthen, net | |
Unamortized | 262,077 |
2019 | 44,294 |
2020 | 44,294 |
2021 | 44,294 |
2022 | 44,294 |
2023 | 44,294 |
Thereafter | 40,607 |
Cash, warrants and stock issued related to the Wholesale license agreement with Nicholas Walker, net | |
Unamortized | 147,620 |
2019 | 24,950 |
2020 | 24,950 |
2021 | 24,950 |
2022 | 24,950 |
2023 | 24,950 |
Thereafter | $ 22,871 |
7. LINE OF CREDIT (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
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Line Of Credit Details Narrative Abstract | ||
Line of credit | $ 0 | $ 0 |
8. CONVERTIBLE PROMISSORY NOTES (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Convertible Promissory Notes Details Narrative Abstract | ||
Interest | $ 205,959 | |
Noncash debt conversion | $ 0 | 446,250 |
Convertible promissory notes | $ 0 | $ 0 |
9. RELATED PARTY TRANSACTIONS (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
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Related Party Transactions | ||
Related party cost of sales | $ 635,710 | $ 333,773 |
10. SHAREHOLDERS' EQUITY (Details) - $ / shares |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Dividend yield | 0.00% | 0.00% |
Warrants | ||
Exercise price | $ 7.50 | |
Risk free interest rate | 2.06% | |
Volatility | 43.12% | |
Expected term | 5 years | 5 years |
Dividend yield | 0.00% | 0.00% |
Minimum | ||
Exercise price | $ 3.34 | $ 4.00 |
Risk free interest rate | 2.77% | 1.14% |
Volatility | 57.76% | 39.44% |
Expected term | 7 years | 5 years |
Minimum | Warrants | ||
Exercise price | $ 4.00 | |
Risk free interest rate | 1.22% | |
Volatility | 39.41% | |
Maximum | ||
Exercise price | $ 5.27 | $ 7.50 |
Risk free interest rate | 2.96% | 2.13% |
Volatility | 64.74% | 60.39% |
Expected term | 10 years | 7 years |
Maximum | Warrants | ||
Exercise price | $ 7.80 | |
Risk free interest rate | 1.64% | |
Volatility | 54.49% |
10. SHAREHOLDERS' EQUITY (Details Narrative) - shares |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Shareholders Equity Details Narrative Abstract | ||
Common stock issued | 8,123,928 | 5,792,261 |
Common stock outstanding | 8,123,928 | 5,792,261 |
11. STOCK-BASED COMPENSATION (Details) - Options - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Number of Options Outstanding, Beginning | 333,300 | 40,000 |
Number of Options Granted | 235,000 | 313,300 |
Number of Options Exercised | 0 | (1,500) |
Number of Options Forfeited | (98,650) | (18,500) |
Number of Options Outstanding, Ending | 469,650 | 333,300 |
Number of Options Exerciseable | 337,150 | |
Weighted Average Exercise Price Outstanding, Beginning | $ 5.83 | $ 2.00 |
Weighted Average Exercise Price Granted | 4.67 | 6.08 |
Weighted Average Exercise Price Exercised | .00 | .00 |
Weighted Average Exercise Price Forfeited | 6.38 | .00 |
Weighted Average Exercise Price Outstanding, Ending | 5.13 | $ 5.83 |
Weighted Average Exercise Price Exerciseable | $ 5.22 | |
Weighted average remaining contractual terms (in years), outstanding | 6 years 10 months 24 days | |
Weighted average remaining contractual terms (in years), exerciseable | 6 years 4 months 24 days | |
Aggregate Intrinsic Value Outstanding, Ending | $ 0 | |
Aggregate Intrinsic Value Exerciseable | $ 0 |
11. STOCK-BASED COMPENSATION (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Unrecognized compensation cost | $ 169,639 | |
Restricted Stock | ||
Stock based compensation expense | $ 39,100 | $ 156,400 |
12. WARRANTS (Details) - Warrants - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Number of Options Outstanding, Beginning | 212,176 | 70,067 |
Number of Options Issued | 100,000 | 212,176 |
Number of Options Exercised | 0 | (70,067) |
Number of Options Forfeited | 0 | 0 |
Number of Options Outstanding, Ending | 312,176 | 212,176 |
Number of Options Exerciseable | 312,176 | |
Weighted Average Exercise Price Outstanding, Beginning | $ 6.53 | $ 4.47 |
Weighted Average Exercise Price Granted | 7.50 | 6.53 |
Weighted Average Exercise Price Exercised | .00 | 4.47 |
Weighted Average Exercise Price Forfeited | .00 | 0.00 |
Weighted Average Exercise Price Outstanding, Ending | 6.84 | $ 6.53 |
Weighted Average Exercise Price Exerciseable | $ 6.84 | |
Weighted average remaining contractual terms (in years), outstanding | 3 years 6 months | |
Weighted average remaining contractual terms (in years), exerciseable | 3 years 6 months | |
Aggregate Intrinsic Value Outstanding, Ending | $ 0 | |
Aggregate Intrinsic Value Exerciseable | $ 0 |
12. WARRANTS (Details 1) - $ / shares |
12 Months Ended | ||
---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
Sep. 30, 2016 |
|
Warrants | |||
Number of shares | 312,176 | 212,176 | 70,067 |
Weighted-average exercise price | $ 6.84 | $ 6.53 | $ 4.47 |
Warrant 1 | |||
Number of shares | 141,676 | ||
Weighted-average exercise price | $ 7.80 | ||
Expiration | September 2021 | ||
Warrant 2 | |||
Number of shares | 100,000 | ||
Weighted-average exercise price | $ 7.50 | ||
Expiration | October 2022 | ||
Warrant 3 | |||
Number of shares | 70,500 | ||
Weighted-average exercise price | $ 4.00 | ||
Expiration | September 2022 |
13. SEGMENT INFORMATION (Details) - USD ($) |
12 Months Ended | ||||
---|---|---|---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
||||
Net sales | $ 6,428,096 | $ 2,743,715 | |||
Net Sales related party | 1,992,046 | 1,731,238 | |||
Total Net Sales | 8,420,142 | 4,474,953 | |||
Income (loss) from Operations before Overhead | 2,198,983 | (370,127) | |||
Allocated Corporate Overhead | [1] | 2,136,149 | 1,016,041 | ||
Net Loss | 62,834 | (1,386,168) | |||
Assets | 15,017,612 | 7,069,439 | |||
Professional Product Division | |||||
Net sales | 95,776 | 872,354 | |||
Net Sales related party | 332,955 | 97,850 | |||
Total Net Sales | 428,731 | 970,204 | |||
Income (loss) from Operations before Overhead | (1,144,557) | (1,705,081) | |||
Allocated Corporate Overhead | [1] | 108,767 | 354,362 | ||
Net Loss | (1,253,324) | (2,059,443) | |||
Assets | 2,840,222 | 3,068,606 | |||
Licensing Division | |||||
Net sales | 5,213,360 | 1,194,582 | |||
Net Sales related party | 0 | 600,000 | |||
Total Net Sales | 5,213,360 | 1,794,582 | |||
Income (loss) from Operations before Overhead | 3,109,601 | 637,888 | |||
Allocated Corporate Overhead | [1] | 1,322,604 | 338,808 | ||
Net Loss | 1,786,997 | 299,080 | |||
Assets | 7,685,509 | 2,603,075 | |||
Entertainment Division | |||||
Net sales | 1,118,960 | 676,779 | |||
Net Sales related party | 1,659,091 | 1,033,388 | |||
Total Net Sales | 2,778,051 | 1,710,167 | |||
Income (loss) from Operations before Overhead | 233,939 | 697,066 | |||
Allocated Corporate Overhead | [1] | 704,778 | 322,871 | ||
Net Loss | (470,839) | 374,195 | |||
Assets | $ 4,491,881 | $ 1,397,758 | |||
|
14. INCOME TAXES (Details) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Current: | ||
Federal | $ 0 | $ 0 |
State | 0 | 0 |
Total Current | 0 | 0 |
Deferred: | ||
Federal | 15,000 | 24,000 |
State | 1,000 | 1,000 |
Total Deferred | 16,000 | 25,000 |
Total expense (benefit) for income taxes | $ 16,000 | $ 25,000 |
14. INCOME TAXES (Details 1) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Income Taxes Details 1Abstract | ||
Federal statutory income tax rate | 24.30% | 34.00% |
State income taxes, net of federal benefit | 49.00% | 3.20% |
Permanent differences | (384.50%) | 0.00% |
Tax impact of federal tax rate change | 1708.10% | 0.00% |
Limitation on net operating losses | 1065.80% | (2.30%) |
Tax impact of non-controlling interest | 246.40% | 21.10% |
Change in valuation allowance | 2250.50% | (57.80%) |
Provision for income taxes | (34.20%) | (1.80%) |
14. INCOME TAXES (Details 2) - USD ($) |
Sep. 30, 2018 |
Sep. 30, 2017 |
---|---|---|
Deferred tax assets: | ||
Net operating loss carryforwards | $ 1,396,000 | $ 2,304,000 |
Stock compensation | 139,000 | 87,000 |
Investments | 0 | 32,000 |
Accrued expenses | 0 | 2,000 |
Intangibles | 42,000 | 0 |
Capitalized expenses | 7,000 | 0 |
Charitable contributions | 26,000 | 10,000 |
Total deferred tax assets | 1,610,000 | 2,435,000 |
Deferred tax liabilities | ||
Prepaid expenses | (177,000) | (31,000) |
Management fees | (169,000) | (73,000) |
Intangibles | (21,000) | (33,000) |
Fixed assets | (1,000) | (18,000) |
Total deferred tax liabilities | (368,000) | (155,000) |
Net deferred tax assets | 1,242,000 | 2,280,000 |
Valuation allowance | (1,263,000) | (2,317,000) |
Net deferred tax liability | $ (21,000) | $ (37,000) |
14. INCOME TAXES (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Income Taxes Details Narrative Abstract | ||
Valuation allowance increase | $ (1,054,000) | $ 788,000 |
Net operating loss carryforward | $ 6,000,000 |
15. LEASES (Details Narrative) - USD ($) |
12 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Leases | ||
Rent expense | $ 262,264 | $ 135,944 |
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