NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED DECEMBER 31, 2018 AND 2017
NOTE 1 – 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 operate from our offices located in
Charlotte, North Carolina. Our fiscal year end is established as
September 30.
The accompanying unaudited interim condensed consolidated financial
statements of Level Brands have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“GAAP”) and the rules of the Securities and
Exchange Commission (“SEC”) and should be read in
conjunction with the audited consolidated financial statements and
notes thereto contained in the Company’s Annual Report filed
with the SEC on Form 10-K for the year ended September 30, 2018. In
the opinion of management, all adjustments, consisting of normal
recurring adjustments, necessary for a fair presentation of
consolidated financial position and the consolidated results of
operations for the interim periods presented have been reflected
herein. Notes to the financial statements which would substantially
duplicate the disclosure contained in the audited consolidated
financial statements for fiscal year 2018 as reported in the Form
10-K have been omitted.
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"),
a North Carolina limited liability company, and contributed
$250,000 in exchange for our member interest. As of September 30,
2018, we own 100% interest in BPU. BPU manufactures, markets and
sells an array of beauty and personal care products, including hair
care and hair treatments, as well as beauty tools. The Company's
products historically have been sold to the professional salon
market, principally through distributors to professional salons in
the North America and has expanded its focus to retailers, online
segments and licensing opportunities.
I’M1, LLC. (“I’M1”) was formed in
California in September 2016. IM1 Holdings, LLC, a California
limited liability company, (“IM1 Holdings”) was the
initial member of I’M1. In January 2017, we acquired all of
the Class A voting membership interests in I’M1 from IM1
Holdings in exchange for 583,000 shares of our common stock, which
represents 51% of the interest in I’M1. IM1 Holdings
continues to own the Class B non-voting membership interest of
I’M1. I’M1 – Ireland Men One is a brand inspired
by Kathy Ireland that focuses on providing millennial-inspired
lifestyle products under the I’M1 brand. I’M1 has
entered into an exclusive wholesale license agreement with kathy
ireland® Worldwide in connection with the use of the
intellectual property related to this brand.
Encore Endeavor 1, LLC (“EE1”) was formed in California
in March 2016. EE1 Holdings, LLC, a California limited liability
company, (“EE1 Holdings") was the initial member of EE1. In
January 2017, we acquired all of the Class A voting membership
interests in EE1 from EE1 Holdings in exchange for 283,000 shares
of our common stock, which represents 51% of the interest in EE1.
EE1 Holdings continues to own the Class B non-voting membership
interests of EE1. EE1 is a brand management company and producer
and marketer of multiple entertainment distribution platforms under
the EE1 brand.
Level H&W, LLC (“Level H&W”) was formed in
North Carolina in October 2017 and began operations in fiscal 2018;
we own 100% interest in Level H&W. The Company signed an
agreement with kathy ireland® Worldwide to retain exclusive
rights to the intellectual property and other rights in connection
with kathy ireland® Health & Wellness™ and its
associated trademarks and tradenames. Level H&W focuses on
establishing licensing arrangements under the kathy ireland®
Health & Wellness™ brand. The agreement initially was a
seven year agreement with a three year option to extend by the
Company. The Company agreed to pay $840,000 over the license term
of seven years, of which $480,000 was paid by January 1, 2018, and
$120,000 was to be paid on January 1 of subsequent years until paid
in full. The Company will pay kathy ireland® Worldwide 33 1/3%
of net proceeds we receive under any sublicense agreements we may
enter into for this intellectual property as royalties, with credit
being applied for any payments made toward the $840,000. In January
2018, the Company, amended its wholesale license agreement with
kathy Ireland® Worldwide. The amendment accounted for the
Company exercising its option on a three year extension and
amending the payment terms related to this extension as follows: to
pay $400,000 within 5 days of executing the amendment (which was
paid on January 31, 2018), and to pay the final amounts due under
the Agreement, $320,000 on the latter of January 1, 2019 or 30 days
after the receipt by the Company of $5,000,000 in net proceeds from
sublicense agreements signed under the health and wellness
trademarks. In addition, royalty payments to kathy ireland®
Worldwide for the additional three year extension are set at 35% of
net proceeds. The Company capitalized the cost into intangibles and
is amortizing them over the term of the licensing agreement. In
December 2018, Level Brands agreed to and paid the balance owed as
final payment at a reduced price of $300,000.
On November 17, 2017, the Company completed an initial public
offering (the “IPO”) of 2,000,000 shares of its common
stock for aggregate gross proceeds of $12.0 million. The Company
received approximately $10.9 million in net proceeds after
deducting expenses and commissions. 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 offering
expenses payable by us.
On
December 20, 2018 the Company, and its newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD, completed a two-step merger (the
“Mergers”) with Cure Based Development, LLC, a Nevada
limited liability company (“
Cure Based Development
”).
Upon completion of the Mergers, cbdMD survived and operates the
prior business of Cure Based Development. As consideration for the
Mergers, the Company has a contractual obligation, after approval
by our shareholders, to issue 15,250,000 shares of our common stock
to the members of Cure Based Development, of which 8,750,000 of the
shares will vest over a five year period and are subject to a
voting proxy agreement. cbdMD LLC produces
and distributes
various high-grade, premium cannibidiol oil (“CBD”)
products under the cbdMD brand. CBD is a natural substance produced
from the hemp plant and the products manufactured by cbdMD are non
pyschoactive as they do not contain tetrahydrocannibinol
(THC).
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 cbdMD, BPU and Level H&W. All
material intercompany transactions and balances have been
eliminated in consolidation. The third party ownership of the
Company’s subsidiaries is accounted for as non-controlling
interest in the consolidated financial statements. Changes in the
non-controlling interest are reported in the statement of
shareholders’ equity (deficit).
Use of Estimates
The preparation of the Company's consolidated financial statements
have been prepared in accordance with accounting principles
generally accepted in the United States (“US GAAP”),
and requires management to make estimates and assumptions that
affect amounts of assets and liabilities and disclosures of
contingent assets and liabilities as of the date of the financial
statements and reported amounts of revenues and expenses during the
periods presented. Estimates and assumptions are reviewed
periodically and the effects of revisions are reflected in the
consolidated financial statements in the period they are determined
to be necessary. Significant estimates made in the accompanying
consolidated financial statements include, but are not limited to,
allowances for doubtful accounts, inventory valuation reserves,
expected sales returns and allowances, trade support costs, certain
assumptions related to the valuation of investments other
securities, marketable securities, common stock, acquired
intangible and long-lived assets and the recoverability of
intangible and long-lived assets and income taxes, including
deferred tax valuation allowances and reserves for estimated tax
liabilities, contingent liability and, hence consideration for the
Mergers is a material estimate. 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 the 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 December 31, 2018 we
have an allowance for doubtful accounts of $32,267, and had no
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 private
entity).
Accounts receivable and accounts receivable other items that
involve a related party are indicated as such on the face of the
financial statements.
Receivable and Merchant Reserve
The Company primarily sells its products through the internet and
has an arrangement to process customer payments with third-party
payment processors. The arrangement with the payment processor
requires that the Company pays a fee of between 5.95% - 6.95% of
the transaction amounts processed. Pursuant to this agreement,
there is a waiting period between 4 -14 days prior to reimbursement
to the Company, as well as a calculated reserve which the payment
processor holds back. Fees and reserves can change periodically
with notice from the processors. At December 31, 2018, the
receivable from payment processors included approximately $361,103
for the waiting period amount and is recorded as accounts
receivable in the accompanying consolidated balance sheet and
$451,343 for the reserve amount for a total receivable of
$812,446.
Marketable
Securities
Marketable securities that are equity securities
are carried at fair value on the consolidated balance sheets with
changes in fair value recorded as an unrealized gain or (loss) in
the Statements of Operations in the period of the change. Upon the
disposition of a marketable security, the Company records a
realized gain or (loss) on the Company’s consolidated
statements of operations. On October 1, 2018, as a result of
the adoption of ASU 2016-01 –
Financial
Instruments
, the Company
reclassified $2,512,539 of net unrealized losses on marketable
securities, that were formerly classified as available-for-sale
securities before the adoption of the new standard, from
Accumulated Other Comprehensive Loss to Accumulated
Deficit.
Investment Other Securities
For equity investments where the Company neither controls nor has
significant influence over the investee and which are
non-marketable, the investments are accounted for using the cost
method of accounting in accordance with ASC 325-10. Under the cost
method, dividends received from the investment are recorded as
dividend income within non-operating income.
Other-than-Temporary
Impairment
The Company’s management periodically assesses its marketable
securities and investment other securities, for any unrealized
losses that may be other-than-temporary and require recognition of
an impairment loss in the consolidated statement of operations. If
the carrying value 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, freight-in, and production fill
and labor (portions of 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.
Customer Deposits
Customer deposits consist of payments received in advance of
revenue recognition. Revenue is recognized as revenue recognition
criteria are met.
Property
and Equipment
Property and equipment items are stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are charged
to operating expense as incurred. Depreciation is charged to
expense over the estimated useful lives of the assets using the
straight-line method. Generally, the useful lives are five years
for show booths and equipment, three to four years for
manufacturer’s molds and plates, computers, furniture and
equipment, leasehold improvements, and software. The cost and
accumulated depreciation of property are eliminated from the
accounts upon disposal, and any resulting gain or loss is included
in the consolidated statement of operations for the applicable
period. Long-lived assets held and used by the Company are reviewed
for impairment whenever changes in circumstance indicate the
carrying value of an asset may not be recoverable.
Fair value accounting
The Company utilizes accounting standards for fair value, which
include the definition of fair value, the framework for measuring
fair value, and disclosures about fair value measurements. Fair
value is a market-based measurement, not an entity-specific
measurement. Therefore, a fair value measurement should be
determined based on the assumptions that market participants would
use in pricing the asset or liability. As a basis for considering
market participant assumptions in fair value measurements, fair
value accounting standards establish a fair value hierarchy that
distinguishes between market participant assumptions based on
market data obtained from sources independent of the reporting
entity (observable inputs that are classified within Levels 1
and 2 of the hierarchy) and the reporting entity’s own
assumptions about market participant assumptions (unobservable
inputs classified within Level 3 of the
hierarchy).
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 an unrealized gain or loss
in
the
Statement of Operations.
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, goodwill,
and other intellectual property, which are accounted for in
accordance with ASC Topic 350, Intangibles – Goodwill and
Other. The Company employs the non-amortization approach to account
for purchased intangible assets having indefinite lives. Under the
non-amortization approach, intangible assets having indefinite
lives are not amortized into the results of operations, but instead
are reviewed annually or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value. We perform
an impairment analysis at August 1 annually on the indefinite-lived
intangible assets following the steps laid out in ASC 350-30-35-18.
Our annual impairment analysis includes a qualitative assessment to
determine if it is necessary to perform the quantitative impairment
test. In performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. If a quantitative analysis is necessary, we
would analyze various aspects including number of contracts
acquired and retained as well as revenues from those contracts,
associated with the intangible assets. In addition, intangible
assets will be tested on an interim basis if an event or
circumstance indicates that it is more likely than not that an
impairment loss has been incurred.
Intangible assets with finite useful lives are amortized using the
straight-line method over their estimated period of benefit. In
accordance with ASC 360-10-35-21, finite lived intangibles are
reviewed annually, or more frequently if events or changes in
circumstances indicate that the assets might be impaired, to assess
whether their fair value exceeds their carrying value.
In
conjunction with any acquisitions, the Company refers to ASC-805 as
amended by Accounting Standards Update (“ASU”) 2017-01
in determining if the Company is acquiring any inputs, processes or
outputs and the impact that such factors would have on the
classification of the acquisition as a business combination or
asset purchase. Additionally, the Company refers to the
aforementioned guidance in reviewing all potential assets and
liabilities for valuation including the determination of intangible
asset values.
Common
stock
Level Brands was a private company until November 2017 and as such
there was no market for the shares of its common stock. Previously,
we valued a share of common stock based on recent financing
transactions that included the issuance of common stock to an
unrelated party at a specified price. In the event, however, there
had not been a recent and significant equity financing transaction,
or the nature of the business had significantly changed subsequent
to an equity financing, we used valuation techniques, which
included discounted cash flow analysis, comparable company review,
and consultation with third party valuation experts to assist in
estimating the value of our common stock. On November 17, 2017, the
Company completed its IPO, thus our stock has been valued by the
market since that date.
Revenue Recognition
The Company adopted ASC 606, Revenue from Contracts with Customers
using the modified retrospective method beginning with our quarter
ending December 31, 2018. The adoption of the new revenue standards
as of October 1, 2018 did not change the Company’s revenue
recognition as the majority of its revenues continue to be
recognized when the customer takes control of its product, the
services have been rendered, or the royalty has been earned. As the
Company did not identify any accounting changes that impacted the
amount of reported revenues with respect to any of its revenue
streams, no adjustment to retained earnings was required upon
adoption.
Under the ASC 606, the Company recognizes revenues when its
customer obtains control of promised goods or services, in an
amount that reflects the consideration which it expects to receive
in exchange for those goods. The Company recognizes revenues
following the five step model prescribed under ASC 606: (i)
identify contract(s) with a customer; (ii) identify the performance
obligations in the contract; (iii) determine the transaction price;
(iv) allocate the transaction price to the performance obligations
in the contract; and (v) recognize revenues when (or as) we satisfy
the performance obligation.
Performance Obligations
A performance obligation is a promise in a contract to transfer a
distinct good or service to a customer. The Company has reviewed
its various revenue streams for its existing contracts under the
five-step approach. The Company has entered into various license
agreements that provide revenues based on guarantee minimum royalty
payments with additional royalty revenues based on a percentage of
defined sales. Guaranteed minimum royalty payments (fixed revenue)
are recognized on a straight-line basis over the term of the
contract, as defined in each license agreement. Earned royalties
and earned royalties in excess of the fixed revenue (variable
revenue) are recognized as income during the period corresponding
to the licensee’s sales. Earned royalties in excess of fixed
revenue are only recognized when the Company is reasonably certain
that the guaranteed minimums payments for the period will be
exceeded.
The below table summaries amounts related to future performance
obligations under fixed contractual arrangements as of December 31,
2018:
|
|
|
|
|
|
|
|
|
Future
performance obligations
|
$
0
|
$
0
|
Allocation
of transaction price
At times, the Company enters into contracts with customers wherein
there are multiple elements that may have disparate revenue
recognition patterns. In such instances, the Company must allocate
the total transaction price to these various elements. This is
achieved by estimating the standalone selling price of each
element, which is the price at which we sell a promised good or
service separately to a customer.
In circumstances where we have not historically sold relevant
products or services on a standalone basis, the Company utilizes
the most situationally appropriate method of estimating standalone
selling price. These methods include (i) an adjusted market
assessment approach, wherein we refer to prices from our
competitors for similar goods or serves and adjust those prices as
necessary to reflect our typical costs and margins, (ii) an
expected cost plus margin approach, wherein we forecast the
costs
that we will incur in satisfying the identified performance
obligation and adding an appropriate margin to such costs, and
(iii) a residual approach, wherein we adjust the total transaction
price to remove all observable standalone selling prices of other
goods or services included in the contract and allocate the
entirety of the remaining contract amount to the remaining
obligation.
Revenue
recognition
The Company records revenue from the sale of its products when risk
of loss and title to the product are transferred to the customer,
which is upon shipping. Net sales are comprised of gross revenues
less 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. 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 currently the Company does
not have a formal return policy and historically our returns have
been immaterial, in connection with the Mergers with Cure Based
Development we are evaluating implementation of a formal
refund/return policy.
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.
Licensing for trademarks are considered symbolic licenses, which
contain the characteristics of a right-to-access license since the
customer is simultaneously receiving the IP and benefiting from it
throughout the license period. As such, the Company primarily
records revenue from licenses on a straight-line basis over the
license period as the performance obligation is satisfied over
time.
In regard to sales for services provided, the Company records
revenue when the customer has accepted services and the Company has
a right to payment. 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.
Disaggregated Revenue
Our segment reporting categorizes Company activity into the
following broad transaction types: product sales, licensing
arrangements and advisory services. We believe that these segment
categories appropriately reflect how the nature, amount, timing and
uncertainty of revenue and cash flows are impacted by economic
factors. See Note 15 – Segment Information, for disaggregated
presentation of revenue.
Contract
Balances
Contract assets represent unbilled receivables and are presented
within accounts receivable, net on the condensed consolidated
balance sheets. Contract liabilities represent unearned revenues
and are presented as deferred revenue or customer deposits on the
condensed consolidated balance sheets.
The below table summarize the net change in contract assets and
contract liabilities from October 1, 2018 to December 31,
2018:
|
|
Entertainment
|
Products
|
Licensing
|
Total
|
|
Balance at September 30, 2018
|
37,500
|
-
|
115,625
|
153,125
|
|
Billed during three months ended December 31, 2018
|
75,000
|
265,000
|
-
|
340,000
|
|
Earned during three months ended December 31, 2018
|
(68,750)
|
-
|
(115,625)
|
(184,375)
|
|
Balance at December 31, 2018
|
43,750
|
265,000
|
-
|
308,750
|
Cost of Sales
Our cost of sales includes costs associated with distribution, fill
and labor expense, components, manufacturing overhead, and outbound
freight for our products divisions, and includes labor, third-party
service providers, and amortization expense related to intellectual
property for our licensing and entertainment
divisions.
In
our 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 $216,000 and $342,000 in advertising and related
marketing and promotional costs included in operating expenses
during the three months ended December 31, 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. cbdMD and Level H&W are wholly
owned subsidiaries and are disregarded entities for tax purposes
and their 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 December 31, 2018 and 2017, there were no
uncertain tax positions taken or expected to be taken that would
require recognition of a liability (or asset) or disclosure in the
consolidated financial statements.
Concentrations
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, accounts receivable, and securities.
The Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation (“FDIC”) covers $250,000 for
substantially all depository accounts. The Company from time to
time may have amounts on deposit in excess of the insured limits.
The Company had a $1,820,758 uninsured balance at December 31, 2018
and a $0 uninsured balance at September 30, 2018. Funds which are
not subject to coverage or loss under FDIC were $5,678,538 and
$4,003,003 at December 31, 2018 and September 30, 2018,
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 sales to two
customers that collectively represented approximately 56% of total
net sales for the three months ended December 31, 2018,
respectively. The aggregate accounts receivable of such customer
represented approximately 18% of the Company’s total accounts
receivable other accounts receivable at December 31, 2018. The
Company had sales to three customers that individually represented
over 10% of total net sales for the three months ended December 31,
2017. Such customers represented 37%, 13%, and 37% of net sales.
The aggregate accounts receivable of such customers represented 79%
of the Company’s total accounts receivable at December 31,
2017.
Stock-Based
Compensation
We account for our stock compensation under the ASC 718-10-30,
“Compensation - Stock Compensation” using the fair
value based method. Under this method, compensation cost is
measured at the grant date based on the value of the award and is
recognized over the service period, which is usually the vesting
period. This guidance establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in
which
an entity incurs liabilities in exchange for goods or services that
are based on the fair value of the entity's equity instruments or
that may be settled by the issuance of those equity
instruments.
We use the Black-Scholes model for measuring the fair value of
options and warrants. The stock based fair value compensation is
determined as of the date of the grant or the date at which the
performance of the services is completed (measurement date) and is
recognized over the vesting periods. Under ASU 2016-09 which amends
ASC 718, which became effective October 1, 2017, we elected to
change our accounting principle to recognize forfeitures when they
occur. This change had no impact on beginning retained earnings as
there had been no forfeitures estimated or incurred in prior
periods.
Net
Income (Loss) Per Share
The Company uses ASC 260-10, “Earnings Per Share” for
calculating the basic and diluted income (loss) per share. The
Company computes basic income (loss) per share by dividing net
income (loss) and net income (loss) attributable to common
shareholders by the weighted average number of common shares
outstanding. Common equivalent shares are excluded from the
computation of net loss per share if their effect is
anti-dilutive.
At the three months ended December 31, 2018 and 2017, 833,255 and
855,476 potential shares, respectively, were excluded from the
shares used to calculate diluted loss per share as their inclusion
would reduce net loss per share.
Deferred
initial public offering (IPO) and issuance costs
In following the guidance under ASC 340-10-S99-1, costs directly
attributable to an offering of equity securities were deferred and
charged against the gross proceeds of the offering as a reduction
of additional paid-in capital, for a secondary offering during the
three months ended December 31, 2018, and for an IPO during the
three months ended December 31, 2017. These costs included legal
fees related to the registration drafting and counsel, independent
audit costs directly related to the registration and offering, SEC
filing and print related costs, exchange listing costs, and IPO
roadshow related costs.
New Accounting Standards
In May 2014, August 2015 and May 2016, the FASB issued ASU
2014-09,
Revenue from Contracts with
Customers
, and ASU
2015-14
Revenue from Contracts with
Customers, Deferral of the Effective Date
, respectively, which implement ASC Topic 606. ASC
Topic 606 outlines a single comprehensive model for entities to use
in accounting for revenue arising from contracts with customers and
supersedes most current revenue recognition guidance under US GAAP,
including industry-specific guidance. It also requires entities to
disclose both quantitative and qualitative information that enable
financial statements users to understand the nature, amount,
timing, and uncertainty of revenue and cash flows arising from
contracts with customers. Subsequently, the FASB has issued the
following standards related to ASU 2014-09: ASU
No. 2016-08,
Revenue from Contracts with
Customers
(Topic 606):
Principal versus Agent Considerations (“ASU 2016-08”);
ASU No. 2016-10,
Revenue from Contracts with
Customers
(Topic 606):
Identifying
Performance Obligations and Licensing
(“ASU 2016-10”); ASU No.
2016-12,
Revenue from Contracts with
Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients
(“ASU 2016-12”); and ASU No.
2016-20,
Technical Corrections and
Improvements to Topic 606, Revenue from Contracts with
Customers
(“ASU
2016-20”). The amendments in these ASUs are effective for
annual periods beginning after December 15, 2017, and interim
periods therein. Early adoption is permitted for annual periods
beginning after December 15, 2016. These ASUs may be applied
retrospectively to all prior periods presented, or retrospectively
with a cumulative adjustment to retained earnings in the year of
adoption. The new revenue standards became effective for the
Company on October 1, 2018 and were adopted using the modified
retrospective method. The adoption of the new revenue standards as
of October 1, 2018 did not change the Company’s revenue
recognition as the majority of its revenues continue to be
recognized when the customer takes control of its product, the
services have been rendered, or the royalty has been received. As
the Company did not identify any accounting changes that impacted
the amount of reported revenues with respect to its product
revenues, no adjustment to retained earnings was required upon
adoption.
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 does have a 3 year lease for a
manufacturing facility and is assessing the impact of implementing
this guidance on its consolidated financial position, results of
operations and liquidity.
In August 2018, the FASB issued ASU No.
2018-13,
“Fair Value Measurement
(Topic 820).”
The
ASU modifies, removes, and adds several disclosure requirements on
fair value measurements in Topic 820, Fair Value Measurement. The
ASU 2018-13 is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December
15, 2019. The amendments on changes in unrealized gains and losses,
the range and weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements, and the narrative
description of measurement uncertainty should be applied
prospectively for only the most recent interim or annual period
presented in the initial fiscal year of adoption. All other
amendments should be applied retrospectively to all periods
presented upon their effective date. Early adoption is permitted
upon issuance of ASU 2018-13. An entity is permitted to early adopt
any removed or modified disclosures upon issuance of ASU 2018-13
and delay adoption of the additional disclosures until their
effective date. The Company is evaluating the effect ASU 2018-13
will have on its consolidated financial statements and disclosures
and has not yet determined the effect of the standard on its
ongoing financial reporting at this time.
NOTE 2 – 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. At closing we
assumed $277,500 of BPUNY's accounts payable to its product vendor,
which bore interest at 6% annually. The payable was paid off in
April 2016. The fair value of the noncontrolling membership
interest issued was based on the value of the initial contribution
of $250,000 made by Level Brands. The total consideration paid was
allocated to the net assets acquired based on relative fair values
of those net assets as of the transaction date, in accordance with
the Fair Value Measurement topic of the FASB ASC 820. The fair
value is comprised of the cash, accounts payable acquired,
non-controlling interest, intangibles, and a minimal amount of
inventory, all in aggregate valued at $486,760. 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 more
information).
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.
On
December 20, 2018 (the “Closing”), the Company, and its
newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD,
both North Carolina limited liability companies, completed a
two-step merger (the “Merger Agreement”) with Cure
Based Development, LLC, a Nevada limited liability company
(“Cure Based Development”). The Merger Agreement
provided that AcqCo LLC merge with and into Cure Based Development
with Cure Based Development as the surviving entity (the
“Merger”), and immediately thereafter Cure Based
Development merged with and into cbdMD with cbdMD as the surviving
entity (the “Secondary Merger” and collectively with
the Merger, the “Mergers”). cbdMD has continued as a
wholly-owned subsidiary of Level Brands and maintains the
operations of Cure Based Development pre-closing. As consideration
for the Merger, the Company has a contractual obligation, after
approval by our shareholders, to issue 15,250,000 shares of our
common stock to the members of Cure Based Development, of which
8,750,000 of the shares will vest over a five year period and are
subject to a voting proxy agreement. The Merger Agreement also
provides that an additional 15,250,000 shares of our common stock
can be issued upon the satisfaction of aggregate net revenue
criteria by cbdMD, within 60 months following the Closing. The net
revenue criteria are: $20.0, $40.0, $80.0 and $160.0 million, in
aggregate $300.0 million (See Note 9 for more
information).
The Company owns 100% of the equity interest of cbdMD. The
valuation and purchase price allocation for the Mergers remains
preliminary and will be finalized by September 30,
2019.
The following table presents the preliminary purchase price
allocation:
|
Consideration
|
$
74,353,483
|
|
|
|
|
Assets acquired:
|
|
|
Cash
and cash equivalents
|
$
1,822,331
|
|
Accounts
receivable
|
850,921
|
|
Inventory
|
1,054,926
|
|
Other
current assets
|
38,745
|
|
Property
and equipment, net
|
608,947
|
|
Intangible
assets
|
21,585,000
|
|
Goodwill
|
55,258,545
|
|
Total assets acquired
|
81,219,415
|
|
|
|
|
Liabilities assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
471,551
|
|
Deferred
tax liability
|
5,108,000
|
|
Total Liabilities assumed
|
6,865,932
|
|
|
|
|
Net Assets Acquired
|
$
74,353,483
|
In connection with the purchase price allocation, the Company
recorded a deferred tax liability of approximately $5,108,000, with
a corresponding increase to goodwill, for the tax effect of the
acquired intangible assets from Cure Base Development. This
liability was recorded as there will be no future tax deductions
related to the acquired intangibles, and we have identified these
as indefinite-lived intangible assets.
The Company also acquired estimated net operating loss
carryforwards of approximately $1,996,000, 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. The Company will perform an analysis
to determine if a change of ownership under IRC Section 382 had
occurred and if so, determine the expiration and limitations of use
of the NOLs.
NOTE 3 – 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, using the estimated fair value of the
services provided. Where an accounts receivable is settled with the
receipt of the common stock or other instrument, the common stock
or other instrument will be classified as an asset on the balance
sheet as either an investment marketable security (when the
customer is a public entity) or as an investment other security
(when the customer is a private entity).
On
June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant
for 1,600,000 shares of common stock for services delivered to a
customer and accounted for this in Investment other securities. The
common stock was issued to the Company’s subsidiaries
I’M1 and EE1. The customer is a private entity and the stock
was valued at $912,000, which was based on its recent financing in
June 2017 at $0.57 per share. The Company has classified this
common stock as Level 3 for fair value measurement purposes as
there are no observable inputs. In valuing the stock the Company
used the fair value of the services provided, utilizing an analysis
of vendor specific objective evidence of its selling price. In
August 2017, each of I’M1 and EE1 distributed the shares to
its majority owner, Level Brands, and also distributed shares
valued at $223,440 to its non-controlling interests. In August
2017, the Company also provided referral services for kathy
Ireland® Worldwide and this customer. As compensation the
Company received an additional 200,000 shares of common stock
valued at $114,000 using the pricing described above. The Company
assessed the common stock and determined there was not an
impairment for the period ended December 31, 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 December 31,
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 from November 7, 2018 thru December 13, 2018, the Company
sold the 50,000 shares held and recorded a realized loss on
marketable securities of $(25,673) in the consolidated
statement of operations.
In December 2017, the Company completed services per an advisory
services agreement with Kure Corp, formerly a related party. As
payment for these services, Kure Corp issued 400,000 shares of its
stock to Level Brands. The customer was a private entity and the
stock was valued at $200,000, which was based on financing
activities by Kure Corp in September 2017 in which shares were
valued at $0.50 per share. In addition, in December 2017, the
Company engaged and completed advisory services in relation to an
additional agreement with Kure Corp, for services related to their
“vape-pod” strategy. As payment for these services,
Kure Corp issued an additional 400,000 shares of its stock to Level
Brands which the Company received in January 2018. These shares
were also valued at $200,000. The Company had classified this
common stock, cumulative value of $400,000, as Level 3 for fair
value measurement purposes as there were no observable inputs. In
valuing the stock the Company used factors including information
provided by the issuer regarding their recent results and future
plans as well as their most recent financing transactions. On April
30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE:
ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In the merger
agreement, each share of Kure was valued at $1.00 as the initial
value and is to be exchanged for shares of Isodiol in three
issuances as follows: 1) 30% of the initial value issued on May 1,
2018, the balance of shares issued based on earn out goals as 2)
50% of the initial value to be issued on January 31, 2019 on a
prorata basis based on sales and using the prior 10 day volume
weighted average price of Isodiol shares and 3) 20% of the initial
value to be issued on January 31, 2020 on a prorata basis based on
sales and using the prior 10 day volume weighted average price of
Isodiol shares. We recorded the first issuance of 380,952 shares
based on a trading price on April 30, 2018 of $0.63 per share
valued at $240,000 as a Level 1 for fair value measurement purposes
as the stock is actively traded on an exchange. We also removed the
value of the Kure equity of $400,000 from our Level 3 investments
as part of the exchange described above. As the full value of the
Kure equity will not be received until the future issuances based
on the above earn out goals, we have recorded an accounts
receivable other of $160,000 as of December 31, 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 was valued at $0.94 per share on December
31, 2018, and we recorded $(74,163) as an
unrealized loss on the Company consolidated financial
statements for the three months ended December 31, 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 private entity. The
Company has classified this common stock as Level 3 for fair value
measurement purposes as there are no observable inputs. In valuing
the stock the Company used the value paid, which was the price
offered to all third party investors. As of December 31, 2018, the
Company has determined there is no impairment on the value of the
shares of stock.
On December 30, 2017 Level Brands entered into an
Agreement with Isodiol International, Inc. (CSE: ISOL, OTCQB:
ISOLF, FSE:LB6A.F), a Canadian company which is a developer
of
pharmaceutical grade
phytochemical compounds and a manufacturer and developer of
phytoceutical consumer products. The agreement required the Company
to create a global branding and marketing campaign, which includes
a joint strategy to develop Isodiol’s brand and products, an
influencer program, and a social and traditional media
strategy.
As payment for these
services, Isodiol agreed to pay $2,000,000 and issued 1,679,321
shares of its common stock to Level Brands, based on the trading
price on the day of the agreement, which was $1.1909 per share.
These shares were issued on January 22, 2018. In addition, the
Company provided ongoing quarterly services, all the services were
valued at $750,000 per quarter. This amount was be paid through the
issuance of Isodiol stock and the number of shares issued was
determined based on the trading value of Isodiol stock on the last
day of each quarter. As previously reported on Form 8-K filed
January 11, 2019, the agreement was mutually cancelled effective
October 1, 2018 for an agreed upon final payment of 500,000 shares
for an outstanding amount of $62,500 and for consultative services
provided through December 31, 2018. The common stock was
valued at $0.94 per share on December 31, 2018,
and we recorded $(58,140) as an unrealized loss on the
Company’s consolidated financial statements for the three
months ended December 31, 2018. The Company assessed the common
stock and based on conversations with the company regarding its
recent announcements to curb impact on shareholder dilution, recent
divestiture, their position in the CBD market, current financing
events, and overall focused business strategy, determined there was
not an indication of an other-than-temporary
impairment.
On June 26, 2018 Level Brands entered into an
Agreement with Boston Therapeutics, Inc. (OTC: BTHE), a
pharmaceutical company focused on the development, manufacturing
and commercialization of novel compounds to address unmet medical
needs in diabetes.
The agreement involved
a licensing agreement and required the Company to create IP for a
branding / marketing campaign.
As payment for these services, Boston Therapeutics
agreed to pay $850,000, of which $450,000 was issued as a note due
no later than December 31, 2019 and $400,000 to be paid thru the
issuance of BTI common stock based on the trading price at the
agreement date ($0.075). As the stock has not been issued, we have
recorded an unrealized loss of ($240,000) based on a
current trading price of $0.03 at December 31,
2018.
The table below summarizes the assets valued at fair value as of
December 31, 2018:
|
|
In
Active Markets for Identical Assets and
Liabilities
(Level
1)
|
Significant
Other Observable Inputs
(Level
2)
|
Significant
Unobservable Inputs
(Level
3)
|
Total
Fair Value at December 31, 2018
|
|
|
|
|
|
|
|
Marketable
securities
|
$
718,658
|
-
|
$
-
|
$
718,658
|
|
Investment
other securities
|
-
|
-
|
$
1,159,112
|
$
1,159,112
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2018
|
$
1,050,961
|
$
-
|
$
1,159,112
|
$
2,210,073
|
|
Sale
of equities
|
$
(200,000
)
|
$
-
|
$
-
|
$
(200,000
)
|
|
Change
in value of equities held
|
$
(132,303
)
|
$
-
|
$
-
|
$
(132,303
)
|
|
Balance
at December 31, 2018
|
$
718,658
|
$
-
|
$
1,159,112
|
$
1,877,770
|
NOTE 4 – INVENTORY
Inventory at December 31, 2018 and September 30, 2018 consists of
the following:
|
|
|
|
|
|
|
|
|
Finished
goods
|
$
300,910
|
$
18,531
|
|
Inventory
components
|
788,769
|
104,692
|
|
Inventory
prepaid
|
102,303
|
|
|
Total
|
$
1,191,982
|
$
123,223
|
During the year ended September 30, 2018, the Company determined
that inventory was impaired by approximately $262,000. Impairment
charges were recorded within operating expenses for the respective
periods.
NOTE 5 – PROPERTY AND EQUIPMENT
Major classes of property and equipment at December 31, 2018 and
September 30, 2018 consist of the following:
|
|
|
|
|
|
|
|
|
Computers,
furniture and equipment
|
$
59,770
|
$
59,770
|
|
Show
booth and equipment
|
49,123
|
49,123
|
|
Manufacturing
equipment
|
459,421
|
|
|
Leasehold
improvements
|
159,450
|
|
|
Manufactures’
molds and plates
|
34,200
|
34,200
|
|
|
761,964
|
143,093
|
|
Less
accumulated depreciation
|
(100,354
)
|
(89,613
)
|
|
Net
property and equipment
|
$
661,610
|
$
53,480
|
Depreciation expense related to property and equipment was $10,741
and $13,756 for the three months ended December 31, 2018 and 2017,
respectively. During the three months ended December 31, 2017 we
recorded a one-time loss of $69,311 on the disposal of a show booth
that is no longer in use.
NOTE 6 – 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.
In December 2018, the parties amended the
agreement to remove the annual minimum guarantee in return for a
one time payment of $70,000. We are amortizing the capitalized
value of the cash, warrants and common stock over the seven year
term of the agreement and have amortized $12,091 for the three
months ended December 31, 2018, respectively.
On September 8, 2017, the Company entered into a seven year
wholesale license agreement with Nicholas Walker and issued 25,000
shares of common stock, valued at $98,750. In addition, the Company
agreed to pay $40,000 in cash within 30 days completion of its
initial public offering and also issued warrants to purchase 25,000
shares of common stock at a strike price of $4.00. The warrants
were valued at $35,900. Under the terms of this nonexclusive
agreement, we have the right to use, assign and sublicense the
marks, intellectual property and other rights in connection with
"Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas
Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin
Du Jour," and all trade names, trademarks and service marks related
to this intellectual property for the purpose of entering into
sublicense agreements with third parties for the manufacture,
marketing and sale of products utilizing these marks. In December
2018, the parties amended the agreement to remove the annual
minimum guarantee in return for a one time payment of $10,000. We
are amortizing the capitalized value of the cash, warrants and
common stock over the seven year term of the agreement and have
amortized $6,382 for the three months ended December 31, 2018,
respectively.
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: royalty
payments to kathy ireland® Worldwide for the three year
extension would be set at 35% of net proceeds, 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.
On December 20, 2018, both parties agreed to
reduce the final amount owed to $300,000 if paid within 5 days,
which was paid immediately.
On December 20, 2018, the Company completed the Mergers with Cure
Based Development and acquired certain assets, including the
trademark "cbdMD" and its variants and certain other intellectual
property. The trademark is the cornerstone of this subsidiary and
is key as we create and distribute products and continue to build
this brand. We believe the trademark does not have limits on the
time it will contribute to the generation of cash flows and
therefore we have identified these as indefinite-lived intangible
assets (see Note 2 for more information).
Intangible assets as of December 31, 2018 and September 30, 2018
consisted of the following:
|
|
|
|
|
|
|
|
|
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
and other intellectual property related to cbdMD
|
21,584,000
|
-
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland®Health & Wellness™, net
|
1,045,162
|
1,074,194
|
|
Wholesale
license agreement with Chef Andre Carthen, net
|
319,989
|
262,077
|
|
Wholesale
license agreement with Nicholas Walker, net
|
151,238
|
147,620
|
|
Trademark
and other intellectual property related to BPU
|
240,591
|
246,760
|
|
Total
|
$
24,785,314
|
$
3,173,985
|
|
|
|
|
The Company has four definite lived intangible assets, which have
seven or ten year lives.
Future amortization schedule:
|
Intangible
|
|
|
|
|
|
|
|
|
Trademark,
tradename and other intellectual property related to kathy
ireland® Health & Wellness™
|
$
1,045,162
|
$
87,097
|
$
116,129
|
$
116,129
|
$
116,129
|
$
116,129
|
$
493,549
|
|
Wholesale
license agreement with Chef Andre Carthen
|
$
319,989
|
$
42,351
|
$
56,468
|
$
56,468
|
56,468
|
$
56,468
|
$
51,766
|
|
Wholesale
license agreement with Nicholas Walker
|
$
151,238
|
$
20,017
|
$
26,689
|
$
26,689
|
$
26,689
|
$
26,689
|
$
24,465
|
|
Trademark
and intellectual property related to BPU
|
$
240,591
|
$
18,507
|
$
24,676
|
$
24,676
|
$
24,676
|
$
24,676
|
$
123,380
|
The Company performs an impairment analysis at August 1 annually on
the
indefinite-lived intangible
assets following the guidance in ASC 350-30-35-18. Our annual
impairment analysis includes a qualitative assessment to determine
if it is necessary to perform the quantitative impairment test. In
performing a qualitative assessment, we review events and
circumstances that could affect the significant inputs used to
determine if the fair value is less than the carrying value of the
intangible assets. In addition, intangible assets will be tested on
an interim basis if an event or circumstance indicates that it is
more likely than not that an impairment loss has been incurred and
the Company evaluates the indefinite-lived intangible assets each
reporting period to determine whether events and circumstances
continue to support an indefinite useful life. The Company has
performed a qualitative and quantitative analysis and for the years
ended September 30, 2018 and there was 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 had
determined that it was appropriate to reclassify the remaining
carrying value of this intangible asset to a definite-lived asset.
The Company began amortizing this asset beginning the first quarter
of 2019. This reclassification is being accounted for as a
prospective change in estimate.
The Company has determined that no event or circumstances indicate
likeliness of an impairment as of December 31, 2018 for the current
indefinite-lived intangible assets.
The Company also performs an impairment analysis at August 1
annually on the definite lived intangible assets following the
guidance in ASC 360-10-35-21. We first assess if there is an
indicator of possible impairment such as change in the use of the
asset, market price changes in the asset, or other events that
impact the value of the asset. If an indicator is present we then
perform a quantitative analysis to determine if the carrying amount
of the asset is recoverable. This is done by comparing the total
undiscounted future cash flows of the long-lived asset to its
carrying amount. If the total undiscounted future cash flows exceed
the carrying amount of the asset, the carrying amount is deemed
recoverable and an impairment is not recorded. If the carrying
amount of a long-lived asset is deemed to be unrecoverable, an
impairment loss needs to be estimated.
In order to calculate the impairment loss, the Fair Value of the
asset must be determined. Fair Value referenced here is determined
using the guidance in FASB ASC Topic 820. After assessing
indicators for impairment, the Company determined that a
quantitative analysis was not needed as of December 31,
2018.
NOTE 7 – PROMISSORY NOTE
On December 20, 2018, as part of the Mergers with Cure Based
Development, the Company converted an outstanding liability held by
Cure Based Development and issued in aggregate a $184,300
Promissory Note to Edge of Business, LLC, an entity controlled by
the CEO of cbdMD. The liability was converted into an 18 month 6%
promissory note. The note is interest only for the first 12 months
and thereafter payable in six equal and consecutive monthly
installments of principal and interest.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a liability, a $20,000 note
payable to an individual, who is the owner of CBD Now, LLC. CBD
Now, LLC
who now has a
contractual right to receive shares of the company as part of the
Merger. The note is due on February 20, 2019, but also includes an
option for the note holder to elect to extend the maturity date to
February 20, 2020. The note bears interest at a rate of 12%. As of
December 31, 2018, $20,000 of the note payable was outstanding and
is recorded as a note payable – related
party.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a liability a $60,000 note
payable to an individual
who
now has a contractual right to receive shares of the company as
part of the Merger. The note is due on March 5, 2019, but also
includes an option for the note holder to elect to extend the
maturity date to March 5, 2020. The note bears interest at a rate
of 12%. As of December 31, 2018, $60,000 of the note payable was
outstanding and is recorded as a note payable – related
party.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we acquired a liability, a $500,000 note
payable to an individual who now has a contractual right to receive
shares of the company as part of the Merger. The note is due on
March 31, 2019, but also includes an option for the note
holder to elect to extend the maturity date to March 31, 2020. The
note bears interest at a rate of 12% and interest is paid monthly.
As of December 31, 2018, $500,000 of the note payable was
outstanding and is recorded as a note payable – related
party.
NOTE 8 – PRO FORMA FINANCIAL INFORMATION
(UNAUDITED)
The following unaudited pro-forma data summarizes the results of
operations for the three months ended December 31, 2018 and 2017,
as if the Mergers with Cure Based Development had been completed on
October 1, 2017. The pro-forma financial information is presented
for informational purposes only and is not indicative of the
results of operations that would have been achieved if the Mergers
had taken place on October 1, 2017.
|
|
Three
Months
Ended December 31,
2018
|
Three
Months
Ended December 31,
2017
|
|
|
|
|
|
Net
revenues
|
$
4,408,505
|
$
688,110
|
|
Operating
income (loss)
|
$
(1,988,146
)
|
$
(1,496,943
)
|
|
Net income (loss)
|
$
(3,368,270
)
|
$
(1,401,860
)
|
|
Net
loss per share – basic and fully diluted
|
$
(0.13
)
|
$
(0.06
)
|
For the per share calculation, it is being assumed that the shares
to be issued contractually under the Merger Agreement, upon
shareholder approval, have been issued. This would account for an
additional 6,500,000 shares issued directly to the members of Cure
Based Development and another 8,750,000 shares issued which would
have a voting proxy and leak out on voting rights over a 5 year
period.
NOTE 9 – CONTINGENT LIABILITY
On
December 20, 2018 (the Closing Date”), the Company, and its
newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD,
both North Carolina limited liability companies, completed the
Mergers with Cure Based Development. The Merger Agreement provided
that AcqCo LLC merge with and into Cure Based Development with Cure
Based Development as the surviving entity (the
“Merger”), and immediately thereafter Cure Based
Development merged with and into cbdMD LLC (“cbdMD”)
with cbdMD as the surviving entity (the “Secondary
Merger” and collectively with the Merger, the
“Mergers”). cbdMD has continued as a wholly-owned
subsidiary of Level Brands and maintains the operations of Cure
Based Development pre-closing.
As
consideration for the Merger, the Company has a contractual
obligation to issue 15,250,000 shares of our common stock, after
approval by our shareholders, to the members of Cure Based
Development, issued in two tranches 6,500,000 and 8,750,000, both
of which are subject to leak out provisions, and the 8,750,000
tranche of shares will also vest over a five year period and are
subject to a voting proxy agreement. The Merger Agreement also
provides that an additional 15,250,000 shares of our common stock
can be issued upon the satisfaction of certain aggregate net
revenue criteria by cbdMD within 60 months following the Closing
Date (“earn out”).
The
contractual obligations and earn out provision are accounted for as
a contingent liability and fair value is determined using Level 3
inputs, as estimating the fair value of these contingent
liabilities require the use of significant and subjective inputs
that may and are likely to change over the duration of the
liabilities with related changes in internal and external market
factors.
The
initial two tranches totaling 15,250,000 shares have been valued
using a market approach method and included the use of the
following inputs: share price upon contractual obligation, discount
for lack of marketability to address leak out restrictions, and
probability of shareholder disapproval. In addition, the 8,750,000
shares in the second tranche also included an input for a discount
for lack of voting rights during the vest periods.
The
Merger Agreement also provides that an additional 15,250,000 shares
(Earnout Shares) would be issued as part of the consideration for
the Mergers, upon the satisfaction of certain aggregate net revenue
criteria by cbdMD within 60 months following the Closing Date as
follows, as measured at four intervals (Marking Period): the
completion of 12, 24, 42, and 59 calendar months from the Closing
Date, and based upon the ratios set forth below:
|
Aggregate Net Revenues
|
|
Shares Issued / Each $ of Aggregate Net Revenue Ratio
|
|
|
|
|
|
$1 - $20,000,000
|
|
.190625
|
|
$20,000,001 - $60,000,000
|
|
.0953125
|
|
$60,000,001 - $140,000,000
|
|
.04765625
|
|
$140,000,001 - $300,000,000
|
|
.023828125
|
For clarification purposes, the Aggregate Net Revenues during a
Marking Period shall be multiplied by the applicable Shares
Issued/Each $ of Aggregate Net Revenue Ratio, minus, the number of
shares issued as a result of Aggregate Net Revenues during the
prior Marking Periods.
The issuance of the Earnout Shares is also subject to prior
shareholder approval.
The 15,250,000 shares which would be issued in the future, upon the
satisfaction of net revenue criteria have been valued using a Monte
Carlo Simulation. Inputs used included: stock price, volatility,
interest rates, revenue projections, and likelihood of obtaining
revenue projections, amongst others.
The value of the contingent liability is $74,353,483 and has not
changed at December 31, 2018.
NOTE
10 – RELATED PARTY TRANSACTIONS
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.
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. The short term note was
extended on August 1, 2018, and the outstanding principal of
$155,400 at 5% interest was paid in full on November 15,
2018.
On August 1, 2017, the Company entered into an additional advisory
agreement with Kure Corp., in which the Company would act as an
advisor regarding business strategy involving (1) conversion of
Kure franchises into company stores, (2) conversion of Kure Corp.
debt and preferred shares into common share of Kure Corp. and (3)
preparation steps required and a strategy to position for a
possible Reg A+ offering. The services are to be delivered in two
phases, the first deliverables of items 1 and 2 above were
delivered by September 30, 2017 and 3 is to be delivered by June
30, 2018. The Company was paid $200,000 in Kure Corp. stock for the
first deliverables and was paid $145,500 in cash for the second
deliverable.
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: royalty payments to kathy ireland® Worldwide for
the three year extension would be set at 35% of net proceeds, 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. On December 20, 2018, both parties agreed to reduce the
final amount owed to $300,000 if paid within 5 days, which was paid
immediately.
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 Marketable
Securities and Other Investment Securities).
In June 2018, per our agreement with kathy ireland® Worldwide,
the company earned a referral fee of $150,000 for facilitating a
business opportunity which led to a new license agreement for kathy
ireland® Worldwide. The Company is to receive 50% of all
royalty revenue earned ongoing via the new business
contract.
In April 2018 through June 2018, EE1 engaged in five separate
statements of work for various marketing campaigns, production
processes, and documentary related services for Sandbox LLC. Under
the terms of the agreements, EE1 will be paid in the range of
$200,000 to $250,000 for each statement of work, from Sandbox LLC.
Sandbox LLC is an affiliate of a former 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.
On December 20, 2018, with the closing of the Merger Agreement with
Cure Based Development, we recognized the following related party
transactions which happened prior to the Mergers:
Cure
Based Development received $265,000 from Verdure Holdings LLC for
future orders of the Company’s products. Verdure Holdings LLC
is an affiliate of the CEO of cbdMD. This amount is recorded as
customer deposits - related party on the accompanying balance
sheet.
Cure
Based Development entered a lease for office space, which also
provides administrative and IT services, from an affiliate of the
CEO of cbdMD. The lease is a month to month lease for $9,166 per
month.
Cure
Based Development leases its manufacturing facility from an entity
partially owned by an individual who now has a contractual right to
receive shares of the company as part of the Merger. The current
lease was entered into on December 15, 2018 and is for three years
at an annual base rent rate of $151,200 allowing for a 3% annual
increase. In addition, common area maintenance rent is set at
$25,200 annually.
As we engage in providing services to customers, at times we will
utilize related parties, typically as a part of our agreement with
kathy ireland® Worldwide, to assist in delivery of the
services. For the three months ended December 31, 2018 and 2017 we
incurred related party cost of sales of approximately $146,000 and
$126,000, respectively.
NOTE 11 – 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 10,095,356
and 8,123,928 shares of common stock issued and outstanding at
December 31, 2018 and September 30, 2018,
respectively.
Common stock transactions:
In the three months ended December 31, 2018:
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. The Company also issued to the selling agent warrants to
purchase in aggregate 51,429 shares of common stock with an
exercise price of $4.375. The warrants were valued at $86,092 and
expire on September 28, 2023.
In
the three months ended December 31, 2017:
On November 17, 2017, the Company completed an IPO of 2,000,000
shares of its common stock for aggregate gross proceeds of $12.0
million.
In November 2017, we issued 6,667 shares of our common stock to an
individual as part of a consulting agreement. The shares were
valued at $37,002, based on the trading price upon issuance and
expensed as contract compensation.
Stock option transactions:
No options were issued in the three months ended December 31,
2018.
No options were issued in the three months ended December 31,
2017.
Warrant transactions:
In the three months ended December 31, 2018:
On October 2, 2018 in relation to the secondary offering, we issued
to the selling agent warrants to purchase in aggregate 51,429
shares of common stock with an exercise price of $4.375. The
warrants expire on September 28, 2023.
In the three months ended December 31, 2017:
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 following table summarizes the inputs used for the
Black-Scholes pricing model on the warrants issued in the three
months ended December 31, 2018 and 2017:
|
|
2018
|
2017
|
|
Exercise
price
|
$4.375
|
$7.50
|
|
Risk
free interest rate
|
2.90%
|
2.06%
|
|
Volatility
|
70.61%
|
43.12%
|
|
Expected
term
|
5
years
|
5
years
|
|
Dividend
yield
|
None
|
None
|
NOTE
12 – STOCK-BASED COMPENSATION
Equity Compensation Plan – On June 2, 2015, the Board of
Directors of Level Brands, Inc. approved the 2015 Equity
Compensation Plan (“Plan”). The Plan made 1,175,000
common stock shares, either unissued or reacquired by the Company,
available for awards of options, restricted stocks, other stock
grants, or any combination thereof. The number of shares of common
stock available for issuance under the Plan shall automatically
increase on the first trading day of January each calendar year
during the term of the Plan, beginning with calendar year 2016, by
an amount equal to one percent (1%) of the total number of shares
of common stock outstanding on the last trading day in December of
the immediately preceding calendar year, but in no event shall any
such annual increase exceed 100,000 shares of common
stock.
We
account for stock-based compensation using the provisions of FASB
ASC 718. FASB ASC 718 codification requires companies to
recognize the fair value of stock-based compensation expense in the
financial statements based on the grant date fair value of the
options. We have only awarded stock options since December 2015.
All options are approved by the Compensation Committee of the Board
of Directors. Restricted stock awards that vest in accordance with
service conditions are amortized over their applicable vesting
period using the straight-line method. The fair value of our stock
option awards or modifications is estimated at the date of grant
using the Black-Scholes option pricing model.
Eligible
recipients include employees, officers, directors and consultants
who are deemed to have rendered or to be able to render significant
services to the Company or its subsidiaries and who are deemed to
have contributed or to have the potential to contribute to the
success of the Company. Options granted generally have a ten-year
term and generally vest over one to three years from the date of
grant. Certain of the stock options granted under the plan have
been granted pursuant to various stock option agreements. Each
stock option agreement contains specific terms.
Stock Options – The Company currently has awards outstanding
with service conditions and graded-vesting features. We recognize
compensation cost on a straight-line basis over the requisite
service period.
The fair value of each time-based award is estimated on the date of
grant using the Black-Scholes option valuation model. 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:
|
|
|
Weighted-average
exercise price
|
Weighted-average
remaining contractual term
(in
years)
|
Aggregate
intrinsic value
(in
thousands)
|
|
Outstanding
at September 30, 2018
|
469,650
|
5.13
|
|
|
|
Granted
|
-
|
-
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at December 31, 2018
|
469,650
|
$
5.13
|
6.72
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
369,650
|
$
5.19
|
6.20
|
$
—
|
As of December 31, 2018, there was approximately $25,966 of total
unrecognized compensation cost related to non-vested stock options
which vest over a period of approximately 4 months.
Restricted Stock Award transactions:
On October 1, 2016 the Company issued 230,000 restricted stock
awards in aggregate to board members. The restricted stock awards
vested January 1, 2018. The stock awards are valued at fair market
upon issuance at $195,500 and amortized over the vesting period. We
recognized $0 and $39,100 of stock based compensation expense for
the three months ended December 31, 2018 and 2017,
respectively.
NOTE 13 – WARRANTS
Transactions involving our equity-classified warrants are
summarized as follows:
|
|
|
Weighted-average exercise price
|
Weighted-
average remaining contractual term
(in years)
|
Aggregate intrinsic value
(in thousands)
|
|
Outstanding
at September 30, 2018
|
312,176
|
$
6.84
|
|
|
|
Issued
|
51,429
|
4.375
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited
|
-
|
-
|
|
|
|
Outstanding
at December 31, 2018
|
363,605
|
$
6.49
|
3.49
|
$
—
|
|
|
|
|
|
|
|
Exercisable
at December 31, 2018
|
363,605
|
$
6.49
|
3.49
|
$
—
|
The following table summarizes outstanding common stock purchase
warrants as of December 31, 2018:
|
|
|
Weighted-averageexerciseprice
|
Expiration
|
|
|
|
|
|
|
Exercisable
at $7.80 per share
|
141,676
|
$
7.80
|
September
2021
|
|
Exercisable
at $4.00 per share
|
70,500
|
$
4.00
|
September
2022
|
|
Exercisable
at $7.50 per share
|
100,000
|
$
7.50
|
October
2022
|
|
Exercisable
at $4.375 per share
|
51,429
|
$
4.375
|
September
2023
|
|
|
363,605
|
6.49
|
|
NOTE 14 – COMMITMENTS AND CONTINGENCIES
In September 2017 we entered into a wholesale license agreement
with kathy ireland® Worldwide under which we were granted an
exclusive, royalty free right to license, assign and use the kathy
ireland® Health & Wellness™ trademark, and all trade
names, trademarks and service marks related to the intellectual
property including any derivatives or modifications, goodwill
associated with this intellectual property when used in conjunction
with health and wellness as well as Ms. Ireland's likeness, videos,
photographs and other visual representations connected with kathy
ireland® Health & Wellness™.
As compensation under this agreement, we agreed to pay kathy
ireland® Worldwide a marketing fee of $840,000, of which
$480,000 was paid by December 31, 2017. The balance is payable in
three equal annual installments beginning January 1, 2019, subject
to acceleration. Under the terms of this agreement, we also agreed
to pay kathy ireland® Worldwide a royalty of 33 1/3% of our
net proceeds under any sublicense agreements we may enter into for
this intellectual property.
In January 2018, Level Brands, amended its wholesale license
agreement with kathy Ireland® Worldwide. The amendment
accounted for the Company exercising its option on a three year
extension and amending the payment terms related to this extension
as follows: to pay $400,000 within 5 days of executing the
amendment (which was paid on January 31, 2018), and to pay the
final amounts due under the Agreement, $320,000 on the latter of
January 1, 2019 or 30 days after the receipt by the Company of
$5,000,000 in net proceeds from sublicense agreements signed under
the health and wellness trademarks. This amount is classified as
accrued expense to related party as of September 30, 2018. In
addition, royalty payments to kathy ireland® Worldwide for the
additional three year extension are set at 35% of net proceeds. The
license fee paid is credited against any royalties to be paid. In
December 2018, Level Brands agreed to and paid the balance owed as
final payment at a reduced price of $300,000.
NOTE 15
– SEGMENT INFORMATION
The Company operates through its five subsidiaries in three
business segments: the products, licensing, and entertainment
divisions. The products division is designed to be an innovative
and cutting-edge producer and marketer of various products,
currently encompassing the CBD sector and hair care products. The
licensing division is designed to establish brands via licensing of
select products / categories and encompasses our two subsidiaries
with a focus on health and wellness products and men’s
lifestyle products. The entertainment division’s focus is to
become a producer and marketer of multiple entertainment
distribution platforms and provide brand management services. The
corporate parent also will generate revenue from time to time,
through advisory consulting agreements. This revenue is similar to
the entertainment divisions’ revenue process and we have
allocated revenue from corporate to the entertainment division for
segment presentation.
The products division operated for the full year in fiscal 2018 and
2017. The licensing and entertainment divisions were both acquired
in January 2017. The Company’s results for the product
division in the first quarter of fiscal 2019 include cbdMD LLC from
the Closing Date of the Mergers with Cure Based Development
(December 20, 2018) through December 31, 2018.
The performance of the business is evaluated at the segment level.
Cash, debt and financing matters are managed centrally. These
segments operate as one from an accounting and overall executive
management perspective, though each segment has senior management
in place; however they are differentiated from a marketing and
customer presentation perspective, though cross-selling
opportunities exist and continue to be pursued.
Condensed summary segment information follows for the three months
ended December 31, 2018 and 2017.
Three
months ended December 31, 2018:
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
475,067
|
$
528,554
|
$
245,409
|
$
1,249,030
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Total
Net Sales
|
$
475,067
|
$
528,554
|
$
245,409
|
$
1,249,030
|
|
Income
(loss) from Operations before Overhead
|
$
63,657
|
$
(1,220,747
)
|
$
(97,882
)
|
$
(1,254,972
)
|
|
Allocated
Corporate Overhead (a)
|
(355,272
)
|
(395,272
)
|
(183,526
)
|
(934,070
)
|
|
Net
Income (Loss)
|
$
(291,615
)
|
$
(1,616,019
)
|
$
(281,408
)
|
$
(2,189,042
)
|
|
|
|
|
|
|
|
Assets
|
$
84,742,526
|
$
6,959,508
|
$
4,735,370
|
$
96,437,404
|
Three
months ended December 31, 2017:
|
|
Three
Months Ended September 30, 2016
|
|
|
|
|
|
|
|
Net
Sales
|
$
29,070
|
$
37,162
|
$
366,979
|
$
433,211
|
|
Net
Sales related party
|
$
-
|
$
-
|
$
254,545
|
$
254,545
|
|
Total
Net Sales
|
$
29,070
|
$
37,162
|
$
621,524
|
$
687,756
|
|
Income
(loss) from Operations before Overhead
|
$
(360,753
)
|
$
(360,109
)
|
$
242,553
|
$
(478,309
)
|
|
Allocated
Corporate Overhead (a)
|
(49,930
)
|
(41,554
)
|
(694,989
)
|
(786,474
)
|
|
Net
Income (Loss)
|
$
(410,683
)
|
$
(401,663
)
|
$
(452,436
)
|
$
(1.264,782
)
|
|
|
|
|
|
|
|
Assets
|
$
4,587,741
|
$
5,792,671
|
$
4,918,581
|
$
15,298,993
|
(a)
The
Company began allocating corporate overhead to the business
segments in April 2017. We have allocated overhead on a proforma
basis for the three months ended December 31, 2018 and 2017 above
for comparison purposes.
NOTE 16 – INCOME TAXES
On November 17, 2017, the Company completed an IPO. The Company
conducted a preliminary Section 382 analysis and determined an
ownership change likely occurred upon the IPO. Management has
determined that the Company's federal and state NOL carryovers
established up through the date of the ownership change may be
subject to an annual limitation. The Company is in the process of
determining the annual limitation.
On December 22, 2017, the Tax Cuts and Jobs Act was enacted. As a
result of the enactment, the U.S. corporate tax rate was changed
from a progressive bracketed tax rate with the highest marginal
rate of 35% to a flat corporate tax rate of 21%. The Company has
revalued its deferred tax assets and liabilities at the date of
enactment and the result was a reduction of the net deferred tax
liability and a tax provision benefit of $12,000 which is reflected
in the nine months ending June 30, 2018 financial
statements.
On December 20, 2018, the Company completed a two-step merger with
Cure Based Development (see Note 2). As a result of the Mergers the
Company established as part of the purchase price allocation a net
deferred tax liability related to the book-tax basis of certain
assets and liabilities of approximately $5.1 million.
The Company has a valuation allowance against the net deferred tax
assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles which cannot be offset by
deferred tax assets and the deferred tax liabilities that resulted
from the Mergers with Cure Based Development. The net deferred tax
liability was reduced during the quarter ending December 31, 2018
by approximately $113,000 mainly due to the tax effected
post-mergers NOL’s which have an indefinite
life.
NOTE
17 – SUBSEQUENT EVENTS
Effective January 1, 2019, the Company entered into an agreement
with a broker dealer for general financial advisory services. The
term of the agreement is from January 1, 2019 until December 31,
2019. As compensation, the Company issued 25,000 shares of its
common stock which was valued at $77,250, based upon the trading
price of $3.09 on December 31, 2019.
On
January 14, 2019, the Company extended its current agreement for
advisory and investment banking services with a registered broker
dealer, which initially expired April 2019. The agreement was
extended through April 2020. As compensation, the Company issued
50,000 shares of its common stock which was valued at $212,500,
based upon the trading price of $4.25 on January 14,
2019.
On
April 19, 2019, following approval by our shareholders at the 2019
annual meeting held on April 19, 2019, we filed Articles of
Amendment to our Articles of Incorporation changing the name of our
company to “cbdMD, Inc.” effective May 1, 2019.
Concurrent with the name change, the CUSIP number of our common
stock will be changed to 12482W1018 and the symbol for our common
stock which is listed on the NYSE American will be changed to
“YCBD.” In addition, the shareholders of Level Brands,
Inc. approved the issuance of an aggregate of 15,250,000 shares of
our common stock pursuant to the rights granted as consideration
for the mergers which closed on December 20, 2018 pursuant to the
terms of the Agreement and Plan of Merger dated December 3, 2018 by
and among our company, our wholly-owned subsidiaries and Cure Based
Development, LLC.