cbdMD, Inc. - Annual Report: 2018 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

(Mark One)

 

 

For the fiscal year ended September 30, 2018

 

or

 

 

For the transition period from _______________ to _______________

 

Commission file number: 001-38299

 

 

LEVEL BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

North Carolina	47-3414576
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

 

4521 Sharon Road, Suite 450, Charlotte, NC 28211

(Address of principal executive offices)(Zip Code)

 

Registrant's telephone number, including area code: (704) 445-5800

 

Securities registered under Section 12(b) of the Act:

 

Title of each class	Name of each exchange on which registered
Common stock, par value $0.001 per share	NYSE American

 

Securities registered under Section 12(g) of the Act:

 

None

(Title of class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes  ☑ No

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes  ☑ No

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☐  Yes   ☑  No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.4.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes  ☐ No

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☑ 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☑
Emerging growth company	☑

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) ☐ Yes  ☑ No

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked prices of such common equity, as of the last business day of the registrant's most recently completed second fiscal quarter. $22,827,346 on March 31, 2018.

 

Indicate the number of shares outstanding of each of the registrant's classes of common stock, as of the latest practicable date. 10,095,356 shares of common stock are issued and outstanding as of December 01, 2018.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

List hereunder the following documents if incorporated by reference and the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is incorporated: (1) Any annual report to security holders; (2) Any proxy or information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or (c) under the Securities Act of 1933. None.

 

 

TABLE OF CONTENTS

 

		Page No.
	Part I
Item 1.	Business.	4
Item 1A.	Risk Factors.	13
Item 1B.	Unresolved Staff Comments.	24
Item 2.	Properties.	24
Item 3.	Legal Proceedings.	24
Item 4.	Mine Safety Disclosures.	24
	Part II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	25
Item 6.	Selected Financial Data.	25
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations.	26
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	32
Item 8.	Financial Statements and Supplementary Data.	32
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	33
Item 9A.	Controls and Procedures.	33
Item 9B.	Other Information.	34
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance.	35
Item 11.	Executive Compensation.	42
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters.	45
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	47
Item 14.	Principal Accounting Fees and Services.	48
	Part IV
Item 15.	Exhibits, Financial Statement Schedules.	49
SIGNATURES		50

 

OTHER PERTINENT INFORMATION

 

Unless the context otherwise indicates, when used in this report, the terms Level Brands,” “we,” “us, “our” and similar terms refer to Level Brands, Inc., a North Carolina corporation formerly known as Level Beauty Group, Inc., and our subsidiaries Beauty and Pinups, LLC, a North Carolina limited liability company which we refer to as “Beauty & Pin-Ups”, I | M 1, LLC, a California limited liability company, which we refer to as “I’M1”, Encore Endeavor 1 LLC, a California limited liability company which we refer to as “EE1,” and Level H&W, LLC, a North Carolina limited liability company which we refer to as “Level H&W.” In addition, "fiscal 2017" refers to the year ended September 30, 2017, "fiscal 2018" refers to the year ended September 30, 2018, and “fiscal 2019” refers to the year ending September 30, 2019.

 

Unless otherwise indicated, all share and per share information contained herein gives pro forma effect to the 1:5 reverse stock split of our common stock, which was effective December 5, 2016. We maintain a corporate website at www.levelbrands.com. The information contained on our corporate website is not part of this report.

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

 

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or “Exchange Act.” These forward-looking statements are subject to known and unknown risks, uncertainties and other factors which may cause actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These forward-looking statements were based on various factors and were derived utilizing numerous assumptions and other factors that could cause our actual results to differ materially from those in the forward-looking statements. These factors include, but are not limited to:

 

	●	our material dependence on our relationships with kathy ireland® Worldwide and certain of its affiliates;
	●	our limited operating history;
	●	the lack of assurance of the closing of the pending transaction with Cure Based Development and the need to meeting the initial listing standards of the NYSE American should the transaction ultimately close;
	●	the limited operating histories of our subsidiaries;
	●	our history of losses;
	●	risks associated with any failure by us to maintain an effective system of internal control over financial reporting;
	●	the terms of various agreements with kathy ireland® Worldwide and possible impacts on our management's abilities to make certain decisions regarding the operations of our company;
	●	our dependence on consumer spending patterns;
	●	our history on reliance on sales from a limited number of customers, including related parties;
	●	risks associated with our failure to effectively promote our brands;
	●	our ability to identify and successfully acquire additional brands and trademarks;
	●	the operating agreements of our I'M1 and EE1 subsidiaries;
	●	the accounting treatment of securities we accept as partial compensation for services;
	●	our ability to liquidate securities we accept as partial compensation for services and the possible impact of the 40 Act;
	●	the possible need to raise additional capital in the future;
	●	terms of the contracts with third parties in each of our divisions;
	●	possible conflicts of interest with kathy ireland® Worldwide;
	●	possible litigation involving our licensed products;
	●	our ability to effectively compete and our dependence on market acceptance of our brands;
	●	the lack of long-term contracts for the purchase of products from our professional products division;
	●	our ability to protect our intellectual property;
	●	additional operational risks associated with our professional products division;
	●	risks associated with developing a liquid market for our common stock and possible future volatility in its trading price;
	●	risks associated with any future failure to satisfy the NYSE American LLC continued listing standards;
	●	dilution to our shareholders from the issuance of additional shares of common stock by us and/or the exercise of outstanding options and warrants;
	●	risks associated with our status as an emerging growth company;
	●	risks associated with control by our executive officers, directors and affiliates;
	●	risks associated with future sales of our common stock by existing shareholders;
	●	our failure to maintain an effective system of internal control over financial reporting;
	●	risks associated with unfavorable research reports; and
	●	risks associated with our articles of incorporation, bylaws and North Carolina law.

 

Most of these factors are difficult to predict accurately and are generally beyond our control. You should consider the areas of risk described in connection with any forward-looking statements that may be made herein. Readers are cautioned not to place undue reliance on these forward-looking statements and readers should carefully review this report and our other filings with the SEC in their entirety. Except for our ongoing obligations to disclose material information under the Federal securities laws, we undertake no obligation to release publicly any revisions to any forward-looking statements, to report events or to report the occurrence of unanticipated events. These forward-looking statements speak only as of the date of this report, and you should not rely on these statements without also considering the risks and uncertainties associated with these statements and our business.

 

PART I

 

Forward-Looking Statements

 

The statements contained in this Annual Report on Form 10-K that are not purely historical are considered to be "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These forward-looking statements include, but are not limited to: any projections of revenues, earnings, or other financial items; any statements of the strategies, plans and objectives of management for future operations; any statements concerning proposed new products or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect" or "anticipate" and any other similar words. These statements represent our expectations, beliefs, anticipations, commitments, intentions, and strategies regarding the future and include, but are not limited to, the risks and uncertainties outlined in Item 1.A Risk Factors and Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. Readers are cautioned that actual results could differ materially from the anticipated results or other expectations that are expressed in forward-looking statements within this report. The forward-looking statements included in this report speak only as of the date hereof, and we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise, except as required by law.

 

ITEM 1.   DESCRIPTION OF BUSINESS.

 

Level Brands strives to be an innovative licensing, marketing and brand management company with a focus on lifestyle-based products. We champion a bold, unconventional image, and social consciousness for our company and our brands. Working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chairman, CEO and Chief Designer of kathy ireland® Worldwide, we seek to secure strategic licenses and joint venture partnerships for our brands, as well as to grow the portfolio of brands through strategic acquisitions.

 

We operate our business in four business units, including:

 

		Level H&W was established in September 2017 and has an exclusive license to the kathy ireland® Health & Wellness™ brand. Its goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. This unit began operating in fiscal 2018.
		Founded in early 2017 and first conceptualized by kathy ireland® Worldwide, I'M1 is a men’s lifestyle brand established to capitalize on potentially lucrative licensing and co-branding opportunities with products focused on millennials.
		Also founded in early 2017, EE1 was established to serve as a producer and marketer of experiential entertainment including recordings, film, TV, web and live events, and entertainment experiences. EE1 also provides brand management services including creative development and marketing, brand strategy, and distribution support.
"Beauty belongs to everyone"		Beauty & Pin-Ups, our first business unit is a hair care line with a social conscience and launched its products in 2015. We offer quality hair care products, including shampoos, conditioners, styling aides and a patented styling tool, through retailers and online outlets and are expanding into licensing opportunities.

 

Our business model is designed with the goal of maximizing the value of our brands through entry into license agreements with partners that are responsible for the design, manufacturing and distribution of our licensed products. We promote our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, which we expect will allow our customers to interact with each of our brands, in addition to the products themselves, will be critical to our success.

 

 

We began reporting our revenues by segment during the second quarter of fiscal 2017 following our acquisitions of I'M1 and EE1. We report in three business segments: the licensing, the entertainment and the products divisions. The licensing division is comprised of two of our business units focused on establishing licensing contracts in two areas: men’s lifestyle products branded under I’M1 (grooming, personal care, cologne, accessories, jewelry and apparel) and Level H&W, which includes health and wellness related products that we have branded under kathy ireland® Health & Wellness™, which began operations in December 2017. EE1 comprises the entertainment division and its focus is to produce and market multiple entertainment distribution platforms as well as engage in brand management services. In addition to revenues generated in each of these segments, the corporate parent also will generate revenue from time to time, through advisory consulting agreements. This revenue is similar to the entertainment division’s revenue process and we have allocated revenue from corporate to the entertainment division for segment presentation. The products division today is comprised of Beauty and Pin-Ups and is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products.

 

Recent Developments

 

On December 3, 2018 we and our newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, upon consummation of a two-step merger, cbdMD LLC will continue as a wholly-owned subsidiary of our company and will continue the operations of Cure Based Development pre-closing. Cure Based Development, a Charlotte, NC-based company formed in August 2017, is owner, operator and manufacturer of nationally recognized consumer cannabidiol (CBD) brand cbdMD which currently offers a variety of CBD products from topicals and tinctures to bath bombs and pet products, manufactured and sold direct to consumers online via the company website. Cure Based Development also provides wholesale distribution with retailers currently selling products at brick-and-mortar locations, compounding pharmacies, salons, supplement stores, and pet shops. Cure Based Development reported revenues of $354 and $3,280,009 for the period from inception through December 31, 2017 and for the eight months ended August 31, 2018, respectively, and a net loss of $323,197 and $353,561 for those periods.

 

Upon the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the two-step merger, the members of Cure Based Development will receive contractual rights to receive 15,525,000 shares of our common stock, representing approximately 60% of our outstanding common stock following such issuance. Assuming the closing of the two-step merger, these initial shares will be issued as promptly as practicable following receipt of approval by our shareholders for the possible issuance of in excess of 19.99% of our presently outstanding common stock in accordance with the rule of the NYSE American (the “Shareholder Approval”). The Merger Agreement also provides that one of the members of Cure Based Development will be entitled to receive up to an additional 15,525,000 shares of our common stock as part of the merger consideration, upon Shareholder Approval and the satisfaction of certain aggregate net revenue criteria by cbdMD LLC within 60 months following the closing. We expect to include the proposal for Shareholder Approval of the issuance of the initial shares as well as the possible future issuance of the earnout shares in the proxy statement for our 2019 annual meeting of shareholders.

 

Following the execution of the Merger Agreement, we lent Cure Based Development $2,000,000 under the terms of a one year 6% secured promissory note. At closing Mr. R. Scott Coffman, the CEO and a manager of Cure Based Development, will be appointed to our Board of Directors and become the chief executive officer of our cbdMD LLC subsidiary. If the pending transaction closes, it will result in a change of control of our company and the combined company will be required to satisfy NYSE American initial listing standards for the continued listing of our common stock on the NYSE American following the closing.

 

In addition to other conditions to closing as described in the Merger Agreement, the completion of the two-step merger is subject to the approval by the President of the United States of the Agricultural and Nutrition Act of 2018, or such other titled Federal legislation, which, when approved, contains a permanent declassification of cannabidiol (CBD) as a controlled substance under Federal law. Because this and certain other conditions precedent to closing are beyond our control, we do not know when, if ever, that this transaction will be consummated. Additional information regarding the terms and conditions of the Merger Agreement is included in our Current Report on Form 8-K as filed with the SEC on December 4, 2018.

 

Growth Strategies and Outlook

 

Level Brands expanded its business operations in fiscal 2017 to include two new divisions through which it now has a committed focus on licensing and branding services. In addition, we added a third division at the end of fiscal 2017 which began operations in fiscal 2018. This expansion has positioned Level Brands with licensing segments in millennial men’s lifestyle and the health and wellness arena, for women and their families at every age. We believe that Level Brands also has solid capabilities related to brand management services and has seen success in early stages by engaging with several customers.

 

We believe that in working closely with our Chairman Emeritus and Chief Brand Strategist, Kathy Ireland, the Chair, CEO and Chief Designer of kathy ireland® Worldwide, and leveraging the expertise and talent of the kathy ireland ® Worldwide executive team, we have opportunity to secure strategic licenses and joint venture partnerships for our brands, as well as to continue to grow the portfolio of brands we manage and represent. We are implementing the kathy ireland® Worldwide “blueprint” and utilize the kathy ireland® Worldwide team as we expand our licensing and branding business.

 

We are pursuing the following strategies to continue to grow our revenues and expand our business and operations in fiscal 2019:

 

 

 

 

 

 

 

 

Our strategy

 

Our business strategy is to maximize the potential value of our brands primarily through strategic licenses and joint venture partnerships around the world, as well as to grow the portfolio of brands through strategic acquisitions. We believe our business model enables us to use the brand management expertise at our disposal, through our relationship with kathy ireland® Worldwide, to continue to grow our portfolio of brands and generate new revenue streams without significantly changing our infrastructure. We believe our business model provides numerous benefits, including:

 

 

 

 

 

We plan to continue to build and maintain our brand portfolio by developing our existing brands and acquiring additional brands directly or through joint ventures or partnerships. In assessing potential acquisitions or joint ventures, we expect to primarily evaluate the strength of the target brand as well as the expected viability and sustainability of future royalty streams and its fit within its targeted segments as well as in segments where we believe significant opportunity lies. We believe that this focused approach will allow us to effectively screen a wide pool of consumer brand candidates and other asset light businesses that meet our criteria, strategically evaluate targets and efficiently complete due diligence for potential acquisition. Ms. Ireland, in her role as Chief Brand Strategist, is expected to provide significant input to our management in the identification and evaluation of potential acquisitions or joint ventures.

 

Our relationship with kathy ireland® Worldwide

 

We are a party to multiple agreements with kathy ireland® Worldwide and principals of that privately held company that are key to our ability to implement our business strategy and provide services under the various other third party agreements with licensors, brands and other partners, The material terms of these agreements are described later in this report under Note 9 to the notes to our consolidated financial statements. These agreements include:

 

 

 

 

 

 

 

 

How we generate sales

 

We generate sales from a variety of sources, including:

 

 

 

 

Please see Note 1 – Revenue Recognition appearing in the consolidated financial statements included in this report for additional information on how we record sales.

 

From time to time we also engage in sales transactions with related parties which may be material to our results of operations. These transactions are described in greater detail in Note 9 of our consolidated financial statements appearing elsewhere in this report.

 

We have entered into agreements where we have accepted common stock, options or warrants (an equity position) as non-cash compensation under the terms of various of these agreements. Please see Note 3 of our consolidated financial statements appearing elsewhere in this report for detailed information on these transactions.

 

 

Our business units

 

Licensing division

 

Our licensing division includes the operations of Level H&W and I’M1.

 

As described elsewhere in this report, we entered into a license agreement for the exclusive license to the kathy ireland® Health & Wellness™ brand, a newly formed entity. Our goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. Our target market sectors for this brand include: complementary and alternative medicine; wellness lifestyle; real estate; spa industry; thermal/mineral springs; workplace wellness; beauty at every age; healthy eating; nutrition and weight loss; wellness tourism; fitness and mind-body; and preventive and personalized medicine. As a result of Ms. Ireland's five best selling fitness programs and her personal focus on health and wellness, we expect to develop a new brand utilizing these rights. Through licensing arrangements with third parties which we will seek to obtain, our goal is to create a brand which will include a wide variety of licensed products and services, targeted to both Baby Boomers as well as millennials. We currently have engaged two licensing agreements in our target categories of wellness lifestyle and continue to assess other opportunities. We believe that licensed products and services under this brand can benefit from a wide distribution path of grocery, drug and mass, as well as direct response and online sales.

 

I’M1's goal is to become a leader in multiple categories including grooming, personal care, cologne, accessories, jewelry and apparel. I’M1 markets itself as a lifestyle brand for men, who are not threatened by change and willingly embrace it. Our target customers are men who enjoy a lifestyle inspired by the rugged chic of an athletic lifestyle, while giving back to our communities by supporting our Millennium Development Goals. Tommy Meharey is the “face” of I’M1. He is a millennial, Marine, father, and the youngest board member of kathy ireland® Worldwide. We believe Mr. Meharey embodies the essence of the targeted I’M1 clientele, and his approachable nature, history of service to the nation, and family values may be an asset to the brand. As the voice and inspiration of I’M1, we expect to leverage Mr. Meharey’s ability to communicate the DNA of I’M1 to the media, retailers, and our consumers. Since our January 2017 acquisition of the voting interests in this newly formed entity from affiliates of kathy ireland® Worldwide, we have entered into licensing agreements with entities in our target categories including men’s fashion and accessories.

 

We have developed a standardized form of licensing agreement for all of our licensing arrangements under all of our businesses, which contains general terms and conditions under which we will grant licenses to our licensed marks that can be modified to meet the business terms of each particular product. The standard terms and conditions include the limitations on the grant of the license for the marks, use and ownership of our intellectual property and the ownership of the intellectual property related to the licensed products, means for conducting brand business and coordinating with us and other licensees, royalty reporting and accounting obligations, quality assurance procedures, acceptable display, labeling and promotional materials, minimum insurance requirements, termination and confidentiality provisions, a code of conduct for our licensees and other customary terms and conditions contained in licensing agreements.

 

Our current licensing agreements provide that the manufacturing, development, distribution and operating costs and expenses of products are borne by our licensee, and we expect that licensing agreements we enter into with future partners will be similarly structured. Our licensing agreements provide for revenues based on royalties as a percentage of sales by our client and are usually signed for an initial five to seven year period. The contracts typically also have a minimum annual guaranteed royalty amount and can also have an advertising/marketing fee which is paid to us.

 

Entertainment division

 

EE1 provides brand management and seeks to be an experiential entertainment company, serving as a producer and marketer of multiple entertainment distribution platforms.

 

Brand management

 

Under the scope of its brand management services, EE1 provides input, strategies and an architecture for corporate brands, including:

 

 

 

Since our January 2017 acquisition of the voting interests in EE1 from affiliates of kathy ireland® Worldwide, we have entered into representation and advisory agreements with a number of entities to provide the services above. In these agreements, we will typically provide a variety of strategic services designed to help expand, establish, or reposition a brand. The services are delivered over a defined timeframe for a contracted fee. In addition we typically receive an on-going royalty fee, for a negotiated period of time, of sales by the client.

 

In addition to the representation and advisory agreements to which EE1 is a party, we also entered into seven year non-exclusive wholesale license agreements with two existing brands introduced to us by kathy ireland® Worldwide. Under the terms of these agreements, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with the brands for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks.

 

Experiential entertainment

 

Experiential entertainment is also part of EE1's business model. EE1’s goal is to provide a variety of “all inclusive” entertainment experiences targeted to millennials which combine multiple facets of an entertainment experience into one event. EE1 is expected to be able to assess all entertainment distribution platforms such as recording, film, television, radio, podcasts, web content, live events including: sports, festivals, fashion shows, holiday-centric programming, and business-centric programming, to identify areas of additional opportunity. EE1 intends to pursue opportunities to build content in every area of the entertainment, sports, and travel industries - including joining artists in the recording studio, participating in an artist’s sound check, VIP back stage artist meet and greets, films, broadcast, live events including concerts and musical theatre, and fashion shows.

 

EE1 is a party to agreements with several entities for projects including a record album and production services related to two television shows featuring Kathy Ireland. These agreements are structured based on the type of entertainment or event produced and will provide revenue as a fee based on the services contracted and provided. In some cases, we will also receive on-going royalties based on sales (for example, album and movie sales).

 

Products division

 

Beauty & Pin-Ups is designed to be an innovative and cutting-edge producer and marketer of quality hair care and other beauty products. It has a brand name that we believe lends itself to various channels of distribution and licensing including swimsuits, cosmetics, nails, accessories and more. With an initial launch in September 2015 of “The Iron”, a unique styling tool, Beauty & Pin-Ups currently has 11 products, including:

 

●	Flaunt- Silkening Shampoo and Conditioner	●	Linger - Style and Sculpting Spray Gel
●	Luxe - Leave-in Spray On Revitalizing Conditioner	●	Fierce - Firm Hold Finishing Spray
●	Lavish - All in 1 Cleansing and Conditioning	●	Fearless Hair Rescue Treatment
●	Sway - Blow Out Styling Primer Enhanced with Marine Botanicals	●	Valor - Superfine Hair Spray
●	Fever - Thermal Protectant	●	Rewind - Shampoo and Conditioner
●	Stay Dirty - Dry Shampoo

 

Marketing

 

We have utilized external resources combined with an internal team to manage and facilitate our social media presence and strategy which strives to appeal to a wide audience with positive messaging that embraces inner beauty and authenticity. Through high quality visual imagery that engages both the consumer and the stylist, we seek to convey our message that beauty belongs to everyone. We use a mix of sales messaging, ingredient stories, giveaways/contests, and images of hairstyles to engage customers and increase reach. We continue to build our brand through our websites, digital, and social media.

 

 

We believe there are licensing opportunities and brand extensions including swimwear, sunglasses and intimate apparel utilizing the Beauty & Pin-Ups tradename that we may be able to take advantage of in future periods. We have been able to enter into two licensing agreements thus far and have put a focus on establishing additional licensing arrangements going forward and transitioning the business into a licensing model.

 

Product development

 

Mr. Priel Maman, formerly the minority owner of Beauty & Pin-Ups, was the developer of the original Beauty & Pin-Ups product line. In our acquisition of the assets of Beauty & Pin-Ups in 2015 we acquired all of the intellectual property associated with those development efforts. Our products were conceptualized by our in-house team and utilized the services of third party contractors to help develop the product formulas, test and finalize.

 

Sales channels

 

Beauty & Pin-Ups products have historically been sold primarily through distributors into the salon channel. At the beginning of fiscal 2018 we began distributing our products thru Riley Rose retail stores and online through JCPenney.com. Our products are currently available on e-commerce channels including from on our website.

 

Manufacturing, warehousing and raw materials

 

We manufacture our core products for Beauty & Pin-Ups through hair care and other third-party manufacturers in the United States and Canada; our flat iron products, foil pods for the irons, and promotional items (back packs, zipper bags, and clutch purses) are manufactured by third parties in China on a purchase order basis. Terms with our China-based manufacturers typically require 30% to 50% upon order with payment due when products are ready to ship.  

 

The principal raw materials used in the manufacture of our core products are essential oils, alcohols and specialty chemicals. We have engagements with specific organizations that are our “fillers” they use the formulas provided to create the products and fill our packaging so we have a product that can be distributed to our customers. Our terms typically provide that upon an order being completed by the filler, balances are due within 30 to 45 days, although in some instances we have been required to place a deposit of 30% to 50% upon placement of an order.

 

We also purchase packaging components that are manufactured to our design specifications using our unique brand image. We utilize a third party firm that specializes in design and rollout of packaging, labeling, merchandising displays and advertising for our products.

 

As we focus on a licensing model, we expect the manufacturing process to be handled by the licensee’s in the future.

 

Intellectual property rights

 

In addition to our license agreements with kathy ireland® Worldwide described elsewhere in this report, our success depends, at least in part, on our ability to protect our brand names. We rely on a combination of trademarks, patents, copyrights, trade secrets and know-how, intellectual property licenses and other contractual rights (including confidentiality and invention assignment agreements) to establish and protect our proprietary rights.

 

We own the trademark rights used in connection with our brands in the United States including Beauty & Pin-Ups and EE1 and have a 10 year license for rights to the I’M1 trademark. We have also filed trademark registrations for an additional approximately 12 trademarks which we may use in the future under the Beauty & Pin-Ups line or as we enter into licensing agreements for Beauty & Pin-Ups, I’M1 and EE1. We consider the protection of our trademarks to be important to our business.

 

We own both U.S., European Union and Chinese design patents on our hair iron titled “hair iron” and have filed application in the U.S., Europe and China for design patents for the hair foil, titled “aluminum foil for hair” under the Chinese application and “hair foil” under the U.S. and European Union application. This product is used in conjunction with the hair iron.

 

 

In connection with the recording master license agreement with McCoo & Davis, Inc. EE1 will own all intellectual property rights in the album, any videos, production elements and the master recordings and in all other forms of media, with the right to sublicense.

 

In addition to www.levelbrands.com, we own multiple domain names that we may or may not operate in the future. However, as with phone numbers, we do not have and cannot acquire any property rights in an Internet address. The regulation of domain names in the United States and in other countries is also subject to change. Regulatory bodies could establish additional top-level domains, appoint additional domain name registrars or modify the requirements for holding domain names. As a result, we might not be able to maintain our domain names or obtain comparable domain names, which could harm our business.

 

Competition

 

Level H&W’s competition includes companies that manufacture and produce products focused on health and wellness. This is a broad market and encompasses companies producing supplements, health and wellness lifestyle items, spa related products, preventative care products, nutrition products and more. Our focus on licensing arrangements in this market we believe will allow us to establish a broader offering quickly in a cost effective manner, which we believe may give us some advantages. There are no assurances, however, that we will ever be successful in effectively competing in this market segment.

 

I’M1’s competition includes established, well-capitalized companies with wide consumer recognition providing products focused for men’s grooming, personal care, accessories, and apparel. I’M1 is expected to be a younger brand, built to address the desires of millennials. While we expect we will seek to address the aspirations of our customers at attainable price points which we believe may give us a competitive advantage, however there are no assurances we will ever be able to effectively compete within this sector.

 

EE1's principal competitors in the entertainment arena are expected to be large, established multi-national entertainment companies providing broad products / offerings including film, television, music recordings, and live events. Additional competitive organizations include independent studios, though the majority of these agencies do not address consumers across multiple platforms. Despite the significant competition in the entertainment industry from larger, established and well-capitalized companies, we believe it is a field that welcomes, and is in fact driven, by disruption and we will seek to leverage the flexibility of a start-up without a large organizational structure to our advantage. There are no assurances, however, that we will ever be successful in effectively competing in this market segment.

 

There is vigorous competition within each market where our hair care and other beauty products are sold. Brand recognition, quality, performance, availability and price are some of the factors that impact consumers’ choices among competing products and brands. Advertising, promotion, merchandising and the pace and timing of new product introductions also have a significant impact on consumers’ buying decisions. We compete against a number of national and international companies, most of which have substantially greater resources than we do. There are no assurances we will ever be able to effectively compete or that we will develop any widespread brand recognition.

 

Employees

 

At December 01, 2018 we had 7 full-time employees. There are no collective bargaining agreements covering any of our employees.

 

Our history

 

Our company was formed under the laws of the state of North Carolina in March 2015 under the name Level Beauty Group, Inc. In March 2015 we formed our majority owned subsidiary Beauty & Pin-Ups. In November 2016 we changed the name of our parent company to Level Brands, Inc. In December 2016 we effected a 1:5 reverse stock split of our outstanding common stock. 

 

Additional information on the terms of material acquisitions may be found in Note 1 to the notes to our consolidated financial statements appearing elsewhere in this report.

 

 

Additional information

 

We file annual and quarterly reports on Forms 10-K and 10-Q, current reports on Form 8-K and other information with the Securities and Exchange Commission (“SEC” or the “Commission”). The Commission also maintains an Internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the Commission.

 

Other information about Level Brands can be found on our website www.levelbrands.com. Reference in this document to that website address does not constitute incorporation by reference of the information contained on the website.

 

 

Investing in our common stock involves risks. In addition to the other information contained in this report, you should carefully consider the following risks before deciding to purchase shares of our common stock. The occurrence of any of the following risks might cause you to lose all or a part of your investment. Some statements in this report, including statements in the following risk factors, constitute forward-looking statements. Please refer to “Cautionary Statement Regarding Forward-Looking Statements” for more information regarding forward-looking statements.

 

RISKS RELATED TO OUR OVERALL BUSINESS

 

Kathy Ireland is not an officer or director of our company. We are materially dependent upon our relationships with kathy ireland® Worldwide and certain of its affiliates. If these advisory agreements or license rights should be terminated or expire, we would be deprived of the services and our business could be materially adversely impacted.

 

While affiliates of kathy ireland® Worldwide are minority owners of both I’M1 and EE1, the terms of the operating agreements for those subsidiaries do not require them to provide any services to us. We have entered into a non-exclusive advisory agreement with kathy ireland® Worldwide, as amended, which expires in February 2025 under which we engaged it to provide various consulting and advisory services to us. Ms. Ireland serves in the non-executive role of Chairman Emeritus and Chief Brand Strategist to us under this agreement. Ms. Ireland is not a member of our management or board of directors, the title Chairman Emeritus is an honorary title and she is not a founder or co-founder of our company. Ms. Ireland provides services to us solely under the terms of the non exclusive advisory agreement. We have also entered into advisory agreements with additional affiliates of kathy ireland® Worldwide, including Messrs. Roseberry, Carrasco, Meharey and Mendoza, pursuant to which they provide various management and advisory services to us, including key operational roles at I’M1 and EE1. These agreements will expire in February 2019 and at that point extend on a month to month basis unless cancelled by either party. None of these services are provided on an exclusive basis, each of these individuals may have a conflict of interest in that they have a long term relationship with Kathy Ireland and have derived substantial income from kathy ireland® Worldwide and there is no minimum number of hours which are required to be devoted to us. In addition we have obtained a royalty free right to license the intellectual property related to kathy ireland® Health & Wellness. Our business model is materially dependent upon our continued relationship with kathy ireland® Worldwide, Ms. Ireland and her affiliates, including Messrs. Roseberry, Carrasco, Meharey and Mendoza. If we should lose access to those relationships or if the reputation of Ms. Ireland and/or kathy ireland® Worldwide were to be damaged, our results would suffer and there are no assurances we would be able to continue to operate our company and develop our brands as presently planned.

 

Our limited operating history does not afford investors a sufficient history on which to base an investment decision.

 

Level Brands was formed in March 2015. Until fiscal 2017, our net sales were solely from our products division. We began reporting revenues from our licensing division and our entertainment division during the second quarter of fiscal 2017. In September 2017, we entered into wholesale license agreements for three new brands, including kathy ireland® Health & Wellness, a newly created brand. There are no assurances we will be successful in generating any significant net sales in future periods based upon these new agreements. Our operations are subject to all the risks inherent in the establishment of a new business enterprise. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays that are frequently encountered in a newly-formed company. There can be no assurance that at this time that we will successfully implement our business plan, operate profitably or will have adequate working capital to meet our obligations as they become due. Prospective investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected and we may not have the resources to continue or expand our business operations.

 

 

There are no assurances we will close the pending transaction with Cure Based Development. If we do close the transaction, it will result in a change of control of our company and we will be required to meet the NYSE American initial listing standards in order to maintain the listing of our common stock.

 

As described earlier in this report, on December 3, 2018 we entered into the Merger Agreement with Cure Based Development. The closing of this pending transaction is subject to a number of conditions precedent including, but not limited to, the approval by the President of the United States of the Agricultural and Nutrition Act of 2018, or such other titled Federal legislation, which, when approved, contains a permanent declassification of cannabidiol (CBD) as a controlled substance under Federal law. Certain of the content of the House and Senate versions of this bill has been the subject of great debate among the members of the House and Senate, and we do not know when a comprise bill will be approved by both chambers or if the President of the United States will sign the final bill. Because the approval of this law is beyond our control, investors should not place undue reliance on this pending transaction when evaluating our company, our business, operations and prospects. In addition, if the pending transaction does close it will result in a change of control of our company. NYSE Regulation, Inc. has informally advised us that we will be required to meet initial listing standards following the closing in order to maintain the listing of our common stock on the NYSE American. While we expect to be able to satisfy all of the qualitative and quantative criteria, there are no assurances our expectations are correct. In that event, our shareholders would find it more difficult to buy and sell shares of our common stock which would adversely impact the market price thereof.

 

Our subsidiaries I’M1, EE1 and Level H&W are new entities with a limited operating history and we recently entered into a license agreement licensing the rights to certain intellectual property related to kathy ireland ® Health & Wellness, a newly created brand with no previous operating history, which does not afford investors a sufficient history on our company which to base an investment decision.

 

I’M1, EE1, and Level H&W are entities formed in September 2016, March 2016, and September 2017 respectively. We acquired membership interests in I’M1 and EE1 in January 2017. In September 2017 we entered into an exclusive license agreement to license the trademark and intellectual property rights for kathy ireland® Health & Wellness, a newly created brand with no operations. All of these entities are in the early stages of their businesses and we began reporting revenues from I’M1 and EE1 operations in the second quarter of fiscal 2017 and reported revenues from Level H&W in the second quarter of fiscal 2018. Our operations are subject to all the risks inherent in the establishment of a new business enterprise. The likelihood of success must be considered in light of the problems, expenses, difficulties, complications and delays that are frequently encountered in a newly-formed company. There can be no assurance that at this time that we will operate profitably or will have adequate working capital to meet our obligations as they become due. Prospective investors must consider the risks and difficulties frequently encountered by early stage companies, particularly in rapidly evolving markets. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. In the event that we do not successfully address these risks, our business, prospects, financial condition, and results of operations could be materially and adversely affected and we may not have the resources to continue or expand our business operations.

 

We have a history of losses and there are no assurances we will report profitable operations in future periods.

 

We reported net losses to common shareholders of $412,075and $1,738,734 for fiscal 2018 and fiscal 2017, respectively. Until such time, if ever, that we are successful in generating profits which are sufficient to pay our operating expenses it is likely we will continue to report losses in future periods. Further, historically our revenues have been attributable to sales from our products division and we did not begin reporting revenues from either our licensing division or our entertainment division until the second quarter of fiscal 2017. There are no assurances we will generate substantial revenues from the new businesses or that we will ever generate sufficient revenues to report profitable operations or a net profit.

 

 

The terms of the various agreements between our company and kathy ireland® Worldwide contain termination provisions which may impact management's ability to make certain decisions regarding the operation of our company.

 

The master advisory and consulting agreement with kathy ireland® Worldwide on which we are materially dependent provides that the agreement is immediately terminable by kathy ireland® Worldwide if any officers are terminated or resign, including Mr. Roseberry in his role as President and co-Managing Director of I'M1 and EE1, or if additional officers are appointed for each I'M1 and EE1 without the consent of kathy ireland® Worldwide. The wholesale license agreement for kathy ireland® Health & Wellness™ contains the right of kathy ireland® Worldwide to immediately terminate it if any officers are terminated or removed or additional officers are appointed with respect to either I'M1 or EE1, or if we compete with or invest in business that compete with kathy ireland® Worldwide. It is possible, however, that our management's ability to make certain operational decisions which it believes are otherwise in the best interests of our company could be restricted in future periods if these decisions could result in triggering the rights of kathy ireland® Worldwide to terminate any agreement.

 

Our business depends on consumer spending patterns.

 

Our business is sensitive to a number of factors that influence the levels of consumer spending, including political and economic conditions such as recessionary environments, the levels of disposable consumer income, consumer debt, interest rates and consumer confidence. Reduced consumer spending on beauty products could have an adverse effect on our operating results in future periods.

 

Substantially all of our net sales have been to a limited number of customers, the loss of any of which would be materially adverse to our company.

 

Substantially all of our net sales in fiscal 2018 and 2017 were attributable to sales to a limited number of customers. There are no assurances sales to these customers will continue. While we expect to add additional customers to our distribution network in the future for our products division, and expand our licensing and consulting clients in our other divisions, until such time as we are successful in these efforts, of which there is no assurance, any significant decrease in sales to any of our customers would have a material adverse financial effect on our company.

 

A significant amount of our net sales were from customers who are identified as related parties, the loss of any of which would be materially adverse to our company.

 

A significant amount of our net sales in fiscal 2018 and 2017, totaling $1,992,046 and $1,731,238 respectively, were from customers who are identified as related parties. There are no assurances sales to these customers will continue. While we expect to add additional customers in all of our businesses as we expand our licensing and consulting clients, until such time as we are successful in these efforts, of which there is no assurance, any significant decrease in sales to any of our customers would have a material adverse financial effect on our company.

 

If we fail to promote and maintain our brands in the market, our businesses, operating results, financial condition, and our ability to attract customers will be materially adversely affected.

 

Our success depends on our ability to create and maintain brand awareness for our product offerings. This may require a significant amount of capital to allow us to market our products and establish brand recognition and customer loyalty. Additionally, many of the companies offering similar products have already established their brand identity within the marketplace. We can offer no assurances that we will be successful in establishing awareness of our brands allowing us to compete in this market. The importance of brand recognition will continue to increase because low barriers of entry to the industries in which we operate may result in an increased number of direct competitors. To promote our brands, we may be required to continue to increase our financial commitment to creating and maintaining brand awareness. We may not generate a corresponding increase in revenue to justify these costs.

 

 

If we are unable to identify and successfully acquire additional brands and trademarks, our growth may be limited, and, even if additional trademarks are acquired, we may not realize anticipated benefits due to integration or licensing difficulties.

 

A component of our growth strategy is the acquisition of additional brands and trademarks. We generally compete with traditional apparel and consumer brand companies, other brand management companies and private equity groups for brand acquisitions. However, as more of our competitors continue to pursue our brand management model, competition for specific acquisition targets may become more acute, acquisitions may become more expensive and suitable acquisition candidates could become more difficult to find. In addition, even if we successfully acquire additional trademarks or the rights to use additional trademarks, we may not be able to achieve or maintain profitability levels that justify our investment in, or realize planned benefits with respect to, those additional brands.

 

Although we seek to temper our acquisition risks by following acquisition guidelines relating to the existing strength of the brand, its diversification benefits to us, its potential licensing scale and credit worthiness of the licensee base, acquisitions, whether they be of additional intellectual property (“IP”) assets or of the companies that own them, entail numerous risks, any of which could detrimentally affect our results of operations.

 

Acquisition of brands or trademarks transactions involve a number of risks and present financial, managerial and operational challenges, including: diversion of management’s attention from running our existing business; unanticipated costs associated with the target acquisition, appropriately valuing the target acquisition and analyzing its marketability, increased expenses, including legal and administrative expenses; integration costs related to the customer base and business practices of the acquired company with our own; and adverse effects on our reported operating results due to possible write-down of goodwill associated with acquisitions.

 

When we acquire IP assets or the companies that own them, our due diligence reviews are subject to inherent uncertainties and may not reveal all potential risks. Although we generally attempt to seek contractual protections through representations, warranties and indemnities, we cannot be sure that we will obtain such provisions in our acquisitions or that such provisions will fully protect us from all unknown, contingent or other liabilities or costs. Finally, claims against us relating to any acquisition may necessitate our seeking claims against the seller for which the seller may not, or may not be able to, indemnify us or that may exceed the scope, duration or amount of the seller’s indemnification obligations.

 

No assurance can be given with respect to the timing, likelihood or financial or business effect of any possible transaction. As a result, there is no guarantee that our shareholders will achieve greater returns as a result of any future acquisitions we complete.

 

Each of our I'M1 and EE1 subsidiaries are governed by operating agreements that require us to distribute amounts to minority members in certain circumstances. These distributions could reduce the amount of operating capital we have in future periods.

 

Under the terms of the operating agreements for each of I’M1 and EE1, Level Brands as the manager of these entities is responsible for the operations, including the payment of the operating costs. These costs are then deducted from the “profits” of the entity and a portion of those amounts, as determined by the particular operating agreement, will then be distributed to the members. We own all of the voting interests in I'M1 and EE1. During fiscal 2017 EE1 made a distribution to its members, no additional distributions have been made or are currently planned. Distributions to the members of I'M1 and EE1 will reduce the amount of working capital available to us and could adversely impact our liquidity in future periods.

 

The value of the equity securities we may accept as compensation under consulting agreements will be subject to adjustment which could result in losses to us in future periods. By accepting equity securities as partial compensation for our services, we may be adversely impacting our working capital in future periods.

 

As described elsewhere herein, we have entered into several agreements with third parties under which we accepted shares of its common stock as partial compensation for the services to be provided. For fiscal 2018 and fiscal 2017, the value of these securities represented 60.6% and 43.2%, respectively, of our total net revenues. By accepting equity securities as partial compensation for our services in lieu of cash, we incur expenses to deliver the services without the corresponding cash payments from our clients. As such, we utilize a greater portion of our working capital to provide services with the hope that we may benefit from an increase in the market value of the equity securities we have received in future periods. In addition, these securities will be reflected on our balance sheets in future periods as “marketable securities” or “investment other securities”. At the end of each quarter, we will evaluate the carrying value of the marketable securities or investment other securities for a decrease in value. We will evaluate the company underlying these marketable securities or investment other securities to determine whether a decline in fair value below the amortized cost basis is other than temporary. If the decline in fair value is judged to be “other- than- temporary”, the cost basis of the individual security will be written down to fair value as a new cost basis and the amount of the write-down is charged to earnings. During fiscal 2018 we recognized an other comprehensive loss of $2,512,539 for loss on these securities, net of taxes. It is possible that we may continue to recognize impairments on the carrying value of these securities in future periods. Any future impairments would adversely affect our operating results for the corresponding periods in that we would be required to reduce the carrying value of these investments.

 

 

We may be unable to liquidate securities we accept as partial compensation under consulting agreements which could adversely impact our liquidity in future periods.

 

Our ability to sell any securities we accept as partial compensation under consulting agreements is dependent upon a number of factors, including the existence of a liquid market for the securities and our compliance with the resale provisions of Federal securities laws which require us to hold the shares for at least six months, among other factors. While we expect to generally accept securities from issuers who are publicly traded or who are expecting to become a publicly traded company, there are no assurances a liquid market will exist in such securities at such time as we are able to resell the shares, or that the price we may receive will be commensurate with the value of the services we are providing. In that event, we would not benefit from the expected rise in the market price of the securities we own as a result of our efforts on behalf of the client company. In addition, depending upon the terms of our business relationship with the issuer of the securities, it is possible that from time to time we could be in possession of non-public information regarding the issuer which could prohibit us from disposing of the shares at a time when it is advantageous to us to do so. If we are unable to readily liquidate any securities we accept as compensation, we would be deprived of the cash value of those services and we would be required to write-off the carrying value of the securities which could adversely impact our results of operations in future periods.

 

The Investment Company Act of 1940 will limit the value of securities we can accept as payment for our business consulting services which may limit our future revenues and, in the event we are deemed an investment company, the cost and expense to comply with ‘40 Act regulations could be material.

 

The Investment Company Act of 1940, or the “‘40 Act,” regulates certain companies that invest in, hold or trade securities. Although we do not believe we are engaged in the business of investing, reinvesting or trading in securities, and we do not currently hold ourselves out to the public as being engaged in those activities, in the past we have accepted securities of our client companies as partial compensation. The ’40 Act and the rules thereunder set forth certain asset and revenue thresholds, which, if exceeded, may require us to register as an investment company under the ’40 Act. As a result, and principally related to the value of the securities received by us as part of our compensation by Isodiol International, Inc. under the terms of the license agreement we entered into with it in December 2017, at March 31, 2018 we exceeded the exemptive asset and revenue thresholds under the ’40 Act. Therefore, at March 31, 2018 we could be deemed an inadvertent investment company under the ’40 Act. While as of September 30, 2018 we reduced our assets in connection to this assessment so that we no longer exceeded the asset threshold, as a part of our agreement with Isodiol we are entitled to receive additional shares of Isodiol’s securities on a quarterly basis in an amount equal to $750,000 which can cause us to continue to exceed the revenue threshold. As it has never been our intention to be an investment company, we are taking certain actions to maintain our assets and revenues under the exemptive thresholds. In particular, we will limit the amount of equity we accept as part of our compensation for services so as to stay under the asset and revenue thresholds as imposed by the ’40 Act. We may therefore structure transactions in a less advantageous manner than if we did not have ’40 Act concerns, or we may avoid otherwise economically desirable transactions due to those concerns. If we are unable to maintain our assets and revenues below the exemptive levels, or if it were otherwise established that we were an unregistered investment company at any period of time, there would be a risk, among other material adverse consequences, that we could become subject to monetary penalties or injunctive relief, or both, in an action by the SEC. In addition, in the event we continue to fall under ’40 Act regulation, we will have significant ongoing ’40 Act public reporting requirements and regulation that would increase our administrative and operating costs and expenses. Further, under certain circumstances the ’40 Act provides that a contract that is made or whose performance involves a violation of the ’40 Act is unenforceable by either party unless a court finds that under the circumstances enforcement would produce a more equitable result than non-enforcement. As a result, we would no longer be able to conduct our business as it is presently conducted which would have a material adverse impact on our results of operations in future periods.

 

 

 We may require additional capital to finance the acquisition of additional brands and if we are unable to raise such capital on beneficial terms or at all this could restrict our growth.

 

We may, in the future, require additional capital to help fund all or part of potential acquisitions. If, at the time required, we do not have sufficient cash to finance those additional capital needs, we will need to raise additional funds through equity and/or debt financing. We cannot guarantee that, if and when needed, additional financing will be available to us on acceptable terms or at all. Further, if additional capital is needed and is either unavailable or cost prohibitive, our growth may be limited as we may need to change our business strategy to slow the rate of our expansion plans. In addition, any additional financing we undertake could impose additional covenants upon us that restrict our operating flexibility, and, if we issue equity securities to raise capital or as acquisition consideration, our existing shareholders may experience dilution or the new securities may have rights senior to those of our common stock.

 

RISKS RELATED TO OUR LICENSING AND ENTERTAINMENT DIVISIONS

 

The failure of our licensees to adequately produce, market, import and sell products bearing our brand names in their license categories, continue their operations, renew their license agreements or pay their obligations under their license agreements could result in a decline in our results of operations.

 

Our future revenues from our licensing division will be substantially dependent on royalty payments made to us under our license agreements, in addition to compensation under any consulting agreements we may enter into with the third parties for services by either our licensing division, our entertainment division, or both. The failure of our licensees to satisfy their obligations under these agreements, or their inability to operate successfully or at all, could result in their breach and/or the early termination of such agreements, their non-renewal of such agreements or our decision to amend such, thereby eliminating some or all of that stream of revenue. It is possible that the milestones to be met under the terms of licensing agreements may never be achieved which also could deprive us of additional revenues. There can be no assurances that we will not lose the licensees under our license agreements due to their failure to exercise the option to renew or extend the term of those agreements or the cessation of their business operations (as a result of their financial difficulties or otherwise) without equivalent options for replacement. Any of such failures could reduce the anticipated revenue stream to be generated by the license agreements. In addition, the failure of our licensees to meet their production, manufacturing and distribution requirements, or to be able to continue to import goods (including, without limitation, as a result of labor strikes or unrest), could cause a decline in their sales and potentially decrease the amount of royalty payments (over and above any guaranteed minimums) due to us.  Further, the failure of our licensees and/or their third party manufacturers, which we do not control, to adhere to local laws, industry standards and practices generally accepted in the United States in areas of worker safety, worker rights of association, social compliance, and general health and welfare, could result in accidents and practices that cause disruptions or delays in production and/or substantial harm to the reputation of our brands, any of which could have a material adverse effect on our business, financial position, results of operations and cash flows.  A weak economy or softness in certain sectors including apparel, consumer products, retail and entertainment could exacerbate this risk. This, in turn, could decrease our potential revenues and cash flows.

  

From time to time we may compete with kathy ireland Worldwide® in securing advisory or representation agreements with potential clients for EE1 which may create a conflict of interests for the managing directors of EE1.

 

kathy ireland® Worldwide is an established company which has significant experience in assisting companies in the promotion and management of their brands through licensing and advisory agreements. Affiliates of kathy ireland® Worldwide are responsible for the day to day operations of EE1 and kathy ireland® Worldwide. Part of EE1's business competes with kathy ireland ®Worldwide in identifying and securing clients for its advisory services. For example, both EE1 and kathy ireland ®Worldwide are parties to substantial identical representation agreements with Dada Media, Inc. and David Tutera. These affiliates will be able to determine which entity, either kathy ireland® Worldwide or EE1, is referred to the potential client. kathy ireland® Worldwide has more experience and resources and there are no assurances that conflicts of interest which may arise will be resolved in our favor. As a result, it is possible that we may lose out on potential business opportunities.

 

 

We could become a party to litigation involving our licensed products which could result in additional costs to us. Certain licensed products may be more likely to lead to product liability lawsuits than others, which could expose us to additional unknown risks.

 

Although we are not responsible for the manufacturing, sale or distribution of licensed products, it is possible our company could be named as a defendant in litigation related to licensed products. Certain licensed products may, by virtue of the industry in which they are sold and the governmental regulations to which they are subject, such as vaping products, could be more likely to be the subject of litigation than others. Notwithstanding that our standard form of license agreements requires the licensee to indemnify us against ligation involving the licensed products and to maintain product liability insurance policies, it is possible that a licensee may fail to maintain this coverage during the term of the license agreement. While we would then have a right to terminate the license agreement as a result of this breach of its terms, there are no assurances we would not be required to expend significant funds and management time defending our company in any potential product liability insurance claim. There are no assurances that we would prevail in any such litigation, which could subject us to judgments and costs of settlements which could adversely impact our liquidity and results of operations in future periods.

 

As a result of the intense competition within our targeted licensees’ markets and the strength of some of their competitors, we and our licensees may not be able to compete successfully.

 

Many of our targeted trademark licenses are for products in the apparel, fashion accessories, footwear, beauty and fragrance, home products and décor, consumer electronics and entertainment industries in which licensees face intense competition from third party brands and licensees. In general, competitive factors include quality, price, style, name recognition and service. In addition, various fads and the limited availability of shelf space could affect competition for our licensees’ products. Many of our licensees’ competitors have greater financial, importation, distribution, marketing and other resources than our licensees and have achieved significant name recognition for their brand names. Our licensees may be unable to compete successfully in the markets for their products, and we may not be able to compete successfully with respect to our licensing arrangements.

 

Our business is dependent on market acceptance of our brands and the potential future products of our licensees bearing these brands.

 

Although some of our targeted licensees might have guaranteed minimum net sales and minimum royalties to us, a failure of our brands or of products bearing our brands to achieve or maintain market acceptance could cause a reduction of our licensing revenue and could further cause existing licensees not to renew their agreements. Such failure could also cause the devaluation of our trademarks, which are our primary intellectual property, or “IP”, assets, making it more difficult for us to renew our current licenses upon their expiration or enter into new or additional licenses for our trademarks. In addition, if such devaluation of our trademarks were to occur, a material impairment in the carrying value of one or more of our trademarks could also occur and be charged as an expense to our operating results.

 

The industries in which we target to compete, including the apparel industry, are subject to rapidly evolving trends and competition. In addition, consumer tastes change rapidly. The licensees under our licensing agreements may not be able to anticipate, gauge or respond to such changes in a timely manner. Failure of our licensees to anticipate, identify and capitalize on evolving trends could result in declining sales of our brands and devaluation of our trademarks. Continued and substantial marketing efforts, which may, from time to time, also include our expenditure of significant additional funds to keep pace with changing consumer demands, are required to maintain market acceptance of the licensees’ products and to create market acceptance of new products and categories of products bearing our trademarks; however, these expenditures may not result in either increased market acceptance of, or licenses for, our trademarks or increased market acceptance, or sales, of our licensees’ products. Furthermore, while we believe that we currently maintain sufficient control over the products our licensees’ produce under our brand names through the provision of trend direction and our right to preview and approve a majority of such products, including their presentation and packaging, we do not actually design or manufacture products bearing our marks, and therefore, have more limited control over such products’ quality and design than would a traditional product manufacturer.

 

 

 RISKS RELATED TO OUR PRODUCTS DIVISION

 

Our revenues from our products division declined 126.3% in fiscal 2018 from fiscal 2017, and 78% of our net sales for this division in fiscal 2018 represented sales to a related party. We recognized asset impairments of $502,000 in fiscal 2018 related to this division.

 

Net sales from our products division have been lower in each period in fiscal 2018 as compared to the same periods in fiscal 2017, with an overall reduction in fiscal 2018 of 126.3% from fiscal 2017. As a result, during the fourth quarter of fiscal 2018 we recognized an impairment of $502,000, including an inventory and prepaid marketing supplies write off of $262,000 and an intangible impairment of $240,000. In addition, 78% of our net sales in this division occurred in September 2018 and were made to an entity affiliated with kathy ireland® Worldwide. There are no assurances net sales in this division will ever return to prior reported levels, or that we will not recognize additional impairment charges in future periods.

 

The majority of our net sales to date in our products division are generated on the basis of purchase orders, rather than long term purchase commitments; which could adversely affect our financial position and results of operations.

 

Our operating history is not long enough to evaluate the likelihood of future cancellations or deferments of customer orders related to product sales in our products division. Manufacturers and distributors are currently contracted on a per order basis. The lack of long-term purchase commitments creates a risk that product demand may be reduced if orders are canceled or deferred or, in the event of unanticipated demand, an inability to timely produce and deliver our products. We do not have long-term agreements with our distributors, manufacturers or suppliers and these parties may disrupt or cancel a purchase order or defer or delay shipments of our products at any time. Furthermore, because of our inability to rely on enforceable purchase contracts, and our limited visibility into future customer demand, actual net sales may be different from our forecasts, which could adversely affect our financial position and results of operations.

 

We may be unable to protect our intellectual property rights and/or intellectual property rights licensed to us, and may be subject to intellectual property litigation and infringement claims by third parties.

 

We intend to protect our intellectual property through limited patents and our unpatented trade secrets and know-how through confidentiality or license agreements with third parties, employees and consultants, and by controlling access to and distribution of our proprietary information. However, this method may not afford complete protection, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States and unauthorized parties may copy or otherwise obtain and use our products, processes or technology. Additionally, there can be no assurance that others will not independently develop similar know-how and trade secrets. We are also dependent upon the owners of intellectual property rights licensed to us under various wholesale license agreements to protect and defend those rights against third party claims. If third parties take actions that affect our rights, the value of our intellectual property, similar proprietary rights or reputation or the licensors who have granted us certain rights under wholesale license agreements, or we are unable to protect the intellectual property from infringement or misappropriation, other companies may be able to offer competitive products at lower prices, and we may not be able to effectively compete against these companies. We also face the risk of claims that we have infringed third parties’ intellectual property rights. Any claims of intellectual property infringement, even those without merit, may require us to:

  

 

In the event of claims by third parties for infringement of intellectual property rights we license from third parties under wholesale license agreements, we could be liable for costs of defending allegations of infringement and there are no assurances the licensors will either adequately defend the licensed intellectual property rights or that they would prevail in the related litigation. In that event, we would incur additional costs and may deprived from generating royalties from these agreements.

 

 

 

A disruption in operations or our supply chain could adversely affect our business and financial results.

 

We are subject to the risks inherent in manufacturing our products, including industrial accidents, environmental events, strikes and other labor disputes, disruptions in supply chain or information systems, loss or impairment of key manufacturing sites or suppliers, product quality control, safety, increase in commodity prices and energy costs, licensing requirements and other regulatory issues, as well as natural disasters and other external factors over which we have no control. If such an event were to occur, it could have an adverse effect on our business and financial results.

 

We rely on third-parties to manufacture and to compound our products, and we have no control over these manufactures and may not be able to obtain quality products on a timely basis or in sufficient quantity.

 

All of our products are manufactured or compounded by unaffiliated third parties. We do not have any long-term contracts with any of these third parties, and we expect to compete with other companies for raw materials, production and import capacity. If we experience significant increased demand, or need to replace an existing manufacturer, there can be no assurance that additional manufacturing capacity will be available when required on terms that are acceptable to us, or at all, or that any manufacturer or compounder would allocate sufficient capacity to us in order to meet our requirements. In addition, even if we are able to expand existing or find new sources, we may encounter delays in production and added costs as a result of the time it takes to engage third parties. Any delays, interruption or increased costs in the manufacturing or compounding of our products could have an adverse effect on our ability to meet retail customer and consumer demand for our products and result in lower revenues and net income both in the short and long-term.

 

RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK

 

We are subject to the continued listing standards of the NYSE American and our failure to satisfy these criteria may result in delisting of our common stock.

 

Our common stock is listed on the NYSE American. In order to maintain this listing, we must maintain certain share prices, financial and share distribution targets, including maintaining a minimum amount of shareholders’ equity and a minimum number of public shareholders. In addition to these objective standards, the NYSE American may delist the securities of any issuer (i) if, in its opinion, the issuer’s financial condition and/or operating results appear unsatisfactory; (ii) if it appears that the extent of public distribution or the aggregate market value of the security has become so reduced as to make continued listing on the NYSE American inadvisable; (iii) if the issuer sells or disposes of principal operating assets or ceases to be an operating company; (iv) if an issuer fails to comply with the NYSE American’s listing requirements; (v) if an issuer’s common stock sells at what the NYSE American considers a “low selling price” and the issuer fails to correct this via a reverse split of shares after notification by the NYSE American; or (vi) if any other event occurs or any condition exists which makes continued listing on the NYSE America, in its opinion, inadvisable. If the NYSE American delists our common stock, investors may face material adverse consequences, including, but not limited to, a lack of trading market for our securities, reduced liquidity, decreased analyst coverage of our securities, and an inability for us to obtain additional financing to fund our operations.

 

The issuance of shares upon exercise of our outstanding options and warrants may cause immediate and substantial dilution to our existing shareholders.

 

We presently have options and warrants that if exercised would result in the issuance of an additional 833,255 shares of our common stock. The issuance of shares upon exercise of warrants and options may result in dilution to the interests of other shareholders.

 

The price of our common stock may be volatile, and you could lose all or part of your investment.

 

Stock markets have experienced extreme volatility that has often been unrelated to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our common stock. In addition, limited trading volume of our stock may contribute to its future volatility. Price declines in our common stock could result from general market and economic conditions, some of which are beyond our control, and a variety of other factors, including any of the risk factors described in this report. These broad market and industry factors may harm the market price of our common stock, regardless of our operating performance, and could cause you to lose all or part of your investment in our common stock since you might be unable to sell your shares at or above the price you paid. Factors that could cause fluctuations in the market price of our common stock include the following:

 

 

 

In addition, in the past, following periods of volatility in the overall market and the market price of a particular company’s securities, securities class action litigation has often been instituted against these companies. This litigation, if instituted against us, could result in substantial costs and a diversion of our management’s attention and resources.

 

We are an “emerging growth company,” and the reduced reporting requirements applicable to emerging growth companies may make our common stock less attractive to investors.

 

We are an “emerging growth company,” as defined in the JOBS Act. For as long as we continue to be an emerging growth company, we may take advantage of exemptions from various reporting requirements that are applicable to other public companies but not to “emerging growth companies,” including, but not limited to:

 

 

 

 

 

 

Investors may find our common stock less attractive if we choose to rely on these exemptions. If some investors find our common stock less attractive as a result of any choices to reduce future disclosure, there may be a less active trading market for our common stock and the price of our common stock may be more volatile. 

 

 

Our executive officers, directors and their affiliates may exert control over us and may exercise influence over matters subject to shareholder approval.

 

Our executive officers and directors, together with their respective affiliates, beneficially own approximately 22.7% of our outstanding common stock as of December 01, 2018. Accordingly, these shareholders, if they act together, may exercise substantial influence over matters requiring shareholder approval, including the election of directors and approval of corporate transactions, such as a merger. This concentration of ownership could have the effect of delaying or preventing a change in control or otherwise discourage a potential acquirer from attempting to obtain control over us, which in turn could have a material adverse effect on the market value of our common stock.

 

If securities or industry analysts do not publish research or publish unfavorable or inaccurate research about our business, our common stock share price and trading volume could decline.

 

An active trading market for our common stock will depend, in part, on the research and reports that securities or industry analysts publish about us or our business. We may be unable to attract or sustain coverage by well-regarded securities and industry analysts. If either none or only a limited number of securities or industry analysts cover us or our business, or if these securities or industry analysts are not widely respected within the general investment community, the trading price for our common stock would be materially and negatively impacted. In the event we obtain securities or industry analyst coverage, if one or more of the analysts who cover us or our business downgrade our common stock or publish inaccurate or unfavorable research about us or our business, the price of our common stock would likely decline. If one or more of these analysts cease coverage of us or our business, or fail to publish reports on us or our business regularly, demand for our common stock could decrease, which might cause the price of our common stock and trading volume to decline.

  

Public company requirements may strain our resources and divert management’s attention, which could adversely impact our ability to execute our strategy and harm operating results.

 

We are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and Consumer Protection Act, which we refer to as “Dodd-Frank,” the listing requirements of the NYSE American and other applicable securities rules and regulations. Despite recent reforms made possible by the JOBS Act, compliance with these rules and regulations will nonetheless increase our legal and financial compliance costs, make some activities more difficult, time-consuming or costly and increase demand on our systems and resources, particularly after we are no longer an “emerging growth company.” While the members of our board of directors have substantial experience relevant to our business, they have limited experience with operations as a public company upon which you can base your prediction of our future success or failure in complying with public company requirements. Our management may fail to comply with public company requirements, or may fail to do so effectively and efficiently, each would materially and adversely harm our ability to execute our strategy and, consequently, our operating results.

 

Furthermore, as a result of disclosure in filings required of a public company, our business and financial condition will become more visible, which may result in threatened or actual litigation, including by competitors and other third parties. If these claims are successful, our business and operating results could be harmed, and even if the claims do not result in litigation or are resolved in our favor, these claims, and the time and resources necessary to resolve them, could divert the resources of management and adversely affect our business, brand and reputation and results of operations. Our new public company status and these new rules and regulations may make it more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced coverage or incur substantially higher costs to obtain coverage. These factors could also make it more difficult for us to attract and retain qualified members of the board of directors, particularly to serve on the audit committee and compensation committee, and qualified executive officers.

 

Some provisions of our charter documents and North Carolina law may have anti-takeover effects that could discourage an acquisition of us by others, even if an acquisition would be beneficial to our shareholders and may prevent attempts by our shareholders to replace or remove our current management.

 

Provisions in our articles of incorporation and bylaws, as well as provisions of North Carolina law, could make it more difficult for a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our shareholders, or remove our current management. These include provisions that:

 

 

 

 

 

These provisions may frustrate or prevent any attempts by our shareholders to replace or remove our current management by making it more difficult for shareholders to replace members of our board of directors, who are responsible for appointing the members of our management. In addition, North Carolina has two primary anti-takeover statutes, the Shareholder Protection Act and the Control Share Acquisition Act, which govern the shareholder approval required for certain business combinations. As permitted by North Carolina law, we have opted out of both these provisions. Accordingly, we are not subject to any anti-takeover effects of the North Carolina Shareholder Protection Act or Control Share Acquisition Act. Any provision of our articles of incorporation, bylaws or North Carolina law that has the effect of delaying or deterring a change in control could limit the opportunity for our shareholders to receive a premium for their shares of common stock, and could also affect the price that some investors are willing to pay for our shares of common stock.

 

We have additional securities available for issuance, which, if issued, could adversely affect the rights of the holders of our common stock. 

 

Our articles of incorporation, as amended, authorizes the issuance of 150,000,000 shares of our common stock and 50,000,000 shares of preferred stock. In certain circumstances, the common stock, as well as the awards available for issuance under our equity incentive plans, can be issued by our board of directors, without stockholder approval. Any future issuances of such stock would further dilute the percentage ownership of us held by holders of common stock. In addition, the issuance of certain securities, including pursuant to the terms of our stockholder rights plan, may be used as an “anti-takeover” device without further action on the part of our stockholders, and may adversely affect the holders of the common stock.

 

In addition, the issuance of preferred stock may be used as an “anti-takeover” device and may adversely affect the holders of the common stock. If our  board of directors and stockholders approved the use of “blank check” preferred stock, our board of directors would be authorized to create and issue from time to time, without further stockholder approval, a certain number of shares of preferred stock, in one or more series and to establish the number of shares of any series of preferred stock and to fix the designations, powers, preferences and rights of the shares of each series and any qualifications, limitations or restrictions of the shares of each series. The authority to designate preferred stock may be used to issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of the common stock or could also be used as a method of determining, delaying or preventing a change of control.

 

 

Not applicable to a smaller reporting company.

 

 

Our headquarters are located in approximately 2,000 square feet in a modern four-story building in Charlotte, North Carolina which we sub-lease under an agreement through December 2019. The Agreement included (1) a discount on rent to $12,000 per month if the full rent was prepaid and (2) a right of return on payments prorated if the landlord exercised an early termination of the lease. In April 2018, we made a full prepayment of $240,000. We lease office space in Los Angeles, California which is utilized by our licensing and brand management divisions under a lease expiring in February 2019 at an annual rate of $88,800.

 

 

We are not a party to any pending or threatened litigation.

 

 

Not applicable to our company.

 

 

PART II

 

 

Since November 17, 2017 our common stock has been listed on the NYSE American under the symbol "LEVB." The last sale price of our common stock as reported on the NYSE American on December 01, 2018 was $4.15 per share. As of December 01, 2018, there were approximately 132 record owners of our common stock.

 

Dividend policy

 

We do not currently intend to pay dividends on our common stock. The declaration, amount and payment of any future dividends on shares of our common stock, if any, will be at the sole discretion of our Board, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions, the implications of the payment of dividends by us to our shareholders or by our subsidiaries to us, and any other factors that our Board may deem relevant.

 

Recent sales of unregistered securities

 

All of our issuances of unregistered securities during our fiscal 2018 were previously disclosed in our Quarterly Reports on Form 10-Q for our first, second and third quarters of our fiscal year ended September 30, 2018 and in our current reports on Form 8-K as filed periodically with the SEC, except for the following:

In July 2018, we issued 5,000 shares of our common stock, valued at $18,500 to a public relations firm for services. The recipient was an accredited or otherwise sophisticated investor and had access to business and financial information on our company. The issuance was exempt from registration under the Securities Act of 1933, as amended (the “Securities Act”), in reliance on an exemption provided by Section 4(a)(2) of the Securities Act.

Purchases of equity securities by the issuer and affiliated purchasers

None.

 

 

Not applicable to a smaller reporting company.

 

 

 

The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Our future operating results, however, are impossible to predict and no guaranty or warranty is to be inferred from those forward-looking statements.

 

Overview

 

Formed in March 2015, we are positioning Level Brands to be an innovative branding and marketing company. We intend to focus our efforts on lifestyle-based brands and omni-entertainment experiences. Our goal is to create a bold, unconventional and socially responsible image and consciousness for our businesses. Our mission is overseen by our Chairman Emeritus and Chief Brand Strategist Kathy Ireland. Our business strategy is to utilize our relationship with kathy ireland® Worldwide in order to secure strategic licenses and joint venture partnerships around the world for our brands, as well as to grow the portfolio of brands through the licensee of third party brands and strategic acquisitions. Our ability to successfully implement our business strategy is dependent on our ability to leverage our contractual arrangement with Ms. Ireland and kathy ireland® Worldwide.

 

Our business model is designed with the goal of maximizing the value of our brands through entry into license agreements with partners that are responsible for the design, manufacturing and distribution of our licensed products. We promote our brands across multiple channels, including print, television and social media. We believe that this “omnichannel” (or multi-channel) approach, which we expect will allow our customers to interact with each of our brands, in addition to the products themselves, will be critical to our success.

 

With the acquisitions of membership interests in I’M1 and EE1 in January 2017 we expanded our brand portfolio and our revenue sources to include revenues from licensing fees, brand management consulting fees and royalties. Following these acquisitions, the continued implementation of our business model and the recent licensing of the rights to the name and intellectual property rights associated with kathy ireland® Health & Wellness, we manage our business in four distinct business units and report our operations and revenue in three operating segments:

 

 

 

 

 

 

We currently report our operations and revenues in three operating segments, this information is utilized on a regular basis by our chief operating decision maker ("CODM") to evaluate performance and allocate resources. Our Chief Executive Officer has been identified as the CODM. In identifying our reportable operating segments, we consider our management structure, the economic characteristics, processes and services delivered.

 

 

As we continue to implement our business strategy, however, we expect to encounter hurdles typically encountered by new companies, operating in highly competitive environments. By the nature of licensing agreements, the time between the execution of a licensing agreement and the launch of the licensed products will vary from client to client, and it may be some time before we begin generating royalty revenues. The terms of the various consulting agreements may also result in inconsistent revenues from period to period based upon the delivery requirements and timelines of the services. We believe, however, that over time our business model will enable us to rapidly grow our revenues while enabling us to control costs and overhead expenses.

 

Results of Operations

 

The following tables provide certain selected consolidated financial information for the periods presented:

 

	Fiscal 2018	Fiscal 2017	Change
Net sales	$6,428,096	$2,743,715	$3,684,381
Net sales related party	$1,992,046	1,731,238	$260,808
Total net sales	$8,420,142	$4,474,953	$3,945,189
Costs of sales	$2,673,272	$1,355,381	$1,317,891
Gross profit as a percentage of net sales	68.2%	69.7%	(1.5)%
Operating expenses	$5,629,771	$3,358,863	$2,270,908
Other income (expenses)	$(70,265)	$(1,121,877)	$1,051,612
Net income (loss) before taxes	$46,834	$(1,361,168)	$1,408,002
Net loss attributable to Level Brands, Inc. common shareholders	$(412,075)	$(1,738,734)	$1,326,659

 

Sales

 

We began reporting our revenues by segment during the second quarter of fiscal 2017 following our acquisitions of I'M1 and EE1. The following table provides information on the contribution of net sales by segment to our total net sales.

 

	Fiscal 2018	% of total	Fiscal 2017	% of total
Licensing division	$5,213,360	61.9%	$1,794,582	40.1%
Entertainment division	$2,778,051	33.0%	$1,710,167	38.2%
Products division	$428,731	5.1%	$970,204	21.7%
Total net sales	$8,420,142		$4,474,953

 

The increase in net sales attributable to our licensing division in fiscal 2018 is due primarily to two significant licensing agreements entered into with our Level H&W unit which generated approximately $5,100,000 of revenue in fiscal 2018.

 

The increase in net sales attributable to our entertainment division in fiscal 2018 is due to continued servicing of brand management engagements with existing customers.

 

The decreases in the fiscal 2018 net sales attributable to our products division is primarily attributable to a strategic decision made at the end of fiscal 2017 to change our distributors as well as testing other sales channels, including large retail and online channels as well as adding licensing opportunities. In fiscal 2018, we had engaged with two retailers who tested the products in these new channels, we expanded our online sales process, and we have also executed our first two license contracts for this division. Based on results, we are keeping our focus on licensing opportunities as well as online sales channels going forward. We believe these areas can support the sales process better and are in line with our overall strategy, although no assurance can be given as to the success of this division.

 

As described elsewhere in this report, from time to time we accept equity positions as compensation for our services. The following table provides information for fiscal 2018 and 2017 regarding the amount of our total net sales in each of those periods for which we received an equity position in lieu of cash.

 

 

2018		2017
Amount	% total net sales	Amount	% total net sales
$5,104,500	60.6%	$1,932,552	43.2%

 

While our management believes this policy could potentially benefit our company, this practice has had an adverse impact on our cash flow from operations and holding these securities could subject our company to additional valuation impacts in future periods as a result of the need to value these holdings on a quarterly basis. During fiscal 2018 and 2017, we recorded other comprehensive loss on these holdings, net of taxes, of $2,512,539 and $0, respectively.

 

Cost of sales

 

Our cost of sales includes labor, third party service providers and amortization for IP for our licensing and entertainment divisions and costs associated with distribution, external fill and labor expense, components, and freight for our products divisions. The following table provides information on the percentage of our cost of sales to our net sales for each segment for fiscal 2018 and 2017:

 

	2018	2017
Licensing division	12.1%	2.7%
Entertainment division	53.2%	25.3%
Products division	131.6%	90.2%

 

The increase in cost of sales as a percentage of sales for our licensing division in the 2018 periods is attributable to a higher cost of sales as the business is maturing and we laid groundwork on social media and production items to increase visibility of our licensed brands, I’M1 and kathy ireland® Health & Wellness™, which we believe will be used in the future to support the brand and future contracts. In addition, we entered into a significant contract for our kathy ireland® Health & Wellness unit which required significant efforts regarding a marketing campaign and strategy. We expect this division to have a cost of sales rate between 10% and 20% as the business is structured in a manner that the licensee (our customer) incurs the significant costs and revenues associated with the sale of licensed products. We recognize the associated royalty fees on a net basis. When we are involved in providing advisory services, we allocate the utilized internal resources costs to our cost of sales.

 

The cost of sales as a percentage of sales for our entertainment division will vary based upon the type of projects in which it is involved. For instance, its cost of sales is expected to be less for advisory services, which utilize internal resources, as compared to television production services which require the use of external facilities and personnel, which increases our cost. As a result, our gross margin for the entertainment division will vary from period to period, however we expect our cost of sales to be between 45% and 60% based on the mix of projects we engage.

 

In our products division, the significant increase in the cost of sales as a percentage of sales in the fiscal 2018 periods is primarily related to inventory impairments, as a result of net realizable value and excess inventory calculations and a decrease in the actual sales as disclosed above. Cost of sales variances are primarily related to two key factors. First, allowances from this division have varied significantly based on the product line not having wide appeal yet and various advertising and promotional packages have been used to promote the products since initial launch. Second, in fiscal 2017 we moved into an online channel and conducted our first online promotion to create more brand visibility, and with this provided significant discount pricing specifically for that channel. As we have changed our focus to online sales and licensing, we expect to reduce the cost of sales for this division going forward.

 

Operating expenses

 

Our principal operating expenses include wages, advertising, travel, rent, professional service fees, and expenses related to industry distribution and trade shows. Our operating expenses on a consolidated basis increased 67.6% in fiscal 2018 from fiscal 2017. These increased included increases in: (i) staff related expenses; (ii) accounting and legal expenses; (iii) travel and entertainment expenses, (iv) outside services related to investor relations, transfer agent, other public company support costs; (v) expenses related to social media, public relations, advertising and marketing process, tradeshows and promotions; (vi) rent expense; (v) charitable contributions; (vi) insurance; (vii) non-cash stock compensation expense; and (viii) allocation of corporate management fees which are described in greater detail later in this report. These increases were offset by decreases in: (i) commissions and (ii) the elimination of one-time new division start-up costs incurred in fiscal 2017.

 

 

We acquired I’M1 and EE1 in January 2017 and Level H&W did not commence operations until the first quarter of fiscal 2018. Accordingly, we did not incur operating expenses for these business units during the entirety of the comparable periods in fiscal 2017. The additional changes in our expenses in the fiscal 2018 periods is directly related to the operational changes in our company as we grew from one operating business segment to three, built the infrastructure to support the overall company from a growth perspective, and completed our initial public offering and transaction to a public company traded on the NYSE American.

 

The following table provides information on our approximate operating expenses for each segment for fiscal 2018 and 2017:

 

	2018	2017	change
Licensing division	$1,487,000	$935,000	$552,000
Entertainment division	$1,066,000	$580,000	$486,000
Products division	$947,000	$1,797,000	$(850,000)

 

Operating expenses attributable to our licensing and entertainment divisions for fiscal 2018 and 2017, included: (i) staff related expenses; (ii) accounting and legal expenses; (iii) expenses related to social media, public relations, advertising, marketing, promotions; (iv) travel and entertainment and tradeshow; (v) professional outside services; and (vi) allocated management fees from corporate. The overall increase in operating expenses is related to the maturation of the new divisions and expenses related to their day to day operations growth.

 

Operating expenses attributable to our products division for fiscal 2018 and 2017, included: (i) staff related expenses; (ii) accounting and legal expenses; (iii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshows; (iv) travel and entertainment expenses; (v) professional outside services related to product formulation, design; (vi) marketing expenses (vii) commissions paid to an outside sales consultant; (viii) intangible impairments, and (ix) allocated management fees from corporate. The overall decrease in operating expenses in this division is related to management’s shift to a more structured approach and cost analysis as the strategy for this business unit was reviewed and repositioned.

 

Corporate overhead and allocation of management fees to our segments

 

Included in our consolidated operating expenses are expenses associated with our corporate overhead which are not allocated to a specific segment of our operations, including (i) staff related expenses; (ii) accounting and legal expenses; (iii) expenses related to social media, public relations, advertising, marketing, promotions and tradeshows; (iv) travel and entertainment expenses; (v) professional outside services; (vi) rent; (vii) non-cash stock compensation expense; (viii) business insurance expense; and (ix) interest expense. The non-cash stock compensation expenses for fiscal 2018 and 2017 were approximately $599,000 and $243,000, respectively.

 

The following table provides information on our approximate corporate overhead for fiscal 2018 and 2017:

 

2018	2017	change
$3,646,000	$1,075,000	$2,571,000

 

The overall increase in corporate operating expenses is related to the maturation of the entire organization and structuring related to its day to day operations and ongoing pubic company related expenses.

 

We allocate a portion of our corporate overhead to our segments in the form of a management fee. These allocations are included in the operating expenses by segment in the earlier table. As set forth above, these internal corporate charges eliminate upon consolidation of our financial statements. The following table provides information on the allocation of management fees to our segments for fiscal 2018 and 2017:

 

	2018	2017	change
Licensing division	$857,000	$90,000	$767,000
Entertainment division	$453,000	$90,000	$363,000
Products division	$175,000	$90,000	$85,000

 

 

We expect to continue to internally allocate corporate management fees to our segments in future periods, however, the amount of such fees will vary depending upon the amount of time devoted by our senior management to the particular segment and the overall revenue performance of each segment.

 

Interest expense and other non-operating expenses

 

Our interest expense materially decreased to $955 from $500,627 for fiscal 2018 as compared to fiscal 2017, which primarily reflects the conversion of outstanding 8% convertible promissory notes into shares of our common stock as of June 30, 2017.

 

In fiscal 2017, we converted the $2,125,000 principal amount of 8% Convertible Promissory Notes and all accrued interest of $127,500 into our common shares, and we accounted for a conversion inducement in accordance with ASC 470-20 on the conversion price reduction from $5.00 to $3.95 per share and recorded a non-cash debt conversion expense of $446,250. This was a one-time non-cash charge. In some cases, we may, from time to time, enter into contracts where all or a portion of the consideration provided by the customer in exchange for our services and the value of the consideration provided could decline and require an impairment charge to be recorded in non-operating income in the consolidated statement of operations. We did not have any impairments to our marketable or other securities in fiscal 2018 as compared to an other than temporary impairments of $175,000 in fiscal 2017.

 

Other comprehensive income (loss)

 

We value investments in marketable securities at fair value and record a gain or loss at each period, in other comprehensive income (loss), unless a decline is determined to be other-than-temporary. For fiscal 2018 we recorded other comprehensive loss of $(2,512,539) as compared to $0 for fiscal 2017.

 

Net loss and net loss attributable to our common shareholders

 

Our net income for fiscal 2018 was $62,834 as compared to a net loss in fiscal of 2017 of $(1,386,168) a change of 104.5%. At September 30, 2018 and 2017, we owned 100%, of the membership interests of Beauty & Pin-Ups and Level H&W and 100% of the voting interests in each of I'M1 and EE1 and 51% membership interest in each of I’M1 and EE1. As such we account for the noncontrolling interest in each of I’M1 and EE1 based on their gains or losses. Based on the noncontrolling interest for these entities, this can have a negative impact on the gains or losses to our shareholders. After allocating a portion of the net gain to the noncontrolling interests in accordance with generally accepted accounting principles, our net income increased 76.3% for fiscal 2018 from fiscal 2017.

 

Liquidity and Capital Resources

 

 We had cash and cash equivalents on hand of $4,282,553 and working capital of $10,820,192 at September 30, 2018 as compared to cash on hand of $284,246 and working capital of $2,170,154 at September 30, 2017. Our current assets increased approximately 219.2% at September 30, 2018 from September 30, 2017, and is primarily attributable to an increase of cash, accounts receivable, accounts receivable other, notes receivable, marketable and other securities, and prepaid expenses, offset by a decrease in deferred issuance costs and inventory. Our current liabilities decreased approximately 36.3% at September 30, 2018 from September 30, 2017. This decrease is primarily attributable to decreases in accrued expenses, offset by increases in accounts payable and deferred revenue. Both the changes in our current assets and current liabilities are also reflective of the further development of our business during fiscal 2018. In January 2017, we acquired membership interests in two new segments, which had an impact on our current assets as the new segments have generated significant revenue compared to prior periods, which has increased our accounts receivables, accounts receivable other, marketable and other securities (as we have received from customers their public or private stock as compensation for services delivered). In November 2017 we completed an IPO and at September 30, 2017 we had recorded deferred issuance costs which were directly attributable to the offering and were charged against the gross proceeds of the offering as a reduction of additional paid-in capital. In July 2017 we sold, to a related party, an equity position in a customer that we had received as compensation for services and we received a portion in cash and the balance as a short term note receivable for $275,000. As of September 30, 2018, the note balance was $156,147, the note was paid in full in November 2018.

 

During fiscal 2018 we used cash primarily to fund our operations in addition to increases in our accounts receivable and marketable and other securities. We offer net 30 day terms and our receivables generally turn every 22 days.

 

 

We do not have any commitments for capital expenditures. We have sufficient working capital to fund our operations and to fund our expected growth.

 

Our goal from a liquidity perspective is to use operating cash flows to fund day to day operations and we have generated the income to meet this goal, however as we have accepted equity as compensation in many of our engagements, we have not met this goal as cash flow from operations has been a net use of $5,573,095 and $2,329,841 for fiscal 2018 and fiscal 2017, respectively.

 

We own 51% of the membership interests of each of I'M1 and EE1 and 100% of Beauty & Pin-Ups at September 30, 2017. We acquired 10% membership interest in Beauty & Pin-Ups in October 2017 and the remaining 12% membership interest in April 2017. We are the manager, have sole voting interests and fund all of the operating expenses for each of these entities. Under the terms of the operating the agreements, the minority owners of each I'M1 and EE1 are entitled to their pro-rata share of a distribution of the available cash and adjusted taxable income for each of the entities. The structure of the operating agreements may increase our need for cash for operations and could adversely impact our results of operations in future periods. In fiscal year 2017, EE1 distributed $287,550 to its two members for quarterly tax planning purposes. Of this amount $228,000 was an investment other security, $116,280 distributed to us and $111,720 distributed to EE1 Holdings. The balance of $59,550 distributed as cash, $30,370 distributed to us and $29,180 distributed to EE1 Holdings. In fiscal year 2017, I’M1 distributed $228,000 to its two members for quarterly tax planning purposes, the distribution was an investment other security, $116,280 distributed to us and $111,720 distributed to IM1 Holdings. The companies have determined that going forward, distributions for tax purposes will be assessed on an annual basis and addressed based on cash flow and the ability to make these distributions without impacting the business.

 

 

Related Parties

 

As described in Note 9 to our consolidated financial statements appearing elsewhere in this report, we have engaged in significant number of related party transactions. As indicated previously, we are a party to multiple agreements with kathy ireland® Worldwide, its principals and its affiliates, therefore as the companies work together on various opportunities, we at times have leveraged the kathy ireland® Worldwide enterprise to assist with delivery and in some cases to engage through them with customers. Due to the significance of these transactions we have reported transactions with related parties within the consolidated financial statements as well as within the notes to the consolidated financial statements. These transactions also are reported as sales with related parties (see Note 9 Related Party Transactions in the consolidated financial statements for more information).

 

Critical Accounting Policies

 

The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles (“US GAAP”) and our discussion and analysis of our financial condition and operating results require our management to make judgments, assumptions and estimates that affect the amounts reported in its consolidated financial statements and accompanying notes. Note 1, “Organization and Summary of Significant Accounting Policies,” of the Notes to our consolidated financial statements appearing elsewhere in this report describes the significant accounting policies and methods used in the preparation of our consolidated financial statements. Management bases its estimates on historical experience and on various other assumptions it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates, and such differences may be material.

 

 

We believe that the following critical accounting policies involve the more significant judgments and estimates used in the preparation of our consolidated financial statements and are the most critical to aid you in fully understanding and evaluating our reported financial results. Management considers these policies critical because they are both important to the portrayal of our financial condition and operating results, and they require management to make judgments and estimates about inherently uncertain matters.

 

Marketable Securities

 

At the time of acquisition, a marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-sale securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded in the accumulated other comprehensive income (loss) component of shareholders’ equity in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Codification (“ASC”) 320-10. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income (loss) to non-operating income (loss) on the Company’s consolidated statements of operations. 

 

Investment Other Securities

 

For equity investments where we neither control nor have 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. For years ended September 30, 2018 and 2017, no such dividends were received.

 

Other-than-Temporary Impairment

 

The Company’s management periodically assesses its marketable securities and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statement of operations. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its cost, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations. 

 

Recent Accounting Pronouncements

 

Please see Note 1 –Organization and Summary of Significant Accounting Policies appearing in the consolidated financial statements included in this report for information on accounting pronouncements.

 

Off Balance Sheet Arrangements

 

As of the date of this report, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

 

Not applicable for a smaller reporting company.

 

 

Please see our Financial Statements beginning on page F-1 of this annual report.

 

 

 

None.

 

 

Evaluation of Disclosure Controls and Procedures.

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

As required by Securities and Exchange Commission Rule 13a-15(e), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls were effective at September 30, 2018.

 

Management’s Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that:

 

 

 

 

Because of the inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

 

 

Our management, including our CEO and CFO, assessed the effectiveness of our internal control over financial reporting as of September 30, 2018. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the 2013 Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were effective.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 

None.

 

 

PART III

 

 

Directors and Executive Officers

 

The following table provides information on our current executive officers and directors:

 

Name		Age		Positions
Martin A. Sumichrast		52		Chairman of the Board of Directors, Chief Executive Officer and President
Mark S. Elliott		57		Chief Financial Officer and Chief Operating Officer
Erik Sterling		64		Director
Anthony K. Shriver		53		Director
Seymour G. Siegel		76		Director
Bakari Sellers		34		Director
Gregory C. Morris		57		Director

 

Martin A. Sumichrast. Mr. Sumichrast has served as a member of the board of directors since April 2015, and has served as our Chief Executive Officer and President since September 2016. Since 2012, Mr. Sumichrast has served as Managing Director of a family office, managing family wealth, which he formed in March 2012 and subsequently incorporated into Washington Capital, LLC in December 2012. Since September 2013 he has been a Managing Member of Stone Street Capital, LLC, a Charlotte, North Carolina-based private investment company. Stone Street Capital, LLC manages specific purpose investment entities, as well as traditional private equity funds. Mr. Sumichrast serves as a Trustee and Chairman of the Nominating and Governance Committees of the Barings Global Short Duration High Yield Fund, Inc. (NYSE: BGH) and the Barings Capital Funds Trust, Inc. From January 2015 until January 2016, he was also a member of the board of directors of Social Reality, Inc. (NADASQ:SRAX) and served as a member of the Audit Committee. From its formation in 2014 until March 1, 2017 he served as Chairman of the board of directors of Kure Corp., a privately-held company which is a related party to our company. We selected Mr. Sumichrast to serve on our board of directors based upon his significant experience both as an investor and advisor, as well as his experience as a member of a board of directors of a listed company.

 

Mark S. Elliott. Mr. Elliott has been our Chief Financial Officer since October 2016 and our Chief Operating Officer since January 2017. He has over 30 years of business experience spanning the financial, retail, consulting and government sectors and includes time at Fortune 500 and regional firms. Mr. Elliott began his career in the technology arena and worked with such Fortune 500 companies as JCPenney and First Union National Bank within their corporate headquarters. Mr. Elliott moved into the consulting arena as a regional technology specialist and eventually moved into senior management as a Director for Contract Data Services (acquired by Inacom Information Systems). This position involved all aspects of the business including staff management, business development, strategy, and managing the profitability of multiple divisions. Mr. Elliott was a founder and partner of Premier Alliance Group (now named root9B Holdings, Inc.) ( NASDAQ:RTNB) and was the Chairman and CEO of the company from 2004 to 2013 where he oversaw the strategic direction and operation of the company. He directed the transformation of the company to a public market company and successfully oversaw and integrated six merger and acquisition transactions that strategically positioned the company. Mr. Elliott has had compliance, financial reporting, and strategic responsibilities within the company (serving as the CFO also from 2004 to 2010 and as the Chief Administrative Officer of the company from 2014 to 2015). Mr. Elliott is also an independent advisor for Malidan Capital Group a firm specializing in business restructuring and turn around management consulting. Mr. Elliott received a Bachelor of Science degree with a concentration in Computer Science and Management from Marshall University.

 

Erik Sterling. Mr. Sterling has served as a member of our board of directors since April 2015. Mr. Sterling is the founder of Sterling/Winters Company, a brand building, marketing and management firm established 1978 and now a wholly-owned subsidiary of kathy ireland® Worldwide. Today the efforts of Sterling/Winters Company encompass branded merchandise development, licensing and entertainment programming. Mr. Sterling also serves as Vice Chairman and Chief Financial Officer of kathy ireland® Worldwide. Over the past 22 years, the kathy ireland brand has included leading manufacturers of furniture, flooring, lighting, bedding, decorative accessories, wall art, tabletop, window coverings, precious jewelry, watches, sewing patterns, fashion accessories, sportswear, women and girls swimwear, active wear, maternity, intimate apparel, sleepwear, shoes, golf wear, fitness equipment, publishing, made-for-television movies and specials. Mr. Sterling serves on the national board of directors for Project Inform, an HIV/AIDS treatment advocacy group which provides free treatment information to its subscribers, and holds memberships in the American Film Institute, Academy of Television Arts & Sciences and the Hollywood Radio & Television Society. Mr. Sterling currently serves on the Corporate Governance and Nominating Committee of our board of directors. We selected Mr. Sterling to serve on our board of directors because he brings to the board extensive branding and marketing company experience and brings to the board significant executive leadership and operational experience.

 

 

Anthony K. Shriver. Mr. Shriver has been a member of our board of directors since June 2015. Mr. Shriver is the Chairman of Best Buddies® International, a nonprofit 501(c)(3) organization he founded in 1989 which is dedicated to establishing a global volunteer movement that creates opportunities for one-to-one friendships, integrated employment and leadership development for people with intellectual and developmental disabilities (IDD). Best Buddies® International has grown from one original chapter to almost 1,900 middle school, high school, and college chapters worldwide, engaging participants programs in each of the 50 United States, and over 50 countries around the world. Mr. Shriver, who graduated from Georgetown University, has been recognized for his work on behalf of Best Buddies® International with diverse international accolades and honorary degrees. Mr. Shriver currently serves on the Compensation Committee of our board of directors. We selected Mr. Shriver to serve on our board of directors based upon his lifelong commitment to charitable efforts and his dedication to the principles upon which our company seeks to operate.

 

Seymour G. Siegel. Mr. Siegel has been a member of our board of directors since March 2017. Mr. Siegel, a certified public accountant no longer in practice, has over 35 years of experience in public accounting and SEC regulatory matters and has a strong background in mergers and acquisitions, start-ups, SEC reporting, cost cutting initiatives, profit enhancements and business operations. Since 2014 he has been President of Siegel Rich, Inc., a consulting firm. From April 2000 until July 2014, Mr. Siegel was a principal emeritus at Rothstein Kass & Company, P.C. (now KPMG), an international firm of accountants and consultants. Mr. Siegel was a founder of Siegel Rich & Co., CPAs, which eventually merged with what is now known as WeiserMazars LLP, where he was a senior partner until selling his interest and co-founding a business advisory firm which later became a part of Rothstein Kass. He received his Bachelor of Business Administration from the Baruch School of The City College of New York. He has been a director and officer of numerous business, philanthropic and civic organizations. As a professional director, he has served on the boards of approximately a dozen public companies over the last 25 years. He was previously a member of the board of directors and chairman of the audit committees of Air Industries Group, Inc. (NYSE American: AIRI), root9B Holdings, Inc. (NASDAQ:RTNB), Hauppauge Digital, Inc., Emerging Vision. Inc., Oak Hall Capital Fund, Prime Motor Inns Limited Partnership, and Noise Cancellation Technologies, Inc. Mr. Siegel currently serves as chairman of the Audit Committee of our board of directors and is also a member of the Compensation Committee of our board of directors. We selected Mr. Siegel as a member of our board of directors as a result of his extensive experience in mergers and acquisitions, public companies and boards, financial reporting and business advisory services.

 

 Bakari Sellers. Mr. Sellers has been a member of our board of directors since March 2017. Mr. Sellers, an attorney, has been a member of the Strom Law Firm, LLC, in Columbia, South Carolina since 2007. Mr. Sellers is a former member of the South Carolina House of Representative, where he represented the 90th District beginning in 2006, making history as the youngest member of the South Carolina state legislature and the youngest African American elected official in the nation. In 2014, he ran as the Democratic nominee for Lt. Governor of South Carolina. He has worked for United States Congressman James Clyburn and former Atlanta Mayor Shirley Franklin. Earning his undergraduate degree from Morehouse College, where he served as student body president, and his law degree from the University of South Carolina, Mr. Sellers has followed in the footsteps of his father, civil rights leader Cleveland Sellers, in his tireless commitment to service taking championing progressive policies to address issues ranging from education and poverty to preventing domestic violence and childhood obesity. He has served as a featured speaker at events for the National Education Association, College Democrats of America National Convention, the 2008 Democratic National Convention and, in 2007, delivered the opening keynote address to the AIPAC Policy Conference in Washington, DC. Mr. Sellers is also a political commentator at CNN. Mr. Sellers currently serves as chairman of the Corporate Governance and Nominating Committee of our board of directors and is also a member of the Audit Committee of our board of directors. We selected Mr. Sellers as a result of his leadership experience, commitment to public policy and legal background.

 

 

Gregory C. Morris. Mr. Morris has been a member of our board of directors since March 2017. Mr. Morris has worked in positions involving finance, investments, benefits, risk management, legal and human resources for more than 30 years. Since June 2015 he has served as the Vice President of Human Resources for Healthstat, Inc., a privately held company providing onsite health clinics and workplace wellness programs. Prior to that, from January 2013 until June 2015, he was the Vice President of Administration and Corporate Secretary at Swisher Hygiene (at that time a NASDAQ-listed company), leading the human resources, risk management and legal functions. He was employed by Snyder’s-Lance, Inc. (NASDAQ: LNCE) for 15 years prior to joining Swisher Hygiene, Inc., holding the positions of Vice President-Human Resources and Senior Director – Benefits and Risk Management. At Snyder’s-Lance, Mr. Morris chaired the Business Continuity Plan Steering Committee and was a member of the Corporate Mergers & Acquisitions team. Prior to joining Snyder’s-Lance, he held various positions with Belk Stores, Collins & Aikman and Laporte plc. Mr. Morris also served as a board member for root9B Holdings, Inc. (NASDAQ:RTNB) from 2008 through April, 2017 where he chaired the Compensation Committee and also served on the Audit Committee. Mr. Morris also served as a board member for the Second Harvest Food Bank of Metrolina from 2001 to 2016. Mr. Morris received a Bachelor of Science degree in Accounting from West Virginia University. Mr. Morris currently serves as chairman of the Compensation Committee of our board of directors and is also a member of the Audit Committee and Corporate Governance and Nominating Committee of our board of directors. We selected Mr. Morris as a member of our board of directors as a result of his extensive executive level experience in public companies regarding human resources, accounting, compliance and compensation matters as well as public board experience.

 

There are no family relationships between any of our directors and executive officers.

 

Board of directors

 

The board of directors oversees our business affairs and monitors the performance of management. In accordance with our corporate governance principles, the board of directors does not involve itself in day-to-day operations. The directors keep themselves informed through discussions with the Chairman and Chief Executive Officer and our Chief Financial Officer/Chief Operating Officer and by reading the reports and other materials that we send them and by participating in board of directors and committee meetings. Directors are elected for a term of one year. Our directors hold office until their successors have been elected and duly qualified unless the director resigns or by reason of death or other cause is unable to serve in the capacity of director. If any director resigns, dies or is otherwise unable to serve out his or her term, or if the board increases the number of directors, the board may fill any vacancy by a vote of a majority of the directors then in office, although less than a quorum exists. A director elected to fill a vacancy shall serve for the unexpired term of his or her predecessor. Vacancies occurring by reason of the removal of directors without cause may only be filled by vote of the shareholders.

 

Board leadership structure and board’s role in risk oversight

 

Mr. Martin A. Sumichrast serves as both our Chief Executive Officer and Chairman of our board of directors. Messrs. Shriver, Siegel, Sellers and Morris are each considered an independent director within the meaning of Section 803 of the NYSE American LLC Company Guide. We do not have a “lead” independent director.

  

Risk is inherent with every business, and how well a business manages risk can ultimately determine its success. We face a number of risks, including credit risk, interest rate risk, liquidity risk, operational risk, strategic risk and reputation risk. Management is responsible for the day-to-day management of risks we face, while the board, as a whole and through its committees, has responsibility for the oversight of risk management. In its risk oversight role, the board of directors has the responsibility to satisfy itself that the risk management process designed and implemented by management are adequate and functioning as designed. To do this, the chairman of the board meets regularly with management to discuss strategy and the risks facing our company. The Chief Financial Officer attends the board meetings and is available to address any questions or concerns raised by the board on risk management and any other matters. The chairman of the board and independent members of the board work together to provide strong, independent oversight of our company’s management and affairs through its standing committees and, when necessary, special meetings of independent directors.

 

 

Board committees

 

The board of directors has standing Audit, Compensation, Compensation and Corporate Governance and Nominating committees. Each committee has a written charter. The charters are available on our website at www.levelbrands.com. All committee members are independent directors. Information concerning the current membership and function of each committee is as follows:

 

Director		Audit Committee Member		Compensation Committee Member		Corporate Governance and Nominating Committee Member
Anthony K. Shriver				✓
Erik Sterling
Seymour G. Siegel		✓*		✓
Bakari Sellers		✓				✓*
Gregory C. Morris		✓		✓*		✓

 

 

Audit Committee

 

The Audit Committee assists the board in fulfilling its oversight responsibility relating to:

 

 

 

 

The Audit Committee has the ultimate authority to select, evaluate and, where appropriate, replace the independent auditor, approve all audit engagement fees and terms, and engage outside advisors, including its own counsel, as it deems necessary to carry out its duties. The Audit Committee is also be responsible for performing other related responsibilities set forth in its charter.

 

The Audit Committee is composed of three directors, Messrs. Siegel, Sellers and Morris, each of whom has been determined by the board of directors to be independent within the meaning of Section 803 of the NYSE American LLC Company Guide. In addition, Mr. Siegel meets the definition of “audit committee financial expert” under applicable SEC rules. The Audit Committee met four times during the fiscal year ended September 30, 2018.

 

Compensation Committee

 

The Compensation Committee assists the board in:

 

 

The Compensation Committee is charged with ensuring that our compensation programs are competitive, designed to attract and retain highly qualified directors, officers and employees, encourage high performance, promote accountability and assure that employee interests are aligned with the interests of our shareholders. The Compensation Committee is composed of three directors, Messrs. Morris, Shriver and Siegel, each of whom has been determined by the board of directors to be independent within the meaning of Section 803 of the NYSE American LLC Company Guide. The Compensation Committee met four times during the fiscal year ended September 30, 2018.

 

 

Corporate Governance and Nominating Committee

 

The Corporate Governance and Nominating Committee:

 

 

 

 

 

The purpose of the Corporate Governance and Nominating Committee is to assess the performance of the board and to make recommendations to the board from time to time, or whenever it shall be called upon to do so, regarding nominees for the board and to ensure our compliance with appropriate corporate governance policies and procedures. The Corporate Governance and Nominating Committee is composed of two directors, each of whom (Messrs. Sellers and Morris) have been determined by the board of directors to be independent within the meaning of Section 803 of the NYSE American LLC Company Guide. The Corporate Governance and Nominating Committee met one time during the fiscal year ended September 30, 2018.

 

Shareholder nominations

 

Shareholders who would like to propose a candidate to serve as a member of our board of directors may do so by submitting the candidate’s name, resume and biographical information to the attention of our Corporate Secretary. All proposals for nomination received by the Corporate Secretary will be presented to the Corporate Governance and Nominating Committee for appropriate consideration. It is the policy of the Corporate Governance and Nominating Committee to consider director candidates recommended by shareholders who appear to be qualified to serve on our board of directors. The Corporate Governance and Nominating Committee may choose not to consider an unsolicited recommendation if no vacancy exists on the board of directors and the committee does not perceive a need to increase the size of the board of directors. In order to avoid the unnecessary use of the Corporate Governance and Nominating Committee’s resources, the committee will consider only those director candidates recommended in accordance with the procedures set forth below. To submit a recommendation of a director candidate to the Corporate Governance and Nominating Committee, a shareholder should submit the following information in writing, addressed to the Corporate Secretary of Level Brands at our main office:

 

 

 

 

 

 

 

Code of Ethics and Conduct and Insider Trading Policy

 

In January 2017 we adopted a Code of Ethics and Conduct which applies to our board of directors, our executive officers and our employees. The Code of Ethics and Conduct outlines the broad principles of ethical business conduct we adopted, covering subject areas such as:

 

 

 

 

 

 

 

 

 

A copy of our Code of Ethics and Conduct is available on our website at www.levelbrands.com.

 

Additionally, all of our directors, officers, employees and consultants are subject to our Insider Trading Policy. Our Insider Trading Policy prohibits the purchase, sale or trade of our securities with the knowledge of material nonpublic information. In addition, our Insider Trading Policy prohibits our employees, officers, directors, and consultants from trading on a short-term basis, engaging in a short sale of our securities, engaging in transactions in puts, call or other derivatives tied to our securities, engaging in hedging transactions, holding any of our securities in a margin account or otherwise pledging our securities as collateral for a loan. Any transactions by our directors, officers, employees and consultants must be first pre-cleared by our Chief Executive Officer or our Chief Financial Officer in an effort to assist these individuals from inadvertently violating our Insider Trading Policy. Our Insider Trading Policy also fixes certain quarterly and event specific blackout periods.

 

Compensation of Directors

 

Non-employee Director Compensation Program

 

In December 2016, our board of directors adopted a compensation plan for our non-employee directors which was amended by the board in January 2017. This compensation plan, which was in place during a portion of fiscal 2018, provided that our non-employee directors would be compensated as follows:

 

 

In addition, board members were reimbursed for out-of-pocket expenses related to participation in board and committee meetings.

 

In August 2018, after reviewing the results of an independent compensation study on public company executive and board compensation and upon recommendation of the Compensation Committee of our board of directors, the board of directors adopted a new compensation program for our non-employee directors for the 2018 board term which began on March 22, 2018 which includes:

 

 

Annual retainer (cash)	$23,000
Annual NSO option grant under our 2015 Equity Compensation Plan, 10 year term, vesting on date of grant; exercise price equal to fair market value on date of grant, cashless exercise	Options to purchase 7,000 shares of common stock

 

Annual Board committee retainers (cash):
	Audit Committee Chair:		$15,000
	Audit Committee member:		$7,500
	Compensation Committee Chair:		$6,000
	Compensation Committee member:		$3,000
	Corporate Governance and Nominating Committee Chair:		$4,000
	Corporate Governance and Nominating Committee member:		$2,000

 

In addition, board members are reimbursed for out-of-pocket expenses related to participation in board and committee meetings.

 

Fiscal 2018 Director Compensation

 

The following table sets forth the compensation paid or earned for the fiscal year ended September 30, 2018 by our non-employee directors. Our employee directors do not receive compensation for their services as directors.

 

Name	Fees earned or paid in cash ($)	Stock awards ($)	Option awards ($)(1)	Non-equity incentive plan compensation ($)	Nonqualified deferred compensation earnings ($)	All other compensation ($)	Total ($)
Erik Sterling	26,500		16,030				42,530
Anthony K. Shriver	27,500		16,030				43,530
Seymour G. Siegel	42,500		16,030				58,530
Bakari Sellers	36,000		16,030				52,030
Gregory C. Morris	40,000		16,030				56,030

 

(1)	Represents the grant date value of the options granted during the year, determined in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the option awards are included in Note 10 of the notes to our consolidated financial statements appearing elsewhere in this report.

 

Compliance with Section 16(a) of the Exchange Act

 

Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the Securities and Exchange Commission initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the Securities and Exchange Commission regulations to furnish us with copies of all Section 16(a) reports they file. Based solely upon a review of Forms 3 and 4 and amendments thereto furnished to us under Rule 16a-3(d) of the Exchange Act during 2018 and Forms 5 and amendments thereto furnished to us with respect to the year ended September 30, 2018, as well as any written representation from a reporting person that no Form 5 is required, we are not aware that any officer, director or 10% or greater stockholder failed to file on a timely basis, as disclosed in the aforementioned Forms, reports required by Section 16(a) of the Exchange Act during the year ended September 30, 2018

 

 

Summary Compensation Table

 

The following table sets forth the compensation paid or earned for the fiscal years ended September 30, 2018 and 2017 to our named executive officers, who are comprised of our chief executive officer and our chief financial officer and chief operating officer, for each of those years.

 

Name and principal position	Year	Salary ($)	Bonus ($)	Stock Awards ($)(1)	Option Awards ($) (1)	No equity incentive plan compensation ($)	Non-qualified deferred compensation earnings ($)	All other compensation ($)(2)	Total ($)
Martin A. Sumichrast	2018	232,500	240,000	0	0	0	0	0	472,500
Chief Executive Officer	2017(2)	90,000	0	127,500	0	0	0	0	217,500
Mark S. Elliott	2018	165,000	100,000	0	519,000	0	0	0	784,000
Chief Financial Officer and Chief Operating Officer	2017(2)	90,000	0	17,000	35,000	0	0	18,000	160,000

 

(1)	Represents the grant date value of the options and awards granted during the years presented, determined in accordance with FASB ASC Topic 718. The assumptions made in the valuations of the awards are included in Notes 10 and 11 of the notes to our consolidated financial statements appearing elsewhere in this report.
(2)	Stock and option award information updated to reflect corrected valuations.

 

Compensation arrangements with Martin A. Sumichrast and Mark S. Elliott

 

In January 2017 we entered into employment agreements with each of Mr. Sumichrast and Mr. Elliott, the terms of which are substantially similar, including:

 

 

Following the expiration in January 2018 of the terms of the 2017 employment agreements, each of Messrs. Sumichrast and Elliott continued to provide services to us under those agreements. Pending the finalization of a new employment agreement with Mr. Sumichrast, in January 2018, we made the following compensation changes with Mr. Sumichrast:

 

 

In addition, pending the finalization of a new employment agreement with Mr. Elliott, in January 2018, we made the following compensation changes with Mr. Elliott:

 

 

 

In May 2018, the board of directors awarded Mr. Elliott options to purchase 150,000 shares of our common stock valued at $519,000, of which options to purchase 75,000 shares vested immediately and options to purchase the remaining 75,000 shares vest in January 2019.

 

On September 6, 2018 we entered into new employment agreements with each of Mr. Sumichrast and Mr. Elliott, the terms of which are substantially similar, including:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding Equity Awards at Year End

 

The following table provides information concerning outstanding equity awards held by each of our named executive officers as of September 30, 2018. Information regarding our 2015 Equity Compensation Plan appears elsewhere in this prospectus under “Description of Capital Stock – 2015 Equity Compensation Plan.”

 

	OPTION AWARDS					STOCK AWARDS
Name	Number of securities underlying unexercised options (#) exercisable	Number of securities underlying unexercised options (#) unexercisable	Equity incentive plan awards: Number of securities underlying unexercised unearned options (#)	Option exercise price ($)	Option expiration date	Number of shares or units of stock that have not vested (#)	Market value of shares or units of stock that have not vested ($)	Equity incentive plan awards: Number of unearned shares, units or other rights that have not vested (#)	Equity incentive plan awards: Market or payout value of unearned shares, units or other rights that have not vested (#)
Martin A. Sumichrast
Mark S. Elliott	100,000			7.50	1/1/2023
	100,000			4.00	5/1/2024
	75,000			4.78	5/29/2028
		75,000		4.78	5/29/2028

 

 

At December 01, 2018, we had 10,095,356 shares of our common stock issued and outstanding. The following table sets forth information known to us as of December 01, 2018 relating to the beneficial ownership of shares of our common stock by:

 

 

 

 

 

Unless otherwise indicated, the address of each beneficial owner in the table set forth below is care of 4521 Sharon Road, Suite 450, Charlotte, NC 28211. We believe that all persons, unless otherwise noted, named in the table have sole voting and investment power with respect to all shares of our common stock shown as being owned by them. Under securities laws, a person is considered to be the beneficial owner of securities owned by him (or certain persons whose ownership is attributed to him) and that can be acquired by him within 60 days from December 01, 2018, including upon the exercise of options, warrants or convertible securities. We determine a beneficial owner’s percentage ownership by assuming that options, warrants or convertible securities that are held by him, but not those held by any other person, and which are exercisable within 60 days of the that date, have been exercised or converted.

 

 

Name of Beneficial Owner	No. of Shares Beneficially Owned	% of Class
Martin A. Sumichrast (1)(5)	746,434	7.4%
Mark S. Elliott (2)(5)	381,680	3.7%
Erik Sterling (3)(5)	1,079,667	10.7%
Anthony K. Shriver (4)(5)	134,500	1.3%
Seymour G. Siegel (5)	9,531	*
Bakari Sellers (5)	9,531	*
Gregory C. Morris (5)	9,531	*
All officers and directors as a group (seven persons) (1)(2)(3)(4)(5)	2,370,874	22.7%
Jason Winters (5)(6)	1,032,667	10.2%
The Runnels Family Trust (7)	600,000	5.9%

 

 

 

 

Mr. Sumichrast in his position at Stone Street Partners, LLC has the right to direct the vote and disposition of securities owned by Stone Street Partners, LLC. Mr. Sumichrast has voting and dispositive control over securities owned by Washington Capital LLC. Mr. Sumichrast disclaims beneficial ownership of the securities held of record by each of these entities except to the extent of his pecuniary interest therein.

 

 

 

 

 

 

 

 

Mr. Sterling and Mr. Jason Winters are co-Trustees of the Trust and have shared voting and dispositive control over securities held by the Trust. The Trust is the manager and a member of each of IM1 Holdings and EE1 Holdings and as manager has voting and dispositive control over securities held of record by IM1 Holdings and EE1 Holdings. Mr. Sterling disclaims beneficial ownership of the securities held of record by the Trust, IM1 Holdings and EE1 Holdings except to the extent of his pecuniary interest therein. See footnote 6.

 

 

 

 

 

 

 

 

 

Mr. Winters disclaims beneficial ownership of the securities held of record by the Trust, IM1 Holdings and EE1 Holdings except to the extent of his pecuniary interest therein. Mr. Winters address is 39 Princeton Drive, Rancho Mirage, CA 92270. See footnote 3.

 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of September 30, 2018.

 

Plan category	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted average exercise price of outstanding options, warrants and rights ($)	Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column
Plans approved by our shareholders:
2015 Equity Compensation Plan	469,650	5.13	845,455
Plans not approved by shareholders	-	-	-

 

Please see Note 11 of the notes to our audited consolidated financial statements appearing in our 2018 10-K for more information on our 2015 Equity Compensation Plan.

 

 

Our Audit Committee will review any transaction in which we or any of our directors, nominees for director, executive officers or holders of more than 5% of our common stock or any of their immediate family members, is, was or is proposed to be a participant and the amount involved exceeds the lesser of $120,000 or 1% of our average total assets at year-end for our last two completed fiscal years. Our management is responsible for determining whether a transaction contains the characteristics described above requiring review by the Audit Committee of our board of directors.

 

During the past three years we have engaged in a number of related party transactions with our directors, executive officers, and owners of 10% or more of our common stock which are described in detail in Note 9 to the notes to consolidated financial statements which appears elsewhere in this report.

 

 

 

The following table shows the fees that were billed for the audit and other services provided for the fiscal years ended September 30, 2018 and 2017:

 

	2018	2017
Audit Fees	$136,750	$151,300
Audit-Related Fees	28,800	-
Tax Fees	24,525	9,675
All Other Fees	54,850	97,370
Total	$244,925	$258,345

 

Audit Fees — This category includes the audit of our annual financial statements and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.

 

Audit-Related Fees — This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category include consultation regarding our correspondence with the Securities and Exchange Commission and other accounting consulting.

 

Tax Fees — This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.

 

All Other Fees — This category consists of fees for other miscellaneous items.

 

Our board of directors has adopted a procedure for pre-approval of all fees charged by our independent registered public accounting firm. Under the procedure, the Audit Committee of the board approves the engagement letter with respect to audit, tax and review services. Other fees are subject to pre-approval by the Audit Committee of the board. The audit and tax fees paid to the auditors with respect to the fiscal year ended September 30, 2018 and 2017 were approved by the Audit Committee of the board of directors.

 

 

 

PART IV

 

 

 

The consolidated financial statements and Report of Independent Registered Accounting Firm are listed in the “Index to Financial Statements and Schedules” beginning on page F-1.

 

(2)           Financial statement schedules

 

All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the consolidated financial statements herein.

 

 

The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.

 

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: December 12, 2018	Level Brands, Inc.
	By:	/s/ Martin Sumichrast
		Martin A. Sumichrast
		Chief Executive Officer (Principal Executive Officer)
Date: December 12, 2018	Level Brands, Inc.
	By:	/s/ Mark Elliott
		Mark S. Elliott
		Chief Financial Officer, (Principal Accounting and Financial Officer)

 

POWER OF ATTORNEY

 

KNOW ALL BY THESE PRESENTS, that each person whose signature appears below hereby constitutes and appoints Mark S. Elliott his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments and supplements to this report, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, and hereby grants to such attorney-in-fact and agent, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Name		Positions		Date
/s/ Martin A. Sumichrast		Chairman of the Board of Directors, Director		December 12, 2018
Martin A. Sumichrast
		Director		December 12, 2018
Erik Sterling
/s/ Anthony K. Shriver		Director		December 12, 2018
Anthony K. Shriver
/s/ Seymour G. Siegel		Director		December 12, 2018
Seymour G. Siegel
/s/ Bakari Sellers		Director		December 12, 2018
Bakari Sellers
/s/ Gregory C. Morris		Director		December 12, 2018
Gregory C. Morris

 

  

 

EXHIBIT INDEX

				Incorporated by Reference						Filed or Furnished Herewith
No.		Exhibit Description		Form		Date Filed		Number
1.1		Underwriting Agreement		S-1		9/26/18		1.1
2.1		Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC		8-K		12/4/18		2.1
3.1		Articles of Incorporation		1-A		9/18/17		2.1
3.2		Articles of Amendment to the Articles of Incorporation filed April 22, 2015		1-A		9/18/17		2.2
3.3		Articles of Amendment to the Articles of Incorporation filed June 22, 2015		1-A		9/18/17		2.3
3.4		Articles of Amendment to the Articles of Incorporation filed November 17, 2016		1-A		9/18/17		2.4
3.5		Articles of Amendment to the Articles of Incorporation filed December 5, 2016		1-A		9/18/17		2.5
3.6		Bylaws, as amended		1-A		9/18/17		2.6
4.1		Form of placement agent warrant issued in June 2015 private placement		1-A		9/18/17		3.3
4.2		Form of placement agent warrant issued in December 2015 private placement		1-A		9/18/17		3.4
4.3		Form of warrant issued in 8% convertible promissory note offering		1-A		9/18/17		3.5
4.4		Form of selling agents’ warrant issued in November 2017 initial public offering		1-A/A		10/12/17		3.6
4.5		Form of common stock certificate of the registrant		1-A		9/18/17		3.7
4.6		2015 Equity Compensation Plan		1-A		9/18/17		3.8
4.7		Form of stock option award under 2015 Equity Compensation Plan+		1-A		9/18/17		3.9
4.8		Form of warrant issued to Andre Carthen		1-A		9/18/17		3.10
4.9		Form of warrant issued to Nicholas Walker		1-A		9/18/17		3.11
4.10		Form of representative’s warrant		S-1		9/26/18		4.10
10.1		Contribution Agreement by and between Beauty & Pin-Ups, Inc. and Beauty and Pin Ups LLC dated April 13, 2015		1-A		9/18/17		7.1
10.2		Operating Agreement of Beauty and Pin Ups LLC, as amended		1-A		9/18/17		6.1
10.3		Consulting Agreement dated April 13, 2015 by and between Beauty and Pin Ups LLC and Priel Maman		1-A		9/18/17		6.2
10.4		Management Services Agreement dated April 27, 2015 by and between kathy ireland® Worldwide and Level Beauty Group, Inc.		1-A		9/18/17		6.3
10.5		Advisory Services Agreement dated April 27, 2015 by and between Stone Street Partners, LLC and Level Beauty Group, Inc.		1-A		9/18/17		6.4
10.6		Termination Agreement dated October 31, 2016 by and between kathy ireland® Worldwide and Level Beauty Group, Inc.		1-A		9/18/17		6.5
10.7		Termination Agreement dated September 30, 2016 by and between Siskey Capital, LLC and Level Beauty Group, Inc.		1-A		9/18/17		6.6
10.8		Revolving Line of Credit Loan Agreement dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC, LLC		1-A		9/18/17		6.7
10.9		Promissory Note dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC LLC		1-A		9/18/17		6.8
10.10		Security Agreement dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC LLC		1-A		9/18/17		6.9
10.11		Executive Employment Agreement dated January 1, 2017 by and between Level Brands, Inc. and Martin A. Sumichrast +		1-A		9/18/17		6.10
10.12		Executive Employment Agreement dated January 2, 2017 by and between Level Brands, Inc. and Mark S. Elliott +		1-A		9/18/17		6.11
10.13		Master Advisory and Consulting Agreement dated February 8, 2017 by and between Level Brands, Inc. and kathy Ireland® Worldwide		1-A		9/18/17		6.12
10.14		Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Stephen Roseberry +		1-A		9/18/17		6.13
10.15		Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Tommy Meharey+		1-A		9/18/17		6.14
10.16		Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Nicolas Mendoza +		1-A		9/18/17		6.15
10.17		Sublease dated January 1, 2017 by and between Kure Franchise, LLC and Level Brands, Inc.		1-A		9/18/17		6.16
10.18		Form of Filler Supply Agreement for Beauty and Pin Ups LLC		1-A		9/18/17		6.17
10.19		Wholesale License Agreement dated January 12, 2017 by and between kathy ireland ®Worldwide and I'M1, LLC		1-A		9/18/17		6.18