Attached files

file filename
EX-32.1 - CERTIFICATE PURSUANT TO SECTION 18 U.S.C. PURSUANT TO SECTION 906 OF THE SARBANE - cbdMD, Inc.levb_ex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - cbdMD, Inc.levb_ex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) CERTIFICATIONS SECTION 302 OF - cbdMD, Inc.levb_ex311.htm
EX-23.1 - CONSENTS OF EXPERTS AND COUNSEL - cbdMD, Inc.levb_ex231.htm
 
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
(Mark One)
 
☑           
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended September 30, 2018
 
or
 
☐           
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______________ to _______________
 
Commission file number: 001-38299
 
 
LEVEL BRANDS, INC.
(Exact name of registrant as specified in its charter)
 
North Carolina
47-3414576
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
4521 Sharon 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.
 
 
2
 
 
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.
 
 
3
 
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.
 
 
4
 
 
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.
 
5
 
 
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:
 
Increase our base of licensed offerings: We believe that in building a strong brand, we must begin with intellectual property. The development of quality IP is frequently one of the most expensive ongoing costs in a licensing operation. The unique kathy ireland® Worldwide “blueprint” for IP development allows us economies of scale, which is a foundation for Level Brands to bring virtually unlimited products and services of quality, through the appropriate distribution channels to meet the demands of our targeted customers. With current contracts encompassing products in fashion, accessories, beverages, personal care, health care, and spirits, which are already in development or available at brick and mortar stores and online retailers, we believe we have a foundation to continue to build upon for additional offerings. We expect to continue to grow our base of licensed products by:
 
innovating and identifying market trends through an ongoing effort based on research of products, tracking buying and demand trends and subsequently identifying the right manufacturer for fulfillment, i.e. utilizing cannabidiol (“CBD”) in unique formats under our kathy ireland® Health & Wellness brand under the terms of our license agreement with our client Isodiol International Inc.; and
 
identifying new product offerings in response to evolving customer demands in our focused areas, that meet our criteria, and with our branding support could increase our reach to new customers.
 
Cross-sell opportunities: With EE1 will seek to continue to grow its portfolio of brand management customers by identifying products that fit our criteria for additional licensing opportunities under our Beauty & Pin-Ups, I’M1 or kathy ireland® Health & Wellness brands;
 
EE1 entertainment projects: EE1 will seek to continue to expand this brand’s offering of entertainment productions as we assess current projects involving television and movies for the best financial opportunity as well as look to expand experiential offerings. Currently EE1 is providing production services for two television shows and a recording project of a tribute album of Lennon/McCartney classics by GRAMMY award winning artists; and
 
Acquisitions. We may also choose to further build and maintain our brand portfolio by acquiring additional brands directly or through joint ventures if opportunities arise that we believe are in our best interests. In assessing potential acquisitions or investments, we expect to primarily evaluate growth industries, the strength of the target brand as well as the expected viability and sustainability of future income or royalty streams and its fit within its targeted segments. We believe that this focused approach will allow us to effectively screen a wide pool of consumer brand candidates and strategically evaluate acquisition targets and efficiently complete due diligence for potential acquisitions. Other than the pending transaction with Cure Based Development described earlier in this section, we are not a party to any agreements or understandings regarding the acquisition of additional brands or companies and there are no assurances we will be successful in expanding our brand portfolio.
 
 
6
 
 
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:
 
potential for financial upside without the significant investment and management risks and capital demands typically associated with traditional wholesale operating companies;
 
diversification resulting from both broad demographic appeal and distribution through a range of distribution channels;
 
growth opportunity through expansion of existing brands into new categories, geographic areas and acquisitions; and
 
reduced operational risks as inventory and other typical wholesale operating functions are the responsibilities of our licensees.
 
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:
 
 
In February 2017 we entered into an eight year master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuant to which it provides us non-exclusive strategic advisory services, including input to us on various aspects of our corporate strategies and branding. Their in-house design team supports our brands and the future licensing partnerships by providing unified trend direction, guidance and coordination of the brand image across all product categories and focuses on seeking to forecast the future design and product demands of the our brand’s customers. Under the terms of this agreement, Ms. Ireland also serves in the non-executive positions as our Chairman Emeritus and Chief Brand Strategist. Under the September 2017 amendment to the agreement, the parties also granted each other certain rights for opportunities introduced by one party to the other, including rights of first refusal and the payment of referral fees;
 
 
In January 2017 I’M1 entered into an exclusive, royalty-free 10 year wholesale worldwide license agreement with kathy ireland® Worldwide for rights to use, assign and sublease certain trademarks, including I’M1, to allow for the manufacturing, marketing and sale of products bearing those marks and to sublicense certain of these rights;
 
 
7
 
 
 
 
In February 2017, we entered into a one year advisory agreement with Mr. Stephen Roseberry pursuant to which he provide advisory and consulting services to us, including serving as co-Managing Director of I’M1 and EE1, devoting such time to our business as we mutually determine. The agreement was amended in March 2018 to also include serving as Managing Director of Level H&W and for the agreement to expire in February 2019 and extend automatically month to month unless canceled by either party. Mr. Roseberry is President and a member of the board of directors of kathy ireland ® Worldwide. Mr. Jon Carrasco, who is the Global Creative Director for kathy ireland® Worldwide, also serves as Global Creative Director for I’M1 and EE1 and he is responsible for developing and facilitating creative strategies for I’M1 and EE1 under the terms of an advisory agreement expiring in February 2019. We expect this agreement will be renewed prior to the expiration of the terms of the current agreement;
 
 
In February 2017, we entered into one year advisory agreements with Mr. Tommy Meharey and Mr. Nic Mendoza pursuant to which they provide advisory and consulting services to us, including Mr. Meharey serving as co-Managing Director of I’M1 and Mr. Mendoza serving as co-Managing Director of EE1, devoting such time to our business as we mutually determine. The agreements were amended in March 2018 to expire in February 2019 and extend automatically month to month unless canceled by either party. Mr. Meharey is Vice President and a member of the board of directors of kathy ireland ® Worldwide and Mr. Mendoza is a Vice President of kathy ireland ® Worldwide, and; 
 
 
In September 2017 we entered into a seven year wholesale license agreement with kathy ireland® Worldwide under which we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
 
How we generate sales
 
We generate sales from a variety of sources, including:
 
our licensing division, which includes the results of I’M1 and Level H&W, enters into various license agreements that can provide revenues based on royalties and advertising/marketing fees and additional revenues based on a percentage of defined sales as well as fees for advisory and promotional services;
 
our entertainment division enters into advisory agreements for brand management services as well as agreements to produce entertainment related events, which include production assistance for television and music recording agreements. Additional revenue earned at the corporate level for advisory agreements is included in the entertainment division for segment reporting purposes; and
 
our products division generates sales through sales of our Beauty & Pin-Ups brand of products.
 
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.
 
 
8
 
 
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:
 
 
9
 
 
•            
content creation and promotion through social and standard media;
•            
marketing input;
•            
assisting with influencer marketing programs;
•            
providing production capability for video and photo support for brand advertising; and
•            
assisting with brand extension through licensing opportunities.
 
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.
 
 
10
 
 
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.
 
 
11
 
 
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.
 
 
12
 
 
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.
 
ITEM 1.A    RISK FACTORS.
 
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.
 
 
13
 
 
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.
 
 
14
 
 
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.
 
 
15
 
 
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.
 
 
16
 
 
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.
 
 
17
 
 
 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.
 
 
18
 
 
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.
 
 
19
 
 
 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:
  
● 
defend against infringement claims which are expensive and time consuming;
● 
cease making, licensing or using products that incorporate the challenged intellectual property;
● 
re-design, re-engineer or re-brand our products or packaging; or
● 
enter into royalty or licensing agreements in order to obtain the right to use a third party’s intellectual property.
 
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.
 
 
 
20
 
 
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:
 
 
21
 
 
price and volume fluctuations in the overall stock market from time to time;
changes in operating performance and stock market valuations of other hair care products companies generally;
sales of shares of our common stock by us or our shareholders;
failure of securities analysts to initiate or maintain coverage of us, changes in financial estimates by securities analysts who follow our company, or our failure to meet these estimates or the expectations of investors;
the financial projections we may provide to the public, any changes in those projections or our failure to meet those projections;
rumors and market speculation involving us or other companies in our industry;
actual or anticipated changes in our results of operations or fluctuations in our results of operations;
actual or anticipated developments in our business, our competitors’ businesses or the competitive landscape generally;
litigation involving us, our industry or both, or investigations by regulators into our operations or those of our competitors;
developments or disputes concerning our intellectual property or other proprietary rights;
announced or completed acquisitions of businesses or brands by us or our competitors;
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
changes in accounting standards, policies, guidelines, interpretations or principles;
any significant change in our management; and
general economic conditions and slow or negative growth of our markets.
 
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:
 
being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
 
not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act of 2002, or “Sarbanes-Oxley Act”;
 
not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
 
reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and
 
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
 
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. 
 
 
22
 
 
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:
 
 
23
 
 
permit our board of directors to issue up to 50,000,000 shares of preferred stock, with any rights, preferences and privileges as they may designate;
 
provide that all vacancies on our board of directors, including as a result of newly created directorships, may, except as otherwise required by law, be filled by the affirmative vote of a majority of directors then in office, even if less than a quorum; and
 
do not provide for cumulative voting rights, thereby allowing the holders of a majority of the shares of common stock entitled to vote in any election of directors to elect all of the directors standing for election.
 
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.
 
ITEM 1B. 
UNRESOLVED STAFF COMMENTS.
 
Not applicable to a smaller reporting company.
 
ITEM 2. 
DESCRIPTION OF PROPERTY.
 
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.
 
ITEM 3. 
LEGAL PROCEEDINGS.
 
We are not a party to any pending or threatened litigation.
 
ITEM 4. 
MINE SAFETY DISCLOSURES.
 
Not applicable to our company.
 
 
24
 
 
PART II
 
ITEM 5. 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
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.
 
ITEM 6.
SELECTED FINANCIAL DATA.
 
Not applicable to a smaller reporting company.
 
 
25
 
 
ITEM 7. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
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:
 
the licensing division, comprised of:
 
I’M1, which is designed to establish a lifestyle brand through the licensing of select products and categories targeted primarily to men under the I'M1 brand;
 
Level H&W, which currently markets products branded under kathy ireland® Health & Wellness;
 
the entertainment division, which is focused on producing and marketing omni-entertainment experiences and providing brand management services, all under the EE1 brand; and
 
the products division, which is a producer and marketer of quality hair care and beauty products. Revenues from this division are attributable to sales of our Beauty & Pin-Ups brand of products.
 
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.
 
 
26
 
 
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.
 
 
27
 
 
 
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.
 
 
28
 
 
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 
 
 
29
 
 
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.
 
 
30
 
 
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.
 
              On November 16, 2017 we closed an IPO and raised net proceeds of $10,932,535. Subsequent to the end of fiscal 2018, we closed a follow-on firm underwritten public offering of shares of our common stock resulting in total gross proceeds to us of $6,899,998, before deducting underwriting discounts, commissions and other offering expenses payable by us. We are using the net proceeds from the offering for brand development and expansion, acquisitions and general working capital. Additionally, during fiscal 2018 as compared to fiscal 2017 we incurred non-cash expenses of $598,590 and $242,934, respectively, related to stock compensation and options, $0 and $310,958, respectively, for amortization of debt discounts and debt issuance fees related to financings. In addition, in fiscal 2017 we had a one-time non-cash charge of $446,250 of debt conversion expense related to conversion of the convertible promissory notes, and a non-cash charge of $175,000 as an other than temporary impairment on securities.
 
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.
 
 
31
 
 
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.
 
ITEM 7A. 
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
Not applicable for a smaller reporting company.
 
ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
 
Please see our Financial Statements beginning on page F-1 of this annual report.
 
 
32
 
 
ITEM 9. 
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
 
None.
 
ITEM 9A. 
CONTROLS AND PROCEDURES.
 
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:
 
 
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
 
 
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
 
 
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.
 
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.
 
 
33
 
 
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.
 
ITEM 9B. 
Other Information.
 
None.
 
 
34
 
 
PART III
 
ITEM 10. 
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
 
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.
 
 
35
 
 
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.
 
 
36
 
 
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.
 
 
37
 
 
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
 
 
✓*
 
 
*            
denotes chairperson.
 
Audit Committee
 
The Audit Committee assists the board in fulfilling its oversight responsibility relating to:
 
 
the integrity of our financial statements;
 
 
our compliance with legal and regulatory requirements; and
 
 
the qualifications and independence of our independent registered public accountants.
 
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:
 
 
determining, in executive session at which our chief executive officer is not present, the compensation for our CEO or president, if such person is acting as the CEO;
  
  
 
 
discharging its responsibilities for approving and evaluating our officer compensation plans, policies and programs;
  
  
 
 
reviewing and recommending to the board regarding compensation to be provided to our employees and directors; and
  
  
 
 
administering our equity compensation plan.
 
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.
 
 
38
 
 
Corporate Governance and Nominating Committee
 
The Corporate Governance and Nominating Committee:
 
 
assists the board in selecting nominees for election to the board;
 
 
monitor the composition of the board;
 
 
develops and recommends to the board, and annually reviews, a set of effective corporate governance policies and procedures applicable to our company; and
 
 
regularly review the overall corporate governance of our company and recommends improvements to the board as necessary.
 
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:
 
 
the name and address of the person recommended as a director candidate;
 
 
all information relating to such person that is required to be disclosed in solicitations of proxies for election of directors pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended;
 
 
the written consent of the person being recommended as a director candidate to be named in the proxy statement as a nominee and to serve as a director if elected;
 
 
as to the person making the recommendation, the name and address, as they appear on our books, of such person, and number of shares of our common stock owned by such person; provided, however, that if the person is not a registered holder of our common stock, the person should submit his or her name and address along with a current written statement from the record holder of the shares that reflects the recommending person’s beneficial ownership of our common stock; and
 
 
a statement disclosing whether the person making the recommendation is acting with or on behalf of any other person and, if applicable, the identity of such person.
 
 
39
 
 
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:
 
 
conflicts of interest;
 
 
corporate opportunities;
 
 
public disclosure reporting;
 
 
confidentiality;
 
 
protection of company assets;
 
 
health and safety;
 
 
conflicts of interest; and
 
 
compliance with applicable laws.
 
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:
 
 
an annual retainer of $10,000 upon joining the board for the first time, paid with the issuance of stock;
 
an annual retainer for committee chairpersons of $15,000 for the Audit Committee Chairman, $5,000 for the Compensation Committee Chairman and $2,500 for the Corporate Governance and Nominating Committee Chairman;
 
an annual retainer for committee members of $6,000 for service on the Audit Committee, $2,000 for service on the Compensation Committee and $1,000 for service on the Corporate Governance and Nominating Committee; and
 
$1,500 for each scheduled board meeting attended.
 
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:
 
 
40
 
 
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
 
41
 
 
ITEM 11. 
EXECUTIVE COMPENSATION.
 
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:
 
 
the term of each agreement is for one year and it may be extended for additional one year periods at our option upon 60 days’ notice;
 
the executive is entitled to an annual base salary of $120,000. The agreement initially provided that the compensation due Mr. Sumichrast is would accrue until the completion of our initial public offering, after which time all accrued compensation was to be paid to him. In April 2017 the employment agreement with Mr. Sumichrast was amended to provide that we begin paying Mr. Sumichrast his compensation on a current basis;
 
the executive is entitled to a discretion bonus as determined by our board of directors;
 
the executive is entitled to participate in all benefit programs we offer our employees, and such amount of paid vacation as is consistent with his position and length of service to us;
 
the agreement will terminate upon his death or disability and may be terminated by us with or without cause, subject to cure periods, or by the executive at his discretion. The executive is not entitled to any severance or similar benefits upon a termination of the agreement; and
 
the agreement contains customary non-compete, confidentiality and indemnification provisions.
 
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:
 
 
annual base salary of $270,000 effective January 1, 2018; and
 
a discretionary bonus award of $240,000 was set based on the prior year accomplishments.
 
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:
 
 
annual base salary of $180,000 effective January 1, 2018; and
 
a discretionary bonus award of $100,000 was set based on the prior year accomplishments.
 
 
42
 
 
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:
 
 
the initial term of each agreement is for three years, and it may be extended for additional one year terms by written notice by us at least 60 days before the expiration of the then current term;
 
 
we agreed to pay Mr. Sumichrast a base salary of $270,000 and Mr. Elliott an initial base salary of $180,000;
 
 
each executive is eligible for a performance bonus, payable in a combination of cash and awards of common stock, and the performance bonus will be based upon his relative achievement of annual performance goals established by our board of directors upon recommendation of the compensation committee, with input from senior executive management. As of the date of this prospectus the board of directors has not established the performance goals. Any performance bonus stock award will be granted to the executive pursuant to the terms and conditions of our 2015 Equity Compensation Plan or such other compensation plan as may be adopted by our company and our shareholders. In addition, the compensation committee of the board of directors will review each executive's performance on an annual basis, and in connection with such annual review, the executive may be entitled to receive an annual discretionary bonus in such amount as may be determined by the board of directors, upon recommendation of the compensation committee, in its sole discretion;
 
 
each executive is also entitled to participate in all benefit programs we offer our employees, reimbursement for business expenses and such amount of paid vacation as is consistent with his position and length of service to us;
 
 
we may terminate each agreement for "cause", upon the executive's death or disability, or without cause, and the executive may terminate the agreement without cause. In each of the employment agreements, “cause” is defined to mean:
 
committing or participating in an injurious and intentional act of fraud, gross neglect, misrepresentation, embezzlement or dishonesty against us;
 
committing or participating in any other injurious act or omission wantonly, willfully, recklessly or in a manner which was grossly negligent against us;
 
engaging in a criminal enterprise involving moral turpitude;
 
conviction for a felony under the laws of the United States or any state;
 
violation of any Federal or state securities laws, rules or regulations, or any rules or regulations of any stock exchange or other market on which our securities may be listed or quoted for trading;
 
violation of our corporate governance policies which have been formally adopted by the board of directors; or
 
any assignment of the agreement in violation of the terms of the agreement.
 
If we terminate the agreement for cause, or if it terminates upon the executive’s death, or if the executive voluntarily terminates the agreement, neither the executive nor his estate (as the case may be) is entitled to any severance or other benefits following the date of termination. If the agreement is terminated upon his disability, we are obligated to pay him his base salary for three months. If we terminate the agreement without cause or by a "constructive termination" of the agreement, we are obligated to pay him his base salary and provide the benefits he would have otherwise been entitled to for the balance of the then current term of the agreement. Constructive termination is defined under the agreement as the occurrence of one or more of the following events without the express written consent of the executive: (1) a material breach of the agreement by our company; (2) failure by a successor company to assume the obligations under the agreement; and/or (3) a material change in the executive's duties and responsibilities as described under the agreement.
 
 
43
 
 
 
in the event of a “change of control” of our company, if the executive's employment is terminated by us without cause within two years of the date of the change of control, or in the 90 days prior to the change of control at the request of the acquiror, we are obligated to pay the executive a lump sum payment equal to the greater of (1) 1.5 times his base salary or (2) all of his base salary remaining to be paid during the initial term, plus all unvested stock options and restricted stock grants will immediately vest and remain exercisable for twelve months from the date of termination. “Change of control” is defined as mean a change of control of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A promulgated under the Exchange Act, whether or not we are in fact required to comply with that regulation, provided that, without limitation, such a change in control shall be deemed to have occurred if:
any person, other than a trustee or other fiduciary holding securities under an employee benefit plan of our company or a corporation owned, directly or indirectly, by our shareholders in substantially the same proportions as their ownership of our stock, is or becomes the beneficial owner, directly or indirectly, of our securities representing more than 50% of the combined voting power of our then outstanding securities;
during any period of two consecutive years (not including any period prior to the execution of the employment agreement), individuals who at the beginning of such period constitute the board of directors and any new director (other than a director designated by a person who has entered into an agreement with us to effect a certain transactions) whose election by the board of directors or nomination for election by our shareholder’s was approved by a vote of at least two-thirds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority;
we enter into an agreement, the consummation of which would result in the occurrence of a change in control of our company;
our shareholders approve a merger or consolidation of our company with any other corporation, other than a merger or consolidation which would result in our voting securities outstanding immediately prior to it continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) of more than 50% of the combined voting power of the voting securities our company or such surviving entity outstanding immediately after such merger or consolidation; or
our shareholders approve a plan of complete liquidation of our company or an agreement for the sale or disposition by us of all or substantially all of our assets.
the agreement contains customary non-compete, confidentiality and indemnification provisions; provided, however, that in the event we terminate the agreement without cause or if it terminates upon a change of control, the executive is no longer subject to the non-compete provisions of the agreement.
 
 
44
 
 
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
 
    
    
    
    
 
ITEM 12. 
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
 
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:
 
 
each person who is known by us to be the beneficial owner of more than 5% of our outstanding common stock;
 
 
each director and nominee;
 
 
each named executive officer; and
 
 
all named executive officers and directors as a group.
 
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.
 
 
45
 
 
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%
*       
Less than 1%
 
(1)          
The number of shares of our common stock owned by Mr. Sumichrast includes:
 
•          
475,834 shares owned of record by Stone Street Partners, LLC; and
 
•          
270,600 shares owned of record by Washington Capital, LLC.
 
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.
 
(2)          
The number of shares of our common stock beneficially owned by Mr. Elliott includes:
 
•          
1,680 shares held of record by his spouse's retirement account; and
 
•          
350,000 shares underlying vested stock options.
 
(3)          
The number of shares of our common stock beneficially owned by Mr. Sterling includes:
 
•          
166,667 shares owned of record by the Sterling Winters Living Trust u/t/d/ December 10, 1993 (the "Trust");
 
•          
583,000 shares owned of record by IM1 Holdings, LLC, a California limited liability company ("IM1 Holdings"); and
 
•          
283,000 shares owned of record by EE1 Holdings, LLC, a California limited liability company ("EE1 Holdings").
 
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.
 
(4)          
The number of shares of our common stock beneficially owned by Mr. Shriver includes 50,000 shares held of record by Best Buddies® International. Mr. Shriver has voting and dispositive control over securities held of record by Best Buddies® International. He disclaims beneficial ownership of such securities except to the extent of his pecuniary interest therein.
 
(5)          
In connection with our secondary offering which closed in October 2018, our officers and directors and their affiliated entities entered into lock-up agreements with Joseph Gunnar & Co., LLC, the sole book running manager for the offering pursuant to which they each agreed not to enter into certain transactions involving shares of our common stock beneficially owned by them, including but not limited to, the offer, sale, pledge, transfer or other disposition of such shares, until December 27, 2018, subject to certain exclusions.
 
 
 
46
 
 
(6)          
Mr. Winters is co-Trustee of the Trust. The number of shares of our common stock beneficially owned by Mr. Winters includes:
 
•          
166,667 shares owned of record by the Trust;
 
•          
583,000 shares owned of record by IM1 Holdings; and
 
•          
283,000 shares owned of record by EE1 Holdings.
 
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.
 
(7)          
Mr. Runnels, is co-Trustee of The Runnels Family Trust. Mr. Runnels disclaims beneficial ownership of the securities held of record by The Runnels Family Trust except to the extent of his pecuniary interest therein. Mr. Runnels' address is 2049 Century Park East, Suite 320, Los Angeles, CA 90067.
 
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.
 
ITEM 13. 
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
 
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.
 
 
47
 
 
ITEM 14. 
PRINCIPAL ACCOUNTING FEES AND SERVICES.
 
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.
 
 
 
48
 
 
PART IV
 
ITEM 15. 
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
 
(a)            
(1)            
Financial statements.
 
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.
 
(3)           
Exhibits.
 
The exhibits that are required to be filed or incorporated by reference herein are listed in the Exhibit Index.
 
 
49
 
 
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
 
 
 
 
 
  
 
50
 
 
EXHIBIT INDEX
 
 
 
 
Incorporated by Reference
 
Filed or
Furnished
Herewith
No.
 
Exhibit Description
 
Form
 
Date Filed
 
Number
 
 
Underwriting Agreement
 
S-1
 
9/26/18
 
1.1
 
 
 
Merger Agreement dated December 3, 2018 by and among Level Brands, Inc., AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
 
8-K
 
12/4/18
 
2.1
 
 
 
Articles of Incorporation
 
1-A
 
9/18/17
 
2.1
 
 
 
Articles of Amendment to the Articles of Incorporation filed April 22, 2015
 
1-A
 
9/18/17
 
2.2
 
 
 
Articles of Amendment to the Articles of Incorporation filed June 22, 2015
 
1-A
 
9/18/17
 
2.3
 
 
 
Articles of Amendment to the Articles of Incorporation filed November 17, 2016
 
1-A
 
9/18/17
 
2.4
 
 
 
Articles of Amendment to the Articles of Incorporation filed December 5, 2016
 
1-A
 
9/18/17
 
2.5
 
 
 
Bylaws, as amended
 
1-A
 
9/18/17
 
2.6
 
 
 
Form of placement agent warrant issued in June 2015 private placement
 
1-A
 
9/18/17
 
3.3
 
 
 
Form of placement agent warrant issued in December 2015 private placement
 
1-A
 
9/18/17
 
3.4
 
 
 
Form of warrant issued in 8% convertible promissory note offering
 
1-A
 
9/18/17
 
3.5
 
 
 
Form of selling agents’ warrant issued in November 2017 initial public offering
 
1-A/A
 
10/12/17
 
3.6
 
 
 
Form of common stock certificate of the registrant
 
1-A
 
9/18/17
 
3.7
 
 
 
2015 Equity Compensation Plan
 
1-A
 
9/18/17
 
3.8
 
 
 
Form of stock option award under 2015 Equity Compensation Plan+
 
1-A
 
9/18/17
 
3.9
 
 
 
Form of warrant issued to Andre Carthen
 
1-A
 
9/18/17
 
3.10
 
 
 
Form of warrant issued to Nicholas Walker
 
1-A
 
9/18/17
 
3.11
 
 
 
Form of representative’s warrant
 
S-1
 
9/26/18
 
4.10
 
 
 
Contribution Agreement by and between Beauty & Pin-Ups, Inc. and Beauty and Pin Ups LLC dated April 13, 2015
 
1-A
 
9/18/17
 
7.1
 
 
 
Operating Agreement of Beauty and Pin Ups LLC, as amended
 
1-A
 
9/18/17
 
6.1
 
 
 
Consulting Agreement dated April 13, 2015 by and between Beauty and Pin Ups LLC and Priel Maman
 
1-A
 
9/18/17
 
6.2
 
 
 
Management Services Agreement dated April 27, 2015 by and between kathy ireland® Worldwide and Level Beauty Group, Inc.
 
1-A
 
9/18/17
 
6.3
 
 
 
Advisory Services Agreement dated April 27, 2015 by and between Stone Street Partners, LLC and Level Beauty Group, Inc.
 
1-A
 
9/18/17
 
6.4
 
 
 
Termination Agreement dated October 31, 2016 by and between kathy ireland® Worldwide and Level Beauty Group, Inc.
 
1-A
 
9/18/17
 
6.5
 
 
 
Termination Agreement dated September 30, 2016 by and between Siskey Capital, LLC and Level Beauty Group, Inc.
 
1-A
 
9/18/17
 
6.6
 
 
 
Revolving Line of Credit Loan Agreement dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC, LLC
 
1-A
 
9/18/17
 
6.7
 
 
 
Promissory Note dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC LLC
 
1-A
 
9/18/17
 
6.8
 
 
 
Security Agreement dated August 7, 2015 from Level Beauty Group, Inc. to LBGLOC LLC
 
1-A
 
9/18/17
 
6.9
 
 
 
Executive Employment Agreement dated January 1, 2017 by and between Level Brands, Inc. and Martin A. Sumichrast +
 
1-A
 
9/18/17
 
6.10
 
 
 
Executive Employment Agreement dated January 2, 2017 by and between Level Brands, Inc. and Mark S. Elliott +
 
1-A
 
9/18/17
 
6.11
 
 
 
Master Advisory and Consulting Agreement dated February 8, 2017 by and between Level Brands, Inc. and kathy Ireland® Worldwide
 
1-A
 
9/18/17
 
6.12
 
 
 
Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Stephen Roseberry +
 
1-A
 
9/18/17
 
6.13
 
 
 
Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Tommy Meharey+
 
1-A
 
9/18/17
 
6.14
 
 
 
Advisory Agreement dated February 8, 2017 by and between Level Brands, Inc. and Nicolas Mendoza +
 
1-A
 
9/18/17
 
6.15
 
 
 
Sublease dated January 1, 2017 by and between Kure Franchise, LLC and Level Brands, Inc.
 
1-A
 
9/18/17
 
6.16
 
 
 
Form of Filler Supply Agreement for Beauty and Pin Ups LLC
 
1-A
 
9/18/17
 
6.17
 
 
 
Wholesale License Agreement dated January 12, 2017 by and between kathy ireland ®Worldwide and I'M1, LLC
 
1-A
 
9/18/17
 
6.18
 
 
 
 
51
 
 
 
Amended and Restated Limited Liability Company Agreement of I'M1, LLC effective January 1, 2017
 
1-A
 
9/18/17
 
6.19
 
 
 
Amended and Restated Limited Liability Company Agreement of Encore Endeavor 1 LLC effective January 1, 2017
 
1-A
 
9/18/17
 
6.20
 
 
 
Amended and Restated Membership Interest Exchange Agreement dated March 24, 2017, effective January 6, 2017, by and among IM1 Holdings, LLC, I'M1, LLC and Level Brands, Inc.
 
1-A
 
9/18/17
 
7.2
 
 
 
Amended and Restated Membership Interest Exchange Agreement dated March 24, 2017, effective January 6, 2017, by and among EE1 Holdings, LLC, Encore Endeavor I LLC and Level Brands, Inc.
 
1-A
 
9/18/17
 
7.3
 
 
 
Form of Indemnification Agreement
 
1-A
 
9/18/17
 
6.21
 
 
 
Charitable Agreement between Beauty & Pin Ups and Best Buddies International, as amended
 
1-A
 
9/18/17
 
6.22
 
 
 
Amendment No. 1 to Transaction Fee Agreement dated March 27, 2017 by and between Level Brands, Inc. and T.R. Winston & Company LLC
 
1-A
 
9/18/17
 
6.23
 
 
 
Form of I'M1 License Agreement
 
1-A
 
9/18/17
 
6.24
 
 
 
Consulting Agreement dated March 20, 2017 by and between I'M1, LLC and Kure Corp.
 
1-A
 
9/18/17
 
6.25
 
 
 
Amended and Restated Consulting Agreement dated March 20, 2017 by and between I'M1, LLC and NuGene International, Inc.
 
1-A
 
9/18/17
 
6.26
 
 
 
Amendment to Executive Employment Agreement dated April 1, 2017 by and between Level Brands, Inc. and Martin A. Sumichrast +
 
1-A
 
9/18/17
 
6.27
 
 
 
Amendment to Swap Agreement dated March 28, 2017 by and among Beauty and Pin Ups, LLC, Level Brands, Inc. and Dean Gangbar
 
1-A
 
9/18/17
 
7.4
 
 
 
License Agreement dated March 29, 2017 by and among I'M1, LLC, Kure Corp. and Kure Franchise, LLC
 
1-A
 
9/18/17
 
6.28
 
 
 
License Agreement dated March 31, 2017 by and between I'M1, LLC and NuGene International, Inc.
 
1-A
 
9/18/17
 
6.29
 
 
 
Television Series Consulting Agreement dated March 1, 2017 by and between Multi-Media Productions Inc. and Encore Endeavor 1, LLC
 
1-A
 
9/18/17
 
6.30
 
 
 
Advisory Agreement dated May 9, 2017 by and between Formula Four Beverages Inc., I'M1, LLC and Encore Endeavor 1, LLC
 
1-A
 
9/18/17
 
6.31
 
 
 
Termination of License Agreement Ab Initio dated June 8, 2017 by and between I'M1, LLC and NuGene International, Inc.
 
1-A
 
9/18/17
 
6.32
 
 
 
Membership Interest Sale and Purchase Agreement by and among Priel Maman, Level Brands, Inc. and Beauty and Pin-Ups, LLC dated April 26, 2017
 
1-A
 
9/18/17
 
6.33
 
 
 
Debt Conversion Agreement dated May 15, 2017 by and between Level Brands, Inc. and LBGLOC, LLC, as amended
 
1-A
 
9/18/17
 
6.34
 
 
 
License Agreement dated March 29, 2017 by and between I'M1, LLC and Andre Phillipe, Inc.
 
1-A
 
9/18/17
 
6.35
 
 
 
Recording Master License Agreement dated May 23, 2017 by and between McCoo & Davis, Inc. and Encore Endeavor 1 LLC
 
1-A
 
9/18/17
 
6.36
 
 
 
Form of note conversion agreement
 
1-A
 
9/18/17
 
6.37
 
 
 
Management Consulting Agreement dated July 1, 2017 by and between Level Brands, Inc. and Market Development Consulting Group, Inc.
 
1-A
 
9/18/17
 
6.38
 
 
 
Amendment No. 1 to Amended and Restated Consulting Agreement dated July 27, 2017 by and between I'M1, LLC and NuGene International, Inc. and Irrevocable Proxy
 
1-A
 
9/18/17
 
6.39
 
 
 
Stock Purchase and Escrow Agreement dated July 31, 2017 and among I'M1, LLC, Stone Street Partners, LLC and Pearlman Law Group LLP
 
1-A
 
9/18/17
 
6.40
 
 
 
Promissory Note dated July 31, 2017 in the principal amount of $275,000 from Stone Street Partners, LLC
 
1-A
 
9/18/17
 
6.41
 
 
 
License Agreement dated June 27, 2017 by and between I'M1, LLC and Loose Leaf Eyewear and Accessories LLC.
 
1-A
 
9/18/17
 
6.42
 
 
 
Advisory Agreement dated August 9, 2017 by and among Damiva Inc., I'M1, LLC and Encore Endeavor 1, LLC
 
1-A
 
9/18/17
 
6.43
 
 
 
Representation Agreement dated August 1, 2017 by and among Encore Endeavor 1 LLC, Romero Britto and Britto Central, Inc.
 
1-A
 
9/18/17
 
6.44
 
 
 
Amended and Restated Representation Agreement dated September 12, 2017 by and among Encore Endeavor 1 LLC, Dada Media, Inc. and David Tutera
 
1-A
 
9/18/17
 
6.45
 
 
 
Amendment dated September 8, 2017 to Master Advisory and Consulting Agreement by and between Level Brands, Inc. and kathy Ireland® Worldwide
 
1-A
 
9/18/17
 
6.47
 
 
 
Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and kathy ireland® Worldwide+
 
1-A
 
9/18/17
 
6.48
 
 
 
Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and Andre Carthen
 
1-A
 
9/18/17
 
6.49
 
 
 
Wholesale License Agreement dated September 8, 2017 by and between Level Brands, Inc. and Nicholas Walker
 
1-A
 
9/18/17
 
6.50
 
 
 
Distribution Agreement dated August 29, 2017 by and between Beauty and Pinups, LLC and East Coast Enterprises, Inc.
 
1-A
 
9/18/17
 
6.51
 
 
 
Advisory Agreement dated September 1, 2017 by and between Level Brands, Inc. and Jon Carrasco +
 
1-A
 
9/18/17
 
6.52
 
 
 
Production Services Agreement dated September 19, 2017 by and between Multimedia Productions, Inc. and Encore Endeavor 1, LLC
 
1-A/A
 
10/12/17
 
6.53
 
 
 
License Agreement dated September 8, 2017 by and between Level Brands, Inc. and kathy ireland® Worldwide
 
1-A
 
9/18/17
 
6.54
 
 
 
Advisory Agreement dated September 22, 2017 by and between SG Blocks, Inc. and Encore Endeavor 1, LLC
 
1-A/A
 
10/12/17
 
6.55
 
 
 
Written description of material terms of oral agreement between Encore Endeavor 1 LLC and Sandbox LLC
 
1-A/A
 
10/12/17
 
6.56
 
 
 
 
52
 
 
 
Agreement dated August 1, 2017 by and between Level Brands, Inc. and Kure Corp.
 
10-K
 
12/26/17
 
10.62
 
 
 
Form of Revolving Line of Credit Loan Agreement dated December 12, 2017 by and between Level Brands, Inc. and Kure Corp.
 
8-K
 
12/12/17
 
10.64
 
 
 
Form of Security Agreement dated December 12, 2017 by and between Level Brands, Inc. and Kure Corp.
 
8-K
 
12/12/17
 
10.65
 
 
 
Form of Promissory Note in the principal amount of $500,000 dated December 12, 2017 due from Kure Corp.
 
8-K
 
12/12/17
 
10.66
 
 
 
Sublease dated December 21, 2017 by and between Kure Franchise, LLC and Level Brands, Inc.
 
10-K
 
12/26/17
 
10.66
 
 
 
License Agreement dated December 30, 2017 by and between Level Brands, Inc. and Isodiol International, Inc.
 
8-K
 
1/5/18
 
10.67
 
 
 
Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Nic Mendoza
 
10-Q
 
5/15/18
 
10.69
 
 
 
Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Tommy Meharey
 
10-Q
 
5/15/18
 
10.70
 
 
 
Advisory Agreement dated March 8, 2018 by and between Level Brands, Inc. and Stephen Roseberry
 
10-Q
 
5/15/18
 
10.71
 
 
 
Sublease effective April 11, 2018 by and between 4th Floor Properties LLC and Level Brands, Inc.
 
10-Q
 
5/15/18
 
10.72
 
 
 
Amendment to promissory note with Stone Street Partners LLC
 
10-Q
 
8/14/18
 
10.74
 
 
 
License Agreement dated June 26, 2018 by and between Level Brands, Inc. and Boston Therapeutics, Inc.
 
8-K
 
6/27/18
 
10.73
 
 
 
First Amendment to License Agreement dated January 19, 2018 by and between Level Brands, Inc. and Isodiol International, Inc.
 
8-K
 
1/22/18
 
10.69
 
 
 
Executive Employment Agreement dated September 6, 2018 by and between Level Brands, Inc. and Martin A. Sumichrast
 
8-K
 
9/7/18
 
10.75
 
 
 
Executive Employment Agreement dated September 6, 2018 by and between Level Brands, Inc. and Mark S. Elliott
 
8-K
 
9/7/18
 
10.76
 
 
 
Secured Promissory Note dated December 4, 2018 in the principal amount of $2,000,000 from Cure Based Development LLC
 
8-K
 
12/4/18
 
10.1
 
 
 
Security Agreement dated December 4, 2018 by and between Level Brands, Inc. and Cure Based Development, LLC
 
8-K
 
12/4/18
 
10.2
 
 
 
Code of Business Conduct and Ethics
 
1-A
 
9/18/17
 
15.1
 
 
 
Subsidiaries of the registrant
 
10-K
 
12/26/17
 
21.1
 
 
 
Consent of Cherry Bekaert LLP
 
 
 
 
 
 
 
Filed
24.1
 
Power of attorney (included on signature page of this report)
 
 
 
 
 
 
 
Filed
31.1
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
 
 
 
 
 
 
 
Filed
31.2
 
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
 
 
 
 
 
 
 
Filed
32.1
 
Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
 
 
 
 
 
 
 
Filed
101 INS
 
XBRL Instance Document
 
 
 
 
 
 
 
Filed
101 SCH
 
XBRL Taxonomy Extension Schema
 
 
 
 
 
 
 
Filed
101 CAL
 
XBRL Taxonomy Extension Calculation Linkbase
 
 
 
 
 
 
 
Filed
101 LAB
 
XBRL Taxonomy Extension Label Linkbase
 
 
 
 
 
 
 
Filed
101 PRE
 
XBRL Taxonomy Extension Presentation Linkbase
 
 
 
 
 
 
 
Filed
101 DEF
 
XBRL Taxonomy Extension Definition Linkbase
 
 
+ Indicated management contract or compensatory plan.
 
 
53
 
 
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
 
To the Shareholders of
Level Brands, Inc. and subsidiaries
Charlotte, North Carolina
 
Opinion on the Financial Statements
 
We have audited the accompanying consolidated balance sheets of Level Brands, Inc. and subsidiaries (the “Company”) as of September 30, 2018 and 2017, and the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for the years then ended, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2018 and 2017, and the results of its operations and its cash flows for years then ended, in conformity with accounting principles generally accepted in the United States of America.
 
Basis for Opinion
 
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
 
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
 
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
 
/s/ Cherry Bekaert LLP
 
 
 
We have served as the Company’s auditor since 2016.
 
Charlotte, North Carolina
December 12, 2018
 
 
 
F-1
 
 
LEVEL BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2018 AND 2017
 
 
 
2018
 
 
2017
 
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
  Cash and cash equivalents
 $4,282,553 
 $284,246 
  Accounts receivable
  307,874 
  141,462 
  Accounts receivable - related party
  1,537,863 
  712,325 
  Accounts receivable other
  1,743,874 
  12,440 
  Accounts receivable other - related party
  - 
  236,364 
  Marketable securities
  1,050,961 
  - 
  Investment other securities
  1,159,112 
  859,112 
  Note receivable
  459,000 
  - 
  Note receivable - related party
  156,147 
  276,375 
  Inventory
  123,223 
  588,197 
  Deferred issuance costs
  28,049 
  497,735 
  Prepaid consulting agreement
  200,000 
  - 
  Prepaid rent
  180,000 
  - 
  Prepaid expenses and other current assets
  561,491 
  85,420 
Total current assets
  11,790,147 
  3,693,676 
 
    
    
Other assets:
    
    
  Property and equipment, net
  53,480 
  135,476 
  Intangible assets, net
  3,173,985 
  3,240,287 
Total other assets
  3,227,465 
  3,375,763 
 
    
    
Total assets
 $15,017,612 
 $7,069,439 
 
See Notes to Consolidated Financial Statements
F-2
 
 
LEVEL BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 2018 AND 2017
(continued)
 
Liabilities and shareholders' equity
 
 
 
 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
  Accounts payable
 $473,717 
 $397,601 
  Accounts payable - related party
  7,860 
  67,879 
  Deferred revenue
  161,458 
  41,417 
  Accrued expenses
  6,920 
  123,823 
  Accrued expenses - related party
  320,000 
  892,805 
Total current liabilities
  969,955 
  1,523,525 
 
    
    
Long term liabilities
    
    
  Long term liabilities
  7,502 
  - 
  Long term liabilities, to related party
  - 
  360,000 
  Deferred tax liability
  21,000 
  37,000 
Total long term liabilities
  28,502 
  397,000 
 
    
    
Total liabilities
  998,457 
  1,920,525 
 
    
    
Level Brands, Inc. shareholders' equity:
    
    
Preferred stock, authorized 50,000,000 shares, $0.001 par value, no shares issued and outstanding
  - 
  - 
Common stock, authorized 150,000,000 shares, $0.001 par value,
    
    
  8,123,928 and 5,792,261 shares issued and outstanding, respectively
  8,124 
  5,792 
Additional paid in capital
  21,781,095 
  10,463,480 
Accumulated other comprehensive income (loss)
  (2,512,539)
  - 
Accumulated deficit
  (6,669,497)
  (6,257,421)
Total Level Brands, Inc. shareholders' equity
  12,607,183 
  4,211,851 
Non-controlling interest
  1,411,972 
  937,063 
Total shareholders' equity
  14,019,155 
  5,148,914 
 
    
    
Total liabilities and shareholders' equity
 $15,017,612 
 $7,069,439 
 
    
    
 
See Notes to Consolidated Financial Statements
F-3
 
 
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Sales
 $6,453,173 
 $3,650,480 
Sales related party
  1,992,046 
  1,731,238 
Total Gross Sales
  8,445,219 
  5,381,718 
Allowances
  (25,077)
  (906,765)
      Net sales
  6,428,096 
  2,743,715 
      Net sales related party
  1,992,046 
  1,731,238 
Total Net Sales
  8,420,142 
  4,474,953 
Costs of sales
  2,673,272 
  1,355,381 
      Gross profit
  5,746,870 
  3,119,572 
Operating expenses
  5,629,771 
  3,358,863 
      Income (loss) from operations
  117,099 
  (239,291)
Debt conversion expense
  - 
  (446,250)
Other than temporary impairment on marketable securities
  - 
  (175,000)
Loss on disposal of property
  (69,310)
  - 
Interest expense
  (955)
  (500,627)
      Income (loss) before provision for income taxes
  46,834 
  (1,361,168)
Provision for income taxes
  16,000 
  25,000 
      Net Income (loss)
  62,834 
  (1,386,168)
Net Income (loss) attributable to non-controlling interest
  474,909 
  352,566 
 
    
    
Net loss attributable to Level Brands, Inc. common shareholders
 $(412,075)
 $(1,738,734)
 
    
    
Loss per share, basic and diluted
 $(0.05)
 $(0.38)
Weighted average number of shares outstanding
  7,742,644 
  4,524,985 
 
    
    
 
 
See Notes to Consolidated Financial Statements
F-4
 
 
LEVEL BRANDS, INC.
  CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
 
 
 
 
2018
 
 
 
2017
 
 
 
 
 
 
 
 
Net Income (Loss)
 $62,834 
 $(1,386,168)
Other Comprehensive Income:
    
    
   Net Unrealized Gain (Loss) on Marketable Securities, net of tax of $0
  (2,512,539)
  - 
  Comprehensive Income (Loss)
  (2,449,705)
  (1,386,168)
 
    
    
Comprehensive Income (loss) attributable to non-controlling interest
  474,909 
  352,566 
Comprehensive Income (Loss) attributable to Level Brands, Inc. common shareholders
 $(2,924,614)
 $(1,738,734)
 
    
    
 
 
 
See Notes to Consolidated Financial Statements
F-5
 
 
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
 
 
 
2018
 
 
2017
 
Cash flows from operating activities:
 
 
 
 
 
 
Net income (loss)
 $62,834 
 $(1,386,168)
Adjustments to reconcile net loss to net
    
    
  cash used by operating activities:
    
    
  Stock based compensation
  639,631 
  56,533 
  Restricted stock expense
  39,100 
  156,400 
  Amortization of debt issue costs
  - 
  305,800 
  Depreciation and amortization
  222,546 
  71,276 
  Issuance of stock / warrants for services
  496,502 
  627,825 
  Other-than-temporary impairment on marketable securities
  - 
  175,000 
  Debt conversion expense
  - 
  446,250 
  Inventory / marketing material impairment
  262,343 
  67,226 
  Intangible impairment
  240,000 
  - 
  Accounts receivable impairment
  - 
  50,000 
  Loss on sale of property and equipment
  69,311 
  4,000 
  Common stock issued as charitable contribution
  - 
  17,000 
  Non-cash consideration received for services provided
  (3,404,502)
  (1,932,552)
Changes in operating assets and liabilities:
    
    
  Accounts receivable
  (499,373)
  (27,488)
  Accounts receivable - related party
  (492,577)
  (712,325)
  Other accounts receivable
  (1,890,434)
  (12,440)
  Other accounts receivable – related party
  236,364 
  (36,364)
  Note receivable
  (459,000)
  - 
  Note receivable - related party
  120,228 
  (1,375)
  Inventory
  255,894 
  (41,216)
  Prepaid consulting agreement
  (200,000)
  - 
  Prepaid rent
  (180,000)
  - 
  Prepaid expenses and other current assets
  (529,335)
  58,458 
  Accounts payable and accrued expenses
  285,156 
  (745,252)
  Accounts payable and accrued expenses – related party
  (951,824)
  278,265 
  Interest Payable
  - 
  184,889 
  Deferred Revenue
  120,041 
  41,417 
  Deferred tax liability
  (16,000)
  25,000 
Cash used by operating activities
  (5,573,095)
  (2,329,841)
 
    
    
Cash flows from investing activities:
    
    
   Proceeds from sale of investments to a related party
  - 
  200,000 
   Purchase of other investment securities
  (300,000)
  - 
   Purchase of intangible assets
  (360,000)
  - 
   Purchase of property and equipment
  (23,559)
  (7,967)
Cash provided by (used by) investing activities
  (683,559)
  192,033 
 
    
    
Cash flows from financing activities:
    
    
   Proceeds from issuance of common stock
  10,927,535 
  829,497 
   Exercise of stock options
  - 
  3,002 
   Deferred issuance costs
  (672,574)
  (39,723)
 
    
    
   Debt issuance cost
  - 
  (200,800)
   Proceeds from convertible note
  - 
  2,125,000 
   Distribution related party
  - 
  (29,180)
   Repayments of line of credit
  - 
  (300,000)
 
Cash provided by financing activities
  10,254,961 
  2,387,796 
Net (decrease) increase in cash
  3,998,307 
  249,988 
Cash and cash equivalents, beginning of year
  284,246 
  34,258 
Cash and cash equivalents, end of year
 $4,282,553 
 $284,246 
 
See Notes to Consolidated Financial Statements
F-6
 
 
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
(continued)
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
Cash Payments for:
 
 
 
 
 
 
    Interest expense
 $955 
 $5,210 
 
    
    
 
    
    
Non-cash financial activities:
    
    
Equity investment exchange to be issued in the future, included in Accounts receivable other
  160,000 
  - 
Non-cash financial activities:
    
    
Common stock issued to purchase membership interest – I’M1
  - 
  971,667 
Common stock issued to purchase membership interest – EE1
  - 
  471,668 
Non-controlling interest transfer
  - 
  950,242 
Strike price adjustment on placement agent warrants
  - 
  31,350 
Common stock issued for warrant exercise
  - 
  38 
Common Stock issued for conversion of Line of Credit
  - 
  773,177 
Common Stock issued for conversion of Promissory Notes
  - 
  2,252,500 
Deferred IPO costs acquired via issuance of payables
  - 
  362,817 
Deferred issuance costs acquired via issuance of stock/warrants
  - 
  95,195 
Distributions of stock to non-controlling interests
  - 
  223,440 
Stock and warrants issued for intangible assets
  - 
  379,714 
Fixed assets acquired through lease
  - 
  14,983 
Non-cash proceeds on sale of fixed assets
  - 
  7,000 
Intellectual property issued via issuance of payables
  - 
  945,000 
Warrants issued to IPO selling agent
  171,600 
  - 
 
    
    
 
See Notes to Consolidated Financial Statements
F-7
 
LEVEL BRANDS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' (DEFICIT) EQUITY
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
 
 
 
Common Stock
 
 
Additional Paid in
 
 
Other Comprehensive
 
 
Accumulated
 
 
Non-controlling
 
 
 
 
 
 
Shares
 
 
Amount
 
 
Capital
 
 
Income(loss)
 
 
Deficit
 
 
Interest
 
 
Total
 
Balance, September 30, 2016
  3,400,834 
 $3,401 
 $4,847,362 
  - 
 $(4,487,336)
 $(656,152)
 $(292,725)
Issuance of common stock
  494,717 
  494 
  993,054 
  - 
  - 
  (164,051)
  829,497 
Issuance of options for share based compensation
  - 
  - 
  56,533 
  - 
  - 
  - 
  56,533 
Issuance of stock and warrants for services
  110,260 
  110 
  627,715 
  - 
  - 
  - 
  627,825 
Issuance of stock for deferred IPO costs
  24,100 
  24 
  95,171 
  - 
  - 
  - 
  95,195 
Issuance of restricted stock for share based compensation
  - 
    
  156,400 
  - 
  - 
  - 
  156,400 
Issuance of stocks and warrants for intellectual property acquisition
  70,500 
  71 
  379,643 
  - 
  - 
  - 
  379,714 
Issuance of stock charitable contribution
  20,000 
  20 
  16,980 
  - 
  - 
  - 
  17,000 
Exercise of stock options and warrants
  39,856 
  40 
  2,962 
  - 
    
    
  3,002 
Investment in membership interests acquired
  866,000 
  866 
  735,235 
  - 
  - 
  707,234 
  1,443,335 
Change in exercise price
  - 
  - 
  31,350 
  - 
  (31,350)
  - 
  - 
Conversion of debt to equity
  765,994 
  766 
  3,471,161 
  - 
    
    
  3,471,927 
Acquisition of non-controlling interests
  - 
  - 
  (950,086)
  - 
  - 
  950,086 
  - 
Distributions
    
    
  - 
  - 
    
  (252,620)
  (252,620)
Net loss
  - 
  - 
  - 
  - 
  (1,738,734)
  352,566 
  (1,386,169)
Balance, September 30, 2017
  5,792,261 
  5,792 
  10,463,480 
  - 
  (6,257,421)
  937,063 
  5,148,914 
Issuance of common stock
  2,000,000 
  2,000 
  9,971,114 
  - 
  - 
  - 
  9,973,114 
Issuance of options for share based compensation
  - 
  - 
  639,631 
  - 
  - 
  - 
  639,631 
Issuance of stock for deferred IPO costs
  - 
  - 
  171,600 
  - 
  - 
  - 
  171,600 
Issuance of stock and warrants for services
  331,667 
  332 
  496,170 
  - 
  - 
  - 
  496,502 
Issuance of restricted stock for share based compensation
  - 
    
  39,100 
  - 
  - 
  - 
  39,100 
Other Comprehensive income (loss)
  - 
  - 
  - 
  (2,512,539)
  - 
  - 
  (2,512,539)
Net loss
  - 
  - 
  - 
  - 
  (412,076)
  474,909 
  62,834 
Balance, September 30, 2018
  8,123,928 
  8,124 
  21,781,095 
  (2,512,539)
  (6,669,497)
  1,411,972 
  14,019,155 
 
See Notes to Consolidated Financial Statements
F-8
 
 
LEVEL BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2018 AND 2017
 
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Organization and Nature of Business – Level Brands, Inc. ("Level Brands", "we", "us", “our”, "Parent Company” or the “Company”) is a North Carolina corporation formed on March 17, 2015 as Level Beauty Group, Inc. In November 2016 we changed the name of the Company to Level Brands Inc. We strive to be an innovative branding and marketing company and, through our subsidiaries, we focus our efforts on lifestyle-based brands. We operate from our offices located in Charlotte, North Carolina. Our fiscal year end is established as September 30, therefore our 2018 fiscal reporting period is from October 1, 2017 to September 30, 2018 and our 2017 fiscal reporting period is from October 1, 2016, to September 30, 2017 (the “periods”).
 
In March 2015, the Company formed Beauty and Pin-Ups, LLC ("BPU"), a North Carolina limited liability company, and contributed $250,000 in exchange for our member interest. As of September 30, 2016 we owned a 78% member interest in BPU. In addition, pursuant to the Amended and Restated Operating Agreement of Beauty & Pin-Ups, we were granted the right to redeem the 10% membership interest of Sigan Industries Group (“Sigan”) for $110,000 at any time before April 13, 2017. In October 2016, as amended in March 2017, we acquired Sigan’s membership interest in exchange for 129,412 shares of our common stock valued at $110,000. As of March 31, 2017 we owned an 88% member interest in BPU. In April 2017 we acquired the remaining 12% membership interest in exchange for 155,294 shares of our common stock valued at $132,000. As of September 30, 2018 we owned a 100% member interest in BPU. BPU manufactures, markets and sells an array of beauty and personal care products, including hair care and hair treatments, as well as beauty tools. BPU’s products are sold to the professional segment, principally through distributors to professional salons in the North America.
 
I’M1, LLC. (“I’M1”) was formed in California in September 2016. IM1 Holdings, LLC, a California limited liability company, (“IM1 Holdings”) was the initial member of I’M1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. I’M1 – Ireland Men One is a brand inspired by Kathy Ireland that plans to provide millennial-inspired lifestyle products under the I’M1 brand. I’M1 has entered into an exclusive wholesale license agreement with kathy ireland® Worldwide in connection with the use of the intellectual property related to this brand.
 
Encore Endeavor 1, LLC (“EE1”) was formed in California in March 2016. EE1 Holdings, LLC, a California limited liability company, (“EE1 Holdings") was the initial member of EE1. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. EE1 is a company and brand, which is designed to serve as a brand management company and producer and marketer of multiple entertainment distribution platforms under the EE1 brand.
 
Level H&W, LLC (“Level H&W”) was formed in North Carolina in October 2017 and began operations in fiscal 2018. The Company signed an agreement with kathy ireland® Worldwide to retain exclusive rights to the intellectual property and other rights in connection with kathy ireland® Health & Wellness and its associated trademarks and tradenames. The Company establishes licensing arrangements under the kathy ireland® Health & Wellness brand. The agreement was initially a seven year agreement with a three year option to extend by the Company. The Company agreed to pay $840,000 over the license term of seven years, of which $480,000 was paid in January 2018, and $120,000 paid on January 1 of subsequent years until paid in full. The agreement can be extended for an additional three years by paying an upfront additional $360,000 upon agreement extension. The Company will pay kathy ireland® Worldwide 33 1/3% of net proceeds we receive under any sublicense agreements we may enter into for this intellectual property as royalties, with credit being applied for any payments made toward the $840,000.
 
In January 2018, the Company, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. The Company capitalized the cost into intangibles and is amortizing them over the term of the licensing agreement.
 
 
F-9
 
 
On November 17, 2017, the Company completed an initial public offering (the “IPO”) of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million. The Company received approximately $10.9 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
 
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its majority owned subsidiaries I’M1 and EE1 and wholly owned subsidiaries BPU and Level H&W. All material intercompany transactions and balances have been eliminated in consolidation. The third party ownership of the Company’s subsidiaries is accounted for as non-controlling interest in the consolidated financial statements. Changes in the non-controlling interest are reported in the statement of shareholders’ equity (deficit).
 
Reclassifications
 
Certain amounts previously presented in the consolidated financial statements have been reclassified to conform to the current year presentation.  Such reclassifications had no effect on previously reported net loss, shareholders’ equity or cash flows.
 
Use of Estimates
 
The preparation of the Company's consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“US GAAP”), and requires management to make estimates and assumptions that affect amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements and reported amounts of revenues and expenses during the periods presented. Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the consolidated financial statements in the period they are determined to be necessary. Significant estimates made in the accompanying consolidated financial statements include, but are not limited to, allowances for doubtful accounts, inventory valuation reserves, expected sales returns and allowances, certain assumptions related to the valuation of investments other securities, common stock prior to IPO, acquired intangible and long-lived assets and the recoverability of intangible and long-lived assets and income taxes, including deferred tax valuation allowances and reserves for estimated tax liabilities. Actual results could differ from these estimates.
 
Cash and Cash Equivalents
 
For financial statements purposes, the Company considers all highly liquid investments with a maturity of less than three months when purchased to be cash equivalents.
 
Accounts receivable and Accounts receivable other
 
Accounts receivable are stated at cost less an allowance for doubtful accounts, if applicable. Credit is extended to customers after an evaluation of customer’s financial condition, and generally collateral is not required as a condition of credit extension. Management’s determination of the allowance for doubtful accounts is based on an evaluation of the receivables, past experience, current economic conditions, and other risks inherent in the receivables portfolio. As of September 30, 2017, management determined an accounts receivable allowance of $50,000 was appropriate due to possible uncollectability. We did not have an allowance at September 30, 2018.
 
In addition, the Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. Where an accounts receivable is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a publicly traded entity) or as an investment other security (when the customer is a privately held entity). 
 
Accounts receivable and accounts receivable other items that involve a related party are indicated as such on the face of the consolidated financial statements.
 

F-10
 
 
Marketable Securities
 
At the time of acquisition, the marketable security is designated as available-for-sale as the intent is to hold for a period of time before selling. Available-for-sale securities are carried at fair value on the consolidated balance sheets with changes in fair value recorded in the accumulated other comprehensive income (loss) component of shareholders’ equity in the period of the change in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Code (“ASC”) 320-10. Upon the disposition of an available-for-sale security, the Company reclassifies the gain or loss on the security from accumulated other comprehensive income to non-operating income on the Company’s consolidated statements of operations. 
 
Investment Other Securities
 
For equity investments where the Company neither controls nor has significant influence over the investee and which are non-marketable, the investments are accounted for using the cost method of accounting in accordance with ASC 325-10. Under the cost method, dividends received from the investment are recorded as dividend income within non-operating income. 
 
Other-than-Temporary Impairment
 
The Company’s management periodically assesses its marketable securities and investment other securities, for any unrealized losses that may be other-than-temporary and require recognition of an impairment loss in the consolidated statements of operations. If the cost of an investment exceeds its fair value, the Company evaluates, among other factors, general market conditions, the length of time the security has been in a loss position, the extent to which the security’s market value is less than its carrying value, the financial condition and prospects of the security’s issuer and the Company’s ability and intent to hold the security for a length of time sufficient to allow for recovery. If the impairment is considered other-than-temporary, an impairment charge is recorded in non-operating income in the consolidated statements of operations. 
 
Inventory
 
Inventory is stated at the lower of cost or net realizable value with cost being determined on a weighted average basis. The cost of inventory includes product cost, and production fill and labor (which we outsource to third party manufacturers). Write-offs of potentially slow moving or damaged inventory are recorded based on management’s analysis of inventory levels, forecasted future sales volume and pricing and through specific identification of obsolete or damaged products. We assess inventory quarterly for slow moving products and potential impairments and perform a physical inventory count annually near fiscal year end.
 
Property and Equipment
 
Property and equipment items are stated at cost less accumulated depreciation. Expenditures for routine maintenance and repairs are charged to operations as incurred. Depreciation is charged to expense over the estimated useful lives of the assets using the straight-line method. Generally, the useful lives are five years for show booths and equipment, three years for manufacturer’s molds and plates, three years for computer, furniture and equipment, and three years for software. The cost and accumulated depreciation of property are eliminated from the accounts upon disposal, and any resulting gain or loss is included in the consolidated statements of operations for the applicable period. Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstance indicate the carrying value of an asset may not be recoverable.
 
Fair value accounting 
The Company utilizes accounting standards for fair value, which include the definition of fair value, the framework for measuring fair value, and disclosures about fair value measurements. Fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, fair value accounting standards establish a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
 

F-11
 
 
Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are directly or indirectly observable for the asset or liability. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, which are based on an entity’s own assumptions, as there is little, if any, observable market activity. In instances where the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
 
When the Company records an investment in marketable securities the asset is valued at fair value. For investment other securities, it will value the asset using the cost method of accounting.  Any changes in fair value for marketable securities, during a given period will be recorded as a gain or loss in other comprehensive income (loss), unless a decline is determined to be other-than-temporary. For investment other securities we use the cost method and compare the fair value to cost in order to determine if there is an other-than-temporary impairment.
 
Intangible Assets
 
The Company's intangible assets consist of trademarks and other intellectual property, all of which are accounted for in accordance with ASC Topic 350, Intangibles – Goodwill and Other. The Company employs the non-amortization approach to account for purchased intangible assets having indefinite lives. Under the non-amortization approach, intangible assets having indefinite lives are not amortized into the results of operations, but instead are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value. We perform an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment, we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. If a quantitative analysis is necessary, we would analyze various aspects including number of contracts acquired and retained as well as revenues from those contracts, associated with the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred. Events that are assessed include contracts acquired and lost that are associated with the intangible assets, as well as the revenues associated with those contracts.
 
Intangible assets with finite useful lives are amortized using the straight-line method over their estimated period of benefit. In accordance with ASC 360-10-35-21, definite lived intangibles are reviewed annually or more frequently if events or changes in circumstances indicate that the assets might be impaired, to assess whether their fair value exceeds their carrying value.
 
In conjunction with any acquisitions, the Company refers to ASC-805 as amended by Accounting Standards Update (“ASU”) 2017-01 in determining if the Company is acquiring any inputs, processes or outputs and the impact that such factors would have on the classification of the acquisition as a business combination or asset purchase. Additionally, the Company refers to the aforementioned guidance in reviewing all potential assets and liabilities for valuation including the determination of intangible asset values.
 
 Common stock
 
Level Brands was a privately owned company until November 2017 and as such there was no market for the shares of its common stock. Previously, we valued a share of common stock based on recent financing transactions that include the issuance of common stock to an unrelated party at a specified price. In the event, however, that there was not a recent and significant equity financing transaction or the nature of the business had significantly changed subsequent to an equity financing, we used valuation techniques, which could include discounted cash flow analysis, comparable company review, and consultation with third party valuation experts to assist in estimating the value of our common stock. On November 17, 2017, the Company completed its IPO, thus our stock has been valued by the market since that date.
 

F-12
 
 
Revenue Recognition
 
The Company's policy on revenue is to recognize revenue when persuasive evidence of an arrangement exists, shipping has occurred or service obligations have been satisfied, the sales price is fixed or determinable and collection is probable. The Company records revenue from the sale of its products when risk of loss and title to the product are transferred to the customer, which is typically upon shipping. Net sales are comprised of gross revenues less expected product returns, trade discounts and customer allowances, which include costs associated with off-invoice mark-downs and other price reductions, as well as trade promotions and coupons. These incentive costs are recognized at the later of the date on which the Company recognizes the related revenue or the date on which the Company offers the incentive. Although the Company does not have a formal return policy, from time to time the Company will allow customers to return certain products.  A business decision related to customer returns is made by the Company and is performed on a case-by-case basis. We record returns as a reduction in sales and based on whether we dispose of the returned product, adjust inventory and record expense as appropriate. There were no allowances for sales returns as of September 30, 2018 and 2017.
 
The Company also enters into various license agreements that provide revenues based on royalties as a percentage of sales and advertising/marketing fees. The contracts can also have a minimum royalty, with which this and the advertising/marketing revenue is recognized on a straight-line basis over the term of each contract year, as defined, in each license agreement. Royalties exceeding the defined minimum amounts are recognized as income during the period corresponding to the licensee’s sales, as are all royalties that do not have a minimum royalty. Payments received as consideration of the grant of a license are recognized ratably as revenue over the term of the license agreement and are reflected on the Company’s consolidated balance sheets as deferred revenue at the time payment is received and recognized ratably as revenue over the term of the license agreement.  Similarly, advanced royalty payments are recognized ratably over the period indicated by the terms of the license and are reflected in the Company’s consolidated balance sheet in deferred revenue at the time the payment is received.  Revenue is not recognized unless collectability is reasonably assured. If licensing arrangements are terminated prior to the original licensing period, we will recognize revenue for any contractual termination fees, unless such amounts are deemed non-recoverable.
 
In regard to sales for services provided, the Company records revenue when persuasive evidence of any agreement exists, services have been rendered, and collectability is reasonably assured. Based on the contracted services, revenue is recognized when the Company invoices customers for completed services at agreed upon rates or revenue is recognized over a fixed period of time during which the service is performed. 
 
Cost of Sales
 
Our cost of sales includes costs associated with distribution, external fill and labor expense, components, and freight for our professional products divisions, and includes labor, third-party service providers, and amortization expense related to intellectual property for our licensing and entertainment divisions. In our professional products division, cost of sales also includes the cost of refurbishing products returned by customers that will be offered for resale and the cost of inventory write-downs associated with adjustments of held inventories to their net realizable value. These costs are reflected in the Company’s consolidated statements of operations when the product is sold and net sales revenues are recognized or, in the case of inventory write-downs, when circumstances indicate that the carrying value of inventories is in excess of their net realizable value.
 
Advertising Costs
 
The Company expenses all costs of advertising and related marketing and promotional costs as incurred. The Company incurred approximately $1,059,000 and $352,000 in advertising and related marketing and promotional costs included in operating expenses during the years ended September 30, 2018 and 2017, respectively.
 
Shipping and Handling Fees and Costs
 
All fees billed to customers for shipping and handling are classified as a component of sales. All costs associated with shipping and handling are classified as a component of cost of goods sold.
 

F-13
 
 
Income Taxes
 
The Parent Company is a North Carolina corporation that is treated as a corporation for federal and state income tax purposes. Prior to April 2017, BPU was a multi-member limited liability company that was treated as a partnership for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of BPU was included in the tax return of the Parent Company. Beginning in April 2017, the Parent Company acquired the remaining interests in BPU. As a result of the acquisition, BPU became a disregarded entity for tax purposes and its entire share of taxable income or loss was included in the tax return of the Parent Company. Level H&W is a wholly owned subsidiary and is a disregarded entity for tax purposes and its entire share of taxable income or loss is included in the tax return of the Parent Company. IM1 and EE1 are multi-member limited liability companies that are treated as partnerships for federal and state income tax purposes. As such, the Parent Company’s partnership share in the taxable income or loss of IM1 and EE1 are included in the tax return of the Parent Company.
 
The Parent Company accounts for income taxes pursuant to the provisions of the Accounting for Income Taxes topic of the FASB ASC 740 which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. The Parent Company uses the inside basis approach to determine deferred tax assets and liabilities associated with its investment in a consolidated pass-through entity. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
 
US GAAP requires management to evaluate tax positions taken by the Company and recognize a tax liability (or asset) if the Company has taken an uncertain tax position that more likely than not would not be sustained upon examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company, and has concluded that as of September 30, 2018 and 2017, there were no uncertain tax positions taken or expected to be taken that would require recognition of a liability (or asset) or disclosure in the consolidated financial statements.
 
Concentrations
 
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents, accounts receivable, and securities.
 
The Company places its cash and cash equivalents on deposit with financial institutions in the United States. The Federal Deposit Insurance Corporation (“FDIC”) covers $250,000 for substantially all depository accounts. The Company from time to time may have amounts on deposit in excess of the insured limits. The Company had an $0 uninsured balance at September 30, 2018 and a $4,728 uninsured balance at September 30, 2017. Funds which are not subject to coverage or loss under FDIC were $4,003,003 and $0 at September 30, 2018 and 2017, respectively.
 
Concentration of credit risk with respect to receivables is principally limited to trade receivables with corporate customers that meet specific credit policies. Management considers these customer receivables to represent normal business risk. The Company had three customers whose revenue in total represented 75% of the Company’s net sales for the year ended September 30, 2018, such customers represented 51%, 10%, and 14% of net sales. The aggregate accounts receivable balance of such customers represented 92% of the Company’s total accounts receivable and other accounts receivable as of September 30, 2018. The Company had five customers whose revenue in total represented 83% of the Company’s net sales for the year ended September 30, 2017 and whose accounts receivable balance in total represented 86% of the Company’s total accounts receivable as of September 30, 2017.
 
The Company had one service provider from whom the Company made approximately 23% of their purchases related to cost of sales during the 2018 fiscal year, and had no service provider from whom the Company made over 10% of their purchases during the 2017 fiscal year.
 
Debt Issuance Costs
 
Debt issuance costs related to a recognized debt liability are presented in the balance sheet as a direct deduction from the carrying value of that debt liability, consistent with debt discounts. Amortization of debt issuance costs are included as a component of interest expense in accordance with ASU 2015-03. All debt obligations were satisfied in fiscal 2017 and all amortization costs had been recognized in interest expense in fiscal 2017 (see Notes 7 and 8).
 

F-14
 
 
Stock-Based Compensation
 
We account for our stock compensation under ASC -718-10-30 “Compensation - Stock Compensation” using the fair value based method. Under this method, compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. This guidance establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments.
 
We use the Black-Scholes model for measuring the fair value of options and warrants. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the vesting periods. Under ASU 2016-09 which amends ASC 718, which became effective October 1, 2017, we elected to change our accounting principle to recognize forfeitures when they occur. This change had no impact on beginning retained earnings as there had been no forfeitures estimated or incurred in prior periods.
 
Net Loss Per Share
 
The Company uses ASC 260-10, “Earnings Per Share” for calculating the basic and diluted loss per share. The Company computes basic loss per share by dividing net loss attributable to common shareholders by the weighted average number of common shares outstanding. Common equivalent shares are excluded from the computation of net loss per share if their effect is anti-dilutive.
 
At September 30, 2018 and 2017, 781,826 and 545,475 potential shares, respectively, were excluded from the shares used to calculate diluted loss per share as their inclusion would reduce net loss per share.
 
Deferred IPO costs
 
In following the guidance under ASC 340-10-S99-1, IPO costs directly attributable to an offering of equity securities have been deferred and charged against the gross proceeds of the offering as a reduction of additional paid-in capital. These costs include legal fees related to the registration drafting and counsel, independent audit costs directly related to the registration and offering, SEC filing and print related costs, exchange listing costs, and IPO roadshow related costs.
 
New Accounting Standards
 
In May 2014, August 2015 and May 2016, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, and ASU 2015-14 Revenue from Contracts with Customers, Deferral of the Effective Date, respectively, which implement ASC Topic 606. ASC Topic 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance under US GAAP, including industry-specific guidance. It also requires entities to disclose both quantitative and qualitative information that enable financial statements users to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, the FASB has issued the following standards related to ASU 2014-09: ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (“ASU 2016-08”); ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (“ASU 2016-10”); ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”); and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers (“ASU 2016-20”). The amendments in these ASUs are effective for annual periods beginning after December 15, 2017, and interim periods therein. Early adoption was permitted for annual periods beginning after December 15, 2016. These ASUs may be applied retrospectively to all prior periods presented, or retrospectively with a cumulative adjustment to retained earnings in the year of adoption. The Company will adopt this standard in the first quarter of fiscal 2019 retrospectively with a cumulative adjustment to retained earnings. The Company in in process of reviewing all contracts to determine if there is any impact in implementing this guidance on its consolidated financial position, results of operations and liquidity.
 

F-15
 
 
In February 2016, the FASB issued ASU 2016-02, Leases.  The purpose of ASU 2016-02 is to establish the principles to report transparent and economically neutral information about the assets and liabilities that arise from leases. This guidance results in a more faithful representation of the rights and obligations arising from operating and capital leases by requiring lessees to recognize the lease assets and lease liabilities that arise from leases in the statement of financial position and to disclose qualitative and quantitative information about lease transactions, such as information about variable lease payments and options to renew and terminate leases. ASU 2016-02 is effective for fiscal years and interim periods beginning after December 15, 2018. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
 
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments. The amendments in this update provided guidance on eight specific cash flow issues. This update is to provide specific guidance on each of the eight issues, thereby reducing the diversity in practice in how certain transactions are classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years and interim periods beginning after December 15, 2017. Early adoption is permitted. The Company is assessing the impact, if any, of implementing this guidance on its consolidated financial position, results of operations and liquidity.
 
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition and provides a more robust framework to use in determining when a set of assets and activities constitutes a business. ASU 2017-01 is intended to provide guidance when evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. ASU 2017-01 will be effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017.
 
NOTE 2 – ACQUISITIONS
 
In March 2015 Level Brands formed BPU, a North Carolina limited liability company, and contributed $250,000 in exchange for its member interest. In April 2015 BPU entered into a Contribution Agreement with Beauty & Pinups, Inc., a New York corporation ("BPUNY"), and two members. Under the terms of the Contribution Agreement, BPUNY and its founder contributed the business and certain assets, including the trademark “Beauty & Pin Ups” and its variants, certain other intellectual property and certain inventory to BPU in exchange for a (i) 22% membership interest for two members, and (ii) $150,000 in cash. The fair value of the noncontrolling membership interest issued was based on the value of the initial contribution of $250,000 made by Level Brands. The total consideration paid was allocated to the net assets acquired based on relative fair values of those net assets as of the transaction date, in accordance with the Fair Value Measurement topic of the FASB ASC 820. The fair value was comprised of the cash, accounts payable acquired, non-controlling interest, intangibles, and a minimal amount of inventory, all in aggregate valued at $486,760. The Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018, see Note 6 for further details.
 
I’M1 was formed in California in September 2016. IM1 Holdings was the initial member of IM'1. In January 2017, we acquired all of the Class A voting membership interests in I’M1 from IM1 Holdings in exchange for 583,000 shares of our common stock, which represents 51% of the interest in I’M1. The shares were valued by the Company based upon assumptions and other information provided by management and used three approaches available when valuing a closely held business interest: the cost approach, the income approach and the market approach. Consequently, the market approach was deemed most appropriate, as it considers values established by non-controlling buyers and sellers of interests in the Company as evidenced by implied pricing in rounds of financing. In addition, given the limited data and outlook, the backsolve method was applied to assign values to the common equity, options and warrants after giving consideration to the preference of the convertible debt holders. The valuation determined the price per share of $0.85 which put the value of the 583,000 shares at $495,550. IM1 Holdings continues to own the Class B non-voting membership interest of I’M1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $971,667.
 
EE1 was formed in California in March 2016. EE1 Holdings was the initial member of EE1 Holdings. In January 2017, we acquired all of the Class A voting membership interests in EE1 from EE1 Holdings in exchange for 283,000 shares of our common stock, which represents 51% of the interest in EE1. We used the same valuation from the Company of $0.85 per share which put the value of the 283,000 shares at $240,550. EE1 Holdings continues to own the Class B non-voting membership interests of EE1. We accounted for the membership acquired by allocating the purchase price to the tradename and intellectual property valued at $471,667.
 

F-16
 
 
NOTE 3 – MARKETABLE SECURITIES AND INVESTMENT OTHER SECURITIES
 
The Company may, from time to time, enter into contracts where a portion of the consideration provided by the customer in exchange for the Company's services is common stock, options or warrants (an equity position).  In these situations, upon invoicing the customer for the stock or other instruments, the Company will record the receivable as accounts receivable other, and use the value of the stock or other instrument upon invoicing to determine the value. If there is insufficient data to support the valuation of the security directly, the company will value it, and the underlying revenue, on the estimated fair value of the services provided. Where an accounts receivable other is settled with the receipt of the common stock or other instrument, the common stock or other instrument will be classified as an asset on the balance sheet as either an investment marketable security (when the customer is a public entity) or as an investment other security (when the customer is a privately held entity). 
 
As of April 2017, the Company received 2,500,000 shares of common stock as terms of its agreement for services, which was valued at $650,000 based on the trading price on the OTC Markets Group, Inc. the day of issuance, which was $0.26 per share. The shares were restricted as indicated under Securities Act of 1933 and may not be resold without registration under the Securities Act of 1933 or an exemption therefrom. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange.
 
As of June 30, 2017, the trading price on the OTC Markets was $0.03 and the Company had exchanged the 2,500,000 shares of common stock with the issuer for 65 shares of preferred stock. The 65 shares of preferred stock issued were each convertible using the lesser of either $0.26 per share or the 30 day trading average, that would provide a number of shares equal to the value of $10,000 per share. The Company classified the preferred stock as Level 3 for fair value measurement purposes as there were no observable inputs. The preferred shares also contained a put option for the holder for the stated value per share. The Company determined that the value of the preferred shares was $475,000, which was an approximation of fair market value. On July 31, 2017 the Company sold the preferred shares to a related party for $475,000; $200,000 in cash and a short term note receivable for $275,000 due July 31, 2018. As a result, the Company recorded an other-than-temporary impairment on securities for the year ended September 30, 2017 of $175,000 in the consolidated statement of operations. The short term note had a balance of $156,147 at September 30, 2018 and was subsequently amended with a payoff date of December 31, 2018.
 
On June 23, 2017, I’M1 and EE1 in aggregate exercised a warrant for 1,600,000 shares of common stock for services delivered to a customer and accounted for this in investment other securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $912,000, which was based on its recent financing in June 2017 at $0.57 per share, the shares are not restricted. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the fair value of the services provided, utilizing an analysis of vendor specific objective evidence of its selling price. In August 2017, each of I’M1 and EE1 distributed the shares to its majority owner, Level Brands, and also distributed shares valued at $223,440 to its non-controlling interests. In August 2017, the Company also provided referral services for kathy ireland WorldWide and this customer. As compensation the Company received an additional 200,000 shares of common stock valued at $114,000 using the pricing described above. The Company assessed the common stock and determined there was not an impairment for the year ended September 30, 2018.
 
On September 19, 2017, I’M1 and EE1 in aggregate exercised a warrant for 56,552 shares of common stock for services delivered to a customer and accounted for this in Investment Other Securities. The common stock was issued to the Company’s subsidiaries I’M1 and EE1. The customer is a private entity and the stock was valued at $56,552, which was based on all 2017 financing transactions of the customer set at $1.00 per share, with the most recent third party transaction in August 2017. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used factors including financial projections provided by the issuer and conversations with the issuer management regarding the Company’s recent results and future plans and the Company’s financing transactions over the past twelve months. The Company assessed the common stock and determined there was not an impairment for the period ended September 30, 2018.
In November 2017, the Company completed services in relation to an agreement with SG Blocks, Inc. (NASDAQ: SGBX). As payment for these services, SG Blocks issued 50,000 shares of its common stock to Level Brands. The customer is a publicly traded entity and the stock was valued based on the trading price at the day the services were determined delivered, which was $5.09 per share for an aggregate value of $254,500. The Company determined that this common stock was classified as Level 1 for fair value measurement purposes as the stock was actively traded on an exchange. The common stock is held as available for sale, and at September 30, 2018, the shares were $4.00 per share, and we have recorded $(54,500) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company assessed the common stock and determined there was not an indication of an other-than-temporary impairment.
 

F-17
 
 
 
In December 2017, the Company completed services per an advisory services agreement with Kure Corp, then a related party. As payment for these services, Kure Corp. issued 400,000 shares of its stock to the Company. The customer was a private entity and the stock was valued at $200,000, which was based on financing activities by Kure Corp. in September 2017 in which shares were valued at $0.50 per share. In addition, in December 2017, the Company engaged and completed advisory services in relation to an additional agreement with Kure Corp., for services related to their “vape-pod” strategy. As payment for these services, Kure Corp. issued an additional 400,000 shares of its stock to the Company which the Company received in January 2018. These shares were also valued at $200,000. The Company had classified this common stock, cumulative value of $400,000, as Level 3 for fair value measurement purposes as there were no observable inputs. In valuing the stock the Company used factors including information provided by the issuer regarding their recent results and future plans as well as their most recent financing transactions. On April 30, 2018, Kure Corp. merged with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company. In the merger agreement, each share of Kure Corp. was valued at $1.00 as the initial value and is to be exchanged for shares of Isodiol in three issuances as follows: 1) 30% of the initial value issued on May 1, 2018, the balance of shares issued based on earn out goals as 2) 50% of the initial value to be issued on January 31, 2019 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares and 3) 20% of the initial value to be issued on January 31, 2020 on a prorata basis based on sales and using the prior 10 day volume weighted average price of Isodiol shares. We recorded the first issuance of 380,952 shares based on a trading price on April 30, 2018 of $0.63 per share valued at $240,000 as a Level 1 for fair value measurement purposes as the stock is actively traded on an exchange. We also removed the value of the Kure Corp. equity of $400,000 from our Level 3 investments as part of the exchange described above. As the full value of the Kure Corp. equity will not be received until the future issuances based on the above earn out goals, we have recorded an accounts receivable other of $160,000 as of September 30, 2018. The Company has assessed the other accounts receivable and determined there is no indication that we will not receive the full amount. The common stock is held as available for sale, and at September 30, 2018, after a 1 for 10 reverse split, the trading price of the shares was $2.88 per share, and we recorded $(130,026) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company also assessed the common stock and determined there was not an indication of an other-than-temporary impairment
 
On December 21, 2017, the Company purchased 300 shares of preferred stock in a private offering from a current customer for $300,000. The preferred shares are convertible into common stock at a 20% discount of a defined subsequent financing, or an IPO offering of a minimum $15 million, or at a company valuation of $45 million whichever is the least. The customer is a privately held entity. The Company has classified this common stock as Level 3 for fair value measurement purposes as there are no observable inputs. In valuing the stock the Company used the value paid, which was the price offered to all third party investors. As of September 30, 2018, the Company has determined there is no impairment on the value of the shares of stock.
 
On December 30, 2017 Level Brands entered into an Agreement with Isodiol International, Inc. (CSE: ISOL, OTCQB: ISOLF, FSE:LB6A.F), a Canadian company which is a developer of pharmaceutical grade phytochemical compounds and a manufacturer and developer of phytoceutical consumer products. The agreement required the Company to create a global branding and marketing campaign, which includes a joint strategy to develop Isodiol’s brand and products, an influencer program, and a social and traditional media strategy. As payment for these services, Isodiol agreed to pay $2,000,000 and issued 1,679,321 shares of its common stock to the Company, based on the trading price on the day of the agreement, which was $1.1909 per share. These shares were issued on January 22, 2018. In addition, the Company will provide ongoing quarterly support of the campaign which includes two branded videos each quarter, Ms. Ireland’s direct involvement in meetings or conferences once each quarter, and ongoing social media support by Ms. Ireland and Level Brands, all the services valued at $750,000 per quarter. This amount will be paid through issuance of Isodiol stock and the number of shares issued will be determined based on the trading value of Isodiol stock on the last day of each quarter. Isodiol made the $750,000 payment for quarterly services for March 31, 2018 through the issuance of shares of common stock, no other shares have been issued as of September 30, 2018 and thus we have recorded an accounts receivable other of $1,352,000 as of September 30, 2018. The common stock is held as available for sale, and at September 30, 2018, after a 1 for 10 reverse split, the shares were valued at $2.88 per share, and we recorded $(2,157,013) as other comprehensive income (loss) on the Company’s consolidated financial statements for the year ended September 30, 2018. The Company assessed the common stock and based on conversations with the company regarding its recent acquisitions, position in the CBD market, current financing events, and overall strategy, determined there was not an indication of an other-than-temporary impairment.
 

F-18
 
 
The table below summarizes the assets valued at fair value as of September 30, 2018:
 
 
 
In Active Markets for Identical Assets and Liabilities
(Level 1)
 
 
Significant Other Observable Inputs
 (Level 2)
 
 
Significant Unobservable Inputs
 (Level 3)
 
 
Total Fair Value at September 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities
 $1,050,961 
  - 
 $- 
 $1,050,961 
Investment other securities
  - 
  - 
 $1,159,112 
 $1,159,112 
 
 
 
 
 
Level 1
 
 
Level 2
 
 
Level 3
 
 
Total
 
Balance at September 30, 2017
 $- 
 $- 
 $859,112 
 $859,112 
Receipt of equity investment upon completion of services
 $3,004,500 
 $- 
 $400,000 
 $3,404,500 
Purchase of preferred shares, convertible into common stock
 $- 
 $- 
 $300,000 
 $300,000 
Exchange of equity via owner merger into public company
 $240,000 
 $- 
 $(400,000)
 $(160,000)
Change in value of equity, other comprehensive income
 $(2,193,539)
 $- 
 $- 
 $(2,193,539)
Balance at September 30, 2018
 $1,050,961 
 $- 
 $1,159,112 
 $2,210,073 
 
NOTE 4 – INVENTORY
 
Inventory at September 30, 2018 and 2017 consists of the following:
 
 
 
2018
 
 
2017
 
Finished goods
 $18,531 
 $375,459 
Inventory components
  104,692 
  212,738 
Total
 $123,223 
 $588,197 
 
During the year ended September 30, 2018, the Company determined that inventory was impaired by approximately $262,000. During the year ended September 30, 2017, the Company determined that inventory was impaired by approximately $67,000. Impairment charges were recorded within operating expenses for the respective periods.
 
NOTE 5PROPERTY AND EQUIPMENT
 
Major classes of property and equipment at September 30, 2018 and 2017 consist of the following:
 
 
 
2018
 
 
2017
 
Computers, furniture and equipment
 $59,770 
 $37,261 
Show booth and equipment
  49,123 
  171,986 
Manufacturers’ molds and plates
  34,200 
  34,200 
 
  143,093 
  243,447 
Less accumulated depreciation
  (89,613)
  (107,971)
Net property and equipment
 $53,480 
 $135,476 
 
Depreciation expense related to property and equipment was $36,244 and $55,755 for the years ended September 30, 2018 and 2017, respectively
 

F-19
 
 
NOTE 6 – INTANGIBLE ASSETS
 
On April 13, 2015, BPU acquired from BPUNY certain assets, including the trademark "Beauty & Pin Ups" and its variants and certain other intellectual property and assumed $277,500 of BPUNY's accounts payable to its product vendor, which was paid off in April 2016.
 
On January 6, 2017, the Company acquired 51% ownership in I’M1 from I’M1 Holdings. I’M1’s assets include the trademark "I’M1” and its variants and certain other intellectual property. Specifically, a licensing agreement with kathy ireland® Worldwide and an advisory agreement for services with kathy ireland® Worldwide. The licensing agreement provides the rights to use of the tradename for business and licensing purposes, this is the baseline of the business and will be required as long as the business is operating. Our capability for renewals of these agreements are extremely likely as the agreements are with a related party. We also believe the existence of this agreement does not have limits on the time it will contribute to the generation of cash flows for I’M1 and therefore we have identified these as indefinite-lived intangible assets.
 
On January 6, 2017, the Company acquired 51% ownership in EE1 from EE1 Holdings. EE1’s assets include the trademark "EE1” and its variants and certain other intellectual property. Specifically, a production deal agreement with BMG Rights Management US and an advisory agreement for services with kathy ireland® Worldwide. We believe the production deal agreement and the advisory agreement do not have limits on the time they will contribute to the generation of cash flows for EE1 and therefore we have identified these as indefinite-lived intangible assets.
 
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725. In addition, the Company agreed to pay $65,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Chef Andre," "Andre Carthen," ACafe" or "Fit Chef" and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $45,068 and $2,917 for the years ending September 30, 2018 and 2017.
 
On September 8, 2017, the Company entered into a seven year wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750. In addition, the Company agreed to pay $40,000 in cash within 30 days completion of its initial public offering and also issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900. Under the terms of this nonexclusive agreement, we have the right to use, assign and sublicense the marks, intellectual property and other rights in connection with "Jardin," "Nicholas Walker," "Nicholas Walker Jardin," "Nicholas Walker Garden Party," "Cultivated by Nicholas Walker," and "Jardin Du Jour," and all trade names, trademarks and service marks related to this intellectual property for the purpose of entering into sublicense agreements with third parties for the manufacture, marketing and sale of products utilizing these marks. We are amortizing the capitalized value of the cash, warrants and common stock over the seven year term of the agreement and have amortized $25,426 and $1,603 for the years ending September 30, 2018 and 2017.
 
In September 2017, the Company entered into an exclusive seven year license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 was due in equal installments on January 1 of subsequent years until the license fee is paid, and were classified as long term liabilities related party as of December 31, 2017. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. In January 2018, the Company amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000, on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as an accrued expense to related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds. We are amortizing the capitalized value of the cash over the ten year term of the agreement and have amortized $115,806 and $0 for the years ending September 30, 2018 and 2017.
 

F-20
 
 
Intangible assets as of September 30, 2018 and 2017 consisted of the following:
 
 
 
September 30,
 
 
September 30,
 
 
 
2018
 
 
2017
 
Trademark and other intellectual property related to BPU
 $246,760 
 $486,760 
Trademark and other intellectual property related to I’M1
  971,667 
  971,667 
Trademark and other intellectual property related to EE1
  471,667 
  471,667 
Trademark, tradename and other intellectual property related to kathy ireland®Health & Wellness™, net
  1,074,194 
  830,000 
Wholesale license agreement with Chef Andre Carthen, net
  262,077 
  307,146 
Wholesale license agreement with Nicholas Walker, net
  147,620 
  173,047 
Total
 $3,173,985 
 $3,240,287 
 
    
    
The Company has three definite lived intangible assets, which have seven or ten year lives.
 
Future amortization schedule:
 
Intangible
 
Total unamortized cost
 
 
2019
 
 
2020
 
 
2021
 
 
2022
 
 
2023
 
 
thereafter
 
Trademark, tradename and other intellectual property related to kathy ireland® Health & Wellness™
 $1,074,194 
 $116,129 
 $116,129 
 $116,129 
 $116,129 
 $116,129 
 $493,549 
Wholesale license agreement with Chef Andre Carthen
 $262,077 
 $44,294 
 $44,294 
 $44,294 
 $44,294 
 $44,294 
 $40,607 
Wholesale license agreement with Nicholas Walker
 $147,620 
 $24,950 
 $24,950 
 $24,950 
 $24,950 
 $24,950 
 $22,871 
 
The Company performs an impairment analysis at August 1 annually on the indefinite-lived intangible assets following the steps laid out in ASC 350-30-35-18. Our annual impairment analysis includes a qualitative assessment to determine if it is necessary to perform the quantitative impairment test. In performing a qualitative assessment we review events and circumstances that could affect the significant inputs used to determine if the fair value is less than the carrying value of the intangible assets. In addition, intangible assets will be tested on an interim basis if an event or circumstance indicates that it is more likely than not that an impairment loss has been incurred and the Company evaluates the indefinite-lived intangible assets each reporting period to determine whether events and circumstances continue to support an indefinite useful life. The Company has performed a qualitative and quantitative analysis for the year ended September 30, 2017 and determined there has been no impairment. The Company has performed a qualitative and quantitative analysis for the year ended September 30, 2018 accounting for the performance of BPU and the business shift in relation to its original business model and current focus on licensing, and has determined that an impairment is required. As a result, the Company recorded an impairment charge of $240,000 as impairment to intangibles under the BPU segment for the year ended of September 30, 2018. No other impairments were identified. Based upon the anticipated changes to BPU’s business model, the Company has determined that it is appropriate to reclassify the remaining carrying value of this intangible asset to a definite-lived asset. The Company expects to begin amortizing this asset beginning in the first quarter of 2019. This reclassification is being accounted for as a prospective change in estimate.
 

F-21
 
 
The Company performs an impairment analysis at August 1 annually on the definite lived intangible assets following the steps laid out in ASC 360-10-35-21. We first assess if there is an indicator of possible impairment such as change in the use of the asset, market price changes in the asset, or other events that impact the value of the asset. If an indicator is present we then perform a quantitative analysis to determine if the carrying amount of the asset is recoverable. This is done by comparing the total undiscounted future cash flows of the long-lived asset to its carrying amount. If the total undiscounted future cash flows exceed the carrying amount of the asset, the carrying amount is deemed recoverable and an impairment is not recorded. If the carrying amount of a long-lived asset is deemed to be unrecoverable, an impairment loss needs to be estimated. In order to calculate the impairment loss, the fair value of the asset must be determined. Fair value referenced here is determined using the guidance in FASB ASC Topic 820. After assessing indicators for impairment, the Company determined that a quantitative analysis was not needed as of September 30, 2018.
 
NOTE 7 – LINE OF CREDIT
 
In August 2015, we entered into a one year $1,000,000 revolving line of credit agreement with LBGLOC, LLC, a related party. Under the terms of the agreement, we pay interest on any amounts available for advance at the rate of 10% per annum. We granted LBGLOC, LLC a blanket security agreement on our assets as collateral for amounts advanced under the credit line. As additional consideration for granting the credit line, we issued the lender 16,000 shares of common stock, valued at $32,000 and was recorded as a debt discount and amortized over the term of the note.
 
The agreement was renewed for an additional one year period on September 1, 2016. As additional consideration for renewing the credit line, we issued the lender 14,000 shares of common stock, which was valued at $105,000 based on the most recent equity financing in February 2016, and was recorded as a debt discount and was being amortized over the term of the note.
 
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the outstanding principal balance of the line of credit in the amount of $593,797, together with the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. The Company recorded a loss on extinguishment of $8,750 which was recorded as interest expense in the consolidated statement of operations. In this transaction, the Company issued 195,740 shares of common stock.
 
The outstanding balances due under the agreements were $0 at September 30, 2018 and 2017, respectively.
 
NOTE 8 – CONVERTIBLE PROMISSORY NOTES
 
On October 4, 2016 and October 24, 2016, the Company issued in aggregate $2,125,000 of 8% Convertible Promissory Notes to accredited investors. The securities consisted of 8% Convertible Notes with warrants to purchase 141,676 shares of the Company’s stock (the “Notes”). The Notes were convertible upon an IPO resulting in gross proceeds to the Company of at least $10,000,000, prior to July 1, 2017, at the option of the investor. The conversion price for the Notes was $5.00. All Notes converted will be subject to a 12-month lockup post IPO. The warrants have an exercise price of $7.80. The warrants expire in September 2021.
 
Effective June 30, 2017, the Company converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
 
The Company accounted for the initial issuance of these Notes in accordance with FASB ASC Topic 470-20 “Debt with Conversion and Other Options”.  The Black-Scholes value of the warrants, $5,159, associated with the issuance was recorded as a discount to debt and was amortized into interest expense. In addition, the issuance of the Notes and warrants were assessed and did not contain an embedded beneficial conversion feature as the effective conversion price was not less than the relative fair value of the instrument. We also had fees of $200,800 associated with the financing, which was recorded as a debt discount and amortized over the term of the Notes. With the June 30, 2017 conversion of the Notes, we accelerated the debt discount and have recorded interest expense related to these amounts of $205,959 for the year ended September 30, 2017. In addition, we accounted for a conversion inducement in accordance with ASC 470-20 on the conversion price reduction from $5.00 to $3.95 per share and recorded a non-cash debt conversion expense of $446,250 in the consolidated statement of operations for the year ended September 30, 2017.
 
The outstanding balances due under the Notes was $0 at both September 30, 2018 and 2017.
 

F-22
 
 
NOTE 9 – RELATED PARTY TRANSACTIONS
 
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International as a charitable contribution. Best Buddies International is an affiliate of a member of our board of directors.
 
On January 1, 2017, we entered into a sublease agreement for office space with Kure Corp., then a related party. The lease is for one year and the space was to be used by our subsidiary BPU. This sublease ended on January 1, 2018.
 
In February 2017 we entered into a master advisory and consulting agreement with kathy ireland® Worldwide, as amended, pursuant to which we have engaged the company to provide non-exclusive strategic advisory services to us under a term expiring in February 2025. Under the terms of this agreement, Ms. Ireland serves in the non-executive positions as our Chairman Emeritus and Chief Brand Strategist. The agreement also provides that kathy ireland® Worldwide will provide input to us on various aspects of our corporate strategies and branding, provides access to us of its in-house design team to assist us in developing our brands. As compensation under the agreement we agreed to pay kathy ireland® Worldwide a nominal monthly fee. We are also responsible for the payment of expenses incurred by Ms. Ireland or kathy ireland® Worldwide in providing these services to our company.
 
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Tommy Meharey pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of I’M1. We have agreed to pay Mr. Meharey a fee of $15,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
 
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Nic Mendoza pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1. We have agreed to pay Mr. Mendoza a fee of $10,000 per month for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
 
On February 8, 2017 the Company entered into a one year advisory agreement with Mr. Stephen Roseberry pursuant to which he provides advisory and consulting services to us, including serving as co-Managing Director of EE1 and I’M1. We have agreed to pay Mr. Roseberry a nominal monthly fee for his services. We entered into a new agreement in March 2018 with the same terms, however the agreement after one year, if not renewed, will automatically extend month to month unless canceled by either party.
 
In February 2017 the Company entered into an advisory agreement with Mr. Jon Carrasco, expiring in February 2019, pursuant to which he provides advisory and consulting services to us including serving as Global Creative Director of EE1 and I’M1. We have agreed to pay Mr. Carassco a nominal monthly fee for his services.
 
In February 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $68,550 for its services, which was recorded as consulting/advisory revenue. Sandbox LLC is an affiliate of a member of our board of directors.
 
In March 2017, our subsidiary I’M1 entered into a consulting agreement with Kure Corp, then a related party. In this agreement I’M1 provided services delivered in two phases. The first phase was delivered by March 31, 2017 which included a social media blitz and marketing and branding support and strategies for $200,000. The second phase was delivered by June 22, 2017 which included modeling impressions for the brand and extension of publicity to other media outlets for $400,000. In addition, in March 2017, I’M1 entered into a separate licensing agreement for 10 years with Kure Corp. under which we are to receive royalties based on gross sales of Kure Corp. products with the I’M1 brand.
 
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the line of credit with LBGLOC LLC, which included the outstanding principal balance of $593,797 and the accrued interest of $179,380 for a total payoff amount of $773,177 into common shares of the Company at a price of $3.95 per share. One member of LBGLOC LLC, Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman, received 94,475 shares of common stock in this transaction.
 

F-23
 
 
Effective June 30, 2017, the lenders converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. One note holder, Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman, and received a total of 26,836 shares.
 
In June 2017, the Company earned a referral fee from kathy ireland® Worldwide after establishing a business meeting resulting in a new license agreement for kathy ireland® Worldwide. The referral fee was paid out of 200,000 options issued to kathy ireland® Worldwide from the new client, which were exercised and transferred to the Company. The shares are valued at $114,000, which was derived after assessing the value of our services provided and determining a per share value of $0.57. The warrant was exercised in June 2017 and the shares issued to the Company in August 2017.
 
In June 2017, Kure Corp., then a related party, purchased products from our subsidiary BPU for resale in their stores. The total purchase was $97,850.
 
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company. The accredited investors included Stone Street Partners LLC, an entity controlled by our CEO and Chairman, and Stone Street Partners Opportunity Fund II LLC, then an affiliate of our CEO and Chairman.
 
 
On July 31, 2017, the Company sold preferred shares it had received from a customer as payment for services to a related party. The preferred shares were originally valued as marketable securities at $650,000 and were sold for $475,000, an approximation of fair market value, which was paid $200,000 in cash and a short term note of $275,000 at 3% interest, which is included in note receivable related party as of September 30, 2018 and September 30, 2017. The short term note was extended on August 1, 2018, and the outstanding principal of $155,400 at 5% interest is due December 31, 2018. The Company recorded an impairment of $175,000 for the year ended September 30, 2017 (see Note 3).
 
On August 1, 2017, the Company entered into an additional advisory agreement with Kure Corp., then a related party, in which the Company would act as an advisor regarding business strategy involving (1) conversion of Kure franchises into company stores, (2) conversion of Kure Corp. debt and preferred shares into common share of Kure Corp. and (3) preparation steps required and a strategy to position for a possible Reg A+ offering. The services are to be delivered in two phases, the first deliverables of items 1 and 2 above were delivered by September 30, 2017 and item 3 was delivered in June 2018. The Company was paid $200,000 in Kure Corp. stock for the first deliverables and was paid $145,500 in cash for the second deliverable.
 
In August 2017, EE1 entered into a representation agreement with Romero Britto and Britto Central, Inc. under which it was appointed as exclusive licensing consultant to license certain intellectual property in entertainment industry category, which includes theatre, film, art, dance, opera, music, literary, publishing, television and radio, worldwide except for South America. Under the terms of the agreement, EE1 will identify and introduce Britto to potential license opportunities, negotiate terms of license agreements, and implement and administer each eligible license agreement entered. As compensation for our services, EE1 is entitled to receive 35% of the net proceeds received under any license, and following the termination or expiration of the agreement, 15% of the net proceeds of eligible licenses. The President of Britto Central, Inc is the spouse of a member of our board of directors. This agreement was mutually terminated in September 2018.
 
In September 2017 EE1 arranged, coordinated and booked for Sandbox LLC a travel related event, arranging for travel and concierge related services. Under the terms of the oral agreement, EE1 was paid $64,475 for its services, which were recorded as consulting/advisory revenue. EE1 engaged Sterling Winters Company to assist with this service and incurred a cost of sales for that service of $35,421. Sandbox LLC is an affiliate of a member of our board of directors.
 
On September 1, 2017, the Company entered into a license agreement with kathy ireland® Worldwide for certain use of kathy ireland trademark, likeness, videos, photos and other visual presentations for the Company’s IPO and associated roadshow. The Company paid $100,000 for this agreement.
 
In September 2017 EE1 created a marketing campaign for a customer and worked through their approved vendor, Sandbox LLC, to deliver services. Under the terms of the oral agreement, EE1 was paid $550,000 for its services from Sandbox. Sandbox LLC is an affiliate of a member of our board of directors. EE1 engaged Sterling Winters Company to assist with this campaign and incurred expenses of $250,000. Sterling Winters Company is a subsidiary of kathy ireland® Worldwide.
 

F-24
 
 
On September 8, 2017, the Company extended its Master Advisory and Consulting Agreement, executed in February 2017, with kathy ireland® Worldwide to February 2025.
 
In September 2017, the Company entered into an exclusive seven year wholesale license agreement with kathy ireland® Worldwide for the right to license the mark, intellectual property and other marks in connection with kathy ireland® Health & Wellness™. The agreement is for seven years for a license fee of $840,000. The Company has an option to extend for another three years for an additional price of $360,000. Per the agreement, $480,000 was paid prior to January 1, 2018. The remaining amount of $360,000 are due in equal installments on January 1 of subsequent years until the license fee is paid. Under this license agreement with kathy ireland® Worldwide we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™. Royalties are paid at 33 1/3% of net proceeds with the license fee being a credit against royalties. On January 30, 2018, the Company amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as an accrued expense related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds.
 
On December 11, 2017, the Company entered into a service agreement with Kure Corp., then a related party, to facilitate the “Vape Pod” transaction with the modular building systems vendor, SG Blocks, Inc., which is also a customer of our company. Under the terms of this agreement we also agreed to facilitate the introduction to third parties in connection with Kure Corp.'s initiative to establish Vape Pod's at U.S. military base retail locations and advising and aid in site selection for Kure retail stores on military bases and adjoining convenience stores, gas stations, and other similar retail properties utilizing Kure Corp.'s retail Vape Pod concept, among other services. As compensation for this recent agreement, we were issued 400,000 shares of Kure Corp.'s common stock which was valued at $200,000 (see Note 3).
 
On December 11, 2017 the Company also entered into a Revolving Line of Credit Loan Agreement with Kure Corp. pursuant to which we agreed to lend Kure Corp. up to $500,000 to be used for the purchase of prefabricated intermodal container building systems. This credit line was provided in connection with Kure Corp.'s recent Master Purchase Agreement with SG Blocks, Inc. for the purchase of 100 repurposed shipping containers for its Kure Vape Pod™ initiative. Under the terms of the Revolving Line of Credit Loan Agreement, Kure Corp. issued us a $500,000 principal amount secured promissory note, which bears interest at 8% per annum, and which matures on the earlier of one year from the issuance date or when Kure Corp. receives gross proceeds of at least $2,000,000 from the sale of its equity securities. As collateral for the repayment of the loan, pursuant to a Security Agreement we were granted a first position security interest in Kure Corp.'s inventory, accounts and accounts receivable. Our CEO and Chairman is the past Chairman of Kure Corp. and currently a minority shareholder of Kure Corp. Level Brands is also a shareholder of Kure Corp. The Revolving Line of Credit has never been utilized and on June 6, 2018, the agreement was terminated.
 
On December 21, 2017, the Company entered into a sublease agreement with a related party for office space for its subsidiary BPU. The initial lease period is for six months and then changes to a month to month lease. The space includes office and warehouse space and will cost $3,000 per month.
 
On January 1, 2018, the Company entered into a consulting agreement with Mr. Craig Brewer, Chairman of Kure Corp., then a related party, expiring in January 2019, pursuant to which he provides business consulting services to us, with a primary focus on BPU. The agreement may be canceled by either party with a 30 day notice. We have agreed to pay Mr. Brewer a fee of $9,000 per month for his services. This agreement ended on April 30, 2018.
 
In June 2018, per our agreement with kathy ireland® Worldwide, the company earned a referral fee of $150,000 for facilitating a business opportunity which led to a new license agreement for kathy ireland® Worldwide. The Company is to receive 50% of all royalty revenue earned ongoing via the new business contract.
 

F-25
 
 
In April 2018 through June 2018, EE1 engaged in five separate statements of work for various marketing campaigns, production processes, and documentary related services for Sandbox LLC. Under the terms of the agreements, EE1 will be paid in the range of $200,000 to $250,000 for each statement of work, from Sandbox LLC, all to be paid by December 31, 2018. Sandbox LLC is an affiliate of a member of our board of directors.
 
In September 2018, B&B Bandwidth purchased products from our subsidiary BPU for resale. The total purchase was $332,985. B&B Bandwidth management are affiliates of kathy ireland® Worldwide.
 
As we engage in providing services to customers, at times we will utilize related parties, typically as a part of our agreement with kathy ireland® Worldwide, to assist in delivery of the services. For the year ended September 30, 2018 and 2017, we incurred related party cost of sales of $635,710 and $333,773, respectively.
 
NOTE 10 – SHAREHOLDERS’ EQUITY
 
Preferred Stock – We are authorized to issue 50,000,000 shares of preferred stock, par value $0.001 per share. Our preferred stock does not have any preference, liquidation, or dividend provisions. No shares of preferred stock have been issued.
 
Common Stock – We are authorized to issue 150,000,000 shares of common stock, par value $0.001 per share. There were 8,123,928 and 5,792,261 shares of common stock issued and outstanding at September 30, 2018 and 2017, respectively.
 
Common stock transactions:
 
Fiscal 2018:
 
On November 17, 2017, the Company completed an IPO of 2,000,000 shares of its common stock for aggregate gross proceeds of $12.0 million and net proceeds of $10.9 million.
 
In November 2017, we issued 6,667 shares of our common stock to an individual as part of a consulting agreement. The shares were valued at $37,002, based on the trading price upon issuance and expensed as contract compensation.
 
In January 2018, we issued 230,000 shares of our common stock, which were granted as restricted stock awards on October 1, 2016 to board members. The restricted stock awards vested on January 1, 2018. The shares were valued at fair market value upon issuance at $195,500 and amortized over the vesting period and expensed as stock compensation.
 
In March 2018, we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $20,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending June 2018.
 
In May 2018, we issued 60,000 shares of our common stock to an investment banking firm for general financial advisory and investment banking services. The shares were valued at $303,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending April 2019.
 
In June 2018, we issued 25,000 shares of our common stock to a broker dealer for business advisory services. The shares were valued at $118,000, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending December 2019.
 
In July 2018 we issued 5,000 shares of our common stock to an investor relations firm for services. The shares were valued at $18,500, based on the trading price upon issuance, and is being amortized and expensed as professional services over the service period ending November 2018.
 

F-26
 
 
Fiscal year 2017:
 
Per terms in the Operating Agreement of BPU, the Company could redeem the 10% membership interest of Sigan for $110,000 at any time before April 13, 2017. On October 14, 2016, as amended in March 2017, Sigan entered into an agreement with the Company and transferred their 10% member interest for 129,412 shares of the Company’s common stock.
 
In October 2016 we issued 38,358 shares of our stock to six individuals and entities upon the cashless exercise of 70,067 placement agents warrants previously granted to T.R. Winston & Co LLC, a broker-dealer and member of FINRA, and its affiliates.
 
In November 2016 we issued Stone Street Partners, LLC, a related party, an aggregate of 76,000 shares of our common stock valued at $570,000 as compensation for services, which had been accrued and expensed at September 30, 2016. The stock was valued at the time based on the most recent equity financing from February 2016 which was priced at what is a post reverse split price of $7.50.
 
In November 2016 we issued 20,000 shares of our common stock valued at $17,000 to Best Buddies International, a related party, as a charitable contribution.
 
In January 2017 we issued 26,667 shares of our common stock to two individuals as part of consulting agreements. The shares were valued at $22,667, based on the valuation from the Company and expensed as salary compensation.
 
In January 2017, the Company acquired 51% ownership in IM1 in exchange for 583,000 shares of common stock, which was valued at $495,550.
 
In January 2017, the Company acquired 51% ownership in EE1 in exchange for 283,000 shares of common stock, which was valued at $240,550.
 
Effective April 28, 2017, Priel Maman entered into an agreement with the Company to transfer his 12% member interest in BPU for 155,294 shares of the Company’s common stock, valued at $132,000. The Company now owns 100% membership interest of BPU.
 
On June 6, 2017, pursuant to an agreement dated May 15, 2017, the Company converted the outstanding line of credit principal balance of $593,797, together with the accrued interest of $179,380 for a total conversion amount of $773,177 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 195,740 shares of common stock.
 
Effective June 30, 2017, the Company converted the $2,125,000 principal amount of Notes and all accrued interest of $127,500 into common shares of the Company at a price of $3.95 per share. In this transaction, the Company issued 570,254 shares of common stock.
 
On June 30, 2017, the Company entered into subscription agreements for 77,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $304,150 to the Company. In this transaction, $201,450 was received on June 30, 2017 and $102,700 was received July 5, 2017.
 
On June 30, 2017, the Company entered into an agreement with an investor relations firm and as part of the compensation issued 5,000 shares of the Company’s common stock for services. The shares were issued July 5, 2017 and valued at $19,750.
 
In July 2017, the Company entered into subscription agreements for 133,000 shares of common stock with two accredited investors in a private placement, which resulted in gross proceeds of $525,350 to the Company.
 
On August 1, 2017, the Company issued 1,500 shares of common stock upon exercise of options.
 

F-27
 
 
On August 24, 2017, the Company issued 19,100 shares of common stock to a vendor for services. The shares were valued at $75,445 and are included in deferred initial public offering costs as of September 30, 2017.
 
On September 8, 2017, the Company entered into a wholesale license agreement with Andre Carthen and issued 45,500 shares of common stock, valued at $179,725.
 
On September 8, 2017, the Company entered into a wholesale license agreement with Nicholas Walker and issued 25,000 shares of common stock, valued at $98,750.
 
On September 30, 2017, the Company issued 7,593 shares in aggregate to 3 independent directors as board compensation. The shares were valued at $30,000 in aggregate.
 
Stock option transactions:
 
Fiscal year 2018:
 
On May 14, 2018 we granted an aggregate of 50,000 common stock options to an employee. The options vest 50% November 14, 2018 and 50% May 14, 2019. The options have an exercise price of $5.27 per share and a term of seven years. We have recorded an expense for the options of $38,950 for the fiscal year ended September 30, 2018.
 
On May 29, 2018 we granted an aggregate of 150,000 common stock options to an employee. The options vest 50% immediately and 50% January 1, 2019. The options have an exercise price of $4.78 per share and a term of ten years. We have recorded an expense for the options of $302,750 for the fiscal year ended September 30, 2018.
 
On August 16, 2018 we granted per the annual board compensation plan, an aggregate of 35,000 common stock options to five directors. The options vest immediately, have an exercise price of $3.34 per share and a term of ten years. We have recorded an expense for the options of $80,150 for the fiscal year ended September 30, 2018.
 
Fiscal year 2017:
 
On October 1, 2016 we granted an aggregate of 14,300 common stock options to two employees. The options vest 16% immediately, 42% January 1, 2017 and 42% January 1, 2018. The options have an exercise price of $7.50 per share and a term of five years. We have recorded an expense for the options of $576 for the year ended September 30, 2017.
 
On October 1, 2016 we granted an aggregate of 171,500 common stock options to two employees. The options vest ratably on January 1, 2018. The options have an exercise price of $7.50 per share and a term of six years. We have recorded an expense for the options of $19,208 for the year ended September 30, 2017.
 
On May 1, 2017 we granted an aggregate of 100,000 common stock options to one employee. The options vest 50% immediately and 50% on January 1, 2018. The options have an exercise price of $4.00 per share and a term of seven years. We have recorded an expense for the options of $17,469 for the year ended September 30, 2017.
 
On August 31, 2017 we granted an aggregate of 20,000 common stock options to one employee. The options vest ratably on August 31, 2018. The options have an exercise price of $4.00 per share and a term of seven years. We have recorded an expense for the options of $3,753 for the year ended September 30, 2017.
 
On September 8, 2017 we granted an aggregate of 7,500 common stock options to three consultants. The options vest ratably on October 1, 2018. The options have an exercise price of $4.00 per share and a term of five years. We have recorded an expense for the options of $897 for the year ended September 30, 2017.
 
The expected volatility rate was estimated based on comparison to the volatility of a peer group of companies in the similar industry. The expected term used was the full term of the contract for the issuances. The risk-free interest rate for periods within the contractual life of the option is based on U.S. Treasury securities. The pre-vesting forfeiture rate of zero is based upon the experience of the Company. As required under ASC 718, we will adjust the estimated forfeiture rate to our actual experience. Management will continue to assess the assumptions and methodologies used to calculate estimated fair value of share-based compensation. Circumstances may change and additional data may become available over time, which could result in changes to these assumptions and methodologies, and thereby materially impact our fair value determination.
 

F-28
 
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the options issued in the years ended September 30, 2018 and 2017:
 
 
 
 2018
 
 
2017
 
Exercise price
 $3.34 – $5.27
$4.00 - $7.50
Risk free interest rate
 2.77% - 2.96%
1.14% - 2.13%
Volatility
 57.76% - 64.74%
39.44% - 60.39%
Expected term
 7 – 10 years
5 - 7 years
Dividend yield
 None
None
 
Warrant transactions:
 
Fiscal 2018:
 
On November 17, 2017 in relation to the IPO, we issued to the selling agent warrants to purchase in aggregate 100,000 shares of common stock with an exercise price of $7.50. The warrants expire on October 27, 2022. The warrants were valued at $171,600 and recorded as paid in capital.
Fiscal 2017:
 
On September 8, 2017, the Company entered into a wholesale license agreement with Andre Carthen and as part of the agreement issued warrants to purchase 45,500 shares of common stock at a strike price of $4.00. The warrants were valued at $65,338.
 
On September 8, 2017, the Company entered into a wholesale license agreement with Nicholas Walker and as part of the agreement issued warrants to purchase 25,000 shares of common stock at a strike price of $4.00. The warrants were valued at $35,900.
 
On October 1, 2016, the board approved the strike price adjustment for certain placement agent warrants totaling 20,067 from a strike price of $8.75 to $5.00. On October 26, 2016, 38,358 shares of common stock were issued, upon a cashless exercise of the 20,067 warrants above and another 50,000 warrants, at a strike price of $2.75, which had been issued to a placement agent for prior services related to previous private placements of our securities.
 
On October 4, 2016 and October 24, 2016, we issued in aggregate, warrants exercisable into 141,676 shares of common stock with an exercise price of $7.80. The warrants expire on September 30, 2021. The warrants were issued in conjunction with the Company’s 8% convertible notes, described in Note 8.
 
The following table summarizes the inputs used for the Black-Scholes pricing model on the warrants issued in the years September 30, 2018 and 2017:
 
 
2018
2017
Exercise price
$7.50
$4.00 - $7.80
Risk free interest rate
2.06%
1.22% - 1.64%
Volatility
43.12%
39.41% - 54.49%
Expected term
5 years
5 years
Dividend yield
None
None
 

F-29
 
 
NOTE 11 – STOCK-BASED COMPENSATION
 
 
Equity Compensation Plan – On June 2, 2015, the Company’s board of directors approved the 2015 Equity Compensation Plan (“Plan”). The Plan made 1,175,000 common stock shares, either unissued or reacquired by the Company, available for awards of options, restricted stock, other stock grants, or any combination thereof. The number of shares of common stock available for issuance under the Plan shall automatically increase on the first trading day of January each calendar year during the term of the Plan, beginning with calendar year 2016, by an amount equal to one percent (1%) of the total number of shares of common stock outstanding on the last trading day in December of the immediately preceding calendar year, but in no event shall any such annual increase exceed 100,000 shares of common stock.
 
We account for stock-based compensation using the provisions of ASC 718.  ASC 718 codification requires companies to recognize the fair value of stock-based compensation expense in the financial statements based on the grant date fair value of the options. We have only awarded stock options since December 2015. All options are approved by the board of directors until the board establishes a Compensation Committee. Restricted stock awards that vest in accordance with service conditions are amortized over their applicable vesting period using the straight-line method. The fair value of our stock option awards or modifications is estimated at the date of grant using the Black-Scholes option pricing model.
 
Eligible recipients include employees, officers, directors and consultants who are deemed to have rendered or to be able to render significant services to the Company or its subsidiaries and who are deemed to have contributed or to have the potential to contribute to the success of the Company. Options granted generally have a five to ten year term and have vesting terms that cover one to three years from the date of grant. Certain of the stock options granted under the plan have been granted pursuant to various stock option agreements. Each stock option agreement contains specific terms.
 
Stock Options – The Company currently has awards outstanding with service conditions and graded-vesting features. We recognize compensation cost on a straight-line basis over the requisite service period.
 
The fair value of each time-based award is estimated on the date of grant using the Black-Scholes option valuation model. Our weighted-average assumptions used in the Black-Scholes valuation model for equity awards with time-based vesting provisions granted during the year.
 
The following table summarizes stock option activity under the Plan:
 
 
 
Number ofshares
 
 
Weighted-averageexerciseprice
 
 
Weighted-averageremainingcontractual term(in years)
 
 
Aggregateintrinsicvalue (inthousands)
 
Outstanding at September 30, 2016
  40,000 
 $2.00 
     
     
Granted
  313,300 
  6.08 
    
    
Exercised
  (1,500)
  - 
    
    
Forfeited
  (18,500)
  - 
    
    
Outstanding at September 30, 2017
  333,300 
  5.83 
    
    
Granted
  235,000 
  4.67 
    
    
Exercised
  - 
  - 
    
    
Forfeited
  (98,650)
  6.38 
    
    
Outstanding at September 30, 2018
  469,650 
 $5.13 
  6.9 
 $ 
 
    
    
    
    
Exercisable at September 30, 2018
  337,150 
 $5.22 
  6.4 
 $ 
 
As of September 30, 2018, there was approximately $169,639 of total unrecognized compensation cost related to non-vested stock options which vest over a period of approximately 0.6 years. 
 

F-30
 
 
Restricted Stock Award transactions:
 
On October 1, 2016, the Company issued 230,000 restricted stock awards in aggregate to board members and the Chairman who is also our Chief Executive Officer. The restricted stock awards vested January 1, 2018. The stock awards are valued at fair market upon issuance at $195,500 and amortized over the vesting period. We recognized $39,100 and $156,400 of stock based compensation expense for the years ended September 30, 2018 and 2017, respectively.
 
NOTE 12 – WARRANTS
 
Transactions involving our equity-classified warrants are summarized as follows:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
 
Weighted-
average remaining contractual term (in years)
 
 
Aggregate intrinsic value (in thousands)
 
Outstanding at September 30, 2016
  70,067 
 $4.47 
 
 
 
 
 
 
Issued
  212,176 
  6.53 
 
 
 
 
 
 
Exercised
  (70,067)
  4.47 
 
 
 
 
 
 
Forfeited
   
   
 
 
 
 
 
 
Outstanding at September 30, 2017
  212,176 
  6.53 
 
 
 
 
 
 
Issued
  100,000 
  7.50 
 
 
 
 
 
 
Exercised
   
   
 
 
 
 
 
 
Forfeited
   
   
 
 
 
 
 
 
Outstanding at September 30, 2018
  312,176 
 $6.84 
  3.5 
 $ 
 
    
    
    
    
Exercisable at September 30, 2018
  312,176 
 $6.84 
  3.5 
 $ 
 
The following table summarizes outstanding common stock purchase warrants as of September 30, 2018:
 
 
 
Number of shares
 
 
Weighted-average exercise price
 
Expiration
 
 
 
 
 
 
 
 
Exercisable at $7.80 per share
  141,676 
 $7.80 
September 2021
Exercisable at $7.50 per share
  100,000 
 $7.50 
October 2022
Exercisable at $4.00 per share
  70,500 
 $4.00 
September 2022
 
  312,176 
  6.84 
 
 
NOTE 13 – SEGMENT INFORMATION
 
The Company operates through its three subsidiaries in three business segments: the Professional Products, the Licensing, and the Entertainment divisions. The Professional Products division is designed to be an innovative and cutting-edge producer and marketer of quality hair care products and has expanded into licensing opportunities. The Licensing division is designed to establish a lifestyle brand via licensing of select products / categories (grooming, personal care, cologne, accessories, jewelry and apparel) with a focus on addressing the needs of the men. The Entertainment division’s focus is to become a producer and marketer of multiple entertainment distribution platforms. The corporate parent also will generate revenue from time to time, thru advisory consulting agreements. This revenue is similar to the Entertainment divisions’ revenue process and we have allocated revenue from corporate to the Entertainment division for segment presentation.
 

F-31
 
 
The Professional Products division operated for the full year in fiscal 2018 and 2017. The Licensing and Entertainment divisions were both acquired in January 2017.
 
The performance of the business is evaluated at the segment level. Cash, debt and financing matters are managed centrally. These segments operate as one from an accounting and overall executive management perspective, though each segment has senior management in place; however they are differentiated from a marketing and customer presentation perspective, though cross-selling opportunities exist and continue to be pursued.
 
Condensed summary segment information follows for the years ended September 30, 2018 and 2017.
 
Year ended September 30, 2018
 
 
 
 
 
Three Months Ended September 30, 2016 
 
 
 
 
Professional
Product Division
 
 
Licensing Division
 
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $95,776 
 $5,213,360 
 $1,118,960 
 $6,428,096 
Net Sales related party
 $332,955 
 $- 
 $1,659,091 
 $1,992,046 
Total Net Sales
 $428,731 
 $5,213,360 
 $2,778,051 
 $8,420,142 
Income (loss) from Operations before Overhead
 $(1,144,557)
 $3,109,601 
 $233,939 
 $2,198,983 
Allocated Corporate Overhead (a)
  108,767 
  1,322,604 
  704,778 
  2,136,149 
Net Income (loss)
 $(1,253,324)
 $1,786,997 
 $(470,839)
 $62,834 
 
    
    
    
    
Assets
 $2,840,222
 $7,865,509
 $4,491,881 
 $15,017,612
 
Year ended September 30, 2017
 
 
 
 
 
Three Months Ended September 30, 2016 
 
 
 
 
Professional
Product Division
 
 
Licensing Division
 
 
 
Entertainment
Division
 
 
 
Total
 
Net Sales
 $872,354 
 $1,194,582 
 $676,779 
 $2,743,715 
Net Sales related party
 $97,850 
 $600,000 
 $1,033,388 
 $1,731,238 
Total Net Sales
 $970,204 
 $1,794,582 
 $1,710,167 
 $4,474,953 
Income (loss) from Operations before Overhead
 $(1,705,081)
 $637,888 
 $697,066 
 $(370,127)
Allocated Corporate Overhead (a)
  354,362 
  338,808 
  322,871 
  1,016,041 
Net Income (loss)
 $(2,059,443)
 $299,080 
 $374,195 
 $(1,386,168)
 
    
    
    
    
Assets
 $3,068,606 
 $2,603,075 
 $1,397,758 
 $7,069,439 
 
(a)            
The Company began allocating corporate overhead to the business segments in April 2017. We have allocated overhead on a proforma basis for the years ended September 30, 2018 and 2017 above for comparison purposes.
 

F-32
 
 
NOTE 14 – INCOME TAXES
 
The Company generated operating losses for the years ended September 30, 2018 and 2017 on which it has recognized a full valuation allowance. The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
 
The following table presents the components of the provision for income taxes for the periods presented:
 
 
 
Years Ended September 30,
 
 
 
2018
 
 
2017
 
Current
 
 
 
 
 
 
  Federal
 $ 
 $ 
  State
   
   
Total current
   
   
Deferred
    
    
  Federal
  15,000 
  24,000 
  State
  1,000 
  1,000 
Total deferred
  16,000 
  25,000 
Total provision
 $16,000 
 $25,000 
 
A reconciliation of the federal statutory income tax rate to the Company's effective income tax rate is as follows:
 
 
 
Years Ended September 30,
 
 
 
2018
 
 
2017
 
Federal statutory income tax rate
  24.3%
  34.0%
State income taxes, net of federal benefit
  49.0 
  3.2 
Permanent differences
  (384.5)
  - 
Tax impact of federal tax rate change
  1,708.1 
  - 
Limitation on net operating losses
  1,065.8 
  (2.3)
Tax impact of non-controlling interest
  (246.4)
  21.1 
Change in valuation allowance
  (2,250.5)
  (57.8)
 
    
    
Provision for income taxes
  (34.2)%
  (1.8)%
 

F-33
 
 
Significant components of the Company's deferred income taxes are shown below:
 
 
 
Years Ended September 30,
 
 
 
2018
 
 
2017
 
Deferred tax assets:
 
 
 
 
 
 
Net operating loss carryforwards
 $1,396,000 
 $2,304,000 
Stock compensation
  139,000 
  87,000 
Investments
  0 
  32,000 
Accrued expenses
  0 
  2,000 
Intangibles
  42,000 
  0 
Capitalized expenses
  7,000 
  - 
Charitable contributions
  26,000 
  10,000 
 
    
    
Total deferred tax assets
  1,610,000 
  2,435,000 
 
    
    
Deferred tax liabilities:
    
    
Prepaid expenses
  (177,000)
  (31,000)
Management fees
  (169,000)
  (73,000)
Intangibles
  (21,000)
  (33,000)
Fixed assets
  (1,000)
  (18,000)
Total deferred tax liabilities
  (368,000)
  (155,000)
Net deferred tax assets
  1,242.000 
  2,280,000 
Valuation allowance
  (1,263,000)
  (2,317,000)
 
    
    
Net deferred tax liability
 $(21,000)
 $(37,000)
 
The Company has established a valuation allowance against net deferred tax assets due to the uncertainty that such assets will be realized. The deferred tax liabilities that result from indefinite life intangibles cannot be offset by deferred tax assets. The Company periodically evaluates the recoverability of the deferred tax assets. At such time as it is determined that it is more likely than not that deferred tax assets will be realizable, the valuation allowance will be reduced.
 
Under Internal Revenue Code (IRC) Section 382, the use of net operating loss (“NOL”) carryforwards may be limited if a change in ownership of a company occurs. During the year ending September 30, 2018, the company determined that a change of ownership under IRC Section 382 had occurred during the years ending September 30, 2017 and 2015. As a result of these ownership changes, the pre-ownership change NOL carryforwards would be limited and approximately $2.1 million of such NOLs will expire before being utilized. Therefore, at September 30, 2018 the Company reduced the deferred tax asset and related valuation allowance associated with these NOLs by approximately $0.5 million due to IRC Section 382.
 
The total valuation allowance decreased by $1,054,000 and increased by $788,000 as of September 30, 2018 and 2017, respectively.
 
At September 30, 2018, the Company has utilizable NOL carryforwards of approximately $6.0 million. The federal NOL carryforwards begin to expire in 2035.
 
The Company accounts for its state franchise and minimum taxes as a component of its general and administrative expenses.
 
On December 22, 2017, the Tax Cuts and Jobs Act (“TCJA”) was enacted.  As a result of the enactment, the U.S. corporate tax rate was changed from a progressive bracketed tax rate with the highest marginal rate of 35% to a flat corporate tax rate of 21%. As the Company has a fiscal year ending September 30, the blended effective rate is 24.3% for the fiscal year ended September 30, 2018.  The Company revalued its deferred tax assets and liabilities, as well as the valuation allowance, at the date of enactment and these repricings are reflected gross in the above presented rate reconciliation.  Finally, as the Company does not own more than 10% of any foreign companies, there is no impact of IRC Section 965 to the Company as a result of the TCJA.
 

F-34
 
 
The Company files income tax returns in the United States, and various state jurisdictions. The Company’s policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2018 and 2017, there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
 
NOTE 15 – LEASES
 
The Company currently leases its corporate office space under an agreement through December 2019. The Agreement included (1) a discount on rent to $12,000 per month if the full rent was prepaid and (2) a right of return on payments prorated if the landlord exercised an early termination of the lease. In April 2018, we made a full prepayment of $240,000. In addition, the Company has a lease for office space until February 2019 in California for the licensing and brand management divisions. Rent expense in aggregate was $262,264 and $135,944 for the years ended September 30, 2018 and 2017, respectively.
 
NOTE 16 – COMMITMENTS AND CONTINGENCIES
 
Wholesale License Agreement
 
In September 2017 we entered into a wholesale license agreement with kathy ireland® Worldwide under which we were granted an exclusive, royalty free right to license, assign and use the kathy ireland® Health & Wellness™ trademark, and all trade names, trademarks and service marks related to the intellectual property including any derivatives or modifications, goodwill associated with this intellectual property when used in conjunction with health and wellness as well as Ms. Ireland's likeness, videos, photographs and other visual representations connected with kathy ireland® Health & Wellness™.
 
As compensation under this agreement, we agreed to pay kathy ireland® Worldwide a marketing fee of $840,000, of which $480,000 was paid by January 1, 2018. The balance is payable in three equal annual installments beginning January 1, 2019, subject to acceleration. Under the terms of this agreement, we also agreed to pay kathy ireland® Worldwide a royalty of 33 1/3% of our net proceeds under any sublicense agreements we may enter into for this intellectual property.
 
The initial term of this wholesale license agreement expires in September 2024, and we have the right to renew it for an additional three year period by paying an additional marketing fee of $360,000.
 
On January 30, 2018, Level Brands, amended its wholesale license agreement with kathy Ireland® Worldwide. The amendment accounted for the Company exercising its option on a three year extension and amending the payment terms related to this extension as follows: to pay $400,000 within 5 days of executing the amendment (which was paid on January 31, 2018), and to pay the final amounts due under the Agreement, $320,000 on the latter of January 1, 2019 or 30 days after the receipt by the Company of $5,000,000 in net proceeds from sublicense agreements signed under the health and wellness trademarks. This amount is classified as an accrued expense related party as of September 30, 2018. In addition, royalty payments to kathy ireland® Worldwide for the additional three year extension are set at 35% of net proceeds.
 
NOTE 17 – SUBSEQUENT EVENTS
 
On October 2, 2018, the Company completed a secondary public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of $6,899,998. The Company received approximately $6.3 million in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
 
On August 1, 2018, the Company extended the term of its original note receivable of $275,000 with a related party. The outstanding principal of $155,400 as of September 30, 2018, with 5% interest is due by December 31, 2018. On November 15 2018, the note was paid in full.
 
On December 3, 2018 the Company and our newly organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Cure Based Development, LLC, a Nevada limited liability company (“Cure Based Development”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, upon consummation of a two-step merger, cbdMD LLC will continue as a wholly-owned subsidiary of our company and will continue the operations of Cure Based Development pre-closing. Cure Based Development, a Charlotte, NC-based company formed in August 2017, is owner, operator and manufacturer of nationally recognized consumer cannabidiol (CBD) brand cbdMD which currently offers a variety of CBD products from topicals and tinctures to bath bombs and pet products, manufactured and sold direct to consumers online via the company website. Cure Based Development also provides wholesale distribution with retailers currently selling products at brick-and-mortar locations, compounding pharmacies, salons, supplement stores, and pet shops. Cure Based Development reported revenues of $354 and $3,280,009 for the period from inception through December 31, 2017 and for the eight months ended August 31, 2018, respectively, and a net loss of $323,197 and $353,561 for those periods.
 

F-35
 
 
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.
 

F-36