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CORRESP
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filename1.htm

Blueprint

Division
of Corporation Finance

United
States Securities and Exchange Commission

February
28, 2019

Level Brands, Inc.

4521 Sharon Road, Suite 450

Charlotte, NC 28211

Telephone (704) 362-6345

'CORRESP'

February
28, 2019

Division
of Corporation Finance

United
States Securities and Exchange Commission

100 F
Street N.W.

Washington,
DC 20549

Attention:
Jay Ingram, Legal Branch Chief

Sergio
Chinos, Staff Attorney

Re:
Level Brands, Inc. (the “Company”)

Registration
Statement on Form S-3

Filed
December 13, 2018

File
No. 333-228773

Ladies
and Gentlemen:

The
Company is in receipt of the staff's letter of comment dated
February 27, 2019. Following are the Company's responses to the
staff's comments.

Form S-3 filed December 13, 2018

Form 8-K/A filed February 22, 2019 Exhibit 99.3

1. – Basis of Pro Forma Presentation, page F-6

1.

You disclosed in your Item 2.01 Form 8-K dated December 20, 2018
that the merger transaction will be accounted for as a reverse
merger. Please address how you determined the appropriateness of
this accounting. In this regard, we note that in the First Tranche
you will issue 6,500,000 shares of common stock to the preferred
membership interest owners of Cure Based Development and in the
Second Tranche you will issue 8,750,000 shares of your common stock
to CBD Holding, LLC, a member of Cure Based Development which is
controlled by Mr. Scott Coffman, CEO and one of the managers of
Cure Based Development. In light of the vesting provisions of the
Second Tranche and guidance set forth in ASC 805-10-25-20 through
21 and ASC 805-10-55-24 through 55-26, please address why the
8,750,000 shares are not accounted for as a separate transaction
and therefore not included in applying the acquisition method of
accounting, including the determination of the purchase price.
Specify whether the vesting terms include a condition of
employment.

Division
of Corporation Finance

United
States Securities and Exchange Commission

February
28, 2019

Page
2 of
13

Response: While
the Company initially believed that the merger transaction would be
accounted for as a reverse merger, the Company subsequently
determined that the Company was the acquirer based upon the
following analysis below. Accordingly, the Company’s Form
8-K/A as filed on February 22, 2019 contains financial information
based upon the application of acquisition accounting, and the
footnote confirms the Company’s ultimate determination of the
proper accounting treatment for the transaction. The Company,
however, acknowledges that the Form 8-K/A as filed does not include
disclosure regarding how the Company ultimately determined that it
was the acquirer. If the staff believes it would be helpful to
investors, the Company will amend the 8-K/A to provide disclosure
on the determination of the accounting treatment that the Company
is the acquirer in the merger.

Abstract of the Merger Agreement dated December 3,
2018:

●

Recitals: The board of
directors of the Company and the members of Cure Based Development
have determined being in the best interest of each entity that: (i)
the Company would acquire Cure Based Development through a
statutory merger with and into the Company, pursuant to which Cure
Based Development would become a wholly owned subsidiary of the
Company.

●

Section 2.02 (a) Closing: The
closing of the merger shall take place at the offices of the
Company no later than the second business day following the
satisfaction of the closing conditions set forth in Article VII of
the Merger Agreement.

●

Article VII: The conditions in
Article VII includes (among others), the passage of the Farm Bill
by both the U.S. House of Representatives and the U.S. Senate and
shall have been signed and approved by the President of the
U.S.

●

Section 2.06 Merger Consideration:

o

The Company will
issue 6,500,000 shares to the former members of Cure Based
Development (“First Tranche
Shares”);

o

The Company will
issue 8,750,000 shares that will vest 2,175,000 each after 12, 24,
42, and 60 months. Until vested, the shares will have a voting
proxy voted by the Audit Committee Chair and voting as directed by
a majority of the independent board members of the Company
(“Second Tranche
Shares”). The structure of the Second Tranche was made
as a business decision by the Company’s management and was a
deliberate decision not to turn control over to the sellers on day
one, so that existing Company shareholders could retain control in
the “near-term”; and

o

In addition to the
above, the seller will have the opportunity to earn shares based on
performance as an earn-out as follows: 3,812,500 shares issued each
for aggregate revenue of $20 million, $60 million, $140 million,
and $300 million. The aggregate revenue totals will be measured on
the 12, 24, 42, and 59 month, starting from the first calendar day
after the close of the transaction (“Earnout
Shares”).

●

Article X Shareholder approval:
While no shareholder approval under North Carolina law was required
for issuance of the First Tranche Shares, Second Tranche Shares and
Earnout Shares, if earned, the Company’s common stock is
listed on the NYSE American and it is subject to its rules
regarding shareholder approval for the possible issuance of in
excess of 20% of the currently outstanding shares of its common
stock. The Company will seek shareholder approval for the issuance
of all shares under the terms of the Merger Agreement, including
the First Tranche Shares, Second Tranche Shares and the Earnout
Shares (if earned) (the “Stock Issuance
Proposal”).

Other points of note:

●

The Company’s
2019 Annual Meeting is currently scheduled for March 29, 2019. As
set forth in the preliminary proxy statement on Schedule 14A as
filed on February 14, 2019, proposal 3 thereof is seeking
shareholder approval for the Stock Issuance Proposal.

●

On December 20,
2018, the closing date of the transaction, the transaction was
deemed consummated and there are no circumstances where the former
Cure Based Development owners can cancel or rescind the transaction
either before the 2019 Annual Meeting or if the Stock Issuance
Proposal is not approved at the 2019 Annual Meeting. Please see the
additional discussion in our response to comment 4
below.

●

In the event the
Stock Issuance Proposal is not approved at the 2019 Annual Meeting,
pursuant to Article X of the Merger Agreement, the Company is
obligated to cause an unlimited number of additional shareholder
meetings to be held every six months thereafter until the
shareholder approval is obtained.

Division
of Corporation Finance

United
States Securities and Exchange Commission

February
28, 2019

Page
3 of
13

Application of ASC 805 – Business Combinations

The
Company notes that Accounting Standards Codification
(“ASC”)
805 Business Combinations
requires that a business combination be accounted for by applying
the acquisition method. Specifically, ASC 805-10-05-4 states that
the acquisition method requires all of the following
steps:

a.

Identifying the
acquirer;

b.

Determining the
acquisition date;

c.

Recognizing and
measuring the identifiable assets acquired, the liabilities
assumed, and any noncontrolling interest in the acquiree;
and

d.

Recognizing and
measuring goodwill or a gain from a bargain purchase

Additionally, due
to the pending issuance of the Company’s stock to the former
members of Cure Based Development in exchange for 100% of the
equity interest in Cure Based Development, the Company also
considered the provisions of ASC 805-10-55-12 (Reverse Acquisition)
during the process of identifying the acquirer.

a.

Identifying the acquirer:

The
Company noted that ASC 805-10-25-4 states that for each business
combination, one of the combining entities shall be identified as
the acquirer. The implementation guidance in ASC 805-10-55-10
further states that the guidance in the General Subsections of
Subtopic 810-10 related to determining the existence of a
controlling financial interest shall be used to identify the
acquirer in a business combination, except when a variable interest
entity (VIE) is acquired. If a business combination has occurred
but applying that guidance does not clearly indicate which of the
combining entities is the acquirer, paragraph 805-10-25-5 requires
the factors in paragraphs 805-10-55-11 through 55-15 to be
considered in making the determination.

Variable Interest Entity discussion:

Prior
to and leading up to the acquisition date, after the definitive
documents were executed leaving only the passage of the Farm Bill
as a requirement for completion of the acquisition, the Company
provided financing to Cure Based Development in the form of a
promissory note that amounted to approximately $2 million. Although
the promissory note (receivable to the Company), may be deemed a
variable interest, the Company determined that Cure Based
Development was not a variable interest entity due to the
following:

●

Cure Based
Development did not lack sufficient equity to finance its
activities. Although the promissory note was provided by the
Company, Cure Based Development had not drawn down fully on the
promissory note prior to the acquisition date and was primarily
financing its activities through its own operations;

●

The equity holders
of Cure Based Development as a group (both preferred unit holders
and common unit holders) had the characteristics of a controlling
financial interest; and

●

There is
substantive voting rights among the members of Cure Based
Development through their membership interest.

Division
of Corporation Finance

United
States Securities and Exchange Commission

February
28, 2019

Page
4 of
13

As Cure
Based Development was deemed not to be a VIE and the transaction
was effected by an exchange of equity interest in the form of
merger consideration paid to the former owners of Cure Based
Development, the Company further evaluated the guidance in ASC
805-10-55-12 through 805-10-55-15 in order to confirm that the
Company was the acquirer and Cure Based Development was the
acquiree.

The
Company noted that ASC 805-10-55-12 through 805-10-55-15 state the
following:

55-12

In a business
combination effected primarily by exchanging equity interests, the
acquirer usually is the entity that issues its equity interests.
However, in some business combinations, commonly called reverse
acquisitions, the issuing entity is the acquiree.
Subtopic 805-40: provides guidance on accounting for
reverse acquisitions. Other pertinent facts and circumstances also
shall be considered in identifying the acquirer in a business
combination effected by exchanging equity interests, including the
following:

a.

The relative voting
rights in the combined entity after the business combination. The
acquirer usually is the combining entity whose owners as a group
retain or receive the largest portion of the voting rights in the
combined entity. In determining which group of owners retains or
receives the largest portion of the voting rights, an entity shall
consider the existence of any unusual or special voting
arrangements and options, warrants, or convertible
securities.

b.

The existence of a
large minority voting interest in the combined entity if no other
owner or organized group of owners has a significant voting
interest. The acquirer usually is the combining entity whose single
owner or organized group of owners holds the largest minority
voting interest in the combined entity.

c.

The composition of
the governing body of the combined entity. The acquirer usually is
the combining entity whose owners have the ability to elect or
appoint or to remove a majority of the members of the governing
body of the combined entity.

d.

The composition of
the senior management of the combined entity. The acquirer usually
is the combining entity whose former management dominates the
management of the combined entity.

e.

The terms of the
exchange of equity interests. The acquirer usually is the combining
entity that pays a premium over the pre-combination fair
value of the equity interests of the other combining entity or
entities.

55-13

The acquirer
usually is the combining entity whose relative size (measured in,
for example, assets, revenues, or earnings) is significantly larger
than that of the other combining entity or entities.

55-14

In a business
combination involving more than two entities, determining the
acquirer shall include a consideration of, among other things,
which of the combining entities initiated the combination, as well
as the relative size of the combining entities, as discussed in the
preceding paragraph.

55-15

A new entity formed to effect a
business combination is not necessarily the acquirer. If a new
entity is formed to issue equity interests to effect a business
combination, one of the combining entities that existed before the
business combination shall be identified as the acquirer by
applying the guidance in paragraphs 805-10-55-10 through 55-14: In
contrast, a new entity that transfers cash or other assets or
incurs liabilities as consideration may be the
acquirer.

The
Company determined that the key fact pattern assessed for this
transaction based on the guidance above was as
follows:

Division
of Corporation Finance

United
States Securities and Exchange Commission

February
28, 2019

Page
5 of
13

ASC 805-10-55-12

i.

Relative voting rights –
The Company is issuing shares to the former members of Cure Based
Development as part of the consideration paid to acquire Cure Based
Development. Prior to the transaction the Company had 10,095,356
shares outstanding as defined under ASC 805-10-55-12. Upon
completion of the transaction and after shareholder approval the
Company will issue an additional 15,250,000 shares (representing
the First Tranche Shares and the Second Tranche Shares) to the
former members of Cure Based Development resulting in a total of
25,345,356 shares outstanding. Until vested, the Second Tranche
Shares will be subject to a voting proxy voted by the Audit
Committee Chair and voting as directed by a majority of the
independent board members of the Company.

ii.

In addition to the
issuance of the shares above, the seller will have the opportunity
to receive the Earnout Shares based on performance as an earn-out
as set forth above.

Additionally, the
Company noted that Ernst & Young (“EY”)
has additional relevant guidance published as it relates to the
question of “Relative Voting Rights” under ASC
805-10-55-12(a). The EY Financial
Reporting Development-Business Combinations dated February
2018 states the following:

We believe that instruments that are not vested or exercisable or
convertible until after the consummation date generally should not
be considered outstanding shares for the purposes of the voting
rights assessment unless it is apparent that a sufficient number of
instruments will be vested or exercisable in the near-term, and it
can be reasonably concluded that those instruments would be
exercised or converted.

Subsequent to the
closing of the transaction and upon the issuance of the First
Tranche and Second Tranche Shares, the Company’s current
shareholders will control approximately 40% of the voting shares,
the former Cure Based Development members will control
approximately 26% of the voting shares (through the First Tranche
Shares) and the Company, through the proxy granted to the Audit
Committee Chair over the Second Tranche Shares until vested, will
control approximately 34% of the voting shares. As set forth above,
the Second Tranche Shares will be voted based on the recommendation
of the majority of the independent board members. However, at the
date of closing the Company’s shareholders owned 100% of the
shares (voting rights) outstanding since the First Tranche Shares
and Second Tranche Shares were not outstanding as of the date of
the acquisition.

Based
on the EY guidance referenced above