CBDMD, INC.
SCHEDULE 14A INFORMATION
Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act
of 1934
(Amendment
No. )
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Under Rule 14(a)(12)
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Level Brands, Inc.
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(Name
of Registrant as Specified in Its Charter)
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Applicable
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(Name
of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Fee computed on
table below per Exchange Act Rules 14a-6(i)(4) and
0-11.
1.
Title
of each class of securities to which transaction
applies:
2.
Aggregate number of
securities to which transaction applies:
3.
Per
unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was
determined):
4.
Proposed maximum
aggregate value of the transaction:
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fee paid:
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statement number, or the Form or Schedule and the date of its
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Filed:
NOTICE OF 2019 ANNUAL MEETING OF SHAREHOLDERS
____________________
TO BE HELD ON APRIL 19, 2019
We will
hold the 2019 annual meeting of shareholders of Level Brands, Inc.
on Friday, April 19, 2019 at 4521 Sharon Road, Suite 450,
Charlotte, NC 28211 beginning at 1:00 p.m. local time. At the
annual meeting you will be asked to vote on the following
matters:
●
the election of
nine directors;
●
the ratification of
the appointment of
Cherry Bekaert
LLP
as our independent registered public accounting
firm;
●
to approve the
possible issuance (the “Stock Issuances”) up to an
aggregate of 30,500,000 shares of our common stock pursuant to
rights granted as consideration for the mergers which closed on
December 20, 2018 (the “Transaction”) pursuant to the
terms of the Agreement and Plan and Merger dated December 3, 2018
(the “Merger Agreement”) by and among Level Brands,
Inc., its wholly-owned subsidiaries AcqCo LLC and cbdMD LLC, and
Cure Based Development, LLC (“Cure Based
Development”);
●
to approve an
amendment to our articles of
incorporation to change the name of our company to “cbdMD,
Inc.” (the “
Name
Change”);
and
●
to approve an
amendment to the 2015 Equity Compensation Plan to increase the
number of shares available for issuance under the plan (the
“2015 Plan Amendment”); and
●
any other business
as my properly come before the meeting.
The
board of directors has fixed the close of business on March 18,
2019 as the record date for determining the shareholders that are
entitled to notice of and to vote at the 2019 annual meeting and
any adjournments thereof.
All
shareholders are invited to attend the annual meeting in person.
Your vote is important regardless of the number of shares you own.
Please vote your shares by proxy over the Internet or by mail, by
telephone or by facsimile.
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By
order of the board of directors
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Charlotte,
NC
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March 22,
2019
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Martin A.
Sumichrast
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Chairman and Chief
Executive Officer
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Important Notice Regarding the
Availability of Proxy Materials for the Annual Meeting to be Held
on April 19, 2019
: This proxy statement, along with our
Annual Report on Form 10-K for the fiscal year ended September 30,
2018, are available free of charge on our website
www.levelbrands.com
and through the SEC’s website
www.sec.gov
.
LEVEL BRANDS, INC.
PROXY STATEMENT
2019 ANNUAL MEETING OF SHAREHOLDERS
TABLE OF CONTENTS
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Page No.
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General
Information
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1
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Summary
of the Transaction
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2
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Proposal
1 - Election of directors
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5
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Proposal
2 - Ratification of appointment of
Cherry Bekaert LLP
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8
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Proposal
3 – Approval of the Stock Issuances
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8
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Proposal
4 – Approval of the Name Change
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35
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Proposal
5 – Approval of the 2015 Plan Amendment
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36
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Other
Matters
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38
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Dissenter’s
Rights
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38
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Corporate
Governance
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38
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Executive
Compensation
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43
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Principal
Shareholders
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47
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Certain
Relationships and Related Transactions
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49
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Shareholder
Proposals to be Presented at the Next Annual Meeting
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50
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Availability
of Annual Report on Form 10-K
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50
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Shareholders
Sharing the Same Last Name and Address
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50
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Where
You Can Find More Information
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50
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Index to Cure Based
Development Financial Information
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F-1
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Exhibits:
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Exhibit
A – Fairness opinion dated November 15, 2018 of
ThinkEquity
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A-1
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Exhibit
B – Form of Amendment for the Name Change
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B-1
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
STATEMENTS
This proxy statement contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These
statements are based on our current expectations and involve risks
and uncertainties which may cause results to differ materially from
those set forth in the statements. The forward-looking statements
may include statements regarding actions to be taken in the future.
We undertake no obligation to publicly update any forward-looking
statement, whether as a result of new information, future events or
otherwise. Forward-looking statements should be evaluated together
with the many uncertainties that affect our business, particularly
those set forth in the section on forward-looking statements and in
the risk factors in Item 1.A of our Annual Report on Form 10-K for
the fiscal year ended September 30, 2018 as filed with the
Securities and Exchange Commission on December 12, 2018 (the
“
2018
10-K
”).
Unless
the context otherwise indicates, when used in this proxy statement,
the terms "Level Brands,” “we,” “us,
“our” and similar terms refer to Level Brands, Inc., a
North Carolina corporation, and our subsidiaries. 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.
Shareholders Should Read the Entire Proxy Statement
Carefully Prior to Returning Their Proxies
PROXY STATEMENT
FOR
2019 ANNUAL MEETING OF SHAREHOLDERS
GENERAL INFORMATION
The
accompanying proxy is solicited by the board of directors of Level
Brands, Inc. for use at our 2019 annual meeting of shareholders to
be held on Friday, April 19, 2019 at 1:00 p.m., or any adjournment
or postponement thereof, for the purposes set forth in the
accompanying notice of 2019 annual meeting of shareholders. The
date of this proxy statement is March 22, 2019, the approximate
date on which this proxy statement and the enclosed proxy were
first sent or made available to our shareholders.
This
proxy statement and the accompanying proxy card are being mailed to
owners of shares of our common stock in connection with the
solicitation of proxies by the board of directors for the 2019
annual meeting of shareholders. This proxy procedure is necessary
to permit all common shareholders, many of whom live throughout the
United States and are unable to attend the 2019 annual meeting in
person, to vote. We will pay the entire cost of preparing,
assembling, printing, mailing and distributing these proxy
materials and soliciting votes.
Electronic
access
.
To access
our proxy statement and 2018 10-K electronically, please visit our
corporate website at
www.levelbrands.com
. The
information which appears on our website is not part of this proxy
statement.
Voting
securities
.
Only our
common shareholders of record as of the close of business on March
18, 2019, the record date for the 2019 annual meeting, will be
entitled to vote at the meeting and any adjournment thereof. As of
that date, there were 10,170,356 shares of our common stock issued
and outstanding, all of which are entitled to vote with respect to
all matters to be acted upon at the 2019 annual meeting. Each
holder of record as of that date is entitled to one vote for each
share held. In accordance with our bylaws, the presence of at least
33 1/3% of the voting power, regardless of whether the proxy has
authority to vote on all matters, constitutes a quorum which is
required in order to hold 2019 annual meeting and conduct business.
Presence may be in person or by proxy. You will be considered part
of the quorum if you voted on the Internet, by telephone, by
facsimile or by properly submitting a proxy card or voting
instruction form by mail, or if you are present and vote at the
2019 annual meeting. Votes for and against, abstentions and
“broker non-votes” will each be counted as present for
purposes of determining the presence of a quorum.
Broker
non-votes
.
If you
are a beneficial owner whose shares are held of record by a broker,
bank or other nominee, you must instruct the broker, bank or other
nominee how to vote your shares. If you do not provide voting
instructions, your shares will not be voted on any proposal on
which the broker, bank or other nominee does not have discretionary
authority to vote. This is called a “broker non-vote.”
In these cases, the broker, bank or other nominee can register your
shares as being present at the 2019 annual meeting for purposes of
determining the presence of a quorum, but will not be able to vote
on those matters for which specific authorization is required. Your
broker, bank or other nominee does not have discretionary authority
to vote on the election of the directors
(proposal 1), to approve the Stock
Issuances (proposal 3), to approve the Name Change (proposal 4) or
to approve the 2015 Plan Amendment (proposal 5) without
instructions from you, in which case a broker non-vote will occur
and your shares will not be voted on this matter. Your broker, bank
or other nominee does have discretionary voting authority to vote
your shares on the ratification of Cherry Bekaert LLP as our
independent registered public accounting firm (proposal 2) even if
the broker, bank or other nominee does not receive voting
instructions from you.
In any
event, it is particularly important that you instruct your broker
as to how you wish to vote your shares.
Voting of
proxies
.
All valid
proxies received prior to the meeting will be exercised. All shares
represented by a proxy will be voted, and where a proxy specifies a
shareholder’s choice with respect to any matter to be acted
upon, the shares will be voted in accordance with that
specification. If no choice is indicated on the proxy, the shares
will be voted by the individuals named on the proxy card as
recommended by the board of directors. A shareholder giving a proxy
has the power to revoke his or her proxy, at any time prior to the
time it is exercised, by delivering to our Corporate Secretary a
written instrument revoking the proxy or a duly executed proxy with
a later date, or by attending the meeting and voting in person. A
shareholder wanting to vote in person at the 2019 annual meeting
and holding shares of our common stock in street name must obtain a
proxy card from his or her broker and bring that proxy card to the
2019 annual meeting, together with a copy of a brokerage statement
reflecting such share ownership as of the record date.
1
Vote required.
The
nine nominees receiving the greatest numbers of votes at the
meeting, assuming a quorum is present, will be elected to the nine
director positions to serve until their terms expire or until their
successors have been duly elected and qualified. Because directors
are elected by plurality, abstentions from voting and broker
non-votes will be entirely excluded from the vote and will have no
effect on its outcome. Assuming a quorum is present, each of
proposal 2, proposal 3, proposal 4 and proposal 5 must be approved
by the affirmative vote of a majority of the shares of common stock
present in person or by proxy at the annual meeting and entitled to
vote. Abstentions will be counted in tabulations of the votes cast
on each such proposal and will have the same effect as a vote
against the proposal, whereas broker non-votes will be excluded
from the vote and will have no effect on the outcome.
Board of directors
recommendations
.
The
board of directors recommends a vote FOR proposals 1, 2, 3, 4 and
5.
Attendance at the
meeting
. You are invited to attend the annual meeting only
if you were a Level Brands shareholder or joint holder as of the
close of business on March 18, 2019, the record date, or if you
hold a valid proxy for the 2019 annual meeting. In addition, if you
are a shareholder of record (owning shares in your own name), your
name will be verified against the list of registered shareholders
on the record date prior to your being admitted to the annual
meeting. If you are not a shareholder of record but hold shares
through a broker or nominee (in street name), you should provide
proof of beneficial ownership on the record date, such as a recent
account statement or a copy of the voting instruction card provided
by your broker or nominee. The meeting will begin at 1:00 p.m.
local time. Check-in will begin at 12:30 p.m. local
time.
Communications with our
board of directors.
You may contact any of our directors by
writing to them c/o Level Brands, Inc., 4521 Sharon Road, Suite
450, Charlotte, NC 28211. Each communication should specify the
applicable director or directors to be contacted as well as the
general topic of the communication. We may initially receive and
process communications before forwarding them to the applicable
director. We generally will not forward to the directors a
shareholder communication that is determined to be primarily
commercial in nature, that relates to an improper or irrelevant
topic, or that requests general information about Level Brands.
Concerns about accounting or auditing matters or communications
intended for non-management directors should be sent to the
attention of the Chairman of the Audit Committee at the address
above. Our directors may at any time review a log of all
correspondence received by Level Brands that is addressed to the
independent members of the board and request copies of any such
correspondence.
Who can help answer your
questions?
If you have additional questions after reading
this proxy statement, you may seek answers to your questions by
writing, calling or emailing:
Mark S.
Elliott
Chief
Financial Officer and
Chief
Operating Officer
Level
Brands, Inc.
4521
Sharon Road
Suite
450
Charlotte,
NC 28211
Telephone:
(704) 362-6345 (direct)
email:mark@levelbrands.com
SUMMARY OF THE TRANSACTION
Why are Level Brands’ shareholders being asked to vote on
proposal 3? (see page 8)
Our shareholders are not being asked to approve
the Transaction. The Transaction closed on December 20, 2018 and
the historic operations of Cure Based Development are now those of
our wholly-owned subsidiary, cbdMD LLC. While our shareholders were
not required to approve the Transaction under North Carolina law,
because our common stock is listed on the NYSE American pursuant to
Rule 712 of the NYSE American Company Guide, our shareholders are
required to approve the issuance of the First Tranche Shares, the
Second Tranche Shares and, if the revenue tests are met, the
Earnout Shares. Proposal 3 seeks shareholder approval for the Stock
Issuances pursuant to the contractual rights tendered to the Cure
Based Development members under the terms of the Merger Agreement
as consideration for the Mergers.
If proposal 3 is not
approved at our 2019 annual meeting, we are required to seek
shareholder approval of the proposal at additional special meetings
of our shareholders, to be held at least every six months, until
such time as shareholder approval is obtained. Until shareholder
approval is obtained, we are not obligated to issue any of these
securities under the rights granted to the Cure Based Development
members as consideration for the Mergers under the terms of the
Merger Agreement, and those members will continue to hold the
contractual rights to the securities pursuant to the terms of the
Merger Agreement.
2
The Transaction
(see page 9)
On
December 3, 2018 we and our
newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, entered into the Merger
Agreement with Cure Based Development. The Merger Agreement
provided that, upon the terms and subject to the conditions set
forth therein, AcqCo LLC would merge with and into Cure Based
Development with the Cure Based Development as the surviving entity
(the “
First
Merger
”), and immediately
thereafter Cure Based Development would merge with and into cbdMD
LLC with cbdMD LLC as the surviving entity (the
“
Second
Merger
” and collectively
with the First Merger, the “
Mergers
”).
Upon consummation of the Mergers, cbdMD LLC would continue as a
wholly-owned subsidiary of Level Brands and continue the operations
of Cure Based Development pre-closing. In addition to customary and
other conditions to closing, the closing of the Mergers was subject
to the approval by the President of the United States of the
Agricultural and Nutrition Act of 2018, commonly known as the Farm
Bill, or such other titled Federal legislation, which, when
approved, contains a permanent declassification of cannabidiol
(CBD) as a controlled substance under Federal
law.
On
December 20, 2018 (the “
Closing Date
”),
immediately
following the
approval by the President of the United States of the Farm Bill,
the closing of the Mergers occurred.
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, on the Closing Date the members of Cure Based
Development received contractual rights to receive 15,250,000
shares of our common stock, representing approximately 60% of our
outstanding common stock following such issuance, as the merger
consideration, issuable as follows:
●
a
s 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 rules of the NYSE American, the members of Cure
Based Development will be issued an aggregate of 6,500,000 shares
of our common stock (the “
First Tranche Shares
”);
and
●
as
promptly as practicable after receipt of such shareholder approval,
we will issue an additional 8,750,000 shares of our common stock
(the “
Second Tranche
Shares
”) 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 (“
CBDH
”), of which these
shares will vest over 60 months.
When
issued, the First Tranche Shares and Second Tranche Shares will be
subject to leak out agreements which are described later in this
proxy statement. In addition, when issued the Second Tranche Shares
will be subject to an irrevocable voting proxy until such time as
the shares vest in accordance with the terms of the Merger
Agreement. The issuances of the First Tranche Shares and Second
Tranche Shares, and upon voting rights vesting over a five year
period, may result in a change of control of our
company.
The Merger Agreement also provides that CBDH will
be entitled to receive up to an additional 15,250,000 shares of our
common stock (the “
Earnout
Shares
”) as part of the
merger consideration, upon the satisfaction of certain aggregate
net revenue criteria by cbdMD LLC within 60 months following the
Closing Date. The issuance of the Earnout Shares is also subject to
prior shareholder approval. A change of control of the company may
result over time in the event of, and as a result of, the issuance
of Earnout Shares.
The
issuance of the shares will constitute a change of control under
the rules and regulations of the NYSE American and at the time of
the initial issuance of the shares the Company shall seek the
continued listing of the Company’s common stock on the NYSE
American.
On December 4, 2018, following the execution of
the Merger Agreement, and pursuant to the terms and conditions of a
Secured Promissory Note and Security Agreement, we lent Cure Based
Development $2,000,000.
On the Closing Date, this obligation
was automatically deemed an unsecured intercompany advance
and will be treated as part of the
purchase price accounting for the Transaction.
Prior to the Closing Date, Cure Based Development
owed Edge of Business, LLC (“
Edge
”),
an entity controlled by Mr. R. Scott Coffman, a founder and CEO of
Cure Based Development, an aggregate of $1,184,300 for working
capital advances. Immediately following the Closing Date, we repaid
Edge $1,000,000 of this amount and the balance was converted into
an
18 month 6% promissory note. The note is interest only
for the first 12 months and thereafter payable in six equal and
consecutive monthly installments of principal and
interest.
On the Closing Date Mr. Coffman was appointed to
our board of directors.
On the Closing Date cbdMD LLC
entered into employment agreements with each of Mr. Coffman and Ms.
Caryn Dunayer to serve as CEO and President, respectively, of cbdMD
LLC. Prior to the Closing Date Mr. Coffman had served as CEO of
Cure Based Development and Ms. Dunayer had served as its
President.
3
The Companies (see page 13)
We are
a brand management and licensing
company. Our primary licensing and corporate brand management
businesses target consumer products in the health and wellness
space and other high-demand verticals, bringing innovative products
to market under the
kathy
ireland
® Health & Wellness; Ireland Men One (I'M1),
and Encore Endeavor One (EE1) brands. Following our acquisition of
Cure Based Development in December 2018, through our wholly-owned
subsidiary cbdMD LLC, we own and operate the nationally recognized
consumer cannabidiol (CBD) brand cbdMD, whose current products
include CBD gummies, CBD tinctures, CBD topicals, CBD bath bombs,
CBD oils, and CBD pet products. Our common stock is listed on the
NYSE American under the symbol “LEVB.” We maintain our
principal executive offices at 4521 Sharon Road, Suite 450,
Charlotte, NC 28211. Our telephone number is (704) 362-6345. See
“
Where You Can Obtain More
Information
” appearing later in this proxy
statement.
Cure Based Development, a Charlotte, NC-based
company formed in August 2017, was the owner, operator and
manufacturer of consumer cannabidiol (CBD) brand cbdMD which
o
ffered 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 provided 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.
Reasons for the Transaction (see page 26)
Prior
to the approval of the Mergers and Merger Agreement by our board of
directors, t
he board established
a
special committee
made up of
the disinterested and independent directors to review, evaluate and
negotiate the proposed transaction (the “
Special Committee
”). In determining to approve the Mergers
and the Merger Agreement, our board of directors considered many
factors, including the benefits described in this proxy statement
and the positive and negative factors described in the section of
this proxy statement entitled "
The Transaction—Reasons
for the Transaction
" beginning
on page 18, and upon the recommendation of the Special Committee,
unanimously determined that the transaction was fair to and in the
best interests of Level Brands and approved the Merger, the Merger
Agreement and the related transactional documents. Our board
believed that the Transaction will be beneficial to our company for
a variety of factors, including, but not limited to, potential the
strategic benefits to us, the terms of the Merger Agreement,
including the contingent nature of up to 50% of the total
consideration to be paid, the favorable opinion of our financial
advisor, the business experience of the Cure Based Development
management team and the addition of Mr. Coffman to our senior
management and board of directors, our entry into an emerging
market space, and the anticipated increase in interest from
investors because of the combined company’s larger size and
scope of operations, among others.
Opinion of our Financial Advisor (see page 29)
In connection with the Transaction, the Special
Committee received a written opinion, dated November 15, 2018, from
our financial advisor, ThinkEquity,
a division of Fordman
Financial Management Inc. (“
ThinkEquity
”),
as to the fairness, from a financial
point of view and as of the date of such opinion, to Level Brands
of the consideration to be paid by us in the Transaction. The full
text of ThinkEquity's written opinion dated November 15, 2018,
which sets forth the assumptions made, procedures followed, matters
considered and limitations on the review undertaken in connection
with the opinion, is attached as
Exhibit A
to this proxy statement and is
incorporated herein by reference. ThinkEquity has consented to the
inclusion of its written opinion dated November 15, 2018 in this
proxy statement, and to the description of such opinion and the
references to ThinkEquity contained in this proxy statement.
Shareholders are urged to read ThinkEquity's written opinion
carefully and in its entirety. ThinkEquity's opinion was provided
for the use and benefit of the Special Committee (in its capacity
as such) in its evaluation of the Transaction. ThinkEquity’s
opinion is limited solely to the fairness, from a financial point
of view and as of the date of such opinion, to us of the
consideration to be paid by us in the Transaction, and does not
address our underlying business decision to effect the Transaction
or the relative merits of the Transaction as compared to any
alternative business strategies or transactions that might be
available with respect to Level Brands. ThinkEquity’s opinion
does not constitute a recommendation to any Level Brands
shareholder as to how such shareholder should vote or act with
respect to proposal 3 or any other matter.
Interests of Certain Persons in the Transaction (see page
34)
Following
the Closing Date, CBDH issued Mr. Martin A. Sumichrast, our
Chairman of the board and CEO, a warrant expiring on December 31,
2019, exercisable at $90.00, to purchase a 9% membership interest
in CBDH. The warrant was exercised by Mr. Sumichrast on January 20,
2019. As a result of this warrant, and assuming CBDH ultimately
distributes the securities to its members, Mr. Sumichrast will be
entitled to receive 787,500 Second Tranche Shares and up to
1,372,500 Earnout Shares. The shares, which are issuable to Mr.
Sumichrast if distributed by CBDH to its members, will also be
subject to the leakout and voting proxy agreements described
earlier in this section.
4
Impact of the Stock Issuances on existing Level Brands shareholders
(see page 11)
The
Stock Issuances will dilute the ownership and voting interests of
our existing shareholders. As of the Closing Date, there were
10,095,396 shares of our common stock issued and outstanding.
Assuming the approval of proposal 3, the issuance of the First
Tranche Shares and the Second Tranche Shares, but giving effect to
no other change to the number of shares of our common stock issued
and outstanding or the possible issuance of the Earnout Shares in
future periods, the members of Cure Based Development would own
60.2% of our then outstanding shares of common stock. Therefore,
the ownership and voting rights of our existing shareholders will
be proportionally reduced.
Material U.S. federal income tax consequences of the Transaction to
the Level Brands’ shareholders (see page 35)
Because
our existing shareholders did not receive any consideration in the
Transaction, they did not recognize gain or loss in connection with
the Transaction with respect to their shares of our common
stock.
Accounting treatment of the Transaction (see page 35)
Level
Brands will account for this transaction under the acquisition
method as described in Financial Accounting Standards Board
Accounting Standards Codification
805 — “Business Combinations”, under
which all assets and liabilities will be recorded at their fair
market values as of the date of the acquisition. Purchase
consideration in excess of the net assets acquired will be recorded
as goodwill.
Board recommendation (see page 35)
Upon approval and
recommendation of the
Special Committee, our board of
directors
approved the Merger,
the Merger Agreement and the related transactions.
Accordingly, our board of directors
recommends that you vote FOR proposal 3 to approve the Stock
Issuances.
For more information regarding the factors
considered by our board in reaching its decision, please see the
section entitled “
The
Transaction – Reasons for the Transaction
”
beginning on page 18.
PROPOSAL 1
ELECTION OF DIRECTORS
The
board, upon recommendation by the Corporate Governance and
Nominating Committee, has nominated the following nine individuals
for election as directors, each to hold office until the 2020
annual meeting of shareholders or until his successor has been duly
elected and qualified. The nominees include our current directors,
all of whom are standing for re-election, and three individuals
also nominated by our board to fill vacancies created by the
expansion of our board.
|
Name
|
Age
|
Positions
|
Director
Since
|
|
Martin A. Sumichrast
|
52
|
Chairman of the board of directors, Chief Executive Officer and
President
|
2015
|
|
Anthony K. Shriver
|
53
|
Director
|
2015
|
|
Seymour G. Siegel
|
76
|
Director
|
2017
|
|
Bakari Sellers
|
34
|
Director
|
2017
|
|
Gregory C. Morris
|
57
|
Director
|
2017
|
|
R.
Scott Coffman
|
57
|
Director
and Chief Executive Officer of cbdMD LLC
|
2018
|
|
Peter
J. Ghiloni
|
68
|
Director
nominee
|
|
|
Scott
G. Stephen
|
53
|
Director
nominee
|
|
|
William
F. Raines, III
|
59
|
Director
nominee
|
|
The
following is biographical information for the director
nominees:
Our current board of directors
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. (NASDAQ: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 was 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.
5
Anthony K.
Shriver
.
Mr. Shriver has been a member of our board of
directors since June 2015. Mr. Shriver is the Chairman of Best
Buddies® International, a nonprofit 501(c)(3)
organization he founded in 1989 which is dedicated to establishing
a global volunteer movement that creates opportunities for
one-to-one friendships, integrated employment and leadership
development for people with intellectual and developmental
disabilities (IDD). Best Buddies® International has grown from
one original chapter to almost 1,900 middle school, high school,
and college chapters worldwide, engaging participants programs in
each of the 50 United States, and over 50 countries around the
world. Mr. Shriver, who graduated from Georgetown University, has
been recognized for his work on behalf of Best Buddies®
International with diverse international accolades and honorary
degrees.
Mr.
Shriver currently serves on the Compensation Committee of our board
of directors.
We
selected Mr. Shriver to serve on our board of directors based upon
his lifelong commitment to charitable efforts and his dedication to
the principles upon which our company seeks to
operate.
Seymour G.
Siegel.
Mr. Siegel has been a
member of our board of directors since March 2017. Mr. Siegel, a
certified public accountant no longer in practice, has over 35
years of experience in public accounting and SEC regulatory matters
and has a strong background in mergers and acquisitions, start-ups,
SEC reporting, cost cutting initiatives, profit enhancements and
business operations. Since 2014 he has been President of Siegel
Rich, Inc., a consulting firm. From April 2000 until July 2014, Mr.
Siegel was a principal emeritus at Rothstein Kass & Company,
P.C. (now KPMG), an international firm of accountants and
consultants. Mr. Siegel was a founder of Siegel Rich & Co.,
CPAs, which eventually merged with what is now known as
WeiserMazars LLP, where he was a senior partner until selling his
interest and co-founding a business advisory firm which later
became a part of Rothstein Kass. He received his Bachelor of
Business Administration from the Baruch School of The City College
of New York. He has been a director and officer of numerous
business, philanthropic and civic organizations. As a professional
director, he has served on the boards of approximately a dozen
public companies over the last 25 years. He was previously a member
of the board of directors and chairman of the audit committees of
Air Industries Group, Inc. (NYSE American: AIRI), root9B Holdings,
Inc. (NASDAQ:RTNB), Hauppauge Digital, Inc., Emerging Vision. Inc.,
Oak Hall Capital Fund, Prime Motor Inns Limited Partnership, and
Noise Cancellation Technologies, Inc. Mr. Siegel currently serves
as chairman of the Audit Committee of our board of directors and is
also a member of the Compensation Committee of our board of
directors. We selected Mr. Siegel as a member of our board of
directors as a result of his extensive experience in mergers and
acquisitions, public companies and boards, financial reporting and
business advisory services.
Bakari
Sellers
. Mr. Sellers has been a
member of our board of directors since March 2017. Mr. Sellers, an
attorney, has been a member of the Strom Law Firm, LLC, in
Columbia, South Carolina since 2007. Mr. Sellers is a former member
of the South Carolina House of Representative, where he represented
the 90th District beginning in 2006, making history as the youngest
member of the South Carolina state legislature and the youngest
African American elected official in the nation. In 2014, he ran as
the Democratic nominee for Lt. Governor of South Carolina. He has
worked for United States Congressman James Clyburn and former
Atlanta Mayor Shirley Franklin. Earning his undergraduate degree
from Morehouse College, where he served as student body president,
and his law degree from the University of South Carolina, Mr.
Sellers has followed in the footsteps of his father, civil rights
leader Cleveland Sellers, in his tireless commitment to service
taking championing progressive policies to address issues ranging
from education and poverty to preventing domestic violence and
childhood obesity. He has served as a featured speaker at events
for the National Education Association, College Democrats of
America National Convention, the 2008 Democratic National
Convention and, in 2007, delivered the opening keynote address to
the AIPAC Policy Conference in Washington, DC. Mr. Sellers is also
a political commentator at CNN. Mr. Sellers currently serves as
chairman of the Corporate Governance and Nominating Committee of
our board of directors and is also a member of the Audit Committee
of our board of directors. We selected Mr. Sellers as a result of
his leadership experience, commitment to public policy and legal
background.
Gregory C.
Morris
.
Mr. Morris has been a member of our board of
directors since March 2017. Mr. Morris has worked in positions
involving finance, investments, benefits, risk management, legal
and human resources for more than 30 years. Since June 2015 he has
served as the Vice President of Human Resources for Healthstat,
Inc., a privately held company providing onsite health clinics and
workplace wellness programs. Prior to that, from January 2013 until
June 2015, he was the Vice President of Administration and
Corporate Secretary at Swisher Hygiene (at that time a
NASDAQ-listed company), leading the human resources, risk
management and legal functions. He was employed by
Snyder’s-Lance, Inc. (NASDAQ: LNCE) for 15 years prior to
joining Swisher Hygiene, Inc., holding the positions of Vice
President-Human Resources and Senior Director – Benefits and
Risk Management. At Snyder’s-Lance, Mr. Morris chaired the
Business Continuity Plan Steering Committee and was a member of the
Corporate Mergers & Acquisitions team. Prior to joining
Snyder’s-Lance, he held various positions with Belk Stores,
Collins & Aikman and Laporte plc. Mr. Morris also served as a
board member for root9B Holdings, Inc. (NASDAQ:RTNB) from 2008
through April, 2017 where he chaired the Compensation Committee and
also served on the Audit Committee. Mr. Morris also served as a
board member for the Second Harvest Food Bank of Metrolina from
2001 to 2016. Mr. Morris received a Bachelor of Science degree in
Accounting from West Virginia University. Mr. Morris
currently serves as chairman of the Compensation Committee of our
board of directors and is also a member of the Audit Committee and
Corporate Governance and Nominating Committee of our board of
directors. We selected Mr. Morris as a member of our board of
directors as a result of his extensive executive level experience
in public companies regarding human resources, accounting,
compliance and compensation matters as well as public board
experience.
6
R. Scott
Coffman
.
Mr. Coffman has been a member of our board of
directors and Chief Executive Officer of our cbdMD LLC subsidiary
since December 2018. Mr. Coffman has over 25 years of business
experience in which he founded several businesses in the internet
services, manufacturing and e-commerce sectors. As an executive or
partner in these entities, Mr. Coffman oversaw the strategic
direction, developed the business plan and oversaw the operation of
the companies. Mr. Coffman was a manager and Chief Executive
Officer of Cure Based Development LLC since founding the company in
September 2017. Prior to that, from 2012 to 2017, he was an
Operating Partner in a regional restaurant group and also had day
to day executive oversight of DataTech Global LLC, a privately
held technology company which focuses on online sales and
marketing. I
n 2009 he founded Blu, an
E-cigarette manufacturer which he built into a leading brand and
subsequently sold it to Lorillard Tobacco in 2012. In 1999, Mr.
Coffman founded DataTech Global LLC and served as its Chief
Executive Officer until 2012. Mr. Coffman currently serves as a
member of the board of directors of DataTech Global, LLC and W
Vapes, LLC, both privately held companies. Mr. Coffman received a
Bachelor of Arts degree in Economics from Marshall University. We
selected Mr. Coffman as a member of our board of directors as a
result of his extensive executive level experience and his role as
the founder of Cure Based Development LLC.
Additional director nominees
Peter J. Ghiloni
. In
2018 Mr. Ghiloni retired as Chief Executive Officer of Swisher
International, Inc., North America’s largest producer of
cigars. Mr. Ghiloni began his career in the tobacco business with
the United States Tobacco Company in 1972 after graduating from
Fordham University with a Bachelor of Science degree in Marketing.
In 1983, he moved to The Helme Tobacco Company as Vice President of
Marketing and in 1991, he was promoted to Senior Vice President of
Sales and Marketing. Following the merger of Swisher International,
Inc. and The Helme Tobacco Company, Mr. Ghiloni assumed the role of
Senior Vice President of Marketing for the combined company. In
2013, Mr. Ghiloni was promoted to the position of President and
Chief Executive Officer. Mr. Ghiloni serves on a variety of boards
including the Board of Swisher International, Inc., the Board of
Jacksonville University and the Board of the Baptist Beaches
Hospital. We selected Mr. Ghiloni to serve on the board of
directors as a result of his executive leadership positions, his
position as President, Chief Executive Officer and a member of the
Board of Directors of Swisher International, Inc., his service on
additional boards and extensive business background.
Scott G. Stephen
.
Mr. Stephen has served as Chief Growth Officer of Guaranteed Rate
Inc., a U.S. residential mortgage company headquartered in Chicago,
IL, since February 2012. Mr. Stephen also serves as President of
Guaranteed Rate Insurance and Ravenswood Title, affiliates of
Guaranteed Rate Inc. From 2003 until 2012, he was employed by
Playboy Enterprises, Inc., a leading men’s global
entertainment and lifestyle company, serving in a variety of
positions including Chief Operations Officer, Executive Vice
President, Playboy Print/Digital Group and Executive Vice President
and General Manger of Playboy Digital Media. From 1999 to 2003 Mr.
Stephen was employed by Yesmail, Inc., an online relationship
marketing company, serving as Chief Operating Officer and Vice
President of Client Services and Operations. Mr. Stephen received a
Bachelor of Business Administration in Finance from the University
of Notre Dame and a Master of Management in Marketing and
Organizational Behavior from the Kellogg School of Management at
Northwestern University. We selected Mr. Stephen to serve on the
board of directors as a result of his executive leadership
positions, his positions with Guaranteed Rate Inc. and Playboy
Enterprises and his extensive business background.
William F. Raines,
III
. Since 2008 Mr. Raines has been employed by DataTech
Global, LLC, a privately held technology company affiliated with
Mr. Coffman which focuses on online sales and marketing, serving as
Chief Financial Officer from 2008 to 2012 and Chief Executive
Officer since 2012. Mr. Raines has over 35 years of accounting and
financial experience with a primary focus on financial control of
operations, financial reporting, acquisitions and implementation of
acquisition plans. Earlier in his career, from 1991 until 2006 Mr.
Raines served in various capacities from Corporate Controller of
Speedway Motorsports, Inc. (NYSE:TRK) to General Manager of SMI
Properties, Inc., a subsidiary of Speedway Motorsports, Inc.,, and
from 2009 until 2012 he was Chief Executive Officer and Chief
Financial Officer of Intermark Brands, LLC, the manufacturer of
Blu, an e-cigarette, and its related entities BLEC, LLC and QSN
Technologies, LLC, which
were
subsequently sold to Lorillard Tobacco in 2012. Mr. Raines received
a B.S. in Accounting from the University of Maryland in 1981. We
selected Mr. Raines to serve on the board as a result of his
extensive technology, accounting and mergers and acquisitions
experience.
There
are no family relationships between any of the executive officers
and directors. The board of directors has determined that each of
Messrs. Shriver, Siegel, Sellers, Morris, Ghiloni and Stephen will
be independent directors within the meaning of Rule 803 of the NYSE
American Company Guide.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
ELECTION
OF THE DIRECTOR NOMINEES.
7
PROPOSAL 2
RATIFICATION OF THE APPOINTMENT OF
CHERRY BEKAERT LLP
The
Audit Committee has appointed
Cherry
Bekaert LLP
as our independent registered public accounting
firm to audit our consolidated financial statements for the fiscal
year ending September 30, 2019. We have invited representatives of
Cherry Bekaert LLP to attend the 2019 annual meeting. Although
shareholder ratification of the appointment of our independent
auditor is not required by our bylaws or otherwise, we are
submitting the selection of
Cherry
Bekaert LLP
to our shareholders for ratification to permit
shareholders to participate in this important corporate decision.
If not ratified, the Audit Committee will reconsider the selection,
although the Audit Committee will not be required to select a
different independent auditor for our company. Even if the
appointment is ratified, the Audit Committee, in its discretion,
may direct the appointment of a different independent registered
public accounting firm at any time during the fiscal year if the
Audit Committee determines that such a change would be in our best
interests.
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.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
RATIFICATION
OF THE APPOINTMENT OF
CHERRY
BEKAERT LLP.
PROPOSAL 3
TO APPROVE THE POSSIBLE ISSUANCE UP TO AN AGGREGATE OF 30,500,000
SHARES OF OUR COMMON STOCK PURSUANT TO RIGHTS GRANTED AS
CONSIDERATION IN THE TRANSACTION
Why we are seeking shareholder approval of the Stock
Issuances
Our
shareholders are not being asked to approve the Transaction. The
Transaction closed on December 20, 2018 and the historic operations
of Cure Based Development are now those of our wholly-owned
subsidiary, cbdMD LLC. A vote against proposal 3 will have no
impact on the closing of the Mergers. While our shareholders were
not required to approve the Transaction under North Carolina law,
because our common stock is listed on the NYSE American, pursuant
to Rule 712 of the NYSE American Company Guide, our shareholders
are required to approve the Stock Issuances. Proposal 3 seeks
shareholder approval for the issuance of the First Tranche Shares
and the Second Tranche Shares pursuant to the contractual rights
tendered to the Cure Based Development members under the terms of
the Merger Agreement as consideration for the Mergers, as well as
the possible future issuance of the Earnout Shares if the revenue
targets are met. If proposal 3 is approved at the 2019 annual
meeting, the First Tranche Shares and the Second Tranche Shares
will be issued as soon as practicable following the meeting. The
Earnout Shares will not be issued until such time, if ever, that
the revenue targets are met in accordance with the terms of the
Merger Agreement.
8
General description of the Transaction
On
December 3, 2018 we and our
newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, entered into the Merger
Agreement with Cure Based Development. The Merger Agreement
provided that, upon the terms and subject to the conditions set
forth therein, AcqCo LLC would merge with and into Cure Based
Development with the Cure Based Development as the surviving entity
in the First Merger, and immediately thereafter Cure Based
Development would merge with and into cbdMD LLC with cbdMD LLC as
the surviving entity in the Second Merger. Upon consummation of the
Mergers, cbdMD LLC would continue as a wholly-owned subsidiary of
Level Brands and continue the operations of Cure Based Development
pre-closing.
In
addition to customary conditions to closing, the closing of the
Mergers was subject to:
●
the
approval by the President of the United States of the Agricultural
and Nutrition Act of 2018, commonly known as the Farm Bill, or such
other titled Federal legislation, which, when approved, contains a
permanent declassification of cannabidiol (CBD) as a controlled
substance under Federal law;
●
the
delivery of customary opinions from our counsel and counsel to Cure
Based Development;
●
the
delivery of leak out agreements and voting proxy agreements from
the members of Cure Based Development; and
●
cbdMD
LLC entering into employment agreements with each of Mr. R. Scott
Coffman and Ms. Caryn Dunayer, currently the CEO and President,
respectively, of Cure Based Development, to serve in similar
positions with cbdMD LLC.
The
Merger Agreement contained certain additional provisions,
including:
●
the
representations and warranties contained in the Merger Agreement
will survive the closing through and including the 18-month
anniversary of the Closing Date,
provided, however
, that all
representations and warranties will survive beyond such expiration
date with respect to any inaccuracy therein or breach thereof if a
claim is made hereunder prior to the expiration of the expiration
date for such representation and warranty, in which case such
representation and warranty shall survive as to such claim until
such claim has been finally resolved;
●
the Cure Based Development members indemnified us
against any breach or inaccuracy of a representation or warranty,
or the failure by Cure Based Development to perform or comply with
any of its obligations under the Merger Agreement. Except in the
instance of fraud, we are obligated to pay the first $50,000 of any
third party claims which fall under this indemnification provision.
Thereafter, a
ll claims for indemnification by us, up to a
$2,000,000 limit, will be satisfied
first
, by a cancellation of a number of
unvested Second Tranche Shares determined based on the
Indemnification Per Share Valuation,
second
, or at the option of CBDH by a
cash payment to us or by a cancellation of a number of shares of
our common stock determined based on the Indemnification Per Share
Valuation, and
third,
by
means of an offset, on a dollar for dollar basis, against the
amounts due under the Edge note described below
. When used the Merger Agreement
“
Indemnification Per
Share Valuation
” was defined as
the greater of
(i) the per share stock price on the Closing Date, or (ii) the
greater of the average closing sale price as report on the NYSE
American, or such other exchange on which our common stock is then
listed, for the 30 trading days immediately preceding (1) the date
of the indemnification claim notice, or (2) the required date of
payment of the indemnification claim;
●
we
indemnified the Cure Based members against any breach or inaccuracy
of a representation or warranty, or the failure by Level Brands to
perform or comply with any of its obligations under the Merger
Agreement. Except in the instance of fraud, the members are
obligated to pay the first $50,000 of any third party claims which
fall under this indemnification provision, and thereafter our
obligation to indemnify is limited to $2,000,000;
●
except
in the case of fraud and with respect to matters for which the
remedy of specific performance, injunctive relief or other
non-monetary equitable remedies are available, the sole and
exclusive remedy of the parties with respect to any and all claims
arising from any breach of the Merger Agreement is pursuant to the
indemnification provisions.
●
each
party was responsible for its expenses incurred in connection with
the Transaction; and
●
the
Merger Agreement is governed by North Carolina law.
On
December 20, 2018, the Closing Date, immediately
following the
approval by the President of
the United States of the Farm Bill, the closing of the Mergers
occurred. The historic business and operations of Cure Based
Development are now continued by our wholly-owned subsidiary cbdMD
LLC.
9
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, on the Closing Date the members of Cure Based
Development received contractual rights to receive 15,250,000
shares of our common stock as the merger consideration, issuable as
follows:
●
a
s 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 rules of the NYSE American, the members of Cure
Based Development will be issued the First Tranche Shares which are
an aggregate of 6,500,000 shares of our common stock;
and
●
as
promptly as practicable after receipt of such shareholder approval,
we will issue the Second Tranche Shares which are an additional
8,750,000 shares of our common stock to CBDH, vesting as
follows:
●
2,187,500
shares on the 12 month anniversary of the Closing
Date;
●
an
additional 2,187,500 shares on the 24 month anniversary of the
Closing Date;
●
an
additional 2,187,500 shares on the 42 month anniversary of the
Closing Date; and
●
the
remaining 2,187,500 shares on the 60 month anniversary of the
Closing Date.
The
Merger Agreement also provides that CBDH will be entitled to
receive up to an additional 15,250,000 Earnout Shares as part of
the merger consideration, upon the satisfaction of certain
aggregate net revenue criteria by cbdMD LLC within 60 months
following the Closing Date as follows, based upon the ratios set
forth below, as measured at four intervals: the completion of 12,
24, 42, and 59 calendar months from the Closing Date:
|
Aggregate Net
Revenues
|
|
Shares Issued /
Each $ of Aggregate Net Revenue Ratio
|
|
|
|
|
|
$1 -
$20,000,000
|
|
.190625
|
|
$20,000,001
- $60,000,000
|
|
.0953125
|
|
$60,000,001
- $140,000,000
|
|
.04765625
|
|
$140,000,001
- $300,000,000
|
|
.023828125
|
The
issuance of the Earnout Shares is also subject to prior shareholder
approval.
Leakout agreements
When issued, the First Tranche Shares and Second
Tranche Shares will be subject to leak out agreements pursuant to
which the holder will
be required to:
●
limit
the offer for sale, sell, pledge, or otherwise transfer or dispose
of (or enter into any transaction or device that is designed to, or
could be expected to, result in the transfer or disposition by any
person at any time in the future of) any shares of our common
stock; and
●
refrain
from entering into any swap or other derivatives transaction that
transfers to another, in whole or in part, any of the economic
benefits or risks of ownership of any shares of our common
stock,
whether
any such transaction described above is to be settled by delivery
of shares of our common stock or other securities, in cash or
otherwise to the lesser of (i) the volume limitations set forth in
Rule 144(e) of the Securities Act of 1933, as amended, or (ii) 20%
of such shares in any 90 day period.
10
Irrevocable voting proxy
In
addition, when issued the Second Tranche Shares will be subject to
an irrevocable voting proxy agreement until such time as the shares
vest in accordance with the terms of the Merger Agreement. The
independent chairman of the Audit Committee of our board of
directors will serve as proxyholder and will vote those shares in
accordance with the recommendations of our board of directors. The
initial proxyholder is Mr. Seymour Siegel, the current Chairman of
the Audit Committee of our board of directors.
Ancillary transactions
On December 4, 2018, following the execution of
the Merger Agreement, and pursuant to the terms and conditions of a
Secured Promissory Note and Security Agreement, we lent Cure Based
Development $2,000,000. The one year note bore interest at the rate
of 6% per annum and was
secured by a first lien and security
interest in all of the assets of Cure Based Development pursuant to
the terms of a Security Agreement dated December 4, 2018 in favor
of Level Brands. On the Closing Date, this obligation was
automatically deemed an intercompany advance
and will be treated as part of the purchase price
accounting for the Transaction.
Prior to the Closing Date, Cure Based Development
owed Edge, an entity controlled by Mr. Coffman, an aggregate of
$1,184,300 for working capital advances. Immediately following the
Closing Date, we repaid Edge $1,000,000 of this amount and the
balance was converted into an
18 month 6% unsecured
promissory note. The unsecured note is interest only for the first
12 months and thereafter payable in six equal and consecutive
monthly installments of principal and interest.
Employment agreements
On the
Closing Date cbdMD LLC entered into a five year Executive
Employment Agreement with Mr. Coffman pursuant to which he will
serve as chief executive officer of that entity, reporting to the
chief executive officer of our company. Under the terms of the
agreement, cbdMD LLC agreed to pay him an initial annual base
salary of $180,000 and he is entitled to a discretionary bonus at
the sole determination of the Compensation Committee of our board
of directors, as well as participation in benefit programs we offer
our employees and paid vacation. The agreement may be terminated by
cbdMD LLC in the event of his death or disability, by cbdMD for
cause (as defined in the agreement), or by Mr. Coffman without
cause. The agreement contains customary confidentiality,
non-compete, and indemnification provisions.
On the
Closing Date cbdMD LLC also entered into a three year Executive
Employment Agreement with Ms. Caryn Dunayer pursuant to which she
will serve as president of that entity. Ms. Dunayer, formerly a
member of Cure Based Development, previously served as its
president. Under the terms of the agreement, cbdMD LLC agreed to
pay her an initial annual base salary of $125,000 and she is
entitled to a discretionary bonus at the sole determination of the
Compensation Committee of our board of directors, as well as
participation in benefit programs we offer our employees and paid
vacation. The agreement may be terminated by cbdMD LLC in the event
of her death or disability, by cbdMD for cause (as defined in the
agreement), or by Ms. Dunayer without cause. The agreement contains
customary confidentiality, non-compete, and indemnification
provisions.
CBDH warrant
Following
the Closing Date, CBDH issued the Sumichrast 2017 Family Trust for
no consideration a warrant expiring on December 31, 2019,
exercisable at $90.00, to purchase a 9% membership interest in
CBDH. Mr. Martin A. Sumichrast, our Chairman of the Board and CEO,
is the trustee of the Sumichrast 2017 Family Trust. The warrant was
exercised by Mr. Sumichrast on January 20, 2019.
As
a result of this warrant, at such time as CBDH distributes the
securities to its members, the trust will be entitled to receive
787,500 Second Tranche Shares and up to 1,372,500 Earnout Shares.
Mr. Sumichrast has been advised that at this time CBDH has no
present intent to distribute the rights to the Second Tranche
Shares or the Earnout Shares in the foreseeable
future.
Change of control – impact of the Stock Issuances on our
shareholders
The Stock Issuances will dilute the ownership and
voting interests of our existing shareholders. As of the Closing
Date there were 10,095,396 shares of our common stock
outstanding.
If this proposal 3 is approved at the 2019
annual meeting, we will issue the First Tranche Shares and the
Second Tranche Shares immediately following the meeting.
Assuming the issuance of the First
Tranche Shares and the Second Tranche Shares, but not giving effect
to the issuance of any additional shares of common stock by us,
there will be 25,345,396 shares of our common stock outstanding.
The issuance of the First Tranche Shares and Second Tranche Shares
will result in a change of control of our company. The following
table provides information on the percentage of shares to be held
by our existing shareholder and the holders of the First Tranche
Shares and Second Tranche Shares after giving pro forma effect to
these issuances:
11
|
|
Pro forma % of ownership
|
|
|
|
|
Existing
shareholders
|
39.8
%
|
|
New
shareholders
|
60.2
%
|
Therefore,
the ownership and voting rights of our existing shareholders will
be proportionally reduced. Voting rights will be impacted by the
vesting process, which will change annually, the following table
provides information on the voting rights to be held after giving
pro forma effect to the First and Second Tranche shares upon
shareholder approval:
|
|
Pro forma % of voting
rights
|
|
|
|
|
Existing
shareholders
|
39.8
%
|
|
New
shareholders - shares subject to proxy
|
34.5
%
|
|
New
shareholders – no proxy
|
25.5
%
|
Assuming
the issuance of the First Tranche Shares, the Second Tranche
Shares, as well as the achievement of the earnout targets over the
60 month timeframe and the issuance of the Earnout Shares, but not
giving effect to the issuance of any additional shares of common
stock by us, there will be 40,395,396 shares of our common stock
outstanding. The following table provides information on the
percentage of shares to be held by our existing shareholder and the
holders of the First Tranche Shares and Second Tranche Shares after
giving pro forma effect to these issuances:
|
|
Pro forma % of
ownership
|
|
|
|
|
Existing
shareholders
|
24.9
%
|
|
New
shareholders
|
75.1
%
|
Therefore,
the ownership and voting rights of our existing shareholders will
be further proportionally reduced.
Based
upon the recipients of the First Tranche Shares and the Second
Tranche Shares as set forth in the Merger Agreement, upon the
issuance of the First Tranche Shares, Edge will be the record
holder of 22.2% of our then outstanding common stock, assuming no
additional issuances by us. Upon the issuance of the Second Tranche
Shares, CBDH will be the record owner of 34.5% of our then
outstanding common stock, giving effect to the issuance of the
First Tranche Shares but assuming no additional issuance of shares
of common stock by us. Accordingly, after giving effect to the
issuance of the First Tranche Shares and Second Tranche Shares, but
no additional issuances by us, Mr. Coffman (through his control of
Edge and CBDH) will be the beneficial owner of an aggregate of
12,434,000 shares of our common stock, or approximately 49.1%. As
set forth above, both the First Tranche Shares and Second Tranche
Shares are subject to the leakout agreement, and until such time as
the Second Tranche Shares vest in accordance with the terms of the
Merger Agreement, such shares are subject to the voting proxy
agreement.
Compliance with NYSE rules
Rule
712 of the NYSE American Company Guide provides that approval of
our shareholders is required as a prerequisite to the approval of
applications to list additional shares of our securities to be
issued as sole or partial consideration for an acquisition of the
stock or assets of another company in the following
circumstances:
●
if
any individual director, officer or substantial shareholder of the
listed company has a 5% or greater interest (or such persons
collectively have a 10% or greater interest), directly or
indirectly, in the company or assets to be acquired or in the
consideration to be paid in the transaction and the present or
potential issuance of common stock, or securities convertible into
common stock, could result in an increase in outstanding common
shares of 5% or more; or
●
where
the present or potential issuance of common stock, or securities
convertible into common stock, could result in an increase in
outstanding common shares of 20% or more.
Proposal 3 seeks shareholder approval for the
Stock Issuances.
If this proposal 3 is not approved at our
2019 annual meeting, we are required to seek shareholder approval
of the proposal at additional special meetings of our shareholders,
to be held at least every six months, until such time as
shareholder approval is obtained. Until shareholder approval is
obtained, we are not obligated to issue any of these securities
under the rights granted to the Cure Based Development members as
consideration for the Mergers under the terms of the Merger
Agreement and the Cure Based Development members will continue to
hold the contractual rights to receive the securities pursuant to
the terms of the Merger Agreement.
12
The
issuance of the First Tranche Share and the Second Tranche Shares
will constitute a change of control under the rules and regulations
of the NYSE American and at the time of the initial issuance of
these shares we will be obligated to meet the initial listing
standards of the NYSE American in order to maintain the continued
listing of our common stock on the exchange. We presently meet all
quantitative and qualitative initial listing standards and expect
to continue to meet these requirements following the 2019 annual
meeting. There are no assurances, however, that our expectations
are correct. If we were unable to meet the initial listing
standards of the NYSE American following the 2019 annual meeting,
it is possible that our common stock would be delisted from the
exchange which would have a material adverse effect on the market
for our common stock.
The Companies
We are
a brand management and licensing
company. Our primary licensing and corporate brand management
businesses target consumer products in the health and wellness
space and other high-demand verticals, bringing innovative products
to market under the
kathy
ireland
® Health & Wellness; Ireland Men One (I'M1),
and Encore Endeavor One (EE1) brands. Following our acquisition of
Cure Based Development in December 2018, through our wholly-owned
subsidiary cbdMD LLC, we own and operate the nationally recognized
consumer cannabidiol (CBD) brand cbdMD, whose current products
include CBD gummies, CBD tinctures, CBD topical, CBD bath bombs,
CBD oils, and CBD pet products. Our common stock is listed on the
NYSE American under the symbol “LEVB.” We maintain our
principal executive offices at 4521 Sharon Road, Suite 450,
Charlotte, NC 28211. Our telephone number is (704) 362-6345. We are
subject to the reporting obligations of the Securities Exchange Act
of 1934, as amended. See “
Where You Can Obtain Additional
Information
” appearing later in this proxy
statement.
Cure Based Development, a Charlotte, NC-based
company formed in August 2017, was the owner, operator and
manufacturer of nationally recognized consumer cannabidiol (CBD)
brand cbdMD which o
ffered 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 provided wholesale distribution with
retailers currently selling products at brick-and-mortar locations,
compounding pharmacies, salons, supplement stores, and pet
shops.
Set
forth below is certain selected summary financial information on
Cure Based Development’s historic operations which are
derived from its audited financial statements we have filed as an
exhibit to our Current Report on Form 8-K as filed with the SEC on
December 20, 2018.
Selected income statement
data
:
|
|
Eight months
ended August 31, 2018
|
Period of August
3, 2017 (inception) to December 31, 2017
|
|
|
|
|
|
Sales
|
$
3,372,712
|
$
354
|
|
Net
sales
|
3,280,009
|
354
|
|
Cost of
sales
|
804,994
|
-
|
|
Gross
profit
|
2,475,015
|
354
|
|
Operating
expenses
|
2,778,976
|
323,551
|
|
Loss from
operations
|
(303,961
)
|
(323,197
)
|
|
Net
loss
|
$
(353,561
)
|
$
(323,197
)
|
Selected balance sheet data:
|
|
August 31,
2018
|
December 31,
2017
|
|
|
|
|
|
Working capital
(deficit)
|
$
(487,336
))
|
$
343,599
|
|
Cash and cash
equivalents
|
$
309,498
|
$
181,762
|
|
Current
assets
|
$
1,649,134
|
$
406,795
|
|
Total
assets
|
$
2,230,765
|
$
511,052
|
|
Current
liabilities
|
$
2,136,470
|
$
63,196
|
|
Total
liabilities
|
$
2,136,470
|
$
63,196
|
|
Total
members’ equity
|
$
94,295
|
$
477,856
|
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.
13
Cure
Based Development, which marketed is products under the cbdMD
brand, produces
and distributes
various high-grade, premium CBD products, including:
●
tinctures;
●
capsules;
●
gummies;
●
bath
bombs;
●
vape
oils;
●
topical
creams; and
●
animal
treats and oils.
Cure
Based Development’s website provides up-to-date information
about CBD quality and current industry events, as well as U.S.
based customer service. Cure Based Development tests its
broad-spectrum CBD extractions through independent, third-party
laboratories in an effort to guarantee the highest of standards and
it offers a 30-day, money-back guarantee.
Its products are available online at www.cbdMD.com
and 700 non-affiliated stores in 40 states. Cure Based Development
currently employs over 50 people in its corporate, manufacturing
and distribution sites based in Charlotte, NC. There are no
collective bargaining agreements with any employees of Cure Based
Development.
Sales and Marketing
Sales
by Cure Based Development of its products mainly come from online
sales and through inside sales concentrating on wholesale
distributors who can offer large quantities of cbdMD products at
physical retail locations. Cure Based Development utilizes a
broad-based marketing strategy across multiple platforms
including:
●
secured
online and print advertising;
●
blog,
web, and visual content;
●
social
media engagement through accounts with large
followings;
●
live
and sponsored events;
●
influencers
and celebrities;
●
affiliate
marketing; and
●
high-quality
brand apparel.
Product manufacturing
Cure
Based Development manufactures its premium line of products at its
Charlotte, NC facility using 100%, all-natural CBD extracted from
organic, non-GMO, vegan, and gluten-free industrial hemp grown in
the USA. It utilizes a CO
2
extraction
process for broad-spectrum concentrations designed to retain other
cannabinoids, terpenes, vitamins, and various other compounds for
potential enhanced benefits while eliminating t
etrahydrocannabinol (
THC)
content.
Research and development
The key
objectives and input points that drive Cure Based
Development’s the research and development process include
current product and new product development
activities:
14
Cure
Based Development’s current product improvement efforts
include:
●
consumer
feedback analysis;
●
optimization
of its product manufacturing process;
●
sourcing
of reliable, high-quality raw materials while maintaining strong
distributor relationships;
●
lab
testing; and
●
feedback
from panels of product testers.
Its new
product development efforts are focused on both near-term and
long-term results for the company:
With a
view toward near-term results, its efforts include:
●
in-depth
market research on current competitor campaigns;
●
website
and product development;
●
sample
size testing and research;
●
implementation
of new product campaigns utilizing social media, digital, affiliate
and email;
●
rapid
product development following testing; and
●
quality
ingredient sourcing.
With a
view towards long-term results, its efforts include:
●
development
of new product lines following initial market
research;
●
use of
current and expected future product trends and research to develop
new product offerings;
●
refinement
of extraction and production methods for product
efficiency;
●
ingredient
research through sustainability testing;
●
manufacturing
process optimization;
●
in-depth
product testing;
●
package
and graphic development; and
●
large
scale product and brand marketing campaigns.
Intellectual property
Cure
Based Development currently holds six U.S. trademarks which are
held for current and future product offerings and extended branding
capability.
Competition
The market for the sale of CBD-based products is
fragmented and intensely competitive. Currently, in the United
States, Cure Brand Development does not believe that there are any
businesses that can demonstrate or claim a dominant market share of
the growing
CBD
products
market. Its competitors
in the retail location sales of
CBD-based products include Green Roads, PlusCBD, and Select CBD,
and in the digital space include Diamond CBD, CBDistillery, and
Lazarus Naturals. Cure Based Development
expects that the quantity and composition of its
competitive environment will continue to evolve as the industry
matures and new customers enter the marketplace. We expect that the
competition in this market segment will dramatically increase
following the approval of the Farm Bill.
15
Government regulations
On December 20, 2018 the President of the United
States signed the Farm Bill into law.
Among other things,
this new law changed certain federal authorities relating to the
production and marketing of hemp, defined as cannabis
(
Cannabis
sativa L.
), and derivatives of
cannabis with extremely low (less than 0.3 percent on a dry weight
basis) concentrations of the psychoactive compound
delta-9-tetrahydrocannabinol (THC). These changes include removing
hemp from the Controlled Substances Act, which means that it will
no longer be an illegal substance under federal law.
For the first time since 1937,
industrial hemp has been decriminalized at the federal level and
can be grown legally in the United States. The Farm Bill recognizes
hemp as distinct from its genetic cousin, marijuana, and
specifically industrial hemp has been excluded from U.S. drug
laws. The Farm Bill allows for each individual state to
regulate industrial hemp and industrial hemp based products.
Although no longer a controlled substance, cannabinoids derived
from industrial hemp (other than THC) are still subject to a
patchwork of state regulations. We are actively monitoring
the regulations and proposed regulations in each state to ensure
our operations are compliant.
In conjunction with the enactment of the Farm
Bill, the United States Food and Drug Administration
(“
FDA
”) released a statement about the status of
CBD and the agency’s actions in the short term with regards
to CBD will guide the industry. The statement
noted that
the Farm Bill explicitly preserved the FDA’s authority to
regulate products containing cannabis or cannabis-derived compounds
under the Federal Food, Drug, and Cosmetic Act (FD&C Act) and
Section 351 of the Public Health Service Act. This authority allows
the FDA to continue enforcing the law to protect patients and the
public while also providing potential regulatory pathways for
products containing cannabis and cannabis-derived compounds.
The statement also noted
th
e
growing public interest in cannabis and cannabis-derived products,
including CBD, and informed the public that the FDA will treat
products containing cannabis or cannabis-derived compounds as it
does any other FDA-regulated products — meaning the products
will be subject to the same authorities and requirements as
FDA-regulated products containing any other substance, regardless
of the source of the substance, including whether the substance is
derived from a plant that is classified as hemp under the Farm
Bill.
As
of the date of this proxy statement, based upon publicly available
information, to our knowledge the FDA has not taken any enforcement
actions against CBD companies. The FDA, however, has sent warning
letters to companies demanding they cease and desist from the
production, distribution, or advertising of CBD products, only
relating to instances that such CBD companies have made misleading
and unapproved label claims. We will continue to monitor the
FDA’s position on CBD.
As
a consumer goods manufacturer, we are continually striving to meet
or exceed the FDAs Good Manufacturing Practice (GMP) guidelines.
With our growth and evolution, challenges could exist and we must
continue to review processes and controls and adapt our day to day
GMP policies and practices as our manufacturing volume
increases. We are dedicated to providing the highest quality
CBD consumer goods on the market and therefore will continue to
focus substantial efforts on GMP compliance.
Selected historical financial data for Cure Based
Development
The
following tables contain selected historical financial data for
Cure Based Development as of and for the nine months ended
September 30, 2018 which is derived from the unaudited financial
statements of Cure Based Development and as of and for the period
of August 3, 2017 (inception) to December 31, 2017 which are
derived from the audited financial statements of Cure Based
Development, each as included elsewhere in this proxy statement.
The financial statements of Cure Based Developmentas of and for the
Period of August 3, 2017 (inception) to December 31, 2017 were
audited by Cherry
Bekaert LLP
,
an independent accounting firm. There were no disagreements
(as defined in Item 304(a)(1)(iv) of
Regulation S-K and the related instructions) between Cure Based
Development and Cherry Bekaert LLP on any matter of accounting
principles or practices, financial statement disclosures or
auditing scope or procedure, which disagreements, if not resolved
to Cherry Bekaert LLP’s satisfaction, would have caused it to
make reference to the subject matter of the disagreement in
connection with any report prepared by it on the financial
statements of Cure Based Development.
The
selected historical financial data of Cure Based Development is not
intended to be an indicator of its financial condition or results
of operations in the future. The information below is only a
summary and should be read in conjunction with the section entitled
“Cure Based Development
Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
appearing below and Cure Based Development’s audited and
unaudited interim financial statements, and the notes related
thereto, which are included elsewhere in this proxy
statement.
16
Selected income
statement data:
|
|
|
Period of
|
|
|
|
August 3,
2017
|
|
|
Nine
Months
|
(inception)
to
|
|
|
Ended
September
|
December
31,
|
|
|
30, 2018
|
2017
|
|
|
(Unaudited)
|
(Audited)
|
|
Sales
|
$
3,997,927
|
354
|
|
Less returns and
allowances
|
(101,723
)
|
0
|
|
Net
sales
|
3,896,204
|
354
|
|
946,536
|
-
|
|
|
Gross
profit
|
2,949,668
|
354
|
|
Operating
expenses
|
3,446,453
|
323,551
|
|
Loss from
operations
|
(496,785
)
|
(323,197
)
|
|
Net
Loss
|
$
(568,895
)
|
(323,197
)
|
Selected balance
sheet data
:
|
|
September 30,
2018
|
December 31,
2017
|
|
|
|
|
|
Working capital
(deficit)
|
$
(730,349
)
|
$
343,599
|
|
Cash and cash
equivalents
|
$
256,850
|
$
181,762
|
|
Current
assets
|
$
1,913,626
|
$
406,795
|
|
Total
assets
|
$
2,522,935
|
$
511,052
|
|
Current
liabilities
|
$
2,643,975
|
$
63,196
|
|
Total
liabilities
|
$
2,643,975
|
$
63,196
|
|
Total
members’ equity (deficit)
|
$
(121,040
)
|
$
477,856
|
Management’s Discussion and Analysis of Financial Condition
and Results of Operations for Cure Based Development
The following discussion and analysis of Cure Based
Development’s audited and unaudited financial condition and
results of operations should be read in conjunction with the
information presented in “Selected Historical Financial Data
of Cure Based Development” and Cure Based Development’s
financial statements and the notes thereto included elsewhere in
this proxy statement. In addition to historical information, the
following discussion contains forward-looking statements, such as
statements regarding Level Brands’expectation for future
performance, liquidity and capital resources that involve risks,
uncertainties and assumptions that could cause actual results to
differ materially from Level Brands’ expectations. Level
Brands’ actual results may differ materially from those
contained in or implied by any forward-looking statements. Level
Brands’ assumes no obligation to update any of these
forward-looking statements.
17
Results
of operations
Cure
Based Development was formed in August 2017. As such, it has a
limited operating history. From inception through December 31, 2017
it was engaged in organizational activities as well as product
development and brand marketing and implementation strategy. In
2017 it generated minimal revenues. Its operating expenses included
salaries, contract labor, and marketing and website
development.
During
the nine months ended September 30, 2018, Cure Based Development
completed the launch of its initial products, and implemented the
initial marketing program. It reported revenues of approximately $4
million for the nine months ended September 30, 2018. The increase
in Cure Based Development’s operating expenses during the
first nine months of 2018 reflected the ramp up of its sales and
marketing efforts, expansion of personnel, and infrastructure for
product manufacturing.
Liquidity and
capital resources
Cure
Based Development had cash and cash equivalents of $256,850 and a
working capital deficit of $730,349 at September 30, 2018 as
compared to cash and cash equivalents of $181,762 and working
capital of $343,599 at December 31, 2017. The significant increases
in total current assets as well as total current liabilities
reflected the continued implementation of its business model during
2018.
Net
cash used by operating activities for the first nine months of 2018
was $1,354,310 as compared to $410,946 used during 2017. In the
2018 interim period, Cure Based Development principally used cash
to fund its losses, together with increases in accounts receivable
and receivables from its payment processor and inventory, off set
by decreases in accounts payable and customer deposits from a
related party. During 2017, it used cash primarily to fund its
losses, offset by an increase in inventory.
Net
cash used by investing activities was $577,402 during the first
nine months of 2018 as compared to $110,792 used in 2017, both for
the purchase of equipment and property.
Net
cash provided by financing activities was $2,006,800 for the first
nine months of 2018 as compared to $703,500 during 2017. In the
2018 period, the proceeds are principally related to the issuance
of notes, and in 2017 the proceeds were principally related to the
contribution of capital by its founders.
Unaudited Pro Forma Information
The
following unaudited pro forma combined condensed balance sheet,
unaudited pro forma combined condensed statement of operations,
unaudited pro forma combined condensed statement of comprehensive
income (loss), and the explanatory notes give effect to the Mergers
on December 20, 2018.
The
unaudited pro forma combined condensed balance sheet, unaudited pro
forma combined condensed statement of operations, unaudited pro
forma combined condensed statement of comprehensive income (loss),
and explanatory notes are based on estimates and assumptions set
forth in the explanatory notes. These unaudited pro forma combined
condensed balance sheet, unaudited pro forma combined condensed
statement of operations and unaudited pro forma combined condensed
statement of comprehensive income (loss) have been prepared
utilizing the historical financial statements of Level Brands to
the extent such has been filed previously with the Securities and
Exchange Commission. Other unaudited combined condensed financial
information has been obtained from the company records of Cure
Based Development.
The
unaudited pro forma combined condensed statement of operations for
the year ended September 30, 2018 and unaudited pro forma condensed
statement of comprehensive income (loss) for the year ended
September 30, 2018 have been prepared as if the Mergers had been
consummated on October 1, 2017. The unaudited pro forma combined
condensed balance sheet as of September 30, 2018 has been prepared
as if the Mergers were consummated on September 30,
2018.
These
unaudited pro forma combined condensed financial statements are
provided for illustrative purposes only, and do not purport to be
indicative of the actual financial position or results of
operations had the Mergers occurred at the beginning of the period
presented, nor are they necessarily indicative of the results of
future operations. The unaudited pro forma condensed financial
statements do not reflect any operating efficiencies and/or cost
savings that the combined entity may achieve with respect to the
combined companies.
18
Level
Brands, Inc.
Unaudited
Pro Forma Combined Condensed Balance Sheet As Of
September
30, 2018
(Unaudited)
|
|
(Audited)
|
(Unaudited)
|
|
|
|
|
|
Level Brands,
Inc.
|
Cure Based
Development LLC
|
|
|
|
|
|
September
30,
|
September
30,
|
Pro
Forma
|
Notes
|
Pro
Forma
|
|
|
2018
|
2018
|
Adjustments
|
|
Combined
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$
4,282,553
|
$
256,850
|
$
5,356,998
|
(2,3
)
|
$
9,896,401
|
|
Accounts
receivable
|
307,874
|
102,655
|
-
|
|
410,529
|
|
Accounts receivable
related party
|
1,537,863
|
-
|
-
|
|
1,537,863
|
|
Accounts receivable
other
|
1,743,874
|
-
|
-
|
|
1,743,874
|
|
Marketable
securities
|
1,050,961
|
-
|
-
|
|
1,050,961
|
|
Investment other
securities
|
1,159,112
|
-
|
-
|
|
1,159,112
|
|
Receivable from
Payment
Processor
|
-
|
533,862
|
-
|
|
533,862
|
|
Note
receivable
|
459,000
|
-
|
-
|
|
459,000
|
|
Note receivable
related party
|
156,147
|
-
|
-
|
|
156,147
|
|
Deferred issuance
costs
|
28,049
|
-
|
-
|
|
28,049
|
|
Prepaid
rent
|
180,000
|
-
|
-
|
|
180,000
|
|
Prepaid expenses
and other
current
assets
|
561,491
|
-
|
-
|
|
561,491
|
|
Prepaid consulting
agreement
|
200,000
|
-
|
-
|
|
200,000
|
|
Inventory
|
123,223
|
1,020,259
|
-
|
|
1,143,482
|
|
Total Current
Assets
|
11,790,147
|
1,913,626
|
5,356,998
|
|
19,060,771
|
|
|
|
|
|
|
|
|
Property and
equipment, net
|
53,480
|
609,309
|
-
|
|
662,789
|
|
Goodwill
|
-
|
-
|
54,876,483
|
(3
)
|
54,876,483
|
|
Intangible assets,
net
|
3,173,985
|
-
|
21,585,000
|
(3
)
|
24,758,985
|
|
Total
Assets
|
$
15,017,612
|
$
2,522,935
|
$
81,818,481
|
|
$
99,359,028
|
|
|
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
$
473,717
|
$
139,879
|
$
-
|
|
$
613,596
|
|
Accounts payable
related party
|
7,860
|
$
-
|
-
|
|
7,860
|
|
Deferred
revenue
|
161,458
|
-
|
-
|
|
161,458
|
|
Note payable
related party
|
-
|
2,010,300
|
(1,000,000
)
|
(3
)
|
1,010,300
|
|
customer
deposit
|
-
|
265,000
|
-
|
|
265,000
|
|
Accrued
expenses
|
6,920
|
186,144
|
-
|
|
193,064
|
|
Accrued expenses
related party
|
320,000
|
42,652
|
-
|
|
362,652
|
|
Total Current
Liabilities
|
969,955
|
2,643,975
|
(1,000,000
)
|
|
2,613,930
|
|
|
|
|
|
|
|
|
Long Term
Liabilities:
|
|
|
|
|
|
|
Long term
liabilities
|
7,502
|
-
|
-
|
|
7,502
|
|
Contingent
liability
|
-
|
-
|
71,353,483
|
(3
)
|
71,353,483
|
|
Deferred tax
liability
|
21,000
|
-
|
5,108,000
|
(3
)
|
5,129,000
|
|
Total Long Term
Liabilities
|
28,502
|
-
|
76,461,483
|
|
76,489,985
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
Preferred
Stock
|
-
|
-
|
-
|
|
-
|
|
Common
stock
|
8,124
|
-
|
1,971
|
(2
)
|
10,095
|
|
Paid In
Capital
|
21,781,095
|
771,053
|
6,355,027
|
(2
)
|
28,907,175
|
|
Accumulated other
comprehensive
income
(loss)
|
(2,512,539
)
|
-
|
-
|
|
(2,512,539
)
|
|
Accumulated
deficit
|
(6,669,497
)
|
(892,093
)
|
-
|
|
(7,561,590
)
|
|
Total Shareholders'
Equity
|
12,607,183
|
(121,040
)
|
6,356,998
|
|
18,843,141
|
|
Non-controlling
interest
|
1,411,972
|
-
|
-
|
|
1,411,972
|
|
Total Shareholder'
Equity
|
$
14,019,155
|
$
(121,040
)
|
$
6,356,998
|
|
$
20,255,113
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders' equity
|
$
15,017,612
|
$
2,522,935
|
$
81,818,481
|
|
$
99,359,028
|
|
|
|
|
|
|
|
19
Level
Brands, Inc.
Unaudited
Pro Forma Combined Condensed Statement Of Operations
For The
Year Ended September 30, 2018
(Unaudited)
|
|
(Audited)
|
(Unaudited)
|
|
|
|
|
|
Level Brands,
Inc.
|
Cure Based
Development LLC
|
|
|
|
|
|
|
12
Months
|
|
|
|
|
|
Year
ended
|
Period
ended
|
Pro
Forma
|
|
Pro
Forma
|
|
|
September 30,
2018
|
September 30,
2018
|
Adjustments
|
Notes
|
Combined
|
|
|
|
|
|
|
|
|
Sales
|
$
6,453,173
|
$
3,998,281
|
$
-
|
|
$
10,451,454
|
|
Sales
related party
|
1,992,046
|
|
|
|
1,992,046
|
|
Total
Gross Sales
|
8,445,219
|
|
|
|
8,445,219
|
|
Less
returns and allowances
|
(25,077
)
|
(101,723
)
|
-
|
|
(126,800
)
|
|
Net
sales
|
6,428,096
|
3,896,558
|
-
|
|
10,324,654
|
|
Net
sales related party
|
1,992,046
|
|
|
|
1,992,046
|
|
Total
Net Sales
|
8,420,142
|
3,896,558
|
|
|
12,316,700
|
|
|
|
|
|
|
|
|
Cost
of sales
|
2,673,272
|
946,536
|
-
|
|
3,619,808
|
|
Gross
profit
|
5,746,870
|
2,950,022
|
-
|
|
8,696,892
|
|
|
|
|
|
|
|
|
Operating
expenses
|
5,629,771
|
3,715,738
|
-
|
|
9,345,509
|
|
Loss
from operations
|
117,099
|
(765,716
)
|
-
|
|
(648,617
)
|
|
|
|
|
|
|
|
|
Loss
on disposal of property
|
69,310
|
-
|
-
|
|
69,310
|
|
Interest
expense
|
955
|
72,110
|
-
|
|
73,065
|
|
Income
(loss) before provision for income taxes
|
46,834
|
(837,826
)
|
-
|
|
(790,992
)
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
16,000
|
-
|
-
|
|
16,000
|
|
Net
Income (loss)
|
62,834
|
(837,826
)
|
-
|
|
(774,992
)
|
|
|
|
|
|
|
|
|
Net
Income (loss) attributable to non-controlling interest
|
474,909
|
-
|
-
|
|
474,909
|
|
Net
loss attributable to Level Brands, Inc. common
shareholders
|
$
(412,075
)
|
$
(837,826
)
|
$
-
|
|
$
(1,249,901
)
|
|
|
|
|
|
|
|
|
Net
loss per share, basic and diluted
|
$
(0.05
)
|
|
|
(5)
|
$
(0.05
)
|
|
Weighted
average number of shares outstanding
|
7,742,644
|
|
|
|
24,964,072
|
20
Level
Brands, Inc.
Unaudited
Pro Forma Combined Statements Of Comprehensive Income
(Loss)
For The
Year Ended September 30, 2018
|
|
(Audited)
|
(Unaudited)
|
|
|
|
|
Level Brands,
Inc.
|
Cure Based
Development LLC
|
|
|
|
|
|
12
Months
|
|
|
|
|
Year
ended
|
Period
ended
|
Pro
Forma
|
Pro
Forma
|
|
|
September 30,
2018
|
September 30,
2018
|
Adjustments
Notes
|
Combined
|
|
|
|
|
|
|
|
Net
Income (Loss)
|
$
62,834
|
$
(837,826
)
|
$
-
|
$
(774,992
)
|
|
Other
Comprehensive Income:
Net
Unrealized Gain (Loss) on Marketable Securities, net of tax of
$0
|
(2,512,539
)
|
-
|
-
|
(2,512,539
)
|
|
Comprehensive
Income (Loss)
|
(2,449,705
)
|
(837,826
)
|
-
|
(3,287,531
)
|
|
|
|
|
|
|
|
Comprehensive
Income (Loss) attributable to non-controlling interest
|
474,909
|
-
|
-
|
474,909
|
|
Comprehensive
Income (Loss) attributable to Level Brands, Inc.common
shareholders
|
$
(2,924,614
)
|
$
(837,826
)
|
-
|
$
(3,762,440
)
|
21
Level
Brands, Inc.
Notes
To
Unaudited
Pro-Forma Combined Condensed Balance Sheet As Of September 30, 2018
And
The
Pro-Forma Combined Condensed Statement Of Operations For The Year
Ended September 30, 2018
1.
Basis of Pro Forma
Presentation.
These
unaudited pro forma combined condensed financial statements have
been compiled from and include:
|
i.
|
An
audited consolidated balance sheet of Level Brands as of September
30, 2018.
|
|
ii.
|
An
unaudited condensed balance sheet of Cure Based Development as of
September 30, 2018.
|
|
iii.
|
An
audited consolidated statement of operations of Level Brands for
the year ended September 30, 2018.
|
|
iv.
|
An
unaudited condensed statement of operations of Cure Based
Development for the twelve months ended as of September 30,
2018.
|
Cure
Based Development’s fiscal year end was December 31,
therefore we utilized their financial results from the periods
which aligned with our year end of September 30 as we created the
unaudited pro forma combined condensed financial
statements.
The
assets acquired and liabilities assumed were recorded as
preliminary estimates of fair values determined by management,
based on information currently available and on current assumptions
as to future operations, and are subject to change upon the
completion of acquisition accounting, including the finalization of
asset valuations. These changes could result in material variances
between the Level Brands’ future financial results and the
amounts presented in these unaudited pro forma combined condensed
financial statements, including fair values recorded, as well as
expenses and cash flows associated with these items.
The
unaudited pro forma combined condensed financial statements are
presented for illustrative purposes only and are not necessarily
indicative of the operating results that would have occurred if
Level Brands had operated Cure Based Development for the year ended
September 30, 2018, nor is it necessarily indicative of future
operating results or financial position. The unaudited pro forma
combined condensed financial statements do not reflect any
operating efficiencies, adjustments for non-recurring expenses
recorded by both Level Brands and Cure Based Development (see note
6), or cost savings that we may achieve with respect to the
combined companies.
The
unaudited pro forma combined condensed financial statements should
be read in conjunction with the historical audited financial
statements and notes to financial statements of Level Brands
contained in our 2018 10-K.
2.
Equity
Financings.
On
October 2, 2018, we completed a secondary public offering of
1,971,428 shares of our common stock for aggregate gross proceeds
of $6,899,998.
(a)
We received
$6,356,998 in net proceeds after deducting underwriting discounts
and commissions and other estimated offering expenses payable by
us.
(b)
A pro forma
adjustment to reflect this equity financing in the unaudited pro
forma combined condensed balance sheet as of September 30, 2018 was
made as if the financing occurred on September 30,
2018.
3.
Preliminary
Purchase Price Allocation and Pro Forma Adjustments.
The
adjustments included in the unaudited pro forma combined condensed
financial statements are those that are considered to be directly
attributable to the Mergers. The total purchase consideration was
$3,000,000 in cash and 30,500,000 shares of our common stock to be
issued upon shareholder approval (including Earnout Shares - shares
that
could be
issued
upon achievement of future revenue targets). In
accordance with purchase accounting rules under ASC 805 guidance,
the consideration we transfer in exchange for Cure Based
Development includes any asset or liability resulting from a
contingent consideration arrangement. We have an obligation to
transfer 15,250,000 shares of our common stock, upon shareholder
approval, to the members of Cure Based Development. In addition, we
have an obligation to potentially transfer the Earnout Shares,
which could total an additional 15,250,000 shares. The issuance of
the Earnout Shares is based on cbdMD LLC meeting certain revenue
targets over the next five years. Both of these share issuances
have been determined as contingent liabilities and were valued
using both a market approach method and a Monte Carlo
simulation.
22
The
following purchase consideration is as follows:
|
6,500,000 shares -
Tranche 1
|
$
16,601,367
|
|
8,750,000 shares -
Tranche 2 leak out shares
|
18,811,117
|
|
Earnout potential
shares
|
35,941,000
|
|
Note
paid
|
1,000,000
|
|
Cash provided via
advance
|
2,000,000
|
|
Total Purchase
Consideration
|
$
74,353,483
|
|
|
|
|
|
|
|
Assets
acquired:
|
|
|
Cash
and cash equivalents
|
$
1,822,331
|
|
Accounts
receivable
|
850,921
|
|
Inventory
|
1,054,926
|
|
Other
current assets
|
38,745
|
|
Property
and equipment, net
|
608,947
|
|
Intangible
assets
|
21,585,000
|
|
Goodwill
|
55,258,545
|
|
Total assets
acquired
|
81,219,415
|
|
|
|
|
Liabilities
assumed:
|
|
|
Accounts
payable
|
257,081
|
|
Notes
payable – related party
|
764,300
|
|
Customer
deposits - related party
|
265,000
|
|
Accrued
expenses
|
471,551
|
|
Deferred
tax liability
|
5,108,000
|
|
Total Liabilities
assumed
|
6,865,932
|
|
|
|
|
Net Assets
Acquired
|
$
74,353,483
|
In
connection with the purchase price allocation, we recorded a
deferred tax liability of approximately $5,108,000, with a
corresponding increase to goodwill, for the tax effect of the
acquired intangible assets from Cure Base Development. This
liability was recorded as there will be no future tax deductions
related to the acquired intangibles, and we have identified these
as indefinite-lived intangible assets.
The
adjustments included in the unaudited pro forma combined condensed
balance sheet as of September 30, 2018 that are considered to be
directly attributable to the Mergers and purchase accounting are as
follows:
|
Asset
adjustments:
|
|
|
Cash and cash
equivalents
|
$
(1,000,000
)
|
|
Intangible
assets
|
21,585,000
|
|
Goodwill
|
54,876,483
|
|
Total asset
adjustments
|
75,461,483
|
|
|
|
|
Liabilities
adjustments:
|
|
|
Notes payable
– related party
|
$
(1,000,000
)
|
|
Contingent
Liability
|
71,353,483
|
|
Deferred tax
liability
|
5,108,000
|
|
Total liabilities
adjustments
|
75,461,483
|
The
goodwill asset adjustment amount for the unaudited pro form
combined condensed balance sheet as of September 30, 2018 is
$382,062 different than the purchase price accounting amount
recorded for the Mergers. The difference is due to the estimated
change in the fair value of assets acquired and liabilities assumed
from the actual acquisition date of December 20, 2018 and the pro
forma financial statement date of September 30, 2018.
4.
Income Tax Expense
/ Benefit.
Cure
Based Development did not record any tax expense for the period
ended September 30, 2018. For the period ended September 30, 2018,
Cure Based Development had not recorded any income tax benefit
against its net losses as it determined it was appropriate to set
up full valuation allowances against the net deferred tax
assets.
As
a result of the Mergers, we established as part of the purchase
price allocation a net deferred tax liability related to the
book-tax basis of certain assets and liabilities of approximately
$5.1 million.
Level
Brands has a valuation allowance against the net deferred tax
assets, with the exception of the deferred tax liabilities that
result from indefinite-life intangibles which cannot be offset by
deferred tax assets and the deferred tax liabilities that resulted
from the Mergers.
We
file income tax returns in the United States, and various state
jurisdictions. Our policy is to recognize interest expense and
penalties related to income tax matters as tax expense. At
September 30, 2018 there are no unrecognized tax benefits, and
there are no significant accruals for interest related to
unrecognized tax benefits or tax penalties.
23
5.
Pro Forma Weighted
Average Shares.
The pro
forma basic and diluted earnings per share amounts presented in the
unaudited pro forma combined condensed statement of operations are
based on the weighted average number of the our common shares
outstanding at September 30, 2018 as adjusted for the
following:
|
|
September 30,
2018
|
|
|
|
|
Weighted average
shares outstanding
|
7,742,644
|
|
Weighted average
effect of shares issued for the Mergers
|
15,250,000
|
|
Issuance of shares
with equity financing
|
1,971,428
|
|
Combined pro forma
weighted average shares
|
24,964,072
|
Common
stock equivalents were not considered as the effects were
anti-dilutive.
6.
Non-Recurring
Items.
During
the year ended September 30, 2018, we determined that inventory
held under the Beauty & Pin-Ups subsidiary was impaired by
approximately $262,000.
We have performed a
qualitative and quantitative analysis for the year ended September
30, 2018 accounting for the performance of Beauty & Pin-Ups and
the business shift in relation to its original business model and
current focus on licensing and has determined that an impairment
was required. As a result, we recorded an impairment charge of
$240,000 as impairment to intangibles under the products segment
for the year ended September 30, 2018.
We
disposed of a show booth held under the Beauty & Pin-Ups
subsidiary, in the year ended September 30, 2018, and recorded a
loss on disposal of property of $69,310.
Background of the Transaction
Our
board of directors has from time to time evaluated strategies for
enhancing shareholder value as we seek to execute our key strategic
objective of being
an innovative
licensing, marketing and brand management company with a focus on
lifestyle-based products. In this regard, our senior management
have periodically evaluated various strategic alternatives in
addition to licensing arrangements for possible recommendation to
our board of directors in an effort to grow our brands through
acquisitions.
Mr.
Sumichrast was introduced to Mr. Coffman by Paul Porter, an
attorney who has represented Level Brands and entities affiliated
with Mr. Sumichrast from time to time. Mr. Porter also represented
Mr. Coffman and his various past companies in the past. The
introduction had been made in the years prior to 2018 and did not
have a specific business purpose. As Mr. Sumichrast assessed Level
Brand’s involvement with CBD thought its license arrangement
with Isodiol International Inc. and began gathering information and
research on the product and its changing regulatory environment, he
reached out to Mr. Coffman as an industry resource.
On
August 6, 2018, Mr. Sumichrast met with Mr. Coffman to discuss Cure
Based Development’s business, and our licensing strategy and
direction related to target consumer products in the health and
wellness space. During the course of this discussion, Mr.
Sumichrast requested additional information on Cure Based
Development’s business and plans which was provided by Mr.
Coffman on the following day.
On
August 10, 2018, Messrs. Sumichrast and Coffman met a second time,
and during the discussion Mr. Sumichrast indicated an interest in
exploring a potential transaction with Cure Based Development,
which Mr. Coffman agreed to consider.
On
August 13, 2018, a non-disclosure agreement between the parties was
executed. Thereafter, Mr. Sumichrast, Mr. Mark S. Elliott, our CFO,
Mr. Coffman and Mr. Todd Justice, another manager of Cure Based
Development, met to discuss a possible transaction between Level
Brands and Cure Based Development.
24
On
August 16, 2018, Mr. Sumichrast and Mr. Coffman met again to
discuss the competitive landscape for Cure Based Development, the
expected provisions of the 2018 Farm Bill which would declassify
hemp as a Schedule 1 controlled substance, and the expected impact
of the passage of the legislation on the market for CBD
products.
Over
the next approximate 10 days Level Brands’ senior management
consulted with representatives of its corporate counsel regarding
general structure matters, including compliance with NYSE American
rules and regulations and the potential impact of a transaction
with Cure Based Development before the declassification of CBD as a
Schedule 1 controlled substance.
On
August 29, 2018, following these discussions, Mr. Sumichrast and
Mr. Coffman discussed the possibility of an advisory relationship
between Level Brands’ EE1 subsidiary and Cure Based
Development for brand support functions pending the ultimate
possible declassification of hemp as a Schedule 1 controlled
substance. During September 2018 senior management of both Level
Brands and Cure Based Development continued to have informal
discussions and monitor the legislative progress of the Farm
Bill.
On
October 5, 2018, senior management of Level Brands met with senior
management of Cure Based Development met to discuss proposed
structures and processes for the acquisition of Cure Based
Development by Level Brands.
For the
next several weeks, Level Brands’ senior management
coordinated the exchange of high-level business due diligence items
between Level Brands and Cure Based Development, and both parties
opened data rooms to allow sharing of this information. During this
time senior management of Level Brands also consulted with
representatives of its corporate counsel and its independent
auditors regarding various proposed structures.
On
October 18, 2018, Level Brands’ board of directors held a
special meeting at which Level Brands’ senior management
reviewed with the board the discussions surrounding a possible
acquisition of Cure Based Development that had taken place and
provided the board with the draft of a non-binding letter of
intent. At the conclusion of the meeting, the Level Brands
supported senior management’s efforts to pursue a possible
acquisition of Cure Based Development, approved the general terms
of the draft letter of intent and agreed to form the Special
Committee of the board, to be
made up
of Messrs. Siegel and Sellers, both of whom were disinterested and
independent directors, to work with Mr. Elliott to review, evaluate
and negotiate the proposed transaction with Cure Based
Development.
On
October 19, 2018, senior management of Level Brands met with
representatives of its corporate counsel regarding the proposed
terms of the transaction as contained in the draft letter of intent
provided to the board. On October 19, 2018 Mr. Elliott and the
Special Committee also met to discuss in greater detail the
business and operations of Cure Based Development, the proposed
transaction as well as considering recommendations for investment
banking firms to be engaged to render a fairness opinion regarding
the proposed transaction. After the meeting the Special Committee
members were granted access to the data rooms.
Following
revisions to the draft letter of intent to accommodate comments
from its corporate counsel and its special tax counsel, senior
management and the Special Committee, on October 20, 2018 the
non-binding letter of intent was circulated to the senior
management of Cure Based Development. On October 22, 2018 the
non-binding letter of intent was signed by Level Brands and Cure
Based Development.
On
October 23, 2018 the Special Committee was formally formed, and on
October 24, 2018 the Special Committee engaged ThinkEquity to
render the fairness opinion. On October 23, 2018 Mr. Elliott and
representatives of Cure Based Development also discussed the audit
of Cure Based Development with representatives of Level
Brands’ independent auditor.
On
October 25, 2018 Mr. Elliott met with senior management of Cure
Based Development to review various due diligence items which had
been produced in response to Level Brands’
request.
Commencing
in late October 2018 Mr. Elliott and members of the Special
Committee conducted various discussions with representatives of its
corporate counsel as well as representatives of its special tax
counsel, regarding requested modifications to the proposed
transaction structure by Cure Based Development in an effort to
address certain tax issues potentially impacting its members.
During this period Mr. Elliott and representatives of its corporate
counsel and its special tax counsel also conducted discussions with
Cure Based Development’s legal counsel and members of its
senior management regarding proposed revisions to the structure of
the transaction. On October 31, 2018 a draft of an amended and
restated non-binding letter of intent was prepared and circulated
by Level Brands to Cure Based Development which, while not
executed, was the basis of the structure of the Merger
Agreement.
On
October 30, 2018 Mr. Elliott and a representative of ThinkEquity
visited Cure Based Development’s offices in Charlotte, NC,
interviewed members of its management, discussed certain due
diligence matters, discussed business operations, strategy and
competition, and visited Cure Based Development’s
manufacturing site. On October 31, 2018 Mr. Elliott also met with
Ms. Caryn Dunayer, President of Cure Based Development, to discuss
business operations and transition planning which would be required
if the proposed transaction was consummated.
25
During
the next several weeks Mr. Elliott continued overseeing the due
diligence of Cure Based Development and discussions continued
between the parties and their legal advisors regarding the proposed
structure of a transaction.
On
November 5, 2018 Mr. Elliott updated the Special Committee on the
status of the due diligence on the proposed transaction, the audit
of Cure Based Development and the ongoing discussions regarding the
proposed structure changes. Mr. Elliott provided additional updates
to the Special Committee on November 9, 2018.
On
November 9, 2018, in connection with a regularly scheduled meeting
of the board of directors, the board visited Cure Based
Development, met with its senior management and received a
presentation from Mr. Coffman on its business, operations and
strategy. During the board meeting, which was attended by Mr.
Elliott, together with representatives of its corporate counsel,
the board received a report of the Special Committee assisted by
Mr. Elliott, on the status of the proposed transaction, the pending
revised structure, key items for the transaction, the status of the
due diligence, the status of the audit of Cure Based Development,
and general matters related to the pending
transaction.
On
November 16, 2018 ThinkEquity delivered the draft of the fairness
opinion to the Special Committee, and on November 19, 2018 Mr.
Siegel, Chairman of the Special Committee, met with representatives
of ThinkEquity at its offices to review the draft of the fairness
opinion. On November 19, 2018 ThinkEquity delivered its fairness
opinion to the Special Committee.
On
November 21, 2018 Mr. Elliott met with the Special Committee to
provide an update on the status of the proposed transaction. On
November 21, 2018 Level Brands’ corporate counsel also
circulated initial drafts of the Merger Agreement and the other
transactional documents to legal counsel for Cure Based
Development.
Between
November 21, 2018 and December 3, 2018 the parties negotiated the
terms of the Merger Agreement and the other transactional
documents, and on December 3, 2018 the Merger Agreement was
executed by the parties.
On
November 30, 2018 the board of directors met and the Special
Committee delivered its report and recommendations that the board
approve the terms of the proposed transaction contained in the
draft Merger Agreement and other transactional documents provided
to the board members. At this meeting Mr. Elliott is authorized to
execute the Merger Agreement on Level Brands’ behalf with
such additional revisions as he and the Special Committee, in
consultation with its corporate counsel, deem advisable and in the
best interests of Level Brands.
On
December 12, 2018 the board of directors of Level Brands met and
approved various pre-closing matters related to the ultimate
closing of the Merger Agreement once the Farm Bill was signed into
law by the President of the United States.
On
the morning of December 20, 2018, following the announcement that
the President of the United States would sign the Farm Bill, senior
management of Level Brands, representatives of its corporate
counsel, senior management of Cure Based Development and its legal
counsel held a pre-closing conference call. Later that afternoon,
following the signing into law of the Farm Bill by the President of
the Untied States, the Merger Agreement closed and the parties
entered into the related transactional documents, including the
employment agreements with Mr. Coffman and Ms. Dunayer described
elsewhere in this proxy statement.
Board recommendation
After
discussion and deliberation based on the information considered
during its evaluation of the proposed transaction with Cure Based
Development, and based upon the recommendation of the Special
Committee, our board of directors approved the Merger, the Merger
Agreement and the related transactional documents.
Accordingly, our board recommends that you vote
FOR proposal 3.
For more information regarding the factors
considered by our board in reaching its decision, see the section
entitled "
The
Transaction—Reasons for the Transaction
"
below.
Reasons for the Transaction
As
described above in the section entitled "
Background of the Transaction
," the
Special Committee, in evaluating the Transaction, consulted with
our senior management and our legal and financial advisors, and, in
reaching its decision to approve the Transaction and recommend the
Transaction to our board of directors or approval, including the
Merger Agreement and related transactional documents, the Special
Committee discussed and considered a variety of factors weighing
positively in favor of the Transaction, including, but not limited
to, the following:
26
Strategic Benefits.
The Special Committee considered our
senior management's belief that the Transaction would position
Level Brands in the emerging CBD market with an opportunity for
significant growth and a subsequent increase in shareholder value.
More specifically, the Special Committee considered
management’s perspective, among others:
●
having control and
ownership of the business versus a licensing agreement (as Level
Brands’ had with Isodiol International Inc.), would provide
greater control over the ability to execute on the growth strategy
by directly overseeing the sales and marketing direction, product
creation and distribution as well as being able to control the full
manufacturing process;
●
belief that time to
market is critical in this emerging market and our past experience
with licensing agreements is that we would not be able to
sufficiently impact and direct this key aspect properly, providing
the benefit, revenue and profit we would expect;
●
the leadership team
at Cure Based Development’s strategy, execution capability,
and historical success, and combined with the current senior
management at Level Brands the belief that synergies existed to
increase our ability for success as an emerging business in the
public markets;
●
the CBD product
market, with the passage of the Farm Bill, could create an
opportunity significantly beyond our current
businesses;
●
strengthened
financial position, including that the Transaction will create a
combined company with greater potential for significant growth as
well as reoccurring annual revenue, it will also increase Level
Brands' market capitalization and shares of common stock
outstanding, which is expected to enhance Level Brand's ability to
access the capital markets in the future; and
●
the ability of
Level Brands’ management team to assist with rapid growth,
system integration and infrastructure support for a rapidly growing
business.
Furthermore, we
believe that, given the favorable strategic fit, the revenue growth
potential, and the purchase price, the transaction is expected to
be accretive to Level Brands 2019 cash earnings per share (net
income adjusted for non-cash items including stock-based
compensation, depreciation and amortization), excluding
transaction, integration and synergy expenses.
Cure
Based Development’s Businesses, Operating Results, Financial
Condition and Management.
The
Special Committee also considered information with respect to Cure
Based Development’s business, operating results and financial
condition on both a historical and prospective basis, and the
quality, breadth and experience of Cure Based Development's senior
management, including the following factors, among
others:
●
its current
marketing and branding strategy and its rapid growth since start
up, which Level Brands senior management believed indicated the
ability to compete and execute effectively;
●
its manufacturing
process and direction regarding production as well as product
creation, research and development and quality control;
and
●
its senior
managements overall strategy combined with their experience and
past historical success with emerging businesses.
Consideration.
The Special Committee
evaluated the Transaction consideration, taking into account its
total value, the all stock nature of the compensation, and the
relative amount of First Tranche Shares and Second Tranche shares
versus the amount of Earnout Shares and the significant revenue
thresholds to be met to trigger the issuance of the Earnout Shares.
The consideration was determined through arms' length negotiations
between Cure Based Development and Level Brands and was approved by
the Special Committee and our board. ThinkEquity did not recommend
any specific consideration to us or the Special Committee, or that
any specific amount or type of consideration constituted the only
appropriate consideration for the transaction.
Addition of a Significant Committed Executive
and Board Member.
The Special Committee considered that Mr.
Coffman will have beneficial ownership over approximately 49% of
our common stock if this proposal 3 is approved at the 2019 annual
meeting, subject to the terms of the irrevocable voting proxy. Mr.
Coffman, who founded Cure Based Development and served as its CEO,
is now serving as CEO of our cbdMD LLC subsidiary and is a member
of our board of directors. Mr. Coffman, who signed a five year
employment agreement with cbdMD LLC on the Closing Date, will
continue to be involved in the expansion of cbdMD LLC’s
operations, will be Level Brands’ single largest shareholder
and will be actively involved at the board level.
27
Terms of the Merger Agreement.
In
addition to evaluating the reasonableness of the Transaction
consideration, the Special Committee considered the overall terms
of the Merger Agreement, including the parties' respective
representations, warranties, covenants and conditions to their
respective obligations in such agreements. In particular, the
Special Committee noted the fact that the parties to the Merger
Agreement indemnified each other for a number of items, including
for breaches of certain representations and warranties, breaches of
covenants and certain other matters.
Restrictions on Resales of Stock Issued in the
Transaction; No Registration Rights.
Another important
consideration for the Special Committee was the fact that the
shares to be issued in connection with the Transaction will be
"restricted securities" under Rule 144 of the Securities Act of
1933, as amended. In addition, the Special Committee noted that the
Second Tranche Shares will be subject to the irrevocable voting
proxy. Among other things, the Special Committee considered that
the First Tranche Shares, and the Second Tranche Shares, following
the expiration of the vesting periods, will be subject to the
leakout agreement. Additionally, the Special Committee considered
that the Cure Brand Development members were not granted any
registration rights.
Opinion of Financial Advisor.
The
Special Committee considered the opinion of ThinkEquity, dated
November 15, 2018, addressed to the Special Committee, as to the
fairness, from a financial point of view and as of the date of such
opinion, and based upon and subject to the conditions and
limitations set forth in the opinion to the Special Committee of
the consideration to be paid in the transaction, as more fully
described in
"Opinion of Level
Brands' Financial Advisor
."
Due Diligence.
The Special Committee
considered the scope of the due diligence investigation of Cure
Based Development, including the availability of audited financial
statements on the company, conducted by members of Level
Brands’ senior management and Level Brands' legal and
financial advisors and evaluated the results.
Other Reasons for the Transaction.
The
reasons in favor of the transaction considered by the Special
Committee also included, but were not limited to, the
following:
●
the Special
Committee's review, with the assistance of our advisors, of the
structure of the Transaction, the accounting and tax consequences
of the Transaction and the financial and other terms of the Merger
Agreement;
●
the anticipated
increase in interest from new investors because of the combined
company's larger size and scope of operations;
and
●
the potential for
future increased trading liquidity for our
shareholders.
In
addition, the Special Committee took into account a number of
potentially negative factors in its deliberations concerning the
Transaction, including the following considerations:
●
the
need to meet initial listing standards of the NYSE American and the
adverse impact on our company if we were unable to do
so;
●
the
early stage of Cure Based Development’s operations and early
stage of the CBD product market;
●
the
level of competition in the sale of CBD products, which is only
expected to increase following the passage of the Farm Bill, and
Level Brands’ ability to effectively
compete;
●
the possible effect
of the Transaction on our stock price, including any effect on the
stock price caused by the public announcement of the Transaction
and the potential volatility in our stock price, as well as a
possible decline in the stock price caused by the ultimate issuance
of First Tranche Shares and the Second Tranche Shares;
●
the
fact that, if the Transaction was not completed (1) the trading
price of our shares of common stock could be adversely affected,
(2) we will have incurred significant transaction and opportunity
costs attempting to complete the Transaction, (3) our business may
be disrupted and (4) the market's perceptions of our prospects
could be adversely affected;
●
the
evolving position on CBD products;
●
the
possibility that litigation might be initiated in regard to the
Transaction that could be potentially expensive and burdensome for
us to defend;
●
the
challenges inherent in the combination of two businesses of the
size and scope of our company and Cure Based Development and the
size of the companies relative to each other, including, the
following:
●
the
possibility that integration costs may be material;
●
the
possible diversion of management's attention for an extended period
of time;
●
the
potential disruption of, or the loss of momentum in, each company's
ongoing businesses before the completion of the transaction;
and
●
complexities
associated with managing the combined businesses, including
difficulty addressing possible differences in corporate cultures
and management philosophies and the challenge of integrating a
privately held company with a limited history of operations into a
public company;
28
●
the
risk that the economic benefits and other synergies that we
anticipate as a result of the Transaction are not fully realized or
take longer to realize than expected; and
●
the
impact of the issuance of shares of our common stock as
consideration for the transaction on our existing stockholders,
including dilution of their ownership and voting interests and this
potential change of control of our company over time.
After
consideration of these factors, the Special Committee determined
that the potential negative factors were significantly outweighed
by the potential benefits of the Transaction to our
shareholders.
The
foregoing discussion of information and factors considered by the
Special Committee and our board of directors is not intended to be
exhaustive. In light of the variety of factors considered in
connection with its evaluation of the Transaction, Merger Agreement
and other transactional documents, neither the Special Committee
nor the board of directors found it practicable to, and did not,
quantify or otherwise assign relative weights to the specific
factors considered in reaching its determinations. Rather, the
Special Committee and the board viewed its determinations as being
based on the totality of information and factors presented to and
considered by it. Moreover, each member of the Special Committee
and the board applied his own personal business judgment to the
process and may have given different weight to different
factors.
For the
reasons set forth above, and upon the recommendation of the Special
Committee, our board of directors approved the Transaction,
including the Merger Agreement, Stock Issuances and associated
transactional agreements, and determined that the Transaction was
advisable and in the best interest of our shareholders. This
explanation of the Special Committee’s and board of
directors' reasons for the Transaction and other information
presented in this section is forward-looking in nature and,
therefore, should be read in the light of the factors described
earlier in this proxy statement under "
Special Note Concerning Forward-Looking
Statements.
"
Opinion of Level Brands' Financial Advisor
ThinkEquity
delivered a draft of the opinion to the Special Committee on
November 16, 2018, which ThinkEquity subsequently reviewed in
detail with the Chairman of the Special Committee, Mr. Siegel, on
November 19, 2018. After that review, ThinkEquity delivered the
final opinion on November 19, 2018 to the Special Committee. At the
meeting of the Special Committee on November 21, 2018, the Special
Committee reviewed and accepted the opinion from ThinkEquity of
which the opinion indicated, as of the date of the opinion and
based upon and subject to the conditions and limitations set forth
in the opinion, the consideration to be paid by Level Brands in the
Transaction was fair from a financial point of view to Level
Brands.
The full text of ThinkEquity's written opinion
dated November 15, 2018 is attached as
Exhibit A
to this proxy statement and is
incorporated herein by reference. ThinkEquity has consented to the
inclusion of its written opinion dated November 15, 2018 in this
proxy statement, and to the description of such opinion and the
references to ThinkEquity contained in this proxy statement.
Shareholders are urged to read ThinkEquity’s written opinion
carefully and in its entirety. ThinkEquity’s opinion was
provided for the use and benefit of the Special Committee (in its
capacity as such) in its evaluation of the Transaction.
ThinkEquity’s opinion may not be
disseminated, quoted, reproduced, summarized, described or referred
to or disclosed to any other person, nor shall any public reference
to ThinkEquity be made, without its prior written consent.
ThinkEquity’s opinion is
limited solely to the fairness, from a financial point of view and
as of the date of such opinion, to Level Brands of the
consideration to be paid by Level Brands in the Transaction and
does not address Level Brands' underlying business decision to
effect the Transaction or the relative merits of the Transaction as
compared to any alternative business strategies or transactions
that might be available with respect to Level Brands.
ThinkEquity’s opinion does not constitute a recommendation to
any Level Brands’ shareholder as to how such shareholder
should vote or act with respect to proposal 3 or any other matter.
In arriving at its opinion, ThinkEquity, among other
things:
●
reviewed
historical and projected financial information prepared by Cure
Based Development and Level Brands;
●
reviewed
publicly available non-financial information concerning Cure Based
Development;
●
conducted
discussions with Level Brands and Cure Based Development senior
management concerning Cure Based Development’s historical
financial results, business prospects and projected financial
information;
●
reviewed
the letter of intent and analyzed the value of the consideration to
be issued in the Transaction;
●
conducted
such other analyses and examinations and considered such other
information and financial, economic and market criteria as it
deemed appropriate in arriving at its opinion, including discounted
cash flow analysis;
●
analyzed
certain financial, stock market and other publicly available
information relating to the business of other companies whose
operations it considered relevant in evaluating those of Cure Based
Development; and
●
conducted
such other analyses and examination and considered such other
information and financial, economic and market criteria as it
deemed appropriate in arriving at its opinion.
29
In
connection with its review, ThinkEquity did not assume any
responsibility for independent verification of any of the
information supplied to, discussed with or reviewed by ThinkEquity
for the purpose of its opinion and has, with the consent of the
Special Committee, relied on such information being complete and
accurate in all material respects. In addition, with the Special
Committee’s consent, ThinkEquity did not make any independent
evaluation or appraisal of any of the assets or liabilities
(contingent, derivative, off-balance-sheet, or otherwise) of Cure
Based Development or Level Brands, nor was ThinkEquity furnished
with any such evaluation or appraisal. With respect to the
financial forecasts and other information relating to Cure Based
Development, Level Brands and the expected synergies, ThinkEquity
assumed, at the direction of the Special Committee, that such
financial information was reasonably prepared on a basis reflecting
(1) the best currently available estimates and judgments of the
management of Cure Based Development and Level Brands as to the
future performance of Cure Based Development and such expected
synergies (including the amount, timing and achievability thereof)
and (2) the best currently available estimates and judgments of the
management of Level Brands as to the future performance of Level
Brands. ThinkEquity also assumed, at the direction of the Special
Committee, that the future financial results reflected in such
forecasts and other information will be achieved at the times and
in the amounts projected. Additionally, at the direction of Special
Committee, ThinkEquity did not apply any effect to valuation based
upon the proposed pro forma ownership of the combined company,
including, without limitation, Mr. Coffman’s significant
beneficial ownership following the Transaction. Finally, at the
direction of the Special Committee, ThinkEquity relied on the
assessments of Level Brands’ senior management as to Level
Brands’ ability to integrate the businesses of Cure Based
Development and Level Brands.
ThinkEquity's
opinion was necessarily based on economic, monetary, market and
other conditions as in effect on, and the information made
available to ThinkEquity as of, the date of the opinion.
ThinkEquity’s opinion did not address, the fairness of the
Transaction or any aspect or implication thereof to, or any other
consideration of or relating to, the holders of any class of
securities, creditors or other constituencies of Level Brands or
Cure Based Development. In addition, ThinkEquity did not express
any opinion as to the fairness of the amount or nature of any
compensation to be received by any officers, directors or employees
of any parties to the Transaction, or any class of such persons,
relative to the consideration or otherwise. ThinkEquity’s
opinion was approved by a ThinkEquity fairness opinion committee.
At the direction of the Special Committee, ThinkEquity was not
asked to, nor did it, offer any opinion as to any terms of the
Merger Agreement or any aspect or implication of the Transaction,
except for the consideration to the extent expressly specified in
ThinkEquity’s opinion. With the consent of the Special
Committee, ThinkEquity’s opinion does not express any opinion
as to what the value of Level Brands’ common stock actually
will be when issued pursuant to the Transaction or the price at
which Level Brands’ common stock may trade at any time.
ThinkEquity is not a tax, legal, regulatory or accounting expert
and ThinkEquity assumed and relied upon, without independent
verification, the assessments of Level Brands and its other
advisors with respect to tax, legal, regulatory and accounting
matters. In rendering its opinion, ThinkEquity assumed, at the
consent of the Special Committee, that the final executed form of
the Merger Agreement would not differ in any material respect from
the draft that ThinkEquity reviewed, that the Transaction would be
consummated in accordance with its terms and that the parties to
the Merger Agreement would comply with all the material terms of
the Merger Agreement. ThinkEquity also assumed, with the consent of
the Special Committee, that all governmental, regulatory or other
consents and approvals necessary for the consummation of the
Transaction would be obtained without the imposition of any delay,
limitation, restriction, divestiture or condition that would have
an adverse effect on Cure Based Development or Level Brands or on
the expected benefits to Level Brands of the Transaction. Except as
described in this summary, Level Brands and the Special Committee
imposed no other instructions or limitations on ThinkEquity with
respect to the investigations made or procedures followed by
ThinkEquity in rendering its opinion.
ThinkEquity
acted as sole book-running
manager for our $6.9 million follow-on public offering in October
2018. We paid the firm a fee of $100,000 in connection with its
engagement as our financial advisor in the Transaction plus
reimbursed it for
travel and other out-of-pocket expenses
incurred in connection with it engagement, including the fees and
expenses of ThinkEquity’s counsel.
The following is a brief summary of the principal
financial analyses performed by ThinkEquity to arrive at the
opinion. Some of the summaries of financial analyses include
information presented in tabular format. In order to fully
understand the financial analyses, the tables must be read together
with the text of each summary. The tables alone do not constitute a
complete description of the financial analyses. Considering the
data set forth in the tables without considering the full narrative
description of the financial analyses, including the methodologies
and assumptions underlying the analyses, could create a misleading
or incomplete view of the financial analyses. ThinkEquity reviewed
with the Special Committee the assumptions on which such analyses
were based and other factors. No limitations were imposed by the
Special Committee with respect to the assumptions made, procedures
followed, limitations of the review undertaken, qualifications
contained and other matters considered by Think Equity in rendering
its opinion.
Selected M&A Transactions Reviewed
ThinkEquity
reviewed recent merger and acquisition transactions
(“
M&A
transactions
”) involving companies with CBD products.
M&A transactions in Cure Based Development LLC’s
(“
CBDMD
”) industry with
comparable financial profiles is limited. Public information
related to the selected transactions is not available to generate
enterprise value to last twelve months’ EBITDA multiples or
enterprise value to last twelve months ' revenue multiples.
ThinkEquity noted that M&A transaction analyses are not
sufficient to derive an indicated range of enterprise values for
CBDMD.
30
Selected Public Companies Reviewed
ThinkEquity
reviewed publicly traded comparable companies, including companies
with consumer facing CBD products and excluding medical and
recreation THC focused cannabis companies, biotech and specialty
pharma companies develop drugs using CBD and companies whose
operations are primarily focused on growing hemp. For purposes of
its analysis, ThinkEquity used certain publicly available
historical financial data and consensus equity analyst estimates
for the selected public companies. ThinkEquity noted that none of
the comparable companies trade on a US senior stock exchange
(Nasdaq, NYSE or NYSE American) and the primary stock exchanges for
the two companies for which forward analyst estimates are available
trade are foreign exchanges (the Canadian Securities Exchange and
the ASX).
31
As of November 14, 2018
Future estimates compiled by Bloomberg LP
Multiples greater than 100x due to Revenue or Net Income of
approximately $1 million or less are excluded in the above table
and averages.
|
(1)
|
Fiscal
year ended 3/31/17 shown for CY2016 and CY2017
|
|
|
|
|
(2)
|
Fiscal
years ended June 30
th
|
The
comparable company group currently trades at valuations from
approximately $20 million $1 billion enterprise value, with the CBD
industry leader Charlotte's Web Holdings, Inc. (“
CWEB
”) commanding the
highest valuation. Projected 2018 sales range from $0 to
CWEB’s $82 million.
Applying the mean
multiples of EV/Revenue and Equity Value/Revenue for 2018 and 2019
from CWEB and Elixinol Global Limited, the two companies for which
analyst estimates are available, to CBDMD’s projected revenue
for 2018 and 2019, results in an implied enterprise value range for
CBDMD of $61 million to $114 million. ThinkEquity noted that
regardless of CBDMD’s 2018 revenue, the value of the
15,250,000 Shares comprised of the initial share consideration and
the fully vested vesting share consideration, at the $3.95 volume
weighted average price for the twenty trading days prior to the
date hereof, is $60.3 million. If CBDMD achieves the $20 million
net revenue hurdle in the first marking period resulting in the
issuance of 3,812,500 shares of contingent share consideration,
then the aggregate value of the 19,062,500 shares issued is $75.3
million.
32
ThinkEquity noted
that CBDMD is still experiencing significant growth, and EBITDA
margins have not yet stabilized, and determined it was not possible
to develop a meaningful indication of value for CBDMD using
selected public companies. Comparable public companies and selected
M&A transactions were primarily used to assess the
reasonableness of CBDMD’s implied multiples using the
discounted cash flow analysis.
33
Discounted Cash Flow Analysis
ThinkEquity
performed a discounted cash flow analysis of the projected
unlevered free cash flows of CBDMD for the fiscal years ending
December 31, 2018 through December 31, 2022, based on financial
projections provided by CBDMD. ThinkEquity defined free cash flow
as the cash generated by the company's existing businesses and
future new initiatives that is available either to reinvest, reduce
its debts, or to distribute to shareholders.
The
discounted cash flow analysis was used to determine the net present
value of projected unlevered free cash flows utilizing an
appropriate cost of capital for the discount rate, which reflects
the relative risk associated with these cash flows as well as the
rates of return that security holders could expect to realize on
alternative investment opportunities with similar risk profiles to
CBDMD.
ThinkEquity used a
discount rate of 20% to discount the projected unlevered free cash
flows related to CBDMD's existing product lines, its future new
initiative growth opportunities, and the estimated terminal
value.
ThinkEquity
calculated the projected unlevered free cash flows by taking
CBDMD’s earnings before interest and taxes (EBIT),
subtracting taxes, adding back depreciation and amortization, and
subtracting capital expenditures and changes in working
capital.
ThinkEquity
calculated the terminal value in 2022 using a perpetuity growth
formula by capitalizing the normalized fiscal 2022 free cash flow
using a 3.0% terminal growth rate and a discount rate of
20%.
ThinkEquity used a
5x revenue multiple valuation for terminal value because CBDMD does
not have composition-of-matter IP protection which creates
uncertainty about barriers to market and future
competition.
Based
on these assumptions, the discounted cash flow analysis indicated
an estimated enterprise value for CBDMD of $85 million to $105
million. Based on ThinkEquity’s estimated enterprise value
range, the implied range of multiples of enterprise value to 2018
estimated revenue is 13.5x to 16.7x. This compares to 12.3x for
CWEB, the only comparable public company for which forward
estimates are available and revenue growth is expected to exceed
100% for 2018 and 2019 (105% and 113%, respectively).
Summary of Analyses
ThinkEquity
concluded M&A transaction analyses, as described above, are not
sufficient to derive an indicated range of enterprise values for
CBDMD.
Comparable public
company analyses is limited, given the limited number of companies
for which forward estimates are available, the stage of growth of
the comparable public companies and CBDMD and the absence of any US
senior exchange-listed comparable companies. Comparable public
company enterprise value to 2018 estimated revenue multiples imply
an enterprise values of $61 million, which ThinkEquity compared to
$60.3 million in fixed consideration to CBDMD; enterprise value to
2019 estimated revenue multiples imply an enterprise value of $111
million, which ThinkEquity compared to $75.3 in consideration value
to CBDMD if CBDMD earns the first tranche of contingent share
consideration.
The
range of indicated enterprise values for CBDMD that ThinkEquity
derived from discounted cash flow analysis are $85 million to $105
million, which ThinkEquity compared to $120.5 million in aggregate
consideration to CBDMD over five years if the full contingent share
consideration is earned.
Interests of Certain Persons in the Transaction
Except
as described below, none of our directors or executive officers
have any interests in the Transaction that were different from, or
in addition to, the interests of our shareholders generally. The
Special Committee and our board of directors was aware of the
interests described below and considered them, among other matters,
in evaluating the Transaction, approving the Merger and the Merger
Agreement and the related transactional documents and recommending
that our shareholders vote in favor of proposal 3.
Following
the Closing Date, CBDH issued Mr. Martin A. Sumichrast, our
Chairman of the board and CEO, a warrant expiring on December 31,
2019, exercisable at $90.00, to purchase a 9% membership interest
in CBDH. As a result of this warrant, and assuming CBDH ultimately
distributes the securities to its members, Mr. Sumichrast will be
entitled to receive 787,500 Second Tranche Shares and up to
1,372,500 Earnout Shares. The shares, which are issuable to Mr.
Sumichrast if distributed by CBDH to its members, will also be
subject to the leakout and voting proxy agreements described
earlier in this section. The warrant was exercised by Mr.
Sumichrast on January 20, 2019.
34
Mr.
William F. Raines, III, a director nominee, has from time to time
acted as an executive officer or manager of Board Investor Group
III LLC, a member of Cure Based Development. Upon the approval of
proposal 3, if Cure Based Development subsequently distributes the
First Tranche Shares of our common stock which will be issued
following the 2019 annual meeting, Board Investor Group III LLC
would be entitled to receive 855,000 of such First Tranche Shares
based upon the membership information of Cure Based Development
provided to us prior to the Closing Date. Mr. Raines, however, has
advised us that he is not a member of Board Investor Group III LLC
and has no beneficial ownership over any shares of our common stock
which may be distributed to that entity by Cure Based Development
as a result of his relationship with Board Investor Group III
LLC.
Level Brands’ board of directors following the Closing Date
of the Transaction
On
the Closing Date Mr. Coffman, a founder and CEO of Cure Based
Development, was appointed to our board of directors. Mr. Coffman,
who also serves as CEO of our cbdMD LLC subsidiary, is not
considered “independent” within the rules of the NYSE
American.
Material U.S. federal income tax consequences of the Transaction to
the Level Brands’ shareholders
Because
our existing shareholders did not receive any consideration in the
Transaction, they did not recognize gain or loss in connection with
the Transaction with respect to their shares of our common
stock.
Accounting treatment of the Transaction
Level
Brands will account for this transaction under the acquisition
method as described in Financial Accounting Standards Board
Accounting Standards Codification
805 — “Business Combinations”, under
which all assets and liabilities will be recorded at their fair
market values as of the date of the acquisition. Purchase
consideration in excess of the net assets acquired will be recorded
as goodwill.
Federal securities law consequence; restrictions on
transfer
If
proposal 3 is approved, the First Tranche Shares and the Second
Tranche Shares, as well as the Earnout Shares if issued in
accordance with the terms of the Merger Agreement, will be issued
to the Cure Based Development members in a private placement
transaction under the exemption from registration provided under
Section 4(a)(2) of the Securities Act of 1933, as amended, as the
offer and sale of the Level Brands’ shares does not involve a
public offering of Level Brands’ common stock. Each Cure
Based Development member has represented to us that such member is
an "accredited investor" within the meaning of Rule 501(a) under
the Securities Act of 1933, as amended. The certificates
representing the Level Brands shares will bear legends that such
securities have not been registered under the Securities Act of
1933, as amended, or the securities laws of any state and may not
be sold or transferred in the absence of an effective registration
statement under the Securities Act of 1933, as amended, and
applicable state securities laws or an exemption from registration
thereunder. We did not grant the Cure Based Development members any
registration rights with respect to the Transaction. In addition,
the First Tranche Shares and Second Tranche Shares will be subject
to the terms of the leakout agreements, and the Second Tranche
Shares will be subject to the terms of the irrevocable voting
proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
PROPOSAL 3 AUTHORIZING THE STOCK ISSUANCES
PROPOSAL 4
NAME CHANGE
General
On February 8, 2019, our board of directors
declared it advisable and in our best interest and directed that
there be submitted to the shareholders for approval, the
prospective amendment to our articles of incorporation, a copy of
which is attached hereto as
Exhibit B
(the “
Amendment
”),
to change the name of our company to “cbdMD,
Inc.”
If
this proposal 4 is approved, the Name Change will become effective
on the date the Amendment is filed with the Secretary of State of
the State of North Carolina, or such later date as is specified in
the filing. We expect the Amendment to become effective as soon as
practicable following the 2019 annual meeting.
35
Reasons for the Name Change
With the closing of the Mergers, we expect that
the health and wellness segment of our company will constitute the
primary focus of our business. We will continue to operate our
other segments, but to better reflect our focus we believe a name
change will better help us to be recognized as a market leader
of
cannabidiol (CBD) brand
products.
Effects of Name Change
If
the Shareholders approve the Name Change, the Name Change will
become effective upon filing of the Amendment. Concurrently we
expect to change the ticker symbol of our common stock which is
listed on the NYSE American, and will be required to obtain a new
CUSIP number for our common stock. While the name change will cause
us to incur certain administrative costs, our board of directors
believes that any potential confusion and costs associated with the
Name Change will be outweighed by the expected benefits of the Name
Change.
The
Name Change will not have any effect on the rights of our existing
shareholders.
Shareholders
will not be required to exchange stock certificates solely to
reflect the new corporate name. If a physical certificate
represents a shareholder’s shares of our common stock
currently, that certificate will continue to represent such
shareholder’s ownership of such shares. It will not be
necessary for shareholders to surrender stock certificates bearing
our former corporate name. When physical certificates are presented
for transfer in the ordinary course, new certificates bearing the
new corporate name will be issued.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE NAME
CHANGE
PROPOSAL 5
APPROVAL OF THE AMENDMENT TO OUR 2015 EQUITY COMPENSATION
PLAN
General
At the annual meeting, our shareholders will be
asked to approve an amendment to the 2015 Equity Compensation Plan
(the “
2015
Plan
”) increasing the
number of shares which are available for issuance under it to
2,000,000 shares. On June 2, 2015, our board of directors and
shareholders adopted our 2015 Plan initially covering 1,175,000
shares of common stock. The 2015 Plan also contains an
“evergreen formula” pursuant to which the number of
shares of common stock available for issuance under the 2015 Plan
will automatically increase on the first trading day of January
each calendar year during the term of the 2015 Plan, beginning with
calendar year 2016, by an amount equal to 1% of the total number of
shares of common stock outstanding on the last trading day in
December of the immediately preceding calendar year, up to a
maximum annual increase of 100,000 shares of common stock. As of
March 18, 2019, there are a total of 1,415,105 shares of our common
stock available for issuance under the 2015 Plan, and there are
outstanding awards for an aggregate of 469,650, leaving 945,455
shares available for future grants.
The
board of directors, upon recommendation of the Compensation
Committee, believe that it is in our best interest to increase the
maximum number of shares of common stock available for grant under
the 2015 Plan so as to maintain its purpose, which is to enable us
to offer to our employees, officers, directors and consultants,
whose past, present and/or potential contributions to our company
have been, are or will be important to our success, an opportunity
to acquire a proprietary interest in our company. Additionally, the
2015 Plan is intended to assist in further aligning the interests
of our executives and employees to those of our other
shareholders.
In
making the recommendation of an increase in the number of shares
available for issuance under the 2015 Plan, our board of directors
noted that our employee base has expanded with the recent closing
of the Mergers with Cure Based Development, and that we expect to
continue to add employees as the company grows. Accordingly, on
February 8, 2018, our board of directors adopted, subject to
shareholder approval, an amendment to the 2015 Plan increasing the
number of shares of common stock that may be issued under that plan
to 2,000,000. All other terms of the 2015 Plan remain
unchanged.
New Plan Benefits
The
2015 Plan is administered by the Compensation Committee. Awards
under the 2015 Plan are subject to the discretion of the
Compensation Committee, and no determination has been made as to
the types or amounts of awards that will be granted in the future
to specific individuals pursuant to the 2015 Plan if the amendment
is approved by our shareholders. Therefore, it is not possible to
determine the future benefits that will be received by
participants.
36
Certain tables appearing elsewhere in this proxy
statement under the general heading “Executive
Compensation,” including the
Executive Compensation -
Summary Compensation Table
and
Executive Compensation -
Outstanding Equity Awards at Fiscal Year End
table, set forth information with respect to prior
awards granted to our named executive officers under the 2015 Plan.
In addition, the
Principal Shareholders -
Securities Authorized for Issuance under Equity Compensation
Plans
table provides
information as of September 30, 2018, regarding the equity
outstanding under our equity compensation plans, the weighted
average exercise price of outstanding equity, and the number of
securities remaining available for issuance.
Summary of the 2015 Plan
The following summary of the 2015 Plan is not
intended to be complete and is qualified in its entirety by
reference to the 2015 Plan which is filed as Exhibit 3.8 to our
Offering Statement on Schedule 1-A as filed with the Securities and
Exchange Commission on September 18, 2017. See
“
Where You Can Obtain More
Information
” appearing
later in this proxy statement.
Plan
options may either be:
●
incentive stock options (ISOs);
●
non-qualified options (NSOs);
●
awards of our common stock; or
●
rights to make direct purchases of our common stock which may be
subject to certain restrictions
Any
option granted under the 2015 Plan must provide for an exercise
price of not less than 100% of the fair market value of the
underlying shares on the date of grant, but the exercise price of
any ISO granted to an eligible employee owning more than 10% of our
outstanding common stock must not be less than 110% of fair market
value on the date of the grant. The plan further provides that with
respect to ISOs the aggregate fair market value of the common stock
underlying the options which are exercisable by any option holder
during any calendar year cannot exceed $100,000. The term of each
plan option and the manner in which it may be exercised is
determined by the board of directors or the compensation committee,
provided that no option may be exercisable more than 10 years after
the date of its grant and, in the case of an incentive option
granted to an eligible employee owning more than 10% of the common
stock, no more than five years after the date of the grant. In the
event of any stock split of our outstanding common stock, the board
of directors in its discretion may elect to maintain the stated
amount of shares reserved under the plan without giving effect to
such stock split. Subject to the limitation on the aggregate number
of shares issuable under the plan, there is no maximum or minimum
number of shares as to which a stock grant or plan option may be
granted to any person.
Summary of Federal Tax Consequences
Set
forth below is a brief summary of the U.S. federal income tax
consequences of awards under the 2015 Plan. This summary is not a
complete description of the applicable tax consequences, and it is
subject to any changes in applicable tax rules. The discussion is
general in nature and does not take into account a number of
considerations which may apply based on the circumstances of a
particular participant, and should not be relied upon as tax
advice.
Generally,
a grant under the 2015 Plan of shares of our common stock which are
subject to vesting and transfer restrictions will not result in
taxable income to the recipient for U.S. federal income tax
purposes or a tax deduction to us in the year of the grant.
Instead, the value of the shares will generally be taxable to the
recipient as ordinary income in the years in which the restrictions
on the shares lapse. Such value will be the fair market value of
the shares on the dates the restrictions lapse. Any recipient,
however, may elect pursuant to Section 83(b) of the Internal
Revenue Code to treat the fair market value of the shares on the
date of grant as ordinary income in the year of the grant, provided
the recipient makes the election within 30 days after the date of
the grant. In any case, we would receive a corresponding deduction
corresponding to the amount of compensation included in the
recipient's income in the year in which that amount is so included.
In accordance with applicable regulations, we will require the
recipient to pay to us an amount sufficient to satisfy any
withholding taxes in respect of such compensation income at the
time the restrictions on the shares lapse or the recipient makes a
Section 83(b) election. If we withhold shares to satisfy this
withholding tax obligation, instead of cash, the recipient
nonetheless will be required to include in income the fair market
value of the shares withheld.
Other Tax Consequences.
State tax consequences may in some
cases differ from those described above. In addition, awards made
under the 2015 Plan may be made to persons who are subject to tax
in jurisdictions other than the United States and may result in tax
consequences differing from those described
above.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR”
APPROVAL
OF THE AMENDMENT TO THE 2015 PLAN
37
OTHER MATTERS
As of
the date hereof, there are no other matters that we intend to
present, or have reason to believe others will present, at the 2019
annual meeting. If, however, other matters properly come before the
2019 annual meeting, the accompanying proxy authorizes the person
named as proxy or his substitute to vote on such matters as he
determines appropriate.
DISSENTER'S RIGHTS
Under
North Carolina law there are no dissenter's rights available to our
shareholders in connection with any matter submitted to a vote of
our shareholders at the 2019 annual meeting.
CORPORATE GOVERNANCE
We are
committed to maintaining the highest standards of honest and
ethical conduct in running our business efficiently, serving our
shareholders interests and maintaining our integrity in the
marketplace. To further this commitment, we have adopted our Code
of Conduct and Business Code of Ethics, which applies to all our
directors, officers and employees. To assist in its governance, our
board has formed three standing committees composed entirely of
independent directors, Audit, Compensation and Corporate Governance
and Nominating committees. A discussion of each committee’s
function is set forth below.
We have
implemented a Whistleblower Policy and provide multiple ways in
which perceived unethical conduct can be anonymously reported. The
Code of Ethics and the Whistleblower Policy are posted on our
Internet website at
www.levelbrands.com
,
under the “Investor Relations—Corporate
Governance” tab.
Our
bylaws, the charters of each board committee, the independent
status of a majority of our board of directors, and our Code of
Conduct and Business Code of Ethics provide the framework for our
corporate governance. Copies of our bylaws, committee charters,
Code of Conduct and Business Code of Ethics may be found on our
website at
www.levelbrands.com
. Copies of
these materials also are available without charge upon written
request to our Corporate Secretary.
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 of directors then 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.
38
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
|
|
|
✓
|
|
|
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 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 Chief Executive Officer or
president, if such person is acting as the Chief Executive
Officer;
●
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.
Use of Outside
Advisors
. All compensation
decisions are made with consideration of the committee’s
guiding principles to provide competitive compensation for the
purpose of attracting and retaining talented executives and of
motivating our executives to achieve improved Level Brands’
performance, which ultimately benefits our shareholders. The
committee has the sole authority
to retain and terminate any advisors, including
independent counsel, compensation consultants and other advisors to
assist as needed, and has sole authority to approve the
advisors’ fees, which will be paid by us, and the other terms
and conditions of their engagement. The committee considers input
and recommendations from management, including our Chief Executive
Officer (who is not present during any committee deliberations with
respect to his compensation) in connection with its review of our
compensation programs and its annual review of the performance of
the other executive officers. During fiscal 2018 the committee
engaged the services of an independent compensation consultant,
Pearl Meyer & Partners, to provide it with an executive pay
review. The committee takes into consideration the recommendations
of the outside compensation consultant and our Chief Executive
Officer, but retains absolute discretion as to whether to adopt
such recommendations in whole or in part, as it deems
appropriate.
39
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
comprised of two directors, Messrs. Sellers and Morris, each of
whom 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.
40
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
Independent Director Compensation Program
In
December 2016, our board of directors adopted a compensation plan
for our independent 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 independent 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 independent directors for the 2018
board term which began on March 22, 2018 which
includes:
41
Options to purchase 7,000 shares of common
stock
|
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 directors. Our
non-independent 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
(2)
|
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 in our 2018 10-K.
|
|
|
|
|
(2)
|
Mr.
Sterling served as a member of our board of directors from April
2015 until December 2018.
|
Audit Committee Report
Report of the Audit Committee of the Board of
Directors
The primary function of the Audit Committee is to assist the board
of directors in its oversight of our financial reporting processes.
Management is responsible for the preparation, presentation and
integrity of the financial statements, including establishing
accounting and financial reporting principles and designing systems
of internal control over financial reporting. Our independent
auditors are responsible for expressing an opinion as to the
conformity of our consolidated financial statements with generally
accepted accounting principles.
With
respect to the fiscal year ended September 30, 2018, in addition to
its other work, the Audit Committee:
●
reviewed and
discussed with management and
Cherry
Bekaert LLP
, our independent registered public accounting
firm, our audited consolidated financial statements as of September
30, 2018 and the fiscal year then ended;
●
discussed with
Cherry Bekaert LLP
the matters
required to be discussed by Statement on Auditing Standards No. 61,
“
Communication with Audit
Committees
,” as amended, with respect to its review of
the findings of the independent registered public accounting firm
during its examination of our financial statements;
and
●
received from
Cherry Bekaert LLP
written
affirmation of its independence as required by the Independence
Standards Board Standard No. 1, “
Independence Discussions with Audit
Committees
.” In addition, the Audit Committee
discussed with
Cherry Bekaert
LLP
, its independence and determined that the provision of
non-audit services was compatible with maintaining auditor
independence.
42
The
Audit Committee recommended, based on the review and discussion
summarized above, that the board of directors include the audited
consolidated financial statements in the 2018 10-K for filing with
the SEC.
|
Dated:
December 12, 2018
|
|
Audit
Committee of the board of directors of Level Brands,
Inc.
|
|
|
|
|
|
|
|
/s/ Seymour G. Siegel, Chairman
|
|
|
|
/s/ Bakari Sellers
|
|
|
|
/s/ Gregory C. Morris
|
Compliance with Section 16(a) of the Securities Exchange Act of
1934
Section
16(a) of the Securities Exchange Act of 1934, as amended, 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 Securities Exchange Act of 1934, as
amended, 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 Securities Exchange Act of 1934, as amended, during the year
ended September 30, 2018.
EXECUTIVE COMPENSATION
Executive officers
|
Name
|
|
Positions
|
|
Martin
A. Sumichrast
|
|
Chairman
of the Board, Chief Executive Officer and President
|
|
Mark S.
Elliott
|
|
Chief
Financial Officer and Chief Operating Officer
|
Executive officers
of our company are appointed by the board of directors and serve at
the pleasure of the board.
Martin A.
Sumichrast.
For information regarding Mr. Sumichrast, please
see Proposal 1 which appears earlier in this proxy
statement.
Mark S.
Elliott
. Mr. Elliott, 58, 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.
Named Executive Officer Compensation in Fiscal 2018
Our
named executive officers in fiscal 2018 were Mr. Sumichrast and Mr.
Elliott. We completed our initial public offering in November 2017,
and in January 2018, after reviewing the various components of
executive compensation and the milestones which had been reached by
our company with the completion of the public offering, the
Compensation Committee increased the base salaries of our named
executive officers and provided each of them with a discretionary
bonus as described below:
Base
Salaries
. In January 2018, Mr.
Sumichrast received a 125% salary increase from the pre-IPO level
resulting in a new base annual salary of $270,000 and Mr. Elliott
received a 50% salary increase from the pre-IPO level resulting in
a new base annual salary of $180,000. These salary levels were
memorialized in the September 2018 executive employment agreements
described below.
43
Discretionary
Bonuses
. In January 2018, Mr.
Sumichrast received a discretionary bonus of $240,000 and Mr.
Elliott received a discretionary bonus of $100,000 in recognition
of their efforts in connection with our initial public offering. In
addition, Mr. Elliott was granted options to purchase 150,000
shares of our common stock.
Later
in fiscal 2018, the Compensation Committee as it continued to
review the components of our named executive officer’s
compensation to determine an appropriate mix for each named
executive officer, the Compensation Committee engaged Pearl Meyer
& Partners as an independent compensation consultant to provide
it with a review of the then exiting compensation arrangements for
our named executive officers. Following these reviews, in June 2018
the board of directors, upon the recommendation of the Compensation
Committee, adopted executive compensation program for our senior
management for fiscal 2018 consisting of a combination of salary,
short-term cash incentives and long-term equity incentives which
may be earned upon the achievement of corporate performance goals.
In September 2018 we entered into new three year employment
agreements with the named executive officers, which are described
later in this proxy statement.
Summary Compensation Table
The
following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for:
●
all individuals
serving as our principal executive officer or acting in a similar
capacity during the fiscal year ended September 30,
2018;
●
our two most highly
compensated named executive officers at September 30, 2018 whose
annual compensation exceeded $100,000; and
●
up to two
additional individuals for whom disclosure would have been made in
this table but for the fact that the individual was not serving as
a named executive officer of our company at September 30,
2018.
The
value attributable to any option awards is computed in accordance
with FASB ASC Topic 718. The assumptions made in the valuations of
the option awards are included in Note 10 of the notes to our
consolidated financial statements appearing in our 2018
10-K.
|
Name and
principal position
|
|
Year
|
Salary
($)
|
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
|
-
|
-
|
-
|
-
|
-
|
472,500
|
|
Chief Executive
Officer
|
|
2017
(2)
|
90,000
|
-
|
127,500
|
-
|
-
|
-
|
-
|
217,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark S. Elliott
|
|
2018
|
165,000
|
100,000
|
-
|
519,000
|
-
|
-
|
-
|
784,000
|
|
Chief Financial Officer and Chief
Operating Officer
|
|
2017
(2)
|
90,000
|
-
|
17,000
|
35,000
|
-
|
-
|
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 in our 2018 10-K.
|
|
|
|
|
(2)
|
Stock and option award information updated to reflect corrected
valuations.
|
Executive Employment Agreements
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.
44
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.
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.
45
●
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.
●
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 Securities Exchange Act of
1934, as amended, 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.
46
Outstanding equity awards at year end
The
following table provides information concerning unexercised
options, stock that has not vested and equity incentive plan awards
for each named executive officer outstanding as of September 30,
2018.
|
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
|
|
1/1/23
|
|
|
|
|
|
|
100,000
|
|
|
4.00
|
|
5/1/24
|
|
|
|
|
|
|
75,000
|
|
|
4.78
|
|
5/29/28
|
|
|
|
|
|
|
|
75,000
|
|
4.78
|
|
5/29/28
|
|
|
|
|
Our equity compensation plans
Information
regarding the material terms of our equity compensation plans is
contained in Note 11 to the notes to the audited consolidated
financial statements appearing in the 2018 10-K.
PRINCIPAL SHAREHOLDERS
At
March 18, 2019, we had 10,170,356 shares of our common stock issued
and outstanding. The following table sets forth information known
to us as of March 18, 2019 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 March 18, 2019, 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.
47
|
Name of
Beneficial Owner
|
No. of Shares
Beneficially Owned
|
% of
Class
|
|
|
|
|
|
Martin A.
Sumichrast
(1)
|
270,600
|
2.7
%
|
|
Mark S. Elliott
(2)
|
381,680
|
3.6
%
|
|
Anthony K. Shriver
(3)
|
134,500
|
1.3
%
|
|
Seymour G.
Siegel
|
9,531
|
*
|
|
Bakari
Sellers
|
9,531
|
*
|
|
Gregory C.
Morris
|
9,531
|
*
|
|
R. Scott Coffman
(4)
|
0
|
*
|
|
All officers and
directors as a group (seven persons)
(1)(2)(3)(4)
|
815,373
|
7.8
%
|
|
Peter J. Ghiloni
(Director nominee)
|
150,000
|
1.5
%
|
|
Scott G. Stephen
(Director nominee)
|
21,052
|
*
|
|
William F. Raines,
III (Director nominee)
(5)
|
1,342
|
*
|
|
Erik Sterling
(6)
|
1,079,667
|
10.6
%
|
|
Jason Winters
(7)
|
1,032,667
|
10.2
%
|
|
The Runnels Family
Trust
(8)
|
600,000
|
5.9
%
|
*
Less than
1%
|
(1)
|
The number of shares of our common stock owned by Mr. Sumichrast
includes
270,600
shares owned of record by Washington Capital,
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 this
entity 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.
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.
|
|
|
|
|
|
|
(4)
|
The
number of shares of our common stock beneficially owned by Mr.
Coffman excludes (a) rights of Edge to receive 3,684,000 shares of
our common stock, and (b) rights of CBDH to receive 8,750,000
shares of our common stock, in both instances if proposal 3 is
approved at the 2019 annual meeting. Mr. Coffman holds voting and
dispositive control over securities held of record by each of Edge
and CBDH. Mr. Coffman disclaims beneficial ownership of the
securities held of record by each of Edge and CBDH except to the
extent of his pecuniary interest therein. Please see proposal 3 for
additional information on these rights.
|
|
|
|
|
|
|
(5)
|
The
number of shares of our common stock beneficially owed by Mr.
Raines includes his pecuniary interest in shares owned of record by
Board Investor Group II LLC.
|
|
|
|
|
|
|
(6)
|
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.
Mr. Sterling was a director of Level Brands until December 27,
2018. Mr. Sterling’s address is 39 Princeton Drive, Rancho
Mirage, CA 92270. See footnote 6.
|
|
48
|
(7)
|
Mr.
Winters and Mr. Sterling are 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
5.
|
|
|
(8)
|
Mr. G.
Tyler Runnels is co-Trustee of The Runnels Family Trust and in such
position holds voting and dispositive control over securities held
of record by the trust. The number of shares beneficially owned by
Mr. Runnels excludes the right of TRW Capital Growth Fund, LLC, an
entity over which he holds voting and dispositive control, to
receive 250,000 shares of our common stock if proposal 3 is
approved at the 2019 annual meeting. Please see proposal 3 for
additional information on this right. Mr. Runnels disclaims
beneficial ownership of the securities held of record by each of
The Runnels Family Trust and TRW Capital Growth Fund, LLC 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 in our 2018 10-K.
49
SHAREHOLDER PROPOSALS TO BE PRESENTED AT THE NEXT ANNUAL
MEETING
As of
the date of this proxy statement, we had not received notice of any
shareholder proposals for the 2018 annual meeting described herein
and proposals received subsequent to the date of this proxy
statement will be considered untimely. For a shareholder proposal
to be considered for inclusion in our proxy statement for the 2020
annual meeting, the Corporate Secretary must receive the written
proposal at our principal executive offices no later than the
deadline stated below. Such proposals must comply with SEC
regulations under Rule 14a-8 regarding the inclusion of shareholder
proposals in company-sponsored proxy materials. Proposals should be
addressed to:
Level
Brands, Inc.
Attention:
Corporate Secretary
4521
Sharon Road, Suite 450
Charlotte,
NC 28211
Under
Rule 14a-8, to be timely, a shareholder’s notice must be
received at our principal executive offices not less than 120
calendar days before the date of our proxy statement release to
shareholders in connection with the previous year’s annual
meeting. However, if we did not hold an annual meeting in the
previous year or if the date of this year’s annual meeting
has been changed by more than 30 days from the date of the previous
year’s annual meeting, then the deadline is a reasonable time
before we begin to print and send our proxy materials. Therefore,
shareholder proposals intended to be presented at the 2020 annual
meeting must be received by us at our principal executive office no
later than December 22, 2019 in order to be eligible for inclusion
in our 2020 proxy statement and proxy relating to that meeting.
Upon receipt of any proposal, we will determine whether to include
such proposal in accordance with regulations governing the
solicitation of proxies.
You may
propose director candidates for consideration by the board’s
Corporate Governance and Nominating Committee. Any such
recommendations should include the nominee’s name and
qualifications for board membership, information regarding the
candidate as would be required to be included in a proxy statement
filed pursuant to SEC regulations, and a written indication by the
recommended candidate of her or his willingness to serve, and
should be directed to the Corporate Secretary of Level Brands, Inc.
at our principal executive offices at 4521 Sharon Road, Suite 450,
Charlotte, NC 28211 within the time period described above for
proposals other than matters brought under SEC Rule
14a-8.
AVAILABILITY OF ANNUAL REPORT ON FORM 10-K
As
required, we have filed our 2018 10-K with the SEC. Shareholders
may obtain, free of charge, a copy of the 2018 10-K by writing to
us at 4521 Sharon Road, Suite 450, Charlotte, NC 28211, Attention:
Corporate Secretary, or from our website,
www.levelbrands.com
.
SHAREHOLDERS SHARING THE SAME LAST NAME AND ADDRESS
The SEC
has adopted rules that permit companies and intermediaries such as
brokers to satisfy delivery requirements for proxy statements with
respect to two or more shareholders sharing the same address by
delivering a single proxy statement addressed to those
shareholders. This process, which is commonly referred to as
“householding,” potentially provides extra convenience
for shareholders and cost savings for companies. We and some
brokers household proxy materials, delivering a single proxy
statement to multiple shareholders sharing an address unless
contrary instructions have been received from the affected
shareholders. Once you have received notice from your broker or us
that they are or we will be householding materials to your address,
householding will continue until you are notified otherwise or
until you revoke your consent. If, at any time, you no longer wish
to participate in householding and would prefer to receive a
separate proxy statement, or if you currently receive multiple
proxy statements and would prefer to participate in householding,
please notify your broker if your shares are held in a brokerage
account or us if you hold registered shares. You can notify us by
sending a written request to Level Brands, Inc., Attention:
Corporate Secretary, 4521 Sharon Road, Suite 450, Charlotte, NC
28211.
WHERE YOU CAN FIND MORE INFORMATION
We file annual and special reports and other
information with the SEC. Certain of our SEC filings are available
on our corporate website at
www.levelbrands.com
and on SEC's web site at
http://www.sec.gov. On December 20, 2018 we filed a Current Report
on Form 8-K with the SEC for the Transaction, which included as
exhibits the Merger Agreement, the employment agreements with each
of Mr. Coffman and Ms. Dunayer, the form of leakout agreement, the
form of irrevocable voting proxy and the audited financial
statements of Cure Based Development. We urge you to read and
review these documents prior to voting on proposal 3. In this, this
proxy statement also refers to certain documents that are not
presented herein or delivered herewith. Such documents are
available to any person, including any beneficial owner of our
shares, to whom this proxy statement is delivered upon oral or
written request, without charge. Requests for such documents should
be directed to Corporate Secretary, Level Brands, Inc., 4521 Sharon
Road, Suite 450, Charlotte, NC 28211. Please note that additional
information can be obtained from our website at
www.levelbrands.com.
50
INDEX
TO CURE BASED FINANCIAL STATEMENTS
|
|
Page No.
|
|
|
|
|
Unaudited
Prepared by Manaement
|
|
|
|
|
|
Balance
Sheets at September 30, 2018 (unaudited) and December 31,
2017
|
F-2
|
|
|
|
|
Statements
of Operations (unaudited) for the nine months ended September 30,
2018
|
F-3
|
|
|
|
|
Statement
of Cash Flow (unaudited) for the period from January 1, 2018 to
September 30, 2018
|
F-4
|
|
|
|
|
Audited
Financial Statement
|
|
|
|
|
|
Notes
to Unaudited Financial Statements
|
F-5
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-11
|
|
|
|
|
Balance
Sheets of at August 31, 2018 and December 31, 2017
|
F-12
|
|
|
|
|
Statements
of Operations for the periods from January 1, 2018 to September 30,
2018
|
|
|
and
August 3, 2017 (inception) through December 31, 2017
|
F-13
|
|
|
|
|
Statements
of Cash Flows for the periods from January 1, 2018 to September 30,
2018
|
|
|
and
August 3, 2017 (inception) through December 31, 2017
|
F-14
|
|
|
|
|
Notes
to Financial Statements August 31, 2018 and December 31,
2017
|
F-15
|
F-1
CURE BASED DEVELOPMENT, LLC
BALANCE
SHEETS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
|
|
(Unaudited)
|
|
|
|
September
30,
|
December
31,
|
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
Cash
and cash equivalents
|
$
256,850
|
$
181,762
|
|
Receivable
from payment processor
|
533,862
|
-
|
|
Receivable
– other
|
102,655
|
-
|
|
Note
receivable – related party
|
-
|
-
|
|
Inventory
|
1,020,259
|
225,033
|
|
Total
current assets
|
$
1,913,626
|
$
406,795
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
609,309
|
104,257
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
$
2,522,935
|
$
511,052
|
|
LIABILITIES
AND MEMBERS' EQUITY
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$
139,879
|
$
-
|
|
Notes
payable related party
|
2,010,300
|
3,500
|
|
Customer
deposits from related party
|
265,000
|
-
|
|
Accrued
expenses
|
186,144
|
15,724
|
|
Accrued
expenses to related party
|
42,652
|
43,972
|
|
Total
Current Liabilities
|
$
2,643,975
|
$
63,196
|
|
|
|
|
|
|
|
|
|
Members'
Equity:
|
|
|
|
Contributed
capital
|
771,053
|
771,053
|
|
Accumulated
deficit
|
(892,093
)
|
(323,197
)
|
|
Total
Members' Equity
|
$
(121,040
)
|
$
447,856
|
|
|
|
|
|
Total
Liabilities and Members' Equity
|
$
2,522,935
|
$
511,052
|
The
accompanying notes to the financial statements are an integral part
of these statements.
F-2
CURE BASED DEVELOPMENT, LLC
STATEMENT
OF OPERATIONS
PERIOD FROM JANUARY 1, 2018 TO SEPTEMBER 30, 2018
|
|
(Unaudited)
|
|
|
September 30,
2018
|
|
|
|
|
Sales
|
$
3,997,927
|
|
Less
returns and allowances
|
(101,723
)
|
|
Net
sales
|
3,896,204
|
|
|
|
|
Cost
of sales
|
946,536
|
|
|
|
|
Gross
profit
|
2,949,668
|
|
|
|
|
Operating
expenses
|
3,446,453
|
|
Loss
from operations
|
(496,785
)
|
|
|
|
|
Interest
expense
|
72,110
|
|
Net
loss
|
$
(568,895
)
|
The accompanying notes to the
financial statements are an integral part of these
statements.
F-3
CURE BASED DEVELOPMENT, LLC
STATEMENT
OF CASH FLOW
PERIOD FROM JANUARY 1, 2018 TO SEPTEMBER 30, 2018
|
|
(Unaudited)
|
|
|
September
30,
|
|
|
2018
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
Net
loss
|
$
(568,895
)
|
|
Adjustments to
reconcile net loss to net
|
|
|
cash
used by operating activities:
|
|
|
Depreciation
and amortization
|
72,349
|
|
Stock
issued for compensation
|
-
|
|
Changes in
operating assets and liabilities:
|
|
|
Receivable
from payment processor
|
(533,862
)
|
|
Receivable
- other
|
(102,655
)
|
|
Note
receivable – related party
|
-
|
|
Inventory
|
(795,226
)
|
|
Accounts
payable and accrued expenses
|
310,299
|
|
Customer
deposits from related party
|
265,000
|
|
Accrued
expenses to related party
|
(1,320
)
|
|
Cash
used by operating activities
|
(1,354,310
)
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
Purchase
of property and equipment
|
(577,402
)
|
|
Cash
used by investing activities
|
(577,402
)
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
Proceeds
from issuance of notes payable
|
2,140,800
|
|
Payments
on notes payable
|
(134,000
)
|
|
Contributed
capital
|
-
|
|
Cash
provided by financing activities
|
2,006,800
|
|
Net increase in
cash
|
75,088
|
|
Cash and cash
equivalents, beginning of period
|
181,762
|
|
Cash and cash
equivalents, end of period
|
$
256,850
|
The accompanying notes to the
financial statements are an integral part of these
statements.
F-4
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies
Organization and Nature of Business –
Cure Based
Development, LLC. ("CBDMD", "we", "us", “our”, or the
“Company”) is a Nevada limited liability corporation
formed on August 3, 2017. CBDMD manufactures and distributes high
quality cannabidiol extracted from hemp plants. The Company
operates from their offices located in Charlotte, North Carolina.
The Company’s fiscal year end is established as December
31.
The
accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
Use of Estimates –
The preparation of the Company's
financial statements have been prepared in accordance with U.S.
GAAP, and requires management to make estimates and assumptions
that affect amounts of 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 financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying financial
statements include, but are not limited to, inventory valuation
reserves, expected sales returns and allowances, 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 date of less than three months when purchased to be cash
equivalents.
Receivable from Payment Processor –
The Company
primarily sells its products through the internet and has an
arrangement to process customer payments with a third-party payment
processor. The arrangement with the payment processor requires that
the Company pay a fee of 5.95% of the transaction amounts
processed. Pursuant to this agreement, there is a 14-day waiting
period prior to reimbursement to the Company, as well as a
calculated reserve which the payment processor holds back. At
September 30, 2018, the receivable from payment processor included
$265,648 for the waiting period amount and $268,214 for the reserve
amount for a total receivable of $533,862. There were no
outstanding amounts receivable from the payment processor at
December 31, 2017.
Inventory –
Inventory is stated at the lower of cost
or net realizable value with cost being determined on a first-in
first-out (FIFO) basis. The cost of inventory includes product
cost, freight-in, and production labor and overhead. Write-offs of
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 perform periodic inventory counts
and assess inventory for slow moving products and potential
impairments prior to applicable reporting periods.
Property and Equipment –
Property and equipment items
are stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations expense as
incurred. Depreciation is charged to expense over the estimated
useful lives of the assets using the straight-line method.
Generally, the useful lives are five years for manufacturing
equipment and three years for leasehold improvements. The cost and
accumulated depreciation of property are eliminated from the
accounts upon disposal, and any resulting gain or loss is included
in the statement of operations for the applicable
period.
Customer Deposits –
Customer deposits consist of
payments received in advance of revenue recognition. Revenue is
recognized as revenue recognition criteria are met.
F-5
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies (continued)
Revenue Recognition –
The Company's policy in relation
to product sales is to recognize revenue when persuasive evidence
of an arrangement exists, shipping has occurred, 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 upon
shipping. Net sales are comprised of gross revenues less expected
product returns, trade discounts, and customer allowances. Although
the Company does not have a formal return policy, from time to time
the Company will allow customers to return certain products.
The Company records returns as a reduction in sales. There were no
allowances for sales returns at September 30, 2018 and December 31,
2017.
Cost of Sales –
Cost of
sales includes costs associated with distribution, labor,
materials, freight and manufacturing overhead, including
depreciation.
Cost of sales also includes 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 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 $857,413 and $28,999
in advertising and related marketing and promotional costs included
in operating expenses during the period ended September 30, 2018
and the year ended December 31, 2017, respectively.
Shipping and Handling Fees and Costs –
All fees billed
to customers for shipping and handling are classified as a
component of sales. All costs associated with shipping and handling
are classified as a component of cost of goods sold.
Income Taxes –
The Company filed an election with the
Internal Revenue Service (“IRS”) where, as
of
January
1, 2018, the Company would file income taxes as a C-corporation.
Prior to January 1, 2018, as a Limited Liability Company, any
federal or state income taxes were passed through to its members
and, therefore, no provision for income taxes is included in the
Company’s financial statements for the period ended December
31, 2017.
For the
period ended September 30, 2018, the Company accounts for income
taxes pursuant to the provisions of the Financial Accounting
Standards Board Accounting Standards Codification Topic 740,
Accounting for Income
Taxes
, 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. 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.
U.S.
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 IRS. Management has analyzed
the tax positions taken by the Company, and has concluded that as
of September 30, 2018, 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 statements.
F-6
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies (continued)
Concentrations –
Financial instruments that
potentially expose the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts
receivable.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation 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
uninsured balances at September 30, 2018 and December 31, 2017 of
$6,850 and $0, respectively.
Note 2—Inventory
Inventory at September 30, 2018 and December 31, 2017 consists of
the following:
|
|
September 30,
2018
|
December 31,
2017
|
|
Finished
goods
|
$
210,049
|
$
-
|
|
Inventory
components
|
810,210
|
225,033
|
|
|
$
1,020,259
|
$
225,033
|
Note 3—Property and equipment
Major classes of property and equipment at September 30, 2018 and
December 31, 2017 consist of the following:
|
|
September 30, 2018
|
December 31, 2017
|
|
Manufacturing
equipment
|
$
329,732
|
$
64,609
|
|
Leasehold
improvements
|
146,181
|
46,183
|
|
Manufacturing
equipment in transit
|
212,280
|
-
|
|
|
688,193
|
110,792
|
|
Less
accumulated depreciation
|
78,884
|
6,535
|
|
Net
property and equipment
|
$
609,309
|
$
104,257
|
Depreciation expense was $72,349 and $6,535 for the period ended
September 30, 2018 and year ended December 31, 2017,
respectively.
F-7
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 4—Notes receivable – related party
In
April 2018, the Company was issued notes in exchange for $210,000
from Edge of Business, LLC. Edge of Business, LLC owns 75.24% of
the outstanding equity of the Company and is an affiliate of the
CEO of the Company. Between May 2018 and September 2018, $210,000
of these notes receivable were collected by the Company leaving no
outstanding balance on September 30, 2018.
On
April 23, 2018, the Company was issued a note in exchange for
$20,000 from an entity that is owned by a related party. The
outstanding balance of $20,000 was paid back on September 14, 2018
and there was no outstanding balance at September 30,
2018.
Note 5—Notes payable – related party
The
Company issued $1,430,300 of notes payable between November 2017
and September 2018 to Edge of Business, LLC, an affiliate of the
CEO of the Company. The notes are due on demand and bear interest
at a rate of a rate of 12%. As of September 30, 2018, $1,430,300 of
the notes payable were outstanding and are recorded as a note
payable – related party. As of December 31, 2017, $3,500 of
the note payable was outstanding and is recorded as a note payable
– related party.
On
February 21, 2018, the Company issued a $20,000 note payable to an
individual, who is the owner of CBD Now, LLC. CBD Now, LLC owns
4.75% of the outstanding equity of the Company. The note is due on
February 20, 2019, but also includes an option for the note holder
to elect to extend the maturity date to February 20, 2020. The note
bears interest at a rate of 12%. As of September 30, 2018, $20,000
of the note payable was outstanding and is recorded as a note
payable – related party.
On
March 6, 2018, the Company issued a $60,000 note payable to Board
Investor Group III. Board Investor Group III owns 14.25% of the
outstanding equity of the Company. The note is due on March 5,
2019, but also includes an option for the note holder to elect to
extend the maturity date to March 5, 2020. The note bears interest
at a rate of 12%. As of September 30, 2018, $60,000 of the note
payable was outstanding and is recorded as a note payable –
related party.
On
April 1, 2018, the Company issued a $500,000 note payable to an
individual, who is the owner of CBD Now, LLC. The note is due on
March 31, 2019, but also includes an option for the note
holder to elect to extend the maturity date to March 31, 2020. The
note bears interest at a rate of 12% and interest is paid monthly.
As of September 30, 2018, $500,000 of the note payable was
outstanding and is recorded as a note payable – related
party.
Note 6—Members’ equity
The Company received $700,000 between July 2017 and December 2017
from three investors in exchange for LLC shares of the Company.
This amount is recorded as contributed capital.
In November 2017, the Company entered into an agreement with the
recently hired president and in connection with her employment,
whereby the Company would issue member units that would amount to
5% of the outstanding equity of the Company. As a result of this
agreement the Company issued 526,316 units which were valued at
$71,053. This amount was recorded as a component of operating
expenses for the period ended December 31, 2017.
F-8
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 7—Related party transactions
During
the nine month period ended September 30, 2018, the Company
received $265,000 from Verdure Holdings LLC for future orders of
the Company’s products. Verdure Holdings LLC is an affiliate
of the CEO of the Company. This amount is recorded as customer
deposits from related party on the accompanying balance
sheet.
The
Company leases office space and also is provided administrative and
IT services from Data Tech
Systems,
LLC. WMM LLC has majority ownership of Data Tech Systems, LLC. WMM
LLC is an affiliate of the CEO of the Company and other Company
shareholders. Total payments for the nine month period ended
September 30, 2018 were $48,579 to Data Tech Systems, LLC. No
payments were made to Data Tech Systems, LLC for the period ended
December 31, 2017.
The
Company leases its manufacturing facility from Wicker Minuet, an
entity partially owned by a related party. Total payments to Wicker
Minuet for the nine month period ended September 30, 2018 and
period ended December 31, 2017 were $51,000 and $9,000,
respectively.
As
described in Notes 4 and 5, the Company has several notes payable
and notes receivable with related parties.
Note 8—Commitments
As
mentioned in Note 7, the Company leases office and manufacturing
facilities from related parties. The office lease agreement is on a
month-to-month basis. The manufacturing facility lease expires in
April 2020 and requires monthly payments of $7,500.
Note 9—Income taxes
A reconciliation of the federal statutory income tax rate to the
Company’s effective income tax rate is as
follows:
|
|
Period ended
September 30, 2018
|
|
|
|
|
Federal
statutory income tax rate
|
21.0
%
|
|
State
income taxes, net of federal benefit
|
2.4
%
|
|
Permanent
differences
|
(0.2
%)
|
|
Change
in valuation allowance
|
(23.2
%)
|
|
Provision
for income taxes
|
0.0
%
|
F-9
CURE BASED DEVELOPMENT, LLC
NOTES
TO THE UNAUDITED FINANCIALSTATEMENTS
SEPTEMBER 30, 2018 AND DECEMBER 31, 2017
Note 9—Income taxes (continued)
Significant components of the Company’s deferred income taxes
are shown below:
|
|
September 30, 2018
|
|
Deferred
tax assets:
|
|
|
Net
operating loss carryforwards
|
$
175,330
|
|
Interest
expense
|
16,874
|
|
Charitable
Contributions
|
8,424
|
|
Deferred
tax liabilities:
|
|
|
Property
and Equipment
|
68,509
|
|
Net
deferred tax asset
|
132,119
|
|
Valuation
allowance
|
(132,119
)
|
|
Net
deferred tax liability
|
$
-
|
Deferred
tax assets represent the future tax benefit of deductible
differences and, if it is more likely than not that a tax asset
will not be realized, a valuation allowance is required to reduce
the recorded deferred tax assets to net realizable value. The
Company has a valuation allowance against the net deferred tax
assets due to the uncertainty that such assets will be realized as
the Company is in the early stages of its development
Tax
positions that meet the more-likely-than-not recognition threshold
are measured as the largest amount of tax benefit that is more than
50% likely to be realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described is
reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and
penalties that would be applicable. For the period ending September
30, 2018 there were no uncertain tax positions taken by the Company
and there are no liability reserves for uncertain tax
positions.
In
October 2018, the Company issued two Senior Convertible Promissory
Notes in the amount of $500,000 each. Upon a change of control of
the Company, as defined by the note agreement, each note has the
option to either be fully repaid or converted to 2.5% of the issued
and outstanding shares of the acquiring Company. The notes are due
on September 30, 2019 and bear interest at a rate of
6%.
The
Company has evaluated subsequent events through November 27, 2018,
in connection with these financial statements, which is the date
the financial statements were available to be issued. The Company
is unaware of any other subsequent events requiring adjustments to,
or disclosure in, the accompanying financial
statements.
F-10
Report of Independent Auditor
To the Board of Managers
Cure Based Development, LLC
Charlotte, North Carolina
We have audited the accompanying financial statements of Cure Based
Development, LLC (the “Company”), which comprise the
balance sheets as of August 31, 2018 and December 31, 2017,
and the related statements of operations and cash flows for the
periods from January 1, 2018 to August 31, 2018 and August 3, 2017
(Inception) to December 31, 2017, and the related notes to the
financial statements.
Management’s Responsibility for the Financial
Statements
Management is responsible for the preparation and fair presentation
of these financial statements in accordance with accounting
principles generally accepted in the United States of America; this
includes the design, implementation, and maintenance of internal
control relevant to the preparation and fair presentation of
financial statements that are free from material misstatement,
whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audit in
accordance with auditing standards generally accepted in the United
States of America. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the
financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence
about the amounts and disclosures in the financial statements. The
procedures selected depend on the auditor’s judgment,
including the assessment of the risks of material misstatement of
the financial statements, whether due to fraud or error. In making
those risk assessments, the auditor considers internal control
relevant to the Company’s preparation and fair presentation
of the financial statements in order to design audit procedures
that are appropriate in the circumstances, but not for the purpose
of expressing an opinion on the effectiveness of the
Company’s internal control. Accordingly, we express no such
opinion. An audit also includes evaluating the appropriateness of
accounting policies used and the reasonableness of significant
accounting estimates made by management, as well as evaluating the
overall presentation of the financial statements.
We believe the audit evidence we have obtained is sufficient and
appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Cure
Based Development, LLC as of August 31, 2018 and December 31,
2017, and the results of its operations and its cash flows for the
periods from January 1, 2018 to August 31, 2018 and August 3, 2017
(Inception) to December 31, 2017, in conformity with accounting
principles generally accepted in the United States of
America.
/s/ Cherry Bekaert LLP
Charlotte, North Carolina
November 27, 2018
F-11
CURE BASED DEVELOPMENT, LLC
BALANCE
SHEETS
AUGUST 31, 2018 AND DECEMBER 31, 2017
|
|
August
31,
|
December
31,
|
|
|
2018
|
2017
|
|
ASSETS
|
|
|
|
Current
Assets:
|
|
|
|
Cash and cash
equivalents
|
$
309,498
|
$
181,762
|
|
Receivable from
payment processor
|
486,082
|
-
|
|
Receivable –
other
|
59,558
|
-
|
|
Note receivable
– related party
|
50,000
|
-
|
|
Inventory
|
743,996
|
225,033
|
|
Total Current
Assets
|
1,649,134
|
406,795
|
|
|
|
|
|
Property and
equipment, net
|
581,631
|
104,257
|
|
Total
Assets
|
$
2,230,765
|
$
511,052
|
|
|
|
|
|
LIABILITIES AND MEMBERS' EQUITY
|
|
|
|
Current
Liabilities:
|
|
|
|
Accounts
payable
|
$
334,741
|
$
-
|
|
Notes payable
related party
|
1,298,500
|
3,500
|
|
Customer deposits
from related party
|
265,000
|
-
|
|
Accrued
expenses
|
203,920
|
15,724
|
|
Accrued expenses to
related party
|
34,309
|
43,972
|
|
Total Current
Liabilities
|
2,136,470
|
63,196
|
|
|
|
|
|
Members'
Equity:
|
|
|
|
Contributed
capital
|
$
771,053
|
771,053
|
|
Accumulated
deficit
|
(676,758
)
|
(323,197
)
|
|
Total Members'
Equity
|
94,295
|
447,856
|
|
Total Liabilities
and Members' Equity
|
$
2,230,765
|
$
511,052
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-12
CURE BASED DEVELOPMENT, LLC
STATEMENTS
OF OPERATIONS
PERIODS FROM JANUARY 1, 2018 TO AUGUST 31, 2018 AND AUGUST 3, 2017
(INCEPTION) TO DECEMBER 31, 2017
|
|
August
31,
|
December
31,
|
|
|
2018
|
2017
|
|
|
|
|
|
Sales
|
$
3,372,712
|
$
354
|
|
Less
returns and allowances
|
(92,703
)
|
-
|
|
Net
sales
|
3,280,009
|
354
|
|
|
|
|
|
Cost
of sales
|
804,994
|
-
|
|
Gross
profit
|
2,475,015
|
354
|
|
|
|
|
|
Operating
expenses
|
2,778,976
|
323,551
|
|
Loss
from operations
|
(303,961
)
|
(323,197
)
|
|
|
|
|
|
Interest
expense
|
49,600
|
-
|
|
Net
loss
|
$
(353,561
)
|
$
(323,197
)
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-13
CURE BASED DEVELOPMENT, LLC
STATEMENTS
OF CASH FLOWS
PERIODS FROM JANUARY 1, 2018 TO AUGUST 31, 2018 AND AUGUST 3, 2017
(INCEPTION) THROUGH DECEMBER 31, 2017
|
|
August
31,
|
December
31,
|
|
|
2018
|
2017
|
|
Cash
flows from operating activities:
|
|
|
|
Net
loss
|
$
(353,561
)
|
(323,197
)
|
|
Adjustments to
reconcile net loss to net
|
|
|
|
cash used by
operating activities:
|
|
|
|
Depreciation and
amortization
|
59,508
|
6,535
|
|
Stock issued for
compensation
|
-
|
71,053
|
|
Changes in
operating assets and liabilities:
|
|
|
|
Receivable from
payment processor
|
(486,082
)
|
-
|
|
Receivable –
other
|
(59,558
)
|
-
|
|
Note receivable
– related party
|
(50,000
)
|
-
|
|
Inventory
|
(518,963
)
|
(225,033
)
|
|
Accounts payable
and accrued expenses
|
522,937
|
15,724
|
|
Customer deposits
from related party
|
265,000
|
-
|
|
Accounts payable
related party
|
(9,663
)
|
43,972
|
|
Cash used by
operating activities
|
(630,382
)
|
(410,946
)
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
Purchase of
property and equipment
|
(536,882
)
|
(110,792
)
|
|
Cash used by
investing activities
|
(536,882
)
|
(110,792
)
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
Proceeds from
issuance of notes payable
|
1,429,000
|
3,500
|
|
Payments on notes
payable
|
(134,000
)
|
-
|
|
Contributed
capital
|
-
|
700,000
|
|
Cash provided by
financing activities
|
1,295,000
|
703,500
|
|
|
|
|
|
Net increase in
cash
|
127,736
|
181,762
|
|
Cash and cash
equivalents, beginning of period
|
181,762
|
-
|
|
Cash and cash
equivalents, end of period
|
$
309,498
|
$
181,762
|
The accompanying notes to the financial statements are an integral
part of these statements.
F-14
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies
Organization and Nature of Business –
Cure Based
Development, LLC. ("CBDMD", "we", "us", “our”, or the
“Company”) is a Nevada limited liability corporation
formed on August 3, 2017. CBDMD manufactures and distributes high
quality cannabidiol extracted from hemp plants. The Company
operates from their offices located in Charlotte, North Carolina.
The Company’s fiscal year end is established as December
31.
The
accompanying financial statements have been prepared in accordance
with accounting principles generally accepted in the United States
of America (“U.S. GAAP”).
Use of Estimates –
The preparation of the Company's
financial statements have been prepared in accordance with U.S.
GAAP, and requires management to make estimates and assumptions
that affect amounts of 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 financial statements in the period they are determined to be
necessary. Significant estimates made in the accompanying financial
statements include, but are not limited to, inventory valuation
reserves, expected sales returns and allowances, 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 date of less than three months when purchased to be cash
equivalents.
Receivable from Payment Processor –
The Company
primarily sells its products through the internet and has an
arrangement to process customer payments with a third-party payment
processor. The arrangement with the payment processor requires that
the Company pay a fee of 5.95% of the transaction amounts
processed. Pursuant to this agreement, there is a 14-day waiting
period prior to reimbursement to the Company, as well as a
calculated reserve which the payment processor holds back. At
August 31, 2018, the receivable from payment processor included
$206,677 for the waiting period amount and $279,405 for the reserve
amount for a total receivable of $486,082. There were no
outstanding amounts receivable from the payment processor at
December 31, 2017.
Inventory –
Inventory is stated at the lower of cost
or net realizable value with cost being determined on a first-in
first-out (FIFO) basis. The cost of inventory includes product
cost, freight-in, and production labor and overhead. Write-offs of
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 perform periodic inventory counts
and assess inventory for slow moving products and potential
impairments prior to applicable reporting periods.
Property and Equipment –
Property and equipment items
are stated at cost less accumulated depreciation. Expenditures for
maintenance and repairs are charged to operations expense as
incurred. Depreciation is charged to expense over the estimated
useful lives of the assets using the straight-line method.
Generally, the useful lives are five years for manufacturing
equipment and three years for leasehold improvements. The cost and
accumulated depreciation of property are eliminated from the
accounts upon disposal, and any resulting gain or loss is included
in the statement of operations for the applicable
period.
Customer Deposits –
Customer deposits consist of
payments received in advance of revenue recognition. Revenue is
recognized as revenue recognition criteria are met.
F-15
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies (continued)
Revenue Recognition –
The Company's policy in relation
to product sales is to recognize revenue when persuasive evidence
of an arrangement exists, shipping has occurred, 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 upon
shipping. Net sales are comprised of gross revenues less expected
product returns, trade discounts, and customer allowances. Although
the Company does not have a formal return policy, from time to time
the Company will allow customers to return certain products.
The Company records returns as a reduction in sales. There were no
allowances for sales returns at August 31, 2018 and December 31,
2017.
Cost of Sales –
Cost of
sales includes costs associated with distribution, labor,
materials, freight and manufacturing overhead, including
depreciation.
Cost of sales also includes 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 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 $691,662 and $28,999
in advertising and related marketing and promotional costs included
in operating expenses during the period ended August 31, 2018 and
the year ended December 31, 2017, respectively.
Shipping and Handling Fees and Costs –
All fees billed
to customers for shipping and handling are classified as a
component of sales. All costs associated with shipping and handling
are classified as a component of cost of goods sold.
Income Taxes –
The Company filed an election with the
Internal Revenue Service (“IRS”) where, as
of
January
1, 2018, the Company would file income taxes as a C-corporation.
Prior to January 1, 2018, as a Limited Liability Company, any
federal or state income taxes were passed through to its members
and, therefore, no provision for income taxes is included in the
Company’s financial statements for the period ended December
31, 2017.
For the
period ended August 31, 2018, the Company accounts for income taxes
pursuant to the provisions of the Financial Accounting Standards
Board Accounting Standards Codification Topic 740,
Accounting for Income Taxes
, 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. 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.
U.S.
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 IRS. Management has analyzed
the tax positions taken by the Company, and has concluded that as
of August 31, 2018, 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 statements.
F-16
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 1—Organization and summary of significant accounting
policies (continued)
Concentrations –
Financial instruments that
potentially expose the Company to concentrations of credit risk
consist primarily of cash and cash equivalents and accounts
receivable.
The
Company places its cash and cash equivalents on deposit with
financial institutions in the United States. The Federal Deposit
Insurance Corporation 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
uninsured balances at August 31, 2018 and December 31, 2017 of
$59,498 and $0, respectively.
Note 2—Inventory
Inventory at August 31, 2018 and December 31, 2017 consists of the
following:
|
|
August
31,
|
December
31,
|
|
|
2018
|
2017
|
|
Finished
goods
|
$
146,731
|
$
-
|
|
Inventory
components
|
597,265
|
225,033
|
|
|
$
743,996
|
$
225,033
|
Note 3—Property and equipment
Major classes of property and equipment at August 31, 2018 and
December 31, 2017 consist of the following:
|
|
August
31,
|
December
31,
|
|
|
2018
|
2017
|
|
Manufacturing
equipment
|
$
329,732
|
$
64,609
|
|
Leasehold
improvements
|
105,662
|
46,183
|
|
Manufacturing
equipment in transit
|
212,280
|
-
|
|
|
647,674
|
110,792
|
|
Less
accumulated depreciation
|
66,043
|
6,535
|
|
Net
property and equipment
|
$
581,631
|
$
104,257
|
Depreciation expense was $59,508 and $6,535 for the period ended
August 31, 2018 and year ended December 31, 2017,
respectively.
F-17
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 4—Notes receivable – related party
In
April 2018, the Company was issued notes in exchange for $210,000
from Edge of Business, LLC. Edge of Business, LLC owns 75.24% of
the outstanding equity of the Company and is an affiliate of the
CEO of the Company. Between May 2018 and August 2018, $180,000 of
these notes receivable were collected by the Company leaving a
$30,000 outstanding balance on August 31, 2018. The remaining
$30,000 was collected by the Company on September 14,
2018.
On
April 23, 2018, the Company was issued a note in exchange for
$20,000 from an entity that is owned by a related party. This
amount was outstanding on August 31, 2018. The outstanding balance
of $20,000 was paid back on September 14, 2018.
Note 5—Notes payable – related party
The
Company issued $718,500 of notes payable between November 2017 and
August 2018 to Edge of Business, LLC, an affiliate of the CEO of
the Company. The notes are due on demand and bear interest at a
rate of a rate of 12%. As of August 31, 2018, $718,500 of the notes
payable were outstanding and are recorded as a note payable –
related party. As of December 31, 2017, $3,500 of the note payable
was outstanding and is recorded as a note payable – related
party.
On
February 21, 2018, the Company issued a $20,000 note payable to an
individual, who is the owner of CBD Now, LLC. CBD Now, LLC owns
4.75% of the outstanding equity of the Company. The note is due on
February 20, 2019, but also includes an option for the note holder
to elect to extend the maturity date to February 20, 2020. The note
bears interest at a rate of 12%. As of August 31, 2018, $20,000 of
the note payable was outstanding and is recorded as a note payable
– related party.
On
March 6, 2018, the Company issued a $60,000 note payable to Board
Investor Group III. Board Investor Group III owns 14.25% of the
outstanding equity of the Company. The note is due on March 5,
2019, but also includes an option for the note holder to elect to
extend the maturity date to March 5, 2020. The note bears interest
at a rate of 12%. As of August 31, 2018, $60,000 of the note
payable was outstanding and is recorded as a note payable –
related party.
On
April 1, 2018, the Company issued a $500,000 note payable to an
individual, who is the owner of CBD Now, LLC. The note is due on
March 31, 2019, but also includes an option for the note
holder to elect to extend the maturity date to March 31, 2020. The
note bears interest at a rate of 12% and interest is paid monthly.
As of August 31, 2018, $500,000 of the note payable was outstanding
and is recorded as a note payable – related
party.
Note 6—Members’ equity
The Company received $700,000 between July 2017 and December 2017
from three investors in exchange for LLC shares of the Company.
This amount is recorded as contributed capital.
In November 2017, the Company entered into an agreement with the
recently hired president and in connection with her employment,
whereby the Company would issue member units that would amount to
5% of the outstanding equity of the Company. As a result of this
agreement the Company issued 526,316 units which were valued at
$71,053. This amount was recorded as a component of operating
expenses for the period ended December 31, 2017.
F-18
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 7—Related party transactions
During
the eight month period ended August 31, 2018, the Company received
$265,000 from Verdure Holdings LLC for future orders of the
Company’s products. Verdure Holdings LLC is an affiliate of
the CEO of the Company. This amount is recorded as customer
deposits from related party on the accompanying balance
sheet.
The
Company leases office space and also is provided administrative and
IT services from Data Tech
Systems,
LLC. WMM LLC has majority ownership of Data Tech Systems, LLC. WMM
LLC is an affiliate of the CEO of the Company and other Company
shareholders. Total payments for the eight month period ended
August 31, 2018 were $39,413 to Data Tech Systems, LLC. No payments
were made to Data Tech Systems, LLC for the period ended December
31, 2017.
The
Company leases its manufacturing facility from Wicker Minuet, an
entity partially owned by a related party. Total payments to Wicker
Minuet for the eight month period ended August 31, 2018 and period
ended December 31, 2017 were $43,500 and $9,000,
respectively.
As
described in Notes 4 and 5, the Company has several notes payable
and notes receivable with related parties.
Note 8—Commitments
As
mentioned in Note 7, the Company leases office and manufacturing
facilities from related parties. The office lease agreement is on a
month-to-month basis. The manufacturing facility lease expires in
April 2020 and requires monthly payments of $7,500.
Note 9—Income taxes
A reconciliation of the federal statutory income tax rate to the
Company’s effective income tax rate is as
follows:
|
|
Period
Ended
|
|
|
August
31,
2018
|
|
Federal
statutory income tax rate
|
21.0
%
|
|
State
income taxes, net of federal benefit
|
2.4
%
|
|
Permanent
differences
|
(0.2
%)
|
|
Change
in valuation allowance
|
(23.2
%)
|
|
Provision
for income taxes
|
0.0
%
|
F-19
CURE BASED DEVELOPMENT, LLC
NOTES TO THE FINANCIAL STATEMENTS
AUGUST 31, 2018 AND DECEMBER 31, 2017
Note 9—Income taxes (continued)
Significant components of the Company’s deferred income taxes
are shown below:
|
|
August
31,
|
|
|
2018
|
|
Deferred
tax assets:
|
|
|
Net
operating loss carryforwards
|
$
124,049
|
|
Interest
expense
|
11,606
|
|
Charitable
Contributions
|
8,424
|
|
Deferred
tax liabilities:
|
|
|
Property
and Equipment
|
62,032
|
|
Net
deferred tax asset
|
82,047
|
|
Valuation
allowance
|
(82,047
)
|
|
Net
deferred tax liability
|
$
-
|
Deferred
tax assets represent the future tax benefit of deductible
differences and, if it is more likely than not that a tax asset
will not be realized, a valuation allowance is required to reduce
the recorded deferred tax assets to net realizable value. The
Company has a valuation allowance against the net deferred tax
assets due to the uncertainty that such assets will be realized as
the Company is in the early stages of its development
Tax
positions that meet the more-likely-than-not recognition threshold
are measured as the largest amount of tax benefit that is more than
50% likely to be realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured as described is
reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and
penalties that would be applicable. For the period ending August
31, 2018 there were no uncertain tax positions taken by the Company
and there are no liability reserves for uncertain tax
positions.
Note 10—Subsequent events
In
October 2018, the Company issued two Senior Convertible Promissory
Notes in the amount of $500,000 each. Upon a change of control of
the Company, as defined by the note agreement, each note has the
option to either be fully repaid or converted to 2.5% of the issued
and outstanding shares of the acquiring Company. The notes are due
on September 30, 2019 and bear interest at a rate of
6%.
The
Company has evaluated subsequent events through November 27, 2018,
in connection with these financial statements, which is the date
the financial statements were available to be issued. The Company
is unaware of any other subsequent events requiring adjustments to,
or disclosure in, the accompanying financial
statements.
F-20
Exhibit A
November 15,
2018
STRICTLY CONFIDENTIAL
The
Special Committee of the Board of Directors Level Brands,
Inc.
Attn: Mr. Seymour
G. Siegel
Ladies
and Gentlemen:
We
understand that Level Brands, Inc., a Delaware corporation
(“Level Brands”) has signed a letter of intent, as
amended (together the “LOI”), to purchase all of the
capital stock of Cure Based Development, LLC, a Nevada limited
liability company doing business as cbdMD (“CBDMD”)
from the members of CBDMD (the “Sellers”) whereby CBDMD
would become a wholly owned subsidiary of Level Brands (the
“Transaction”). The aggregate consideration to be paid
by Level Brands to the Sellers in the Transaction, a portion of
which will require shareholder approval for the issuance of more
than 19.99% of the outstanding shares of common stock of Level
Brands (“Shares”), shall include (a) 6,500,000
restricted Shares (the “Initial Share Consideration”),
having a value of $25.7 million based on the volume weighted
average price of $3.95 for the 20 day prior to the date hereof (the
“Initial Share Consideration Value”); (b) 8,750,000
restricted Shares (the “Vesting Share Consideration”
and together with the Initial Share Consideration, the “Fixed
Consideration”), subject to a five year vesting schedule from
the closing of the Transaction (the “Closing”), for an
aggregate value of $34.6 million once fully vested; and (c) four
tranches of Shares issuable upon the business of CBDMD achieving
cumulative net revenue hurdles as of four marking periods over five
years following the Closing, for a total of 15,250,000 Shares (the
“Contingent Share Consideration”) and an aggregate
value of $60.3 million, if fully earned. The Fixed Consideration
and the Contingent Share Consideration are collectively referred to
as the “Consideration.” Additionally, Level Brands will
provide a $2 million loan to CBDMD following the signing of
definitive documents for the Transaction. We understand that the
Transaction is contingent upon, and the Closing will occur
following, the passage of the 2018 Farm Bill including provisions
removing hemp, and hemp products including CBD oil, from the list
of Schedule I controlled substances.
You
have requested our opinion (the “Opinion”), as
investment bankers, as to the fairness of the consideration paid by
Level Brands in connection with the Transaction from a financial
point of view. Our Opinion therefore addresses only the fairness,
from a financial point of view, of the consideration paid by Level
Brands in the Transaction, and we do not express any views on any
other terms of the Transaction, nor do we express an opinion about
the fairness of the amount or nature of the compensation to any of
Level Brands officers, directors, or employees, or class of such
persons, relative to the compensation to the public shareholders of
Level Brands. Specifically, we have not been requested to opine as
to, and our Opinion does not in any manner address, the relative
merits of the Transaction as compared to any alternative business
strategy that might exist.
In
arriving at our Opinion, we have:
●
reviewed historical
and projected financial information prepared by CBDMD and Level
Brands management concerning CBDMD,
●
reviewed publicly
available non-financial information concerning CBDMD;
●
conducted
discussions with Level Brands and CBDMD senior management
concerning CBDMD’s historical financial results, business
prospects and projected financial information;
A-1
●
reviewed the LOI
and analyzed the value of the Consideration;
●
conducted such
other analyses and examinations and considered such other
information and financial, economic and market criteria as we
deemed appropriate in arriving at our Opinion, including discounted
cash flow analyses;
●
analyzed certain
financial, stock market and other publicly available information
relating to the businesses of other companies whose operations we
considered relevant in evaluating those of CBDMD; and
●
conducted such
other analyses and examinations and considered such other
information and financial, economic and market criteria as we
deemed appropriate in arriving at our Opinion.
In
arriving at our Opinion, we have assumed and relied upon the
accuracy and completeness of the financial and other information
used by us without assuming any responsibility for the independent
verification of such information, and we have further relied upon
the assurances of Level Brands management that they are not aware
of any facts or circumstances that would make such information
inaccurate or misleading. We have also assumed that obtaining all
regulatory approvals and third party consents, including the
approval by Level Brands shareholders if applicable, required for
the consummation of the Transaction will not have a materially
adverse impact on Level Brands or on the anticipated benefits of
the Transaction. In addition, we have assumed that the Transaction
will be consummated in accordance with the terms set forth in the
LOI without any waiver, amendment or delay of any material terms or
conditions thereof. In arriving at our Opinion, we did not conduct
an independent evaluation or appraisal of the assets or liabilities
(contingent or otherwise) of CBDMD, nor were we furnished with any
such evaluations or appraisals, other than the draft financial
statements of CBDMD. We relied upon the assurances of Level Brands
management that the audited financial statements of CBDMD will not
materially differ from the draft versions. Our Opinion set forth
herein is therefore necessarily based upon financial, market,
economic and other conditions and circumstances as they exist and
have been disclosed, and can be evaluated, as of the date hereof
without independent verification.
Level
Brands has agreed to indemnify us for certain liabilities that may
arise out of the rendering of this Opinion. We have been engaged by
Level Brands to render this opinion and will receive a fee in
connection therewith upon delivery of this opinion, which is not
contingent upon the consummation of the Transaction. No part of our
fee is conditioned upon the conclusion expressed in this opinion.
Our affiliates, employees, officers and partners may at any time
own securities (long or short) of the Level Brands. We have in the
past provided investment banking services to Level Brands,
unrelated to the Transaction, for which services we have received
compensation and certain of our employees provided investment
banking services to Level Brands while working at a prior employer
for which they received compensation. In connection with the past
investment banking services provided to Level Brands, several of
our employees own warrants to purchase common shares of Level
Brands. We disclaim any undertaking or obligation to advise any
person of any change in any fact or matter affecting our opinion
that may come or be brought to our attention after the date of this
Opinion. No limitations were imposed upon us by Level Brands with
respect to the investigations made or procedures followed by us in
rendering our Opinion.
Our
Opinion is provided for the use and benefit of the Board of
Directors of Level Brands and is rendered to the Board of
Directors. This Opinion is not intended and does not constitute a
recommendation as to any action the Board of Directors of Level
Brands should take in connection with the Transaction or to any
stockholder of Level Brands as to how a stockholder should vote
with respect to the Transaction if,
A-2
in fa
,
ct a
shareholder
vote is
deemed nece
ss
ary by Level
Brands. Further
,
we express no
opinion
herein
as to the structure
,
terms or effect of anyother aspect of
the Transaction
,
including, without limitation, the
tax, accounting or regulatory consequences thereof. This Opinion is
not to be reprinted, reproduced or disseminated without our
prior
written
consent,
and
is
not to be quoted or referred
to
,
in whole or in
part
,
in connection with
the
Transaction
or
any other matter; provided that we understand and agree that if
this Opinion is required pursuant to any applicable statute or
regulation to be included in any materials
to
be filed
with the Securities and Exchange Commission or mailed to the
shareholders of
Le
vel
Brands
in
connection with the
Transaction
,
the
Opinion may be reproduced in
such
materials
onl
y
in
its
entirety
,
and any description o
f
or
reference
to us or any summary of this Opinion in
such
materials
must be
i
n a form
acceptable to and
consented
to
in advance in writing by us,
such consen
t
not to be
unreasonably withheld.
Bas
ed
upon
and
subject
to
the
foregoing
,
including
the
vario
us
assumptions,
limitations, and qualifications set forth herein,
and after approval from our Fairness Committee
,
we are
of
the
opinion that, as of the date hereof, the
consideration to be paid by Level
Brands
in
connection with the Transaction is fair from a financial
point
of
view.
Respectfully
submitted,
ThinkEquity,
a
division of
Fordham Financial
Management,
Inc.
A-3
Exhibit
B
B-1
B-2
|
LEVEL BRANDS, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF
DIRECTORS
2019
ANNUAL MEETING OF SHAREHOLDERS –APRIL 19, 2019 AT 1:00
P.M.
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CONTROL ID:
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REQUEST ID:
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The
undersigned, a shareholder of Level Brands, Inc. (the "Company")
hereby revoking any proxy heretofore given, does hereby appoint
Mark S. Elliott, with power of substitution, for and in the name of
the undersigned to attend the 2019 annual meeting of shareholders
of the Company to be held at 4521 Sharon Road, Suite 450,
Charlotte, NC 28211, on April 19, 2019 beginning at 1:00 p.m.,
local time, or any adjournment or postponement thereof, and there
to vote, as designated below.
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(CONTINUED AND TO BE SIGNED ON REVERSE SIDE.)
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VOTING INSTRUCTIONS
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If you vote by phone, fax or internet, please DO NOT mail your
proxy card.
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MAIL:
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Please
mark, sign, date, and return this Proxy Card promptly using the
enclosed envelope.
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FAX:
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Complete
the reverse portion of this Proxy Card and Fax to
202-521-3464
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INTERNET:
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https://www.iproxydirect.com/LEVB
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PHONE:
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1-866-752-VOTE(8683)
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2019 ANNUAL MEETING OF THE SHAREHOLDERS OF LEVEL BRANDS,
INC.
|
PLEASE COMPLETE, DATE, SIGN AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN
HERE:
☒
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PROXY
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
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Proposal 1
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FOR ALL
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AGAINST ALL
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FOR ALL EXCEPT
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To
elect nine members to the board of directors
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☐
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☐
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Martin
A. Sumichrast
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☐
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Anthony
K. Shriver
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☐
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Seymour
G. Siegel
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☐
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Bakari
Sellers
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☐
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Gregory
C. Morris
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☐
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R.
Scott Coffman
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☐
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Peter
J. Ghiloni
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☐
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Scott
G. Stephen
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☐
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William
F. Raines, III
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☐
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Proposal 2
|
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FOR
|
|
AGAINST
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ABSTAIN
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The
ratification of the appointment of
Cherry Bekaert LLP
as the Company's
independent registered public accounting firm
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☐
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☐
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☐
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Proposal 3
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FOR
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AGAINST
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ABSTAIN
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To
approve the Stock Issuances
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☐
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☐
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☐
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Proposal 4
|
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FOR
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AGAINST
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ABSTAIN
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To
approve the Name Change
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☐
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☐
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☐
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Proposal 5
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FOR
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AGAINST
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ABSTAIN
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To
approve the 2015 Plan Amendment
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☐
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☐
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☐
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MARK “X” HERE IF YOU PLAN
TO ATTEND THE MEETING:
☐
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The board of directors unanimously recommends that the shareholders
vote "FOR" proposals 1, 2, 3, 4 and 5.
THIS PROXY WILL BE VOTED AS DIRECTED. IF NO CONTRARY INSTRUCTION IS
INDICATED, THE VOTE OF THE UNDERSIGNED WILL BE CAST
“FOR” PROPOSALS 1, 2, 3, 4 AND 5. IF ANY OTHER BUSINESS
IS PRESENTED AT THE ANNUAL MEETING, THIS PROXY WILL BE VOTED BY
THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT
TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE
PRESENTED AT THE ANNUAL MEETING.
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MARK
HERE FOR ADDRESS CHANGE
☐
New Address (if
applicable):
_____________________________
_____________________________
_____________________________
IMPORTANT:
Please sign exactly as your name or names appear
on this Proxy. When shares are held jointly, each holder should
sign. When signing as executor, administrator, attorney, trustee or
guardian, please give full title as such. If the signer is a
corporation, please sign full corporate name by duly authorized
officer, giving full title as such. If signer is a partnership,
please sign in partnership name by authorized person.
Dated:
________________________, 2019
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||||||
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||||||||||
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(Print
Name of Shareholder and/or Joint Tenant)
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(Signature
of Shareholder)
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(Second
Signature if held jointly)
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TABLE OF CONTENTS