RISK FACTORS
An investment in our securities involves a high degree of risk. You
should carefully consider the risks and uncertainties described
below together with all of the other information contained or
incorporated by reference in this prospectus, including our
consolidated financial statements and the related notes, before
making a decision to invest in our securities. You should also
consider the risks, uncertainties and assumptions discussed under
Item 1A, “Risk Factors,” in Part I of our Annual Report
on Form 10-K for the year ended September 30, 2017 and Item 1A,
“Risk Factors,” in our Quarterly Report on Form 10-Q
for the period ended June 30, 2018 together with any updates or
other risks contained in other filings that we may make with the
SEC after the date of this prospectus, all of which are
incorporated herein by reference, and may be amended, supplemented
or superseded from time to time by other reports we file with the
SEC in the future and any additional prospectus supplement. If any
of these risks actually occur, our business, results of operations
and financial condition could suffer. In that case, the market
price of our common stock could decline, and you may lose all or
part of your investment.
RISKS RELATED TO THIS OFFERING
You will experience immediate and
substantial dilution in the book value per share of the common
stock you purchase
.
The
public offering price per share of our common stock is
substantially higher than the net tangible book value per share of
our common stock immediately prior to the offering. After giving
effect to the sale of 1,714,286 shares of our common
stock, at a public offering price of $3.50 per share
and after deducting the estimated underwriting discounts and
estimated offering expenses payable by us, purchasers of our common
stock in this offering will incur immediate dilution of
$1.79 per share in the net tangible book value of the
common stock they acquire. In addition, to the extent that
outstanding stock options or warrants have been or may be exercised
or other shares issued, you may experience further dilution. For a
further description of the dilution that investors in this offering
will experience, see “Dilution.”
Our management will have broad discretion over the use and
investment of the net proceeds received in this offering and might
not apply the proceeds in ways that increase the value of your
investment in our common stock.
Our management will have broad discretion over the use and
investment of the net proceeds received from this offering, and you
will be relying on, and may not agree with, the judgment of
management regarding the application of these net proceeds.
Management intends to use the net proceeds received from this
offering as described in the section entitled “Use of
Proceeds.” While we may use a portion of the proceeds for
strategic acquisitions, we are not presently a party to any
agreements and there are no assurances we will ever acquire any
additional companies. The failure by management to apply these
funds effectively may result in financial losses that could have a
material adverse effect on our business and cause the price of our
common stock to decline. Management may invest the net proceeds
received from this offering in a manner that does not produce
income or increase value, which could have a material adverse
effect on our business and cause the price of our common stock to
decline.
RISKS RELATED TO OUR COMPANY
Kathy Ireland is not an officer or director of our company. We are
materially dependent upon our relationships with kathy
ireland® Worldwide and certain of its affiliates. If these
advisory agreements or license rights should be terminated or
expire, we would be deprived of the services and our business could
be materially adversely impacted.
While
affiliates of
kathy
ireland
® Worldwide are minority owners of both
I’M1 and EE1, the terms of the operating agreements for those
subsidiaries do not require them to provide any services to us. We
have entered into a non-exclusive advisory agreement with
kathy ireland
®
Worldwide, as amended, which expires in February 2025 under which
we engaged it to provide various consulting and advisory services
to us. Ms. Ireland serves in the non-executive role of Chairman
Emeritus and Chief Brand Strategist to us under this agreement. Ms.
Ireland is not a member of our management or board of directors,
the title Chairman Emeritus is an honorary title and she is not a
founder or co-founder of our company. Ms. Ireland provides services
to us solely under the terms of the non-exclusive advisory
agreement. We have also entered into advisory agreements with
additional affiliates of
kathy
ireland
® Worldwide, including Messrs. Roseberry,
Carrasco, Meharey and Mendoza, pursuant to which they provide
various management and advisory services to us, including key
operational roles at I’M1 and EE1. The initial terms of these
agreements expire in March 2019 and, if not renewed, thereafter are
on a month to month basis until terminated by either party. None of
these services are provided on an exclusive basis, each of these
individuals may have a conflict of interest in that they have a
long term relationship with Kathy Ireland and have derived
substantial income from
kathy
ireland
® Worldwide and there is no minimum number of
hours which are required to be devoted to us. In addition we have
obtained a royalty free right to license the intellectual property
related to
kathy
ireland
® Health & Wellness. Our business model is
materially dependent upon our continued relationship with
kathy ireland
®
Worldwide, Ms. Ireland and her affiliates, including Messrs.
Roseberry, Carrasco, Meharey and Mendoza. If we should lose access
to those relationships or if the reputation of Ms. Ireland and/or
kathy ireland
®
Worldwide were to be damaged, our results would suffer and there
are no assurances we would be able to continue to operate our
company and develop our brands as presently planned.
Our limited operating history does not afford investors a
sufficient history on which to base an investment
decision.
Level Brands was formed in March 2015. During fiscal 2016 and
fiscal 2015 our net sales were solely from our professional
products division. We began reporting revenues from our licensing
division and our entertainment division during the second
quarter of fiscal 2017. In September 2017, we entered into
wholesale license agreements for three new brands, including
kathy
ireland
® Health &
Wellness, a newly created brand. There are no assurances we will be
successful in generating net sales in future periods based upon
these new agreements. Our operations are subject to all the risks
inherent in the establishment of a new business enterprise. The
likelihood of success must be considered in light of the problems,
expenses, difficulties, complications and delays that are
frequently encountered in a
newly-formed company. There can be no assurance
that at this time that we will successfully implement our business
plan, operate profitably or will have adequate working capital to
meet our obligations as they become due. Prospective investors must
consider the risks and difficulties frequently encountered by early
stage companies, particularly in rapidly evolving markets. We
cannot be certain that our business strategy will be successful or
that we will successfully address these risks. In the event that we
do not successfully address these risks, our business, prospects,
financial condition, and results of operations could be materially
and adversely affected and we may not have the resources to
continue or expand our business operations.
Our subsidiaries I’M1 and EE1 have a limited operating
history and we recently entered into a license agreement licensing
the rights to certain intellectual property related to kathy
ireland ® Health & Wellness, a newly created brand with no
operating history, which does not afford investors a sufficient
history on our company which to base an investment
decision.
I’M1 and EE1 are entities formed in September 2016 and March
2016, respectively. We acquired membership interests in each of
these entities in January 2017. Both entities are in the early
stages of their businesses and we began reporting revenues from
each of these subsidiaries operations in the second quarter of
fiscal 2017. In September 2017 we entered into an exclusive license
agreement to license the trademark and intellectual property rights
for
kathy
ireland
® Health &
Wellness, a newly created brand with no operations. We began
generating revenues from this business unit in the first quarter of
fiscal 2018. Our operations are subject to all the risks inherent
in the establishment of a new business enterprise. The likelihood
of success must be considered in light of the problems, expenses,
difficulties, complications and delays that are frequently
encountered in a newly-formed company. There can be no assurance at
this time that we will operate profitably or will have adequate
working capital to meet our obligations as they become due.
Prospective investors must consider the risks and difficulties
frequently encountered by early stage companies, particularly in
rapidly evolving markets. We cannot be certain that our business
strategy will be successful or that we will successfully address
these risks. In the event that we do not successfully address these
risks, our business, prospects, financial condition, and results of
operations could be materially and adversely affected and we may
not have the resources to continue or expand our business
operations.
While we have been reporting net income to our shareholders in
fiscal 2018, we have a history of losses and there are no
assurances we will continue report profitable operations in future
periods.
We reported net losses to common shareholders of $1,738,734 and
$3,356,489 for fiscal 2017 and fiscal 2016, respectively. For the
first nine months of fiscal 2018, however, we reported net income
to common shareholders of $477,542. There are no assurances we will
generate substantial revenues from the new businesses, or that we
will be able to control our operating expenses in future periods to
a level that we will be able to continue to report profitable
operations or a net profit.
The terms of the various agreements between our company and kathy
ireland® Worldwide contain termination provisions which may
impact management's ability to make certain decisions regarding the
operation of our company
.
The
master advisory and consulting agreement with
kathy ireland
® Worldwide on which
we are materially dependent provides that the
agreement is immediately terminable by
kathy
ireland
® Worldwide if any
officers are terminated or resign, including Mr. Roseberry in his
role as President and co-Managing Director of I'M1 and EE1, or if
additional officers are appointed for each I'M1 and EE1 without the
consent of kathy ireland® Worldwide. The wholesale license
agreement for
kathy
ireland
® Health &
Wellness™ contains the right of
kathy
ireland
® Worldwide to
immediately terminate it
if any officers are terminated or
removed or additional officers are appointed with respect to either
I'M1 or EE1, or if we compete with or invest in a business that
competes with
kathy
ireland® Worldwide. We believe our relationship with
kathy ireland
®
Worldwide and its affiliates is good. It is possible, however, that
our management's ability to make certain operational decisions
which it believes are otherwise in the best interests of our
company could be restricted in future periods if these decisions
could result in triggering the rights of
kathy ireland
® Worldwide to
terminate any agreement.
Our business
depends on consumer spending patterns
.
Our business is sensitive to a number of factors that influence the
levels of consumer spending, including political and economic
conditions such as recessionary environments, the levels of
disposable consumer income, consumer debt, interest rates and
consumer confidence. Reduced consumer spending on beauty products
could have an adverse effect on our operating results in future
periods.
Substantially all of our net sales have been to a limited
number of customers, the loss of any of which would be materially
adverse to our company.
Substantially all of our net sales in the first nine months of
fiscal 2018, as well as in fiscal 2017 and 2016, were attributable
to sales to a limited number of customers. There are no assurances
sales to these customers will continue. While we expect to add
additional customers to our distribution network in the future for
our professional products division, and expand our licensing and
consulting clients in our other divisions, until such time as we
are successful in these efforts, of which there is no assurance,
any significant decrease in sales to any of our customers would
have a material adverse financial effect on our
company.
A significant amount of our net sales were from customers who are
identified as related parties, the loss of any of which would be
materially adverse to our company.
A significant amount of our net sales for the first nine months of
fiscal 2018 and fiscal 2017, totaling $1,550,000 and $1,731,238,
respectively, or approximately 22% and 39%, respectively, were from
customers who are identified as related parties. There are no
assurances sales to these customers will continue. While we expect
to add additional customers in all of our businesses as we expand
our licensing and consulting clients, until such time as we are
successful in these efforts, of which there is no assurance, any
significant decrease in sales to any of our customers would have a
material adverse financial effect on our company.
If we fail to promote and maintain our brands in the market, our
businesses, operating results, financial condition, and our ability
to attract customers will be materially adversely
affected.
Our success depends on our ability to create and maintain brand
awareness for our product offerings. This may require a significant
amount of capital to allow us to market our products and establish
brand recognition and customer loyalty. Additionally, many of the
companies offering similar products have already established their
brand identity within the marketplace. We can offer no assurances
that we will be successful in establishing awareness of our brands
allowing us to compete in this market. The importance of brand
recognition will continue to increase because low barriers of entry
to the industries in which we operate may result in an increased
number of direct competitors. To promote our brands, we may be
required to continue to increase our financial commitment to
creating and maintaining brand awareness. We may not generate a
corresponding increase in revenue to justify these
costs.
If we are unable to identify and successfully acquire additional
brands and trademarks, our growth may be limited, and, even if
additional trademarks are acquired, we may not realize anticipated
benefits due to integration or licensing difficulties.
A component of our growth strategy is the acquisition of additional
brands and trademarks. We generally compete with traditional
apparel and consumer brand companies, other brand management
companies and private equity groups for brand acquisitions.
However, as more of our competitors continue to pursue our brand
management model, competition for specific acquisition targets may
become more acute, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to
find. In addition, even if we successfully acquire additional
trademarks or the rights to use additional trademarks, we may not
be able to achieve or maintain profitability levels that justify
our investment in, or realize planned benefits with respect to,
those additional brands.
Although we seek to temper our acquisition risks by following
acquisition guidelines relating to the existing strength of the
brand, its diversification benefits to us, its potential licensing
scale and credit worthiness of the licensee base, acquisitions,
whether they be of additional intellectual property, or
“IP”, assets or of the companies that own them, entail
numerous risks, any of which could detrimentally affect our results
of operations.
Acquisition of brands or trademarks transactions involve a number
of risks and present financial, managerial and operational
challenges, including: diversion of management’s attention
from running our existing business; unanticipated costs associated
with the target acquisition, appropriately valuing the target
acquisition and analyzing its marketability, increased expenses,
including legal and administrative expenses; integration costs
related to the customer base and business practices of the acquired
company with our own; and adverse effects on our reported operating
results due to possible write-down of goodwill associated with
acquisitions.
When we acquire IP assets or the companies that own them, our due
diligence reviews are subject to inherent uncertainties and may not
reveal all potential risks. Although we generally attempt to
seek contractual protections through representations, warranties
and indemnities, we cannot be sure that we will obtain such
provisions in our acquisitions or that such provisions will fully
protect us from all unknown, contingent or other liabilities or
costs. Finally, claims against us relating to any acquisition
may necessitate our seeking claims against the seller for which the
seller may not, or may not be able to, indemnify us or that
may exceed the scope, duration or amount of the seller’s
indemnification obligations.
No assurance can be given with respect to the timing, likelihood or
financial or business effect of any possible transaction. As a
result, there is no guarantee that our shareholders will achieve
greater returns as a result of any future acquisitions we
complete.
Each of our I'M1 and EE1 subsidiaries are governed by operating
agreements that require us to distribute amounts to minority
members in certain circumstances. These distributions could reduce
the amount of operating capital we have in future
periods.
Under the terms of the operating agreements for each of I’M1
and EE1, Level Brands as the manager of these entities is
responsible for the operations, including the payment of the
operating costs. These costs are then deducted from the
“profits” of the entity and a portion of those amounts,
as determined by the particular operating agreement, will then be
distributed to the members. We own all of the voting interests
in I'M1 and EE1. During fiscal 2017 EE1 made a distribution to its
members. Distributions to the members of I'M1 and EE1 will reduce
the amount of working capital available to us and could adversely
impact our liquidity in future periods.
The value of the equity securities we may accept as compensation
under consulting, licensing and advisory agreements will be subject
to adjustment which could result in losses to us in future periods.
By accepting equity securities as partial compensation for our
services, we may be adversely impacting our working capital in
future periods.
In March 2017 I'M1 entered into a consulting agreement with a third
party under which we accepted shares of its common stock as partial
compensation for the services to be provided. In May 2017 as
compensation under the terms of an advisory agreement I'M1 and EE1
received a warrant to purchase shares of the third party’s
stock which was exercised in June 2017. Since then we have entered
into similar agreements with additional clients and it is possible
we may enter into similar arrangements with other third parties. By
accepting equity securities as partial compensation for our
services in lieu of cash, we will be incurring expenses to deliver
the services without the corresponding cash payments from our
clients. As such, we will be utilizing a greater portion of our
working capital to provide services with the hope that we may
benefit from an increase in the market value of the equity
securities we have received in future periods. In addition, these
securities will be reflected on our balance sheets in future
periods as “marketable securities” or “investment
other securities”. At the end of each quarter, we will
evaluate the carrying value of the marketable securities or
investment other securities for a decrease in value. We will
evaluate the company underlying these marketable securities or
investment other securities to determine whether a decline in fair
value below the amortized cost basis is other than temporary. If
the decline in fair value is judged to be “other- than-
temporary”, the cost basis of the individual security will be
written down to fair value as a new cost basis and the amount of
the write-down is charged to earnings. As a result of these
policies, it is possible that we may recognize impairments on the
carrying value of these securities in future periods. Any future
impairments would adversely affect our operating results for the
corresponding periods in that we would be required to reduce the
carrying value of these investments.
We may be unable to liquidate securities we accept as partial
compensation under consulting, licensing and advisory agreements
which could adversely impact our liquidity in future
periods.
Our ability to sell any securities we accept as partial
compensation is dependent upon a number of factors, including the
existence of a liquid market for the securities and our compliance
with the resale provisions of Federal securities laws which require
us to hold the shares for at least six months, among other factors.
While we expect to generally accept securities from issuers who are
publicly traded or who are expecting to become a publicly traded
company, there are no assurances a liquid market will exist in such
securities at such time as we are able to resell the shares, or
that the price we may receive will be commensurate with the value
of the services we are providing. In that event, we would not
benefit from the expected rise in the market price of the
securities we own as a result of our efforts on behalf of the
client company. In addition, depending upon the terms of our
business relationship with the issuer of the securities, it is
possible that from time to time we could be in possession of
non-public information regarding the issuer which could prohibit us
from disposing of the shares at a time when it is advantageous to
us to do so. If we are unable to readily liquidate any securities
we accept as compensation, we would be deprived of the cash value
of those services and we would be required to write-off the
carrying value of the securities which could adversely impact our
results of operations in future periods.
The Investment Company Act of 1940 will limit the value of
securities we can accept as payment for our business consulting
services which may limit our future revenues and, in the event we
are deemed an investment company, the cost and expense to comply
with ‘40 Act regulations could be material.
The Investment Company Act of 1940, or the “40 Act,”
regulates certain companies that invest in, hold or trade
securities.
Although we do not believe we are engaged in the
business of investing, reinvesting or trading in securities, and we
do not currently hold ourselves out to the public as being engaged
in those activities, i
n the past we
have accepted securities of our client companies as partial
compensation. The ’40 Act and the rules thereunder set forth
certain asset and revenue thresholds, which, if exceeded, may
require us to register as an investment company under the ’40
Act. As a result, and principally related to the value of the
securities received by us as part of our compensation by Isodiol
International, Inc. under the terms of the license agreement we
entered into with it in December 2017, at March 31, 2018 we
exceeded the exemptive asset and revenue
thresholds under
the ’40 Act. Therefore, at March 31, 2018 we could be deemed
an inadvertent investment company under the ’40 Act. While as
of June 30, 2018 we reduced our assets so that we no longer
exceeded the thresholds, as a part of our agreement with Isodiol we
are entitled to receive additional shares of Isodiol’s
securities on a quarterly basis in an amount equal to $750,000. As
it has never been our intention to be an investment company, we are
taking certain actions to maintain our assets and revenues under
the exemptive thresholds.
In
particular, we will limit the amount of equity we accept as part of
our compensation for services so as to stay under the asset and
revenue thresholds as imposed by the ’40 Act. We may
therefore structure transactions in a less advantageous manner than
if we did not have ’40 Act concerns, or we may avoid
otherwise economically desirable transactions due to those
concerns. If we are unable to maintain our assets and revenues
below the exemptive levels, or if it were otherwise established
that we were an unregistered investment company at any period of
time, there would be a risk, among other material adverse
consequences, that we could become subject to monetary penalties or
injunctive relief, or both, in an action by the SEC. In addition,
in the event we continue to fall under ’40 Act regulation, we
will have significant ongoing ’40 Act public reporting
requirements and regulation that would increase our administrative
and operating costs and expenses. Further, under certain
circumstances the ’40 Act provides that a contract that is
made or whose performance involves a violation of the ’40 Act
is unenforceable by either party unless a court finds that under
the circumstances enforcement would produce a more equitable result
than non-enforcement. As a result, we would no longer be able to
conduct our business as it is presently conducted which would have
a material adverse impact on our results of operations in future
periods.
We may require additional capital to finance the acquisition of
additional brands and if we are unable to raise such capital on
beneficial terms or at all this could restrict our
growth.
We may, in the future, require additional capital to help fund all
or part of potential acquisitions. If, at the time required, we do
not have sufficient cash to finance those additional capital needs,
we will need to raise additional funds through equity and/or debt
financing. We cannot guarantee that, if and when needed, additional
financing will be available to us on acceptable terms or at all.
Further, if additional capital is needed and is either unavailable
or cost prohibitive, our growth may be limited as we may need to
change our business strategy to slow the rate of our expansion
plans. In addition, any additional financing we undertake could
impose additional covenants upon us that restrict our operating
flexibility, and, if we issue equity securities to raise capital or
as acquisition consideration, our existing shareholders may
experience dilution or the new securities may have rights senior to
those of our common stock.
RISKS RELATED TO OUR LICENSING AND ENTERTAINMENT
DIVISIONS
AND OUR HEALTH & WELLNESS BRAND
We are materially dependent upon the wholesale license agreement
with kathy ireland® Worldwide. If this agreement were to be
terminated, we would be unable to continue to operate
I’M1.
In January 2017, I’M1 entered into a 10 year wholesale
license agreement with
kathy
ireland
® Worldwide under
which we were granted exclusive royalty free rights to certain
marks and tradenames associated with the I’M1 brand. This
agreement may be immediately terminated upon notice to us if
I’M1 terminates, removes or replaces officers, if we cease to
be the manager of I’M1 or if we compete with or invest in a
business that competes with
kathy
ireland
® Worldwide. The
restriction on competition against
kathy
ireland
® Worldwide may
limit our ability to enter into licensing agreements in the future
for products which could impact our revenues in future periods.
If
kathy
ireland
® Worldwide should
terminate this wholesale license agreement, our ability to operate
I’M1 under that brand name would cease and, depending upon
the amount of revenues we are then recognizing from that brand, our
results of operations and liquidity in future periods could be
materially adversely impacted.
The failure of our licensees to adequately produce, market, import
and sell products bearing our brand names in their license
categories, continue their operations, renew their license
agreements or pay their obligations under their license agreements
could result in a decline in our results of
operations.
Our future revenues from our licensing division will be
substantially dependent on royalty payments made to us under our
license agreements, in addition to compensation under any
consulting agreements we may enter into with the third parties for
services by either our licensing division, our entertainment
division, or both. The failure of our licensees to satisfy their
obligations under these agreements, or their inability to operate
successfully or at all, could result in their breach and/or the
early termination of such agreements, their non-renewal of such
agreements or our decision to amend such, thereby eliminating some
or all of that stream of revenue. It is possible that the
milestones to be met under the terms of licensing agreements may
never be achieved which also could deprive us of additional
revenues. There can be no assurances that we will not lose the
licensees under our license agreements due to their failure to
exercise the option to renew or extend the term of those agreements
or the cessation of their business operations (as a result of their
financial difficulties or otherwise) without equivalent options for
replacement. Any of such failures could reduce the anticipated
revenue stream to be generated by the license agreements. In
addition, the failure of our licensees to meet their production,
manufacturing and distribution requirements, or to be able to
continue to import goods (including, without limitation, as a
result of labor strikes or unrest), could cause a decline in their
sales and potentially decrease the amount of royalty payments (over
and above any guaranteed minimums) due to us. Further,
the failure of our licensees and/or their third party
manufacturers, which we do not control, to adhere to local laws,
industry standards and practices generally accepted in the United
States in areas of worker safety, worker rights of association,
social compliance, and general health and welfare, could result in
accidents and practices that cause disruptions or delays in
production and/or substantial harm to the reputation of our brands,
any of which could have a material adverse effect on our business,
financial position, results of operations and cash
flows. A weak economy or softness in certain sectors
including apparel, consumer products, retail and entertainment
could exacerbate this risk. This, in turn, could decrease our
potential revenues and cash flows.
From time to time we may compete with kathy ireland Worldwide®
in securing advisory or representation agreements with potential
clients for EE1 which may create a conflict of interests for the
managing directors of EE1.
kathy ireland®
Worldwide is an established company
which has significant experience in assisting companies in the
promotion and management of their brands through licensing and
advisory agreements. Affiliates of
kathy ireland
® Worldwide are
responsible for the day to day operations of both EE1 and
kathy ireland
®
Worldwide. Part of EE1's business competes with
kathy ireland
®Worldwide in
identifying and securing clients for its advisory services. For
example, both EE1 and
kathy
ireland
®Worldwide are parties to substantial identical
representation agreements with Dada Media, Inc. and David Tutera.
The affiliates of
kathy
ireland
®Worldwide who are also responsible for day to
day operations at EE1 are able to determine which entity, either
kathy ireland
®
Worldwide or EE1, is referred to the potential client.
kathy ireland
® Worldwide has more
experience and resources and there are no assurances that conflicts
of interest which may arise will be resolved in our favor. As a
result, it is possible that we may lose out on potential business
opportunities.
We could become a party to litigation involving our licensed
products which could result in additional costs to us. Certain
licensed products may be more likely to lead to product liability
lawsuits than others, which could expose us to additional unknown
risks.
Although we are not responsible for the manufacturing, sale or
distribution of licensed products, it is possible our company could
be named as a defendant in litigation related to licensed products.
Certain licensed products may, by virtue of the industry in which
they are sold and the governmental regulations to which they are
subject, such as vaping products and cannabidiol product
categories, could be more likely to be the subject of litigation
than others. Notwithstanding that our standard form of license
agreements requires the licensee to indemnify us against ligation
involving the licensed products and to maintain product liability
insurance policies, it is possible that a licensee may fail to
maintain this coverage during the term of the license agreement.
While we would then have a right to terminate the license agreement
as a result of this breach of its terms, there are no assurances we
would not be required to expend significant funds and management
time defending our company in any potential product liability
insurance claim. There are no assurances that we would prevail in
any such litigation, which could subject us to judgments and costs
of settlements which could adversely impact our liquidity and
results of operations in future periods.
As a result of the intense competition within our targeted
licensees’ markets and the strength of some of their
competitors, we and our licensees may not be able to compete
successfully.
Many of our targeted trademark licenses are for products in the
apparel, fashion accessories, footwear, beauty and fragrance, home
products and décor, consumer electronics and entertainment
industries in which licensees face intense competition from third
party brands and licensees. In general, competitive factors include
quality, price, style, name recognition and service. In addition,
various fads and the limited availability of shelf space could
affect competition for our licensees’ products. Many of our
licensees’ competitors have greater financial, importation,
distribution, marketing and other resources than our licensees and
have achieved significant name recognition for their brand names.
Our licensees may be unable to compete successfully in the markets
for their products, and we may not be able to compete successfully
with respect to our licensing arrangements.
Our business is dependent on market acceptance of our brands and
the potential future products of our licensees bearing these
brands.
Although some of our targeted licensees might have guaranteed
minimum net sales and minimum royalties to us, a failure of our
brands or of products bearing our brands to achieve or maintain
market acceptance could cause a reduction of our licensing revenue
and could further cause existing licensees not to renew their
agreements. Such failure could also cause the devaluation of our
trademarks, which are our primary IP assets, making it more
difficult for us to renew our current licenses upon their
expiration or enter into new or additional licenses for our
trademarks. In addition, if such devaluation of our trademarks
were to occur, a material impairment in the carrying value of one
or more of our trademarks could also occur and be charged as an
expense to our operating results.
The industries in which we target to compete, including the apparel
industry, are subject to rapidly evolving trends and competition.
In addition, consumer tastes change rapidly. The licensees under
our licensing agreements may not be able to anticipate, gauge or
respond to such changes in a timely manner. Failure of our
licensees to anticipate, identify and capitalize on evolving trends
could result in declining sales of our brands and devaluation of
our trademarks. Continued and substantial marketing efforts, which
may, from time to time, also include our expenditure of significant
additional funds to keep pace with changing consumer demands, are
required to maintain market acceptance of the licensees’
products and to create market acceptance of new products and
categories of products bearing our trademarks; however, these
expenditures may not result in either increased market acceptance
of, or licenses for, our trademarks or increased market acceptance,
or sales, of our licensees’ products. Furthermore, while we
believe that we currently maintain sufficient control over the
products our licensees’ produce under our brand names through
the provision of trend direction and our right to preview and
approve a majority of such products, including their presentation
and packaging, we do not actually design or manufacture products
bearing our marks, and therefore, have more limited control over
such products’ quality and design than would a traditional
product manufacturer.
RISKS RELATED TO OUR PROFESSIONAL PRODUCTS DIVISION
The majority of our net sales to date in our professional products
division are generated on the basis of purchase orders, rather than
long term purchase commitments; which could adversely affect our
financial position and results of operations.
Our operating history is not long enough to evaluate the likelihood
of future cancellations or deferments of customer orders related to
product sales in our professional products division. Manufacturers
and distributors are currently contracted on a per order basis. The
lack of long-term purchase commitments creates a risk that product
demand may be reduced if orders are canceled or deferred or, in the
event of unanticipated demand, an inability to timely produce and
deliver our products. We do not have long-term agreements with our
distributors, manufacturers or suppliers and these parties may
disrupt or cancel a purchase order or defer or delay shipments of
our products at any time. Furthermore, because of our inability to
rely on enforceable purchase contracts, and our limited visibility
into future customer demand, actual net sales may be different from
our forecasts, which could adversely affect our financial position
and results of operations.
The beauty products business is highly competitive, and if we are
unable to compete effectively our results will suffer.
We face vigorous competition from companies much larger than ours
throughout the world, including multinational consumer product
companies. Almost all of these competitors have much greater
resources than we do and may be able to respond to changing
business and economic conditions more quickly than us. Competition
in the beauty business is based on pricing of products, innovation,
perceived value, service to the consumer, promotional activities,
advertising, special events, new product introductions, e-commerce
and m-commerce initiatives and other activities. It is difficult
for us to predict the timing and scale of our competitors’
actions in these areas. Our ability to compete also depends on the
continued strength of our brands, our ability to attract and retain
key talent and other personnel, the efficiency of our manufacturing
facilities and distribution network, and our ability to maintain
and protect our intellectual property and those other rights used
in our business. As a new company with limited brand recognition,
there are no assurances we will ever be able to effectively compete
in our target markets.
We may be unable to protect our intellectual property rights and/or
intellectual property rights licensed to us, and may be subject to
intellectual property litigation and infringement claims by third
parties.
We intend to protect our intellectual property through limited
patents and our unpatented trade secrets and know-how through
confidentiality or license agreements with third parties, employees
and consultants, and by controlling access to and distribution of
our proprietary information. However, this method may not afford
complete protection, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the
United States and unauthorized parties may copy or otherwise obtain
and use our products, processes or technology. Additionally, there
can be no assurance that others will not independently develop
similar know-how and trade secrets. We are also dependent upon the
owners of intellectual property rights licensed to us under various
wholesale license agreements to protect and defend those rights
against third party claims. If third parties take actions that
affect our rights, the value of our intellectual property, similar
proprietary rights or reputation or the licensors who have granted
us certain rights under wholesale license agreements, or we are
unable to protect the intellectual property from infringement or
misappropriation, other companies may be able to offer competitive
products at lower prices, and we may not be able to effectively
compete against these companies. We also face the risk of claims
that we have infringed third parties’ intellectual property
rights. Any claims of intellectual property infringement, even
those without merit, may require us to:
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defend against infringement claims which are expensive and time
consuming;
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cease making, licensing or using products that incorporate the
challenged intellectual property;
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re-design, re-engineer or re-brand our products or packaging;
or
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enter into royalty or licensing agreements in order to obtain the
right to use a third party’s intellectual
property.
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In the
event of claims by third parties for infringement of intellectual
property rights we license from third parties under wholesale
license agreements, we could be liable for costs of defending
allegations of infringement and there are no assurances the
licensors will either adequately defend the licensed intellectual
property rights or that they would prevail in the related
litigation. In that event, we would incur additional costs and may
deprived from generating royalties from these
agreements.
A disruption in operations or our supply chain could adversely
affect our business and financial results.
We are subject to the risks inherent in manufacturing our products,
including industrial accidents, environmental events, strikes and
other labor disputes, disruptions in supply chain or information
systems, loss or impairment of key manufacturing sites or
suppliers, product quality control, safety, increase in commodity
prices and energy costs, licensing requirements and other
regulatory issues, as well as natural disasters and other external
factors over which we have no control. If such an event were to
occur, it could have an adverse effect on our business and
financial results.
We are dependent upon suppliers for our raw materials which we
purchase on a per order basis without long term contracts and our
suppliers are dependent on the continued availability and pricing
of raw materials, either of which could negatively affect our
ability to manage costs and maintain profitable operating
margins.
We currently purchase our raw materials from suppliers with whom we
have no written purchase contracts. Any supplier and any order may
be terminated or rejected by any supplier at any time. Our reliance
on open orders, no preference or assurances from suppliers, and our
reliance on these suppliers, creates a risk that our supply of raw
materials may be interrupted at any time. We may not be able to
timely source another supplier, resulting in delays and decreased
sales. There are no assurances that we will be able to maintain
adequate stockpiles or that we will be able to acquire and
stockpile raw materials at reasonable costs. Our failure to ensure
a steady supply of raw material or any significant interruption in
the supply of raw materials could have a material adverse effect on
our operations and ability to timely fulfill orders, resulting in
lost orders and revenue.
We rely on third-parties to manufacture and to compound our
products, and we have no control over these manufactures and may
not be able to obtain quality products on a timely basis or in
sufficient quantity.
All of our products are manufactured or compounded by unaffiliated
third parties. We do not have any long-term contracts with any of
these third parties, and we expect to compete with other companies
for raw materials, production and import capacity. If we experience
significant increased demand, or need to replace an existing
manufacturer, there can be no assurance that additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any manufacturer or
compounder would allocate sufficient capacity to us in order to
meet our requirements. In addition, even if we are able to expand
existing or find new sources, we may encounter delays in production
and added costs as a result of the time it takes to engage third
parties. Any delays, interruption or increased costs in the
manufacturing or compounding of our products could have an adverse
effect on our ability to meet retail customer and consumer demand
for our products and result in lower revenues and net income both
in the short and long-term.
Adverse changes in political and economic policies of the
People’s Republic of China government could negatively affect
the production and cost of certain of our products and damage our
business.
Certain of our products are currently manufactured in China.
Accordingly, our business, financial condition, results of
operations and prospects are affected significantly by economic,
political and legal developments in China and relationships with
the United States. The PRC economy differs from the economies of
most developed countries in many respects, including:
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the higher level of government involvement and
regulation;
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the early stage of development of the market-oriented sector of the
economy;
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the rapid growth rate;
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the higher rate of inflation;
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tariffs and the higher level of control over foreign exchange;
and
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government control over the allocation of many
resources.
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Although the PRC government has in recent years implemented
measures emphasizing the utilization of market forces for economic
reform, the PRC government continues to exercise significant
control over economic growth in China through the allocation of
resources, controlling payment of foreign currency-denominated
obligations, setting monetary policy and imposing policies that
impact particular industries or companies in different ways. Any
adverse change in the economic conditions or government policies in
China or relationship with the United States could have a material
adverse effect on tariffs and the cost or availability of our
products and consequently have a material adverse effect on our
business and prospects.
Like other distributors and manufacturers of beauty products, we
face an inherent risk of exposure to product liability claims in
the event that the use of the products that we sell results in
injury.
While we believe we are currently materially compliant with
regulations covering our products, we may be subjected to various
product liability claims, including claims that the products we
sell contain contaminants, are improperly labeled or include
inadequate instructions as to use or inadequate warnings concerning
side effects and interactions with other substances. In addition,
we may be forced to defend lawsuits. While to date we have never
been subject to any product liability claim, given our limited
operating history we cannot predict whether product liability
claims will be brought against us in the future or predict the
effect of any resulting adverse publicity on our business.
Moreover, we may not have adequate resources in the event of a
successful claim against us. If our insurance protection is
inadequate and our third-party vendors do not indemnify us, the
successful assertion of product liability claims against us could
result in potentially significant monetary damages. In addition,
interactions of our products with other similar products,
prescription medicines and over-the-counter drugs have not been
fully explored. We may also be exposed to claims relating to
product advertising or product quality. People may purchase our
products expecting certain physical results, unique to beauty
products. If they do not perceive expected results to occur, such
individuals may seek monetary retribution.
Our business may be adversely affected by unfavorable publicity
within the beauty products market.
We believe that the beauty products market is significantly
affected by national media attention. As with any retail provider,
future scientific research or publicity may not be favorable to the
industry or to any particular product, and may not be consistent
with earlier favorable research or publicity. Because of our
dependence on consumers’ perceptions, adverse publicity
associated with illness or other adverse effects resulting from the
use of our products or any similar products distributed by other
companies and future reports of research that are perceived as less
favorable or that question earlier research, could have a material
adverse effect on our business, financial condition and results of
operations. We are highly dependent upon consumers’
perceptions of the safety and quality of our products as well as
similar products distributed by other companies. Thus, the mere
publication of reports asserting that beauty products may be
harmful or questioning their efficacy could have a material adverse
effect on our business, financial condition and results of
operations, regardless of whether such reports are scientifically
supported or whether the claimed harmful effects would be present
at the dosages recommended for such products.
Our success is dependent upon the successful introduction of our
new products and success in expanding the demand for existing
brands.
We believe the growth of our net sales is substantially dependent
upon our ability to introduce our products to the public. Our
ability to meet future obligations is dependent in large measure on
the success of our product sales. Subject to the availability of
sufficient capital and the further establishment of effective
distribution channels, we expect to introduce additional products.
The success of new products is dependent upon a number of factors,
including our ability to formulate products that will appeal to
consumers and respond to market trends in a timely manner. There
can be no assurance that our efforts to formulate new products will
be successful or that consumers will accept our new products. In
addition, products experiencing strong popularity and rapid growth
may not maintain their sales volumes over time.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
There may never be an active market for our common stock, which is
listed on the NYSE American.
Following
our initial public offering in November 2017, there currently is a
limited market for our common stock. Although our common stock is
listed on the NYSE American, trading of our common stock is limited
and sporadic and generally at very low volumes. Further, the price
at which our common stock has traded has been below its initial
public offering price. We expect that the price will continue to
fluctuate significantly in response to various factors, many of
which are beyond our control. The stock market in general, and
securities of small-cap companies in our industry in particular,
has experienced extreme price and volume fluctuations in recent
years. Continued market fluctuations could result in further
volatility in the price at which our common stock may trade, which
could cause its value to decline. A more active market for our
common stock may never develop. As a result, investors must bear
the economic risk of holding their shares of our common stock for
an indefinite period of time.
We are subject to the continued
listing standards of the NYSE American and our failure to satisfy
these criteria may result in delisting of our common
stock
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Our
common stock is listed on the NYSE American. In order to maintain
this listing, we must maintain certain share prices, financial and
share distribution targets, including maintaining a minimum amount
of shareholders’ equity and a minimum number of public
shareholders. In addition to these objective standards, the NYSE
American may delist the securities of any issuer (i) if, in its
opinion, the issuer’s financial condition and/or operating
results appear unsatisfactory; (ii) if it appears that the extent
of public distribution or the aggregate market value of the
security has become so reduced as to make continued listing on the
NYSE American inadvisable; (iii) if the issuer sells or disposes of
principal operating assets or ceases to be an operating company;
(iv) if an issuer fails to comply with the NYSE American’s
listing requirements; (v) if an issuer’s common stock sells
at what the NYSE American considers a “low selling
price” and the issuer fails to correct this via a reverse
split of shares after notification by the NYSE American; or (vi) if
any other event occurs or any condition exists which makes
continued listing on the NYSE American, in its opinion,
inadvisable. If the NYSE American delists our common stock,
investors may face material adverse consequences, including, but
not limited to, a lack of trading market for our securities,
reduced liquidity, decreased analyst coverage of our securities,
and an inability for us to obtain additional financing to fund our
operations.
The price of our common stock may be volatile, and you could lose
all or part of your investment.
Stock markets have experienced extreme volatility that has often
been unrelated to the operating performance of particular
companies. These broad market fluctuations may adversely affect the
trading price of our common stock. In addition, limited trading
volume of our stock may contribute to its future volatility. Price
declines in our common stock could result from general market and
economic conditions, some of which are beyond our control, and a
variety of other factors, including any of the risk factors
described in this prospectus. These broad market and industry
factors may harm the market price of our common stock, regardless
of our operating performance, and could cause you to lose all or
part of your investment in our common stock since you might be
unable to sell your shares at or above the price you paid. Factors
that could cause fluctuations in the market price of our common
stock include the following:
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price and volume fluctuations in the overall stock market from time
to time;
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changes in operating performance and stock market valuations of
other hair care products companies generally;
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sales of shares of our common stock by us or our
shareholders;
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failure of securities analysts to initiate or maintain coverage of
us, changes in financial estimates by securities analysts who
follow our company, or our failure to meet these estimates or the
expectations of investors;
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the financial projections we may provide to the public, any changes
in those projections or our failure to meet those
projections;
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rumors and market speculation involving us or other companies in
our industry;
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actual or anticipated changes in our results of operations or
fluctuations in our results of operations;
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actual or anticipated developments in our business, our
competitors’ businesses or the competitive landscape
generally;
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litigation involving us, our industry or both, or investigations by
regulators into our operations or those of our
competitors;
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developments or disputes concerning our intellectual property or
other proprietary rights;
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announced or completed acquisitions of businesses or brands by us
or our competitors;
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new laws or regulations or new interpretations of existing laws or
regulations applicable to our business;
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changes in accounting standards, policies, guidelines,
interpretations or principles;
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any significant change in our management; and
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general economic conditions and slow or negative growth of our
markets.
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In addition, in the past, following periods of volatility in the
overall market and the market price of a particular company’s
securities, securities class action litigation has often been
instituted against these companies. This litigation, if instituted
against us, could result in substantial costs and a diversion of
our management’s attention and resources.
We are an “emerging growth company,” and the reduced
reporting requirements applicable to emerging growth companies may
make our common stock less attractive to investors.
We are an “emerging growth company,” as defined in the
JOBS Act. For as long as we continue to be an emerging growth
company, we may take advantage of exemptions from various reporting
requirements that are applicable to other public companies but not
to “emerging growth companies,” including, but not
limited to:
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being permitted to provide only two years of audited financial
statements, in addition to any required unaudited interim financial
statements, with correspondingly reduced “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations” disclosures;
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not being required to comply with the auditor attestation
requirements in the assessment of our internal control over
financial reporting under Section 404 of the Sarbanes-Oxley Act of
2002, or “Sarbanes-Oxley Act”;
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not being required to comply with any requirement that may be
adopted by the Public Company Accounting Oversight Board regarding
mandatory audit firm rotation or a supplement to the
auditor’s report providing additional information about the
audit and the financial statements;
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reduced disclosure obligations regarding executive compensation in
our periodic reports and proxy statements; and
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exemptions from the requirements of holding a nonbinding advisory
vote on executive compensation and shareholder approval of any
golden parachute payments not previously approved.
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Investors may find our common stock less attractive if we choose to
rely on these exemptions. If some investors find our common stock
less attractive as a result of any choices to reduce future
disclosure, there may be a less active trading market for our
common stock and the price of our common stock may be more
volatile.
Our executive officers, directors and their affiliates may exert
control over us and may exercise influence over matters subject to
shareholder approval.
Our executive officers and directors, together with their
respective affiliates, beneficially own approximately 23.9% of our
outstanding common stock as of August 31, 2018. Accordingly, these
shareholders, if they act together, may exercise substantial
influence over matters requiring shareholder approval, including
the election of directors and approval of corporate transactions,
such as a merger. This concentration of ownership could have the
effect of delaying or preventing a change in control or otherwise
discourage a potential acquirer from attempting to obtain control
over us, which in turn could have a material adverse effect on the
market value of our common stock.
Future sales of our common stock by our existing shareholders could
cause our stock price to decline.
On
August 31, 2018, we had 8,123,928 shares of our common stock
outstanding, 6,203,067 of which are currently eligible for sale in
the public market, subject, in certain circumstances to the volume,
manner of sale and other limitations under Rule 144 promulgated
under the Securities Act of 1933, as amended, or “Securities
Act.” It is conceivable that shareholders may wish to sell
some or all of their shares. If our shareholders sell substantial
amounts of our common stock in the public market at the same time,
the market price of our common stock could decrease significantly
due to an imbalance in the supply and demand of our common stock.
Even if they do not actually sell the stock, the perception in the
public market that our shareholders might sell significant shares
of our common stock could also depress the market price of our
common stock. A decline in the price of shares of our common stock
might impede our ability to raise capital through the issuance of
additional shares of our common stock or other equity securities,
and may cause shareholders to lose part or all of their investment
in our shares of common stock.
If we fail to maintain an effective system of internal control over
financial reporting, we may not be able to accurately report our
financial results. As a result, current and potential shareholders
could lose confidence in our financial reporting, which would harm
our business and the trading price of our stock.
As described in our Annual Report on Form 10-K for the year ended
September 30, 2017, our management determined that, as of September
30, 2017, we did not maintain effective internal controls over
financial reporting based on criteria set forth by the Committee of
Sponsoring Organizations of the 2013 Treadway Commission in
Internal Control-Integrated Framework as a result of identified
material weaknesses in our internal control over financial
reporting. A material weakness is a deficiency, or a combination of
deficiencies, in internal control over financial reporting such
that there is a reasonable possibility that a material misstatement
of the company's annual or interim financial statements will not be
prevented or detected on a timely basis. While we have never been
required to restate our consolidated financial statements and
during fiscal 2018 we have taken steps necessary to remediate those
material weakness, if our actions are not sufficient, the existence
of any continuing material weaknesses in our internal control over
financial reporting increases the risk that a future restatement of
our consolidated financials is possible.
If securities or industry analysts do not publish research or
publish unfavorable or inaccurate research about our business, our
common stock share price and trading volume could
decline.
An active trading market for our common stock will depend, in part,
on the research and reports that securities or industry analysts
publish about us or our business. We may be unable to attract or
sustain coverage by well-regarded securities and industry analysts.
If either none or only a limited number of securities or industry
analysts cover us or our business, or if these securities or
industry analysts are not widely respected within the general
investment community, the trading price for our common stock would
be materially and negatively impacted. In the event we obtain
securities or industry analyst coverage, if one or more of the
analysts who cover us or our business downgrade our common stock or
publish inaccurate or unfavorable research about us or our
business, the price of our common stock would likely decline. If
one or more of these analysts cease coverage of us or our business,
or fail to publish reports on us or our business regularly, demand
for our common stock could decrease, which might cause the price of
our common stock and trading volume to decline.
Some provisions of our charter documents and North Carolina law may
have anti-takeover effects that could discourage an acquisition of
us by others, even if an acquisition would be beneficial to our
shareholders and may prevent attempts by our shareholders to
replace or remove our current management.
Provisions in our articles of incorporation and bylaws, as well as
provisions of North Carolina law, could make it more difficult for
a third party to acquire us or increase the cost of acquiring us,
even if doing so would benefit our shareholders, or remove our
current management. These include provisions that:
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permit our board of directors to issue up to 50,000,000 shares of
preferred stock, with any rights,
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preferences and privileges as they may designate;
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provide that all vacancies on our board of directors, including as
a result of newly created directorships, may, except as otherwise
required by law, be filled by the affirmative vote of a majority of
directors then in office, even if less than a quorum;
and
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do not provide for cumulative voting rights, thereby allowing the
holders of a majority of the shares of common stock entitled to
vote in any election of directors to elect all of the directors
standing for election.
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These provisions may frustrate or prevent any attempts by our
shareholders to replace or remove our current management by making
it more difficult for shareholders to replace members of our board
of directors, who are responsible for appointing the members of our
management. In addition, North Carolina has two primary
anti-takeover statutes, the Shareholder Protection Act and the
Control Share Acquisition Act, which govern the shareholder
approval required for certain business combinations. As permitted
by North Carolina law, we have opted out of both these provisions.
Accordingly, we are not subject to any anti-takeover effects of the
North Carolina Shareholder Protection Act or Control Share
Acquisition Act. Any provision of our articles of incorporation,
bylaws or North Carolina law that has the effect of delaying or
deterring a change in control could limit the opportunity for our
shareholders to receive a premium for their shares of common stock,
and could also affect the price that some investors are willing to
pay for our shares of common stock.
Sales of additional shares of common stock, including by us or our
directors and officers following expiration or early release of the
lock-up periods, could cause the price of our common stock to
decline.
Sales
of substantial amounts of our common stock in the public market, or
the availability of such shares for sale, by us or by others,
including the issuance of shares of common stock upon the exercise
of outstanding options and warrants, could adversely affect the
price of our common stock. In connection with this offering,
we and our directors and officers have entered into lock-up
agreements for a period of 90 days following this offering.
We and our directors and officers may be released from the
lock-up prior to its expiration period at the sole discretion of
the representative of the underwriters. See
“Underwriting.” Upon expiration or earlier
release of the lock-up, we and our directors and officers may sell
shares of our common stock into the market, which could adversely
affect the market price of our common stock.
We have additional securities available for issuance, which, if
issued, could adversely affect the rights of the holders of our
common stock.
In addition, the
issuance of shares upon exercise of our outstanding options and
warrants and/or future grants under our 2015 Equity Compensation
Plan may cause immediate and substantial dilution to our existing
shareholders.
Our
articles of incorporation, as amended, authorizes the issuance of
150,000,000 shares of our common stock and 50,000,000 shares of
preferred stock. In certain circumstances, the common stock, as
well as the awards available for issuance under our equity
incentive plans, can be issued by our board of directors, without
stockholder approval. Any future issuances of such stock would
further dilute the percentage ownership of us held by holders of
common stock. In addition, the issuance of certain securities,
including pursuant to the terms of our stockholder rights plan, may
be used as an “anti-takeover” device without further
action on the part of our stockholders, and may adversely affect
the holders of the common stock.
In
addition, the issuance of preferred stock may be used as an
“anti-takeover” device, and may adversely affect the
holders of the common stock. If our board of directors and
stockholders approved the use of “blank check”
preferred stock, our board of directors would be authorized to
create and issue from time to time, without further stockholder
approval, a certain number of shares of preferred stock, in one or
more series and to establish the number of shares of any series of
preferred stock and to fix the designations, powers, preferences
and rights of the shares of each series and any qualifications,
limitations or restrictions of the shares of each series. The
authority to designate preferred stock may be used to issue series
of preferred stock, or rights to acquire preferred stock, that
could dilute the interest of, or impair the voting power of,
holders of the common stock or could also be used as a method of
determining, delaying or preventing a change of
control.
Lastly,
w
e presently have options and warrants
that, if exercised, would result in the issuance of an additional
781,826 shares of our common stock, and we presently have an
additional 845,455 shares of our common stock reserved for future
grants under our 2015 Equity Compensation Plan. The issuance of
shares upon exercise of warrants and options, including future
grants under our 2105 Equity Compensation Plan, may result in
dilution to the interests of other shareholders including
purchasers of shares in this offering.
We have never paid dividends and have no plans to pay dividends in
the future.
Holders
of shares of our common stock are entitled to receive such
dividends as may be declared by our board of directors. To date, we
have paid no cash dividends on our shares of our preferred or
common stock and we do not expect to pay cash dividends in the
foreseeable future. We intend to retain future earnings, if any, to
provide funds for operations of our business. Therefore, any return
investors in our preferred or common stock may have will be in the
form of appreciation, if any, in the market value of their shares
of common stock.
UNDERWRITING
ThinkEquity,
a division of Fordham Financial Management, Inc., is acting as the
representative of the underwriters of this offering, or the
Representative. We have entered into an underwriting agreement
dated September 28, 2018 with the Representative.
Subject to the terms and conditions of the underwriting agreement,
we have agreed to sell to each underwriter named below and each
underwriter named below has severally and not jointly agreed to
purchase from us, at the public offering price per share less the
underwriting discounts set forth on the cover page of this
prospectus, the number of shares of common stock listed next to its
name in the following table:
Underwriters
|
|
ThinkEquity, a
division of Fordham Financial Management, Inc.
|
1,714,286
|
Total
|
1,714,286
|
All of
the shares to be purchased by the underwriters will be purchased
from us.
The
underwriting agreement provides that the obligations of the
underwriters to pay for and accept delivery of the shares of common
stock offered by this prospectus are subject to various conditions
and representations and warranties, including the approval of
certain legal matters by their counsel and other conditions
specified in the underwriting agreement. The shares of common stock
are offered by the underwriters, subject to prior sale, when, as
and if issued to and accepted by them. The underwriters reserve the
right to withdraw, cancel or modify the offer to the public and to
reject orders in whole or in part. The underwriters are obligated
to take and pay for all of the shares of common stock offered by
this prospectus if any such shares of common stock are taken, other
than those shares of common stock covered by the over-allotment
option described below.
Over-Allotment Option
We have
granted to the underwriters an option, exercisable no later than 45
calendar days after the closing of this offering, to purchase up to
an additional 257,142 shares of common stock (15% of
the shares of common stock sold in this offering) from us to cover
over-allotments, if any, at a price per share of common stock equal
to the public offering price, less the underwriting discounts and
commissions. The underwriters may exercise this option only to
cover over-allotments made in connection with this offering. If the
underwriters exercise this option in whole or in part, then the
underwriters will be severally committed, subject to the conditions
described in the underwriting agreement, to purchase these
additional shares of common stock. If any additional shares of
common stock are purchased, the underwriters will offer the
additional shares of common stock on the same terms as those on
which the shares of common stock are being offered
hereby.
Discounts and Commissions
The Representative has advised us that the underwriters propose to
offer the shares of common stock to the public at the public
offering price per share set forth on the cover page of this
prospectus. The underwriters may offer shares to securities dealers
at that price less a concession of not more than
$1.925 per share. After the initial offering to the
public, the public offering price and other selling terms may be
changed by the Representative.
The
following table summarizes the public offering price, underwriting
discounts and commissions and proceeds before expenses to us
assuming both no exercise and full exercise by the underwriters of
their over-allotment option:
|
|
Total Without
Over-allotment Option
|
Total With
Over-allotment Option
|
Public offering
price
|
$
3.50
|
$
6,000,001
|
$
6,899,998
|
Underwriting
discounts and commissions (7%)
|
$
0.245
|
$
420,000
|
$
483,000
|
Proceeds, before
expenses, to us
|
$
3.255
|
$
5,580,001
|
$
6,416,998
|
We
have agreed to reimburse the Representative for all
reasonable out-of-pocket accountable fees and costs incurred by the
Representative in connection with this offering up to a maximum of
$80,000 in the aggregate, including: (a) all filing fees and
communication expenses associated with the review of this offering
by the Financial Industry Regulatory Authority
(“FINRA”); (b) all fees and expenses relating to the
listing of the shares of our common stock on the NYSE American,
including any fees charged by the Depositary Trust Company for new
securities; (c) all fees, expenses and disbursements relating to
the registration, qualification or exemption of the shares of our
common stock offered hereby under the “blue sky”
securities laws of such states and other jurisdictions as the
Representative may reasonably designate, including, without
limitation, all filing and registration fees; (d) all fees,
expenses and disbursements relating to the registration,
qualification or exemption of securities offered under the
securities laws of foreign jurisdictions designated by the
Representative; (e) the costs of all mailing and printing of the
underwriting documents (including, without limitation, the
underwriting agreement, any blue sky surveys and, if appropriate,
any agreement among underwriters, selected dealers’
agreement, and underwriters’ questionnaire), and as many
preliminary and final prospectuses as the Representative may
reasonably deem necessary; (f) stock transfer and/or stamp taxes,
if any, payable upon the transfer of securities from us to the
underwriters; (g) the costs associated with bound volumes of the
public offering materials as well as commemorative mementos and
Lucite tombstones in such quantities as the Representative may
reasonably request; and (h) the Representative’s other
out-of-pocket fees and expenses together with the fees and expenses
of the underwriters’ legal counsel.
We have paid an expense deposit of
$20,000 to the Representative, which will be applied against these
out-of-pocket accountable fees and expenses that will be paid by us
to the underwriters in connection with this offering, and will be
reimbursed to us to the extent not incurred.
We
estimate the expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately
$550,663.
Representative’s Warrants
Upon
closing of this offering, we have agreed to issue to the
Representative as compensation warrants to purchase a number of
shares of common stock equal to 3% of the aggregate number of
shares of common stock sold in this offering, or the
Representative’s Warrants. The Representative’s
Warrants will be exercisable at a per share exercise price equal to
125% of the public offering price per share in this offering
(excluding the over-allotment option). The Representative’s
Warrants are exercisable at any time and from time to time, in
whole or in part, during the four and one half year period
commencing 180 days from the effective date of the registration
statement of which this prospectus is a part.
The
Representative’s Warrants have been deemed compensation by
FINRA and are therefore subject to a 180-day lock-up pursuant to
Rule 5110(g)(1) of FINRA. The Representative (or permitted
assignees under Rule 5110(g)(1)) will not sell, transfer, assign,
pledge, or hypothecate these warrants or the securities underlying
these warrants, nor will they engage in any hedging, short sale,
derivative, put, or call transaction that would result in the
effective economic disposition of the warrants or the underlying
securities for a period of 180 days from the effective date of the
registration statement. In addition, the warrants provide for
registration rights upon request, in certain cases. The demand
registration right provided will not be greater than five years
from the effective date of the registration statement in compliance
with FINRA Rule 5110(f)(2)(G)(iv). The piggyback registration right
provided will not be greater than seven years from the effective
date of the registration statement in compliance with FINRA Rule
5110(f)(2)(G)(v). We will bear all fees and expenses attendant to
registering the securities issuable on exercise of the warrants
other than underwriting commissions incurred and payable by the
holders. The exercise price and number of shares issuable upon
exercise of the warrants may be adjusted in certain circumstances
including in the event of a stock dividend or our recapitalization,
reorganization, merger or consolidation. However, the warrant
exercise price or underlying shares will not be adjusted for
issuances of shares of common stock at a price below the warrant
exercise price.
Right of First Refusal
Until
six months after the closing date of this offering, the
Representative will have, subject to certain exceptions, an
irrevocable right of first refusal to act as sole investment
banker, sole book-runner and/or sole placement agent, at the
Representative’s discretion, for each and every future public
equity and debt offering, including all equity linked financings,
during such six months, for us, or any successor to or any
subsidiary of us, on terms customary for the Representative. The
Representative will have the sole right to determine whether or not
any other broker-dealer shall have the right to participate in any
such offering and the economic terms of any such participation. The
Representative will not have more than one opportunity to waive or
terminate the right of first refusal in consideration of any
payment or fee.
Discretionary Accounts
The
underwriters do not intend to confirm sales of the securities
offered hereby to any accounts over which they have discretionary
authority.
Other
From time to time, certain of the underwriters and/or their
affiliates have provided, and may in the future provide, various
investment banking and other financial services for us for
which
services
they have
received and, may in the future receive, customary fees. In
the course of their businesses, the underwriters and their
affiliates may actively trade our securities or loans for their own
account or for the accounts of customers, and, accordingly, the
underwriters and their affiliates may at any time hold long or
short positions in such securities or loans. Except for services
provided in connection with this offering, no underwriter has
provided any investment banking or other financial services to us
during the 180-day period preceding the date of this prospectus and
we do not expect to retain any underwriter to perform any
investment banking or other financial services for at least 90 days
after the date of this prospectus.
Lock-Up Agreements
Pursuant
to “lock-up” agreements, we and our executive officers
and directors have agreed, subject to limited exceptions, without
the prior written consent of the Representative not to directly or
indirectly, offer to sell, sell, pledge or otherwise transfer or
dispose of any of shares 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)
our common stock, enter 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 shares of our common
stock, make any demand for or exercise any right or cause to be
filed a registration statement, including any amendments thereto,
with respect to the registration of any shares of common stock or
securities convertible into or exercisable or exchangeable for
common stock or any of our other securities or publicly disclose
the intention to do any of the foregoing, subject to customary
exceptions, for a period of 90 days from the date of this
prospectus.
Listing
Our
common stock is listed on the NYSE American under the symbol
“LEVB.”
Price Stabilization, Short Positions and Penalty Bids
In
connection with this offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price
of our common stock. Specifically, the underwriters may over-allot
in connection with this offering by selling more shares than are
set forth on the cover page of this prospectus supplement. This
creates a short position in our common stock for its own account.
The short position may be either a covered short position or a
naked short position. In a covered short position, the number of
shares of common stock over-allotted by the underwriters is not
greater than the number of shares of common stock that they may
purchase in the over-allotment option. In a naked short position,
the number of shares of common stock involved is greater than the
number of shares common stock in the over-allotment option. To
close out a short position, the underwriters may elect to exercise
all or part of the over-allotment option. The underwriters may also
elect to stabilize the price of our common stock or reduce any
short position by bidding for, and purchasing, common stock in the
open market.
The
underwriters may also impose a penalty bid. This occurs when a
particular underwriter or dealer repays selling concessions allowed
to it for distributing shares of common stock in this offering
because the underwriter repurchases the shares of common stock in
stabilizing or short covering transactions.
Finally,
the underwriters may bid for, and purchase, shares of our common
stock in market making transactions, including
“passive” market making transactions as described
below.
These
activities may stabilize or maintain the market price of our common
stock at a price that is higher than the price that might otherwise
exist in the absence of these activities. The underwriters are not
required to engage in these activities, and may discontinue any of
these activities at any time without notice. These transactions may
be effected on the national securities exchange on which our shares
of common stock are traded, in the over-the-counter market, or
otherwise.
Indemnification
We have
agreed to indemnify the underwriters against liabilities relating
to this offering arising under the Securities Act and the Exchange
Act, liabilities arising from breaches of some or all of the
representations and warranties contained in the underwriting
agreement, and to contribute to payments that the underwriters may
be required to make for these liabilities.
Electronic Distribution
This prospectus in electronic format may be made
availa
b
le on websites or
through other online services maintained by one or more of the
underwriters, or by their affiliates. Other than this
prospectus in electronic format, the information on any
underwriter’s website and any information contained in any
other website maintained by an underwriter is not part of this
prospectus or the registration statement of which this prospectus
forms a part, has not been approved and/or endorsed by us or any
underwriter in its capacity as underwriter, and should not be
relied upon by investors.
Selling Restrictions
No
action has been taken in any jurisdiction (except in the United
States) that would permit a public offering of our common stock, or
the possession, circulation or distribution of this prospectus
supplement, the accompanying prospectus or any other material
relating to us or our common stock in any jurisdiction where action
for that purpose is required. Accordingly, our common stock may not
be offered or sold, directly or indirectly, and none of this
prospectus supplement, the accompanying prospectus or any other
offering material or advertisements in connection with our common
stock may be distributed or published, in or from any country or
jurisdiction, except in compliance with any applicable rules and
regulations of any such country or jurisdiction.
European Economic Area
In
relation to each Member State of the European Economic Area which
has implemented the Prospectus Directive, each a “Relevant
Member State”, with effect from and including the date on
which the Prospectus Directive is implemented in that Relevant
Member State, or the “Relevant Implementation Date”,
our securities will not be offered to the public in that Relevant
Member State prior to the publication of a prospectus in relation
to our securities that has been approved by the competent authority
in that Relevant Member State or, where appropriate, approved in
another Relevant Member State and notified to the competent
authority in that Relevant Member State, all in accordance with the
Prospectus Directive, except that, with effect from and including
the Relevant Implementation Date, an offer of our securities may be
made to the public in that Relevant Member State at any
time:
●
to any legal entity
that is a qualified investor as defined in the Prospectus
Directive;
●
to fewer than 100
or, if the Relevant Member State has implemented the relevant
provision of the 2010 PD Amending Directive, 150 natural or legal
persons (other than qualified investors as defined in the
Prospectus Directive), as permitted under the Prospectus Directive,
subject to obtaining the prior consent of the manager for any such
offer; or
●
in any other
circumstances which do not require the publication by the issuer of
a prospectus pursuant to Article 3(2) of the Prospectus Directive,
provided that no such offer of the securities shall require the
issuer or any underwriter to publish a prospectus pursuant to
Article 3 of the Prospectus Directive.
For the
purposes of this provision, the expression an “offer of
securities to the public” in relation to any securities in
any Relevant Member State means the communication in any form and
by any means of sufficient information on the terms of the offer
and securities to be offered so as to enable an investor to decide
to purchase or subscribe securities, as the same may be varied in
that Relevant Member State by any measure implementing the
Prospectus Directive in that Relevant Member State and the
expression “Prospectus Directive” means Directive
2003/71/EC (and amendments thereto, including the 2010 PD Amending
Directive, to the extent implemented in the Relevant Member State),
and includes any relevant implementing measure in each Relevant
Member State and the expression “2010 PD Amending
Directive” means Directive 2010/73/EU.
United Kingdom
In the
United Kingdom, this document is being distributed only to, and is
directed only at, and any offer subsequently made may only be
directed at persons who are “qualified investors” (as
defined in the Prospectus Directive) (i) who have professional
experience in matters relating to investments falling within
Article 19 (5) of the Financial Services and Markets Act 2000
(Financial Promotion) Order 2005, as amended (the Order), and/or
(ii) who are high net worth companies (or persons to whom it may
otherwise be lawfully communicated) falling within Article 49(2)(a)
to (d) of the Order (all such persons together, the relevant
persons). This document must not be acted on or relied on in the
United Kingdom by persons who are not relevant persons. In the
United Kingdom, any investment or investment activity to which this
document relates is only available to, and will be engaged in with,
relevant persons.
Canada
The
offering of our common stock in Canada is being made on a private
placement basis in reliance on exemptions from the prospectus
requirements under the securities laws of each applicable Canadian
province and territory where our common stock may be offered and
sold, and therein may only be made with investors that are
purchasing, or deemed to be purchasing, as principal and that
qualify as both an “accredited investor” as such term
is defined in National Instrument 45-106
Prospectus Exemptions
or subsection
73.3(1) of the
Securities
Act
(Ontario) and as a “permitted client” as
such term is defined in National Instrument 31-103
Registration Requirements, Exemptions and
Ongoing Registrant Obligations.
Any offer and sale of our
common stock in any province or territory of Canada may only be
made through a dealer that is properly registered under the
securities legislation of the applicable province or territory
wherein our common stock is offered and/or sold or, alternatively,
where such registration is not required.
Any
resale of our common stock by an investor resident in Canada must
be made in accordance with applicable Canadian securities laws,
which require resales to be made in accordance with an exemption
from, or in a transaction not subject to, prospectus requirements
under applicable Canadian securities laws. These resale
restrictions may under certain circumstances apply to resales of
the common stock outside of Canada.
Securities
legislation in certain provinces or territories of Canada may
provide a purchaser with remedies for rescission or damages if this
prospectus (including any amendment thereto) contains a
misrepresentation, provided that the remedies for rescission or
damages are exercised by the purchaser within the time limit
prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable
provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult
with a legal advisor.
Pursuant
to section 3A.3 (or, in the case of securities issued or guaranteed
by the government of a non-Canadian jurisdiction, section 3A.4) of
National Instrument 33-105
Underwriting Conflicts
(“NI
33-105”), the underwriters are not required to comply with
the disclosure requirements of NI 33-105 regarding underwriter
conflicts of interest in connection with this
offering.
Upon
receipt of this prospectus, each Québec investor hereby
confirms that it has expressly requested that all documents
evidencing or relating in any way to the sale of the securities
described herein (including for greater certainty any purchase
confirmation or any notice) be drawn up in the English language
only.
Par la réception de ce
document, chaque investisseur québecois confirme par les
présentes qu’il a expressément exigé que tous
les documents faisant foi ou se rapportant de quelque manière
que ce soit à la vente des valeurs mobilières
décrites aux présentes (incluant, pour plus de certitude,
toute confirmation d’achat ou tout avis) soient
rédigés en anglais seulement
.