Filed
Pursuant to Rule 424(b)(5)
Registration
No. 333-228773
(To the Prospectus
dated April 9, 2019)
2,000,000
Shares
Common
Stock
cbdMD,
Inc.
We are
offering 2,000,000 shares of our common stock in this
offering
, pursuant to this prospectus
supplement and the accompanying prospectus.
Our
common stock is listed on the NYSE American under the symbol
“YCBD.” On May 10, 2019, the last reported sale price
of our common stock was $6.77 per share.
Investing in our common stock involves a high degree of risk.
See “Risk Factors” beginning on page S-5 of this
prospectus supplement and on page 5 of the accompanying
prospectus for a discussion of information that should be
considered in connection with an investment in our common
stock.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
We are an “emerging growth company” as that term is
used in the Jumpstart Our Business Startups Act of 2012 (the
“JOBS Act”) and, as such, have elected to comply with
certain reduced public company reporting requirements. See
“Prospectus Summary—Implications of Being an Emerging
Growth Company.”
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|
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Public offering
price
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$
6.00
|
$
12,000,000
|
Underwriting
discounts and commissions
(1)
|
$
0.465
|
$
930,000
|
Proceeds, before
expenses, to us
|
$
5.535
|
$
11,070,000
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———————
(1)
In addition, we
have agreed to reimburse the underwriters for certain expenses. See
“Underwriting” on page S-12 of this prospectus
supplement for additional information.
We have granted the
representative of the underwriters an option to purchase up to an
additional 300,000 shares of common stock from us at the public
offering price, less the underwriting discounts and commissions,
within 45 days from the date of this prospectus to cover
over-allotments, if any.
The underwriters
expect to deliver the shares of common stock to the purchasers on
or about May 15, 2019.
ThinkEquity
a
division of Fordham Financial Management, Inc.
The date of this
prospectus supplement is May 13, 2019
TABLE
OF CONTENTS
Prospectus
Supplement
ABOUT THIS
PROSPECTUS SUPPLEMENT
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S-ii
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CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
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S-iii
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PROSPECTUS
SUPPLEMENT SUMMARY
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S-1
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THE
OFFERING
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S-4
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RISK
FACTORS
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S-5
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USE OF
PROCEEDS
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S-8
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CAPITALIZATION
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S-9
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DIVIDEND
POLICY
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S-10
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DILUTION
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S-11
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DESCRIPTION OF THE
SECURITIES WE ARE OFFERING
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S-12
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UNDERWRITING
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S-13
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LEGAL
MATTERS
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S-18
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EXPERTS
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S-18
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WHERE YOU CAN FIND
MORE INFORMATION
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S-18
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INFORMATION
INCORPORATED BY REFERENCE
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S-19
|
Prospectus
ABOUT THIS
PROSPECTUS
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2
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AVAILABLE
INFORMATION
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2
|
OUR
COMPANY
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3
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CAUTIONARY
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
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4
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RISK
FACTORS
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5
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USE OF
PROCEEDS
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17
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DESCRIPTION OF
CAPITAL STOCK
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17
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DESCRIPTION OF
WARRANTS
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18
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MATERIAL FEDERAL
INCOME TAX CONSEQUENCES
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19
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PLAN OF
DISTRIBUTION
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19
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LEGAL
MATTERS
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20
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EXPERTS
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20
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INFORMATION
INCORPORATED BY REFERENCE
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20
|
ABOUT
THIS PROSPECTUS SUPPLEMENT
This document is in
two parts. The first part is the prospectus supplement, including
the documents incorporated by reference, which describes the
specific terms of this offering. The second part, the accompanying
prospectus, including the documents incorporated by reference,
provides more general information. Before you invest, you should
carefully read this prospectus supplement, the accompanying
prospectus, all information incorporated by reference herein and
therein, as well as the additional information described under
“Where You Can Find More Information” on page S-18 of
this prospectus supplement. These documents contain information you
should consider when making your investment decision. This
prospectus supplement may add, update or change information
contained in the accompanying prospectus. To the extent there is a
conflict between the information contained in this prospectus
supplement, on the one hand, and the information contained in the
accompanying prospectus or any document incorporated by reference
therein filed prior to the date of this prospectus supplement, on
the other hand, you should rely on the information in this
prospectus supplement. If any statement in one of these documents
is inconsistent with a statement in another document having a later
date — for example, a document filed after the date of this
prospectus supplement and incorporated by reference in this
prospectus supplement and the accompanying prospectus — the
statement in the document having the later date modifies or
supersedes the earlier statement.
You should rely
only on the information contained or incorporated by reference in
this prospectus supplement, the accompanying prospectus and in any
free writing prospectuses we may provide to you in connection with
this offering. We have not, and ThinkEquity, a division of Fordham
Financial Management, Inc., or ThinkEquity, has not, authorized any
other person to provide you with any information that is different.
If anyone provides you with different or inconsistent information,
you should not rely on it. We are offering to sell, and seeking
offers to buy, shares of our common stock only in jurisdictions
where offers and sales are permitted. The distribution of this
prospectus supplement and the offering of the common stock in
certain jurisdictions may be restricted by law. Persons outside the
United States who come into possession of this prospectus
supplement must inform themselves about, and observe any
restrictions relating to, the offering of the common stock and the
distribution of this prospectus supplement outside the United
States. This prospectus supplement does not constitute, and may not
be used in connection with, an offer to sell, or a solicitation of
an offer to buy, any securities offered by this prospectus
supplement by any person in any jurisdiction in which it is
unlawful for such person to make such an offer or
solicitation.
We further note
that the representations, warranties and covenants made by us in
any agreement that is filed as an exhibit to any document that is
incorporated by reference in the accompanying prospectus were made
solely for the benefit of the parties to such agreement, including,
in some cases, for the purpose of allocating risk among the parties
to such agreements, and should not be deemed to be a
representation, warranty or covenant to you. Moreover, such
representations, warranties or covenants were accurate only as of
the date when made. Accordingly, such representations, warranties
and covenants should not be relied on as accurately representing
the current state of our affairs.
When used herein,
“cbdMD”, “we”, “us” or
“our” refers to cbdMD, Inc., a North Carolina
corporation formerly known as Level Brands, Inc., and our
subsidiaries, CBD Industries, LLC, a North Carolina limited
liability company formerly known as cbdMD, LLC, which we refer to
as “CBD Industries,”
Beauty and Pinups, LLC, a North Carolina limited
liability company which we refer to as “Beauty &
Pin-Ups”, I | M 1, LLC, a California limited liability
company, which we refer to as “I’M1”, Encore
Endeavor 1 LLC, a California limited liability company which we
refer to as “EE1,” and Level H&W, LLC, a North
Carolina limited liability company which we refer to as
“Level H&W.” In addition, “fiscal 2017”
refers to the year ended September 30, 2017, “fiscal
2018” refers to the year ended September 30, 2018, and
“fiscal 2019” refers to the year ending September 30,
2019.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION
The information
included or incorporated by reference into this prospectus
supplement and the accompanying prospectus contains forward-looking
statements within the meaning of Section 27A of the Securities Act
of 1933, as amended, or Securities Act, and Section 21E of the
Securities Exchange Act of 1934, as amended, or Exchange Act. These
forward-looking statements that relate
to future events or our future financial performance and involve
known and unknown risks, uncertainties and other factors that may
cause our actual results, levels of activity, performance or
achievements to differ materially from any future results, levels
of activity, performance or achievements expressed or implied by
these forward-looking statements. Words such as, but not limited
to, “believe,” “expect,”
“anticipate,” “estimate,”
“intend,” “plan,” “targets,”
“likely,” “aim,” “will,”
“would,” “could,” and similar expressions
or phrases identify forward-looking statements. We have based these
forward-looking statements largely on our current expectations and
future events and financial trends that we believe may affect our
financial condition, results of operation, business strategy and
financial needs. Actual results may differ materially from those
expressed or implied in such forward-looking statements as a result
of various factors. We do not undertake, and we disclaim, any
obligation to update any forward-looking statements or to announce
any revisions to any of the forward-looking statements, except as
required by law. Certain factors that could cause results to be
materially different from those projected in the forward-looking
statements include, but are not limited to, statements
about:
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management’s
broad discretion as to the use of proceeds from this
offering;
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immediate dilution
to purchasers of shares of our common stock in this
offering;
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the impact of fair
value accounting on our results of operations in future
periods;
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risks for failing
to comply with the continued listing standards of the NYSE
American;
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possible continuing
material weaknesses in our internal control over financial
reporting;
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the dilution to our
shareholders upon the possible future issuance of the Earnout
Shares;
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risks associated
with control by our executive officers, directors and
affiliates;
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expected lack of
dividends on our common stock;
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our history of
losses;
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laws and
regulations impacting our company; and
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risks associated
with our possible need to raise additional capital.
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We urge you to
consider these factors before investing in our common stock. The
forward-looking statements included in this prospectus supplement,
the accompanying prospectus and any other offering material, or in
the documents incorporated by reference into this prospectus
supplement, the accompanying prospectus and any other offering
material, are made only as of the date of the prospectus
supplement, the accompanying prospectus, any other offering
material or the incorporated document. For more detail on these and
other risks, please see “Risk Factors” in this
prospectus supplement, the accompanying prospectus, our Annual
Report on Form 10-K for our fiscal year ended September 30, 2018
filed on December 12, 2018, our Quarterly Report on Form 10-Q/A for
the period ended December 31, 2018 filed on April 26, 2019 and our
subsequent filings with the Securities and Exchange Commission, or
SEC.
PROSPECTUS
SUPPLEMENT SUMMARY
The following information below is only a summary of more detailed
information included elsewhere in, or incorporated by reference in,
this prospectus supplement and the accompanying prospectus, and
should be read together with the information contained or
incorporated by reference in other parts of this prospectus
supplement and the accompanying prospectus. This summary highlights
selected information about us and this offering. This summary may
not contain all of the information that may be important to you.
Before making a decision to invest in our common stock, you should
read carefully all of the information contained in or incorporated
by reference into this prospectus supplement and the accompanying
prospectus, including the information set forth under the caption
“Risk Factors” in this prospectus supplement and the
accompanying prospectus as well as the documents incorporated
herein by reference, which are described under “Where You Can
Find More Information” and “Information Incorporated by
Reference” in this prospectus supplement.
Our Company
We operate our
business in five business units, including:
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Our newest business
unit, CBD Industries, was established in December 2018 in
connection with the mergers with Cure Based Development LLC, or
Cure Based Development. In conjunction with the mergers, we
acquired the cbdMD brand. CBD Industries produces
and distributes
various high-grade, premium cannabidiol, or CBD, products under the
cbdMD brand, including: tinctures, capsules, gummies, bath bombs,
vape oils, topical creams and animal treats and oils.
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Level H&W was established in September
2017
and has an exclusive license to the
kathy
ireland
® Health &
Wellness™ brand. Its goal is to create a brand which will
include a wide variety of licensed products and services, targeted
to both Baby Boomers as well as millennials. This unit began
operating in fiscal 2018.
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Founded in early
2017
and first conceptualized
by
kathy
ireland
® Worldwide
,
I'M1 is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
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Also founded in
2017, EE1 was established to serve as a producer and marketer of
experiential entertainment including recordings, film, TV, web and
live events, and entertainment experiences. EE1 also provides brand
management services including creative development and marketing,
brand strategy, and distribution support.
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"
Beauty belongs to
everyone
"
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Beauty &
Pin-Ups, our first business unit is a hair care line with a social
conscience and launched its products in 2015. We offer quality hair
care products, including shampoos, conditioners, styling aides and
a patented styling tool, through retailers and online outlets and
are expanding into licensing opportunities.
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Our business model
is designed with the goal of maximizing the value of our brands
through either acquisition of strategic brands with a portfolio of
products or entry into license agreements with partners that are
responsible for the design, manufacturing and distribution of our
licensed products. We promote our brands across multiple channels,
including print, television and social media. We believe that this
“omnichannel” (or multi-channel) approach, which we
expect will allow our customers to interact with each of our
brands, in addition to the products themselves, will be critical to
our success.
Recent Events
Mergers with Cure Based Development and non-cash impact of the
closing of the mergers on our financial statements
On
December 20, 2018, we completed the mergers with Cure Based
Development. As consideration for the mergers, we had a contractual
obligation to issue 15,250,000 shares of our common stock, or the
Initial Shares, to the former members of Cure Based Development,
together with an obligation to issue these former members an
additional 15,250,000 shares of common stock, or the Earnout
Shares, upon the satisfaction of certain aggregate net revenue
criteria by CBD Industries within 60 months following the closing
date, each subject to approval by our shareholders in conformity
with the rules of the NYSE American. At our 2019 annual meeting of
shareholders held on April 19, 2019, our shareholders approved the
issuance of both the Initial Shares as well as the issuance of the
Earnout Shares following the satisfaction of the earnout criteria.
The Initial Shares were issued in April 2019 following the annual
meeting.
Preliminary Second Quarter 2019 Financial Results
Because
the mergers closed late in our first quarter of fiscal 2019, our
results of operations for the three months ended December 31, 2018
did not include operations of CBD Industries for a full fiscal
quarter. While we have yet to finalize our unaudited consolidated
financial statements for the quarter ended March 31, 2019, based
upon the preliminary information known to us at this time we expect
our unaudited consolidated total net sales for the three months
ended March 31, 2019 will range from $5.5 million to $5.8 million,
and our net loss for the three months ended March 31, 2019 will
range from $31.5 million to $32.5 million, of which approximately
$31 million will be attributable to the increase in the non-cash
contingent liability related to the Initial Shares and the Earnout
Shares that were accounted for as a contingent liability in
accordance with GAAP, and fair value was determined in accordance
with GAAP. The main driver of the increase in the value of the
contingent liability at March 31, 2019 was the increase of our
stock price, which was $4.42 at March 31, 2019 as compared to $3.09
on December 31, 2018. These total net sales and net loss ranges and
the non-cash increases in the contingent liability are preliminary
estimates, based upon calculation or figures that have been
prepared internally by our management and have not been reviewed by
our independent registered public accounting firm and may change
upon completion of our financial reporting processes and review.
There can be no assurance that our actual results for the three
months ended March 31, 2019 will not differ from the preliminary
financial data presented in this prospectus supplement and such
changes could be material. This preliminary financial data should
not be viewed as a substitute for full financial statements
prepared in accordance with GAAP and is not necessarily indicative
of the results to be achieved for any future period. Our unaudited
consolidated financial statements for the three and six months
ended March 31, 2019 will be contained in our Quarterly Report on
Form 10-Q for the period ended March 31, 2019 to be filed with the
SEC.
This
non-cash increase in the contingent liability will result in a
reduction in our shareholders’ equity at March 31, 2019 to
below the continued listing standards of the NYSE American.
Following shareholder approval in April 2019, we issued the Initial
Shares, and during the quarter ending June 30, 2019, we expect that
the amount of the non-cash contingent liability associated with the
Initial Shares will be reduced by $52.0 million to $54.0 million as
this liability is moved to shareholders’ equity based on the
issuance from April 19, 2019. The Earnout Shares will be valued for
any change on the balance of the contingent liability as of June
30, 2019. This change in the carrying value of the contingent
liability associated with the Initial Shares will result in a
non-cash gain which will, absent any unknown events at this time,
increase our shareholders’ equity to a level which we expect
will exceed the continued listing standards of the NYSE American.
The NYSE American Company Guide states that the NYSE American will
not normally suspend an issuer which is below the
shareholders’ equity criteria if it has a market
capitalization of $50 million, among other tests. Although our
market capitalization presently exceeds $50 million and we
currently meet the other continued listing requirements of the NYSE
American, there can be no assurance that the NYSE American will not
suspend us due to our failure to meet the shareholders’
equity continued listing requirement at March 31, 2019, or that the
expected change in the amount of the contingent liability at June
30, 2019 will be sufficient to result in a shareholders’
equity that meets the NYSE American continued listing requirements
or that our market capitalization will continue to be at least $50
million.
Risk
Factors
An investment in
our common stock involves risk. Before deciding whether to
participate in this offering, you should carefully consider the
risk factors beginning on page S-5 of this prospectus supplement
and the risk factors contained in the documents incorporated by
reference in this prospectus supplement and the accompanying
prospectus.
Corporate
Information
Our
company was formed under the laws of the state of North Carolina in
March 2015 under the name Level Beauty Group, Inc. In November 2016
we changed the name of our company to Level Brands, Inc. Effective
May 1, 2019, we changed our name to cbdMD, Inc. in connection with
the mergers with Cure Based Development.
Our principal executive offices are located at
4521 Sharon Road, Suite 450, Charlotte, NC 28211. Our telephone
number at this location is (704) 362-6286. Our current website
address is
www.levelbrands.com
.
We make our periodic and current reports that are filed with the
SEC available, free of charge, on our website as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC. The information contained in, and that can
be accessed through, our website is not incorporated into and is
not a part of this prospectus supplement.
Please see our
Annual Report on Form 10-K for the fiscal year ended September 30,
2018 and subsequently filed Quarterly Report on Form 10-Q/A for the
quarter ended December 31, 2018 and for additional information
about our business, operations and financial
condition.
Implications of Being an
Emerging Growth Company
We qualify as an
“emerging growth company” as defined in the JOBS Act.
As an emerging growth company, we intend to take advantage of
specified reduced disclosure and other requirements that are
otherwise applicable generally to public companies. These
provisions include:
●
allowance 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;
●
reduced disclosure
about our executive compensation arrangements;
●
no non-binding
advisory votes on executive compensation or golden parachute
arrangements; and
●
exemption from
auditor attestation requirements in the assessment of our internal
control over financial reporting.
We may take
advantage of these provisions for up to five years or such earlier
time that we are no longer an emerging growth company. We would
cease to be an emerging growth company on the date that is the
earliest of: (i) the last day of the fiscal year in which we have
total annual gross revenues of $1.07 billion or more; (ii) the last
day of our fiscal year following the fifth anniversary of the date
of the completion of our initial public offering; (iii) the date on
which we have issued more than $1.0 billion in nonconvertible debt
during the previous three years; or (iv) the date on which we are
deemed to be a large accelerated filer under the rules of the SEC.
We have taken advantage of reduced reporting requirements in this
prospectus. Accordingly, the information contained herein may be
different than the information you receive from other public
companies in which you have beneficial ownership.
THE OFFERING
The following
summary contains basic information about this offering. The summary
is not intended to be complete. You should read the full text and
more specific details contained elsewhere in this prospectus
supplement.
Issuer
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cbdMD, Inc.
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Common stock offered by us
|
2,000,000 shares at a purchase price of $6.00 per
share.
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Over-allotment option
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We have granted to the representative of the underwriters the
option, exercisable for 45 days from the date of this prospectus
supplement, to purchase up to additional 300,000 shares of common
stock to cover over-allotments.
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|
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Common stock to be outstanding after
this
offering
(1)
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27,420,356 shares.
If the representative’s
over-allotment option is exercised in full, the total number of
shares of common stock outstanding immediately after this offering
would be 27,720,356 shares.
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Representative’s Warrants
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The registration statement of which this prospectus supplement is a
part also registers for sale warrants to purchase 60,000 shares of
our common stock to the representative of the underwriters as a
portion of the underwriting compensation payable to the
underwriters in connection with this offering. The warrants will be
exercisable for a period commencing 180 days following the closing
of this offering and ending on the fifth anniversary of the closing
date at an exercise price equal to $7.50 per share, or 125% of the
initial public offering price of the common stock. Please see
“Underwriting — Representative’s Warrants”
for a description of these warrants.
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NYSE American symbol
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YCBD
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Use of proceeds
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We intend to use the net proceeds from this offering for working
capital. See “Use of Proceeds."
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Risk factors
|
This investment involves a high degree of risk. See “Risk
Factors” and other information included or incorporated by
reference in this prospectus supplement and the accompanying
prospectus for a discussion of certain factors you should carefully
consider before deciding to invest in shares of our common
stock.
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____________________
(1)
The number of
shares outstanding after this offering is based on 25,420,356
shares of common stock outstanding on May 10, 2019. The number of
shares of common stock to be outstanding after this offering
excludes the following as of May 10, 2019:
●
469,650 shares issuable upon the
exercise of outstanding options with a weighted average exercise
price of $5.19 per share;
●
an additional 120,000 shares
issuable upon the exercise of options granted on May 9, 2019 with
an exercise price of $5.41 per share;
●
363,605 shares issuable upon the
exercise of outstanding warrants with a weighted average exercise
price of $6.49 per share;
●
60,000 shares of our common stock
issuable upon the exercise of the representative’s warrants
to be issued upon the closing of this offering at an exercise price
equal to $7.50 per share, or 125% of the initial public offering
price of the common stock;
●
1,650,455 shares reserved for
future issuances under our equity compensation plan;
and
●
up to 15,250,000 Earnout Shares,
which may be issued subject to the satisfaction of earnout targets
pursuant to the rights granted as consideration for the mergers
with Cure Based Development, which closed on December 20,
2018.
RISK
FACTORS
Investing in our securities involves a
high degree of risk. You should carefully consider and evaluate all
of the information contained in this prospectus supplement, the
accompanying prospectus and in the documents we incorporate by
reference into this prospectus supplement and the accompanying
prospectus before you decide to purchase our securities. In
particular, you should carefully consider and evaluate the risks
and uncertainties described under the heading “Risk
Factors” in this prospectus supplement and the accompanying
prospectus.
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, 2018 and Item 1A, “Risk
Factors,” in our Quarterly Report on Form 10-Q/A for the
period ended December 31, 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.
Any of the risks and uncertainties set forth in
this prospectus supplement and the accompanying prospectus, as
updated by annual, quarterly and other reports and documents that
we file with the SEC and incorporate by reference into this
prospectus supplement or the accompanying prospectus could
materially and adversely affect our business, results of operations
and financial condition, which in turn could materially and
adversely affect the value of our common stock. As a result, you
could lose all or part of your investment.
RISKS RELATED TO THIS OFFERING
We have broad discretion in determining how to use the proceeds
from this offering and we cannot assure you that we will be
successful in spending the proceeds in ways that increase our
profitability or market value, or otherwise yield favorable
returns.
We plan to utilize
net proceeds of this offering for general working capital.
Nevertheless, we will have broad discretion in determining specific
expenditures. You will be entrusting your funds to our management,
upon whose judgment you must depend, with limited information
concerning the purposes to which the funds will ultimately be
applied. We may not be successful in spending the proceeds of this
offering in ways which increase our profitability or market value,
or otherwise yield favorable returns.
If you purchase shares of our common stock sold in this offering,
you will experience immediate and substantial dilution in the net
tangible book value of your shares. In addition, we may issue
additional equity or convertible debt securities in the future,
which may result in additional dilution to investors.
The
price per share of our common stock being offered is higher than
the net tangible book value per share of our outstanding common
stock prior to this offering. An aggregate of 2,000,000 shares of
our common stock were sold at a price of $6.00 per share, for
aggregate gross proceeds of approximately $ 10,940,000, and after
deducting commissions and estimated offering expenses payable by
us, but giving no effect to the exercise of the over-allotment
option. As a result, new investors in this offering will incur
immediate dilution of $5.92 per share. For a more detailed
discussion of the foregoing, see the section entitled
“Dilution” below. To the extent outstanding stock
options or warrants are exercised or the Earnout Shares are issued,
there will be further dilution to new investors.
The impact of changes in the fair value of our contingent
liabilities associated with the Earnout Shares may materially
impact our results of operations in future periods.
Under GAAP we are required to record a non-cash
contingent liability associated with both the Initial Shares and
the Earnout Shares. At December 31, 2018, the total of this
contingent liability was $71,353,483. While the contingent
liability associated with the Initial Shares will be recognized
during the quarter ending June 30, 2019 following the issuance of
the shares in April 2019, on a quarterly basis, we will be
obligated to reassess the obligations associated with the Earnout
Shares and, in the event our estimate of the
fair value
of the contingent consideration
changes, we will record increases or decreases in the
fair
value
as an adjustment to operating
earnings, which could have a material impact on our results of
operations and our shareholders’ equity. In particular,
changes in the market price of our common stock, which is one of
the inputs used in determining the amount of the non-cash
contingent liability, will result in increases or decreases in this
liability and positively or negatively impact our net loss or
profit for the period. Investors should not place undue reliance on
the impact of these non-cash changes when evaluating our results of
operations in future periods, as they have no impact on the
operations of the business.
RISKS RELATED TO OUR COMPANY
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. We expect that our
shareholders’ equity for the three months ended March 31,
2019 will be below the NYSE American shareholders’ equity
criteria.
Our
common stock is listed on the NYSE American. In order to maintain
this listing, we must maintain certain share prices, financial and
share distribution targets, including maintaining a minimum amount
of shareholders’ equity and a minimum number of public
shareholders. In addition to these objective standards, the NYSE
American may delist the securities of any issuer (i) if, in its
opinion, the issuer’s financial condition and/or operating
results appear unsatisfactory; (ii) if it appears that the extent
of public distribution or the aggregate market value of the
security has become so reduced as to make continued listing on the
NYSE American inadvisable; (iii) if the issuer sells or disposes of
principal operating assets or ceases to be an operating company;
(iv) if an issuer fails to comply with the NYSE American’s
listing requirements; (v) if an issuer’s common stock sells
at what the NYSE American considers a “low selling
price” and the issuer fails to correct this via a reverse
split of shares after notification by the NYSE American; or (vi) if
any other event occurs or any condition exists which makes
continued listing on the NYSE America, in its opinion, inadvisable.
As a result of the expected impact of the recognition of the
contingent liability associated with the change in the fair value
of both the Initial Shares and the Earnout Shares during the
quarter ended March 31, 2019 we expect that our shareholders’
equity will be reduced to an amount below the continued listing
criterial of the NYSE American. While we expect that the accounting
for the issuance of the Initial Shares during the quarter ending
June 30, 2019 will result in our shareholders’ equity
returning to an amount which exceeds the continued listing
standards of the exchange, we do not know if the exchange will
notify us of our non-compliance. 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.
We have identified weaknesses in our internal controls, and we
cannot provide assurances that these weaknesses will be effectively
remediated or that additional material weaknesses will not occur in
the future.
Our management is responsible for establishing and
maintaining adequate internal control over our financial reporting,
as defined in Rule 13a-15(f) under the Exchange Act. During the
first quarter of 2019, we determined that a material weakness in
our internal control over financial reporting existed as of
December 31, 2018 in that we did not maintain effective internal
controls related to accounting for the application of new
accounting rules. Specifically, we did not properly assess the
phase-in date of ASU 2016-01 which became material to our company
in the quarter ended December 31, 2018. The foregoing resulted in
the restatement of our unaudited condensed consolidated financial
statements for quarter ended December 31, 2018. While certain
remedial actions have been completed in the second quarter of
fiscal 2019, and we intend to continue to remediate these control
deficiencies, there can be no assurance that the internal control
over financial reporting, as modified, will enable us to identify
or avoid material weaknesses in the future.
Any failure to
maintain effective disclosure controls and internal control over
financial reporting could have a material and adverse effect on our
business and operating results, and cause a decline in the market
price of our common stock.
The issuance of shares the Earnout Shares and/or the issuance of
shares of our common stock upon exercise of our outstanding options
and warrants may cause immediate and substantial dilution to our
existing shareholders.
Upon
the terms set forth in the merger agreement, we may issue up to an
additional 15,250,000 Earnout Shares to the former members of Cure
Based Development upon the satisfaction of certain aggregate net
revenue criteria by CBD Industries within 60 months following the
closing date. In addition, we presently have options and warrants
that if exercised would result in the issuance of an additional
833,255 shares of our common stock. The issuance of the Earnout
Shares and/or shares of our common stock upon exercise of warrants
and options will result in dilution to the interests of other
shareholders.
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 52% of our outstanding
common stock as of May 10, 2019. 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. 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.
Because we do not anticipate paying any cash dividends on our
common stock in the foreseeable future, capital appreciation, if
any, will be your sole source of potential gain.
We
have never declared or paid cash dividends on our common stock. We
currently intend to retain all of our future earnings, if any, to
finance the growth and development of our business. As a result,
capital appreciation, if any, of our shares of common stock will be
your sole source of gain for the foreseeable future.
RISKS RELATED TO OUR OVERALL BUSINESS
We have a
history of losses and there are no assurances we will report
profitable operations in future periods
.
We
reported net losses to common shareholders of $2,109,893, $412,075
and $1,738,734 for the first quarter of fiscal 2019, fiscal 2018
and fiscal 2017, respectively. Until such time, if ever, that we
are successful in generating profits which are sufficient to pay
our operating expenses it is likely we will continue to report
losses in future periods. There are no assurances we will generate
substantial revenues from the new businesses or that we will ever
generate sufficient revenues to report profitable operations or a
net profit.
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.
USE
OF PROCEEDS
We will have broad
discretion in the use of the net proceeds from the sale of the
shares of common stock offered under this prospectus supplement. We
intend to use the net proceeds from the sale of our shares of
common stock for general working capital.
Pending our use of
the net proceeds from this offering, we intend to invest the net
proceeds in a variety of capital preservation investments,
including short-term, investment grade, interest bearing
instruments and U.S. government securities.
CAPITALIZATION
The
following table sets forth our capitalization as of December 31,
2018:
●
on
a pro forma basis to give effect to the issuance of the Initial
Shares of common stock in April 2019 following shareholder approval
as merger consideration under the terms of the mergers with Cure
Based Development, and the value increase to the additional paid-in
capital and the offsetting decrease in the contingent liability of
$53,215,163 resulting from such issuance, but gives no effect to
further changes in the value of additional paid-in capital and
offsetting increases or decreases in the contingent liability in
future periods which may be material; and
●
on
a pro forma as adjusted basis to give effect to the issuance of the
Initial Shares of common stock in April 2019 and the sale of shares
of common stock in this offering at the public offering price of $
per share, after deducting underwriting discounts and commissions
and other estimated offering expenses payable by us.
This
capitalization table should be read in conjunction with
Management’s Discussion and Analysis of Financial Condition
and Results of Operations and our consolidated financial statements
and related notes included in our Annual Report on Form 10-K for
the year ended September 30, 2018, and in our Quarterly Report on
Form 10-Q/A for the quarter ended December 1, 2018, and other
financial information included and incorporated by reference in
this prospectus supplement.
|
As of December
31, 2018
(unaudited)
|
|
|
|
|
Cash and cash
Equivalents
|
$
8,031,534
|
$
8,031,534
|
$
18,971,534
|
|
|
|
|
Preferred stock,
authorized 50,000,000 shares, $0.001 par value; no shares issued
and outstanding
|
-
|
-
|
-
|
Common stock,
authorized 150,000,000 shares, $0.001 par value; 10,095,356 shares,
25,345,356 shares and 27,345,356 shares, issued and outstanding,
respectively
|
10,095
|
25,345
|
27,345
|
Additional paid-in
capital
|
28,074,224
|
81,274,137
|
92,212,137
|
Accumulated
deficit
|
(11,291,930
)
|
(11,291,930
)
|
(11,291,930
)
|
Total cbdMD, Inc.
shareholders’ equity
|
16,792,389
|
70,007,552
|
80,947,552
|
Non-controlling
interest
|
1,332,824
|
1,332,824
|
1,332,824
|
Total
shareholders’ equity
|
18,125,213
|
71,340,376
|
82,280,376
|
Total
capitalization
|
$
26,156,747
|
$
79,371,910
|
$
101,251,910
|
————————
All information in
this Capitalization section
excludes:
●
an additional
75,000 shares of our common stock issued in January
2019;
●
469
,
650 shares issuable upon the exercise of outstanding options with a
weighted average exercise price of $5.19 per share
;
●
an
additional 120,000 shares issuable upon the exercise of options
granted on May 9, 2019 with an exercise price of $5.41 per
share;
●
363,605
shares issuable upon the exercise of outstanding warrants with a
weighted average exercise price of $6.49 per share;
●
60,000
shares of our common stock issuable upon the exercise of the
representative’s warrants to be issued upon the closing of
this offering at an exercise price equal to $7.50 per share, or
125% of the initial public offering price of the common
stock;
●
1,650,455
shares reserved for future issuances under our equity compensation
plan;
●
the future issuance
of up to 15,250,000 Earnout Shares; and
●
the
future impact of changes in the fair value of the contingent
liabilities associated with the Earnout Shares.
DIVIDEND POLICY
We
do not currently intend to pay dividends on our common stock. The
declaration, amount and payment of any future dividends on shares
of our common stock, if any, will be at the sole discretion of our
board of directors, which may take into account general and
economic conditions, our financial condition and results of
operations, our available cash and current and anticipated cash
needs, capital requirements, contractual, legal, tax and regulatory
restrictions, the implications of the payment of dividends by us to
our shareholders or by our subsidiaries to us, and any other
factors that our board of directors may deem relevant.
DILUTION
A purchaser of our
shares of our common stock in this offering will be diluted
immediately to the extent of the difference between the offering
price per shares and the pro forma as adjusted net book value per
share of our common stock upon the closing of this offering. Our
historical net tangible book value as of December 31, 2018, was
$(61,918,556), or approximately $ (6.13) per share of outstanding
common stock, based on 10,095,356 shares of common stock
outstanding as of December 31, 2018. Net tangible book value per
share of our common stock is determined at any date by subtracting
total liabilities from the amount of total tangible assets, and
dividing this amount by the number of shares of common stock deemed
to be outstanding as of that date.
Our pro
forma net tangible book value as of December 31, 2018 was
$(8,703,393) or approximately $(0.34) per share of common stock,
based upon 25,345,356 shares outstanding, after giving effect to
issuances on April 22, 2019 of 15,250,000 Initial Shares as
consideration in the mergers with Cure Based Development but giving
no effect to the issuance in January 2019 of 75,000 shares of our
common stock. After giving effect to (i) the pro forma issuance of
15,250,000 Initial Shares as consideration in the mergers with Cure
Based Development, and (ii) the sale of 2,000,000 shares of our
common stock at the offering price of $6.00 per share in this
offering, but giving no effect to the possible exercise of the
over-allotment option, our pro forma as adjusted net tangible book
value as of December 31, 2018 would have been approximately $2.2
million, or approximately $0.08 per share of outstanding common
stock. This amount represents an immediate increase in net tangible
book value of $6.22 per share of our common stock to our existing
shareholders and an immediate dilution of $ 5.92 per share of our
common stock to new investors purchasing securities in this
offering, as illustrated in the following table:
Public
offering price per share
|
|
$
6.00
|
Pro
forma net tangible book value per share before this offering as of
December 31, 2018
|
$
(0.34
)
|
|
Increase
in pro forma net tangible book value per share attributable to this
offering
|
$
5.79
|
|
Pro
forma as adjusted net tangible book value per share after giving
effect to this offering
|
|
$
0.08
|
Dilution
per share to new investors in this offering
|
|
$
5.92
|
The foregoing table
does not take into account further dilution to new investors that
could occur upon the exercise of outstanding options or warrants
having a per share exercise price less than the per share offering
price to the public in this offering.
The foregoing table
excludes the following as of May 10, 2019:
●
469,650
shares issuable upon the exercise of outstanding options with a
weighted average exercise price of $5.19 per share;
●
an
additional 120,000 shares issuable upon the exercise of options
granted on May 9, 2019 with an exercise price of $5.41 per
share;
●
363,605
shares issuable upon the exercise of outstanding warrants with a
weighted average exercise price of $6.49 per share;
●
60,000
shares of our common stock issuable upon the exercise of the
representative’s warrants to be issued upon the closing of
this offering at an exercise price equal to $7.50 per share, or
125% of the initial public offering price of the common
stock;
●
1,650,455
shares reserved for future issuances under our equity compensation
plan; and
●
up to
15,250,000 Earnout Shares.
DESCRIPTION OF THE SECURITIES WE ARE OFFERING
We are
offering pursuant to this prospectus supplement: (i) 2,000,000
shares of our common stock (and up to 300,000 additional shares to
cover over-allotments) and (ii) warrants to purchase 60,000 shares
of our common stock to the representative of the underwriters as a
portion of the underwriting compensation payable to the
underwriters in connection with this offering.
Common Stock
A
description of our common stock is set forth hereunder and under
the heading “Description of Capital Stock—Common
stock” starting on page 17 of the accompanying prospectus. As
of May 10, 2019, we had
25,420,356
shares of common stock
outstanding.
Representative’s Warrants
The
representative’s warrants will have an exercise price of
$7.50 per share, are exercisable commencing 180 days following
the closing of this offering and will expire five years from the
date of issuance. Please see “Underwriting —
Representative’s Warrants” in this prospectus
supplement for a more detailed description of the
representative’s warrants that we have agreed to issue to the
representative of the underwriters in this offering, subject to the
completion of the offering. The
summary of certain terms and provisions of the
representative’s warrants that are being offered pursuant to
this prospectus supplement is not complete and is subject to, and
qualified in its entirety by, the provisions of the form of
representative’s warrant, which will be filed by us as an
exhibit to a Current Report on Form 8-K filed on or about the date
of this prospectus supplement.
UNDERWRITING
ThinkEquity,
a division of Fordham Financial Management, Inc., is acting as the
representative of the underwriters of this offering, or the
Representative or ThinkEquity. We have entered into an underwriting
agreement dated May 13, 2019 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
supplement, 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.
|
2,000,000
|
Total
|
2,000,000
|
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 supplement 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 supplement 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 300,000 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 supplement. The underwriters may offer shares to
securities dealers at that price less a concession of not more than
$0.24
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
|
$
6.00
|
$
12,000,000
|
$
13,800,000
|
Underwriting
discounts and commissions (7.75%)
|
$
0.465
|
$
930,000
|
$
1,069,500
|
Proceeds, before
expenses, to us
|
$
5.535
|
$
11,070,000
|
$
12,730,500
|
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) the cost associated with
the use of Ipreo’s book-building prospectus tracking and
compliance software for this offering up to a maximum of $15,000;
and (b) the fees and expenses of the underwriters’ legal
counsel up to $65,000.
We
estimate the expenses of this offering payable by us, not including
underwriting discounts and commissions, will be approximately
$130,000.
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 date of the closing
of this offering.
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 date of the closing of
this offering. 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 date of
the closing of this offering in compliance with FINRA Rule
5110(f)(2)(G)(iv). The piggyback registration right provided will
not be greater than seven years from the date of the closing of
this offering 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 December 31,
2019, 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
and private equity financing, including equity-linked financings,
during such period, 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.
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.
In November 2018, we engaged ThinkEquity to serve
as our financial advisor in connection with the mergers with Cure
Based Development.
We paid ThinkEquity a fee of $100,000
and reimbursed it for
travel and other out-of-pocket
expenses incurred in connection with this engagement, including the
fees and expenses of ThinkEquity’s counsel.
During January 2019, we issued
Joseph
Gunnar & Co., LLC 25,000 shares of our restricted common stock
for certain advisory and investment
banking services. Pursuant to a “lock-up”
agreement
Joseph Gunnar & Co., LLC
agreed
not to directly or indirectly, offer
to sell, sell, pledge or otherwise transfer or dispose of any of
such shares for a period of 180 days from the date of the closing
of this offering.
Except
for services provided in connection with this offering and as our
financial advisor in connection with the mergers with Cure Based
Development and other advisory services disclosed above, no
underwriter has provided any investment banking or other financial
services to us during the 180-day period preceding the date of this
prospectus supplement 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
supplement.
Lock-Up
Agreements
Pursuant to
“lock-up” agreements, we and our executive officers and
directors and greater than 5% stockholders 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 supplement.
NYSE
American Listing
Our common stock is
listed on the NYSE American under the symbol
“YCBD.”
Transfer
Agent
Our transfer agent
is
VStock Transfer, LLC, 18 Lafayette
Place, Woodmere, New York 11598.
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 supplement 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 supplement in electronic format, the information on any
underwriters’ website and any information contained in any
other website maintained by an underwriter is not part of this
prospectus supplement 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 supplement, 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
.
LEGAL MATTERS
Pearlman Law Group
LLP, Fort Lauderdale, Florida will provide us with an opinion as to
certain legal matters in connection with the securities offered
hereby.
Certain matters under North
Carolina law have been passed upon for us by the Law Offices of
Jason H. Scott. Gracin & Marlow, LLP, New York, New York
is representing the underwriter.
EXPERTS
Our
consolidated balance sheets as of September 30, 2018 and 2017 and
the related consolidated statements of operations, comprehensive
income (loss), shareholders’ equity and cash flows for the
fiscal years ended September 30, 2018 and 2017 incorporated by
reference in the registration statement of which this prospectus
supplement is a part have been audited by Cherry Bekaert LLP,
independent registered public accounting firm, as indicated in
their report with respect thereto, and have been so included in
reliance upon the report of such firm given on their authority as
experts in accounting and auditing.
Cherry Bekaert LLP, independent registered public
accounting firm, as indicated in their report with respect
thereto,
has audited the consolidated financial statements
of Cure Based Development, LLC as of August 31, 2018 and for the
periods from January 1, 2018 to August 31, 2018 and from August 3,
2017 (inception) to December 31, 2017, included in our Current
Report on Form 8-K filed with the SEC on December 20, 2018, as
stated in their report thereon, dated November 27, 2018, included
therein, which is incorporated by reference herein. Such
consolidated financial statements are incorporated by reference in
reliance upon the report of such firm given upon their authority as
experts in accounting and auditing.
WHERE
YOU CAN FIND MORE INFORMATION
We file annual,
quarterly and other reports, proxy statements and other information
with the SEC. The SEC maintains a website at
www.sec.gov
that contains reports, proxy and information statements, and other
information regarding issuers such as our company that file
electronically with the SEC.
Our current website
address is
www.levelbrands.com
,
as we transition to our new name
cbdMD, Inc
. We make available free of charge, through the
Investor section of our website, annual reports on Form 10-K,
quarterly reports on Form 10-Q and current reports on Form 8-K and
amendments to those reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably
practicable after we electronically file such material with, or
furnish it to, the SEC.
INFORMATION INCORPORATED BY REFERENCE
The
SEC allows us to incorporate by reference the information we file
with them, which means that we can disclose important information
to you by referring you to those documents. The information
incorporated by reference is considered to be part of this
prospectus supplement, and later information filed with the
Securities and Exchange Commission will update and supersede this
information. We incorporate by reference the documents listed below
that we have previously filed with the SEC, except that information
furnished under Item 2.02 or Item 7.01 of our Current Reports on
Form 8-K or any other filing where we indicate that such
information is being furnished and not filed under the Exchange
Act, is not deemed to be filed and not incorporated by reference
herein:
●
our Annual Report on Form 10-K for the fiscal year ended September
30, 2018 as filed on December 12, 2018;
●
our Quarterly Report on Form 10-Q/A for the period ended December
31, 2018 as filed on April 26, 2019;
●
our Current Reports on Forms 8-K and 8-K/A as filed on October 3,
2018, December 4, 2018, December 20, 2018, December 28, 2018,
January 11, 2019, February 22, 2019, March 21, 2019, April 18,
2019, April 19, 2019, April 29, 2019, May 1, 2019 and May 10,
2019;
●
our definitive proxy statement on Schedule 14A as filed on March
21, 2019; and
●
the description of our common stock contained in our Registration
Statement on Form 8-A as filed with the SEC on November 15, 2017
and any further amendment or report filed hereafter for the purpose
of updating such description.
We
also incorporate by reference into this prospectus supplement
additional documents that we may file with the SEC under Sections
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
completion or termination of the offering, including all such
documents we may file with the SEC after the date of the initial
registration statement and prior to the effectiveness of the
registration statement, but excluding any information deemed
furnished and not filed with the SEC. Any statements contained in a
previously filed document incorporated by reference into this
prospectus supplement is deemed to be modified or superseded for
purposes of this prospectus supplement to the extent that a
statement contained in this prospectus supplement, or in a
subsequently filed document also incorporated by reference herein,
modifies or supersedes that statement.
This
prospectus supplement may contain information that updates,
modifies or is contrary to information in one or more of the
documents incorporated by reference in this prospectus supplement.
You should rely only on the information incorporated by reference
or provided in this prospectus supplement. We have not authorized
anyone else to provide you with different information. You should
not assume that the information in this prospectus supplement is
accurate as of any date other than the date of this prospectus
supplement or the date of the documents incorporated by reference
in this prospectus supplement.
We
will provide to each person, including any beneficial owner, to
whom this prospectus supplement is delivered, upon written or oral
request, at no cost to the requester, a copy of any and all of the
information that is incorporated by reference in this prospectus
supplement. You may request a copy of these filings, at no cost to
you, by telephoning us at (704) 445-5800 or by writing us at the
following address:
cbdMD,
Inc.
4521
Sharon Road
Suite
450
Charlotte,
NC 28211
Attention:
Investor Relations
You
may also access the documents incorporated by reference in this
prospectus supplement through our website at www.levelbrands.com.
The reference to our website is an inactive textual reference only
and, except for the specific incorporated documents listed above,
no information available on or through our website shall be deemed
to be incorporated in this prospectus supplement, the accompanying
prospectus or the registration statement of which it forms a
part.
The information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and we are not soliciting offers to buy these securities in any
state where the offer or sale is not permitted.
SUBJECT
TO COMPLETION, DATED APRIL 4, 2019
PROSPECTUS
$100,000,000
Level Brands, Inc.
COMMON STOCK
PREFERRED STOCK
WARRANTS
UNITS
We may offer and
sell, from time to time in one or more offerings, any combination
of common stock, preferred stock, warrants or units having a
maximum aggregate offering price of $100,000,000. When we decide to
sell a particular class or series of securities, we will provide
specific terms of the offered securities in a prospectus
supplement.
The prospectus
supplement may also add, update or change information contained in
or incorporated by reference into this prospectus. However, no
prospectus supplement shall offer a security that is not registered
and described in this prospectus at the time of its effectiveness.
You should read this prospectus and any prospectus supplement, as
well as the documents incorporated by reference or deemed to be
incorporated by reference into this prospectus, carefully before
you invest.
This prospectus may
not be used to offer or sell our securities unless accompanied by a
prospectus supplement relating to the offered
securities.
Our common stock is
listed on the NYSE American under the symbol “LEVB.”
The last reported sale price of our common stock on April 3, 2019
was $4.63 per share.
The aggregate
market value of our outstanding common stock held by non-affiliates
is $51,390,150 based on 10,170,356 shares of common stock
outstanding, of which 7,732,983 shares are held by non-affiliates,
and a per share value of $5.23 based on the closing price of our
common stock on the NYSE American on February 19, 2019. We have not
offered any securities pursuant to General Instruction I.B.6 of
Form S-3 during the prior 12 calendar month period that ends on and
includes the date of this prospectus.
These securities
may be sold directly by us, through dealers or agents designated
from time to time, to or through underwriters or through a
combination of these methods. See “Plan of
Distribution” beginning on page 18. We may also describe the
plan of distribution for any particular offering of our securities
in a prospectus supplement. If any agents, underwriters or dealers
are involved in the sale of any securities in respect of which this
prospectus is being delivered, we will disclose their names and the
nature of our arrangements with them in a prospectus supplement.
The net proceeds we expect to receive from any such sale will also
be included in a prospectus supplement.
Investing
in our securities involves various risks. See “Risk
Factors” on page 5 for more information on these risks.
Additional risks, if any, will be described in the prospectus
supplement related to a potential offering under the heading
“Risk Factors”. You should review that section of the
related prospectus supplement for a discussion of matters that
investors in such securities should consider.
Neither
the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities, or
passed upon the adequacy or accuracy of this prospectus or any
accompanying prospectus supplement. Any representation to the
contrary is a criminal offense.
The date of this
prospectus is April 9, 2019
ABOUT THIS PROSPECTUS
This
prospectus is part of a registration statement on Form S-3 that we
filed with the Securities and Exchange Commission utilizing a
“shelf” registration, or continuous offering, process.
Under the shelf registration process, we may issue and sell any
combination of the securities described in this prospectus in one
or more offerings with a maximum offering price of up to
$100,000,000.
This
prospectus provides you with a general description of the
securities we may offer. Each time we sell securities under this
shelf registration, we will provide a prospectus supplement that
will contain certain specific information about the terms of that
offering, including a description of any risks related to the
offering, if those terms and risks are not described in this
prospectus. A prospectus supplement may also add, update or change
information contained in this prospectus. If there is any
inconsistency between the information in this prospectus and the
applicable prospectus supplement, you should rely on the
information in the prospectus supplement. The registration
statement we filed with the Securities and Exchange Commission
includes exhibits that provide more details on the matters
discussed in this prospectus. You should read this prospectus and
the related exhibits filed with the Securities and Exchange
Commission and the accompanying prospectus supplement together with
additional information described under the headings
“Available Information” and “Information
Incorporated by Reference” before investing in any of the
securities offered.
We
may sell securities to or through underwriters or dealers, and also
may sell securities directly to other purchasers or through agents.
To the extent not described in this prospectus, the names of any
underwriters, dealers or agents employed by us in the sale of the
securities covered by this prospectus, the principal amounts or
number of shares or other securities, if any, to be purchased by
such underwriters or dealers and the compensation, if any, of such
underwriters, dealers or agents will be set forth in the
accompanying prospectus supplement.
The
information in this prospectus is accurate as of the date on the
front cover. Information incorporated by reference into this
prospectus is accurate as of the date of the document from which
the information is incorporated. You should not assume that the
information contained in this prospectus is accurate as of any
other date.
Unless the context otherwise indicates, when used
herein, the terms “Level Brands,” “we,”
“us”, “our” and similar terms refer to
Level Brands, Inc., a North Carolina corporation formerly known as
Level Beauty Group, Inc., and our subsidiaries
cbdMD, LLC, a North Carolina limited liability
company which we refer to as “cbdMD”,
Beauty and
Pinups, LLC, a North Carolina limited liability company which we
refer to as “Beauty & Pin-Ups”, I | M 1, LLC, a
California limited liability company, which we refer to as
“I’M1”, Encore Endeavor 1 LLC, a California
limited liability company which we refer to as “EE1,”
Level H&W, LLC, a North Carolina limited liability company
which we refer to as “Level Health & Wellness”,
AcqCo, LLC, a newly organized North Carolina limited liability
company and cbdMD LLC, a newly organized North Carolina limited
liability company. In addition, “fiscal 2017” refers to
the year ended September 30, 2017, "fiscal 2018" refers to the year
ended September 30, 2018, "fiscal 2019" refers to the year ending
September 30, 2019.
AVAILABLE INFORMATION
We
file annual, quarterly and other reports, proxy statements and
other information with the Securities and Exchange Commission. You
may read and copy any materials that we file at the Securities and
Exchange Commission’s Public Reference Room, 100 F Street,
N.E., Washington, D.C. 20549. You may obtain information on the
operation of the Public Reference Room by calling the Securities
and Exchange Commission at 1-800-SEC-0330. The Securities and
Exchange Commission also maintains a website at www.sec.gov that
contains reports, proxy and information statements, and other
information regarding issuers such as our company that file
electronically with the Securities and Exchange
Commission.
We
have filed a registration statement under the Securities Act of
1933 with the Securities and Exchange Commission with respect to
the securities to be sold by pursuant to this prospectus. This
prospectus has been filed as part of the registration statement.
This prospectus does not contain all of the information set forth
in the registration statement because certain parts of the
registration statement are omitted in accordance with the rules and
regulations of the Securities and Exchange Commission. You should
refer to the registration statement, including the exhibits, for
further information about us and the securities being offered
pursuant to this prospectus. Statements in this prospectus
regarding the provisions of certain documents filed with, or
incorporated by reference in, the registration statement are not
necessarily complete and each statement is qualified in all
respects by that reference.
Our
Internet address is www.levelbrands.com. We make available free of
charge, through the investor section of our website, annual reports
on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 as soon as reasonably practicable after we electronically
file such material with, or furnish it to, the Securities and
Exchange Commission.
OUR COMPANY
Level Brands
strives to be an innovative licensing, marketing and brand
management company with a focus on lifestyle-based products. We
champion a bold, unconventional image, and social consciousness for
our company and our brands. Working closely with our Chairman
Emeritus and Chief Brand Strategist, Kathy Ireland, the Chairman,
CEO and Chief Designer of
kathy
ireland
® Worldwide, we seek to secure strategic
licenses and joint venture partnerships for our brands, as well as
to grow the portfolio of brands through strategic
acquisitions.
We operate our
business in four business units, including:
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Level H&W was established in September
2017
and has an exclusive license to the
kathy
ireland
® Health &
Wellness™ brand. Its goal is to create a brand which will
include a wide variety of licensed products and services, targeted
to both Baby Boomers as well as millennials. This unit began
operating in fiscal 2018.
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Founded in early
2017
and first conceptualized
by
kathy
ireland
® Worldwide
,
I'M1 is a men’s lifestyle brand established to capitalize on
potentially lucrative licensing and co-branding opportunities with
products focused on millennials.
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Also founded in
2017, EE1 was established to serve as a producer and marketer of
experiential entertainment including recordings, film, TV, web and
live events, and entertainment experiences. EE1 also provides brand
management services including creative development and marketing,
brand strategy, and distribution support.
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"
Beauty belongs to
everyone
"
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Beauty &
Pin-Ups, our first business unit is a professional hair care line
with a social conscience and launched its products in 2015. We
offer quality hair care products, including shampoos, conditioners,
styling aides and a patented styling tool, through retailers and
online outlets and are expanding into licensing
opportunities.
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Our newest business
unit was established in December 2018 in connection with the
mergers with Cure Based Development LLC. In conjunction with the
mergers, we acquired the cbdMD brand. cbdMD produces
and distributes
various high-grade, premium cannabidiol ("CBD") products under the
cbdMD brand, including: tinctures, capsules, gummies, bath bombs,
vape oils, topical creams and animal treats and
oils.
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Our business model
is designed with the goal of maximizing the value of our brands
through entry into license agreements with partners that are
responsible for the design, manufacturing and distribution of our
licensed products. We promote our brands across multiple channels,
including print, television and social media. We believe that this
“omnichannel” (or multi-channel) approach, which we
expect will allow our customers to interact with each of our
brands, in addition to the products themselves, will be critical to
our success.
Corporate
information
Our
company was formed under the laws of the state of North Carolina in
March 2015 under the name Level Beauty Group, Inc. In November 2016
we changed the name of our company to Level Brands,
Inc.
Our principal executive offices are located at
4521 Sharon Road, Suite 450, Charlotte, NC 28211. Our telephone
number at this location is (704
) 362-6286. T
he information which appears on our website at
www.levelbrands.com is not part of this
prospectus.
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING
INFORMATION
This prospectus
contains forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. These
forward-looking statements are subject to known and unknown risks,
uncertainties and other factors which may cause actual results,
performance or achievements to be materially different from any
future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results
to differ materially from those in the forward-looking statements.
These factors include, but are not limited to:
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our ability to
successfully integrate the operations of Cure Based Development
following the mergers;
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our material
dependence on our relationships with
kathy ireland®
Worldwide and
certain of its affiliates;
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the significant
dilution to our shareholders of the issuance of the shares of our
common stock as the consideration for the mergers;
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our limited
operating history;
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the limited
operating histories of our subsidiaries;
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our history of
losses;
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the evolving and
highly competitive market in which cbdMD operates;
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laws and
regulations impacting cbdMD
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risks associated
with any failure by us to maintain an effective system of internal
control over financial reporting;
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the terms of
various agreements with
kathy
ireland®
Worldwide and possible impacts on our
management's abilities to make certain decisions regarding the
operations of our company;
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our dependence on
consumer spending patterns;
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our history on
reliance on sales from a limited number of customers, including
related parties;
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risks associated
with our failure to effectively promote our brands;
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our ability to
identify and successfully acquire additional brands and
trademarks;
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the operating
agreements of our I'M1 and EE1 subsidiaries;
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the accounting
treatment of securities we accept as partial compensation for
services;
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our ability to
liquidate securities we accept as partial compensation for services
and the possible impact of the Investment Company Act of
1940;
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the possible need
to raise additional capital in the future;
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terms of the
contracts with third parties in each of our divisions;
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possible conflicts
of interest with
kathy
ireland®
Worldwide;
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possible litigation
involving our licensed products;
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our ability to
effectively compete and our dependence on market acceptance of our
brands;
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the lack of
long-term contracts for the purchase of products from our
professional products division;
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our ability to
protect our intellectual property;
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additional
operational risks associated with our professional products
division;
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risks associated
with developing a liquid market for our common stock and possible
future volatility in its trading price;
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risks associated
with any future failure to satisfy the NYSE American LLC continued
listing standards;
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dilution to our
shareholders from the exercise of outstanding options and warrants
and the vesting of restricted stock awards;
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risks associated
with our status as an emerging growth company;
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risks associated
with control by our executive officers, directors and
affiliates;
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risks associated
with unfavorable research reports;
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risks associated
with our status as a public company; and
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risks associated
with articles of incorporation, bylaws and North Carolina
law.
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Most of these
factors are difficult to predict accurately and are generally
beyond our control. You should consider the areas of risk described
in connection with any forward-looking statements that may be made
herein. Readers are cautioned not to place undue reliance on these
forward-looking statements and readers should carefully review our
Annual Report on Form 10-K for the fiscal year ended September 30,
2018 as filed with the Securities and Exchange Commission on
December 12, 2018, including the risk factors described therein,
our Quarterly Report on Form 10-Q for the period ended December 31,
2018 as filed with the Securities and Exchange Commission on
February 14, 2019, as well as our other filings with the Securities
and Exchange Commission. Except for our ongoing obligations to
disclose material information under the Federal securities laws, we
undertake no obligation to release publicly any revisions to any
forward-looking statements, to report events or to report the
occurrence of unanticipated events. These forward-looking
statements speak only as of the date of this prospectus, and you
should not rely on these statements without also considering the
risks and uncertainties associated with these statements and our
business.
RISK FACTORS
An
investment in our securities involves a significant degree of risk.
You should not invest in our securities unless you can afford to
lose your entire investment. You should consider carefully the
following risk factors and other information in this prospectus
before deciding to invest in our securities. If any of the
following risks and uncertainties develops into actual events, our
business, financial condition or results of operations could be
materially adversely affected and you could lose your entire
investment in our company.
RISKS RELATED TO OUR OVERALL BUSINESS
THERE ARE NO ASSURANCES WE WILL SUCCESSFULLY INTEGRATE THE CURE
BASED DEVELOPMENT BUSINESSES INTO OUR BUSINESS, WHICH WOULD
ADVERSELY AFFECT THE COMBINED COMPANY’S FUTURE
RESULTS.
In December 2018 we
closed the mergers with Cure Based Development. The success of this
transaction will depend, in large part, on the ability of the
combined company to realize anticipated benefits from combining the
businesses of the companies. The failure to successfully integrate
and to successfully manage the challenges presented by the
integration process may result in the failure to achieve some or
all the anticipated benefits of the transaction, which may have a
material adverse effect on our operations and financial condition.
Potential difficulties that may be encountered in the integration
process include the following:
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the potential
disruption of, or the loss of momentum in, each company’s
ongoing business;
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using the combined
company’s assets efficiently to develop the business of the
combined company;
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potential unknown
or currently unquantifiable liabilities associated with the mergers
and the operations of the combined company;
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potential unknown
and unforeseen expenses and delays associated with the mergers and
the possibility that integration costs may be
material;
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performance
shortfalls at one or both companies as a result of the diversion of
management’s attention caused by integrating the
companies’ operations;
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necessary changes
in the operations and culture of the acquired company post-closing
in order to accommodate the changes from a privately-held company
with a limited operating history to a subsidiary of a public
company;
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complexities
associated with managing the combined businesses, including
difficulty addressing possible differences in corporate cultures
and management philosophies;
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significant
increases in our operating expenses; and
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additional
business, financial and operating risks we have yet to
identify.
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There are no
assurances that the mergers will ultimately result in the
realization of the anticipated economic benefits and other expected
synergies, or that such anticipated economic benefits and other
expected synergies will take longer than excepted to be realized.
If we are unable to fully realize the perceived benefits from the
mergers on a timely basis, we may be required to in the future
impair some or all of the goodwill associated with this transaction
which would materially adversely impact our results of operations
in future periods.
CBDMD LLC HAS A LIMITED OPERATING HISTORY THAT IMPEDES OUR ABILITY
TO EVALUATE ITS POTENTIAL FUTURE PERFORMANCE AND
STRATEGY.
Our wholly-owned
subsidiary, cbdMD, succeeded to the operations of Cure Based
Development following the closing of the mergers in December 2018.
We formed cbdMD in connection with the mergers and it had no
operating history prior to the mergers. Cure Based Development was
formed in 2017 and did not begin reporting any meaningful revenues
until mid-2018. Its limited operating history makes it difficult
for us to evaluate cbdMD’s future business prospects and make
decisions based on estimates of its future performance. To address
these risks and uncertainties, we must do the
following:
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successfully
execute our business strategy to offer the highest quality CBD in
the industry;
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introduce new,
differentiated botanical products;
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respond to
competitive business developments;
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effectively and
efficiently market and sell our line of CBD products;
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improve the
distribution of our CBD products; and
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attract, integrate,
retain and motivate qualified personnel.
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Our business
strategy may not be successful and we may not successfully address
these risks. In the event that we do not successfully address these
risks, our business, prospects, financial condition and results of
operations may be materially and adversely affected.
THE MARKET FOR CBD PRODUCTS IS HIGHLY COMPETITIVE, AND IF WE ARE
UNABLE TO COMPETE EFFECTIVELY AGAINST OUR COMPETITORS, OUR BUSINESS
AND OPERATING RESULTS COULD BE ADVERSELY AFFECTED.
cbdMD operates in a
competitive and rapidly evolving market. While we believe that the
industry is fragmented at the present time, there are numerous
competitors, including Green Roads, PlusCBD, and Select CBD in the
retail of CBD-based products, and in the digital selling space
Diamond CBD, CBDistillery, and Lazarus Naturals, some of whom are
larger and have a longer operating history and may have greater
financial resources than cbdMD does. Moreover, we expect
competition in the CBD industry to intensify following the passage
of the Farm Bill in December 2018. In the future we may also face
competition with larger, better capitalized companies who elect to
enter the market given the relatively low barriers to entry. cbdMD
believes that it competes effectively with its competitors because
of the quality of its products and customer service. However, no
assurance can be given that cbdMD will effectively compete with its
existing or future competitors. In addition, competition may drive
the prices of our products down, which may have a materially
adverse effect on our results of operations in future
periods.
LAWS AND REGULATIONS AFFECTING OUR INDUSTRY ARE EVOLVING UNDER THE
FARM BILL, FDA AND OTHER REGULATORY AUTHORITIES AND CHANGES TO ANY
REGULATION MAY MATERIALLY EFFECT OUR CBD OPERATIONS.
In conjunction with
the enactment of the Farm Bill, the United States Food and Drug
Administration (“FDA”) released a statement about the
status of CBD as a nutritional supplement, and the agency’s
actions in the short term with regards to CBD will guide the
industry. The statement noted that the Farm Bill explicitly
preserved the FDA’s authority to regulate products containing
cannabis or cannabis-derived compounds under the Federal Food,
Drug, and Cosmetic Act (FD&C Act) and Section 351 of the Public
Health Service Act. As a nutritional supplement manufacturer, cbdMD
LLC is also striving to meet or exceed the FDAs Good Manufacturing
Practice (GMP) guidelines. Any difficulties in compliance with
existing government regulation could increase our operating costs
and adversely impact our results of operations in future
periods.
In addition, as a
result of the Farm Bill’s recent passage, we expect that
there will be a constant evolution of laws and regulations
affecting the CBD industry which could affect cbdMD’s
operations. Local, state and federal hemp laws and regulations may
be broad in scope and subject to changing interpretations. These
changes may require us to incur substantial costs associated with
legal and compliance fees and ultimately require us to alter our
business plan. Furthermore, violations of these laws, or alleged
violations, could disrupt our business and result in a material
adverse effect on our operations. In addition, we cannot predict
the nature of any future laws, regulations, interpretations or
applications, and it is possible that regulations may be enacted in
the future that will be directly applicable to our
business.
THE ISSUANCES OF THE SHARES OF OUR COMMON STOCK TO THE CURE BASED
DEVELOMENT MEMBERS WILL SIGNIFICATLY DILUTE OUR EXISTING
SHAREHOLDERS. WE ARE REQUIRED TO MEET THE INITIAL LISTING STANDARDS
OF THE NYSE AMERICAN IN CONNECTION WITH SUCH
ISSUANCES.
Upon the terms set
forth in the merger agreement, on the closing date the members of
Cure Based Development received contractual rights to receive
15,250,000 shares of our common stock, representing approximately
60% of our outstanding common stock following such issuance, as the
consideration for the mergers. The merger agreement also provides
that we may issue up to an additional 15,250,000 shares of our
common stock as part of the merger consideration upon the
satisfaction of certain aggregate net revenue criteria by cbdMD
within 60 months following the closing date. As of the closing
date, there were 10,095,396 shares of our common stock issued and
outstanding. Our ability to issue these shares must be approved by
our shareholders at our upcoming 2019 annual meeting of
shareholders in accordance with the rules and regulations of NYSE
American. Assuming the approval of such issuances at the
shareholder meeting, the issuance of the first 15,250,000 shares,
but giving effect to no other change to the number of shares of our
common stock issued and outstanding or the possible issuance of
additional 15,250,000 shares in future periods, the members of Cure
Based Development would own 60.2% of our then outstanding shares of
common stock. Therefore, the ownership and voting rights of our
existing shareholders will be proportionally reduced.
Kathy
Ireland is not an officer or director of our company. We are
materially dependent upon our relationships with kathy
ireland® Worldwide and certain of its affiliates. If these
advisory agreements or license rights should be terminated or
expire, we would be deprived of the services and our business could
be materially adversely impacted
.
While affiliates of
kathy
ireland
® Worldwide are
minority owners of both I’M1 and EE1, the terms of the
operating agreements for those subsidiaries do not require them to
provide any services to us. We have entered into a non-exclusive
advisory agreement with
kathy
ireland
® Worldwide, as
amended, which expires in February 2025 under which we engaged it
to provide various consulting and advisory services to us. Ms.
Ireland serves in the non-executive role of Chairman Emeritus and
Chief Brand Strategist to us under this agreement. Ms. Ireland is
not a member of our management or board of directors, the title
Chairman Emeritus is an honorary title and she is not a founder or
co-founder of our company. Ms. Ireland provides services to us
solely under the terms of the non exclusive advisory agreement. We
have also entered into advisory agreements with additional
affiliates of
kathy
ireland
® Worldwide,
including Messrs. Roseberry, Carrasco, Meharey and Mendoza,
pursuant to which they provide various management and advisory
services to us, including key operational roles at I’M1 and
EE1. These agreements will expire in February 2019 and at that
point extend on a month to month basis unless cancelled by either
party. None of these services are provided on an exclusive basis,
each of these individuals may have a conflict of interest in that
they have a long term relationship with Kathy Ireland and have
derived substantial income from
kathy
ireland
® Worldwide and
there is no minimum number of hours which are required to be
devoted to us. In addition we have obtained a royalty free right to
license the intellectual property related to
kathy
ireland
® Health &
Wellness. Our business model is materially dependent upon our
continued relationship with
kathy
ireland
® Worldwide, Ms.
Ireland and her affiliates, including Messrs. Roseberry, Carrasco,
Meharey and Mendoza. If we should lose access to those
relationships or if the reputation of Ms. Ireland and/or
kathy
ireland
® Worldwide were to
be damaged, our results would suffer and there are no assurances we
would be able to continue to operate our company and develop our
brands as presently planned.
Our limited operating history does not afford investors a
sufficient history on which to base an investment
decision.
Level Brands was formed in March 2015. Until
fiscal 2017, our net sales were solely from our products division.
We began reporting revenues from our licensing division and our
entertainment division during the second quarter of fiscal 2017. In
September 2017, we entered into wholesale license agreements for
three new brands, including
kathy
ireland
® Health &
Wellness, a newly created brand. There are no assurances we will be
successful in generating any significant net sales in future
periods based upon these new agreements. Our operations are subject
to all the risks inherent in the establishment of a new business
enterprise. The likelihood of success must be considered in light
of the problems, expenses, difficulties, complications and delays
that are frequently encountered in a newly-formed company. There
can be no assurance that at this time that we will successfully
implement our business plan, operate profitably or will have
adequate working capital to meet our obligations as they become
due. Prospective investors must consider the risks and difficulties
frequently encountered by early stage companies, particularly in
rapidly evolving markets. We cannot be certain that our business
strategy will be successful or that we will successfully address
these risks. In the event that we do not successfully address these
risks, our business, prospects, financial condition, and results of
operations could be materially and adversely affected and we may
not have the resources to continue or expand our business
operations.
Our subsidiaries I’M1, EE1 and Level H&W are new entities
with a limited operating history and we recently entered into a
license agreement licensing the rights to certain intellectual
property related to kathy ireland ® Health & Wellness, a
newly created brand with no previous operating history, which does
not afford investors a sufficient history on our company which to
base an investment decision.
I’M1, EE1, and Level H&W are entities
formed in September 2016, March 2016, and September 2017
respectively. We acquired membership interests in I’M1 and
EE1 in January 2017. In September 2017 we entered into an exclusive
license agreement to license the trademark and intellectual
property rights for
kathy
ireland
® Health &
Wellness, a newly created brand with no previous operations. All of
these entities are in the early stages of their businesses and we
began reporting revenues from I’M1 and EE1 operations in the
second quarter of fiscal 2017 and reported revenues from Level
H&W in the second quarter of fiscal 2018. Our operations are
subject to all the risks inherent in the establishment of a new
business enterprise. The likelihood of success must be considered
in light of the problems, expenses, difficulties, complications and
delays that are frequently encountered in a newly-formed company.
There can be no assurance that at this time that we will operate
profitably or will have adequate working capital to meet our
obligations as they become due. Prospective investors must consider
the risks and difficulties frequently encountered by early stage
companies, particularly in rapidly evolving markets. We cannot be
certain that our business strategy will be successful or that we
will successfully address these risks. In the event that we do not
successfully address these risks, our business, prospects,
financial condition, and results of operations could be materially
and adversely affected and we may not have the resources to
continue or expand our business operations.
We have a
history of losses and there are no assurances we will report
profitable operations in future periods
.
We
reported net losses to common shareholders of $584,385, $412,075
and $1,738,734 for the first quarter of fiscal 2019, fiscal 2018
and fiscal 2017, respectively. Until such time, if ever, that we
are successful in generating profits which are sufficient to pay
our operating expenses it is likely we will continue to report
losses in future periods. Further, historically our revenues have
been attributable to sales from our products division and we did
not begin reporting revenues from either our licensing division or
our entertainment division until the second quarter of fiscal 2017.
There are no assurances we will generate substantial revenues from
the new businesses or that we will ever generate sufficient
revenues to report profitable operations or a net
profit.
The terms
of the various agreements between our company and kathy
ireland® Worldwide contain termination provisions which may
impact management's ability to make certain decisions regarding the
operation of our company
.
The master advisory and consulting agreement
with
kathy
ireland
® Worldwide on
which we are materially dependent provides that the agreement is
immediately terminable by
kathy
ireland
® Worldwide if any
officers are terminated or resign, including Mr. Roseberry in his
role as President and co-Managing Director of I'M1 and EE1, or if
additional officers are appointed for each I'M1 and EE1 without the
consent of
kathy
ireland
® Worldwide. The
wholesale license agreement for
kathy
ireland
® Health &
Wellness™ contains the right of
kathy
ireland
® Worldwide to
immediately terminate it if any officers are terminated or removed
or additional officers are appointed with respect to either I'M1 or
EE1, or if we compete with or invest in business that compete
with
kathy
ireland
® Worldwide. It is
possible, however, that our management's ability to make certain
operational decisions which it believes are otherwise in the best
interests of our company could be restricted in future periods if
these decisions could result in triggering the rights of
kathy
ireland
® Worldwide to
terminate any agreement.
Our
business depends on consumer spending patterns
.
Our
business is sensitive to a number of factors that influence the
levels of consumer spending, including political and economic
conditions such as recessionary environments, the levels of
disposable consumer income, consumer debt, interest rates and
consumer confidence. Reduced consumer spending on beauty products
could have an adverse effect on our operating results in future
periods.
Substantially
all of our net sales historically have been to a limited number of
customers, the loss of any of which would be materially adverse to
our company
.
Prior
to the close of the mergers in December 2018, substantially all of
our net sales in fiscal 2018 and 2017 were attributable to sales to
a limited number of customers. There are no assurances sales to
these customers will continue. While we expect to add additional
customers to our distribution network in the future for our
products division, and expand our licensing and consulting clients
in our other divisions, until such time as we are successful in
these efforts, of which there is no assurance, any significant
decrease in sales to any of our customers would have a material
adverse financial effect on our company.
A significant amount of our net sales were from customers who are
identified as related parties, the loss of any of which would be
materially adverse to our company.
A
significant amount of our net sales in fiscal 2018 and 2017,
totaling $1,992,046 and $1,731,238 respectively, were from
customers who are identified as related parties. There are no
assurances sales to these customers will continue. While we expect
to add additional customers in all of our businesses as we expand
our licensing and consulting clients, until such time as we are
successful in these efforts, of which there is no assurance, any
significant decrease in sales to any of our customers would have a
material adverse financial effect on our company.
If we fail to promote and maintain our brands in the market, our
businesses, operating results, financial condition, and our ability
to attract customers will be materially adversely
affected.
Our
success depends on our ability to create and maintain brand
awareness for our product offerings. This may require a significant
amount of capital to allow us to market our products and establish
brand recognition and customer loyalty. Additionally, many of the
companies offering similar products have already established their
brand identity within the marketplace. We can offer no assurances
that we will be successful in establishing awareness of our brands
allowing us to compete in this market. The importance of brand
recognition will continue to increase because low barriers of entry
to the industries in which we operate may result in an increased
number of direct competitors. To promote our brands, we may be
required to continue to increase our financial commitment to
creating and maintaining brand awareness. We may not generate a
corresponding increase in revenue to justify these
costs.
If we are unable to identify and successfully acquire additional
brands and trademarks, our growth may be limited, and, even if
additional trademarks are acquired, we may not realize anticipated
benefits due to integration or licensing difficulties.
A
component of our growth strategy is the acquisition of additional
brands and trademarks. We generally compete with traditional
apparel and consumer brand companies, other brand management
companies and private equity groups for brand acquisitions.
However, as more of our competitors continue to pursue our brand
management model, competition for specific acquisition targets may
become more acute, acquisitions may become more expensive and
suitable acquisition candidates could become more difficult to
find. In addition, even if we successfully acquire additional
trademarks or the rights to use additional trademarks, we may not
be able to achieve or maintain profitability levels that justify
our investment in, or realize planned benefits with respect to,
those additional brands.
Although we seek to temper our acquisition risks by following
acquisition guidelines relating to the existing strength of the
brand, its diversification benefits to us, its potential licensing
scale and credit worthiness of the licensee base, acquisitions,
whether they be of additional intellectual property, 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 and/or identifiable intangibles
associated with acquisitions.
When
we acquire IP assets or the companies that own them, our due
diligence reviews are subject to inherent uncertainties and may not
reveal all potential risks. Although we generally attempt to seek
contractual protections through representations, warranties and
indemnities, we cannot be sure that we will obtain such provisions
in our acquisitions or that such provisions will fully protect us
from all unknown, contingent or other liabilities or costs.
Finally, claims against us relating to any acquisition may
necessitate our seeking claims against the seller for which the
seller may not, or may not be able to, indemnify us or that may
exceed the scope, duration or amount of the seller’s
indemnification obligations.
No assurance can be given with respect to the timing, likelihood or
financial or business effect of any possible transaction. As a
result, there is no guarantee that our shareholders will achieve
greater returns as a result of any future acquisitions we
complete.
Each
of our I'M1 and EE1 subsidiaries are governed by operating
agreements that require us to distribute amounts to minority
members in certain circumstances. These distributions could reduce
the amount of operating capital we have in future periods. Under
the terms of the operating agreements for each of I’M1 and
EE1, Level Brands as the manager of these entities is responsible
for the operations, including the payment of the operating costs.
These costs are then deducted from the “profits” of the
entity and a portion of those amounts, as determined by the
particular operating agreement, will then be distributed to the
members. We own all of the voting interests in I'M1 and EE1. During
fiscal 2017 EE1 made a distribution to its members, no additional
distributions have been made or are currently planned.
Distributions to the members of I'M1 and EE1 will reduce the amount
of working capital available to us and could adversely impact our
liquidity in future periods.
The value of the equity securities we may accept as compensation
under consulting agreements will be subject to adjustment which
could result in losses to us in future periods. By accepting equity
securities as partial compensation for our services, we may be
adversely impacting our working capital in future
periods.
From time to time
we have entered into several agreements with third parties under
which we accepted shares of its common stock as partial
compensation for the services to be provided. For fiscal 2018 and
fiscal 2017, the value of these securities represented 60.6% and
43.2%, respectively, of our total net revenues, and for the first
quarter of fiscal 2019 was 37.6% of total net revenues. By
accepting equity securities as partial compensation for our
services in lieu of cash, we incur expenses to deliver the services
without the corresponding cash payments from our clients. As such,
we utilize a greater portion of our working capital to provide
services with the hope that we may benefit from an increase in the
market value of the equity securities we have received in future
periods. In addition, these securities will be reflected on our
balance sheets in future periods as “marketable
securities” or “investment other securities”. At
the end of each quarter, we will evaluate the carrying value of the
marketable securities or investment other securities for a decrease
in value. We will evaluate the company underlying these marketable
securities or investment other securities to determine whether a
decline in fair value below the amortized cost basis is other than
temporary. If the decline in fair value is judged to be
“other- than- temporary”, the cost basis of the
individual security will be written down to fair value as a new
cost basis and the amount of the write-down is charged to earnings.
During fiscal 2018 we recognized an other comprehensive loss of
$2,512,539 for loss on these securities, net of taxes.
Subsequent to our
most recently Form 10Q being filed, we have liquidated certain
positions in accordance with our intention to avoid being
classified as an Investment Company under the 1940 Act. As a result
of this liquidation, we recognized a significant other than
temporary impairment expense. As we continue to divest ourselves of
such positions in future quarters, such continued losses are
probable.
It is possible that we may continue to recognize
impairments on the carrying value of these securities in future
periods. Any future impairments would adversely affect our
operating results for the corresponding periods in that we would be
required to reduce the carrying value of these
investments.
We may be unable to liquidate securities we accept as partial
compensation under consulting agreements which could adversely
impact our liquidity in future periods.
Our
ability to sell any securities we accept as partial compensation
under consulting agreements is dependent upon a number of factors,
including the existence of a liquid market for the securities and
our compliance with the resale provisions of Federal securities
laws which require us to hold the shares for at least six months,
among other factors. While we expect to generally accept securities
from issuers who are publicly traded or who are expecting to become
a publicly traded company, there are no assurances a liquid market
will exist in such securities at such time as we are able to resell
the shares, or that the price we may receive will be commensurate
with the value of the services we are providing. In that event, we
would not benefit from the expected rise in the market price of the
securities we own as a result of our efforts on behalf of the
client company. In addition, depending upon the terms of our
business relationship with the issuer of the securities, it is
possible that from time to time we could be in possession of
non-public information regarding the issuer which could prohibit us
from disposing of the shares at a time when it is advantageous to
us to do so. If we are unable to readily liquidate any securities
we accept as compensation, we would be deprived of the cash value
of those services and we would be required to write-off the
carrying value of the securities which could adversely impact our
results of operations in future periods.
We are
subject to the risk of possibly becoming an investment company
under the Investment Company Act of 1940
.
The
Investment Company Act of 1940 regulates certain companies that
invest in, hold or trade securities. Although we do not believe we
are engaged in the business of investing, reinvesting or trading in
securities, and we do not currently hold ourselves out to the
public as being engaged in those activities, in the past we have
accepted securities of our client companies as partial
compensation. At December 31, 2018, we do not exceed the exemptive
asset and revenue thresholds under Section 3(a)(1)(C) of Investment
Company Act of 1940. So that we do not become an inadvertent
investment company, we will continue to limit the amount of equity
we accept as compensation for services provided so as to stay under
the income threshold as indicated in the Investment Company Act of
1940 going forward. As a result, we may structure transactions in a
less advantageous manner than if we did not have Investment Company
Act of 1940 concerns, or we may avoid otherwise economically
desirable transactions due to those concerns.
We may require additional capital to finance the acquisition of
additional brands and if we are unable to raise such capital on
beneficial terms or at all this could restrict our
growth.
We
may, in the future, require additional capital to help fund all or
part of potential acquisitions. If, at the time required, we do not
have sufficient cash to finance those additional capital needs, we
will need to raise additional funds through equity and/or debt
financing. We cannot guarantee that, if and when needed, additional
financing will be available to us on acceptable terms or at all.
Further, if additional capital is needed and is either unavailable
or cost prohibitive, our growth may be limited as we may need to
change our business strategy to slow the rate of our expansion
plans. In addition, any additional financing we undertake could
impose additional covenants upon us that restrict our operating
flexibility, and, if we issue equity securities to raise capital or
as acquisition consideration, our existing shareholders may
experience dilution or the new securities may have rights senior to
those of our common stock.
RISKS RELATED TO OUR LICENSING AND ENTERTAINMENT
DIVISIONS
The failure
of our licensees to adequately produce, market, import and sell
products bearing our brand names in their license categories,
continue their operations, renew their license agreements or pay
their obligations under their license agreements could result in a
decline in our results of operations
.
Our
future revenues from our licensing division will be substantially
dependent on royalty payments made to us under our license
agreements, in addition to compensation under any consulting
agreements we may enter into with the third parties for services by
either our licensing division, our entertainment division, or both.
The failure of our licensees to satisfy their obligations under
these agreements, or their inability to operate successfully or at
all, could result in their breach and/or the early termination of
such agreements, their non-renewal of such agreements or our
decision to amend such, thereby eliminating some or all of that
stream of revenue. It is possible that the milestones to be met
under the terms of licensing agreements may never be achieved which
also could deprive us of additional revenues. There can be no
assurances that we will not lose the licensees under our license
agreements due to their failure to exercise the option to renew or
extend the term of those agreements or the cessation of their
business operations (as a result of their financial difficulties or
otherwise) without equivalent options for replacement. Any of such
failures could reduce the anticipated revenue stream to be
generated by the license agreements. In addition, the failure of
our licensees to meet their production, manufacturing and
distribution requirements, or to be able to continue to import
goods (including, without limitation, as a result of labor strikes
or unrest), could cause a decline in their sales and potentially
decrease the amount of royalty payments (over and above any
guaranteed minimums) due to us. Further, the failure of our
licensees and/or their third party manufacturers, which we do not
control, to adhere to local laws, industry standards and practices
generally accepted in the United States in areas of worker safety,
worker rights of association, social compliance, and general health
and welfare, could result in accidents and practices that cause
disruptions or delays in production and/or substantial harm to the
reputation of our brands, any of which could have a material
adverse effect on our business, financial position, results of
operations and cash flows. A weak economy or softness in certain
sectors including apparel, consumer products, retail and
entertainment could exacerbate this risk. This, in turn, could
decrease our potential revenues and cash flows.
From time
to time we may compete with kathy ireland Worldwide® in
securing advisory or representation agreements with potential
clients for EE1 which may create a conflict of interests for the
managing directors of EE1
.
kathy
ireland
® Worldwide is an
established company which has significant experience in assisting
companies in the promotion and management of their brands through
licensing and advisory agreements. Affiliates of
kathy
ireland
® Worldwide are
responsible for the day to day operations of EE1 and
kathy
ireland
® Worldwide. Part
of EE1's business competes with
kathy ireland
®Worldwide in identifying and
securing clients for its advisory services. For example, both EE1
and
kathy
ireland
®Worldwide are
parties to substantial identical representation agreements with
Dada Media, Inc. and David Tutera. These affiliates will be able to
determine which entity, either
kathy
ireland
® Worldwide or EE1,
is referred to the potential client.
kathy
ireland
® Worldwide has
more experience and resources and there are no assurances that
conflicts of interest which may arise will be resolved in our
favor. As a result, it is possible that we may lose out on
potential business opportunities.
We could
become a party to litigation involving our licensed products which
could result in additional costs to us. Certain licensed products
may be more likely to lead to product liability lawsuits than
others, which could expose us to additional unknown
risks
.
Although
we are not responsible for the manufacturing, sale or distribution
of licensed products, it is possible our company could be named as
a defendant in litigation related to licensed products. Certain
licensed products may, by virtue of the industry in which they are
sold and the governmental regulations to which they are subject,
such as vaping products, could be more likely to be the subject of
litigation than others. Notwithstanding that our standard form of
license agreements requires the licensee to indemnify us against
ligation involving the licensed products and to maintain product
liability insurance policies, it is possible that a licensee may
fail to maintain this coverage during the term of the license
agreement. While we would then have a right to terminate the
license agreement as a result of this breach of its terms, there
are no assurances we would not be required to expend significant
funds and management time defending our company in any potential
product liability insurance claim. There are no assurances that we
would prevail in any such litigation, which could subject us to
judgments and costs of settlements which could adversely impact our
liquidity and results of operations in future periods.
As a result
of the intense competition within our targeted licensees’
markets and the strength of some of their competitors, we and our
licensees may not be able to compete
successfully
.
Many
of our targeted trademark licenses are for products in the apparel,
fashion accessories, footwear, beauty and fragrance, home products
and décor, consumer electronics and entertainment industries
in which licensees face intense competition from third party brands
and licensees. In general, competitive factors include quality,
price, style, name recognition and service. In addition, various
fads and the limited availability of shelf space could affect
competition for our licensees’ products. Many of our
licensees’ competitors have greater financial, importation,
distribution, marketing and other resources than our licensees and
have achieved significant name recognition for their brand names.
Our licensees may be unable to compete successfully in the markets
for their products, and we may not be able to compete successfully
with respect to our licensing arrangements.
Our business is dependent on market acceptance of our brands and
the potential future products of our licensees bearing these
brands.
Although
some of our targeted licensees might have guaranteed minimum net
sales and minimum royalties to us, a failure of our brands or of
products bearing our brands to achieve or maintain market
acceptance could cause a reduction of our licensing revenue and
could further cause existing licensees not to renew their
agreements. Such failure could also cause the devaluation of our
trademarks, which are our primary intellectual property, or
“IP”, assets, making it more difficult for us to renew
our current licenses upon their expiration or enter into new or
additional licenses for our trademarks. In addition, if such
devaluation of our trademarks were to occur, a material impairment
in the carrying value of one or more of our trademarks could also
occur and be charged as an expense to our operating
results.
The
industries in which we target to compete, including the apparel
industry, are subject to rapidly evolving trends and competition.
In addition, consumer tastes change rapidly. The licensees under
our licensing agreements may not be able to anticipate, gauge or
respond to such changes in a timely manner. Failure of our
licensees to anticipate, identify and capitalize on evolving trends
could result in declining sales of our brands and devaluation of
our trademarks. Continued and substantial marketing efforts, which
may, from time to time, also include our expenditure of significant
additional funds to keep pace with changing consumer demands, are
required to maintain market acceptance of the licensees’
products and to create market acceptance of new products and
categories of products bearing our trademarks; however, these
expenditures may not result in either increased market acceptance
of, or licenses for, our trademarks or increased market acceptance,
or sales, of our licensees’ products. Furthermore, while we
believe that we currently maintain sufficient control over the
products our licensees’ produce under our brand names through
the provision of trend direction and our right to preview and
approve a majority of such products, including their presentation
and packaging, we do not actually design or manufacture products
bearing our marks, and therefore, have more limited control over
such products’ quality and design than would a traditional
product manufacturer.
RISKS RELATED TO OUR PRODUCTS DIVISION
Our
revenues from our products division have been declining. We
recognized asset impairments of $502,000 in fiscal 2018 related to
this division
.
Net sales from our products division were lower in
each period in fiscal 2018 as compared to the same periods in
fiscal 2017, with an overall reduction in fiscal 2018 of 126.3%
from fiscal 2017. This decline continued into the first quarter of
fiscal 2019, with a 10% decline as compared to the first quarter of
2018.
As a result, during the fourth quarter of fiscal
2018 we recognized an impairment of $502,000, including an
inventory and prepaid marketing supplies write off of $262,000 and
an intangible asset impairment of $240,000. In addition, 78% of our
net sales in this division occurred in September 2018 and were made
to an entity affiliated with
kathy
ireland
® Worldwide. cbdMD
will also be reporting under the products division and it is
unknown if there will continue to be impairments, similar to what
we have had historically in future
periods.
The majority of our net sales to date in our products division are
generated on the basis of purchase orders, rather than long term
purchase commitments; which could adversely affect our financial
position and results of operations.
Our
operating history is not long enough to evaluate the likelihood of
future cancellations or deferments of customer orders related to
product sales in our products division. Manufacturers and
distributors are currently contracted on a per order basis. The
lack of long-term purchase commitments creates a risk that product
demand may be reduced if orders are canceled or deferred or, in the
event of unanticipated demand, an inability to timely produce and
deliver our products. We do not have long-term agreements with our
distributors, manufacturers or suppliers and these parties may
disrupt or cancel a purchase order or defer or delay shipments of
our products at any time. Furthermore, because of our inability to
rely on enforceable purchase contracts, and our limited visibility
into future customer demand, actual net sales may be different from
our forecasts, which could adversely affect our financial position
and results of operations.
We may be
unable to protect our intellectual property rights and/or
intellectual property rights licensed to us, and may be subject to
intellectual property litigation and infringement claims by third
parties
.
We
intend to protect our intellectual property through limited patents
and our unpatented trade secrets and know-how through
confidentiality or license agreements with third parties, employees
and consultants, and by controlling access to and distribution of
our proprietary information. However, this method may not afford
complete protection, particularly in foreign countries where the
laws may not protect our proprietary rights as fully as in the
United States and unauthorized parties may copy or otherwise obtain
and use our products, processes or technology. Additionally, there
can be no assurance that others will not independently develop
similar know-how and trade secrets. We are also dependent upon the
owners of intellectual property rights licensed to us under various
wholesale license agreements to protect and defend those rights
against third party claims. If third parties take actions that
affect our rights, the value of our intellectual property, similar
proprietary rights or reputation or the licensors who have granted
us certain rights under wholesale license agreements, or we are
unable to protect the intellectual property from infringement or
misappropriation, other companies may be able to offer competitive
products at lower prices, and we may not be able to effectively
compete against these companies. We also face the risk of claims
that we have infringed third parties’ intellectual property
rights. Any claims of intellectual property infringement, even
those without merit, may require us to:
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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 rely on third-parties to manufacture and to compound some of 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.
Some
of our products are manufactured or compounded by unaffiliated
third parties. We do not have any long-term contracts with any of
these third parties, and we expect to compete with other companies
for raw materials, production and import capacity. If we experience
significant increased demand, or need to replace an existing
manufacturer, there can be no assurance that additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any manufacturer or
compounder would allocate sufficient capacity to us in order to
meet our requirements. In addition, even if we are able to expand
existing or find new sources, we may encounter delays in production
and added costs as a result of the time it takes to engage third
parties. Any delays, interruption or increased costs in the
manufacturing or compounding of our products could have an adverse
effect on our ability to meet retail customer and consumer demand
for our products and result in lower revenues and net income both
in the short and long-term.
RISKS RELATED TO OWNERSHIP OF OUR COMMON STOCK
We are subject to the continued listing standards of the NYSE
American and our failure to satisfy these criteria may result in
delisting of our common stock.
Our
common stock is listed on the NYSE American. In order to maintain
this listing, we must maintain certain share prices, financial and
share distribution targets, including maintaining a minimum amount
of shareholders’ equity and a minimum number of public
shareholders. In addition to these objective standards, the NYSE
American may delist the securities of any issuer (i) if, in its
opinion, the issuer’s financial condition and/or operating
results appear unsatisfactory; (ii) if it appears that the extent
of public distribution or the aggregate market value of the
security has become so reduced as to make continued listing on the
NYSE American inadvisable; (iii) if the issuer sells or disposes of
principal operating assets or ceases to be an operating company;
(iv) if an issuer fails to comply with the NYSE American’s
listing requirements; (v) if an issuer’s common stock sells
at what the NYSE American considers a “low selling
price” and the issuer fails to correct this via a reverse
split of shares after notification by the NYSE American; or (vi) if
any other event occurs or any condition exists which makes
continued listing on the NYSE America, in its opinion, inadvisable.
If the NYSE American delists our common stock, investors may face
material adverse consequences, including, but not limited to, a
lack of trading market for our securities, reduced liquidity,
decreased analyst coverage of our securities, and an inability for
us to obtain additional financing to fund our
operations.
The issuance of shares upon exercise of our outstanding options and
warrants may cause immediate and substantial dilution to our
existing shareholders.
We
presently have options and warrants that if exercised would result
in the issuance of an additional 833,255 shares of our common
stock. The issuance of shares upon exercise of warrants and options
may result in dilution to the interests of other
shareholders.
The price of our common stock may be volatile, and you could lose
all or part of your investment.
Stock
markets have experienced extreme volatility that has often been
unrelated to the operating performance of particular companies.
These broad market fluctuations may adversely affect the trading
price of our common stock. In addition, limited trading volume of
our stock may contribute to its future volatility. Price declines
in our common stock could result from general market and economic
conditions, some of which are beyond our control, and a variety of
other factors, including any of the risk factors described in this
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” disclosure;
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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 7.8% of our outstanding
common stock as of March 20, 2019. However, when issued, the
aggregate of 15,250,000 shares which are part of the merger
consideration, including following the voting rights vesting over
five years of 8,750,000 of those shares, may result in a change of
control of our company. In addition, the merger agreement also
provides that we may issue up to an additional 15,250,000 shares of
our common stock as part of the merger consideration upon the
satisfaction of certain aggregate net revenue criteria by cbdMD LLC
within 60 months following the closing date. A change of control of
the company may result over time in the event of, and as a result
of, the issuance of those earnout shares. Accordingly, these
shareholders, if they act together, may exercise substantial
influence over matters requiring shareholder approval, including
the election of directors and approval of corporate transactions,
such as a merger. This concentration of ownership could have the
effect of delaying or preventing a change in control or otherwise
discourage a potential acquirer from attempting to obtain control
over us, which in turn could have a material adverse effect on the
market value of our common stock.
If securities or industry analysts do not publish research or
publish unfavorable or inaccurate research about our business, our
common stock share price and trading volume could
decline.
An
active trading market for our common stock will depend, in part, on
the research and reports that securities or industry analysts
publish about us or our business. We may be unable to attract or
sustain coverage by well-regarded securities and industry analysts.
If either none or only a limited number of securities or industry
analysts cover us or our business, or if these securities or
industry analysts are not widely respected within the general
investment community, the trading price for our common stock would
be materially and negatively impacted. In the event we obtain
securities or industry analyst coverage, if one or more of the
analysts who cover us or our business downgrade our common stock or
publish inaccurate or unfavorable research about us or our
business, the price of our common stock would likely decline. If
one or more of these analysts cease coverage of us or our business,
or fail to publish reports on us or our business regularly, demand
for our common stock could decrease, which might cause the price of
our common stock and trading volume to decline.
Public company requirements may strain our resources and divert
management’s attention, which could adversely impact our
ability to execute our strategy and harm operating
results.
We
are subject to the reporting requirements of the Securities
Exchange Act of 1934, the Sarbanes-Oxley Act, the Dodd-Frank Wall
Street Reform and Consumer Protection Act, which we refer to as
“Dodd-Frank,” the listing requirements of the NYSE
American and other applicable securities rules and regulations.
Despite recent reforms made possible by the JOBS Act, compliance
with these rules and regulations will nonetheless increase our
legal and financial compliance costs, make some activities more
difficult, time-consuming or costly and increase demand on our
systems and resources, particularly after we are no longer an
“emerging growth company.” While the members of our
board of directors have substantial experience relevant to our
business, they have limited experience with operations as a public
company upon which you can base your prediction of our future
success or failure in complying with public company requirements.
Our management may fail to comply with public company requirements,
or may fail to do so effectively and efficiently, each would
materially and adversely harm our ability to execute our strategy
and, consequently, our operating results.
Furthermore,
as a result of disclosure in filings required of a public company,
our business and financial condition will become more visible,
which may result in threatened or actual litigation, including by
competitors and other third parties. If these claims are
successful, our business and operating results could be harmed, and
even if the claims do not result in litigation or are resolved in
our favor, these claims, and the time and resources necessary to
resolve them, could divert the resources of management and
adversely affect our business, brand and reputation and results of
operations. Our new public company status and these new rules and
regulations may make it more expensive for us to obtain director
and officer liability insurance, and we may be required to accept
reduced coverage or incur substantially higher costs to obtain
coverage. These factors could also make it more difficult for us to
attract and retain qualified members of the board of directors,
particularly to serve on the audit committee and compensation
committee, and qualified executive officers.
Some provisions of our charter documents and North Carolina law may
have anti-takeover effects that could discourage an acquisition of
us by others, even if an acquisition would be beneficial to our
shareholders and may prevent attempts by our shareholders to
replace or remove our current management.
Provisions
in our articles of incorporation and bylaws, as well as provisions
of North Carolina law, could make it more difficult for a third
party to acquire us or increase the cost of acquiring us, even if
doing so would benefit our shareholders, or remove our current
management. These include provisions that:
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permit
our board of directors to issue up to 50,000,000 shares of
preferred stock, with any rights, preferences and privileges as
they may designate;
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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.
We have additional securities available for issuance, which, if
issued, could adversely affect the rights of the holders of our
common stock.
Our
articles of incorporation, as amended, authorizes the issuance of
150,000,000 shares of our common stock and 50,000,000 shares of
preferred stock. In certain circumstances, the common stock, as
well as the awards available for issuance under our equity
incentive plans, can be issued by our board of directors, without
stockholder approval. Any future issuances of such stock would
further dilute the percentage ownership of us held by holders of
common stock. In addition, the issuance of certain securities,
including pursuant to the terms of our stockholder rights plan, may
be used as an “anti-takeover” device without further
action on the part of our stockholders, and may adversely affect
the holders of the common stock.
In
addition, the issuance of preferred stock may be used as an
“anti-takeover” device and may adversely affect the
holders of the common stock. If our board of directors and
stockholders approved the use of “blank check”
preferred stock, our board of directors would be authorized to
create and issue from time to time, without further stockholder
approval, a certain number of shares of preferred stock, in one or
more series and to establish the number of shares of any series of
preferred stock and to fix the designations, powers, preferences
and rights of the shares of each series and any qualifications,
limitations or restrictions of the shares of each series. The
authority to designate preferred stock may be used to issue series
of preferred stock, or rights to acquire preferred stock, that
could dilute the interest of, or impair the voting power of,
holders of the common stock or could also be used as a method of
determining, delaying or preventing a change of
control.
USE OF PROCEEDS
Unless
otherwise indicated in an accompanying prospectus supplement, the
net proceeds from the sale of the securities offered hereby will be
used for general corporate purposes, which may include working
capital, capital expenditures, and development costs. We have not
allocated any portion of the net proceeds for any particular use at
this time. The net proceeds may be invested temporarily until they
are used for their stated purpose. Specific information concerning
the use of proceeds from the sale of any securities will be
included in the prospectus supplement relating to such
securities.
DESCRIPTION OF CAPITAL STOCK
Our
authorized capital is 150,000,000 shares of common stock, par value
$0.001 per share, and 50,000,000 shares of blank check preferred
stock, par value $0.001 per share. At March 26, 2019, there were
10,170,356 shares of common stock and no shares of preferred stock
issued and outstanding.
Common stock
Holders
of common stock are entitled to one vote for each share on all
matters submitted to a shareholder vote. Holders of common stock do
not have cumulative voting rights. Holders of common stock are
entitled to share in all dividends that the board of directors, in
its discretion, declares from legally available funds. In the event
of our liquidation, dissolution or winding up, subject to the
preferences of any shares of our preferred stock which may then be
outstanding, each outstanding share entitles its holder to
participate in all assets that remain after payment of liabilities
and after providing for each class of stock, if any, having
preference over the common stock.
Holders
of common stock have no conversion, preemptive or other
subscription rights, and there are no redemption provisions for the
common stock. The rights of the holders of common stock are subject
to any rights that may be fixed for holders of preferred stock,
when and if any preferred stock is authorized and issued. All
outstanding shares of common stock are duly authorized, validly
issued, fully paid and non-assessable.
Preferred stock
Our
board of directors, without further shareholder approval, may issue
preferred stock in one or more series from time to time and fix or
alter the designations, relative rights, priorities, preferences,
qualifications, limitations and restrictions of the shares of each
series. The rights, preferences, limitations and restrictions of
different series of preferred stock may differ with respect to
dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions
and other matters. Our board of directors may authorize the
issuance of preferred stock, which ranks senior to our common stock
for the payment of dividends and the distribution of assets on
liquidation. In addition, our board of directors can fix
limitations and restrictions, if any, upon the payment of dividends
on both classes of our common stock to be effective while any
shares of preferred stock are outstanding.
Limitations on liabilities for our officers and
directors
Sections
55-8-50 through 55-8-58 of the North Carolina General Statutes
permit a corporation to indemnify its directors, officers,
employees or agents under either or both a statutory or
non-statutory scheme of indemnification. Under the statutory
scheme, a corporation may, with certain exceptions, indemnify a
director, officer, employee or agent of the corporation who was,
is, or is threatened to be made, a party to any threatened, pending
or completed legal action, suit or proceeding, whether civil,
criminal, administrative, or investigative, because of the fact
that such person was a director, officer, agent or employee of the
corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another
corporation or enterprise. This indemnity may include the
obligation to pay any judgment, settlement, penalty, fine
(including an excise tax assessed with respect to an employee
benefit plan) and reasonable expenses incurred in connection with a
proceeding (including counsel fees), but no such indemnification
may be granted unless such director, officer, agent or employee (i)
conducted himself in good faith, (ii) reasonably believed (a) that
any action taken in his official capacity with the corporation was
in the best interest of the corporation or (b) that in all other
cases his conduct at least was not opposed to the
corporation’s best interest, and (iii) in the case of any
criminal proceeding, had no reasonable cause to believe his conduct
was unlawful. Whether a director has met the requisite standard of
conduct for the type of indemnification set forth above is
determined by the board of directors, a committee of directors,
special legal counsel or the shareholders in accordance with
Section 55-8-55. A corporation may not indemnify a director under
the statutory scheme in connection with a proceeding by or in the
right of the corporation in which the director was adjudged liable
to the corporation or in connection with a proceeding in which a
director was adjudged liable on the basis of having received an
improper personal benefit.
In
addition to, and separate and apart from the indemnification
described above under the statutory scheme, Section 55-8-57 of
the North Carolina General Statutes permits a corporation to
indemnify or agree to indemnify any of its directors, officers,
employees or agents against liability and expenses (including
attorney’s fees) in any proceeding (including proceedings
brought by or on behalf of the corporation) arising out of their
status as such or their activities in such capacities, except for
any liabilities or expenses incurred on account of activities that
were, at the time taken, known or believed by the person to be
clearly in conflict with the best interests of the corporation. Our
bylaws provide for indemnification to the fullest extent permitted
by law for persons who serve as a director, officer, agent or
employee of Level Brands or at the request of Level Brands serve as
a director, officer, agent or employee for any other corporation,
partnership, joint venture, trust or other enterprise, or as a
trustee or administrator under an employee benefit plan.
Accordingly, we may indemnify our directors, officers, agents or
employees in accordance with either the statutory or non-statutory
standards.
Sections
55-8-52 and 55-8-56 of the North Carolina General Statutes require
a corporation, unless its articles of incorporation provide
otherwise, to indemnify a director or officer who has been wholly
successful, on the merits or otherwise, in the defense of any
proceeding to which such director or officer was a party. Unless
prohibited by the articles of incorporation, a director or officer
also may make application and obtain court-ordered indemnification
if the court determines that such director or officer is fairly and
reasonably entitled to such indemnification as provided in Sections
55-8-54 and 55-8-56.
Finally,
Section 55-8-57 of the North Carolina General Statutes provides
that a corporation may purchase and maintain insurance on behalf of
an individual who is or was a director, officer, employee or agent
of the corporation against certain liabilities incurred by such
persons, whether or not the corporation is otherwise authorized by
the North Carolina Business Corporation Act to indemnify such
party. We have purchased a standard directors’ and
officers’ liability policy which will, subject to certain
limitations, indemnify us and our officers and directors for
damages they become legally obligated to pay as a result of any
negligent act, error, or omission committed by directors or
officers while acting in their capacity as such.
As
permitted by North Carolina law, Article 6 of our Articles of
Incorporation limits the personal liability of directors for
monetary damages for breaches of duty as a director arising out of
any legal action for breach of duty as a director.
Transfer Agent
The
transfer agent and registrar for our common stock is VStock
Transfer, LLC, 18 Lafayette Place, Woodmere, NY 11598.
Listing
Our
common stock is listed on the NYSE American under the symbol
“LEVB.”
DESCRIPTION OF WARRANTS
We
may issue warrants for the purchase of preferred stock or common
stock, or any combination of these securities. Warrants may be
issued independently or together with other securities and may be
attached to or separate from any offered securities. Each series of
warrants will be issued under a separate warrant agreement. The
following outlines some of the general terms and provisions of the
warrants that we may issue from time to time. Additional terms of
the warrants and the applicable warrant agreement will be set forth
in the applicable prospectus supplement.
The
following descriptions, and any description of the warrants
included in a prospectus supplement, may not be complete and is
subject to and qualified in its entirety by reference to the terms
and provisions of the applicable warrant agreement, which we will
file with the Securities and Exchange Commission in connection with
any offering of warrants.
General
The
prospectus supplement relating to a particular issue of warrants
will describe the terms of the warrants, including the
following:
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the
title of the warrants;
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the
offering price for the warrants, if any;
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the
aggregate number of the warrants;
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the
terms of the security that may be purchased upon exercise of the
warrants;
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if
applicable, the designation and terms of the securities that the
warrants are issued with and the number of warrants issued with
each security;
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if
applicable, the date from and after which the warrants and any
securities issued with the warrants will be separately
transferable;
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the
dates on which the right to exercise the warrants commence and
expire;
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if
applicable, the minimum or maximum amount of the warrants that may
be exercised at any one time;
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if
applicable, a discussion of material United States federal income
tax considerations;
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anti-dilution
provisions of the warrants, if any;
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redemption
or call provisions, if any, applicable to the warrants;
and
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any
additional terms of the warrants, including terms, procedures and
limitations relating to the exchange and exercise of the
warrants.
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Exercise of warrants
Each
warrant will entitle the holder of the warrant to purchase the
securities that we specify in the applicable prospectus supplement
at the exercise price that we describe in the applicable prospectus
supplement. Holders may exercise warrants at any time up to the
close of business on the expiration date set forth in the
applicable prospectus supplement. After the close of business on
the expiration date, unexercised warrants will be void. Holders may
exercise warrants as set forth in the prospectus supplement
relating to the warrants being offered. Until a holder exercises
the warrants to purchase any securities underlying the warrants,
the holder will not have any rights as a holder of the underlying
securities by virtue of ownership of warrants.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
A
summary of any material United States federal income tax
consequences to persons investing in the securities offered by this
prospectus will be set forth in any applicable prospectus
supplement. The summary will be presented for informational
purposes only, however, and will not be intended as legal or tax
advice to prospective purchasers. Prospective purchasers of
securities are urged to consult their own tax advisors prior to any
purchase of securities.
PLAN OF DISTRIBUTION
We
may sell the securities from time to time pursuant to underwritten
public offerings, "at-the-market" offerings, negotiated
transactions, block trades, or a combination of these methods. We
may sell the securities in one or more of the following ways from
time to time:
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to
or through underwriters or dealers;
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directly
to one or more purchasers; or
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through
agents.
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The
prospectus supplement (and any related free writing prospectuses
that we may authorize) will describe the terms of such offering,
including:
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the
name or names of any underwriters, dealers or agents;
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the
purchase price of the offered securities and the proceeds to Level
Brands from the sale;
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any
over-allotment options under which underwriters may purchase
additional securities from us;
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any
underwriting discounts and commissions or agency fees and other
items constituting underwriters' or agents' compensation;
and
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any
initial public offering price, any discounts or concessions allowed
or reallowed or paid to dealers and any securities exchanges on
which such offered securities may be listed.
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Any
initial public offering prices, discounts or concessions allowed or
reallowed or paid to dealers may be changed from time to
time.
If
underwriters are used in the sale, the underwriters will acquire
the offered securities for their own account and may resell them
from time to time in one or more transactions, including negotiated
transactions, at a fixed public offering price or at varying prices
determined at the time of sale. The offered securities may be
offered either to the public through underwriting syndicates
represented by one or more managing underwriters or by one or more
underwriters without a syndicate. Unless otherwise set forth in a
prospectus supplement, the obligations of the underwriters to
purchase any series of securities will be subject to certain
conditions precedent, and the underwriters will be obligated to
purchase all of such series of securities, if any are purchased
(other than securities subject to any over-allotment
option).
In
connection with underwritten offerings of the offered securities
and in accordance with applicable law and industry practice,
underwriters may over-allot or effect transactions that stabilize,
maintain or otherwise affect the market price of the offered
securities at levels above those that might otherwise prevail in
the open market, including by entering stabilizing bids, effecting
syndicate covering transactions or imposing penalty bids. A
stabilizing bid means the placing of any bid, or the effecting of
any purchase, for the purpose of pegging, fixing or maintaining the
price of a security. A syndicate covering transaction means the
placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in
connection with the offering. A penalty bid means an arrangement
that permits the managing underwriter to reclaim a selling
concession from a syndicate member in connection with the offering
when offered securities originally sold by the syndicate member are
purchased in syndicate covering transactions.
These
transactions may be effected on the NYSE American, in the
over-the-counter market, or otherwise. Underwriters are not
required to engage in any of these activities, or to continue such
activities if commenced.
If
a dealer is used in the sale, Level Brands will sell such offered
securities to the dealer, as principal. The dealer may then resell
the offered securities to the public at varying prices to be
determined by that dealer at the time for resale. The names of the
dealers and the terms of the transaction will be set forth in the
prospectus supplement relating to that transaction.
Offered
securities may be sold directly by Level Brands to one or more
institutional purchasers, or through agents designated by us from
time to time, at a fixed price or prices, which may be changed, or
at varying prices determined at the time of sale. Any agent
involved in the offer or sale of the offered securities in respect
of which this prospectus is delivered will be named, and any
commissions payable by Level Brands to that agent will be set
forth, in the prospectus supplement relating to that offering.
Unless otherwise indicated in such prospectus supplement, any such
agent will be acting on a best efforts basis for the period of its
appointment.
Underwriters,
dealers and agents may be entitled under agreements entered into
with us to indemnification by us against certain civil liabilities,
including liabilities under the Securities Act of 1933, or to
contribution with respect to payments that the underwriters,
dealers or agents may be required to make in respect thereof.
Underwriters, dealers and agents may be customers of, engage in
transactions with, or perform services for us and our affiliates in
the ordinary course of business.
Other
than our common stock, which is listed on the NYSE American, each
of the securities issued hereunder will be a new issue of
securities, will have no prior trading market, and may or may not
be listed on a national securities exchange. Any common stock sold
pursuant to a prospectus supplement will be listed on the NYSE
American, subject to official notice of issuance. Any underwriters
to whom we sell securities for public offering and sale may make a
market in the securities, but such underwriters will not be
obligated to do so and may discontinue any market making at any
time without notice. We cannot assure you that there will be a
market for the offered securities.
LEGAL MATTERS
The
validity of the securities offered by this prospectus will be
passed upon for us by Pearlman Law Group LLP, 200 S. Andrews
Avenue, Suite 901, Fort Lauderdale, Florida 33301. Certain matters
under North Carolina law have been passed upon for us by the Law
Offices of Jason H. Scott.
EXPERTS
Our
consolidated balance sheets as of September 30, 2018 and 2017 and
the related consolidated statements of operations, comprehensive
income (loss), shareholders’ equity and cash flows for the
fiscal years ended September 30, 2018 and 2017 incorporated by
reference in the registration statement of which this prospectus is
a part have been audited by Cherry Bekaert LLP, independent
registered public accounting firm, as indicated in their report
with respect thereto, and have been so included in reliance upon
the report of such firm given on their authority as experts in
accounting and auditing.
INFORMATION INCORPORATED BY REFERENCE
The
Securities and Exchange Commission allows us to “incorporate
by reference” the information we file with them, which means
that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is
considered to be part of this prospectus, and later information
filed with the Securities and Exchange Commission will update and
supersede this information. We incorporate by reference the
documents listed below that we have previously filed with the SEC,
except that information furnished under Item 2.02 or Item 7.01 of
our Current Reports on Form 8-K or any other filing where we
indicate that such information is being furnished and not
“filed” under the Securities Exchange Act of 1934, is
not deemed to be filed and not incorporated by reference
herein:
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our
Annual Report on Form 10-K for the fiscal year ended September 30,
2018;
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our
Quarterly Report on Form 10-Q for the period ended December 31,
2018;
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our
Current Reports on Form 8-K/A as filed on February 22, 2019 and
March 21, 2019; and
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the
description of our common stock contained in our Registration
Statement on Form 8-A as filed with the SEC on November 15, 2017
and any further amendment or report filed hereafter for the purpose
of updating such description.
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We
also incorporate by reference into this prospectus additional
documents that we may file with the SEC under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934 prior to
the completion or termination of the offering, including all such
documents we may file with the SEC after the date of the initial
registration statement and prior to the effectiveness of the
registration statement, but excluding any information deemed
furnished and not filed with the SEC. Any statements contained in a
previously filed document incorporated by reference into this
prospectus is deemed to be modified or superseded for purposes of
this prospectus to the extent that a statement contained in this
prospectus, or in a subsequently filed document also incorporated
by reference herein, modifies or supersedes that
statement.
This
prospectus may contain information that updates, modifies or is
contrary to information in one or more of the documents
incorporated by reference in this prospectus. You should rely only
on the information incorporated by reference or provided in this
prospectus. We have not authorized anyone else to provide you with
different information. You should not assume that the information
in this prospectus is accurate as of any date other than the date
of this prospectus or the date of the documents incorporated by
reference in this prospectus.
We
will provide to each person, including any beneficial owner, to
whom this prospectus is delivered, upon written or oral request, at
no cost to the requester, a copy of any and all of the information
that is incorporated by reference in this prospectus.
You
may request a copy of these filings, at no cost to you, by
telephoning us at (704) 445-5800 or by writing us at the following
address:
Level
Brands, Inc.
4521
Sharon Road
Suite
450
Charlotte,
NC 28211
Attention:
Investor Relations
You
may also access the documents incorporated by reference in this
prospectus through our website at www.levelbrands.com. The
reference to our website is an inactive textual reference only and,
except for the specific incorporated documents listed above, no
information available on or through our website shall be deemed to
be incorporated in this prospectus or the registration statement of
which it forms a part.
2,000,000
Shares
Common
Stock
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PROSPECTUS SUPPLEMENT
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ThinkEquity
a division of Fordham Financial Management, Inc.
May 13, 2019
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