Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
Date of Report (Date of earliest event reported)
December 20,
2018
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LEVEL BRANDS, INC.
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(Exact name of registrant as specified in its charter)
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North Carolina
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001-38299
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47-3414576
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(State or other jurisdiction of incorporation or
organization)
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(Commission File Number)
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(I.R.S. Employer Identification No.)
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4521 Sharon Road, Suite 450, Charlotte, NC 28211
(Address of principal executive offices)(Zip Code)
Registrant's
telephone number, including area code: (704) 445-5800
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not applicable
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(Former name or former address, if changed since last
report)
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Check
the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant
under any of the following provisions (see General Instruction A.2.
below):
☐
Written
communications pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
☐
Soliciting material
pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
☐
Pre-commencement
communications pursuant to Rule 14d-2(b) under the Exchange Act (17
CFR 240.14d-2(b))
☐
Pre-commencement
communications pursuant to Rule 13e-4(c) under the Exchange Act (17
CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth
company as defined in in Rule 405 of the Securities Act of 1933
(§230.405 of this chapter) or Rule 12b-2 of the
Securities Exchange Act of 1934 (§240.12b-2 of this
chapter).
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Emerging
growth company ☑
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If an
emerging growth company, indicate by checkmark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange
Act. ☐
Item
2.01 Completion
of Acquisition or Disposition of Assets.
On
December 20, 2018 (the “Closing Date”) the
two-step mergers occurred following the closing (the
“Closing”) of the
previously announced Agreement and Plan of Merger (the
“Merger
Agreement”) by and among Level Brands, Inc., its newly
organized wholly-owned subsidiaries AcqCo, LLC and cbdMD LLC, and
Cure Based Development, LLC (“Cure Based Development”).
On the Closing Date, and upon the
terms and subject to the conditions set forth in the Merger
Agreement, AcqCo LLC was merged with and into Cure Based
Development with the Cure Based Development as the surviving
entity, and immediately thereafter Cure Based Development was
merged with and into cbdMD LLC with cbdMD LLC as the surviving
entity. cbdMD LLC will continue as a wholly-owned subsidiary of
Level Brands and will continue the operations of Cure Based
Development pre-closing. The Articles of Merger as filed with the
Secretaries of State of Nevada and North Carolina are filed
as Exhibits 2.2, 2.3, 2.4
and 2.5 to this
report.
The Closing followed the approval on
December 20, 2018 by the President of the United States of the
Agricultural Improvement Act of 2018, commonly known as the Farm
Bill, which contained a permanent declassification of cannabidiol
(CBD) as a controlled substance under Federal law.
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, on the Closing Date the members of Cure Based
Development listed on Exhibit B to the Merger Agreement included in
our Current Report on Form 8-K as filed with the SEC on December 4,
2018 received contractual rights to receive 15,250,000 shares of
our common stock, representing approximately 60% of our outstanding
common stock following such issuance, as the merger consideration,
issuable as follows:
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as promptly as practicable following receipt of approval by
our shareholders for the possible issuance of in excess of 19.99%
of our presently outstanding common stock in accordance with the
rules of the NYSE American (the “Shareholder Approval”)
the members of Cure Based Development will be issued an aggregate
of 6,500,000 shares of our common stock (the “First Tranche
Shares”); and
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as
promptly as practicable after receipt of Shareholder Approval, we
will issue an additional 8,750,000 shares of our common stock (the
“Second Tranche Shares”) to CBD Holding, LLC, a member
of Cure Based Development which is controlled by Mr. Scott Coffman,
CEO and one of the managers of Cure Based Development
(“CBDH”), vesting follows: (i) 2,187,500 shares will
vest on the 12 month anniversary of the Closing Date; (ii) an
additional 2,187,500 shares will vest on the 24 month anniversary
of the Closing Date; (iii) an additional 2,187,500 shares will vest
on the 42 month anniversary of the Closing Date; and (iv) the
remaining 2,187,500 shares will vest on the 60 month anniversary of
the Closing Date.
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For accounting purposes, the Closing of the
transaction will be treated as a reverse merger under U.S.
generally accepted accounting principles. The issuance of the First
Tranche Share and the Second Tranche Shares will constitute a
change of control under the rules and regulations of the NYSE
American and at the time of the initial issuance of these shares we
will be obligated to meet the initial listing standards of the NYSE
American in order to maintain the continued listing of our common
stock on the exchange. We expect to include the Shareholder
Approval proposal covering both the First Tranche Shares and the
Second Tranche Shares, as well as the Earnout Shares, in the proxy
statement to be filed with the SEC for our 2019 annual shareholders
meeting. If this proposal is approved at this meeting, to be
scheduled for spring 2019, we will issue the First Tranche Shares
and the Second Tranche Shares immediately following the receipt of
Shareholder Approval. If this proposal is not approved at our 2019
annual meeting of shareholders, we are required to seek shareholder
approval of the proposal at additional special meetings of our
shareholders, to be held at least every six months, until such time
as Shareholder Approval is obtained. Until Shareholder Approval is
obtained, we are not obligated to issue any of these securities
under the terms of the Merger Agreement.
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When issued, the First Tranche Shares and Second
Tranche Shares will be subject to leak out agreements pursuant to
which the holder will be required to (1) limit the offer for
sale, sell, pledge, or otherwise transfer or dispose of (or enter
into any transaction or device that is designed to, or could be
expected to, result in the transfer or disposition by any person at
any time in the future of) any shares of our common stock; and (2)
refrain from entering into any swap or other derivatives
transaction that transfers to another, in whole or in part, any of
the economic benefits or risks of ownership of any shares of our
common stock, whether any such transaction described in clause (1)
or (2) above is to be settled by delivery of shares of our common
stock or other securities, in cash or otherwise to the lesser of
(i) the volume limitations set forth in Rule 144(e) of the
Securities Act of 1933, as amended, or (ii) 20% of such shares in
any 90 day period. The description of the terms of the leakout
agreement is qualified in its entirety by reference to the
form of agreement which is filed
as Exhibit 10.1
to this report.
In addition, when issued the Second Tranche Shares
will be subject to an irrevocable voting proxy agreement until such
time as the shares vest in accordance with the terms of the Merger
Agreement. The independent chairman of the Audit Committee of our
board of directors will serve as proxyholder and will vote those
shares in accordance with the recommendations of our board of
directors. The initial proxyholder is Mr. Seymour Siegel, the
current Chairman of the Audit Committee of our board of directors.
The description of the terms of the voting proxy agreement is
qualified in its entirety by reference to the form of agreement
which is filed as Exhibit 10.2
to this report.
As described in the Merger Agreement as previously
filed with the SEC, the Merger Agreement also provides that CBDH
will be entitled to receive up to an additional 15,250,000 shares
of our common stock (the “Earnout
Shares”) as part of the
merger consideration, upon the satisfaction of certain aggregate
net revenue criteria by cbdMD LLC within 60 months following the
Closing. The issuance of the Earnout Shares is also subject to
prior Shareholder Approval.
Immediately
prior to the Closing, the holders of two promissory notes in the
aggregate amount of $1,000,000 due by Cure Based Development
converted those notes into the contractual right to receive an
aggregate of 500,000 shares of our common stock, which such shares
are included in the aforedescribed First Tranche Shares. Upon such
election by the noteholders, those notes were deemed satisfied in
full.
As described in our Current Report on Form 8-K as
filed with the SEC on December 4, 2018, following the execution of
the Merger Agreement, and pursuant to the terms and conditions of a
Secured Promissory Note and Security Agreement, we lent Cure Based
Development $2,000,000. At Closing, this amount remained
outstanding and will be treated as part of the purchase price
accounting for the transaction.
Prior to the Closing Date, Cure Based Development
owed Edge of Business, LLC, an entity controlled by Mr. Coffman
(“Edge”),
an aggregate of $1,430,300 for working capital advances.
Immediately following the Closing Date, we repaid Edge $1,000,000
of this amount and the balance was converted into an 18
month 6% promissory note. The note is interest only for the first
12 months and thereafter payable in six equal and consecutive
monthly installments of principal and interest. The foregoing
description of the terms and conditions of this unsecured
promissory note is qualified in its entirety by reference to the
note which is filed as Exhibit 10.3 to this
report.
Following
the Closing of the merger, CBDH issued Mr. Martin A. Sumichrast,
our Chairman of the Board and CEO, a warrant expiring on December
31, 2019, exercisable at $90.00, to purchase a 9% membership
interest in CBDH. As a result of this warrant, and assuming CBDH
distributes the securities to its members, Mr. Sumichrast will be
entitled to receive 787,500 Second Tranche Shares and up to
1,372,500 Earnout Shares. The shares, which are issuable to Mr.
Sumichrast if distributed by CBDH to its members, will also be
subject to the leakout and voting proxy agreements described
earlier in this section.
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Item
5.01 Change
in Control of Registrant.
The Closing of the mergers will result in a change
of control of our company upon the issuance of the First Tranche
Shares and the Second Tranche Shares which will collectively
represent 60% of our then outstanding common stock, without giving
effect to the issuance of any additional shares by us. Based upon
the expected recipients of these shares, as set forth in Exhibit B
to the Merger Agreement as previously filed, upon the issuance of
the First Tranche Shares, Edge will be the record holder of 22.2%
of our then outstanding common stock, assuming no additional
issuances by us. As set forth above, Edge is controlled by Mr.
Coffman. Upon the issuance of the Second Tranche Shares, CBDH will
be the record owner of 34.5% of our then outstanding common stock,
giving effect to the issuance of the First Tranche Shares but
assuming no additional issuance of shares of common stock by us. As
set forth above, CBDH is also controlled by Mr. Coffman.
Accordingly, after giving effect to the issuance of the First
Tranche Shares and Second Tranche Shares, but no additional
issuances by us, Mr. Coffman (through his control of Edge and CBDH)
will be the beneficial owner of an aggregate of 12,434,000 shares
of our common stock, or approximately 49.1%. We expect Mr. Coffman
to disclaim this beneficial ownership interest except to the
extent of his pecuniary interest therein. As set forth above, both the First Tranche Shares
and Second Tranche Shares are subject to the leakout agreement, and
until such time as the Second Tranche Shares vest in accordance
with the terms of the Merger Agreement, such shares are subject to
the voting proxy agreement.
The
foregoing description gives no effect to the possible issuance of
the Earnout Shares to CBDH which are subject to the satisfaction of
net revenue milestones.
Item
5.02 Departure
of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of
Certain Officers.
On
December 20, 2018 pursuant to the Closing of the Merger Agreement
Mr. Coffman was appointed to our board of directors. Biographical
information concerning Mr. Coffman is as follows:
Raymond
Scott Coffman. Mr. Coffman, 57, has over 25 years of business
experience in which he has started 12 companies and built them into
significant businesses in the internet services, manufacturing and
e-commerce sectors. As an executive or partner in all of these
entities, Mr. Coffman oversaw the strategic direction, developed
the business plan and oversaw the operation of the companies. Mr.
Coffman was a manager and Chief Executive Officer of Cure Based
Development LLC since founding the company in September 2017. Prior
to that, from 2012 to 2017, he was an Operating Partner in a
regional restaurant group and also had day to day executive
oversight of Data Tech Systems, an internet hosting company.
In 2009 he founded and was the Chief
Executive Officer of Blu, an E-cigarette manufacturer which he
built into a leading brand and subsequently sold it to Lorillard
Tobacco in 2012. In 1999, Mr. Coffman founded Datatech Systems,
LLC, an internet hosting company, and served as its Chief Executive
Officer until 2012. Mr. Coffman currently serves as a member of the
board of directors of Datatech Systems, LLC and W Vapes, LLC, both
privately held companies. Mr. Coffman received a Bachelor of Arts
degree in Economics from Marshall University.
Mr.
Coffman is not considered an “independent director”
within the meaning of Section 803 of the NYSE American Company
Guide. As a management director, he is not eligible to receive the
compensation we pay to our non-management directors nor will he be
appointed to any committee of our board of directors.
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Item
5.03 Amendments
to Articles of Incorporation or Bylaws; Change in Fiscal
Year.
On
December 12, 2018 our board of directors adopted a resolution
fixing the number of members of our board of directors at seven in
accordance with the provisions of Section 3.2 of our Bylaws,
thereby creating a vacancy on the board on the board which was
filled by Mr. Coffman’s appointment as described under Item
5.02 of this report.
As
set forth above, the Closing of the mergers will be treated as a
reverse merger for accounting purposes under U.S. generally
accepted accounting principles. We have elected to retain our
September 30 fiscal year following the Closing Date.
Item
8.01. Other Events.
Employment Agreements
On the
Closing Date cbdMD LLC entered into a five year Executive
Employment Agreement with Mr. Coffman pursuant to which he will
serve as chief executive officer of that entity, reporting to the
chief executive officer of our company. Under the terms of the
agreement, cbdMD LLC agreed to pay him an initial annual base
salary of $160,000 and he is entitled to a discretionary bonus at
the sole determination of the Compensation Committee of our board
of directors, as well as participation in benefit programs we offer
our employees and paid vacation. The agreement may be terminated by
cbdMD LLC in the event of his death or disability, by cbdMD for
cause (as defined in the agreement), or by Mr. Coffman without
cause. The agreement contains customary confidentiality,
non-compete, and indemnification provisions. The description of the
terms of the Executive Employment Agreement with Mr. Coffman is
qualified in its entirety by reference to the agreement which is
filed as Exhibit
10.4 to this report.
On the
Closing Date cbdMD LLC also entered into a three year Executive
Employment Agreement with Ms. Caryn Dunayer pursuant to which she
will serve as president of that entity. Ms. Dunayer, formerly a
member of Cure Based Development, previously served as its
president. Under the terms of the agreement, cbdMD LLC agreed to
pay her an initial annual base salary of $125,000 and she is
entitled to a discretionary bonus at the sole determination of the
Compensation Committee of our board of directors, as well as
participation in benefit programs we offer our employees and paid
vacation. The agreement may be terminated by cbdMD LLC in the event
of her death or disability, by cbdMD for cause (as defined in the
agreement), or by Ms. Dunayer without cause. The agreement contains
customary confidentiality, non-compete, and indemnification
provisions. The description of the terms of the Executive
Employment Agreement with Ms. Dunayer is qualified in its entirety
by reference to the agreement which is filed as Exhibit 10.5 to this
report.
Business of cbdMD LLC following the Closing
As
described earlier in this report, following the Closing Date cbdMD
LLC continues the business and operations of Cure Based
Development. Information regarding Cure Based Development’s
historic business is set forth below:
Cure
Based Development, which markets is products under the cbdMD brand,
produces and distributes
various high-grade, premium CBD products, including:
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tinctures;
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capsules;
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gummies;
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bath
bombs;
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vape
oils;
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topical creams;
and
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animal treats and
oils.
Cure
Based Development’s website provides up-to-date information
about CBD quality and current industry events, as well as U.S.
based customer service. Cure Based Development tests its
broad-spectrum CBD extractions through independent, third-party
laboratories in an effort to guarantee the highest of standards and
it offers a 30-day, money-back guarantee. Its products are available online at www.cbdMD.com
and 700 non-affiliated stores in 40 states. Cure Based Development
currently employs over 50 people in its corporate, manufacturing
and distribution sites based in Charlotte, NC. There are no
collective bargaining agreements with any employees of Cure Based
Development.
Sales and Marketing
Sales
by Cure Based Development of its products mainly come from online
sales and through inside sales concentrating on wholesale
distributors who can offer large quantities of cbdMD products at
physical retail locations.
Cure
Based Development utilizes a broad-based marketing strategy across
multiple platforms including:
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secured online and
print advertising;
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blog, web, and
visual content;
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social media
engagement through accounts with large followings;
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live and sponsored
events;
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influencers and
celebrities;
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affiliate
marketing; and
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high-quality brand
apparel.
Product Manufacturing
Cure
Based Development manufactures its premium line of products at its
Charlotte, NC facility using 100%, all-natural CBD extracted from
organic, non-GMO, vegan, and gluten-free industrial hemp grown in
the USA. It utilizes a CO2 extraction
process for broad-spectrum concentrations retaining other
cannabinoids, terpenes, vitamins, and various other compounds for
enhanced benefits while eliminating tetrahydrocannabinol
(THC) content.
Research and Development
The key
objectives and input points that drive Cure Based
Development’s the research and development process include
current product and new product development
activities:
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Cure
Based Development’s current product improvement efforts
include:
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consumer feedback
analysis;
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optimization of its
product manufacturing process;
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sourcing of
reliable, high-quality raw materials while maintaining strong
distributor relationships;
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lab testing;
and
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feedback from
panels of product testers.
Its new
product development efforts are focused on both near-term and
long-term results for the company:
With a
view toward near-term results:
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in-depth market
research on current competitor campaigns;
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website and product
development;
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sample size testing
and research;
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implementation of
new product campaigns utilizing social media, digital, affiliate,
and email;
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rapid product
development following testing; and
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quality ingredient
sourcing.
With a
view towards long-term results, Cure Based Development’s
efforts include:
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development of new
product lines following initial market research;
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use of current and
expected future product trends and research to develop new product
offerings;
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refinement of
extraction and production methods for product
efficiency;
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ingredient research
through sustainability testing;
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manufacturing
process optimization;
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in-depth product
testing;
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package and graphic
development; and
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large scale product
and brand marketing campaigns
Intellectual Property
Cure
Based Development currently holds six U.S. trademarks which are
held for current and future product offerings and extended branding
capability.
Competition
The market for the sale of CBD-based products is
fragmented and intensely competitive. Currently, in the United
States, Cure Brand Development does not believe that there are any
businesses that can demonstrate or claim a dominant market share of
the growing CBD products
market. Its competitors in the retail location sales of
CBD-based products include Green Roads, PlusCBD, and Select CBD,
and in the digital space include Diamond CBD, CBDistillery, and
Lazarus Naturals. Cure Based Development expects that the quantity and composition of its
competitive environment will continue to evolve as the industry
matures and new customers enter the marketplace. We expect that the
competition in this market segment will dramatically increase
following the approval of the Farm Bill.
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Item 9.01. Financial Statement and
Exhibits.
(a)
Financial statements of businesses
acquired.
Filed
as Exhibit 99.1 to
this report are the audited financial statements of Cure Based
Development for the period of August 3, 2017 (inception) through
December 31, 2017 and for the eight months ended August 31, 2018.
Under an amendment to this report we will file the required
unaudited interim financial statements of Cure Based Development
for the periods required pursuant to Rule 8-04(b) of Regulation
S-X.
(b)
Pro forma financial
information.
The pro
forma financial information required by Rule 8-05 of Regulation S-X
will be provided under an amendment to this report within the time
required pursuant to Item 9.01(c) of Form 8-K.
(d)
Exhibits.
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Incorporated by Reference
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Filed or
Furnished
Herewith
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No.
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Exhibit Description
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Form
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Date Filed
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Number
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Merger
Agreement dated December 3, 2018 by and among Level Brands, Inc.,
AcqCo, LLC, cbdMD LLC and Cure Based Development, LLC
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8-K
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12/3/2018
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2.1
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2.2
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Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of Nevada merging AcqCo, LLC with and into Cure Based
Development, LLC
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(1)
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2.3
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Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of North Carolina merging AcqCo, LLC with and into Cure Based
Development, LLC
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(1)
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2.4
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Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of Nevada merging Cure Based Development, LLC with an into
cbdMD LLC
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(1)
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2.5
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Articles
of Merger dated December 20, 2018 as filed with the Secretary of
State of North Carolina merging Cure Based Development, LLC with an
into cbdMD LLC
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(1)
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Form of
leak out agreement
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Filed
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Form of
voting proxy agreement
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Filed
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6%
promissory note dated December 20, 2018 to Edge of Business,
LLC
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Filed
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Executive
Employment Agreement dated December 20, 2018 by and between cbdMD
LLC and R. Scott Coffman
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Filed
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Executive
Employment Agreement dated December 20, 2018 by and between cbdMD
LLC and Caryn Dunayer
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Filed
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Audited
financial statements of Cure Based Development, LLC for the period
of August 3, 2017 (inception) through December 31, 2017 and for the
eight months ended August 31, 2018
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Filed
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(1)
To be
filed by amendment to this report.
8
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
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LEVEL
BRANDS, INC.
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Date:
December 20, 2018
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By:
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/s/ Mark S.
Elliott
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Mark S.
Elliott, Chief Financial Officer and Chief Operating
Officer
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9