Business Context and Reporting Period
This Form 8-K, filed on December 4, 2018, reports events occurring on December 3 and 4, 2018, by Level Brands, Inc. (the "Company"). The filing details the entry into a Material Definitive Agreement to acquire Cure Based Development, LLC, the owner and operator of the consumer cannabidiol (CBD) brand cbdMD. The Company is an emerging growth company incorporated in North Carolina.
Key Financial Metrics and Transaction Terms
The filing focuses on the structure of the acquisition rather than the Company's consolidated financial results for a specific period. Key financial data points include:
- Target Revenue: Cure Based Development reported revenues of $354 for the period from inception through December 31, 2017, and $3,280,009 for the eight months ended August 31, 2018.
- Target Net Loss: Cure Based Development reported net losses of $323,197 (inception through Dec 31, 2017) and $353,561 (eight months ended Aug 31, 2018).
- Equity Consideration: Members of Cure Based Development will receive 15,525,000 shares of Level Brands common stock, representing approximately 60% of outstanding stock post-issuance. This includes 6,500,000 shares issued immediately upon shareholder approval and 8,750,000 shares subject to a four-year vesting schedule.
- Earnout Potential: Up to an additional 15,525,000 shares may be issued based on aggregate net revenue targets ranging from $1 million to $300 million over 60 months.
- Debt and Liquidity: Level Brands provided a $2,000,000 secured promissory note to Cure Based Development on December 4, 2018, bearing 6% interest. Additionally, a pre-existing $1,490,823 loan from an affiliate of the target's CEO will be partially repaid with $1,000,000 cash, with the balance converted to an 18-month, 6% promissory note.
Material Changes and Transaction Structure
The primary material change is the proposed merger of Level Brands' subsidiaries with Cure Based Development. Upon consummation, cbdMD LLC will become a wholly-owned subsidiary of Level Brands. The transaction represents a significant shift in the Company's capital structure, as the issuance of shares will result in a change of control under NYSE American rules. The filing notes that the Company must satisfy initial listing standards for continued listing following the closing.
Guidance, Risks, and Contingencies
The filing outlines several critical conditions and risks associated with the transaction:
- Regulatory Contingency: Closing is contingent upon the approval of the Agricultural and Nutrition Act of 2018 (or similar legislation) by the President of the United States, which must permanently declassify cannabidiol (CBD) as a controlled substance under Federal law.
- Shareholder Approval: The issuance of shares (First Tranche, Second Tranche, and Earnout Shares) requires shareholder approval, expected to be sought at the 2019 annual shareholders meeting.
- Management Changes: Upon closing, Scott Coffman (CEO of Cure Based Development) will be appointed to the Level Brands Board of Directors. Employment agreements for Mr. Coffman and Ms. Caryn Dunayer are conditions to closing.
- Unusual Items: The transaction involves a complex vesting schedule for a significant portion of the consideration and a warrant issued to the Level Brands Chairman to purchase up to 9% of the Second Tranche and Earnout Shares.
Investor Verification Checklist
- Verify the status of the Agricultural and Nutrition Act of 2018 and whether CBD has been permanently declassified as a controlled substance.
- Confirm the outcome of the Level Brands shareholder vote required to approve the issuance of over 19.99% of outstanding common stock.
- Review the full text of the Merger Agreement (Exhibit 2.1) for detailed representations, warranties, and termination rights.
- Assess the impact of the 60% equity dilution on existing shareholders and the Company's future capital structure.
- Monitor the execution of the $2 million secured promissory note and the repayment of the affiliate loan.