Business Context and Reporting Period
Company: Level Brands, Inc. (filing as Level Brands, Inc., formerly associated with cbdMD, Inc. in metadata context)
Reporting Date: December 20, 2018
Event: Completion of a two-step reverse merger with Cure Based Development, LLC (operating as cbdMD). The transaction was finalized following the passage of the Agricultural Improvement Act of 2018 (Farm Bill), which declassified cannabidiol (CBD) as a controlled substance. For accounting purposes, the transaction is treated as a reverse merger, with cbdMD LLC continuing as a wholly-owned subsidiary of Level Brands.
Key Financial Metrics and Transaction Terms
Consideration Structure: Members of Cure Based Development received contractual rights to 15,250,000 shares of Level Brands common stock, representing approximately 60% of outstanding stock post-issuance.
- First Tranche: 6,500,000 shares (includes 500,000 shares from converted promissory notes).
- Second Tranche: 8,750,000 shares issued to CBD Holding, LLC (controlled by CEO Scott Coffman), subject to a 5-year vesting schedule.
- Earnout Shares: Up to an additional 15,250,000 shares contingent on net revenue milestones within 60 months.
Debt and Liquidity:
- Bridge Loan: $2,000,000 previously lent to Cure Based Development remains outstanding and is treated as part of the purchase price.
- Note Conversion: $1,000,000 in promissory notes held by Cure Based Development members converted into equity (First Tranche).
- Working Capital Repayment: Level Brands repaid $1,000,000 of a $1,430,300 debt owed to Edge of Business, LLC. The remaining $430,300 was converted into an 18-month, 6% promissory note.
Financial Statements: Audited financial statements for Cure Based Development are filed as Exhibit 99.1 for the period of inception (August 3, 2017) through December 31, 2017, and for the eight months ended August 31, 2018. Pro forma financial information is pending in an amendment.
Material Changes Versus Prior Period
Change of Control: Upon issuance of the First and Second Tranche Shares, a change of control occurs. Scott Coffman (through Edge of Business, LLC and CBD Holding, LLC) will beneficially own approximately 49.1% of the outstanding common stock.
Corporate Structure: The board of directors was expanded to seven members, with Mr. Coffman appointed as a management director. The company retained its September 30 fiscal year.
Operational Shift: The registrant's primary business focus shifts to the production and distribution of premium CBD products (tinctures, capsules, gummies, vape oils, etc.) previously operated by Cure Based Development.
Guidance, Outlook, Risks, and Unusual Items
Shareholder Approval Requirement: Issuance of the First and Second Tranche Shares is contingent upon shareholder approval at the 2019 annual meeting (scheduled for spring 2019) due to the issuance exceeding 19.99% of outstanding stock. If not approved, the company must seek approval at special meetings every six months.
Restrictions on Shares: Issued shares are subject to "leakout" agreements limiting sales to the lesser of Rule 144(e) volume limitations or 20% in any 90-day period. Second Tranche Shares are subject to an irrevocable voting proxy until vested.
Executive Compensation:
- Scott Coffman (CEO of cbdMD): 5-year agreement with a $160,000 annual base salary plus discretionary bonus.
- Caryn Dunayer (President of cbdMD): 3-year agreement with a $125,000 annual base salary plus discretionary bonus.
Risks and Competition: The CBD market is described as fragmented and intensely competitive. The filing notes that competition is expected to increase dramatically following the Farm Bill approval. Key competitors include Green Roads, PlusCBD, Diamond CBD, and CBDistillery.
Investor Verification Checklist
- Verify the outcome of the shareholder vote at the 2019 annual meeting regarding the issuance of the 15,250,000 shares.
- Review the audited financial statements of Cure Based Development (Exhibit 99.1) to assess historical revenue and profitability.
- Monitor the vesting schedule and voting proxy status of the Second Tranche Shares held by CBD Holding, LLC.
- Track the performance of cbdMD against the net revenue criteria required to trigger the issuance of up to 15,250,000 Earnout Shares.
- Assess the impact of the $2,000,000 bridge loan and the new $430,300 promissory note on the consolidated balance sheet.