Blueprint
As filed with the Securities and Exchange Commission on December
[12], 2018
Registration No. 333-_________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
Level Brands, Inc.
(Exact name of registrant as specified in its charter)
North Carolina
(State or other jurisdiction of incorporation or
organization)
47-3414576
(I.R.S. Employer Identification Number)
4521 Sharon Road
Suite 450
Charlotte, NC 28211
Telephone (704) 445-5800
(Address, including zip code, and telephone number, including area
code, of registrant’s principal executive
offices)
Mr. Mark S. Elliott
Chief Financial Officer and Chief Operating Officer
4521 Sharon Road
Suite 450
Charlotte, NC 28211
Telephone (704) 445-5800
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
With a copy to:
Brian A. Pearlman, Esq.
Pearlman Law Group LLP
200 S. Andrews Avenue
Suite 901
Fort Lauderdale, FL 33301
Telephone (954) 880-9484
From time to time after effectiveness of this registration
statement
(Approximate date of commencement of proposed sale to the
public)
If the only securities being registered on this Form are being
offered pursuant to a dividend or interest reinvestment plans,
please check the following box: ☐
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, other than securities offered only in
connection with dividend or interest reinvestment plans, check the
following box: ☒
If this Form is to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier
effective registration statement for the same offering:
☐
If this Form is a registration statement pursuant to General
Instruction I.D. or a post-effective amendment thereto that shall
become effective upon filing with the Commission pursuant to Rule
462(e) under the Securities Act, check the following box:
☐
If this Form is a post-effective amendment to a registration
statement filed pursuant to General Instruction I.D. filed to
register additional securities or additional classes of securities
pursuant to Rule 413(b) under the Securities Act, check the
following box: ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth
company.
Large accelerated filer
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Accelerated filer
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Non-accelerated filer
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Smaller reporting company
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☒
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Emerging growth company
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☒
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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 o Section7(a)(2)(B) of the Securities
Act. ☐
CALCULATION OF REGISTRATION FEE
Title of each
class of securities to be registered(1)
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Proposed
maximum
aggregate offering price(2)
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Amount
of
registration
fee(3)
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Common
stock, par value $0.001 per share
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(1)
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-
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-
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Preferred
stock, par value $0.001 per share
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(1)
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-
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Warrants
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(1)
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Units
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(1)
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Total
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(1)
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$(2)
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$12,450.00
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(1)
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This registration statement includes $100,000,000.00 of securities
which may be issued by the registrant from time to time in
indeterminable amounts and at indeterminable times. Any
securities registered hereunder may be sold separately or as units
with other securities registered hereunder. Including also such
indeterminate amounts and numbers of securities as may be issued in
primary offerings or upon exercise, conversion or exchange of any
securities registered hereunder that provide for exercise,
conversion or exchange, including pursuant to anti-dilution
provisions of any such securities.
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(2)
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Not
specified as to each class of securities to be registered pursuant
to General Instruction II.D to Form S-3 under the Securities
Act.
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(3)
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Estimated
solely for the purpose of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act. Pursuant to
Rule 457(p) Level Brands, Inc. (the "Registrant") is offsetting
$10,728.59 of the filing fee previously paid with respect to the
registration statement on Form S-3 (File Number 333-226854) filed
by the Registrant with the Securities and Exchange Commission on
August 15, 2018 against the filing fee of $12,450.00 due under this
registration statement. The balance of the filing fee of $1,721.41
is paid with this filing.
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The registrant hereby amends this registration statement on such
date or dates as may be necessary to delay its effective date until
the registrant shall file a further amendment which specifically
states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of
1933, as amended, or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
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 DECEMBER [12], 2018
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 December 11, 2018 was $3.88 per share.
The
aggregate market value of our outstanding common stock held by
non-affiliates is $30,818,122 based on 10,095,356 shares of common
stock outstanding, of which 7,942,815 shares are held by
non-affiliates, and a per share value of $3.88 based on the closing
price of our common stock on the NYSE American on December 11,
2018. 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 _____________, 2018
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 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
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.
Recent Developments
On
December 3, 2018 we and our newly organized wholly-owned
subsidiaries AcqCo, LLC and cbdMD LLC, entered into an Agreement
and Plan of Merger, or the “Merger Agreement,” with
Cure Based Development, LLC, a Nevada limited liability company, or
“Cure Based Development”. The Merger Agreement provides
that, upon the terms and subject to the conditions set forth
therein, upon consummation of a two-step merger, cbdMD LLC will
continue as a wholly-owned subsidiary of our company and will
continue the operations of Cure Based Development pre-closing. Cure
Based Development, a Charlotte, NC-based company formed in August
2017, is owner, operator and manufacturer of nationally recognized
consumer cannabidiol (CBD) brand cbdMD which currently offers a
variety of CBD products from topicals and tinctures to bath bombs
and pet products, manufactured and sold direct to consumers online
via the company website. Cure Based Development also provides
wholesale distribution with retailers currently selling products at
brick-and-mortar locations, compounding pharmacies, salons,
supplement stores, and pet shops. Cure Based Development reported
revenues of $354 and $3,280,009 for the period from inception
through December 31, 2017 and for the eight months ended August 31,
2018, respectively, and a net loss of $323,197 and $353,561 for
those periods.
Upon
the terms and subject to the conditions set forth in the Merger
Agreement, at the effective time of the two-step merger, the
members of Cure Based Development will receive contractual rights
to receive 15,525,000 shares of our common stock, representing
approximately 60% of our outstanding common stock following such
issuance. Assuming the closing of the two-step merger, these
initial shares will be issued 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 rule of the NYSE American, or the
“Shareholder Approval”. The Merger Agreement also
provides that one of the members of Cure Based Development will be
entitled to receive up to an additional 15,525,000 shares of our
common stock as part of the merger consideration, upon Shareholder
Approval and the satisfaction of certain aggregate net revenue
criteria by cbdMD LLC within 60 months following the closing. We
expect to include the proposal for Shareholder Approval of the
issuance of the initial shares as well as the possible future
issuance of the earnout shares in the proxy statement for our 2019
annual meeting of shareholders.
Following the
execution of the Merger Agreement, we lent Cure Based Development
$2,000,000 under the terms of a one year 6% secured promissory
note. At closing Mr. R. Scott Coffman, the CEO and a manager of
Cure Based Development, will be appointed to our Board of Directors
and become the chief executive officer of our cbdMD LLC subsidiary.
If the pending transaction closes, it will result in a change of
control of our company and the combined company will be required to
satisfy NYSE American initial listing standards for the continued
listing of our common stock on the NYSE American following the
closing.
In
addition to other conditions to closing as described in the Merger
Agreement, the completion of the two-step merger is subject to the
approval by the President of the United States of the Agricultural
and Nutrition Act of 2018, or such other titled Federal
legislation, which, when approved, contains a permanent
declassification of CBD as a controlled substance under Federal
law. Because this and certain other conditions precedent to closing
are beyond our control, we do not know when, if ever, that this
transaction will be consummated. Additional information regarding
the terms and conditions of the Merger Agreement is included in our
Current Report on Form 8-K as filed with the SEC on December 4,
2018.
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) 445-5800. The 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
material dependence on our relationships with kathy ireland® Worldwide and
certain of its affiliates;
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our
limited operating history;
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the
lack of assurance of the closing of the pending transaction with
Cure Based Development and the need to meet the initial listing
standards of the NYSE American should the transaction ultimately
close;
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risks
associated with integrating the operations of Cure Based
Development into our company, should the pending transaction close,
together with risks associated with the new and emerging market in
which it operates;
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the
limited operating histories of our subsidiaries;
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our
history of losses;
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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 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, 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
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.
There are no assurances we will close the pending transaction with
Cure Based Development. If we do close the transaction, it will
result in a change of control of our company and we will be
required to meet the NYSE American initial listing standards in
order to maintain the listing of our common stock.
As
described earlier in this prospectus, on December 3, 2018 we
entered into the Merger Agreement with Cure Based Development. The
closing of this pending transaction is subject to a number of
conditions precedent including, but not limited to, the approval by
the President of the United States of the Agricultural and
Nutrition Act of 2018, or such other titled Federal legislation,
which, when approved, contains a permanent declassification of
cannabidiol (CBD) as a controlled substance under Federal law.
Certain of the content of the House and Senate versions of this
bill has been the subject of great debate among the members of the
House and Senate, and we do not know when a comprise bill will be
approved by both chambers or if the President of the United States
will sign the final bill. Because the approval of this law is
beyond our control, investors should not place undue reliance on
this pending transaction when evaluating our company, our business,
operations and prospects. In addition, if the pending transaction
does close it will result in a change of control of our company.
NYSE Regulation, Inc. has informally advised us that we will be
required to meet initial listing standards following the closing in
order to maintain the listing of our common stock on the NYSE
American. While we expect to be able to satisfy all of the
qualitative and quantative criteria, there are no assurances our
expectations are correct. In that event, our shareholders would
find it more difficult to buy and sell shares of our common stock
which would adversely impact the market price thereof.
Even if the pending transaction with Cure Based Development is
closed, there are no assurances we will successfully integrate
those operations into our business or achieve the expected benefits
which would adversely affect the combined company’s future
results.
The
future success of the pending transaction with Cure Based
Development, should it close of which there are no assurances, will
depend in large part on the ability to realize anticipated benefits
from this pending transaction. 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 of 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
ability of the acquired company to continue to report revenues at
historic levels;
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possible
loss by the acquired company of material customers
post-closing;
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possible
failure to continue to efficiently to develop the business of the
acquired company including expected significant competition in its
marketplace;
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potential
unknown or currently unquantifiable liabilities associated with the
transaction;
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potential
unknown and unforeseen expenses and delays associated with the
transaction;
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performance
shortfalls as a result of the diversion of management’s
attention caused by integrating the acquired company;
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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 to a subsidiary of a public
company;
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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 pending transaction with Cure Based
Development will ultimately result in the realization of the
anticipated benefits. If we are unable to realize the perceived
benefits from this transaction, we may be required to impair some
or all of the goodwill and/or identifiable intangibles associated
with the transaction which would materially adversely impact our
results of operations in future periods.
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 $412,075and
$1,738,734 for 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 have been to a limited number of
customers, the loss of any of which would be materially adverse to
our company.
Substantially
all of our net sales in 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.
As
described elsewhere herein, 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. 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. 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.
The Investment Company Act of 1940 will limit the value of
securities we can accept as payment for our business consulting
services which may limit our future revenues and, in the event we
are deemed an investment company, the cost and expense to comply
with ‘40 Act regulations could be material.
The
Investment Company Act of 1940, or the “‘40 Act,”
regulates certain companies that invest in, hold or trade
securities. Although we do not believe we are engaged in the
business of investing, reinvesting or trading in securities, and we
do not currently hold ourselves out to the public as being engaged
in those activities, in the past we have accepted securities of our
client companies as partial compensation. The ’40 Act and the
rules thereunder set forth certain asset and revenue thresholds,
which, if exceeded, may require us to register as an investment
company under the ’40 Act. As a result, and principally
related to the value of the securities received by us as part of
our compensation by Isodiol International, Inc. under the terms of
the license agreement we entered into with it in December 2017, at
March 31, 2018 we exceeded the exemptive asset and revenue
thresholds under the ’40 Act. Therefore, at March 31, 2018 we
could be deemed an inadvertent investment company under the
’40 Act. While as of September 30, 2018 we reduced our assets
in connection to this assessment so that we no longer exceeded the
asset threshold, as a part of our agreement with Isodiol we are
entitled to receive additional shares of Isodiol’s securities
on a quarterly basis in an amount equal to $750,000 which can cause
us to continue to exceed the revenue threshold. As it has never
been our intention to be an investment company, we are taking
certain actions to maintain our assets and revenues under the
exemptive thresholds. In particular, we will limit the amount of
equity we accept as part of our compensation for services so as to
stay under the asset and revenue thresholds as imposed by the
’40 Act. We may therefore structure transactions in a less
advantageous manner than if we did not have ’40 Act concerns,
or we may avoid otherwise economically desirable transactions due
to those concerns. If we are unable to maintain our assets and
revenues below the exemptive levels, or if it were otherwise
established that we were an unregistered investment company at any
period of time, there would be a risk, among other material adverse
consequences, that we could become subject to monetary penalties or
injunctive relief, or both, in an action by the SEC. In addition,
in the event we continue to fall under ’40 Act regulation, we
will have significant ongoing ’40 Act public reporting
requirements and regulation that would increase our administrative
and operating costs and expenses. Further, under certain
circumstances the ’40 Act provides that a contract that is
made or whose performance involves a violation of the ’40 Act
is unenforceable by either party unless a court finds that under
the circumstances enforcement would produce a more equitable result
than non-enforcement. As a result, we would no longer be able to
conduct our business as it is presently conducted which would have
a material adverse impact on our results of operations in future
periods.
We may require additional capital to finance the acquisition of
additional brands and if we are unable to raise such capital on
beneficial terms or at all this could restrict our
growth.
We
may, in the future, require additional capital to help fund all or
part of potential acquisitions. If, at the time required, we do not
have sufficient cash to finance those additional capital needs, we
will need to raise additional funds through equity and/or debt
financing. We cannot guarantee that, if and when needed, additional
financing will be available to us on acceptable terms or at all.
Further, if additional capital is needed and is either unavailable
or cost prohibitive, our growth may be limited as we may need to
change our business strategy to slow the rate of our expansion
plans. In addition, any additional financing we undertake could
impose additional covenants upon us that restrict our operating
flexibility, and, if we issue equity securities to raise capital or
as acquisition consideration, our existing shareholders may
experience dilution or the new securities may have rights senior to
those of our common stock.
RISKS RELATED TO OUR LICENSING AND ENTERTAINMENT
DIVISIONS
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 declined 126.3% in fiscal
2018 from fiscal 2017, and 78% of our net sales for this division
in fiscal 2018 represented sales to a related party. We recognized
asset impairments of $502,000 in fiscal 2018 related to this
division.
Net sales from our products division have been
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. 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 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. There
are no assurances net sales in this division will ever return to
prior reported levels, or that we will not recognize additional
impairment charges 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 our
products, and we have no control over these manufactures and may
not be able to obtain quality products on a timely basis or in
sufficient quantity.
All
of our products are manufactured or compounded by unaffiliated
third parties. We do not have any long-term contracts with any of
these third parties, and we expect to compete with other companies
for raw materials, production and import capacity. If we experience
significant increased demand, or need to replace an existing
manufacturer, there can be no assurance that additional
manufacturing capacity will be available when required on terms
that are acceptable to us, or at all, or that any manufacturer or
compounder would allocate sufficient capacity to us in order to
meet our requirements. In addition, even if we are able to expand
existing or find new sources, we may encounter delays in production
and added costs as a result of the time it takes to engage third
parties. Any delays, interruption or increased costs in the
manufacturing or compounding of our products could have an adverse
effect on our ability to meet retail customer and consumer demand
for our products and result in lower revenues and net income both
in the short and long-term.
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 22.7% of our outstanding
common stock as of December 1, 2018. Accordingly, these
shareholders, if they act together, may exercise substantial
influence over matters requiring shareholder approval, including
the election of directors and approval of corporate transactions,
such as a merger. This concentration of ownership could have the
effect of delaying or preventing a change in control or otherwise
discourage a potential acquirer from attempting to obtain control
over us, which in turn could have a material adverse effect on the
market value of our common stock.
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 December 11, 2018, there were
10,095,356 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
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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; and
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|
|
●
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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.
|
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.
TABLE OF CONTENTS
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Page
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About this Prospectus
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1
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Available Information
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1
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$100,000,000
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Our Company
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2
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Cautionary Statements Regarding Forward-Looking
Information
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3
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Risks Factors
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4
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Use of Proceeds
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15
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Description of Capital Stock
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15
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Description of Warrants
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16
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COMMON STOCK, PREFERRED STOCK,
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Material Federal Income Tax Consequences
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17
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WARRANTS OR UNITS
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Plan of Distribution
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17
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Legal Matters
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18
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PROSPECTUS
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Experts
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18
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Information Incorporated by Reference
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18
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________, 2018
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14.
Other Expenses of Issuance and Distribution.
The
estimated expenses payable by Level Brands, Inc. in connection with
the distribution of the securities being registered are as
follows:
SEC
registration and filing fee
|
$12,450.00
|
Legal
fees and expenses
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25,000.00
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Accounting
fees and expenses
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5,000.00
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EDGAR
fees and printing costs
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500.00
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Transfer
agent fees
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0.00
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Blue
Sky fees and expenses
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0.00
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Miscellaneous
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50.00
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TOTAL
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$43,000.00
|
All
fees and expenses other than the SEC registration and filing fee
are estimated
Item
15.
Indemnification of Directors and Officers.
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.
Insofar
as the limitation of, or indemnification for, liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers, or persons controlling us pursuant to the foregoing, or
otherwise, we have been advised that, in the opinion of the
Securities and Exchange Commission, such limitation or
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore,
unenforceable.
Exhibit No.
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Exhibit
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Underwriting Agreement**
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Articles of Incorporation (incorporated by reference to Exhibit 2.1
to the Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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|
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Articles of Amendment to the Articles of Incorporation filed April
22, 2015 (incorporated by reference to Exhibit 2.2 to the Offering
Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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|
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Articles of Amendment to the Articles of Incorporation filed June
22, 2015 (incorporated by reference to Exhibit 2.3 to the Offering
Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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|
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Articles of Amendment to the Articles of Incorporation filed
November 17, 2016 (incorporated by reference to Exhibit 2.4 to the
Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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|
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Articles of Amendment to the Articles of Incorporation filed
December 5, 2016 (incorporated by reference to Exhibit 2.5 to the
Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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Bylaws, as amended (incorporated by reference to Exhibit 2.6 to the
Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
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Form of
common stock certificate (incorporated
by reference to Exhibit 3.7 to the Offering Statement on Form 1-A,
SEC File No. 024-10742, as amended)
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4.2
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Form of
preferred stock certificate**
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4.3
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Form of
warrant**
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|
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Opinion
of Pearlman Law Group LLP *
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|
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Opinion
of the Law Offices of Jason H. Scott
*
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Consent
of Cherry Bekaert LLP
*
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Consent
of Pearlman Law Group LLP (included in Exhibit 5.1) *
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Consent
of the Law Offices of Jason H. Scott (included in Exhibit 5.2)
*
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24.1
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Power
of Attorney (included on signature page of the registration
statement)
|
**
to
be filed, if necessary, by amendment or as an exhibit to a Current
Report on Form 8-K and incorporated by reference
herein.
(a)
The
undersigned registrant hereby undertakes:
(1)
To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration
statement:
(i)
To
include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii)
To
reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form
of prospectus filed with the Commission pursuant to Rule 424(b)
under the Securities Act if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the “Calculation of
Registration Fee” table in the effective registration
statement; and
(iii)
To
include any material information with respect to the plan of
distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that
paragraphs (a)(1)(i) (a)(1)(ii) and (a)(1)(iii) of this section do
not apply if the registration statement is on Form S-3 and the
information required to be included in a post-effective amendment
by those paragraphs is contained in reports filed with or furnished
to the Commission by the registrant pursuant to Section 13 or
Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement, or is
contained in a form of prospectus filed pursuant to Rule 424(b)
that is part of the registration statement.
(2)
That,
for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3)
To
remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the
termination of the offering.
(4)
That,
for the purpose of determining liability under the Securities Act
of 1933 to any purchaser:
(i)
Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall
be deemed to be part of the registration statement as of the date
the filed prospectus was deemed part of and included in the
registration statement; and
(ii)
Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5),
or (b)(7) as part of a registration statement in reliance on Rule
430B relating to an offering made pursuant to Rule 415(a)(1)(i),
(vii), or (x) for the purpose of providing the information required
by Section 10(a) of the Securities Act of 1933 shall be deemed to
be part of and included in the registration statement as of the
earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of
securities in the offering described in the prospectus. As provided
in Rule 430B, for liability purposes of the issuer and any person
that is at that date an underwriter, such date shall be deemed to
be a new effective date of the registration statement relating to
the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
Provided, however, that no statement made in a registration
statement or prospectus that is part of the registration statement
or made in a document incorporated or deemed incorporated by
reference into the registration statement or prospectus that is
part of the registration statement will, as to a purchaser with a
time of contract of sale prior to such effective date, supersede or
modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in
any such document immediately prior to such effective
date.
(5)
That,
for the purpose of determining liability of the registrant under
the Securities Act of 1933 to any purchaser in the initial
distribution of the securities, the undersigned registrant
undertakes that in a primary offering of securities of the
undersigned registrant pursuant to this registration statement,
regardless of the underwriting method used to sell the securities
to the purchaser, if the securities are offered or sold to such
purchaser by means of any of the following communications, the
undersigned registrant will be a seller to the purchaser and will
be considered to offer or sell such securities to such
purchaser:
(i)
Any
preliminary prospectus or prospectus of the undersigned registrant
relating to the offering required to be filed pursuant to Rule
424;
(ii)
Any
free writing prospectus relating to the offering prepared by or on
behalf of the undersigned registrant or used or referred to by the
undersigned registrant;
(iii)
The
portion of any other free writing prospectus relating to the
offering containing material information about the undersigned
registrant or its securities provided by or on behalf of the
undersigned registrant; and
(iv)
Any
other communication that is an offer in the offering made by the
undersigned registrant to the purchaser.
(b)
The
undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each
filing of the registrant’s annual report pursuant to Section
13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan’s
annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the registration
statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(c)
Insofar
as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of
the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant
of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
(d)
The
undersigned registrant hereby undertakes that:
(1)
For
purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant
to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall
be deemed to be part of this registration statement as of the time
it was declared effective.
(2)
For
the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona
fide offering thereof.
Pursuant
to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets
all of the requirements for filing on Form S-3 and has duly caused
this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Charlotte,
State of North Carolina on December 12, 2018.
|
Level Brands, Inc.
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By:
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/s/
Mark S. Elliott
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Mark S. Elliott,
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Chief Financial Officer and Chief Operating Officer
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POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that
each person whose signature appears below constitutes and appoints
Mark S. Elliott his true and lawful attorney-in-fact and agent,
with full power of substitution, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to
this Form S-3 registration statement, and to file the same with all
exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and ratifying and
confirming all that said attorney-in-fact and agent or his
substitute or substitutes may lawfully do or cause to be done by
virtue hereof.
Pursuant
to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in
the capacities and on the dates indicated.
Name
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Positions
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Date
|
|
|
|
|
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/s/
Martin A. Sumichrast
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Chairman of the Board of Directors, Chief Executive Officer and
President (principal executive officer)
|
|
December
12, 2018
|
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|
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/s/
Mark S. Elliott
|
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Chief Financial Officer and Chief Operating Officer (principal
financial and accounting officer)
|
|
December
12, 2018
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Director
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December
12, 2018
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/s/
Anthony K. Shriver
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Director
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December
12, 2018
|
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/s/
Seymour G. Siegel
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Director
|
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December 12, 2018
|
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/s/
Bakari Sellers
|
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Director
|
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December
12, 2018
|
Bakari Sellers
|
|
|
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/s/
Gregory C. Morris
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Director
|
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December
12, 2018
|
Gregory
C. Morris
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Exhibit Index
Exhibit No.
|
|
Exhibit
|
|
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Underwriting
Agreement**
|
|
|
Articles
of Incorporation (incorporated by reference to Exhibit 2.1 to the
Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
|
|
|
Articles
of Amendment to the Articles of Incorporation filed April 22, 2015
(incorporated by reference to Exhibit 2.2 to the Offering Statement
on Form 1-A, SEC File No. 024-10742, as amended)
|
|
|
Articles
of Amendment to the Articles of Incorporation filed June 22, 2015
(incorporated by reference to Exhibit 2.3 to the Offering Statement
on Form 1-A, SEC File No. 024-10742, as amended)
|
|
|
Articles
of Amendment to the Articles of Incorporation filed November 17,
2016 (incorporated by reference to Exhibit 2.4 to the Offering
Statement on Form 1-A, SEC File No. 024-10742, as
amended)
|
|
|
Articles
of Amendment to the Articles of Incorporation filed December 5,
2016 (incorporated by reference to Exhibit 2.5 to the Offering
Statement on Form 1-A, SEC File No. 024-10742, as
amended)
|
|
|
Bylaws,
as amended (incorporated by reference to Exhibit 2.6 to the
Offering Statement on Form 1-A, SEC File No. 024-10742, as
amended)
|
|
|
Form of common
stock certificate (incorporated by
reference to Exhibit 3.7 to the Offering Statement on Form 1-A, SEC
File No. 024-10742, as amended)
|
4.2
|
|
Form of preferred
stock certificate**
|
4.3
|
|
Form of
warrant**
|
|
|
Opinion of Pearlman
Law Group LLP *
|
|
|
Opinion of the
Law Offices of Jason H. Scott
*
|
|
|
Consent of Cherry
Bekaert LLP *
|
|
|
Consent of Pearlman
Law Group LLP (included in Exhibit 5.1) *
|
|
|
Consent of the Law
Offices of Jason H. Scott (included in Exhibit 5.2) *
|
24.1
|
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Power of Attorney
(included on signature page of the registration
statement)
|
**
to
be filed, if necessary, by amendment or as an exhibit to a Current
Report on Form 8-K and incorporated by reference
herein.