LEVEL BRANDS, INC.
UNAUDITED PRO-FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
| Introduction to Unaudited Pro-Forma Combined Condensed Financial Statements | F-1 |
| Unaudited Pro-Forma Combined Condensed Balance Sheet as of September 30, 2018 | F-2 |
| Unaudited Pro-Forma Combined Condensed Statement of Operations for the Year Ended September 30, 2018 | F-4 |
| Notes to Unaudited Pro-Forma Combined Condensed Financial Statements | F-6 |
LEVEL BRANDS, INC.
INTRODUCTION TO
UNAUDITED PRO-FORMA COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 2018 AND
THE PRO-FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2018
The following unaudited pro forma combined condensed balance sheet, unaudited pro forma combined condensed statement of operations, unaudited pro forma combined condensed statement of comprehensive income (loss), and the explanatory notes give effect to the mergers of Cure Based Development LLC and CBDMD LLC, a wholly owned subsidiary of Level Brands, Inc., on December 20, 2018.
The unaudited pro forma combined condensed balance sheet, unaudited pro forma combined condensed statement of operations, unaudited pro forma combined condensed statement of comprehensive income (loss), and explanatory notes are based on estimates and assumptions set forth in the explanatory notes. These unaudited pro forma combined condensed balance sheet, unaudited pro forma combined condensed statement of operations and unaudited pro forma combined condensed statement of comprehensive income (loss) have been prepared utilizing the historical financial statements of Level Brands to the extent such has been filed previously with the Securities and Exchange Commission. Other unaudited combined condensed financial information has been obtained from the company records of Cure Based Development.
The unaudited pro forma combined condensed statement of operations for the year ended September 30, 2018 and unaudited pro forma condensed statement of comprehensive income (loss) for the year ended September 30, 2018 have been prepared as if the mergers of Cure Based Development LLC and CBDMD LLC had been consummated on October 1, 2017. The unaudited pro forma combined condensed balance sheet as of September 30, 2018 has been prepared as if the mergers of Cure Based Development LLC and CBDMD LLC was consummated on September 30, 2018.
These unaudited pro forma combined condensed financial statements are provided for illustrative purposes only, and do not purport to be indicative of the actual financial position or results of operations had the mergers occurred at the beginning of the period presented, nor are they necessarily indicative of the results of future operations. The unaudited pro forma condensed financial statements do not reflect any operating efficiencies and/or cost savings that the combined entity may achieve with respect to the combined companies.
LEVEL BRANDS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET AS OF
SEPTEMBER 30, 2018
(UNAUDITED)
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| ASSETS | | | | | |
| Current Assets: | | | | | |
| Cash and cash equivalents | $4,282,553 | $256,850 | $5,356,998 | (2,3) | $9,896,401 |
| Accounts receivable | 307,874 | 102,655 | - | | 410,529 |
| Accounts receivable related party | 1,537,863 | - | - | | 1,537,863 |
| Accounts receivable other | 1,743,874 | - | - | | 1,743,874 |
| Marketable securities | 1,050,961 | - | - | | 1,050,961 |
| Investment other securities | 1,159,112 | - | - | | 1,159,112 |
Receivable from Payment Processor | - | 533,862 | - | | 533,862 |
| Note receivable | 459,000 | - | - | | 459,000 |
| Note receivable related party | 156,147 | - | - | | 156,147 |
| Deferred issuance costs | 28,049 | - | - | | 28,049 |
| Prepaid rent | 180,000 | - | - | | 180,000 |
Prepaid expenses and other current assets | 561,491 | - | - | | 561,491 |
| Prepaid consulting agreement | 200,000 | - | - | | 200,000 |
| Inventory | 123,223 | 1,020,259 | - | | 1,143,482 |
| Total Current Assets | 11,790,147 | 1,913,626 | 5,356,998 | | 19,060,771 |
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| Property and equipment, net | 53,480 | 609,309 | - | | 662,789 |
| Goodwill | - | - | 54,876,483 | (3) | 54,876,483 |
| Intangible assets, net | 3,173,985 | - | 21,585,000 | (3) | 24,758,985 |
| Total Assets | $15,017,612 | $2,522,935 | $81,818,481 | | $99,359,028 |
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see notes to unaudited combined condensed pro forma financial statements
F-2
LEVEL BRANDS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF SEPTEMBER 30, 2018
(UNAUDITED)
(continued)
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| LIABILITIES AND MEMBERS' EQUITY | | | | | |
| Current Liabilities: | | | | | |
| Accounts payable | $473,717 | $139,879 | $- | | $613,596 |
| Accounts payable related party | 7,860 | $- | - | | 7,860 |
| Deferred revenue | 161,458 | - | - | | 161,458 |
| Note payable related party | - | 2,010,300 | (1,000,000) | (3) | 1,010,300 |
| customer deposit | - | 265,000 | - | | 265,000 |
| Accrued expenses | 6,920 | 186,144 | - | | 193,064 |
| Accrued expenses related party | 320,000 | 42,652 | - | | 362,652 |
| Total Current Liabilities | 969,955 | 2,643,975 | (1,000,000) | | 2,613,930 |
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| Long Term Liabilities: | | | | | |
| Long term liabilities | 7,502 | - | - | | 7,502 |
| Contingent liability | - | - | 71,353,483 | (3) | 71,353,483 |
| Deferred tax liability | 21,000 | - | 5,108,000 | (3) | 5,129,000 |
| Total Long Term Liabilities | 28,502 | - | 76,461,483 | | 76,489,985 |
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| Shareholders' Equity: | | | | | |
| Preferred Stock | - | - | - | | - |
| Common stock | 8,124 | - | 1,971 | (2) | 10,095 |
| Paid In Capital | 21,781,095 | 771,053 | 6,355,027 | (2) | 28,907,175 |
Accumulated other comprehensive income (loss) | (2,512,539) | - | - | | (2,512,539) |
| Accumulated deficit | (6,669,497) | (892,093) | - | | (7,561,590) |
| Total Shareholders' Equity | 12,607,183 | (121,040) | 6,356,998 | | 18,843,141 |
| Non-controlling interest | 1,411,972 | - | - | | 1,411,972 |
| Total Shareholder' Equity | $14,019,155 | $(121,040) | $6,356,998 | | $20,255,113 |
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| Total liabilities and shareholders' equity | $15,017,612 | $2,522,935 | $81,818,481 | | $99,359,028 |
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see notes to unaudited combined condensed pro forma financial statements
F-3
LEVEL BRANDS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2018
(UNAUDITED)
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| Sales | $6,453,173 | $3,998,281 | $- | | $10,451,454 |
| Sales related party | 1,992,046 | | | | 1,992,046 |
| Total Gross Sales | 8,445,219 | | | | 8,445,219 |
| Less returns and allowances | (25,077) | (101,723) | - | | (126,800) |
| Net sales | 6,428,096 | 3,896,558 | - | | 10,324,654 |
| Net sales related party | 1,992,046 | | | | 1,992,046 |
| Total Net Sales | 8,420,142 | 3,896,558 | | | 12,316,700 |
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| Cost of sales | 2,673,272 | 946,536 | - | | 3,619,808 |
| Gross profit | 5,746,870 | 2,950,022 | - | | 8,696,892 |
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| Operating expenses | 5,629,771 | 3,715,738 | - | | 9,345,509 |
| Loss from operations | 117,099 | (765,716) | - | | (648,617) |
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| Loss on disposal of property | 69,310 | - | - | | 69,310 |
| Interest expense | 955 | 72,110 | - | | 73,065 |
| Income (loss) before provision for income taxes | 46,834 | (837,826) | - | | (790,992) |
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| Provision for income taxes | 16,000 | - | - | | 16,000 |
| Net Income (loss) | 62,834 | (837,826) | - | | (774,992) |
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| Net Income (loss) attributable to non-controlling interest | 474,909 | - | - | | 474,909 |
| Net loss attributable to Level Brands, Inc. common shareholders | $(412,075) | $(837,826) | $- | | $(1,249,901) |
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| Net loss per share, basic and diluted | $(0.05) | | | (5) | $(0.05) |
| Weighted average number of shares outstanding | 7,742,644 | | | | 24,964,072 |
see notes to unaudited combined condensed pro forma financial statements
F-4
LEVEL BRANDS, INC.
UNAUDITED PRO FORMA COMBINED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR ENDED SEPTEMBER 30, 2018
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| Net Income (Loss) | $62,834 | $(837,826) | $- | $(774,992) |
Other Comprehensive Income: Net Unrealized Gain (Loss) on Marketable Securities, net of tax of $0 | (2,512,539) | - | - | (2,512,539) |
| Comprehensive Income (Loss) | (2,449,705) | (837,826) | - | (3,287,531) |
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| Comprehensive Income (Loss) attributable to non-controlling interest | 474,909 | - | - | 474,909 |
| Comprehensive Income (Loss) attributable to Level Brands, Inc. common shareholders | $(2,924,614) | $(837,826) | - | $(3,762,440) |
see notes to unaudited combined condensed pro forma financial statements
F-5
LEVEL BRANDS, INC.
NOTES TO
UNAUDITED PRO-FORMA COMBINED CONDENSED BALANCE SHEET AS OF SEPTEMBER 30, 2018 AND
THE PRO-FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 2018
1. – Basis of Pro Forma Presentation
These unaudited pro forma combined condensed financial statements have been compiled from and include:
i.
An audited consolidated balance sheet of Level Brands as of September 30, 2018.
ii.
An unaudited condensed balance sheet of Cure Based Development as of September 30, 2018.
iii.
An audited consolidated statement of operations of Level Brands for the year ended September 30, 2018.
iv.
An unaudited condensed statement of operations of Cure Based Development for the twelve months ended as of September 30, 2018.
Cure Based Development’s fiscal year end was December 31, therefore we utilized their financial results from the periods which aligned with our year end of September 30 as we created the unaudited pro forma combined condensed financial statements.
The assets acquired and liabilities assumed were recorded as preliminary estimates of fair values determined by management, based on information currently available and on current assumptions as to future operations, and are subject to change upon the completion of acquisition accounting, including the finalization of asset valuations. These changes could result in material variances between the Company’s future financial results and the amounts presented in these unaudited pro forma combined condensed financial statements, including fair values recorded, as well as expenses and cash flows associated with these items.
The unaudited pro forma combined condensed financial statements are presented for illustrative purposes only and are not necessarily indicative of the operating results that would have occurred if the Company had operated CBD for the year ended September 30, 2018, nor is it necessarily indicative of future operating results or financial position. The unaudited pro forma combined condensed financial statements do not reflect any operating efficiencies, adjustments for non-recurring expenses recorded by both Level Brands and CBD (see note 6), or cost savings that the Company may achieve with respect to the combined companies.
The unaudited pro forma combined condensed financial statements should be read in conjunction with the historical audited financial statements and notes to financial statements of Level Brands contained in its 2018 Annual Report on Form 10-K.
2. – Equity Financings
On October 2, 2018, the Company completed a secondary public offering of 1,971,428 shares of its common stock for aggregate gross proceeds of $6,899,998.
(a)
The Company received $6,356,998 in net proceeds after deducting underwriting discounts and commissions and other estimated offering expenses payable by us.
(b)
A proforma adjustment to reflect this equity financing in the unaudited pro forma combined condensed balance sheet as of September 30, 2018 was made as if the financing occurred on September 30, 2018.
3. – Preliminary Purchase Price Allocation and Pro Forma Adjustments
The adjustments included in the unaudited pro forma combined condensed financial statements are those that are considered to be directly attributable to the merger with Cure Based Development. The total purchase consideration is $3,000,000 in cash and 30,500,000 shares of Level Brands common stock to be issued upon shareholder approval (including Earnout Shares - shares that could be issued upon achievement of future revenue targets). In accordance with purchase accounting rules under ASC 805 guidance, the consideration the Company transfers in exchange for Cure Based Development includes any asset or liability resulting from a contingent consideration arrangement. The Company has an obligation to transfer 15,250,000 common shares of Level Brands, upon shareholder approval, to the members of Cure Based Development. In addition, the Company has an obligation to potentially transfer Earnout Shares, which could total an additional 15,250,000 shares. The issuance of the Earnout Shares is based on CBDMD meeting certain revenue targets over the next five years. Both of these share issuances have been determined as contingent liabilities and were valued using both a market approach method and a monte carlo simulation.
The following purchase consideration is as follows:
| 6,500,000 shares - tranche 1 | $16,601,367 |
| 8,750,000 shares - tranche 2 leak out shares | 18,811,117 |
| Earnout potential shares | 35,941,000 |
| Note paid | 1,000,000 |
| Cash provided via advance | 2,000,000 |
| Total Purchase Consideration | $74,353,483 |
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| Assets acquired: | |
| Cash and cash equivalents | $1,822,331 |
| Accounts receivable | 850,921 |
| Inventory | 1,054,926 |
| Other current assets | 38,745 |
| Property and equipment, net | 608,947 |
| Intangible assets | 21,585,000 |
| Goodwill | 55,258,545 |
| Total assets acquired | 81,219,415 |
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| Liabilities assumed: | |
| Accounts payable | 257,081 |
| Notes payable – related party | 764,300 |
| Customer deposits - related party | 265,000 |
| Accrued expenses | 471,551 |
| Deferred tax liability | 5,108,000 |
| Total Liabilities assumed | 6,865,932 |
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| Net Assets Acquired | $74,353,483 |
In connection with the purchase price allocation, the Company recorded a deferred tax liability of approximately $5,108,000, with a corresponding increase to goodwill, for the tax effect of the acquired intangible assets from Cure Base Development. This liability was recorded as there will be no future tax deductions related to the acquired intangibles, and we have identified these as indefinite-lived intangible assets.
The adjustments included in the unaudited pro forma combined condensed balance sheet as of September 30, 2018 that are considered to be directly attributable to the merger with Cure Based Development and purchase accounting are as follows:
| Asset adjustments: | |
| Cash and cash equivalents | $(1,000,000) |
| Intangible assets | 21,585,000 |
| Goodwill | 54,876,483 |
| Total asset adjustments | 75,461,483 |
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| Liabilities adjustments: | |
| Notes payable – related party | $(1,000,000) |
| Contingent Liability | 71,353,483 |
| Deferred tax liability | 5,108,000 |
| Total liabilities adjustments | 75,461,483 |
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The goodwill asset adjustment amount for the unaudited pro form combined condensed balance sheet as of September 30, 2018 is $382,062 different than the purchase price accounting amount recorded for the merger. The difference is due to the estimated change in the fair value of assets acquired and liabilities assumed from the actual acquisition date of December 20, 2018 and the pro forma financial statement date of September 30, 2018.
4.
Income Tax Expense / Benefit
Cure Based Development did not record any tax expense for the period ended September 30, 2018. For the period ended September 30, 2018, Cure Based Development had not recorded any income tax benefit against its net losses as it determined it was appropriate to set up full valuation allowances against the net deferred tax assets.
As a result of the Mergers, the Company established as part of the purchase price allocation a net deferred tax liability related to the book-tax basis of certain assets and liabilities of approximately $5.1 million.
The Company has a valuation allowance against the net deferred tax assets, with the exception of the deferred tax liabilities that result from indefinite-life intangibles which cannot be offset by deferred tax assets and the deferred tax liabilities that resulted from the Mergers with Cure Based Development.
Level Brands files income tax returns in the United States, and various state jurisdictions. Our policy is to recognize interest expense and penalties related to income tax matters as tax expense. At September 30, 2018 there are no unrecognized tax benefits, and there are no significant accruals for interest related to unrecognized tax benefits or tax penalties.
5.
Pro Forma Weighted Average Shares
The pro forma basic and diluted earnings per share amounts presented in the unaudited pro forma combined condensed statement of operations are based on the weighted average number of the Company’s common shares outstanding at September 30, 2018 as adjusted for the following:
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| Weighted average shares outstanding | 7,742,644 |
| Weighted average effect of CBD shares issued for the mergers | 15,250,000 |
| Issuance of shares with equity financing | 1,971,428 |
| Combined pro forma weighted average shares | 24,964,072 |
Common stock equivalents were not considered as the effects were anti-dilutive.
During the year ended September 30, 2018, the Company determined that inventory held under the Beauty & Pin-Ups subsidiary was impaired by approximately $262,000.
The Company has performed a qualitative and quantitative analysis for the year ended September 30, 2018 accounting for the performance of Beauty and Pin-Ups and the business shift in relation to its original business model and current focus on licensing and has determined that an impairment was required. As a result, the Company recorded an impairment charge of $240,000 as impairment to intangibles under the products segment for the year ended September 30, 2018.
The Company disposed of a show booth held under the Beauty & Pin-Ups subsidiary, in the year ended September 30, 2018, and recorded a loss on disposal of property of $69,310.
