BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

6 Months Ended

Jun. 30, 2019

Notes to Financial Statements

NOTE 13 - BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

CHI Acquisition

On May 14, 2019, the Company acquired all of the issued and outstanding stock of CHI for shares of the Company’s Common Stock. The maximum number of shares of Common Stock to be issued, including escrowed shares and shares issuable pursuant to a variety of earn-out provisions and warrants, is 32,072,283 shares. The shares are allocated as follows: (i) 5,700,000 shares of Common Stock as upfront consideration issued at the Closing (the “Upfront Consideration Shares”); (ii) 7,128,913 shares to be held in escrow, subject to indemnification and clawback rights that lapse upon the achievement of certain milestones (the “Clawback Shares”); (iii) up to 3,207,228 shares that may be issued pursuant to an earn-out over five years upon the achievement of certain technological implementations (“Achievement Shares”); (iv) up to 8,018,071 shares that may be issued pursuant to an earn-out over two years upon the achievement of certain revenue goals (“Earnout Shares”); and (v) up to 8,018,071 shares issuable upon exercise of warrants (“Acquisition Warrants”) that become exercisable upon achieving certain revenue goals between the second and fourth anniversary of the Closing Date at an exercise price of $5.01 per share, exercisable, to the extent vested, for five years from the Closing Date. In exchange for the assets and liabilities acquired, the Company received an investment of $2,000,000 (the “Principal Amount”) from Chemistry Holdings pursuant to a convertible note (the “Note”). Such Note, on the Closing Date, became an intercompany payable and was cancelled.

CHI has developed a novel chewable delivery system, nanoemulsions, microemulsions, microcapsules and taste masking solutions. These technologies complement and expand the CUREfilm™ platform to enable the delivery of a wider range of active ingredients at higher doses. The combined technologies create a versatile platform for both immediate and controlled-release drug delivery.

The acquisition was accounted for in accordance with ASC 805, Business Combinations.  The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 32,072,283 total potential shares to be issued, 26,372,283 shares are considered contingent shares to be release or issued over a period from 5 months to 5 years based on the various contingency as described in the Merger Agreement. (“Contingent Shares”). Under ASC 480-10-25, based on the variable number of shares to be issued as part of the acquisition, the fair value of the Contingent and Acquisition Warrant Shares of $14,632,000 will be recorded as a liability as contingent share consideration.

  The Company estimated the fair value of the preliminary purchase price for the acquisition of CHI is approximately $34,069,942. The Company acquired CHI through the issuance of shares of Common Stock of the Company with no cash consideration provided. The preliminary total purchase price was determined based on the following: i) Company’s closing price ($3.34) on May 14, 2019 for the Upfront Consideration Share; ii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 66 month performance period applied to the total number of contingent shares, which consists of the Clawback Shares, Achievement Shares and Earnout Shares, as determined based on the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished (“Adjusted Contingent Shares”); iii) the fair value of the Acquisition Warrant Shares based on using the Black-Scholes valuation using the a risk free rate of 2.4%, stock price volatility of 134.7%, no dividend payout, 1 year expected life, exercise price of $5.01 and an estimated stock price of $0.39 based on the end of the earn-out period, year 4 (as determine by using a Monte-Carlo simulation model); and iv) the Company estimated acquisition costs of $399,942, of which $290,209 were included in general and administrative expenses for the period ended June 30, 2019.

	Shares		Amount
Upfront Consideration Shares		5,700,000	$	19,038,000
Adjusted Contingent Shares		8,410,875		14,627,358
Acquisition Warrant Shares		8,018,071		4,642
Acquisition costs		-		399,942
Total purchase price		22,128,946	$	34,069,942

The Company estimated the fair value of acquired in-process research and development technology using the relief from royalty method. The fair values of acquired patents and developed technology were estimated using the multi-period excess earnings method. Under both the relief from royalty and multi-period excess earnings methods, the fair value models incorporate estimates of future cash flows, estimates of allocations of certain assets and cash flows, estimates of future growth rates, and management’s judgment regarding the applicable discount rates to use to discount such estimates of cash flows. The estimated useful lives of identifiable finite-lived intangible assets range from 11 to 14 years.

The Company allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures.

The excess of the purchase price over the estimated fair values is assigned to goodwill.

The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed in the CHI acquisition, which is subject to change during measurement period:

Net assets acquired:
Cash	$	8,487,489
Note receivable from CURE		2,000,000
Property, plant and equipment		82,700
Patents and development technology		650,000
In-process research and development		14,460,000
Goodwill		9,178,477
Accounts payable		(353,856	)
Payroll tax liabilities		(834,810	)
Net assets acquired		33,670,000
Acquisition costs		399,942
Net assets acquired and acquisition costs incurred	$	34,069,942

Information regarding identifiable intangible assets acquired in the CHI acquisition is presented below:

	Weighted-average Estimated useful life	Preliminary Estimated Asset Fair Value
Finite-lived intangible assets:
Patent and developed technology	11.0 years	$	650,000
In-Process research and development	14.0 years		14,460,000
Total finite-lived intangible assets acquired	14.0 years		15,110,000

Supplemental Pro Forma Information

The following unaudited supplemental pro forma financial information is based on our historical condensed consolidated financial statements and CHI’s historical condensed consolidated financial statements as adjusted to give effect to the May 14, 2019 acquisition of CHI’s. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition as if it had occurred on January 1, 2018.

This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.

The following table presents pro forma sales, net income attributable to Cure Pharmaceuticals Holding, Inc., and net income attributable to CURE per common share data assuming CHI was acquired at the beginning of the 2018 fiscal year:

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Net revenues	$	107,926		$	407,588		$	182,426		$	838,774
Net loss		(14,590,578			(2,344,350			(24,739,485			(4,200,631
Net loss attributable to Cure per common share, basic	$	(0.36	)	$	(0.08	)	$	(0.67	)		(0.14
Net loss attributable to Cure per common share, diluted		(0.36			(0.08			(0.67			(0.14

Deconsolidation of Oak Therapeutics, Inc.

On April 15, 2019, the Company entered into a Termination and Release Agreement (“Agreement”) with Oak Therapeutics (“Oak”) to surrender all of its Oak shares to Oak and terminating any rights the Company might have to acquire additional shares or interest in Oak. The parties terminated all contractual relationships between them, whether written or verbal, express or implied. All license or other rights previously granted by Oak to the Company or the Company to Oak were terminated, including all licenses or rights of any kind granted by the Company. As of the date of deconsolidation, Oak has a negative net assets, which resulted in a gain of $80,868.

In the Company’s condensed consolidated financial statements for the six months period ended June 30, 2019, the Company’s investment in Oak has been written off and was reflected at a value of zero.

The following information summarizes the results of operations of Oak for the period January 1, 2019 through April 15, 2019, the date of deconsolidation:

	January 1, 2019 through April 15, 2019
Revenue	$	-
Net loss	$	29,185