BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

12 Months Ended

Dec. 31, 2021

BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

NOTE 20 – BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

Sera Labs Acquisition

On October 2, 2020, the Company acquired all of the issued and outstanding stock of Sera Labs. All issued and outstanding shares of the capital stock of Sera Labs were converted into the right to receive, subject to customary adjustments, an aggregate of approximately (i) $1.0 million in cash (the “Upfront Payment”) and (ii) up to 6,909,091 shares of the Company’s common stock. On October 1, 2020, the Parties entered into a Waiver of Closing Condition, pursuant to which the Company’s obligation to pay the Upfront Payment at the Effective Time was extended to October 13, 2020. Pursuant to the Sera Labs Merger Agreement, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as set forth in the Sera Labs Merger Agreement. Subsequent to the Effective Time and for a period of two years, the Company agreed to make available to Sera Labs $4.0 million for working capital, less the outstanding amount of the Secured Promissory Note previously issued by the Company to Sera Labs.

Sera Labs is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. Its more than 20 products are sold under the brand names Seratopical™, SeraLabs™, and Gordon’s Herbals™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health & wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.

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 12,897,115 total potential shares to be issued, 5,988,024 shares are considered contingent shares based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as described in the Sera Labs 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 Shares of $3.1 million will be recorded as a liability as contingent share consideration as of October 2, 2020.

(Dollars in thousands)	Fair Value of the Contingent Share Consideration
Fair value at December 31, 2020	$	3,205
Fair value at December 31, 2021		1,430
Net change in fair value during the year ended December 31, 2021	$	(1,775	)

The Company estimated the fair value of the preliminary purchase price for the acquisition of Sera Labs is approximately $14.2 million. The Company acquired Sera Labs through the issuance of shares of Common Stock of the Company with $1 million of cash consideration to be provided. The preliminary total purchase price was determined based on the following: i) $1 million of the Upfront Payment ii) Company’s closing price ($1.38) on October 2, 2020 for the closing merger consideration shares; and iii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 24 month performance period applied to the Clawback Shares.

(Dollars in thousands)	Shares		Amount
Upfront Payment		-	$	1,000
Closing Merger Consideration Shares		6,909,091		9,535
Contingent Consideration Shares (Clawback Shares)		5,988,024		3,083
Liabilities assumed		-		550
Total purchase price		12,897,115	$	14,168

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 was assigned to goodwill.

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

(Dollars in thousands)
Net assets acquired:
Cash	$	1,357
Other assets		1,440
Property, plant and equipment		6
Other long term assets		384
Intangibles assets		10,182
Goodwill		4,687
Accounts payable and accrued expenses		(1,063	)
Contract liabilities		(1,963	)
Other current liabilities		(462	)
Other long-term liabilities		(400	)
Net assets acquired	$	14,168

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

(Dollars in thousands)	Weighted- average Estimated useful life	Preliminary Estimated Asset Fair Value
Finite-lived intangible assets:
Customer relationships	5.0 years	$	7,110
Tradename	4.0 years	$	2,610
Non-compete	2.0 years	$	462
Total finite-lived intangible assets acquired	4.6 years	$	10,182

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 million (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.

On June 5, 2020 (the “Release Effective Date”), the Company and CHI, entered into a Release, Waiver, and Amendment (the “Agreement”) and a related Warrant Amendment Agreement (“Warrant Amendment”), in order to make a full resolution of the shares issuable pursuant to the CHI Merger. The Agreement provided as follows: (a) all7,128,913r shares held in escrow were released to the Holders as of the Release Effective Date, of which 140,828shares were returned to the Company for cancellation in consideration for the Company committing to pay certain outstanding liabilities, (b) of the 11,225,299 total shares issuable pursuant to the earn-out provisions in the CHI Merger Agreement, 5,612,654 shares were issued to the Holders as of the Release Effective Date (310,821 of which were assigned back to the Company as of the Release Effective Date) and the obligation of the Company to issue any further earn-out shares was terminated, and (c) certain Holders exercised warrants issued in the CHI Merger to purchase708,467 shares of Common Stock on the Release Effective Date at a price of $2.00 per share (which reflects a reduced exercise price as a result of the Warrant Amendment) for gross proceeds to the Company of approximately $1.4million and the remaining warrants to purchase 7,309,605 shares of Common Stock issued in the CHI Merger expired on the Release Effective Date as a result of an amendment of such warrants effected pursuant to the Warrant Amendment.

As previously disclosed, the Company undertook to issue warrants to purchase an additional 4,143,706 shares of common stock to certain affiliates of CHI in consideration for consulting and advisory services to be provided following the closing of the CHI Merger (the “Service Warrants”). Pursuant to the Agreement, the undertaking by the Company to issue the Service Warrants was terminated as of the Release Effective Date.

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 released 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 $14.6 million will be recorded as a liability as contingent share consideration as of May 14, 2019. Below is the change of contingent share consideration during the year ended December 31, 2020:

(Dollars in thousands)	Fair Value of the Contingent Share Consideration
Fair value at December 31, 2018	$	-
Fair value at May 14, 2019		14,632
Net change in fair value during the year ended December 31, 2019		1,657
Fair value of common stock shares to be released from escrow and to be issued		(246	)
Fair Value at December 31, 2019		16,043
Settlement of contingent consideration liability		(21,701	)
Net change in fair value during the year ended December 31, 2020		5,658
Fair Value at December 31, 2020	$	-

Supplemental Pro Forma Information

The following unaudited supplemental pro forma financial information is based on our historical consolidated financial statements, CHI’s historical consolidated financial statements and Sera Lab’s historical consolidated financial statements as adjusted to give effect to the May 14, 2019 acquisition of CHI’s and the October 2, 2020 acquisition of Sera Labs. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition for CHI as if it had occurred on January 1, 2018 and January 1, 2019 for Sera Labs.

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 loss attributable to Cure Pharmaceutical Holding, Inc., and net loss attributable to the Company per common share data assuming Sera Labs and CHI were acquired at the beginning of 2019 fiscal year.

For the year ended December 31, 2020 (in thousands, except per share data):

	Cure Pharmaceutical			Sera Labs			Pro forma Adjustments			Consolidated Pro Forma
Net product sales	$	1,049		$	6,728		$	(34	)	$	7,743
Net loss	$	(29,059	)	$	(3,051	)	$	162		$	(31,948	)
Net loss attributable to Cure per common share, basic and diluted	$	(0.65	)	$	(0.26	)				$	(0.68	)