Quarterly report pursuant to Section 13 or 15(d)

CONTINGENT CONSIDERATION LIABILITY

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CONTINGENT CONSIDERATION LIABILITY
6 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
Note 9. CONTINGENT CONSIDERATION LIABILITY

The Company accounts for “contingent consideration” according to FASB ASC 805, “Business Combinations”. Contingent consideration typically represents the acquirer’s obligation to transfer additional assets or equity interests to the former owners of the acquiree if specified future events occur or conditions are met. FASB ASC 805 requires that contingent consideration be recognized at the acquisition-date fair value as part of the consideration transferred in the transaction.

 

In the acquisition of Black Oak, the Company valued the contingent consideration based on an analysis using a cash flow model to determine the expected contingent consideration payment, which model determined that the aggregate expected contingent consideration liability was $15,305,463 and the present value of the contingent consideration liability was $12,754,553. Accordingly, the Company recognized at April 1, 2016, the closing date of the Black Oak merger, a $12,754,553 contingent consideration liability associated with the contingent consideration paid pursuant to the Merger Agreement.

 

On April 1, 2017, the anniversary date of the acquisition and the settlement date of the contingent consideration, the final contingent consideration was approximately $16.5 million. A summary of the changes in the contingent consideration as well as the detail is below:

 

    Amount  
       
Contingent Consideration Summary      
       
Balance at December 31, 2016   $ 12,085,859  
Change in Fair Market Valuation of Contingent Consideration     4,348,761  
         
Balance at March 31, 2017 and April 1, 2017   $ 16,434,620  
         
Contingent Consideration Detail        
         
Performance-Based Cash Contingent Consideration   $ 2,088,000  
Market-Based Stock Contingent Consideration     14,346,620  
         
    $ 16,434,620  

 

Changes in the fair market valuation of the contingent consideration are recognized in the consolidated statements of operations. For the three and six months ended June 30, 2017, the loss on fair market valuation of contingent consideration was $77,286, and $4,426,047, respectively.

 

During April 2017, in final settlement of the contingent consideration, the Company issued approximately $4.7 million in shares of its common stock, or common stock equivalent of approximately 18.1 million shares of its common stock, and made a cash payment of approximately $2.1 million. A summary is as follows:

 

Contingent Consideration Balance at March 31, 2017   $ 16,434,620  
         
Change in Fair Market Valuation of Contingent Consideration     77,286  
Payment of Contingent Consideration in Cash     (2,088,000 )
Settlement of Contingent Consideration     (4,739,638 )
Settlement of Contingent Consideration Recorded Against Additional Paid-In Capital     (4,692,697 )
Gain on Settlement of Contingent Consideration     (4,991,571 )
         
Contingent Consideration Balance at June 30, 2017   $  

  

Pursuant to the terms of the contingent consideration as outlined in the Merger Agreement, the Company was required to release from escrow shares worth approximately $14.4 million. Of those shares, 18.1 million shares, with a value of $4,789,638, were issued in final settlement of the Market-Based Contingent Consideration, and approximately 34.2 million shares were additionally clawed-back. The Market-Based Clawback associated with common stock equivalent of approximately 35.1 million shares were clawed-back pursuant to the appreciation of the quoted price of the Company’s stock underlying the market-based component of the contingent consideration. An additional common stock equivalent of approximately 34.2 million shares, with a value of $9,684,268, were clawed-back pursuant to disputes between the sellers of Black Oak and the Company with respect to certain operational and performance goals that would have impacted the appreciation of the quoted price of the Company’s common stock underlying the market-based component of the contingent consideration and, in effect, increasing the number of clawback shares. For the three and six months ended June 30, 2017, the Company recognized a gain on settlement of contingent consideration of $4,991,571. The balance attributable to related parties was recorded in additional paid in capital.

   

See “Note 10 – Fair Value Measurements” for further information.