CONTINGENT CONSIDERATION LIABILITY
|3 Months Ended|
Mar. 31, 2017
|Notes to Financial Statements|
|Note 9. CONTINGENT CONSIDERATION LIABILITY||
The Company accounts for contingent consideration according to FASB ASC 805, Business Combinations (FASB ASC 805). Contingent consideration typically represents the acquirers 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 Gallery, 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, as well as the settlement date of the contingent consideration, the final contingent consideration was $16,434,620, or approximately $1.1 million greater than the expected contingent consideration liability of $15,305,463 which the Company estimated on April 1, 2016, the closing date of the Black Oak acquisition.
At March 31, 2017 and December 31, 2016, the total contingent consideration based upon the analysis using the cash flow model to determine the expected contingent consideration payment was $16,434,620 and $12,085,858, respectively, a difference of approximately $4.3 million. The increase was primarily due to i.) revisions in the estimated probability that the upper threshold of $16,667,000 of the revenue target component of the contingent consideration would be met, which revenue target was met as of April 1, 2017, and ii.) the change in the quoted price of the underlying shares of the Companys common stock which change affected the number of shares to be issued pursuant to the contingent consideration.
Changes in the fair market valuation of contingent consideration are recognized in the consolidated statements of operations. For the three months ended March 31, 2017, the change in the fair market valuation of contingent consideration was $4,348,761 which amount reflects the final settlement of the change in fair value of the Contingent Consideration liability.
See Note 10 Fair Value Measurements for further information.
See Note 16 Subsequent Events for further information on the final settlement of the contingent consideration liability during the month ended April 2017.