Quarterly report pursuant to Section 13 or 15(d)

CONTINGENT CONSIDERATION LIABILITY

v3.5.0.2
CONTINGENT CONSIDERATION LIABILITY
6 Months Ended
Jun. 30, 2016
Notes to Financial Statements  
Note 11. CONTINGENT CONSIDERATION LIABILITY

The Company accounts for "contingent consideration" according to FASB ASC 805 Business Combinations ("FASB ASC 805"). 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. FASB ASC 805 uses the fair value definition in Fair Value Measurements, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As defined in FASB ASC 805, contingent consideration is (i) an obligation of the acquirer to transfer additional assets or equity interests to the former owners of an acquiree as part of the exchange for control of the acquire, if specified future events occur or conditions are met or (ii) the right of the acquirer to the return of previously transferred consideration, if specified conditions are met.

 

Accordingly, the Company valued the Holdback Consideration and the Performance-based Cash Consideration (collectively, 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.

 

In determining the likelihood of payouts related to the Contingent Consideration, the probabilities for various scenarios (e.g., a 75% probability that the maximum amount of Contingent Consideration will be payable), as well as the discount rate used in the Company's calculations were based on internal projections, all of which were vetted by the Company's senior management.

 

Holdback Consideration

 

The Holdback Consideration is comprised of (i) the market-based clawback amount (the "Market-Based Clawback Amount") and (ii) the performance-based clawback amount (the "Performance-Based Clawback Amount"). The Holdback Consideration, which is comprised of shares of our preferred stock, was issued on April 1, 2016, the closing date of the Black Oak merger, and will be held in an escrow account for a period of one year.

 

The Market-Based Clawback Amount is determined as follows:

 

  a) If the Terra Tech Common Stock 30-day VWAP on the one-year anniversary date of the Merger Agreement exceeds the Terra Tech Closing Price, the Market-Based Clawback Amount shall mean the number of shares of Terra Tech Common Stock equal to (i) (A) $4,912,000.00 divided by (B) the Terra Tech Closing Price, less (ii) (A) $4,912,000.00 divided by (B) the Terra Tech Common Stock 30-day VWAP on such date.
     
  b) If the Terra Tech Common Stock 30-day VWAP on the one-year anniversary date of the Merger Agreement is less than or equal to the Terra Tech Closing Price, the Market-Based Clawback Amount shall be zero shares.

 

In no event will the Market-Based Clawback Amount exceed 50% of the Holdback Consideration.

 

The Performance-Based Clawback Amount is determined as follows:

 

  a) The "Lower Threshold" means an amount equal to $11,979,351.00, and the "Upper Threshold" means an amount equal to $16,667,000.00.
     
  b) If Black Oak's operating revenues for the 12-month period following the closing date of the Black Oak merger (the "Year 1 Revenue") is less than the Lower Threshold, then the Performance-Based Clawback Amount will be the number of shares obtained from a quotient, (A) the numerator of which is equal to the sum of (1) $4,912,000.00, plus (2) the product of 1.5 multiplied by the difference between the Lower Threshold and the Year 1 Revenue, and (B) the denominator of which is the Terra Tech common stock 30-day VWAP as of the one-year anniversary date of the closing of the Black Oak merger.
     
  c) If the Year 1 Revenue is greater than or equal to the Lower Threshold but is less than the Upper Threshold, then the Performance-Based Clawback Amount will be the number of shares obtained from a quotient, (A) the numerator of which is equal to the product of 1.053 multiplied by the difference between the Upper Threshold and the Year 1 Revenue, and (B) the denominator of which is the Terra Tech common stock 30-day VWAP as of the one-year anniversary date of the closing of the Black Oak merger.
     
  d) If the Year 1 Revenue is greater than or equal to the Upper Threshold, then the Performance-Based Clawback Amount will be zero shares

 

The Company calculated the Contingent Consideration based upon the following formula:

 

Performance-based Cash Consideration

 

Pursuant to the Merger Agreement, the Group B Shareholders may receive cash consideration of up to approximately $2,088,000 to be paid on approximately the one-year anniversary date of the closing of the Black Oak merger, to be determined as follows:

 

  (a) $0 if Year 1 Revenue is less than or equal to $12,000,000; and
     
  (b) the product obtained by multiplying 0.447 times Year 1 Revenue if Year 1 Revenue is greater than $12,000,000; provided, that in no event will the Performance-based Cash Consideration amount exceed $2,088,000.

 

For example, pursuant to the above formula, if the revenue in Year 1 equals $16,666,666, then the Performance-based Cash Consideration will be $2,088,000 calculated as follows:

 

Year 1 Revenue   $ 16,666,666  
Less:   $ 12,000,000  
    $ 4,666,666  
      0.44742864  
Performance-based Cash Payment   $ 2,088,000  

 

            One-year Anniversary
Date of the
Merger
    Value of
Common
    Performance-Based           Probability-Weighted
Amounts
       
Year 1           30-Day     Stock to     Cash           Earn-out     Performance-        
Revenue           VWAP     Issue     Payment     Probability     Shares     Based Cash     Total  
                                                                 
              5 %   $ 15,636,342     $ 2,088,000       3.8 %   $ 586,363     $ 78,300     $ 664,663  
            $ 0.2162                                                  
                                                                 
Upside     75 %     15 %   $ 13,753,811     $ 2,088,000       11.3 %   $ 1,547,304     $ 234,900     $ 1,782,204  
$ 16,667,000           $ 0.3162                                                  
                                                                   
                80 %   $ 12,775,908     $ 2,088,000       60.0 %   $ 7,665,545     $ 1,252,800     $ 8,918,345  
              $ 0.4162                                                  
                                                                   
                5 %   $ 11,813,030     $ 747,500       1.0 %   $ 118,130     $ 7,475     $ 125,605  
              $ 0.2162                                                  
                                                                   
Base     20 %     15 %   $ 11,139,643     $ 747,500       3.0 %   $ 334,189     $ 22,425     $ 356,614  
$ 13,670,835           $ 0.3162                                                  
                                                                   
                80 %   $ 10,789,844     $ 747,500       16.0 %   $ 1,726,375     $ 119,600     $ 1,845,975  
              $ 0.4162                                                  
                                                                   
                5 %   $ 7,312,181     $ 0       0.3 %   $ 18,280     $ 0     $ 18,280  
              $ 0.2162                                                  
                                                                   
Downside     5 %     15 %   $ 8,062,212     $ 0       0.8 %   $ 60,467     $ 0     $ 60,467  
$ 10,674,670           $ 0.3162                                                  
                                                                   
                80 %   $ 8,451,825     $ 0       4.0 %   $ 338,073     $ 0     $ 338,073  
              $ 0.4162                                                  
                      Fair value of expected earn-out payment     $ 12,394,726     $ 1,715,500       14,110,226  
                      Price per share of common stock     $ 0.2620     $ 0.2620          
                        Discount rate       20 %     20 %        
                        Periods       0.750       0.750          
                      Present value factor at 20% discount rate for 12 months       0.8722       0.8722          
                      Present value of contingent consideration     $ 10,810,630     $ 1,496,252          
                                                                   
                      Present value of contingent consideration     $               $ 12,306,883