Sinotop Contingent Consideration

9 Months Ended

Sep. 30, 2014

Sinotop Contingent Consideration [Text Block]

9.	Sinotop Contingent Consideration
	In connection with the acquisition of Sinotop Hong Kong on July 30, 2010, if specified performance milestones are achieved, Weicheng Liu (“Mr. Liu” or the “Seller”) will be entitled to earn up to (i) an additional 403,820 shares of common stock of the Company, (ii) three-year warrants to purchase 571,275 shares of the Company’s common stock, and (iii) a four-year option to purchase 80,000 shares of the Company’s common stock (collectively, the securities referred to in clauses (i), (ii) and (iii) are referred to herein as the “Earn-Out Securities”). The milestones are as follows: Sinotop Hong Kong will ensure that (i) at the end of the first earn-out year (July 1, 2012), at least 3 million homes will have access to the Company’s VOD services, (ii) at the end of the second earn-out year (July 1, 2013), at least 11 million homes will have access to the Company’s VOD services, and (iii) at the end of the third earn-out year (July 1, 2014), at least 30 million homes will have access to the Company’s VOD services. The shares, warrants, and options are earned at a rate of one third for each milestone achieved.
	Subsequent to the acquisition of Sinotop, the Company underwent a warrant exchange that converted the three- year warrants to be potentially earned under clause (ii) above to 332,002 shares of common stock. As such, the Earn-Out Securities subject to the achievement of the specified performance milestones were 735,822 shares of common stock and a four-year option to purchase 80,000 shares of common stock.
	The Company recorded a contingent consideration obligation related to the Earn-Out Securities at the time of acquisition which totaled $2,750,966, representing the fair value of the estimated payment of the full earn-out. The contingent consideration was classified as a liability because the Earn-Out Securities did not meet the fixed- for-fixed criteria under ASC 815-40-15 for equity classification, since the achievement of the milestones is not solely based on the operations of the Company. Further ASC 815-40-15 required us to re- measure the contingent consideration obligation at the end of every reporting period with the change in value reported in the consolidated statements of operations. Accordingly, we reported a fair value loss of $47,634 and $160,766 for the three and nine months ended September 30, 2014, respectively. We reported a loss of $15,649 and $99,343 for the three and nine months ended September 30, 2013, respectively.
	As of the end of the second earn-out year (July 1, 2013), the second milestone was achieved with over 11 million homes having access to our VOD services. As such, we issued in total 490,548 shares of our common stock and 53,334 options to Mr. Liu for achieving the first two year milestones. As of the end of the third earn-out year (July 1, 2014), the third milestone was achieved with over 30 million homes having access to our VOD services. As such, we issued 245,274 shares of our common stock and 26,666 options to Mr. Liu for achieving the third year milestone on July 1, 2014.