Contract consideration refers to the value or benefit that each party agrees to exchange as part of the agreement, which is necessary for a contract to be legally binding. It can include money, services, goods, or a promise to refrain from a specific action.
The Company accounted for the Contract Consideration Convertible Notes Payable issued as consideration related to a related party contract (see Note 9, “Debt and Convertible Notes Payable”), as liability classified convertible instruments in accordance with FASB ASC 718, “Stock Compensation” (“ASC 718”). Under ASC 718, liability classified convertible instruments are measured at fair value at the grant date and at each reporting date (see Note 10, “Fair Value Measurements”) with the change in fair value included in the consolidated statements of operations.
On February 2, 2022, the Company entered into a long-term supply agreement with ProFrac Services, LLC (the “Initial ProFrac Agreement”), a subsidiary of ProFrac Holdings LLC, in exchange for $10 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (“Initial ProFrac Agreement Contract Consideration Convertible Notes Payable”), under the same terms as the Convertible Notes Payable issued in the PIPE transaction described above, including paid-in-kind interest at a rate of 10% per annum and conversion features. The Initial ProFrac Agreement Contract Consideration Convertible Notes Payable were accounted for as liability classified convertible instruments and were initially recorded at fair value of $10.0 million on the issuance date with a corresponding contract asset.
On February 2, 2023, the Initial ProFrac Agreement Contract Consideration Convertible Notes Payable, remeasured to and carried at a fair value of $15.1 million, were converted, upon maturity, into 12,683,281 February 2023 Warrants with an exercise price of $0.0001 per share (see Note 10, “Fair Value Measurements”).
On May 17, 2022, the Company entered into the Amended ProFrac Agreement upon issuance of $50 million in aggregate principal amount of Contract Consideration Convertible Notes Payable (see Note 9, “Debt and Convertible Notes Payable”). The Initial ProFrac Agreement was amended to (a) increase ProFrac Services LLC’s minimum purchase obligation for each year to the greater of 70% of ProFrac Services LLC’s requirements and a baseline measured by ProFrac Services, LLC’s first 30 hydraulic fracturing fleets, and (b) increase the term to 10 years.
On February 2, 2022, the Company entered into the Initial ProFrac Agreement, upon issuance of $10 million in aggregate principal amount of the convertible notes (the “Contract Consideration Convertible Notes Payable”) to ProFrac Holdings LLC (see Note 9, “Debt and Convertible Notes Payable”). Under the Initial ProFrac Agreement, ProFrac Services, LLC is obligated to order chemicals from the Company at least equal to the greater of (a) the chemicals required for 33% of ProFrac Services, LLC’s hydraulic fracturing fleets and (b) a baseline measured by the first ten hydraulic fracturing fleets deployed by ProFrac Services, LLC during the term of the Initial ProFrac Agreement. If the minimum volumes are not achieved in any given year, ProFrac Services LLC shall pay to the Company, as liquidated damages an amount equal to twenty-five percent (25%) of the difference between (i) the aggregate purchase price of the quantity of products comprising the minimum purchase obligation and (ii) the actual purchased volume during such calendar year (“Contract Shortfall Fees”).
Income before income taxes for the three months ended June 30, 2022, was impacted by interest charges of $1.6 million versus $17 thousand for the same period in 2021. For the six months ended June 30, 2022 and 2021 interest charges were $2.3 million and $35 thousand respectively. The increased interest costs relate to payment in kind interest expense on the Contract Consideration Convertible Notes Payable.
The Company advises that contract consideration attributable to the promised right of access to a library of continuously updated imagery for a specific area of interest (“AOI”), as selected by the customer, is recognized as revenue on a straight-line basis over the term of the contract.
Enterprise segment revenue for the three months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices, and the up-front recognition of term license revenue and related costs under ASC 606. Under ASC 605, Enterprise segment revenue increased by $9.1 million, or 7.6%, primarily due to the growth in our omni-channel hosting solutions and higher license and service revenue from our contact center customers.
Other segment revenue for the three months ended June 30, 2019 reflected the impact of allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Other segment revenue decreased by $10.1 million, or 45.6%, primarily due to the wind-down of Devices and the sale of Mobile Operator Services business in Brazil.
Automotive segment revenue for the nine months ended June 30, 2019 reflected the allocation of contract consideration to multiple performance obligations based on standalone selling prices under ASC 606. Under ASC 605, Automotive segment revenue increased by $24.1 million, or 11.8%, primarily due to higher royalties and hosting revenue driven by the continued growth in our speech recognition and infotainment platform services.
During the majority of each customer contract term, the amount invoiced is generally less than the amount of revenue recognized to date, primarily because we transfer control of the performance obligation related to the software license at the inception of the contract term, and the allocation of contract consideration to the license performance obligation is a significant portion of the total contract consideration.
2.04Independent Contract Consideration. Notwithstanding anything to the contrary contained herein, the Earnest Money being delivered by Purchaser includes the amount of $100.00 as independent contract consideration (the “Independent Contract Consideration”). The Independent Contract Consideration is nonrefundable to Purchaser and shall be released to and retained by Seller notwithstanding any other provision of this Agreement to the contrary, but shall be credited against the Purchase Price at the Closing (hereinafter defined). Purchaser and Seller expressly acknowledge and agree that (i) the Independent Contract Consideration, plus Purchaser’s other obligations as provided in this Agreement, has been bargained for as consideration for Seller's execution and delivery of this Agreement and for Purchaser’s review, inspection and termination rights prior to the expiration of the Inspection Period, and (ii) such consideration is adequate for all purposes under any applicable law or judicial decision.
With the adoption of ASC 606, Presto did not to revisit the allocation of contract consideration to lease contracts that were in existence prior to the of adoption of ASC 606 and therefore did not separate the arrangement into lease elements accounted for under ASC 840 and the non-lease elements under ASC 606. Rather, Presto continues to recognize the combined unit for contracts in existence before the adoption of ASC 606, using ASC 840.
As previously disclosed, the Company’s Board of Directors adopted a resolution on November 21, 2021 to rescind the 3,000,000 shares of Series F Preferred Stock issued to Halo for lack of contract consideration. The Company recorded this action into its accounts in the fourth quarter of 2021.
Contingent Contract Consideration We utilize a Level 3 category fair value measurement to value the contingent contract consideration liability at period end since there are no quoted prices for this liability in non-active markets, there are no quoted prices for similar liabilities in active markets and there are no inputs that are observable for substantially the full term of the the liability. The contingent contract consideration calculation requires management to make estimates and assumptions that affect the reported amount of the liability. The contingent contract consideration is payable each calendar quarter through the earlier of the expiration or termination of the relevant maintenance agreements, or the seventh (7th) anniversary of the acquisition date. The consideration is equal to the product of the revenues collected in a calendar quarter multiplied by an applicable percentage.
Contract consideration refers to something of value that is exchanged between parties in a contract. It can be in the form of money, goods, services, or a promise to refrain from doing something. Consideration is one of the essential elements for the formation of a legally binding contract. Without consideration, a contract is generally not enforceable.
You should use contract consideration in the following situations:
When drafting contract consideration, ensure that it is clearly defined and agreed upon by all parties involved. Here are some steps to consider:
Example:
“In exchange for the services provided, Party A agrees to pay Party B $10,000 upon completion of the project. Payment will be made via bank transfer within 30 days of project delivery.”
Contract consideration is typically found in the following types of contracts:
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Dive deeper into the world of clauses and learn more about these other clauses that are used in real contracts.
The contract duration clause specifies the length of time for which the agreement remains in effect, outlining the start and end dates of the contractual obligations. It may also include provisions regarding renewal or termination options before the specified end date.
Contract modification refers to the agreed-upon changes made to the terms or conditions of an existing contract by all involved parties. These modifications require mutual consent and can address various aspects, such as scope, pricing, or timelines, ensuring the contract remains relevant and effective.
A "Contract Year" is a defined term referring to a consecutive 12-month period starting on a specified date, often the effective date of a contract, and repeating annually throughout the contract's duration. It is used to structure time-based obligations, such as payments, performance milestones, or renewals, within the agreement.
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