NOTE 5. CONTINGENT EARN-OUT CONSIDERATION

Our acquisitions of Twitchy.com and entities of Eagle Publishing included contingent consideration, the fair value of which was estimated on the acquisition date as the present value of the expected future contingent payments which we determined using a probability-weighted discounted cash flow model for probabilities of possible future payments.

The unobservable inputs used in determining the fair value of the contingent consideration include assumptions as to the ability of the acquired businesses to meet the targets and discount rates used in the calculation. Should the actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the fair value of the contingent consideration obligations would increase or decrease, up to the contracted limit, as applicable. The fair value measurement includes revenue forecasts which are a Level 3 measurement as discussed in Note 14 to our Condensed Consolidated Financial Statements. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contractual amounts, are reflected in our results of operations in the periods they are identified. Any changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results.

On December 10, 2013, we recorded an estimate of contingent earn-out consideration payable upon achievement of page view milestones over a two year period related to our acquisition of Twitchy.com. Using a probability-weighted discounted cash flow model, we estimated the fair value of the $1.2 million total contingent earn-out consideration at the present value of $0.6 million as of the closing date. During our quarterly reviews as of March 31, 2014, June 30, 2014 and September 30, 2014, we observed actual page views that were higher than those estimated at the time of our projections. We increased our future page view estimates and revised our probability-weighted discounted cash flow model for the updated projections. We recorded a $58,000 and $275,000 increase in the estimated fair value of the contingent earn-out consideration which is reflected in our operating results for the three and nine months ending September 30, 2014, respectively. We will continue to review our estimates quarterly over the remaining earn-out period of 1.25 years. We may pay up to an additional $1.0 million of contingent earn-out consideration over the remaining earn-out period based on the achievement of certain page view milestones established in the purchase agreement. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contracted amount, will be reflected in our results of operations in future periods as they are identified.

On January 10, 2014, we recorded an estimate of contingent earn-out consideration payable upon achievement of certain revenue benchmarks over a three year period related to the acquisition of the Eagle entities. Using a probability-weighted discounted cash flow model, we recorded the estimated fair value of the $8.5 million total contingent earn-out consideration at the present value of $2.0 million as of the closing date. There were no changes in our estimates as of the quarterly review performed as of March 31, 2014. During our quarterly reviews as of June 30, 2014 and September 30, 2014, we observed actual revenues that were higher than those estimated at the time of our original projections. We increased our revenue estimates and revised our probability-weighted discounted cash flow model for the updated projections. We recorded a $0.5 million and $0.6 million increase in the estimated fair value of the contingent earn-out consideration which is reflected in our operating results for the three and nine months ending September 30, 2014, respectively. We will continue to review our estimates quarterly over the remaining earn-out period of 2.50 years. Any changes in the estimated fair value of the contingent earn-out consideration, up to the contracted amount, will be reflected in our results of operations in future periods as they are identified.

The following table reflects the changes in the present value of our acquisition related contingent earn-out consideration for the three and nine months ended September 30, 2014: