NOTE 5. CONTINGENT EARN-OUT CONSIDERATION

Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments. The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates use significant unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in FASB Codification Topic 820, Fair Value Measurements and Disclosures, as Level 3 inputs discussed in detail in Note 14.

We review the probabilities of possible future payments to the estimated fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.

Daily Bible Devotion

We acquired Daily Bible Devotion mobile applications on May 6, 2015 for $1.1 million in cash paid upon closing and up to an additional $0.3 million in contingent earn-out consideration payable over the next two years based upon on the achievement of cumulative session benchmarks for each mobile application. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Bible Devotional Applications to achieve the session benchmarks, we estimated the fair value of the contingent earn-out consideration to be $165,000, which was recorded at the discounted present value of $142,000. The discount is being accreted to interest expense over the two-year earn out period. We believe that our experience with digital mobile applications and websites provides a reasonable basis for our estimates.

The fair value of the contingent earn-out consideration will be reviewed quarterly over the two year earn-out period based on cumulative sessions achieved as compared to the estimates used in our forecast. Any change in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified up to the maximum future value of $0.3 million. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results. For the three months ending September 30, 2015, we increased the estimated fair value of the contingent earn-out consideration for Daily Bible Devotional by $35,000. Based upon the achievement of actual cumulative sessions in excess of the estimated amounts used in our original forecasts, we increased the probabilities of achieving the future benchmarks by approximately 12.5%.

Bryan Perry Newsletters

On February 6, 2015, we acquired the assets and assumed the deferred subscription liabilities for Bryan Perry Newsletters, paying no cash to the seller upon closing. Future contingent earn-out consideration due to the seller is based upon net subscriber revenues over a two-year period from the closing date, of which we will pay the seller 50%. There is no minimum or maximum contractual amount due. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks, we estimated the fair value of the contingent earn-out consideration to be $171,000, which we recorded at the discounted present value of $158,000. The discount is being accreted to interest expense over the two-year earn out period. We believe that our experience with digital publications and renewals provides a reasonable basis for our estimates.

The fair value of the contingent earn-out consideration will be reviewed quarterly over the two year earn-out period based on actual subscription revenue earned as compared to the estimated subscription revenue used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the nine months ending September 30, 2015, we have paid $30,000 to the seller as contingent earn-out consideration. For the three months ending September 30, 2015, we decreased the estimated fair value of the contingent earn-out consideration for the Bryan Perry Newsletters by $47,000. The decline reflects lower actual subscription revenues achieved during the third quarter of 2015 as compared to subscription revenues estimated in our forecasts.

Eagle Publishing

On January 10, 2014, we acquired entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. We paid $3.5 million in cash upon closing, with $5.0 million due in future installments due January 2015 and January 2016, and up to an additional $8.5 million due in contingent earn-out consideration payable over a three-year period based upon the achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks, we estimated the fair value of the contingent earn-out consideration to be $2.4 million, which was recorded at the discounted present value of $2.0 million. The discount is being accreted to interest expense over the three-year earn out period. We believe that our experience with publications, renewal rates and websites provide a reasonable basis for our estimates.

The fair value of the contingent earn-out consideration is reviewed quarterly over the three year earn-out period. During the year ending December 31, 2014, we recorded a net increase in the estimated fair value of the contingent earn-out consideration of $0.4 million based upon the achievement of actual revenues earned by Eagle entities in excess of those estimated in our forecasts. In June 2015, we paid $0.9 million in cash for amounts earned under the contingent earn-out. During the nine months ending September 30, 2015, we recorded a net decrease in the estimated fair value of the contingent earn-out consideration of $0.5 million based on actual revenues that were below those estimated in our forecasts. The declines noted in actual revenues occurred during the three month period ending September 30, 2015, during which time Eagle Publishing did not produce a bestseller and renewals of financial publications declined significantly as compared to prior quarters.

Twitchy.com

On December 10, 2013, we acquired Twitchy.com for $0.9 million in cash paid upon closing and up to $1.3 million in contingent earn-out consideration payable over a two-year period based upon the achievement of future page view targets. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks, we estimated the fair value of the contingent earn-out consideration to be $0.8 million, which was recorded at the discounted present value of $0.6 million. The discount is being accreted to interest expense over the two-year earn out period. We believe that our experience with digital content and websites provides a reasonable basis for our estimates.

The fair value of the contingent earn-out consideration is reviewed quarterly over the two year earn-out period. During the year ending December 31, 2014, we recorded a net increase in the estimated fair value of the contingent earn-out consideration of $0.3 million based upon the achievement of actual page views in excess of those estimated in our forecasts. To date, we have paid $0.6 million in cash for amounts due under the contingent earn-out. During the nine months ending September 30, 2015, we recorded a net decrease in the estimated fair value of the contingent earn-out consideration of $0.3 million based on actual page views that were below those estimated in our forecasts. The declines in page views during the three month period ending September 30, 2015 were greater than in other periods which we believe resulted from changes in the Facebook algorithm that drives traffic to our sites.

The following table reflects the changes in the present value of our acquisition-related estimated contingent earn-out consideration for the three and nine months ended September 30, 2015: