Quarterly report pursuant to Section 13 or 15(d)

CONTINGENT EARN-OUT CONSIDERATION

v3.5.0.2
CONTINGENT EARN-OUT CONSIDERATION
6 Months Ended
Jun. 30, 2016
Business Combination, Contingent Consideration, Liability [Abstract]  
CONTINGENT EARN-OUT CONSIDERATION
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 ASC 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. We paid $1.1 million in cash upon closing and may pay 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 at the time of closing, 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.
 
We review the fair value of the contingent earn-out consideration quarterly over the two-year earn-out period to compare actual cumulative sessions achieved to the estimated cumulative sessions used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract, or $0.3 million less amounts paid or expired to date. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the six month period ending June 30, 2016, we paid a total of $75,000 to the seller as contingent earn-out consideration for achieving benchmarks during the earn-out period to date, which was less than our original estimates. Due to declines in the cumulative sessions achieved during the six month period ending June 30, 2016, we recorded a net decrease of $93,000 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for this period.
 
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 achieved over a two-year period from date of close, 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 our revenue projections at the time of closing, 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.
 
We review the fair value of the contingent earn-out consideration quarterly over the two year earn-out period to compare actual subscription revenue earned to the estimated subscription revenue used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are 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 six month period ending June 30, 2016, we paid a total of $13,000 to the seller as contingent earn-out consideration for amounts earned, which was less than our original estimates. Due to declines in the number of subscriptions renewed during the six month period ending June 30, 2016, we recorded a net decrease of $13,000 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for this period.
 
Eagle Publishing
 
On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. The base purchase price was $8.5 million, with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million each due January 2015 and January 2016. As part of the purchase agreement, we may pay up to an additional $8.5 million of contingent earn-out consideration during the three year period from the closing date 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 at the time of closing, 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. We have paid $0.6 million to date and have one contingent earn-out period remaining through January 10, 2017. 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.
 
We review the fair value of the contingent earn-out consideration quarterly over the three year earn-out period to compare actual operating revenues earned to the estimated revenue used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract, or $8.5 million less amounts paid or expired to date. Changes in the fair value of the contingent earn-out consideration may materially impact and cause volatility in our future operating results. During the six month period ending June 30, 2016, no payments were made to the seller for amounts earned under the contingent earn-out consideration, which was less than our original estimates. Based on actual revenues for the period ending June 30, 2016 that were below those used in our prior estimates, we recorded a net decrease in the estimated fair value of the contingent earn-out consideration of $156,000 that is reflected in our results of operations for this period.
 
The following table reflects the changes in the present value of our acquisition-related estimated contingent earn-out consideration during the three and six month period ending June 30, 2016 and 2015:
 
 
 
Three Months Ending June 30, 2016
 
 
 
Short-Term
 
Long-Term
 
 
 
 
 
Accrued Expenses
 
Other Liabilities
 
Total
 
 
 
(Dollars in thousands)
 
Beginning Balance as of April 1, 2016
 
$
541
 
$
33
 
$
574
 
Acquisitions
 
 
—
 
 
—
 
 
—
 
Accretion of acquisition-related contingent earn-out consideration
 
 
5
 
 
1
 
 
6
 
Change in the estimated fair value of contingent earn-out consideration
 
 
(134)
 
 
—
 
 
(134)
 
Reclassification of payments due in next 12 months to short-term
 
 
34
 
 
(34)
 
 
—
 
Payments
 
 
(5)
 
 
—
 
 
(5)
 
Ending Balance as of June 30, 2016
 
$
441
 
$
—
 
$
441
 
 
 
 
 
Three Months Ending June 30, 2015
 
 
 
Short-Term
Accrued Expenses
 
Long-Term
Other Liabilities
 
Total
 
 
 
(Dollars in thousands)
 
Beginning Balance as of April 1, 2015
 
$
2,251
 
$
1,035
 
$
3,286
 
Acquisitions
 
 
88
 
 
54
 
 
142
 
Accretion of acquisition-related contingent earn-out consideration
 
 
21
 
 
11
 
 
32
 
Change in the estimated fair value of contingent earn-out consideration
 
 
(293)
 
 
(14)
 
 
(307)
 
Reclassification of payments due in next 12 months to short-term
 
 
—
 
 
—
 
 
—
 
Payments
 
 
(877)
 
 
—
 
 
(877)
 
Ending Balance as of June 30, 2015
 
$
1,190
 
$
1,086
 
$
2,276
 
 
 
 
Six Months Ending June 30, 2016
 
 
 
Short-Term
 
Long-Term
 
 
 
 
 
Accrued Expenses
 
Other Liabilities
 
Total
 
 
 
(Dollars in thousands)
 
Beginning Balance as of January 1, 2016
 
$
173
 
$
602
 
$
775
 
Acquisitions
 
 
—
 
 
—
 
 
—
 
Accretion of acquisition-related contingent earn-out consideration
 
 
8
 
 
8
 
 
16
 
Change in the estimated fair value of contingent earn-out consideration
 
 
(208)
 
 
(54)
 
 
(262)
 
Reclassification of payments due in next 12 months to short-term
 
 
556
 
 
(556)
 
 
—
 
Payments
 
 
(88)
 
 
—
 
 
(88)
 
Ending Balance as of June 30, 2016
 
$
441
 
$
—
 
$
441
 
 
 
 
Six Months Ending June 30, 2015
 
 
 
Short-Term
Accrued Expenses
 
Long-Term
Other Liabilities
 
Total
 
 
 
(Dollars in thousands)
 
Beginning Balance as of January 1, 2015
 
$
1,575
 
$
1,710
 
$
3,285
 
Acquisitions
 
 
176
 
 
124
 
 
300
 
Accretion of acquisition-related contingent earn-out consideration
 
 
31
 
 
26
 
 
57
 
Change in the estimated fair value of contingent earn-out consideration
 
 
(213)
 
 
24
 
 
(189)
 
Reclassification of payments due in next 12 months to short-term
 
 
798
 
 
(798)
 
 
—
 
Payments
 
 
(1,177)
 
 
—
 
 
(1,177)
 
Ending Balance as of June 30, 2015
 
$
1,190
 
$
1,086
 
$
2,276