SALEM MEDIA GROUP, INC. General
Salem Media Group, Inc. is a domestic multimedia company specializing in Christian and conservative content, with media properties comprising radio broadcasting, digital media, and publishing. Our content is intended for audiences interested in Christian and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to theSEC . The information on our website is not a part of or incorporated by reference into this or any other report of the company filed with, or furnished to, theSEC . The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report on Form 10-Q and our audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . Our Condensed Consolidated Financial Statements are not directly comparable from period to period due to acquisitions and dispositions. Refer to Note 3 of our Condensed Consolidated Financial Statements on Form 10-Q for details of each of these transactions. Historical operating results are not necessarily indicative of future operating results. Actual future results may differ from those contained in or implied by the forward-looking statements as a result of various factors. These factors include, but are not limited to: • the coronavirus ("COVID-19") is adversely impacting our business,
• risks and uncertainties relating to the need for additional funds to
service our debt,
• risks and uncertainties relating to the need for additional funds to
execute our business strategy,
• our ability to access borrowings under our ABL Facility,
• reductions in revenue forecasts,
• our ability to renew our broadcast licenses,
• changes in interest rates,
• the timing of our ability to complete any acquisitions or dispositions,
• costs and synergies resulting from the integration of any completed
acquisitions,
• our ability to effectively manage costs,
• our ability to drive and manage growth,
• the popularity of radio as a broadcasting and advertising medium,
• changes in consumer tastes,
• the impact of general economic conditions in the United States or in
specific markets in which we do business,
• industry conditions, including existing competition and future
competitive technologies and cancellation,
• disruptions or postponements of advertising schedules and programming in
response to national or world events,
• our ability to generate revenues from new sources, including local
commerce and technology-based initiatives,
• the impact of regulatory rules or proceedings that may affect ourbusiness from time to time, and the future write off of any material
portion of the fair value of our
Because these factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. Overview We have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which also qualify as reportable segments. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assess the performance of each operating segment and determine the appropriate allocations of resources to each segment. We continually review our operating segment classifications to align with operational changes in our business and may make changes as necessary. We measure and evaluate our operating segments based on operating income and operating expenses that exclude costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury. We also exclude costs such as amortization, depreciation, taxes and interest expense when evaluating the performance of our operating segments. Our principal sources of broadcast revenue include:
• the sale of block program time to national and local program producers;
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• the sale of advertising time on our radio stations to national and local
advertisers;
• the sale of banner advertisements on our station websites or on our
mobile applications;
• the sale of digital streaming advertisements on our station websites or
on our mobile applications;
• the sale of advertisements included in digital newsletters;
• fees earned for the creation of custom web pages and custom digital media
campaigns for our advertisers through Salem Surround;
• the sale of advertising time on our national network;
• the syndication of programming on our national network;
• the sale of advertising time through podcasts and
video-on-demand
services;
• product sales and royalties for
on-air
host materials, including podcasts and programs; and
• other revenue such as events, including ticket sales and sponsorships,
listener purchase programs, where revenue is generated from special
discounts and incentives offered to our listeners from our advertisers;
talent fees for voice-overs or custom endorsements from our
on-air
personalities and production services, and rental income for studios,
towers or office space.
Our principal sources of digital media revenue include:
• the sale of digital banner advertisements on our websites and mobile
applications;
• the sale of digital streaming advertisements on websites and mobile
applications;
• the support and promotion to stream third-party content on our websites;
• the sale of advertisements included in digital newsletters; • the digital delivery of newsletters to subscribers; and • the sale of video and graphic downloads.
Our principal sources of publishing revenue include:
• the sale of books and
e-books;
• publishing fees from authors;
• the sale of digital advertising on our magazine websites and digital
newsletters;
• subscription fees for our print magazine; and
• the sale of print magazine advertising.
In each of our operating segments, the rates we are able to charge for airtime,
advertising and other products and services are dependent upon several factors,
including:
• audience share;
• how well our programs and advertisements perform for our clients;
• the size of the market and audience reached;
• the number of impressions delivered;
• the number of advertisements and programs streamed;
• the number of page views achieved;
• the number of downloads completed;
• the number of events held, the number of event sponsorships sold and the
attendance at each event;
• demand for books and publications;
• general economic conditions; and
• supply and demand for airtime on a local and national level.
Broadcasting
Our foundational business is radio broadcasting, which includes the ownership
and operation of radio stations in large metropolitan markets, our national
networks and our national sales firms including Salem Surround. Revenues
generated from our radio stations, networks and sales firms are reported as
broadcast media revenue in our Condensed Consolidated Financial Statements
included in Part 1 of this quarterly report on Form
10-Q.
Advertising revenue is recorded on a gross basis unless an agency represents the
advertiser, in which case, revenue is reported net of the commission retained by
the agency.
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Broadcast revenues are impacted by the rates radio stations can charge for
programming and advertising time, the level of airtime sold to programmers and
advertisers, the number of impressions delivered or downloads made, and the
number of events held, including the size of the event and the number of
attendees. Block programming rates are based upon our stations' ability to
attract audiences that will support the program producers through contributions
and purchases of their products. Advertising rates are based upon the demand for
advertising time, which in turn is based on our stations and networks' ability
to produce results for their advertisers. We market ourselves to advertisers
based on the responsiveness of our audiences. We do not subscribe to traditional
audience measuring services for most of our radio stations. In select markets,
we subscribe to Nielsen Audio , which develops monthly reports measuring a radio
station's audience share in the demographic groups targeted by advertisers. Each
of our radio stations and our networks has a
pre-determined
level of time available for block programming and/or advertising, which may vary
at different times of the day.
Nielsen Audio uses the Portable People Meter
TM
("PPM
"
) technology to collect data for its ratings service. PPM is a small device that
is capable of automatically measuring radio, television, Internet, satellite
radio and satellite television signals encoded by the broadcaster. The PPM
offers a number of advantages over traditional diary ratings collection systems,
including ease of use, more reliable ratings data, shorter time periods between
when advertising runs and actual listening data, and little manipulation of data
by users. A disadvantage of the PPM includes data fluctuations from changes to
the "panel" (a group of individuals holding PPM devices). This makes all
stations susceptible to some inconsistencies in ratings that may or may not
accurately reflect the actual number of listeners at any given time. We
subscribe to Nielsen Audio for ratings services in 7 of our broadcast markets.
Our results are subject to seasonal fluctuations. As is typical in the
broadcasting industry, our second and fourth quarter advertising revenue
typically exceeds our first and third quarter advertising revenue. Seasonal
fluctuations in advertising revenue correspond with quarterly fluctuations in
the retail industry. Additionally, we experience increased demand for political
advertising during election, or even numbered years, over
non-election
or odd numbered years. Political advertising revenue varies based on the number
and type of candidates as well as the number and type of debated issues.
Our cash flows from broadcasting are affected by transitional periods
experienced by radio stations when, based on the nature of the radio station,
our plans for the market and other circumstances, we find it beneficial to
change the station format. During this transitional period, when we develop a
radio station's listener and customer base, the station may generate negative or
insignificant cash flow.
In broadcasting, trade or barter agreements are commonly used to reduce cash
expenses by exchanging advertising time for goods or services. We may enter
barter agreements to exchange airtime or digital advertising for goods or
services that can be used in our business or that can be sold to our audience
under Listener Purchase Programs. The terms of these barter agreements permit us
to preempt the barter airtime or digital campaign in favor of customers who
purchase the airtime or digital campaign for cash. The value of these
non-cash
exchanges is included in revenue in an amount equal to the fair value of the
goods or services we receive. Each transaction is reviewed to determine that the
products, supplies and/or services we receive have economic substance, or value
to us. We record barter operating expenses upon receipt and usage of the
products, supplies and services, as applicable. We record barter revenue as
advertising spots or digital campaigns are delivered, which represents the point
in time that control is transferred to the customer thereby completing our
performance obligation. Barter revenue is recorded on a gross basis unless an
agency represents the programmer, in which case, revenue is reported net of the
commission retained by the agency. During the six months ended June 30, 2021 and
2020, 99% and 98%, respectively of our broadcast revenue was sold for cash.
Broadcast operating expenses include: (i) employee salaries, commissions and
related employee benefits and taxes, (ii) facility expenses such as lease cost
and utilities, (iii) marketing and promotional expenses, (iv) production and
programming expenses, and (v) music license fees. In addition to these expenses,
our network incurs programming costs and lease expenses for satellite
communication facilities.
Digital Media
Our digital media based businesses provide Christian, conservative, investing,
e-commerce,
audio and video streaming, and other resources digitally through the web. Refer
to Item 1. Business of our annual report on Form
10-K
for the year ended December 31, 2020 for a description of each of our digital
media websites and operations. Revenue generated from this segment is reported
as digital media revenue in our Condensed Consolidated Financial Statements
included in Part 1 of this quarterly report on Form
10-Q.
Digital media revenue is impacted by the rates our sites can charge for
advertising time, the level of advertisements sold, the number of impressions
delivered or the number of products sold and the number of digital subscriptions
sold. Like our broadcasting segment, our second and fourth quarter advertising
revenue generally exceeds our first and third quarter advertising revenue. This
seasonal fluctuation in advertising revenue corresponds with quarterly
fluctuations in the retail advertising industry. We also experience fluctuations
in quarter-over-quarter comparisons based on the date on which Easter is
observed, as this holiday generates a higher volume of product downloads from
our church product websites. Additionally, we experience increased demand for
advertising time and placement during election years for political
advertisements.
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The primary operating expenses incurred by our digital media businesses include:
(i) employee salaries, commissions and related employee benefits and taxes,
(ii) facility expenses such as lease expense and utilities, (iii) marketing and
promotional expenses, (iv) royalties, (v) streaming costs, and (vi) cost of
goods sold associated with
e-commerce
sites.
Publishing
Our publishing operations include book publishing through Regnery
®
Publishing, a print magazine and our self-publishing services. Revenues
generated from this segment are reported as publishing revenue in our Condensed
Consolidated Financial Statements included in Part 1 of this quarterly report on
Form
10-Q.
Publishing revenue is impacted by the number and the retail price of books and
e-books
sold, the number and rate of print magazine subscriptions sold, the rate and
number of pages of advertisements sold in each print magazine, and the number
and rate at which self-published books are published. Regnery
®
Publishing revenue is impacted by elections as it generates higher levels of
interest and demand for publications containing conservative and political based
opinions.
Publishing operating expenses include: (i) employee salaries, commissions and
related employee benefits and taxes, (ii) facility expenses such as lease costs
and utilities, (iii) marketing and promotional expenses; and (iv) cost of goods
sold that includes printing and production costs, fulfillment costs, author
royalties and inventory reserves.
Known Trends and Uncertainties
The
COVID-19
global pandemic that began in March 2020 continues to impact our business.
Measures taken by federal, state and local governments to prevent the spread of
COVID-19
have adversely affected workforces, business operations and overall economic
conditions resulting in a significant economic downturn. We experienced a rapid
decline in revenue from advertising, programming, events and book sales. Several
advertisers reduced or ceased advertising spending due to the outbreak and
stay-at-home
orders that effectively shut many businesses down. The revenue decline impacted
our broadcast segment, which derives substantial revenue from local advertisers
who have been particularly hard hit due to social distancing and government
interventions, and our publishing segment, which derives revenue from book sales
through retail stores and live events.
While the economic downturn is expected to be temporary, there remains to be
considerable uncertainty around the duration. Advertising revenue continues to
improve over the lowest levels that were experienced during April and May of
2020 but remains significantly below prior years. The exact timing and pace of
the economic recovery has not been determinable due to varying degrees of
restrictions and resurgences. Due to continuing uncertainties regarding the
ultimate scope and trajectory of
COVID-19's
spread and evolution, it is impossible to predict the total impact that the
pandemic will have on our business. If public and private entities continue to
enforce restrictive measures, the material adverse effect on our business,
results of operations, financial condition and cash flows could persist. Our
businesses could also continue to be impacted by the disruptions from
COVID-19
and resulting adverse changes in advertising and consumer behavior.
Lower revenue and longer days to collect receivables negatively impacts future
availability under our credit facility. Availability under our Asset Based Loan
("ABL Facility") is subject to a borrowing base consisting of (a) 90% of the
eligible accounts receivable plus (b) a calculated amount based on the value of
certain real property. The maximum amount available under our ABL Facility
increased to $25.0 million at June 30, 2021 compared to $24.8 million at
December 31, 2020 , of which none was outstanding at June 30, 2021 compared to
$5.0 million outstanding at December 31, 2020 .
The growth of broadcast revenue associated with the sale of airtime remains
challenged. We believe this is due to increased competition from other forms of
content distribution and the length of time spent listening to audio streaming
services, podcasts and satellite radio. Increases in competition and the mix in
listening time may lead advertisers to conclude that the effectiveness of radio
has diminished. To reduce the impact of these factors, we continue to enhance
our digital assets to complement our broadcast content. The increased use of
voice activated platforms, or smart speakers, that provide audiences with the
ability to access AM and FM radio stations show increased potential for
broadcasters to reach audiences.
Our broadcast spot advertising revenue is particularly dependent on advertising
from our Los Angeles and Dallas markets, which generated 13.6% and 21.6%,
respectively, of our total net broadcast spot advertising revenue during the
six-month
period ended June 30, 2021 compared to 15.1% and 20.0%, respectively, of our
total net broadcast spot advertising revenue during the same period of the prior
year.
Revenue from print magazines, including advertising revenue and subscription
revenue, is challenged due to lower demand from the audiences that increasingly
use other mediums that deliver comparable information. Book sales are contingent
upon overall economic conditions and our ability to attract and retain authors.
Decreases in digital revenue could adversely affect our operating results,
financial condition and results of operations. Digital revenue is impacted by
the nature and delivery of page views and the number of advertisements per page.
We have experienced a shift in the number of page views from desktop devices to
mobile devices. While mobile page views have increased dramatically, they carry
a lower number of advertisements per page and are generally sold at lower rates.
A shift from desktop page views to mobile device views negatively impacts
revenue as mobile devices carry lower rates and less advertisement per page. To
minimize the impact that any one of these areas could have, we continue to
explore opportunities to cross-promote our brands and our content, and to
strategically monitor costs.
Key Financial Performance Indicators - Same-Station Definition
In the discussion of our results of operations below, we compare our broadcast
operating results between periods on an
as-reported
basis, which includes the operating results of all radio stations and networks
owned or operated at any time during either period and on a Same Station basis.
Same Station is a
Non-GAAP
financial measure used both in presenting our results to stockholders and the
investment community as well as in our internal evaluations and management of
the business. We believe that Same Station Operating Income provides a
meaningful comparison of period over period performance of our core broadcast
operations as this measure excludes the impact of new stations, the impact of
stations we no longer own or operate, and the impact of stations operating under
a new programming format. Our presentation of Same Station Operating Income is
not intended to be considered in isolation or as a substitute for the most
directly comparable financial measures reported in accordance with GAAP. Our
definition of Same Station Operating Income is not necessarily comparable to
similarly titled measures reported by other companies. Refer to
"NON-GAAP
FINANCIAL MEASURES" below for a reconciliation of these
non-GAAP
performance measures to the most comparable GAAP measures.
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We define Same Station net broadcast revenue as net broadcast revenue from our
radio stations and networks that we own or operate in the same format on the
first and last day of each quarter, as well as the corresponding quarter of the
prior year. We define Same Station broadcast operating expenses as broadcast
operating expenses from our radio stations and networks that we own or operate
in the same format on the first and last day of each quarter, as well as the
corresponding quarter of the prior year. Same Station Operating Income includes
those stations we own or operate in the same format on the first and last day of
each quarter, as well as the corresponding quarter of the prior year. Same
Station Operating Income for a full calendar year is calculated as the sum of
the Same Station results for each of the four quarters of that year.
Non-GAAP
Financial Measures
Management uses certain
non-GAAP
financial measures defined below in communications with investors, analysts,
rating agencies, banks and others to assist such parties in understanding the
impact of various items on our financial statements. We use these
non-GAAP
financial measures to evaluate financial results, develop budgets, manage
expenditures and as a measure of performance under compensation programs.
Our presentation of these
non-GAAP
financial measures should not be considered as a substitute for or superior to
the most directly comparable financial measures as reported in accordance with
GAAP.
Item 10(e) of Regulation
S-K
defines and prescribes the conditions under which certain
non-GAAP
financial information may be presented in this report. We closely monitor
EBITDA, Adjusted EBITDA, Station Operating Income ("SOI"), Same Station net
broadcast revenue, Same Station broadcast operating expenses, Same Station
Operating Income, Digital Media Operating Income, and Publishing Operating
Income (Loss), all of which are
non-GAAP
financial measures. We believe that these
non-GAAP
financial measures provide useful information about our core operating results,
and thus, are appropriate to enhance the overall understanding of our financial
performance. These
non-GAAP
financial measures are intended to provide management and investors a more
complete understanding of our underlying operational results, trends and
performance.
The performance of a radio broadcasting company is customarily measured by the
ability of its stations to generate SOI. We define SOI as net broadcast revenue
less broadcast operating expenses. Accordingly, changes in net broadcast revenue
and broadcast operating expenses, as explained above, have a direct impact on
changes in SOI. SOI is not a measure of performance calculated in accordance
with GAAP. SOI should be viewed as a supplement to and not a substitute for our
results of operations presented on the basis of GAAP. We believe that SOI is a
useful
non-GAAP
financial measure to investors when considered in conjunction with operating
income (the most directly comparable GAAP financial measures to SOI), because it
is generally recognized by the radio broadcasting industry as a tool in
measuring performance and in applying valuation methodologies for companies in
the media, entertainment and communications industries. SOI is commonly used by
investors and analysts who report on the industry to provide comparisons between
broadcasting groups. We use SOI as one of the key measures of operating
efficiency and profitability, including our internal reviews associated with
impairment analysis of our indefinite-lived intangible assets. SOI does not
purport to represent cash provided by operating activities. Our statement of
cash flows presents our cash activity in accordance with GAAP and our income
statement presents our financial performance prepared in accordance with GAAP.
Our definition of SOI is not necessarily comparable to similarly titled measures
reported by other companies.
We define Same Station net broadcast revenue as net broadcast revenue from our
radio stations and networks that we own or operate in the same format on the
first and last day of each quarter, as well as the corresponding quarter of the
prior year. We define Same Station broadcast operating expenses as broadcast
operating expenses from our radio stations and networks that we own or operate
in the same format on the first and last day of each quarter, as well as the
corresponding quarter of the prior year. Same Station Operating Income includes
those stations we own or operate in the same format on the first and last day of
each quarter, as well as the corresponding quarter of the prior year. Same
Station Operating Income for a full calendar year is calculated as the sum of
the Same Station -results for each of the four quarters of that year. We use Same
Station Operating Income, a
non-GAAP
financial measure, both in presenting our results to stockholders and the
investment community, and in our internal evaluations and management of the
business. We believe that Same Station Operating Income provides a meaningful
comparison of period over period performance of our core broadcast operations as
this measure excludes the impact of new stations, the impact of stations we no
longer own or operate, and the impact of stations operating under a new
programming format. Our presentation of Same Station Operating Income is not
intended to be considered in isolation or as a substitute for the most directly
comparable financial measures reported in accordance with GAAP. Our definition
of Same Station net broadcast revenue, Same Station broadcast operating expenses
and Same Station Operating Income is not necessarily comparable to similarly
titled measures reported by other companies.
We apply a similar methodology to our digital media and publishing group.
Digital Media Operating Income is defined as net digital media revenue less
digital media operating expenses. Publishing Operating Income (Loss) is defined
as net publishing revenue less publishing operating expenses. Digital Media
Operating Income and Publishing Operating Income (Loss) are not measures of
performance in accordance with GAAP. Our presentations of these
non-GAAP
financial performance measures are not to be considered a substitute for or
superior to our operating results reported in accordance with GAAP. We believe
that Digital Media Operating Income and Publishing Operating Income (Loss) are
useful
non-GAAP
financial measures to investors, when considered in conjunction with operating
income (the most directly comparable GAAP financial measure), because they are
comparable to those used to measure performance of our broadcasting entities. We
use this analysis as one of the key measures of operating efficiency,
profitability and in our internal review. This measurement does not purport to
represent cash provided by operating activities. Our statement of cash flows
presents our cash activity in accordance with GAAP and our income statement
presents our financial performance in accordance with GAAP. Our definitions of
Digital Media Operating Income and Publishing Operating Income (Loss) are not
necessarily comparable to similarly titled measures reported by other companies.
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We define EBITDA as net income before interest, taxes, depreciation, and
amortization. We define Adjusted EBITDA as EBITDA before gains or losses on the
sale or disposition of assets, before changes in the estimated fair value of
contingent
earn-out
consideration, before gains on bargain purchases, before the change in fair
value of interest rate swaps, before impairments, before net miscellaneous
income and expenses, before (gain) loss on early retirement of debt, before
(gain) loss from discontinued operations and before
non-cash
compensation expense. EBITDA and Adjusted EBITDA are commonly used by the
broadcast and media industry as important measures of performance and are used
by investors and analysts who report on the industry to provide meaningful
comparisons between broadcasters. EBITDA and Adjusted EBITDA are not measures of
liquidity or of performance in accordance with GAAP and should be viewed as a
supplement to and not a substitute for or superior to our results of operations
and financial condition presented in accordance with GAAP. Our definitions of
EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled
measures reported by other companies.
For all
non-GAAP
financial measures, investors should consider the limitations associated with
these metrics, including the potential lack of comparability of these measures
from one company to another.
We use
non-GAAP
financial measures to evaluate financial performance, develop budgets, manage
expenditures, and determine employee compensation. Our presentation of this
additional information is not to be considered as a substitute for or superior
to the most directly comparable measures reported in accordance with GAAP.
Reconciliation of
Non-GAAP
Financial Measures:
In the tables below, we present a reconciliation of net broadcast revenue, the
most comparable GAAP measure, to Same Station net broadcast revenue, and
broadcast operating expenses, the most comparable GAAP measure to Same Station
broadcast operating expense. We show our calculation of Station Operating Income
and Same Station Operating Income, which is reconciled from net income, the most
comparable GAAP measure in the table following our calculation of Digital Media
Operating Income and Publishing Operating Income (Loss). Our presentation of
these
non-GAAP
measures are not to be considered a substitute for or superior to the most
directly comparable measures reported in accordance with GAAP.
Three Months Ended June 30, Six Months Ended June 30,
2020 2021 2020 2021
(Dollars in thousands)
Reconciliation of Net Broadcast
Revenue to Same Station Net Broadcast
Revenue
Net broadcast revenue $ 39,470 $ 46,783 $ 84,650 $ 90,831
Net broadcast revenue - acquisitions - (79 ) - (79 )
Net broadcast revenue - dispositions (220 ) (42 ) (443 ) (38 )
Net broadcast revenue - format change (104 ) (205 ) (280 ) (345 )
Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses Broadcast operating expenses$ 33,094 $ 36,162 $ 70,421 $ 69,505 Broadcast operating expenses - acquisitions - (38 ) - (38 ) Broadcast operating expenses - dispositions (379 ) (79 ) (881 ) (185 ) Broadcast operating expenses - format change (259 ) (206 ) (519 ) (384 )Same Station broadcast operating expenses$ 32,456 $ 35,839
Reconciliation of Operating Income to Same Station Operating Income Station Operating Income$ 6,376 $ 10,621 $ 14,229 $ 21,326 Station operating (income) loss -acquisitions - (41 ) - (41 ) Station operating loss - dispositions 159 37 438 147 Station operating loss - format change 155 1 239 39Same Station - Station Operating Income$ 6,690 $ 10,618 $ 14,906 $ 21,471 37
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In the table below, we present our calculations of Station Operating Income,
Digital Media Operating Income and Publishing Operating Income (Loss). Our
presentation of these
non-GAAP
performance indicators are not to be considered a substitute for or superior to
the directly comparable measures reported in accordance with GAAP.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2021 2020 2021
(Dollars in thousands)Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) Net broadcast revenue
$ 39,470 $ 46,783 $ 84,650 $ 90,831 Less broadcast operating expenses (33,094 ) (36,162 )
(70,421 ) (69,505 )
Station Operating Income$ 6,376 $ 10,621
Net digital media revenue$ 9,443 $ 10,339 $ 18,547 $ 19,958 Less digital media operating expenses (7,653 ) (8,338 )
(15,979 ) (17,011 )
Digital Media Operating Income$ 1,790 $ 2,001
Net publishing revenue$ 3,958 $ 6,660 $ 7,924 $ 12,346 Less publishing operating expenses (5,567 ) (6,426 )
(10,629 ) (11,631 )
Publishing Operating Income (Loss)
In the table below, we present a reconciliation of net income (loss), the most
directly comparable GAAP measure to Station Operating Income, Digital Media
Operating Income and Publishing Operating Income (Loss). Our presentation of
these
non-GAAP
performance indicators are not to be considered a substitute for or superior to
the most directly comparable measures reported in accordance with GAAP.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2021 2020 2021
(Dollars in thousands)
Reconciliation of Net Income (Loss) to Operating Income and Station Operating Income, Digital Media
Operating Income and Publishing Operating Income (Loss)
Net income (loss) $ (2,515 ) $ 2,257 $ (57,719 ) $ 2,580
Plus provision for (benefit from) income
taxes (2,380 ) (488 ) 30,779 (358 )
Plus net miscellaneous income and (expenses) (6 ) (63 ) 46 (85 )
Plus (gain) on early retirement of long-term
debt - - (49 ) -
Plus interest expense, net of capitalized
interest 4,013 3,935 8,045 7,861
Less interest income - - - (1 )
Net operating income (loss) $ (888 ) $
5,641
Plus net (gain) loss on the disposition of assets 34 (263 ) 113 55 Plus change in the estimated fair value of contingent earn-out consideration 3 - (2 ) - Plus impairment of indefinite-lived long-term assets other than goodwill - - 17,254 - Plus impairment of goodwill - - 307 - Plus depreciation and amortization 3,558 3,286 7,258 6,456 Plus unallocated corporate expenses 3,850
4,192 8,060 8,480
Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Loss$ 6,557 $ 12,856 $ 14,092 $ 24,988 Station Operating Income$ 6,376 $ 10,621 $ 14,229 $ 21,326 Digital Media Operating Income 1,790 2,001 2,568 2,947 Publishing Operating Income (Loss) (1,609 ) 234 (2,705 ) 715$ 6,557 $ 12,856 $ 14,092 $ 24,988 38
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In the table below, we present a reconciliation of Adjusted EBITDA to EBITDA to
Net Income (Loss), the most directly comparable GAAP measure. EBITDA and
Adjusted EBITDA are
non-GAAP
financial performance measures that are not to be considered a substitute for or
superior to the most directly comparable measures reported in accordance with
GAAP.
Three Months Ended Six Months Ended
June 30, June 30,
2020 2021 2020 2021
(Dollars in thousands)Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) Net income (loss)
$ (2,515 ) $ 2,257 $ (57,719 ) $ 2,580 Plus interest expense, net of capitalized interest 4,013 3,935 8,045 7,861 Plus provision for (benefit from) income taxes (2,380 ) (488 ) 30,779 (358 ) Plus depreciation and amortization 3,558 3,286 7,258 6,456 Less interest income - - - (1 ) EBITDA$ 2,676 $ 8,990 $ (11,637 ) $ 16,538 Plus net (gain) loss on the disposition of assets 34 (263 ) 113 55 Plus change in the estimated fair value of contingent earn-out consideration 3 - (2 ) - Plus impairment of indefinite-lived long-term assets other than goodwill - - 17,254 - Plus impairment of goodwill - - 307 - Plus net miscellaneous (income) and expenses (6 ) (63 ) 46 (85 ) Plus (gain) on early retirement of long-term debt - - (49 ) - Plus non-cash stock-based compensation 96 84 199 162 Adjusted EBITDA$ 2,803 $ 8,748 $ 6,231 $ 16,670 RESULTS OF OPERATIONS Three months endedJune 30, 2021 compared to the three months endedJune 30, 2020 The following factors affected our results of operations and cash flows for the three months endedJune 30, 2021 as compared to the same period of the prior year: Acquisitions and Divestitures The operating results of our business acquisitions and asset purchases are included in our consolidated results of operations from their respective closing date or the date that we began operating them under an LMA or TBA. The operating results of business and asset divestitures are excluded from our consolidated results of operations from their respective closing date or the date that a third-party began operating them under an LMA or TBA. • OnJune 1, 2021 , we acquired radio stationsKDIA-AM and KDYA-AM inSan Francisco, California for$0.6 million in cash.
• On
$0.1 million in cash. • OnApril 28, 2021 , we acquired the Centerline New Media domain and
digital assets for
operated within Salem Web Network's church products division.
• On
paid no cash at the time of closing and assumed deferred subscription
liabilities of $0.1 million .
• On March 18, 2021 , we sold radio station
WKAT-AM
and an FM translator in
operating the station under a LMA in November 2020 .
• On
related assets for $1.1 million in cash. We paid $0.4 million in cash
upon closing with deferred payments of $0.4 million due January 31, 2021
and $0.3 million due September 15, 2021 .
• On April 6, 2020 , we sold radio station
WBZW-AM
and an FM translator construction permit in Orlando, Florida , for
$0.2 million in cash.
39--------------------------------------------------------------------------------
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Net Broadcast Revenue
Three Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Broadcast Revenue $ 39,470 $ 46,783 $ 7,313 18.5 % 74.7 % 73.3 %
Same Station Net Broadcast Revenue
18.7 %
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Three Months Ended June 30,
2020 2021
(Dollars in thousands)
Block Programming:
National $ 11,770 29.8 % $ 11,861 25.4 %
Local 5,632 14.3 % 5,817 12.4 %
17,402 44.1 % 17,678 37.8 %
Broadcast Advertising :
National 2,587 6.6 % 3,458 7.4 %
Local 7,788 19.7 % 10,546 22.5 %
10,375 26.3 % 14,004 29.9 %
Broadcast Digital (local) 5,655 14.3 % 7,728 16.5 %
Infomercials 228 0.6 % 225 0.5 %
Network 4,226 10.7 % 4,950 10.6 %
Other Revenue 1,584 4.0 % 2,198 4.7 %
Net Broadcast Revenue $ 39,470 100.0 % $ 46,783 100.0 %
Block programming revenue increased by $0.3 million including a $0.2 million
increase in local programming and a $0.1 million increase in national
programming. Our Christian Teaching and Talk radio stations generated
$0.2 million in additional local programming revenue from an increase in the
programs
on-air
and a $0.1 million increase in national programming revenue due to the impact of
early-payment discounts offered to certain customers during the prior year.
Local programming revenue also increased by $0.1 million on our News Talk radio
stations that was offset with a $0.1 million decline in revenue from our Spanish
Christian Teaching and Talk stations due to the sale of radio station
WKAT-AM
in Miami, Florida.
Advertising revenue, net of agency commissions, increased by $3.6 million ,
including a $2.7 million increase in local advertising and a $0.9 million
increase in national advertising. Excluding the impact of political, advertising
revenue increased by $3.5 million , of which $2.7 million was local and
$0.8 million was national. Increases, net of political, include $2.5 million
from our Contemporary Christian Music format radio stations, primarily in our
Dallas , Los Angeles , and Atlanta markets, $0.4 million from our News Talk format
radio stations, $0.2 million from our Christian Teaching and Talk format radio
stations and $0.5 million increase from other station formats, that were offset
by a $0.1 million decline from our Spanish Christian Teaching and Talk format
stations. The increases are attributable to a higher demand for airtime
associated with improving economic conditions as pandemic restrictions begin to
ease that can in turn result in higher spot rates for prime airtime spots.
Broadcast digital revenue, net of agency commissions, or net digital revenue
generated from our broadcast markets and networks, increased by $2.1 million due
to growth in digital product offerings and the launch of the Salem Podcast
Network in January 2021 . Salem Podcast Network is a highly specialized platform
for conservative, political, news, family-oriented podcasts with talk show hosts
including Dinesh D'Souza , Todd Starnes and Charlie Kirk . Salem Podcast Network
joins Salem Surround, our multimedia digital advertising agency providing
digital marketing services to our customers, and SalemNow, our
on-demand
pay-per-view
video streaming platform launched in the fourth quarter of 2020, along with our
owned and operated station branded websites to offer new digital products and
services. Increases in digital revenue include a $1.3 million increase in
digital marketing services through Salem Surround, a $1.2 million increase from
Salem Podcast Network, a $0.4 million increase in streaming revenue and a
$0.4 million increase in digital advertising revenue from our station websites
that were partially offset by a $1.3 million decline in revenue from SalemNow
that released two successful titles during the prior year. There were no
significant changes in digital rates as compared to the prior year.
There were no significant changes in the number of infomercials aired and no
significant changes in rates. The placement of infomercials can vary
significantly from one period to another due to the number of time slots
available and the degree to which the infomercial content is considered to be of
interest to our audience.
Network revenue, excluding amounts reported with digital, increased by
$0.7 million due to a $0.8 million increase in revenue from our nationally
syndicated host programs offset by a $0.1 million decline in political
advertising.
Other revenue increased by $0.6 million due to a $0.3 million increase in
listener purchase program revenue from higher listener participation and half
price tuition tickets sold as schools and businesses started to
re-open,
a $0.1 million increase in event revenue due to the
re-opening
of live events, a $0.1 million increase in TBA fees associated with radio
station
KBJD-AM,
Denver, Colorado and a $0.1 million increase in talent fees. Event revenue
varies from period to period based on the nature and timing of events, audience
demand, and in some cases, the weather which can affect attendance.
40
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On a Same Station basis, net broadcast revenue increased $7.3 million , which
reflects these items net of the impact of stations with acquisition,
dispositions, and format changes.
Net Digital Media Revenue
Three Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Digital Media Revenue $ 9,443 $ 10,339 $ 896 9.5 % 17.9 % 16.2 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Three Months Ended June 30,
2020 2021
(Dollars in thousands)
Digital Advertising, net $ 4,547 48.2 % $ 4,393 42.5 %
Digital Streaming 853 9.0 862 8.3
Digital Subscriptions 2,157 22.8 3,299 31.9
Digital Downloads 1,802 19.1 1,694 16.4
e-commerce 27 0.3 67 0.6
Other Revenues 57 0.6 24 0.2
Net Digital Media Revenue $ 9,443 100.0 % $ 10,339 100.0 %
National digital revenue, net of agency commissions, or net revenue generated
from our owned and operated Christian and conservative opinion websites,
declined by $0.2 million due to a lower number of advertisements on our
conservative opinion websites within Townhall Media. Our conservative opinion
websites experience lower demand and lower page views during
non-election
years. We also experience lower demand from advertisers who move advertising
spending to digital programmatic advertisers, such as Facebook and Google, and
we may lose advertisers who decide to reduce or eliminate advertising on
political-content websites such as ours. We continue to acquire, develop and
promote the use of mobile applications to reduce our dependency on page views
from digital programmatic advertisers. Because mobile page views carry fewer
advertisements and tend to have shorter site visits as compared to desktop, our
growth in mobile page views exceeds our growth in revenue from the mobile
applications.
Digital streaming revenue was consistent with that of the same period of the
prior year with no significant changes in sales volume or rates.
Digital subscription revenue increased by $1.1 million including a $0.5 million
increase from Eagle Financial Publications , a $0.4 million increase from
Christianjobs.com and Churchstaffing.com within SWN due to an increase in job
postings, and a $0.2 million increase from Townhall Media's launch of Townhall
VIP, a subscription service. The number of subscribers to Eagle Financial
Publications increased due an increased investment in marketing with no
significant changes in rates over the prior period.
Digital download revenue decreased by $0.1 million due to declines in the number
of downloads purchased from our church product websites, WorshipHouseMedia.com
and SermonSpice
TM
.com. Digital downloads are impacted by timing of Easter holiday, which was on
Sunday April 4, 2021 , resulting in a majority of the associated revenue being
generated on or before March 31, 2021 . There were no significant changes in
rates.
E-commerce
revenue includes
in-app
purchases that increased in volume with no significant changes in rates.
Other revenue includes revenue sharing arrangements for mobile applications and
mail list rentals which declined slightly in volume with no significant changes
in rates.
Net Publishing Revenue
Three Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue $ 3,958 $ 6,660 $ 2,702 68.3 % 7.5 % 10.4 %
41
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The following table shows the dollar amount and percentage of net publishing
revenue for each publishing revenue source.
Three Months Ended June 30,
2020 2021
(Dollars in thousands)
Book Sales $ 2,698 68.2 % $ 6,212 93.3 %
Estimated Sales Returns & Allowances ) )
(560 ) (14.1 ) (1,918 (28.8
Net Book Sales 2,138 54.1 4,294 64.5
E-Book
Sales 250 6.3 453 6.8
Self-Publishing Fees 1,051 26.5 1,550 23.3
Print Magazine Subscriptions 174 4.4 104 1.6
Print Magazine Advertisements 91 2.3 54 0.8
Digital Advertising 52 1.3 70 1.1
Other Revenue 202 5.1 135 2.0
Net Publishing Revenue $ 3,958 100.0 % $ 6,660 100.0 %
Net book sales increased by $2.2 million including a $2.0 million increase from
Regnery
®
Publishing and a $0.2 million increase from Salem Author Services. Book sales
through Regnery
®
Publishing reflect a 197% increase in volume largely attributable to the
reopening of bookstores and retail locations, offset with a 12% decrease in the
average price per unit sold. Revenue is directly attributable to the number of
titles released each period and the composite mix of titles available that can
vary significantly from period to period based on the book release date and the
number of titles that achieve placement on bestseller lists, which can increase
awareness and demand for the book. The increase of $1.4 million in estimated
sales returns and allowances is based on a higher volume of print books sold
through Regnery
®
Publishing. The $0.2 million increase in Salem Author Services book sales was
due to an increase in the number of books sold as trade shows and events resumed
with no significant changes in sale prices.
Regnery
®
Publishing
e-book
sales increased by $0.2 million with a 9% increase in the average price per unit
sold from sales incentives and a 57% increase in sales volume.
E-book
sales can also vary based on the composite mix of titles released and available
in each period. Revenues can vary significantly based on the book release date
and the number of titles that achieve placement on bestseller lists, which can
increase awareness and demand for the book.
Self-publishing fees increased $0.5 million due an increase in the number of
authors publishing books with no change in fees charged to authors.
Declines in print magazine subscription revenues and advertising revenues
reflect the sale of Singing News Magazine on May 25, 2021 , and ongoing lower
consumer demand and distribution levels prior to the sale.
Digital adverting revenue generated from our publishing division was consistent
with that of the prior year with no changes in sales volume and rates.
Other revenue includes change fees, video trailers, and subright revenue for
foreign translation and audio books for original published titles from Regnery
®
Publishing. Subright revenue declined $0.1 million due to lower demand.
There were no changes in volume or rates.
Broadcast Operating Expenses
Three Months Ended June 30,
2020 2021 Change Change 2020 2021
(Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses $ 33,094 $ 36,162 $ 3,068 9.3 % 62.6 % 56.7 %
Same Station Broadcast Operating Expenses
Broadcast operating expenses increased by$3.1 million , including a$1.6 million increase in payroll costs of which$0.3 million relates to growth in digital marketing services and the remainder is attributable to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, a$0.9 million increase in costs associated with the new Salem Podcast Network, a$0.6 million increase in advertising and event costs, a$0.6 million increase in third-party marketing costs associated with digital marketing services, a$0.5 million increase in health insurance costs, a$0.3 million increase in facilities related expenses, and a$0.2 million increase in production and programming costs. These costs were partially offset with a$1.1 million decline in bad debt expense due to the additional reserves recorded in the prior year because of the uncertainties of the COVID-19 pandemic on collections, a$0.1 million decline in employee benefit costs from the suspension of the 401(k) match, and a$0.7 million decline in cost of sales from SalemNow that experienced increase costs in 2020 from the release of two successful titles during that period. On a same-station basis, broadcast operating expenses increased by$3.4 million reflecting these items net of the impact of station dispositions and format changes. 42 -------------------------------------------------------------------------------- Table of Contents Digital Media Operating Expenses Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
9.0 % 14.5 % 13.1 % Digital media operating expenses increased by$0.7 million including a$0.5 million increase in advertising and promotional expenses, a$0.2 million increase payroll and employee benefits expense, a$0.1 million increase in bad debt expense and a$0.1 million increase in sales-based commissions and bonuses, offset by a$0.3 million decline in royalties. Increases in advertising and promotional expenses are driven by a new video initiative forEagle Financial Publications that management believes to be beneficial for the business. The increase in payroll expenses reflects theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020. Publishing Operating Expenses Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
15.4 % 10.5 % 10.1 % Publishing operating expenses increased by$0.9 million , including a$0.8 million increase in costs of sales, a$0.5 million increase in royalty expense based on higher sales, and a$0.2 million increase in payroll expenses from theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020 that were offset by a$0.7 million decline in bad debt expense. Cost of goods sold increased$0.8 million including a$0.8 million increase from print books sold by Regnery ® Publishing and a$0.1 million increase from Salem Author Services due to a higher volume of book sales that was offset by a$0.1 million decline fromSalem Publishing due to the sale ofSinging News Magazine . The gross profit margin for Regnery ® Publishing improved to 50% from 32% as sales volume increased while material costs increased only slightly. Regnery ® Publishing margins vary based on the volume of e-book sales, which have higher margins due to the nature of delivery and no reserve for sales returns and allowances. The gross profit margin for Salem Author Services improved to 74% from 70% due to lower paper costs for print book sales. Unallocated Corporate Expenses Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
8.9 % 7.3 % 6.6 % Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating segments. The net increase of$0.3 million includes a$0.5 million increase in payroll expense due to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020 that was offset with a$0.1 million decline in employee benefit expense due to the suspension of the 401(k) match, and a$0.1 million decline in professional service fees. Depreciation Expense Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Depreciation Expense$ 2,718 $ 2,741 $ 23 0.8 % 5.1 % 4.3 % Depreciation expense was consistent with that of the prior year. There were no changes in our depreciation methods or in the estimated useful lives of our asset groups. Amortization Expense Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Amortization Expense$ 840 $ 545 $ (295 ) (35.1) % 1.6 % 0.9 % The decrease in amortization expense reflects the impact of fully amortized domain names, customer lists and contracts, and subscriber base lists that had estimated useful lives of three to five years. These items were fully amortized at or near the beginning of 2021 resulting in lower amortization expense. There were no changes in our amortization methods or the estimated useful lives of our intangible asset groups. 43 -------------------------------------------------------------------------------- Table of Contents Net (Gain) Loss on the Disposition of Assets Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Net (Gain) Loss on the Disposition of assets
The net (gain) loss on the disposition of assets of ($0.3 million ) for the three-month period endingJune 30, 2021 includes a ($0.5 million ) pre-tax gain on the sale ofSinging News Magazine and Singing News Radio that was offset by an additional$0.1 million loss recorded at the time of closing on the sale of radio stationWKAT-AM and FM translator inMiami, Florida as well as various other fixed asset disposals. The net (gain) loss on the disposition of assets of$34,000 for the three-month period endedJune 30, 2020 reflects various fixed asset disposals. Other Income (Expense) Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Interest Expense$ (4,013 ) $ (3,935 ) 78 (1.9) % (7.6) % (6.2) % Net Miscellaneous Income and (Expenses) 6 63 57 950.0% - % 0.1% Interest expense includes interest due on outstanding debt balances and non-cash accretion associated with deferred installments. The decrease of$0.1 million reflects the lower outstanding balance of the Notes, the lower outstanding balance of the ABL Facility, and finance lease obligations outstanding during the three-months endedJune 30, 2021 . Net miscellaneous income and expenses includes non-operating receipts such as usage fees and other expenses. Provision for (Benefit from) Income Taxes Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Provision for (Benefit from) Income Taxes$ (2,380 ) $ (488 ) $ 1,892 (79.5) % (4.5) % (0.8) % Our benefit from income taxes decreased$1.9 million to$0.5 million tax provision for the three months endedJune 30, 2021 compared to a$2.4 million for the same period of the prior year. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate was (27.6)% for the three months endedJune 30, 2021 compared to 48.6% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 21.0% due to state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance. The effective tax rate of (27.6)% is driven by certain expenses that are nondeductible for income tax purposes relative to pre-tax book loss, tax expense attributable to deductible amortization on indefinite lived assets for fully valued state jurisdictions and projected utilization of operating loss carryforwards. Net Income (Loss) Three Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Net Income (Loss)$ (2,515 ) $ 2,257 $ 4,772 (189.7) % (4.8) % 3.5 % Net income increased by$4.8 million to$2.3 million for the three months endedJune 30, 3021 compared to a net loss of$2.5 million during the same period of the prior year due to an increase in revenue with a lower increase in operating and other expenses as described above. Six months endedJune 30, 2021 compared to the six months endedJune 30, 2020 The following factors affected our results of operations and cash flows for the six months endedJune 30, 2021 as compared to the same period of the prior year: Acquisitions, Divestitures and Other Transactions The operating results of our business acquisitions and asset purchases are included in our consolidated results of operations from their respective closing date or the date that we began operating them under an LMA or TBA. The operating results of business and asset divestitures are excluded from our consolidated results of operations from their respective closing date or the date that a third-party began operating them under an LMA or TBA. • OnJune 1, 2021 , we acquired radio stationsKDIA-AM and KDYA-AM inSan Francisco, California for$0.6 million in cash.
• On
$0.1 million in cash. 44
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Table of Contents
• On
digital assets for
operated within Salem Web Network's church products division.
• On
paid no cash at the time of closing and assumed deferred subscription
liabilities of $0.1 million .
• On March 18, 2021 , we sold radio station
WKAT-AM
and an FM translator in
operating the station under a LMA in November 2020 .
• On
related assets for $1.1 million in cash. We paid $0.4 million in cash
upon closing with deferred payments of $0.4 million due January 31, 2021
and $0.3 million due September 15, 2021 .
• On April 6, 2020 , we sold radio station
WBZW-AM
and an FM translator construction permit in Orlando, Florida , for
$0.2 million in cash.
Debt Transactions
During the six months ended June 30, 2021 , we received $11.2 million in
aggregate principal amount of PPP loans through the SBA that were available to
our radio stations and networks under the CAA. During July 2021 , the SBA
forgave all but $20,000 of the PPP loans.
During the six-months ended June 30, 2020 , we completed repurchases of $3.5
million of the Notes for $3.4 million in cash, recognizing a net gain of $49,000
after adjusting for bond issuance costs.
Equity Transactions
No distributions were declared or paid during six month period ended June 30,
2021 , compared to distributions of $0.7 million ($0.025 per share) declared and
paid during the
six-month
period ended June 30, 2020 based upon our Board's then current assessment of our
business as detailed in Note 16 - Equity Transactions.
Net Broadcast Revenue
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Broadcast Revenue $ 84,650 $ 90,831 $ 6,181 7.3 % 76.2 % 73.8 %
Same Station Net Broadcast Revenue
7.7 %
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Six Months Ended June 30,
2020 2021
(Dollars in thousands)
Block Programming:
National $ 23,804 28.1 % $ 23,322 25.7 %
Local 12,440 14.7 % 11,773 13.0 %
36,244 42.8 % 35,095 38.6 %
Broadcast Advertising :
National 6,544 7.7 % 7,118 7.8 %
Local 19,145 22.6 % 19,441 21.4 %
25,689 30.3 % 26,559 29.2 %
Broadcast Digital (local) 9,948 11.8 % 14,797 16.3 %
Infomercials 536 0.6 % 462 0.5 %
Network 8,614 10.2 % 9,821 10.8 %
Other Revenue 3,619 4.3 % 4,097 4.5 %
Net Broadcast Revenue $ 84,650 100.0 % $ 90,831 100.0 %
Block programming revenue declined by $1.1 million , including a $0.6 million
decline in local programming revenue and a $0.5 million decline in national
programming revenue. The decline includes $0.6 million from our Christian
Teaching and Talk stations, $0.3 million from our News Talk stations and
$0.3 million from our Spanish Christian Teaching and Talk stations that were
offset by an increase of $0.1 million for our Contemporary Christian Music
stations. Each of these formats experienced cancellations beginning in March
2020 when many programmers, primarily ministries, cancelled programming to
offset lost revenues. Event cancellations impacted many programmers who lost a
significant portion of their revenue during the
COVID-19
pandemic.
Advertising revenue, net of agency commissions, increased by $0.9 million ,
$1.0 million net of political, due to a $0.6 million increase in national
advertising net of political and a $0.4 million increase in local advertising
revenue net of political. The increase includes $1.7 million from our
Contemporary Christian Music format radio stations, primarily in our Atlanta and
Dallas markets, that was offset with a $0.4 million decline from our News Talk
format radio stations and a $0.3 million decline from our Christian Teaching and
Talk format radio stations. The increases in Atlanta and Dallas reflect an
increase in demand for advertising as pandemic restrictions ease that can in
turn creates higher spot rates for prime airtime spots. The
year-to-date
decline from other formats reflects the ongoing impact of cancellations that
resulted from the
COVID-19
pandemic.
45-------------------------------------------------------------------------------- Table of Contents Broadcast digital revenue, net of agency commissions, or net digital revenue generated from our broadcast markets and networks, increased by$4.9 million due to growth in digital product offerings and the launch of the Salem Podcast Network inJanuary 2021 . Salem Podcast Network is a highly specialized platform for conservative, political, news, family-oriented podcasts with talk show hosts includingDinesh D'Souza ,Todd Starnes andCharlie Kirk . Salem Podcast Network joins Salem Surround, our multimedia digital advertising agency providing digital marketing services to our customers, and SalemNow, our on-demand pay-per-view video streaming platform launched in the fourth quarter of 2020, along with our owned and operated station branded websites to offer new digital products and services. Increases in digital revenue include a$3.0 million increase from Salem Podcast Network, a$1.3 million increase in digital marketing services through Salem Surround, a$0.7 million increase in streaming revenue and a$0.5 million increase in digital advertising revenue from our station websites and an increase of$0.6 million from our networks that were partially offset by a$1.3 million decline in revenue from SalemNow that released two successful titles during the prior year. There were no significant changes in digital rates as compared to the prior year. Declines in infomercial revenue were due to a reduction in the number of infomercials aired with no significant changes in rates as compared to the prior year. The placement of infomercials can vary significantly from one period to another due to the number of time slots available and the degree to which the infomercial content is considered to be of interest to our audience. Network revenue, net of amounts reported as digital, increased by$1.2 million due to a$1.3 million increase in revenue from our nationally syndicated host programs that was partially offset by a$0.2 million decline in political advertising. Other revenue increased by$0.5 million due to a$0.3 million increase in listener purchase program revenue from higher listener participation and half price tuition tickets sold as schools and businesses started to re-open, a$0.1 million increase in TBA fees associated with radio stationKBJD-AM ,Denver, Colorado and a$0.1 million increase in talent fees. Event revenue varies from period to period based on the nature and timing of events, audience demand, and in some cases, the weather which can affect attendance. On aSame Station basis, net broadcast revenue increased$6.4 million , which reflects the above described items net of the impact of stations with acquisitions, dispositions and format changes. Net Digital Media Revenue Six Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Net Digital Media$ 18,547 $ 19,958 $ 1,411 7.6 % 16.7 % 16.2 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Six Months Ended June 30,
2020 2021
(Dollars in thousands)
Digital Advertising, net $ 9,260 49.9 % $ 8,806 44.1 %
Digital Streaming 1,768 9.5 1,706 8.5
Digital Subscriptions 4,292 23.2 6,072 30.4
Digital Downloads 3,047 16.4 3,173 15.9
e-commerce 55 0.3 98 0.5
Other Revenues 125 0.7 103 0.5
Net Digital Media Revenue $ 18,547 100.0 % $ 19,958 100.0 %
National digital revenue, net of agency commissions, or net revenue generated
from our owned and operated Christian and conservative opinion websites declined
by $0.5 million due to a lower volume of advertisements on our conservative
opinion websites within Townhall Media. Revenue declines of $0.1 million from
Salem Web Network were offset with a $0.1 million increase in sales from Eagle
Financial Publications . Our conservative opinion websites experience lower
demand and lower page views during
non-election
years. We also experience lower demand from advertisers who move advertising
spending to digital programmatic advertisers, such as Facebook and Google, and
we may lose advertisers who decide to reduce or eliminate advertising on
political-content websites such as ours. We continue to acquire, develop and
promote the use of mobile applications to reduce our dependency on page views
from digital programmatic advertisers. Because mobile page views carry fewer
advertisements and tend to have shorter site visits as compared to desktop, our
growth in mobile page views exceeds our growth in revenue from the mobile
applications.
Digital streaming revenue decreased $0.1 million as compared to the prior year
based on a slightly lower demand for content available from our Christian
websites. There were no significant changes in rates as compared to the prior
year.
Digital subscription revenue increased $1.8 million on a consolidated basis
reflecting a $0.8 million increase in revenues from Eagle Financial
Publications , a $0.5 million increase from Christianjobs.com and
Churchstaffing.com within Salem Web Network due to increases in job postings as
job markets start to
re-open
and a $0.5 million increase in revenues from Townhall Media's launch of Townhall
VIP, a subscription service. Eagle Financial Publications saw an increase in the
number of subscribers due to an increased investment in marketing with no
significant changes in rates over the same period of the prior year.
46
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Digital download revenue increased by $0.1 million from our church product
websites, WorshipHouseMedia.com and SermonSpice
TM
.com. There were no significant changes in rates as compared to the prior year.
E-commerce
revenue includes
in-app
purchases through Salem Web Network that increased slightly in volume with no
significant changes in rates over the prior year.
Other revenue includes revenue sharing arrangements for mobile applications and
mail list rentals which remained consistent as with no changes in volume or
rates.
Net Publishing Revenue
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue %
$ 7,924 $ 12,346 $ 4,422 55.8 % 7.1 % 10.0
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
Six Months Ended June 30,
2020 2021
(Dollars in thousands)
Book Sales $ 5,391 68.0 % $ 10,513 85.2 %
Estimated Sales Returns & Allowances ) )
(1,530 ) (19.3 ) (3,011 (24.4
Net Book Sales 3,861 48.7 7,502 60.8
E-Book
Sales 504 6.4 792 6.4
Self-Publishing Fees 2,453 31.0 3,174 25.7
Print Magazine Subscriptions 351 4.4 262 2.1
Print Magazine Advertisements 193 2.4 122 1.0
Digital Advertising 151 1.9 132 1.1
Other Revenue 411 5.2 362 2.9
Net Publishing Revenue $ 7,924 100.0 % $ 12,346 100.0 %
Net book sales increased by $3.6 million which includes a $3.5 million increase
in Regnery
®
Publishing as book sales reflect a 133% increase in volume largely attributable
to the reopening of bookstores and retail locations, offset by a 6% decrease in
the average price unit sold and a $0.1 million increase in Salem Author
Services. The increase in the number of print books sold through Regnery
®
Publishing resulted in a $1.5 million increase to the estimated sales returns
and allowances. The increase in book sales from Salem Author Services of
$0.1 million was due to books sold at tradeshows with events resuming in limited
capacity as pandemic restrictions are lifted. There were no significant changes
in sale prices for Salem Author Services as compared to the prior year.
Regnery
®
Publishing
e-book
sales increased $0.3 million with a 34% increase in the average price per unit
sold from sales incentives and a 32% increase in sales volume.
E-book
sales can also vary based on the composite mix of titles released and available
in each period. Revenues can vary significantly based on the book release date
and the number of titles that achieve placement on bestseller lists, which can
increase awareness and demand for the book.
Self-publishing fees increased $0.7 million due an increase in the number of
authors and services provided with no change in fees charged to authors.
Declines in print magazine subscription revenues and advertising revenues
reflect the sale of Singing News Magazine on May 25, 2021 , and ongoing lower
consumer demand and distribution levels prior to the sale.
Other revenue includes change fees, video trailers, and subright revenue for
foreign translation and audio books for original published titles from Regnery
®
Publishing. Subright revenue declined $0.1 million due to lower demand.
Broadcast Operating Expenses
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses
(1.3 )% 63.4 % 56.4 % Same Station Broadcast Operating Expenses$ 69,021 $ 68,898 $ (123 )
(0.2 )%
Broadcast operating expenses declined by$0.9 million , including a$3.0 million decline in bad debt expense due to the additional reserves recorded in the prior year from uncertainties of the COVID-19 pandemic on collections, a$0.9 million decline in the cost of sales from SalemNow that incurred higher costs in the prior year from the release of two successful titles, a$0.5 million decline in employee benefit costs due to the suspension of the 401(k) match, a$0.3 million decline in event and entertainment costs due to the expenses associated with events that took place prior to the pandemic restrictions in early 2020, and a$0.2 million decrease in facility related expenses that were offset with a$1.4 million increase in costs associated with the new Salem Podcast Network, a$1.1 million increase in payroll costs attributable to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, a$0.6 million increase in third-party marketing costs associated with digital marketing services, a$0.4 million increase in advertising and promotions, a$0.3 million increase in hosting fees and a$0.3 million increase in professional services. 47 -------------------------------------------------------------------------------- Table of Contents On a same-station basis, broadcast operating expenses decreased by$0.1 million . The decrease in broadcast operating expenses on a same station basis reflects these items net of the impact of start-up costs associated with acquisitions, station dispositions and format changes. Digital Media Operating Expenses Six Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
6.5 % 14.4 % 13.8 % Digital media operating expenses increased by$1.0 million , including a$0.8 million increase in advertising and promotional expenses, a$0.5 million increase in sales-based commissions and incentives, and a$0.3 million increase in payroll costs that were offset by a$0.2 million decrease in bad debt expense, a$0.1 million decrease in costs of sales, a$0.1 million decrease in employee benefit costs due to the suspension of the 401(k) match, and$0.1 million decrease in royalties. Increases in advertising and promotional expenses are driven by a new video initiative forEagle Financial Publications that management believes to be beneficial for the business. The increase in payroll related expenses reflects theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020. Publishing Operating Expenses Six Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
9.4 % 9.6 % 9.4 % Publishing operating expenses increased by$1.0 million , including a$1.0 million increase in costs of sales, a$0.5 million increase in royalty expense based on higher sales, a$0.4 million increase in payroll costs due to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, and a$0.2 million increase in advertising and promotional costs that were offset by a$0.7 million decrease in bad debt expense, a$0.3 million decrease in facility related expenses due to the termination of a lease inWashington D.C. , and a$0.1 million decrease in employee benefit costs due to the suspension of the 401(k) match. Cost of goods sold increased$1.0 million including a$1.0 million increase from print books sold by Regnery ® Publishing and$0.1 million increase from Salem Author Services due to higher volume of book sales offset by a$0.1 million declineSalem Publishing due to the sale ofSinging News Magazine . The gross profit margin for Regnery ® Publishing improved to 55% from 40% as sales volume increased while material costs increased only slightly. Regnery ® Publishing margins vary based on the volume of e-book sales, which have higher margins due to the nature of delivery and no reserve for sales returns and allowances. The gross profit margin for Salem Author Services improved to 75% from 71% due to lower paper costs for print book sales. Unallocated Corporate Expenses Six Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
5.2 % 7.3 % 6.9 % Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating segments. The increase of$0.4 million includes a$0.7 million increase in payroll costs due to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020 that were offset by a$0.2 million decrease in travel and entertainment-related expenses due to the events that took place prior to the pandemic restrictions in early 2020 and a$0.1 million decrease in employee benefit costs due to the suspension of the 401(k) match. Depreciation Expense Six Months Ended June 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Depreciation Expense$ 5,431 $ 5,330 $ (101 ) (1.9 )% 4.9 % 4.3 % The decrease in depreciation expense reflects the impact of prior year capital expenditures for data processing equipment and computer software that had shorter estimated useful lives as compared to towers or other assets and were fully depreciated during the current year. There were no changes in our depreciation methods or in the estimated useful lives of our asset groups. 48 --------------------------------------------------------------------------------
Table of Contents
Amortization Expense
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 1,827 $ 1,126 $ (701 ) (38.4 )% 1.6 % 0.9 %
The decrease in amortization expense reflects the impact of fully amortized
domain names, customer lists and contracts, and subscriber base lists that had
estimated useful lives of three to five years. These items were fully amortized
at or near the beginning of the 2021 calendar year resulting in lower
amortization expense for this year. There were no changes in our amortization
methods or the estimated useful lives of our intangible asset groups.
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars
in thousands) % of Total Net Revenue
Impairment of Indefinite-Lived
Long-Term Assets Other Than Goodwill $ 17,254 $ - $ (17,254 ) (100.0 )% 15.5 % - %
We performed an interim review of broadcast licenses for certain markets during
the first quarter of 2020 due to the
COVID-19
pandemic and the resulting
stay-at-home
orders that began to adversely impact revenues. We engaged an independent
third-party appraisal and valuation firm to assist us with determining the fair
value of our broadcast licenses. Based on our interim review and analysis in the
first quarter of 2020, we recorded an impairment charge of $17.0 million to the
value of broadcast licenses in Chicago , Cleveland , Louisville , Philadelphia ,
Portland , Sacramento and Tampa . We also recorded an impairment charge of
$0.3 million to the value of mastheads during our interim review in the first
quarter of 2020. These impairments were driven by decreases in projected
revenues due to the current estimated impact of
COVID-19
and an increase in the WACC. We believe that these factors are indicative of
trends in the industry as a whole and not unique to our company or operations.
There were no indications of impairment as of our interim review during the
second quarter of 2020.
Impairment of Goodwill
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars
in thousands) % of Total Net Revenue
Impairment of Goodwill $ 307 $ - $ (307 ) (100.0 )% 0.3 % - %
We performed an interim review of goodwill for impairment during the first
quarter of 2020 due to the
COVID-19
pandemic and the resulting
stay-at-home
orders that began to adversely impact revenues. We engaged an independent
third-party appraisal and valuation firm to assist us with determining the
enterprise value for certain entities. Based on our interim review and analysis
in the first quarter of 2020, we recorded an impairment charge of $0.3 million .
These impairments were driven by decreases in projected revenues due to the
current estimated impact of
COVID-19
and an increase in the WACC. We believe that these factors are indicative of
trends in the industry as a whole and not unique to our company or operations.
There were no indications of impairment as of our interim review during the
second quarter of 2020.
Net (Gain) Loss on the Disposition of Assets
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net (Gain) Loss on the Disposition of
assets $ 113 $ 55 $ (58 ) (51.3 )% 0.1 % - %
The net (gain) loss on the disposition of assets of $0.1 million for the
six-month
period ended June 30, 2021 reflects the $0.5 million
pre-tax
gain on the sale of Singing News Magazine and Singing News Radio offset by
$0.4 million additional loss recorded at closing on the sale of radio station
WKAT-AM
and FM translator in Miami, Florida and various fixed asset disposals.
The net (gain) loss on the disposition of assets of $0.1 million for the
six-month
period ended June 30, 2020 reflects various fixed asset disposals.
Other Income (Expense)
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Interest Income $ - $ 1 $ 1 100.0 % - % - %
Interest Expense (8,045 ) (7,861 ) (184) (2.3 )% (7.2 )% (6.4 )% Gain on Early Retirement of Long-Term Debt
49 - (49 ) (100.0 )% - % - %
Net Miscellaneous Income and
(Expenses) (46 ) 85 131 (284.8 )% - % 0.1 %
Interest income represents earnings on excess cash and interest due under promissory notes.
49
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Interest expense includes interest due on outstanding debt balances and
non-cash
accretion associated with deferred installments. The decrease of $0.2 million
reflects the lower outstanding balance of the Notes, the lower outstanding
balance of the ABL Facility, and finance lease obligations outstanding during
the three-months ended June 30, 2021 .
The gain on the early retirement of long-term debt reflects $3.5 million of
repurchases of the Notes at prices below face value resulting in a
pre-tax
gain of $49,000 for the
six-month
period ended June 30, 2020 .
Net miscellaneous income and expenses includes
non-operating
receipts such as usage fees and other miscellaneous expenses.
Provision for (Benefit from) Income Taxes
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Provision for (Benefit from) Income
Taxes $ 30,779 $ (358 ) $ (31,137 ) (101.2 )% 27.7 % (0.3 )%
Our provision for income taxes decreased $31.1 million to a benefit of ($0.4)
million for the six months ended June 30, 2021 as compared to a provision for
income taxes of $30.8 million for the same period of the prior year. The
provision for income taxes as a percentage of income before income taxes, or the
effective tax rate was (16.1)% for the six months ended June 30, 2021 compared
to (114.3)% for the same period of the prior year. The effective tax rate for
each period differs from the federal statutory income rate of 21.0% due to state
income taxes, certain expenses that are not deductible for tax purposes, and
changes in the valuation allowance. The effective tax rate of (16.1)% is driven
by certain expenses that are nondeductible for income tax purposes relative to
pre-tax
book loss, tax expense attributable to deductible amortization on indefinite
lived assets for fully valued state jurisdictions and projected utilization of
operating loss carryforwards.
Net Income (Loss)
Six Months Ended June 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Income (Loss) $ (57,719 ) $ 2,580 $ 60,299 (104.5 )% (51.9 )% 2.1 %
Net income increased by $60.3 million to $2.6 million for the six months ended
June 30, 2021 compared to a net loss of $57.7 million during the same period of
the prior year due to an increase in revenue with a lower increase in operating
and other expenses as described above.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The discussion and analysis of our financial condition and results of operations
are based upon our Condensed Consolidated Financial Statements, which have been
prepared in accordance with GAAP. The preparation of these financial statements
requires management to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. We evaluate our estimates on an ongoing
basis. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results can be materially different from these estimates and assumptions.
Significant areas for which management uses estimates include:
• going concern evaluations;
• revenue recognition;
• asset impairments, including broadcasting licenses, goodwill and other
indefinite-lived intangible assets;
• fair value measurements;
• contingency reserves;
• allowance for doubtful accounts;
• sales returns and allowances;
• barter transactions;
• inventory reserves;
• reserves for royalty advances;
• fair value of equity awards;
• self-insurance reserves;
• estimated lives for tangible and intangible assets;
• assessment of contract-based factors, asset-based factors,
entity-based factors and market-based factors to determine the lease
term impacting
Right-Of-Use
("ROU") assets and lease liabilities;
• determining the Incremental Borrowing Rate ("IBR") for calculating ROU
assets and lease liabilities
50--------------------------------------------------------------------------------
Table of Contents • income tax valuation allowances; and • uncertain tax positions. These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary. The COVID-19 pandemic continues to create significant uncertainty and disruption in the global economy and financial markets. It is reasonably possible that these uncertainties could materially impact our estimates related to, but not limited to, revenue recognition, broadcast licenses, goodwill and income taxes. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements. We believe the following accounting policies and the related judgments and estimates are critical accounting policies that affect the preparation of our Condensed Consolidated Financial Statements. Going Concern Management is responsible for evaluating conditions or events as related to uncertainties that raise substantial doubt about our ability to continue as a going concern and to provide related footnote disclosures, as applicable. Management's estimates and assumptions, used in the evaluation of our ability to meet our obligations as they become due within one year after the date our financial statements are issued, are based on the facts and circumstances at such date and are subject to a material and high level of subjectivity and uncertainty due to the matters themselves being uncertain and subject to modification. The effect of any individual or aggregate changes in the estimates and assumptions, or the facts and circumstances, could be material to the financial statements. Revenue Recognition Significant management judgments and estimates must be made in connection with determining the amount of revenue to be recognized in any accounting period. We must assess the promises within each sales contract to determine if they are distinct performance obligations. Once the performance obligation(s) are determined, the transaction price is allocated to the performance obligation(s) based on a relative standalone selling price basis. If a sales contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative standalone selling price. If the stand-alone selling price is not determinable, an estimate is used. We make significant estimates related to variable consideration at the point of sale, including estimates for refunds and product returns. Under ASC Topic 606, estimates of variable consideration are to be recognized before contingencies are resolved in certain circumstances, including when it is probable that a significant reversal in the amount of any estimated cumulative revenue will not occur. A growing source of revenue is generated from digital product offerings, which allow for enhanced audience interaction and participation, and integrated digital advertising solutions. When offering digital products, another party may be involved in providing the goods or services that make up a performance obligation to the customer. These include the use of third-party websites for social media campaigns. We must evaluate if we are the principal or agent in order to determine if revenue should be reported gross as principal or net as agent. In this evaluation, we consider if we obtain control of the specified goods or services before they are transferred to our customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. The determination of whether we control a specified good or service immediately prior to the good or service being transferred requires us to make reasonable judgments on the nature of each agreement. We have determined that we are acting as principal when we manage all aspects of a social media campaign, including reviewing and approving target audiences, monitoring actual results and making modifications as needed and when we are responsible for delivering campaign results to our customers regardless of the use of a third-party or parties. Trade and Barter Transactions In broadcasting, trade or barter agreements are commonly used to reduce cash expenses by exchanging advertising time for goods or services. We may enter barter agreements to exchange airtime or digital advertising for goods or services that can be used in our business or that can be sold to our audience under Listener Purchase Programs. The terms of these barter agreements permit us to preempt the barter airtime or digital campaign in favor of customers who purchase the airtime or digital campaign for cash. The value of these non-cash exchanges is included in revenue in an amount equal to the fair value of the goods or services we receive. Each transaction must be reviewed to determine that the products, supplies and/or services we receive have economic substance, or value to us. We record barter operating expenses upon receipt and usage of the products, supplies and services, as applicable. We record barter revenue as advertising spots or digital campaigns are delivered, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Barter revenue is recorded on a gross basis unless an agency represents the programmer, in which case, revenue is reported net of the commission retained by the agency. Broadcast Licenses,Goodwill and Other Indefinite-Lived Intangible Assets Approximately 65% of our total assets atJune 30, 2021 consisted of indefinite-lived intangible assets including broadcast licenses, goodwill and mastheads. These indefinite-lived intangible assets originated from acquisitions in which a significant amount of the purchase price was allocated to broadcast licenses and goodwill. We do not amortize indefinite-lived intangible assets, but rather 51 -------------------------------------------------------------------------------- Table of Contents test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. We perform our annual impairment testing during the fourth quarter of each year, which coincides with our budget and planning process for the upcoming year. Impairment testing requires an estimate of the fair value of our indefinite-lived intangible assets. We believe that these estimates of fair value are critical accounting estimates as the value is significant in relation to our total assets and the estimates incorporate variables and assumptions based on our experiences and judgment about our future operating performance. Fair value measurements use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value, including assumptions about risk. If actual future results are less favorable than the assumptions and estimates used in our estimates, we are subject to future impairment charges, the amount of which may be material. The unobservable inputs are defined in FASB ASC Topic 820, Fair Value Measurements and Disclosures as Level 3 inputs discussed in Note 12 of our Financial Statements and Supplementary Data. The first step of our impairment testing is to perform a qualitative assessment as to whether it is more likely than not that an indefinite-lived intangible asset is impaired. This qualitative assessment requires significant judgment when considering the events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets. These events and circumstances are not all-inclusive and are not by themselves indicators of impairment. We consider external and internal factors when reviewing the following events and circumstances, which are presented in the order of what we believe to be the strongest to weakest indicators of impairment: (1) the difference between any recent fair value calculations and the carrying value; (2) financial performance, such as station operating income, including
performance as compared to projected results used in prior estimates of
fair value;
(3) macroeconomic economic conditions, including limitations on accessing
capital that could affect the discount rates used in prior estimates of
fair value;
(4) industry and market considerations such as a decline in market-dependent
multiples or metrics, a change in demand, competition, or other economic
factors;
(5) operating cost factors, such as increases in labor, that could have a
negative effect on future expected earnings and cash flows;
(6) legal, regulatory, contractual, political, business, or other factors;
(7) other relevant entity-specific events such as changes in management or
customers; and
(8) any changes to the carrying amount of the indefinite-lived intangible
asset.
If it is more likely than not that an impairment exists, we are required to
perform a second step to preparing a quantitative analysis to estimate the fair
or enterprise value of the assets. We did not find reconciliation to our current
market capitalization meaningful in the determination of our enterprise value
given current factors that impact our market capitalization, including but not
limited to: limited trading volume, the impact of our publishing segment
operating losses and the significant voting control of our Chairman and Chief
Executive Officer. We engage an independent third-party appraisal and valuation
firm to assist us with determining the enterprise value as part of our
quantitative review.
If the results of our quantitative analysis indicate that the fair value of a
reporting unit is less than its carrying value, an impairment is recorded equal
to the amount by which the carrying value exceeds the estimated fair value.
We believe we have made reasonable estimates and assumptions to calculate the
estimated fair value of our indefinite-lived intangible assets, however, these
estimates and assumptions are highly judgmental in nature. Actual results can be
materially different from estimates and assumptions. If actual market conditions
are less favorable than those projected by the industry or by us, or if events
occur or circumstances change that would reduce the estimated fair value of our
indefinite-lived intangible assets below the amounts reflected on our balance
sheet, we may recognize future impairment charges, the amount of which may be
material.
Business Acquisitions
We account for business acquisitions in accordance with the acquisition method
of accounting as specified in FASB ASC Topic 805
Business Combinations
. The total acquisition consideration is allocated to assets acquired and
liabilities assumed based on their estimated fair values as of the date of the
transaction. Estimates of the fair value include discounted estimated cash flows
to be generated by the assets and their expected useful lives based on
historical experience, market trends and any synergies believed to be achieved
from the acquisition. The excess of consideration paid over the estimated fair
values of the net assets acquired is recorded as goodwill and any excess of fair
value of the net assets acquired over the consideration paid is recorded as a
gain on bargain purchase. Prior to recording a gain, the acquiring entity must
reassess whether all acquired assets and assumed liabilities have been
identified and recognized and perform
re-measurements
to verify that the consideration paid, assets acquired, and liabilities assumed
have been properly valued.
Acquisitions may include contingent
earn-out
consideration, the fair value of which is estimated as of the acquisition date
as the present value of the expected contingent payments as determined using
weighted probabilities of the payment amounts.
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A majority of our radio station acquisitions have consisted primarily of the FCC
licenses to broadcast in a particular market. We often do not acquire the
existing format, or we change the format upon acquisition when we find it
beneficial. As a result, a substantial portion of the purchase price for the
assets of a radio station is allocated to the broadcast license. Under ASU
2017-01,
a fewer number of our radio station acquisitions qualify as business
acquisitions and instead are accounted for as asset purchases. Asset purchases
are recognized based on their cost to acquire, including transaction costs. The
cost to acquire an asset group is allocated to the individual assets acquired
based on their relative fair value with no goodwill recognized.
We may retain a third-party appraiser to estimate the fair value of the acquired
net assets as of the acquisition date. As part of the valuation and appraisal
process, the third-party appraiser prepares a report assigning estimated fair
values to the various asset categories in our financial statements. These fair
value estimates are subjective in nature and require careful consideration and
judgment. Management reviews the third-party reports for reasonableness of the
assigned values. We believe that the purchase price allocations represent the
appropriate estimated fair value of the assets acquired and we have not had to
modify our purchase price allocations.
We estimate the economic life of each tangible and intangible asset acquired to
determine the period of time in which the asset should be depreciated or
amortized. A considerable amount of judgment is required in assessing the
economic life of each asset. We consider our own experience with similar assets,
industry trends, market conditions and the age of the property at the time of
our acquisition to estimate the economic life of each asset. If the financial
condition of the assets were to deteriorate, the resulting change in life or
impairment of the asset could cause a material impact and volatility in our
operating results. To date, we have not experienced changes in the economic life
established for each major category of our assets.
Fair Value Measurements
FASB ASC Topic 820,
Fair Value Measurements and Disclosures
established a single definition of fair value in generally accepted accounting
principles and requires expanded disclosure requirements about fair value
measurements. The provision applies to other accounting pronouncements that
require or permit fair value measurements. This includes applying the fair value
concept to (i) nonfinancial assets and liabilities initially measured at fair
value in business combinations; (ii) reporting units or nonfinancial assets and
liabilities measured at fair value in conjunction with goodwill impairment
testing; (iii) other nonfinancial assets measured at fair value in conjunction
with impairment assessments; and (iv) asset retirement obligations initially
measured at fair value.
The fair value provisions include guidance on how to estimate the fair value of
assets and liabilities in the current economic environment and reemphasize that
the objective of a fair value measurement remains an exit price. If we were to
conclude that there has been a significant decrease in the volume and level of
activity of the asset or liability in relation to normal market activities,
quoted market values may not be representative of fair value and we may conclude
that a change in valuation technique or the use of multiple valuation techniques
may be appropriate.
The degree of judgment utilized in measuring the fair value of financial
instruments generally correlates to the level of pricing observability. Pricing
observability is affected by a number of factors, including the type of
financial instrument, whether the financial instrument is new to the market, and
the characteristics specific to the transaction. Financial instruments with
readily available active quoted prices or for which fair value can be measured
from actively quoted prices generally will have a higher degree of pricing
observability and a lesser degree of judgment utilized in measuring fair value.
Conversely, financial instruments rarely traded or not quoted will generally
have less (or no) pricing observability and a higher degree of judgment utilized
in measuring fair value.
FASB ASC Topic 820 established a hierarchal disclosure framework associated with
the level of pricing observability utilized in measuring fair value. This
framework defined three levels of inputs to the fair value measurement process
and requires that each fair value measurement be assigned to a level
corresponding to the lowest level input that is significant to the fair value
measurement in its entirety. The three broad levels of inputs defined by the
FASB ASC Topic 820 hierarchy are as follows:
• Level 1 Inputs-quoted prices (unadjusted) in active markets for identical
assets or liabilities that the reporting entity has the ability to access
at the measurement date;
• Level 2 Inputs-inputs other than quoted prices included within Level 1
that are observable for the asset or liability, either directly or
indirectly. If the asset or liability has a specified (contractual) term,
a Level 2 input must be observable for substantially the full term of the
asset or liability; and
• Level 3 Inputs-unobservable inputs for the asset or liability. These
unobservable inputs reflect the entity's own assumptions about the
assumptions that market participants would use in pricing the asset or
liability and are developed based on the best information available in
the circumstances (which might include the reporting entity's own data).
We believe that we have used reasonable estimates and assumptions to calculate
the estimated fair value of our financial assets as discussed in Note 12 in the
notes to our Condensed Consolidated Financial Statements contained in Part 1 of
this quarterly report on Form
10-Q.
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Contingency Reserves
In the ordinary course of business, we are involved in various legal
proceedings, lawsuits, arbitration and other claims that are complex in nature
and have outcomes that are difficult to predict. Consequently, we are unable to
ascertain the ultimate aggregate amount of monetary liability or the financial
impact with respect to these matters. Certain of these proceedings are discussed
in Note 14, Commitments and Contingencies, contained in our Condensed
Consolidated Financial Statements.
We record contingency reserves to the extent we conclude that it is probable
that a liability has been incurred and the amount of the related loss can be
reasonably estimated. The establishment of the reserve is based on a review of
all relevant factors, the advice of legal counsel, and the subjective judgment
of management. The reserves we have recorded to date have not been material to
our consolidated financial position, results of operations or cash flows. We
believe that our estimates and assumptions are reasonable and that our reserves
are accurately reflected.
While we believe that the final resolution of any known maters, individually and
in the aggregate, will not have a material adverse effect upon our consolidated
financial position, results of operations or cash flows, it is possible that we
could incur additional losses. We maintain insurance that may provide coverage
for such matters. Future claims against us, whether meritorious or not, could
have a material adverse effect upon our consolidated financial position, results
of operations or cash flows, including losses due to costly litigation and
losses due to matters that require significant amounts of management time that
can result in the diversion of significant operational resources.
Allowance for Doubtful Accounts
We evaluate the balance reserved in our allowance for doubtful accounts on a
quarterly basis based on our historical collection experience, the age of the
receivables, specific customer information and current economic conditions. We
increased our reserve percentages based on the adverse economic conditions due
to the
COVID-19
pandemic and the expected impact on the ability of our customers to make
payments. Past due balances are generally not
written-off
until all collection efforts have been unsuccessful, including use of a
collection agency. A considerable amount of judgment is required in assessing
the likelihood of ultimate realization of these receivables, including the
current creditworthiness of each customer. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required. We have not modified our
estimate methodology and we have not historically recognized significant losses
from changes in our estimates. We believe that our estimates and assumptions are
reasonable and that our reserves are accurately reflected.
Sales Returns and Allowances
We provide for estimated returns for products sold with the right of return,
primarily book sales associated with Regnery
®
Publishing. We record an estimate of these product returns as a reduction of
revenue in the period of the sale. Our estimates are based upon historical sales
returns, the amount of current period sales, economic trends and any changes in
customer demand and acceptance of our products. We regularly monitor actual
performance to estimated return rates and make adjustments as necessary.
Estimated return rates utilized for establishing estimated returns reserves have
approximated actual returns experience. However, actual returns may differ
significantly, either favorably or unfavorably, from these estimates if factors
such as the historical data we used to calculate these estimates do not properly
reflect future returns or as a result of changes in economic conditions of the
customer and/or the market. We have not modified our estimate methodology and we
have not historically recognized significant losses from changes in our
estimates. We believe that our estimates and assumptions are reasonable and that
our reserves are accurately reflected.
Inventory Reserves
Inventories consist of published books from Regnery
®
Publishing Inventory is recorded at the lower of cost or net realizable value as
determined on a
First-In
First-Out
cost method. We review historical data and our own experiences to estimate the
fair value of inventory on hand. Our analysis includes reviewing actual sales
returns, allowance estimates, royalty reserves, overall economic conditions and
demand for each title. We record a provision to expense the balance of unsold
inventory that we believe to be unrecoverable. We regularly monitor actual
performance to our estimates and make adjustments as necessary. Estimated
inventory reserves may be adjusted, either favorably or unfavorably, if factors
such as the historical data we used to calculate these estimates do not properly
reflect future returns or as a result of changes in economic conditions of the
customer and/or the market. We have not modified our estimate methodology and we
have not historically recognized significant losses from changes in our
estimates. We believe that our estimates and assumptions are reasonable and that
our reserves are accurately reflected.
Reserves for Royalty Advances
Royalties due to book authors are paid in advance and capitalized. Royalties are
expensed as the related book revenues are earned or when we determine that
future recovery of the royalty is not likely. We reviewed historical data
associated with royalty advances, earnings and recoverability based on actual
results of Regnery
®
Publishing. Historically, the longer the unearned portion of an advance remains
outstanding, the less likely it is that we will recover the advance through the
sale of the book. We apply this historical experience to outstanding royalty
advances to estimate the likelihood of recovery. A provision was established to
expense the balance of any unearned advance which we believe is not recoverable.
Our analysis also considers other discrete factors, such as death of an author,
any decision to not pursue publication of a title, poor market demand or other
relevant factors. We have not modified our estimate methodology and we have not
historically recognized significant losses from changes in our estimates. We
believe that our estimates and assumptions are reasonable and that our reserves
are accurately reflected.
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Fair Value of Equity Awards
We account for stock-based compensation under the provisions of FASB ASC Topic
718,
Compensation-Stock Compensation
. We record equity awards with stock-based compensation measured at the fair
value of the award as of the grant date. We determine the fair value of each
award using the Black-Scholes valuation model that requires the input of highly
subjective assumptions, including the expected stock price volatility and
expected term of the award granted. The exercise price for each award is equal
to or greater than the closing market price of Salem Media Group, Inc. common
stock as of the date of the award. We use the straight-line attribution method
to recognize share-based compensation costs over the expected service period of
the award. Upon exercise, cancellation, forfeiture, or expiration of the award,
deferred tax assets for awards with multiple vesting dates are eliminated for
each vesting period on a
first-in,
first-out
basis as if each vesting period was a separate award. We have not modified our
estimates or assumptions used in our valuation model. We believe that our
estimates and assumptions are reasonable and that our stock-based compensation
is accurately reflected in our results of operations.
Partial Self-Insurance on Employee Health Plan
We provide health insurance benefits to eligible employees under a self-insured
plan whereby we pay actual medical claims subject to certain stop loss limits.
We record self-insurance liabilities based on actual claims filed and an
estimate of those claims incurred but not reported. Our estimates are based on
historical data and probabilities. Any projection of losses concerning our
liability is subject to a high degree of variability. Among the causes of this
variability are unpredictable external factors such as future inflation rates,
changes in severity, benefit level changes, medical costs and claim settlement
patterns. Should the actual amount of claims increase or decrease beyond what
was anticipated, we may adjust our future reserves. Our self-insurance liability
was $0.5 million at June 30, 2021 , and December 31, 2020 . We have not modified
our estimate methodology and we have not historically recognized significant
losses from changes in our estimates.
Leases
We account for leases under the provisions of FASB ASC Topic 842, "
Leases"
("ASC 842"). We consider all relevant facts and circumstances, to determine
whether a contract is or contains a lease at inception. Our analysis includes
whether the contract conveys the right to control the use of an identified asset
for a period of time in exchange for consideration. This consideration involves
judgment with respect to whether we have the right to obtain substantially all
of the economic benefits from the use of the identified asset and whether we
have the right to direct the use of the identified asset.
Lease Term - Impact on
Right-of-Use
Assets and Lease Liabilities
The lease term can materially impact the value of the
Right-of-Use
("ROU") assets and lease liabilities recorded on our balance sheet as required
under ASC 842. We calculate the term for each lease agreement to include the
noncancellable period specified in the agreement together with (1) the periods
covered by options to extend the lease if we are reasonably certain to exercise
that option, (2) periods covered by an option to terminate if we are reasonably
certain not to exercise that option and (3) period covered by an option to
extend (or not terminate) if controlled by the lessor. The assessment of whether
we are reasonably certain to exercise an option to extend a lease requires
significant judgement surrounding contract-based factors, asset-based factors,
entity-based factors and market-based factors. These factors, detailed below,
are evaluated based on the facts and circumstances at the time we enter a lease
agreement.
Contract-Based Factors:
• The existence of a bargain renewal option
• The existence of contingent or variable payments
• The nature and terms of renewal or termination options
• The costs the lessee would incur to restore the asset before returning
it to the lessor
Asset-Based Factors:
• The existence of significant lessee-installed leasehold improvements
that would still have economic value when the option becomes
exercisable
• The physical location of the asset
• The costs that would be incurred to replace or find an alternative asset
Entity-Based Factors:
• Historical practice
• Management's intent
• Common industry practice
• The financial impact on the entity of extending or terminating the lease
• The importance of the leased asset to the entity's operations
55-------------------------------------------------------------------------------- Table of Contents Market-Based Factors: • Market rental or purchase rates for comparable assets
• Potential implications of local regulations and statutory requirements
We have not modified our estimate methodology since adopting ASC 842 onJanuary 1, 2019 . Incremental Borrowing Rate The ROU asset and related lease liabilities recorded under ASC 842 are calculated based on the present value of the lease payments using (1) the rate implicit in the lease or (2) the lessee's Incremental Borrowing Rate ("IBR"). IBR is defined as the rate of interest that a lessee would have to pay to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. We estimate the IBR applicable to Salem using significant judgement and estimates, including the estimated value of the underlying leased asset, and the following available evidence: The credit history ofSalem Media Group Our most recent credit facility consisted of 6.75% Senior Secured Notes and an ABL revolver. As of each month end, the weighted average interest rate on outstanding debt is calculated. The credit worthiness ofSalem Media Group We review our credit ratings from third parties, includingStandard & Poor's and Moody's. Class of the underlying asset and the remaining term of the arrangement We use a portfolio approach applying a single IBR to all leases with reasonably similar characteristics, including the remaining lease term, the underlying assets and the economic environment. We group leases according to the nature of leased asset and the lease term. We have six main categories of leases, (1) Buildings, (2) Equipment, (3) Land, (4) Other (Parking Facilities), (5) Towers and (6) Vehicles. We consider vehicles to have a higher risk for collateral that is mitigated by the shorter term of the lease that would typically range from three to five years. We consider building and towers to have a higher risk based on (1) the longer lease term of up to thirty years and (2) a higher outstanding balance that is mitigated by the lower risk that the collateralized asset would lose significant value. The debt incurred under the lease liability as compared to amounts that would be borrowed We review the cost to finance comparable amounts under our ABL and based on the current market environment as derived from available economic data. We referred to the Bloomberg Single B Rated Communications Yield Curve (unsecured) and considered adjustments for industry risk factors and the estimated value of the underlying leased asset to be collateral for the debt incurred. From this analysis, we develop a matrix to estimate the IBR for each major category of leases. We review our IBR estimates on a quarterly basis and update as necessary. We have not modified our estimate methodology since adopting ASC 842 onJanuary 1, 2019 . Impairment of ROU Assets ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, Property, Plant, and Equipment, as ROU assets are long-lived nonfinancial assets. ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities. After a careful analysis of the guidance, we concluded that the appropriate unit of accounting for testing ROU assets for impairment is the broadcast market cluster level for radio station operations and the entity or division level for digital media entities, publishing entities and networks. Corporate ROU assets are tested on a consolidated level with consideration given to all cash flows of the company as corporate functions do not generate cash flows and are funded by revenue-producing activities at lower levels of the entity. ASC 360 requires three steps to identify, recognize and measure the impairment of a long-lived asset (asset group) to be held and used: Step 1 - Consider whether Indicators of Impairment are Present 56 -------------------------------------------------------------------------------- Table of Contents As detailed in ASC 360-10-35-21, the following are examples of impairment indicators:
• A significant decrease in the market price of a long-lived asset (asset
group)
• A significant adverse change in the extent or manner in which along-lived asset (asset group) is being used or in its physical condition
• A significant adverse change in legal factors or in the business climate
that could affect the value of a long-lived asset (asset group),
including an adverse action or assessment by a regulator
• An accumulation of costs significantly in excess of the amount originally
expected for the acquisition or construction of a long-lived asset (asset
group)
• A current period operating or cash flow loss combined with a history of
operating or cash flow losses or a projection or forecast that
demonstrates continuing losses associated with the use of a long-lived
asset (asset group)
• A current expectation that, more likely than not, a long-lived asset
(asset group) will be sold or otherwise disposed of significantly before
the end of its previously estimated useful life. The term more likely
than not refers to a level of likelihood that is more than 50 percent.
Other indicators should be considered if we believe that the carrying amount of
an asset (asset group) may not be recoverable.
Step 2-Test for Recoverability
If indicators of impairment are present, we are required to perform a
recoverability test comparing the sum of the estimated undiscounted cash flows
attributable to the long-lived asset or asset group in question to the carrying
amount of the long-lived asset or asset group.
ASC 360 does not specifically address how operating lease liabilities and future
cash outflows for lease payments should be considered in the recoverability
test. Under ASC 360, financial liabilities, or long-term debt, generally are
excluded from an asset group while operating liabilities, such as accounts
payable, generally are included. ASC 842 characterizes operating lease
liabilities as operating liabilities. Because operating lease liabilities may be
viewed as having attributes of finance liabilities as well as operating
liabilities, it is generally acceptable for a lessee to either include or
exclude operating lease liabilities from an asset group when testing whether the
carrying amount of an asset group is recoverable provided the approach is
applied consistently for all operating leases and when performing Steps 2 and 3
of the impairment model in ASC 360.
In cases where we have received lease incentives, including operating lease
liabilities in an asset group may result in the long-lived asset or asset group
having a zero or negative carrying amount because the incentives reduce our ROU
assets. We elected to exclude operating lease liabilities from the carrying
amount of the asset group such that we test ROU assets for operating leases in
the same manner that we test ROU assets for financing leases.
Undiscounted Future Cash Flows
The undiscounted future cash flows in Step 2 are based on our own assumptions
rather than a market participant. If an election is made to exclude operating
lease liabilities from the asset or asset group, all future cash lease payments
for the lease should also be excluded. The standard requires lessees to exclude
certain variable lease payments from lease payments and, therefore, from the
measurement of a lessee's lease liabilities. Because these variable payments do
not reduce the lease liability, we include the variable payments we expect to
make in our estimate of the undiscounted cash flows in the recoverability test
(Step 2) using a probability-weighted approach.
Step 3-Measurement of an Impairment Loss
If the undiscounted cash flows used in the recoverability test are less than the
carrying amount of the long-lived asset (asset group), we are required to
estimate the fair value of the long-lived asset or asset group and recognize an
impairment loss when the carrying amount of the long-lived asset or asset group
exceeds the estimated fair value. We elected to exclude operating lease
liabilities from the estimated fair value, consistent with the recoverability
test. Any impairment loss for an asset group must reduce only the carrying
amounts of a long-lived asset or assets of the group, including the ROU assets.
The loss must be allocated to the long-lived assets of the group on a pro rata
basis using the relative carrying amounts of those assets, except that the loss
allocated to an individual long-lived asset of the group must not reduce the
carrying amount of that asset below its fair value whenever the fair value is
determinable without undue cost and effort. ASC 360 prohibits the subsequent
reversal of an impairment loss for an asset held and used.
Fair Value Considerations
When determining the fair value of a ROU asset, we must estimate what market
participants would pay to lease the asset or what a market participant would pay
up front in one payment for the ROU asset, assuming no additional lease payments
would be due. The ROU asset must be valued assuming its highest and best use, in
its current form, even if that use differs from the current or intended use. If
no market exists for an asset in its current form, but there is a market for a
transformed asset, the costs to transform the asset are considered in the fair
value estimate. Refer to Note 12, Fair Value Measurements.
There were no indications of impairment during the period ended June 30, 2021 .
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Income Tax Valuation Allowances (Deferred Taxes)
In preparing our condensed consolidated financial statements, we estimate our
income tax liability in each of the jurisdictions in which we operate by
estimating our actual current tax exposure and assessing temporary differences
resulting from differing treatment of items for tax and financial statement
purposes. Our judgments, assumptions and estimates relative to the current
provision for income tax consider current tax laws, our interpretation of
current tax laws and possible outcomes of audits conducted by tax authorities.
Reserves for income taxes to address potential exposures involving tax positions
that could be challenged by tax authorities are established if necessary.
Although we believe our judgments, assumptions and estimates are reasonable,
changes in tax laws or our interpretation of tax laws and the resolution of any
future tax audits could significantly impact the amounts provided for income
taxes in our consolidated financial statements.
We calculate our current and deferred tax provisions based on estimates and
assumptions that could differ from the actual results reflected in income tax
returns filed during the subsequent year. Adjustments based on filed returns are
generally recorded in the period when the tax returns are filed and the tax
implications are known. Tax law and rate changes are reflected in the income tax
provision in the period in which such changes are enacted.
We record a valuation allowance to reduce our deferred tax assets to the amount
that is more likely than not to be realized. We consider all available evidence,
both positive and negative, including historical levels of income, expectations
and risks associated with estimates of future taxable income and ongoing prudent
and feasible tax planning strategies in assessing the need for a valuation
allowance. In the event we were to determine that we would not be able to
realize all or part of our net deferred tax assets in the future, an adjustment
to the deferred tax assets would be charged to earnings in the period in which
we make such a determination. Likewise, if we later determine that it is more
likely than not that the net deferred tax assets would be realized, we would
reverse the applicable portion of the previously provided valuation allowance.
Income Taxes and Uncertain Tax Positions
We are subject to audit and review by various taxing jurisdictions. We may
recognize liabilities on our financial statements for positions taken on
uncertain tax positions. When tax returns are filed, it is highly certain that
some positions taken would be sustained upon examination by the taxing
authorities, while others may be subject to uncertainty about the merits of the
position taken or the amount of the position that would be ultimately sustained.
Such positions are deemed to be unrecognized tax benefits and a corresponding
liability is established on the balance sheet. It is inherently difficult and
subjective to estimate such amounts, as this requires us to make estimates based
on the various possible outcomes. The benefit of a tax position is recognized in
the financial statements in the period during which, based on all available
evidence, we believe it is more likely than not that the position will be
sustained upon examination, including the resolution of appeals or litigation
processes, if any.
We review and reevaluate uncertain tax positions on a quarterly basis. Changes
in assumptions may result in the recognition of a tax benefit or an additional
charge to the tax provision. At June 30, 2021 , we recognized liabilities
associated with uncertain tax positions around our subsidiary Salem
Communications Holding Company's Pennsylvania tax filing. The position taken on
the tax returns follows Pennsylvania Notice
2016-01
which provides guidance for reversal of intercompany interest income and
associated expense yielding a net loss for Pennsylvania . Beginning January 1,
2021 , we no longer accrue intercompany interest, therefore, any liability
associated with intercompany interest for future years is eliminated. The
current liability recognized for the tax position is $0.3 million including
interest and penalties. Our evaluation was performed for all tax years that
remain subject to examination, which range from 2016 through 2020.
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds are operating cash flows, borrowings under credit
facilities and proceeds from the sale of selected assets or businesses. We have
historically funded, and will continue to fund, expenditures for operations,
administrative expenses, and capital expenditures from these sources. We have
historically financed acquisitions through borrowings, including borrowings
under credit facilities and, to a lesser extent, from operating cash flow and
from proceeds on selected asset dispositions. We expect to fund future
acquisitions from cash on hand, borrowings under our credit facilities,
operating cash flow and possibly through the sale of income-producing assets or
proceeds from debt and equity offerings.
The
COVID-19
global pandemic that began in March 2020 continues to impact our business.
Measures taken by federal, state and local governments to prevent the spread of
COVID-19
have adversely affected workforces, business operations and overall economic
conditions resulting in a significant economic downturn. We experienced a rapid
decline in revenue from advertising, programming, events and book sales. Several
advertisers reduced or ceased advertising spending due to the outbreak and
stay-at-home
orders that effectively shut many businesses down. The revenue decline impacted
our broadcast segment, which derives substantial revenue from local advertisers
who have been particularly hard hit due to social distancing and government
interventions, and our publishing segment, which derives revenue from book sales
through retail stores and live events.
While the economic downturn is expected to be temporary, there remains to be
considerable uncertainty around the duration. Advertising revenue continues to
improve over the lowest levels that were experienced during April and May of
2020 but remains significantly below prior years. The exact timing and pace of
the economic recovery has not been determinable due to varying degrees of
restrictions and resurgences. Due to continuing uncertainties regarding the
ultimate scope and trajectory of
COVID-19's
spread and evolution, it is impossible to predict the total impact that the
pandemic will have on our business. If public and private entities continue to
enforce restrictive measures, the material adverse effect on our business,
results of operations, financial condition and cash flows could persist. Our
businesses could also continue to be impacted by the disruptions from
COVID-19
and resulting adverse changes in advertising and consumer behavior.
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Lower revenue and longer days to collect receivables negatively impacts future
availability under our credit facility. Availability under our Asset Based Loan
("ABL Facility") is subject to a borrowing base consisting of (a) 90% of the
eligible accounts receivable plus (b) a calculated amount based on the value of
certain real property. The maximum amount available under our ABL Facility
increased to $25.0 million at June 30, 2021 , compared to $24.8 million at
December 31, 2020 , of which none was outstanding at June 30, 2021 compared to
$5.0 million outstanding at December 31, 2020 .
In response to these developments we implemented several measures during 2020 to
reduce costs and conserve cash to ensure that we have adequate cash to meet our
debt servicing requirements, including:
• limiting capital expenditures;
• reducing discretionary spending, including travel and entertainment;
• eliminating open positions and freezing new hires;
• reducing staffing levels;
• implementing temporary pay cuts of 5%, 7.5% or 10% depending on salary
level;
• furloughing certain employees;
• temporarily suspending the company 401(k) match;
• requesting rent concessions from landlords;
• requesting discounts from vendors;
• offering early payment discounts to certain customers in exchange for
advance cash payments; and
• suspending the payment of equity distributions until further notice.
As the economy begins to show signs of recovery, many of these cost reduction initiatives have been reversed during 2021. We continue to operate with lower staffing levels, we have not reinstated the company 401(k) match and we have not paid equity distributions on our common stock. We have utilized certain benefits of the CARES Act, and we may be entitled to benefits under the CAA based on our individual locations, including:
• we deferred
December 2020 , with 50% payable inDecember 2021 and 50% payable inDecember 2022 ; • relaxation of interest expense deduction limitation for income tax purposes; and • Paycheck Protection Program ("PPP") loans available based on the eligibility determined on a per-location basis of$11.2 million on a consolidated basis. During 2020 we began keeping higher balances of cash and cash equivalents on-hand to meet operating needs due to the adverse economic conditions of the COVID-19 pandemic. Historically, we kept the balance of cash and cash equivalents on-hand low in order to reduce the balance of outstanding debt. Our ABL Facility automatically covers any shortfalls in operating cash flows such that we are not required to hold excess cash balances on hand. Our cash and cash equivalents increased to$19.9 million atJune 30, 2021 compared to$19.0 million atJune 30, 2020 . Working capital increased$25.7 million to$9.1 million atJune 30, 2021 , compared to$(16.7) million atJune 30, 2020 due to the$0.8 million increase in cash and cash equivalents and a$19.0 million decrease in the outstanding balance on the ABL Facility, that was partially offset by a decrease in trade accounts receivable of$2.1 million and a$4.2 million decrease in contract liabilities offset by a$3.4 million increase in net accounts payable and accrued expenses. Operating Cash Flows Our largest source of operating cash inflows are receipts from customers in exchange for advertising and programming. Other sources of operating cash inflows include receipts from customers for digital downloads and streaming, book sales, subscriptions, self-publishing fees, ticket sales, sponsorships, and vendor promotions. The adverse economic impact of the COVID-19 pandemic negatively impacted our revenue and cash receipts from customers. Advertising revenue continues to improve over the lowest levels that were experienced during April and May of 2020 but remains significantly below prior years. The exact timing and pace of the economic recovery has not been determinable due to varying degrees of restrictions and resurgences. A majority of our operating cash outflows consist of payments to employees, such as salaries and benefits, and vendor payments under facility and tower leases, talent agreements, inventory purchases and recurring services such as utilities and music license fees. Our operating cash flows are subject to factors such as fluctuations in preferred advertising media and changes in demand caused by shifts in population, station listenership, demographics, and audience tastes. In addition, our operating cash flows may be affected if our customers are unable to pay, delay payment of amounts owed to us, or if we experience reductions in revenue, or increases in costs and expenses. 59 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities during the six-month period endedJune 30, 2021 , decreased by$8.8 million to$10.2 million compared to$19.0 million during the same period of the prior year. Cash provided by operating activities includes the impact of the following items: • Total net revenue increased by$12.0 million ; • Operating expenses decreased by$16.9 million ;
• Trade accounts receivables, net of allowances, increased by
compared to a decrease of $8.3 million for the same period of the prior
year;
• Unbilled revenue decreased $0.6 million ;
• Our Day's Sales Outstanding, or the average number of days to collect
cash from the date of sale, increased to 58 days at
56 days in the same period of the prior year;
• Deferred income tax liabilities increased by
increase of $68.9 million during the same period of the prior year; and
• Net accounts payable and accrued expenses increased $0.9 million toInvesting Cash Flows Our primary source of investing cash inflows includes proceeds from the sale of assets or businesses. Investing cash outflows include cash payments made to acquire businesses, to acquire property and equipment and to acquire intangible assets such as domain names. While our focus continues to be on deleveraging the company, we remain committed to explore and pursue strategic acquisitions. We undertake projects from time to time to upgrade our radio station technical facilities and/orFCC broadcast licenses, expand our digital and web-based offerings, improve our facilities and upgrade our computer infrastructures. The nature and timing of these upgrades and expenditures can be delayed or scaled back at the discretion of management. Based on our original 2021 budget, we plan to incur additional capital expenditures of approximately$3.9 million during the remainder of 2021. We plan to fund any future purchases and any future acquisitions from cash on hand, operating cash flow or our credit facilities. Net cash used in investing activities increased$2.7 million to$3.2 million during the six-month period endedJune 30, 2021 , from net cash used of$0.5 million during the same period of the prior year. The increase in cash provided by investing activities was the result of:
• We paid
• Cash paid for capital expenditures increased
from $2.5 million ;
• We collected
dollar life insurance policies in 2020; and
• Receipts from asset sales provided
months ended June 30, 2021 , compared to $0.2 million during the same
period of the prior year.
Financing Cash Flows
Financing cash inflows include borrowings under our credit facilities and any
proceeds from the exercise of stock options issued under our stock incentive
plan. Financing cash outflows include repayments of our credit facilities, the
payment of equity distributions and payments of amounts due under deferred
installments and contingency
earn-out
consideration associated with acquisition activity.
During the
six-month
period ended June 30, 2021 , the principal balances outstanding under the Notes
and ABL Facility ranged from $216.3 million to $221.3 million . We received
$11.2 million in aggregate principal amount of PPP loans through the SBA
available to our radio stations and networks by location under the CAA that were
funded during the first quarter of 2021 and outstanding at June 30, 2021 . These
outstanding balances were ordinary and customary based on our operating and
investing cash needs during this time. We have used the PPP loans for eligible
purposes and are applying for loan forgiveness based on the terms. During July
2021 , the SBA forgave all but $20,000 of the PPP loans.
Our sole source of cash available for making any future equity distributions is
our operating cash flow, subject to our credit facilities and Notes, which
contain covenants that restrict the payment of dividends and equity
distributions unless certain specified conditions are satisfied. On May 6, 2020 ,
our Board of Directors voted to discontinue equity distributions until further
notice due to the adverse economic impact of the
COVID-19
pandemic on our financial position, results of operations, and cash flows.
Net cash provided by financing activities increased $6.0 million to $6.5 million
during the
six-month
period ended June 30, 2021 , compared to $0.5 million during the same period of
the prior year. The increase in cash provided from financing activities
includes:
• Proceeds of $11.2 million under PPP loans were received during the
six-months
ended June 30, 2021 ;
• A $1.9 million increase in the book overdraft from the prior year;
• We used
the 6.75% Senior Secured Notes during the same period of the prior year;
and
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• Net repayments on our ABL Facility were $5.0 million during the
six-months
ended June 30, 2021 , compared to net borrowings of $6.6 million during
the same period of the prior year.
Salem Media Group, Inc. has no independent assets or operations, the subsidiary
guarantees relating to certain debt are full and unconditional and joint and
several, and any subsidiaries of Salem Media Group, Inc. other than the
subsidiary guarantors are minor.
SBA PPP Loans
We received $11.2 million in aggregate principal amount of PPP loans through the
Small Business Administration ("SBA") during the first quarter of 2021 available
to our radio stations and networks by location under the CAA. The PPP loans and
accrued interest are forgivable provided that the proceeds are used for eligible
purposes, including payroll, benefits, rent and utilities within the covered
period of up to 24 weeks from funding of the loans. The amount of PPP loan and
accrued interest that is forgiven can be reduced if we reduce payroll or
eliminate positions during the covered period. We are using, and intend to
continue to use, the PPP loan proceeds according to the terms and will file
timely applications for forgiveness. The PPP loans accrue interest at 1%
annually and mature in five years for any amount that is not forgiven. The PPP
loans are reflected in long-term debt in the accompanying condensed consolidated
financial statements in accordance with FASB ASC Topic 470,
Debt
, until the loans are repaid or legally discharged. During July 2021 , the SBA
forgave all but $20,000 of the PPP loans.
6.75% Senior Secured Notes
On May 19, 2017 , we issued the Notes in a private placement. The Notes are
guaranteed on a senior secured basis by our existing subsidiaries (the
"Subsidiary Guarantors"). The Notes bear interest at a rate of 6.75% per year
and mature on June 1, 2024 , unless they are earlier redeemed or repurchased.
Interest initially accrued on the Notes from May 19, 2017 , and is payable
semi-annually, in cash in arrears, on June 1 and December 1 of each year,
commencing December 1, 2017 .
The Notes are secured by a first-priority lien on substantially all assets of
ours and the Subsidiary Guarantors other than the ABL Facility Priority
Collateral (as described below) (the "Notes Priority Collateral"). There is no
direct lien on our FCC licenses to the extent prohibited by law or regulation
(other than the economic value and proceeds thereof).
The Notes were redeemable, in whole or in part, at any time on or before June 1,
2020 , at a price equal to 100% of the principal amount of the Notes plus a
"make-whole" premium as of, and accrued and unpaid interest, if any, to, but not
including, the redemption date. At any time on or after June 1, 2020 , the Notes
are redeemable at the redemption prices (expressed as percentages of the
principal amount to be redeemed) set forth in the Notes, plus accrued and unpaid
interest, if any, to, but not including, the redemption date.
The indenture relating to the Notes (the "Indenture") contains covenants that,
among other things and subject in each case to certain specified exceptions,
limit our ability and the ability of our restricted subsidiaries to: (i) incur
additional debt; (ii) declare or pay dividends, redeem stock or make other
distributions to stockholders; (iii) make investments; (iv) create liens or use
assets as security in other transactions; (v) merge or consolidate, or sell,
transfer, lease or dispose of substantially all of our assets; (vi) engage in
transactions with affiliates; and (vii) sell or transfer assets.
The Indenture provides for the following events of default (each, an "Event of
Default"): (i) default in payment of principal or premium on the Notes at
maturity, upon repurchase, acceleration, optional redemption or otherwise;
(ii) default for 30 days in payment of interest on the Notes; (iii) the failure
by us or certain restricted subsidiaries to comply with other agreements in the
Indenture or the Notes, in certain cases subject to notice and lapse of time;
(iv) the failure of any guarantee by certain significant Subsidiary Guarantors
to be in full force and effect and enforceable in accordance with its terms,
subject to notice and lapse of time; (v) certain accelerations (including
failure to pay within any grace period) of other indebtedness of ours or any
restricted subsidiary if the amount accelerated (or so unpaid) is at least
$15 million ; (vi) certain judgments for the payment of money in excess of
$15 million ; (vii) certain events of bankruptcy or insolvency with respect to us
or any significant subsidiary; and (viii) certain defaults with respect to any
collateral having a fair market value in excess of $15 million . If an Event of
Default occurs and is continuing, the Trustee or the holders of at least 25% in
principal amount of the outstanding Notes may declare the principal of the Notes
and any accrued interest on the Notes to be due and payable immediately, subject
to remedy or cure in certain cases. Certain events of bankruptcy or insolvency
are Events of Default which will result in the Notes being due and payable
immediately upon the occurrence of such Events of Default. At June 30, 2021 , we
were, and we remain, in compliance with all of the covenants under the
Indenture.
Based on the balance of the Notes currently outstanding, we are required to pay
$14.6 million per year in interest on the Notes. As of June 30, 2021 , accrued
interest on the Notes was $1.2 million .
We incurred debt issuance costs of $6.3 million that were recorded as a
reduction of the debt proceeds that are being amortized to
non-cash
interest expense over the life of the Notes using the effective interest method.
During the three and
six-month
periods ended June 30, 2021 , $0.2 million and $0.4 million , respectively, of
debt issuance costs associated with the Notes was amortized to interest expense.
During the three and
six-month
periods ended June 30, 2020 , $0.2 million and $0.4 million , respectively, of
debt issuance costs associated with the Notes was amortized to interest expense.
We may from time to time, depending on market conditions and prices, contractual
restrictions, our financial liquidity and other factors, seek to repurchase the
Notes in open market transactions, privately negotiated transactions, by tender
offer or otherwise, as market conditions warrant.
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Based on the then existing market conditions, we completed repurchases of our
6.75% Senior Secured Notes at amounts less than face value as follows:
Date Principal Repurchased Cash Paid % of Face Value Bond Issue Costs Net Gain
(Dollars in thousands)
January 30, 2020 $ 2,250 $ 2,194 97.50 % $ 34 $ 22
January 27, 2020 1,245 1,198 96.25 % 20 27
December 27, 2019 3,090 2,874 93.00 % 48 167
November 27, 2019 5,183 4,548 87.75 % 82 553
November 15, 2019 3,791 3,206 84.58 % 61 524
March 28, 2019 2,000 1,830 91.50 % 37 134
March 28, 2019 2,300 2,125 92.38 % 42 133
February 20, 2019 125 114 91.25 % 2 9
February 19, 2019 350 319 91.25 % 7 24
February 12, 2019 1,325 1,209 91.25 % 25 91
January 10, 2019 570 526 92.25 % 9 35
December 21, 2018 2,000 1,835 91.75 % 38 127
December 21, 2018 1,850 1,702 92.00 % 35 113
December 21, 2018 1,080 999 92.50 % 21 60
November 17, 2018 1,500 1,357 90.50 % 29 114
May 4, 2018 4,000 3,770 94.25 % 86 144
April 10, 2018 4,000 3,850 96.25 % 87 63
April 9, 2018 2,000 1,930 96.50 % 43 27
$ 38,659 $ 35,586 $ 706 $ 2,367
Asset-Based Revolving Credit Facility
On May 19, 2017 , we entered into the ABL Facility pursuant to a Credit Agreement
(the "Credit Agreement") by and among us and our subsidiaries party thereto as
borrowers, Wells Fargo Bank, National Association , as administrative agent and
lead arranger, and the lenders that are parties thereto. We used the proceeds of
the ABL Facility, together with the net proceeds from the Notes offering, to
repay outstanding borrowings under our previously existing senior credit
facilities, and related fees and expenses. Current proceeds from the ABL
Facility are used to provide ongoing working capital and for other general
corporate purposes, including permitted acquisitions.
The ABL Facility is a five-year $30.0 million revolving credit facility due
March 1, 2024 , which includes a $5.0 million subfacility for standby letters of
credit and a $7.5 million subfacility for swingline loans. All borrowings under
the ABL Facility accrue interest at a rate equal to a base rate or LIBOR plus a
spread. The spread, which is based on an availability-based measure, ranges from
0.50% to 1.00% for base rate borrowings and 1.50% to 2.00% for LIBOR borrowings.
If an event of default occurs, the interest rate may increase by 2.00% per
annum. Amounts outstanding under the ABL Facility may be paid and then
reborrowed at our discretion without penalty or premium. Additionally, we pay a
commitment fee on the unused balance from 0.25% to 0.375% per year based on the
level of borrowings.
On October 20, 2020 , we entered into a fourth amendment to our ABL Facility that
provides a
one-time
waiver with respect to the current covenant testing period allowing the covenant
trigger event date be the first day after the availability on the ABL Facility
had equaled or exceeded (1) 15% of the maximum revolver amount and (2)
$4.5 million and a waiver permitting our July 2020 financial statements to be
issued on or before September 30, 2020 due to delays that were caused by a
ransomware attack.
On April 7, 2020 , we entered into a third amendment to ABL Facility that
increased the advance rate on eligible accounts receivable from 85% to 90% and
extended the maturity date from May 19, 2022 to March 1, 2024 . The April 7, 2020
amendment also allows for an alternative benchmark rate that may include SOFR
due to LIBOR being scheduled to be discontinued at the end of calendar year
2021.
Availability under the ABL Facility is subject to a borrowing base consisting of
(a) 90% of the eligible accounts receivable plus (b) a calculated amount based
on the value of certain real property. As of June 30, 2021 , the amount available
under the ABL Facility was $25.0 million of which none was outstanding. The ABL
Facility has a first-priority lien on our and the Subsidiary Guarantors'
accounts receivable, inventory, deposit and securities accounts, certain real
estate and related assets (the "ABL Facility Priority Collateral") and by a
second-priority lien on the Notes Priority Collateral. There is no direct lien
on our FCC licenses to the extent prohibited by law or regulation (other than
the economic value and proceeds thereof).
The Credit Agreement includes a springing fixed charge coverage ratio of 1.0 to
1.0, which is tested during the period commencing on the last day of the fiscal
month most recently ended prior to the date on which Availability (as defined in
the Credit Agreement) is less than the greater of 15% of the Maximum Revolver
Amount (as defined in the Credit Agreement) and $4.5 million and continuing for
a period of 60 consecutive days after the first day on which Availability
exceeds such threshold amount. The Credit Agreement also includes other negative
covenants that are customary for credit facilities of this type, including
covenants that, subject to exceptions described in the Credit Agreement,
restrict our ability and the ability of our subsidiaries (i) to incur additional
indebtedness; (ii) to make investments; (iii) to make distributions, loans or
transfers of assets; (iv) to enter into, create, incur, assume or suffer to
exist any liens, (v) to sell assets; (vi) to enter into transactions with
affiliates; (vii) to merge or consolidate with, or dispose of all assets to a
third party, except as permitted thereby; (viii) to prepay indebtedness; and
(ix) to pay dividends.
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The Credit Agreement provides for the following events of default: (i) default
for
non-payment
of any principal or letter of credit reimbursement when due or any interest,
fees or other amounts within five days of the due date; (ii) the failure by any
borrower or any subsidiary to comply with any covenant or agreement contained in
the Credit Agreement or any other loan document, in certain cases subject to
applicable notice and lapse of time; (iii) any representation or warranty made
pursuant to the Credit Agreement or any other loan document is incorrect in any
material respect when made; (iv) certain defaults of other indebtedness of any
borrower or any subsidiary of indebtedness of at least $10 million ; (v) certain
events of bankruptcy or insolvency with respect to any borrower or any
subsidiary; (vi) certain judgments for the payment of money of $10 million or
more; (vii) a change of control; and (viii) certain defaults relating to the
loss of FCC licenses, cessation of broadcasting and termination of material
station contracts. If an event of default occurs and is continuing, the
Administrative Agent and the Lenders may accelerate the amounts outstanding
under the ABL Facility and may exercise remedies in respect of the collateral.
At June 30, 2021 , we were, and we remain, in compliance with all of the
covenants under Credit Agreement.
We incurred debt issue costs of $0.9 million that were recorded as an asset and
are being amortized to
non-cash
interest expense over the term of the ABL Facility using the effective interest
method. During the three and
six-month
periods ended June 30, 2021 , $29,000 and $0.1 million , respectively, of debt
issuance costs associated with the ABL was amortized to interest expense. During
the three and
six-month
periods ended June 30, 2020 , $50,000 and $0.1 million , respectively, of debt
issue costs associated with the ABL was amortized to interest expense.
We report outstanding balances on the ABL Facility as short-term regardless of
the maturity date based on use of the ABL Facility to fund ordinary and
customary operating cash needs with frequent repayments. We believe that our
borrowing capacity under the ABL Facility allows us to meet our ongoing
operating requirements, fund capital expenditures and satisfy our debt service
requirements for at least the next twelve months.
Summary of long-term debt obligations
Long-term debt consisted of the following:
December 31, 2020 June 30, 2021
(Dollars in thousands)
6.75% Senior Secured Notes $ 216,341 $ 216,341
Less unamortized debt issuance costs based
on imputed interest rate of 7.08% (2,577 ) (2,209 )
6.75% Senior Secured Notes net carrying
value 213,764 214,132
Asset-Based Revolving Credit Facility principal outstanding 5,000 - SBA Paycheck Protection Program loans - 11,195 Long-term debt less unamortized debt issuance costs $ 218,764$ 225,327 Less current portion (5,000 ) - Long-term debt less unamortized debt issuance costs, net of current portion $ 213,764
In addition to the outstanding amounts listed above, we also have interest
payments related to our long-term debt as follows as of
•
interest payments at an annual rate of 6.75%; and
• Commitment fee of 0.25% to 0.375% per annum on the unused portion of the
ABL Facility.
Maturities of Long-Term Debt Principal repayment requirements under all long-term debt agreements outstanding atJune 30, 2021 for each of the next five years and thereafter are as follows: Amount For the Year Ended June 30, (Dollars in thousands) 2022 $ - 2023 - 2024 216,341 2025 - 2026 11,195 Thereafter - $ 227,536 Impairment Losses onGoodwill and Indefinite-Lived Intangible Assets We have incurred significant impairment losses with regards to our indefinite-lived intangible assets. We believe that the impairments are indicative of trends in the industry as a whole and are not unique to our company or operations. While impairment charges are non-cash in nature and do not violate the covenants on our debt agreements, the potential for future impairment charges can be viewed as a negative factor with regard to forecasted future performance and cash flows. 63
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Table of Contents The valuation of intangible assets is subjective and based on estimates rather than precise calculations. The fair value measurements of our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. Given the current economic environment and uncertainties that can negatively impact our business, there can be no assurance that our estimates and assumptions made for the purpose of our indefinite-lived intangible fair value estimates will prove to be accurate. OFF-BALANCE SHEET ARRANGEMENTS AtJune 30, 2021 , we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
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