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.
34
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Table of Contents
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;
• 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.
35-------------------------------------------------------------------------------- Table of Contents 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. 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 toNielsen 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 toNielsen 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. 36 -------------------------------------------------------------------------------- Table of Contents 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 nine months endedSeptember 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 endedDecember 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. 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 obsolescence charges. Known Trends and Uncertainties The COVID-19 global pandemic that began inMarch 2020 materially impacted our business. 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 were 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. 37 -------------------------------------------------------------------------------- Table of Contents While we see progress being made in revenue returning to pre-pandemic levels, the COVID-19 pandemic continues to create significant uncertainty and disruption in the economy. These uncertainties could materially impact significant accounting estimates related to, but not limited to, allowances for doubtful accounts, impairments and right-of-use assets. As a result, many estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. These estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in its consolidated financial statements. 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 ourLos Angeles andDallas markets, which generated 13.8% and 21.8%, respectively, of our total net broadcast spot advertising revenue during the nine-month period endedSeptember 30, 2021 compared to 14.3% and 22.1%, respectively, of our total net broadcast spot advertising revenue during the same period of the prior year. 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. Decreases in digital revenue could adversely affect our operating results, financial condition and results of operations. 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 aSame 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. We defineSame 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 defineSame 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 theSame 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. 38 -------------------------------------------------------------------------------- Table of Contents Item 10€ 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 defineSame 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 defineSame 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 theSame 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 ofSame 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. 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. 39 -------------------------------------------------------------------------------- Table of Contents 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, toSame Station net broadcast revenue, and broadcast operating expenses, the most comparable GAAP measure toSame 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 Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (Dollars in thousands)
Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue Net broadcast revenue
$ 45,391 $ 49,591 $ 130,041 $ 140,422 Net broadcast revenue - acquisitions - (264 ) - (343 ) Net broadcast revenue - dispositions (192 ) 2 (635 ) (36 ) Net broadcast revenue - format change (104 ) (216 )
(384 ) (561 )
Same Station net broadcast revenue$ 45,095 $ 49,113
Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses Broadcast operating expenses
$ 34,283 $ 37,463 $ 104,704 $ 106,968 Broadcast operating expenses - acquisitions - (168 ) - (206 )
Broadcast operating expenses - dispositions (344 ) (14 )
(1,225 ) (199 )
Broadcast operating expenses - format
change (252 ) (209 ) (771 ) (593 )
Reconciliation of Operating Income to Same Station Operating Income Station Operating Income
$ 11,108 $ 12,128 $ 25,337 $ 33,454 Station operating (income) loss -acquisitions - (96 ) - (137 ) Station operating loss - dispositions 152 16 590 163 Station operating (income) loss - format change 148 (7 ) 387 32
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 Nine Months Ended
September 30, September 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
$ 45,391 $ 49,591 $ 130,041 $ 140,422 Less broadcast operating expenses (34,283 ) (37,463 )
(104,704 ) (106,968 )
Station Operating Income$ 11,108 $ 12,128
Net digital media revenue$ 9,808 $ 10,645 $ 28,355 $ 30,603 Less digital media operating expenses (7,144 ) (8,269 )
(23,123 ) (25,280 )
Digital Media Operating Income$ 2,664 $ 2,376
Net publishing revenue$ 5,442 $ 5,747 $ 13,366 $ 18,093 Less publishing operating expenses (5,814 ) (5,213 )
(16,443 ) (16,844 )
Publishing Operating Income (Loss)
$ (3,077 ) $ 1,249 40
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Table of Contents
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 Nine Months Ended
September 30, September 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) $ 329 $ 22,094 $ (57,390 ) $ 24,674
Plus provision for income taxes 401 837 31,180 479
Plus net miscellaneous income and ) )
(expenses) (1 ) (2 45 (87
Plus gain on the forgiveness of PPP loans ) )
- (11,212 - (11,212
Plus (gain) loss on early retirement of
long-term debt - 56 (49 ) 56
Plus interest expense, net of capitalized
interest 4,024 4,026 12,069 11,887
Less interest income - )
(1 ) (1 ) (1
Net operating income (loss) $ 4,752 $ 15,799 Plus net (gain) loss on the disposition of ) assets 1,381 (10,607 1,494 (10,552 ) Plus change in the estimated fair value of contingent earn-out consideration (10 ) - (12 ) - Plus debt modification costs - 2,347 - 2,347 Plus impairment of indefinite-lived long-term assets other than goodwill - - 17,254 - Plus impairment of goodwill - - 307 - Plus depreciation and amortization 3,428 3,215 10,686 9,671 Plus unallocated corporate expenses 3,849 4,284
11,909 12,764
Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Loss$ 13,400 $ 15,038
Station Operating Income$ 11,108 $ 12,128 $ 25,337 $ 33,454 Digital Media Operating Income 2,664 2,376 5,232 5,323 Publishing Operating Income (Loss) (372 ) 534 (3,077 ) 1,249$ 13,400 $ 15,038 $ 27,492 $ 40,026 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 Nine Months Ended September 30, September 30, 2020 2021 2020 2021 (Dollars in thousands)
Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) Net income (loss)
$ 329 $ 22,094 $ (57,390 ) $ 24,674 Plus interest expense, net of capitalized interest 4,024 4,026 12,069 11,887 Plus provision for income taxes 401 837 31,180 479 Plus depreciation and amortization 3,428 3,215 10,686 9,671 Less interest income (1 ) - (1 ) (1 ) EBITDA$ 8,181 $ 30,172 $ (3,456 ) $ 46,710 Plus net (gain) loss on the disposition of assets 1,381 (10,607 ) 1,494 (10,552 ) Plus change in the estimated fair value of contingent earn-out consideration (10 ) - (12 ) - Plus debt modification costs - 2,347 - 2,347 Plus impairment of indefinite-lived long-term assets other than goodwill - - 17,254 - Plus impairment of goodwill - - 307 - Plus net miscellaneous (income) and expenses (1 ) (2 ) 45 (87 ) Plus (gain) loss on early retirement of long-term debt - 56 (49 ) 56 Plus gain on the forgiveness of PPP loans - (11,212 ) - (11,212 ) Plus non-cash stock-based compensation 74 78 273 240 Adjusted EBITDA$ 9,625 $ 10,832 $ 15,856 $ 27,502 41
-------------------------------------------------------------------------------- Table of Contents RESULTS OF OPERATIONS The following factors affected our results of operations and cash flows: 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.
• On
related assets for $0.2 million to be collected in quarterly
installments over the
two-year
period ending September 30, 2023 . We recognized a
pre-tax
gain on the sale of $0.1 million .
• On July 23, 2021 , we sold approximately 34 acres of land in
Lewisville, Texas , for $12.1 million in cash. The land was being used
for as the transmitter site for company owned radio station
KSKY-AM .
We retained a portion of the land in the southwest corner of the site
to continue operating the radio station. We recognized a
pre-tax
gain on the sale of $10.5 million .
• On July 2, 2021 , we acquired the SeniorResource.com domain for
$0.1 million in cash.
• On
assets for $2.6 million in cash. The digital content library is
operated within Salem Web Network's church products division.
• On June 1, 2021 , we acquired radio stations
KDIA-AM
and
KDYA-AM
in San Francisco, California for $0.6 million in cash.
• On
for $0.1 million in cash.
• On April 28, 2021 , we acquired the Centerline New Media domain and
digital assets for $1.3 million in cash. The digital content library
is 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 Miami, Florida for $3.5 million . The buyer
began 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
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
• On
Secured Notes due 2024 ("2024 Notes") for $4.7 million in cash,
recognizing a net loss of $56,000 after adjusting for bond issuance
costs.
• On September 10, 2021 , we exchanged $112.8 million of the 2024 Notes
for $114.7 million (reflecting a call premium of 1.688%) of newly
issued 2028 Notes.
• We received $11.2 million in aggregate principal amount of PPP loans
through the SBA during the first quarter of 2021 based on the
eligibility of our radio stations and networks as determined on a
per-location
basis.
• In July 2021 , the SBA forgave all but $20,000 of the PPP loans.
The remaining PPP loan was repaid in July 2021 .
• During the nine-months ended September 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 nine-month period ended
September 30, 2021 , compared to distributions of$0.7 million ($0.025 per share) declared and paid during the nine-month period endedSeptember 30, 2020 based upon our Board's then current
assessment of
our business as detailed in Note 16 - Equity Transactions.
42-------------------------------------------------------------------------------- Table of Contents Three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 Net Broadcast Revenue Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Net Broadcast Revenue$ 45,391 $ 49,591 $ 4,200 9.3 % 74.9 % 75.2 %
Same Station Net Broadcast Revenue
8.9 %
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Three Months Ended September 30,
2020 2021
(Dollars in thousands)
Block Programming:
National $ 11,732 25.8 % $ 12,502 25.2 %
Local 5,771 12.7 6,299 12.7 %
17,503 38.5 18,801 37.9 %
Broadcast Advertising :
National 3,635 8.0 3,447 7.0 %
Local 9,485 20.9 10,682 21.5 %
13,120 28.9 14,129 28.5 %
Broadcast Digital (local) 7,754 17.1 8,805 17.8 %
Infomercials 214 0.5 220 0.4 %
Network 4,891 10.8 4,908 9.9 %
Other Revenue 1,909 4.2 2,728 5.5 %
Net Broadcast Revenue $ 45,391 100.0 % $ 49,591 100.0 %
Block programming revenue increased by $1.3 million including a $0.8 million
increase in national programming and a $0.5 million increase in local
programming. Our Christian Teaching and Talk format radio stations generated a
$0.5 million increase in national programming revenue and a $0.4 million
increase in local programming revenue while our News Talk format radio stations
generated a $0.2 million increase in national programming and a $0.2 million
increase in local programming. These increases include the impact of the
$0.2 million in early-payment discounts offered during the prior year and an
increase in the number of programmers
on-air.
Advertising revenue, net of agency commissions, increased by $1.0 million ,
including a $1.2 million increase in local advertising that was offset with a
$0.2 million decline in national advertising. Excluding political advertising,
advertising revenue increased by $1.4 million , all in local advertising. The
increase includes $0.6 million from our Contemporary Christian Music format
radio stations, primarily in our Los Angeles , Atlanta and Nashville markets,
$0.3 million from our News Talk format radio stations, $0.2 million from our
Christian Teaching and Talk format radio stations, and $0.5 million from other
radio station formats, that were offset by a $0.1 million decline from our
Spanish Christian Teaching and Talk format radio stations. The increases reflect
the higher demand for airtime associated with improving economic conditions as
pandemic restrictions continue to ease that can in turn result in higher spot
rates for premium airtime spots. The decline from Spanish Christian Teaching and
Talk format radio stations is due to the sale of radio station
WKAT-AM
in Miami, Florida , and the reformatting of our remaining Spanish Christian
Teaching and Talk format radio stations.
Broadcast digital revenue, net of agency commissions, or net digital revenue
generated from our broadcast markets and networks, increased by $1.1 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 transactional
video
on-demand
streaming platform launched in the fourth quarter of 2020, along with our owned
and operated station branded websites to offer an expanding line of digital
products and services. Increases in broadcast digital revenue include a
$1.2 million increase in digital marketing services through Salem Surround, a
$1.8 million increase from Salem Podcast Network and a $0.2 million increase in
streaming revenue that was partially offset by a $2.1 million decline in revenue
from SalemNow due to the impact of two successful titles released during the
prior year. There were no significant changes in digital rates as compared to
the prior year.
43
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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, exclusive of amounts reported within digital, increased by
$17,000 compared to the same period of the prior year due to a $0.7 million
increase in revenue from our nationally syndicated host programs that was
partially offset by a $0.7 million decline in political advertising.
Other revenue increased by $0.8 million due to a $0.6 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.
On a Same Station basis, net broadcast revenue increased $4.0 million , which
reflects these items net of the impact of stations acquired, disposed of, or
with format changes.
Net Digital Media Revenue
Three Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Digital Media Revenue $ 9,808 $ 10,645 $ 837 8.5 % 16.2 % 16.1 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Three Months Ended September 30,
2020 2021
(Dollars in thousands)
Digital Advertising, net $ 5,213 53.2 % $ 5,053 47.5 %
Digital Streaming 843 8.6 873 8.2
Digital Subscriptions 2,387 24.3 3,155 29.6
Digital Downloads 1,244 12.7 1,464 13.8
e-commerce 53 0.5 65 0.6
Other Revenues 68 0.7 35 0.3
Net Digital Media Revenue $ 9,808 100.0 % $ 10,645 100.0 %
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 $0.8 million including a $0.4 million
increase from Christianjobs.com and Churchstaffing.com within SWN due to an
increase in job postings, a $0.2 million increase from Eagle Financial
Publications due to an increase in the number of subscribers from increased
marketing efforts, and a $0.2 million increase from Townhall Media's launch of
Townhall VIP, a subscription service. There were no significant changes in rates
over the prior period.
Digital download revenue increased by $0.2 million due to increases in the
number of downloads purchased from our church product websites and form the
acquisitions of Centerline New Media in April 2021 and ShiftWorship in July
2021 . There were no significant changes in rates.
44
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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 September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue $ 5,442 $ 5,747 $ 305 5.6 % 9.0 % 8.7 %
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
Three Months Ended September 30,
2020 2021
(Dollars in thousands)
Book Sales $ 4,310 79.2 % $ 4,561 79.4 %
Estimated Sales Returns & Allowances ) )
(1,322 ) (24.3 ) (1,212 (21.1
Net Book Sales 2,988 54.9 3,349 58.3
E-Book
Sales 456 8.4 502 8.7
Self-Publishing Fees 1,407 25.8 1,556 27.1
Print Magazine Subscriptions 168 3.1 - -
Print Magazine Advertisements 85 1.6 - -
Digital Advertising 65 1.2 - -
Other Revenue 273 5.0 340 5.9
Net Publishing Revenue $ 5,442 100.0 % $ 5,747 100.0 %
Net book sales increased by $0.3 million including a $0.2 million increase from
Salem Author Services and a $0.1 million increase from Regnery
®
Publishing. Book sales through Regnery
®
Publishing reflect a 10% decrease in volume with a 11% decrease in the average
price per unit sold offset with a reduction in sales returns and allowances
resulting from lower print sales. 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 decrease of $0.1 million in
estimated sales returns and allowances is based on a flat 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 $46,000 with a 6% increase in the average price per unit sold
from sales incentives and a 19% 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 $0.1 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 .
Declines in digital advertising revenues reflect the sale of Singing News
Magazine on May 25, 2021 .
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 increased $0.1 million due to higher demand.
There were no changes in volume or rates.
45
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Broadcast Operating Expenses
Three Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses
9.3 % 56.5 % 56.8 % Same Station Broadcast Operating Expenses$ 33,687 $ 37,072 $ 3,385
10.0 %
Broadcast operating expenses increased by$3.2 million , including a$1.9 million increase from expenses associated with Salem Surround and Salem Podcast Network, a$1.0 million increase in payroll costs including theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, a$0.5 million increase in health insurance costs, a$0.3 million increase in advertising and event costs, a$0.2 million increase in production and programming costs, a$0.2 million increase in travel and entertainment costs, and a$0.2 million increase in professional services. These costs were partially offset with a$0.9 million decline in cost of sales from SalemNow consistent with the decline in revenue as compared to the prior year when SalemNow released two successful titles, a$0.3 million decline in bad debt expense due to the impact of the COVID-19 pandemic on prior year reserves, and a$0.1 million decrease in rent and facilities related expenses. 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. Digital Media Operating Expenses Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
15.7 % 11.8 % 12.5 % Digital media operating expenses increased by$1.1 million including a$0.5 million increase payroll and employee benefits expense, a$0.4 million increase in advertising and promotional expenses, a$0.2 million increase in sales-based commissions and bonuses and a$0.1 million increase in professional services, offset by a$0.1 million decrease in bad debt expense. 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 and overall gradual increase in adverting spending as the economy begins to return to pre-pandemic levels. 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 September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
(10.3 )% 9.6 % 7.9 % Publishing operating expenses decreased by$0.6 million , including a$0.3 million decrease in royalty expense reflecting a decrease in the reserve for royalty advances based on flat book sales for Regnery ® Publishing, a$0.2 million decrease in professional services, a$0.1 million decrease in costs of sales and a$0.1 million decrease in facility-related expenses that was offset by a$0.1 million increase in payroll expenses from theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020. Cost of goods sold decreased$0.1 million including a$0.1 million from Regnery ® Publishing due to flat book sales and$0.1 million decline fromSalem Publishing due to the sale ofSinging News Magazine offset by a$0.1 million increase from Salem Author Services due to a higher volume of book sales. The gross profit margin for Regnery ® Publishing improved to 52% from 42% as sales volume remained flat while material costs decreased. 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 remained flat at 74% due to higher book sales offset by higher paper costs for print book sales. Unallocated Corporate Expenses Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
11.3 % 6.3 % 6.5 %
46-------------------------------------------------------------------------------- Table of Contents 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$0.4 million includes a$0.6 million increase in payroll expense due to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020 that was offset a$0.2 million decline in professional service fees. Debt Modification Costs Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Debt Modification Costs $ -$ 2,347 $ 2,347 100.0 % - % 3.6 % OnSeptember 10, 2021 , we exchanged$112.8 million of the 2024 Notes for$114.7 million (reflecting a call premium of 1.688%) of 2028 Notes. The transaction was assessed on a lender-specific level and was accounted for as a debt modification in accordance with FASB ASC Topic 470 with$2.3 million of fees paid to third parties included in operating expenses for the period. Depreciation Expense Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Depreciation Expense$ 2,677 $ 2,788 $ 111 4.1 % 4.4 % 4.2 % Depreciation increase 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 September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Amortization Expense$ 751 $ 427 $ (324 ) (43.1 )% 1.2 % 0.6 % 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. Net (Gain) Loss on the Disposition of Assets Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Net (Gain) Loss on the Disposition of assets$ 1,381 $ (10,607 ) $ (11,988 ) (868.1 )% 2.3 % (16.1 )% The net gain on the disposition of assets of$10.6 million for the three-month period endingSeptember 30, 2021 includes a$10.5 million pre-tax gain on the sale of land inLewisville, Texas , and a$0.1 million pre-tax gain on the sale of the Hilary Kramer Financial Newsletter and related assets as well as various other fixed asset disposals. The net loss on the disposition of assets of$1.4 million for the three months endedSeptember 30, 2020 reflects the estimated pre-tax loss associated with the exit of theMiami broadcast market with the then pending sale of radio station WKAT-AM. 47 -------------------------------------------------------------------------------- Table of Contents Other Income (Expense) Three Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Interest Income$ 1 $ - (1 ) (100.0 )% - - % Interest Expense (4,024 ) (4,026 ) 2 - % (6.6 )% (6.1 )%
Gain on the Forgiveness of PPP loans - 11,212 11,212 100.0 %
- 17.0 %
Gain (Loss) on Early Retirement of
Long-Term Debt - (56 ) (56 ) (100.0 )% - % (0.1 )%
Net Miscellaneous Income and
(Expenses) 1 2 1 - % - % - %
Interest expense includes interest due on outstanding debt balances and
non-cash
accretion associated with deferred installments.
We received $11.2 million in aggregate principal amount of PPP loans through the
SBA during the first quarter of 2021 based on the eligibility of our radio
stations and networks as determined on a
per-location
basis. We used the PPP loan proceeds according to the terms and filed timely
applications for forgiveness. During July 2021 , the SBA forgave all but $20,000
of the PPP loans resulting in a
pre-tax
gain on the forgiveness of $11.2 million .
The loss on the early retirement of long-term debt reflects $4.7 million of
repurchases of the 2024 Notes for $4.7 million in cash, recognizing a net loss
of $56,000 after adjusting for bond issuance costs.
Net miscellaneous income and expenses includes
non-operating
receipts such as usage fees and other expenses.
Provision for Income Taxes
Three
Months Ended
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Provision for Income Taxes $ 401 $ 837 $ 436 108.7 % 0.7 % 1.3 %
Our expense from income taxes increased $0.4 million to a $0.8 million provision
for the three months ended September 30, 2021 compared to $0.4 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 3.7% for the three
months ended September 30, 2021 compared to 54.9% for the same period of the
prior year. The change in the effective tax between the comparative three-month
quarters is attributable to the current year forecasted income and related
operating loss utilization coupled with the PPP loan forgiveness favorable tax
adjustment relative to
pre-tax
book income for the period. 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 3.7% 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 September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Income (Loss) $ 329 $ 22,094 $ 21,765 6,615.5 % 0.5 % 33.5 %
Net income increased by $21.8 million to $22.1 million for the three months
ended September 30, 3021 compared $0.3 million during the same period of the
prior year as described above.
Nine months ended September 30, 2021 compared to the nine months ended
September 30, 2020
Net Broadcast Revenue
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Broadcast Revenue $ 130,041 $ 140,422 $ 10,381 8.0 % 75.7 % 74.3 %
Same Station Net Broadcast Revenue
8.1 %
48--------------------------------------------------------------------------------
Table of Contents The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Nine Months Ended September 30,
2020 2021
(Dollars in thousands)
Block Programming:
National $ 35,536 27.3 % $ 35,824 25.5 %
Local 18,211 14.0 18,072 12.9 %
53,747 41.3 53,896 38.4 %
Broadcast Advertising :
National 10,179 7.8 10,565 7.5 %
Local 28,630 22.0 30,123 21.5 %
38,809 29.8 40,688 29.0 %
Broadcast Digital (local) 17,702 13.6 23,602 16.8 %
Infomercials 750 0.6 682 0.5 %
Network 13,505 10.4 14,729 10.4 %
Other Revenue 5,528 4.3 6,825 4.9 %
Net Broadcast Revenue $ 130,041 100.0 % $ 140,422 100.0 %
Block programming revenue increased by $0.1 million , including a $0.3 million
increase in national programming revenue offset by a $0.1 million decline in
local programming revenue. Our Christian Teaching and Talk format radio station
increased $0.4 million , while our News Talk format radio stations increased
$0.1 million and our Contemporary Christian Music format radio stations
increased $0.1 million . These increases include the impact of the $0.3 million
in early-payment discounts offered during the prior year and an increase in the
number of programmers
on-air
that were offset by a decrease of $0.5 million from our Spanish Christian
Teaching and Talk format radio stations primarily from the sale of radio station
WKAT-AM
in Miami, Florida.
Advertising revenue, net of agency commissions, increased by $1.9 million ,
$2.4 million net of political, due to a $1.8 million increase net of political
in local advertising revenue and a $0.6 million increase net of political in
national advertising. Net of political, the increase includes $2.4 million from
our Contemporary Christian Music format radio stations, primarily in our
Atlanta , Dallas and Los Angeles markets and $0.7 million from other format radio
stations, that was offset with a $0.4 million decline from our Spanish Christian
Teaching and Talk format radio stations, a $0.1 million decline from our News
Talk format radio stations, and a $0.1 million decline from our Christian
Teaching and Talk format radio stations. The increases in Atlanta , Dallas and
Los Angeles reflect an increase in demand for advertising as pandemic
restrictions ease that in turn creates higher spot rates for premium airtime
spots. The decline from our Christian Teaching and Talk format radio stations
reflects the sale of
WKAT-AM
in Miami, Florida and the reformatting of our remaining Spanish Christian
Teaching and Talk format radio stations.
Broadcast digital revenue, net of agency commissions, or net digital revenue
generated from our broadcast markets and networks, increased by $5.9 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 $4.7 million increase from
Salem Podcast Network, a $2.6 million increase in digital marketing services
through Salem Surround, a $0.9 million increase in streaming revenue and a
$0.9 million increase in digital advertising revenue from our station websites
and an increase of $0.2 million from our networks that were offset by a
$3.4 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 $2.0 million increase in revenue from our nationally syndicated host
programs that was partially offset by a $0.8 million decline in political
advertising.
49
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Table of Contents
Other revenue increased by $1.3 million due to a $0.6 million increase in event
revenue due to the
re-opening
of live events, a $0.2 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 $0.2 million increase in TBA fees associated with radio station
KBJD-AM ,
Denver, Colorado , a $0.1 million increase in LMA fees associated with radio
station
KGU-AM,
Honolulu, Hawaii 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 a Same Station basis, net broadcast revenue increased $10.5 million , which
reflects the above described items net of the impact of stations with
acquisitions, dispositions and format changes.
Net Digital Media Revenue
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Digital Media Revenue $ 28,355 $ 30,603 $ 2,248 7.9 % 16.5 % 16.2 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Nine Months Ended September 30,
2020 2021
(Dollars in thousands)
Digital Advertising, net $ 14,473 51.0 % $ 13,859 45.3 %
Digital Streaming 2,611 9.2 2,579 8.4
Digital Subscriptions 6,679 23.6 9,227 30.2
Digital Downloads 4,291 15.1 4,637 15.1
e-commerce 108 0.4 163 0.5
Other Revenues 193 0.7 138 0.5
Net Digital Media Revenue $ 28,355 100.0 % $ 30,603 100.0 %
National digital revenue, net of agency commissions, or net revenue generated
from our owned and operated Christian and conservative opinion websites declined
by $0.9 million due to a lower volume of advertisements on our conservative
opinion websites within Townhall Media. Revenues increased $0.1 million from
Salem Web Network and $0.2 million 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 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 $2.5 million on a consolidated basis
reflecting a $0.9 million increase in revenues from Eagle Financial
Publications , a $0.9 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 $0.7 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.
Digital download revenue increased by $0.3 million from our church product
websites, WorshipHouseMedia.com and SermonSpice
TM
.com and the acquisitions of Centerline New Media in April 2021 and ShiftWorship
in July 2021 . 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 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 with no changes in volume or rates.
50
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Table of Contents
Net Publishing Revenue
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue $ 13,366 $ 18,093 $ 4,727 35.4 % 7.8 % 9.6 %
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
Nine Months Ended September 30,
2020 2021
(Dollars in thousands)
Book Sales $ 9,701 72.5 % $ 15,074 83.3 %
Estimated Sales Returns & Allowances (2,852 ) (21.3 ) (4,223 ) (23.3 )
Net Book Sales 6,849 51.2 10,851 60.0
E-Book
Sales 960 7.2 1,294 7.2
Self-Publishing Fees 3,860 28.9 4,730 26.1
Print Magazine Subscriptions 519 3.9 262 1.4
Print Magazine Advertisements 278 2.1 123 0.7
Digital Advertising 216 1.6 132 0.7
Other Revenue 684 5.1 701 3.9
Net Publishing Revenue $ 13,366 100.0 % $ 18,093 100.0 %
Net book sales increased by $4.0 million which includes a $3.7 million increase
in Regnery
®
Publishing as book sales reflect a 76% increase in volume largely attributable
to the reopening of bookstores and retail locations, offset by a 7% decrease in
the average price unit sold and a $0.3 million increase in Salem Author
Services. The increase in the number of print books sold through Regnery
®
Publishing resulted in a $1.4 million increase to the estimated sales returns
and allowances. The increase in book sales from Salem Author Services of
$0.3 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 6% increase in the average price per unit
sold from sales incentives and a 27% 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 $0.9 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.
Digital advertising revenue decreased $0.1 million due to the sale of Singing
News Magazine on May 25, 2021 and Regnery
®
Publishing websites declined due to a lower demand due to the
COVID-19
pandemic and the ongoing closure of bookstores with rates comparable to the same
period of the prior year.
Other revenue includes change fees, video trailers, and subright revenue for
foreign translation and audio books for original published titles from Regnery
®
Publishing which remained consistent to the prior year.
Broadcast Operating Expenses
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses
2.2 % 61.0 % 56.6 % Same Station Broadcast Operating Expenses$ 102,708 $ 105,970 $ 3,262 3.2 % 51
-------------------------------------------------------------------------------- Table of Contents Broadcast operating expenses increased by$2.3 million , including a$4.2 million increase from expenses associated with Salem Surround and Salem Podcast Network, a$1.8 million increase in payroll costs including theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, a$0.4 million increase in health insurance costs, a$0.4 million increase in advertising and event costs, a$0.4 million increase in production and programming costs, and a$0.4 million increase in professional services. These costs were partially offset with a$1.5 million decline in cost of sales from SalemNow consistent with the decline in revenue as compared to the prior year when they released two successful titles, a$3.2 million decline in bad debt expense due to the impact of the COVID-19 pandemic on prior year reserves, a$0.4 million decline in employee benefits attributable to the suspension of the 401(k) match and a$0.2 million decrease in rent and facilities related expenses. On a same-station basis, broadcast operating expenses increased by$3.3 million . The increase 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 Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
9.3 % 13.5 % 13.4 % Digital media operating expenses increased by$2.2 million , including a$1.2 million increase in advertising and promotional expenses, a$0.7 million increase in sales-based commissions and incentives, a$0.7 million increase in payroll costs and a$0.2 million increase in professional services that were offset by a$0.3 million decrease in bad debt expense, a$0.2 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 and overall gradual increase in adverting spending as the economy begins to return to pre-pandemic levels. The increase in payroll related expenses reflects theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020. Publishing Operating Expenses Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
2.4 % 9.6 % 8.9 % Publishing operating expenses increased by$0.4 million , including a$0.9 million increase in costs of sales, a$0.4 million increase in payroll costs due to theJanuary 2021 reinstatement of company-wide pay cuts that were implemented in 2020, a$0.2 million increase in royalty expense based on higher sales, and a$0.1 million increase in advertising and promotional costs that were offset by a$0.8 million decrease in bad debt expense, a$0.4 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$0.9 million including a$0.9 million increase from print books sold by Regnery ® Publishing and$0.2 million increase from Salem Author Services due to higher volume of book sales offset by a$0.2 million declineSalem Publishing due to the sale ofSinging News Magazine . The gross profit margin for Regnery ® Publishing improved to 54% from 41% 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 72% due to higher sales volume while paper costs for print book sales increased only slightly. Unallocated Corporate Expenses Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
855 7.2 % 6.9 % 6.7 %
52-------------------------------------------------------------------------------- Table of Contents 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$0.9 million includes a$1.3 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, a$0.2 million decrease in professional services and a$0.1 million decrease in employee-related benefits associated with the cash surrender value of split dollar life insurance. Debt Modification Costs Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Debt Modification Costs $ -$ 2,347 $ 2,347 100.0 % - % 1.2 % OnSeptember 10, 2021 , we exchanged$112.8 million of the 2024 Notes for$114.7 million (reflecting a call premium of 1.688%) of 2028 Notes. The transaction was assessed on a lender-specific level and was accounted for as a debt modification in accordance with FASB ASC Topic 470 with$2.3 million of fees paid to third parties included in operating expenses for the period. Depreciation Expense Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Depreciation Expense$ 8,108 $ 8,118 $ 10 0.1 % 4.7 % 4.3 % 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. Amortization Expense Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Amortization Expense$ 2,578 $ 1,553 $ (1,025 ) (39.8 )% 1.5 % 0.8 % 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 Nine
Months Ended
2020 2021 Change $ Change % 2020 2021
(Dollars
in thousands) % of Total Net Revenue
Impairment of Indefinite-Lived
Long-Term Assets Other Than Goodwill
10.0 % - %
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, 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. 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
third quarter of 2021.
53
--------------------------------------------------------------------------------Table of Contents Impairment ofGoodwill Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Impairment of Goodwill$ 307 $ -$ (307 ) (100.0 )% 0.2 % - % 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 third quarter of 2021. Net (Gain) Loss on the Disposition of Assets Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue
Net (Gain) Loss on the Disposition of assets$ 1,494 $ (10,552 ) $ (12,046 ) (806.3 )% 0.9 % (5.6 )% The net gain on the disposition of assets of$10.6 million for the nine-month period endedSeptember 30, 2021 reflects a$10.5 million pre-tax gain on the sale of approximately 34 acres of land inLewisville, Texas , a$0.5 million pre-tax gain on the sale ofSinging News Magazine and Singing News Radio, and a$0.1 million pre-tax gain on the sale of the Hilary Kramer Financial Newsletter and related assets, offset by a$0.4 million additional loss recorded at closing on the sale of radio station WKAT-AM and FM translator inMiami, Florida and various other fixed asset disposals. The net loss on the disposition of assets of$1.5 million for the nine-month period endedSeptember 30, 2020 includes a$1.4 million estimated pre-tax loss for associated with the plans to exit theMiami broadcast market with the then pending sale of radio station WKAT-AM and various other fixed asset disposals. Other Income (Expense) Nine Months Ended September 30, 2020 2021 Change $ Change % 2020 2021 (Dollars in thousands) % of Total Net Revenue Interest Income$ 1 $ 1 $ - - % - % - % Interest Expense (12,069 ) (11,887 ) (182 ) (1.5 )% (7.0 )% (6.3 )% Gain on the Forgiveness of PPP Loans - 11,212 11,212 100.0 % - 5.9 % Gain (Loss) on Early Retirement of Long-Term Debt 49 (56 ) (105 ) (214.3 )% - % - % Net Miscellaneous Income and (Expenses) (45 ) 87 132 (2,93.3 )% - % - % Interest income represents earnings on excess cash and interest due under promissory notes. 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 nine-months endedSeptember 30, 2021 . We received$11.2 million in aggregate principal amount of PPP loans through the SBA during the first quarter of 2021 based on the eligibility of our radio stations and networks as determined on a per-location basis. We used the PPP loan proceeds according to the terms and filed timely applications for forgiveness. DuringJuly 2021 , the SBA forgave all but$20,000 of the PPP loans resulting in a pre-tax gain on the forgiveness of$11.2 million . The loss on the early retirement of long-term debt reflects$4.7 million of repurchases of the 2024 Notes for$4.7 million in cash, recognizing a net loss of$56,000 after adjusting for bond issuance costs. The gain on the early retirement of long-term debt reflects$3.5 million of repurchases of the 2024 Notes at prices below face value resulting in a pre-tax gain of$49,000 for the nine-month period endedSeptember 30, 2020 . Net miscellaneous income and expenses includes non-operating receipts such as usage fees and other miscellaneous expenses. 54 --------------------------------------------------------------------------------
Table of Contents
Provision for Income Taxes
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Provision for Income Taxes $ 31,180 $ 479 $ (30,701 ) (98.5 )% 18.2 % 0.3 %
Our provision for income taxes decreased $30.7 million to $0.5 million for the
nine months ended September 30, 2021 compared to $31.2 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 1.9% for the nine
months ended September 30, 2021 compared to (119.0)% for the same period of the
prior year. The change between the comparative nine-month quarters is
attributable to the recognition of a valuation allowance against the net
operating loss deferred tax assets for the period ended September 30, 2021
coupled with a change in forecasted income for 2021 impacting the utilization of
operating losses along with favorable tax adjustment around the PPP forgiveness.
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 1.9% 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)
Nine Months Ended September 30,
2020 2021 Change $ Change % 2020 2021
(Dollars in thousands) % of Total Net Revenue
Net Income (Loss) $ (57,390 ) $ 24,674 $ 82,064 (143.0 )% (33.4 )% 13.0 %
Net income increased by $82.1 million to $24.7 million for the nine months ended
September 30, 2021 compared to a net loss of $57.4 million during the same
period of the prior year 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.
There have been no significant and material changes in our critical accounting
policies as compared to those disclosed in "Management's Discussion and Analysis
of Financial Conditions and Results of Operations-Critical Accounting Policies
and Significant Judgments and Estimates" in our most recent Annual Report on
Form
10-K,
as filed with the SEC on March 4, 2021 .
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 materially impacted our business. 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 were 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.
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While we see progress being made in revenue returning to
pre-pandemic
levels, the
COVID-19
pandemic continues to create significant uncertainty and disruption in the
economy. These uncertainties could materially impact significant accounting
estimates related to, but not limited to, allowances for doubtful accounts,
impairments and
right-of-use assets.
As a result, many estimates and assumptions require increased judgment and carry
a higher degree of variability and volatility. These estimates may change as new
events occur and additional information emerges, and such changes are recognized
or disclosed in its consolidated financial statements.
During 2020 we implemented several measures to reduce costs and conserve cash to
ensure that we had 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 company-wide 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 distributions on our common stock indefinitely.
As the economy continues to show signs of recovery, many of these cost reduction initiatives were 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. The Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") was signed into law onMarch 27, 2020 . The CARES Act provided emergency economic assistance for individuals and businesses impacted by the COVID-19 pandemic, including opportunities for additional liquidity, loan guarantees, and other government programs. OnDecember 27, 2020 ,Congress passed the Consolidated Appropriations Act ("CAA") that included a second relief package, which, among other things, provides for an extension of the Payroll Support Program established by the CARES Act. We utilized certain benefits of the CARES Act and the CAA, including:
• we deferred
through December 2020 , with 50% payable in December 2021 recorded in
accrued compensation and related expenses and 50% payable in December
2022 recorded in other long-term liabilities;
• relaxation of interest expense deduction limitation for income tax purposes;
• we received Paycheck Protection Program ("PPP") loans of $11.2 million
in total through the SBA during the first quarter of 2021 based on the
eligibility as determined on a
per-location
basis; and
• In
remaining PPP loan repaid in July 2021 .
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.
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Net cash provided by operating activities during the nine-month period ended
September 30, 2021 , decreased by $8.4 million to $14.7 million compared to
$23.1 million during the same period of the prior year. Cash provided by
operating activities includes the impact of the following items:
• The favorable impact of
non-cash
items on the prior year, including a $17.3 million impairment of
indefinite-lived assets and a $31.0 million deferred income tax charge
combined with;
• Total net revenue increased by $17.4 million ;
• Operating expenses decreased by $22.6 million ;
• Trade accounts receivables, net of allowances, did not change
significantly compared to a decrease of $6.6 million for the same
period of the prior year;
• Unbilled revenue increased $0.1 million ;
• Our Day's Sales Outstanding, or the average number of days to collect
cash from the date of sale, decreased to 53 days at September 30,
2021 , from 59 days in the same period of the prior year;
• Deferred income tax liabilities increased by
an increase of $31.0 million during the same period of the prior year;
and
• Net accounts payable and accrued expenses increased
$24.7 million from$21.9 million as of the prior year. Investing 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 expect to incur additional capital expenditures of approximately$1.6 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 provided by investing activities increased$4.7 million to$2.8 million during the nine-month period endedSeptember 30, 2021 , from net cash used of$1.9 million during the same period of the prior year. The increase in cash provided by investing activities was the result of: • Receipts from asset sales provided$15.8 million of cash during the nine months endedSeptember 30, 2021 , compared to$0.2 million during the same period of the prior year;
• We paid
ended September 30, 2021 , compared to $0.4 million during the same
period of the prior year;
• Cash paid for capital expenditures increased $3.4 million to
$6.9 million from $3.5 million ; and
• We collected
life insurance policies in 2020.
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 any equity distributions and any payments due under deferred
installments and contingency
earn-out
consideration associated with acquisition activity.
In April 2021 , we filed a prospectus supplement to our shelf registration
statement on Form
S-3
with the SEC covering the offering, issuance and sale of up to $15.0 million of
our Class A Common Stock pursuant to an
at-the-market
facility, with B. Riley Securities, Inc. acting as sales agent. No Common Stock
transactions have taken place under the facility.
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During the nine-month period ended September 30, 2021 , the principal balances
outstanding under the 2024 Notes, 2028 Notes and the ABL Facility ranged from
$216.3 million to $218.2 million . Additionally, during the first quarter of 2021
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. The
SBA forgave all but $20,000 of the PPP loans during July 2021 resulting in a
pre-tax
gain on the forgiveness of $11.2 million . The remaining $20,000 PPP loan was
repaid in July 2021 . The outstanding balances were ordinary and customary based
on our operating and investing cash needs during this time
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 used in financing activities decreased $1.8 million to $0.1 million
during the nine-month period ended September 30, 2021 , compared to $1.9 million
during the same period of the prior year. The decrease in cash used in financing
activities includes:
• A $1.9 million increase in the book overdraft from the prior year;
• We exchanged $112.8 million of our Senior Secured Notes due 2024 (the
"2024 Notes") for $114.7 million (reflecting a call premium of 1.688%)
of newly issued 7.125% Senior Secured Notes due 2028 (the "2028
Notes");
• We received $11.2 million in aggregate principal amount of PPP loans
through the SBA during the first quarter of 2021 based on the
eligibility of our radio stations and networks as determined on a
per-location
basis. During July 2021 , the SBA forgave all but $20,000 of the PPP
loans with the remaining PPP loan repaid in July 2021 ;
• We used
of the 2024 Notes compared to $3.4 million in cash torepurchase
$3.5 million in face value of 2024 Notes during the same
period of the
prior year; and
• Net repayments on our ABL Facility were $5.0 million during the
nine-months ended September 30, 2021 , compared to netborrowings of
$4.2 million during the same period of the prior year.
Long-term debt consists of the following:
December 31, 2020 September 30, 2021
(Dollars in thousands)
7.125% Senior Secured Notes $ - $ 114,731
Less unamortized discount and debt
issuance costs based on imputed
interest rate of 7.64% - (4,048 )
7.125% Senior Secured Notes net
carrying value - 110,683
6.75% Senior Secured Notes 216,341 98,815
Less unamortized debt issuance costs
based on imputed interest rate of 7.10% (2,577 ) (939 )
6.75% Senior Secured Notes net carrying
value 213,764 97,876
Asset-Based Revolving Credit Facility
principal outstanding (1) 5,000 -
SBA Paycheck Protection Program loans - -
Long-term debt less unamortized
discount and debt issuance costs $ 218,764 $ 208,559
Less current portion (5,000 ) -
Long-term debt less unamortized
discount and debt issuance costs, net
of current portion $ 213,764 $ 208,559
(1) As of
had a borrowing base of
borrowing base availability.
Our weighted average interest rate was 6.65% and 6.94% at
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In addition to the outstanding amounts listed above, we also have interest
payments related to our long-term debt as follows as of
• $114.7 million aggregate principal amount of 2028 Notes with
semi-annual interest payments at an annual rate of 7.125%;
• $98.8 million aggregate principal amount of 2024 Notes with
semi-annual 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.
7.125% Senior Secured Notes
On September 10, 2021 , we exchanged $112.8 million of the 2024 Notes for
$114.7 million (reflecting a call premium of 1.688%) of newly issued 7.125%
Senior Secured Notes due 2028 ("2028 Notes.") Contemporaneously with the
refinancing, we obtained commitments from the holders of the 2028 Notes to
purchase up to $50 million in additional 2028 Notes ("Delayed Draw 2028 Notes"),
contingent upon satisfying certain performance benchmarks, the proceeds of which
are to be used exclusively to repurchase or repay the remaining balance
outstanding of the 2024 Notes.
The 2028 Notes and the related guarantees were exchanged and sold to certain
holders of the 2024 Notes, whom we believe to be qualified institutional buyers,
in a private placement. The 2028 Notes and the related guarantees have not been
and will not be registered under the Securities Act or the securities laws of
any other jurisdiction and may not be offered or sold in the United States or to
U.S. persons absent registration or an applicable exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
or any state securities laws. The transaction was assessed on a lender-specific
level and was accounted for as a debt modification in accordance with FASB ASC
Topic 470.
The 2028 Notes are guaranteed on a senior secured basis. We may redeem the
7.125% Notes, in whole or in part, at any time prior to June 1, 2024 at a price
equal to 100% of the principal amount of the 2028 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, 2024 , we may redeem some or
all of the 2028 Notes at the redemption prices (expressed as percentages of the
principal amount to be redeemed) set forth in the 2028 Notes Indenture, plus
accrued and unpaid interest, if any, to, but not including the redemption date.
In addition, we may redeem up to 35% of the aggregate principal amount of the
2028 Notes before June 1, 2024 with the net cash proceeds from certain equity
offerings at a redemption price of 107.125% of the principal amount plus accrued
and unpaid interest, if any, to, but not including the redemption date. We may
also redeem up to 10% of the aggregate original principal amount of the 2028
Notes per twelve-month period, in connection with up to two redemptions in such
twelve-month period, at a redemption price of 101% of the principal amount plus
accrued and unpaid interest to, but not including, the redemption date
The 2028 Notes mature on June 1, 2028 , unless earlier redeemed or repurchased.
Interest accrues on the 2028 Notes from September 10, 2021 and is payable
semi-annually, in cash in arrears, on June 1 and December 1 of each year,
commencing December 1, 2021 . Based on the balance of the 2028 Notes outstanding,
we are required to pay $8.2 million per year in interest. As of September 30,
2021 , accrued interest on the 2028 Notes was $0.5 million .
The indenture to the 2028 Notes ("2028 Indenture") contains covenants that,
among other things and subject in each case to certain specified exceptions,
limit the ability 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 assets; (vi) engage in transactions with affiliates; and (vii) sell or
transfer assets. At September 30, 2021 , we were, and we remain, in compliance
with all of the covenants under the 7.125% Indenture.
We incurred debt issuance costs of $4.2 million , of which $2.3 million of
third-party debt modification costs are reflected in operating expenses for the
current period, $0.8 million is deferred with the Delayed Draw 2028 Notes, and
$1.1 million , along with $3.0 million from the exchanged 2024 Notes, is being
amortized as part of the effective yield on the 2028 Notes.
SBA PPP Loans
We received $11.2 million in aggregate principal amount of PPP loans through the
SBA during the first quarter of 2021 based on the eligibility of our radio
stations and networks as determined on a
per-location
basis. The PPP loans and accrued interest were forgivable provided that the
proceeds were used for eligible purposes, including payroll, benefits, rent and
utilities within the covered period. We used the PPP loan proceeds according to
the terms and filed timely applications for forgiveness. During July 2021 , the
SBA forgave all but $20,000 of the PPP loans resulting in a
pre-tax
gain on the forgiveness of $11.2 million . The remaining PPP loan was repaid in
July 2021 .
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6.75% Senior Secured Notes
On May 19, 2017 , we issued 6.75% Senior Secured Notes ("2024 Notes") in a
private placement. The 2024 Notes are guaranteed on a senior secured basis by
our existing subsidiaries (the "Subsidiary Guarantors"). The 2024 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 is payable semi-annually, in cash in
arrears, on June 1 and December 1 of each year.
The 2024 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 "2024 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 indenture relating to the 2024 Notes (the "2024 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. At
September 30, 2021 , we were, and we remain, in compliance with all of the
covenants under the Indenture.
We may from time to time, depending on market conditions and prices, contractual
restrictions, our financial liquidity and other factors, seek to repurchase the
2024 Notes in open market transactions, privately negotiated transactions, by
tender offer or otherwise, as market conditions warrant.
As described above, on September 10, 2021 , we exchanged $112.8 million of the
2024 Notes for $114.7 million of newly issued 2028 Notes, reflecting a call
premium of 1.688%. Bond issuance costs of $1.1 million associated with the
$112.8 million of the 2024 Notes are being amortized as part of the effective
yield on the 2028 Notes.
On September 24, 2021 , we repurchased $4.7 million of the 2024 Notes for
$4.7 million in cash, recognizing a net loss of $56,000 after adjusting for bond
issuance costs.
Based on the balance of the 2024 Notes outstanding of $98.8 million , we are
required to pay $6.6 million per year in interest on the 2024 Notes. As of
September 30, 2021 , accrued interest on the 2024 Notes was $2.3 million .
We incurred debt issuance costs of $4.2 million , of which $2.3 million of
third-party debt modification costs are reflected in operating expenses for the
current period, $0.8 million is deferred with the Delayed Draw 2028 Notes, and
$1.1 million , along with $3.0 million from the exchanged 2024 Notes, is being
amortized as part of the effective yield on the 2028 Notes.
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. 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.
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 September 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). At
September 30, 2021 , we were, and we remain, in compliance with all of the
covenants under Credit Agreement.
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On September 10, 2021 , we entered into the fifth amendment to the ABL Facility
to designate the incurrence of the 2028 Notes, and any further refinancing of
2024 Notes through the issuance of additional 2028 Notes, as permitted
indebtedness thereunder and to effect related arrangements for the interests in
the ABL Priority Collateral and the Notes Priority Collateral. 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 nine-month periods ended September 30, 2021 ,
$27,000 and $0.1 million , respectively, of debt issuance costs associated with
the ABL was amortized to interest expense. During the three and nine-month
periods ended September 30, 2020 , $30,000 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.
Maturities of Long-Term Debt
Principal repayment requirements under all long-term debt agreements outstanding
at September 30, 2021 for each of the next five years and thereafter are as
follows:
Amount
(Dollars in
For the Year Ended September 30, thousands)
2022 $ -
2023 -
2024 98,815
2025 -
2026 -
Thereafter 114,731
$ 213,546
Impairment Losses on Goodwill 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.
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
At September 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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