10-Q 1 d17064d10q.htm 10-Q 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2020

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM __________________ TO __________________

COMMISSION FILE NUMBER 000-26497

 

 

SALEM MEDIA GROUP, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

LOGO

 

 

 

DELAWARE   77-0121400

(STATE OR OTHER JURISDICTION OF

INCORPORATION OR ORGANIZATION)

 

(I.R.S. EMPLOYER

IDENTIFICATION NUMBER)

4880 SANTA ROSA ROAD

CAMARILLO, CALIFORNIA

  93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)   (ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400

 

Title of each Class

 

Trading

Symbol(s)

 

Name of each exchange

on which registered

Class A Common Stock, $0.01 par value per share   SALM   NASDAQ Global Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)

    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer      Accelerated filer  
Non-accelerated filer      Smaller Reporting Company  
     Emerging Growth Company  

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class A

  

Outstanding at August 3, 2020

Common Stock, $0.01 par value per share    21,129,667 shares

 

Class B

  

Outstanding at August 3, 2020

Common Stock, $0.01 par value per share    5,553,696 shares

 

 

 


Table of Contents

SALEM MEDIA GROUP, INC.

INDEX

 

     PAGE NO.  

COVER PAGE

  

INDEX

  

FORWARD LOOKING STATEMENTS

     2  

PART I - FINANCIAL INFORMATION

     3  

Item 1. Condensed Consolidated Financial Statement

     3  

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     35  

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     72  

Item 4. Controls and Procedures

     72  

PART II - OTHER INFORMATION

     73  

Item 1. Legal Proceedings

     73  

Item 1A. Risk Factors

     73  

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     73  

Item 3. Default Upon Senior Securities

     73  

Item 4. Mine Safety Disclosures

     73  

Item 5. Other Information

     73  

Item 6. Exhibits

     73  

EXHIBIT INDEX

     73  

SIGNATURES

     74  

 

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Table of Contents

CERTAIN DEFINITIONS

Unless the context requires otherwise, all references in this report to “Salem” or the “company,” including references to Salem by “we,” “us,” “our,” and “its” refer to Salem Media Group, Inc. and our subsidiaries.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

Salem Media Group, Inc. makes “forward-looking statements” from time to time in both written reports (including this report) and oral statements, within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may,” “intends,” “could,” “would,” “should,” “seeks,” “predicts,” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995.

You should not place undue reliance on these forward-looking statements, which reflect our expectations based upon data available to the company as of the date of this report. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission. Except as required by law, the company undertakes no obligation to update or revise any forward-looking statements made in this report. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by Salem about its business. These projections and other forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

SALEM MEDIA GROUP, INC.

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3


Table of Contents

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

 

     December 31, 2019
(Note 1)
    June 30, 2020
(Unaudited)
 

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 6     $ 19,048  

Trade accounts receivable (net of allowances of $10,947 in 2019 and $12,543 in 2020)

     30,824       22,513  

Unbilled revenue

     2,749       1,984  

Other receivables

     1,352       1,297  

Inventories (net of reserves of $1,271 in 2019 and $1,338 in 2020)

     717       707  

Prepaid expenses

     5,890       5,793  

Assets held for sale

     185       —    
  

 

 

   

 

 

 

Total current assets

     41,723       51,342  
  

 

 

   

 

 

 

Notes receivable (net of allowance of $954 in 2019 and $618 in 2020)

     667       753  

Property and equipment (net of accumulated depreciation of $173,122 in 2019 and $176,689 in 2020)

     87,673       84,380  

Operating lease right-of-use assets

     54,550       51,899  

Financing lease right-of-use assets

     180       144  

Broadcast licenses

     337,858       320,864  

Goodwill

     23,998       23,691  

Other indefinite-lived intangible assets

     260       —    

Amortizable intangible assets (net of accumulated amortization of $55,617 in 2019 and $57,443 in 2020)

     7,100       5,274  

Deferred financing costs

     224       198  

Other assets

     4,197       2,755  
  

 

 

   

 

 

 

Total assets

   $ 558,430     $ 541,300  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 3,468     $ 4,810  

Accrued expenses

     9,395       8,360  

Accrued compensation and related expenses

     7,895       7,558  

Accrued interest

     1,262       1,232  

Contract liabilities

     9,493       16,567  

Deferred rent income

     110       141  

Income taxes payable

     531       686  

Current portion of operating lease liabilities

     8,485       9,588  

Current portion of financing (capital) lease liabilities

     69       61  

Current portion of long-term debt

     12,426       19,000  
  

 

 

   

 

 

 

Total current liabilities

     53,134       68,003  
  

 

 

   

 

 

 

Long-term debt, less current portion

     216,468       213,396  

Operating lease liabilities, less current portion

     54,050       51,356  

Financing (capital) lease liabilities, less current portion

     124       98  

Deferred income taxes

     38,778       69,407  

Contract liabilities, long-term

     1,744       1,937  

Deferred rent income, less current portion

     3,956       3,910  

Other long-term liabilities

     513       1,717  
  

 

 

   

 

 

 

Total liabilities

     368,767       409,824  
  

 

 

   

 

 

 

Commitments and contingencies (Note 16)

    

Stockholders’ Equity:

    

Class A common stock, $0.01 par value; authorized 80,000,000 shares; 23,447,317 and 21,129,667 issued and outstanding at December 31, 2019 and June 30, 2020, respectively

     227       227  

Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2019 and June 30, 2020

     56       56  

Additional paid-in capital

     246,680       246,879  

Accumulated deficit

     (23,294     (81,680

Treasury stock, at cost (2,317,650 shares at December 31, 2019 and June 30, 2020)

     (34,006     (34,006
  

 

 

   

 

 

 

Total stockholders’ equity

     189,663       131,476  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 558,430     $ 541,300  
  

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

(Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2019     2020     2019     2020  

Net broadcast revenue

   $ 49,082     $ 39,470     $ 95,175     $ 84,650  

Net digital media revenue

     9,960       9,443       20,200       18,547  

Net publishing revenue

     5,638       3,958       9,774       7,924  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total net revenue

     64,680       52,871       125,149       111,121  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $536 and $435 for the three months ended June 30, 2019 and 2020, respectively, and $972 and $866 for the six months ended June 30, 2019 and 2020, respectively, paid to related parties)

     37,707       33,094       74,156       70,421  

Digital media operating expenses, exclusive of depreciation and amortization shown below

     7,648       7,653       15,706       15,979  

Publishing operating expenses, exclusive of depreciation and amortization shown below

     5,773       5,567       10,595       10,629  

Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $60 and $0 for the three months ended June 30, 2019 and 2020, respectively, and $67 and $180 for the six months ended June 30, 2019 and 2020, respectively, paid to related parties)

     4,332       3,850       8,203       8,060  

Depreciation

     2,852       2,718       5,785       5,431  

Amortization

     1,124       840       2,420       1,827  

Change in the estimated fair value of contingent earn-out consideration

     —         3       —         (2

Impairment of indefinite-lived long-term assets other than goodwill

     —         —         —         17,254  

Impairment of goodwill

     —         —         —         307  

Net (gain) loss on the disposition of assets

     (357     34       3,667       113  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     59,079       53,759       120,532       130,019  
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     5,601       (888     4,617       (18,898

Other income (expense):

        

Interest income

     —         —         1       —    

Interest expense

     (4,371     (4,013     (8,796     (8,045

Gain on early retirement of long-term debt

     —         —         426       49  

Net miscellaneous income and (expenses)

     18       6       19       (46
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     1,248       (4,895     (3,733     (26,940

Provision for (benefit from) income taxes

     4,892       (2,380     (411     30,779  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,644   $ (2,515   $ (3,322   $ (57,719
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic loss per share data:

        

Basic loss per share

   $ (0.14   $ (0.09   $ (0.13   $ (2.16

Diluted loss per share data:

        

Diluted loss per share

   $ (0.14   $ (0.09   $ (0.13   $ (2.16

Basic weighted average shares outstanding

     26,525,564       26,683,363       26,355,838       26,683,363  
  

 

 

   

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     26,525,564       26,683,363       26,355,838       26,683,363  
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Dollars in thousands, except share and per share data)

 

     Class A
Common Stock
     Class B
Common Stock
     Additional                     
     Shares      Amount      Shares      Amount      Paid-In
Capital
     Accumulated
Deficit
    Treasury
Stock
    Total  

Stockholders’ equity, December 31, 2019

     23,447,317      $  227        5,553,696      $ 56      $  246,680      $  (23,294   $ (34,006   $  189,663  

Stock-based compensation

     —          —          —          —          103        —         —         103  

Cash distributions

     —          —          —          —          —          (667     —         (667

Net loss

     —          —          —          —          —          (55,204     —         (55,204
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity, March 31, 2020

     23,447,317      $ 227        5,553,696      $ 56      $ 246,783      $  (79,165   $ (34,006   $ 133,895  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Distributions per share

   $ 0.025         $ 0.025               
  

 

 

       

 

 

              

Stock-based compensation

     —          —          —          —          96        —         —         96  

Net loss

     —          —          —          —          —          (2,515     —         (2,515
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity, June 30, 2020

     23,447,317      $ 227        5,553,696      $ 56      $ 246,879      $  (81,680   $ (34,006   $ 131,476  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

 

     Class A
Common Stock
     Class B
Common Stock
     Additional                     
     Shares      Amount      Shares      Amount      Paid-In
Capital
     Accumulated
Earnings
    Treasury
Stock
    Total  

Stockholders’ equity, December 31, 2018

     22,950,066      $  227        5,553,696      $ 56      $  245,220      $  10,372     $ (34,006   $  221,869  

Stock-based compensation

     —          —          —          —          176        —         —         176  

Cash distributions

     —          —          —          —          —          (1,702     —         (1,702

Net income

     —          —          —          —          —          322       —         322  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity, March 31, 2019

     22,950,066      $ 227        5,553,696      $ 56      $ 245,396      $ 8,992     $ (34,006   $ 220,665  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Distributions per share

   $ 0.065         $ 0.065               
  

 

 

       

 

 

              

Stock-based compensation

     —          —          —          —          936        —         —         936  

Options exercised

     200        —          —          —          —          —         —         —    

Lapse of restricted shares

     389,061        —          —          —          —          —         —         —    

Cash distributions

     —          —          —          —          —          (1,728     —         (1,728

Net loss

     —          —          —          —          —          (3,644     —         (3,644
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Stockholders’ equity, June 30, 2019

     23,339,327      $ 227        5,553,696      $ 56      $ 246,332      $ 3,620     $ (34,006   $ 216,229  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Distributions per share

   $ 0.065         $ 0.065               
  

 

 

       

 

 

              

See accompanying notes

 

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Table of Contents

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2019     2020  

OPERATING ACTIVITIES

    

Net loss

   $ (3,322   $ (57,719

Adjustments to reconcile net income to net cash provided by operating activities:

    

Non-cash stock-based compensation

     1,112       199  

Depreciation and amortization

     8,205       7,258  

Amortization of deferred financing costs

     513       461  

Non-cash lease expense

     4,448       4,464  

Accretion of acquisition-related deferred payments and contingent consideration

     2       —    

Provision for bad debts

     737       3,621  

Deferred income taxes

     (546     30,629  

Change in the estimated fair value of contingent earn-out consideration

     —         (2

Impairment of indefinite-lived long-term assets other than goodwill

     —         17,254  

Impairment of goodwill

     —         307  

Gain on early retirement of long-term debt

     (426     (49

Net (gain) loss on the disposition of assets

     3,667       113  

Changes in operating assets and liabilities:

    

Accounts receivable and unbilled revenue

     3       5,530  

Inventories

     (353     10  

Prepaid expenses and other current assets

     1,078       97  

Accounts payable and accrued expenses

     (459     1,720  

Operating lease liabilities

     (5,765     (3,403

Contract liabilities

     (1,081     7,267  

Deferred rent income

     (84     (151

Other liabilities

     —         1,204  

Income taxes payable

     32       155  
  

 

 

   

 

 

 

Net cash provided by operating activities

     7,761       18,965  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Cash paid for capital expenditures net of tenant improvement allowances

     (4,697     (2,525

Capital expenditures reimbursable under tenant improvement allowances and trade agreements

     —         (94

Purchases of digital media businesses and assets

     (650     —    

Proceeds from sale of assets

     2,872       188  

Other

     (728     1,979  
  

 

 

   

 

 

 

Net cash used in investing activities

     (3,203     (452
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Payments to repurchase 6.75% Senior Secured Notes

     (6,123     (3,392

Proceeds from borrowings under ABL Facility

     54,295       38,349  

Payments on ABL Facility

     (51,539     (31,775

Refund (payments) of debt issuance costs

     (30     (66

Payments on financing lease liabilities

     (43     (35

Payment of cash distribution on common stock

     (3,430     (667

Book overdraft

     2,204       (1,885
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (4,666     529  
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (108     19,042  

Cash and cash equivalents at beginning of year

     117       6  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 9     $ 19,048  
  

 

 

   

 

 

 

See accompanying notes

 

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Table of Contents

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2019      2020  

Supplemental disclosures of cash flow information:

     

Cash paid during the period for:

     

Cash paid for interest, net of capitalized interest

   $ 8,312      $ 7,600  

Cash paid for interest on finance lease liabilities

   $ 5      $ 4  

Cash paid (received) for income taxes

   $ 103      $ (5

Other supplemental disclosures of cash flow information:

     

Barter revenue

   $ 2,730      $ 1,705  

Barter expense

   $ 2,469      $ 1,558  

Non-cash investing and financing activities:

     

Capital expenditures reimbursable under tenant improvement allowances

   $ —        $ 94  

Right-of-use assets acquired through operating leases

   $ 1,064      $ 2,655  

Right-of-use assets acquired through financing leases

   $ 2      $ —    

Non-cash capital expenditures for property & equipment acquired under trade agreements

   $ —        $ 4  

See accompanying notes

 

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Table of Contents

SALEM MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

Business

Salem Media Group, Inc. is a domestic multimedia company specializing in Christian and conservative content. Our media properties include radio broadcasting, digital media, and publishing entities. We have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which are discussed in Note 19 – Segment Data.

Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant economic downturn. We have experienced declining revenues from advertising, programming, events and book sales. Several advertisers have reduced or ceased advertising spend due to the outbreak and stay at home orders that effectively shut many businesses down. This was particularly true within our broadcast segment which derives substantial revenue from local advertisers who have been particularly hard hit due to social distancing and government interventions.

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring the COVID-19 situation and its impact in the markets we serve. Although advertising improved toward the end of the second quarter of 2020, it remains significantly below the prior year. The exact timing and pace of the recovery is not determinable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, resulting in varying degrees of reinstated stay at home orders. We are taking all precautionary safety measures as directed by health authorities and local and national governments. Due to continuing uncertainties regarding the ultimate scope and trajectory of COVID-19’s spread and evolution, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities continue to enforce restrictive measures, the material adverse effect on our business, results of operations, financial condition and cash flows could persist.

The maximum amount available under our Asset Based Loan (“ABL”) Facility declined from $26.0 million at March 31, 2020 to $23.2 million at June 30, 2020 of which $19.0 million was outstanding at June 30, 2020 compared to $14.0 million outstanding at March 31,2020. Future availability under our credit facility is contingent upon our eligible receivable balance that is negatively impacted by lower revenues and longer days to collect. Availability under the ABL 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. In response to these developments, beginning in March and continuing throughout the second quarter of 2020, we have implemented several measures to reduce costs and conserve cash to ensure that we have adequate cash to meet our debt servicing requirements, including:

 

 

limiting capital expenditures except for emergency-only requirements;

 

 

reducing all discretionary spending, including travel and entertainment;

 

 

eliminating open positions and freezing new hires;

 

 

reducing staffing levels;

 

 

implementing company-wide pay cuts ranging from 5%, 7.5% or 10% depending on salary level;

 

 

furloughing certain employees that are non-essential at this time;

 

 

temporarily suspending the company 401K match;

 

 

requesting rent concessions from landlords;

 

 

requesting discounts from vendors.

 

 

offering early payment discounts to certain customers in exchange for advance cash payments;

 

 

offering extended payment terms of up to 90 days to limit cancellations and entice new business;

 

 

considering sales-leaseback of owned facilities; and

 

 

suspending the payment of distributions on our common stock indefinitely.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. Based on our preliminary analysis of the CARES Act, the benefits we expect to recognize include:

 

 

deferral of all employer FICA taxes beginning in April 2020 for the remainder of 2020, with 50 percent payable in December 2021 and the remainder payable in December 2022; and

 

 

relaxation of interest expense deduction limitation for income tax purposes.

 

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We reforecast our anticipated results extending through August 2021. Our reforecast includes the impact of certain of these cost-cutting measures. We may consider sales-leaseback of owned facilities if the adverse economic impact of the COVID-19 pandemic continues beyond 2020. Based on our current and expected economic outlook and our current and expected funding needs, we believe that the borrowing capacity under our current credit facilities allows us to meet our ongoing operating requirements, fund necessary capital expenditures and satisfy our debt service requirements for at least the next twelve months, including the working capital deficit at June 30, 2020. Based on our current assessment, we believe that we have the ability to meet our obligations as they come due for one year from the issuance of these financial statements.

We continue to review and consider any available potential benefit under the CARES Act for which we qualify. We cannot predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered and we cannot assure you that we will be able to access such benefits in a timely manner or at all. If the U.S. government or any other governmental authority agrees to provide such aid under the CARES Act or any other crisis relief assistance it may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements of Salem include the company and its wholly owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Information with respect to the three and six months ended June 30, 2020 and 2019 is unaudited. The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the company. The unaudited interim financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Salem filed on Form 10-K for the year ended December 31, 2019. Our results are subject to seasonal fluctuations. Therefore, the results of operations for the interim periods presented are not necessarily indicative of the results of operations for the full year.

The balance sheet at December 31, 2019 included in this report has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results can be materially different from these estimates and assumptions.

Significant areas for which management uses estimates include:

 

 

revenue recognition;

 

 

asset impairments, including broadcasting licenses, goodwill and other indefinite-lived intangible assets;

 

 

probabilities associated with the potential for contingent earn-out consideration;

 

 

fair value measurements;

 

 

contingency reserves;

 

 

allowance for doubtful accounts;

 

 

sales returns and allowances;

 

 

barter transactions;

 

 

inventory reserves;

 

 

reserves for royalty advances;

 

 

fair value of equity awards;

 

 

self-insurance reserves;

 

 

estimated lives for tangible and intangible assets;

 

 

assessment of contract-based factors, asset-based factors, entity-based factors and market-based factors to determine the lease term impacting Right-Of-Use (“ROU”) assets and lease liabilities;

 

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determining the Incremental Borrowing Rate (“IBR”) for calculating ROU assets and lease liabilities;

 

 

income tax valuation allowances;

 

 

uncertain tax positions; and

 

 

estimates used in going concern analysis.

These estimates require the use of judgment as future events and the effect of these events cannot be predicted with certainty. The estimates will change as new events occur, as more experience is acquired and as more information is obtained. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary.

The COVID-19 pandemic continues to create significant uncertainty and disruption in the global economy and financial markets. It is reasonably possible that these uncertainties could materially impact our estimates related to, but not limited to, revenue recognition, broadcast licenses, goodwill and income taxes. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

There have been no changes to our significant accounting policies described in Note 2 to our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on March 12, 2020, that have had a material impact on our Condensed Consolidated Financial Statements and related notes.

Recent Accounting Pronouncements

Changes to accounting principles are established by the FASB in the form of ASUs to the FASB’s Codification. We consider the applicability and impact of all ASUs on our financial position, results of operations, cash flows, or presentation thereof. Described below are ASUs that are not yet effective, but may be applicable to our financial position, results of operations, cash flows, or presentation thereof. ASUs not listed below were assessed and determined to not be applicable to our financial position, results of operations, cash flows, or presentation thereof.

In January 2020, the FASB issued ASU 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815) - Clarifying the Interactions between Topic 321, Topic 323, and Topic 815. The ASU is based on a consensus of the Emerging Issues Task Force and is expected to increase comparability in accounting for these transactions. ASU 2016-01 made targeted improvements to accounting for financial instruments, including providing an entity the ability to measure certain equity securities without a readily determinable fair value at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Among other topics, the amendments clarify that an entity should consider observable transactions that require it to either apply or discontinue the equity method of accounting. The ASU is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses, which changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. Subsequent to issuing ASU 2016-13, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses, for the purpose of clarifying certain aspects of ASU 2016-13. ASU 2018-19 has the same effective date and transition requirements as ASU 2016-13. In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments – Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which is effective with the adoption of ASU 2016-13. In May 2019, the FASB issued ASU 2019-05, Financial Instruments – Credit Losses (Topic 326), which is also effective with the adoption of ASU 2016-13. In October 2019, the FASB voted to delay the implementation date for certain companies, including those, such as Salem, that qualify as a smaller reporting company under SEC rules, until January 1, 2023, with revised ASU’s expected to be issued in November 2019. We expect to continue to qualify as a smaller reporting company and will adopt this ASU on its effective date of January 1, 2023. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

NOTE 3. RECENT TRANSACTIONS

During the six-month period ended June 30, 2020, we completed or entered into the following transactions:

 

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Debt Transactions

On April 7, 2020, we amended the Asset Based Loan (“ABL”) Facility to increase the advance rate on eligible accounts receivable from 85% to 90% and to extend the maturity date from May 19, 2022 to March 1, 2024. The April 7, 2020 amendment allows for an alternative benchmark rate that may include the SOFR rate due to the LIBOR rate being scheduled to be discontinued at the end of calendar year 2021.

We completed repurchases of $3.5 million of the 6.75% Senior Secured Notes (“Notes”) for $3.4 million in cash, recognizing a net gain of $49,000 after adjusting for bond issuance costs as detailed in Note 13 – Long-Term Debt.

Equity Transactions

Distributions of $0.7 million ($0.025 per share) were declared and paid in March 2020 based upon our Board of Directors’ (“Board”) then current assessment of our business as detailed in Note 18 – Equity Transactions.

Divestitures

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. We recognized an estimated pre-tax loss of approximately $1.5 million in the fourth quarter of 2019, which reflects the sale price as compared to the carrying value of the assets less the estimated closing costs.    

Pending Transactions

On February 5, 2020, we entered an Asset Purchase Agreement (“APA”) with Word Broadcasting to sell radio stations WFIA-AM, WFIA-FM and WGTK-AM in Louisville, Kentucky for $4.0 million with a $250,000 credit applied to the sale price if closing occurred before March 31, 2020. Additionally, Word Broadcasting would receive a credit toward the purchase price of a sum equal to the monthly fees paid under a Time Brokerage Agreement (“TBA”) that began in January 2017 for months 4-29 of the TBA and a sum equal to $2,000 per month for each monthly fee payment for months 30 and thereafter of the TBA; and a credit of the $450,000 option payment. We estimated the loss on sale to be approximately $0.5 million net of tax had the sale closed by March 31, 2020 and $0.3 million net of tax if the sale closes later. Due to changes in debt markets, the transaction was not funded, and it is uncertain when, or if, the transaction will close.

NOTE 4. CONTINGENT EARN-OUT CONSIDERATION

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

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

At June 30, 2020, our estimated contingent earn-out liability was $17,000 compared to $19,000 at December 31, 2019. The changes in our estimate of the contingent earn-out liability reflect volatility from variables, including revenue growth, page views or session time. We made no cash payments for contingent earn-out consideration during the six-month period ended June 30, 2020.

NOTE 5. REVENUE RECOGNITION

We recognize revenue in accordance with ASC 606, “Revenue from Contracts with Customers” (“ASC 606,”) a comprehensive revenue recognition model that requires revenue to be recognized when control of the promised goods or services are transferred to customers at an amount that reflects the consideration expected to be received. The application of ASC 606 requires the use of significant judgment and estimates in applying a five-step model applicable to all revenue streams as follows:

 

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Identification of the contract, or contracts, with a customer

A contract with a customer exists when (i) we enter into an enforceable contract with a customer that defines each party’s rights regarding the goods or services to be transferred and identifies the payment terms related to these goods or services, (ii) the contract has commercial substance and, (iii) we determine that collection of substantially all consideration for goods or services that are transferred is probable based on the customer’s intent and ability to pay the promised consideration.

We apply judgment in determining the customer’s ability and intention to pay, which is based on a variety of factors including the customer’s historical payment experience or, in the case of a new customer, published credit and financial information pertaining to the customer.

Identification of the performance obligations in the contract

Performance obligations promised in a contract are identified based on the goods or services that will be transferred to the customer that are both capable of being distinct, whereby the customer can benefit from the goods or service either on its own or together with other resources that are readily available from third parties or from us, and are distinct in the context of the contract, whereby the transfer of the goods or services is separately identifiable from other promises in the contract.

When a contract includes multiple promised goods or services, we apply judgment to determine whether the promised goods or services are capable of being distinct and are distinct within the context of the contract. If these criteria are not met, the promised goods or services are accounted for as a combined performance obligation.

Determination of the transaction price

The transaction price is determined based on the consideration to which we will be entitled to receive in exchange for transferring goods or services to our customer. We estimate any variable consideration included in the transaction price using the expected value method that requires the use of significant estimates for discounts, cancellation periods, refunds and returns. Variable consideration is described in detail below.

Allocation of the transaction price to the performance obligations in the contract

If the contract contains a single performance obligation, the entire transaction price is allocated to the single performance obligation. Contracts that contain multiple performance obligations require an allocation of the transaction price to each performance obligation based on a relative Stand-Alone Selling Price (“SSP”) basis. We determine SSP based on the price at which the performance obligation would be sold separately. If the SSP is not observable, we estimate the SSP based on available information, including market conditions and any applicable internally approved pricing guidelines.

Recognition of revenue when, or as, we satisfy a performance obligation

We recognize revenue at the point in time that the related performance obligation is satisfied by transferring the promised goods or services to our customer.

A summary of our principal sources of revenue is as follows:

Block Programming. We recognize revenue from the sale of blocks of airtime to program producers that typically range from 121/2, 25 or 50-minutes of time. We separate block program revenue into three categories, National, Local and Infomercial revenue. Our stations are classified by format, including Christian Teaching and Talk, News Talk, Contemporary Christian Music, Spanish Language Christian Teaching and Talk and Business. National and local programming content is complementary to our station format while infomercials are closely associated with long-form advertisements. Block programming revenue may include variable consideration for charities and programmers that purchase blocks of airtime to generate donations and contributions from our audience. Block programming revenue is recognized at the time of broadcast, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Block programming 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.

Spot Advertising. We recognize revenue from the sale of airtime to local and national advertisers who purchase spot commercials of varying lengths. Spot Advertising may include variable consideration for charities and programmers that purchase spots to generate donations and contributions from our audience. Advertising revenue is recognized at the time of broadcast, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. 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.

Network Revenue. Network revenue includes the sale of advertising time on our national network and fees earned from the syndication of programming on our national network. Network revenue is recognized at the time of broadcast, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Network revenue is recorded on a gross basis unless an agency represents the customer, in which case, revenue is reported net of the commission retained by the agency.

 

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Digital Advertising. We recognize revenue from the sale of banner advertising on our owned and operated websites and on our own and operated mobile applications. Each of our radio stations, our digital media entities and certain of our publishing entities have custom websites and mobile applications that generate digital advertising revenue. Digital advertising revenue is recognized at the time that the banner display is delivered, or the number of impressions delivered meets the previously agreed-upon performance criteria, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Digital advertising revenue is reported on a gross basis unless an agency represents the customer, in which case, revenue is reported net of the commission retained by the agency.

Broadcast digital advertising revenue consists of local digital advertising, such as the sale of banner advertisements on our owned and operated websites, the sale of advertisements on our own and operated mobile applications, and advertisements in digital newsletters that we produce, as well an national digital advertising, or the sale of custom digital advertising solutions, such as web pages and social media campaigns, that we offer to our customers. 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.

Salem Surround, our national multimedia advertising agency, offers a comprehensive suite of digital marketing services to develop and execute audience-based marketing strategies for clients on both the national and local level. Salem Surround specializes in digital marketing services for each of our radio stations and websites as well as provides a full-service digital marketing strategy for each of our clients. In our role as a digital agency, our sales team provides our customers with integrated digital advertising solutions that optimize the performance of their campaign, which we view as one performance obligation. Our advertising campaigns are designed to be “white label” agreements between Salem and our advertiser, meaning we provide special care and attention to the details of the campaign. We provide custom digital product offerings, including tools for metasearch, retargeting, website design, reputation management, online listing services, and social media marketing. Digital advertising solutions may include third-party websites, such as Google or Facebook, which can be included in a digital advertising social media campaign. We manage all aspects of the digital campaign, including social media placements, review and approval of target audiences, and the monitoring of actual results to make modifications as needed. We may contract directly with a third-party, however, we are responsible for delivering the campaign results to our customer with or without the third-party. We are responsible for any payments due to the third-party regardless of the campaign results and without regard to the status of payment from our customer. We have discretion in setting the price to our customer without input or approval from the third-party. Accordingly, revenue is reported gross, as principal, as the performance obligation is delivered, which represents the point in time that control is transferred to the customer thereby completing our performance obligation.

Digital Streaming. We recognize revenue from the sale of advertisements and from the placement of ministry content that is streamed on our owned and operated websites and on our owned and operated mobile applications. Each of our radio stations, our digital media entities and certain of our publishing entities have custom websites and mobile applications that generate streaming revenue. Digital streaming revenue is recognized at the time that the content is delivered, or when the number of impressions delivered meets the previously agreed-upon performance criteria. Delivery of the content represents the point in time that control is transferred to the customer thereby completing our performance obligation. Streaming revenue is reported on a gross basis unless an agency represents the customer, in which case, revenue is reported net of the commission retained by the agency.

Digital Downloads and e-books. We recognize revenue from sale of downloaded materials, including videos, song tracks, sermons, content archives and e-books. Payments for downloaded materials are due in advance of the download, however, the download is often instant upon confirmation of payment. Digital download revenue is recognized at the time of download, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Revenue is recorded at the gross amount due from the customer. All sales are final with no allowances made for returns.

Subscriptions. We recognize revenue from the sale of subscriptions for financial publication digital newsletters, digital magazines, podcast subscriptions for on-air content, and subscriptions to our print magazine. Subscription terms typically range from three months to two years, with a money-back guarantee for the first 30 days. Refunds after the first 30-day period are considered on a pro-rata basis based on the number of publications issued and delivered. Payments are due in advance of delivery and can be made in full upon subscribing or in quarterly installments. Cash received in advance of the subscription term, including amounts that are refundable, is recorded in contract labilities. Revenue is recognized ratably over the subscription term at the point in time that each publication is transmitted or shipped, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Revenue is reported net of estimated cancellations, which are based on our experience and historical cancellation rates during the cancellable period.

Book Sales. We recognize revenue from the sale of books upon shipment, which represents the point in time that control is transferred to the customer thereby completing the performance obligation. Revenue is recorded at the gross amount due from the customer, net of estimated sales returns and allowances based on our historical experience. Print-based consumer books are sold on a fully returnable basis. We do not record assets or inventory for the value of returned books as they are considered “used” regardless of the condition upon return. Our experience with unsold or returned books is that their resale value is insignificant and they are often destroyed or disposed of.

 

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e-Commerce. We recognize revenue from the sale of products sold through our digital platform. Payments for products are due in advance shipping. We record a contract liability when we receive customer payments in advance of shipment. The time frame from receipt of payment to shipment is typically one business day based on the time that an order is placed as compared to fulfillment. E-Commerce revenue is recognized at the time of shipment, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Revenue is reported net of estimated returns, which are based on our experience and historical return rates. Returned products are recorded in inventory if they are unopened and re-saleable with a corresponding reduction in the cost of goods sold.

Self-Publishing Fees. We recognize revenue from self-publishing services through Salem Author Services (“SAS”), including book publishing and support services to independent authors. Services include book cover design, interior layout, printing, distribution, marketing services and editing for print books and eBooks. As each book and related support services are unique to each author, authors must make payments in advance of the performance. Payments are typically made in installments over the expected production timeline for each publication. We record contract liabilities equal to the amount of payments received, including those amounts that are fully or partially refundable. Contract liabilities are reported as current liabilities or long-term liabilities on our consolidated financial statements based on the time to fulfill the performance obligations under terms of the contract. Refunds are limited based on the percentage completion of each publishing project.

Revenue is recognized upon completion of each performance obligation, which represents the point in time that control of the product is transferred to the author, thereby completing our performance obligation. Revenue is recorded at the net amount due from the author, including discounts based on the service package.

Advertising - Print. We recognize revenue from the sale of print magazine advertisements. Revenue is recognized upon delivery of the print magazine which represents the point in time that control is transferred to the customer thereby completing the performance obligation. Revenue is reported on a gross basis unless an agency represents the customer, in which case, revenue is reported net of the commission retained by the agency.

Other Revenues. Other revenues include various sources, such as event revenue, listener purchase programs, talent fees for on-air hosts, rental income for studios and towers, production services, and shipping and handling fees. We recognize event revenue, including fees earned for ticket sales and sponsorships, when the event occurs, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Revenue for all other products and services is recorded as the products or services are delivered or performed, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Other revenue is reported on a gross basis unless an agency represents the customer, in which case, revenue is reported net of the commission retained by the agency.

Trade and Barter Transactions

In broadcasting, trade or barter agreements are commonly used to reduce cash expenses by exchanging advertising time for goods or services. We may enter barter agreements to exchange airtime or digital advertising for goods or services that can be used in our business or that can be sold to our audience under Listener Purchase Programs. The terms of these barter agreements permit us to preempt the barter airtime or digital campaign in favor of customers who purchase the airtime or digital campaign for cash. The value of these non-cash exchanges is included in revenue in an amount equal to the fair value of the goods or services we receive. Each transaction must be reviewed to determine that the products, supplies and/or services we receive have economic substance, or value to us. We record barter operating expenses upon receipt and usage of the products, supplies and services, as applicable. We record barter revenue as advertising spots or digital campaigns are delivered, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Barter revenue is recorded on a gross basis unless an agency represents the programmer, in which case, revenue is reported net of the commission retained by the agency.

Trade and barter revenues and expenses were as follows:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2020      2019      2020  
     (Dollars in thousands)  

Net broadcast barter revenue

   $ 1,415      $ 508      $ 2,714      $ 1,674  

Net digital media barter revenue

     —          —          —          —    

Net publishing barter revenue

     5        5        16        31  

Net broadcast barter expense

   $ 1,112      $ 524      $ 2,468      $ 1,558  

Net digital media barter expense

     —          —          —          —    

Net publishing barter expense

     1        —          1        —    

Contract Assets

Contract Assets - Costs to Obtain a Contract: We capitalize commissions paid to sales personnel in our self-publishing business when customer contracts are signed and advance payment is received. These capitalized costs are recorded as prepaid commission expense in the Consolidated Balance Sheets. The amount capitalized is incremental to the contract and would not have been incurred absent the execution of the customer contract. Commissions paid upon the initial acquisition of a contract are expensed at the point in time that related revenue is recognized. Prepaid commission expenses are periodically reviewed for impairment. At June 30, 2020, our prepaid commission expense was $0.6 million.

 

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Contract Liabilities

Contract liabilities consist of customer advance payments and billings in excess of revenue recognized. We may receive payments from our customers in advance of completing our performance obligations. Additionally, new customers, existing customers without approved credit terms and authors purchasing specific self-publishing services, are required to make payments in advance of the delivery of the products or performance of the services. We record contract liabilities equal to the amount of payments received in excess of revenue recognized, including payments that are refundable if the customer cancels the contract according to the contract terms. Contract liabilities are reported as current liabilities on our consolidated financial statements when the time to fulfill the performance obligations under terms of our contracts is less than one year. Long-term contract liabilities represent the amount of payments received in excess of revenue earned, including those that are refundable, when the time to fulfill the performance obligation is greater than one year. Our long-term liabilities consist of subscriptions with a term of two-years for which some customers have purchased and paid for multiple years.

Significant changes in our contract liabilities balances during the period are as follows:

 

     Short-Term      Long-Term  
     (Dollars in thousands)  

Balance, beginning of period January 1, 2020

   $ 9,493      $ 1,744  

Revenue recognized during the period that was included in the beginning balance of contract liabilities

     (4,796      —    

Additional amounts recognized during the period

     17,105        573  

Revenue recognized during the period that was recorded during the period

     (5,615      —    

Transfers

     380        (380
  

 

 

    

 

 

 

Balance, end of period June 30, 2020

   $ 16,567      $ 1,937  
  

 

 

    

 

 

 

Amount refundable at beginning of period

   $ 9,403      $ 1,744  

Amount refundable at end of period

   $ 16,477      $ 1,937  

We expect to satisfy these performance obligations as follows:

 

     Amount  
For the Twelve Months Ended June 30,    (Dollars in thousands)  

2021

   $ 16,567  

2022

     1,004  

2023

     476  

2024

     231  

2025

     109  

Thereafter

     117  
  

 

 

 
   $ 18,504  
  

 

 

 

The following table presents our revenues disaggregated by revenue source for each of our operating segments:

 

     Six Months Ended June 30, 2020  
     Broadcast      Digital Media      Publishing      Consolidated  
     (dollars in thousands)  

By Source of Revenue:

           

Block Programming - National

   $ 23,804      $ —        $ —        $ 23,804  

Block Programming - Local

     12,440        —          —          12,440  

Spot Advertising - National

     6,544        —          —          6,544  

Spot Advertising - Local

     19,145        —          —          19,145  

Infomercials

     536        —          —          536  

Network

     8,614        —          —          8,614  

Digital Advertising

     6,483        9,260        151        15,894  

Digital Streaming

     1,229        1,768        —          2,997  

Digital Downloads and eBooks

     —          3,047        504        3,551  

Subscriptions

     573        4,292        351        5,216  

Book Sales and e-commerce, net of estimated sales returns and allowances

     1,663        55        3,861        5,579  

Self-Publishing Fees

     —          —          2,453        2,453  

Print Advertising

     1        —          193        194  

Other Revenues

     3,618        125        411        4,154  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $  84,650      $  18,547      $  7,924      $  111,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

Timing of Revenue Recognition

           

Point in Time

   $  83,379      $  18,547      $  7,924      $  109,850  

Rental Income (1)

     1,271        —          —          1,271  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 84,650      $ 18,547      $ 7,924      $ 111,121  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Six Months Ended June 30, 2019  
     Broadcast      Digital Media      Publishing      Consolidated  
     (dollars in thousands)  

By Source of Revenue:

           

Block Programming - National

   $ 24,319      $ —        $ —        $ 24,319  

Block Programming - Local

     15,320        —          —          15,320  

Spot Advertising - National

     7,988        —          —          7,988  

Spot Advertising - Local

     25,686        —          —          25,686  

Infomercials

     751        —          —          751  

Network

     9,261        —          —          9,261  

Digital Advertising

     5,370        10,316        182        15,868  

Digital Streaming

     345        1,981        —          2,326  

Digital Downloads and eBooks

     —          2,964        468        3,432  

Subscriptions

     549        4,071        393        5,013  

Book Sales and e-commerce, net of estimated sales returns and allowances

     232        443        5,171        5,846  

Self-Publishing Fees

     —          —          2,725        2,725  

Print Advertising

     3        —          280        283  

Other Revenues

     5,351        425        555        6,331  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $  95,175      $  20,200      $  9,774      $  125,149  
  

 

 

    

 

 

    

 

 

    

 

 

 

Timing of Revenue Recognition

           

Point in Time

   $ 94,045      $ 20,172      $ 9,774      $ 123,991  

Rental Income (1)

     1,130        28        —          1,158  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 95,175      $ 20,200      $ 9,774      $ 125,149  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Rental income is not applicable to ASC Topic 606, but shown for the purpose of identifying each revenue source presented in total revenue on our Condensed Consolidated Financial Statements within this report on Form 10-Q.

Principal versus Agent Considerations

When another party is involved in providing goods or services to our customer, we apply the principal versus agent guidance in ASC 606 to determine if we are the principal or an agent to the transaction. When we control the specified goods or services before they are transferred to our customer, we report revenue gross, as principal. If we do not control the goods or services before they are transferred to our customer, revenue is reported net of the fees paid to the other party, as agent. Our evaluation to determine if we control the goods or services within ASC 606 includes the following indicators:

We are primarily responsible for fulfilling the promise to provide the specified good or service.

When we are primarily responsible for providing the goods and services, such as when the other party is acting on our behalf, we have indication that we are the principal to the transaction. We consider if we may terminate our relationship with the other party at any time without penalty or without permission from our customer.

We have inventory risk before the specified good or service has been transferred to a customer or after transfer of control to the customer.

We may commit to obtaining the services of another party with or without an existing contract with our customer. In these situations, we have risk of loss as principal for any amount due to the other party regardless of the amount(s) we earn as revenue from our customer.

The entity has discretion in establishing the price for the specified good or service.

We have discretion in establishing the price our customer pays for the specified goods or services.

Significant Financing Component

The length of our typical sales agreement is less than 12 months; however, we may sell subscriptions with a two-year term. The balance of our long-term contract liabilities represents the unsatisfied performance obligations for subscriptions with a remaining term in excess of one year. We review long-term contract liabilities that are expected to be completed in excess of one year to assess whether the contract contains a significant financing component. The balance includes subscriptions that will be satisfied at various dates between July 1, 2021 and June 30, 2025. The difference between the promised consideration and the cash selling price of the publications is not significant. Therefore, we have concluded that subscriptions do not contain a significant financing component under ASC 606.

Our self-publishing contracts may exceed a one-year term due to the length of time for an author to submit and approve a manuscript for publication. The author may pay for publishing services in installments over the production timeline with payments due in advance of performance. The timing of the transfer of goods and services under self-publishing arrangements are at the

 

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discretion of the author and based on future events that are not substantially within our control. We require advance payments to provide us with protection from incurring costs for products that are unique and only sellable to the author. Based on these considerations, we have concluded that our self-publishing contracts do not contain a significant financing component under ASC 606.

Variable Consideration

Like former revenue recognition guidance, we continue to make significant estimates related to variable consideration at the point of sale, including estimates for refunds and product returns. Under ASC 606, estimates of variable consideration are to be recognized before contingencies are resolved in certain circumstances, including when it is probable that a significant reversal in the amount of any estimated cumulative revenue will not occur.

We enter into agreements under which the amount of revenue we earn is contingent upon the amount of money raised by our customer over the contract term. Our customer is typically a charity or programmer that purchases blocks of programming time or spots to generate revenue from our audience members. Contract terms can range from a few weeks to a few months, depending the charity or programmer. If the campaign does not generate a pre-determined level of donations or revenue to our customer, the consideration that we expect to be entitled to may vary above a minimum base level per the contract. Historically, under ASC Topic 605, we reported variable consideration as revenue when the amount was fixed and determinable. Under ASC 606, variable consideration is to be estimated using the expected value or the most likely amount to the extent it is probable that a significant reversal will not occur when the uncertainty associated with the variable consideration is subsequently resolved.

Based on the constraints for using estimates of variable consideration within ASC 606, and our historical experience with these campaigns, we will continue to recognize revenue at the base amount of the campaign with variable consideration recognized when the uncertainty of each campaign is resolved. These constraints include: (1) the amount of consideration received is highly susceptible to factors outside of our influence, specifically the extent to which our audience donates or contributes to our customer or programmer, (2) the length of time in which the uncertainty about the amount of consideration expected is to be resolved, and (3) our experience has shown these contracts have a large number and broad range of possible outcomes.

Practical Expedients and Exemptions

We elected certain practical expedients and policy elections as follows:

 

   

We do not adjust the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception;

 

   

We do not assess promised goods or services as performance obligations if they are immaterial in the context of the contract with the customer;

 

   

We exclude sales and similar taxes from the transaction price;

 

   

We treat shipping and handling costs that occur after control transfers as fulfillment activities instead of assessing such activities as separate performance obligations; and

 

   

We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

NOTE 6. INVENTORIES

Inventories consist of finished goods including books from Regnery® Publishing. All inventories are valued at the lower of cost or net realizable value as determined on a First-In First-Out cost method net of estimated reserves for obsolescence.

The following table provides details of inventory on hand within our publishing segment:

 

     December 31, 2019      June 30, 2020  
     (Dollars in thousands)  

Book inventories

   $ 1,988      $ 2,045  

Reserve for obsolescence

     (1,271      (1,338
  

 

 

    

 

 

 

Inventory, net

   $ 717      $ 707  
  

 

 

    

 

 

 

 

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NOTE 7. PROPERTY AND EQUIPMENT

We account for property and equipment in accordance with FASB ASC Topic 360-10, Property, Plant and Equipment.

The following is a summary of the categories of our property and equipment:

 

     As of December 31, 2019      As of June 30, 2020  
     (Dollars in thousands)  

Land

   $ 30,936      $ 30,951  

Buildings

     30,283        30,283  

Office furnishings and equipment

     36,855        36,885  

Antennae, towers and transmitting equipment

     78,312        78,603  

Studio, production and mobile equipment

     30,164        29,465  

Computer software and website development costs

     29,595        31,828  

Record and tape libraries

     17        17  

Automobiles

     1,509        1,515  

Leasehold improvements

     18,834        18,960  

Construction-in-progress

     4,290        2,562  
  

 

 

    

 

 

 
   $ 260,795      $ 261,069  

Less accumulated depreciation

     (173,122      (176,689
  

 

 

    

 

 

 
   $ 87,673      $ 84,380  
  

 

 

    

 

 

 

Depreciation expense was approximately $2.7 million and $2.9 million for the three-month periods ended June 30, 2020 and 2019, respectively and $5.4 million and $5.8 million for the six-month periods ended June 30, 2020 and 2019, respectively. We periodically review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. This review requires us to estimate the fair value of the assets using 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. There were no indications of impairment during the three- and six-month period ended June 30, 2020.

NOTE 8. OPERATING AND FINANCE LEASE RIGHT-OF-USE ASSETS

Leases

We account for leases in accordance with ASC 842, “Leases” that requires lessees to recognize Right of Use (“ROU”) assets and lease liabilities calculated based on the present value of lease payments for all lease agreements with terms that are greater than twelve months. ASC 842 distinguishes leases as either a finance lease or an operating lease that affects how the leases are measured and presented in the statement of operations and statement of cash flows.

Leasing Transactions

Our leased assets include offices and studios, transmitter locations, antenna sites, towers, tower sites, and land. Our lease portfolio has terms remaining from less than one-year up to twenty years. Many of these leases contain options under which we can extend the term from five to twenty years, the exercise of which is at our sole discretion. Renewal options are excluded from our calculation of lease liabilities unless we are reasonably assured to exercise the renewal option. Our lease agreements do not contain residual value guarantees or material restrictive covenants. We lease certain properties from our principal stockholders or from trusts and partnerships created for the benefit of the principal stockholders and their families. These leases are designated as Related Party leases in the details provided. We are obligated to pay taxes, insurance and common area maintenance charges under a majority of our lease agreements.

Operating leases are reflected on our balance sheet within operating lease ROU assets and the related current and non-current operating lease liabilities. ROU assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from lease agreement. Operating lease ROU assets and liabilities are recognized at the commencement date, or the date on which the lessor makes the underlying asset available for use, based upon the present value of the lease payments over the respective lease term. Lease expense is recognized on a straight-line basis over the lease term, subject to any changes in the lease or expectation regarding the lease terms. Variable lease costs, such as common area maintenance, property taxes and insurance, are expensed as incurred.

Due to the adverse economic impact of the COVID-19 pandemic, we began negotiating with landlords in April 2020 to obtain rent concessions in order to improve short-term liquidity. We withheld portions of and/or delayed payments to landlords as we negotiated terms. Total payments withheld at June 30, 2020 were approximately $0.6 million and are included in current lease liabilities. Additional negotiations of payment terms are still in process.

 

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In some instances, the renegotiations have led to agreements with landlords for rent abatements or rental deferrals. In accordance with the FASB’s recent Staff Q&A regarding rent concessions related to the effects of the COVID-19 pandemic, we will not apply the lease modification guidance under ASC 842 to rent concessions that result in the total payments required under the modified contract that are substantially the same as or less than total payments required by the original contract. If other terms of the lease are changed or renegotiated in connection with the concession process, then the changes will be treated as a modification in accordance with ASC 842.

For qualifying rent abatement concessions, we recorded negative lease expense for abatement during the period of relief. During the three months ended June 30, 2020, we recognized negative lease expense related to rent abatement concessions of $0.1 million. Additionally, we deferred cash payments of $0.3 million at June 30, 2020 that are included in short term and long-term operating lease liabilities as applicable based on repayment terms that range from August 2020 through December 2024.

Balance Sheet

Supplemental balance sheet information related to leases is as follows:

 

     June 30, 2020  
     (Dollars in thousands)  
Operating Leases    Related Party      Other      Total  

Operating leases ROU assets

   $  7,449      $  44,450      $  51,899  

Operating lease liabilities (current)

   $ 1,026      $ 8,562      $ 9,588  

Operating lease liabilities (non-current)

     6,680        44,676        51,356  
  

 

 

    

 

 

    

 

 

 

Total operating lease liabilities

   $ 7,706      $ 53,238      $ 60,944  
  

 

 

    

 

 

    

 

 

 

 

Weighted Average Remaining Lease Term

  

Operating leases

     8.5 years  

Finance leases

     3.0 years  

Weighted Average Discount Rate

  

Operating leases

     7.74

Finance leases

     4.59

Lease Expense

The components of lease expense were as follows:

 

     Six Months Ended
June 30, 2020
 
     (Dollars in thousands)  

Amortization of finance lease ROU Assets

   $ 36  

Interest on finance lease liabilities

     4  
  

 

 

 

Finance lease expense

     40  

Operating lease expense

     7,402  

Variable lease expense

     400  

Short-term lease expense

     309  
  

 

 

 

Total lease expense

   $ 8,151  
  

 

 

 

Supplemental Cash Flow

Supplemental cash flow information related to leases was as follows:

 

     Six Months Ended
June 30, 2020
 
     (Dollars in thousands)  

Cash paid for amounts included in the measurement of lease liabilities:

  

Operating cash flows from operating leases

   $  7,354  

Operating cash flows from finance leases

     3  

Financing cash flows from finance leases

     35  

Leased assets obtained in exchange for new operating lease liabilities

     2,080  

Leased assets obtained in exchange for new finance lease liabilities

     —    

 

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Maturities

Future minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of June 30, 2020, are as follows:

 

     Related Parties     Other Operating
Leases
    Total Operating
Leases
    Finance
Leases
    Total  
     (Dollars in thousands)  

2021

   $ 1,617     $ 11,998     $ 13,615     $ 65     $ 13,680  

2022

     1,610       11,194       12,804       49       12,853  

2023

     1,470       10,107       11,577       39       11,616  

2024

     1,017       8,036       9,053       14       9,067  

2025

     1,021       6,149       7,170       2       7,172  

Thereafter

     4,582       28,477       33,059       0       33,059  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Undiscounted Cash Flows

   $  11,317     $ 75,961     $ 87,278     $  169     $ 87,447  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: imputed interest

     (3,611     (22,723     (26,334     (10     (26,344
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 7,706     $ 53,238     $ 60,944     $ 159     $ 61,103  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation to lease liabilities:

 

       

Lease liabilities - current

   $ 1,026     $ 8,562     $ 9,588     $ 61     $ 9,649  

Lease liabilities - long-term

     6,680       44,676       51,356       98       51,454  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Lease Liabilities

   $ 7,706     $ 53,238     $ 60,944     $ 159     $ 61,103  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

NOTE 9. BROADCAST LICENSES

We account for broadcast licenses in accordance with FASB ASC Topic 350 Intangibles—Goodwill and Other. We do not amortize broadcast licenses, but rather test for impairment annually or more frequently if events or circumstances indicate that the value may be impaired. In the case of our broadcast radio stations, we would not be able to operate the properties without the related broadcast license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal fee that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements that are necessary for the FCC renewal and all of our broadcast licenses have been renewed at the end of their respective periods. We expect all of our broadcast licenses to be renewed in the future and therefore, we consider our broadcast licenses to be indefinite-lived intangible assets. We are not aware of any legal, competitive, economic or other factors that materially limit the useful life of our broadcast licenses.

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 assessed a variety of factors, including media industry forecasts and the amount by which the prior estimated fair value exceeded the carrying value under the start-up income approach. Based on our assessment, we engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to assist us with determining the enterprise value of 11 of our market clusters. The results of our first quarter of 2020 interim impairment analysis are described further below.

During the second quarter of 2020, we re-evaluated these factors to determine if it was more likely than not that assets are impaired. We concluded that there are no indications of impairment mainly because at this time, media industry forecasts have not changed significantly from those used in our first quarter valuations. Further, there are indications that based on assumptions used to calculate the weighted average cost of capital used in our valuations, the rate has likely declined since testing for the first quarter was completed.

Impairment testing requires estimates of the fair value of our indefinite-lived intangible assets. We believe that these fair value estimates are critical accounting estimates as the value is significant in relation to our total assets and the estimates incorporate variables and assumptions based on our experiences and judgment about our future operating performance. Fair value measurements use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value, including assumptions about risk. If actual future results are less favorable than the assumptions and estimates used in our estimates, we are subject to future impairment charges, the amount of which may be material. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 14 – Fair Value Measurements.

The estimated fair value of each market cluster was determined using the Greenfield Method, a form of the income approach. The premise of the Greenfield Method is that the value of a broadcast license is equivalent to a hypothetical start-up in which the only asset owned by the station as of the valuation date is the broadcast license. This approach eliminates factors that are unique to our operation of the station, including its format and historical financial performance. The method then assumes the entity has to purchase, build, or rent all of the other assets needed to operate a comparable station to the one in which the broadcast license is being utilized as of the valuation date. Cash flows are estimated and netted against all start-up costs, expenses and investments necessary to achieve a normalized and mature state of operations, thus reflecting only the cash flows directly attributable to the broadcast license. A multi-year discounted cash flow approach is then used to determine the net present value of these cash flows to derive an indication of fair value. For cash flows beyond the projection period, a terminal value is calculated using the Gordon constant growth model and long-term industry growth rate assumptions based on long-term industry growth and Gross Domestic Product (“GDP”) inflation rates.

 

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The primary assumptions used in the Greenfield Method are:

 

  (1)

gross operating revenue in the station’s designated market area,

 

  (2)

normalized market share,

 

  (3)

normalized profit margin,

 

  (4)

duration of the “ramp-up” period to reach normalized operations, (which was assumed to be three years),

 

  (5)

estimated start-up costs (based on market size),

 

  (6)

ongoing replacement costs of fixed assets and working capital,

 

  (7)

the calculations of yearly net free cash flows to invested capital; and

 

  (8)

amortization of the intangible asset, or the broadcast license.

The assumptions used reflect those of a hypothetical market participant and not necessarily the actual or projected results of Salem. The key estimates and assumptions used in the start-up income valuation for the broadcast licenses subject to testing were as follows:

 

Broadcast Licenses

  

December 31, 2019

  

March 31, 2020

Risk-adjusted discount rate

   9.0%    9.5%

Operating profit margin ranges

   4.0% - 33.8%    4.6% - 33.8%

Long-term revenue growth rates

   0.7% - 1.1%    0.8% - 1.1%

The risk-adjusted discount rate reflects the Weighted Average Cost of Capital (“WACC”) developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Based on our review and analysis, we determined that the carrying value of broadcast licenses in 7 of our market clusters were impaired as of the interim testing period ended March 31, 2020. We recorded an impairment charge of $17.0 million to the value of broadcast licenses in Chicago, Cleveland, Louisville, Philadelphia, Portland, Sacramento and Tampa as of the interim testing period ended March 31, 2020. The impairment charges 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.

The table below presents the results of our interim impairment testing under the start-up income approach at March 31, 2020:

 

Market Cluster

   Excess Fair Value
March 31, 2020
Estimate
 

Boston, MA

     4.8

Chicago, IL

     (9.0 %) 

Cleveland, OH

     (18.4 %) 

Dallas, TX

     8.5

Louisville, KY

     (21.8 %) 

New York, NY

     7.3

Philadelphia, PA

     (13.1 %) 

Portland, OR

     (14.8 %) 

Sacramento, CA

     (9.6 %) 

San Francisco, CA

     1.2

Tampa, FL

     (28.0 %) 

We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our broadcast licenses, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. Due to the continued impact of the COVID-19 pandemic we will continue to evaluate broadcast licenses for impairment and further assess if an impairment triggering event has occurred. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our broadcast licenses below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.

 

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The following table presents the changes in broadcasting licenses that include acquisitions and divestitures of radio stations and FM translators.

 

Broadcast Licenses

   Twelve Months Ended
December 31, 2019
     Six Months Ended
June 30, 2020
 
     (Dollars in thousands)  

Balance before cumulative loss on impairment, beginning of period

   $ 484,691      $ 441,143  

Accumulated loss on impairment, beginning of period

     (108,375      (103,285
  

 

 

    

 

 

 

Balance after cumulative loss on impairment, beginning of period

     376,316        337,858  
  

 

 

    

 

 

 

Acquisitions of radio stations

     617        —    

Acquisitions of FM translators and construction permits

     35        —    

Capital projects

     300        —    

Dispositions of radio stations

     (36,502      —    

Impairments based on the estimated fair value of broadcast licenses

     (2,908      (16,994
  

 

 

    

 

 

 

Balance, end of period after cumulative loss on impairment

   $ 337,858      $ 320,864  
  

 

 

    

 

 

 

Balance, end of period before cumulative loss on impairment

   $ 441,143      $ 441,143  

Accumulated loss on impairment, end of period

     (103,285      (120,279
  

 

 

    

 

 

 

Balance, end of period after cumulative loss on impairment

   $ 337,858      $ 320,864  
  

 

 

    

 

 

 

NOTE 10. GOODWILL

We account for goodwill in accordance with FASB ASC Topic 350 “Intangibles—Goodwill and Other.” We do not amortize goodwill, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. We perform our annual impairment testing during the fourth quarter of each year, which coincides with our budget and planning process for the upcoming year.

We performed an interim review of goodwill 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 assessed a variety of factors, including media industry forecasts and the amount by which the prior estimated fair value exceeded the carrying value including goodwill. The results of our first quarter of 2020 interim impairment analysis are described further below.

During the second quarter of 2020, we re-evaluated these factors to if it was more likely than not that assets are impaired. We concluded that there are no indications of impairment mainly because at this time, media industry forecasts have not changed significantly from those used in our first quarter valuations. Further, there are indications that based on assumptions used to calculate the weighted average cost of capital used in our valuations, the rate has likely declined since testing for the first quarter was completed.

Impairment testing requires estimates of the fair value of our indefinite-lived intangible assets. We believe that these fair value estimates are critical accounting estimates as the value is significant in relation to our total assets and the estimates incorporate variables and assumptions based on our experiences and judgment about our future operating performance. Fair value measurements use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value, including assumptions about risk. If actual future results are less favorable than the assumptions and estimates used in our estimates, we are subject to future impairment charges, the amount of which may be material. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 14 – Fair Value Measurements.

For the interim testing performed in the first quarter of 2020, we engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the enterprise of value Salem Author Services for the purpose of evaluating if goodwill is impaired. The enterprise valuation assumes that the subject assets are installed as part of an operating business rather than as a hypothetical start-up. The key estimates and assumptions used for our enterprise valuations for the reporting units subject to testing are as follows:

 

Publishing Enterprise Valuations

   December 31, 2019   March 31, 2020

Risk adjusted discount rate

   10.0%   10.5%

Operating margin ranges

   1.5% – 3.9%   0.0% – 3.9%

Long-term revenue growth rates

   0.5%   0.5%

The risk-adjusted discount rate reflects the WACC developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Based on our review and analysis, we recorded an impairment charge of $0.3 million, including a $0.1 million charge to the carrying value of goodwill associated with Salem Author Services as of the interim testing period ended March 31, 2020. The impairment charges were driven by a decrease in the operating margins due to the impact of COVID-19 on revenue 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.

 

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We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of goodwill, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. Due to the continued impact of the COVID-19 pandemic we will continue to evaluate goodwill for impairment and further assess if an impairment triggering event has occurred. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of goodwill below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.

The following table presents the changes in goodwill including business acquisitions and dispositions as discussed in Note 3 of our Condensed Consolidated Financial Statements.

 

Goodwill

   Twelve Months Ended
December 31, 2019
     Six Months Ended
June 30, 2020
 
     (Dollars in thousands)  

Balance, beginning of period before cumulative loss on impairment,

   $ 28,818      $ 28,454  

Accumulated loss on impairment

     (2,029      (4,456
  

 

 

    

 

 

 

Balance, beginning of period after cumulative loss on impairment

     26,789        23,998  
  

 

 

    

 

 

 

Acquisitions of radio stations

     —          —    

Acquisitions of digital media entities

     6        —    

Disposition of radio stations

     (29      —    

Disposition of digital media entities

     (341      —    

Impairments based on the estimated fair value goodwill

     (2,427      (307
  

 

 

    

 

 

 

Ending period balance

   $ 23,998      $ 23,691  
  

 

 

    

 

 

 

Balance, end of period before cumulative loss on impairment

     28,454        28,454  

Accumulated loss on impairment

     (4,456      (4,763
  

 

 

    

 

 

 

Ending period balance

   $ 23,998      $ 23,691  
  

 

 

    

 

 

 

NOTE 11. OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

Other indefinite-lived intangible assets consist of mastheads, or the graphic elements that identify our publications to readers and advertisers. These include customized typeset page headers, section headers, and column graphics as well as other name and identity stylized elements within the body of each publication. We are not aware of any legal, competitive, economic or other factors that materially limit the useful life of our mastheads. We account for mastheads in accordance with FASB ASC Topic 350 Intangibles—Goodwill and Other. We do not amortize mastheads, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired.

We performed an interim review of mastheads 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 assessed a variety of factors, including media industry forecasts and the amount by which the prior estimated fair value exceeded the carrying value. The results of our first quarter of 2020 interim impairment analysis are described further below.

Impairment testing requires estimates of the fair value of our indefinite-lived intangible assets. We believe that these fair value estimates are critical accounting estimates as the value is significant in relation to our total assets and the estimates incorporate variables and assumptions based on our experiences and judgment about our future operating performance. Fair value measurements use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value, including assumptions about risk. If actual future results are less favorable than the assumptions and estimates used in our estimates, we are subject to future impairment charges, the amount of which may be material. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 14 – Fair Value Measurements.

For the interim testing performed in the first quarter of 2020, we engaged Bond & Pecaro, an independent appraisal and valuation firm, to assist us in estimating the fair value of mastheads using a Relief from Royalty method, a form of the income approach. The Relief from Royalty method estimates the fair value of mastheads through use of a discounted cash flow model that incorporates a hypothetical “royalty rate” that a third-party owner would be willing to pay in lieu of owning the asset. The royalty rate is based on observed royalty rates for comparable assets as of the measurement date. We adjust the selected royalty rate to account for a percentage of the royalty fee that could be attributed to the use of other intangibles, such as goodwill, time in existence, trade secrets and industry expertise. The adjusted royalty rate represents the royalty fee remaining that could be attributed to the use of the masthead only.

Pre-tax royalty income is based on a 10-year revenue forecast and assumed to carry on into perpetuity. Revenue beyond the projection period (terminal year) is based on estimated long-term industry growth rates. The analysis also incorporates the present value of the tax amortization benefit associated with mastheads. The key estimates and assumptions are as follows:

 

Mastheads

  

December 31, 2019

  

March 31, 2020

Risk-adjusted discount rate

   10.0%    10.5%

Long-term revenue growth rates

   (4.0%) – (1.0%)    (1.0%) – (25.0%)

Royalty rate

   3.00%    3.00%

 

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The risk-adjusted discount rate reflects the WACC developed based on data from same or similar industry participants and publicly available market data as of the measurement date.

Based on our review and analysis, we recorded an impairment charge to mastheads of $0.3 million as of the interim testing period ended March 31, 2020. The impairment charge was driven by decreases in the projected long-term revenue growth rates for the print magazine industry 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. The impairment charge during the first quarter of 2020 reduced the value of our mastheads to zero eliminating subsequent testing.

NOTE 12. AMORTIZABLE INTANGIBLE ASSETS

The following tables provide a summary of our significant classes of amortizable intangible assets:

 

     As of June 30, 2020  
            Accumulated         
     Cost      Amortization      Net  
     (Dollars in thousands)  

Customer lists and contracts

   $ 23,833      $ (22,223    $ 1,610  

Domain and brand names

     20,332        (18,466      1,866  

Favorable and assigned leases

     2,188        (1,934      254  

Subscriber base and lists

     9,886        (8,709      1,177  

Author relationships

     2,771        (2,687      84  

Non-compete agreements

     2,041        (1,879      162  

Other amortizable intangible assets

     1,666        (1,545      121  
  

 

 

    

 

 

    

 

 

 
   $ 62,717      $ (57,443    $ 5,274  
  

 

 

    

 

 

    

 

 

 

 

     As of December 31, 2019  
            Accumulated         
     Cost      Amortization      Net  
     (Dollars in thousands)  

Customer lists and contracts

   $ 23,833      $ (21,823    $ 2,010  

Domain and brand names

     20,332        (17,727      2,605  

Favorable and assigned leases

     2,188        (1,920      268  

Subscriber base and lists

     9,886        (8,251      1,635  

Author relationships

     2,771        (2,609      162  

Non-compete agreements

     2,041        (1,798      243  

Other amortizable intangible assets

     1,666        (1,489      177  
  

 

 

    

 

 

    

 

 

 
   $ 62,717      $ (55,617    $ 7,100  
  

 

 

    

 

 

    

 

 

 

Amortization expense was approximately $0.8 million and $1.1 million for the three-month periods ended June 30, 2020 and 2019, respectively and $1.8 million and $2.4 million for the six-month periods ended June 30, 2020 and 2019, respectively. Based on the amortizable intangible assets as of June 30, 2020, we estimate amortization expense for the next five years to be as follows:

 

Year Ended December 31,

   Amortization Expense  
     (Dollars in thousands)  

2020 (July – Dec)

   $ 1,438  

2021

     1,783  

2022

     1,146  

2023

     627  

2024

     78  

Thereafter

     202  
  

 

 

 

Total

   $ 5,274  
  

 

 

 

NOTE 13. LONG-TERM DEBT

Salem Media Group, Inc. has no independent assets or operations, the subsidiary guarantees relating to certain debt are full and unconditional and joint and several, and any subsidiaries of Salem Media Group, Inc. other than the subsidiary guarantors are minor.

6.75% Senior Secured Notes

On May 19, 2017, we issued in a private placement the Notes, which are guaranteed on a senior secured basis by our existing subsidiaries (the “Subsidiary Guarantors”). The Notes bear interest at a rate of 6.75% per year and mature on June 1, 2024, unless they are earlier redeemed or repurchased. Interest initially accrued on the Notes from May 19, 2017 and is payable semi-annually, in cash in arrears, on June 1 and December 1 of each year, commencing December 1, 2017.

The Notes are secured by a first-priority lien on substantially all assets of ours and the Subsidiary Guarantors (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).

 

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The Notes were redeemable, in whole or in part, at any time on or before June 1, 2020 at a price equal to 100% of the principal amount of the Notes plus a “make-whole” premium as of, and accrued and unpaid interest, if any, to, but not including, the redemption date. At any time on or after June 1, 2020, we may redeem some or all of the Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth in the Notes, plus accrued and unpaid interest, if any, to, but not including, the redemption date.

The indenture relating to the Notes (the “Indenture”) contains covenants that, among other things and subject in each case to certain specified exceptions, limit our ability and the ability of our restricted subsidiaries to: (i) incur additional debt; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; (vi) engage in transactions with affiliates; and (vii) sell or transfer assets.

The Indenture provides for the following events of default (each, an “Event of Default”): (i) default in payment of principal or premium on the Notes at maturity, upon repurchase, acceleration, optional redemption or otherwise; (ii) default for 30 days in payment of interest on the Notes; (iii) the failure by us or certain restricted subsidiaries to comply with other agreements in the Indenture or the Notes, in certain cases subject to notice and lapse of time; (iv) the failure of any guarantee by certain significant Subsidiary Guarantors to be in full force and effect and enforceable in accordance with its terms, subject to notice and lapse of time; (v) certain accelerations (including failure to pay within any grace period) of other indebtedness of ours or any restricted subsidiary if the amount accelerated (or so unpaid) is at least $15 million; (vi) certain judgments for the payment of money in excess of $15 million; (vii) certain events of bankruptcy or insolvency with respect to us or any significant subsidiary; and (vii) certain defaults with respect to any collateral having a fair market value in excess of $15 million. If an Event of Default occurs and is continuing, the Trustee or the holders of at least 25% in principal amount of the outstanding Notes may declare the principal of the Notes and any accrued interest on the Notes to be due and payable immediately, subject to remedy or cure in certain cases. Certain events of bankruptcy or insolvency are Events of Default which will result in the Notes being due and payable immediately upon the occurrence of such Events of Default. At June 30, 2020, we were, and we remain in compliance with all of the covenants under the Indenture.

Based on the balance of the Notes currently outstanding, we are required to pay $14.6 million per year in interest on the Notes. As of June 30, 2020, accrued interest on the Notes was $1.2 million.

We incurred debt issuance costs of $6.3 million that were recorded as a reduction of the debt proceeds that are being amortized to non-cash interest expense over the life of the Notes using the effective interest method. During the three and six-month periods ended June 30, 2020, $0.2 million and $0.4 million, respectively, of debt issuance costs associated with the Notes was amortized to interest expense. During the three and six-month periods ended June 30, 2019, $0.2 million and $0.4 million, respectively, of debt issuance costs associated with the Notes was amortized to interest expense.

We may from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity and other factors, seek to repurchase the Notes in open market transactions, privately negotiated transactions, by tender offer or otherwise, as market conditions warrant. Due to the adverse economic conditions resulting from the COVID-19 pandemic, we are unlikely to repurchase Notes at least through the remainder of 2020, so that we conserve cash.

Based on the then existing market conditions, we completed repurchases of our 6.75% Senior Secured Notes at amounts less than face value as follows:

 

Date

   Principal
Repurchased
     Cash
Paid
     % of Face
Value
    Bond Issue
Costs
     Net
Gain
 
     (Dollars in thousands)  

January 30, 2020

   $  2,250      $  2,194        97.50   $  35      $ 22  

January 27, 2020

     1,245        1,198        96.25     19        27  

December 27, 2019

     3,090        2,874        93.00     48        167  

November 27, 2019

     5,183        4,548        87.75     82        553  

November 15, 2019

     3,791        3,206        84.58     61        524  

March 28, 2019

     2,000        1,830        91.50     37        134  

March 28, 2019

     2,300        2,125        92.38     42        133  

February 20, 2019

     125        114        91.25     2        9  

February 19, 2019

     350        319        91.25     7        24  

February 12, 2019

     1,325        1,209        91.25     25        91  

January 10, 2019

     570        526        92.25     9        35  

December 21, 2018

     2,000        1,835        91.75     38        127  

December 21, 2018

     1,850        1,702        92.00     35        113  

December 21, 2018

     1,080        999        92.50     21        60  

November 17, 2018

     1,500        1,357        90.50     29        114  

May 4, 2018

     4,000        3,770        94.25     86        144  

April 10, 2018

     4,000        3,850        96.25     87        63  

April 9, 2018

     2,000        1,930        96.50     43        27  
  

 

 

    

 

 

      

 

 

    

 

 

 
   $  38,659      $  35,586        $  706      $  2,367  
  

 

 

    

 

 

      

 

 

    

 

 

 

 

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Asset-Based Revolving Credit Facility

On May 19, 2017, the company entered into the Asset Based Loan (“ABL”) Facility pursuant to a Credit Agreement (the “Credit Agreement”) by and among us and our subsidiaries party thereto as borrowers, Wells Fargo Bank, National Association, as administrative agent and lead arranger, and the lenders that are parties thereto. We used the proceeds of the ABL Facility, together with the net proceeds from the Notes offering, to repay outstanding borrowings under our previously existing senior credit facilities, and related fees and expenses. Current proceeds from the ABL Facility are used to provide ongoing working capital and for other general corporate purposes, including permitted acquisitions.

The ABL Facility is a five-year $30.0 million revolving credit facility due March 1, 2024, which includes a $5.0 million subfacility for standby letters of credit and a $7.5 million subfacility for swingline loans. All borrowings under the ABL Facility accrue interest at a rate equal to a base rate or LIBOR rate 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 rate 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.

We amended the ABL on April 7, 2020 to increase the advance rate on eligible accounts receivable and to extend the maturity date from May 19, 2022 to March 1, 2024. The April 7, 2020 amendment allows for an alternative benchmark rate that may include the SOFR rate due to the LIBOR rate being scheduled to be discontinued at the end of calendar year 2021.

Availability under the ABL is subject to a borrowing base consisting of (a) 90% of the eligible accounts receivable plus (b) a calculated amount based on the value of certain real property. As of June 30, 2020, the amount available under the ABL was $23.2 million of which $19.0 million 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 Priority Collateral”) and by a second-priority lien on the Notes Priority Collateral. There is no direct lien on the company’s FCC licenses to the extent prohibited by law or regulation (other than the economic value and proceeds thereof).

The Credit Agreement includes a springing fixed charge coverage ratio of 1.0 to 1.0, which is tested during the period commencing on the last day of the fiscal month most recently ended prior to the date on which Availability (as defined in the Credit Agreement) is less than the greater of 15% of the Maximum Revolver Amount (as defined in the Credit Agreement) and $4.5 million and continuing for a period of 60 consecutive days after the first day on which Availability exceeds such threshold amount. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict our ability and the ability of our subsidiaries (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens, (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all assets to a third party, except as permitted thereby; (viii) to prepay indebtedness; and (ix) to pay dividends.

The Credit Agreement provides for the following events of default: (i) default for non-payment of any principal or letter of credit reimbursement when due or any interest, fees or other amounts within five days of the due date; (ii) the failure by any borrower or any subsidiary to comply with any covenant or agreement contained in the Credit Agreement or any other loan document, in certain cases subject to applicable notice and lapse of time; (iii) any representation or warranty made pursuant to the Credit Agreement or any other loan document is incorrect in any material respect when made; (iv) certain defaults of other indebtedness of any borrower or any subsidiary of indebtedness of at least $10 million; (v) certain events of bankruptcy or insolvency with respect to any borrower or any subsidiary; (vi) certain judgments for the payment of money of $10 million or more; (vii) a change of control; and (viii) certain defaults relating to the loss of FCC licenses, cessation of broadcasting and termination of material station contracts. If an event of default occurs and is continuing, the Administrative Agent and the Lenders may accelerate the amounts outstanding under the ABL Facility and may exercise remedies in respect of the collateral. At June 30, 2020, we were, and we remain in compliance with all of the covenants under Credit Agreement.

We incurred debt issue costs of $0.8 million that were recorded as an asset and are being amortized to non-cash interest expense over the term of the ABL Facility using the effective interest method. During the three and six-month periods ended June 30, 2020, $50,000 and $0.1 million, respectively, of debt issuance costs associated with the ABL was amortized to interest expense. During the three and six-month periods ended June 30, 2019, $51,000 and $0.1 million, respectively, of debt issue costs associated with the ABL was amortized to interest expense. At June 30, 2020, the blended interest rate on amounts outstanding under the ABL Facility was 2.25%.

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.

 

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Summary of long-term debt obligations

Long-term debt consisted of the following:

 

     As of
December 31, 2019
     As of
June 30, 2020
 
     (Dollars in thousands)  

6.75% Senior Secured Notes

   $ 219,836      $ 216,341  

Less unamortized debt issuance costs based on imputed interest rate of 7.08%

     (3,368      (2,945
  

 

 

    

 

 

 

6.75% Senior Secured Notes net carrying value

     216,468        213,396  
  

 

 

    

 

 

 

Asset-Based Revolving Credit Facility principal outstanding

     12,426        19,000  
  

 

 

    

 

 

 

Long-term debt less unamortized debt issuance costs

   $ 228,894      $ 232,396  
  

 

 

    

 

 

 

Less current portion

     (12,426      (19,000
  

 

 

    

 

 

 

Long-term debt less unamortized debt issuance costs, net of current portion

   $ 216,468      $ 213,396  
  

 

 

    

 

 

 

In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of June 30, 2020:

 

   

$19.0 million under the ABL Facility, with interest spread ranging from Base Rate plus 0.50% to 1.00% for base rate borrowings and LIBOR plus 1.50% to 2.00% for LIBOR rate borrowings;

 

   

$216.3 million aggregate principal amount of 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.

Maturities of Long-Term Debt

Principal repayment requirements under all long-term debt agreements outstanding at June 30, 2020 for each of the next five years and thereafter are as follows:

 

     Amount  
For the Year Ended June 30,    (Dollars in thousands)  

2021

   $ 19,000  

2022

     —    

2023

     —    

2024

     216,341  

2025

     —    

Thereafter

     —    
  

 

 

 
   $ 235,341  
  

 

 

 

NOTE 14. FAIR VALUE MEASUREMENTS

Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” FASB ASC Topic 820 “Fair Value Measurements and Disclosures,” (“ASC 820”) established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defines three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the ASC 820 hierarchy are as follows:

 

   

Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

 

   

Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

 

   

Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

Under ASC 820, a fair value measurement of a nonfinancial asset considers a market participant’s ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use. Therefore, fair value is a market-based measurement and not an entity-specific measurement. It is determined based on assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.

 

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As of June 30, 2020, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments. The carrying amount of the Notes at June 30, 2020 was $216.3 million compared to the estimated fair value of $179.6 million, based on the prevailing interest rates and trading activity of our Notes.

We have certain assets that are measured at fair value on a non-recurring basis that are adjusted to fair value only when the carrying values exceed the fair values. The categorization of the framework used to price the assets is considered Level 3 due to the subjective nature of the unobservable inputs used when estimating the fair value.

The following table summarizes the fair value of our financial assets and liabilities that are measured at fair value:

 

     June 30, 2020  
     Carrying Value on
Balance Sheet
     Fair Value Measurement Category  
     Level 1      Level 2      Level 3  
     (Dollars in thousands)  

Assets

           

Estimated fair value of other indefinite-lived intangible assets

   $           —          —        $ —    

Liabilities:

           

Estimated fair value of contingent earn-out consideration included in accrued expenses

     17        —          —          17  

Long-term debt less unamortized debt issuance costs

     232,396        —          192,889        —    

NOTE 15. INCOME TAXES

We recognize deferred tax assets and liabilities for future tax consequences attributable to differences between our consolidated financial statement carrying amount of assets and liabilities and their respective tax bases. We measure these deferred tax assets and liabilities using enacted tax rates expected to apply in the years in which these temporary differences are expected to reverse. We recognize the effect on deferred tax assets and liabilities resulting from a change in tax rates in income in the period that includes the date of the change. We continue to evaluate the impact of the CARES Act, including the modifications on the limitation of business interest for tax years beginning in 2019 and 2020 that we have considered in our analysis.

The amortization of our indefinite-lived intangible assets for tax purposes, but not for book purposes, creates deferred tax liabilities. A reversal of deferred tax liabilities may occur when indefinite-lived intangibles: (1) become impaired; or (2) are sold, which would typically only occur in connection with the sale of the assets of a station or groups of stations or the entire company in a taxable transaction. Due to the amortization for tax purposes and not book purposes of our indefinite-lived intangible assets, we expect to continue to generate deferred tax liabilities in future periods exclusive of any impairment losses in future periods. These deferred tax liabilities and net operating loss carryforwards result in differences between our provision for income tax and cash paid for taxes.

At December 31, 2019, we had net operating loss carryforwards for federal income tax purposes of approximately $136.1 million that expire in years 2021 through 2038 and for state income tax purposes of approximately $793.7 million that expire in years 2020 through 2039. For financial reporting purposes at December 31, 2019, we had a valuation allowance of $8.9 million, net of federal benefit, to offset the deferred tax assets related to the state net operating loss carryforwards along with a valuation allowance of $4.1 million to offset the deferred tax assets related to the federal net operating loss carryforwards.

As a result of our adjusted cumulative three-year pre-tax book loss as of June 30, 2020, we performed an assessment of positive and negative evidence with respect to the realization of our net deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carryforwards and estimates of projected future taxable income. The economic uncertainty from the COVID-19 pandemic provided additional negative evidence that outweighed positive evidence resulting in our conclusion that additional deferred tax assets of $36.8 million related to federal and state net operating loss carryforwards are more likely than not to be not realized. As such, an additional valuation allowance of $37.1 million was recorded in the period ended March 31, 2020, which was reduced by $0.3 million in the period ended June 30, 2020, for a total valuation allowance of $49.8 million for the period ended June 30, 2020.

We recognized a benefit from income taxes of $2.4 million for the three months ended June 30, 2020 compared to a tax provision of $4.9 million for the same period of the prior year. For the six months ended June 30, 2020, we recognized a tax provision of $30.8 million compared to a benefit of $0.4 million for the same period of the prior year. The provision for (benefit from) income taxes as a percentage of income before income taxes, or the effective tax rate, was 48.6% for the three months ended June 30, 2020 compared to 392.0% for the same period of the prior year. The provision for (benefit from) income taxes as a percentage of income before income taxes, or the effective tax rate was (114.3)% for the six months ended June 30, 2020 compared to 11.0% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 21.0% due to the effect of the sale of business assets in various states, state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance. The effective tax rate of (114.3%) is driven by increases in the valuation allowance of $24.5 million recorded against federal deferred tax assets relating to federal net operating loss carryforwards and $12.3 million of additional valuation allowance relating to state net operating loss carryforwards.

We recorded an out-of-period adjustment of $1.5 million as of June 30, 2020 due to a change in our annual effective tax rate which should have been recorded in the quarter ended March 31, 2020. In evaluating the adjustment, we referred to the Securities and Exchange Commission (SEC) Staff Accounting Bulletin (SAB) No. 99, including SAB Topic 1.M, which provides guidance on the assessment of materiality and states that “the omission or misstatement of an item in a financial report is material if, in the light of surrounding circumstances, the magnitude of the item is such that it is probable that the judgment of a reasonable person relying upon the report would have been changed or influenced by the inclusion or correction of the item.” Our analysis of the materiality of the adjustment was performed by reviewing quantitative and qualitative factors. We determined based on this analysis that the adjustment was not material to the current period and any prior periods.

Valuation Allowance (Deferred Taxes)

For financial reporting purposes a valuation allowance of $49.8 million offsets deferred tax assets at June 30, 2020. We regularly review our financial forecasts to determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on our estimate of the benefit the company will receive from such carryforwards. As a result of our adjusted cumulative three-year pre-tax book loss as of June 30, 2020, we performed an assessment of positive and negative evidence with respect to the realization of our net deferred tax assets. This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carryforwards and estimates of projected future taxable income. The economic uncertainty from the COVID-19 pandemic provided additional negative evidence that outweighed positive evidence resulting in our conclusion that additional deferred tax assets of $36.8 million related to federal and state net operating loss carryforwards are more likely than not to be not realized. As such, an additional valuation allowance of $37.1 million was recorded in the period ended March 31, 2020, which was reduced by $0.3 million in the period ended June 30, 2020, for a total valuation allowance of $49.8 million for the period ended June 30, 2020.

 

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NOTE 16. COMMITMENTS AND CONTINGENCIES

The company enters into various agreements in the normal course of business that contain minimum guarantees. Minimum guarantees are typically tied to future events, such as future revenue earned in excess of the contractual level. Accordingly, the fair value of these arrangements is zero.

The company also records contingent earn-out consideration representing the estimated fair value of future liabilities associated with acquisitions that may have additional payments due upon the achievement of certain performance targets. The fair value of the contingent earn-out consideration is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of the expected payment amounts. We review the probabilities of possible future payments to estimate the fair value of any contingent earn-out consideration on a quarterly basis over the earn-out period. Actual results are compared to the estimates and probabilities of achievement used in our forecasts. Should actual results of the acquired business increase or decrease as compared to our estimates and assumptions, the estimated fair value of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair value of the contingent earn-out consideration are reflected in our results of operations in the period in which they are identified. Changes in the estimated fair value of the contingent earn-out consideration may materially impact and cause volatility in our operating results.

The company and its subsidiaries, incident to its business activities, are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. The company evaluates claims based on what we believe to be both probable and reasonably estimable. The company maintains insurance that may provide coverage for such matters. Consequently, the company is unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. The company believes, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon the company’s condensed consolidated financial position, results of operations or cash flows.

NOTE 17. STOCK INCENTIVE PLAN

Our Amended and Restated 1999 Stock Incentive Plan (the “Plan”) provides for grants of equity-based awards to employees, non-employee directors and officers, and advisors of the company (“Eligible Persons”). The Plan is designed to promote the interests of the company using equity investment interests to attract, motivate, and retain individuals.

A maximum of 8,000,000 shares are authorized under the Plan. All awards have restriction periods tied primarily to employment and/or service. The Plan allows for accelerated or continued vesting in certain circumstances as defined in the Plan including death, disability, a change in control, and termination or retirement. Our Board, or a committee appointed by our Board, has discretion subject to limits defined in the Plan, to modify the terms of any outstanding award. Awards granted to non-employee directors are made in exchange for their services to the company as directors and therefore, the guidance in FASB ASC Topic 505-50 Equity Based Payments to Non-Employees is not applicable.

Under the Plan, our Board, or a committee appointed by our Board, may impose restrictions on the exercise of awards during pre-defined blackout periods. Insiders may participate in plans established pursuant to Rule 10b5-1 under the Exchange Act that allow them to exercise awards subject to pre-established criteria.

We recognize non-cash stock-based compensation expense based on the estimated fair value of awards in accordance with FASB ASC Topic 718 Compensation—Stock Compensation. Stock-based compensation expense fluctuates over time as a result of the vesting periods for outstanding awards and the number of awards that actually vest. The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six-month periods ended June 30, 2020 and 2019:

 

     Three Months
Ended June 30,
     Six Months Ended
June 30,
 
     2019      2020      2019      2020  
     (Dollars in thousands)      (Dollars in thousands)  

Stock option compensation expense included in unallocated corporate expenses

   $ 79      $ 43      $ 186      $ 93  

Restricted stock shares compensation expense included in unallocated corporate expenses

     423        —          423        —    

Stock option compensation expense included in broadcast operating expenses

     29        37        68        74  

Restricted stock shares compensation expense included in broadcast operating expenses

     383        —          383        —    

Stock option compensation expense included in digital media operating expenses

     20        16        46        31  

Stock option compensation expense included in publishing operating expenses

     2        —          6        1  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense, pre-tax

   $ 936      $ 96      $ 1,112      $ 199  
  

 

 

    

 

 

    

 

 

    

 

 

 

Tax expense for stock-based compensation expense

     (243      (25      (289      (52
  

 

 

    

 

 

    

 

 

    

 

 

 

Total stock-based compensation expense, net of tax

   $ 693      $ 71      $ 823      $ 147  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Stock Option and Restricted Stock Grants

Eligible employees may receive stock option awards annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. Incentive and non-qualified stock option awards allow the recipient to purchase shares of our common stock at a set price, not to be less than the closing market price on the date of award, for no consideration payable by the recipient. The related number of shares underlying the stock option is fixed at the time of the grant. Options generally vest over a four-year period with a maximum term of five years from the vesting date. In addition, certain management and professional level employees may receive stock option awards upon the commencement of employment.

The Plan also allows for awards of restricted stock that contain transfer restrictions under which they cannot be sold, pledged, transferred or assigned until the period specified in the award, generally from one to five years. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards are considered issued and outstanding from the date of grant.

The fair value of each award is estimated as of the date of the grant using the Black-Scholes valuation model. The expected volatility reflects the consideration of the historical volatility of our common stock as determined by the closing price over a six to ten-year term commensurate with the expected term of the award. Expected dividends reflect the amount of quarterly distributions authorized and declared on our Class A and Class B common stock as of the grant date. The expected term of the awards is based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the award are based on the U.S. Treasury yield curve in effect during the period the options were granted. We have used historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the valuation model. These estimates have approximated our actual forfeiture rates.

The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes valuation model were as follows for the three and six-month periods ended June 30, 2020 and 2019:

 

     Three Months Ended
June 30, 2019
     Six Months Ended
June 30, 2019
    Three Months Ended
June 30, 2020
     Six Months Ended
June 30, 2020
 

Expected volatility

     n/a        47.54     n/a        53.96

Expected dividends

     n/a        9.22     n/a        7.30

Expected term (in years)

     n/a        7.5       n/a        7.6  

Risk-free interest rate

     n/a        2.61     n/a        1.14

Activity with respect to the company’s option awards during the six-month period ended June 30, 2020 is as follows:

 

Options

   Shares     Weighted
Average
Exercise Price
     Weighted
Average Grant
Date
Fair Value
     Weighted Average
Remaining
Contractual Term
     Aggregate
Intrinsic Value
 
     (Dollars in thousands, except weighted average exercise price and weighted average
grant date fair value)
 

Outstanding at January 1, 2020

     1,860,722     $ 4.63      $ 2.61        4.1 years      $  —    

Granted

     743,000       1.37        0.35           —    

Exercised

     —         —          —             —    

Forfeited or expired

     (221,425     6.46        4.35         $ —    
  

 

 

            

Outstanding at June 30, 2020

     2,382,297     $ 3.26      $ 1.56        4.7 years      $ —    
  

 

 

            

Exercisable at June 30, 2020

     1,262,547     $ 4.47      $ 2.32        2.7 years      $ —    
  

 

 

            

Expected to Vest

     1,063,203     $ 3.29      $ 1.58        4.6 years      $ —    
  

 

 

            

Activity with respect to the company’s restricted stock awards during the six-month period ended June 30, 2020 is as follows:

 

Restricted Stock Awards

   Shares      Weighted Average
Grant Date Fair Value
     Weighted Average
Remaining Contractual Term
     Aggregate
Intrinsic Value
 
     (Dollars in thousands, except weighted average exercise price and weighted average grant
date fair value)
 

Outstanding at January 1, 2020

     107,990      $ 1.85        1.67 years      $ 156  

Granted

     —          —          —          —    

Lapsed

     —          —          —          —    

Forfeited

     —          —          —          —    
  

 

 

          

Outstanding at June 30, 2020

     107,990      $ 1.85        1.12 years      $ 122  
  

 

 

          

The aggregate intrinsic value represents the difference between the company’s closing price of common stock on June 30, 2020 of $1.13 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the periods ended June 30, 2020 and 2019 was $0.4 million and $0.7 million, respectively.

 

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As of June 30, 2020, there was $52,000 of total unrecognized compensation cost related to non-vested stock option awards. This cost is expected to be recognized over a weighted-average period of 1.9 years.

NOTE 18. EQUITY TRANSACTIONS

We account for stock-based compensation expense in accordance with FASB ASC Topic 718, Compensation-Stock Compensation. As a result, $0.1 million and $0.2 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the three and six month periods ended June 30, 2020, respectively, in comparison to $0.9 million and $1.1 million of non-cash stock-based compensation expense having been recorded to additional paid-in capital for the three and six month periods ended June 30, 2019, respectively.

The declaration of any future distributions and the establishment of the per share amount, record dates, and payment dates are subject to final determination by our Board and dependent upon future earnings, cash flows, financial and legal requirements, and other factors. On May 6, 2020 our Board voted to discontinue distributions on our common stock indefinitely due to the adverse economic impact of the COVID-19 pandemic on our financial position, results of operations, and cash flows.

The following table shows distributions that have been declared and paid since January 1, 2019:

 

Announcement Date

   Payment Date    Amount Per Share      Cash Distributed
(in thousands)
 

March 10, 2020

   March 31, 2020    $ 0.0250      $ 667  

December 10, 2019

   December 30, 2019    $ 0.0250        667  

September 11, 2019

   September 30, 2019    $ 0.0650        1,730  

May 14, 2019

   June 28, 2019    $ 0.0650        1,728  

March 7, 2019

   March 29, 2019    $ 0.0650        1,702  

NOTE 19. SEGMENT DATA

FASB ASC Topic 280, “Segment Reporting,” requires companies to provide certain information about their operating segments. 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 do not include allocations of costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury, which are reported as unallocated corporate expenses in our condensed consolidated statements of operations included in this quarterly report on Form 10-Q. We also exclude costs such as amortization, depreciation, taxes and interest expense.

Segment performance, as defined by Salem, is not necessarily comparable to other similarly titled captions of other companies.

Broadcast

Our foundational business is radio broadcasting, which includes the ownership and operation of radio stations in large metropolitan markets. Our broadcasting segment includes our national networks and national sales firms. National companies often prefer to advertise across the United States as an efficient and cost-effective way to reach their target audiences. Our national platform under which we offer radio airtime, digital campaigns and print advertisements can benefit national companies by reaching audiences throughout the United States.

Salem Radio NetworkTM (“SRNTM”), based in Dallas, Texas, develops, produces and syndicates a broad range of programming specifically targeted to Christian and family-themed talk stations, music stations and News Talk stations. SRNTM delivers programming via satellite to approximately 3,100 affiliated radio stations throughout the United States, including several of our Salem-owned stations. SRNTM operates five divisions, SRNTM Talk, SRNTM News, SRNTM Websites, SRNTM Satellite Services and Salem Music Network that includes Today’s Christian Music (“TCM”) and Singing News® Radio.

Salem Media Representatives (“SMR”) is our national advertising sales firm with offices in 12 U.S. cities. SMR specializes in placing national advertising on Christian and talk formatted radio stations as well as other commercial radio station formats. SMR sells commercial airtime to national advertisers on our radio stations and through our networks, as well as for independent radio station affiliates. SMR also contracts with independent radio stations to create custom advertising campaigns for national advertisers to reach multiple markets.

Salem Surround, our national multimedia advertising agency with locations in 34 markets across the United States, offers a comprehensive suite of digital marketing services to develop and execute audience-based marketing strategies for clients on both the national and local level. Salem Surround specializes in digital marketing services for each of our radio stations and websites as well as provides a full-service digital marketing strategy for each of our clients.

 

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Digital Media

Our digital media based businesses provide Christian, conservative, investing and health-themed content, e-commerce, audio and video streaming, and other resources digitally through the web. Salem Web Network (“SWN”) websites include Christian content websites; BibleStudyTools.com, Crosswalk.com®, GodVine.com, iBelieve.com, GodTube®.com, OnePlace.com, Christianity.com, GodUpdates.com, CrossCards.com, ChristianHeadlines.com, LightSource.com, AllCreated.com, ChristianRadio.com, CCMmagazine.com, SingingNews®.com and SouthernGospel.com and our conservative opinion websites; collectively known as Townhall Media, include Townhall.com®, HotAir.com, Twitchy®.com, RedState®.com, BearingArms.com, ConservativeRadio.com and pjmedia.com. We also publish digital newsletters through Eagle Financial Publications, which provide market analysis and non-individualized investment strategies from financial commentators on a subscription basis.

Our church e-commerce websites, including SermonSearch.com, ChurchStaffing.com, WorshipHouseMedia.com, SermonSpice.com, WorshipHouseKids.com, Preaching.com, ChristianJobs.com, Youthworker.com, JourneyBoxMedia.com and Playblackmedia.com, offer a variety of digital resources including videos, song tracks, sermon archives and job listings to pastors and Church leaders.

Our web content is accessible through all of our radio station websites that feature content of interest to local audiences throughout the United States.

Publishing

Our publishing operating segment includes three businesses: (1) Regnery® Publishing, a traditional book publisher that has published dozens of bestselling books by leading conservative authors and personalities, including Ann Coulter, Newt Gingrich, David Limbaugh, Ed Klein, Mark Steyn and Dinesh D’Souza; (2) Salem Author Services, a self-publishing service for authors through Xulon Press and Mill City Press; and (3) Singing News®, which produces and distributes a print magazine.

The table below presents financial information for each operating segment as of June 30, 2020 and 2019 based on the composition of our operating segments:

 

     Broadcast     Digital
Media
     Publishing     Unallocated
Corporate
Expenses
    Consolidated  
     (Dollars in thousands)  

Three Months Ended June 30, 2020

           

Net revenue

   $ 39,470     $ 9,443      $ 3,958     $        $ 52,871  

Operating expenses

     33,094       7,653        5,567       3,850       50,164  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and net (gain) loss on the disposition of assets

   $ 6,376     $ 1,790      $ (1,609   $ (3,850   $ 2,707  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Depreciation

     1,641       767        73       237       2,718  

Amortization

     5       623        211       1       840  

Change in the estimated fair value of contingent earn-out consideration

              3                          3  

Net (gain) loss on the disposition of assets

     30                          4       34  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net operating income (loss)

   $ 4,700     $ 397      $ (1,893   $ (4,092   $ (888
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Three Months Ended June 30, 2019

           

Net revenue

   $ 49,082     $ 9,960      $ 5,638     $ —       $ 64,680  

Operating expenses

     37,707       7,648        5,773       4,332       55,460  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and net (gain) loss on the disposition of assets

   $ 11,375     $ 2,312      $ (135   $ (4,332   $ 9,220  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Depreciation

     1,819       764        93       176       2,852  

Amortization

     9       903        211       1       1,124  

Net (gain) loss on the disposition of assets

     (371     15        1       (2     (357
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net operating income (loss)

   $ 9,918     $ 630      $ (440   $ (4,507   $ 5,601  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Broadcast     Digital
Media
    Publishing     Unallocated
Corporate
Expenses
    Consolidated  
     (Dollars in thousands)  

Six Months Ended June 30, 2020

          

Net revenue

   $ 84,650     $ 18,547     $ 7,924     $ —       $ 111,121  

Operating expenses

     70,421       15,979       10,629       8,060       105,089  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration, impairments and net (gain) loss on the disposition of assets

   $ 14,229     $ 2,568     $ (2,705   $ (8,060   $ 6,032  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

     3,286       1,538       142       465       5,431  

Amortization

     14       1,391       421       1       1,827  

Change in the estimated fair value of contingent earn-out consideration

     —         (2     —         —         (2

Impairment of indefinite-lived long-term assets other than goodwill

     16,994       —         260       —         17,254  

Impairment of goodwill

     184       10       105       8       307  

Net (gain) loss on the disposition of assets

     109       —         —         4       113  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (loss)

   $ (6,358   $ (369   $ (3,633   $ (8,538   $ (18,898
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2019

          

Net revenue

   $ 95,175     $ 20,200     $ 9,774     $ —       $ 125,149  

Operating expenses

     74,156       15,706       10,595       8,203       108,660  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and net (gain) loss on the disposition of assets

   $ 21,019     $ 4,494     $ (821   $ (8,203   $ 16,489  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Depreciation

     3,679       1,538       209       359       5,785  

Amortization

     18       1,978       423       1       2,420  

Net (gain) loss on the disposition of assets

     3,412       254       1       —         3,667  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income (loss)

   $ 13,910     $ 724     $ (1,454   $ (8,563   $ 4,617  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Broadcast     Digital
Media
    Publishing     Unallocated
Corporate
    Consolidated  
     (Dollars in thousands)  

As of June 30, 2020

          

Inventories, net

   $ —       $ —       $ 707     $ —       $ 707  

Property and equipment, net

     69,754       5,847       789       7,990       84,380  

Broadcast licenses

     320,864       —         —         —         320,864  

Goodwill

     2,746       19,499       1,446       —         23,691  

Other indefinite-lived intangible assets

     —         —         —         —         —    

Amortizable intangible assets, net

     254       4,262       757       1       5,274  

As of December 31, 2019

          

Inventories, net

   $ —       $ —       $ 717     $ —       $ 717  

Property and equipment, net

     72,816       6,127       801       7,929       87,673  

Broadcast licenses

     337,858       —         —         —         337,858  

Goodwill

     2,930       19,509       1,551       8       23,998  

Other indefinite-lived intangible assets

     —         —         260       —         260  

Amortizable intangible assets, net

     268       5,653       1,178       1       7,100  

NOTE 20. SUBSEQUENT EVENTS

Subsequent events reflect all applicable transactions through the date of the filing.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 the SEC. 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, the SEC.

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 ended December 31, 2019. 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 of this 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 (“COVID-19”) that 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,

 

   

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, and

 

   

the impact of regulatory rules or proceedings that may affect our business from time to time, and the future write off of any material portion of the fair value of our FCC broadcast licenses and goodwill.

Because these factors could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law.

Overview

We have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which also qualify as reportable segments. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assess the performance of each operating segment and determine the appropriate allocations of resources to each segment. We continually review our operating segment classifications to align with operational changes in our business and may make changes as necessary.

We measure and evaluate our operating segments based on operating income and operating expenses that exclude costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury. We also exclude costs such as amortization, depreciation, taxes and interest expense when evaluating the performance of our operating segments.

 

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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;

 

   

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 number of video and graphic downloads.

Our principal sources of publishing revenue include:

 

   

the sale of books and e-books;

 

   

publishing fees from authors;

 

   

the sale of digital advertising on our magazine websites and digital newsletters;

 

   

subscription fees for our print magazine; and

 

   

the sale of print magazine advertising.

In each of our operating segments, the rates we are able to charge for airtime, advertising and other products and services are dependent upon several factors, including:

 

   

audience share;

 

   

how well our programs and advertisements perform for our clients;

 

   

the size of the market and audience reached;

 

   

the number of impressions delivered;

 

   

the number of advertisements and programs streamed;

 

   

the number of page views achieved;

 

   

the number of downloads completed;

 

   

the number of events held, the number of event sponsorships sold and the attendance at each event;

 

   

demand for books and publications;

 

   

general economic conditions; and

 

   

supply and demand for airtime on a local and national level.

 

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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 to Nielsen Audio, which develops monthly reports measuring a radio station’s audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time available for block programming and/or advertising, which may vary at different times of the day.

Nielsen Audio uses the Portable People Meter TM (“PPM) technology to collect data for its ratings service. PPM is a small device that is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals encoded by the broadcaster. The PPM offers a number of advantages over traditional diary ratings collection systems, including ease of use, more reliable ratings data, shorter time periods between when advertising runs and actual listening data, and little manipulation of data by users. A disadvantage of the PPM includes data fluctuations from changes to the “panel” (a group of individuals holding PPM devices). This makes all stations susceptible to some inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time. We subscribe to Nielsen Audio for ratings services in only 22 of our markets.

As is typical in the radio broadcasting industry, 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. Additionally, we experience increased demand for advertising during election years by way of political advertisements. During election years, or even numbered years, we benefit from a significant increase in political advertising revenue 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. Quarterly block programming revenue tends not to vary significantly because program rates are generally set annually and recognized on a per program basis.

Our cash flows from broadcasting are affected by transitional periods experienced by radio stations when, based on the nature of the radio station, our plans for the market, and other circumstances, we find it beneficial to change the station format. During this transitional period, when we develop a radio station’s listener and customer base, the station may generate negative or insignificant cash flow.

In broadcasting, trade or barter agreements are commonly used to reduce cash expenses by exchanging advertising time for goods or services. We may enter barter agreements to exchange airtime or digital advertising for goods or services that can be used in our business or that can be sold to our audience under Listener Purchase Programs. The terms of these barter agreements permit us to preempt the barter airtime or digital campaign in favor of customers who purchase the airtime or digital campaign for cash. The value of these non-cash exchanges is included in revenue in an amount equal to the fair value of the goods or services we receive. Each transaction is reviewed to determine that the products, supplies and/or services we receive have economic substance, or value to us. We record barter operating expenses upon receipt and usage of the products, supplies and services, as applicable. We record barter revenue as advertising spots or digital campaigns are delivered, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Barter revenue is recorded on a gross basis unless an agency represents the programmer, in which case revenue is reported net of the commission retained by the agency. During the six-month period ended June 30, 2020, 98% of our broadcast revenue was sold for cash as compared to 97% during the same period of the prior year.

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

Web-based and digital content continues to be a focus of future development. Our digital media based businesses provide Christian, conservative, investing and health-themed content, e-commerce, audio and video streaming, and other resources digitally through the web. Revenues generated this segment are 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 revenues are 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 the Easter holiday is observed, as this holiday generates a higher volume of product downloads from our church product sites. Additionally, we experience increased demand for advertising time and placement during election years for political advertisements.

 

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Digital media 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, (iv) royalties, (v) streaming costs, and (vi) cost of goods sold associated with e-commerce sites.

Publishing

Our publishing operations include book publishing through Regnery® Publishing, a print magazine and our self-publishing services. Revenues generated from this segment are reported as publishing revenue in our Condensed Consolidated Financial Statements included in Part 1 of this quarterly report on Form 10-Q.

Publishing revenue is impacted by the number and the retail price of books and e-books sold, the number and rate of print magazine subscriptions sold, the rate and number of pages of advertisements sold in each print magazine, and the number and rate at which self-published books are published. Regnery® Publishing revenue is impacted by elections as it generates higher levels of interest and demand for publications containing conservative and political based opinions.

Publishing operating expenses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as lease costs and utilities, (iii) marketing and promotional expenses; and (iv) cost of goods sold that includes printing and production costs, fulfillment costs, author royalties and inventory reserves.

Known Trends and Uncertainties

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant economic downturn. We have experienced declining revenue from advertising, programming, events and book sales. Several advertisers have reduced or ceased advertising spend due to the outbreak and stay at home orders that effectively shut many businesses down. This was particularly true within our broadcast segment which derives substantial revenue from local advertisers who have been particularly hard hit due to social distancing and government interventions.

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring the COVID-19 situation and its impact in the markets we serve. Although advertising has improved toward the end of the second quarter of 2020, it remains significantly below the prior year. The exact timing and pace of the recovery is not determinable as certain markets have reopened, some of which have since experienced a resurgence of COVID-19 cases, resulting in varying degrees of reinstated stay at home orders. We are taking all precautionary safety measures as directed by health authorities and local and national governments. Due to continuing uncertainties regarding the ultimate scope and trajectory of COVID-19’s spread and evolution, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities continue to enforce restrictive measures, the material adverse effect on our business, results of operations, financial condition and cash flows could persist.

The maximum amount available under our ABL Facility declined from $26.0 million at March 31, 2020 to $23.2 million at June 30, 2020 of which $19.0 million was outstanding at June 30, 2020 compared to $14.0 million outstanding at March 31,2020. Future availability under our credit facility is contingent upon our eligible receivable balance that is negatively impacted by lower revenues and longer days to collect. Availability under the ABL 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. In response to these developments, beginning in March and continuing throughout the second quarter of 2020, we have implemented several measures to reduce costs and conserve cash to ensure that we have adequate cash to meet our debt servicing requirements, including:

 

   

limiting capital expenditures except for emergency-only requirements;

 

   

reducing all discretionary spending, including travel and entertainment;

 

   

eliminating open positions and freezing new hires;

 

   

reducing staffing levels;

 

   

implementing company-wide pay cuts ranging from 5%, 7.5% or 10% depending on salary level;

 

   

furloughing certain employees that are non-essential at this time;

 

   

temporarily suspending the company 401K match;

 

   

requesting rent concessions from landlords;

 

   

requesting discounts from vendors.

 

   

offering early payment discounts to certain customers in exchange for advance cash payments;

 

   

offering extended payment terms of up to 90 days to limit cancellations and entice new business;

 

   

considering sales-leaseback of owned facilities; and

 

   

suspending the payment of distributions on our common stock indefinitely .

 

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We reforecast our anticipated results extending through August 2021. Our reforecast includes the impact of certain of these cost-cutting measures. We may consider sales-leaseback of owned facilities if the adverse economic impact of the COVID-19 pandemic continues beyond 2020. Based on our current and expected economic outlook and our current and expected funding needs, we believe that the borrowing capacity under our current credit facilities allows us to meet our ongoing operating requirements, fund necessary capital expenditures and satisfy our debt service requirements for at least the next twelve months, including the working capital deficit at June 30, 2020. Based on our current assessment, we believe that we have the ability to meet our obligations as they come due for a year from the issuance of the financial statements in this Form 10Q.

We continue to review and consider any available potential benefit under the CARES Act for which we qualify. We cannot predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered and we cannot assure you that we will be able to access such benefits in a timely manner or at all. If the U.S. government or any other governmental authority agrees to provide such aid under the CARES Act or any other crisis relief assistance it may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

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 minimize the impact of these factors, we continue to enhance our digital assets to complement our broadcast content. The increase 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 revenues are particularly dependent on advertising from our Los Angeles and Dallas markets, which generated 11.3% and 8.9%, respectively, of our total net broadcast revenue during the six month period ended June 30, 2020 compared to 11.7% and 10.2%, respectively, of our total net broadcast revenue during the same period of the prior year.

Revenues from print magazines, including advertising revenue and subscription revenues, are challenged due to lower demand from audiences that increasingly use other mediums that deliver comparable information. Book sales are contingent upon overall economic conditions and our ability to attract and retain authors. Digital revenue is impacted by the nature and delivery of page views and the number of advertisements per page. Decreases in digital revenue streams could adversely affect our operating results, financial condition and results of operations. 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. Declines in desktop page views negatively impact revenue as mobile devices carry lower rates and less advertisement per page. To minimize the impact that any one of these areas could have, we continue to explore opportunities to cross-promote our brands and our content, and to strategically monitor costs.

Key Financial Performance Indicators – Same-Station Definition

In the discussion of our results of operations below, we compare our broadcast operating results between periods on an as-reported basis, which includes the operating results of all radio stations and networks owned or operated at any time during either period and on a Same Station basis. Same Station is a Non-GAAP financial measure used both in presenting our results to stockholders and the investment community as well as in our internal evaluations and management of the business. We believe that Same Station Operating Income provides a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of Same Station Operating Income is not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition of Same Station Operating Income is not necessarily comparable to similarly titled measures reported by other companies. Refer to “NON-GAAP FINANCIAL MEASURES” below for a reconciliation of these non-GAAP performance measures to the most comparable GAAP measures.

We define Same Station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We define Same Station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income for a full calendar year is calculated as the sum of the Same Station results for each of the four quarters of that year.

Non-GAAP Financial Measures

Management uses certain non-GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks and others to assist such parties in understanding the impact of various items on our financial statements. We use these non-GAAP financial measures to evaluate financial results, develop budgets, manage expenditures and as a measure of performance under compensation programs.

 

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Our presentation of these non-GAAP financial measures should not be considered as a substitute for or superior to the most directly comparable financial measures as reported in accordance with GAAP.

Item 10(e) of Regulation S-K defines and prescribes the conditions under which certain non-GAAP financial information may be presented in this report. We closely monitor EBITDA, Adjusted EBITDA, Station Operating Income (“SOI”), Same Station net broadcast revenue, Same Station broadcast operating expenses, Same Station Operating Income, Digital Media Operating Income, and Publishing Operating Loss, all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful information about our core operating results, and thus, are appropriate to enhance the overall understanding of our financial performance. These non-GAAP financial measures are intended to provide management and investors a more complete understanding of our underlying operational results, trends and performance.

The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate SOI. We define SOI as net broadcast revenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI. SOI is not a measure of performance calculated in accordance with GAAP. SOI should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of GAAP. We believe that SOI is a useful non-GAAP financial measure to investors when considered in conjunction with operating income (the most directly comparable GAAP financial measures to SOI), because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment and communications industries. SOI is commonly used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. We use SOI as one of the key measures of operating efficiency and profitability, including our internal reviews associated with impairment analysis of our indefinite-lived intangible assets. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition of SOI is not necessarily comparable to similarly titled measures reported by other companies.

We define Same Station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We define Same Station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income for a full calendar year is calculated as the sum of the Same Station-results for each of the four quarters of that year. We use Same Station Operating Income, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluations and management of the business. We believe that Same Station Operating Income provides a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of Same Station Operating Income is not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition of Same Station net broadcast revenue, Same Station broadcast operating expenses and Same Station Operating Income is not necessarily comparable to similarly titled measures reported by other companies.

We apply a similar methodology to our digital media and publishing group. Digital Media Operating Income is defined as net digital media revenue less digital media operating expenses. Publishing Operating Income (Loss) is defined as net publishing revenue less publishing operating expenses. Digital Media Operating Income and Publishing Operating Income (Loss) are not measures of performance in accordance with GAAP. Our presentation of these non-GAAP financial performance measures is 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 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 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.

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.

 

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We use non-GAAP financial measures to evaluate financial performance, develop budgets, manage expenditures, and determine employee compensation. Our presentation of this additional information is not to be considered as a substitute for or superior to the most directly comparable measures reported in accordance with GAAP.

Reconciliation of Non-GAAP Financial Measures:

In the tables below, we present a reconciliation of net broadcast revenue, the most comparable GAAP measure, to Same Station net broadcast revenue, and broadcast operating expenses, the most comparable GAAP measure to Same Station broadcast operating expense. We show our calculation of Station Operating Income and Same Station Operating Income, which is reconciled from net income, the most comparable GAAP measure in the table following our calculation of Digital Media Operating Income and Publishing Operating Income (Loss). Our presentation of these non-GAAP measures is not to be considered a substitute for or superior to the most directly comparable measures reported in accordance with GAAP.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2019      2020      2019      2020  
     (Dollars in thousands)  

Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue

 

Net broadcast revenue

   $ 49,082      $ 39,470      $ 95,175      $ 84,650  

Net broadcast revenue – acquisitions

     —                    —              

Net broadcast revenue – dispositions

     (1,557      (24      (3,014      (48

Net broadcast revenue – format change

     (621      (717      (1,213      (1,562
  

 

 

    

 

 

    

 

 

    

 

 

 

Same Station net broadcast revenue

   $ 46,904      $ 38,729      $ 90,948      $ 83,040  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses

 

Broadcast operating expenses

   $ 37,707      $ 33,094      $ 74,156      $ 70,421  

Broadcast operating expenses – acquisitions

     —          (1      —          (2

Broadcast operating expenses – dispositions

     (1,754      (27      (3,413      (110

Broadcast operating expenses – format change

     (670      (855      (1,316      (1,824
  

 

 

    

 

 

    

 

 

    

 

 

 

Same Station broadcast operating expenses

   $ 35,283      $ 32,211      $ 69,427      $ 68,485  
  

 

 

    

 

 

    

 

 

    

 

 

 

Reconciliation of Operating Income to Same Station Operating Income

 

Station Operating Income

   $ 11,375      $ 6,376      $ 21,019      $ 14,229  

Station operating loss –acquisitions

     —          1        —          2  

Station operating loss – dispositions

     197        3        399        62  

Station operating loss – format change

     49        138        103        262  
  

 

 

    

 

 

    

 

 

    

 

 

 

Same Station – Station Operating Income

   $ 11,621      $ 6,518      $ 21,521      $ 14,555  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 is not to be considered a substitute for or superior to the directly comparable measures reported in accordance with GAAP.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2019      2020      2019      2020  
     (Dollars in thousands)  

Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Loss

 

Net broadcast revenue

   $ 49,082      $ 39,470      $ 95,175      $ 84,650  

Less broadcast operating expenses

     (37,707      (33,094      (74,156      (70,421
  

 

 

    

 

 

    

 

 

    

 

 

 

Station Operating Income

   $ 11,375      $ 6,376      $ 21,019      $ 14,229  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net digital media revenue

   $ 9,960      $ 9,443      $ 20,200      $ 18,547  

Less digital media operating expenses

     (7,648      (7,653      (15,706      (15,979
  

 

 

    

 

 

    

 

 

    

 

 

 

Digital Media Operating Income

   $ 2,312      $ 1,790      $ 4,494      $ 2,568  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net publishing revenue

   $ 5,638      $ 3,958      $ 9,774      $ 7,924  

Less publishing operating expenses

     (5,773      (5,567      (10,595      (10,629
  

 

 

    

 

 

    

 

 

    

 

 

 

Publishing Operating Loss

   $ (135    $ (1,609    $ (821    $ (2,705
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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 is not to be considered a substitute for or superior to the most directly comparable measures reported in accordance with GAAP.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2019      2020      2019      2020  
     (Dollars in thousands)  

Reconciliation of Net Loss to Operating Income and Station Operating Income, Digital Media Operating Income and Publishing Operating Loss

 

Net loss

   $ (3,644    $ (2,515    $ (3,322    $ (57,719

Plus provision for (benefit from) income taxes

     4,892        (2,380      (411      30,779  

Plus net miscellaneous income and (expenses)

     (18      (6      (19      46  

Plus (gain) on early retirement of long-term debt

     —          —          (426      (49

Plus interest expense, net of capitalized interest

     4,371        4,013        8,796        8,045  

Less interest income

     —          —          (1      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net operating income (loss)

   $ 5,601      $ (888    $ 4,617      $ (18,898
  

 

 

    

 

 

    

 

 

    

 

 

 

Plus net (gain) loss on the disposition of assets

     (357      34        3,667        113  

Plus change in the estimated fair value of contingent earn-out

consideration

     —          3        —          (2

Plus impairment of indefinite-lived long-term assets other than

goodwill

     —          —          —          17,254  

Plus impairment of goodwill

     —          —          —          307  

Plus depreciation and amortization

     3,976        3,558        8,205        7,258  

Plus unallocated corporate expenses

     4,332        3,850        8,203        8,060  
  

 

 

    

 

 

    

 

 

    

 

 

 

Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Loss

   $ 13,552      $ 6,557      $ 24,692      $ 14,092  
  

 

 

    

 

 

    

 

 

    

 

 

 

Station Operating Income

   $ 11,375      $ 6,376      $ 21,019      $ 14,229  

Digital Media Operating Income

     2,312        1,790        4,494        2,568  

Publishing Operating Loss

     (135      (1,609      (821      (2,705
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 13,552      $ 6,557      $ 24,692      $ 14,092  
  

 

 

    

 

 

    

 

 

    

 

 

 

In the table below, we present a reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss), the most directly comparable GAAP measure. EBITDA and Adjusted EBITDA are non-GAAP financial performance measures that are not to be considered a substitute for or superior to the most directly comparable measures reported in accordance with GAAP.

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2019      2020      2019      2020  
     (Dollars in thousands)  

Reconciliation of Adjusted EBITDA to EBITDA to Net Loss

 

Net loss

   $ (3,644    $ (2,515    $ (3,322    $ (57,719

Plus interest expense, net of capitalized interest

     4,371        4,013        8,796        8,045  

Plus provision for (benefit from) income taxes

     4,892        (2,380      (411      30,779  

Plus depreciation and amortization

     3,976        3,558        8,205        7,258  

Less interest income

     —          —          (1      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

EBITDA

   $ 9,595      $ 2,676      $ 13,267      $ (11,637
  

 

 

    

 

 

    

 

 

    

 

 

 

Plus net (gain) loss on the disposition of assets

     (357      34        3,667        113  

Plus change in the estimated fair value of contingent earn-out consideration

     —          3        —          (2

Plus impairment of indefinite-lived long-term assets other than goodwill

     —          —          —          17,254  

Plus impairment of goodwill

     —          —          —          307  

Plus net miscellaneous (income) and expenses

     (18      (6      (19      46  

Plus (gain) on early retirement of long-term debt

     —          —          (426      (49

Plus non-cash stock-based compensation

     936        96        1,112        199  

Plus ASC 842 lease adoption

     —          —          171        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 10,156      $ 2,803      $ 17,772      $ 6,231  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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RESULTS OF OPERATIONS

Three months ended June 30, 2020 compared to the three months ended June 30, 2019

The following factors affected our results of operations and cash flows for the three months ended June 30, 2020 as compared to the same period of the prior year:

Acquisitions, Divestitures and Other Transactions

Based on the timing of these transactions, our consolidated financial statements for the three months ended June 30, 2020 do not reflect the net revenues, operating expenses, depreciation and amortization expenses of the divested entities, whereas our consolidated financial statements for the three months ended June 30, 2019 do reflect the net revenues, operating expenses, depreciation and amortization expenses of the divested entities. Likewise, our condensed consolidated financial statements for the three months ended June 30, 2020 reflect the net revenues, operating expenses, depreciation and amortization expenses of acquired entities, whereas our condensed consolidated financial statements for the three months ended June 30, 2019 do not reflect the net revenues, operating expenses, depreciation and amortization expenses of acquired entities.

 

   

On November 14, 2019, we sold nine radio stations, WAFS-AM in Atlanta, Georgia, WWDJ-AM in Boston, Massachusetts, WHKZ-AM in Cleveland, Ohio, KEXB-AM (formerly KTNO-AM) in Dallas, Texas, KDMT-AM in Denver, Colorado, KTEK-AM in Houston, Texas, KRDY-AM in San Antonio, Texas and KXFN-AM and WSDZ-AM in St. Louis, Missouri for $8.7 million in cash.

 

   

On September 26, 2019, we sold four radio stations, WWMI-AM and WLCC-AM in Tampa, Florida and WZAB-AM and WOCN-AM (formerly WKAT-AM) in Miami, Florida for $8.2 million in cash.

 

   

On September 18, 2019, we sold radio station WDYZ-AM (formerly WORL-AM) in Orlando, Florida for $0.9 million in cash.

 

   

On July 25, 2019, we acquired the Journeyboxmedia.com website and related assets for $0.5 million in cash.

 

   

On July 10, 2019 we acquired certain assets including a digital content library from Steelehouse Productions, Inc. for $0.1 million in cash.

 

   

On June 6, 2019, we acquired InvestmentHouse.com website and related financial newsletter assets for $0.6 million in cash.

 

   

On May 14, 2019, we sold radio station WSPZ-AM (previously WWRC-AM) in Washington D.C. for $0.8 million in cash. The buyer began programming the station on April 12, 2019 under a TBA.

Net Broadcast Revenue

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)           % of Total Net Revenue  

Net Broadcast Revenue

   $ 49,082      $ 39,470      $ (9,612     (19.6 )%      75.9     74.7

Same Station Net Broadcast Revenue

   $ 46,904      $ 38,729      $ (8,175     (17.4 )%     

The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.

 

     Three Months Ended June 30,  
     2019     2020  
     (Dollars in thousands)  

Block Programming:

          

National

   $  12,086        24.6   $  11,770        29.8

Local

     7,410        15.1     5,632        14.3
  

 

 

    

 

 

   

 

 

    

 

 

 
     19,496        39.7     17,402        44.1

Broadcast Advertising:

          

National

     4,088        8.3     2,587        6.6

Local

     13,624        27.8     7,788        19.7
  

 

 

    

 

 

   

 

 

    

 

 

 
     17,712        36.1     10,375        26.3

Station Digital (local)

     3,672        7.5     5,655        14.3

Infomercials

     361        0.7     228        0.6

Network

     4,955        10.1     4,226        10.7

Other Revenue

     2,886        5.9     1,584        4.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Broadcast Revenue

   $ 49,082        100.0   $ 39,470        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Block programming revenue declined by $2.1 million, including a $1.8 million decline in local programming revenue and a $0.3 million decline in national programming revenue. Stations sold during 2019 accounted for $0.8 million of the decline in local programming and $0.1 million of the decline in national programming. Station sales, once announced, negatively impact our ability

 

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to enter sales contracts with customers. The remainder of the decline was due to certain local programmers discontinuing their ministry efforts, sports programming that was cancelled due to the COVID-19 pandemic and competition from other broadcasters and podcasts that resulted in lost programs and lower rates.

Advertising revenue, net of agency commissions, declined by $7.3 million, $7.4 million net of political, including a $5.9 million decline in local advertising net of political and a $1.5 million decline in national advertising revenue net of political. Local advertising net of political, declined by $2.7 million on our Contemporary Christian Music format radio stations due to lower spot rates charged to compete with other broadcasters that offered lower rates, primarily in the Dallas, Atlanta and Los Angeles markets, $1.1 million on our Christian Teaching and Talk format radio stations and $1.3 million on our News Talk format radio stations. The remainder of the decline was due to the impact of stations sold during 2019 and the impact of cancellations due to the COVID-19 pandemic.

Local digital revenue, or digital revenue generated from our radio stations and networks, increased by $2.0 million due to the growth of digital product offerings through Salem Surround, our national multimedia digital advertising agency providing digital marketing services to our customers and SalemNOW, a recently launched on-demand pay-per-view video steaming platform which contributed $1.5 million of the $2.0 million growth in revenue during the three months ended June 30, 2020. Our product offerings include social media campaigns, search engine optimization, retargeted advertising, and other services intended to increase our market share as advertising dollars shift away from pure broadcast to include digital and digital technologies. 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 digital, decreased by $0.7 million due to a $0.8 million declines in national advertising revenue offset by a $0.1 million increase in political advertising.

Other revenue declined by $1.3 million including an $0.8 million decline from the absence of live events due to the COVID-19 pandemic and a $0.5 million decline in listener purchase program revenue from lower listener participation.

On a Same Station basis, net broadcast revenue decreased $8.2 million, which reflects these items net of the impact of stations with acquisitions, dispositions and format changes.

Net Digital Media Revenue

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)           % of Total Net Revenue  

Net Digital Media Revenue

   $ 9,960      $ 9,443      $ (517     (5.2 )%      15.4     17.9

The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.

 

     Three Months Ended June 30,  
     2019     2020         
     (Dollars in thousands)         

Digital Advertising, net

   $ 4,999        50.2   $ 4,547        48.2

Digital Streaming

     970        9.7       853        9.0  

Digital Subscriptions

     1,987        20.0       2,157        22.8  

Digital Downloads

     1,689        17.0       1,802        19.1  

e-commerce

     33        0.3       27        0.3  

Other Revenues

     282        2.8       57        0.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Digital Media Revenue

   $ 9,960        100.0   $ 9,443        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Digital advertising revenue, net of agency commissions, or national digital revenue declined by $0.4 million on a consolidated basis including a $0.6 million decline from Salem Web Network that was offset by a $0.1 million net increase from our conservative opinion websites within Townhall Media and a $0.1 million increase Eagle Financial Publications. Declines in national digital are attributable to a loss of advertisers who moved advertising spending to digital programmatic advertisers, such as Facebook and Google, lower programmatic advertising rates and to a loss of advertisers who reduced or eliminated advertising on political-content websites such as ours. We continue to acquire, develop and promote the use of mobile applications, particularly for our Christian mobile applications, to reduce our dependency on page views from digital programmatic advertisers. Mobile page views carry fewer advertisements and tend to have shorter site visits as compared to desktop. As a result, our growth in mobile page views exceeds our growth in revenue from the mobile applications.

 

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Digital streaming revenue decreased $0.1 million as compared to the prior year based on lower demand for content available from our Christian websites. There were no significant changes in sales volume or rates as compared to the prior year.

Digital subscription revenue increased $0.2 million on a consolidated basis including a $0.2 million increase in revenue from the launch of Townhall Media’s Townhall VIP, a new subscription service, and a $0.1 million increase from our June 2019 acquisition of InvesmentHouse.com that was offset by a $0.1 million decrease in revenues from Salem Web Network related to Christianjobs.com and Churchstaffing.com.

Digital download revenue increased by $0.1 million from our church product websites, WorshipHouseMedia.com and SermonSpiceTM.com. There were no significant changes in rates as compared to the prior year.

E-commerce revenue remained consistent as compared to the same period of the prior year.

Other revenue includes revenue sharing arrangements for mobile applications and mail list rentals. We recognized revenue of $0.2 million in 2019 related to transfer services provided to the buyer of Newport Natural Health. There were no changes in volume or rates as compared to the prior year.

Net Publishing Revenue

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)    

 

    % of Total Net Revenue  

Net Publishing Revenue

   $ 5,638      $ 3,958      $ (1,680     (29.8 )%      8.7     7.5

The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.

 

     Three Months Ended June 30,  
     2019     2020  
     (Dollars in thousands)  

Book Sales

   $ 4,747        84.2   $ 2,698        68.2

Estimated Sales Returns & Allowances

     (1,417      (25.1     (560      (14.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Book Sales

     3,330        59.1       2,138        54.1  

E-Book Sales

     306        5.4       250        6.3  

Self-Publishing Fees

     1,248        22.1       1,051        26.5  

Print Magazine Subscriptions

     192        3.4       174        4.4  

Print Magazine Advertisements

     145        2.6       91        2.3  

Digital Advertising

     97        1.7       52        1.3  

Other Revenue

     320        5.7       202        5.1  
  

 

 

    

 

 

   

 

 

    

 

 

 

Net Publishing Revenue

   $ 5,638        100.0   $ 3,958        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Net book sales declined by $1.2 million due to a lower volume of sales from Regnery Publishing and Salem Author Services. Regnery Publishing book sales reflect a 9% decrease in the average price per unit sold and a 42% decrease in volume due to a majority of book stores in the country being closed due to the COVID-19 pandemic and Amazon’s decision to prioritize the shipment of essential products over the shipment of books. Historically, book sales through Regnery Publishing are directly attributable to the number of titles released each period and the composite mix of titles available. Revenues 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 $0.9 million to the estimated sales returns and allowances reflects the lower number of print books sold through Regnery Publishing. The decline in book sales from Salem Author Services was due to authors choosing not to buy books because they could not be promoted at live events. There were no significant changes in sale prices as compared to the prior year.

Regnery Publishing e-book sales decreased by $0.1 million with a 7% decrease in sales volume offset by a 17% increase in the average price per unit sold from sales incentives. E-book sales can also vary based on the composite mix of titles released and available in each period. Revenues 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 decreased $0.2 million due a decline in the number of authors with rates charged that were comparable to the prior year.

Declines in print magazine subscription revenues and advertising revenues reflect lower consumer demand and distribution levels. There were no significant changes in rates over the prior year.

Digital adverting revenue from Regnery® Publishing websites declined due to a lower demand due to the COVID-19 pandemic closing bookstores with rates comparable to the same period of the prior year.

 

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Other revenue includes change fees, video trailers, and subright revenue for foreign translation and audio books for original published titles from Regnery publishing. Subright revenue declined $0.1 million due to lower demand.

Broadcast Operating Expenses

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)           % of Total Net Revenue  

Broadcast Operating Expenses

   $ 37,707      $ 33,094      $ (4,613     (12.2 )%      58.3     62.6

Same Station Broadcast Operating Expenses

   $ 35,283      $ 32,211      $ (3,072     (8.7 )%     

Broadcast operating expenses decreased by $4.6 million reflecting cost savings of $6.2 million offset by a $1.6 million increase in costs associated with Salem Surround and SalemNOW, our new on-demand pay-per-view video steaming platform. The decrease in broadcast operating expense of $6.2 million reflects several cost cutting measures implemented during the second quarter of 2020 in response to the economic impact of the COVID-19 pandemic. Cost reductions include pay cuts, layoffs and furloughs that contributed to a $3.1 million decline in employee-related costs, a $1.7 million decrease in discretionary advertising spending, a $0.5 million decline in travel and entertainment, a $0.5 million decrease in facility-related expenses, a $0.4 million decrease in non-cash stock-based compensation associated with restricted stock awards, a $0.2 million decrease in professional services, a $0.1 million decrease in production and programming expenses and a $0.1 million decrease in lease expense that was partially offset by a $0.6 million increase in bad debt expense. Broadcast operating expenses increased to 62.6% of total revenue from 58.3% of total revenue due to revenue declines associated with COVID-19 in excess of cost reductions to date.

On a same-station basis, broadcast operating expenses decreased by $3.1 million. The decrease in broadcast operating expenses on a same station basis reflects the above described items net of the impact of start-up costs associated with acquisitions, station dispositions and format changes.

Digital Media Operating Expenses

 

     Three Months Ended June 30,  
     2019      2020      Change $      Change %     2019     2020  
     (Dollars in thousands)            % of Total Net Revenue  

Digital Media Operating Expenses

   $ 7,648      $ 7,653      $ 5        0.1     11.8     14.5

The increase in digital media operating expenses includes a $0.2 million increase in cost of sales, a $0.1 million increase in royalties and a $0.1 million increase in professional services offset by a $0.2 million decrease in streaming and hosting fees, a $0.1 million decrease in employee-related expenses and a $0.1 million decrease in advertising and promotional expenses.

Publishing Operating Expenses

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)           % of Total Net Revenue  

Publishing Operating Expenses

   $ 5,773      $ 5,567      $ (206     (3.6 )%      8.9     10.5

Publishing operating expenses decreased by $0.2 million, including a $0.3 million decrease in payroll-related costs offset by a $0.6 million increase in bad debt expense and a $0.2 million increase in royalty expense reflecting an increase in the reserve for royalty advances based on lower sales. Cost of goods sold decreased $0.8 million including a $0.6 million decrease from print books sold by Regnery® Publishing and a $0.2 million decline from Salem Author Services due to a lower volume of book sales. The gross profit margin for Regnery Publishing was 32% for the three months ended June 30, 2020 as compared to 53% for the same period of the prior year as sales volume decreased with smaller savings in material costs. 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 70% from 65% due to lower paper costs for print book sales.

Unallocated Corporate Expenses

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020  
     (Dollars in thousands)           % of Total Net Revenue  

Unallocated Corporate Expenses

   $ 4,332      $ 3,850      $ (482     (11.1 )%      6.7     7.3

 

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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 decrease of $0.5 million includes a $0.4 million decrease in non-cash stock-based compensation associated with restricted stock awards, a $0.2 million decrease in payroll-related expenses due to company-wide pay cuts, and a $0.1 million decrease from travel related expenses due to the COVID-19 pandemic offset by a $0.3 million increase in expense associated with the cash surrender value of split dollar life insurance.

Depreciation Expense

 

     Three Months Ended June 30,  
     2019      2020      Change $     Change %     2019     2020