2021 EXECUTIVE OFFICES) (469) Yes ☐ Yes ☐ ☐ Yes ☒x☒2017¨☐
INCORPORATION OR ORGANIZATION) 77-0121400 4880 SANTA ROSA ROADCAMARILLO, CALIFORNIA 93012(805) 987-0400x ☒ No¨ and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulationand post such files.)x ☒ No¨Large accelerated filer ¨☐ Accelerated filer xEmerging Growth Company ¨☐ Non-accelerated filer ¨☒ Smaller Reporting Company ¨☒ (Do not check if a Smaller Reporting Company) Emerging Growth Company ☐ ¨¨ ☐ NoxClass A Outstanding at November 3, 20172, 2021Common Stock, $0.01 par value per share 20,609,55121,431,824 sharesClass B Outstanding at November 3, 20172, 2021Common Stock, $0.01 par value per share 5,553,696 shares
| PAGE NO. | ||||
| 3 | ||||
| 4 | ||||
| 34 | ||||
| 61 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 62 | ||||
| 63 | ||||
ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) |
| December 31, 2016 (Note 1) | September 30, 2017 (Unaudited) | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 130 | $ | 4 | ||||
| Trade accounts receivable (net of allowances of $10,420 in 2016 and $10,627 in 2017) | 37,260 | 35,862 | ||||||
| Other receivables (net of allowances of $260 in 2016 and $145 in 2017 ) | 751 | 990 | ||||||
| Inventories (net of reserves of $2,226 in 2016 and $1,611 in 2017) | 670 | 809 | ||||||
| Prepaid expenses | 6,287 | 7,288 | ||||||
| Deferred income taxes - current | 9,411 | — | ||||||
| Total current assets | 54,509 | 44,953 | ||||||
| Notes receivable (net of allowance of $564 in 2016 and $794 in 2017) | 65 | 92 | ||||||
| Land held for sale | 1,000 | 1,000 | ||||||
| Property and equipment (net of accumulated depreciation of $156,024 in 2016 and $161,848 in 2017) | 102,790 | 102,203 | ||||||
| Broadcast licenses | 388,517 | 388,720 | ||||||
| Goodwill | 25,613 | 26,436 | ||||||
| Other indefinite-lived intangible assets | 332 | 313 | ||||||
| Amortizable intangible assets (net of accumulated amortization of $44,488 in 2016 and $46,007 in 2017) | 14,408 | 14,276 | ||||||
| Deferred financing costs | 82 | 549 | ||||||
| Deferred income taxes – non-current | — | 1,877 | ||||||
| Other assets | 2,952 | 3,205 | ||||||
| Total assets | $ | 590,268 | $ | 583,624 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 4,968 | $ | 3,721 | ||||
| Accrued expenses | 15,658 | 12,427 | ||||||
| Accrued compensation and related expenses | 8,133 | 9,865 | ||||||
| Accrued interest | 77 | 6,481 | ||||||
| Current portion of deferred revenue | 9,491 | 10,835 | ||||||
| Income taxes payable | 223 | 174 | ||||||
| Current portion of long-term debt and capital lease obligations | 590 | 6,741 | ||||||
| Total current liabilities | 39,140 | 50,244 | ||||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion | 261,084 | 249,375 | ||||||
| Fair value of interest rate swap | 514 | — | ||||||
| Deferred income taxes | 60,769 | 54,644 | ||||||
| Deferred rent expense | 9,596 | 9,633 | ||||||
| Deferred revenue less current portion | 5,252 | 6,427 | ||||||
| Other long-term liabilities | 67 | 64 | ||||||
| Total liabilities | 376,422 | 370,387 | ||||||
| Commitments and contingencies (Note 18) | ||||||||
| Stockholders’ Equity: | ||||||||
| Class A common stock, $0.01 par value; authorized 80,000,000 shares; 22,593,130 and 22,927,201 issued and 20,275,480 and 20,609,551 outstanding at December 31, 2016 and September 30, 2017, respectively | 226 | 227 | ||||||
| Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2016 and September 30, 2017 | 56 | 56 | ||||||
| Additional paid-in capital | 243,607 | 245,800 | ||||||
| Accumulated earnings | 3,963 | 1,160 | ||||||
| Treasury stock, at cost (2,317,650 shares at December 31, 2016 and September 30, 2017) | (34,006 | ) | (34,006 | ) | ||||
| Total stockholders’ equity | 213,846 | 213,237 | ||||||
| Total liabilities and stockholders’ equity | $ | 590,268 | $ | 583,624 | ||||
See accompanying notes
| December 31, 2020 (Note 1) | September 30, 2021 (Unaudited) | |||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 6,325 | $ | 23,781 | ||||
| Trade accounts receivable (net of allowances of $14,069 in 2020 and $11,680 in 2021) | 24,469 | 24,429 | ||||||
| Unbilled revenue | 3,192 | 3,300 | ||||||
| Other receivables (net of allowances of $124 in 2020 and $455 in 2021) | 1,122 | 1,589 | ||||||
| Inventories | 495 | 907 | ||||||
| Prepaid expenses | 6,847 | 7,970 | ||||||
| Assets held for sale | 3,346 | 1,875 | ||||||
| Total current assets | 45,796 | 63,851 | ||||||
| Notes receivable (net of allowance of $461 in 2020 and $996 in 2021) | 721 | 364 | ||||||
| Property and equipment (net of accumulated depreciation of $180,336 in 2020 and $185,127 in 2021) | 79,122 | 78,425 | ||||||
Operating lease right-of-use | 48,203 | 44,100 | ||||||
Financing lease right-of-use | 152 | 121 | ||||||
| Broadcast licenses | 319,773 | 320,008 | ||||||
| Goodwill | 23,757 | 23,986 | ||||||
| Amortizable intangible assets (net of accumulated amortization of $58,897 in 2020 and $57,769 in 2021) | 4,017 | 2,785 | ||||||
| Deferred financing costs | 213 | 895 | ||||||
| Other assets | 2,817 | 3,678 | ||||||
| Total assets | $ | 524,571 | $ | 538,213 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 2,006 | $ | 2,180 | ||||
| Accrued expenses | 11,002 | 11,740 | ||||||
| Accrued compensation and related expenses | 10,242 | 10,752 | ||||||
| Accrued interest | 1,225 | 2,750 | ||||||
| Contract liabilities | 11,652 | 11,561 | ||||||
| Deferred rent income | 147 | 114 | ||||||
| Income taxes payable | 563 | 626 | ||||||
| Current portion of operating lease liabilities | 8,963 | 8,604 | ||||||
| Current portion of financing lease liabilities | 60 | 59 | ||||||
| Current portion of long-term debt | 5,000 | 0 | ||||||
| Total current liabilities | 50,860 | 48,386 | ||||||
| Long-term debt, less current portion | 213,764 | 208,559 | ||||||
| Operating lease liabilities, less current portion | 47,740 | 43,180 | ||||||
| Financing (capital) lease liabilities, less current portion | 107 | 79 | ||||||
| Deferred income taxes | 68,883 | 69,287 | ||||||
| Contract liabilities, long-term | 1,869 | 2,081 | ||||||
| Deferred rent income, less current portion | 3,864 | 3,795 | ||||||
| Other long-term liabilities | 2,205 | 2,248 | ||||||
| Total liabilities | 389,292 | 377,615 | ||||||
| Commitments and contingencies (Note 14) | 0 | 0 | ||||||
| Stockholders’ Equity: | ||||||||
| Class A common stock, $0.01 par value; authorized 80,000,000 shares; 23,447,317 and 23,639,824 issued and 21,129,667 and 21,322,174 outstanding at December 31, 2020 and September 30, 2021, respectively | 227 | 229 | ||||||
| Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2020 and September 30, 2021, respectively | 56 | 56 | ||||||
Additional paid-in capital | 247,025 | 247,668 | ||||||
| Accumulated deficit | (78,023 | ) | (53,349 | ) | ||||
| Treasury stock, at cost (2,317,650 shares at December 31, 2020 and September 30, 2021) | (34,006 | ) | (34,006 | ) | ||||
| Total stockholders’ equity | 135,279 | 160,598 | ||||||
| Total liabilities and stockholders’ equity | $ | 524,571 | $ | 538,213 | ||||
See accompanying notes | ||||||||
(Unaudited)
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| Net broadcast revenue | $ | 51,052 | $ | 48,424 | $ | 149,768 | $ | 145,479 | ||||||||
| Net digital media revenue | 11,999 | 10,446 | 34,056 | 31,998 | ||||||||||||
| Net publishing revenue | 8,221 | 6,563 | 19,802 | 19,048 | ||||||||||||
| Total net revenue | 71,272 | 65,433 | 203,626 | 196,525 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $412 and $431 for the three months ended September 30, 2016 and 2017, respectively, and $1,231 and $1,284 for the nine months ended September 30, 2016 and 2017, respectively, paid to related parties) | 37,434 | 37,040 | 109,455 | 108,807 | ||||||||||||
| Digital media operating expenses, exclusive of depreciation and amortization shown below | 9,172 | 8,169 | 26,815 | 25,241 | ||||||||||||
| Publishing operating expenses, exclusive of depreciation and amortization shown below | 8,020 | 6,686 | 19,951 | 18,705 | ||||||||||||
| Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $147 and $98 for the three months ended September 30, 2016 and 2017, respectively, and $254 and $218 for the nine months ended September 30, 2016 and 2017, respectively, paid to related parties) | 4,147 | 4,233 | 11,928 | 13,183 | ||||||||||||
| Depreciation | 2,976 | 3,082 | 8,950 | 9,171 | ||||||||||||
| Amortization | 1,341 | 1,135 | 3,673 | 3,420 | ||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | (196 | ) | (12 | ) | (458 | ) | (54 | ) | ||||||||
| Impairment of long-lived assets | — | — | 700 | — | ||||||||||||
| Impairment of indefinite-lived long-term assets other than goodwill | — | — | — | 19 | ||||||||||||
| Net (gain) loss on the sale or disposal of assets | (457 | ) | 95 | (2,008 | ) | (410 | ) | |||||||||
| Total operating expenses | 62,437 | 60,428 | 179,006 | 178,082 | ||||||||||||
| Operating income | 8,835 | 5,005 | 24,620 | 18,443 | ||||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 1 | 1 | 4 | 3 | ||||||||||||
| Interest expense | (3,726 | ) | (4,802 | ) | (11,252 | ) | (12,156 | ) | ||||||||
| Change in the fair value of interest rate swap | 856 | — | (1,325 | ) | 357 | |||||||||||
| Loss on early retirement of long-term debt | (18 | ) | — | (32 | ) | (2,775 | ) | |||||||||
| Net miscellaneous income and (expenses) | 7 | (80 | ) | 7 | (80 | ) | ||||||||||
| Net income before income taxes | 5,955 | 124 | 12,022 | 3,792 | ||||||||||||
| Provision for income taxes | 3,763 | 170 | 6,121 | 1,506 | ||||||||||||
| Net income (loss) | $ | 2,192 | $ | (46 | ) | $ | 5,901 | $ | 2,286 | |||||||
| Basic earnings (loss) per share data: | ||||||||||||||||
| Basic earnings (loss) per share | $ | 0.08 | $ | — | $ | 0.23 | $ | 0.09 | ||||||||
| Diluted earnings (loss) per share data: | ||||||||||||||||
| Diluted earnings (loss) per share | $ | 0.08 | $ | — | $ | 0.23 | $ | 0.09 | ||||||||
| Distributions per share | $ | 0.07 | $ | 0.07 | $ | 0.20 | $ | 0.20 | ||||||||
| Basic weighted average shares outstanding | 25,815,242 | 26,144,796 | 25,617,307 | 26,036,333 | ||||||||||||
| Diluted weighted average shares outstanding | 26,183,182 | 26,144,796 | 26,012,930 | 26,454,923 | ||||||||||||
See accompanying notes
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
| Net broadcast revenue | $ | 45,391 | $ | 49,591 | $ | 130,041 | $ | 140,422 | ||||||||
| Net digital media revenue | 9,808 | 10,645 | 28,355 | 30,603 | ||||||||||||
| Net publishing revenue | 5,442 | 5,747 | 13,366 | 18,093 | ||||||||||||
| Total net revenue | 60,641 | 65,983 | 171,762 | 189,118 | ||||||||||||
| Operating expenses: | ||||||||||||||||
| Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $447 and $480 for the three months ended September 30, 2020 and 2021, respectively, and $1,313 and $1,369 for the nine months ended September 30, 2020 and 2021, respectively, paid to related parties) | 34,283 | 37,463 | 104,704 | 106,968 | ||||||||||||
| Digital media operating expenses, exclusive of depreciation and amortization shown below | 7,144 | 8,269 | 23,123 | 25,280 | ||||||||||||
| Publishing operating expenses, exclusive of depreciation and amortization shown below | 5,814 | 5,213 | 16,443 | 16,844 | ||||||||||||
| Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $18 and $0 for the three months ended September 30, 2020 and 2021, respectively, and $198 and $5 for the nine months ended September 30, 2020 and 2021, respectively, paid to related parties) | 3,849 | 4,284 | 11,909 | 12,764 | ||||||||||||
| Debt modification costs | — | 2,347 | — | 2,347 | ||||||||||||
| Depreciation | 2,677 | 2,788 | 8,108 | 8,118 | ||||||||||||
| Amortization | 751 | 427 | 2,578 | 1,553 | ||||||||||||
Change in the estimated fair value of contingent earn-out consideration | (10 | ) | — | (12 | ) | — | ||||||||||
| Impairment of indefinite-lived long-term assets other than goodwill | — | — | 17,254 | — | ||||||||||||
| Impairment of goodwill | — | — | 307 | — | ||||||||||||
| Net (gain) loss on the disposition of assets | 1,381 | (10,607 | ) | 1,494 | (10,552 | ) | ||||||||||
| Total operating expenses | 55,889 | 50,184 | 185,908 | 163,322 | ||||||||||||
| Operating income (loss) | 4,752 | 15,799 | (14,146 | ) | 25,796 | |||||||||||
| Other income (expense): | ||||||||||||||||
| Interest income | 1 | — | 1 | 1 | ||||||||||||
| Interest expense | (4,024 | ) | (4,026 | ) | (12,069 | ) | (11,887 | ) | ||||||||
| Gain on the forgiveness of PPP loans | — | 11,212 | — | 11,212 | ||||||||||||
| Gain (loss) on the early retirement of long-term debt | — | (56 | ) | 49 | (56 | ) | ||||||||||
| Net miscellaneous income and (expenses) | 1 | 2 | (45 | ) | 87 | |||||||||||
| Net income (loss) before income taxes | 730 | 22,931 | (26,210 | ) | 25,153 | |||||||||||
| Provision for income taxes | 401 | 837 | 31,180 | 479 | ||||||||||||
| Net income (loss) | $ | 329 | $ | 22,094 | $ | (57,390 | ) | $ | 24,674 | |||||||
| Basic income (loss) per share data: | ||||||||||||||||
| Basic income (loss) per share | $ | 0.01 | $ | 0.82 | $ | (2.15 | ) | $ | 0.92 | |||||||
| Diluted income (loss) per share data: | ||||||||||||||||
| Diluted income (loss) per share | $ | 0.01 | $ | 0.81 | $ | (2.15 | ) | $ | 0.91 | |||||||
| Basic weighted average shares outstanding | 26,683,363 | 26,870,664 | 26,683,363 | 26,825,483 | ||||||||||||
| Diluted weighted average shares outstanding | 27,791,353 | 27,280,949 | 26,683,363 | 27,217,382 | ||||||||||||
See accompanying notes | ||||||||||||||||
Class A | Class B | |||||||||||||||||||||||||||||||
Common Stock | Common Stock | Additional | ||||||||||||||||||||||||||||||
Paid-In | Accumulated | Treasury | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | 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 | ||||||||||||||||
| Stock-based compensation | — | — | — | — | 74 | — | — | 74 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 329 | — | 329 | ||||||||||||||||||||||||
Stockholders’ equity, September 30, 2020 | 23,447,317 | $ | 227 | 5,553,696 | $ | 56 | $ | 246,953 | $ | (81,351 | ) | $ | (34,006 | ) | $ | 131,879 | ||||||||||||||||
Class A | Class B | |||||||||||||||||||||||||||||||
Common Stock | Common Stock | Additional | ||||||||||||||||||||||||||||||
Paid-In | Accumulated | Treasury | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Deficit | Stock | Total | |||||||||||||||||||||||||
Stockholders’ equity, December 31, 2020 | 23,447,317 | $ | 227 | 5,553,696 | $ | 56 | $ | 247,025 | $ | (78,023 | ) | $ | (34,006 | ) | $ | 135,279 | ||||||||||||||||
| Stock-based compensation | — | — | — | — | 78 | — | — | 78 | ||||||||||||||||||||||||
| Options exercised | 185,782 | 2 | — | — | 390 | — | — | 392 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 323 | — | 323 | ||||||||||||||||||||||||
Stockholders’ equity, March 31, 2021 | 23,633,099 | $ | 229 | 5,553,696 | $ | 56 | $ | 247,493 | $ | (77,700 | ) | $ | (34,006 | ) | $ | 136,072 | ||||||||||||||||
| Stock-based compensation | — | — | — | — | 84 | — | — | 84 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 2,257 | — | 2,257 | ||||||||||||||||||||||||
Stockholders’ equity, June 30, 2021 | 23,633,099 | $ | 229 | 5,553,696 | $ | 56 | $ | 247,577 | $ | (75,443 | ) | $ | (34,006 | ) | $ | 138,413 | ||||||||||||||||
| Stock-based compensation | — | — | — | — | 78 | — | — | 78 | ||||||||||||||||||||||||
| Options exercised | 6,725 | — | — | — | 13 | — | — | 13 | ||||||||||||||||||||||||
| Net income | — | — | — | — | — | 22,094 | — | 22,094 | ||||||||||||||||||||||||
Stockholders’ equity, September 30, 2021 | 23,639,824 | $ | 229 | 5,553,696 | $ | 56 | $ | 247,668 | $ | (53,349 | ) | $ | (34,006 | ) | $ | 160,598 | ||||||||||||||||
Nine Months Ended September 30, | ||||||||
| 2016 | 2017 | |||||||
| OPERATING ACTIVITIES | ||||||||
| Net income | $ | 5,901 | $ | 2,286 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
| Non-cash stock-based compensation | 458 | 1,693 | ||||||
| Tax benefit related to stock options exercised | 264 | — | ||||||
| Depreciation and amortization | 12,623 | 12,591 | ||||||
| Amortization of deferred financing costs | 475 | 645 | ||||||
| Accretion of financing items | 155 | 74 | ||||||
| Accretion of acquisition-related deferred payments and contingent consideration | 55 | 32 | ||||||
| Provision for bad debts | 688 | 1,548 | ||||||
| Deferred income taxes | 5,684 | 1,409 | ||||||
| Change in the fair value of interest rate swap | 1,325 | (357 | ) | |||||
| Change in the estimated fair value of contingent earn-out consideration | (458 | ) | (54 | ) | ||||
| Impairment of long-lived assets | 700 | — | ||||||
| Impairment of indefinite-lived long-term assets other than goodwill | — | 19 | ||||||
| Loss on early retirement of long-term debt | 32 | 2,775 | ||||||
| Net gain on the sale or disposal of assets | (2,008 | ) | (410 | ) | ||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | 4,380 | (463 | ) | |||||
| Inventories | 147 | (139 | ) | |||||
| Prepaid expenses and other current assets | (718 | ) | (1,001 | ) | ||||
| Accounts payable and accrued expenses | (39 | ) | 4,879 | |||||
| Deferred rent | 1,183 | 3 | ||||||
| Deferred revenue | (4,444 | ) | (310 | ) | ||||
| Other liabilities | — | (3 | ) | |||||
| Income taxes payable | 106 | (49 | ) | |||||
| Net cash provided by operating activities | 26,509 | 25,168 | ||||||
| INVESTING ACTIVITIES | ||||||||
| Cash paid for capital expenditures net of tenant improvement allowances | (7,240 | ) | (6,800 | ) | ||||
| Capital expenditures reimbursable under tenant improvement allowances and trade agreements | (486 | ) | (50 | ) | ||||
| Escrow deposits related to acquisitions | (228 | ) | (30 | ) | ||||
| Purchases of broadcast assets and radio stations | (718 | ) | (1,662 | ) | ||||
| Purchases of digital media businesses and assets | (3,153 | ) | (1,690 | ) | ||||
| Purchases of publishing businesses assets | (3,318 | ) | — | |||||
| Proceeds from sale of broadcast assets | 3,147 | 602 | ||||||
| Other | (398 | ) | (224 | ) | ||||
| Net cash used in investing activities | (12,394 | ) | (9,854 | ) | ||||
| FINANCING ACTIVITIES | ||||||||
| Payments under Term Loan B | (5,000 | ) | (263,000 | ) | ||||
| Proceeds from borrowings under Revolver and ABL Facility | 35,601 | 60,133 | ||||||
| Payments on Revolver and ABL Facility | (37,837 | ) | (53,980 | ) | ||||
| Payment of interest rate swap | — | (783 | ) | |||||
| Proceeds from bond offering | — | 255,000 | ||||||
| Payment of debt issuance costs | — | (6,837 | ) | |||||
| Payments of acquisition-related contingent earn-out consideration | (99 | ) | (14 | ) | ||||
| Payments of deferred installments due from acquisition activity | (3,421 | ) | (225 | ) | ||||
| Proceeds from the exercise of stock options | 969 | 501 | ||||||
| Payments of capital lease obligations | (80 | ) | (93 | ) | ||||
| Payment of cash distributions on common stock | (5,000 | ) | (5,089 | ) | ||||
| Book overdraft | 734 | (1,053 | ) | |||||
| Net cash used in financing activities | (14,133 | ) | (15,440 | ) | ||||
| Net decrease in cash and cash equivalents | (18 | ) | (126 | ) | ||||
| Cash and cash equivalents at beginning of year | 98 | 130 | ||||||
| Cash and cash equivalents at end of period | $ | 80 | $ | 4 | ||||
Nine Months Ended September 30, | ||||||||
2020 | 2021 | |||||||
OPERATING ACTIVITIES | ||||||||
| Net income (loss) | $ | (57,390 | ) | $ | 24,674 | |||
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Non-cash stock-based compensation | 273 | 240 | ||||||
| Depreciation and amortization | 10,686 | 9,671 | ||||||
| Amortization of deferred financing costs | 675 | 690 | ||||||
Non-cash lease expense | 6,745 | 6,527 | ||||||
| Provision for bad debts | 4,122 | (248 | ) | |||||
| Deferred income taxes | 30,954 | 404 | ||||||
Change in the estimated fair value of contingent earn-out consideration | (12 | ) | — | |||||
| Impairment of indefinite-lived long-term assets other than goodwill | 17,254 | — | ||||||
| Impairment of goodwill | 307 | — | ||||||
| Gain on the forgiveness of PPP loans | — | (11,212 | ) | |||||
| Gain (loss) on the early retirement of long-term debt | (49 | ) | 56 | |||||
| Net (gain) loss on the disposition of assets | 1,494 | (10,552 | ) | |||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable and unbilled revenue | 2,565 | (67 | ) | |||||
| Inventories | 99 | (412 | ) | |||||
| Prepaid expenses and other current assets | (1,343 | ) | (1,218 | ) | ||||
| Accounts payable and accrued expenses | 5,871 | 2,596 | ||||||
| Operating lease liabilities | (6,396 | ) | (7,317 | ) | ||||
| Contract liabilities | 5,274 | 782 | ||||||
| Deferred rent income | (268 | ) | 28 | |||||
| Other liabilities | 2,254 | 41 | ||||||
| Income taxes payable | 30 | 63 | ||||||
| Net cash provided by operating activities | 23,145 | 14,746 | ||||||
INVESTING ACTIVITIES | ||||||||
| Cash paid for capital expenditures net of tenant improvement allowances | (3,565 | ) | (6,952 | ) | ||||
| Capital expenditures reimbursable under tenant improvement allowances and trade agreements | (140 | ) | (138 | ) | ||||
| Deposit on broadcast assets and radio station acquisitions | — | (100 | ) | |||||
| Purchases of broadcast assets and radio stations | — | (600 | ) | |||||
| Purchases of digital media businesses and assets | (400 | ) | (3,980 | ) | ||||
| Proceeds from sale of long-lived assets | 188 | 15,771 | ||||||
| Proceeds from the cash surrender value of life insurance policies | 2,363 | — | ||||||
| Other | (353 | ) | (1,227 | ) | ||||
| Net cash provided by (used in) investing activities | (1,907 | ) | 2,774 | |||||
FINANCING ACTIVITIES | ||||||||
| Proceeds from 2028 Notes | — | 114,731 | ||||||
| Payments to repurchase or exchange 2024 Notes | (3,392 | ) | (119,443 | ) | ||||
| Proceeds from borrowings under ABL Facility | 38,626 | 16 | ||||||
| Payments on ABL Facility | (34,452 | ) | (5,016 | ) | ||||
| Proceeds from borrowings under PPP Loans | — | 11,195 | ||||||
| Payments under PPP loans | — | 17 | ||||||
| Payments of debt issuance costs | (124 | ) | (1,921 | ) | ||||
| Proceeds from the exercise of stock options | — | 405 | ||||||
| Payments on financing lease liabilities | (52 | ) | (48 | ) | ||||
| Payment of cash distribution on common stock | (667 | ) | — | |||||
| Book overdraft | (1,885 | ) | — | |||||
| Net cash used in financing activities | (1,946 | ) | (64 | ) | ||||
| Net increase in cash and cash equivalents | 19,292 | 17,456 | ||||||
| Cash and cash equivalents at beginning of year | 6 | 6,325 | ||||||
| Cash and cash equivalents at end of period | $ | 19,298 | $ | 23,781 | ||||
(Unaudited)
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid during the period for: | ||||||||
| Cash paid for interest, net of capitalized interest | $ | 10,644 | $ | 4,962 | ||||
| Cash paid for income taxes | $ | 67 | $ | 128 | ||||
| Other supplemental disclosures of cash flow information: | ||||||||
| Barter revenue | $ | 3,886 | $ | 4,152 | ||||
| Barter expense | $ | 3,734 | $ | 4,012 | ||||
| Non-cash investing and financing activities: | ||||||||
| Capital expenditures reimbursable under tenant improvement allowances | $ | 486 | $ | 50 | ||||
| Current value of deferred cash payments (short-term) | $ | 1,566 | $ | — | ||||
Net assets and liabilities assumed non-cash acquisition | — | 2,852 | ||||||
| Assets acquired under capital leases | $ | — | $ | 16 | ||||
| Debt issuance costs accrued | $ | — | $ | 132 |
See accompanying notes
Cash paid during the period for: Cash paid for interest, net of capitalized interest $ 7,731 Cash paid for interest on finance lease liabilities $ 6 Net cash paid for (received from) income taxes $ 196 Other supplemental disclosures of cash flow information: Barter revenue $ 2,152 Barter expense $ 1,971 Capital expenditures reimbursable under tenant improvement allowances $ 140 Deferred payments on acquisitions $ 708 $ 2,715 $ — $ 4 $ — Estimated present value of contingent-earn out consideration $ —
The accompanying consolidated financial statements of
Description of Business
Salem is a domestic multimedia company specializing in Christian and conservative content. Our media properties are comprised of radio broadcasting, digital media, and publishing entities. We Certain reclassifications have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which are discussed in Note 19 – Segment Data. Our foundational business is radio broadcasting, which includesbeen made to the ownership and operation of radio stations in large metropolitan markets. We also own and operate Salem Radio Network® (“SRN”), SRN News Network (“SNN”), Today’s Christian Music (“TCM”), Singing News Network (formerly Solid Gospel Network) and Salem Media RepresentativesTM (“SMR”). SRN, SNN, TCM and Singing News Network are networks that develop, produce and syndicate a broad range of programming specifically targetedprior year financial statements to Christian and family-themed talk stations, music stations and general News Talk stations throughoutconform to the United States, including Salem-owned and operated stations. SMR, a national advertising sales firm with offices in ten U.S. cities, specializes in placing national advertising on religious and other format commercial radio stations. Each of our radio stations has a website specifically designed for that station from which our audience can access our entire library of digital content and online publications.
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; OnePlace.com, Christianity.com, Crosswalk.com®, GodVine.com, GodTube.com, CrossCards.com, LightSource.com, Jesus.org, BibleStudyTools.com, iBelieve.com, CCMmagazine.com and ChristianHeadlines.com, and our conservative opinion websites; collectively known as Townhall Media, include Townhall.com™, HotAir.com, Twitchy.com, HumanEvents.com, RedState.com, and BearingArms.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 WorshipHouseMedia.com, SermonSpice.com, SermonSearch.com, ChurchStaffing.com, and ChristianJobs.com, offer a variety of digital resources including videos, song tracks, sermon archives and job listings to pastors and Church leaders. E-commerce also includes Eagle Wellness, which sells nutritional supplements.
Our web content is accessible through all of our radio station websites that feature content of interest to local audiences throughout the United States.
Our publishing operating segment is comprised of 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, our self-publishing service for authors through Xulon Press and Mill City Press; and (3)Singing News® magazine, previously Salem Publishing™ which produced and distributed print magazines.
Variable Interest Entities
We may enter into agreements or investments with other entities that could qualify as variable interest entities (“VIEs”) in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation.”A VIE is consolidatedpresentation in the financial statements ifwe are deemed to be the primary beneficiary. The primary beneficiary is the entity that holds the majority of the beneficial interests in the VIE, either explicitly or implicitly. A VIE is an entity forcurrent year, which the primary beneficiary’s interest in the entity can change with variations in factors other than the amount of investment in the entity. We perform our evaluation for VIE’s upon entry into the agreement or investment. We re-evaluate the VIE when or if events occur that could change the status of the VIE.
We may enter into lease arrangements with entities controlled by our principal stockholders or other related parties. We believe that the requirements of FASB ASC Topic 810 do not apply to these entities because the lease arrangements do not contain explicit guarantees of the residual value of the real estate, do not contain purchase options or similar provisions and the leases are at terms that do not vary materially from leases that would have been available with unaffiliated parties. Additionally, we do not have an equity interest in the entities controlled by our principal stockholders or other related parties and we do not guarantee debt of the entities controlled by our principal stockholders or other related parties.
We also enter into Local Marketing Agreements (“LMAs”) or Time Brokerage Agreements (“TBAs”) contemporaneously with entering into an Asset Purchase Agreement (“APA”) to acquire or sell a radio station. Typically, both LMAs and TBAs are contractual agreements under which the station owner/licensee makes airtime available to a programmer/licensee in exchange for a fee and reimbursement of certain expenses. LMAs and TBAs are subject to compliance with the antitrust laws and the communications laws, including the requirement that the licensee must maintain independent control over the station and, in particular, its personnel, programming, and finances. The FCC has held that such agreements do not violate the communications laws as long as the licensee of the station receiving programming from another station maintains ultimate responsibility for, and control over, station operations and otherwise ensures compliance with the communications laws.
The requirements of FASB ASC Topic 810 may apply to entities under LMAs or TBAs, dependinghad no impact on the facts and circumstances related to each transaction. As of September 30, 2017, we did not have implicit or explicit arrangements that required consolidation under the guidance in FASB ASC Topic 810.
previously reported financial statements.
these estimates and assumptions.
Reclassifications
Certain reclassifications
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 ASUson ourfinancial 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 September 2017, the FASB issued ASU 2017-13,Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842). ASU 2017-13 provides additional clarification including the addition of SEC paragraphs to the new revenue and leases sections of the Codification.have been implemented. We do not expect these clarifications tobelieve that there are any other new accounting pronouncements that have been issued that might have a material impact on our financial position, results of operations or cash flows
In August 2017,entered into the FASB issued ASU 2017-12, "Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities," which improves the financial reporting of hedging relationships to better align risk management activities in financial statements and make certain targeted improvements to simplify the applicationfollowing transactions:
In May 2017, the FASB issued ASU 2017-09, “Compensation – Stock Compensation (Topic 718) Scope of Modification Accounting,” which clarifies when to account for a change in the terms or conditions of a share-based payment award as a modification. ASU 2017-09 requires modification accounting only if the fair value, the vesting conditions,from their respective closing date or the classificationdate that we began operating them under a Local Marketing Agreement (“LMA”) or Time Brokerage Agreement (“TBA.”)
In March 2017, the FASB issued ASU 2017-08, “Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium on Purchased Callable Debt Securities,” which amends the amortization period for certain purchased callable debt securities held at a premium to a shorter period based on the earliest call date. ASU 2017-08achievement of certain revenue benchmarks.
Acquisition Date | Description | Total Consideration | ||||
(Dollars in thousands) | ||||||
| July 2, 2021 | SeniorResource.com (asset acquisition) | $ | 80 | |||
| July 1, 2021 | ShiftWorship.com (business acquisition) | 2,600 | ||||
| June 1, 2021 | KDIA-AM andKDYA-AM San Francisco, California (business acquisition) | 600 | ||||
| April 28, 2021 | Centerline New Media (business acquisition) | 1,300 | ||||
| March 8, 2021 | Triple Threat Trader (asset acquisition) | 127 | ||||
$ | 4,707 | |||||
In February 2017, the FASB issued ASU 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Topic 610-20),” which clarifies the scope and application of ASC Topic 610-20 on accounting for the sale or transfer of nonfinancial assets, that is an asset with physical value such as real estate, equipment, intangibles or similar property. ASU 2017-05 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years.We have not yetevaluated the impact of the adoption of this accounting standardon ourfinancial position, results of operations, cash flows, or presentation thereof.
In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment,” which eliminates the requirement to calculate the implied fair value of goodwill in Step 2 of the goodwill impairment test. Under ASU 2017-04, goodwill impairment charges will be based on the excessdefinition of a reporting unit’s carrying amount over its fair value as determinedbusiness in Step 1 of the testing. ASU 2017-04 is effective for interim and annual testing dates after January 1, 2019, with early adoption permitted for interim and annual goodwill impairment testing dates after January 1, 2017.We have not yetevaluated the impact of the adoption of this accounting standardon ourfinancial position, results of operations, cash flows, or presentation thereof.
In January 2017, the FASB issued ASU
Description | Total Consideration | |||
(Dollars in thousands) | ||||
| Cash payments made upon closing | $ | 4,580 | ||
| Deferred payments | 116 | |||
Present value of estimated fair value of contingent earn-out consideration | 11 | |||
| Total purchase price consideration | $ | 4,707 | ||
Net Broadcast Assets Acquired | Net Digital Assets Acquired | Total Net Assets | ||||||||||||
(Dollars in thousands) | ||||||||||||||
Assets | ||||||||||||||
| Property and equipment | $ | 361 | $ | 3,221 | $ | 3,582 | ||||||||
| Broadcast licenses | 235 | 0 | 235 | |||||||||||
| Goodwill | 4 | 225 | 229 | |||||||||||
| Customer lists and contracts | 0 | 789 | 789 | |||||||||||
| Domain and brand names | 0 | 66 | 66 | |||||||||||
$ | 600 | $ | 4,301 | $ | 4,901 | |||||||||
Liabilities | ||||||||||||||
| Contract liabilities, short-term | 0 | (194 | ) | (194 | ) | |||||||||
$ | 600 | $ | 4,107 | $ | 4,707 | |||||||||
In November 2016, the FASB issued ASU 2016-18, “Statements of Cash Flows (Topic 230): Restricted Cash,” which provides guidancedate that a third-party began operating them under an LMA or TBA.
In October 2016,portion of the FASB issued ASU 2016-16 “Intra-Entity Transfers of Assets Other Than Inventory,” which modifies existing guidance for the accounting for income tax consequences of intra-entity transfers of assets.This ASU requires entitiesmonthly fees paid under a TBA. Due to immediately recognize the tax consequences on intercompany asset transfers (excluding inventory) atchanges in debt markets, the transaction date, rather than deferringwas not funded, and it is uncertain when, or if, the tax consequencestransaction will close. Word Broadcasting continues to program the stations under current GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, and interim reports within those fiscal years,a TBA that began in January 2017.
In August 2016, the FASB issued ASU 2016-15,ASC Topic 606, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments,”which clarifies how entities should classify certain cash receipts and cash payments on the statement of cash flows with the objective of reducing diversity in practice related to eight specific types of transactions. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with early adoption permitted. We do not expect the adoption of ASU 2016-15 to have a material impact on our financial 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. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with early adoption permitted.We have not yetevaluated the impact of the adoption of this accounting standardon ourfinancial position, results of operations, cash flows, or presentation thereof.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which requires that lessees recognize a right-of-use asset and a lease liability for all leases with lease terms greater than twelve months in the balance sheet. ASU 2016-02 requires additional disclosures including the significant judgments made by management to provide insight into the revenue and expense to be recognized from existing contracts and the timing and uncertainty of cash flows arising from leases. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with early adoption permitted. We have not yet determined the dollar impact of recording operating leases on our statement of financial position. The adoption of ASU 2016-02 will have a material impacton ourfinancial position and the presentation thereof. Our existing credit facility stipulates that our covenants are based on GAAP as of the agreement date. Therefore, the material impact of recording right-to-use assets and lease liabilities on our statement of financial position is not expected to impact the compliance status for any covenant.
In January 2016, the FASB issued ASU 2016-01, “Recognition and Measurement of Financial Assets and Financial Liabilities,” which provides updated guidance that enhances the reporting model for financial instruments, including amendments, to address aspects of recognition, measurement, presentation and disclosure. The guidance is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. With the exception of the early application guidance applicable to certain entities, early adoption of the amendments is not permitted.We have not yetevaluated the impact of the adoption of this accounting standardon ourfinancial position, results of operations, cash flows, or presentation thereof.
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers, (Topic 606),”and issued subsequent amendments to the initial guidance in August 2015, March 2016, April 2016, May 2016 and December 2016, within ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20 and ASU 2017-13 respectively (ASU 2014-09, ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, ASU 2016-20, and ASU 2017-13, collectively, “Topic 606”). Topic 606 supersedes nearly all existing
Nine Months Ended September 30, 2021 | ||||||||||||||||
Broadcast | Digital Media | Publishing | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
| By Source of Revenue: | ||||||||||||||||
| Block Programming – National | $ | 35,824 | $ | 0— | $ | 0— | $ | 35,824 | ||||||||
| Block Programming – Local | 18,072 | 0— | 0— | 18,072 | ||||||||||||
| Spot Advertising – National | 10,565 | 0— | 0— | 10,565 | ||||||||||||
| Spot Advertising – Local | 30,123 | 0— | 0— | 30,123 | ||||||||||||
| Infomercials | 682 | 0— | 0— | 682 | ||||||||||||
| Network | 14,729 | 0— | 0— | 14,729 | ||||||||||||
| Digital Advertising | 18,415 | 13,859 | 132 | 32,406 | ||||||||||||
| Digital Streaming | 3,559 | 2,579 | 0— | 6,138 | ||||||||||||
| Digital Downloads and eBooks | 509 | 4,637 | 1,294 | 6,440 | ||||||||||||
| Subscriptions | 828 | 9,227 | 262 | 10,317 | ||||||||||||
Book Sales and e-commerce, net of estimated sales returns and allowances | 289 | 163 | 10,851 | 11,303 | ||||||||||||
| Self-Publishing Fees | 0— | 0— | 4,730 | 4,730 | ||||||||||||
| Print Advertising | 2 | 0— | 123 | 125 | ||||||||||||
| Other Revenues | 6,825 | 138 | 701 | 7,664 | ||||||||||||
$ | 140,422 | $ | 30,603 | $ | 18,093 | $ | 189,118 | |||||||||
| Timing of Revenue Recognition | ||||||||||||||||
| Point in Time | $ | 138,540 | $ | 30,603 | $ | 18,093 | $ | 187,236 | ||||||||
| Rental Income (1) | 1,882 | 0— | 0— | 1,882 | ||||||||||||
$ | 140,422 | $ | 30,603 | $ | 18,093 | $ | 189,118 | |||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||
Broadcast | Digital Media | Publishing | Consolidated | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
| By Source of Revenue: | ||||||||||||||||
| Block Programming – National | $ | 35,536 | $ | — | $ | — | $ | 35,536 | ||||||||
| Block Programming – Local | 18,211 | — | — | 18,211 | ||||||||||||
| Spot Advertising – National | 10,179 | — | — | 10,179 | ||||||||||||
| Spot Advertising – Local | 28,630 | — | — | 28,630 | ||||||||||||
| Infomercials | 750 | — | — | 750 | ||||||||||||
| Network | 13,505 | — | — | 13,505 | ||||||||||||
| Digital Advertising | 10,676 | 14,473 | 216 | 25,365 | ||||||||||||
| Digital Streaming | 1,981 | 2,611 | — | 4,592 | ||||||||||||
| Digital Downloads and eBooks | 3,049 | 4,291 | 960 | 8,300 | ||||||||||||
| Subscriptions | 868 | 6,679 | 519 | 8,066 | ||||||||||||
Book Sales and e-commerce, net of estimated sales returns and allowances | 1,128 | 108 | 6,849 | 8,085 | ||||||||||||
| Self-Publishing Fees | — | — | 3,860 | 3,860 | ||||||||||||
| Print Advertising | 1 | — | 278 | 279 | ||||||||||||
| Other Revenues | 5,527 | 193 | 684 | 6,404 | ||||||||||||
$ | 130,041 | $ | 28,355 | $ | 13,366 | $ | 171,762 | |||||||||
| Timing of Revenue Recognition | ||||||||||||||||
| Point in Time | $ | 128,157 | $ | 28,319 | $ | 13,366 | $ | 169,842 | ||||||||
| Rental Income (1) | 1,884 | 36 | — | 1,920 | ||||||||||||
$ | 130,041 | $ | 28,355 | $ | 13,366 | $ | 171,762 | |||||||||
| (1) | Rental income is not applicable to FASB 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. |
NOTE 2. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS
Approximately 71% of our total assets as of September 30, 2017 consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly upon the operating results of our businesses. In the casedigital 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 would notview as one performance obligation. Our advertising campaigns are designed to be able“white label” agreements between Salem and our advertiser, meaning we provide special care and attention to operate the propertiesdetails 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 related FCC licensethird-party. We are responsible for each property. Broadcast licenses are renewed withany payments due to the FCC every eight years for a nominal costthird-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.
We complete our annual impairment tests in the fourth quarter of each year. We believe that our estimate of the value of our broadcast licenses, mastheads, and goodwillreturned books as they are considered used regardless of the condition returned. Our experience with unsold or returned books is a critical accounting estimate as thethat their resale value is significantinsignificant and they are often destroyed or disposed of.
Throughout 2017, we continued to evaluate ourdiscounts based on the service package.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
| Net broadcast barter revenue | $ | 444 | $ | 582 | $ | 2,118 | $ | 1,647 | ||||||||
| Net digital media barter revenue | — | — | — | — | ||||||||||||
| Net publishing barter revenue | 3 | — | 34 | — | ||||||||||||
| Net broadcast barter expense | $ | 413 | $ | 619 | $ | 1,971 | $ | 1,704 | ||||||||
| Net digital media barter expense | — | 0— | — | 0— | ||||||||||||
| Net publishing barter expense | — | (2 | ) | — | (5 | ) | ||||||||||
Short-Term | Long-Term | |||||||
(Dollars in thousands) | ||||||||
| Balance, beginning of period January 1, 2021 | $ | 11,652 | $ | 1,869 | ||||
| Revenue recognized during the period that was included in the beginning balance of contract liabilities | (7,770 | ) | 0— | |||||
| Additional amounts recognized during the period | 19,742 | 883 | ||||||
| Revenue recognized during the period that was recorded during the period | (12,734 | ) | 0— | |||||
| Transfers | 671 | (671 | ) | |||||
| Balance, end of period September 30, 2021 | $ | 11,561 | $ | 2,081 | ||||
| Amount refundable at beginning of period | $ | 11,607 | $ | 1,869 | ||||
| Amount refundable at end of period | $ | 11,549 | $ | 2,081 | ||||
Amount | ||||
For the Twelve Months Ended September 30, | (Dollars in thousands) | |||
2022 | $ | 11,561 | ||
2023 | 979 | |||
2024 | 787 | |||
2025 | 238 | |||
2026 | 77 | |||
Thereafter | 0 | |||
| $ | 13,642 | |||
determined on a weighted average cost method.
6. PROPERTY AND EQUIPMENT
| December 31, 2020 | September 30, 2021 | |||||||
(Dollars in thousands) | ||||||||
| Buildings | $ | 28,922 | $ | 28,567 | ||||
| Office furnishings and equipment | 36,875 | 36,592 | ||||||
| Antennae, towers and transmitting equipment | 78,057 | 77,543 | ||||||
| Studio, production, and mobile equipment | 29,023 | 29,333 | ||||||
| Computer software and website development costs | 33,928 | 38,272 | ||||||
| Record and tape libraries | 17 | — | ||||||
| Automobiles | 1,514 | 1,492 | ||||||
| Leasehold improvements | 18,187 | 18,703 | ||||||
| $ | 226,523 | $ | 230,502 | |||||
| Less accumulated depreciation | (180,336 | ) | (185,127 | ) | ||||
| 46,187 | 45,375 | |||||||
| Land | $ | 30,254 | $ | 27,040 | ||||
Construction-in-progress | 2,681 | 6,010 | ||||||
| $ | 79,122 | $ | 78,425 | |||||
NOTE 4. ACQUISITIONS AND RECENT TRANSACTIONS
Duringduring the nine monththree- and nine-month period ended September 30, 2017, we completed or entered into the following transactions:
Debt
On May 19, 2017, we closed on a private offering2021
In connection with the Refinancing, on May 19, 2017, we repaid $258.0 million in principal on the Term Loan B and paid interest due as of that date. We recorded a $0.6 million pre-tax loss on the early retirement of long-term debt related to the unamortized discount and a $1.5 million pre-tax loss on the early retirement of long-term debt related to unamortized debt issuance costs associated with the Term Loan B. We also terminated the Revolver as of May 19, 2017. We repaid $4.1 million in outstanding principal on the Revolver and paid interest due as of that date. We recorded a $56,000 pre-tax loss on the early retirement of long-term debt related to unamortized debt issuance costs associated with the Revolver.
On February 28, 2017, we repaid $3.0 million principal on the Term Loan B of $300.0 million, and paid interest due as of that date. We recorded a $6,200 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $18,000 in unamortized debt issuance costs associated with the principal repayment.
On January 30, 2017, we repaid $2.0 million in principal on the Term Loan B and paid interest due as of that date. We recorded a $4,500 pre-tax loss on the early retirement of long-term debt related to the unamortized discount and $12,000 in unamortized debt issuance costs associated with the principal repayment.
Equity
On September 12, 2017, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on September 29, 2017 to all Class A and Class B common stockholders of record as of September 22, 2017.
On August 9, 2017, a restricted stock award of 33,066 shares was granted to an executive that vested immediately. The fair value of the restricted stock award was measuredlease liabilities calculated based on the grant date market pricepresent value of lease payments for all lease agreements with terms that are greater than twelve months. FASB ASC Topic 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.
On June 1, 2017, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on June 30, 2017 to all Class A and Class B common stockholders of record as of June 16, 2017.
On March 9, 2017, we announced a quarterly equity distribution in the amount of $0.0650 per share on Class A and Class B common stock. The equity distribution of $1.7 million was paid on March 30, 2017 to all Class A and Class B common stockholders of record as of March 20, 2017.
On March 24, 2017, a restricted stock award of 178,592 shares was granted to certain members of management that vested immediately. The fair value of each restricted stock award was measured based on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until three months from vesting date. Recipients of these restricted stock awards were entitled to all the rights of absolute ownership of therestricted stock from the date of grant, including the right to vote the shares and to receive dividends.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 were considered issued and outstanding from the vest date of grant.
Acquisitions – Broadcast
On September 15, 2017, we closed on the acquisition of real property, including the land, tower and broadcasting facilities, of radio station WSPZ-AM in Bethesda, Maryland for $1.5 million in cash. We recognized goodwill of approximately $13,000 associated with the going concern value of the existing income generating leases acquired with the broadcast tower.
On July 24, 2017, we closed on the acquisition of the FM translator construction permit in Eaglemount, Washington, for $40,000 in cash. The FM translator will be relocated to the Portland, Oregon market for use by our KDZR-AM radio station.
On June 28, 2017, we closed on the acquisition of an FM translator construction permit in Festus, Missouri for $40,000 in cash. The FM translator will be relocated to the St. Louis, Missouri market for use by our KXFN-FM radio station.
On March 14, 2017, we closed on the acquisition of an FM translator construction permit in Quartz Site, Arizona for $20,000 in cash. The FM translator will be relocated to the San Diego, California market for use by our KPRZ-AM radio station.
On March 1, 2017, we closed on the acquisition of an FM translator construction permit in Roseburg, Oregon for $45,000 in cash. The FM translator will be relocated to the Portland, Oregon market for use by our KPDQ-AM radio station.
On January 16, 2017, we closed on the acquisition of an FM translator in Astoria, Oregon for $33,000 in cash. The FM translator will be relocated to the Seattle, Washington market for use by our KGNW-AM radio station.
On January 6, 2017, we closed on the acquisition of an FM translator construction permit in Mohave Valley, Arizona for $20,000 in cash. The FM translator will be relocated to the San Diego, California market for use by our KCBQ-AM radio.
Acquisitions − Digital Media
On August 31, 2017, we acquired the TeacherTube.com website and related assets for $1.1 million in cash. TeacherTube.com is an online instructional video sharing community for teachers, students and parents. We recorded goodwill of approximately $0.4 million associated with the expected synergies to be realized from combining this website and related assets into our existing digital media platform. The accompanying Condensed Consolidated Statement of Operations reflects the operating results as of the closing date within our digital media operating segment.
On August 31, 2017, we acquired the Intelligence Report newsletter and related assets valued at $2.5 million and we assumed deferred subscription liabilities of $2.9 million. We paid no cash to the seller upon closing. We recorded goodwill of approximately $0.4 million associated with the expected synergies to be realized from combining this financial publication and related assets into our existing digital media platform. The accompanying Condensed Consolidated Statement of Operations reflects the operating results as of the closing date within our digital media operating segment.
On July 6, 2017, we acquired the TradersCrux.com website and related assets for $0.3 million in cash. As part of the purchase agreement, we may pay up to an additional $0.1 million in contingent earn-out consideration within one year upon the achievement of income benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of TradersCrux.com to achieve the income targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $18,750, which approximates the discounted present value due to the earn-out period of less than one year. We recorded goodwill of approximately $900 associated with the expected synergies to be realized from combining this website and related assets into our existing digital media platform.
On June 8, 2017, we acquired a Portuguese Bible mobile application and related assets for $65,000 in cash. As part of the purchase agreement, we may pay up to an additional $20,000 in contingent earn-out consideration over the next twelve months based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of the Portuguese Bible mobile’s applications to achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $16,500, which approximated the discounted present value due to the earn-out period of less than one year.
On March 15, 2017, we acquired the website prayers-for-special-help.com and related assets for $0.2 million in cash. We recorded goodwill of approximately $15,000 with the expected synergies to be realized from combining these applications into our existing digital media platform. The accompanying Condensed Consolidated Statement of Operations reflects the operating results as of the closing date within our digital media operating segment.
A summary of our business acquisitions and asset purchases during the nine month period ended September 30, 2017, none of which were individually or in the aggregate material to our Condensed Consolidated financial position as of the respective date of acquisition, is as follows:
| Acquisition Date | Description | Total Cost | ||||
| (Dollars in thousands) | ||||||
| September 15, 2017 | Real property of radio station WSPZ-AM in Bethesda, Maryland (business acquisition) | $ | 1,500 | |||
| August 31, 2017 | TeacherTube.com (business acquisition) | 1,100 | ||||
| August 31, 2017 | Intelligence Reporter newsletter (business acquisition) | — | ||||
| July 24, 2017 | FM Translator construction permit, Eaglemount, Washington (asset acquisition) | 40 | ||||
| July 6, 2017 | TradersCrux.com (business acquisition) | 298 | ||||
| June 28, 2017 | FM Translator construction permit, Festus, Missouri (asset acquisition) | 40 | ||||
| June 8, 2017 | Portuguese Bible Mobile Applications (business acquisition) | 82 | ||||
| March 15, 2017 | Prayers for Special Help (business acquisition) | 245 | ||||
| March 14, 2017 | FM Translator construction permit, Quartz Site, Arizona (asset purchase) | 20 | ||||
| March 1, 2017 | FM Translator construction permit, Roseburg, Oregon (asset purchase) | 45 | ||||
| January 16, 2017 | FM Translator, Astoria, Oregon (asset purchase) | 33 | ||||
| January 1, 2017 | FM Translator construction permit, Mohave Valley, Arizona (asset purchase) | 20 | ||||
| $ | 3,423 | |||||
The operating results of our business acquisitions and asset purchases are included in our consolidated results of operations from their respective closingcommencement date, or the date that we began operating them under an LMA or TBA. Underon which the acquisition method of accounting as specified in FASB ASC Topic 805, “Business Combinations,”lessor makes the total acquisition consideration is allocated to the assets acquired and liabilities assumedunderlying asset available for use, based on their estimated fair values as of the date of the transaction.
Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed to be achieved from the acquisition. Acquisitions may include contingent consideration, the fair value of which is estimated as of the acquisition date asupon the present value of the expected contingentlease payments as determined using weighted probabilities ofover the payment amounts. We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various assets acquired. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for reasonableness of the assigned values.
We believe that these valuations and analysis provide appropriate estimates of the fair value for the net assets acquired as of the acquisition date. These initial valuations are subject to refinement during the measurement period, which may be up to one year from the acquisition date. During this measurement period, we may retroactively record adjustments to the net assets acquired based on additional information obtained for items that existed as of the acquisition date. Upon the conclusion of the measurement period, any adjustments are reflected in our Condensed Consolidated Statements of Operations. To date, we have not recorded adjustments to the estimated fair values used in our acquisition consideration during or after the measurement period.
Property and equipment are recorded at the estimated fair value and depreciatedrespective lease term. Lease expense is recognized on a straight-line basis over their estimated useful lives. Finite-lived intangible assets are recorded at their estimated fair value and amortized on a straight-line basis over their estimated useful lives. Goodwill, which represents the organizational systems and procedureslease term, subject to any changes in place to ensure the effective operation oflease or expectation regarding the entity, may also be recorded and tested for impairment. Costs associated with acquisitions,lease terms. Variable lease costs, such as consultingcommon area maintenance, property taxes and legal fees,insurance, are expensed as incurred. We recognized costs associated with acquisitions
September 30, 2021 | ||||||||||||
(Dollars in thousands) | ||||||||||||
Operating Leases | Related Party | Other | Total | |||||||||
| Operating leases ROU assets | $ | 6,303 | $ | 37,797 | $ | 44,100 | ||||||
| Operating lease liabilities (current) | $ | 1,004 | $ | 7,600 | $ | 8,604 | ||||||
Operating lease liabilities (non-current) | 5,479 | 37,701 | 43,180 | |||||||||
| Total operating lease liabilities | $ | 6,483 | $ | 45,301 | $ | 51,784 | ||||||
Weighted Average Remaining Lease Term | ||||
| Operating leases | 7.8 years | |||
| Finance leases | 2.9 years | |||
Weighted Average Discount Rate | ||||
| Operating leases | 7.98 | % | ||
| Finance leases | 5.74 | % |
Nine Months Ended September 30, 2021 | ||||
(Dollars in thousands) | ||||
| Amortization of finance lease ROU Assets | $ | 48 | ||
| Interest on finance lease liabilities | 6 | |||
| Finance lease expense | 54 | |||
| Operating lease expense | 9,656 | |||
| Variable lease expense | 430 | |||
| Short-term lease expense | 444 | |||
| Total lease expense | $ | 10,584 | ||
Nine Months Ended September 30, 2021 | ||||
(Dollars in thousands) | ||||
| Cash paid for amounts included in the measurement of lease liabilities: | ||||
| Operating cash flows from operating leases | $ | 10,403 | ||
| Operating cash flows from finance leases | 4 | |||
| Financing cash flows from finance leases | 48 | |||
| Leased assets obtained in exchange for new operating lease liabilities | $ | 3,466 | ||
| Leased assets obtained in exchange for new finance lease liabilities | 17 | |||
The total acquisition consideration is equal to the sum of all cash payments, the fair value of any deferred payments and promissory notes, and the present value of any estimated contingent earn-out consideration. We estimate the fair value of contingent earn-out consideration using a probability-weighted discounted cash flow model. The fair value measurement is based on significant inputs that are not observable in the market and thus represent a Level 3 measurement as defined in Note 16 - Fair Value Measurements.
The following table summarizes the total acquisition consideration for the nine month period ended September 30, 2017:
| Description | Total Consideration | |||
| (Dollars in thousands) | ||||
| Cash payments made upon closing | $ | 3,352 | ||
| Escrow deposits paid in prior years | 35 | |||
| Present value of estimated fair value of contingent earn-out consideration | 36 | |||
| Total purchase price consideration | $ | 3,423 | ||
The fair value of the net assets acquired was allocated as follows:
| Net Broadcast | Net Digital Media | Total Net | ||||||||||
| Assets Acquired | Assets Acquired | Assets Acquired | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Assets | ||||||||||||
| Property and equipment | $ | 1,487 | $ | 479 | $ | 1,966 | ||||||
| Broadcast licenses | 198 | — | 198 | |||||||||
| Goodwill | 13 | 810 | 823 | |||||||||
| Customer lists and contracts | — | 314 | 314 | |||||||||
| Domain and brand names | — | 647 | 647 | |||||||||
| Subscriber base and lists | — | 2,316 | 2,316 | |||||||||
| Non-compete agreements | — | 11 | 11 | |||||||||
| $ | 1,698 | $ | 4,577 | $ | 6,275 | |||||||
| Liabilities | ||||||||||||
| Deferred revenue | $ | — | (2,852 | ) | (2,852 | ) | ||||||
| $ | 1,698 | $ | 1,725 | $ | 3,423 | |||||||
Pending Transactions
On September 15, 2017, we entered an APA to acquire radio station WSPZ-AM in Bethesda, Maryland for $0.6 million in cash from a related party. We began programming the station under an LMA within our Washington DC broadcast market on the same date. The accompanying Condensed Consolidated Statement of Operations reflects the operating results of this station as of the LMA date within our broadcast segment. The acquisition is subject to the approval of the FCC and is expected to close in the fourth quarter of 2017.
In August 2017, we received an escrow deposit under an agreement to sell land in Covina, California for $1.0 million dollars. The land is recorded in assets held for sale and has not been used in operations. The sale is subject to the buyer’s ability to complete due diligence on their expected use of the land and is currently expected to close in the latter half of 2020.
We are programming radio station KHTE-FM, Little Rock, Arkansas, under a 36 month TBA that began on April 1, 2015. The TBA is extendable for up to 48 months. We have the option to acquire the station for $1.2 million in cash during the TBA period. The accompanying Condensed Consolidated Statements of Operations included in this quarterly report on Form 10-Q reflect the operating results of this entity as of the TBA date within our broadcast segment.
Divestitures
On June 1, 2017, we received $0.6 million in cash for a former transmitter site in our Dallas, Texas market that had been leased to a third-party.
Due to operating results during the three month period ended March 31, 2017 that did not meet management’s expectations, we ceased publishing Preaching Magazine™, YouthWorker Journal™, FaithTalk Magazine™ and Homecoming® The Magazine upon delivery of the May 2017 print publications. On May 30, 2017, we received $10,000 for Preaching Magazine™and YouthWorker Journal™. The purchaser assumed all deferred subscription liabilities for these publications resulting in a pre-tax gain on the sale or disposal of assets of approximately $56,000.
On January 3, 2017, Word Broadcasting began operating our Louisville radio stations (WFIA-AM; WFIA-FM; WGTK-AM) under a twenty-four month TBA.
NOTE 5. CONTINGENT EARN-OUT CONSIDERATION
Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments. The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates use 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 16.
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.
TradersCrux.com
We acquired the TradersCrux.com website and related assets for $0.3 million in cash on July 6, 2017. We paid $0.3 million in cash upon closing and may pay up to an additional $0.1 million in contingent earn-out consideration within one year upon the achievement of income benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of TradersCrux.com to achieve the income targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $18,750, which approximates the discounted present value due to the earn-out of less than one year.
We review the fair value of the contingent earn-out consideration quarterly over the earn-out period to compare actual revenues achieved and projected to the estimated revenues used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $0.1 million. There were no changes in our estimates of the fair value of the contingent earn-out consideration as of the three month period ended September 30, 2017.
Portuguese Bible Mobile Application
We acquired a Portuguese Bible mobile application and related assets on June 8, 2017. We paid $65,000 in cash upon closing and may pay up to an additional $20,000 in contingent earn-out consideration during the twelve month period ending June 8, 2018 based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of the Portuguese Bible mobile applications to achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $16,500, which approximated the discounted present value due to the earn-out of less than one year.
We review the fair value of the contingent earn-out consideration quarterly over the earn-out period to compare actual revenues achieved and projected to the estimated revenues used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $20,000. We recorded an increase of $1,700 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for the three month period ended September 30, 2017. The increase is due to a higher likelihood of achieving the revenue targets based on actual results to date that exceed our original estimates.
Turner Investment Products
We acquired Mike Turner’s line of investment products, including TurnerTrends.com and other domain names and related assets on September 13, 2016. We paid $0.4 million in cash upon closing and may pay up to an additional $0.1 million in contingent earn-out consideration during the twelve month period ended September 13, 2017 based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Turner’s investment products to achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $74,000, which was recorded at the discounted present value of $66,000. The discount is being accreted to interest expense over the twelve month earn-out period. We believe that our experience with digital subscriptions and websites provides a reasonable basis for our estimates.
We review the fair value of the contingent earn-out consideration quarterly over the earn-out period to compare actual subscriber revenues achieved and projected to the estimated subscriber revenues used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $74,000. During the three and nine month period ended September 30, 2017, we recorded a net decrease of $14,000 and $53,000, respectively, in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations. These decreases were based on the likelihood of achieving the revenue targets based on actual results to date that were lower than our original estimates. We made no additional cash payments to the seller during the earn-out period ended September 13, 2017.
| Operating Leases | ||||||||||||||||||||
| Related Party | Other | Total | Finance Leases | Total | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
2021 (Oct-Dec) | $ | 1,505 | $ | 10,789 | $ | 12,294 | $ | 66 | $ | 12,360 | ||||||||||
| 2022 | 1,370 | 10,908 | 12,278 | 47 | 12,325 | |||||||||||||||
| 2023 | 1,070 | 8,533 | 9,603 | 24 | 9,627 | |||||||||||||||
| 2024 | 1,021 | 6,890 | 7,911 | 10 | 7,921 | |||||||||||||||
| 2025 | 1,089 | 5,640 | 6,729 | 1 | 6,730 | |||||||||||||||
| Thereafter | 3,293 | 22,222 | 25,515 | — | 25,515 | |||||||||||||||
| Undiscounted Cash Flows | $ | 9,348 | $ | 64,982 | $ | 74,330 | $ | 148 | $ | 74,478 | ||||||||||
| Less: imputed interest | (2,865 | ) | (19,681 | ) | (22,546 | ) | (10 | ) | (22,556 | ) | ||||||||||
| Total | $ | 6,483 | $ | 45,301 | $ | 51,784 | $ | 138 | $ | 51,922 | ||||||||||
| Reconciliation to lease liabilities: | ||||||||||||||||||||
| Lease liabilities – current | $ | 1,004 | $ | 7,600 | $ | 8,604 | $ | 59 | $ | 8,663 | ||||||||||
| Lease liabilities – long-term | 5,479 | 37,701 | 43,180 | 79 | 43,259 | |||||||||||||||
| Total Lease Liabilities | $ | 6,483 | $ | 45,301 | $ | 51,784 | $ | 138 | $ | 51,922 | ||||||||||
Daily Bible Devotion
We acquired Daily Bible Devotion mobile applications on May 6, 2015. We paid $1.1 million in cash upon closing and may pay up to an additional $0.3 million in contingent earn-out consideration payable over the next two years based upon the achievement of cumulative session benchmarks for each mobile application. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Bible Devotional Applications to achieve the session benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $165,000, which was recorded at the discounted present value of $142,000. The discount is being accreted to interest expense over the two-year earn-out period. We believe that our experience with digital mobile applications and websites provides a reasonable basis for our estimates.
We reviewed the fair value of the contingent earn-out consideration quarterly over the two-year earn-out period to compare actual cumulative sessions achieved to the estimated cumulative sessions used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration were reflected in our results of operations in the period they were identified, up to the maximum amount due under the contract of $165,000 less any amounts paid to date. As of the six month period ended June 30, 2017, the end of the earn-out period, we recorded a net decrease of $4,000 in the estimated fair value of the contingent earn-out consideration based on actual session results at the end of the earn-out period. We paid a total of $75,000 in cash for amounts due under the contingent earn-out as of the end of the term on May 6, 2017. Over the total two-year earn out period, we paid a total of $75,000 to the seller with no payments made during the nine month period ended September 30, 2017.
Bryan Perry Newsletters
On February 6, 2015, we acquired the assets and assumed the deferred subscription liabilities for Bryan Perry Newsletters, paying no cash to the seller upon closing. Future contingent earn-out consideration due to the seller was based upon 50% of the net subscriber revenues achieved over the two-year period from date of close with no minimum or maximum contractual amount due. Using a probability-weighted discounted cash flow model based on our revenue projections at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $171,000, which we recorded at the discounted present value of $158,000. The discount was accreted to interest expense over the two-year earn-out period. We paid a total of $91,000 to the seller over the two year earn out period, of which approximately $14,000 was paid during the six month period ended June 30, 2017, which concluded the earn-out period.
Eagle Publishing
On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. The base purchase price was $8.5 million, with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million each due January 2015 and January 2016. The purchase agreement included contingent earn-out consideration of up to $8.5 million based upon the achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $2.4 million, which was recorded at the discounted present value of $2.0 million. The discount was accreted to interest expense over the three-year earn-out period. We paid a total of $0.9 million in cash for amounts due under the contingent earn-out as of the end of the term on December 31, 2016.
The following table reflects the changes in the present value of our acquisition-related estimated contingent earn-out consideration during the three and nine month periods ended September 30, 2017 and 2016:
| Three Months Ended September 30, 2017 | ||||||||||||
| Short-Term | Long-Term | |||||||||||
| Accrued Expenses | Other Liabilities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Beginning Balance as of July 1, 2017 | $ | 31 | $ | — | $ | 31 | ||||||
| Acquisitions | 19 | — | 19 | |||||||||
| Accretion of acquisition-related contingent earn-out consideration | — | — | — | |||||||||
| Change in the estimated fair value of contingent earn-out consideration | (12 | ) | — | (12 | ) | |||||||
| Reclassification of payments due in next 12 months to short-term | — | — | — | |||||||||
| Payments | — | — | — | |||||||||
| Ending Balance as of September 30, 2017 | $ | 38 | $ | — | $ | 38 | ||||||
| Three Months Ended September 30, 2016 | ||||||||||||
| Short-Term | Long-Term | |||||||||||
| Accrued Expenses | Other Liabilities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Beginning Balance as of July 1, 2016 | $ | 441 | $ | — | $ | 441 | ||||||
| Acquisitions | 66 | — | 66 | |||||||||
| Accretion of acquisition-related contingent earn-out consideration | �� | 5 | — | 5 | ||||||||
| Change in the estimated fair value of contingent earn-out consideration | (196 | ) | — | (196 | ) | |||||||
| Reclassification of payments due in next 12 months to short-term | — | — | — | |||||||||
| Payments | (11 | ) | — | (11 | ) | |||||||
| Ending Balance as of September 30, 2016 | $ | 305 | $ | — | $ | 305 | ||||||
| Nine Months Ended September 30, 2017 | ||||||||||||
| Short-Term | Long-Term | |||||||||||
| Accrued Expenses | Other Liabilities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Beginning Balance as of January 1, 2017 | $ | 66 | $ | — | $ | 66 | ||||||
| Acquisitions | 36 | — | 36 | |||||||||
| Accretion of acquisition-related contingent earn-out consideration | 4 | — | 4 | |||||||||
| Change in the estimated fair value of contingent earn-out consideration | (54 | ) | — | (54 | ) | |||||||
| Reclassification of payments due in next 12 months to short-term | — | — | — | |||||||||
| Payments | (14 | ) | — | (14 | ) | |||||||
| Ending Balance as of September 30, 2017 | $ | 38 | $ | — | $ | 38 | ||||||
| Nine Months Ended September 30, 2016 | ||||||||||||
| Short-Term | Long-Term | |||||||||||
| Accrued Expenses | Other Liabilities | Total | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Beginning Balance as of January 1, 2016 | $ | 173 | $ | 602 | $ | 775 | ||||||
| Acquisitions | 66 | — | 66 | |||||||||
| Accretion of acquisition-related contingent earn-out consideration | 13 | 8 | 21 | |||||||||
| Change in the estimated fair value of contingent earn-out consideration | (404 | ) | (54 | ) | (458 | ) | ||||||
| Reclassification of payments due in next 12 months to short-term | 556 | (556 | ) | — | ||||||||
| Payments | (99 | ) | — | (99 | ) | |||||||
| Ending Balance as of September 30, 2016 | $ | 305 | $ | — | $ | 305 | ||||||
NOTE 6. INVENTORIES
Inventories consist of finished goods that include books printed for sale by Regnery Publishing and wellness products for sale on our e-commerce sites. All inventories are valued at the lower of cost or market as determined on a First-In First-Out (“FIFO”) cost method and reported net of estimated reserves for obsolescence.
The following table provides details of inventory on hand by segment:
| As of December 31, 2016 | As of September 30, 2017 | |||||||
| (Dollars in thousands) | ||||||||
| Regnery Publishing book inventories | $ | 2,473 | $ | 2,026 | ||||
| Reserve for obsolescence – Regnery Publishing | (2,104 | ) | (1,544 | ) | ||||
| Inventory, net - Regnery Publishing | 369 | 482 | ||||||
| Wellness products | $ | 423 | $ | 394 | ||||
| Reserve for obsolescence – Wellness products | (122 | ) | (67 | ) | ||||
| Inventory, net - Wellness products | 301 | 327 | ||||||
| Consolidated inventories, net | $ | 670 | $ | 809 | ||||
NOTE 7. BROADCAST LICENSES
The following table presents the changes in broadcasting licenses that include capital projects and acquisitions of radio stations and FM translators as discussed in Note 4 of our Condensed Consolidated financial statements.
| Broadcast Licenses | Twelve Months Ended December 31, 2016 | Nine Months Ended September 30, 2017 | ||||||
| (Dollars in thousands) | ||||||||
| Balance, beginning of period before cumulative loss on impairment | $ | 492,032 | $ | 494,058 | ||||
| Accumulated loss on impairment | (99,001 | ) | (105,541 | ) | ||||
| Balance, beginning of period after cumulative loss on impairment | 393,031 | 388,517 | ||||||
| Acquisitions of radio stations | 74 | — | ||||||
| Acquisitions of FM translators and construction permits | 1,645 | 198 | ||||||
| Capital projects to improve broadcast signal and strength | 307 | 5 | ||||||
| Impairments based on estimated fair value of broadcast licenses | (6,540 | ) | — | |||||
| Balance, end of period before cumulative loss on impairment | 494,058 | 494,261 | ||||||
| Accumulated loss on impairment | (105,541 | ) | (105,541 | ) | ||||
| Balance, end of period after cumulative loss on impairment | $ | 388,517 | $ | 388,720 | ||||
NOTE 8. GOODWILL
The following table presents the changes in goodwill including acquisitions as discussed in Note 4 of our Condensed Consolidated financial statements.
| Goodwill | Twelve Months Ended December 31, 2016 | Nine Months Ended September 30, 2017 | ||||||
| (Dollars in thousands) | ||||||||
| Balance, beginning of period before cumulative loss on impairment | $ | 26,560 | $ | 27,642 | ||||
| Accumulated loss on impairment | (1,997 | ) | (2,029 | ) | ||||
| Balance, beginning of period after cumulative loss on impairment | 24,563 | 25,613 | ||||||
| Acquisitions of radio stations and broadcast businesses | — | 13 | ||||||
| Acquisitions of digital media entities | 237 | 810 | ||||||
| Acquisitions of publishing entities | 845 | — | ||||||
| Impairment charge during year | (32 | ) | — | |||||
| Balance, end of period before cumulative loss on impairment | 27,642 | 28,465 | ||||||
| Accumulated loss on impairment | (2,029 | ) | (2,029 | ) | ||||
| Ending period balance | $ | 25,613 | $ | 26,436 | ||||
The following is a summary of8. BROADCAST LICENSES
| As of December 31, 2016 | As of September 30, 2017 | |||||||
| (Dollars in thousands) | ||||||||
| Land | $ | 32,402 | $ | 33,008 | ||||
| Buildings | 29,070 | 29,018 | ||||||
| Office furnishings and equipment | 37,386 | 37,135 | ||||||
| Office furnishings and equipment under capital lease obligations | 228 | 244 | ||||||
| Antennae, towers and transmitting equipment | 84,144 | 85,450 | ||||||
| Antennae, towers and transmitting equipment under capital lease obligations | 795 | 795 | ||||||
| Studio, production and mobile equipment | 28,668 | 29,322 | ||||||
| Computer software and website development costs | 20,042 | 22,756 | ||||||
| Record and tape libraries | 27 | 27 | ||||||
| Automobiles | 1,373 | 1,342 | ||||||
| Leasehold improvements | 14,696 | 18,626 | ||||||
| Construction-in-progress | 9,983 | 6,328 | ||||||
| $ | 258,814 | $ | 264,051 | |||||
| Less accumulated depreciation | (156,024 | ) | (161,848 | ) | ||||
| $ | 102,790 | $ | 102,203 | |||||
Depreciation expense was approximately $3.1 million and $3.0 million,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
Broadcast Licenses | Twelve Months Ended December 31, 2020 | Nine Months Ended September 30, 2021 | ||||||
(Dollars in thousands) | ||||||||
| Balance before cumulative loss on impairment, beginning of period | $ | 435,300 | $ | 434,209 | ||||
| Accumulated loss on impairment, beginning of period | (97,442 | ) | (114,436 | ) | ||||
| Balance after cumulative loss on impairment, beginning of period | 337,858 | 319,773 | ||||||
| Acquisitions of radio stations | — | 235 | ||||||
| Dispositions of radio stations | (1,091 | ) | — | |||||
| Impairments based on the estimated fair value of broadcast licenses | (16,994 | ) | — | |||||
| Balance, end of period after cumulative loss on impairment | $ | 319,773 | $ | 320,008 | ||||
| Balance, end of period before cumulative loss on impairment | $ | 434,209 | $ | 434,444 | ||||
| Accumulated loss on impairment, end of period | (114,436 | ) | (114,436 | ) | ||||
| Balance, end of period after cumulative loss on impairment | $ | 319,773 | $ | 320,008 | ||||
| Goodwill | Twelve Months Ended December 31, 2020 | Nine Months Ended September 30, 2021 | ||||||
(Dollars in thousands) | ||||||||
Balance, beginning of period before cumulative loss on | $ | 28,454 | $ | 28,520 | ||||
| Accumulated loss on impairment | (4,456 | ) | (4,763 | ) | ||||
| Balance, beginning of period after cumulative loss on impairment | 23,998 | 23,757 | ||||||
| Acquisitions of radio stations | 66 | 4 | ||||||
| Acquisitions of digital media entities | — | 225 | ||||||
| Impairments based on the estimated fair value goodwill | (307 | ) | — | |||||
| Ending period balance | $ | 23,757 | $ | 23,986 | ||||
| Balance, end of period before cumulative loss on impairment | 28,520 | 28,749 | ||||||
| Accumulated loss on impairment | (4,763 | ) | (4,763 | ) | ||||
| Ending period balance | $ | 23,757 | $ | 23,986 | ||||
| As of September 30, 2017 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Customer lists and contracts | $ | 22,865 | $ | (20,681 | ) | $ | 2,184 | |||||
| Domain and brand names | 20,109 | (14,139 | ) | 5,970 | ||||||||
| Favorable and assigned leases | 2,379 | (2,018 | ) | 361 | ||||||||
| Subscriber base and lists | 8,797 | (4,402 | ) | 4,395 | ||||||||
| Author relationships | 2,771 | (2,171 | ) | 600 | ||||||||
| Non-compete agreements | 2,029 | (1,263 | ) | 766 | ||||||||
| Other amortizable intangible assets | 1,333 | (1,333 | ) | — | ||||||||
| $ | 60,283 | $ | (46,007 | ) | $ | 14,276 | ||||||
| As of December 31, 2016 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
| (Dollars in thousands) | ||||||||||||
| Customer lists and contracts | $ | 22,599 | $ | (20,070 | ) | $ | 2,529 | |||||
| Domain and brand names | 19,821 | (12,970 | ) | 6,851 | ||||||||
| Favorable and assigned leases | 2,379 | (1,972 | ) | 407 | ||||||||
| Subscriber base and lists | 7,972 | (5,304 | ) | 2,668 | ||||||||
| Author relationships | 2,771 | (1,824 | ) | 947 | ||||||||
| Non-compete agreements | 2,018 | (1,012 | ) | 1,006 | ||||||||
| Other amortizable intangible assets | 1,336 | (1,336 | ) | — | ||||||||
| $ | 58,896 | $ | (44,488 | ) | $ | 14,408 | ||||||
September 30, 2021 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
| Customer lists and contracts | $ | 23,700 | $ | (21,987 | ) | $ | 1,713 | |||||
| Domain and brand names | 19,875 | (19,340 | ) | 535 | ||||||||
| Favorable and assigned leases | 2,188 | (1,955 | ) | 233 | ||||||||
| Subscriber base and lists | 8,647 | (8,343 | ) | 304 | ||||||||
| Author relationships | 2,771 | (2,771 | ) | — | ||||||||
Non-compete agreements | 2,041 | (2,041 | ) | — | ||||||||
| Other amortizable intangible assets | 1,332 | (1,332 | ) | — | ||||||||
$ | 60,554 | $ | (57,769 | ) | $ | 2,785 | ||||||
December 31, 2020 | ||||||||||||
| Accumulated | ||||||||||||
| Cost | Amortization | Net | ||||||||||
(Dollars in thousands) | ||||||||||||
| Customer lists and contracts | $ | 24,012 | $ | (22,533 | ) | $ | 1,479 | |||||
| Domain and brand names | 20,350 | (19,127 | ) | 1,223 | ||||||||
| Favorable and assigned leases | 2,188 | (1,943 | ) | 245 | ||||||||
| Subscriber base and lists | 9,886 | (8,974 | ) | 912 | ||||||||
| Author relationships | 2,771 | (2,765 | ) | 6 | ||||||||
Non-compete agreements | 2,041 | (1,954 | ) | 87 | ||||||||
| Other amortizable intangible assets | 1,666 | (1,601 | ) | 65 | ||||||||
| $ | 62,914 | $ | (58,897 | ) | $ | 4,017 | ||||||
| Year Ended December 31, | Amortization Expense | |||
| (Dollars in thousands) | ||||
| 2017 (Oct – Dec) | $ | 1,173 | ||
| 2018 | 4,576 | |||
| 2019 | 4,006 | |||
| 2020 | 2,714 | |||
| 2021 | 1,159 | |||
| Thereafter | 648 | |||
| Total | $ | 14,276 | ||
Year Ended December 31, | Amortization Expense | |||
(Dollars in thousands) | ||||
| 2021 (Oct – Dec) | $ | 341 | ||
| 2022 | 1,219 | |||
| 2023 | 796 | |||
| 2024 | 205 | |||
| 2025 | 21 | |||
| Thereafter | 203 | |||
| Total | $ | 2,785 | ||
Salem Media Group, Inc. has no independent assets
| December 31, 2020 | September 30, 2021 | |||||||
(Dollars in thousands) | ||||||||
| 7.125% Senior Secured Notes | $ | — | $ | 114,731 | ||||
| Less unamortized discount and debt issuance costs based on imputed interest rate of 7.64% | — | (4,048 | ) | |||||
| 7.125% Senior Secured Notes net carrying value | — | 110,683 | ||||||
| 6.75% Senior Secured Notes | 216,341 | 98,815 | ||||||
| Less unamortized debt issuance costs based on imputed interest rate of 7.10% | (2,577 | ) | (939 | ) | ||||
| 6.75% Senior Secured Notes net carrying value | 213,764 | 97,876 | ||||||
| Asset-Based Revolving Credit Facility principal outstanding (1) | 5,000 | — | ||||||
| SBA Paycheck Protection Program loans | — | 0— | ||||||
| Long-term debt less unamortized discount and debt issuance costs | $ | 218,764 | $ | 208,559 | ||||
| Less current portion | (5,000 | ) | — | |||||
| Long-term debt less unamortized discount and debt issuance costs, net of current portion | $ | 213,764 | $ | 208,559 | ||||
| (1) | As of September 30, 2021, the Asset-Based Revolving Credit Facility (“ABL”), had a borrowing base of $24.6 million, 0 outstanding borrowings and $0.3 million of outstanding letters of credit, resulting in a $24.3 million borrowing base availability. |
6.75% Senior Secured2024 Notes,
On May 19, 2017, whom we issuedbelieve to be qualified institutional buyers, in a private placementplacement. The 2028 Notes and the related guarantees have not been and will not be registered under the Securities Act or the securities laws of any other jurisdiction and may not be offered or sold in the United States or to U.S. persons absent registration or an applicable exemption from, or in a transaction not subject to, the registration requirements of the Securities Act or any state securities laws. The transaction was assessed on a lender-specific level and was accounted for as a debt modification in accordance with FASB ASC Topic 470.
The Notes and the ABL Facility are secured by liens on substantially all of our and the Subsidiary Guarantors’ assets, other than certain excluded assets. The ABL Facility has a first-priority lien on our and the Subsidiary Guarantor’s accounts receivable, inventory, deposit and securities accounts, certain real estate and related assets (the “ABL Priority Collateral”). The Notes are secured by a first-priority lien on substantially all other assets of ours and the Subsidiary Guarantors (the “Notes Priority Collateral”). There is no direct lien on our Federal Communications Commission (“FCC”) licenses to the extent prohibited by law or regulation.
basis. We may redeem the 7.125% Notes, in whole or in part, at any time on or afterprior to June 1, 20202024 at a price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium as of, and accrued and unpaid interest, if any, to, but not including, the redemption date. At any time on or after June 1, 2020,2024, we may redeem some or all of the 2028 Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth in the 2028 Notes Indenture, plus accrued and unpaid interest, if any, to, but not including the redemption date. In addition, we may redeem up to 35% of the aggregate principal amount of the 2028 Notes before June 1, 20202024 with the net cash proceeds from certain equity offerings at a redemption price of 106.75%107.125% of the principal amount plus accrued and unpaid interest, if any, to, but not including the redemption date. We may also redeem up to 10% of the aggregate original principal amount of the 2028 Notes per twelve monthtwelve-month period, before June 1, 2020in connection with up to two redemptions in such twelve-month period, at a redemption price of 103%101% of the principal amount plus accrued and unpaid interest to, but not including, the redemption date.
The Indenture provides At September 30, 2021, we were, and we remain, in compliance with all of the covenants under the Indenture.
We$98.8 million, we are required to pay $17.2$6.6 million per year in interest on the 2024 Notes. As of September 30, 2017,2021, accrued interest on the 2024 Notes was $6.4$2.3 million.
During the three and nine-month periods ended September 30, 2020, $0.2 million and $0.6 million, respectively, of debt issuance costs associated with the Notes was amortized to interest expense.
The ABL Facility is a five-year $30.0 million revolving credit facility due May 19, 2022,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 offrom 0.25% to 0.375% per year.
year based on the level of borrowings.
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 At September 30, 2021, we were, and we remain, in compliance with all of the fiscal month most recently ended priorcovenants under Credit Agreement.
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 respectto designate the incurrence of the collateral.
2028 Notes, and any further refinancing of 2024 Notes through the issuance of additional 2028 Notes, as permitted indebtedness thereunder and to effect related arrangements for the interests in the ABL Priority Collateral and the Notes Priority Collateral. We incurred debt issue costs of $0.6$0.9 million that were recorded as an asset and are being amortized to
Prior Term Loan B and Revolving Credit Facility
Our prior credit facility consisted
Summary of long-term debt obligations
Long-term debt consisted of the following:
| As of December 31, 2016 | As of September 30, 2017 | |||||||
| (Dollars in thousands) | ||||||||
| 6.75% Senior Secured Notes | $ | — | $ | 255,000 | ||||
| Less unamortized debt issuance costs based on imputed interest rate of 7.08% | — | (6,004 | ) | |||||
| 6.75% Senior Secured Notes net carrying value | — | 248,996 | ||||||
| Asset-Based Revolving Credit Facility principal outstanding | — | 6,629 | ||||||
| Term Loan B principal amount | 263,000 | — | ||||||
| Less unamortized discount and debt issuance costs based on imputed interest rate of 4.78% | (2,371 | ) | — | |||||
| Term Loan B net carrying value | 260,629 | — | ||||||
| Revolver principal outstanding | 477 | — | ||||||
| Capital leases and other loans | 568 | 491 | ||||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs | 261,674 | 256,116 | ||||||
| Less current portion | (590 | ) | (6,741 | ) | ||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion | $ | 261,084 | $ | 249,375 | ||||
In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2017:
Other Debt
We have several capital leases related to office equipment. The obligation recorded at December 31, 2016 and September 30, 2017 represents the present value of future commitments under the capital lease agreements.
| Amount | ||||
| For the Twelve Months Ended September 30, | (Dollars in thousands) | |||
| 2018 | $ | 6,741 | ||
| 2019 | 108 | |||
| 2020 | 107 | |||
| 2021 | 121 | |||
| 2022 | 43 | |||
| Thereafter | 255,000 | |||
| $ | 262,120 | |||
Amount | ||||
For the Year Ended September 30, | (Dollars in thousands) | |||
| 2022 | $ | 0 | ||
| 2023 | 0 | |||
| 2024 | 98,815 | |||
| 2025 | 0 | |||
| 2026 | 0 | |||
| Thereafter | 114,731 | |||
| $ | 213,546 | |||
Our AmendedFAIR VALUE MEASUREMENTS
A maximum of 5,000,000 shares of common stock 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. The Board of Directors, or a committee appointed by the Board, has discretion subject to limits defined in the Plan, to modify the terms of any outstanding award.
Under the Plan, the Board, or a committee appointed by the 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$213.3 million, based on the prevailing interest rates and trading activity of our Notes.
September 30, 2021 | ||||||||||||||||
| Carrying Value on Balance Sheet | Fair Value Measurement Category | |||||||||||||||
| Level 1 | Level 2 | Level 3 | ||||||||||||||
(Dollars in thousands) | ||||||||||||||||
| Liabilities: | ||||||||||||||||
Estimated fair value of contingent earn-out consideration included inaccrued expenses | $ | 11 | — | — | $ | 11 | ||||||||||
| Long-term debt less unamortized discount and debt issuance costs | 208,559 | — | 208,314 | — | ||||||||||||
The following table reflects the components of stock-based compensation expenseoperating loss carryforwards resulting in a tax benefit recognized in the Condensed Consolidated Statementsoverall annual effective tax rate. We recognized a favorable tax adjustment attributable to the GAAP income recognition of Operationsthe PPP loan forgiveness within the quarter as a discrete adjustment for both federal and state jurisdictions where applicable given its unusual and infrequent nature.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Stock option compensation expense included in corporate expenses | $ | 94 | $ | 27 | $ | 296 | $ | 126 | ||||||||
| Restricted stock shares compensation expense included in corporate expenses | — | 225 | 24 | 1,100 | ||||||||||||
| Stock option compensation expense included in broadcast operating expenses | 19 | 7 | 67 | 41 | ||||||||||||
| Restricted stock shares compensation expense included in broadcast operating expenses | — | — | — | 224 | ||||||||||||
| Stock option compensation expense included in digital media operating expenses | 12 | 6 | 51 | 25 | ||||||||||||
| Restricted stock shares compensation expense included in digital media operating expenses | — | — | — | 124 | ||||||||||||
| Stock option compensation expense included in publishing operating expenses | 9 | 3 | 20 | 17 | ||||||||||||
| Restricted stock shares compensation expense included in publishing operating expenses | — | — | — | 36 | ||||||||||||
| Total stock-based compensation expense, pre-tax | $ | 134 | $ | 268 | $ | 458 | $ | 1,693 | ||||||||
| Tax benefit (expense) for stock-based compensation expense | (54 | ) | (107 | ) | (183 | ) | (677 | ) | ||||||||
| Total stock-based compensation expense, net of tax | $ | 80 | $ | 161 | $ | 275 | $ | 1,016 | ||||||||
Stock Option and Restricted Stock Grants
Eligible employees2021, we refinanced $112.8 million of the 2024 Notes by exchanging $112.8 million of the 2024 Notes into $114.7 million of newly issued 2028 Notes, incurring third-party debt modification costs during the quarter. For tax purposes, we considered these debt modification costs in our operating loss utilization analysis.
The Plan also allows for awards of restricted stock, which have been granted periodically to non-employee directors$19.7 million of the company. Awards granteddeferred tax assets related to non-employee directors are made in exchangestate net operating loss carryforwards of $15.7 million and other financial statement accrual assets of $4.0 million, 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. Restricted stock awards 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 independenta total valuation allowance 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 vest 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 are 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.
There were no stock options granted during the nine month period ended September 30, 2017. The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes valuation model were as follows$48.1 million for the three and nine month periodsyear ended September 30, 2016:
Activity with respect to the company’s option awards during the nine month period ended September 30, 2017 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, 2017 | 1,720,000 | $ | 5.12 | $ | 2.89 | 4.5 years | $ | 2,428 | ||||||||||
| Granted | — | — | — | |||||||||||||||
| Exercised | (122,413 | ) | 4.09 | 2.04 | ||||||||||||||
| Forfeited or expired | (143,125 | ) | 5.85 | 2.99 | ||||||||||||||
| Outstanding at September 30, 2017 | 1,454,462 | $ | 5.18 | $ | 2.95 | 3.9 years | $ | 2,292 | ||||||||||
| Exercisable at September 30, 2017 | 954,959 | $ | 5.63 | $ | 3.76 | 2.9 years | $ | 1,146 | ||||||||||
| Expected to Vest | 474,278 | $ | 5.19 | $ | 2.97 | 3.9 years | $ | 1,115 | ||||||||||
The aggregate intrinsic value represents the difference between the company’s closing stock price on September 30, 2017 of $6.60 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 nine month periods ended September 30, 2017 and 2016 was $0.9 million and $1.1 million, respectively.
As of September 30, 2017, there was $0.2 million 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 1.6 years.
On August 9, 2017, a restricted stock award of 33,066 shares was granted to an executive that vested immediately. The fair value of the restricted stock award was measured based on the grant date market price of our common shares and expensed as of the vesting date. The restricted stock award contains transfer restrictions under which they cannot be sold, pledged, transferred or assigned until three months from vesting date. The recipient of this restricted stock award is entitled to all of the rights of absolute ownership of therestricted stock from the date of grant, including the right to vote the shares and to receive dividends.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 award is considered issued and outstanding from the vest date of grant.
On February 24, 2017, a restricted stock award of 178,592 shares was granted to certain members of management that vested immediately. The fair value of each restricted stock award was measured based on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned until three months from vesting date. Recipients of these restricted stock awards were entitled to all of the rights of absolute ownership of therestricted stock from the date of grant including the right to vote the shares and to receive dividends.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 were considered issued and outstanding from the vest date of grant.
Activity with respect to the company’s restricted stock awards during the nine month period ended September 30, 2017 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, 2017 | — | $ | — | — | $ | — | ||||||||
| Granted | 211,658 | 7.01 | 0.2 years | 1,484 | ||||||||||
| Lapse of restrictions | (178,592 | ) | 7.05 | — | 1,259 | |||||||||
| Forfeited | — | — | — | — | ||||||||||
| Outstanding at September 30, 2017 | 33,066 | $ | 6.80 | 0.2 years | $ | 225 | ||||||||
14. COMMITMENTS AND CONTINGENCIES
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | (Dollars in thousands) | |||||||||||||||
| Stock option compensation expense included in unallocated corporate expenses | $ | 30 | $ | 23 | $ | 122 | $ | 75 | ||||||||
| Stock option compensation expense included in broadcast operating expenses | 32 | 31 | 106 | 92 | ||||||||||||
| Stock option compensation expense included in digital media operating expenses | 12 | 24 | 44 | 73 | ||||||||||||
| Stock option compensation expense included in publishing operating expenses | — | — | 1 | — | ||||||||||||
Total stock-based compensation expense, pre-tax | $ | 74 | $ | 78 | $ | 273 | $ | 240 | ||||||||
| Tax expense for stock-based compensation expense | (19 | ) | (20 | ) | (71 | ) | (62 | ) | ||||||||
| Total stock-based compensation expense, net of tax | $ | 55 | $ | 58 | $ | 202 | $ | 178 | ||||||||
While we intend to pay regular quarterly distributions, the actual declarationpurchase shares of such future distributions and the establishment of the per share amount, record dates, and payment dates are subject to final determination by our Board of Directors and dependent upon future earnings, cash flows, financial and legal requirements, and other factors. The current policy of the Board of Directors is to review each of these factors oncommon stock at a quarterly basis to determine the appropriate amount, if any, to allocate toward a cash distribution. In recent years, distributions have been approximately 20% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest. Adjusted EBITDA is a non-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included with this quarterly report on Form 10-Q. Future distributions, if any, are likelyset price, not to be approximately 30%less than the closing market price on the date of Adjusted EBITDA less cash paidaward, for capital expenditures, less cash paid for income taxes, and less cash paid for interest.
no consideration payable by the recipient. The following table shows distributions that have been declared and paid since January 1, 2016:
| Announcement Date | Payment Date | Amount Per Share | Cash Distributed (in thousands) | |||||||
| September 12, 2017 | September 29, 2017 | $ | 0.0650 | $ | 1,701 | |||||
| June 1, 2017 | June 30, 2017 | $ | 0.0650 | $ | 1,697 | |||||
| March 9, 2017 | March 30, 2017 | $ | 0.0650 | $ | 1,691 | |||||
| December 7, 2016 | December 31, 2016 | $ | 0.0650 | $ | 1,678 | |||||
| September 9, 2016 | September 30, 2016 | $ | 0.0650 | $ | 1,679 | |||||
| June 2, 2016 | June 30, 2016 | $ | 0.0650 | $ | 1,664 | |||||
| March 10, 2016 | April 5, 2016 | $ | 0.0650 | $ | 1,657 | |||||
Based on therelated number of shares underlying the stock option is fixed at the time of Class A and Class B currently outstanding, we expectthe grant. Options generally vest over a four-year period with a maximum term of five years from the vesting date.
NOTE 14. BASIC AND DILUTED NET EARNINGS PER SHARE
Basic net earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period.five years. Restricted stock awards that vested immediately duringare independent of option grants and are granted at no cost to the three month period ended March 31, 2017, were included inrecipient other than applicable taxes owed by the weighted average numberrecipient. The awards are considered issued and outstanding from the date of common shares used to compute basic earnings per share because these restricted stock awards contained dividend participation and voting rights. Diluted net earnings per sharegrant.
Options to purchase 1,454,462options using the Black-Scholes valuation model were as follows for the three- and 1,729,000 shares of Class A common stock were outstanding atnine-month periods ended September 30, 20172021 and 2016, respectively. Diluted weighted average shares outstanding exclude outstanding2020:
Three Months Ended | Nine Months Ended | Three Months Ended | Nine Months Ended | |||||||||||||
September 30, 2020 | September 30, 2020 | September 30, 2021 | September 30, 2021 | |||||||||||||
| Expected volatility | n/a | 53.96 | % | 79.99 | % | 75.98 | % | |||||||||
| Expected dividends | n/a | 7.30 | % | 0.00 | % | 0.00 | % | |||||||||
| Expected term (in years) | n/a | 7.6 | 8.0 | 7.8 | ||||||||||||
| Risk-free interest rate | n/a | 1.14 | % | 1.27 | 1.03 | % | ||||||||||
| 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, 2021 | 2,291,020 | $ | 3.23 | $ | 1.52 | 4.3 years | $ | — | ||||||||||||
| Granted | 270,000 | 2.14 | 1.55 | — | ||||||||||||||||
| Exercised | (192,507 | ) | 2.11 | 0.97 | 200 | |||||||||||||||
| Forfeited or expired | (157,446 | ) | 6.73 | 4.74 | — | |||||||||||||||
Outstanding at September 30, 2021 | 2,211,067 | $ | 2.95 | $ | 1.34 | 4.4 years | $ | 2,484 | ||||||||||||
Exercisable at September 30, 2021 | 1,209,942 | $ | 3.84 | $ | 1.75 | 2.6 years | $ | 640 | ||||||||||||
Expected to Vest | 950,568 | $ | 2.97 | $ | 1.35 | 4.3 years | $ | 2,391 | ||||||||||||
| 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, 2021 | 107,990 | $ | 1.85 | 1.67 years | $ | 112 | ||||||||||
| Granted | — | — | — | — | ||||||||||||
| Lapsed | (41,323 | ) | 2.42 | — | 100 | |||||||||||
| Forfeited | — | — | — | — | ||||||||||||
| Outstanding at September 30, 2021 | 66,667 | $ | 1.50 | 0.02 years | $ | 247 | ||||||||||
NOTE 15. DERIVATIVE INSTRUMENTS
We are exposedwas $22,000 of total unrecognized compensation cost related to fluctuations in interest rates. We actively monitor these fluctuations and use derivative instruments from time
Under FASB ASC Topic 815, “Derivatives and Hedging,” the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, shall be recognized currently in earnings.
On March 27, 2013, we entered into an interest rate swap agreement with Wells Fargo that began on March 28, 2014 withover a notional principal amountweighted-average period of $150.0 million. The agreement was entered to offset risks associated with the variable interest rate on the Term Loan B. Payments on the swap are due on a quarterly basis with a LIBOR floor of 0.625%. Pursuant to the terms, the swap was set to expire on March 28, 2019 at a fixed rate of 1.645%. The interest rate swap agreement was not designated as a cash flow hedge, and as a result, all changes in the fair value were recognized in the current period statement of operations rather than through other comprehensive income. On May 19, 2017, in connection with our Refinancing, we paid $0.8 million to terminate the interest rate swap.
The following table summarizes the fair value of our derivative instruments that are measured at fair value:
| As of December 31, 2016 | As of September 30, 2017 | |||||||
| (Dollars in thousands) | ||||||||
| Fair value of interest rate swap | $ | 514 | $ | — | ||||
NOTE 16. FAIR VALUE MEASUREMENTS
FASB ASC Topic 820 “Fair Value Measurements and Disclosures,” 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 FASB ASC Topic 820 hierarchy are as follows:
As of September 30, 2017, 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.
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:
| September 30, 2017 | ||||||||||||||||
| Total Fair Value and Carrying Value on Balance | Fair Value Measurement Category | |||||||||||||||
| Sheet | Level 1 | Level 2 | Level 3 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Assets | ||||||||||||||||
| Estimated fair value of other indefinite-lived intangible assets | $ | 313 | — | — | $ | 313 | ||||||||||
| Liabilities: | ||||||||||||||||
| Estimated fair value of contingent earn-out consideration included in accrued expenses | 38 | — | — | 38 | ||||||||||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs | 256,116 | — | 256,116 | — | ||||||||||||
NOTE 17. 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 recorded no adjustments to our unrecognized tax benefits as of September 30, 2017 and 2016.
We prospectively adopted ASU 2015-17, “Income Taxes, Balance Sheet Classification of Deferred Taxes”as of January 1, 2017. ASU 2015-17 requires that deferred tax assets and liabilities be classified as non-current on the balance sheet instead of separating the deferred tax assets and liabilities into current and non-current amounts. Our Condensed Consolidated Balance Sheet as of March 31, 2017 reflects the adoption of this guidance with a $9.4 million reduction in current deferred income tax assets, a $1.9 million increase in non-current deferred income tax assets and a $7.5 million reduction in non-current deferred income tax liabilities.Other than this revised presentation, the adoption of this ASU had no impact on our financial position, results of operations, or cash flows.
At December 31, 2016, we had net operating loss carryforwards for federal income tax purposes of approximately $150.7 million that expire in 2020 through 2034 and for state income tax purposes of approximately $1,021.2 million that expire in years 2017 through 2036. For financial reporting purposes at December 31, 2016 we had a valuation allowance of $4.5 million, net of federal benefit, to offset $4.2 million of the deferred tax assets related to the state net operating loss carryforwards and $0.3 million associated with asset impairments. Our evaluation was performed for tax years that remain subject to examination by major tax jurisdictions, which range from 2013 through 2016.
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.
Valuation Allowance (Deferred Taxes)
For financial reporting purposes, we recorded a valuation allowance of $4.5 million as of September 30, 2017 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. We regularly review our financial forecasts in an effort 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.
16. EQUITY TRANSACTIONS
The Company also records contingent earn-out consideration representing the estimated fair valueDirectors and dependent upon future earnings, cash flows, financial and legal requirements, and other factors. On May 6, 2020, our Board of future liabilities associated with acquisitions that may have additional paymentsDirectors voted to discontinue equity distributions until further notice 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 probabilitiesadverse economic impact of achievement used inthe
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. We evaluate claims based on what we believe to be both probable and reasonably estimable. With the exception of the matter described below, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. The company maintains insurance that may provide coverage for such matters.
In April 2016, pursuant to a counterclaim to a collection suit initiated by Salem, an award was issued against Salem for breach of contract and attorney fees. We filed an appeal against the award as well as a malpractice lawsuit against the lawyer that represented Salem in the collection lawsuit. A legal reserve of $0.5 million was recorded representing the total possible loss contingency without third party recoveries from our appeal, malpractice lawsuit or insurance claims. In March 2017, the case and all counterclaims were settled for a net amount of $0.3 million.
During the third quarter of 2016, we reclassed Salem Consumer Products, our e-commerce business that sells books, DVD’s and editorial content developed by our on-air personalities, from our Digital Media segment to our Broadcast segment. With this reclassification, all revenue and expenses generated by on-air hosts, including broadcast programs and e-commerce product sales are consolidated to assess the financial performance of each network program.
Our operating segments reflect howourchief operating decision makers, which we define as a collective group of senior executives, assessassesses the performance of each operating segment and determinedetermines the appropriate allocations of resources to each segment. We continue tocontinually review our operating segment classifications to align with operational changes in our business and may make future changes as necessary.
| Broadcast | Digital Media | Publishing | Unallocated Corporate Expenses | Consolidated | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Three Months Ended September 30, 2017 | ||||||||||||||||||||
| Net revenue | $ | 48,424 | $ | 10,446 | $ | 6,563 | $ | — | $ | 65,433 | ||||||||||
| Operating expenses | 37,040 | 8,169 | 6,686 | 4,233 | 56,128 | |||||||||||||||
| Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and net (gain) loss on the sale or disposal of assets | $ | 11,384 | $ | 2,277 | $ | (123 | ) | $ | (4,233 | ) | $ | 9,305 | ||||||||
| Depreciation | 1,920 | 792 | 159 | 211 | 3,082 | |||||||||||||||
| Amortization | 11 | 860 | 264 | — | 1,135 | |||||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | — | (12 | ) | — | — | (12 | ) | |||||||||||||
| Net (gain) loss on the sale or disposal of assets | 97 | — | — | (2 | ) | 95 | ||||||||||||||
| Net operating income (loss) | $ | 9,356 | $ | 637 | $ | (546 | ) | $ | (4,442 | ) | $ | 5,005 | ||||||||
| Three Months Ended September 30, 2016 | ||||||||||||||||||||
| Net revenue | $ | 51,052 | $ | 11,999 | $ | 8,221 | $ | — | $ | 71,272 | ||||||||||
| Operating expenses | 37,434 | 9,172 | 8,020 | 4,147 | 58,773 | |||||||||||||||
| Net operating income (loss) before depreciation, amortization, change in the estimated fair value of contingent earn-out consideration and net (gain) loss on the sale or disposal of assets | $ | 13,618 | $ | 2,827 | $ | 201 | $ | (4,147 | ) | $ | 12,499 | |||||||||
| Depreciation | 1,753 | 840 | 174 | 209 | 2,976 | |||||||||||||||
| Amortization | 22 | 1,091 | 228 | — | 1,341 | |||||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | — | (13 | ) | (183 | ) | — | (196 | ) | ||||||||||||
| Net (gain) loss on the sale or disposal of assets | (633 | ) | 176 | — | — | (457 | ) | |||||||||||||
| Net operating income (loss) | $ | 12,476 | $ | 733 | $ | (18 | ) | $ | (4,356 | ) | $ | 8,835 | ||||||||
| Broadcast | Digital Media | Publishing | Unallocated Corporate Expenses | Consolidated | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Nine Months Ended September 30, 2017 | ||||||||||||||||||||
| Net revenue | $ | 145,479 | $ | 31,998 | $ | 19,048 | $ | — | $ | 196,525 | ||||||||||
| Operating expenses | 108,807 | 25,241 | 18,705 | 13,183 | 165,936 | |||||||||||||||
| 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 sale or disposal of assets | $ | 36,672 | 6,757 | $ | 343 | $ | (13,183 | ) | $ | 30,589 | ||||||||||
| Depreciation | 5,668 | 2,389 | 515 | 599 | 9,171 | |||||||||||||||
| Amortization | 46 | 2,494 | 879 | 1 | 3,420 | |||||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | — | (54 | ) | — | — | (54 | ) | |||||||||||||
| Impairment of indefinite-lived long-term assets other than goodwill | — | — | 19 | — | 19 | |||||||||||||||
| Net (gain) loss on the sale or disposal of assets | (399 | ) | — | (9 | ) | (2 | ) | (410 | ) | |||||||||||
| Net operating income (loss) | $ | 31,357 | $ | 1,928 | $ | (1,061 | ) | $ | (13,781 | ) | $ | 18,443 | ||||||||
| Nine Months Ended September 30, 2016 | ||||||||||||||||||||
| Net revenue | $ | 149,768 | $ | 34,056 | $ | 19,802 | $ | — | $ | 203,626 | ||||||||||
| Operating expenses | 109,455 | 26,815 | 19,951 | 11,928 | 168,149 | |||||||||||||||
| 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 sale or disposal of assets | $ | 40,313 | $ | 7,241 | $ | (149 | ) | $ | (11,928 | ) | $ | 35,477 | ||||||||
| Depreciation | 5,431 | 2,392 | 489 | 638 | 8,950 | |||||||||||||||
| Amortization | 67 | 3,233 | 372 | 1 | 3,673 | |||||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | — | (119 | ) | (339 | ) | — | (458 | ) | ||||||||||||
| Impairment of long-lived assets | 700 | — | — | — | 700 | |||||||||||||||
| Net (gain) loss on the sale or disposal of assets | (2,175 | ) | 182 | (21 | ) | 6 | (2,008 | ) | ||||||||||||
| Net operating income (loss) | $ | 36,290 | $ | 1,553 | $ | (650 | ) | $ | (12,573 | ) | $ | 24,620 | ||||||||
| Broadcast | Digital Media | Publishing | Unallocated Corporate | Consolidated | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| As of September 30, 2017 | ||||||||||||||||||||
| Inventories, net | $ | — | $ | 327 | $ | 482 | $ | — | $ | 809 | ||||||||||
| Property and equipment, net | 86,187 | 6,603 | 1,326 | 8,087 | 102,203 | |||||||||||||||
| Broadcast licenses | 388,720 | — | — | — | 388,720 | |||||||||||||||
| Goodwill | 3,594 | 20,946 | 1,888 | 8 | 26,436 | |||||||||||||||
| Other indefinite-lived intangible assets | — | — | 313 | — | 313 | |||||||||||||||
| Amortizable intangible assets, net | 361 | 10,720 | 3,190 | 5 | 14,276 | |||||||||||||||
| As of December 31, 2016 | ||||||||||||||||||||
| Inventories, net | $ | — | $ | 300 | $ | 370 | $ | — | $ | 670 | ||||||||||
| Property and equipment, net | 86,976 | 6,634 | 1,779 | 7,401 | 102,790 | |||||||||||||||
| Broadcast licenses | 388,517 | — | — | — | 388,517 | |||||||||||||||
| Goodwill | 3,581 | 20,136 | 1,888 | 8 | 25,613 | |||||||||||||||
| Other indefinite-lived intangible assets | — | — | 332 | — | 332 | |||||||||||||||
| Amortizable intangible assets, net | 407 | 9,927 | 4,069 | 5 | 14,408 | |||||||||||||||
Broadcast | Digital Media | Publishing | Unallocated Corporate Expenses | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||||||||
| Net revenue | $ | 49,591 | $ | 10,645 | $ | 5,747 | $ | — | $ | 65,983 | ||||||||||
| Operating expenses | 37,463 | 8,269 | 5,213 | 4,284 | 55,229 | |||||||||||||||
| Net operating income (loss) before depreciation, amortization, and net (gain) loss on the disposition of assets | $ | 12,128 | $ | 2,376 | $ | 534 | $ | (4,284 | ) | $ | 10,754 | |||||||||
| Debt modification costs | — | — | — | 2,347 | 2,347 | |||||||||||||||
| Depreciation | 1,539 | 965 | 43 | 241 | 2,788 | |||||||||||||||
| Amortization | 4 | 375 | 48 | — | 427 | |||||||||||||||
| Net (gain) loss on the disposition of assets | (10,505 | ) | (148 | ) | 22 | 24 | (10,607 | ) | ||||||||||||
| Net operating income (loss) | $ | 21,090 | $ | 1,184 | $ | 421 | $ | (6,896 | ) | $ | 15,799 | |||||||||
Three Months Ended September 30, 2020 | ||||||||||||||||||||
| Net revenue | $ | 45,391 | $ | 9,808 | $ | 5,442 | $ | — | $ | 60,641 | ||||||||||
| Operating expenses | 34,283 | 7,144 | 5,814 | 3,849 | 51,090 | |||||||||||||||
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 | $ | 11,108 | $ | 2,664 | $ | (372 | ) | $ | (3,849 | ) | $ | 9,551 | ||||||||
| Depreciation | 1,626 | 746 | 70 | 235 | 2,677 | |||||||||||||||
| Amortization | 4 | 537 | 210 | — | 751 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (10 | ) | — | — | (10 | ) | |||||||||||||
| Net (gain) loss on the disposition of assets | 1,380 | — | 1 | — | 1,381 | |||||||||||||||
| Net operating income (loss) | $ | 8,098 | $ | 1,391 | $ | (653 | ) | $ | (4,084 | ) | $ | 4,752 | ||||||||
Broadcast | Digital Media | Publishing | Unallocated Corporate Expenses | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||||||
| Net revenue | $ | 140,422 | $ | 30,603 | $ | 18,093 | $ | — | $ | 189,118 | ||||||||||
| Operating expenses | 106,968 | 25,280 | 16,844 | 12,764 | 161,856 | |||||||||||||||
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 | $ | 33,454 | $ | 5,323 | $ | 1,249 | $ | (12,764 | ) | $ | 27,262 | |||||||||
| Debt modification costs | — | — | — | �� | 2,347 | 2,347 | ||||||||||||||
| Depreciation | 4,667 | 2,606 | 134 | 711 | 8,118 | |||||||||||||||
| Amortization | 12 | 1,204 | 337 | — | 1,553 | |||||||||||||||
| Net (gain) loss on the disposition of assets | (10,187 | ) | (83 | ) | (306 | ) | 24 | (10,552 | ) | |||||||||||
| Net operating income (loss) | $ | 38,962 | $ | 1,596 | $ | 1,084 | $ | (15,846 | ) | $ | 25,796 | |||||||||
Nine Months Ended September 30, 2020 | ||||||||||||||||||||
| Net revenue | $ | 130,041 | $ | 28,355 | $ | 13,366 | $ | — | $ | 171,762 | ||||||||||
| Operating expenses | 104,704 | 23,123 | 16,443 | 11,909 | 156,179 | |||||||||||||||
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 | $ | 25,337 | $ | 5,232 | $ | (3,077 | ) | $ | (11,909 | ) | $ | 15,583 | ||||||||
| Depreciation | 4,912 | 2,284 | 212 | 700 | 8,108 | |||||||||||||||
| Amortization | 18 | 1,928 | 631 | 1 | 2,578 | |||||||||||||||
Change in the estimated fair value of contingent earn-out consideration | — | (12 | ) | — | — | (12 | ) | |||||||||||||
| 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 | 1,489 | — | 1 | 4 | 1,494 | |||||||||||||||
| Net operating income (loss) | $ | 1,740 | $ | 1,022 | $ | (4,286 | ) | $ | (12,622 | ) | $ | (14,146 | ) | |||||||
Broadcast | Digital Media | Publishing | Unallocated Corporate | Consolidated | ||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
As of September 30, 2021 | ||||||||||||||||||||
| Inventories, net | $ | — | $ | — | $ | 907 | $ | — | $ | 907 | ||||||||||
| Property and equipment, net | 60,502 | 8,619 | 723 | 8,581 | 78,425 | |||||||||||||||
| Broadcast licenses | 320,008 | — | — | — | 320,008 | |||||||||||||||
| Goodwill | 2,750 | 19,790 | 1,446 | — | 23,986 | |||||||||||||||
| Amortizable intangible assets, net | 233 | 2,552 | — | — | 2,785 | |||||||||||||||
As of December 31, 2020 | ||||||||||||||||||||
| Inventories, net | $ | — | $ | — | $ | 495 | $ | — | $ | 495 | ||||||||||
| Property and equipment, net | 64,231 | 6,221 | 741 | 7,929 | 79,122 | |||||||||||||||
| Broadcast licenses | 319,773 | — | — | — | 319,773 | |||||||||||||||
| Goodwill | 2,746 | 19,565 | 1,446 | — | 23,757 | |||||||||||||||
| Amortizable intangible assets, net | 246 | 3,434 | 337 | — | 4,017 | |||||||||||||||
Date | Principal Repurchased | Cash Paid | % of Face Value | Bond Issue Costs | Net Loss | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||
October 25, 2021 | $ | 2,000 | $ | 2,020 | 101.00 | % | $ | 19 | $ | 39 | ||||||||||
October 12, 2021 | 250 | 251 | 100.38 | % | 2 | 3 | ||||||||||||||
October 5, 2021 | 763 | 766 | 100.38 | % | 7 | 10 | ||||||||||||||
October 4, 2021 | 628 | 629 | 100.13 | % | 6 | 7 | ||||||||||||||
| $ | 3,641 | $ | 3,666 | $ | 34 | 59 | ||||||||||||||
our Condensed Consolidated Financial Statements on Form
Our Condensed Consolidated Financial Statements are not directly comparable from period to period due to acquisitions and dispositionsotherwise, except as required by law.
During the third quarter of 2016, we reclassed Salem Consumer Products, our e-commerce business that sells books, DVD’s and editorial content developed by our on-air personalities, from Digital Media to Broadcast to assess the performance of each network program based on all revenue sources. Changes to our operating segments did not impact the reporting units used to test non-amortizable assets for impairment. All prior periods presented are updated to reflect the new composition of our operating segments. Refer to Note 19 – Segment Data in the notes to our Condensed Consolidated financial statements contained in Item 1 of this quarterly report on Form 10-Q for additional information.
the sale of block program time to national and local program producers; the sale of advertising time on our radio stations to national and local advertisers; the sale of banner advertisements on our station websites or on our mobile applications; the sale of digital streaming advertisements on our station websites or on our mobile applications; the sale of advertisements included in digital newsletters; fees earned for the creation of custom web pages and custom digital media campaigns for our advertisers through Salem Surround; the sale of advertising time on our national network; the syndication of programming on our national network; the sale of advertising time through podcasts and video-on-demand product sales and royalties for on-air host materials, including podcasts and programs; andother revenue such as events, including ticket sales and sponsorships, listener purchase programs, where revenue is generated from special discounts and incentives offered to our listeners from our advertisers; talent fees for voice-overs or custom endorsements from our on-air personalities and production services, and rental income for studios, towers or office space.Our principal sources of digital media revenue include: the sale of digital banner advertisements on our websites and mobile applications; the sale of digital streaming advertisements on websites and mobile applications; the support and promotion to stream third-party content on our websites; the sale of advertisements included in digital newsletters; the digital delivery of newsletters to subscribers; and the sale of video and graphic downloads. Our principal sources of publishing revenue include: the sale of books and e-books; publishing fees from authors; the sale of digital advertising on our magazine websites and digital newsletters; subscription fees for our print magazine; and the sale of print magazine advertising. 35 In each of our operating segments, the |
The rates we are able to charge for broadcast air timeairtime, advertising and other advertisementsproducts and services are dependent upon several factors, including:
Our principal sources
| the market and audience reached; the number |
Our principal sources of publishing revenue include:
impressions delivered;
Our five main formats are (1) Christian Teaching and Talk, (2) News Talk, (3) Contemporary Christian Music, (4) Spanish Language Christian Teaching and Talk and (5) Business.
Christian Teaching and Talk.We currently program 43 of our radio stations in our foundational format, Christian Teaching and Talk, which is talk programming emphasizing Christian and family themes. Through this format, a listener can hear Bible teachings and sermons, as well as gain insight to questions related to daily life, such as raising children or religious legal rights in education and in the workplace. This format uses block programming time to offer a learning resource and a source of personal support for listeners. Listeners often contact our programmers to ask questions, obtain materials on a subject matter or receive study guides based on what they have learned on the radio.
Block Programming.We sell blocks of airtime on our Christian Teaching and Talk format stations to a variety of national and local religious and charitable organizations that we believe create compelling radio programs. Historically, more than 95% of these religious and charitable organizations renew their annual programming relationships with us. Based on our historical renewal rates, we believe that block programming provides a steady and consistent source of revenue and cash flows. Our top ten programmers have remained relatively constant and average more than 30 years on-air. Over the last five years, block-programming revenue has generated 40% to 43% of our total net broadcast revenue.
Satellite Radio.We program SiriusXM Channel 131, the exclusive Christian Teaching and Talk channel on SiriusXM, reaching the entire nation 24 hours a day, seven days a week.
News Talk.We currently program 33 of our radio stations in a News Talk format. Our research shows that our News Talk format is highly complementary to our core Christian Teaching and Talk format. As programmed by Salem, both of these formats express conservative views and family values. Our News Talk format also provides for the opportunity to leverage syndicated talk programming produced by SRN to radio stations throughout the United States. Syndication of our programs allows Salem to reach audiences in markets in which we do not own or operate radio stations.
Contemporary Christian Music.We currently program 13 radio stations in a Contemporary Christian Music (“CCM”) format, branded The FISH® in most markets. Through the CCM format, we are able to bring listeners the words of inspirational recording artists, set to upbeat contemporary music. Our music format, branded “Safe for the Whole Family®”, features sounds that listeners of all ages can enjoy and lyrics that can be appreciated. The CCM genre continues to be popular. We believe that the listener base for CCM is underserved in terms of radio coverage, particularly in larger markets, and that our stations fill an otherwise void area in listener choices.
Spanish Language Christian Teaching and Talk. We currently program eight of our radio stations in a Spanish Language Christian Teaching and Talk format. This format is similar to our core Christian Teaching and Talk format in that it broadcasts biblical and family-themed programming, but the programming is specifically tailored for Spanish-speaking audiences. Additionally, block programming on our Spanish Language Christian Teaching and Talk stations is primarily local while Christian Teaching and Talk stations are primarily national.
Business. We currently program 13 of our radio stations in a business format. Our business format features financial commentators, business talk, and nationally recognized Bloomberg programming. The business format operates similar to our Christian Teaching and Talk format in that it features long-form block programming.
Each of our radio stations has a website specifically designed for that station. The station websites have digital banner advertisements, streaming, links to purchase goods featured by on-air advertisers, and links to our other digital media sites.
Surround. Revenues generated from our radio stations, networks and sales firms are reported as broadcast media revenue in our Condensed Consolidated financial statementsFinancial Statements included in Part 1 of this quarterly report on Form
We subscribe to Nielsen Audio for ratings services in 7 of our broadcast markets.
debated issues.
Trade
cash.
Web-based and digital content has been a growth area for Salem and continues to be a focus of future development.
Our church e-commerce websites, including WorshipHouseMedia.com, SermonSpice.com, SermonSearch.com, ChurchStaffing.com, and ChristianJobs.com, offer a variety of digital resources including videos, song tracks, sermon archives and job listings to pastors and Church leaders.
E-commerce also includes Eagle Wellness, which is a seller of nutritional supplements.
The revenuesoperations. Revenue generated from this segment areis reported as digital media revenue in our Condensed Consolidated Financial Statements of Operations included in Part 1 of this quarterly report on Form
Salem Publishing™ produces and distributes theSinging News® magazine and operates a website specifically designed for this print magazine. The website has digital banner advertisements, streaming, links to purchase goods featured by advertisers, and links to our other digital media sites. Salem Author Services includes Xulon Press™ and Mill City Press which offer print-on-demand self-publishing services for authors. We acquired Mill City Press from Hillcrest Publishing Group, Inc., on August 1, 2016. Xulon Press™ publishes books for Christian authors while Mill City Press publishes books for all general market publications.
The revenuesRevenues generated from this segment are reported as publishing revenue in our Condensed Consolidated Financial Statements of Operations included in Part 1 of this quarterly report on Form
The primary
KNOWN TRENDS AND UNCERTAINTIES
Broadcastobsolescence charges.
Revenues from print magazines, including2021 compared to 14.3% and 22.1%, respectively, of our total net broadcast spot advertising revenue and subscription revenues, are challenged both economically and byduring the increasing usesame period of other mediums that deliver comparable information. Book sales are contingent upon overall economic conditions and our ability to attract and retain authors. Because digital media has been a growth area for us, decreases in digital revenue streams could adversely affect our operating results, financial condition and results of operations. the prior year.
Same-Station Definition
Reclassifications
During the three months ended September 30, 2017, we reclassified certain revenue streams within our digital media operating segment and certain revenue streams within our publishing operating segment to conform to the current period presentation.
RESULTS OF OPERATIONS
Three months ended September 30, 2017 compared to the three months ended September 30, 2016
The following factors affected our results of operations and cash flows for the three months ended September 30, 2017 as compared to the same period of the prior year:
Financing
Acquisitions
Net Broadcast Revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Broadcast Revenue | $ | 51,052 | $ | 48,424 | $ | (2,628 | ) | (5.1 | )% | 71.6 | % | 74.0 | % | |||||||||||
| Same Station Net Broadcast Revenue | $ | 50,670 | $ | 48,321 | $ | (2,349 | ) | (4.6 | )% | |||||||||||||||
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
| Three Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Block program time: | ||||||||||||||||
| National | $ | 12,425 | 24.3 | % | $ | 12,014 | 24.8 | % | ||||||||
| Local | 9,137 | 17.9 | 8,640 | 17.8 | ||||||||||||
| 21,562 | 42.2 | 20,654 | 42.6 | |||||||||||||
| Broadcast Advertising: | ||||||||||||||||
| National | 3,300 | 6.5 | 3,325 | 6.9 | ||||||||||||
| Local | 16,098 | 31.5 | 14,341 | 29.6 | ||||||||||||
| 19,398 | 38.0 | 17,666 | 36.5 | |||||||||||||
| Station Digital | 1,734 | 3.4 | 1,639 | 3.4 | ||||||||||||
| Infomercials | 741 | 1.5 | 605 | 1.2 | ||||||||||||
| Network | 4,723 | 9.2 | 4,558 | 9.4 | ||||||||||||
| Other Revenue | 2,894 | 5.7 | 3,302 | 6.8 | ||||||||||||
| Net Broadcast Revenue | $ | 51,052 | 100.0 | % | $ | 48,424 | 100.0 | % | ||||||||
In late August 2017, our Houston broadcast market was impacted by Hurricane Harvey followed by Hurricane Irma in early September that impacted our Miami, Tampa and Orlando broadcast markets. We estimate total lost revenues from both storms to be approximately $0.1 million across all broadcast markets impacted, which includes orders that were cancelled in anticipation of the storms and losses for programs and advertisements that could not broadcast due to the loss of power.
The net decline in block programming revenue of $0.9 million includes a $0.6 million decline in programming on our Christian Teaching stations, a $0.3 million decline in programming on our Business format stations, and a decline of $0.2 million decline in programming previously generated from our Louisville market, that was partially offset by a $0.2 million increase in programming on our News Talk format stations. Declines in programming, particularly at the local level, resulted from program cancellations that we believe are due to increased competition from other broadcasters. Declines in national programming revenue reflect the non-renewal of a program that was featured on 19 of our Christian Teaching and Talk stations and declines in business programs as they pursue content that remains in compliance with securities rules and regulations. There were no changes in programming rates as compared to the same period of the prior year, however our programming rates may be impacted in the future due to this increased competition.
Advertising revenue, net of agency commissions, declined by $1.7 million, of which $0.6 million was due to political advertising that was recognized during the third quarter of 2016 based on the elections cycle. The remaining $1.1 million decline includes a $1.0 million decline in local advertising on our CCM stations, particularly in our Dallas market, due to lower ratings and an increase in competition from other advertisers and a $0.2 million decline in local advertising on our Christian Teaching and Talk format stations. These declines resulted from increased competition from other broadcasters and agencies that reduce the number of advertisements placed. This can, in turn, create lower demand and lower rates. We have undertaken efforts to retool our music, image and promotions to capture a younger demographic that we believe will improve the ratings for our CCM stations in the Dallas market. We are beginning to see some improved ratings but it will take additional time to turn the improved ratings into improved revenue.
Digital revenue generated from our radio station and network websites declined by $0.1 million due to the number of political related digital campaigns during the third quarter of 2016 based on the elections cycle. Rates charged were consistent with those during the same period of the prior year.
Declines in infomercial revenue reflect our effort to feature programming that is tailored to our audience and consistent with our company values. We continue to seek alternatives to infomercial programs that we believe are not of interest to our audience.
Network revenue decreased $0.2 million due to due to the number of political related campaigns during the third quarter of 2016 based on the elections cycle. Rates charged were consistent with those during the same period of the prior year.
Other revenue increased $0.4 million due to a $0.2 million increase in event revenue due to higher attendance and ticket sales for local events such as concerts and speaking events, a $0.1 million increase in listener purchase program revenue from a higher audience demand with respect to participation in sales incentives and discount programs and $0.1 million increase in broadcast tower rental fees.
On a Same Station basis, net broadcast revenue decreased $2.3 million, which reflects these items net of the impact of stations that were acquired or are operating under different formats.
Net Digital Media Revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Digital Media Revenue | $ | 11,999 | $ | 10,446 | $ | (1,553 | ) | (12.9 | )% | 16.8 | % | 16.0 | % | |||||||||||
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
| Three Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Digital Advertising, net | $ | 7,305 | 60.9 | % | $ | 6,111 | 58.5 | % | ||||||||
| Digital Streaming | 1,103 | 9.2 | 1,107 | 10.6 | ||||||||||||
| Digital Subscriptions | 1,561 | 13.0 | 1,646 | 15.8 | ||||||||||||
| Digital Downloads | 1,111 | 9.2 | 950 | 9.1 | ||||||||||||
| e-commerce | 600 | 5.0 | 545 | 5.2 | ||||||||||||
| Other Revenues | 319 | 2.7 | 87 | 0.8 | ||||||||||||
| Net Digital Media Revenue | $ | 11,999 | 100.0 | % | $ | 10,446 | 100.0 | % | ||||||||
Digital advertising revenue, net of agency commissions, declined by $1.2 million on a consolidated basis. This decline was attributable to lower page views on our conservative opinion websites, primarily Townhall Media, as compared to the same period of the prior year due to the timing of the 2016 election and a reduction in political advertisements. Page views for conservative opinion websites are typically higher during election years due to higher level of interest in content, for both desktop and mobile devices. Changes in the Facebook newsfeed algorithm have negatively impacted the volume of our desktop page views. Page views from Facebook declined 22.0% as compared to the same period of the prior year. To offset declines in page views generated from Facebook, we have continued to develop and promote the use of mobile applications, particularly for our Christian mobile applications. As mobile page views carry fewer advertisements and typically have shorter site visits, our growth in mobile application generated traffic is larger than our growth in revenue.
Digital streaming revenue was consistent with that of the same period of the prior year with no changes in sales volume or rates.
Digital subscription revenue increased $0.1 million due to higher distribution levels including additional subscriptions from acquisitions including Turner Investment Products in September of 2016 and Intelligence Reporter in August of 2017 that were partially offset by declines in the number of subscribers to Skousen’s Five Star Trader and Fast Money Alert newsletters. There were no changes in subscription rates as compared to the same period of the prior year.
Digital download revenue decreased $0.2 million due to a lower volume of downloads as compared to the same period of the prior year due in part to content featured during 2016 that covered the 15th anniversary of the September 11th terrorist attacks. There were no changes in rates charged to our customers for digital downloads as compared to the same period of the prior year.
E-commerce revenue declined by $0.1 million due to discounts offered on products sold through our wellness website. The average price per unit declined 17% while the number of products sold increased 10.0%. The discounts result from increased competition in the online market place that is driving prices down.
Other revenue includes miscellaneous sources such as event revenue, revenue sharing arrangements for purchases made from applications, and mail list rentals. The decrease of $0.2 million reflects the impact of a Townhall and Red State Gathering event held during third quarter of 2016 leading up to the presidential election.
Net Publishing Revenue
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Publishing Revenue | $ | 8,221 | $ | 6,563 | $ | (1,658 | ) | (20.2 | )% | 11.5 | % | 10.0 | % | |||||||||||
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
| Three Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Book Sales | $ | 6,410 | 78.0 | % | $ | 5,633 | 85.8 | % | ||||||||
| Estimated Sales Returns & Allowances | (1,645 | ) | (20.0 | ) | (1,595 | ) | (24.3 | ) | ||||||||
| E-Book Sales | 755 | 9.2 | 621 | 9.5 | ||||||||||||
| Self-Publishing Fees | 1,634 | 19.9 | 1,096 | 16.7 | ||||||||||||
| Print Magazine Subscriptions | 327 | 4.0 | 287 | 4.4 | ||||||||||||
| Print Magazine Advertisements | 272 | 3.3 | 183 | 2.8 | ||||||||||||
| Digital Advertising | 217 | 2.6 | 106 | 1.6 | ||||||||||||
| Other Revenue | 251 | 3.0 | 232 | 3.5 | ||||||||||||
| Net Publishing Revenue | $ | 8,221 | 100.0 | % | $ | 6,563 | 100.0 | % | ||||||||
On a consolidated basis, book sales declined by $0.8 million due to a reduction in the number of print books sold by Regnery Publishing based on a lower number of release dates within the period. Book sales from Salem Author Services, our self-publishing operations of Xulon Press and Mill City Press, were consistent with the same period of the prior year. The decrease in sales from Regnery Publishing reflects a 17% reduction in sales volume that was partially offset by a 4% increase in the average price per unit sold. Within Salem Author Services, consolidated sales includes a $0.2 million increase in sales from Mill City Press offset by a $0.2 million decline in sales from Xulon Press™. These results include the impact of Hurricane Irma, which resulted in delays in production due to the loss of power in the Orlando area. We estimate the impact to be approximately $0.2 million of revenue for the three months ended September 30, 2017. There were no changes in rates charged as compared to the same period of the prior year. Sales of Regnery Publishing books are directly attributable to the composite mix of titles released and available in each period. Revenues can vary significantly based on the book release date and the number of titles that achieve bestseller lists, which can increase awareness and demand for a book.
The $0.1 million decrease in estimated sales returns and allowances resulted from lower sales of Regnery Publishing print books, a reduction in the historical average return rate for Regnery Political books, and a reduction to the reserve for backlist titles.
Regnery Publishing e-book sales decreased $0.1 million due to a 30% decrease in the average sales price per unit in addition to a 33% decrease in the number of books sold. 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 bestseller lists, which can increase awareness and demand for the book.
Self-publishing fees decreased overall by $0.5 million due to a decline of $0.6 million from a lower sales volume for Xulon Press™ that was offset by a $0.1 million increase in volume from Mill City Press, which was acquired on August 1, 2016. There were no changes in fees charged to our customers as compared to the same period of the prior year. We believe that our ability to cross-promote our self-publishing services to authors interested in Regnery Publishing provides us with ongoing growth potential.
Declines in print magazine subscription and print magazine advertising revenue are due to the continual decline within this business and our planned reduction in the number of print publications produced. We ceased publishing Preaching Magazine™, YouthWorker Journal™, FaithTalk Magazine™ and Homecoming® The Magazine as of the May 2017 publication due to continual declines in the number of subscribers. Lower demand and distribution levels resulted in corresponding declines in advertising revenues.
Digital adverting revenue decreased $0.1 million due to the closure of the Salem Publishing Homecoming website and transfer of the Preaching.com and Youthworker.com websites to our Salem Web Network division with the ceasing of publications of these print magazines. There were no changes in sales volume or rates.
Broadcast Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Broadcast Operating Expenses | $ | 37,434 | $ | 37,040 | $ | (394 | ) | (1.1 | )% | 52.5 | % | 56.6 | % | |||||||||||
| Same Station Broadcast Operating Expenses | $ | 37,013 | $ | 36,938 | $ | (75 | ) | (0.2 | )% | |||||||||||||||
Broadcast operating expenses declined by $0.4 million including a $0.7 million reduction in employee related expenses including sales-based commissions and incentives consistent with lower revenues that was offset by a $0.3 million increase in bad debt expense.
On a same-station basis, broadcast operating expenses decreased by $0.1 million. The decrease in broadcast operating expenses on a same station basis reflects these items net of the impact of start-up costs associated with acquisitions of $0.1 million and $0.4 million associated with the Louisville market.
Digital Media Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Digital Media Operating Expenses | $ | 9,172 | $ | 8,169 | $ | (1,003 | ) | (10.9 | )% | 12.9 | % | 12.5 | % | |||||||||||
Digital media operating expense declined by $1.0 million due to a $0.3 million reduction in sales-based commissions and incentives consistent with lower revenues, a $0.2 million decline royalty fees, a $0.2 million reduction in travel and entertainment costs, a $0.1 million decrease in professional services, and a $0.1 million combined reduction in facility related expenses and advertising costs.
Publishing Operating Expenses
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Publishing Operating Expenses | $ | 8,020 | $ | 6,686 | $ | (1,334 | ) | (16.6 | )% | 11.3 | % | 10.2 | % | |||||||||||
Publishing operating expenses declined by $1.3 million of which $0.6 million was due to lower payroll related expenses and $0.6 million related to a lower consolidated cost of goods sold. Cost of goods sold includes a $0.7 million decline for Regnery Publishing based on a reduction in the number of books sold and a $0.1 million decline for Salem Publishing, which reduced the number of print publications produced, offset by a $0.2 million increase from a higher sales volume for Salem Author Services. The gross profit margin for Regnery Publishing was 55% for the three months ended September 30, 2017 as compared to 49% for the same period of the prior year as declines in sales volume resulted in comparable savings in material costs. Regnery Publishing margins are impacted by the volume of e-book sales, which have higher margins due to the nature of delivery and lack of sales returns and allowances. The gross profit margin for our self-publishing entities was 20% for the three months ended September 30, 2017, as compared to 36% for the same period of the prior year due to higher material costs, including paper costs associated with sales of print-on-demand books.
Unallocated Corporate Expenses
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Unallocated Corporate Expenses | $ | 4,147 | $ | 4,233 | $ | 86 | 2.1 | % | 5.8 | % | 6.5 | % | ||||||||||||
Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating segments. The increase of $0.1 million reflects the non-cash stock-based compensation charge associated with a restricted stock award and a $0.1 million increase in net payroll related costs associated with higher staffing levels and annual pay increases that were offset by a $0.1 million decline in legal fees.
Depreciation Expense
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Depreciation Expense | $ | 2,976 | $ | 3,082 | $ | 106 | 3.6 | % | 4.2 | % | 4.7 | % | ||||||||||||
Depreciation expense increased $0.1 million compared to the same period of the prior year. The increase reflects the impact of recent capital expenditures associated with computer software and office equipment that have shorter estimated useful lives than towers and broadcast assets. There were no changes in our depreciation methods or in the estimated useful lives of our asset groups.
Amortization Expense
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Amortization Expense | $ | 1,341 | $ | 1,135 | $ | (206 | ) | (15.4 | )% | 1.9 | % | 1.7 | % | |||||||||||
Amortization expense decreased by $0.2 million compared to the same period of the prior year. Increases in amortization associated with acquisitions, including Cycle Prophet and Mill City Press in September 2016, were offset with a reductions due to intangible assets acquired with Eagle Publishing and WorshipHouseMedia.com that were fully amortized as of June 30, 2017. There were no changes in our amortization methods or the estimated useful lives of our intangible asset groups.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Change in the Estimated Fair Value of Contingent Earn-Out Consideration | $ | (196 | ) | $ | (12 | ) | $ | 184 | (93.9 | )% | (0.3 | )% | — | % | ||||||||||
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. 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.
During the three month period ended September 30, 2017, we decreased the estimated fair value of our contingent earn-out liabilities by $12,000 compared to a net decrease of $196,000 during the same period of the prior year. These changes are based on actual results as compared to the estimates used in our probability analysis for each contingency. Refer to Note 5 of our Condensed Consolidated financial statements for a detailed analysis of the changes in our assumptions and the impact for each contingency.
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.
Net (Gain) Loss on the Sale or Disposal of Assets
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net (Gain) Loss on the Sale or Disposal of Assets | $ | (457 | ) | $ | 95 | $ | 552 | (120.8 | )% | (0.6 | )% | 0.1 | % | |||||||||||
The net loss on the sale or disposal of assets of $0.1 million for the three month period ended September 30, 2017 includes $77,000 related to transmitter equipment in Dallas, Texas that is no longer in use and in addition to various other fixed asset disposals. We recorded a net loss of $2,000 for equipment damaged in our Tampa, Florida market as a result of hurricane Irma in September 2017.
The net gain on the sale or disposal of assets of $0.5 million for the three month period ended September 30, 2016 includes a $0.7 million gain from a land easement in our South Carolina market offset by $0.2 million in various fixed asset disposals.
Other Income (Expense)
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Interest Income | $ | 1 | $ | 1 | $ | — | — | % | — | % | — | % | ||||||||||||
| Interest Expense | (3,726 | ) | (4,802 | ) | (1,076 | ) | 28.9 | % | (5.2 | )% | (7.3 | )% | ||||||||||||
| Change in the Fair Value of Interest Rate Swap | 856 | — | (856 | ) | (100.0 | )% | 1.2 | % | — | % | ||||||||||||||
| Loss on Early Retirement of Long-Term Debt | (18 | ) | — | 18 | (100.0 | )% | — | % | — | % | ||||||||||||||
| Net Miscellaneous Income and (Expenses) | 7 | (80 | ) | (87 | ) | (1,242.9 | )% | — | % | (0.1 | )% | |||||||||||||
Interest income represents earnings on excess cash and interest due under promissory notes.
Interest expense includes interest due on outstanding debt balances, interest due on our swap agreement prior to termination, and non-cash accretion associated with deferred installments and contingent earn-out consideration associated with our acquisition activity. The increase of $1.1 million reflects the Notes and ABL outstanding as of the period ending September 30, 2017 with interest payable in December 2017, as compared to the Term Loan B and Revolver during the same period of the prior year.
The $0.9 million decline in the fair value of interest rate swap reflects the termination of our swap agreement on May 19, 2017, as comparted to the mark-to-market fair value adjustment during the same period of the prior year.
There was no loss on early retirement of long-term debt as compared to the same period of the prior year when a repayment was made on our then outstanding Term Loan B.
Net miscellaneous income and expenses includes royalty income and usage fees for real estate properties. During the three months ending September 30, 2017, we recorded a non-recurring loss of $78,000 on an investment.
Provision for Income Taxes
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Provision for Income Taxes | $ | 3,763 | $ | 170 | $ | (3,593 | ) | (95.5 | )% | 5.3 | % | 0.3 | % | |||||||||||
Our provision for income taxes decreased $3.6 million to $0.2 million from $3.8 million for the same period of the prior year due to the $1.6 million out-of-period adjustment recognized at September 30, 2016 and the impact of our current period tax analysis that reflects pre-tax operating income of $0.1 million. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate was 137.9% for the three months ended September 30, 2017 compared to 63.2% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards. The effective tax rate for the current period of 137.9% is based on the operating results and the impact of non-deductible expenses, changes in the valuation allowance and discrete tax items. Net income before income taxes for the three months ended September 30, 2017 was $0.1 million; the tax adjustments (excluding discrete tax items) amounted to $117,000; and discrete items including incentive stock options, non-qualified stock options, and restricted stock, amounted to $53,000.
Net Income (Loss)
| Three Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Income (Loss) | $ | 2,192 | $ | (46 | ) | $ | (2,238 | ) | (102.1 | )% | 3.1 | % | (0.1 | )% | ||||||||||
We recognized a net loss of $46,000 for the three month period ended September 30, 2017 compared to net income $2.2 million during the same period of the prior year. Net operating income decreased by $3.8 million due to a $5.8 million decline in net revenue that was offset by a $2.0 million decline in operating expenses. The impact of our operating results resulted in a $3.6 million decrease in our provision for income taxes that was offset by a $1.1 million increase in interest expense and the $0.8 million favorable impact of our interest rate swap on the prior year.
Nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
The following factors affected our results of operations and cash flows for the nine months ended September 30, 2017 as compared to the same period of the prior year:
Financing
|
Acquisitions
Net Broadcast Revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Broadcast Revenue | $ | 149,768 | $ | 145,479 | $ | (4,289 | ) | (2.9 | )% | 73.6 | % | 74.0 | % | |||||||||||
| Same Station Net Broadcast Revenue | $ | 148,523 | $ | 144,848 | $ | (3,675 | ) | (2.5 | )% | |||||||||||||||
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
| Nine Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Block program time: | ||||||||||||||||
| National | $ | 36,881 | 24.6 | % | $ | 36,439 | 25.0 | % | ||||||||
| Local | 27,151 | 18.1 | 25,852 | 17.8 | ||||||||||||
| 64,032 | 42.7 | 62,291 | 42.8 | |||||||||||||
| Broadcast Advertising: | ||||||||||||||||
| National | 9,724 | 6.5 | 9,961 | 6.8 | ||||||||||||
| Local | 47,792 | 31.9 | 43,365 | 29.8 | ||||||||||||
| 57,516 | 38.4 | 53,326 | 36.6 | |||||||||||||
| Station Digital | 5,036 | 3.4 | 5,239 | 3.6 | ||||||||||||
| Infomercials | 1,957 | 1.3 | 1,821 | 1.3 | ||||||||||||
| Network | 12,930 | 8.6 | 13,198 | 9.1 | ||||||||||||
| Other Revenue | 8,297 | 5.6 | 9,604 | 6.6 | ||||||||||||
| Net Broadcast Revenue | $ | 149,768 | 100.0 | % | $ | 145,479 | 100.0 | % | ||||||||
In late August 2017, our Houston broadcast market was impacted by Hurricane Harvey followed by Hurricane Irma in early September that impacted our Miami, Tampa and Orlando broadcast markets. We estimate total lost revenues from both storms to be approximately $0.1 million across all broadcast markets impacted, which includes orders cancelled in anticipation of the storms and losses for programs and advertisements that could not broadcast due to the loss of power.
The net decline in block programming revenue of $1.7 million includes a $1.3 million decline in programming on our Christian Teaching and Talk stations, a $0.5 million decline in programming on our Business stations and a $0.6 million decline programming previously generated from our Louisville market, which was offset by a $0.8 million increase programming on our News Talk stations. Declines, particularly from local programming, resulted from cancellations that we believe are due to increased competition from other broadcasters. Declines in national programming revenue reflect the non-renewal of a program that was featured on 19 of our Christian Teaching and Talk stations and declines in business programs as they pursue content that remains in compliance with securities rules and regulations. There were no changes in programming rates as compared to the same period of the prior year, however rates may be impacted in the future due to this increased competition for programming dollars.
Advertising revenue, net of agency commissions, decreased by $4.2 million of which $1.5 million was due to political advertising that was recognized during 2016 based on the elections cycle. The remaining $2.7 million decrease includes a $2.2 million decline in local advertising on our CCM stations, particularly in our Dallas market due to lower ratings and from higher competition from other broadcasters and a $0.6 million decrease in local advertising on our Christian Teaching and Talk stations. Higher competition from other broadcasters and agencies reduce the number of advertisements placed that in turns creates lower demand and lower rates, particularly for unsold spots. We have undertaken efforts to retool our music, image and promotions to capture a younger demographic that we believe will improve the ratings for our CCM stations in the Dallas market. We are beginning to see some improved ratings but it will take additional time to turn the improved ratings into improved revenue.
Digital revenue generated from our radio station and network websites increased $0.2 million, which reflects an increase in sales of licensed products through Salem Consumer Products. There were no changes in rates as compared to the same period of the prior year.
Declines in infomercial revenue reflect our effort to feature programming that is tailored to our audience and consistent with our company values. We continue to seek alternatives to infomercial programs that we believe are not of interest to our audience.
Network revenue increased by $0.3 million, including a $0.6 million increase from a revenue share agreement and a $0.2 million increase in advertising sales with our national talk shows that we believe is attributable to our increased exposure and media presence during the 2016 presidential debates that were offset by a $0.5 million decline in political advertising revenue based on the 2016 election cycle.
Other revenue increased $1.3 million due to a $0.7 million increase in listener purchase program revenue from a higher audience demand with respect to participation in sales incentives and discount programs, a $0.5 million increase in event revenue due to higher attendance and ticket sales for local events such as concerts and speaking events, and a $0.1 million increase in broadcast tower rental fees.
On a Same Station basis, net broadcast revenue decreased $3.7 million, which reflects these items net of the impact of stations that were acquired or are operating under different formats.
Net Digital Media Revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Digital Media Revenue | $ | 34,056 | $ | 31,998 | $ | (2,058 | ) | (6.0 | )% | 16.7 | % | 16.3 | % | |||||||||||
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
| Nine Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Digital Advertising, Net | $ | 19,727 | 57.9 | % | $ | 18,391 | 57.5 | % | ||||||||
| Digital Streaming | 3,360 | 9.9 | 3,371 | 10.5 | ||||||||||||
| Digital Subscriptions | 4,550 | 13.3 | 4,766 | 14.9 | ||||||||||||
| Digital Downloads | 4,118 | 12.1 | 3,644 | 11.4 | ||||||||||||
| e-commerce | 1,799 | 5.3 | 1,558 | 4.9 | ||||||||||||
| Other Revenue | 502 | 1.5 | 268 | 0.8 | ||||||||||||
| Net Digital Media Revenue | $ | 34,056 | 100.0 | % | $ | 31,998 | 100.0 | % | ||||||||
Digital advertising revenue, net of agency commissions, declined by $1.3 million on a consolidated basis. This decline was attributable to lower page views on our conservative opinion websites, primarily Townhall Media, as compared to the same period of the prior year due to the timing of the 2016 election. Page views for conservative opinion websites are typically higher during election years due to higher level of interest in content, both desktop and mobile. Changes in the Facebook newsfeed algorithm have negatively impacted the volume of our desktop page views. Page views from Facebook declined 25.4% as compared to the same period of the prior year. To offset declines in page views generated from Facebook, we have continued to develop and promote the use of mobile applications, particularly for our Christian mobile applications. As mobile page views carry fewer advertisements and typically have shorter site visits, our growth in mobile application generated traffic is larger than our growth in revenue.
Digital streaming revenue was consistent with the prior year with no changes in sales volume or rates.
Digital subscription revenue increased by $0.2 million due to higher distribution levels from acquisitions including Retirement Watch and Turner Investment Products in 2016 and Intelligence Reporter in August of 2017, that were partially offset by a decline in the number of subscribers to Skousen’s Five Star Trader and Fast Money Alert newsletters. There were no changes in subscriber rates as compared to the same period of the prior year.
Digital download revenue declined by $0.5 million due to a lower volume of downloads generated as compared to the same period of the prior year. Of this decline, $0.3 million was attributable to WorshipHouseMedia.com and $0.2 million was attributable to SermonSpice.com. Declines in downloads of third-party produced videos are common throughout the industry as users become more adept at creating their own content. We believe that our content is unique and valuable and that the number of downloads of our content will not be impacted as severely by user created content. In addition, there was a lower volume of downloads as compared to the same period of the prior year due in part to content in 2016 that covered the 15th anniversary of the September 11th terrorist attacks. There were no changes in rates charged to our customers for digital downloads as compared to the same period of the prior year.
E-commerce revenue declined by $0.2 million due to discounts offered on products sold through our wellness website. The average price per unit declined 15% with a 2% decline in the number of products sold. The discounts result from increased competition in the online market place that is driving prices down.
Other revenue includes event revenue, revenue sharing arrangements for purchases made from applications, and mail list rentals. The decrease of $0.2 million reflects the impact of a Townhall and Red State Gathering event held during third quarter of 2016 leading up to the presidential election.
Net Publishing Revenue
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Publishing Revenue | $ | 19,802 | $ | 19,048 | $ | (754 | ) | (3.8 | )% | 9.7 | % | 9.7 | % | |||||||||||
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
| Nine Months Ended September 30, | ||||||||||||||||
| 2016 | 2017 | |||||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Book Sales | $ | 14,242 | 71.9 | % | $ | 13,594 | 71.4 | % | ||||||||
| Estimated Sales Returns & Allowances | (4,082 | ) | (20.6 | ) | (2,969 | ) | (15.6 | ) | ||||||||
| E-Book Sales | 1,712 | 8.7 | 1,463 | 7.7 | ||||||||||||
| Self-Publishing Fees | 4,680 | 23.6 | 3,972 | 20.8 | ||||||||||||
| Print Magazine Subscriptions | 1,087 | 5.5 | 892 | 4.7 | ||||||||||||
| Print Magazine Advertisements | 726 | 3.7 | 605 | 3.2 | ||||||||||||
| Digital Advertising | 583 | 2.9 | 545 | 2.8 | ||||||||||||
| Other Revenue | 854 | 4.3 | 946 | 5.0 | ||||||||||||
| Net Publishing Revenue | $ | 19,802 | 100.0 | % | $ | 19,048 | 100.0 | % | ||||||||
On a consolidated basis, book sales declined by $0.6 million due to a $1.9 million decline in book sales from Regnery Publishing that were offset by a $1.2 million increase in book sales from Salem Author Services, our self-publishing operations of Xulon Press and Mill City Press. Regnery Publishing book sales declined 16% in volume with a 1% reduction in the average price per unit sold. The $1.2 million increase in book sales generated from Salem Author Services included a $1.1 million increase from Mill City Press, which we acquired on August 1, 2016, and a $0.1 million increase in book sales from Xulon Press™. These results include the impact of Hurricane Irma, which resulted in delays in production due to the loss of power in the Orlando area. We estimate the impact to be approximately $0.2 million of revenue for the three months ended September 30, 2017. There were no changes in rates charged as compared to the same period of the prior year. Sales of books through Regnery Publishing are directly attributable to the number of titles released each period and the composite mix of titles. Revenues can vary significantly based on the book release date and the number of titles that achieve bestseller lists, which can increase awareness and demand for the book.
The $1.1 million decrease in estimated sales returns and allowances resulted from lower sales of Regnery Publishing print books, a reduction in the historical average return rate for Regnery Political books and a reduction to the reserve associated with backlist titles.
Regnery Publishing e-book sales decreased $0.2 million due to a decrease in sales volume of 6% and a decrease of 18% in the average price per unit sold. E-book sales can also vary based on the composite mix of titles released and available in each period. Revenues can vary significantly based on the book release date and the number of titles that achieve bestseller lists, which can increase awareness and demand for the book.
Self-publishing fees decreased $0.7 million which includes a $1.3 million decline in sales volume from Xulon Press™ that was offset by a $0.6 million increase in sales volume from Mill City Press, which was acquired in August 2016. There were no changes in self-publishing fees charged to authors as compared to the same period of the prior year. We believe that our ability to cross-promote our self-publishing services to authors interested in Regnery Publishing provides us with ongoing growth potential.
Declines in print magazine subscription and print magazine advertising revenue are due to the continual decline within this business and our planned reduction in the number of print publications produced. We ceased publishing Preaching Magazine™, YouthWorker Journal™, FaithTalk Magazine™ and Homecoming® The Magazine as of the May 2017 publication due to continual declines in the number of subscribers. Lower demand and distribution levels resulted in corresponding declines in advertising revenues.
Digital adverting revenue decreased $38,000 due to the closure of the Salem Publishing Homecoming website and transfer of the Preaching.com and Youthworker.com websites to our Salem Web Network division with the ceasing of publications of these print magazines. There were no changes in sales volume or rates.
Other revenue consists of miscellaneous sources such as change fees, trailers and website revenues. The increase of $0.1 million was generated by Mill City Press that was acquired on August 1, 2016.
Broadcast Operating Expenses
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Broadcast Operating Expenses | $ | 109,455 | $ | 108,807 | $ | (648 | ) | (0.6 | )% | 53.8 | % | 55.4 | % | |||||||||||
| Same Station Broadcast Operating Expenses | $ | 108,144 | $ | 107,964 | $ | (180 | ) | (0.2 | )% | |||||||||||||||
Broadcast operating expenses declined by $0.6 million including a $0.9 million reduction in sales-based commissions and incentives consistent with lower revenues, a $0.7 million favorable litigation matter, and a $0.3 million decline in music license fees, that were offset by a $0.7 million increase in bad debt expense, a $0.4 million increase in payroll related costs associated with higher personnel levels and annual rate increases, and a $0.2 million increase in non-cash stock-based compensation expense.
On a same-station basis, broadcast operating expenses decreased by $0.2 million. The decrease in broadcast operating expenses on a same station basis reflects these items net of the impact of start-up costs associated with acquisitions and format changes and the impact of the Louisville market LMA.
Digital Media Operating Expenses
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Digital Media Operating Expenses | $ | 26,815 | $ | 25,241 | $ | (1,574 | ) | (5.9 | )% | 13.2 | % | 12.8 | % | |||||||||||
Digital media operating expenses declined by $1.6 million due to a $0.6 million reduction in sales-based commissions and incentives, a $0.4 million reduction in advertising and promotion costs, a $0.4 million reduction in royalties and a $0.3 million decrease in travel and entertainment costs that were offset by a $0.1 million increase in bad debt expenses.
Publishing Operating Expenses
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Publishing Operating Expenses | $ | 19,951 | $ | 18,705 | $ | (1,246 | ) | (6.2 | )% | 9.8 | % | 9.5 | % | |||||||||||
Publishing operating expenses declined by $1.2 million of which $0.6 million was due to a reduction in the consolidated cost of goods sold. Cost of goods sold reflects a $1.4 million decline for Regnery Publishing based on a reduction in the number of books sold and a $0.2 million decline for Salem Publishing, which reduced the number of print publications produced, offset by a $1.0 million increase in the cost of goods sold for Salem Author Services. The gross profit margin for Regnery Publishing was 52% for the nine months ended September 30, 2017 as compared to 48% for the same period of the prior year. Regnery Publishing margins are impacted by the volume of e-book sales, which have higher margins due to the nature of delivery and lack of sales returns and allowances. The gross profit margin for our self-publishing entities was 27% for the nine months ended September 30, 2017 as compared to 31% for the same period of the prior year due to higher paper costs. In addition, there was a $0.7 million decline in payroll related expenses and a $0.2 million decline in travel and entertainment expenses that were offset by a $0.3 million increase in advertising and promotion expenses.
Unallocated Corporate Expenses
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Unallocated Corporate Expenses | $ | 11,928 | $ | 13,183 | $ | 1,255 | 10.5 | % | 5.9 | % | 6.7 | % | ||||||||||||
Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax and treasury, that are not directly attributable to any one of our operating segments. The net increase of $1.3 million includes a $0.9 million non-cash stock-based compensation charge associated with restricted stock awards and a $0.5 million increase in net payroll related costs due to higher staffing levels and annual rate increases that were offset by a $0.2 million decrease professional fees.
Impairment of Long-Lived Assets
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Impairment of Long-Lived Assets | $ | 700 | $ | — | $ | (700 | ) | (100.0 | )% | 0.3 | % | — | % | |||||||||||
Based on changes in management’s planned usage, we classified land in Covina, California as held for sale as of June 2012. At that time we evaluated the land for impairment in accordance with guidance for impairment of long-lived assets held for sale. We determined that the carrying value of the land exceeded the estimated fair value less costs to sell and recorded an impairment charge of $5.6 million associated with the land based on our estimated sale price at that time. In December 2012, after several purchase offers for the land were terminated, we obtained a third-party valuation for the land. Based on the fair value determined by the third-party, we recorded an additional impairment charge of $1.2 million associated with the land. While we continued to market the land for sale and had no intention to use the land in our operations, we had not received successful offers. Based on the amount of time that the land had been held for sale, we obtained a third-party valuation for the land as of June 2016. Based on this fair value appraisal, we recorded an additional $0.7 million impairment charge associated with the land during the three months ended June 30, 2016. In August 2017, we received an escrow deposit under an agreement to sell the land in Covina, California for $1.0 million dollars. The land is recorded in assets held for sale and has not been used in operations. The sale is subject to the buyer’s ability complete due diligence on their expected use of the land and is currently expected to close in the latter half of 2020.
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill | $ | — | $ | 19 | $ | 19 | 100.0 | % | — | % | — | % | ||||||||||||
We reviewed magazine mastheads for impairment at June 30, 2017 based on management’s plan to cease publishing Preaching Magazine™, YouthWorker Journal™, FaithTalk Magazine™ and Homecoming® The Magazine upon issuance of the May 2017 issues. We have received purchase offers from third parties interested in acquiring the rights to continue publishing Preaching Magazine™, but we have not closed on or agreed to final terms. Because of the likelihood that these print magazines would be sold or otherwise disposed of before the end of their previously estimated life, we performed impairment tests as of March 31, 2017. Due to reductions in forecasted operating cash flows and indications of interest from potential buyers, we then recorded an impairment charge of $19,000 associated with mastheads.
Depreciation Expense
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Depreciation Expense | $ | 8,950 | $ | 9,171 | $ | 221 | 2.5 | % | 4.4 | % | 4.7 | % | ||||||||||||
Depreciation expense increased $0.2 million compared to the same period of the prior year. The increase reflects the impact of recent capital expenditures associated with computer software and office equipment that have shorter estimated useful lives than towers and broadcast assets. There were no changes in our depreciation methods or in the estimated useful lives of our asset groups.
Amortization Expense
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Amortization Expense | $ | 3,673 | $ | 3,420 | $ | (253 | ) | (6.9 | )% | 1.8 | % | 1.7 | % | |||||||||||
The decline in amortization expense reflects the impact of the intangible assets acquired with Eagle Publishing and WorshipHouseMedia.com that were fully amortized as during 2017, compared to generating amortization expense of $0.9 million during the prior year that were offset with the $0.6 million amortization of intangible assets acquired related to 2016 acquisitions of Cycle Prophet in September 2016 and Mill City Press in September 2016. There were no changes in our amortization methods or in the estimated useful lives of our intangible asset groups.
Change in the Estimated Fair Value of Contingent Earn-Out Consideration
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Change in the Estimated Fair Value of Contingent Earn-Out Consideration | $ | (458 | ) | $ | (54 | ) | $ | 404 | (88.2 | )% | (0.2 | )% | — | % | ||||||||||
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. 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.
During the nine month period ended September 30, 2017, we decreased the estimated fair value of our contingent earn-out liabilities by $54,000 compared to a net decrease of $458,000 during the same period of the prior year. These changes are based on actual results as compared to the estimates used in our probability analysis for each contingency. Refer to Note 5 of our Condensed Consolidated financial statements for a detailed analysis of the changes in our assumptions and the impact for each contingency.
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.
Net Gain on the Sale or Disposal of Assets
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Gain on the Sale or Disposal of assets | $ | (2,008 | ) | $ | (410 | ) | $ | 1,598 | (79.6 | )% | (1.0 | )% | (0.2 | )% | ||||||||||
The net gain on the sale or disposal of assets of $0.4 million for the nine month period ended September 30, 2017 includes a $0.5 million gain from the sale of a former transmitter site in our Dallas, Texas market and a $16,000 net gain from disposals within our print magazine segment that was offset a $77,000 loss related to transmitter equipment in Dallas, Texas that is no longer in use in addition to various other fixed asset disposals. We recorded a net loss of $2,000 for equipment damaged in our Tampa, Florida market as a result of hurricane Irma in September 2017.
The net gain on the sale or disposal of assets of $2.0 million for the nine month period ended September 30, 2016 includes a $1.9 million gain on the sale of our Miami tower site and $0.7 million gain from a land easement in our South Carolina market offset by a $0.4 million charge associated with the relocation of our offices in the Washington D.C. market and various losses from fixed asset disposals.
Other Income (Expense)
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Interest Income | $ | 4 | $ | 3 | $ | (1 | ) | (25.0 | )% | — | % | — | % | |||||||||||
| Interest Expense | (11,252 | ) | (12,156 | ) | (904 | ) | 8.0 | % | (5.5 | )% | (6.2 | )% | ||||||||||||
| Change in the Fair Value of Interest Rate Swap | (1,325 | ) | 357 | 1,682 | (126.9 | )% | (0.7 | )% | 0.2 | % | ||||||||||||||
| Loss on Early Retirement of Long-Term Debt | (32 | ) | (2,775 | ) | (2,743 | ) | 8,571.9 | % | — | % | (1.4 | )% | ||||||||||||
| Net Miscellaneous Income and (Expenses) | 7 | (80 | ) | (87 | ) | (1,242.9 | )% | — | % | — | % | |||||||||||||
Interest income represents earnings on excess cash and interest due under promissory notes.
Interest expense includes interest due on outstanding debt balances, interest due on our swap agreement prior to termination, and non-cash accretion associated with deferred installments and contingent earn-out consideration associated with our acquisition activity. The increase of $0.9 million reflects the Notes outstanding as of the period ending September 30, 2017 with interest payable in December 2017, as compared to the Term Loan B during the same period of the prior year.
The $1.7 million favorable impact of change in the fair value of interest rate swap reflects the mark-to-market impact prior to the termination of our swap agreement on May 19, 2017. There was no loss on early retirement of long-term debt as compared to the same period of the prior year when a repayment was made on our then outstanding Term Loan B.
Loss on early retirement of long-term debt reflects $0.6 million of the unamortized discount and $1.5 million of unamortized debt issuance costs associated with the payoff and termination of the Term Loan B on May 19, 2017, $0.1 million of unamortized debt issuance costs associated with the Revolver terminated on May 19, 2017, and a $0.6 million loss to exit and terminate our swap agreement on May 19, 2017, as well as $41,000 of the unamortized discount and unamortized debt issuance costs associated with prior principal redemptions of the Term Loan B.
Net miscellaneous income and expenses includes royalty income and usage fees for real estate properties. During the nine months ending September 30, 2017, we recorded a non-recurring loss of $78,000 on an investment.
Provision for Income Taxes
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Provision for Income Taxes | $ | 6,121 | $ | 1,506 | $ | (4,615 | ) | (75.4 | )% | 3.0 | % | 0.08 | % | |||||||||||
Our provision for income taxes decreased $4.6 million to $1.5 million for the nine months ended September 30, 2017 compared to $6.1 million for the same period of the prior year due to the $1.6 million out-of-period adjustment recognized at September 30, 2016 and the impact of our current period tax analysis that reflects pre-tax operating income of $0.1 million with no changes in our annualized tax adjustments. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate was 39.7% for the nine months ended September 30, 2017 compared to 50.9% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards.
Net Income (Loss)
| Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2016 | 2017 | Change $ | Change % | 2016 | 2017 | |||||||||||||||||||
| (Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
| Net Income (Loss) | $ | 5,901 | $ | 2,286 | $ | (3,615 | ) | (61.3 | )% | 2.9 | % | 1.2 | % | |||||||||||
We recognized net income of $2.3 million for the nine month period ended September 30, 2017 compared to $5.9 million in the same period of the prior year. The $3.6 million decline includes a $6.2 million decline in net operating income, a $2.7 million increase in loss on the early retirement of long-term debt, and a $0.9 million increase in interest expense offset by a $4.6 million decrease in our provision for income taxes and a $1.7 million favorable impact of the change in fair value of our interest rate swap.
NON-GAAP FINANCIAL MEASURES
Management uses certain
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
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
Financial Measures:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue | ||||||||||||||||
| Net broadcast revenue | $ | 51,052 | $ | 48,424 | $ | 149,768 | $ | 145,479 | ||||||||
| Net broadcast revenue – acquisitions | ― | (58 | ) | — | (398 | ) | ||||||||||
| Net broadcast revenue – dispositions | (382 | ) | (45 | ) | (1,187 | ) | (131 | ) | ||||||||
| Net broadcast revenue – format change | ― | ― | (58 | ) | (102 | ) | ||||||||||
| Same Station net broadcast revenue | $ | 50,670 | $ | 48,321 | $ | 148,523 | $ | 144,848 | ||||||||
| Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses | ||||||||||||||||
| Broadcast operating expenses | $ | 37,434 | $ | 37,040 | $ | 109,455 | $ | 108,807 | ||||||||
| Broadcast operating expenses – acquisitions | (9 | ) | (102 | ) | (9 | ) | (635 | ) | ||||||||
| Broadcast operating expenses – dispositions | (412 | ) | ― | (1,214 | ) | (102 | ) | |||||||||
| Broadcast operating expenses – format change | ― | ― | (88 | ) | (106 | ) | ||||||||||
| Same Station broadcast operating expenses | $ | 37,013 | $ | 36,938 | $ | 108,144 | $ | 107,964 | ||||||||
| Reconciliation of Station Operating Income to Same Station Operating Income | ||||||||||||||||
| Station Operating Income | $ | 13,618 | $ | 11,384 | $ | 40,313 | $ | 36,672 | ||||||||
| Station operating (income) loss –acquisitions | 9 | 44 | 9 | 237 | ||||||||||||
| Station operating (income) loss – dispositions | 30 | (45 | ) | 27 | (29 | ) | ||||||||||
| Station operating (income) loss – format change | ― | ― | 30 | 4 | ||||||||||||
| Same Station – Station Operating Income | $ | 13,657 | $ | 11,383 | $ | 40,379 | $ | 36,884 | ||||||||
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue | ||||||||||||||||
Net broadcast revenue | $ | 45,391 | $ | 49,591 | $ | 130,041 | $ | 140,422 | ||||||||
Net broadcast revenue – acquisitions | — | (264 | ) | — | (343 | ) | ||||||||||
Net broadcast revenue – dispositions | (192 | ) | 2 | (635 | ) | (36 | ) | |||||||||
Net broadcast revenue – format change | (104 | ) | (216 | ) | (384 | ) | (561 | ) | ||||||||
Same Station net broadcast revenue | $ | 45,095 | $ | 49,113 | $ | 129,022 | $ | 139,482 | ||||||||
Reconciliation of Broadcast Operating Expenses To Same Station Broadcast Operating Expenses | ||||||||||||||||
Broadcast operating expenses | $ | 34,283 | $ | 37,463 | $ | 104,704 | $ | 106,968 | ||||||||
Broadcast operating expenses – acquisitions | — | (168 | ) | — | (206 | ) | ||||||||||
Broadcast operating expenses – dispositions | (344 | ) | (14 | ) | (1,225 | ) | (199 | ) | ||||||||
Broadcast operating expenses – format change | (252 | ) | (209 | ) | (771 | ) | (593 | ) | ||||||||
Same Station broadcast operating expenses | $ | 33,687 | $ | 37,072 | $ | 102,708 | $ | 105,970 | ||||||||
Reconciliation of Operating Income to Same Station Operating Income | ||||||||||||||||
Station Operating Income | $ | 11,108 | $ | 12,128 | $ | 25,337 | $ | 33,454 | ||||||||
Station operating (income) loss –acquisitions | — | (96 | ) | — | (137 | ) | ||||||||||
Station operating loss – dispositions | 152 | 16 | 590 | 163 | ||||||||||||
Station operating (income) loss – format change | 148 | (7 | ) | 387 | 32 | |||||||||||
Same Station – Station Operating Income | $ | 11,408 | $ | 12,041 | $ | 26,314 | $ | 33,512 | ||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | ||||||||||||||||
| Net broadcast revenue | $ | 51,052 | $ | 48,424 | $ | 149,768 | $ | 145,479 | ||||||||
| Less broadcast operating expenses | (37,434 | ) | (37,040 | ) | (109,455 | ) | (108,807 | ) | ||||||||
| Station Operating Income | $ | 13,618 | $ | 11,384 | $ | 40,313 | $ | 36,672 | ||||||||
| Net digital media revenue | $ | 11,999 | $ | 10,446 | $ | 34,056 | $ | 31,998 | ||||||||
| Less digital media operating expenses | (9,172 | ) | (8,169 | ) | (26,815 | ) | (25,241 | ) | ||||||||
| Digital Media Operating Income | $ | 2,827 | $ | 2,277 | $ | 7,241 | $ | 6,757 | ||||||||
| Net publishing revenue | $ | 8,221 | $ | 6,563 | $ | 19,802 | $ | 19,048 | ||||||||
| Less publishing operating expenses | (8,020 | ) | (6,686 | ) | (19,951 | ) | (18,705 | ) | ||||||||
| Publishing Operating Income (Loss) | $ | 201 | $ | (123 | ) | $ | (149 | ) | $ | 343 | ||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Calculation of Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | ||||||||||||||||
Net broadcast revenue | $ | 45,391 | $ | 49,591 | $ | 130,041 | $ | 140,422 | ||||||||
Less broadcast operating expenses | (34,283 | ) | (37,463 | ) | (104,704 | ) | (106,968 | ) | ||||||||
Station Operating Income | $ | 11,108 | $ | 12,128 | $ | 25,337 | $ | 33,454 | ||||||||
Net digital media revenue | $ | 9,808 | $ | 10,645 | $ | 28,355 | $ | 30,603 | ||||||||
Less digital media operating expenses | (7,144 | ) | (8,269 | ) | (23,123 | ) | (25,280 | ) | ||||||||
Digital Media Operating Income | $ | 2,664 | $ | 2,376 | $ | 5,232 | $ | 5,323 | ||||||||
Net publishing revenue | $ | 5,442 | $ | 5,747 | $ | 13,366 | $ | 18,093 | ||||||||
Less publishing operating expenses | (5,814 | ) | (5,213 | ) | (16,443 | ) | (16,844 | ) | ||||||||
Publishing Operating Income (Loss) | $ | (372 | ) | $ | 534 | $ | (3,077 | ) | $ | 1,249 | ||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Reconciliation of Net Income (Loss) to Operating Income and Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | ||||||||||||||||
| Net income (Loss) | $ | 2,192 | $ | (46 | ) | $ | 5,901 | $ | 2,286 | |||||||
| Plus provision for income taxes | 3,763 | 170 | 6,121 | 1,506 | ||||||||||||
| Plus loss on early retirement of long-term debt | 18 | ― | 32 | 2,775 | ||||||||||||
| Plus change in fair value of interest rate swap | (856 | ) | ― | 1,325 | (357 | ) | ||||||||||
| Plus interest expense, net of capitalized interest | 3,726 | 4,802 | 11,252 | 12,156 | ||||||||||||
| Less interest income | (1 | ) | (1 | ) | (4 | ) | (3 | ) | ||||||||
| Less net miscellaneous (income) and expenses | (7 | ) | 80 | (7 | ) | 80 | ||||||||||
| Net operating income | $ | 8,835 | $ | 5,005 | $ | 24,620 | $ | 18,443 | ||||||||
| Less net (gain) loss on the sale or disposal of assets | (457 | ) | 95 | (2,008 | ) | (410 | ) | |||||||||
| Less change in the estimated fair value of contingent earn-out consideration | (196 | ) | (12 | ) | (458 | ) | (54 | ) | ||||||||
| Plus impairment of long-lived assets | ― | ― | 700 | ― | ||||||||||||
| Plus impairment of indefinite-lived long-term assets other than goodwill | ― | ― | ― | 19 | ||||||||||||
| Plus depreciation and amortization | 4,317 | 4,217 | 12,623 | 12,591 | ||||||||||||
| Plus unallocated corporate expenses | 4,147 | 4,233 | 11,928 | 13,183 | ||||||||||||
| Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | $ | 16,646 | $ | 13,538 | $ | 47,405 | $ | 43,772 | ||||||||
| Station Operating Income | $ | 13,618 | $ | 11,384 | $ | 40,313 | $ | 36,672 | ||||||||
| Digital Media Operating Income | 2,827 | 2,277 | 7,241 | 6,757 | ||||||||||||
| Publishing Operating Income (Loss) | 201 | (123 | ) | (149 | ) | 343 | ||||||||||
| $ | 16,646 | $ | 13,538 | $ | 47,405 | $ | 43,772 | |||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Reconciliation of Net Income (Loss) to Operating Income and Station Operating Income, Digital Media Operating Income and Publishing Operating Income (Loss) | ||||||||||||||||
Net income (loss) | $ | 329 | $ | 22,094 | $ | (57,390 | ) | $ | 24,674 | |||||||
Plus provision for income taxes | 401 | 837 | 31,180 | 479 | ||||||||||||
Plus net miscellaneous income and (expenses) | (1 | ) | (2 | ) | 45 | (87 | ) | |||||||||
Plus gain on the forgiveness of PPP loans | — | (11,212 | ) | — | (11,212 | ) | ||||||||||
Plus (gain) loss on early retirement of long-term debt | — | 56 | (49 | ) | 56 | |||||||||||
Plus interest expense, net of capitalized interest | 4,024 | 4,026 | 12,069 | 11,887 | ||||||||||||
Less interest income | (1 | ) | — | (1 | ) | (1 | ) | |||||||||
Net operating income (loss) | $ | 4,752 | $ | 15,799 | $ | (14,146 | ) | $ | 25,796 | |||||||
Plus net (gain) loss on the disposition of assets | 1,381 | (10,607 | ) | 1,494 | (10,552 | ) | ||||||||||
Plus change in the estimated fair value of contingent earn-out consideration | (10 | ) | — | (12 | ) | — | ||||||||||
Plus debt modification costs | — | 2,347 | — | 2,347 | ||||||||||||
Plus impairment of indefinite-lived long-term assets other than goodwill | — | — | 17,254 | — | ||||||||||||
Plus impairment of goodwill | — | — | 307 | — | ||||||||||||
Plus depreciation and amortization | 3,428 | 3,215 | 10,686 | 9,671 | ||||||||||||
Plus unallocated corporate expenses | 3,849 | 4,284 | 11,909 | 12,764 | ||||||||||||
Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Loss | $ | 13,400 | $ | 15,038 | $ | 27,492 | $ | 40,026 | ||||||||
Station Operating Income | $ | 11,108 | $ | 12,128 | $ | 25,337 | $ | 33,454 | ||||||||
Digital Media Operating Income | 2,664 | 2,376 | 5,232 | 5,323 | ||||||||||||
Publishing Operating Income (Loss) | (372 | ) | 534 | (3,077 | ) | 1,249 | ||||||||||
| $ | 13,400 | $ | 15,038 | $ | 27,492 | $ | 40,026 | |||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2016 | 2017 | 2016 | 2017 | |||||||||||||
| (Dollars in thousands) | ||||||||||||||||
| Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) | ||||||||||||||||
| Net income (loss) | $ | 2,192 | $ | (46 | ) | $ | 5,901 | $ | 2,286 | |||||||
| Plus interest expense, net of capitalized interest | 3,726 | 4,802 | 11,252 | 12,156 | ||||||||||||
| Plus provision for income taxes | 3,763 | 170 | 6,121 | 1,506 | ||||||||||||
| Plus depreciation and amortization | 4,317 | 4,217 | 12,623 | 12,591 | ||||||||||||
| Less interest income | (1 | ) | (1 | ) | (4 | ) | (3 | ) | ||||||||
| EBITDA | $ | 13,997 | $ | 9,142 | $ | 35,893 | $ | 28,536 | ||||||||
| Less net (gain) loss on the sale or disposal of assets | (457 | ) | 95 | (2,008 | ) | (410 | ) | |||||||||
| Less change in the estimated fair value of contingent earn-out consideration | (196 | ) | (12 | ) | (458 | ) | (54 | ) | ||||||||
| Plus impairment of long-lived assets | ― | ― | 700 | ― | ||||||||||||
| Plus impairment of indefinite-lived long-term assets other than goodwill | ― | ― | ― | 19 | ||||||||||||
| Plus changes the fair value of interest rate swap | (856 | ) | ― | 1,325 | (357 | ) | ||||||||||
| Plus net miscellaneous (income) and expenses | (7 | ) | 80 | (7 | ) | 80 | ||||||||||
| Plus loss on early retirement of long-term debt | 18 | ― | 32 | 2,775 | ||||||||||||
| Plus non-cash stock-based compensation | 134 | 268 | 458 | 1,693 | ||||||||||||
| Adjusted EBITDA | $ | 12,633 | $ | 9,573 | $ | 35,935 | $ | 32,282 | ||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2020 | 2021 | 2020 | 2021 | |||||||||||||
(Dollars in thousands) | ||||||||||||||||
Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) | ||||||||||||||||
Net income (loss) | $ | 329 | $ | 22,094 | $ | (57,390 | ) | $ | 24,674 | |||||||
Plus interest expense, net of capitalized interest | 4,024 | 4,026 | 12,069 | 11,887 | ||||||||||||
Plus provision for income taxes | 401 | 837 | 31,180 | 479 | ||||||||||||
Plus depreciation and amortization | 3,428 | 3,215 | 10,686 | 9,671 | ||||||||||||
Less interest income | (1 | ) | — | (1 | ) | (1 | ) | |||||||||
EBITDA | $ | 8,181 | $ | 30,172 | $ | (3,456 | ) | $ | 46,710 | |||||||
Plus net (gain) loss on the disposition of assets | 1,381 | (10,607 | ) | 1,494 | (10,552 | ) | ||||||||||
Plus change in the estimated fair value of contingent earn-out consideration | (10 | ) | — | (12 | ) | — | ||||||||||
Plus debt modification costs | — | 2,347 | — | 2,347 | ||||||||||||
Plus impairment of indefinite-lived long-term assets other than goodwill | — | — | 17,254 | — | ||||||||||||
Plus impairment of goodwill | — | — | 307 | — | ||||||||||||
Plus net miscellaneous (income) and expenses | (1 | ) | (2 | ) | 45 | (87 | ) | |||||||||
Plus (gain) loss on early retirement of long-term debt | — | 56 | (49 | ) | 56 | |||||||||||
Plus gain on the forgiveness of PPP loans | — | (11,212 | ) | — | (11,212 | ) | ||||||||||
Plus non-cash stock-based compensation | 74 | 78 | 273 | 240 | ||||||||||||
Adjusted EBITDA | $ | 9,625 | $ | 10,832 | $ | 15,856 | $ | 27,502 | ||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Broadcast Revenue | $ | 45,391 | $ | 49,591 | $ | 4,200 | 9.3 | % | 74.9 | % | 75.2 | % | ||||||||||||
Same Station Net Broadcast Revenue | $ | 45,095 | $ | 49,113 | $ | 4,018 | 8.9 | % | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Block Programming: | ||||||||||||||||
National | $ | 11,732 | 25.8 | % | $ | 12,502 | 25.2 | % | ||||||||
Local | 5,771 | 12.7 | 6,299 | 12.7 | % | |||||||||||
| 17,503 | 38.5 | 18,801 | 37.9 | % | ||||||||||||
Broadcast Advertising: | ||||||||||||||||
National | 3,635 | 8.0 | 3,447 | 7.0 | % | |||||||||||
Local | 9,485 | 20.9 | 10,682 | 21.5 | % | |||||||||||
| 13,120 | 28.9 | 14,129 | 28.5 | % | ||||||||||||
Broadcast Digital (local) | 7,754 | 17.1 | 8,805 | 17.8 | % | |||||||||||
Infomercials | 214 | 0.5 | 220 | 0.4 | % | |||||||||||
Network | 4,891 | 10.8 | 4,908 | 9.9 | % | |||||||||||
Other Revenue | 1,909 | 4.2 | 2,728 | 5.5 | % | |||||||||||
Net Broadcast Revenue | $ | 45,391 | 100.0 | % | $ | 49,591 | 100.0 | % | ||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Digital Media Revenue | $ | 9,808 | $ | 10,645 | $ | 837 | 8.5 | % | 16.2 | % | 16.1 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Digital Advertising, net | $ | 5,213 | 53.2 | % | $ | 5,053 | 47.5 | % | ||||||||
Digital Streaming | 843 | 8.6 | 873 | 8.2 | ||||||||||||
Digital Subscriptions | 2,387 | 24.3 | 3,155 | 29.6 | ||||||||||||
Digital Downloads | 1,244 | 12.7 | 1,464 | 13.8 | ||||||||||||
e-commerce | 53 | 0.5 | 65 | 0.6 | ||||||||||||
Other Revenues | 68 | 0.7 | 35 | 0.3 | ||||||||||||
Net Digital Media Revenue | $ | 9,808 | 100.0 | % | $ | 10,645 | 100.0 | % | ||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Publishing Revenue | $ | 5,442 | $ | 5,747 | $ | 305 | 5.6 | % | 9.0 | % | 8.7 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Book Sales | $ | 4,310 | 79.2 | % | $ | 4,561 | 79.4 | % | ||||||||
Estimated Sales Returns & Allowances | (1,322 | ) | (24.3 | ) | (1,212 | ) | (21.1 | ) | ||||||||
Net Book Sales | 2,988 | 54.9 | 3,349 | 58.3 | ||||||||||||
E-Book Sales | 456 | 8.4 | 502 | 8.7 | ||||||||||||
Self-Publishing Fees | 1,407 | 25.8 | 1,556 | 27.1 | ||||||||||||
Print Magazine Subscriptions | 168 | 3.1 | — | — | ||||||||||||
Print Magazine Advertisements | 85 | 1.6 | — | — | ||||||||||||
Digital Advertising | 65 | 1.2 | — | — | ||||||||||||
Other Revenue | 273 | 5.0 | 340 | 5.9 | ||||||||||||
Net Publishing Revenue | $ | 5,442 | 100.0 | % | $ | 5,747 | 100.0 | % | ||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Broadcast Operating Expenses | $ | 34,283 | $ | 37,463 | $ | 3,180 | 9.3 | % | 56.5 | % | 56.8 | % | ||||||||||||
Same Station Broadcast Operating Expenses | $ | 33,687 | $ | 37,072 | $ | 3,385 | 10.0 | % | ||||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Digital Media Operating Expenses | $ | 7,144 | $ | 8,269 | $ | 1,125 | 15.7 | % | 11.8 | % | 12.5 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Publishing Operating Expenses | $ | 5,814 | $ | 5,213 | $ | (601 | ) | (10.3 | )% | 9.6 | % | 7.9 | % | |||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Unallocated Corporate Expenses | $ | 3,849 | $ | 4,284 | $ | 435 | 11.3 | % | 6.3 | % | 6.5 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Debt Modification Costs | $ | — | $ | 2,347 | $ | 2,347 | 100.0 | % | — | % | 3.6 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Depreciation Expense | $ | 2,677 | $ | 2,788 | $ | 111 | 4.1 | % | 4.4 | % | 4.2 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Amortization Expense | $ | 751 | $ | 427 | $ | (324 | ) | (43.1 | )% | 1.2 | % | 0.6 | % | |||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net (Gain) Loss on the Disposition of assets | $ | 1,381 | $ | (10,607 | ) | $ | (11,988 | ) | (868.1 | )% | 2.3 | % | (16.1 | )% | ||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Interest Income | $ | 1 | $ | — | (1 | ) | (100.0 | )% | — | — | % | |||||||||||||
Interest Expense | (4,024 | ) | (4,026 | ) | 2 | — | % | (6.6 | )% | (6.1 | )% | |||||||||||||
Gain on the Forgiveness of PPP loans | — | 11,212 | 11,212 | 100.0 | % | — | 17.0 | % | ||||||||||||||||
Gain (Loss) on Early Retirement of Long-Term Debt | — | (56 | ) | (56 | ) | (100.0 | )% | — | % | (0.1 | )% | |||||||||||||
Net Miscellaneous Income and (Expenses) | 1 | 2 | 1 | — | % | — | % | — | % | |||||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Provision for Income Taxes | $ | 401 | $ | 837 | $ | 436 | 108.7 | % | 0.7 | % | 1.3 | % | ||||||||||||
Three Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Income (Loss) | $ | 329 | $ | 22,094 | $ | 21,765 | 6,615.5 | % | 0.5 | % | 33.5 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Broadcast Revenue | $ | 130,041 | $ | 140,422 | $ | 10,381 | 8.0 | % | 75.7 | % | 74.3 | % | ||||||||||||
Same Station Net Broadcast Revenue | $ | 129,022 | $ | 139,482 | $ | 10,460 | 8.1 | % | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Block Programming: | ||||||||||||||||
National | $ | 35,536 | 27.3 | % | $ | 35,824 | 25.5 | % | ||||||||
Local | 18,211 | 14.0 | 18,072 | 12.9 | % | |||||||||||
| 53,747 | 41.3 | 53,896 | 38.4 | % | ||||||||||||
Broadcast Advertising: | ||||||||||||||||
National | 10,179 | 7.8 | 10,565 | 7.5 | % | |||||||||||
Local | 28,630 | 22.0 | 30,123 | 21.5 | % | |||||||||||
| 38,809 | 29.8 | 40,688 | 29.0 | % | ||||||||||||
Broadcast Digital (local) | 17,702 | 13.6 | 23,602 | 16.8 | % | |||||||||||
Infomercials | 750 | 0.6 | 682 | 0.5 | % | |||||||||||
Network | 13,505 | 10.4 | 14,729 | 10.4 | % | |||||||||||
Other Revenue | 5,528 | 4.3 | 6,825 | 4.9 | % | |||||||||||
Net Broadcast Revenue | $ | 130,041 | 100.0 | % | $ | 140,422 | 100.0 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Digital Media Revenue | $ | 28,355 | $ | 30,603 | $ | 2,248 | 7.9 | % | 16.5 | % | 16.2 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Digital Advertising, net | $ | 14,473 | 51.0 | % | $ | 13,859 | 45.3 | % | ||||||||
Digital Streaming | 2,611 | 9.2 | 2,579 | 8.4 | ||||||||||||
Digital Subscriptions | 6,679 | 23.6 | 9,227 | 30.2 | ||||||||||||
Digital Downloads | 4,291 | 15.1 | 4,637 | 15.1 | ||||||||||||
e-commerce | 108 | 0.4 | 163 | 0.5 | ||||||||||||
Other Revenues | 193 | 0.7 | 138 | 0.5 | ||||||||||||
Net Digital Media Revenue | $ | 28,355 | 100.0 | % | $ | 30,603 | 100.0 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Publishing Revenue | $ | 13,366 | $ | 18,093 | $ | 4,727 | 35.4 | % | 7.8 | % | 9.6 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||
| 2020 | 2021 | |||||||||||||||
(Dollars in thousands) | ||||||||||||||||
Book Sales | $ | 9,701 | 72.5 | % | $ | 15,074 | 83.3 | % | ||||||||
Estimated Sales Returns & Allowances | (2,852 | ) | (21.3 | ) | (4,223 | ) | (23.3 | ) | ||||||||
Net Book Sales | 6,849 | 51.2 | 10,851 | 60.0 | ||||||||||||
E-Book Sales | 960 | 7.2 | 1,294 | 7.2 | ||||||||||||
Self-Publishing Fees | 3,860 | 28.9 | 4,730 | 26.1 | ||||||||||||
Print Magazine Subscriptions | 519 | 3.9 | 262 | 1.4 | ||||||||||||
Print Magazine Advertisements | 278 | 2.1 | 123 | 0.7 | ||||||||||||
Digital Advertising | 216 | 1.6 | 132 | 0.7 | ||||||||||||
Other Revenue | 684 | 5.1 | 701 | 3.9 | ||||||||||||
Net Publishing Revenue | $ | 13,366 | 100.0 | % | $ | 18,093 | 100.0 | % | ||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Broadcast Operating Expenses | $ | 104,704 | $ | 106,968 | $ | 2,264 | 2.2 | % | 61.0 | % | 56.6 | % | ||||||||||||
Same Station Broadcast Operating Expenses | $ | 102,708 | $ | 105,970 | $ | 3,262 | 3.2 | % | ||||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Digital Media Operating Expenses | $ | 23,123 | $ | 25,280 | $ | 2,157 | 9.3 | % | 13.5 | % | 13.4 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Publishing Operating Expenses | $ | 16,443 | $ | 16,844 | $ | 401 | 2.4 | % | 9.6 | % | 8.9 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Unallocated Corporate Expenses | $ | 11,909 | $ | 12,764 | $ | 855 | 7.2 | % | 6.9 | % | 6.7 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Debt Modification Costs | $ | — | $ | 2,347 | $ | 2,347 | 100.0 | % | — | % | 1.2 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Depreciation Expense | $ | 8,108 | $ | 8,118 | $ | 10 | 0.1 | % | 4.7 | % | 4.3 | % | ||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Amortization Expense | $ | 2,578 | $ | 1,553 | $ | (1,025 | ) | (39.8 | )% | 1.5 | % | 0.8 | % | |||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill | $ | 17,254 | $ | — | $ | (17,254 | ) | (100.0 | )% | 10.0 | % | — | % | |||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Impairment of Goodwill | $ | 307 | $ | — | $ | (307 | ) | (100.0 | )% | 0.2 | % | — | % | |||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net (Gain) Loss on the Disposition of assets | $ | 1,494 | $ | (10,552 | ) | $ | (12,046 | ) | (806.3 | )% | 0.9 | % | (5.6 | )% | ||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Interest Income | $ | 1 | $ | 1 | $ | — | — | % | — | % | — | % | ||||||||||||
Interest Expense | (12,069 | ) | (11,887 | ) | (182 | ) | (1.5 | )% | (7.0 | )% | (6.3 | )% | ||||||||||||
Gain on the Forgiveness of PPP Loans | — | 11,212 | 11,212 | 100.0 | % | — | 5.9 | % | ||||||||||||||||
Gain (Loss) on Early Retirement of Long-Term Debt | 49 | (56 | ) | (105 | ) | (214.3 | )% | — | % | — | % | |||||||||||||
Net Miscellaneous Income and (Expenses) | (45 | ) | 87 | 132 | (2,93.3 | )% | — | % | — | % | ||||||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Provision for Income Taxes | $ | 31,180 | $ | 479 | $ | (30,701 | ) | (98.5 | )% | 18.2 | % | 0.3 | % | |||||||||||
Nine Months Ended September 30, | ||||||||||||||||||||||||
| 2020 | 2021 | Change $ | Change % | 2020 | 2021 | |||||||||||||||||||
(Dollars in thousands) | % of Total Net Revenue | |||||||||||||||||||||||
Net Income (Loss) | $ | (57,390 | ) | $ | 24,674 | $ | 82,064 | (143.0 | )% | (33.4 | )% | 13.0 | % | |||||||||||
Significant areas for which management uses estimates include:
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.
We believe the following accounting policies and the related judgments and estimates are critical accounting policies that affect the preparation of our Condensed Consolidated financial statements.
Goodwill, Broadcast Licenses and Other Indefinite-Lived Intangible Assets
We have accounted for acquisitions for which a significant amount of the purchase price was allocated to broadcast licenses and goodwill. Approximately 71% of our total assets at September 30, 2017, consisted of indefinite-lived intangible assets including broadcast licenses, goodwill and mastheads. The value of these indefinite-lived intangible assets depends significantly upon the operating results of our businesses. We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least 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 believe that our estimate of the value of our broadcast licenses, mastheads, and goodwill is a critical accounting estimate as the value is significant in relation to our total assets, and our estimates incorporate variables and assumptions that are based on experiences and judgment about future operating performance of our markets and business segments. We did not find reconciliation to our current market capitalization meaningful in the determination of our enterprise value given current factors that impact our market capitalization, including but not limited to: limited trading volume, the impact of our publishing segment operating losses and the significant voting control of our Chairman and Chief Executive Officer.
The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 16.
We are permitted to perform a qualitative assessment as to whether it is more likely than not that an indefinite-lived intangible asset is impaired. This qualitative assessment requires significant judgment in considering events and circumstances that may affect the estimated fair value of our indefinite-lived intangible assets and requires that we weigh these events and circumstances by what we believe to be the strongest to weakest indicator of potential impairment. If it is more likely than not that an impairment exists, we are required to perform a quantitative analysis to estimate the fair value of the assets.
Our analysis includes the following events and circumstances that could affect the estimated fair value of indefinite-lived intangible assets, presented in the order of what we believe to be the strongest to weakest indicators of impairment:
The primary assumptions used in the Greenfield Method are:
When we are required to perform a quantitative analysis to estimate the fair value of mastheads, the Relief from Royalty method is used. 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.
When performing Step 1 of our annual impairment testing for goodwill, the fair value of each applicable reporting unit is estimated using a discounted cash flow analysis, which is a form of the income approach. The discounted cash flow analysis utilizes a five to seven year projection period to derive operating cash flow projections from a market participant view. We make certain assumptions regarding future revenue growth based on industry market data, historical performance and expected future performance. We also make assumptions regarding working capital requirements and ongoing capital expenditures for fixed assets.
If the results of Step 1 indicate that the fair value of a reporting unit is less than its carrying value, Step 2 is required. Under Step 2, the implied fair value of the reporting unit, including goodwill, is calculated to determine the amount of the impairment.
We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our indefinite-lived intangible assets, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from these estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our indefinite-lived intangible assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.
Sensitivity of Key Broadcasting LicensesThere have been no significant and Goodwill Assumptions
When estimating the fair value of our broadcasting licenses and goodwill, we make assumptions regarding revenue growth rates, operating cash flow margins and discount rates. These assumptions require substantial judgment, and actual rates and margins may differ materially. We prepare a sensitivity analysis of these assumptions and the hypothetical non-cash impairment charge that would have resulted if our estimated long-term revenue growth rates and estimated discount rates were increased.
Impairment of Long-Lived Assets
We account for property and equipment in accordance with FASB ASC Topic 360-10, “Property, Plant and Equipment.” We periodically review our long-lived assets for impairment whenever events ormaterial changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. In accordance with authoritative guidance for impairment of long-lived assets, we must estimate the fair value of assets when events or circumstances indicate that they may be impaired. The fair value measurements for our long-lived assets use significant observable 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.
We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our long-lived assets, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of long-lived assets below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.
Business Acquisitions
We account for business acquisitions in accordance with the acquisition method ofcritical accounting as specified in FASB ASC Topic 805 “Business Combinations.” The total acquisition consideration is allocated to assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction. Estimates of the fair value include discounted estimated cash flows to be generated by the assets and their expected useful lives based on historical experience, market trends and any synergies believed to be achieved from the acquisition. The excess of consideration paid over the estimated fair values of the net assets acquired is recorded as goodwill and any excess of fair value of the net assets acquired over the consideration paid is recorded as a gain on bargain purchase. Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued.
Acquisitions may include contingent earn-out consideration, the fair value of which is estimated as of the acquisition date as the present value of the expected contingent payments as determined using weighted probabilities of the payment amounts.
A majority of our radio station acquisitions have consisted primarily of the FCC licenses to broadcast in a particular market. We often do not acquire the existing format, or we change the format upon acquisition when we find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station is allocated to the broadcast license.
We may retain a third-party appraiser to estimate the fair value of the acquired net assets as of the acquisition date. As part of the valuation and appraisal process, the third-party appraiser prepares a report assigning estimated fair values to the various asset categories in our financial statements. These fair value estimates are subjective in nature and require careful consideration and judgment. Management reviews the third party reports for reasonableness of the assigned values. We believe that the purchase price allocations represent the appropriate estimated fair value of the assets acquired and we have not had to modify our purchase price allocations.
We estimate the economic life of each tangible and intangible asset acquired to determine the period of time in which the asset should be depreciated or amortized. A considerable amount of judgment is required in assessing the economic life of each asset. We consider our own experience with similar assets, industry trends, market conditions and the age of the property at the time of our acquisition to estimate the economic life of each asset. If the financial condition of the assets were to deteriorate, the resulting change in life or impairment of the asset could cause a material impact and volatility in our operating results. To date, we have not experienced changes in the economic life established for each major category of our assets.
Accounting for 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 16.
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 decreasepolicies as compared to our estimatesthose disclosed in “Management’s Discussion and assumptions, the estimated fair valueAnalysis of the contingent earn-out consideration liability will increase or decrease, up to the contracted limit, as applicable. Changes in the estimated fair valueFinancial Conditions and Results of the contingent earn-out consideration are reflectedOperations—Critical Accounting Policies and Significant Judgments and Estimates” 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.
We recorded a net decrease to our estimated contingent earn-out liabilities of $54,000 for the nine months ended September 30, 2017 and net decrease of $458,000 during the same period of the prior year. The changes in our estimates reflect volatility from variables, such most recent Annual Report on Form
Fair Value Measurements
FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” established a single definition of fair value in generally accepted accounting principles and requires expanded disclosure requirements about fair value measurements. The provision applies to other accounting pronouncements that require or permit fair value measurements. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations; (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing; (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments; and (iv) asset retirement obligations initially measured at fair value.
The fair value provisions include guidance on how to estimate the fair value of assets and liabilities in the current economic environment and reemphasize that the objective of a fair value measurement remains an exit price. If we were to conclude that there has been a significant decrease in the volume and level of activity of the asset or liability in relation to normal market activities, quoted market values may not be representative of fair value and we may conclude that a change in valuation technique or the use of multiple valuation techniques may be appropriate.
The degree of judgment utilized in measuring the fair value of financial instruments generally correlates to the level of pricing observability. Pricing observability is affected by a number of factors, including the type of financial instrument, whether the financial instrument is new to the market, and the characteristics specific to the transaction. Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of pricing observability and a lesser degree of judgment utilized in measuring fair value. Conversely, financial instruments rarely traded or not quoted will generally have less (or no) pricing observability and a higher degree of judgment utilized in measuring fair value.
FASB ASC Topic 820 established a hierarchal disclosure framework associatedfiled with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:
We believe that we have used reasonable estimates and assumptions to calculate the estimated fair value of our financial assets as discussed in Note 16.
Contingency Reserves
In the ordinary course of business, we are involved in various legal proceedings, lawsuits, arbitration and other claims that are complex in nature and have outcomes that are difficult to predict. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. Certain of these proceedings are discussed in Note 18, Commitments and Contingencies, contained in our Condensed Consolidated financial statements.
We record contingency reserves to the extent we conclude that it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. The establishment of the reserve is based on a review of all relevant factors, the advice of legal counsel, and the subjective judgment of management. The reserves we have recorded to date have not been material to our Condensed Consolidated financial position, results of operations or cash flows.We believe thatour estimates and assumptions are reasonable and that our reserves are accurately reflected.
While we believe that the final resolution of any known maters, individually and in the aggregate, will not have a material adverse effect upon our Condensed Consolidated financial position, results of operations or cash flows, it is possible that we could incur additional losses.We maintain insurance that may provide coverage for such matters. Future claims against us, whether meritorious or not, could have a material adverse effect upon our Condensed Consolidated financial position, results of operations or cash flows, including losses due to costly litigation and losses due to matters that require significant amounts of management time that can result in the diversion of significant operational resources.
Allowance for Doubtful Accounts
We evaluate the balance reserved in our allowance for doubtful accounts on a quarterly basis based on our historical collection experience, the age of the receivables, specific customer information and current economic conditions. Past due balances are generally not written-off until all collection efforts have been exhausted, including use of a collections agency. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables, including the current creditworthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Sales Returns and Allowances
We provide for estimated returns for products sold with the right of return, primarily book sales associated with Regnery Publishing and nutritional products sold through Eagle Wellness. We record an estimate of these product returns as a reduction of revenue in the period of the sale. Our estimates are based upon historical sales returns, the amount of current period sales, economic trends and any changes in customer demand and acceptance of our products. We regularly monitor actual performance to estimated return rates and make adjustments as necessary. Estimated return rates utilized for establishing estimated returns reserves have approximated actual returns experience. However, actual returns may differ significantly, either favorably or unfavorably, from these estimates if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or the market. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Barter Transactions
We may provide broadcast time or digital advertising placement to customers in exchange for certain products, supplies or services. The terms of these exchanges generally permit for the preemption of such broadcast time or digital placements in favor of customers who purchase these items for cash. We include the value of such exchanges in net revenues and operating expenses. The value recorded for barter revenue and barter expense is based upon management’s estimate of the fair value of the products, supplies or services received. We believe that our estimates and assumptions are reasonable and that our barter revenue and barter expense are accurately reflected.
We record barter revenue as it is earned, typically when the broadcast time is used or the digital advertisement is delivered. We record barter expense equal to the estimated fair value of the goods or services received upon receipt or usage of the items as applicable. Barter advertising revenue included in broadcast revenue for the three and nine month periods ended September 30, 2017 was approximately $1.6 million and $4.1 million, respectively, and $1.4 million and $3.8 million for the three and nine month periods ended September 30, 2016, respectively. Barter expenses included in broadcast operating expense for the three and nine month periods ended September 30, 2017 was approximately $1.6 million and $3.9 million, respectively, and $1.3 million and $3.7 million for the three and nine month periods ended September 30, 2016, respectively. Barter advertising revenue included in digital media revenue for the three and nine month periods ended September 30, 2017 was approximately $7,000 and $47,000, respectively, and $14,000 and $36,000 for the three and nine month periods ended September 30, 2016, respectively. Barter expenses included in digital media operating expense for the three and nine month periods ended September 30, 2017 was approximately $1,000 and $84,000, respectively, and $18,000 and $24,500 for the three and nine month periods ended September 30, 2016, respectively.
Inventory Reserves
Inventories consist of finished goods, including published books and wellness products. Inventory is recorded at the lower of cost or market as determined on a First-In First-Out (“FIFO”) cost method. We reviewed historical data associated with book and wellness product inventories held by Regnery Publishing and our e-commerce wellness entities, as well as our own experiences to estimate the fair value of inventory on hand. Our analysis includes a review of actual sales returns, our allowances, royalty reserves, overall economic conditions and product demand. We record a provision to expense the balance of unsold inventory that we believe to be unrecoverable. We regularly monitor actual performance to our estimates and make adjustments as necessary. Estimated inventory reserves may be adjusted, either favorably or unfavorably, if factors such as the historical data we used to calculate these estimates do not properly reflect future returns or as a result of changes in economic conditions of the customer and/or the market. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Reserves for Royalty Advances
Royalties due to book authors are paid in advance and capitalized. Royalties are expensed as the related book revenues are earned or when we determine that future recovery of the royalty is not likely. We reviewed historical data associated with royalty advances, earnings and recoverability based on actual results of Regnery Publishing. Historically, the longer the unearned portion of an advance remains outstanding, the less likely it is that we will recover the advance through the sale of the book. We apply this historical experience to outstanding royalty advances to estimate the likelihood of recovery. A provision was established to expense the balance of any unearned advance which we believe is not recoverable. Our analysis also considers other discrete factors, such as death of an author, any decision to not pursue publication of a title, poor market demand or other relevant factors. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates. We believe that our estimates and assumptions are reasonable and that our reserves are accurately reflected.
Fair Value of Equity Awards
We account for stock-based compensation under the provisions of FASB ASC Topic 718, “Compensation—Stock Compensation.” We record equity awards with stock-based compensation measured at the fair value of the award as of the grant date. We determine the fair value of each award using the Black-Scholes valuation model that requires the input of highly subjective assumptions, including the expected stock price volatility and expected term of the award granted. The exercise price for each award is equal to or greater than the closing market price of Salem Media Group, Inc. common stock as of the date of the award. We use the straight-line attribution method to recognize share-based compensation costs over the expected service period of the award. Upon exercise, cancellation, forfeiture, or expiration of the award, deferred tax assets for awards with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each vesting period was a separate award. We have not modified our estimates or assumptions used in our valuation model. We believe that our estimates and assumptions are reasonable and that our stock based compensation is accurately reflected in our results of operations.
Partial Self-Insurance on Employee Health Plan
We provide health insurance benefits to eligible employees under a self-insured plan whereby we pay actual medical claims subject to certain stop loss limits. We record self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Our estimates are based on historical data and probabilities. Any projection of losses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should the actual amount of claims increase or decrease beyond what was anticipated, we may adjust our future reserves. Our self-insurance liability was $0.8 million at September 30, 2017 and December 31, 2016. We have not modified our estimate methodology and we have not historically recognized significant losses from changes in our estimates.
Income Tax Valuation Allowances (Deferred Taxes)
In preparing our Condensed Consolidated financial statements, we estimate our income tax liability in each of the jurisdictions in which we operate by estimating our actual current tax exposure and assessing temporary differences resulting from differing treatment of items for tax and financial statement purposes. Our judgments, assumptions and estimates relative to the current provision for income tax take into account current tax laws, our interpretation of current tax laws and possible outcomes of audits conducted by tax authorities. Reserves for income taxes to address potential exposures involving tax positions that could be challenged by tax authorities are established if necessary. Although we believe our judgments, assumptions and estimates are reasonable, changes in tax laws or our interpretation of tax laws and the resolution of any future tax audits could significantly impact the amounts provided for income taxes in our Condensed Consolidated financial statements.
We calculate our current and deferred tax provisions based on estimates and assumptions that could differ from the actual results reflected in income tax returns filed during the subsequent year. Adjustments based on filed returns are generally recorded in the period when the tax returns are filed and the tax implications are known. Tax law and rate changes are reflected in the income tax provision in the period in which such changes are enacted.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. We consider all available evidence, both positive and negative, including historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance. In the event we were to determine that we would not be able to realize all or part of our net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to earnings in the period in which we make such a determination. Likewise, if we later determine that it is more likely than not that the net deferred tax assets would be realized, we would reverse the applicable portion of the previously provided valuation allowance.
For financial reporting purposes, we recorded a valuation allowance of $4.5 million as of September 30, 2017 and December 31, 2016 to offset $4.2 million of the deferred tax assets related to the state net operating loss carryforwards and $0.3 million associated with asset impairments.
Income Taxes and Uncertain Tax Positions
We are subject to audit and review by various taxing jurisdictions. We may recognize liabilities on our financial statements for positions taken on uncertain tax positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others may be subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. Such positions are deemed to be unrecognized tax benefits and a corresponding liability is established on the balance sheet. It is inherently difficult and subjective to estimate such amounts, as this requires us to make estimates based on the various possible outcomes. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, we believe it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
We review and reevaluate uncertain tax positions on a quarterly basis. Changes in assumptions may result in the recognition of a tax benefit or an additional charge to the tax provision. During the nine month period ended September 30, 2017, we did not recognize liabilities associated with uncertain tax positions. Accordingly, we have no liabilities for uncertain tax positions recorded at September 30, 2017. Our evaluation was performed for all tax years that remain subject to examination, which range from 2013 through 2016. There is currently one tax examination in process. The City of New York began their audit of Salem’s 2013 and 2014 tax filings. We do not anticipate any material or significant results from the audit.
LIQUIDITY AND CAPITAL RESOURCES
Our cash
July 2021.
In recent years, our acquisition agreements have contained contingent earn-out arrangements that are payable in the future based on the achievement of predefined operating results. We believe that these contingent earn-out arrangements provide some degree of protection with regard to our cash outflows should these acquisitions not meet our operational expectations.
We plan to fund future purchases and any acquisitions from cash on hand, operating cash flow or our credit facilities. These transactions include the acquisition of WSPZ-AM in our Washington DC market for $0.6 million and an option to acquire radio station KHTE-FM, Little Rock, Arkansas, for $1.2 million in cash during the TBA period under which we are programming the station. The 36 month TBA began on April 1, 2015, and contains an option to extend to 48 months.
2021.
was the result of:
We believe that cash payments for deferred installments and contingent earn-out consideration that were entered contemporaneously with an acquisition are appropriately recorded as financing activities. These payments are similarIn April 2021, we filed a prospectus supplement to seller financing arrangements in that cash payments are typically due one to three years after the acquisition date. We referred to guidance in FASB ASC Topic 230-10-45-13 (c) which states that only advance payments, down payments, or other amounts paid at the time of purchase or soon before or after a purchase of property, plant and equipment and other productive assets are investing cash outflows. The guidance clarifies that incurring directly related debt to the seller is a financing transaction and that subsequent payments of that debt are financing cash outflows. This is consistent our shelf registration statement on Form
On May 19, 2017, we closed on a private offering of the Notes and concurrently entered into the ABL Facility. The net proceeds from the offering of the Notes, together with borrowings under the ABL Facility, were used to repay outstanding borrowings, including accrued and unpaid interest, on our previously existing senior credit facilities consisting of the Term Loan B and the Revolver, and to pay fees and expenses incurred in connection with the Notes offering and the ABL Facility.
During the six month period ended June 30, 2017, the principal balances outstanding under our previous credit facilities ranged from $258.0 million to $263.5 million. During the nine month period ended September 30, 2017,2021, the principal balances outstanding under the 2024 Notes, 2028 Notes and the ABL Facility ranged from $258.0$216.3 million to $268.6$218.2 million. TheseAdditionally, during the first quarter of 2021 we received $11.2 million in aggregate principal amount of PPP loans through the SBA available to our radio stations and networks by location under the CAA. The SBA forgave all but $20,000 of the PPP loans during July 2021 resulting in a
Based on the number of shares of Class A and Class B common stock currently outstanding we expect to pay total annual equity distributions of approximately $6.8 million in 2017. However, the actual declaration of dividends and equity distributions, as well as the establishment of per share amounts, dates of record, and payment dates are subject to final determination by our Board of Directors and depend upon future earnings, cash flows, financial and legal requirements, and other factors. The current policy of the Board of Directors is to review each of these factors on a quarterly basis to determine the appropriate amount, if any, to allocate toward a cash distribution. In recent years, distributions have been approximately 20% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest. Adjusted EBITDA is a non-GAAP financial measure defined in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this quarterly report on Form 10-Q. Future distributions, if any, are likely to be approximately 30% of Adjusted EBITDA less cash paid for capital expenditures, less cash paid for income taxes, and less cash paid for interest.
time
On May 6, 2020, our Board of Directors voted to discontinue equity distributions until further notice due to the adverse economic impact of the
| December 31, 2020 | September 30, 2021 | |||||||
(Dollars in thousands) | ||||||||
7.125% Senior Secured Notes | $ | — | $ | 114,731 | ||||
Less unamortized discount and debt issuance costs based on imputed interest rate of 7.64% | — | (4,048 | ) | |||||
7.125% Senior Secured Notes net carrying value | — | 110,683 | ||||||
6.75% Senior Secured Notes | 216,341 | 98,815 | ||||||
Less unamortized debt issuance costs based on imputed interest rate of 7.10% | (2,577 | ) | (939 | ) | ||||
6.75% Senior Secured Notes net carrying value | 213,764 | 97,876 | ||||||
Asset-Based Revolving Credit Facility principal outstanding (1) | 5,000 | — | ||||||
SBA Paycheck Protection Program loans | — | — | ||||||
Long-term debt less unamortized discount and debt issuance costs | $ | 218,764 | $ | 208,559 | ||||
Less current portion | (5,000 | ) | — | |||||
Long-term debt less unamortized discount and debt issuance costs, net of current portion | $ | 213,764 | $ | 208,559 | ||||
| (1) | As of September 30, 2021, the |
Our weighted average interest rate was 6.65% and 6.94% at December 31, 2020 and September 30, 2021, respectively. 58 In addition to |
Salem Media Group, Inc. has no independent assets or operations, the subsidiary guarantees are fulloutstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2021:
6.75%
The Notes and the ABL Facility are secured by liens on substantially all of our and the Subsidiary Guarantors’ assets, other than certain excluded assets. The ABL Facility has a first-priority lien on our and the Subsidiary Guarantor’s accounts receivable, inventory, deposit and securities accounts, certain real estate and related assets (the “ABL Priority Collateral”). The Notes are secured by a first-priority lien on substantially all other assets of ours and the Subsidiary Guarantors (the “Notes Priority Collateral”). There is no direct lien on our Federal Communications Commission (“FCC”) licenses to the extent prohibited by law or regulation.
basis. We may redeem the 7.125% Notes, in whole or in part, at any time on or afterprior to June 1, 20202024 at a price equal to 100% of the principal amount of the 2028 Notes plus a “make-whole” premium as of, and accrued and unpaid interest, if any, to, but not including, the redemption date. At any time on or after June 1, 2020,2024, we may redeem some or all of the 2028 Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth in the 2028 Notes Indenture, plus accrued and unpaid interest, if any, to, but not including the redemption date. In addition, we may redeem up to 35% of the aggregate principal amount of the 2028 Notes before June 1, 20202024 with the net cash proceeds from certain equity offerings at a redemption price of 106.75%107.125% of the principal amount plus accrued and unpaid interest, if any, to, but not including the redemption date. We may also redeem up to 10% of the aggregate original principal amount of the 2028 Notes per twelve monthtwelve-month period, before June 1, 2020in connection with up to two redemptions in such twelve-month period, at a redemption price of 103%101% of the principal amount plus accrued and unpaid interest to, but not including, the redemption date.
date
The Indenture provides At September 30, 2021, we were, and we remain, in compliance with all of the covenants under the Indenture.
We$98.8 million, we are required to pay $17.2$6.6 million per year in interest on the 2024 Notes. As of September 30, 2017,2021, accrued interest on the 2024 Notes was $6.4$2.3 million.
2028 Notes.
The ABL Facility is a five-year $30.0 million revolving credit facility due May 19, 2022,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 offrom 0.25% to 0.375% per year.
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 At September 30, 2021, we were, and we remain, in compliance with all of the fiscal month most recently ended priorcovenants under Credit Agreement.
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 respectto designate the incurrence of the collateral.
2028 Notes, and any further refinancing of 2024 Notes through the issuance of additional 2028 Notes, as permitted indebtedness thereunder and to effect related arrangements for the interests in the ABL Priority Collateral and the Notes Priority Collateral. We incurred debt issue costs of $0.6$0.9 million that were recorded as an asset and are being amortized to
Prior Term Loan B and Revolving Credit Facility
Our prior credit facility consisted of a term loan of $300.0 million (“Term Loan B”) and a revolving credit facility of $25.0 million (“Revolver”). The Term Loan B was issued at a discount for total net proceeds of $298.5 million. The discount was amortized to non-cash interest expense over the life of the loan using the effective interest method. For each of the three months ended September 30, 2017 and 2016, approximately $0 and $51,000, respectively, of the discount associated with the Term Loan B was recognized as interest expense. For each of the nine months ended September 30, 2017 and 2016, approximately $74,000 and $155,000, respectively, of the discount associated with the Term Loan B was recognized as interest expense.
The Term Loan B had a term of seven years, maturing in March 2020. On May 19, 2017, we used the net proceeds of the Notes and a portion of the ABL Facility to fully repay amounts outstanding under the Term Loan B of $258.0 million and under the Revolver of $4.1 million. We recorded a loss on the early retirement of long-term debt of $2.1 million, which included $1.5 million of unamortized debt issuance costs on the Term Loan B and the Revolver and $0.6 million of unamortized discount on the Term Loan B.
The following payments or prepayments of the Term Loan B were made during the year ended December 31, 2016 and through the date of the termination, including interest through the payment date as follows:
| Date | Principal Paid | Unamortized Discount | ||||||
| (Dollars in Thousands) | ||||||||
| May 19, 2017 | $ | 258,000 | $ | 550 | ||||
| February 28, 2017 | 3,000 | 6 | ||||||
| January 30, 2017 | 2,000 | 5 | ||||||
| December 30, 2016 | 5,000 | 12 | ||||||
| November 30, 2016 | 1,000 | 3 | ||||||
| September 30, 2016 | 1,500 | 4 | ||||||
| September 30, 2016 | 750 | — | ||||||
| June 30, 2016 | 441 | 1 | ||||||
| June 30, 2016 | 750 | — | ||||||
| March 31, 2016 | 750 | — | ||||||
| March 17, 2016 | 809 | 2 | ||||||
Debt issuance costs were amortized to non-cash interest expense over the life of the Term Loan B using the effective interest method. For each of the three months ended September 30, 2017 and 2016, approximately $0 and $140,000, respectively, of the debt issuance costs associated with the Term Loan B were recognized as interest expense. For each of the nine months ended September 30, 2017 and 2016, approximately $203,000 and $423,000 respectively, of the debt issuance costs associated with the Term Loan B were recognized as interest expense.
Debt issuance costs associated with the Revolver were recorded as an asset in accordance with ASU 2015-15. The costs were amortized to non-cash interest expense over the five year life of the Revolver using the effective interest method based on an imputed interest rate of 4.58%. For each of the three month periods ended September 30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $0 and $17,000. For each of the nine month periods ended September 30, 2017 and 2016, we recorded amortization of deferred financing costs of approximately $26,000 and $52,000.
Summary of long-term debt obligations
Long-term debt consisted of the following:
| As of December 31, 2016 | As of September 30, 2017 | |||||||
| (Dollars in thousands) | ||||||||
| 6.75% Senior Secured Notes | $ | — | $ | 255,000 | ||||
| Less unamortized debt issuance costs based on imputed interest rate of 7.08% | — | (6,004 | ) | |||||
| 6.75% Senior Secured Notes net carrying value | — | 248,996 | ||||||
| Asset-Based Revolving Credit Facility principal outstanding | — | 6,629 | ||||||
| Term Loan B principal amount | 263,000 | — | ||||||
| Less unamortized discount and debt issuance costs based on imputed interest rate of 4.78% | (2,371 | ) | — | |||||
| Term Loan B net carrying value | 260,629 | — | ||||||
| Revolver principal outstanding | 477 | — | ||||||
| Capital leases and other loans | 568 | 491 | ||||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs | 261,674 | 256,116 | ||||||
| Less current portion | (590 | ) | (6,741 | ) | ||||
| Long-term debt and capital lease obligations less unamortized debt issuance costs, net of current portion | $ | 261,084 | $ | 249,375 | ||||
In addition to the outstanding amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2017:
Other Debt
We have several capital leases related to office equipment. The obligation recorded at December 31, 2016 and September 30, 2017 represents the present value of future commitments under the capital lease agreements.
| Amount | ||||
| For the Twelve Months Ended September 30, | (Dollars in thousands) | |||
| 2018 | $ | 6,741 | ||
| 2019 | 108 | |||
| 2020 | 107 | |||
| 2021 | 121 | |||
| 2022 | 43 | |||
| Thereafter | 255,000 | |||
| $ | 262,120 | |||
Amount | ||||
For the Year Ended September 30, | (Dollars in thousands) | |||
2022 | $ | — | ||
2023 | — | |||
2024 | 98,815 | |||
2025 | — | |||
2026 | — | |||
Thereafter | 114,731 | |||
| $ | 213,546 | |||
Under FASB ASC Topic 350 “Intangibles—Goodwill and Other,” indefinite-lived intangibles, including broadcast licenses, goodwill and mastheads are not amortized but instead are tested for impairment at least annually, or more frequently if events or circumstances indicate that there may be an impairment. Impairment is measured as the excess of the carrying value of the indefinite-lived intangible asset over its fair value. Intangible assets that have finite useful lives continue to be amortized over their useful lives and are measured for impairment if events or circumstances indicate that they may be impaired. Impairment losses are recorded as operating expenses.
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. During our annual testing in the fourth quarter of 2016, we recognized impairment charges of $7.0 million including a $6.5 million impairment of broadcast licenses and $0.5 million impairment of mastheads. Broadcast licenses were deemed to be impaired in four of the twenty five markets tested. Impairments were recorded in our Cleveland, Dallas, Detroit and Portland market clusters due to an increase in the risk-adjusted discount rate or Weighted Average Cost of Capital (“WACC”). Mastheads were deemed to be impaired due to further reductions in projected net revenues and increases in the WACC. We continue to evaluate our print magazine business due to recurring declines in operating results and projected revenues. Due to operating results during the three month period ended March 31, 2017 that did not meet management’s expectations, we ceased publishing Preaching Magazine™, YouthWorker Journal™, FaithTalk Magazine™ and Homecoming® The Magazine upon issuance of the May 2017 publication. We have received purchase offers from third parties interested in acquiring the rights to continue publishing Preaching Magazine™, but we have not closed on or agreed to final terms of the sale.
Because of the likelihood that these print magazines would be sold or otherwise disposed of before the end of their previously estimated life, we performed impairment tests as of March 31, 2017. Due to reductions in forecasted operating cash flows and indications of interest from potential buyers, we then recorded an impairment charge of $19,000 associated with mastheads.
We believe that our estimatethe impairments are indicative of trends in the value of our broadcast licenses, mastheads,industry as a whole and goodwill is a critical accounting estimate as the value is significant in relationare not unique to our total assets,company or operations. While impairment charges are
cash flows.
While the impairment charges we have recognized are non-cash in nature and did not violate the covenants on the then existing Revolver and Term Loan B, the potential for future impairment charges can be viewed as a negative factor with regard to forecasted future performance and cash flows. We believe that we have adequately considered the potential for an economic downturn in our valuation models and do not believe that the non-cash impairments in and of themselves are a liquidity risk.
DERIVATIVE INSTRUMENTS
We are exposed to fluctuations in interest rates. We actively monitor these fluctuations and use derivative instruments from time to time to manage the related risk. In accordance with our risk management strategy, we may use derivative instruments only
Exhibit Number | Exhibit Description | Form | File No. | Date of First Filing | Exhibit Number | Filed Herewith | ||||||
| 31.1 | Certification of Edward G. Atsinger III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | - | - | - | - | X | ||||||
| 31.2 | Certification of Evan D. Masyr Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act. | - | - | - | - | X | ||||||
| 32.1 | Certification of Edward G. Atsinger III Pursuant to 18 U.S.C. Section 1350. | - | - | - | - | X | ||||||
| 32.2 | Certification of Evan D. Masyr Pursuant to 18 U.S.C. Section 1350. | - | - | - | - | X | ||||||
| 101 | The following financial information from the Quarterly Report on Form 10Q for the three and nine months ended September 30, 2021, formatted in iXBRL (Inline Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets (ii) Condensed Consolidated Statements of Operations (iii) the Condensed Consolidated Statements of Cash Flows (iv) the Notes to the Condensed Consolidated Financial Statements. | - | - | - | - | X | ||||||
| 104 | The cover page of this Quarterly Report on Form 10-Q, formatted in inline XBRL. | - | - | - | - | X | ||||||
| SALEM MEDIA GROUP, INC. | |||||||
| November | |||||||
| By: | /s/ EDWARD G. ATSINGER III | ||||||
| Edward G. Atsinger III | |||||||
| Chief Executive Officer | |||||||
| (Principal Executive Officer) | |||||||
| November 4, 2021 | |||||||
| By: | /s/ EVAN D. MASYR | ||||||
| Evan D. Masyr | |||||||
| Executive Vice President and Chief Financial Officer | |||||||
| (Principal Financial Officer) | |||||||