SALEM MEDIA GROUP, INC. General
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the Condensed Consolidated Financial Statements and related notes included elsewhere in this report on Form 10-Q and our audited Consolidated Financial Statements in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . Our Condensed Consolidated Financial Statements are not directly comparable from period to period due to acquisitions and dispositions. Refer to Note 3 of our Condensed Consolidated Financial Statements on Form 10-Q for details of each of these transactions. Historical operating results are not necessarily indicative of future operating results. Actual future results may differ from those contained in or implied by the forward-looking statements as a result of various factors. These factors include, but are not limited to: • the coronavirus COVID-19 pandemic ("COVID-19") that adversely impacted our business, • risks and uncertainties relating to the need for additional funds to service our debt, • risks and uncertainties relating to the need for additional funds to execute our business strategy, • our ability to access borrowings under our ABL Facility, • reductions in revenue forecasts, • our ability to renew our broadcast licenses, • changes in interest rates,
• the timing of our ability to complete any acquisitions or dispositions,
• costs and synergies resulting from the integration of any completed
acquisitions,
• our ability to effectively manage costs,
• our ability to drive and manage growth,
• the popularity of radio as a broadcasting and advertising medium,
• changes in consumer tastes,
• the impact of general economic conditions in the United States or in
specific markets in which we do business,
• the impact of inflation increasing operating costs and changing consumer
habits,
• industry conditions, including existing competition and future
competitive technologies,
• disruptions or postponements of advertising schedules and programming in
response to national or world events,
• our ability to generate revenue from new sources, including local
commerce and technology-based initiatives, and
• the impact of regulatory rules or proceedings that may affect our
business from time to time, and the future
write-off
of any material portion of the fair value of our FCC broadcast licenses
and goodwill.
Because these factors could cause actual results or outcomes to differ
materially from those expressed in any forward-looking statements made by us or
on our behalf, you should not place undue reliance on any of these
forward-looking statements. In addition, any forward-looking statement speaks
only as of the date on which it is made, and we undertake no obligation to
update any forward-looking statement or statements to reflect events or
circumstances after the date on which the statement is made, to reflect the
occurrence of unanticipated events or otherwise, except as required by law.
Overview
Salem Media Group, Inc. ("Salem," "we," "us," "our" or the "company") is a domestic multimedia company specializing in Christian and conservative content, with media properties comprising radio broadcasting, digital media, and publishing. Our content is intended for audiences interested in Christian and family-themed programming and conservative news talk. We maintain a website at www.salemmedia.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to theSEC . The information on our website is not a part of or incorporated by reference into this or any other report of the company filed with, or furnished to, theSEC . We have three operating segments: (1) Broadcast, (2) Digital Media, and (3) Publishing, which also qualify as reportable segments. Our operating segments reflect how our chief operating decision makers, which we define as a collective group of senior executives, assess the performance of each operating segment and determine the appropriate allocations of resources to each segment. We continually review our operating segment classifications to align with operational changes in our business and may make changes as necessary. We measure and evaluate our operating segments based on operating income and operating expenses that exclude costs related to corporate functions, such as accounting and finance, human resources, legal, tax and treasury. We also exclude costs such as amortization, depreciation, taxes, and interest expense when evaluating the performance of our operating segments.
Our principal sources of broadcast revenue include:
• the sale of block program time to national and local program producers;
• the sale of advertising time on our radio stations to national and local
advertisers;
32
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• 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;
• fees earned for the creation of custom web pages and custom digital media
campaigns for our advertisers through Salem Surround;
• the sale of advertising time on our national network;
• the syndication of programming on our national network;
• the sale of advertising time through podcasts and
video-on-demand
services;
• product sales and royalties for
on-airhost materials, including podcasts, programs and media content including
documentary motion pictures, films; and
• other revenue such as events, including ticket sales and sponsorships,
listener purchase programs, where revenue is generated from special
discounts and incentives offered to our listeners from our advertisers,
talent fees for voice-overs or custom endorsements from our
on-air
personalities and production services, and rental income for studios,
towers, or office space.
Our principal sources of digital media revenue include:
• the sale of digital banner advertisements on our websites and mobile
applications;
• the sale of digital streaming advertisements on websites and mobile
applications;
• the support and promotion to stream third-party content on our websites;
• the sale of advertisements included in digital newsletters; • the digital delivery of newsletters to subscribers; and • the sale of video and graphic downloads.
Our principal sources of publishing revenue include:
• the sale of books and
e-books;
• publishing fees from authors; and
• the sale of digital advertising in digital newsletters;
In each of our operating segments, the rates we are able to charge for airtime,
advertising and other products and services are dependent upon several factors,
including:
• audience share;
• how well our programs and advertisements perform for our clients;
• the size of the market and audience reached;
• the number of impressions delivered;
• the number of advertisements and programs streamed;
• the number of page views achieved;
• the number of downloads completed;
• the number of events held, the number of event sponsorships sold and the
attendance at each event;
• demand for books and publications;
• general economic conditions; and
• supply and demand for airtime on a local and national level.
Broadcasting
Our foundational business is radio broadcasting, which includes the ownership and operation of radio stations in large metropolitan markets, our national networks and our national sales firms including Salem Surround. Revenues generated from our radio stations, networks and sales firms are reported as broadcast media revenue in our Condensed Consolidated Financial Statements included in Part 1 of this quarterly report on Form 10-Q. Advertising revenue is recorded on a gross basis unless an agency represents the advertiser, in which case, revenue is reported net of the commission retained by the agency. Broadcast revenues are impacted by the rates radio stations can charge for programming and advertising time, the level of airtime sold to programmers and advertisers, the number of impressions delivered, or downloads made, and the number of events held, including the size of the event and the number of attendees. Block programming rates are based upon our stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations and networks' ability to produce results for their advertisers. We market ourselves to advertisers based on the responsiveness of our audiences. We do not subscribe to traditional audience measuring services for most of our radio stations. In select markets, we subscribe toNielsen Audio , which develops monthly reports measuring a radio station's audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time available for block programming and/or advertising, which may vary at different times of the day. 33 --------------------------------------------------------------------------------Nielsen Audio uses the Portable People Meter TM ("PPM " ) technology to collect data for its ratings service. PPM is a small device that is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals encoded by the broadcaster. The PPM offers a number of advantages over traditional diary ratings collection systems, including ease of use, more reliable ratings data, shorter time periods between when advertising runs and actual listening data, and little manipulation of data by users. A disadvantage of the PPM includes data fluctuations from changes to the "panel" (a group of individuals holding PPM devices). This makes all stations susceptible to some inconsistencies in ratings that may or may not accurately reflect the actual number of listeners at any given time. We subscribe toNielsen Audio for ratings services in 7 of our broadcast markets. Our results are subject to seasonal fluctuations. As is typical in the broadcasting industry, our second and fourth quarter advertising revenue typically exceeds our first and third quarter advertising revenue. Seasonal fluctuations in advertising revenue correspond with quarterly fluctuations in the retail industry. Additionally, we experience increased demand for political advertising during election, or even numbered years, over non-election or odd numbered years. Political advertising revenue varies based on the number and type of candidates as well as the number and type of debated issues. Our cash flows from broadcasting are affected by transitional periods experienced by radio stations when, based on the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change the station format. During this transitional period, when we develop a radio station's listener and customer base, the station may generate negative or insignificant cash flow. In broadcasting, trade or barter agreements are commonly used to reduce cash expenses by exchanging advertising time for goods or services. We may enter barter agreements to exchange airtime or digital advertising for goods or services that can be used in our business or that can be sold to our audience under Listener Purchase Programs. The terms of these barter agreements permit us to preempt the barter airtime or digital campaign in favor of customers who purchase the airtime or digital campaign for cash. The value of these non-cash exchanges is included in revenue in an amount equal to the fair value of the goods or services we receive. Each transaction is reviewed to determine that the products, supplies and/or services we receive have economic substance, or value to us. We record barter operating expenses upon receipt and usage of the products, supplies and services, as applicable. We record barter revenue as advertising spots or digital campaigns are delivered, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Barter revenue is recorded on a gross basis unless an agency represents the programmer, in which case, revenue is reported net of the commission retained by the agency. During the six months endedJune 30, 2022 and 2021, 98% and 99%, respectively, of our broadcast revenue was sold for cash. Broadcast operating expenses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as lease cost and utilities, (iii) marketing and promotional expenses, (iv) production and programming expenses, and (v) music license fees. In addition to these expenses, our network incurs programming costs and lease expenses for satellite communication facilities.
Digital Media
Our digital media based businesses provide Christian, conservative, investing, audio and video streaming, and other resources digitally through the web. Refer to Item 1. Business of our annual report on Form 10-K for the year endedDecember 31, 2021 for a description of each of our digital media websites and operations. Revenue generated from this segment is reported as digital media revenue in our Condensed Consolidated Financial Statements included in Part 1 of this quarterly report on Form 10-Q. Digital media revenue is impacted by the rates our sites can charge for advertising time, the level of advertisements sold, the number of impressions delivered, or the number of products sold, and the number of digital subscriptions sold. Like our broadcasting segment, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. We also experience fluctuations in quarter-over-quarter comparisons based on the date on which Easter is observed, as this holiday generates a higher volume of product downloads from our church product websites. Additionally, we experience increased demand for advertising time and placement during election years for political advertisements. The primary operating expenses incurred by our digital media businesses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as lease expense and utilities, (iii) marketing and promotional expenses, (iv) royalties, (v) streaming costs, and (vi) cost of goods sold associated with certain products.
Publishing
Our publishing operations include book publishing through Regnery ® Publishing, and self-publishing through Salem Author Services. Refer to Item 1. Business of our annual report on Form 10-K for the year endedDecember 31, 2021 for a description of each of our publishing entities. Revenue generated from this segment is reported as publishing revenue in our Condensed Consolidated Financial Statements included in Part 1 of this quarterly report on Form 10-Q. Publishing revenue is impacted by the number and the retail price of books and e-books sold and the number and rate at which self-published books are published. Regnery ® Publishing revenue is impacted by elections as it generates higher levels of interest and demand for publications containing conservative and political based opinions. 34
-------------------------------------------------------------------------------- Publishing operating expenses include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as lease costs and utilities, (iii) marketing and promotional expenses; and (iv) cost of goods sold that includes printing and production costs, fulfillment costs, author royalties and inventory reserves.
Known Trends and Uncertainties
Ongoing global supply chain disruptions from the pandemic have been further impacted with the military conflict inUkraine . Additionally, increases in consumer prices, persistent inflation, theFederal Reserve's raising of the federal funds interest rate and other actions to moderate inflation, may have a material impact on our business if the disruptions interfere with our customers advertising and promotional spending. These uncertainties could materially impact significant accounting estimates related to, but not limited to, allowances for doubtful accounts, impairments, and right-of-use assets. As a result, many estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. We will experience an increase in lease expense as several of our leases have escalations that are tied to Consumer Price Index ("CPI"). CPI increased 9.1% for the twelve months endingJune 30, 2022 , the largest 12-month change since 1981, driven in large part by the energy sector. The growth of broadcast revenue associated with the sale of airtime remains challenged. We believe this is due to audiences spending less time commuting in cars, increased competition from other forms of content distribution, and decreases in the length of time spent listening to broadcast radio as compared to audio streaming services, podcasts, and satellite radio. These factors may lead advertisers to conclude that the effectiveness of radio has diminished. In response, we continue to enhance our digital assets to complement our broadcast content. The increased use of smart speakers, or voice activated platforms, that provide audiences with the ability to access AM and FM radio stations show increased potential for radio broadcasters to reach audiences. Our broadcast advertising revenue is particularly dependent on advertising from ourLos Angeles andDallas markets, which generated 12.7% and 18.5%, respectively, of our total net broadcast advertising revenue during the six-month period endedJune 30, 2022 , compared to 13.6% and 21.6%, respectively, of our total net broadcast advertising revenue during the same period of the prior year. Digital revenue is impacted by the nature and delivery of page views and the number of advertisements per page. We have experienced a shift in the number of page views from desktop devices to mobile devices. While mobile page views have increased dramatically, they carry a lower number of advertisements per page and are generally sold at lower rates. A shift from desktop page views to mobile device views negatively impacts revenue as mobile devices carry lower rates and less advertisement per page. Decreases in digital revenue could adversely affect our operating results, financial condition, and results of operations. To minimize the impact that any one of these areas could have, we continue to explore opportunities to cross-promote our brands and our content, and to strategically monitor costs.
Key Financial Performance Indicators - Same-Station Definition
In the discussion of our results of operations below, we compare our broadcast operating results between periods on an as-reported basis, which includes the operating results of all radio stations and networks owned or operated at any time during either period and on aSame Station basis.Same Station is a Non-GAAP financial measure used both in presenting our results to stockholders and the investment community as well as in our internal evaluations and management of the business. We believe that Same Station Operating Income provides a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of Same Station Operating Income is not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition of Same Station Operating Income is not necessarily comparable to similarly titled measures reported by other companies. Refer to "NON-GAAP FINANCIAL MEASURES" below for a reconciliation of these non-GAAP performance measures to the most comparable GAAP measures. We defineSame Station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We defineSame Station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income for a full calendar year is calculated as the sum of theSame Station results for each of the four quarters of that year. Non-GAAP Financial Measures Management uses certain non-GAAP financial measures defined below in communications with investors, analysts, rating agencies, banks, and others to assist such parties in understanding the impact of various items on our financial statements. We use these non-GAAP financial measures to evaluate financial results, develop budgets, manage expenditures and as a measure of performance under compensation programs. 35 -------------------------------------------------------------------------------- Our presentation of these non-GAAP financial measures should not be considered as a substitute for, or superior to, the most directly comparable financial measures as reported in accordance with GAAP. Item 10(e) of Regulation S-K defines and prescribes the conditions under which certain non-GAAP financial information may be presented in this report. We closely monitor EBITDA, Adjusted EBITDA, Station Operating Income ("SOI"),Same Station net broadcast revenue,Same Station broadcast operating expenses,Same Station Operating Income, Digital Media Operating Income, and Publishing Operating Income (Loss), all of which are non-GAAP financial measures. We believe that these non-GAAP financial measures provide useful information about our core operating results, and thus, are appropriate to enhance the overall understanding of our financial performance. These non-GAAP financial measures are intended to provide management and investors a more complete understanding of our underlying operational results, trends, and performance. The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate SOI. We define SOI as net broadcast revenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI. SOI is not a measure of performance calculated in accordance with GAAP. SOI should be viewed as a supplement to, and not a substitute for, our results of operations presented on the basis of GAAP. We believe that SOI is a useful non-GAAP financial measure to investors when considered in conjunction with operating income (the most directly comparable GAAP financial measures to SOI), because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment, and communications industries. SOI is commonly used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. We use SOI as one of the key measures of operating efficiency and profitability, including our internal reviews associated with impairment analysis of our indefinite-lived intangible assets. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income statement presents our financial performance prepared in accordance with GAAP. Our definition of SOI is not necessarily comparable to similarly titled measures reported by other companies. We defineSame Station net broadcast revenue as net broadcast revenue from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. We defineSame Station broadcast operating expenses as broadcast operating expenses from our radio stations and networks that we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income includes those stations we own or operate in the same format on the first and last day of each quarter, as well as the corresponding quarter of the prior year. Same Station Operating Income for a full calendar year is calculated as the sum of theSame Station -results for each of the four quarters of that year. We use Same Station Operating Income, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluations and management of the business. We believe that Same Station Operating Income provides a meaningful comparison of period over period performance of our core broadcast operations as this measure excludes the impact of new stations, the impact of stations we no longer own or operate, and the impact of stations operating under a new programming format. Our presentation of Same Station Operating Income is not intended to be considered in isolation or as a substitute for the most directly comparable financial measures reported in accordance with GAAP. Our definition ofSame Station net broadcast revenue,Same Station broadcast operating expenses and Same Station Operating Income is not necessarily comparable to similarly titled measures reported by other companies. We apply a similar methodology to our digital media and publishing group. Digital Media Operating Income is defined as net digital media revenue less digital media operating expenses. Publishing Operating Income (Loss) is defined as net publishing revenue less publishing operating expenses. Digital Media Operating Income and Publishing Operating Income (Loss) are not measures of performance in accordance with GAAP. Our presentations of these non-GAAP financial performance measures are not to be considered a substitute for, or superior to, our operating results reported in accordance with GAAP. We believe that Digital Media Operating Income and Publishing Operating Income (Loss) are useful non-GAAP financial measures to investors, when considered in conjunction with operating income (the most directly comparable GAAP financial measure), because they are comparable to those used to measure performance of our broadcasting entities. We use this analysis as one of the key measures of operating efficiency, profitability, and in our internal review. This measurement does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash activity in accordance with GAAP and our income statement presents our financial performance in accordance with GAAP. Our definitions of Digital Media Operating Income and Publishing Operating Income (Loss) are not necessarily comparable to similarly titled measures reported by other companies. We define EBITDA as net income before interest, taxes, depreciation, and amortization. We define Adjusted EBITDA as EBITDA before gains or losses on the sale or disposition of assets, before changes in the estimated fair value of contingent earn-out consideration, before debt modification costs, before impairments, before net miscellaneous income and expenses, before (gain) loss on early retirement of debt, and before non-cash compensation expense. EBITDA and Adjusted EBITDA are commonly used by the broadcast and media industry as important measures of performance and are used by investors and analysts who report on the industry to provide meaningful comparisons between broadcasters. EBITDA and Adjusted EBITDA are not measures of liquidity or of performance in accordance with GAAP and should be viewed as a supplement to, and not a substitute for, or superior to, our results of operations and financial condition presented in accordance with GAAP. Our definitions of EBITDA and Adjusted EBITDA are not necessarily comparable to similarly titled measures reported by other companies. 36 -------------------------------------------------------------------------------- For all non-GAAP financial measures, investors should consider the limitations associated with these metrics, including the potential lack of comparability of these measures from one company to another. We use non-GAAP financial measures to evaluate financial performance, develop budgets, manage expenditures, and determine employee compensation. Our presentation of this additional information is not to be considered as a substitute for, or superior to, the most directly comparable measures reported in accordance with GAAP. Reconciliation of Non-GAAP Financial Measures: In the tables below, we present a reconciliation of net broadcast revenue, the most comparable GAAP measure, toSame Station net broadcast revenue, and broadcast operating expenses, the most comparable GAAP measure toSame Station broadcast operating expense. We show our calculation of Station Operating Income and Same Station Operating Income, which is reconciled from net income, the most comparable GAAP measure in the table following our calculation of Digital Media Operating Income and Publishing Operating Income (Loss). Our presentation of these non-GAAP measures are not to be considered a substitute for, or superior to, the most directly comparable measures reported in accordance with GAAP. Three Months Ended Six Months Ended June 30, June 30, 2021 2022 2021 2022 (Dollars in thousands) Reconciliation of Net Broadcast Revenue to Same Station Net Broadcast Revenue Net broadcast revenue$ 46,783 $ 52,452 $ 90,831 $ 100,884 Net broadcast revenue - acquisitions - (14 ) - (247 ) Net broadcast revenue - dispositions (96 ) (56 ) (113 ) (49 ) Net broadcast revenue - format change - - (65 ) (111 ) Same Station net broadcast revenue$ 46,687 $
52,382
Reconciliation of Broadcast Operating Expenses to Same Station Broadcast Operating Expenses Broadcast operating expenses
$ 36,162 $ 42,489 $ 69,505 $ 80,610 Broadcast operating expenses - acquisitions - (63 ) (1 ) (279 ) Broadcast operating expenses - dispositions (81 ) (24 ) (214 ) (48 ) Broadcast operating expenses - format change - - (131 ) (132 ) Same Station broadcast operating expenses$ 36,081 $
42,402
Reconciliation of Operating Income to Same Station Operating Income Station Operating Income
$ 10,621 $ 9,963 $ 21,326 $ 20,274 Station operating (income) loss -acquisitions - 49 1 32 Station operating (income) loss - dispositions (15 ) (32 ) 101 (1 ) Station operating loss - format change - - 66 21 Same Station - Station Operating Income$ 10,606 $
9,980
In the table below, we present our calculations of Station Operating Income,
Digital Media Operating Income and Publishing Operating Income (Loss). Our
presentation of these
non-GAAP
performance indicators are not to be considered a substitute for, or superior
to, the directly comparable measures reported in accordance with GAAP.
Three Months Ended Six Months Ended
June 30, June 30,
2021 2022 2021 2022
(Dollars in thousands)
Calculation of Station Operating Income, Digital Media Operating Income and
Publishing Operating Income (Loss)
Net broadcast revenue $ 46,783 $ 52,452 $ 90,831 $ 100,884
Less broadcast operating expenses (36,162 ) (42,489 ) (69,505 ) (80,610 )
Station Operating Income$ 10,621 $
9,963
Net digital media revenue$ 10,339 $ 10,804 $ 19,958 $ 21,104 Less digital media operating expenses (8,338 )
(8,273 ) (17,011 ) (16,746 )
Digital Media Operating Income$ 2,001 $
2,531
Net publishing revenue$ 6,660 $ 5,426 $ 12,346 $ 9,303 Less publishing operating expenses (6,426 )
(5,432 ) (11,631 ) (9,899 )
Publishing Operating Income (Loss)$ 234 $
(6 )
In the table below, we present a reconciliation of net income, the most directly
comparable GAAP measure to Station Operating Income, Digital Media Operating
Income and Publishing Operating Income (Loss). Our presentation of these
non-GAAP
performance indicators are not to be considered a substitute for, or superior
to, the most directly comparable measures reported in accordance with GAAP.
37
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Three Months Ended Six Months Ended
June 30, June 30,
2021 2022 2021 2022
(Dollars in thousands)
Reconciliation of Net Income to Operating Income and Station Operating Income, Digital Media Operating
Income and Publishing Operating Income (Loss)
Net income $ 2,257 $ 9,117 $ 2,580 $ 10,856
Plus benefit from income taxes (488 ) (1,082 ) (358 ) (1,293 )
Plus net miscellaneous income and (expenses) (63 ) 1 (85 ) -
Plus (gain) loss on early retirement of
long-term debt - (35 ) - 18
Plus earnings from equity method investment - (3,913 ) - (3,913 )
Plus interest expense, net of capitalized
interest 3,935 3,389 7,861 6,783
Less interest income - (149 ) (1 ) (149 )
Net operating income$ 5,641 $ 7,328
Plus net (gain) loss on the disposition of assets (263 ) (6,893 ) 55 (8,628 ) Plus change in the estimated fair value of contingent earn-out consideration - - - (5 ) Plus debt modification costs - 20 - 248 Plus impairment of indefinite-lived long-term assets other than goodwill - 3,935 - 3,935 Plus impairment of goodwill - 127 - 127 Plus depreciation and amortization 3,286 3,190 6,456 6,466 Plus unallocated corporate expenses 4,192 4,781
8,480 9,591
Combined Station Operating Income, Digital Media Operating Income and Publishing Operating Loss$ 12,856 $ 12,488 $ 24,988 $ 24,036 Station Operating Income$ 10,621 $ 9,963 $ 21,326 $ 20,274 Digital Media Operating Income 2,001 2,531 2,947 4,358 Publishing Operating Income (Loss) 234 (6 ) 715 (596 )$ 12,856 $ 12,488 $ 24,988 $ 24,036 In the table below, we present a reconciliation of Adjusted EBITDA to EBITDA to Net Income, the most directly comparable GAAP measure. EBITDA and Adjusted EBITDA are non-GAAP financial performance measures that are not to be considered a substitute for, or superior to, the most directly comparable measures reported in accordance with GAAP. Three Months Ended Six Months Ended June 30, June 30, 2021 2022 2021 2022 (Dollars in thousands)
Reconciliation of Adjusted EBITDA to EBITDA to Net Income Net income
$ 2,257 $ 9,117 $ 2,580 $ 10,856 Plus interest expense, net of capitalized interest 3,935 3,389 7,861 6,783 Plus benefit from income taxes (488 ) (1,082 ) (358 ) (1,293 ) Plus depreciation and amortization 3,286 3,190 6,456 6,466 Less interest income - (149 ) (1 ) (149 ) EBITDA$ 8,990 $ 14,465 $ 16,538 $ 22,663 Plus net (gain) loss on the disposition of assets (263 ) (6,893 ) 55 (8,628 ) Plus change in the estimated fair value of contingent earn-out consideration - - - (5 ) Plus debt modification costs - 20 - 248 Plus impairment of indefinite-lived long-term assets other than goodwill - 3,935 - 3,935 Plus impairment of goodwill - 127 - 127 Plus net miscellaneous (income) and expenses (63 ) 1 (85 ) - Plus (gain) loss on early retirement of long-term debt - (35 ) - 18 Plus non-cash stock-based compensation 84 68 162 174 Adjusted EBITDA$ 8,748 $ 11,688 $ 16,670 $ 18,532 RESULTS OF OPERATIONS
Three months ended
The following factors affected our results of operations and cash flows for the three months endedJune 30, 2022 as compared to the same period of the prior year: 38
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Acquisitions and Divestitures
The operating results of our business acquisitions and asset purchases are
included in our consolidated results of operations from their respective closing
date or the date that we began operating them under an LMA or TBA. The operating
results of business and asset divestitures are excluded from our consolidated
results of operations from their respective closing date or the date that a
third-party began operating them under an LMA or TBA.
• On June 27, 2022 , we sold 9.3 acres of land in the Denver area for
$8.2 million resulting in a
pre-tax
gain of $6.5 million .
• On May 25, 2022 , we sold radio stations
WFIA-AM ,
WFIA-FM
and
WGTK-AM
in Louisville, Kentucky for $4.0 million with credits applied from
amounts previously paid, including a portion of the monthly fees paid
under a TBA. We recorded a
pre-tax
gain of $0.5 million .
• On
Media for $0.2 million in cash. We recorded goodwill ofapproximately
$2,400 associated with the expected synergies to be realized
upon
combining the operations into our digital media platform within Eagle
Financial Publications . The accompanying Condensed
Consolidated
Statement of Operations reflects the operating results of this entity
as of the closing date within our digital media segment.
• On February 15, 2022 , we closed on the acquisition of radio station
WLCC-AM
and an FM translator in the Tampa, Florida market for $0.6 million of cash.
• On January 10, 2022 , we closed on the sale of 4.5 acres of land in
Phoenix, Arizona for $2.0 million in cash. We recorded a
pre-tax
gain of $1.8 million on the sale.
Debt Transactions
• During the three months ended
of $13.0 million of the 2024 Notes for $12.9 million in cash,
recognizing a net gain of $35,000 after adjusting for bond issuance
costs as detailed in Note 11 - Long-Term Debt of our Condensed
Consolidated Financial Statements included in Part 1 of this quarterly
report on Form
10-Q.
Net Broadcast Revenue
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net Broadcast Revenue $ 46,783 $ 52,452 $ 5,669 12.1 % 73.3 % 76.4 %
Same Station Net Broadcast Revenue
12.2 %
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Three Months Ended June 30,
2021 2022
(Dollars in thousands)
Block Programming:
National $ 11,861 25.4 % $ 13,340 25.4 %
Local 5,817 12.4 % 5,876 11.2 %
17,678 37.8 % 19,216 36.6 %
Broadcast Advertising :
National 3,458 7.4 % 4,059 7.7 %
Local 10,546 22.5 % 11,269 21.5 %
14,004 29.9 % 15,328 29.2 %
Station Digital (local) 7,728 16.5 % 9,881 18.9 %
Infomercials 225 0.5 % 182 0.4 %
Network 4,950 10.6 % 5,409 10.3 %
Other Revenue 2,198 4.7 % 2,436 4.6 %
Net Broadcast Revenue $ 46,783 100.0 % $ 52,452 100.0 %
Block programming revenue increased 8.7% to $19.2 million from $17.7 million due
to an increase in rates and higher demand from the expansion of existing
programs and the launch of new programs. Our 2022 annual renewals with national
programmers reflected an average increase of 2.6% in rates. National programming
from our Christian Teaching and Talk format radio stations increased
$1.3 million while News Talk increased $0.1 million . Local programming increased
$0.1 million from our News Talk format radio stations that was partially offset
with a decline from Christian Teaching and Talk format radio stations.
Net advertising revenue increased 9.5%, or $1.3 million ($0.5 million net of
political), to $15.3 million from $14.0 million , driven by a 17.4% increase in
national spots and a 6.9% increase in local spots. National spot sales increased
$0.2 million excluding political and local spot sales increased $0.3 million
excluding political revenue. The largest increase was $0.7 million from our News
Talk format stations followed by a $0.2 million increase from our Christian
Teaching and Talk format ratio stations that was offset with a $0.4 million
decline from our CCM format radio stations. The increase reflects a higher
demand for advertising as pandemic restrictions ease but remains below
pre-pandemic
levels. National spot advertising is impacted by advertisers that are limiting
ad spending as concerns grow regarding inflation and the overall state of the
economy.
39
-------------------------------------------------------------------------------- Broadcast digital revenue, net of agency commissions, or net digital revenue generated from our broadcast markets and networks, increased 27.9%, or$2.2 million , to$9.9 million from$7.7 million . The increase includes a$0.6 million increase of revenue generated from SalemNow, our video-on-demand service through Salem Consumer Products, that received distribution fees from the documentary motion picture that we invested in. We also saw increases of$0.7 million in digital marketing services through Salem Surround, a$0.4 million increase in advertising from the Salem Podcast Network, a$0.1 million increase in streaming revenue, a$0.3 million increase in digital advertising revenue from our station websites, and a$0.1 million increase from our networks. There were no significant changes in digital rates as compared to the prior year. We experienced a small decline in infomercial revenue of$43,000 due to a lower number of infomercials aired during the period with no significant changes in rates as compared to the prior year. The placement of infomercials can vary significantly from one period to another due to the number of time slots available and the degree to which the infomercial content is considered to be of interest to our audience. Network revenue, net of amounts reported as digital, increased 9.3%, or$0.5 million , due to a$0.3 million increase in political advertising and a$0.2 million increase in revenue from our nationally syndicated host programs. There were no significant changes in rates as compared to the same period of the prior year. Other revenue increased 10.8%, or$0.2 million , due to an increase in event revenue. Revenue from live events can vary from period to period based on the nature and timing of events, audience demand, any applicable local pandemic restrictions, and in some cases, the weather which can affect attendance. While pandemic restrictions have eased, we continue to offer some virtual events as conditions warrant. On aSame Station basis, net broadcast revenue increased$5.7 million , which reflects these items net of the impact of stations acquisitions, dispositions, and format changes. Net Digital Media Revenue Three Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Net Digital Media Revenue$ 10,339 $ 10,804 $ 465 4.5 % 16.2 % 15.7 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Three Months Ended June 30,
2021 2022
(Dollars in thousands)
Digital Advertising, net $ 4,393 42.5 % $ 4,549 42.1 %
Digital Streaming 862 8.3 897 8.3
Digital Subscriptions 3,299 31.9 3,191 29.5
Digital Downloads 1,694 16.4 2,047 19.0
Other Revenues 91 0.9 120 1.1
Net Digital Media Revenue $ 10,339 100.0 % $ 10,804 100.0 %
Digital advertising revenue net of agency commissions, or national net digital
revenue, increased 3.6%, or $0.2 million , including a $0.3 million increase from
Salem Web Network and a $0.1 million increase from Townhall Media, which was
offset with a $0.2 million decline from Eagle Financial Publications . These
changes were driven by the number of advertisements placed with no significant
changes in rates as compared to the same period of the prior year.
Digital streaming revenue increased
Digital subscription revenue decreased 3.3%, or$0.1 million , including a$0.4 million decline fromEagle Financial Publications that was offset with a$0.2 million increase from Townhall VIP and a$0.1 million increase fromSalem Web Network . The decline in new subscriptions forEagle Financial Publications reflects the impact of the sale ofHilary Kramer newsletters. There were no significant changes in rates as compared to the same period of the prior year.
Digital download revenue increased 20.8%, or
Other revenue includes revenue sharing arrangements for mobile applications and
mail list rentals which increased slightly in volume with no changes in rates
over the same period of the prior year.
Net Publishing Revenue
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue $ 6,660 $ 5,426 $ (1,234 ) (18.5 )% 10.4 % 7.9 %
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
40
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Three Months Ended June 30,
2021 2022
(Dollars in thousands)
Book Sales $ 6,212 93.3 % $ 3,643 67.1 %
Estimated Sales Returns & Allowances (1,918 ) (28.8 ) (609 ) (11.2 )
Net Book Sales 4,294 64.5 3,034 55.9
E-Book
Sales 453 6.8 338 6.3
Self-Publishing Fees 1,550 23.3 1,652 30.4
Print Magazine Subscriptions 104 1.6 - -
Print Magazine Advertisements 54 0.8 - - Digital Advertising 70 1.1 - - Other Revenue 135 2.0 402 7.4 Net Publishing Revenue$ 6,660 100.0 %$ 5,426 100.0 % Net book sales declined 29.3%, or$1.3 million , including a$1.1 million decline fromRegnery Publishing , as book sales reflect a 6% decrease in the average price per unit sold, a 39% decrease in volume and a$0.2 million decline from Salem Author Services. Book sales throughRegnery Publishing are directly attributable to the number and popularity of titles released each period and the composite mix of titles available. Revenues vary significantly from period to period based on the book release date and the number and popularity of titles. The decline of$1.3 million in estimated sales returns and allowances reflects a lower number of print books sold throughRegnery Publishing . The decline in book sales from Salem Author Services was due to a reduction in the number of books sold with no significant changes in sale prices.Regnery Publishing e-book sales declined 25.4%, or$0.1 million , due to a 47% decrease in sales volume what was offset by a 41% increase in the average price per unit sold. E-book sales vary based on the composite mix of titles released and available in each period. Revenues can vary significantly based on a book release date and the number of titles that achieve placement on bestseller lists, which can increase awareness and demand for the book.
Self-publishing fees increased 6.6%, or
There have been no sales of print magazine subscriptions and print advertising revenues following the sale ofSinging News Magazine onMay 25, 2021 . Digital advertising was not significant to Publishing and is no longer sold. Other revenue includes change fees, video trailers and website revenues and subright revenue for foreign translation and audio books for original published titles from Regnery ® Publishing. Subright revenue increased$0.3 million due to higher volume. There were no significant changes in rates as compared to the same period of the prior year. Broadcast Operating Expenses Three Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses
17.5 % 56.7 % 61.9 % Same Station Broadcast Operating Expenses$ 36,081 $ 42,402 $ 6,321
17.5 %
Broadcast operating expenses increased 17.5%, or$6.3 million , including a$5.0 million increase from broadcast stations, a$0.9 million increase from Salem Surround, and a$0.4 million increase from Salem Podcast Network. The increase in expenses associated with Salem Surround and Salem Podcast Network are consistent with the growth of these entities in expanding digital product offerings through our broadcast division. The increase of$5.0 million from our broadcast stations includes a$1.9 million increase in payroll costs primarily driven by an increase in commissions and theJanuary 2022 reinstatement of the company 401(k) match, a$1.6 million increase in professional services, a$0.7 million increase in travel and entertainment, a$0.4 million increase in advertising and event costs, a$0.2 million increase in facility-related expenses and a$0.1 million increase in production and programming costs.
On a same-station basis, broadcast operating expenses increased 17.5%, or
Digital Media Operating Expenses
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
(0.8 )% 13.1 % 12.0 % Digital media operating expenses declined 0.8%, or$0.1 million , including a$0.2 million decrease in software and streaming costs, a$0.1 million decrease in costs of sales, a$0.1 million decrease in bad debt expense and a$0.1 million decrease in royalties, which were offset by a$0.4 million increase in employee related costs including$0.1 million associated with the reinstatement of the company 401(k) match effectiveJanuary 1, 2022 . 41
--------------------------------------------------------------------------------
Publishing Operating Expenses
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
10.1 % 7.9 %
Publishing operating expenses declined 15.5%, or $1.0 million , including a
$0.6 million decrease in royalty expense consistent with lower revenue, a
$0.4 million decrease in the cost of sales and a $0.1 million decrease in
payroll costs due to the sale of Singing News Magazine in May 2021 , that was
partially offset by a $0.1 million increase in bad debt expense. The decrease in
cost of sales includes a $0.2 million reduction from the number of print books
sold by Regnery
®
Publishing, a $0.1 million decrease in Salem Author Services and a $0.1 million
decline from the sale of Singing News Magazine . The gross profit margin for
Regnery
®
Publishing declined to 38% from 50% as sales volume decreased. Regnery
®
Publishing margins vary based on the volume of
e-book
sales, which have higher margins due to the nature of delivery and no reserve
for sales returns and allowances. The gross profit margin for Salem Author
Services improved to 79% from 74%.
Unallocated Corporate Expenses
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
14.1 % 6.6 % 7.0 % Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax, and treasury, which are not directly attributable to any one of our operating segments. The increase of 14.1%, or$0.6 million , includes a$0.3 million increase in travel and entertainment, and a$0.2 million increase in employee related costs associated with executive bonuses and the reinstatement of the company 401(k) match effectiveJanuary 1, 2022 . Debt Modification Costs Three Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Debt Modification Costs $ -$ 20 $ 20 - % - % - %
We recorded additional debt modification costs of
Depreciation Expense
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 2,741 $ 2,858 $ 117 4.3 % 4.3 % 4.2 %
Depreciation expense increased slightly due to acquisitions of property and
equipment, including capital projects that were delayed due to the pandemic.
There were no changes in our depreciation methods or in the estimated useful
lives of our asset groups.
Amortization Expense
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 545 $ 332 $ (213 ) (39.1 )% 0.9 % 0.5 %
The decline in amortization expense reflects the impact of fully amortized
domain names, customer lists and contracts, and subscriber base lists that have
estimated useful lives from three to five years. These assets were fully
amortized by early 2021, with a lower level of acquisition activity in recent
years, resulting in lower amortization expense. There were no changes in our
amortization methods or the estimated useful lives of our asset groups.
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars
in thousands) % of Total Net Revenue
Impairment of Indefinite-Lived
Long-Term Assets Other Than
Goodwill $ - $ 3,935 $ 3,935 - % - % 5.7 %
We performed an interim review of broadcast licenses for impairment at June 30,
2022 . Based on our review and analysis, we determined that the carrying value of
broadcast licenses in seven of our market clusters were impaired as of the
interim testing period ending June 30, 2022 . We recorded an impairment charge of
$3.9 million to the value of broadcast licenses in Columbus , Dallas , Greenville ,
Honolulu , Orlando , Portland , and Sacramento . The impairment charges were driven
by an increase in the WACC that was partially offset with improvements in
revenue growth rates over those used in the
year-end
valuation forecasts.
42
--------------------------------------------------------------------------------
Impairment ofGoodwill Three Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Impairment of Goodwill $ -$ 127 $ 127 - % - % 0.2 % As a result of changes in macroeconomic conditions and rising interest rates that increase the WACC, we performed an interim review of goodwill for impairment atJune 30, 2022 . Based on our review and analysis, we recorded an impairment charge of$0.1 million to goodwill in one of our broadcast markets atJune 30, 2022 .
Net (Gain) Loss on the Disposition of Assets
Three
Months Ended
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net (Gain) Loss on the Disposition
of assets $ (263 ) $ (6,893 ) $ (6,630 ) 2,520.9 % (0.4 )% (10.0 )%
The net gain on the disposition of assets of $6.9 million for the three-month
period ending June 30, 2022 reflects a $6.5 million
pre-tax
gain on the sale of land used in our Denver, Colorado broadcast operations and a
$0.5 million
pre-tax
gain on the sale of our radio stations in Louisville, Kentucky that was offset
with $0.1 million of net losses from various fixed asset disposals.
The net gain on the disposition of assets of $0.3 million for the three-month
period ending June 30, 2021 includes a $0.5 million
pre-tax
gain on the sale of Singing News Magazine and Singing News Radio that was offset
by an additional $0.1 million loss recorded at the time of closing on the sale
of radio station
WKAT-AM
and FM translator in Miami, Florida as well as various other fixed asset
disposals.
Other Income (Expense)
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Interest Income $ - $ 149 $ 149 - % - % 0.2 %
Interest Expense (3,935 ) (3,389 ) (546 ) (13.9 )% (6.2 )% (4.9 )%
Gain (Loss) on Early Retirement of
Long-Term Debt - 35 35 - % - % 0.1 %
Earnings from equity method
investment - 3,913 3,913 - % - % 5.7 %
Net Miscellaneous Income and
(Expenses) 63 (1 ) (64 ) (101.6 )% 0.1 % - %
Interest income represents earnings on excess cash, interest due under promissory notes and interest earned from our equity investment in OPA.
Interest expense includes interest due on outstanding debt balances, and non-cash accretion associated with deferred installments and contingent earn-out consideration from certain acquisitions. The decrease of$0.5 million reflects the lower outstanding balance of the Notes, the lower outstanding balance of the ABL Facility, and finance lease obligations outstanding during the three-months endedJune 30, 2022 . The gain on the early retirement of long-term debt for the three months endedJune 30, 2022 , reflects$13.0 million of repurchases of the Notes at prices below face value resulting in a pre-tax gain of$35,000 . We recorded$3.9 million of earnings from our equity investment in OPA, an entity formed for the purpose of developing, producing, and distributing a documentary motion picture. The motion picture , 2,000 Mules , was released inMay 2022 . Net miscellaneous income and expenses includes non-operating receipts such as usage fees and other expenses. Benefit from Income Taxes Three Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Benefit from Income Taxes$ (488 ) $ (1,082 ) $ (594 ) 121.7 % (0.8 )% (1.6 )% We recognized a tax benefit of$1.1 million for the three months endedJune 30, 2022 , as compared to$0.5 million for the same period of the prior year. The benefit from income taxes as a percentage of income before income taxes, or the effective tax rate, was (13.5)% for the three months endedJune 30, 2022 , compared to (27.6)% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 21.0% due to the effect of the sale of business assets in various states, state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance. The effective tax rate of (13.5)% is primarily driven by projected utilization of operating loss carryforwards, along with certain expenses that are nondeductible for income tax purposes relative to pre-tax book income, and tax expense attributable to deductible amortization on indefinite lived assets for fully valued state jurisdictions for state jurisdictions in which a full valuation allowance has been recording against net operating loss carryforward. 43
--------------------------------------------------------------------------------
Net Income
Three Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) %of Total Net Revenue Net Income$ 2,257 $ 9,117 $ 6,860 303.9 % 3.5 % 13.3 % Net income increased$6.8 million to$9.1 million for the three months endedJune 30, 2022 , from$2.3 million during the same period of the prior year as described above.
Six months ended
The following factors affected our results of operations and cash flows for the
six months ended
Acquisitions, Divestitures and Other Transactions
The operating results of our business acquisitions and asset purchases are
included in our consolidated results of operations from their respective closing
date or the date that we began operating them under an LMA or TBA. The operating
results of business and asset divestitures are excluded from our consolidated
results of operations from their respective closing date or the date that a
third-party began operating them under an LMA or TBA.
• On June 27, 2022 , we sold 9.3 acres of land in the Denver area for
$8.2 million resulting in a
pre-tax
gain of $6.5 million .
• On May 25, 2022 , we sold radio stations
WFIA-AM ,
WFIA-FM
and
WGTK-AM
in Louisville, Kentucky for $4.0 million with credits applied from
amounts previously paid, including a portion of the monthly fees paid
under TBA. We recorded a
pre-tax
gain of $0.5 million .
• On
Media for $0.2 million in cash. The accompanying Condensed
Consolidated Statement of Operations reflects the operating results of
this entity as of the closing date within our digital media segment.
• On February 15, 2022 , we closed on the acquisition of radio station
WLCC-AM
and an FM translator in the Tampa, Florida market for $0.6 million of cash.
• On January 10, 2022 , we closed on the sale of 4.5 acres of land in
Phoenix, Arizona for $2.0 million in cash. We recorded a
pre-tax
gain of $1.8 million on the sale.
• On November 30, 2021 , we sold approximately 77 acres of land in Tampa,
Florida for $13.5 million in cash. We recognized a
pre-tax
gain on the sale of $12.9 million .
• On
related assets for $0.2 million to be collected in quarterly
installments over the
two-year
period ending September 30, 2023 . We recognized a
pre-tax
gain on the sale of $0.1 million .
• On July 23, 2021 , we sold approximately 34 acres of land in
Lewisville, Texas , for $12.1 million in cash. We recognized a
pre-tax
gain on the sale of $10.5 million .
• On July 2, 2021 , we acquired the SeniorResource.com domain for
$0.1 million in cash.
• On
assets for $2.6 million in cash. The digital content library is
operated within Salem Web Network's church products division.
• On June 1, 2021 , we acquired radio stations
KDIA-AM
and
KDYA-AM
in San Francisco, California for $0.6 million in cash.
• On
for $0.1 million in cash.
• On April 28, 2021 , we acquired the Centerline New Media domain and
digital assets for $1.3 million in cash. The digital content library
is operated within Salem Web Network's church products division.
• On
paid no cash at the time of closing and assumed deferred subscription
liabilities of $0.1 million .
• On March 18, 2021 , we sold radio station
WKAT-AM
and an FM translator in Miami, Florida for $3.5 million . The buyer
began operating the station under a LMA in November 2020 .
44
--------------------------------------------------------------------------------
Debt Transactions
During the six months endedJune 30, 2022 , we completed repurchases of$15.5 million of the 2024 Notes for$15.4 million in cash, recognizing a net loss of$18,000 after adjusting for bond issuance costs as detailed in Note 11 - Long-Term Debt of our Condensed Consolidated Financial Statements included in Part 1 of this quarterly report on Form 10-Q. During the six months endedJune 30, 2021 , we received$11.2 million in aggregate principal amount of PPP loans through the SBA that were available to our radio stations and networks under the CAA. DuringJuly 2021 , the SBA forgave all but$20,000 of the PPP loans. Net Broadcast Revenue Six Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Net Broadcast Revenue$ 90,831 $ 100,884 $ 10,053 11.1 % 73.8 % 76.8 %
Same Station Net Broadcast Revenue
10.8 %
The following table shows the dollar amount and percentage of net broadcast revenue for each broadcast revenue source.
Six Months Ended June 30,
2020 2021
(Dollars in thousands)
Block Programming:
National $ 23,322 25.7 % $ 26,399 26.2 %
Local 11,773 13.0 % 12,049 11.9 %
35,095 38.6 % 38,448 38.1 %
Broadcast Advertising :
National 7,118 7.8 % 7,700 7.6 %
Local 19,441 21.4 % 21,552 21.4 %
26,559 29.2 % 29,252 29.0 %
Broadcast Digital (local) 14,797 16.3 % 18,087 17.9 %
Infomercials 462 0.5 % 373 0.4 %
Network 9,821 10.8 % 10,240 10.2 %
Other Revenue 4,097 4.5 % 4,484 4.8 %
Net Broadcast Revenue $ 90,831 100.0 % $ 100,884 100.0 %
Block programming revenue increased 9.6% to $38.4 million from $35.1 million ,
due to an increase in rates and higher demand from the expansion of existing
programs and the launch of new programs. Our 2022 annual renewals with national
programmers reflected an average increase of 2.6% in rates. National programming
from our Christian Teaching and Talk format radio stations increased
$2.8 million while our News Talk format stations increased $0.3 million . Local
programming increased $0.2 million from our News Talk format radio stations and
$0.1 million from our Christian Teaching and Talk format radio stations.
Net advertising revenue increased 10.1%, or $2.7 million ($1.6 million net of
political), to $29.3 million from $26.6 million , driven by an 8.2% increase in
national spots and a 10.9% increase in local spots. Local spot sales increased
$1.6 million excluding political revenue while national spot sales decreased
$0.1 million excluding political revenue. The largest increase was $0.8 million
from our News Talk format stations followed by a $0.3 million increase from our
Christian Teaching and Talk format ratio stations and a $0.2 million increase
from our CCM format radio stations. The increase reflects a higher demand for
advertising as pandemic restrictions ease but remains below
pre-pandemic
levels. National spot advertising is impacted by advertisers that are limiting
ad spending as concerns grow regarding inflation and the overall state of the
economy.
Broadcast digital revenue, net of agency commissions, or net digital revenue
generated from our broadcast markets and networks, increased 22.2%, or
$3.3 million . The increase includes $0.6 million of revenue generated from
SalemNow, our
video-on-demand
service through Salem Consumer Products, which received distribution fees from
2,000 Mules
, the documentary motion picture we invested in during 2022. We also saw
increases of $2.0 million from digital marketing services through Salem
Surround, a $0.2 million increase from Salem Podcast Network, a $0.3 million
increase in streaming revenue, and a $0.5 million increase in digital
advertising revenue from our station websites that were partially offset by a
$0.2 million decrease from our networks. There were no significant changes in
digital rates as compared to the prior year.
We experienced a small decline in infomercial revenue of $89,000 due to a lower
number of infomercials aired during the period with no significant changes in
rates as compared to the prior year. The placement of infomercials can vary
significantly from one period to another due to the number of time slots
available and the degree to which the infomercial content is considered to be of
interest to our audience.
Network revenue, net of amounts reported as digital, increased 4.3%, or
45
--------------------------------------------------------------------------------
Other revenue increased 9.4%, or $0.4 million , including a $0.6 million increase
in event revenue that was offset with a $0.2 million decrease in listener
purchase program revenue from lower half price tuition sales. Event revenue
varies from period to period based on the nature and timing of events, audience
demand, any applicable local pandemic restrictions, and in some cases, the
weather which can affect attendance. While pandemic restrictions have eased, we
continue to offer some virtual events as conditions warrant.
On a Same Station basis, net broadcast revenue increased $9.8 million , which
reflects these items net of the impact of stations acquisitions, dispositions,
and format changes.
Net Digital Media Revenue
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net Digital Media Revenue $ 19,958 $ 21,104 $ 1,146 5.7 % 16.2 % 16.1 %
The following table shows the dollar amount and percentage of net digital media revenue for each digital media revenue source.
Six Months Ended June 30,
2021 2022
(Dollars in thousands)
Digital Advertising, net $ 8,806 44.1 % $ 9,088 43.1 %
Digital Streaming 1,706 8.5 1,798 8.5
Digital Subscriptions 6,072 30.4 6,343 30.1
Digital Downloads 3,173 15.9 3,645 17.3
Other Revenues 201 1.1 230 1.0
Net Digital Media Revenue $ 19,958 100.0 % $ 21,104 100.0 %
Digital advertising revenue net of agency commissions, or national net digital
revenue, increased 3.2%, or $0.2 million , including a $0.5 million increase from
Salem Web Network that was offset with a $0.3 decline from Eagle Financial
Publications . On a
year-to-date
basis, there were no significant changes in revenue from Townhall Media. There
were no significant changes in rates as compared to the same period of the prior
year.
Digital streaming revenue increased 5.4%, or
Digital subscription revenue increased 4.5%, or$0.3 million , including a$0.4 million increase fromSalem Web Network and a$0.3 million increase from Townhall VIP, that were offset with a$0.5 million decline fromEagle Financial Publications from a reduction in the number of new subscriptions generated. The decline in new subscriptions forEagle Financial Publications reflects the impact of the sale ofHilary Kramer newsletters.
Digital download revenue increased 14.9%, or
Other revenue includes revenue sharing arrangements for mobile applications and
mail list rentals which increased slightly in volume with no changes in rates
over the same period of the prior year.
Net Publishing Revenue
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net Publishing Revenue $ 12,346 $ 9,303 $ (3,043 ) (24.6 )% 10.0 % 7.1 %
The following table shows the dollar amount and percentage of net publishing revenue for each publishing revenue source.
Six Months Ended June 30,
2021 2022
(Dollars in thousands)
Book Sales $ 10,513 85.2 % $ 6,204 66.7 %
Estimated Sales Returns & Allowances (3,011 ) (24.4 ) (1,444 ) (15.5 )
Net Book Sales 7,502 60.8 4,760 51.2
E-Book
Sales 792 6.4 625 6.7
Self-Publishing Fees 3,174 25.7 3,379 36.3
Print Magazine Subscriptions 262 2.1 - -
Print Magazine Advertisements 122 1.0 - -
Digital Advertising 132 1.1 - -
Other Revenue 362 2.9 539 5.8
Net Publishing Revenue $ 12,346 100.0 % $ 9,303 100.0 %
46
-------------------------------------------------------------------------------- Net book sales declined 36.6%, or$2.7 million , which includes a$2.5 million decline fromRegnery Publishing , as book sales reflect a 5% decrease in the average price per unit sold, a 38% decrease in volume and a$0.2 million decline from Salem Author Services. Book sales throughRegnery Publishing are directly attributable to the number and popularity of titles released each period and the composite mix of titles available. Revenues vary significantly from period to period based on the book release date and the number and popularity of titles. The decline of$1.6 million in estimated sales returns and allowances reflects a lower number of print books sold throughRegnery Publishing . The decline in book sales from Salem Author Services was due to a reduction in the number of books sold with no significant changes in sale prices.Regnery Publishing e-book sales declined 21.1%, or$0.2 million , due to a 5% decrease in sales volume and a 17% decrease 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 a book release date and the number of titles that achieve placement on bestseller lists, which can increase awareness and demand for the book.
Self-publishing fees increased 6.5%, or
There have been no sales of print magazine subscriptions and print advertising revenues following the sale ofSinging News Magazine onMay 25, 2021 . Digital advertising was not significant to Publishing and is no longer sold. Other revenue includes change fees, video trailers and website revenues and subright revenue for foreign translation and audio books for original published titles from Regnery ® Publishing. Subright revenue increased 48.9%, or$0.2 million , due to higher demand. There were no changes in volume or rates.
Broadcast Operating Expenses
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Broadcast Operating Expenses
16.0 % 56.4 % 61.4 % Same Station Broadcast Operating Expenses$ 69,159 $ 80,151 $ 10,992
15.9 %
Broadcast operating expenses increased 16.0%, or$11.1 million , including an$8.0 million increase from broadcast stations, a$2.1 million increase from Salem Surround, and a$1.0 million increase from Salem Podcast Network. The increase in expenses associated with Salem Surround and Salem Podcast Network are consistent with the growth of these entities in expanding new digital product offerings through our broadcast division. The increase of$8.0 million from our broadcast stations includes a$3.0 million increase in payroll costs primarily driven by an increase in commissions and theJanuary 2022 reinstatement of the company 401(k) match, a$1.6 million increase in professional services, a$1.0 million increase in advertising and event costs, a$1.0 million increase in travel and entertainment, a$0.6 million increase in facility-related expenses, a$0.4 million increase in production and programming costs, a$0.2 million increase in health insurance costs, and a$0.2 million increase in bad debt expense. On a same-station basis, broadcast operating expenses increased 15.9%, or$11.0 million . The increase in broadcast operating expenses on a same station basis reflects these items net of the impact of start-up costs associated with acquisitions, station dispositions and format changes.
Digital Media Operating Expenses
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Digital Media Operating Expenses
(1.6 )% 13.8 % 12.8 % Digital media operating expenses declined 1.6%, or$0.3 million , including a$0.4 million decrease in software and streaming costs, a$0.3 million decrease in royalties, a$0.1 million decrease in costs of sales, a$0.1 million decrease in sales-based commissions and bonuses, a$0.1 million decrease in advertising and promotional expenses and a$0.1 million decrease in professional services, that were offset by a$0.7 million increase in employee related costs including$0.2 million associated with the reinstatement of the company 401(k) match effectiveJanuary 1, 2022 and a$0.2 million increase in bad debt expense.
Publishing Operating Expenses
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Publishing Operating Expenses
(14.9 )% 9.4 % 7.5 % Publishing operating expenses declined 14.9%, or$1.7 million , including a$0.7 million decrease in the cost of sales, a$0.7 million decrease in royalty expense consistent with lower revenues, a$0.4 million decrease in payroll costs due to the sale ofSinging News Magazine inMay 2021 partially offset by a$0.1 million increase in bad debt expense. The decrease in cost of sales includes a$0.4 million reduction from the number of print books sold by Regnery ® Publishing, a$0.2 million decline from the sale ofSinging News Magazine and a$0.1 million decrease in Salem Author Services. The gross profit margin for Regnery ® Publishing declined to 41% from 55% as sales volume decreased. Regnery ® Publishing margins vary based on the volume of e-book sales, which have higher margins due to the nature of delivery and no reserve for sales returns and allowances. The gross profit margin for Salem Author Services improved to 79% from 75%. 47
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Unallocated Corporate Expenses
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Unallocated Corporate Expenses
1,111 13.1 % 6.9 % 7.3 % Unallocated corporate expenses include shared services, such as accounting and finance, human resources, legal, tax, and treasury, which are not directly attributable to any one of our operating segments. The increase of 13.1%, or$1.1 million , includes a$0.6 million increase in employee related costs associated with executive bonuses and the reinstatement of the company 401(k) match effectiveJanuary 1, 2022 , a$0.3 million increase in travel and entertainment, and a$0.2 million increase in facility-related expenses.
Debt Modification Costs
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Debt Modification Costs $ - $ 248 $ 248 - % - % 0.2 %
We recorded additional debt modification costs of $0.2 million during the first
half of 2022 associated with the refinance of $112.8 million of the 2024 Notes
for $114.7 million of the 2028 Notes.
Depreciation Expense
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Depreciation Expense $ 5,330 $ 5,800 $ 470 8.8 % 4.3 % 4.4 %
Depreciation expense increased due to recent acquisitions of property and
equipment, including assets of Centerline New Media in April 2021 and
ShiftWorship.com in July 2021 , in addition to an increase in capital
expenditures for data processing equipment and computer software that had
shorter estimated useful lives as compared to towers or other assets. There were
no changes in our depreciation methods or in the estimated useful lives of our
asset groups.
Amortization Expense
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Amortization Expense $ 1,126 $ 666 $ (460 ) (40.9 )% 0.9 % 0.5 %
The decrease in amortization expense reflects the impact of fully amortized
domain names, customer lists and contracts, and subscriber base lists that had
estimated useful lives of three to five years. These items were fully amortized
at, or near the beginning of 2021, resulting in lower amortization expense.
There were no changes in our amortization methods or the estimated useful lives
of our asset groups.
Impairment of Indefinite-Lived Long-Term Assets Other Than Goodwill
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars
in thousands) % of Total Net Revenue
Impairment of Indefinite-Lived
Long-Term Assets Other Than Goodwill $ -
- % - % 3.0 %
As a result of changes in macroeconomic conditions and rising interest rates
that increase the WACC we performed an interim review of broadcast licenses for
impairment at June 30, 2022 . Based on our review and analysis, we determined
that the carrying value of broadcast licenses in seven of our market clusters
were impaired as of the interim testing period ending June 30, 2022 . We recorded
an impairment charge of $3.9 million to the value of broadcast licenses in
Columbus , Dallas , Greenville , Honolulu , Orlando , Portland , and Sacramento . The
impairment charges were driven by increases in the WACC that were partially
offset with revenue growth rates that improved over
year-end
forecasts.
Impairment of Goodwill
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars
in thousands) % of Total Net Revenue
Impairment of Goodwill $ - $ 127 $ 127 - % - % 0.1 %
48
-------------------------------------------------------------------------------- As a result of changes in macroeconomic conditions and rising interest rates that increase the WACC, we performed an interim review of goodwill for impairment atJune 30, 2022 . Based on our review and analysis, we recorded an impairment charge of$0.1 million to goodwill in one of our broadcast markets atJune 30, 2022 .
Net (Gain) Loss on the Disposition of Assets
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Net (Gain) Loss on the Disposition
of assets $ 55 $ (8,628 ) $ (8,683 ) (15,787.3 )% - % (6.6 )%
The net gain on the disposition of assets of $8.6 million for the three-month
period ending June 30, 2022 reflects a $6.5 million
pre-tax
gain on the sale of land used in our Denver, Colorado broadcast operations, a
$1.8 million
pre-gain
on the sale of land used in our Phoenix, Arizona broadcast operations, and a
$0.5 million
pre-tax
gain on the sale of our radio stations in Louisville, Kentucky that was offset
with $0.2 million of net losses from various fixed asset disposals.
The net loss on the disposition of assets of $0.1 million for the
six-month
period ended June 30, 2021 reflects the $0.5 million
pre-tax
gain on the sale of Singing News Magazine and Singing News Radio offset by
$0.4 million additional loss recorded at closing on the sale of radio station
WKAT-AM
and FM translator in Miami, Florida and various fixed asset disposals.
Other Income (Expense)
Six Months Ended June 30,
2021 2022 Change $ Change % 2021 2022
(Dollars in thousands) % of Total Net Revenue
Interest Income $ 1 $ 149 $ 148 14,800.0 % - % 0.1 %
Interest Expense (7,861 ) (6,783 ) (1,078 ) (13.7 )% (6.4 )% (5.2 )%
Gain (Loss) on Early Retirement of
Long-Term Debt - (18 ) (18 ) - % - % - %
Earnings from equity method
investment - 3,913 3,913 - % - % 3.0 %
Net Miscellaneous Income and
(Expenses) 85 - (85 ) (100.0 )% 0.1 % - %
Interest income represents earnings on excess cash, interest due under promissory notes, and interest earned from our equity investment in OPA.
Interest expense includes interest due on outstanding debt balances, and non-cash accretion associated with deferred installments and contingent earn-out consideration from certain acquisitions. The decrease of$1.1 million reflects the lower outstanding balance of the Notes, the lower outstanding balance of the ABL Facility, and finance lease obligations outstanding during the six-months endedJune 30, 2022 . The loss on the early retirement of long-term debt for the six months endedJune 30, 2022 , reflects$15.5 million of repurchases of the Notes at prices below face value resulting in a pre-tax loss of$18,000 . We recorded$3.9 million of earnings from our equity investment in OPA, an entity formed for the purpose of developing, producing, and distributing a documentary motion picture. The motion picture , 2,000 Mules , was released inMay 2022 . Net miscellaneous income and expenses includes non-operating receipts such as usage fees and other expenses. Benefit from Income Taxes Six Months Ended June 30, 2021 2022 Change $ Change % 2021 2022 (Dollars in thousands) % of Total Net Revenue Benefit from Income Taxes$ (358 ) $ (1,293 ) $ (935 )
261.2 % (0.3 )% (1.0 )%
We recognized a tax benefit of$1.3 million for the six months endedJune 30, 2022 as compared to$0.4 million for the same period of the prior year. The provision for income taxes as a percentage of income before income taxes, or the effective tax rate was (13.5)% for the six months endedJune 30, 2022 compared to (16.1)% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 21.0% due to state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance. The effective tax rate of (13.5)% is driven by certain expenses that are nondeductible for income tax purposes relative to pre-tax book loss, tax expense attributable to deductible amortization on indefinite lived assets for fully valued state jurisdictions and projected utilization of operating loss carryforwards. AtDecember 31, 2021 , we had net operating loss carryforwards for federal income tax purposes of approximately$98.4 million that expire in years 2024 through 2038 and for state income tax purposes of approximately$607.7 million that expire in years 2022 through 2041. During the six-month period endingJune 30, 2022 , we utilized net operating losses of approximately$11.3 million and$5.6 million for federal and states respectively, resulting in ending federal net operating loss carryforward of$87.1 million and state net operating loss carryforward of$602.1 million . 49
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Net Income
Six Months Ended June 30,
2021 2022 Change $ Change% 2021 2022
(Dollars in thousands) % of
Total Net Revenue
%
Net Income $ 2,580 $ 10,856 $ 8,276 320.8 % 2.1 % 8.3
Net income increased
CRITICAL ACCOUNTING ESTIMATES Our consolidated financial statements are prepared in accordance with GAAP, which requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses. These estimates require the use of judgment as future events, and the effect of these events cannot be predicted with certainty. The COVID-19 pandemic created significant uncertainty and disruption in the global economy and financial markets. It is reasonably possible that these uncertainties could materially impact our estimates related to, but not limited to, revenue recognition, broadcast licenses, goodwill, and income taxes. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements. We evaluate and update our assumptions and estimates on an ongoing basis and we may consult outside experts to assist as considered necessary. There have been no significant and material changes in our critical accounting policies as compared to those disclosed in "Management's Discussion and Analysis of Financial Conditions and Results of Operations - Critical Accounting Policies and Significant Judgments and Estimates" in our most recent Annual Report on Form 10-K, as filed with theSEC onMarch 4, 2022 .
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of funds are operating cash flows, borrowings under credit facilities, and proceeds from the sale of selected assets or businesses. We have historically funded, and will continue to fund, expenditures for operations, administrative expenses, and capital expenditures from these sources. We have historically financed acquisitions through borrowings, including borrowings under credit facilities and, to a lesser extent, from operating cash flow and from proceeds on selected asset dispositions. We expect to fund future acquisitions from cash on hand, borrowings under our credit facilities, operating cash flow, and possibly through the sale of income-producing assets or proceeds from debt and equity offerings. During 2020 we implemented several measures to reduce costs and conserve cash to ensure that we had adequate liquidity to meet our debt servicing requirements. As the economy began to show signs of recovery, we reversed several of these cost reduction initiatives during 2021. We continue to operate with lower staffing levels where appropriate, we have not declared or paid equity distributions on our common stock, and the company 401(k) match was not reinstated untilJanuary 2022 . The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") provided emergency economic assistance for individuals and businesses impacted by the COVID-19 pandemic, including opportunities for additional liquidity, loan guarantees, and other government programs. The Consolidated Appropriations Act ("CAA") included a second relief package, which, among other things, provides for an extension of the Payroll Support Program established by the CARES Act. We utilized certain benefits of the CARES Act and the CAA, including: • We deferred$3.3 million of employer FICA taxes fromApril 2020 throughDecember 2020 , of which 50% was paid inDecember 2021 and the remaining 50% is payable inDecember 2022 ;
• A relaxation of interest expense deduction limitation for income tax
purposes;
• We received Paycheck Protection Program ("PPP") loans of
in total during the first quarter of 2021 through the Small Business
Association ("SBA") based on the eligibility as determined on a
per-location
basis; and
o In July 2021 , the SBA forgave all but $20,000 of the PPP loans,
with the remaining PPP loan repaid in July 2021 .
During 2020 we began to keep higher balances of cash and cash equivalents
on-hand
to meet operating needs due to the adverse economic conditions of the
COVID-19
pandemic. Historically, we kept the balance of cash and cash equivalents
on-hand
low in order to reduce the balance of outstanding debt. Our ABL Facility
automatically covers any shortfalls in operating cash flows such that we are not
required to hold excess cash balances on hand. Our cash and cash equivalents
decreased $17.3 million to $2.5 million at June 30, 2022 as compared to
$19.8 million at June 30, 2021 . Working capital decreased $17.5 million to
$(8.5) million at June 30, 2022 compared to $9.0 million at June 30, 2021 due to
the $17.3 million decrease in cash and cash equivalents.
Operating Cash Flows
Our largest source of operating cash inflows are receipts from customers in
exchange for advertising and programming. Other sources of operating cash
inflows include receipts from customers for digital downloads and streaming,
book sales, subscriptions, self-publishing fees, ticket sales, sponsorships, and
vendor promotions. A majority of our operating cash outflows consist of payments
to employees, such as salaries and benefits, vendor payments under facility and
tower leases, talent agreements, inventory purchases and recurring services such
as utilities and music license fees. Our operating cash flows are subject to
factors such as fluctuations in preferred advertising media and changes in
demand caused by shifts in population, station listenership, demographics, and
audience tastes. In addition, our operating cash flows may be affected if our
customers are unable to pay, delay payment of amounts owed to us, or if we
experience reductions in revenue or increases in costs and expenses.
50
--------------------------------------------------------------------------------
Net cash provided by operating activities during the
six-month
period ended June 30, 2022 decreased $2.4 million to $7.8 million compared to
$10.2 million during the same period of the prior year. The decrease in cash
provided by operating activities includes the impact of the following items:
• Total net revenue increased $8.2 million ;
• Operating expenses exclusive of depreciation, amortization, changes in
the estimated fair value of contingent
earn-out
consideration, impairments and net gain (loss) on thedisposition of
assets, increased $10.2 million ;
• Trade accounts receivables, net of allowances, increased
compared to an increase of $0.1 million for the same period of the
prior year;
• Unbilled revenue decreased $0.4 million ;
• Our Day's Sales Outstanding, or the average number of days to collect
cash from the date of sale, decreased to 52 days at June 30, 2022 from
58 days in the same period of the prior year;
• Net accounts payable and accrued expenses increased $9.4 million to
$33.6 million from $24.2 million as of the prior year; and
• Net inventories on hand increased
June 30, 2022 compared to a$0.2 million increase to$0.7
million for
the same period of the prior year.
Investing Cash Flows
Our primary source of investing cash inflows includes proceeds from the sale of assets or businesses. Investing cash outflows include cash payments made to acquire businesses, to acquire property and equipment and to acquire intangible assets such as domain names. While our focus continues to be on deleveraging the company, we remain committed to exploration and pursuit of strategic acquisitions. During the six-month period endingJune 30, 2022 , we invested an additional$3.5 million of cash inOneParty America LLC ("OPA"), an entity formed for the purpose of developing, producing, and distribution a documentary motion picture. We recorded our equity method investment at cost with subsequent adjustments to the carrying value for our share of the earnings or losses of OPA. Distributions received from the equity method investment were recorded as reductions in the carrying value of such investment and are classified on the unaudited condensed consolidated interim statements of cash flows pursuant to the cumulative earnings approach. Under the cumulative earnings approach, distributions received are accounted for as a return on investment in cash inflows from operating activities unless the cumulative distributions received exceed the cumulative equity in earnings recognized from the investment. When such an excess occurs, the current period distributions up to this excess are considered returns of investment and are classified as cash inflows from investing activities. We received our total investment of$4.5 million from OPA during the second quarter of 2022 that is reflected as investing cash inflows. All other receipts from OPA are reflected in operating cash flows representing our share of revenue from the documentary motion picture. We undertake projects from time to time to upgrade our radio station technical facilities and/orFCC broadcast licenses, expand our digital and web-based offerings, improve our facilities, and upgrade our computer infrastructures. The nature and timing of these upgrades and expenditures can be delayed or scaled back at the discretion of management. Based on our original 2022 budget, we plan to incur additional capital expenditures of approximately$4.4 million during the remainder of 2022.
We plan to fund any future purchases and any future acquisitions from cash on hand, operating cash flow or our credit facilities.
Net cash flow from investing activities increased$11.5 million to$8.3 million net cash provided during the six-month period endedJune 30, 2022 from net cash used of$3.2 million during the same period of the prior year. The increase in net cash flow from investing activities was the result of: • Cash paid for capital expenditures increased$2.2 million to$6.2 million from$4.0 million ; • Cash paid for investments was$3.5 million in the current year; • Cash received from return of investments was$4.5 million in the current year;
• We received
six months ended June 30, 2022 compared to $3.6 million of cash during
same period of the prior year; and
• Cash paid for acquisitions was
June 30, 2022 compared to$1.9 million during the same period of the prior year. Financing Cash Flows Financing cash inflows include borrowings under our credit facilities and any proceeds from the exercise of stock options issued under our stock incentive plan. Financing cash outflows include repayments of our credit facilities, the payment of equity distributions and payments of amounts due under deferred installments, and contingency earn-out consideration associated with acquisition activity. 51 -------------------------------------------------------------------------------- During the six-month period endedJune 30, 2022 , the principal balances outstanding under the Notes and ABL Facility ranged from$158.9 million to$174.5 million . These outstanding balances were ordinary and customary based on our operating and investing cash needs during this time. Our sole source of cash available for making any future equity distributions is our operating cash flow, subject to our credit facilities and Notes, which contain covenants that restrict the payment of dividends and equity distributions unless certain specified conditions are satisfied. OnMay 6, 2020 , our Board of Directors voted to discontinue equity distributions until further notice due to the adverse economic impact of the COVID-19 pandemic on our financial position, results of operations, and cash flows. Net cash flow from financing activities decreased$21.9 million to$15.4 million net cash used during the six-month period endedJune 30, 2022 from net cash provided by$6.5 million during the same period of the prior year. The decrease in net cash flow from financing activities includes:
• Proceeds of
three-months ended March 31, 2021 ;
• We used $15.4 million of cash to repurchase $15.5 million in face
value of the 2024 Notes during the
six-months
ended June 30, 2022 ; and
• Net repayments on our ABL Facility of $5.0 million during the
six-months
ended March 31, 2021 .
Salem Media Group, Inc. has no independent assets or operations, the subsidiary
guarantees relating to certain debt are full and unconditional and joint and
several, and any subsidiaries of Salem Media Group, Inc. other than the
subsidiary guarantors are minor.
Long-term debt consists of the following:
December 31, 2021 June 30, 2022
(Dollars in thousands)
2028 Notes $ 114,731 $ 114,731
Less unamortized discount and debt issuance
costs based on imputed interest rate of
7.64% (3,844 ) (3,549 )
2028 Notes, net carrying value 110,887 111,182
2024 Notes 60,174 44,685 Less unamortized debt issuance costs based on imputed interest rate of 7.10% (480 ) (272 ) 2024 Notes, net carrying value 59,694 44,413 Asset-Based Revolving Credit Facility principal outstanding (1) - 10 Long-term debt less unamortized discount and debt issuance costs $ 170,581$ 155,605 Less current portion - (10 ) Long-term debt less unamortized discount and debt issuance costs, net of current portion $ 170,581$ 155,595
(1) As of
borrowing base of
borrowing base availability.
Our weighted average interest rate was 6.99% and 7.01% at
In addition to the outstanding amounts listed above, we also have interest
obligations related to our long-term debt as follows as of
• $114.7 million aggregate principal amount of 2028 Notes with
semi-annual interest payments at an annual rate of 7.125%;
• $44.7 million aggregate principal amount of 2024 Notes with
semi-annual interest payments at an annual rate of 6.75%; and
• Commitment fee of 0.25% to 0.375% per annum on the unused portion of
the ABL Facility.
2028 Notes
On September 10, 2021 , we refinanced $112.8 million of the 2024 Notes for
$114.7 million (reflecting a call premium of 1.688%) of newly issued 7.125%
Senior Secured Notes due 2028 ("2028 Notes"). Contemporaneously with the
refinancing, we obtained commitments from the holders of the 2028 Notes to
purchase up to $50 million in additional 2028 Notes ("Delayed Draw 2028 Notes"),
contingent upon satisfying certain performance benchmarks, the proceeds of which
are to be used exclusively to repurchase or repay the remaining balance
outstanding of the 2024 Notes.
We used the cash proceeds from 2028 Notes to fund the repurchase of a portion of
our 2024 Notes. The 2028 Notes and the related guarantees were sold to certain
holders of the 2024 Notes, whom we believe to be qualified institutional buyers,
in a private placement. The 2028 Notes and the related guarantees have not been
and will not be registered under the Securities Act or the securities laws of
any other jurisdiction and may not be offered or sold in the United States or to
U.S. persons absent registration or an applicable exemption from, or in a
transaction not subject to, the registration requirements of the Securities Act
or any state securities laws. The transaction was assessed on a lender-specific
level and was accounted for as a debt modification in accordance with FASB ASC
Topic 470.
52
-------------------------------------------------------------------------------- The 2028 Notes are guaranteed on a senior secured basis. We may redeem the 2028 Notes, in whole or in part, at any time prior toJune 1, 2024 , at a price equal to 100% of the principal amount of the 2028 Notes plus a "make-whole" premium as of, and accrued and unpaid interest, if any, up to, but not including, the redemption date. At any time on or afterJune 1, 2024 , we may redeem some or all of the 2028 Notes at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth in the 2028 Notes indenture, plus accrued and unpaid interest, if any, up to, but not including the redemption date. In addition, we may redeem up to 35% of the aggregate principal amount of the 2028 Notes beforeJune 1, 2024 , with the net cash proceeds from certain equity offerings at a redemption price of 107.125% of the principal amount plus accrued and unpaid interest, if any, up to, but not including the redemption date. We may also redeem up to 10% of the aggregate original principal amount of the 2028 Notes per twelve-month period, in connection with up to two redemptions in such twelve-month period, at a redemption price of 101% of the principal amount plus accrued and unpaid interest up to, but not including, the redemption date. The 2028 Notes mature onJune 1, 2028 , unless earlier redeemed or repurchased. Interest accrues on the 2028 Notes fromSeptember 10, 2021 , and is payable semi-annually, in cash in arrears, onJune 1 andDecember 1 of each year, commencingDecember 1, 2021 . Based on the balance of the 2028 Notes outstanding, we are required to pay$8.2 million per year in interest. AtJune 30, 2022 , accrued interest on the 2028 Notes was$0.7 million . The indenture to the 2028 Notes contains covenants that, among other things and subject in each case to certain specified exceptions, limit the ability to: (i) incur additional debt; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all assets; (vi) engage in transactions with affiliates; and (vii) sell or transfer assets. AtJune 30, 2022 , we were, and we remain, in compliance with all of the covenants under the indenture. We recorded debt issuance costs of$4.7 million , of which$2.5 million of third-party debt modification costs were expensed during 2021 and$0.2 million were expensed during the three months endedMarch 31, 2022 ,$0.8 million was deferred with the Delayed Draw 2028 Notes, and$1.1 million , along with$3.0 million from the exchanged 2024 Notes, is being amortized as part of the effective yield on the 2028 Notes. During the three and six months endedJune 30, 2022 ,$0.2 million and$0.4 million , respectively, of debt issuance costs and delayed draw fees associated with the Notes were amortized to interest expense. SBA PPP Loans We received$11.2 million in aggregate principal amount of PPP loans through the SBA during the first quarter of 2021 based on the eligibility of our radio stations and networks as determined on a per-location basis. The PPP loans were accounted for as debt in accordance with FASB ASC Topic 470. The loan balances and accrued interest were forgivable provided that the proceeds were used for eligible purposes, including payroll, benefits, rent, and utilities within the covered period. We used the PPP loan proceeds according to the terms and filed timely applications for forgiveness. DuringJuly 2021 , the SBA forgave all but$20,000 of the PPP loans resulting in a pre-tax gain on the forgiveness of$11.2 million . The remaining PPP loan was repaid inJuly 2021 . 2024 Notes OnMay 19, 2017 , we issued 6.75% Senior Secured Notes ("2024 Notes") in a private placement. The 2024 Notes are guaranteed on a senior secured basis by our existing subsidiaries ("Subsidiary Guarantors"). The 2024 Notes bear interest at a rate of 6.75% per year and mature onJune 1, 2024 , unless they are earlier redeemed or repurchased. Interest is payable semi-annually, in cash in arrears, onJune 1 andDecember 1 of each year. The 2024 Notes are secured by a first-priority lien on substantially all assets of ours and the Subsidiary Guarantors other than the ABL Facility Priority Collateral as described below. There is no direct lien on ourFCC licenses to the extent prohibited by law or regulation other than the economic value and proceeds thereof. The indenture relating to the 2024 Notes contains covenants that, among other things and subject in each case to certain specified exceptions, limit our ability and the ability of our restricted subsidiaries to: (i) incur additional debt; (ii) declare or pay dividends, redeem stock or make other distributions to stockholders; (iii) make investments; (iv) create liens or use assets as security in other transactions; (v) merge or consolidate, or sell, transfer, lease or dispose of substantially all of our assets; (vi) engage in transactions with affiliates; and (vii) sell or transfer assets. AtJune 30, 2022 , we were, and we remain, in compliance with all of the covenants under the indenture. We recorded debt issuance costs of$6.3 million as a reduction of the debt proceeds being amortized to non-cash interest expense over the life of the Notes using the effective interest method. During the three and six months endedJune 30, 2022 ,$45,000 and$0.1 million , respectively, of debt issuance costs associated with the Notes was amortized to interest expense. During the three and six months endedJune 30, 2021 ,$0.2 million and$0.4 million , respectively, of debt issuance costs associated with the Notes was amortized to interest expense.
Based on the balance of the 2024 Notes outstanding of
We may from time to time, depending on market conditions and prices, contractual restrictions, our financial liquidity, and other factors, seek to repurchase the 2024 Notes in open market transactions, privately negotiated transactions, by tender offer or otherwise, as market conditions warrant. As described above within the 2028 Notes, onSeptember 10, 2021 , we exchanged$112.8 million of the 2024 Notes for$114.7 million of newly issued 2028 Notes, reflecting a call premium of 1.688%. Bond issuance costs of$1.1 million associated with the$112.8 million of the 2024 Notes are being amortized as part of the effective yield on the 2028 Notes. 53
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Based on the then existing market conditions, we also completed repurchases of
our 2024 Notes as follows:
Cash
Principal % of Face Bond Issue Net Gain
Date Repurchased Paid Value Costs (Loss)
(Dollars in thousands)
June 13, 2022 $ 5,000 $ 4,947 98.95 % $ 35 $ 18
June 10, 2022 3,000 2,970 99.00 % 21 9
June 7, 2022 2,464 2,446 99.25 % 17 1
May 17, 2022 2,525 2,500 99.00 % 18 7
January 12, 2022 2,500 2,531 101.26 % 22 (53 )
December 10, 2021 35,000 35,591 101.69 % 321 (912 )
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 )
September 24, 2021 4,700 4,712 100.25 % 44 (56 )
January 30, 2020 2,250 2,194 97.50 % 34 22
January 27, 2020 1,245 1,198 96.25 % 20 27
December 27, 2019 3,090 2,874 93.00 % 48 167
November 27, 2019 5,183 4,548 87.75 % 82 553
November 15, 2019 3,791 3,206 84.58 % 61 524
March 28, 2019 2,000 1,830 91.50 % 37 134
March 28, 2019 2,300 2,125 92.38 % 42 133
February 20, 2019 125 114 91.25 % 2 9
February 19, 2019 350 319 91.25 % 7 24
February 12, 2019 1,325 1,209 91.25 % 25 91
January 10, 2019 570 526 92.25 % 9 35
December 21, 2018 2,000 1,835 91.75 % 38 127
December 21, 2018 1,850 1,702 92.00 % 35 113
December 21, 2018 1,080 999 92.50 % 21 60
November 17, 2018 1,500 1,357 90.50 % 29 114
May 4, 2018 4,000 3,770 94.25 % 86 144
April 10, 2018 4,000 3,850 96.25 % 87 63
April 9, 2018 2,000 1,930 96.50 % 43 27
$ 97,489 $ 94,949 $ 1,218 $ 1,322 Asset-Based Revolving Credit Facility
OnMay 19, 2017 , we entered into the ABL Facility pursuant to a Credit Agreement ("Credit Agreement") by and among us and our subsidiaries party thereto as borrowers,Wells Fargo Bank, National Association , as administrative agent and lead arranger, and the lenders that are parties thereto. We used the proceeds of the ABL Facility, together with the net proceeds from the Notes offering, to repay outstanding borrowings under our previously existing senior credit facilities and related fees and expenses. Current proceeds from the ABL Facility are used to provide ongoing working capital and for other general corporate purposes, including permitted acquisitions. The ABL Facility is a$30.0 million revolving credit facility dueMarch 1, 2024 , which includes a$5.0 million subfacility for standby letters of credit and a$7.5 million subfacility for swingline loans. All borrowings under the ABL Facility accrue interest at a rate equal to a base rate or LIBOR plus a spread. The spread, which is based on an availability-based measure, ranges from 0.50% to 1.00% for base rate borrowings and 1.50% to 2.00% for LIBOR borrowings. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the ABL Facility may be paid and then reborrowed at our discretion without penalty or premium. Additionally, we pay a commitment fee on the unused balance from 0.25% to 0.375% per year based on the level of borrowings. OnOctober 20, 2020 , we entered into a fourth amendment to our ABL Facility that provides a one-time waiver with respect to the current covenant testing period allowing the covenant trigger event date be the first day after the availability on the ABL Facility had equaled or exceeded (1) 15% of the maximum revolver amount and (2)$4.5 million and a waiver permitting ourJuly 2020 financial statements to be issued on or beforeSeptember 30, 2020 due to delays that were caused by a ransomware attack. OnApril 7, 2020 , we entered into a third amendment to ABL Facility that increased the advance rate on eligible accounts receivable from 85% to 90% and extended the maturity date fromMay 19, 2022 toMarch 1, 2024 . TheApril 7, 2020 amendment also allows for an alternative benchmark rate that may include SOFR due to LIBOR being scheduled to be discontinued at the end of calendar year 2021. 54 -------------------------------------------------------------------------------- Availability under the ABL Facility is subject to a borrowing base consisting of (a) 90% of the eligible accounts receivable plus (b) a calculated amount based on the value of certain real property. As ofJune 30, 2022 , the amount available under the ABL Facility was$24.0 million of which$10,000 was outstanding. The ABL Facility has a first-priority lien on our and the Subsidiary Guarantors' accounts receivable, inventory, deposit and securities accounts, certain real estate and related assets, and by a second- priority lien on the Notes Priority Collateral. There is no direct lien on ourFCC licenses to the extent prohibited by law or regulation other than the economic value and proceeds thereof. The Credit Agreement includes a springing fixed charge coverage ratio of 1.0 to 1.0, which is tested during the period commencing on the last day of the fiscal month most recently ended prior to the date on which Availability (as defined in the Credit Agreement) is less than the greater of 15% of the Maximum Revolver Amount (as defined in the Credit Agreement) and$4.5 million and continuing for a period of 60 consecutive days after the first day on which Availability exceeds such threshold amount. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict our ability and the ability of our subsidiaries (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens, (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all assets to a third party, except as permitted thereby; (viii) to prepay indebtedness; and (ix) to pay dividends. The Credit Agreement provides for the following events of default: (i) default for non-payment of any principal or letter of credit reimbursement when due or any interest, fees, or other amounts within five days of the due date; (ii) the failure by any borrower or any subsidiary to comply with any covenant or agreement contained in the Credit Agreement or any other loan document, in certain cases subject to applicable notice and lapse of time; (iii) any representation or warranty made pursuant to the Credit Agreement or any other loan document is incorrect in any material respect when made; (iv) certain defaults of other indebtedness of any borrower or any subsidiary of indebtedness of at least$10 million ; (v) certain events of bankruptcy or insolvency with respect to any borrower or any subsidiary; (vi) certain judgments for the payment of money of$10 million or more; (vii) a change of control; and (viii) certain defaults relating to the loss ofFCC licenses, cessation of broadcasting and termination of material station contracts. If an event of default occurs and is continuing, the Administrative Agent and the Lenders may accelerate the amounts outstanding under the ABL Facility and may exercise remedies in respect of the collateral. AtJune 30, 2022 , we were, and we remain, in compliance with all of the covenants under Credit Agreement. We recorded debt issue costs of$0.9 million as an asset being amortized to non-cash interest expense over the term of the ABL Facility using the effective interest method. During the three and six months endedJune 30, 2022 ,$28,000 and$0.1 million , respectively, of debt issuance costs associated with the ABL Facility was amortized to interest expense. During the three and six months endedJune 30, 2021 ,$29,000 and$0.1 million , respectively, of debt issuance costs associated with the ABL Facility was amortized to interest expense. AtJune 30, 2022 , the blended interest rate on amounts outstanding under the ABL Facility was 0.0%. We report outstanding balances on the ABL Facility as short-term regardless of the maturity date based on use of the ABL Facility to fund ordinary and customary operating cash needs with frequent repayments. We believe that our borrowing capacity under the ABL Facility allows us to meet our ongoing operating requirements, fund capital expenditures and satisfy our debt service requirements for at least the next twelve months.
Maturities of Long-Term Debt
Principal repayment requirements under all long-term debt agreements outstanding
at
Amount
(Dollars in
For the Year Ended June 30, thousands)
2023 $ 10
2024 44,685
2025 -
2026 -
2027 -
Thereafter 114,731
$ 159,426 Impairment Losses on
We have incurred significant impairment losses with regards to our indefinite-lived intangible assets. If overall market conditions or the performance of the economy deteriorates, our operating results could be negatively impacted, including expectations for future growth.
The valuation of intangible assets is subjective and based on estimates rather
than precise calculations. The fair value measurements of our indefinite-lived
intangible assets use significant unobservable inputs that reflect our own
assumptions about the estimates that market participants would use in measuring
fair value including assumptions about risk. If actual future results are less
favorable than the assumptions and estimates we used, we are subject to future
impairment charges, the amount of which may be material. The
COVID-19
pandemic increases the uncertainty with respect to such market and economic
conditions and, as such, increases the risk of future impairment.
55
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Given the current economic environment and uncertainties that can negatively
impact our business, there can be no assurance that our estimates and
assumptions made for the purpose of our indefinite-lived intangible fair value
estimates will prove to be accurate. While impairment charges are
non-cash
in nature and do not violate the covenants on our debt agreements, the potential
for future impairment charges can be viewed as a negative factor with regard to
forecasted future performance and cash flows.
OFF-BALANCE
SHEET ARRANGEMENTS
Standby Letter of Credit
As of
Equity Method Investment We invested inOneParty America LLC ("OPA"), an entity formed for the purpose of developing, producing, and distributing a documentary motion picture. We reviewed OPA in accordance with the guidance within Accounting Standards Codification ("ASC") 810, Consolidation . Based on our analysis using the variable interest model, we determined that OPA was a Variable Interest Entity ("VIE"), but because we did not have a controlling financial interest, we were not the primary beneficiary of OPA. Accordingly, we accounted for our investment in OPA in accordance with ASC 323-30, Investments -Equity Method and Joint Ventures .
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