October 21, 2016
VIA EDGAR AND OVERNIGHT MAIL
Mr. Larry Spirgel
Assistant Director
Division of Corporation Finance
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
| RE: | Salem Media Group, Inc. |
Form 10-K for Fiscal Year Ended December 31, 2015
Filed March 11, 2016
File No. 000-26497
Dear Mr. Spirgel:
Set forth below are our responses to the comments provided by the Staff of the Division of Corporation Finance of the Securities and Exchange Commission (“Staff”) in a letter dated October 11, 2016 relating to the above-captioned filing of Salem Media Group, Inc. For convenience, we have set forth the Staff’s comments in italics followed by our response. References to “we,” “us,” “our” and “management” refer to Salem Media Group, Inc. All other terms used herein and not otherwise defined shall have the meanings ascribed to such terms in the Form 10-K.
Non-GAAP Financial Measures, page 45
| 1. | Your presentation of EBITDA is inconsistent with Question 103.01 of the updated Compliance and Disclosure Interpretations issued on May 17, 2016. Please review this guidance in its entirety when preparing your next filing. |
RESPONSE
Management has reviewed the updated Compliance and Disclosure Interpretations issued on May 17, 2016 (“C&DIs”) regarding the presentation of EBITDA described in Question 103.01. In response to the C&DIs, we will revise our presentation of EBITDA to omit the adjustment relating to changes in fair value of interest rate swaps and instead include such adjustment in our presentation of Adjusted EBITDA. In future filings we will present EBITDA and Adjusted EBITDA in the manner presented below, except as updated to reflect future periods:
Reconciliation of Adjusted EBITDA to EBITDA and Net Income (Loss):
| Year Ended December 31, | ||||||||||||||||||||
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Reconciliation of Adjusted EBITDA to EBITDA to Net Income (Loss) | ||||||||||||||||||||
| Adjusted EBITDA | $ | 53,767 | $ | 53,450 | $ | 52,824 | $ | 50,081 | $ | 50,439 | ||||||||||
| Less non-cash stock-based compensation | (950 | ) | (1,368 | ) | (1,849 | ) | (1,576 | ) | (771 | ) | ||||||||||
| Less net miscellaneous income and expenses | (40 | ) | 79 | 18 | 665 | 201 | ||||||||||||||
| Less loss on early retirement of long-term debt | (2,169 | ) | (1,088 | ) | (27,795 | ) | (391 | ) | (41 | ) | ||||||||||
| Less discontinued operations, net of tax | (741 | ) | (95 | ) | (37 | ) | — | — | ||||||||||||
| Less change in the estimated fair value of contingent earn-out consideration | — | — | — | (734 | ) | 1,715 | ||||||||||||||
| Less gain on bargain purchase | — | — | — | — | 1,357 | |||||||||||||||
| Less impairment of indefinite-lived long-term assets other than goodwill | — | (88 | ) | (1,006 | ) | (34 | ) | — | ||||||||||||
| Less impairment of goodwill | — | — | (438 | ) | (45 | ) | (439 | ) | ||||||||||||
| Less impairment of long-lived assets | — | (6,808 | ) | — | — | — | ||||||||||||||
| Less change in fair value of interest rate swaps | ― | ― | 3,177 | (2,702 | ) | (1,273 | ) | |||||||||||||
| Less gain (loss) on the sale or disposal of assets | 4,153 | (49 | ) | 264 | (251 | ) | (181 | ) | ||||||||||||
| EBITDA | $ | 54,020 | $ | 44,033 | $ | 25,158 | $ | 45,013 | $ | 51,007 | ||||||||||
| Plus interest income | 344 | 106 | 68 | 45 | 8 | |||||||||||||||
| Less depreciation and amortization | (14,971 | ) | (14,647 | ) | (15,262 | ) | (18,825 | ) | (17,741 | ) | ||||||||||
| Less interest expense, net of capitalized interest | (27,665 | ) | (24,911 | ) | (16,892 | ) | (15,993 | ) | (15,429 | ) | ||||||||||
| Less provision for (benefit from) income taxes | (6,110 | ) | (153 | ) | 4,192 | (4,765 | ) | (6,695 | ) | |||||||||||
| Net income (loss) | $ | 5,618 | $ | 4,428 | ($ | 2,736 | ) | $ | 5,475 | $ | 11,150 | |||||||||
Non-GAAP Financial Measures, page 45
| 2. | Please reconcile “Free Cash Flow” to its comparable GAAP measure which is “Net cash provided by continuing operating activities.” Since your Free Cash Flow reflects adjustments other than capital expenditures, please re-characterize and rename such non- GAAP measure as “Adjusted Free Cash Flow.” |
RESPONSE
In response to the Staff’s comment, we will no longer present Free Cash Flow or Adjusted Free Cash Flow in future Form 10-Q and Form 10-K filings with the Commission. We use Adjusted Free Cash Flow, a non-GAAP financial measure, both in presenting our results to stockholders and the investment community, and in our internal evaluation and management of the business. We believe that Adjusted Free Cash Flow is used by investors and analysts who report on the Company to provide meaningful comparisons between broadcast groups. We will revise future earnings releases furnished under Item 2.02 Form 8-K to reflect our non-GAAP Free Cash Flow measure as “Adjusted Free Cash Flow” based on the nature of the adjustments. In addition, we will include a reconciliation of Adjusted Free Cash Flow to Net Cash Provided by Continuing Operating Activities in the manner presented below, except as updated to reflect future periods:
Reconciliation of Adjusted Free Cash Flow to Net Cash Provided by Continuing Operating Activities:
| 2011 | 2012 | 2013 | 2014 | 2015 | ||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||
| Adjusted Free Cash Flow | $ | 19,966 | $ | 21,233 | $ | 25,300 | $ | 25,943 | $ | 26,987 | ||||||||||
| Plus cash paid for interest, net of capitalized interest | 26,053 | 23,448 | 16,747 | 14,518 | 14,289 | |||||||||||||||
| Plus cash paid for taxes | 226 | 220 | 242 | 257 | 330 | |||||||||||||||
| Plus net cash paid for capital expenditures (1) | 7,522 | 8,549 | 10,535 | 9,363 | 8,833 | |||||||||||||||
| Adjusted EBITDA | $ | 53,767 | $ | 53,450 | $ | 52,824 | $ | 50,081 | $ | 50,439 | ||||||||||
| Less non-cash stock-based compensation | (950 | ) | (1,368 | ) | (1,849 | ) | (1,576 | ) | (771 | ) | ||||||||||
| Less net miscellaneous income and expenses | (40 | ) | 79 | 18 | 665 | 201 | ||||||||||||||
| Less loss on early retirement of long-term debt | (2,169 | ) | (1,088 | ) | (27,795 | ) | (391 | ) | (41 | ) | ||||||||||
| Less discontinued operations, net of tax | (741 | ) | (95 | ) | (37 | ) | — | — | ||||||||||||
| Less change in the estimated fair value of contingent earn-out consideration | — | — | — | (734 | ) | 1,715 | ||||||||||||||
| Less gain on bargain purchase | — | — | — | — | 1,357 | |||||||||||||||
| Less impairment of indefinite-lived long-term assets other than goodwill | — | (88 | ) | (1,006 | ) | (34 | ) | — | ||||||||||||
| Less impairment of goodwill | — | — | (438 | ) | (45 | ) | (439 | ) | ||||||||||||
| Less impairment of long-lived assets | — | (6,808 | ) | — | — | — | ||||||||||||||
| Less change in fair value of interest rate swaps | ― | ― | 3,177 | (2,702 | ) | (1,273 | ) | |||||||||||||
| Less gain (loss) on the sale or disposal of assets | 4,153 | (49 | ) | 264 | (251 | ) | (181 | ) | ||||||||||||
| EBITDA | $ | 54,020 | $ | 44,033 | $ | 25,158 | $ | 45,013 | $ | 51,007 | ||||||||||
| Plus interest income | 344 | 106 | 68 | 45 | 8 | |||||||||||||||
| Less depreciation and amortization | (14,971 | ) | (14,647 | ) | (15,262 | ) | (18,825 | ) | (17,741 | ) | ||||||||||
| Less interest expense, net of capitalized interest | (27,665 | ) | (24,911 | ) | (16,892 | ) | (15,993 | ) | (15,429 | ) | ||||||||||
| Less provision for (benefit from) income taxes | (6,110 | ) | (153 | ) | 4,192 | (4,765 | ) | (6,695 | ) | |||||||||||
| Net income (loss) | $ | 5,618 | $ | 4,428 | ($ | 2,736 | ) | $ | 5,475 | $ | 11,150 | |||||||||
| Loss from discontinued operations net of tax | 741 | 95 | 37 | — | — | |||||||||||||||
| Net income (loss) from continuing operations | $ | 6,359 | $ | 4,523 | ($ | 2,699 | ) | $ | 5,475 | $ | 11,150 | |||||||||
| Non-cash stock-based compensation | 950 | 1,368 | 1,849 | 1,576 | 771 | |||||||||||||||
| Tax benefit related to stock options exercised | (52 | ) | (228 | ) | 339 | 120 | 133 | |||||||||||||
| Depreciation and amortization | 14,971 | 14,647 | 15,262 | 18,825 | 17,741 | |||||||||||||||
| Amortization of deferred financing costs | 1,556 | 1,291 | 853 | 643 | 628 | |||||||||||||||
| Accretion of financing items | 186 | 179 | 194 | 187 | 188 | |||||||||||||||
| Accretion of acquisition-related deferred payments and contingent earn-out consideration | — | — | 576 | 349 | ||||||||||||||||
| Provision for bad debts | 2,069 | 2,554 | 3,456 | 3,026 | 1,733 | |||||||||||||||
| Deferred income taxes | 5,404 | (101 | ) | (4,764 | ) | 4,375 | 6,313 | |||||||||||||
| Impairment of indefinite-lived long-term assets other than goodwill | — | 6,896 | 1,006 | 34 | — | |||||||||||||||
| Impairment of goodwill | — | — | 438 | 45 | 439 | |||||||||||||||
| Change in the fair value of interest rate swaps | — | — | (3,177 | ) | 2,702 | 1,273 | ||||||||||||||
| Change in the estimated fair value of contingent earn-out consideration | — | — | — | 734 | (1,715 | ) | ||||||||||||||
| (Gain) loss on the sale or disposal of assets | (4,153 | ) | 49 | (264 | ) | 251 | 181 | |||||||||||||
| Gain on bargain purchase | — | — | — | — | (1,357 | ) | ||||||||||||||
| Loss on early retirement of debt | 2,169 | 1,088 | 27,795 | 391 | 41 | |||||||||||||||
| Changes in operating assets and liabilities: | ||||||||||||||||||||
| Accounts receivable | (633 | ) | (2,556 | ) | (3,049 | ) | 4,756 | 1,958 | ||||||||||||
| Inventories | — | — | — | (27 | ) | (307 | ) | |||||||||||||
| Prepaid expenses and other current assets | (81 | ) | 118 | (50 | ) | 237 | (705 | ) | ||||||||||||
| Accounts payable and accrued expenses | 980 | 3,291 | (4,733 | ) | 4,041 | (3,090 | ) | |||||||||||||
| Deferred revenue | (616 | ) | (2,240 | ) | (3,688 | ) | (4,929 | ) | (216 | ) | ||||||||||
| Other liabilities | 2,601 | — | — | (1,125 | ) | 703 | ||||||||||||||
| Income taxes payable | (5 | ) | (30 | ) | (33 | ) | 12 | (81 | ) | |||||||||||
| Net cash provided by continuing operating activities | $ | 31,705 | $ | 30,849 | $ | 28,735 | $ | 41,925 | $ | 36,130 | ||||||||||
| (1) | Net cash paid for capital expenditures reflects actual cash payments net of amounts reimbursable for tenant improvements allowances. |
Management’s Discussion and Analysis, page 47
| 3. | We note that in your second quarter earnings call for the fiscal year ended December 31, 2016, your CEO stated that management is concerned with declines in Facebook traffic to your sites (46% decline). However, there is only a brief mention of this concern in your most recent MD&A, and no discussion regarding what steps, if any, management is taking to address changes in the Facebook newsfeed algorithm to counteract the negative impact to your number of page views and to increase your monetization of mobile advertising. Please revise accordingly. Please refer to Item 303(a)(3)(ii) of Regulation S-K and Section III.B.1 of SEC Release 33-8350. |
RESPONSE
In response to the Staff’s comment, in future filings, management will provide enhanced disclosures of applicable key variables and other qualitative or quantitative factors necessary for an understanding and evaluation of known trends and the impact of these trends on performance. These variables include the item noted with regard to the observed changes in Facebook algorithms that impact traffic to our sites.
Our discussion of these changes would read substantially as follows, except as updated to reflect future periods:
Digital revenue declined 2% during the second quarter of 2016. While overall traffic was steady as compared to prior periods, we noted a decline of 46% in traffic from Facebook as a result of changes in its algorithm featuring business posts. We continue to explore opportunities to promote mobile applications to become less reliant on Facebook generated traffic. Digital revenue is impacted by this change as mobile page views carry fewer ads per page than desktop and these ads typically carry lower rates as compared to Facebook generated traffic.
Please contact me at (805) 987-0400 with any questions or if you require further information.
Sincerely,
| /s/ Christopher J. Henderson |
Christopher J. Henderson
Senior Vice President and General Counsel
cc:
Securities and Exchange Commission
Kathryn Jacobson
Dean Suehiro
Joshua Shainess
Salem Media Group, Inc.
Edward G. Atsinger
Eric H. Halvorson
Evan D. Masyr
K&L Gates LLP
David C. Lee
Crowe Horwath, LLP
David L. Kral