UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

OR

 

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

FOR THE TRANSITION PERIOD FROM                      TO                     

COMMISSION FILE NUMBER 000-26497

 

 

SALEM MEDIA GROUP, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

 

 

 

 

DELAWARE		77-0121400
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)		(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
4880 SANTA ROSA ROAD CAMARILLO, CALIFORNIA		93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)		(ZIP CODE)

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

 

Title of each Class		Trading Symbol(s)		Name of each exchange on which registered
Class A Common Stock, $0.01 par value per share		SALM		NASDAQ Global Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.)    Yes  ☒    No  ☐

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

 

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ☐    No  ☒

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

 

Class A		Outstanding at May 7, 2020
Common Stock, $0.01 par value per share		21,129,667 shares

 

Class B		Outstanding at May 7, 2020
Common Stock, $0.01 par value per share		5,553,696 shares

 

 

 

SALEM MEDIA GROUP, INC.

INDEX

 

		PAGE NO.
COVER PAGE
INDEX
FORWARD LOOKING STATEMENTS			2
PART I—FINANCIAL INFORMATION			3
Item 1. Condensed Consolidated Financial Statements			3
Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Item 3. Quantitative and Qualitative Disclosures About Market Risk			64
Item 4. Controls and Procedures			64
PART II—OTHER INFORMATION			64
Item 1. Legal Proceedings			64
Item 1A. Risk Factors			64
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			64
Item 3. Defaults Upon Senior Securities			64
Item 4. Mine Safety Disclosures			65
Item 5. Other Information			65
Item 6. Exhibits			65
EXHIBIT INDEX			65
SIGNATURES			66

 

1

CERTAIN DEFINITIONS

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

EXPLANATORY NOTE

As disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”), on May 11, 2020, we delayed the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, due to the impact of the coronavirus COVID-19 (“COVID-19”) pandemic that made it more difficult, and therefore it has taken us more time, to finish our analysis and compile certain information necessary to make key assessments and estimates.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

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

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

 

2

PART I – FINANCIAL INFORMATION

SALEM MEDIA GROUP, INC.

 

ITEM 1.

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

3

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

		December 31, 2019 (Note 1)				March 31, 2020 (Unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	6			$	1,253
Trade accounts receivable (net of allowances of $10,947 in 2019 and $11,408 in 2020)			30,824				26,862
Unbilled revenue			2,749				2,356
Other receivables			1,352				1,508
Inventories (net of reserves of $1,271 in 2019 and $1,431in 2020)			717				647
Prepaid expenses			5,890				6,477
Assets held for sale			185				185
Total current assets			41,723				39,288
Notes receivable (net of allowance of $954 in 2019 and $930 in 2020)			667				669
Property and equipment (net of accumulated depreciation of $173,122 in 2019 and $175,212 in 2020)			87,673				86,630
Operating lease right-of-use assets			54,550				52,425
Financing lease right-of-use assets			180				161
Broadcast licenses			337,858				320,864
Goodwill			23,998				23,691
Other indefinite-lived intangible assets			260				—
Amortizable intangible assets (net of accumulated amortization of $55,617 in 2019 and $56,604 in 2020)			7,100				6,113
Deferred financing costs			224				183
Other assets			4,197				4,639
Total assets		$	558,430			$	534,663
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	3,468			$	2,192
Accrued expenses			9,395				8,064
Accrued compensation and related expenses			7,895				9,578
Accrued interest			1,262				4,902
Contract liabilities			9,493				9,630
Deferred rent income			110				118
Income taxes payable			531				588
Current portion of operating lease liabilities			8,485				8,697
Current portion of financing (capital) lease liabilities			69				65
Current portion of long-term debt			12,426				14,000
Total current liabilities			53,134				57,834
Long-term debt, less current portion			216,468				213,212
Operating lease liabilities, less current portion			54,050				51,557
Financing (capital) lease liabilities, less current portion			124				111
Deferred income taxes			38,778				71,862
Contract liabilities, long-term			1,744				1,740
Deferred rent income, less current portion			3,956				3,933
Other long-term liabilities			513				519
Total liabilities			368,767				400,768
Commitments and contingencies (Note 16)
Stockholders’ Equity:
Class A common stock, $0.01 par value; authorized 80,000,000 shares; 23,447,317 issued and 21,129,667 outstanding at December 31, 2019 and March 31, 2020			227				227
Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2019 and March 31, 2020			56				56
Additional paid-in capital			246,680				246,783
Accumulated earnings (deficit)			(23,294	)			(79,165	)
Treasury stock, at cost (2,317,650 shares at December 31, 2019 and March 31, 2020)			(34,006	)			(34,006	)
Total stockholders’ equity			189,663				133,895
Total liabilities and stockholders’ equity		$	558,430			$	534,663
See accompanying notes

 

4

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

(Unaudited)

 

		Three Months Ended
		March 31,
		2019				2020
Net broadcast revenue		$	46,093			$	45,180
Net digital media revenue			10,240				9,104
Net publishing revenue			4,136				3,966
Total net revenue			60,469				58,250
Operating expenses:
Broadcast operating expenses, exclusive of depreciation and amortization shown below (including $436 and $431 for the three months ended March 31, 2019 and 2020, respectively, paid to related parties)			36,449				37,327
Digital media operating expenses, exclusive of depreciation and amortization shown below			8,058				8,326
Publishing operating expenses, exclusive of depreciation and amortization shown below			4,822				5,062
Unallocated corporate expenses exclusive of depreciation and amortization shown below (including $7 and $180 for the three months ended March 31, 2019 and 2020, respectively, paid to related parties)			3,871				4,210
Depreciation			2,933				2,713
Amortization			1,296				987
Change in the estimated fair value of contingent earn-out consideration			—				(5	)
Impairment of indefinite-lived long-term assets other than goodwill			—				17,254
Impairment of goodwill			—				307
Net (gain) loss on the disposition of assets			4,024				79
Total operating expenses			61,453				76,260
Operating loss			(984	)			(18,010	)
Other income (expense):
Interest income			1				—
Interest expense			(4,425	)			(4,032	)
Gain on early retirement of long-term debt			426				49
Net miscellaneous income and expenses			1				(52	)
Net loss before income taxes			(4,981	)			(22,045	)
Provision for (benefit from) income taxes			(5,303	)			33,159
Net income (loss)		$	322			$	(55,204	)
Basic earnings (loss) per share data:
Basic earnings (loss) per share Class A and Class B common stock		$	0.01			$	(2.07	)
Diluted earnings (loss) per share data:
Diluted earnings (loss) per share Class A and Class B common stock		$	0.01			$	(2.07	)
Basic weighted average Class A and Class B shares outstanding			26,186,112				26,683,363
Diluted weighted average Class A and Class B shares outstanding			26,193,307				26,683,363
See accompanying notes

 

5

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

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

 

		Class A Common Stock								Class B Common Stock								Additional Paid-In				Accumulated				Treasury
		Shares				Amount				Shares				Amount				Capital				Earnings (Deficit)				Stock				Total
Stockholders’ equity, December 31, 2019			23,447,317			$	227				5,553,696			$	56			$	246,680			$	(23,294	)		$	(34,006	)		$	189,663
Stock-based compensation			—				—				—				—				103				—				—				103
Cash distributions			—				—				—				—				—				(667	)			—				(667	)
Net loss			—				—				—				—				—				(55,204	)			—				(55,204	)
Stockholders’ equity, March 31, 2020			23,447,317			$	227				5,553,696			$	56			$	246,783			$	(79,165	)		$	(34,006	)		$	133,895
Distributions per share		$	0.025							$	0.025

 

		Class A Common Stock								Class B Common Stock								Additional Paid-In				Accumulated				Treasury
		Shares				Amount				Shares				Amount				Capital				Earnings				Stock				Total
Stockholders’ equity, December 31, 2018			22,950,066			$	227				5,553,696			$	56			$	245,220			$	10,372			$	(34,006	)		$	221,869
Stock-based compensation			—				—				—				—				176				—				—				176
Cash distributions			—				—				—				—				—				(1,702	)			—				(1,702	)
Net income			—				—				—				—				—				322				—				322
Stockholders’ equity, March 31, 2019			22,950,066			$	227				5,553,696			$	56			$	245,396			$	8,992			$	(34,006	)		$	220,665
Distributions per share		$	0.065							$	0.065

See accompanying notes

 

6

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2019				2020
OPERATING ACTIVITIES
Net income (loss)		$	322			$	(55,204	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Non-cash stock-based compensation			176				103
Depreciation and amortization			4,229				3,700
Amortization of deferred financing costs			258				227
Non-cash lease expense			2,267				2,252
Accretion of acquisition-related deferred payments and contingent consideration			1				—
Provision for bad debts			320				1,900
Deferred income taxes			(5,304	)			33,084
Change in the estimated fair value of contingent earn-out consideration			—				(5	)
Impairment of indefinite-lived long-term assets other than goodwill			—				17,254
Impairment of goodwill			—				307
Gain on early retirement of long-term debt			(426	)			(49	)
Net (gain) loss on the disposition of assets			4,024				79
Changes in operating assets and liabilities:
Accounts receivable and unbilled revenue			1,758				2,419
Inventories			(256	)			70
Prepaid expenses and other current assets			1,387				(587	)
Accounts payable and accrued expenses			3,449				4,478
Operating lease liabilities			(3,458	)			(2,407	)
Contract liabilities			133				133
Deferred rent income			(43	)			(84	)
Other liabilities			—				6
Income taxes payable			130				57
Net cash provided by operating activities			8,967				7,733
INVESTING ACTIVITIES
Cash paid for capital expenditures net of tenant improvement allowances			(2,404	)			(1,587	)
Capital expenditures reimbursable under tenant improvement allowances and trade agreements			—				(84	)
Purchases of digital media businesses and assets			(100	)			—
Proceeds from sale of assets			1,255				2
Other			(139	)			(428	)
Net cash used in investing activities			(1,388	)			(2,097	)
FINANCING ACTIVITIES
Payments to repurchase 6.75% Senior Secured Notes			(6,123	)			(3,392	)
Proceeds from borrowings under ABL Facility			22,189				33,319
Payments on ABL Facility			(25,849	)			(31,745	)
Refund (payments) of debt issuance costs			(13	)			(1	)
Payments on financing lease liabilities			(21	)			(18	)
Payment of cash distribution on common stock			(1,702	)			(667	)
Book overdraft			3,827				(1,885	)
Net cash used in financing activities			(7,692	)			(4,389	)
Net increase (decrease) in cash and cash equivalents			(113	)			1,247
Cash and cash equivalents at beginning of year			117				6
Cash and cash equivalents at end of period		$	4			$	1,253
See accompanying notes

 

7

SALEM MEDIA GROUP, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(Dollars in thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2019				2020
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Cash paid for interest, net of capitalized interest		$	302			$	163
Cash paid for interest on finance lease liabilities		$	2			$	2
Cash paid for income taxes		$	130			$	18
Other supplemental disclosures of cash flow information:
Barter revenue		$	1,310			$	1,192
Barter expense		$	1,356			$	1,034
Non-cash investing and financing activities:
Capital expenditures reimbursable under tenant improvement allowances		$	—			$	84
Right-of-use assets acquired through operating leases		$	288			$	575
Non-cash capital expenditures for property & equipment acquired under trade agreements		$	—			$	4
See accompanying notes

 

8

SALEM MEDIA GROUP, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BUSINESS AND BASIS OF PRESENTATION

Business

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

Impact of the COVID-19 Pandemic

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

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring the COVID-19 situation and its impact in the markets we serve. We are taking all precautionary measures as directed by health authorities and local and national governments. Due to continuing uncertainties regarding the ultimate scope and trajectory of COVID-19’s spread and evolution, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities continue to implement restrictive measures, the material adverse effect on our business, results of operations, financial condition and cash flows could persist.

To date, the pandemic has not increased our cost of, or access to, capital under our credit facility. Future availability under our credit facility is contingent upon our eligible receivable balance that will be impacted by lower revenues and longer days to collect. To limit our exposure and ensure that we have adequate cash to meet our debt servicing requirements, we have initiated several strategies to reduce costs and conserve cash including:

 

•

limiting capital expenditures;

 

•

reducing discretionary spending, such as travel and entertainment;

 

•

eliminating open positions and new hires;

 

•

reducing staffing levels;

 

•

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

 

•

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

 

•

temporarily suspending the company 401K match;

 

•

requesting rent concessions from landlords;

 

•

requesting discounts from vendors.

 

•

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

 

•

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

 

•

considering sales-leaseback of owned facilities; and

 

•

suspending the payment of equity distributions until further notice.

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

 

•

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

 

•

relaxation of interest expense deduction limitation for income tax purposes.

 

9

We reforecast our 2020 anticipated results extending through June 2021. Our reforecast includes the impact of certain of these cost-cutting measures. We may consider sales-leaseback of owned facilities if the adverse economic impact of the COVID-19 pandemic continues beyond 2020. Based on our current and expected economic outlook and our current and expected funding needs, we believe that the borrowing capacity under our current credit facilities allows us to meet our ongoing operating requirements, fund necessary capital expenditures and satisfy our debt service requirements for at least the next twelve months, including the working capital deficit at March 31, 2020. Based on our current assessment, we believe that we have the ability to meet our obligations as they come due for a year from the issuance of the financial statements.

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

Basis of Presentation

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

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

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

Use of Estimates

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

Significant areas for which management uses estimates include:

 

•

revenue recognition;

 

•

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

 

•

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

 

•

fair value measurements;

 

•

contingency reserves;

 

•

allowance for doubtful accounts;

 

•

sales returns and allowances;

 

•

barter transactions;

 

•

inventory reserves;

 

•

reserves for royalty advances;

 

•

fair value of equity awards;

 

•

self-insurance reserves;

 

•

estimated lives for tangible and intangible assets;

 

•

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

 

•

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

 

•

income tax valuation allowances;

 

10

•

uncertain tax positions; and

 

•

estimates used in going concern analysis.

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

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

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Recent Accounting Pronouncements

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

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The guidance is effective prospectively as of March 12, 2020 through December 31, 2022 and interim periods within those fiscal years. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

In March 2020, the FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which makes improvements to financial instruments guidance. The standard is effective immediately for certain amendments and for fiscal years beginning after December 15, 2019. We do not expect the adoption of this ASU to have a material impact on our consolidated financial position, results of operations, cash flows, or presentation thereof.

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

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

NOTE 3. RECENT TRANSACTIONS

During the three month period ended March 31, 2020, we completed or entered into the following transactions:

 

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Debt Transactions

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

Equity Transactions

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

Pending Transactions

On October 31, 2019, we entered into an agreement to sell radio station WBZW-AM and an FM translator construction permit in Orlando, Florida, for $0.2 million in cash. We recognized an estimated pre-tax loss of approximately $1.5 million in the fourth quarter of 2019, which reflects the sale price as compared to the carrying value of the assets less the estimated closing costs. The buyer began programming the stations under a Local Marketing Agreement (“LMA”) on March 1, 2020. The transaction closed on April 6, 2020.

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

NOTE 4. CONTINGENT EARN-OUT CONSIDERATION

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

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

At March 31, 2020, our estimated contingent earn-out was $14,000 compared to $19,000 at December 31, 2019. We recorded a net decrease to our estimated contingent earn-out liabilities of $5,000 for the three month period ended March 31, 2020. The changes in our estimate of the contingent earn-out reflect volatility from variables, including revenue growth, page views or session time. We made no cash payments for contingent earn-out consideration during the three month period ended March 31, 2020.

NOTE 5. REVENUE RECOGNITION

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

Identification of the contract, or contracts, with a customer

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

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

 

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Identification of the performance obligations in the contract

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

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

Determination of the transaction price

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

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

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

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

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

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

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

Spot Advertising. We recognize revenue from the sale of airtime to local and national advertisers who purchase spot commercials of varying lengths. Spot Advertising may include variable consideration for charities and programmers that purchase spots to generate donations and contributions from our audience. Advertising revenue is recognized at the time of broadcast, which represents the point in time that control is transferred to the customer thereby completing our performance obligation. Advertising revenue is recorded on a gross basis unless an agency represents the advertiser, in which case, revenue is reported net of the commission retained by the agency.

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

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

Broadcast digital advertising revenue consists of local digital advertising, such as the sale of banner advertisements on our owned and operated websites, the sale of advertisements on our own and operated mobile applications, and advertisements in digital newsletters that we produce, as well an national digital advertising, or the sale of custom digital advertising solutions, such as web pages and social media campaigns, that we offer to our customers. Advertising revenue is recorded on a gross basis unless an agency represents the advertiser, in which case, revenue is reported net of the commission retained by the agency.

 

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

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

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

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

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

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

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

 

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

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

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

Trade and Barter Transactions

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

Trade and barter revenues and expenses were as follows:

 

		Three Months Ended March 31,
		2019				2020
Net broadcast barter revenue		$	1,299			$	1,166
Net digital media barter revenue			—				—
Net publishing barter revenue			11				26
Net broadcast barter expense		$	1,356			$	1,034
Net digital media barter expense			—				—
Net publishing barter expense			—				—

Contract Assets

Contract Assets—Costs to Obtain a Contract: We capitalize commissions paid to sales personnel in our self-publishing business when customer contracts are signed and advance payment is received. These capitalized costs are recorded as prepaid commission expense in the Consolidated Balance Sheets. The amount capitalized is incremental to the contract and would not have been incurred absent the execution of the customer contract. Commissions paid upon the initial acquisition of a contract are expensed at the point in time that related revenue is recognized. Prepaid commission expenses are periodically reviewed for impairment. At March 31, 2020, our prepaid commission expense was $0.5 million.

Contract Liabilities

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

 

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

 

		Short-Term				Long-Term
		(Dollars in thousands)
Balance, beginning of period January 1, 2020		$	9,493			$	1,744
Revenue recognized during the period that was included in the beginning balance of contract liabilities			(3,042	)			—
Additional amounts recognized during the period			5,196				287
Revenue recognized during the period that was recorded during the period			(2,308	)			—
Transfers			291				(291	)
Balance, end of period March 31, 2020		$	9,630			$	1,740
Amount refundable at beginning of period		$	9,403			$	1,744
Amount refundable at end of period		$	9,541			$	1,740

We expect to satisfy these performance obligations as follows:

 

		Amount
For the Twelve Months Ended March 31,		(Dollars in thousands)
2021		$	9,630
2022			998
2023			378
2024			173
2025			75
Thereafter			116
		$	11,370

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

 

		Three Months Ended March 31, 2020
		Broadcast				Digital Media				Publishing				Consolidated
		(dollars in thousands)
By Source of Revenue:
Block Programming - National		$	12,034			$	—			$	—			$	12,034
Block Programming - Local			6,808				—				—				6,808
Spot Advertising - National			3,957				—				—				3,957
Spot Advertising - Local			11,357				—				—				11,357
Infomercials			308				—				—				308
Network			4,388				—				—				4,388
Digital Advertising			3,326				4,713				99				8,138
Digital Streaming			608				915				—				1,523
Digital Downloads and eBooks			—				1,245				254				1,499
Subscriptions			282				2,135				177				2,594
Book Sales and e-commerce, net of estimated sales returns and allowances			76				28				1,723				1,827
Self-Publishing Fees			—				—				1,402				1,402
Print Advertising			1				—				102				103
Other Revenues			2,035				68				209				2,312
		$	45,180			$	9,104			$	3,966			$	58,250
Timing of Revenue Recognition
Point in Time		$	44,563			$	9,104			$	3,966			$	57,633
Rental Income (1)			617				—				—				617
		$	45,180			$	9,104			$	3,966			$	58,250

 

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		Three Months Ended March 31, 2019
		Broadcast				Digital Media				Publishing				Consolidated
		(dollars in thousands)
By Source of Revenue:
Block Programming - National		$	12,233			$	—			$	—			$	12,233
Block Programming - Local			7,910				—				—				7,910
Spot Advertising - National			3,900				—				—				3,900
Spot Advertising - Local			12,062				—				—				12,062
Infomercials			390				—				—				390
Network			4,306				—				—				4,306
Digital Advertising			2,352				5,317				85				7,754
Digital Streaming			161				1,011				—				1,172
Digital Downloads and eBooks			—				1,275				162				1,437
Subscriptions			274				2,084				201				2,559
Book Sales and e-commerce, net of estimated sales returns and allowances			37				410				1,841				2,288
Self-Publishing Fees			—				—				1,477				1,477
Print Advertising			2				—				135				137
Other Revenues			2,466				143				235				2,844
		$	46,093			$	10,240			$	4,136			$	60,469
Timing of Revenue Recognition
Point in Time		$	45,472			$	10,225			$	4,136			$	59,833
Rental Income (1)			621				15				—				636
		$	46,093			$	10,240			$	4,136			$	60,469

 

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

Principal versus Agent Considerations

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

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

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

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

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

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

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

Significant Financing Component

The length of our typical sales agreement is less than 12 months; however, we may sell subscriptions with a two-year term. The balance of our long-term contract liabilities represents the unsatisfied performance obligations for subscriptions with a remaining term in excess of one year. We review long-term contract liabilities that are expected to be completed in excess of one year to assess whether the contract contains a significant financing component. The balance includes subscriptions that will be satisfied at various dates between April 1, 2021 and March 31, 2025. The difference between the promised consideration and the cash selling price of the publications is not significant. Therefore, we have concluded that subscriptions do not contain a significant financing component under ASC 606.

Our self-publishing contracts may exceed a one-year term due to the length of time for an author to submit and approve a manuscript for publication. The author may pay for publishing services in installments over the production timeline with payments due in advance of performance. The timing of the transfer of goods and services under self-publishing arrangements are at the discretion of the author and based on future events that are not substantially within our control. We require advance payments to provide us with protection from incurring costs for products that are unique and only sellable to the author. Based on these considerations, we have concluded that our self-publishing contracts do not contain a significant financing component under ASC 606.

 

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Variable Consideration

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

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

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

Practical Expedients and Exemptions

We elected certain practical expedients and policy elections as follows:

 

•

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

 

•

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

 

•

We exclude sales and similar taxes from the transaction price;

 

•

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

 

•

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

NOTE 6. INVENTORIES

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

The following table provides details of inventory on hand by segment:

 

		December 31, 2019				March 31, 2020
		(Dollars in thousands)
Regnery® Publishing book inventories		$	1,988			$	2,078
Reserve for obsolescence – Regnery® Publishing			(1,271	)			(1,431	)
Inventory, net - Regnery® Publishing		$	717			$	647

NOTE 7. PROPERTY AND EQUIPMENT

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

 

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

 

		As of December 31, 2019				As of March 31, 2020
		(Dollars in thousands)
Land		$	30,936			$	30,951
Buildings			30,283				30,283
Office furnishings and equipment			36,855				37,215
Antennae, towers and transmitting equipment			78,312				78,423
Studio, production and mobile equipment			30,164				29,713
Computer software and website development costs			29,595				30,587
Record and tape libraries			17				17
Automobiles			1,509				1,556
Leasehold improvements			18,834				18,983
Construction-in-progress			4,290				4,114
		$	260,795			$	261,842
Less accumulated depreciation			(173,122	)			(175,212	)
		$	87,673			$	86,630

Depreciation expense was approximately $2.7 million and $2.9 million for the three month periods ended March 31, 2020 and 2019, respectively. We periodically review long-lived assets for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. This review requires us to estimate the fair value of the assets using significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value, including assumptions about risk. If actual future results are less favorable than the assumptions and estimates we used, we are subject to future impairment charges, the amount of which may be material. There were no indications of impairment during the period ended March 31, 2020.

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

Leases

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

Leasing Transactions

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

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

 

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Balance Sheet

Supplemental balance sheet information related to leases is as follows:

 

		March 31, 2020
		(Dollars in thousands)
Operating Leases		Related Party				Other				Total
Operating leases ROU assets		$	7,708			$	44,717			$	52,425
Operating lease liabilities (current)		$	999			$	7,698			$	8,697
Operating lease liabilities (non-current)			6,948				44,609				51,557
Total operating lease liabilities		$	7,947			$	52,307			$	60,254

 

Weighted Average Remaining Lease Term
Operating leases			8.6 years
Finance leases			3.2 years
Weighted Average Discount Rate
Operating leases			8.22	%
Finance leases			4.60	%

Lease Expense

The components of lease expense were as follows:

 

		Three Months Ended March 31, 2020
		(Dollars in thousands)
Amortization of finance lease ROU Assets		$	18
Interest on finance lease liabilities			2
Finance lease expense			20
Operating lease expense			3,473
Variable lease expense			205
Short-term lease expense			155
Total lease expense		$	3,853

Supplemental Cash Flow

Supplemental cash flow information related to leases was as follows:

 

		Three Months Ended March 31, 2020
		(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases		$	3,636
Operating cash flows from finance leases			2
Financing cash flows from finance leases			18
Leased assets obtained in exchange for new operating lease liabilities		$	575
Leased assets obtained in exchange for new finance lease liabilities			—

 

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Maturities

Future minimum lease payments under leases that had initial or remaining non-cancelable lease terms in excess of one year as of March 31, 2020, are as follows:

 

		Operating Leases
Future minimum lease		Related Party				Other				Total				Finance Leases				Total
		(Dollars in thousands)
2020 (Apr-Dec)		$	1,203			$	9,476			$	10,679			$	55			$	10,734
2021			1,619				11,616				13,235				55				13,290
2022			1,613				10,067				11,680				46				11,726
2023			1,169				8,996				10,165				25				10,190
2024			1,015				6,641				7,656				7				7,663
Thereafter			5,097				30,888				35,985				0				35,985
Undiscounted Cash Flows		$	11,716			$	77,684			$	89,400			$	188			$	89,588
Less: imputed interest			(3,769	)			(25,377	)			(29,146	)			(12	)			(29,158	)
Total		$	7,947			$	52,307			$	60,254			$	176			$	60,430
Reconciliation to lease liabilities:
Lease liabilities - current		$	999			$	7,698			$	8,697			$	65			$	8,762
Lease liabilities - long-term			6,948				44,609				51,557				111				51,668
Total Lease Liabilities		$	7,947			$	52,307			$	60,254			$	176			$	60,430

NOTE 9. BROADCAST LICENSES

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

We performed an interim review of broadcast licenses for certain markets during the first quarter of 2020 due to the COVID-19 pandemic and the resulting stay-at-home orders that began to adversely impact revenues. We assessed a variety of factors, including media industry forecasts for the remainder of 2020 and the amount by which the prior estimated fair value exceeded the carrying value under the start-up income approach. Based on our assessment, we engaged Bond & Pecaro, an independent third-party appraisal and valuation firm, to assist us with determining the enterprise value of 11 of our market clusters.

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

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

 

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The primary assumptions used in the Greenfield Method are:

 

(1)

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

 

(2)

normalized market share,

 

(3)

normalized profit margin,

 

(4)

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

 

(5)

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

 

(6)

ongoing replacement costs of fixed assets and working capital,

 

(7)

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

 

(8)

amortization of the intangible asset, or the broadcast license.

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

 

Broadcast Licenses		December 31, 2019		March 31, 2020
Risk-adjusted discount rate		9.0%		9.5%
Operating profit margin ranges		4.0% - 33.8%		4.6% - 33.8%
Long-term revenue growth rates		0.7% - 1.1%		0.8% - 1.1%

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

Based on our review and analysis, we determined that the carrying value of broadcast licenses in 7 of our market clusters were impaired as of the interim testing period ending March 31, 2020. We recorded an impairment charge of $17.0 million to the value of broadcast licenses in Chicago, Cleveland, Louisville, Philadelphia, Portland, Sacramento and Tampa. The impairment charges were driven by decreases in projected revenues due to the current estimated impact of COVID-19 and an increase in the WACC. We believe that these factors are indicative of trends in the industry as a whole and not unique to our company or operations.

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

 

Market Cluster		Excess Fair Value March 31, Estimate
Boston, MA			4.8	%
Chicago, IL			(9.0	%)
Cleveland, OH			(18.4	%)
Dallas, TX			8.5	%
Louisville, KY			(21.8	%)
New York, NY			7.3	%
Philadelphia, PA			(13.1	%)
Portland, OR			(14.8	%)
Sacramento, CA			(9.6	%)
San Francisco, CA			1.2	%
Tampa, FL			(28.0	%)

We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of our broadcast licenses, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of our broadcast licenses below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.

 

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

 

Broadcast Licenses		Twelve Months Ended December 31, 2019				Three Months Ended March 31, 2020
		(Dollars in thousands)
Balance before cumulative loss on impairment, beginning of period		$	484,691			$	441,143
Accumulated loss on impairment, beginning of period			(108,375	)			(103,285	)
Balance after cumulative loss on impairment, beginning of period			376,316				337,858
Acquisitions of radio stations			617				—
Acquisitions of FM translators and construction permits			35				—
Capital projects			300				—
Dispositions of radio stations			(36,502	)			—
Impairments based on the estimated fair value of broadcast licenses			(2,908	)			(16,994	)
Balance, end of period after cumulative loss on impairment		$	337,858			$	320,864
Balance, end of period before cumulative loss on impairment		$	441,143			$	441,143
Accumulated loss on impairment, end of period			(103,285	)			(120,279	)
Balance, end of period after cumulative loss on impairment		$	337,858			$	320,864

NOTE 10. GOODWILL

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

We performed an interim review of goodwill during the first quarter of 2020 due to the COVID-19 pandemic and the resulting stay-at-home orders that began to adversely impact revenues. We assessed a variety of factors, including media industry forecasts for the remainder of 2020 and the amount by which the prior estimated fair value exceeded the carrying value including goodwill.

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

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

 

Publishing Enterprise Valuations		December 31, 2019		March 31, 2020
Risk adjusted discount rate		10.0%		10.5%
Operating margin ranges		1.5% – 3.9%		0.0% – 3.9%
Long-term revenue growth rates		0.5%		0.5%

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

Based on our review and analysis, we recorded an impairment charge of $0.3 million, including a $0.1 million charge to the carrying value of goodwill associated with Salem Author Services. The impairment charges were driven by a decrease in the operating margins due to the impact of COVID-19 on revenue and an increase in the WACC. We believe that these factors are indicative of trends in the industry as a whole and not unique to our company or operations.

We believe we have made reasonable estimates and assumptions to calculate the estimated fair value of goodwill, however, these estimates and assumptions are highly judgmental in nature. Actual results can be materially different from estimates and assumptions. If actual market conditions are less favorable than those projected by the industry or by us, or if events occur or circumstances change that would reduce the estimated fair value of goodwill below the amounts reflected on our balance sheet, we may recognize future impairment charges, the amount of which may be material.

 

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