Salem Media Group, Inc. Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Stock Incentive Plan

Stock Incentive Plan

12 Months Ended

Dec. 31, 2019

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

NOTE 17. STOCK INCENTIVE PLAN

Our Amended and Restated 1999 Stock Incentive Plan (the “Plan”) provides for grants of equity-based awards to employees,

non-employee

directors and officers, and advisors of the company (“Eligible Persons”). The Plan is designed to promote the interests of the company using equity investment interests to attract, motivate, and retain individuals.

At the annual meeting of the company held on May 8, 2019, the Company’s stockholders approved a revision to the Plan increasing the number of shares authorized by 3,000,000. As a result, a maximum of 8,000,000 shares are authorized under the Plan. All awards have restriction periods tied primarily to employment and/or service. The Plan allows for accelerated or continued vesting in certain circumstances as defined in the Plan including death, disability, a change in control, and termination or retirement. The Board of Directors, or a committee appointed by the Board, has discretion subject to limits defined in the Plan, to modify the terms of any outstanding award.

Under the Plan, the Board, or a committee appointed by the Board, may impose restrictions on the exercise of awards during

pre-defined

blackout periods. Insiders may participate in plans established pursuant to Rule

10b5-1

under the Exchange Act that allow them to exercise awards subject to

pre-established

criteria.

We recognize

non-cash

stock-based compensation expense based on the estimated fair value of awards in accordance with FASB ASC Topic 718 “

Compensation—Stock Compensation

.” Stock-based compensation expense fluctuates over time as a result of the vesting periods for outstanding awards and the number of awards that actually vest. The following table reflects the components of stock-based compensation expense recognized in the Consolidated Statements of Operations for the years ended December 31, 2019 and 2018:


	Year Ended December 31,
	2018			2019
	(Dollars in thousands)
Stock option compensation expense included in unallocated corporate expenses	$	329		$	271
Restricted stock shares compensation expense included in unallocated corporate expenses		—			623
Stock option compensation expense included in broadcast operating expenses		122			111
Restricted stock shares compensation expense included in broadcast operating expenses		—			383
Stock option compensation expense included in digital media operating expenses		77			71
Restricted stock shares compensation expense included in digital media operating expenses		—			—
Stock option compensation expense included in publishing operating expenses		15			1
Restricted stock shares compensation expense included in publishing operating expenses		—			—

Total stock-based compensation expense, pre-tax	$	543		$	1,460
Tax expense from stock-based compensation expense		(141	)		(380	)

Total stock-based compensation expense, net of tax	$	402		$	1,080

Stock option and restricted stock grants

Eligible employees may receive stock option awards annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. Incentive and

non-qualified

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

The Plan also allows for awards of restricted stock, which have been granted periodically to

non-employee

directors of the company. Awards granted to

non-employee

directors are made in exchange for their services to the company as directors and therefore, the guidance in FASB ASC Topic

505-50

Equity Based Payments to Non Employees

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

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

The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes valuation model were as follows for the years ended December 31, 2019 and 2018:


	Year Ended December 31, 2018			Year Ended December 31, 2019
Expected volatility		41.84	%		56.12	%
Expected dividends		7.89	%		16.27	%
Expected term (in years)		7.4			6.7
Risk-free interest rate		2.93	%		1.69	%

Activity with respect to the company’s option awards during the two years ended December 31, 2019 is as follows (Dollars in thousands, except weighted average exercise price and weighted average grant date fair value):


Options	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Outstanding at January 1, 2018		1,428,462		$	5.20	$	2.96		3.7 years	$	653
Granted		650,000			3.30		1.86				—
Exercised		(17,615	)		2.49		2.11				35
Forfeited or expired		(79,875	)		4.42		3.20				28

Outstanding at December 31, 2018		1,980,972		$	4.63	$	2.61		4.1 years	$	—

Exercisable at December 31, 2018		1,055,716			5.51		3.38		2.2 years		—

Expected to Vest		878,531		$	4.65	$	2.63		4.0 years	$	—
Outstanding at January 1, 2019		1,980,972		$	4.63	$	2.61		4.1 years	$	—
Granted		88,750			1.63		0.44				—
Exercised		(200	)		2.38		2.05				—
Forfeited or expired		(208,800	)		5.77		4.06				2

Outstanding at December 31, 2019		1,860,722		$	4.39	$	2.37		3.6 years	$	—

Exercisable at December 31, 2019		1,248,844			4.93		2.78		2.3 years		—

Expected to Vest		580,978		$	4.40	$	2.38		3.5 years	$	—

There were no restricted stock awards granted during the year ended December 31, 2018.

On October 5, 2019, we issued 66,667 restricted shares that vested immediately to our Chief Executive Officer under an election made pursuant to his employment agreement. The fair value of the restricted stock award was measured based on the grant date market price of our common shares. The restricted stock award contains transfer restrictions under which they cannot be sold, pledged, transferred or assigned for two years. The restricted stock awards provide all of the rights of absolute ownership of the restricted stock from the date of grant, including the right to vote the shares and to receive dividends. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards are considered issued and outstanding from the date of grant.

On July 5, 2019, we issued 41,323 restricted shares that vested immediately to our Chief Executive Officer under an election made pursuant to his employment agreement. The fair value of the restricted stock award was measured based on the grant date market price of our common shares. The restricted stock award contains transfer restrictions under which they cannot be sold, pledged, transferred or assigned for two years. The restricted stock awards provide all of the rights of absolute ownership of the restricted stock from the date of grant, including the right to vote the shares and to receive dividends. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards are considered issued and outstanding from the date of grant.

On May 14, 2019, a restricted stock award of 119,049 shares was granted to our Chief Executive Officer and Chairman of the board that vested immediately. The fair value of each restricted stock award was measured based on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned for 10 days. Recipients of these restricted stock awards were entitled to all the rights of absolute ownership of the restricted stock from the date of grant including the right to vote the shares and to receive dividends. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards were considered issued and outstanding from the date of grant.

On May 8, 2019, a restricted stock award of 270,012 shares was granted to certain members of management that vested immediately. The fair value of each restricted stock award was measured based on the grant date market price of our common shares and expensed as of the vesting date. These restricted stock awards contained transfer restrictions under which they could not be sold, pledged, transferred or assigned for10 days. Recipients of these restricted stock awards were entitled to all the rights of absolute ownership of the restricted stock from the date of grant including the right to vote the shares and to receive dividends. Restricted stock awards are independent of option grants and are granted at no cost to the recipient other than applicable taxes owed by the recipient. The awards were considered issued and outstanding from the date of grant.

Activity with respect to the company’s restricted stock awards during the year ended December 31, 2019 is as follows:


Restricted Stock Awards	Shares			Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value
Non-Vested at January 1, 2019		—		$	—		— years	$	—
Granted		497,051			2.02		—		1,006
Lapse of restrictions		(389,061	)		2.07		—		919
Forfeited or expired		—			—		—		—

Outstanding at December 31, 2019		107,990		$	1.85		1.67 years	$	156

Additional information regarding options outstanding as of December 31, 2019, is as follows:


Range of Exercise Prices	Options		Weighted Average Contractual Life Remaining (Years)		Weighted Average Exercise Price		Exercisable Options		Weighted Average Exercise Price
$2.38 - $3.00		357,005		3.0	$	2.43		268,255	$	2.70
$3.01 - $3.28		565,000		5.7		3.25		176,500		3.25
$3.29 - $4.63		67,750		5.4		3.78		20,125		3.81
$4.64 - $4.85		411,792		3.7		4.85		324,789		4.85
$4.86 - $6.65		10,750		1.4		5.68		10,750		5.68
$6.66 - $8.76		448,425		1.1		7.00		448,425		7.00
		1,860,722		3.6	$	4.39		1,248,844	$	4.93

The aggregate intrinsic value represents the difference between the company’s closing stock price on December 31, 2019 of $1.44 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the years ended December 31, 2019 and 2018 was $0.7 million and $0.3 million, respectively.

As of December 31, 2019, there was $0.1 million of total unrecognized compensation cost related to

non-vested

stock option awards. This cost is expected to be recognized over a weighted-average period of 1.6 years.