Salem Media Group, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

CONTINGENT EARN-OUT CONSIDERATION

CONTINGENT EARN-OUT CONSIDERATION

6 Months Ended

Jun. 30, 2017

Business Combination, Contingent Consideration, Liability [Abstract]

NOTE 5. CONTINGENT EARN-OUT CONSIDERATION

Our acquisitions may include contingent earn-out consideration as part of the purchase price under which we will make future payments to the seller upon the achievement of certain benchmarks. The fair value of the contingent earn-out consideration is estimated as of the acquisition date at the present value of the expected contingent payments to be made using a probability-weighted discounted cash flow model for probabilities of possible future payments. The present value of the expected future payouts is accreted to interest expense over the earn-out period. The fair value estimates use unobservable inputs that reflect our own assumptions as to the ability of the acquired business to meet the targeted benchmarks and discount rates used in the calculations. The unobservable inputs are defined in FASB ASC Topic 820, “Fair Value Measurements and Disclosures,” as Level 3 inputs discussed in detail in Note 16.

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

Portuguese Bible Mobile Application

We acquired a Portuguese Bible mobile application and related assets on June 8, 2017. We paid $65,000 in cash upon closing and may pay up to an additional $20,000 in contingent earn-out consideration during the twelve month period ending June 8, 2018 based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of the Portuguese Bible mobile applications to achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $16,500, which approximated the discounted present value.

We review the fair value of the contingent earn-out consideration quarterly over the earn-out period to compare actual revenues achieved and projected to the estimated revenues used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $20,000. There were no changes in our estimates of the fair value of the contingent earn-out consideration as of the period ended June 30, 2017.

Turner Investment Products

We acquired Mike Turner’s line of investment products, including TurnerTrends.com and other domain names and related assets on September 13, 2016. We paid $0.4 million in cash upon closing and may pay up to an additional $0.1 million in contingent earn-out consideration during the twelve month period ending September 13, 2017 based on the achievement of certain revenue benchmarks. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Turner’s investment products to achieve the revenue targets at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $74,000, which was recorded at the discounted present value of $66,000. The discount is being accreted to interest expense over the twelve month earn-out period. We believe that our experience with digital subscriptions and websites provides a reasonable basis for our estimates.

We review the fair value of the contingent earn-out consideration quarterly over the earn-out period to compare actual subscriber revenues achieved and projected to the estimated subscriber revenues used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration will be reflected in our results of operations in the period they are identified, up to the maximum future value outstanding under the contract of $74,000. During the six month period ended June 30, 2017, we recorded a net decrease of $39,000 in the estimated fair value of the contingent earn-out consideration that is reflected in our results of operations for this period due to a reduction in the likelihood of achieving the revenue targets based on actual results to date that were lower than our original estimates.

Daily Bible Devotion

We acquired Daily Bible Devotion mobile applications on May 6, 2015. We paid $1.1 million in cash upon closing and may pay up to an additional $0.3 million in contingent earn-out consideration payable over the next two years based upon the achievement of cumulative session benchmarks for each mobile application. Using a probability-weighted discounted cash flow model based on our own assumptions as to the ability of Bible Devotional Applications to achieve the session benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $165,000, which was recorded at the discounted present value of $142,000. The discount is being accreted to interest expense over the two-year earn-out period. We believe that our experience with digital mobile applications and websites provides a reasonable basis for our estimates.

We reviewed the fair value of the contingent earn-out consideration quarterly over the two-year earn-out period to compare actual cumulative sessions achieved to the estimated cumulative sessions used in our forecasts. Any changes in the estimated fair value of the contingent earn-out consideration were reflected in our results of operations in the period they were identified, up to the maximum amount due under the contract of $165,000 less any amounts paid to date. During the six month period ended June 30, 2017, we recorded a net decrease of $4,000 in the estimated fair value of the contingent earn-out consideration based on actual session results at the end of the earn-out period. We paid a total of $75,000 to the seller over the two year earn-out period, with no payments made during the six month period ended June 30, 2017.

Bryan Perry Newsletters

On February 6, 2015, we acquired the assets and assumed the deferred subscription liabilities for Bryan Perry Newsletters, paying no cash to the seller upon closing. Future contingent earn-out consideration due to the seller was based upon 50% of the net subscriber revenues achieved over the two-year period from date of close with no minimum or maximum contractual amount due. Using a probability-weighted discounted cash flow model based on our revenue projections at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $171,000, which we recorded at the discounted present value of $158,000. The discount was accreted to interest expense over the two-year earn-out period. We paid a total of $91,000 to the seller over the two year earn out period, of which approximately $14,000 was paid during the six month period ended June 30, 2017.

Eagle Publishing

On January 10, 2014, we acquired the entities of Eagle Publishing, including Regnery Publishing, HumanEvents.com, RedState.com, Eagle Financial Publications and Eagle Wellness. The base purchase price was $8.5 million, with $3.5 million paid in cash upon closing, and deferred payments of $2.5 million each due January 2015 and January 2016. The purchase agreement included contingent earn-out consideration of up to $8.5 million based upon the achievement of certain revenue benchmarks established for calendar years 2014, 2015 and 2016 for each of the Eagle entities. Using a probability-weighted discounted cash flow model based on the likelihood of achievement of the benchmarks at the time of closing, we estimated the fair value of the contingent earn-out consideration to be $2.4 million, which was recorded at the discounted present value of $2.0 million. The discount was accreted to interest expense over the three-year earn-out period. We paid a total of $0.9 million in cash for amounts due under the contingent earn-out as of the end of the term on December 31, 2016.

The following table reflects the changes in the present value of our acquisition-related estimated contingent earn-out consideration during the three and six month periods ended June 30, 2017 and 2016:

	Three Months Ended June 30, 2017
	Short-Term		Long-Term
	Accrued Expenses		Other Liabilities	Total
	(Dollars in thousands)
Beginning Balance as of April 1, 2017	$	60	$	$	60
Acquisitions		17			17
Accretion of acquisition-related contingent earn-out consideration		2			2
Change in the estimated fair value of contingent earn-out consideration		(43)			(43)
Reclassification of payments due in next 12 months to short-term
Payments		(5)			(5)
Ending Balance as of June 30, 2017	$	31	$	$	31

	Three Months Ended June 30, 2016
	Short-Term		Long-Term
	Accrued Expenses		Other Liabilities		Total
	(Dollars in thousands)
Beginning Balance as of April 1, 2016	$	541	$	33	$	574
Acquisitions
Accretion of acquisition-related contingent earn-out consideration		5		1		6
Change in the estimated fair value of contingent earn-out consideration		(134)				(134)
Reclassification of payments due in next 12 months to short-term		34		(34)
Payments		(5)				(5)
Ending Balance as of June 30, 2016	$	441	$		$	441

	Six Months Ended June 30, 2017
	Short-Term		Long-Term
	Accrued Expenses		Other Liabilities	Total
	(Dollars in thousands)
Beginning Balance as of January 1, 2017	$	66	$	$	66
Acquisitions		17			17
Accretion of acquisition-related contingent earn-out consideration		4			4
Change in the estimated fair value of contingent earn-out consideration		(42)			(42)
Reclassification of payments due in next 12 months to short-term
Payments		(14)			(14)
Ending Balance as of June 30, 2017	$	31	$	$	31

	Six Months Ended June 30, 2016
	Short-Term		Long-Term
	Accrued Expenses		Other Liabilities		Total
	(Dollars in thousands)
Beginning Balance as of January 1, 2016	$	173	$	602	$	775
Acquisitions
Accretion of acquisition-related contingent earn-out consideration		8		8		16
Change in the estimated fair value of contingent earn-out consideration		(208)		(54)		(262)
Reclassification of payments due in next 12 months to short-term		556		(556)
Payments		(88)				(88)
Ending Balance as of June 30, 2016	$	441	$		$	441