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

Quarterly report pursuant to Section 13 or 15(d)

STOCK INCENTIVE PLAN

STOCK INCENTIVE PLAN

6 Months Ended

Jun. 30, 2017

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

NOTE 12. 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.

A maximum of 5,000,000 shares of common stock 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 “CompensationStock 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. We adopted ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” as of January 1, 2017. The adoption of this ASU did not materially impact our financial position, results of operations, or cash flows.

The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2017 and 2016:

	Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	81	$	28	$	202	$	99
Restricted stock shares compensation expense included in corporate expenses						24		875
Stock option compensation expense included in broadcast operating expenses		20		6		48		34
Restricted stock shares compensation expense included in broadcast operating expenses								224
Stock option compensation expense included in digital media operating expenses		14		5		39		19
Restricted stock shares compensation expense included in digital media operating expenses								124
Stock option compensation expense included in publishing operating expenses		10		5		11		14
Restricted stock shares compensation expense included in publishing operating expenses								36
Total stock-based compensation expense, pre-tax	$	125	$	44	$	324	$	1,425
Tax benefit (expense) for stock-based compensation expense		(50)		(18)		(130)		(570)
Total stock-based compensation expense, net of tax	$	75	$	26	$	194	$	855

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 vest 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 are 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.

There were no stock options granted during the six month period ended June 30, 2017. 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 three and six month periods ended June 30, 2016:

	Three Months Ended			Six Months Ended
	June 30, 2016			June 30, 2016
Expected volatility		46.77	%		47.03	%
Expected dividends		4.08	%		5.36	%
Expected term (in years)		6.0			7.5
Risk-free interest rate		1.38	%		1.66	%

Activity with respect to the company’s option awards during the six month period ended June 30, 2017 is as follows:

			Weighted Average		Weighted Average		Weighted Average Remaining Contractual		Aggregate Intrinsic
Options	Shares		Exercise Price		Grant Date Fair Value		Term		Value

	(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value)
Outstanding at January 1, 2017		1,720,000	$	5.12	$	2.89		4.5 years	$	2,428
Granted
Exercised		(107,471)		4.24		2.05
Forfeited or expired		(122,125)		5.87		3.03
Outstanding at June 30, 2017		1,490,404	$	5.13	$	2.93		4.1 years	$	2,979
Exercisable at June 30, 2017		988,276	$	5.53	$	3.69		3.1 years	$	1,582
Expected to Vest		476,771	$	5.13	$	2.95		4.1 years	$	1,357

The aggregate intrinsic value represents the difference between the company’s closing stock price on June 30, 2017 of $7.10 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 six month periods ended June 30, 2017 and 2016 was $13,000 and $1.1 million, respectively.

As of June 30, 2017, there was $0.3 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 1.8 years.

On February 24, 2017, a restricted stock award 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 until three months from vesting date. 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 vest date of grant.

Activity with respect to the company’s restricted stock awards during the six month period ended June 30, 2017 is as follows:

			Weighted Average		Weighted Average Remaining		Aggregate
Restricted Stock Awards	Shares		Grant Date Fair Value		Contractual Term		Intrinsic Value
	(Dollars in thousands, except weighted average exercise price and weighted average grant date fair value)
Outstanding at January 1, 2017			$				$
Granted		178,592		7.05		0.2 years		1,331
Lapsed		(178,592)		7.25				1,295
Forfeited
Outstanding at June 30, 2017			$				$