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

Annual report pursuant to Section 13 and 15(d)

Operating and Finance Lease Right-of-Use Assets

Operating and Finance Lease Right-of-Use Assets

12 Months Ended

Dec. 31, 2021

Leases [Abstract]

Operating and Finance Lease Right-of-Use Assets

NOTE 7. OPERATING AND FINANCE LEASE

RIGHT-OF-USE

ASSETS

Leasing Transactions

Our leased assets include offices and studios, transmitter locations, antenna sites, towers, tower sites, and land. Our lease portfolio has terms remaining from less than

one-year

up to twenty years. Many of these leases contain options under which we can extend the term from

five

twenty years

, the exercise of which is at our sole discretion. 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. We are obligated to pay taxes, insurance, and common area maintenance charges under a majority of our lease agreements.

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.

Due to the adverse economic impact of the

COVID-19

pandemic, we negotiated with our landlords in early 2020 to obtain rent concessions to improve our short-term liquidity. In accordance with the FASB’s recent Staff Q&A regarding rent concessions related to the effects of the

COVID-19

pandemic, we did not apply the lease modification guidance under ASC 842 to rent concessions that resulted in total payments required under the modified contract were substantially the same as or less than total payments required by the original contract. For qualifying rent abatement concessions, we recorded negative lease expense for abatement during the period of relief. During the year ended December 31, 2020, we recognized negative lease expense related to rent abatement concessions of $0.3 million. At December 31, 2020, we deferred cash payments of $0.7 million that were reported in short-term and long-term operating lease liabilities as applicable based on repayment terms that range from one year through December 2024. At December 31, 2021, $0.2 million of the deferred cash payments remained with $28,000 payable in 2022, $26,000 payable in 2023 and the remainder payable in 2024.

Balance Sheet

Supplemental balance sheet information related to leases was as follows:


	December 31, 2021
	(Dollars in thousands)
Operating Leases	Related Party		Other		Total


Operating leases ROU assets	$	7,419	$	36,141	$	43,560
Operating lease liabilities (current)	$	947	$	7,704	$	8,651
Operating lease liabilities (non-current)		6,562		35,646		42,208

Total operating lease liabilities	$	7,509	$	43,350	$	50,859


Weighted Average Remaining Lease Term


Operating leases			7.8 years
Finance leases			2.7 years
Weighted Average Discount Rate
Operating leases			8.02%
Finance leases			5.81%

Lease Expense

The components of lease expense were as follows:


	Twelve Months Ended December 31, 2021
	(Dollars in thousands)

Amortization of finance lease ROU Assets	$	64
Interest on finance lease liabilities		8

Finance lease expense		72
Operating lease expense		12,874
Variable lease expense		699
Short-term lease expense		590

Total lease expense	$	14,235

Supplemental Cash Flow

Supplemental cash flow information related to leases was as follows:


	Twelve Months Ended December 31, 2021
	(Dollars in thousands)
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases	$	13,953
Operating cash flows from finance leases		5
Financing cash flows from finance leases		63
Leased assets obtained in exchange for new operating lease liabilities	$	6,507
Leased assets obtained in exchange for new finance lease liabilities		17

Maturities

Future minimum lease payments under leases that had initial or remaining

non-cancelable

lease terms in excess of one year as of December 31, 2021, are as follows:


	Operating Leases
	Related Party			Other			Total			Finance Leases			Total
	(Dollars in thousands)

2022	$	1,537		$	10,782		$	12,319		$	64		$	12,383
2023		1,408			10,404			11,812			39			11,851
2024		1,314			8,086			9,400			20			9,420
2025		1,021			6,890			7,911			8			7,919
2026		1,341			6,678			8,019			1			8,020
Thereafter		3,955			20,411			24,366			3			24,369

Undiscounted Cash Flows	$	10,576		$	63,251		$	73,827		$	135		$	73,962

Less: imputed interest		(3,067	)		(19,901	)		(22,968	)		(12	)		(22,980	)

Total	$	7,509		$	43,350		$	50,859		$	123		$	50,982

Reconciliation to lease liabilities:
Lease liabilities – current	$	947		$	7,704		$	8,651		$	58		$	8,709
Lease liabilities – long-term		6,562			35,646			42,208			65			42,273

Total Lease Liabilities	$	7,509		$	43,350		$	50,859		$	123		$	50,982

Impairment of ROU Assets

ROU assets are reviewed for impairment when indicators of impairment are present. ROU assets from operating and finance leases are subject to the impairment guidance in ASC 360, “

Property, Plant, and Equipment

,” as ROU assets are long-lived nonfinancial assets.

ROU assets are tested for impairment individually or as part of an asset group if the cash flows related to the ROU asset are not independent from the cash flows of other assets and liabilities. An asset group is the unit of accounting for long-lived assets to be held and used, which represents the lowest level for which identifiable cash flows are largely independent of the cash flows of other groups of assets and liabilities.

After a careful analysis of the guidance, we concluded that the appropriate unit of accounting for testing ROU assets for impairment is the broadcast market cluster level for radio station operations and the entity or division level for digital media entities, publishing entities and networks. Corporate ROU assets are tested on a consolidated level with consideration given to all cash flows of the company as corporate functions do not generate cash flows and are funded by revenue-producing activities at lower levels of the entity.

ASC 360 requires three steps to identify, recognize and measure the impairment of a long-lived asset (asset group) to be held and used:

Step 1 – Consider whether Indicators of Impairment are Present

As detailed in ASC

360-10-35-21,

the following are examples of impairment indicators:

•

A significant decrease in the market price of a long-lived asset (asset group)

•

A significant adverse change in the extent or manner in which a long-lived asset (asset group) is being used or in its physical condition

•

A significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset (asset group), including an adverse action or assessment by a regulator

•

An accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset (asset group)

•

A current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset (asset group)

•

A current expectation that, more likely than not, a long-lived asset (asset group) will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. The term more likely than not refers to a level of likelihood that is more than 50 percent.

Other indicators should be considered if we believe that the carrying amount of an asset (asset group) may not be recoverable.

Step 2 – Test for Recoverability

If indicators of impairment are present, we are required to perform a recoverability test comparing the sum of the estimated undiscounted cash flows attributable to the long-lived asset or asset group in question to the carrying amount of the long-lived asset or asset group.

ASC 360 does not specifically address how operating lease liabilities and future cash outflows for lease payments should be considered in the recoverability test. Under ASC 360, financial liabilities, or long-term debt, generally are excluded from an asset group while operating liabilities, such as accounts payable, generally are included. ASC 842 characterizes operating lease liabilities as operating liabilities. Because operating lease liabilities may

be viewed as having attributes of finance liabilities as well as operating liabilities, it is generally acceptable for a lessee to either include or exclude operating lease liabilities from an asset group when testing whether the carrying amount of an asset group is recoverable provided the approach is applied consistently for all operating leases and when performing Steps 2 and 3 of the impairment model in ASC 360.

In cases where we have received lease incentives, including operating lease liabilities in an asset group may result in the long-lived asset or asset group having a zero or negative carrying amount because the incentives reduce our ROU assets. We elected to exclude operating lease liabilities from the carrying amount of the asset group such that we test ROU assets for operating leases in the same manner that we test ROU assets for financing leases.

Undiscounted Future Cash Flows

The undiscounted future cash flows in Step 2 are based on our own assumptions rather than a market participant. If an election is made to exclude operating lease liabilities from the asset or asset group, all future cash lease payments for the lease should also be excluded. The standard requires lessees to exclude certain variable lease payments from lease payments and, therefore, from the measurement of a lessee’s lease liabilities. Because these variable payments do not reduce the lease liability, we include the variable payments we expect to make in our estimate of the undiscounted cash flows in the recoverability test (Step 2) using a probability-weighted approach.

Step 3 – Measurement of an Impairment Loss

If the undiscounted cash flows used in the recoverability test are less than the carrying amount of the long-lived asset (asset group), we are required to estimate the fair value of the long-lived asset or asset group and recognize an impairment loss when the carrying amount of the long-lived asset or asset group exceeds the estimated fair value. We elected to exclude operating lease liabilities from the estimated fair value, consistent with the recoverability test. Any impairment loss for an asset group must reduce only the carrying amounts of a long-lived asset or assets of the group, including the ROU assets. The loss must be allocated to the long-lived assets of the group on a pro rata basis using the relative carrying amounts of those assets, except that the loss allocated to an individual long-lived asset of the group must not reduce the carrying amount of that asset below its fair value whenever the fair value is determinable without undue cost and effort. ASC 360 prohibits the subsequent reversal of an impairment loss for an asset held and used.

Fair Value Considerations

When determining the fair value of a ROU asset, we must estimate what market participants would pay to lease the asset or what a market participant would pay up front in one payment for the ROU asset, assuming no additional lease payments would be due. The ROU asset must be valued assuming its highest and best use, in its current form, even if that use differs from the current or intended use. If no market exists for an asset in its current form, but there is a market for a transformed asset, the costs to transform the asset are considered in the fair value estimate. Refer to Note 12, Fair Value Measurements and Disclosures.

There were no indications of impairment during the year ended December 31, 2021.