AUDACY, INC. In preparing the discussion and analysis contained in this Item 2, we presume that readers have read or have access to the discussion and analysis contained in our Annual Report on Form 10-K filed with theSecurities and Exchange Commission (the "SEC") onMarch 1, 2022 . In addition, you should read the following discussion and analysis of our financial condition and results of operations in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this report. The following results of operations include a discussion of the six and three months endedJune 30, 2022 as compared to the comparable period in the prior year. Our results of operations during the relevant periods represent the operations of the radio stations owned or operated by us. The following discussion and analysis contains forward-looking statements about our business, operations and financial performance based on current expectations that involve risks, uncertainties and assumptions. You should not place undue reliance on any of these forward-looking statements. In addition, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement or statements to reflect events or circumstances after the date on which the statement is made, to reflect the occurrence of unanticipated events or otherwise, except as required by law. New factors emerge from time to time, and it is not possible for us to predict which will arise or to assess with any precision the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Results of Operations for the Year-To-Date
The following significant factors affected our results of operations for the six
months ended
COVID-19 Pandemic and Current Macroeconomic Conditions
InDecember 2019 , a novel strain of coronavirus ("COVID-19") surfaced which resulted in an outbreak of infections throughout the world, which has affected operations and global supply chains. OnMarch 11, 2020 , theWorld Health Organization declared COVID-19 a pandemic. While the full impact of this pandemic is not yet known, we have taken proactive actions in an effort to mitigate its effects and are continually assessing its effects on our business, including how it has and will continue to impact advertisers, professional sports and live events.
In
Due to the seasonality of the business, the month over month improvement in net revenues did not continue into the first quarter of 2021. However, net revenues in each month fromMarch 2021 toDecember 2021 exceeded net revenues in each month fromMarch 2020 toDecember 2020 . Again, due to the seasonality of the business, the month over month improvement in net revenues did not continue into the first quarter of 2022. However, net revenues in each month fromJanuary 2022 toJune 2022 exceeded net revenues in each month fromJanuary 2021 toJune 2021 . While we experienced sequential growth in net revenues month-over-month throughJune 2022 , the pace of such growth began to slow down inJune 2022 due to the current macroeconomic conditions. We are currently unable to predict the extent of the impact that the current macroeconomic conditions will have on our financial condition, results of operations and cash flows in future periods due to numerous uncertainties, but we believe the impact could be material if conditions persist.
The extent to which the current macroeconomic conditions impact our business,
operations and financial results is inherently uncertain and will depend on
numerous evolving factors that we may not be able to accurately predict.
Therefore, the results for the six months ended
WideOrbit Streaming Acquisition
OnOctober 20, 2021 , we completed an acquisition ofWideOrbit's digital audio streaming technology and the related assets and operations ofWideOrbit Streaming for approximately$40.0 million (the "WideOrbit Streaming Acquisition"). We will operate WideOrbit Streaming under the name AmperWave ("AmperWave"). We funded this acquisition through a draw on our revolving credit facility (the "Revolver"). Based upon the timing of the WideOrbit Streaming Acquisition, our condensed 34 -------------------------------------------------------------------------------- Table of Contents consolidated financial statements for the six months endedJune 30, 2022 , reflect the results of AmperWave. Our condensed consolidated financial statements for the six months endedJune 30, 2021 do not reflect the results of AmperWave. Urban One Exchange InApril 2021 , we completed a transaction with Urban One, Inc. ("Urban One") under which we exchanged our four station cluster inCharlotte, North Carolina for one station inSt. Louis, Missouri , one station inWashington, D.C. , and one station inPhiladelphia, Pennsylvania (the "Urban One Exchange"). We began programming the respective stations under local marketing agreements ("LMAs") onNovember 23, 2020 . Based on the timing of this transaction, our condensed consolidated financial statements for the six months endedJune 30, 2022 : (i) reflect the results of the acquired stations; and (ii) do not reflect the results of the divested stations. Our condensed consolidated financial statements for the six months endedJune 30, 2021 : (i) reflect the results of the acquired stations for the portion of the period in which the LMAs were in effect; and (ii) do not reflect the results of the divested stations.
Podcorn Acquisition
InMarch 2021 , we completed an acquisition of podcast influencers marketplace,Podcorn Media, Inc. ("Podcorn") for$14.6 million in cash and a performance-based earn out which is based upon the achievement of certain annual performance benchmarks over a two year period (the "Podcorn Acquisition"). Based on the timing of this transaction, our condensed consolidated financial statements for the six months endedJune 30, 2022 , reflect the results of Podcorn. Our condensed consolidated financial statements for the six months endedJune 30, 2021 , reflect the results of Podcorn for the portion of the period after the completion of the Podcorn Acquisition.
Restructuring Charges
In connection with theCBS Radio business acquisition inNovember 2017 (the "Merger") and the COVID-19 pandemic, we incurred restructuring charges, including workforce reductions and other restructuring costs of$1.9 million during each of the six months endedJune 30, 2022 andJune 30, 2021 . Amounts were expensed as incurred and are included in Restructuring charges.
Note Issuance - The 2029 Notes
During the first quarter of 2021, we issued$540.0 million in aggregate principal amount of senior secured second-lien notes dueMarch 31, 2029 (the "2029 Notes"). Interest on the 2029 Notes accrues at the rate of 6.750% per annum and is payable semi-annually in arrears onMarch 31 andSeptember 30 of each year. We used net proceeds of the offering, along with cash on hand, to: (i) repay$77.0 million of existing indebtedness under our term B-2 loan (the "Term B-2 Loan"); (ii) repay$40.0 million of drawings under our revolving credit facility (the "Revolver"); and (iii) fully redeem all of our$400.0 million aggregate principal amount of 7.250% senior notes due 2024 (the "Senior Notes") and to pay fees and expenses in connection with the redemption. In connection with this activity, during the first quarter of 2021, we: (i) recorded$6.6 million of new debt issuance costs attributable to the 2029 Notes; and (ii)$0.4 million of debt issuance costs attributable to the Revolver. We also incurred$0.5 million of costs which were classified within refinancing expenses. In connection with the redemption of the Senior Notes during the first quarter of 2021, we wrote off the following amounts to gain/loss on extinguishment of debt: (i)$14.5 million in prepayment premiums for the early retirement of the Senior Notes; (ii)$8.7 million of unamortized premium attributable to the Senior Notes; (iii)$1.0 million of unamortized debt issuance costs attributable to the Senior Notes; and (iv)$1.3 million of unamortized debt issuance costs attributable to the Term B-2 Loan.
Note Issuance - The 2027 Notes
During 2019, we, issued$425.0 million in aggregate principal amount of senior secured second-lien notes dueMay 1, 2027 (the "Initial 2027 Notes"). Interest on the Initial 2027 Notes accrues at the rate of 6.500% per annum and is payable semi-annually in arrears onMay 1 andNovember 1 of each year. The Initial 2027 Notes are governed by an indenture dated as ofApril 30, 2019 (the "Base Indenture"), as supplemented by a first supplemental indenture datedDecember 13, 2019 (the "First Supplemental Indenture"), (collectively, the "Indenture"). 35
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During the fourth quarter of 2021, we issued$45.0 million of additional 6.500% senior secured second-lien notes due 2027 (the "Additional 2027 Notes"). The Additional 2027 Notes are treated as a single series with the Initial 2027 Notes. We used net proceeds of the Additional 2027 Notes offering to repay$44.6 million of existing indebtedness under the Term B-2 Loan. Increases in our interest expense occurred due to the issuance of the Additional 2027 Notes which have a higher interest rate than the Term B-2 Loan. In connection with this note issuance: (i) we incurred third party costs of approximately$1.1 million , of which approximately$0.8 million was capitalized and approximately$0.4 million was captured as refinancing expenses. During the six months endedJune 30, 2022 , we repurchased$10.0 million of our 2027 Notes through open market purchases. This repurchase activity generated a gain on retirement of the 2027 Notes in the amount of$0.6 million .
Impairment Loss
The impairment loss incurred during the six months endedJune 30, 2022 includes$3.2 million related to an early termination of leases in several markets. The impairment loss incurred during the six months endedJune 30, 2021 includes a$0.8 million write down of property and equipment and$0.5 million related to an early termination of certain leases.
Net (Gain) Loss on Sale or Disposal
During 2022, we entered into an agreement with a third party Qualified
Intermediary ("QI"), under which we entered into an exchange of real property
held for productive use or investment. This agreement relates to the sale of
real property and identification and acquisition of replacement property. Total
proceeds from the sale resulted in a gain of approximately $2.5 million . During
the six months ended June 30, 2022 , we finalized the sale of assets which had
previously been classified within assets held for sale and recognized a loss of
$0.5 million . Additionally, we also recognized a gain of $0.6 million in
connection with the bond repurchase activity discussed above.
Six Months Ended June 30, 2022 As Compared To The Six Months Ended June 30, 2021
SIX MONTHS ENDED JUNE 30,
2022 2021 % Change
(dollars in millions)
NET REVENUES $ 594.7 $ 545.2 9 %
OPERATING EXPENSE:
Station operating expenses 486.9 458.0 6 %
Depreciation and amortization expense 29.1 26.2 11 %
Corporate general and administrative expenses 51.6 47.3 9 %
Restructuring charges 1.9 1.9 - %
Impairment loss 3.3 1.3 154 %
Net gain on sale or disposal (2.6) (3.7) (30) %
Refinancing expenses - 0.5 (100) %
Change in fair value of contingent consideration (7.7) - 100 %
Other expenses 0.4 0.3 33 %
Total operating expense 562.9 531.8 6 %
OPERATING INCOME 31.8 13.4 137 %
INTEREST EXPENSE 48.0 43.7 10 %
Net loss on extinguishment of debt - 8.2 (100) %
Other income (0.2) (0.5) (60) %
OTHER INCOME (EXPENSE) (0.2) 7.7 -100
LOSS BEFORE INCOME TAX BENEFIT (16.0) (38.0) (58) %
INCOME TAX BENEFIT (4.1) (17.8) (77) %
NET LOSS $ (11.9) $ (20.2) (41) %
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Net Revenues
Revenues increased compared to prior year primarily due to economic recovery and improvements across all segments of our business from the depressed levels of the prior year. Prior year revenues were negatively impacted from the economic slowdown triggered by the COVID-19 pandemic. In the current year, we continued to report sequential growth in net revenues month-over-month. This trend may not continue in future periods due to the current macroeconomic conditions. Net revenues were also positively impacted by: (i) growth in our spot revenues; (ii) growth in our digital revenues; and (iii) the operations of AmperWave for the full period;
Net revenues increased the most for our stations located in the
Station Operating Expenses
Station operating expenses increased compared to prior year primarily due to: (i) an increase in payroll and related expenses in the current year; (ii) an increase in digital expenses related to user acquisition, content licenses and podcast host and talent fees; and (iii) an increase in 2022 revenues which resulted in a corresponding increase in variable sales-related expenses.
Station operating expenses include non-cash compensation expense of
Depreciation and Amortization Expense
Depreciation and amortization expense increased primarily due to an increase in amortization of intangible assets in 2022 relative to 2021. The increase in amortization is due to the addition of amortizable intangible assets in the WideOrbit Streaming Acquisition and the Podcorn Acquisition. Additionally, depreciation and amortization expense increased due to an increase in capital expenditures in 2022 relative to 2021.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased primarily as a result of an increase in payroll and related expenses in the current year. This increase was partially offset by a decrease in corporate rebranding costs in connection with our corporate name change in 2021, which is nonrecurring in nature.
Corporate general and administrative expenses include non-cash compensation
expense of
Restructuring Charges
We incurred restructuring charges in 2022 and 2021 primarily in response to the COVID-19 pandemic. These costs primarily included workforce reduction charges.
Impairment Loss
The impairment loss incurred during the six months endedJune 30, 2022 primarily consists of a$3.2 million charge related to an early termination of certain leases. The impairment loss incurred during the six months endedJune 30, 2021 includes a$0.8 million write down of property and equipment and$0.5 million related to an early termination of certain leases.
During the six months ended
Refinancing Expenses
We incurred
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Change in Fair Value of Contingent Consideration
In connection with the Podcorn Acquisition, we recorded a contingent consideration liability during the first quarter of 2021, which is subject to fair value remeasurements. Due to fluctuation in the market-based inputs used to develop the discount rate, the discount rate has increased during the six months endedJune 30, 2022 . Additionally, a reduction in projected Adjusted EBITDA values resulted in a lower expected present value of the contingent consideration. As a result, the fair value of the contingent consideration decreased$7.7 million during the six months endedJune 30, 2022 .
Interest Expense
During the six months ended
This increase in interest expense was primarily attributable to an increase in the outstanding variable-rate indebtedness upon which interest is computed coupled with an increase in variable interest rates. This increase was partially offset by a reduction in outstanding fixed-rate indebtedness upon which interest is computed. Income Tax Benefit
Tax Rate for the Six Months Ended
We recognized an income tax benefit at an effective income tax rate of 25.9% for the six months endedJune 30, 2022 . The effective income tax rate was determined using a forecasted tax rate based upon projected taxable income for the year. The effective income tax rate for the period was impacted by permanent items, state tax expense, discrete income tax expense items related to stock based compensation, a valuation allowance for certain state net operating losses, and interest and penalties associated with uncertain tax positions. OnMarch 27, 2020 ,the United States enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthenthe United States economy and fund a nationwide effort to curtail the effects of the COVID-19 pandemic. The CARES Act includes significant business tax provisions that, among other things, includes the removal of certain limitations on utilization of NOLs, increases the loss carry back period for certain losses to five years, and increases the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. We were able to carryback our 2020 federal income tax loss to prior tax years and file a refund claim with the Internal Revenue Service ("IRS") for$15.2 million . OnDecember 27, 2020 ,the United States enacted the Consolidated Appropriations Act, 2021 (the "Appropriations Act"), an additional stimulus package providing financial relief for individuals and small businesses. The Appropriations Act contains a variety of tax provisions, including full expensing of business meals in 2021 and 2022, and expansion of the employee retention tax credit. We do not currently expect the Appropriations Act to have a material tax impact.
Tax Rate for the Six Months Ended
We recognized an income tax benefit at an effective income tax rate was 46.8% for the six months endedJune 30, 2021 , which was determined using a forecasted rate based upon projected taxable income for the year. 38
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Three Months EndedJune 30, 2022 As Compared To The Three Months EndedJune 30, 2021 THREE MONTHS ENDED JUNE 30, 2022 2021 % Change (dollars in millions) NET REVENUES$ 319.4 $ 304.5 5 % OPERATING EXPENSE: Station operating expenses 260.1 245.5 6 % Depreciation and amortization expense 15.6 14.6 7 % Corporate general and administrative expenses 25.7 23.7 8 % Restructuring charges 1.0 1.7 (41) % Impairment loss 1.8 0.7 157 % Net gain on sale or disposal (0.1) (3.7) (97) % Change in fair value of contingent consideration (8.0) - 100 % Other expenses 0.1 0.3 (67) % Total operating expense 296.2 282.8 5 % OPERATING INCOME 23.2 21.7 7 % INTEREST EXPENSE 24.5 22.6 8 % Other income (0.2) (0.4) (50) % OTHER INCOME (0.2) (0.4) (50) % LOSS BEFORE INCOME TAX BENEFIT (0.9) (0.5) 80 % INCOME TAX BENEFIT (0.2) (1.9) (89) % NET INCOME (LOSS)$ (0.7) $ 1.4 (150) % Net Revenues Revenues increased compared to prior year primarily due to economic recovery and improvements across all segments of our business from the depressed levels of the prior year. Prior year revenues were negatively impacted from the economic slowdown triggered by the COVID-19 pandemic. In the current year, we continued to report sequential growth in net revenues month-over-month. This trend may not continue in future periods due to the current macroeconomic conditions. Net revenues were also positively impacted by: (i) growth in our spot revenues; (ii) growth in our digital revenues; and (iii) the operations of AmperWave for the full period.
Net revenues increased the most for our stations located in the
Station Operating Expenses
Station operating expenses increased compared to prior year primarily due to: (i) an increase in payroll and related expenses in the current year; (ii) an increase in digital expenses related to user acquisition, content licenses and podcast host and talent fees; and (iii) an increase in 2022 revenues which resulted in a corresponding increase in variable sales-related expenses.
Station operating expenses include non-cash compensation expense of
Depreciation and Amortization Expense
Depreciation and amortization expense increased primarily due to an increase in amortization of intangible assets in 2022 relative to 2021. The increase in amortization is due to the addition of amortizable intangible assets in the WideOrbit Streaming
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Acquisition and the Podcorn Acquisition. Additionally, depreciation and amortization expense increased due to an increase in capital expenditures in 2022 relative to 2021.
Corporate General and Administrative Expenses
Corporate general and administrative expenses increased primarily as a result of an increase in payroll and related expenses in the current year.
Corporate general and administrative expenses include non-cash compensation
expense of
Restructuring Charges
We incurred restructuring charges in 2022 and 2021 primarily in response to the COVID-19 pandemic. These costs primarily included workforce reduction charges and were expensed as incurred.
Impairment Loss
The impairment loss incurred during the three months endedJune 30, 2022 primarily consists of a$2.1 million charge related to an early termination of certain leases, which was partially offset by$0.4 million of gains recognized from removal of certain leased assets. The impairment loss incurred during the three months endedJune 30, 2021 primarily consists of a$0.5 million write down of property and equipment.
During the three months endedJune 30, 2022 , we recognized a gain on bond repurchases of$0.6 million . These gains were partially offset by a loss on sale of a station inSan Francisco, California of$0.5 million . During the three months endedJune 30, 2021 , we recognized a gain on the Urban One Exchange of$3.9 million and a sale of an investment of$0.9 million . These gains were partially offset by a loss related to disposal of property, plant and equipment inPittsburgh, Pennsylvania of approximately$1.1 million .
Change in Fair Value of Contingent Consideration
In connection with the Podcorn Acquisition, we recorded a contingent consideration liability during the first quarter of 2021, which is subject to fair value remeasurements. Due to fluctuation in the market-based inputs used to develop the discount rate, the discount rate has increased during the three months endedJune 30, 2022 . Additionally, a reduction in projected Adjusted EBITDA values resulted in a lower expected present value of the contingent consideration. As a result, the fair value of the contingent consideration decreased$8.0 million during the three months endedJune 30, 2022 .
Interest Expense
During the three months ended
This increase in interest expense was primarily attributable to an increase in the outstanding variable-rate indebtedness upon which interest is computed coupled with an increase in variable interest rates. This increase was partially offset by a reduction in outstanding fixed-rate indebtedness upon which interest is computed. Income Tax Benefit For the three months endedJune 30, 2022 , the effective income tax rate was 23.8%. The effective income tax rate for the quarter was impacted by permanent items, state tax expense, discrete income tax expense items related to stock based compensation, a valuation allowance for certain state net operating losses, and interest and penalties associated with uncertain tax positions.
For the three months ended
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Liquidity and Capital Resources
Liquidity
Although we have been, and expect to continue to be, negatively impacted by the COVID-19 pandemic and expect to continue to be negatively impacted by current macroeconomic conditions, we anticipate that our business will continue to generate sufficient cash flow from operating activities and we believe that these cash flows, together with our existing cash and cash equivalents and our ability to draw on current credit facilities, will be sufficient for us to meet our current and long-term liquidity and capital requirements. However, our ability to maintain adequate liquidity is dependent upon a number of factors, including our revenue, macroeconomic conditions, the length and severity of business disruptions, our ability to contain costs and to collect accounts receivable, and various other factors, many of which are beyond our control. Moreover, if the current macroeconomic conditions continue to create significant disruptions in the credit or financial markets, or impacts our credit ratings, it could adversely affect our ability to access capital on attractive terms, if at all. We also expect the timing of certain priorities to be impacted, such as the pace of our debt reduction efforts and the delay of certain capital projects. The Credit Facility, as amended, is comprised of the$250.0 million Revolver and the Term B-2 Loan. As ofJune 30, 2022 , we had$632.4 million outstanding under the Term B-2 Loan and$135.0 million outstanding under the Revolver. In addition, we had$6.1 million in outstanding letters of credit. During the six months endedJune 30, 2022 , we repaid$22.7 million outstanding under our Revolver and borrowed an additional$60.0 million under our Revolver. During the six months endedJune 30, 2022 , we repurchased$10.0 million of our 2027 Notes through open market purchases. This repurchase activity generated a gain on retirement of the 2027 Notes in the amount of$0.6 million . As ofJune 30, 2022 , total liquidity was$149.7 million , which was comprised of$109.1 million available under the Revolver and$40.6 million in cash, cash equivalents and restricted cash. For the six months endedJune 30, 2022 , we increased our outstanding debt by$29.3 million due to the previously discussed revolver pay down and borrowing activity and the bond repurchase activity against the 2027 Notes. As ofJune 30, 2022 , our Consolidated Net First Lien Leverage Ratio was 3.6 times as calculated in accordance with the terms of our Credit Facility, which place restrictions on the amount of cash, cash equivalents and restricted cash that can be subtracted in determining consolidated first lien net debt.
Amendment and Repricing -
In connection with the Merger, we assumed
The 2027 Notes
During 2019, we and our finance subsidiary,Audacy Capital Corp. , issued$425.0 million in aggregate principal amount of senior secured second-lien notes dueMay 1, 2027 (the "Initial 2027 Notes"). Interest on the Initial 2027 Notes accrues at the rate of 6.500% per annum and is payable semi-annually in arrears onMay 1 andNovember 1 of each year. The Initial 2027 Notes are governed by an indenture dated as ofApril 30, 2019 (the "Base Indenture"), as supplemented by a first supplemental indenture datedDecember 13, 2019 (the "First Supplemental Indenture), (collectively, the "Indenture"). A portion of the Initial 2027 Notes was issued at a premium. As of any reporting period, the unamortized premium on the Initial 2027 Notes is reflected on the balance sheet as an addition to the Initial 2027 Notes. We used net proceeds of the offering, along with cash on hand and amounts borrowed under our Revolver, to repay$521.7 million of existing indebtedness under our term loan component previously outstanding (the "Term B-1 Loan"). Contemporaneous with this partial pay-down of the Term B-1 Loan, we replaced the remaining amount outstanding under the Term B-1 Loan with the Term B-2 Loan. During the fourth quarter of 2021,Audacy Capital Corp. issued$45.0 million of additional 6.500% senior secured second-line notes due 2027 (the "Additional 2027 Notes"). The Additional 2027 Notes were issued as additional notes under the Indenture. The Additional 2027 Notes are treated as a single series with the Initial 2027 Notes (collectively, the "2027 Notes") and have substantially the same terms as the Initial 2027 Notes. The Additional 2027 Notes were issued at a price of 100.750% 41
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of their principal amount. As of any reporting period, the unamortized premium on the 2027 Notes is reflected on the balance sheet as an addition to the$460.0 million 2027 Notes.
The 2027 Notes are fully and unconditionally guaranteed on a senior secured
second-lien basis by most of the direct and indirect subsidiaries of
A default under the 2027 Notes could cause a default under the Credit Facility and/or the 2029 Notes. Any event of default, therefore, could have a material adverse effect on our business and financial condition. The 2027 Notes are not a registered security and there are no plans to register the 2027 Notes as a security in the future. As a result, Rule 3-10 of Regulation S-X promulgated by theSEC is not applicable and no separate financial statements are required for the guarantor subsidiaries.
The Credit Facility
The Term B-2 Loan requires mandatory prepayments equal to a percentage of Excess Cash Flow, subject to incremental step-downs, depending on the Consolidated Net Secured Leverage Ratio. The Excess Cash Flow payment is based on the Excess Cash Flow and the Consolidated Net Secured Leverage Ratio for the prior year. We made our first Excess Cash Flow payment in the first quarter of 2020. As ofJune 30, 2022 , we were in compliance with the financial covenant then applicable and all other terms of the Credit Facility in all material respects. Our ability to maintain compliance with our financial covenant under the Credit Facility is highly dependent on our results of operations. Currently, given the impact of COVID-19, the outlook is highly uncertain. Failure to comply with our financial covenant or other terms of our Credit Facility and any subsequent failure to negotiate and obtain any required relief from our lenders could result in a default under the Credit Facility. We will continue to monitor our liquidity position and covenant obligations and assess the impact of the COVID-19 pandemic on our ability to comply with the covenants under the Credit Facility. Any event of default could have a material adverse effect on our business and financial condition. We may seek from time to time to amend our Credit Facility or obtain other funding or additional funding, which may result in higher interest rates on our debt. However, we may not be able to do so on terms that are acceptable or to the extent necessary to avoid a default, depending upon conditions in the credit markets, the length and depth of the market reaction to the COVID-19 pandemic and our ability to compete in this environment.
The Credit Facility - Amendment No. 5
OnJuly 20, 2020 ,Audacy Capital Corp. entered into an amendment ("Amendment No. 5") to the Credit Agreement, datedOctober 17, 2016 (as previously amended, the "Existing Credit Agreement" and, as amended by Amendment No. 5, the "Credit Agreement"), with the guarantors party thereto, the lenders party thereto andJPMorgan Chase Bank, N.A ., as administrative agent and collateral agent. Amendment No. 5, among other things: (a) amended our financial covenants under the Credit Agreement by: (i) suspending the testing of the Consolidated Net First Lien Leverage Ratio (as defined in the Credit Agreement) through the Test Period (as defined in the Credit Agreement) endingDecember 31, 2020 ; (ii) adding a new minimum liquidity covenant of$75.0 million untilDecember 31, 2021 , or such earlier date as we may elect (the "Covenant Relief Period"); and (iii) imposing certain restrictions during the Covenant Relief Period, including among other things, certain limitations on incurring additional indebtedness and liens, making restricted payments or investments, redeeming notes and entering into certain sale and lease-back transactions; (b) increased the interest rate and/or fees under the Credit Agreement during the Covenant Relief Period applicable to: (i) 2024 Revolving Credit Loans (as defined in the Credit Agreement) to (x) in the case of Eurodollar Rate Loans (as defined in the Credit Agreement), a customary Eurodollar rate formula plus a margin of 2.50% per annum, and (y) in the case of Base Rate Loans (as defined in the Credit Agreement), a customary base rate formula plus a margin of 1.50% per annum, and (ii) Letter of Credit (as defined in the Credit Agreement) fees to 2.50% times the daily maximum amount available to be drawn under any such Letter of Credit; and (c) modified the definition of Consolidated EBITDA by setting fixed amounts for the fiscal quarters endingJune 30, 2020 ,September 30, 2020 , andDecember 31, 2020 , for purposes of testing compliance with the ConsolidatedNet First Lien Leverage 42
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Ratio financial covenant during the Covenant Relief Period, which fixed amounts correspond to the Borrower's Consolidated EBITDA as reported under the Existing Credit Agreement for the Test Period endedMarch 31, 2020 , for the fiscal quarters endingJune 30, 2019 ,September 30, 2019 , andDecember 31, 2019 , respectively.
The Credit Facility - Amendment No. 6
OnMarch 5, 2021 ,Audacy Capital Corp. entered into an amendment ("Amendment No. 6") to the Credit Agreement, datedOctober 17, 2016 (as previously amended, the "Existing Credit Agreement" and, as amended by Amendment No. 6, the "Credit Agreement"), with the guarantors party thereto, the lenders party thereto andJPMorgan Chase Bank, N.A ., as administrative agent and collateral agent. Under the Existing Credit Agreement, during the Covenant Relief Period the Company was subject to a$75.0 million limitation on investments in joint ventures, Affiliates, Unrestricted Subsidiaries and Non-Guarantor Subsidiaries (each as defined in the Existing Credit Agreement) (the "Covenant Relief Period Investment Limitation"). Amendment No. 6, among other things, excludes from the Covenant Relief Period Investment Limitation any investments made in connection with a permitted receivables financing facility. The Covenant Relief Period ended in the fourth quarter of 2021.
Accounts Receivable Facility
On
The documentation for the Receivables Facility includes (i) a Receivables Purchase Agreement (the "Receivables Purchase Agreement") entered into by and amongAudacy Operations, Inc. , aDelaware corporation and our wholly-owned subsidiary ("Audacy Operations"),Audacy Receivables, LLC , aDelaware limited liability company and our wholly-owned subsidiary, as seller ("Audacy Receivables"), the investors party thereto (the "Investors"), andDZ BANK AG Deutsche Zentral-Genossenschaftsbank, Frankfurt AM Main , as agent ("DZ BANK"); (ii) a Sale and Contribution Agreement (the "Sale and Contribution Agreement"), by and among Audacy Operations,Audacy New York, LLC , aDelaware limited liability company and our wholly-owned subsidiary ("Audacy NY"), andAudacy Receivables; and (iii) a Purchase and Sale Agreement (the "Purchase and Sale Agreement," and together with the Receivables Purchase Agreement and the Sale and Contribution Agreement, the "Agreements") by and among certain of our wholly-owned subsidiaries (together with Audacy NY, the "Originators"),Audacy Operations and Audacy NY. Audacy Receivables is considered a special purpose vehicle ("SPV") as it is an entity that has a special, limited purpose and it was created to sell accounts receivable, together with customary related security and interest in the proceeds thereof, to the Investors in exchange for cash investments. Yield is payable to Investors under the Receivables Purchase Agreement at a variable rate based on either one-month LIBOR or commercial paper rates plus a margin. Collections on the accounts receivable: (x) will be used to: (i) satisfy the obligations of Audacy Receivables under the Receivables Facility; or (ii) purchase additional accounts receivable from the Originators; or (y) may be distributed to Audacy NY, the sole member of Audacy Receivables.Audacy Operations acts as the servicer under the Agreements. The Agreements contain representations, warranties and covenants that are customary for bankruptcy-remote securitization transactions, including covenants requiring Audacy Receivables to be treated at all times as an entity separate from the Originators, Audacy Operations, the Company or any of its other affiliates and that transactions entered into between Audacy Receivables and any of its affiliates shall be on arm's-length terms. The Receivables Purchase Agreement also contains customary default and termination provisions which provide for acceleration of amounts owed under the Receivables Purchase Agreement upon the occurrence of certain specified events with respect toAudacy Receivables, Audacy Operations, the Originators, or the Company, including, but not limited to: (i) Audacy Receivables' failure to pay yield and other amounts due; (ii) certain insolvency events; (iii) certain judgments entered against the parties; (iv) certain liens filed with respect to assets; and (v) breach of certain financial covenants and ratios. We have agreed to guarantee the performance obligations of Audacy Operations and the Originators under the Receivables Facility documents. We have not agreed to guarantee any obligations of Audacy Receivables or the collection of any of the receivables and will not be responsible for any obligations to the extent the failure to perform such obligations by Audacy Operations or any Originator results from receivables being uncollectible on account of the insolvency, bankruptcy or lack of creditworthiness or other financial inability to pay of the related obligor. 43
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In general, the proceeds from the sale of the accounts receivable are used by the SPV to pay the purchase price for accounts receivables it acquires from Audacy NY and may be used to fund capital expenditures, repay borrowings on the Credit Facility, satisfy maturing debt obligations, as well as fund working capital needs and other approved uses. Although the SPV is a wholly owned consolidated subsidiary of Audacy NY, the SPV is legally separate from Audacy NY. The assets of the SPV (including the accounts receivables) are not available to creditors of Audacy NY,Audacy Operations or the Company, and the accounts receivables are not legally assets of Audacy NY, Audacy Operations or the Company. The Receivables Facility is accounted for as a secured financing. The pledged receivables and the corresponding debt are included in Accounts receivable and Long-term debt, respectively, on the Consolidated Balance Sheets. The Receivables Facility will expire onJuly 15, 2024 , unless earlier terminated or subsequently extended pursuant to the terms of the Receivables Purchase Agreement. The pledged receivables and the corresponding debt are included in Accounts receivable, net and Long-term debt, net of current portion, respectively, on the Condensed Consolidated Balance Sheet. AtJune 30, 2022 , we had outstanding borrowings of$75.0 million under the Receivables Facility.
The 2029 Notes
During the first quarter of 2021, we and our finance subsidiary,Audacy Capital Corp. , issued$540.0 million in aggregate principal amount of senior secured second-lien notes dueMarch 31, 2029 (the "2029 Notes"). Interest on the 2029 Notes accrues at the rate of 6.750% per annum and is payable semi-annually in arrears onMarch 31 andSeptember 30 of each year. We used net proceeds of the offering, along with cash on hand, to: (i) repay$77.0 million of existing indebtedness under the Term B-2 Loan; (ii) repay$40.0 million of drawings under the Revolver; and (iii) fully redeem all of our$400.0 million aggregate principal amount of 7.250% senior notes due 2024 (the "Senior Notes") and to pay fees and expenses in connection with the redemption. In connection with this activity, during the first quarter of 2021, we: (i) recorded$6.6 million of new debt issuance costs attributable to the 2029 Notes; and (ii)$0.4 million of debt issuance costs attributable to the Revolver which will be amortized over the remaining term of the Revolver on a straight line basis. We also incurred$0.5 million of costs which were classified within refinancing expenses. The 2029 Notes are fully and unconditionally guaranteed on a senior secured second priority basis by each of the direct and indirect subsidiaries ofAudacy Capital Corp. A default under the 2029 Notes could cause a default under our Credit Facility or the 2027 Notes. Any event of default, therefore, could have a material adverse effect on our business and financial condition. The 2029 Notes are not a registered security and there are no plans to register the 2029 Notes as a security in the future. As a result, Rule 3-10 of Regulation S-X promulgated by theSEC is not applicable and no separate financial statements are required for the guarantor subsidiaries.
The Senior Notes
Simultaneously with entering into the Merger and assuming the Credit Facility onNovember 17, 2017 , we also assumed the Senior Notes that were set to mature onNovember 1, 2024 in the amount of$400.0 million (the "Senior Notes"). The Senior Notes, which were originally issued byCBS Radio (nowAudacy Capital Corp. ) onOctober 17, 2016 , were valued at a premium as part of the fair value measurement on the date of the Merger. The premium on the Senior Notes was amortized over the term under the effective interest rate method. As of any reporting period, the unamortized premium on the Senior Notes was reflected on the balance sheet as an addition to the$400.0 million liability. As discussed above, during the six months endedJune 30, 2021 , we issued a call notice to redeem our Senior Notes with an effective date ofApril 10, 2021 . We incurred interest on the Senior Notes until the redemption date. In connection with the redemption, we deposited the following funds to satisfy our obligations under the Senior Notes and discharge the Indenture governing the Senior Notes: (i)$400.0 million to redeem the Senior Notes in full; (ii)$14.5 million for a call premium for the early retirement of the Senior Notes; and (iii)$12.8 million for accrued and unpaid interest throughApril 10, 2021 . As a result of the refinancing, we recorded an$8.2 million loss on extinguishment of debt that included the call premium, the write off of unamortized debt issuance costs, and the write off of unamortized premium on the Senior Notes. 44
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Operating Activities
Net cash flows used in operating activities were$0.4 million for the six months endedJune 30, 2022 . Net cash flows provided by operating activities were$28.4 million for the six months endedJune 30, 2021 . The cash flows provided by operating activities decreased primarily due to: (i) an increase in net investment in working capital of$17.9 million ; (ii) a decrease in loss on extinguishment of debt of$8.2 million ; (iii) a decrease in net gains on deferred compensation of$7.8 million ; and (iv) an increase in gain on remeasurement of contingent consideration of$7.7 million . These decreases in cash flows provided by operating activities were partially offset by a decrease in net loss, as adjusted for certain non-cash charges and income tax benefits of$8.8 million . The increase in investment in working capital is primarily due to the timing of: (i) collections of accounts receivable; (ii) settlements of accounts payable and accrued liabilities; (iii) settlements of accrued interest expense; (iv) settlements of prepaid expenses; and (v) settlements of other long-term liabilities. The decrease in net loss, as adjusted for certain non-cash charges and income tax benefits is primarily attributable to: (i) a reduction in net loss of$8.4 million ; (ii) an increase in impairment loss of$1.9 million ; and (iii) an increase in deferred tax benefits of$1.5 million .
Investing Activities
Net cash flows used in investing activities were
During 2022, net cash flows used in investing activities increased primarily due to an increase in additions to tangible and intangible assets of$27.3 million in connection with investments in our A2 platform. This increase in cash flows used in financing activities was partially offset by: (i) a decrease in purchases of business and audio assets of$15.3 million ; and (ii) an increase in proceeds from the sale of property, equipment, intangibles and other assets of$1.8 million . Financing Activities
Net cash flows provided by financing activities were
During 2022, net cash flows provided by financing activities increased primarily due to: (i) a decrease in cash outflows related to the redemption of fixed rate debt of$390.0 million ; (ii) a decrease of payments of long-term debt of$77.0 million ; (iii) a decrease of payments against the Revolver of$29.3 million ; (iv) an increase in borrowing under the Revolver of$28.0 million ; (v) a decrease in payments of call premiums and other fees of$14.5 million ; and (vi) a decrease in payments for debt issuance costs of$6.9 million . These increases in cash flows provided by financing activities were partially offset by a decrease in proceeds from issuance of long term debt of$540.0 million .
Dividends
We presently do not pay a dividend. Any future dividends will be at the discretion of the Board based upon the relevant factors at the time of such consideration, including, without limitation, compliance with the restrictions set forth in our Credit Facility, the 2027 Notes and the 2029 Notes.
Share Repurchase Program
During the six months endedJune 30, 2022 , we did not repurchase any shares under our share repurchase program (the "2017 Share Repurchase Program"). As ofJune 30, 2022 ,$41.6 million is available for future share repurchases under the 2017 Share Repurchase Program.
Income Taxes
Under the CARES Act, we were able to carry back our 2020 federal income tax loss
to prior tax years and file a refund claim with the
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approximately$15.2 million . We do not anticipate making any federal income tax payments in 2022 primarily as a result of the availability of NOLs to offset federal tax due. For federal income tax purposes, the acquisition ofCBS Radio was treated as a reverse acquisition which caused us to undergo an ownership change under Section 382 of the Internal Revenue Code ("Code"). This ownership change will limit the utilization of our NOLs for post-acquisition tax years. We may need to make additional state estimated tax payments during the remainder of the year.
Capital Expenditures
Capital expenditures, including amortizable intangibles, for the six months
ended
Contractual Obligations
As of
As discussed above in the liquidity section, during the six months endedJune 30, 2022 , we made a voluntary prepayments against our Revolver of$22.7 million . We borrowed an additional$60.0 million under our Revolver, and also made opportunist repurchases under our 2027 Notes in the amount of$10.0 million . As a result of this activity, the amounts outstanding under our long-term debt obligations increased by$29.3 million during the six months endedJune 30, 2022 .
Off-Balance Sheet Arrangements
As of
During 2022, we disposed of certain property that we considered as surplus to our operations and that resulted in a gain of approximately$2.5 million . In order to minimize the tax impact on a certain portion of these taxable gains, we created an entity that serves as a qualified intermediary ("QI") for tax purposes and that held the net sales proceeds of$2.5 million from this transaction. As ofJune 30, 2022 , the balance in the account of the QI is$0.1 million and this amount is reflected as restricted cash on our condensed consolidated balance sheet. We used a portion of these funds in a tax-free exchange by using the net sales proceeds from relinquished property for the purchase of replacement property. This entity was treated as a variable interest entity ("VIE") and is included in our consolidated financial statements as we are considered the primary beneficiary. The use of a QI in a like-kind exchange enables us to effectively minimize our tax liability in connection with certain asset dispositions. As discussed in Note 1, Basis of Presentation and Significant Policies, we sold real property inSan Francisco, California for net proceeds of$2.5 million . During the second quarter of 2022, we used a portion of these proceeds to repurchase replacement property in the amount of$2.4 million . These net sales proceeds were deposited into the account of the QI to comply with requirements under Section 1031 of the Code to execute a like-kind exchange. The remaining unused portion of funds are reflected as restricted cash on our condensed consolidated balance sheet as ofJune 30, 2022 . Restrictions on these deposits will lapse prior to the end of the third quarter of 2022. We do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet financial arrangements or other contractually narrow or limited purposes as ofJune 30, 2022 . Accordingly, we are not materially exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Critical Accounting Policies
There have been no material changes to our critical accounting policies from the information provided in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies, in our Annual Report on Form 10-K for the year endedDecember 31, 2021 , as filed with theSEC onMarch 1, 2022 . 46
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Goodwill Valuation Risk
We no longer have any goodwill attributable to the broadcast reporting unit. Our remaining goodwill as ofJune 30, 2022 is limited to the goodwill acquired in the Cadence13 Acquisition and Pineapple Acquisition in 2019, the goodwill acquired in the BetQL Acquisition in 2020, and the goodwill acquired in the Podcorn Acquisition and WideOrbit Streaming Acquisition in 2021. Future impairment charges may be required on our goodwill, as the discounted cash flow model is subject to change based upon our performance, peer company performance, overall market conditions, and the state of the credit markets. We continue to monitor these relevant factors to determine if an interim impairment assessment is warranted. A deterioration in our forecasted financial performance, an increase in discount rates, a reduction in long-term growth rates, a sustained decline in our stock price, or a failure to achieve analyst expectations could all be potential indicators of an impairment to the remaining goodwill, which could be material, in future periods. Due to the uncertainty of the current market and economic conditions, there is an increased risk of future impairment. As ofJune 30, 2022 , we evaluated whether the facts and circumstances and available information result in the need for an impairment assessment for any goodwill, particularly the results of operations, increase in interest rates and related impact on the weighted average cost of capital and changes in stock price, and concluded no impairment was indicated. We will continue to evaluate the impacts of the current macroeconomic conditions on our business, including the impacts of overall economic conditions, which could result in the recognition of an impairment charge, which could be material, in the future.
Broadcasting License Valuation Risk
After the annual impairment test conducted on our broadcasting licenses in the fourth quarter of 2021, the results indicated that there were 17 units of accounting where the fair value exceeded their carrying value by 10% or less. In aggregate, these 17 units of accounting had a carrying value of$875.2 million atDecember 31, 2021 . If overall market conditions or the performance of the economy deteriorates, advertising expenditures and radio industry results could be negatively impacted, including expectations for future growth. This could result in future impairment charges for these or other of our units of accounting, which could be material. Due to the uncertainty of the current market and economic conditions, there is an increased risk of future impairment.
As of
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