MEDIACO HOLDING INC. Note: Certain statements included in this report or in the financial statements contained herein which are not statements of historical fact, including but not limited to those identified with the words "expect," "should," "will" or "look" are intended to be, and are, by this Note, identified as "forward-looking statements," as defined in the Securities Exchange Act of 1934, as amended. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the Company to be materially different from any future result, performance or achievement expressed or implied by such forward-looking statement. Such factors include, among others: •Potential conflicts of interest withSG Broadcasting and our status as a "controlled company"; •Our ability to operate as a standalone public company and to execute on our business strategy; •Our ability to compete with, and integrate into our operations, new media channels, such as digital video, live video streaming, YouTube, and other real-time media delivery; •Our ability to continue to exchange advertising time for goods or services; •Our ability to use market research, advertising and promotions to attract and retain audiences; •U.S. regulatory requirements for owning and operating media broadcasting channels and our ability to maintain regulatory licenses granted by theFCC ; •PendingU.S. regulatory requirements for paying royalties to performing artists; •Industry and economic trends within theU.S. radio industry, generally, and theNew York City radio industry, in particular; •Our ability to finance our operations or to obtain financing on terms that are favorable toMediaCo ; •Our ability to successfully complete and integrate any future acquisitions; •The impact of COVID-19 and other pandemics; •The accuracy of management's estimates and assumptions on which the Company's financial projections are based; and •Other factors mentioned in documents filed by the Company with theSecurities and Exchange Commission . For a more detailed discussion of these and other risk factors, see the Risk Factors section of our Annual Report on Form 10-K, filed with theSecurities and Exchange Commission onMarch 24, 2022 .MediaCo does not undertake any obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.
GENERAL
We own and operate two radio stations located inNew York City and outdoor advertising businesses geographically focused in the Southeast (Georgia ,Alabama ,South Carolina andFlorida ) and the Mid-Atlantic (Kentucky ,West Virginia andOhio ) regions. Our revenues are mostly affected by the advertising rates our entities charge, as advertising sales are the primary component of our consolidated revenues. These rates are in large part based on our radio stations' ability to attract audiences in demographic groups targeted by their advertisers and the number of persons exposed to our billboards.The Nielsen Company generally measures radio station ratings weekly for markets measured by the Portable People Meter™, which includes both of our radio stations, while Geopath Insight Suite is the annual audience location measurement used for our billboards. Because audience ratings in a radio station's local market are critical to the station's financial success, our strategy is to use market research, advertising and promotion to attract and retain audiences in each station's chosen demographic target group. Our revenues vary throughout the year. Revenue and operating income are usually lowest in the first calendar quarter for both our radio and outdoor advertising segments, partly because retailers cut back their advertising spending immediately following the holiday shopping season. In addition to the sale of advertising time for cash, stations typically exchange advertising time for goods or services, which can be used by the station in its business operations. These barter transactions are recorded at the estimated fair value of the product or service received. We generally confine the use of such trade transactions to promotional items or services for which we would otherwise have paid cash. In addition, it is our general policy not to preempt advertising spots paid for in cash with advertising spots paid for in trade. -21-
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The following table summarizes the sources of our revenues for the three and nine months endedSeptember 30, 2022 and 2021. The category "Nontraditional" principally consists of ticket sales and sponsorships of events our stations conduct in their local market. The category "Other" includes, among other items, revenues related to network revenues, production of billboard advertisements and barter. Three Months Ended September 30, Nine Months Ended September 30, (dollars in thousands) 2022 % of Total 2021 % of Total 2022 % of Total 2021 % of Total Net revenues: Radio Advertising$ 6,029 51.0 %$ 8,073 45.3 %$ 19,025 48.1 %$ 21,941 52.3 % Outdoor Advertising (1) 3,273 27.7 % 3,197 17.9 % 9,734 24.6 % 9,407 22.4 % Nontraditional 276 2.3 % 4,206 23.6 % 3,633 9.2 % 4,635 11.1 % Digital 962 8.1 % 1,001 5.6 % 3,280 8.3 % 2,151 5.1 % Other 1,285 10.9 % 1,343 7.6 % 3,840 9.8 % 3,805 9.1 % Total net revenues$ 11,825 $ 17,820 $ 39,512 $ 41,939
(1) A substantial portion of this revenue is from lessor revenue derived from operating leases accounted for under ASC 842, "Leases."
Roughly 20% of our expenses varies in connection with changes in revenue. These variable expenses primarily relate to costs in our sales department, such as salaries, commissions and bad debt. Our costs that do not vary as much in relation to revenue are mostly in our programming and administrative departments, such as talent costs, ratings fees, rent, utilities and salaries. Lastly, our costs that are highly discretionary are costs in our marketing and promotions department, which we primarily incur to maintain and/or increase our audience and market share.
KNOWN TRENDS AND UNCERTAINTIES
TheU.S. radio industry is a mature industry and its growth rate has slowed considerably. Management believes this is principally the result of two factors: (1) new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, which have gained advertising share against radio and other traditional media and created a proliferation of advertising inventory and (2) the fragmentation of the radio audience and time spent listening caused by satellite radio, audio streaming services and podcasts has led some investors and advertisers to conclude that the effectiveness of radio advertising has diminished. Along with the rest of the radio industry, our stations have deployed HD Radio®. HD Radio offers listeners advantages over standard analog broadcasts, including improved sound quality and additional digital channels. In addition to offering secondary channels, the HD Radio spectrum allows broadcasters to transmit other forms of data. We are participating in a joint venture with other broadcasters to provide the bandwidth that a third party uses to transmit location-based data to hand-held and in-car navigation devices. The number of radio receivers incorporating HD Radio has increased in the past few years, particularly in new automobiles. It is unclear what impact HD Radio will have on the markets in which we operate. Our stations have also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by developing highly interactive websites with content that engages our listeners, deploying mobile applications and streaming our content, and harnessing the power of digital video on our websites, YouTube channels and other third-party social media outlets. The results of our broadcast radio operations are solely dependent on the results of our stations in theNew York market. Some of our competitors that operate larger station clusters in theNew York market are able to leverage their market share to extract a greater percentage of available advertising revenue through packaging a variety of advertising inventory at discounted unit rates. Market revenues inNew York as measured byMiller Kaplan Arase LLP ("Miller Kaplan"), an independent public accounting firm used by the radio industry to compile revenue information, were up 2.8% for the nine months endedSeptember 30, 2022 , as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan were down 8.7%, as compared to the same period of the prior year. The decreases for our New York Cluster were largely driven by lower healthcare spend, which our stations benefited from more than those serving the general population due to the targeted nature of the awareness campaigns. As part of our business strategy, we continually evaluate potential acquisitions of businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. We also regularly review our portfolio of assets and may opportunistically dispose of or otherwise monetize assets when we believe it is appropriate to do so. -22-
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Throughout 2021 and into 2022, with the increased availability of vaccines, theU.S. experienced an easing of restrictions on travel as well as social gatherings and business activities. However, the broad economic impact of the COVID-19 pandemic remains across multiple sectors, specifically disrupting logistics and global supply chains. If apprehension persists around interest rate volatility, supply chain disruptions, and COVID-19, consumer spending may be adversely impacted, causing certain advertising categories (e.g., automotive dealers) to advertise less, we expect that our results of operations, financial condition and cash flows will continue to be negatively affected, the extent to which is difficult to estimate at this time.MediaCo entered into Amendment No. 5 to its Senior Credit Facility, which lowered the minimum liquidity requirement to$2.0 million throughDecember 31, 2022 and$3.0 million thereafter and removed the testing requirement for the minimum consolidated fixed charge coverage ratio covenant for the period fromSeptember 30, 2022 toDecember 31, 2022 . There is substantial doubt that the Company will be in compliance with these covenants in subsequent periods.MediaCo's business units are highly correlated to the economic environment, which recently have been impacted by macroeconomic uncertainty, inflationary and labor market pressures, as well as continued COVID-19 concerns. If some or all of these factors continue to influence the economic environment, thenMediaCo's liquidity, financial condition or results of operations may be adversely affected. See Note 1 to the condensed consolidated financial statements, "Liquidity and Going Concern," for additional information.
CRITICAL ACCOUNTING ESTIMATES
Due to the COVID-19 pandemic, the global economy and financial markets have been disrupted and there is uncertainty about the length and severity of the consequences caused by the pandemic. We have considered information available to us as of the date of issuance of these financial statements and are not aware of any specific events or circumstances that would require an update to our estimates or judgments, or a revision to the carrying value of our assets or liabilities. Our estimates may change as new events occur and additional information becomes available. Our actual results may differ materially from these estimates. A complete description of our critical accounting estimates is contained in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , filed with theSecurities and Exchange Commission onMarch 24, 2022 .
RESULTS OF OPERATIONS
Three-Month and Nine-Month Periods EndedSeptember 30, 2022 compared toSeptember 30, 2021 Net revenues: Three Months Ended September 30, Nine Months Ended September 30, 2022 (dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Radio$ 8,270 $ 14,361 $ (6,091) (42.4) %$ 28,914 $ 31,714 $ (2,800) (8.8) % Outdoor Advertising 3,555 3,459 96 2.8 % 10,598 10,225 373 3.6 % Total net revenues$ 11,825 $ 17,820 $ (5,995) (33.6) %$ 39,512 $ 41,939 $ (2,427) (5.8) % Net radio revenues decreased for the three-month and nine-month periods endedSeptember 30, 2022 as a result of a substantial decline in healthcare spend as the COVID-19 vaccination awareness campaigns have slowed, partially offset by stronger tourism advertising spend as the restrictions on travel, social gatherings, and business activities have continued to ease. Additionally, net radio revenues further decreased for the three month endedSeptember 30, 2022 as a result of the absence in the current period of ticket sales for, and broadcast and streaming sponsorships of, our annual outdoor concert,Summer Jam , which was held in the second quarter of the current year compared to the third quarter of the prior year. We typically monitor the performance of our stations against the aggregate performance of the market in which we operate based on reports for the period prepared by Miller Kaplan. Miller Kaplan reports are generally prepared on a gross revenues basis and exclude revenues from barter and syndication arrangements. Miller Kaplan reported gross revenues for theNew York radio market increased 2.8% for the nine-month period endedSeptember 30, 2022 , as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan were down 8.7% for the nine-month period endedSeptember 30, 2022 , as compared to the same period of the prior year. Outdoor advertising revenues increased for the three-month and nine-month periods endedSeptember 30, 2022 , attributable to slight increases in bulletin occupancy and rates as overall advertising revenues continued to rebound from the COVID-19 pandemic. Revenues in our outdoor advertising business have been less volatile than our radio business due to greater geographic diversification and longer duration advertising contracts with customers. -23-
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Operating expenses excluding depreciation and amortization expense:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Radio $ 6,983 $ 10,467 $ (3,484) (33.3) % $ 24,930 $ 21,497 $ 3,433 16.0 %
Outdoor Advertising 2,619 2,073 546 26.3 % 7,920 6,622 1,298 19.6 %
Total operating expenses
excluding depreciation and
amortization expense $ 9,602 $ 12,540 $ (2,938) (23.4) % $ 32,850 $ 28,119 $ 4,731 16.8 %
Radio operating expenses excluding depreciation and amortization expense
decreased during the three-month period ended September 30, 2022 due to expenses
associated with Summer Jam , which was held in the third quarter of the prior
year.
Radio operating expenses excluding depreciation and amortization expense
increased during the nine-month period ended September 30, 2022 due to
investment in growing our digital business as well as in our labor force with a
higher focus on sales. Additionally, in the prior year, we recorded employee
retention credits that reduced operating expenses, which were not available in
the current year.
Outdoor advertising operating expenses excluding depreciation and amortization
are largely fixed in nature; however, in the prior year, we recorded employee
retention credits that reduced operating expenses, which were not available in
the current year.
Corporate expenses:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Corporate expenses $ 1,460 $ 2,422 $ (962) (39.7) % $ 5,286 $ 5,908 $ (622) (10.5) %
The decreases in corporate expenses for the three-month and nine-month periods
ended September 30, 2022 were primarily due to fees from the Emmis Management
Agreement that ended in November 2021 , partially offset by personnel costs for
the entire period associated with the corporate staff, performing the functions
that were previously part of the management agreement.
Depreciation and amortization:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Radio $ 85 $ 179 $ (94) (52.5) % $ 272 $ 553 $ (281) (50.8) %
(7.6) %$ 2,468 $ 2,474 $ (6) (0.2) % Total depreciation and amortization$ 906 $ 1,068 $ (162) (15.2) %$ 2,740 $ 3,027 $ (287) (9.5) %
Radio and
Loss (gain) on sale of assets:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Outdoor Advertising $ 26 $ - $ 26 - % $ 71 $ (78) $ 149 (191.0) %
Total loss (gain) on sale
of assets $ 26 $ - $ 26 - % $ 71 $ (78) $ 149 (191.0) %
The loss (gain) on sale of assets relates to the disposal of certain outdoor advertising structures in the normal course of business.
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Operating (loss) income:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Radio $ 1,202 $ 3,715 $ (2,513) (67.6) % $ 3,712 $ 9,664 $ (5,952) (61.6) %
Outdoor Advertising 89 497 (408) (82.1) % 139 1,207 (1,068) (88.5) %
All other $ (1,460) $ (2,422) $ 962 (39.7) % $ (5,286) $ (5,908) $ 622 (10.5) %
Total operating (loss)
income $ (169) $ 1,790 $ (1,959) (109.4) % $ (1,435) $ 4,963 $ (6,398) (128.9) %
See "Net revenues," "Operating expenses excluding depreciation and amortization," "Depreciation and amortization," "Loss (gain) on sale of assets," and "Corporate expenses" above.
Interest expense:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change Interest expense$ (2,404) $ (2,895) $ 491 (17.0) %$ (8,185) $ (8,134) $ (51) 0.6 % Interest expense increased slightly for the nine-month period endedSeptember 30, 2022 due to (i) the additional funding fromSG Broadcasting during 2021, which took the form of additional loans, (ii) accrued interest on the Emmis Promissory Note being paid in kind in the fourth quarter of 2021, (iii) accrued interest on the SG Broadcasting Promissory Notes being paid in kind in the fourth quarter of 2021 and the second quarter of 2022, (iv) an additional 1% paid in kind interest rate applicable beginningMay 19, 2021 as a result of Amendment No. 4 to the senior credit facility, and (v) rising interest rates. These increases were partially offset by the conversion of the outstanding principal and accrued but unpaid interest of the SG Broadcasting Promissory Notes onJuly 28, 2022 .
Interest expense decreased for the three-month period ended
Provision for income taxes:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Provision for income taxes
(5) (6.0) % $ 227 $ 246 $ (19) (7.7) %
Our provision for income taxes tax is primarily due to the recognition of additional valuation allowance.
Consolidated net loss:
Three Months Ended September 30, Nine Months Ended September 30, 2022
(dollars in thousands) 2022 2021 $ Change % Change 2022 2021 $ Change % Change
Consolidated net loss $ (2,651) $ (1,188) $ (1,463) 123.1 % $ (9,847) $ (3,498) $ (6,349) 181.5 %
See "Net revenues," "Operating expenses excluding depreciation and amortization," "Depreciation and amortization," "Loss (gain) on sale of assets," "Corporate expenses," and "Interest expense" above.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations, cash available through additional borrowings under the SG Broadcasting Promissory Note, and our At Market Issuance Sales Agreement. Our primary uses of capital have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements and acquisitions. AtSeptember 30, 2022 , we had cash and cash equivalents of$5.9 million and net working capital of$0.6 million . AtDecember 31, 2021 , we had cash and cash equivalents of$6.1 million and net working capital of$7.7 million . The decrease in net working capital was primarily driven by an increase in the current portion of long-term debt, cash paid for capital expenditures, principal payments on long term debt, and cash paid for the settlement of tax withholding obligations. AtSeptember 30, 2022 , we had$66.7 million of borrowings outstanding under the Senior Credit Facility, of which$3.7 million was current. The borrowing rate under our Senior Credit Facility was 10.6% atSeptember 30, 2022 . Additionally, atSeptember 30, 2022 , we had$6.1 million of promissory notes outstanding to Emmis, all of which was classified as long-term. -25-
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The debt service requirements ofMediaCo over the next twelve-month period are expected to be$11.1 million related to our Senior Credit Facility ($3.7 million of principal repayments and$7.4 million of interest payments). The Senior Credit Facility bears interest at a variable rate. The Company estimates interest payments by using the amounts outstanding as ofSeptember 30, 2022 and then-current interest rates. There are no debt service requirements over the next twelve months for the Emmis Convertible Promissory Note. OnNovember 12, 2022 ,MediaCo entered into Amendment No. 5 to its Senior Credit Facility, which lowered the minimum liquidity requirement to$2.0 million throughDecember 15, 2022 and$3.0 million thereafter and removed the testing requirement for the minimum consolidated fixed charge coverage ratio covenant onSeptember 30, 2022 . There is substantial doubt that the Company will be in compliance with these covenants in subsequent periods.MediaCo's business units are highly correlated to the economic environment, which recently have been impacted by macroeconomic uncertainty, inflationary and labor market pressures, as well as continued COVID-19 concerns. If some or all of these factors continue to influence the economic environment, thenMediaCo's liquidity, financial condition or results of operations may be adversely affected. See Note 1 to the condensed consolidated financial statements, "Liquidity and Going Concern," for additional information. OnJuly 28, 2022 ,SG Broadcasting opted to convert$28.0 million plus$1.9 million of accrued interest into 12.9 million Class A Common Shares. This event reduced the amount of accrued interest and long-term debt on the balance sheet and increased the number of outstanding shares of Class A common stock to approximately 16 million. We will continue to assess opportunities that will help transform our capital structure. As part of our business strategy, we continually evaluate potential acquisitions of businesses that we believe hold promise for long-term appreciation in value and leverage our strengths. However, our Senior Credit Facility substantially limits our ability to make acquisitions.
Cash flows provided by operating activities were
Cash flows used in investing activities were$1.8 million for the nine months endedSeptember 30, 2022 , attributable to capital expenditures related to a new digital platform project. Cash flows used in investing activities were$1.3 million for the nine months endedSeptember 30, 2021 , attributable to capital expenditures, net of proceeds from the sale of property and equipment. Cash flows used in financing activities were$3.2 million for the nine months endedSeptember 30, 2022 , attributable to principal payments on long-term debt and settlement of tax withholding obligations. Cash flows provided by financing activities were$0.3 million for the nine months endedSeptember 30, 2021 , attributable to net debt proceeds.
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