MEDIACO HOLDING INC. GENERAL
The following discussion pertains to
OnDecember 9, 2022 ,Fairway Outdoor LLC ,FMG Kentucky, LLC andFMG Valdosta, LLC (collectively, "Fairway"), all of which are wholly owned direct and indirect subsidiaries ofMediaCo , entered into an Asset Purchase Agreement (the "Purchase Agreement"), withThe Lamar Company, L.L.C. , aLouisiana limited liability company (the "Purchaser"). The transactions contemplated by the Purchase Agreement closed as of the date of the Purchase Agreement. The purchase price was$78.6 million , subject to certain customary adjustments, paid at closing in cash. The sale resulted in a pre-tax gain of$46.9 million in the fourth quarter of 2022. We have classified the related assets and liabilities associated with our Fairway business as discontinued operations in our consolidated balance sheets and the results of our Fairway business have been presented as discontinued operations in our consolidated statements of income for all periods presented throughDecember 9, 2022 as the sale represented a strategic shift in our business that had a major effect on our operations and financial results. Unless otherwise noted, discussion in management's discussion and analysis refers to the Company's continuing operations. See Note 2 - Discontinued Operations in our consolidated financial statements included elsewhere in this report for additional information. 21
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We own and operate two radio stations located inNew York City . 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.The Nielsen Company generally measures radio station ratings weekly for markets measured by the Portable People Meter™, which includes both of our radio stations. 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, 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. The following table summarizes the sources of our revenues for the years endedDecember 31, 2022 , and 2021. The category "Nontraditional" principally consists of ticket sales and sponsorships of events our stations conduct in their local markets. The category "Other" includes, among other items, revenues related to network revenues and barter. Year Ended December 31, 2022 2021 Net revenues: Radio Advertising$ 25,790 66.8 %$ 30,012 71.9 % Nontraditional 3,973 10.3 % 4,864 11.7 % Digital 4,713 12.2 % 2,864 6.9 % Other 4,119 10.7 % 3,987 9.5 % Total net revenues$ 38,595 $ 41,727 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 general and administrative departments, such as talent costs, rating fees, rents, 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 stalled. Management believes this is principally the result of two factors: (i) new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, have gained advertising share against radio and other traditional media and created a proliferation of advertising inventory and (ii) 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 year, 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 and YouTube channels. 22
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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 1.6% for the year endedDecember 31, 2022 , and up 41.2% for the year endedDecember 31, 2021 , as compared to the same periods of the prior year. During these periods, revenues for ourNew York cluster were down 8.5% and up 62.2%, respectively. 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 in the prior year 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. Throughout 2021 and 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 lingering pandemic impact has caused increases in inflation and general economic disruption. 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 has been impacted by the rising interest rate environment in the financial markets, driving the interest paid on the Senior Credit Facility to increase as well as increasing the cost of any potential future borrowings. At this time, we do not anticipate LIBOR rates to decline.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting policies are defined as those that encompass significant judgments and uncertainties, and potentially derive materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below.
As ofDecember 31, 2022 , we have recorded approximately$63.3 million forFCC licenses, which represents approximately 65% of our total assets. We would not be able to operate our radio stations without the relatedFCC license for each property.FCC broadcast licenses are renewed every eight years; consequently, we continually monitor our stations' compliance with the various regulatory requirements. Historically, each of ourFCC licenses has been renewed at the end of its respective period, and we expect that eachFCC license will continue to be renewed in the future. We consider ourFCC licenses to be indefinite-lived intangibles. We do not amortize indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by Accounting Standards Codification ("ASC") Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting if they are not being operated under a Local Marketing Agreement by another broadcaster. Consequently, our two radio stations inNew York are considered a single unit of accounting.
For the years ended
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Valuation of Indefinite-lived Broadcasting Licenses
Fair value of ourFCC licenses is estimated to be the stick value that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine the fair value of ourFCC licenses, the Company considers both income and market valuation methods when it performs its impairment tests. Under the income method, the Company projects cash flows that would be generated by its unit of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for theFCC license. The Company assumes the competitive situation that exists in the unit of accounting's market remains unchanged, with the exception that the unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values theFCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. The projections incorporated into our license valuations take then current economic conditions into consideration. Under the market method, the Company uses recent sales of comparable radio stations for which the sales value appeared to be concentrated entirely in the value of the license, to arrive at an indication of fair value.
Below are some of the key assumptions used in our income method annual
impairment assessments. Long-term growth rates in the
October 1, 2022 October 1, 2021
Discount Rate 12.7% 12.1%
Long-term Revenue Growth Rate 0.6% 1.3%
Mature Market Share 9.8% 9.2%
Operating Profit Margin 23.5-29.0% 24.2-29.0%
Deferred Taxes
The Company accounts for income taxes under the asset and liability method,
which requires the recognition of deferred tax assets and liabilities for the
expected future tax consequence of events that have been recognized in the
Company's financial statements or income tax returns. Income taxes are
recognized during the year in which the underlying transactions are reflected in
the consolidated statements of operations. Deferred taxes are provided for
temporary differences between amounts of assets and liabilities recorded for
financial reporting purposes as compared to amounts recorded for income tax
purposes. After determining the total amount of deferred tax assets, the Company
determines whether it is more likely than not that some portion of the deferred
tax assets will not be realized.
RESULTS OF OPERATIONS
Year ended
The following discussion refers to the Company's continuing operations. See Note
2 - Discontinued Operations in our consolidated financial statements included
elsewhere in this report for additional information.
Net revenues:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Net revenues $ 38,595 $ 41,727 $ (3,132) (7.5) %
Net radio revenues decreased due to a substantial decline in healthcare spend as
COVID-19 vaccination awareness campaigns have slowed, partially offset by
stronger tourism advertising spend as restrictions on travel, social gatherings,
and business activities have continued to ease. Additionally, revenues from the
Summer Jam event were lower in 2022 due to depressed market conditions, in
particular as they affected attendance at concerts and festivals.
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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 1.6% for the year endedDecember 31, 2022 , as compared to the prior year. Our gross revenues reported to Miller Kaplan were down 8.5% for the year endedDecember 31, 2022 , as compared to the prior year.
Operating expenses excluding depreciation and amortization expense:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Operating expenses excluding depreciation
and amortization expense: $ 32,847 $ 28,667 $ 4,180 14.6 %
Radio operating expenses excluding depreciation and amortization expense
increased during the year ended December 31, 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.
Corporate expenses:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Corporate expenses $ 6,463 $ 8,434 $ (1,971) (23.4) %
The decrease in corporate expenses for the year ended December 31, 2022 was
primarily due to fees from the Emmis Management Agreement that ended in November
2021 and consulting fees incurred in the prior year. These decreases were
partially offset by employee retention credits recorded in the prior year that
reduced operating expenses, which were not available in the current year.
Depreciation and amortization:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Depreciation and amortization $ 666 $ 688
Radio depreciation and amortization expense was flat compared to the prior year
due to additions in the current year offset by certain assets becoming fully
depreciated in the prior year.
Operating income (loss):
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Operating (loss) income $ (1,386) $ 3,938 $ (5,324) (135.2) %
See "Net revenues," "Operating expenses excluding depreciation and amortization," and "Corporate expenses" above.
Interest expense:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Interest expense $ (6,980) $ (7,707) $ 727 (9.4) %
Interest expense decreased slightly due to the conversion of the SG Broadcasting
Promissory Notes (as defined below) in July 2022 , which notes were outstanding
for all of the prior year, and a lower interest rate after the pay down of the
SG Broadcasting Promissory Notes partially offset by accrued interest on the
Emmis Convertible Promissory Note being paid in kind in the fourth quarter of
2021, which increased the principal balance for the entirety of the current
year.
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Provision for income taxes:
Year ended December 31, Change
(Dollars in thousands) 2022 2021 $ %
Provision for income taxes $ 336 $ 348 $ (12) (3.4) %
See Note 12 - Income Taxes in our consolidated financial statements included elsewhere in this report.
Consolidated net income (loss):
Year ended December 31 , Change
(Dollars in thousands) 2022 2021 $ % Consolidated net income (loss)$ 30,914 $ (6,082) $
36,996 (608.3) %
The increase in consolidated net income (loss) was due to the gain on sale of Fairway inDecember 2022 , partially offset by lower operating income of continuing operations. See "Net revenues," "Operating expenses excluding depreciation and amortization,", "Corporate expenses," "Interest expense," and "Provision for income taxes" above and Note 2 - Discontinued Operations in our consolidated financial statements included elsewhere in this report.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity are cash provided by operations 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, and acquisitions.
AtDecember 31, 2022 we had cash, cash equivalents and restricted cash of$15.3 million and net working capital of$15.2 million . AtDecember 31, 2021 , we had cash, cash equivalents and restricted cash of$6.1 million and net working capital of$7.7 million . The increase in net working capital is due to an increase in cash and accounts receivable resulting from improved business operations and the sale of Fairway. AtDecember 31, 2022 , we had$6.0 million outstanding to Emmis under the Emmis Convertible Promissory Note, all of which is classified as long-term and has no debt service requirements over the next twelve-month period. 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.
Operating Activities
Cash provided by continuing operating activities was$2.3 million for the year endedDecember 31, 2022 compared to cash used in continuing operating activities of$0.6 million for the year endedDecember 31, 2021 . The increase in operating cash flows was mainly attributable to improved collections of accounts receivable.
Investing Activities
Cash provided by continuing investing activities was$77.6 million for the year endedDecember 31, 2022 primarily attributable to the proceeds from the sale of Fairway, partially offset by capital expenditures. Cash used in investing activities of$0.4 million for the year endedDecember 31, 2021 was attributable to capital expenditures. Financing Activities
Cash used in continuing financing activities was
Cash provided by continuing financing activities was$0.3 million for the year endedDecember 31, 2021 , was due to debt proceeds of$4.0 million and proceeds from the issuance of Class A common stock of$0.3 million , partially offset by debt payments and debt related costs of$3.4 million and settlement of tax withholding obligations of$0.7 million .
SEASONALITY
Our results of operations are usually subject to seasonal fluctuations, which
result in higher second quarter revenues and operating income. For our radio
operations, this seasonality is largely due to the timing of our largest concert
in June of each year. Results are typically lowest in the first calendar
quarter.
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INFLATION
The impact of inflation on operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on operating results.
OFF-BALANCE SHEET FINANCINGS AND LIABILITIES
Other than legal contingencies incurred in the normal course of business, and contractual commitments to purchase goods and services, all of which are discussed in Note 11 to the consolidated financial statements, which is incorporated by reference herein, the Company does not have any material off-balance sheet financings or liabilities. The Company does not have any majority-owned or controlled subsidiaries that are not included in the consolidated financial statements, nor does the Company have any interests in or relationships with any "special-purpose entities" that are not reflected in the consolidated financial statements or disclosed in the Notes to consolidated financial statements.
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