MEDIACO HOLDING INC. GENERAL
The following discussion pertains to
We own and operate two radio stations located inNew York City and outdoor advertising businesses geographically focused inSouthern Georgia andEastern Kentucky . 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 all of our radio stations. Because audience ratings in a 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. The following table summarizes the sources of our revenues for the ten-month period endedDecember 31, 2019 and the year endedDecember 31, 2020 . The category "Non Traditional" 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, production of billboard advertisements and barter. Ten Months Ended Year Ended December 31, 2019 December 31, 2020 Net revenues: Local$ 20,914 51.3 %$ 15,958 40.6 % National 3,912 9.6 % 3,089 7.9 % Political - 0.0 % 82 0.2 % Non Traditional 8,166 20.0 % 761 1.9 % Digital 3,018 7.4 % 2,256 5.7 % Outdoor Advertising 759 1.9 % 12,459 31.7 % Other 4,031 9.8 % 4,656 11.8 % Total net revenues$ 40,800 $ 39,261 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: (1) 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 (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 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. The results of our 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 2.6% for the ten months endedDecember 31, 2019 , but down 31.3% for the year endedDecember 31, 2020 , as compared 21
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to the same periods of the prior year. During these periods, revenues for ourNew York cluster were up 9.5% and down 42.1%, respectively. Our outperformance in the ten months endedDecember 31, 2019 was principally due to record-setting ticket sales associated with our largest annual concert,Summer Jam , inJune 2019 ; however, our underperformance in the year endedDecember 31, 2020 was largely driven by the cancellation of that event in 2020 due to the COVID-19 pandemic. 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,MediaCo's long-term debt agreements substantially limit our ability to make acquisitions. We also regularly review our portfolio of assets and may opportunistically dispose of assets when we believe it is appropriate to do so. The Company has been actively monitoring the COVID-19 situation and its impact globally, as well as domestically and in the markets we serve. Our priority has been the safety of our employees, as well as the informational needs of the communities that we serve. Through the first few months of calendar 2020, the disease became widespread around the world, and onMarch 11, 2020 , theWorld Health Organization declared a pandemic. In an effort to mitigate the continued spread of COVID-19, many federal, state and local governments have mandated various restrictions, including travel restrictions, restrictions on non-essential businesses and services, restrictions on public gatherings and quarantining of people who may have been exposed to the virus. These restrictions, in turn, causedthe United States economy to decline and businesses to cancel or reduce amounts spent on advertising, negatively impacting our advertising-based businesses. Furthermore, the restrictions on public gatherings in and aroundNew York City during 2020 forced us to cancel our largest annual concert,Summer Jam . In addition, some of our advertisers have seen a material decline in their businesses and may not be able to pay amounts owed to us when they come due. If the spread of COVID-19 continues, or is suppressed but later reemerges as a variant strain, and public and private entities continue to implement restrictive measures, 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.
CRITICAL ACCOUNTING POLICIES
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.
Revenue Recognition
Broadcasting revenue is recognized as advertisements are aired and outdoor revenue is recognized over the life of the applicable lease of each billboard. Both broadcasting revenue and outdoor revenue recognition is subject to meeting certain conditions such as persuasive evidence that an arrangement exists and collection is reasonably assured. These criteria are generally met at the time the advertisement is aired for broadcasting revenue or displayed for outdoor revenue. Broadcasting advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.
We have made acquisitions in the past for which a significant amount of the purchase price was allocated toFCC licenses and goodwill assets. As ofDecember 31, 2020 , we have recorded approximately$63.3 million inFCC licenses, which represents approximately 43% of our total assets. In the case of our radio stations, we would not be able to operate the properties without the relatedFCC license for each property.FCC licenses are renewed every eight years; consequently, we continually monitor our stations' compliance with the various regulatory requirements. Historically, all of ourFCC licenses have been renewed at the end of their respective periods, and we expect that allFCC licenses 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.
In the ten-month period endedDecember 31, 2019 , we completed our annual impairment test onNovember 25, 2019 , the date the stations were transferred by Emmis. For the year endedDecember 31, 2020 , we completed our annual impairment tests onOctober 1 and will continue to perform our assessments on this date in future years.
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of ourFCC licenses is estimated to be the price 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 considered both income and market valuation methods when it performed its impairment tests. Under the income method, the Company projects cash flows that would be generated by each of its units 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 each market remains unchanged, with the exception that its 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 22
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that may be beyond our control. The projections incorporated into our license valuations take 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. In recent years, we have reduced long-term growth rates in theNew York market in which we operate based on recent industry trends and our expectations for the market going forward. November 25, 2019 October 1, 2020 Discount Rate 11.9% 12.4% Long-term Revenue Growth Rate -0.6% 1.0% Mature Market Share 9.0% 9.4% Operating Profit Margin 22.7-26.7% 26.6-29.5% Valuation ofGoodwill As a result of the Fairway Acquisition, the Company has recorded$13.1 million of goodwill. This accounts for all goodwill on the consolidated balance sheet as ofDecember 31, 2020 . The Fairway Acquisition closed onDecember 13, 2019 and all assets acquired and liabilities assumed were valued as of that date, resulting in a goodwill valuation of$13.1 million . ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. Under ASC 350 we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test. Given the macroeconomic environment as a result of the COVID-19 pandemic we have elected not to perform the qualitative assessment. When performing a quantitative assessment for impairment, the Company uses a market approach to determine the fair value of the reporting unit. Management determines the fair value for the reporting unit by multiplying the cash flows of the reporting unit by an estimated market multiple. Management believes this methodology for valuing outdoor advertising businesses is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons, analyst reports, and market transactions. To corroborate the fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit. If the carrying value of a reporting unit's goodwill exceeds its fair value, the Company recognizes an impairment charge equal to the difference in the statement of operations. 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. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value. 23
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Table Of Contents RESULTS OF OPERATIONS
TEN MONTHS ENDED
Net revenues:
For the ten For the
months ended year ended
December 31, December
2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)
Net revenues:
Radio $ 40,041 $ 26,020 $ (14,021 ) (35.0 )%
Outdoor Advertising 759 13,241 12,482 N/M
Total net revenues $ 40,800 $ 39,261 $ (1,539 ) (3.8 )%
Radio net revenues decreased for the year ended December 31, 2020 compared to
the ten-month period ended December 31, 2019 . Despite having two additional
months of results in the current year, revenues decreased as a result of the
decline in advertising revenues due to the COVID-19 pandemic, coupled with the
cancellation of Summer Jam , our largest outdoor concert which is held annually
in June. We were able to hold the event in June 2019 , but we were forced to
cancel the event in June 2020 . We typically monitor the performance of our
stations against the performance of the New York radio market based on reports
for the periods prepared by Miller Kaplan. Miller Kaplan reports are generally
prepared on a gross revenues basis and exclude revenues from barter
arrangements. A summary of market revenue performance and MediaCo's revenue
performance in the New York market for the year ended December 31, 2020 is
presented below:
For the year ended December 31, 2020
Overall Market MediaCo
Revenue Revenue
Market Performance Performance
New York (31.3 %) (42.1 %)
Our underperformance as compared to the overall market revenue performance in
the year ended
We acquired two outdoor advertising businesses principally located in
Operating expenses excluding depreciation and amortization expense:
For the ten
months ended For the year
December 31, ended December
2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)
Operating expenses excluding
depreciation and amortization
expense:
Radio $ 30,751 $ 22,827 $ (7,924 ) (25.8 )%
Outdoor Advertising 375 9,517 9,142 N/M
Total operating expenses
excluding depreciation and
amortization expense $ 31,126 $ 32,344 $ 1,218 3.9 %
Operating expenses excluding depreciation and amortization expense for our radio
division decreased, despite two additional months of results in the current
year. Our largest outdoor concert, Summer Jam , is held annually in June, but due
to the COVID-19 pandemic, it was cancelled in 2020. Therefore, we did not incur
the costs of producing the event for the year ended December 31, 2020 . Expenses
also declined due to lower payroll costs in the second quarter as a result of
the Loan Proceeds Participation Agreement with Emmis, and cost reductions put in
place in response to the decline in revenues caused by the COVID-19 pandemic. We
acquired two outdoor advertising businesses principally located in Southern
Georgia and Eastern Kentucky on December 13, 2019 , so there is only minimal
activity in our reported results for the ten months ended December 31, 2019 .
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Corporate expenses excluding depreciation and amortization expense:
For the ten For the year
months ended ended December
December 31, 31, 2020
2019 $ Change % Change
(As reported, amounts in thousands)
Corporate expenses excluding
depreciation and amortization
expense $ 4,303 $ 4,338 $ 35 0.8 %
Corporate expenses excluding depreciation and amortization expense for the ten
months ended December 31, 2019 , mostly relate to nonrecurring transaction costs
associated with the acquisition of a controlling interest in the Company from
Emmis in November 2019 and two outdoor advertising businesses in December 2019 .
Corporate expenses excluding depreciation and amortization expense for the year
ended December 31, 2020 , principally consist of the costs associated with being
a public company, corporate staff to oversee the outdoor advertising business,
and management fees paid to Emmis.
Depreciation and amortization:
For ten months For the year
ended December ended December
31, 2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)
Depreciation and amortization:
Radio $ 980 $ 893 $ (87 ) (8.9 )%
Outdoor Advertising 100 3,188 3,088 N/M
Total depreciation and amortization $ 1,080
Radio depreciation and amortization expense decreased due to a number of assets becoming fully depreciated during the year endedDecember 31, 2020 . We acquired two outdoor advertising businesses principally located inSouthern Georgia andEastern Kentucky onDecember 13, 2019 , so there is only minimal activity in our reported results for the ten months endedDecember 31, 2019 .
Loss on disposal of assets:
For ten For the
months ended year ended
December 31, December
2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)Loss on disposal of assets
Radio $ - $ - $
- N/A
Outdoor Advertising - 197
197 N/A
Loss on disposal of assets $ -
Loss on disposal of assets for the year endedDecember 31, 2020 , relates to the disposal of various billboard structures in the ordinary course of business. Operating income (loss): For the ten months ended For the year December 31, ended December 2019 31, 2020 $ Change % Change (As reported, amounts in thousands) Operating income (loss): Radio$ 8,310 $ 2,300 $ (6,010 ) (72.3 )% Outdoor Advertising 284 339 55 N/M Corporate (4,303 ) (4,338 ) (35 ) 0.8 % Total operating income (loss)$ 4,291 $ (1,699 ) $ (5,990 ) (139.6 )%
Despite having two additional months of results in the current year, operating income decreased due to the impact of the COVID-19 pandemic.
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Interest expense:
For the ten For the year
months ended ended December
December 31, 2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)
Interest expense $ (821 ) $ (9,493 ) $ 8,672 N/M
During the quarter ended December 31, 2019 , the Company entered into numerous
debt instruments to finance SG Broadcasting's acquisition of a controlling
interest in the Company from Emmis in November 2019 and two outdoor advertising
businesses in December 2019 . These debt instruments have been outstanding for
all of 2020, which caused the increase in interest expense as compared to the
ten months ended December 31, 2019 .
Provision for income taxes:
For the ten
months ended For the year
December 31, ended December
2019 31, 2020 $ Change % Change
(As reported, amounts in thousands)
Provision for income taxes $ 1,522 $ 15,561 $ 14,039 922.4 %
During the year ended December 31, 2020 , as a result of a sharp deterioration of
business activity related to the COVID-19 pandemic, the Company concluded that
it was more likely than not that it would be unable to realize its deferred tax
assets and recorded an $18.8 million valuation allowance against these assets.
Consolidated net income (loss):
For the ten For the year
months ended ended
December 31, December 31,
2019 2020 $ Change % Change
(As reported, amounts in thousands)
Consolidated net income (loss) $ 1,948
Consolidated net income decreased primarily due to a decline in operating income, an increase in interest expense and an increase in the provision for income taxes, each as discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Senior secured term loan agreement
OnNovember 25, 2019 , the Company entered into a$50.0 million , five-year senior secured term loan agreement (the "Senior Credit Facility") withGACP Finance Co., LLC , aDelaware limited liability company, as administrative agent and collateral agent. The Senior Credit Facility provides for initial borrowings of up to$50.0 million , of which net proceeds of$48.3 million after debt discount of$1.7 million , were paid concurrently to Emmis in connection withSG Broadcasting's acquisition of a controlling interest in the Company, as well as one tranche of additional borrowings of$25.0 million . The Senior Credit Facility bears interest at a rate equal to the London Interbank Offered Rate ("LIBOR"), plus 7.5%, with a 2.0% LIBOR floor. The Senior Credit Facility requires interest payments on the first business day of each calendar month, and quarterly payments on the principal in an amount equal to one and one quarter percent of the initial aggregate principal amount are due on the last day of each calendar quarter. The Senior Credit Facility includes covenants pertaining to, among other things, the ability to incur indebtedness, restrictions on the payment of dividends, minimum Liquidity (as defined in the Senior Credit Facility) of$2.0 million for the period from the effective date untilNovember 25, 2020 ,$2.5 million for the period fromNovember 26, 2020 untilNovember 25, 2021 , and$3.0 million for the period thereafter, collateral maintenance, minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) of 1.10:1.00, and other customary restrictions. The Company borrowed$23.4 million of the remaining available borrowings to fund the Fairway Acquisition onDecember 13, 2019 . Proceeds received were$22.6 million , net of a debt discount of$0.8 million .
Amendment No.1 to senior secured term loan agreement
OnFebruary 28, 2020 , the Company entered into Amendment No. 1 to its Senior Credit Facility, in order to, among other things, increase the maximum aggregate principal amount issuable under the SG Broadcasting Promissory Note to$10.3 million .
Amendment No.2 to senior secured term loan agreement
OnMarch 27, 2020 , the Company entered into Amendment No. 2 ("Amendment No. 2") to its Senior Credit Facility, in order to, among other things, (i) reduce the required Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) to 1.00x fromJune 30, 2020 toDecember 31, 2020 , (ii) reduce the minimum Liquidity (as defined in the Senior Credit Facility) requirement to$1.0 million throughSeptember 30, 2020 , (iii) permit equity contributions and loans during calendar year 2020 under the SG Broadcasting Promissory Note and any amendments thereto to count toward Consolidated EBITDA (as defined in the Senior Credit Facility) for purposes of the Consolidated Fixed Charge Coverage Ratio calculation, and (iv) increase the maximum aggregate principal amount issuable under the Second Amended and Restated SG Broadcasting Promissory Note (as defined below) from$10.3 million to$20.0 million . In connection with Amendment No. 2, the 26
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Company incurred an amendment fee of approximately
Amendment No.3 to senior secured term loan agreement
OnAugust 28, 2020 , the Company entered into Amendment No. 3 ("Amendment No. 3") to its Senior Credit Facility, in order, among other things, (i) to modify certain provisions relating to the repayment of the Term Loan (as defined in the Senior Credit Facility) such that no quarterly payments shall be required beginning with the fiscal quarter endingSeptember 30, 2020 through and including the fiscal quarter endingJune 30, 2021 and (ii) to suspend the testing of the Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) fromJuly 1, 2020 through and includingJune 30, 2021 . In connection with Amendment No. 3, the Company incurred an amendment fee of approximately$0.1 million , which was added to the principal amount of the Senior Credit Facility then outstanding.
Emmis Convertible Promissory Note
OnNovember 25, 2019 , as part of the consideration owed to Emmis in connection withSG Broadcasting's acquisition of a controlling interest in the Company, the Company issued to Emmis the Emmis Convertible Promissory Note in the amount of$5.0 million . The Emmis Convertible Promissory Note carries interest at a base rate equal to the interest on any senior credit facility, or if no senior credit facility is outstanding, of 6.0%, plus an additional 1.0% on any payment of interest in kind and, without regard to whether the Company pays such interest in kind, an additional increase of 1.0% following the second anniversary of the date of issuance and additional increases of 1.0% following each successive anniversary thereafter. Because the Senior Credit Facility prohibits the Company from paying interest in cash on the Emmis Convertible Promissory Note, the Company accrues interest using the rate applicable for interest paid in kind. The Emmis Convertible Promissory Note is convertible, in whole or in part, into MediaCo Class A common stock at the option of Emmis beginning six months after issuance and at a strike price equal to the thirty day volume weighted average price of the MediaCo Class A common stock on the date of conversion. The Emmis Convertible Promissory Note matures onNovember 25, 2024 .
SG Broadcasting Promissory Note and amendments thereto
OnNovember 25, 2019 , the Company issued the SG Broadcasting Promissory Note, a subordinated convertible promissory note payable by the Company toSG Broadcasting , in return for whichSG Broadcasting contributed toMediaCo $6.3 million for working capital and general corporate purposes.The SG Broadcasting Promissory Note carries interest at a base rate equal to the interest on any senior credit facility, or if no senior credit facility is outstanding, of 6.0%, and an additional increase of 1.0% following the second anniversary of the date of issuance and additional increases of 1.0% following each successive anniversary thereafter. The SG Broadcasting Promissory Note matures onMay 25, 2025 . Additionally, interest under the SG Broadcasting Promissory Note is payable in kind through maturity, and is convertible into MediaCo Class A common stock at the option ofSG Broadcasting beginning six months after issuance and at a strike price equal to the thirty day volume weighted average price of the MediaCo Class A common stock on the date of conversion. OnFebruary 28, 2020 , the Company andSG Broadcasting amended and restated the SG Broadcasting Promissory Note such that the maximum aggregate principal amount issuable under the note was increased from$6.3 million to$10.3 million . Also onFebruary 28, 2020 ,SG Broadcasting loaned an additional$2.0 million to the Company pursuant to the amended note for working capital purposes. OnMarch 27, 2020 , the Company andSG Broadcasting further amended and restated the SG Broadcasting Promissory Note (the "Second Amended and Restated SG Promissory Note") such that the maximum aggregate principal amount issuable under the note was increased from$10.3 million to$20.0 million . OnMarch 27, 2020 ,SG Broadcasting loaned an additional$3.0 million to the Company pursuant to the Second Amended and Restated SG Promissory Note for working capital purposes.
On
OnSeptember 30, 2020 ,SG Broadcasting loaned an additional$0.3 million to the Company pursuant to an additional SG Broadcasting Promissory Note for working capital purposes.
Series A Convertible Preferred Stock
OnDecember 13, 2019 , in connection with the Fairway Acquisition, the Company issued toSG Broadcasting 220,000 shares of MediaCo Series A Convertible Preferred Stock. The MediaCo Series A Convertible Preferred Stock ranks senior in preference to the MediaCo Class A common stock, MediaCo Class B common stock, and the MediaCo Class C common stock. Pursuant to our Articles of Amendment, the ability of the Company to make distributions with respect to, or make a liquidation payment on, any other class of capital stock in the Company designated to be junior to, or on parity with, the MediaCo Series A Convertible Preferred Stock, will be subject to certain restrictions, including that (i) the MediaCo Series A Convertible Preferred Stock shall be entitled to receive the amount of dividends per share that would be payable on the number of whole common shares of the Company into which each share of MediaCo Series A Convertible Preferred Stock could be converted when such conversion becomes active, and (ii) the MediaCo Series A Convertible Preferred Stock, upon any liquidation, dissolution or winding up of the Company, shall be entitled to a preference on the assets of the Company. Issued and outstanding shares of MediaCo Series A Convertible Preferred Stock shall accrue cumulative dividends, payable in kind, at an annual rate equal to the interest rate on any senior credit facility of the Company, or if no senior debt is outstanding, 6.0%, plus additional increases of 1.0% onDecember 12, 2020 and each anniversary thereof. 27
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Table Of Contents Other liquidity matters As part of the acquisition ofSG Broadcasting's controlling interest in the Company from Emmis onNovember 25, 2019 , Emmis retained the working capital of the stations, but the Company was permitted to collect and use, for a period of nine months, the first$5.0 million of net working capital attributable to the stations as of the closing date. This amount was paid to Emmis during the three months endedSeptember 30, 2020 . OnApril 22, 2020 ,MediaCo and Emmis entered into a certain Loan Proceeds Participation Agreement (the "LPPA") pursuant to which (i) Emmis agreed to use certain of the proceeds of the loan Emmis received pursuant to the Paycheck Protection Program ("PPP") under Division A, Title I of the CARES Act to pay certain wages of employees leased toMediaCo pursuant to theEmployee Leasing Agreement, between Emmis andMediaCo , (ii) Emmis agreed to waive up to$1.5 million in reimbursement obligations ofMediaCo to Emmis under the Employee Leasing Agreement to the extent that the PPP Loan is forgiven, and (iii)MediaCo agreed to promptly pay Emmis an amount equal to 31.56% of the amount of the PPP Loan, if any, that Emmis is required to repay, up to the amount of the reimbursement obligations forgiven under (ii) above.Standard General L.P. , on behalf of all of the funds for which it serves as an investment advisor, agreed to guarantyMediaCo's obligations under the LPPA. As of the date of these financial statements, Emmis believes that the loan will be forgiven as Emmis believes it has spent the proceeds on qualifying expenditures. Accordingly,$1.5 million of leased employee expense was waived by Emmis during the year endedDecember 31, 2020 . Going concern The accompanying consolidated and combined financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. Pursuant to ASC Topic 205-40, "Going Concern," the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern within one year of the date of the filing of these financial statements (March 30, 2021 ). Management considered the Company's ability to forecast future cash flows, current financial condition, sources of liquidity and debt service obligations due on or beforeMarch 30, 2022 . The Company has been negatively impacted by COVID-19, and expects COVID-19 to continue to negatively impact revenues and profitability for an undetermined period of time. Management has considered these circumstances in assessing the Company's liquidity over the next year. Liquidity is a measure of an entity's ability to meet potential cash requirements, maintain its assets, fund its operations, and meet the other general cash needs of its business. The Company's liquidity is impacted by general economic, financial, competitive, and other factors beyond its control. The Company's liquidity requirements consist primarily of funds necessary to pay its expenses, principally debt service and operational expenses, such as labor costs, and other related expenditures. The Company generally satisfies its liquidity needs through cash provided by operations. In addition, the Company has taken steps to enhance its ability to fund its operational expenses by reducing various costs and is prepared to take additional steps as necessary. The Company has debt service obligations of approximately$8.6 million due under its Senior Credit Facility fromMarch 30, 2021 (the date of issuance of these financial statements) throughMarch 30, 2022 . In addition, our Senior Credit Facility requires us to maintain Minimum Liquidity (as defined in the Senior Credit Facility) of$2.5 million untilNovember 25, 2021 , and$3.0 million for the period thereafter. During the year endedDecember 31, 2020 , the Company obtained amendments to our Senior Credit Facility in order to, among other things, suspend the testing of the Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) untilJuly 1, 2021 , at which time the Company will once again be required to comply with a Fixed Charge Coverage Ratio of 1.10:1.00. The Company expects its revenues and profitability will continue to be adversely impacted by the COVID-19 pandemic, and the duration and severity of the impact is unknown as of the date of issuance of these financial statements. Management anticipates that the Company will be unable to meet its liquidity needs and comply with the covenants of our Senior Credit Facility for the next twelve months with cash and cash equivalents on hand, projected cash flows from operations, and/or additional borrowings. In addition, the Senior Credit Facility includes a loan to value calculation, whereby the amount of debt outstanding thereunder is limited to a formula based on 60% of the fair value of the Company'sFCC licenses plus a multiple of the Company's Billboard Cash Flow (as defined in the Senior Credit Facility). If the most recent appraisal of the fair value of ourFCC licenses obtained in connection with our annual impairment testing as ofOctober 1, 2020 is deemed to be an Acceptable Appraisal (as defined in the Senior Credit Facility) by our lender in its sole discretion, we will have a shortfall in this calculation, requiring a repayment of approximately$8.0 million of Senior Credit Facility debt. Our lender is not required to accept this appraisal and has the right to obtain a different appraisal, which could result in a different repayment amount, if any. As a result of the conditions identified above, management has concluded that there is substantial doubt about the Company's ability to continue as a going concern within one year after the date that the financial statements are issued. The Company's independent auditor has included an explanatory paragraph regarding the Company's ability to continue as a going concern in its report on these consolidated and combined financial statements, which constitutes an event of default under the Senior Credit Facility. Upon this event of default, under the Senior Credit Facility, the lender may, but is not required to, declare all or any portion of the unpaid principal amount of the Senior Credit Facility, including interest accrued and unpaid, to be immediately due and payable, and/or to increase the annual interest rate in effect by 3%. Consequently, amounts outstanding under the Senior Credit Facility as ofDecember 31, 2020 have been classified as current liabilities in the accompanying consolidated and combined financial statements. Furthermore, depending on the duration and severity of the impact the COVID-19 pandemic has on our businesses and any action our lender may take, we may record impairments of assets in the future. Management intends to request a waiver or amendment to its Senior Credit Facility and seek additional borrowings from Standard General to cure the existing event of default and anticipated future covenant violations. While the Company has been successful in obtaining waivers and amendments under its Senior Credit Facility and has also received additional liquidity from Standard General in the past, no assurances can be made that the Company will be successful or receive such liquidity in the future. 28
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Table Of Contents SOURCES OF LIQUIDITY
Our primary sources of liquidity are cash provided by operations and cash available through borrowings under the SG Broadcasting Promissory Note. Our primary uses of capital have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements and acquisitions.
AtDecember 31, 2020 we had cash and cash equivalents of$4.2 million and net working capital of($62.5) million . AtDecember 31, 2019 , we had cash and cash equivalents of$2.1 million and net working capital of($4.7) million . This decrease in net working capital is due to the reclassification of our Senior Credit Facility as a current liability. Excluding the current maturity of our Senior Credit Facility, our working capital atDecember 31, 2020 would be$6.3 million , an increase in net working capital fromDecember 31, 2019 . The increase is largely due to the decrease in accounts payable and accrued expenses as working capital amounts due to Emmis as ofDecember 31, 2019 , were paid during the year endedDecember 31, 2020 . This was principally financed with additional borrowings. Operating Activities Cash flows provided by operating activities were$3.6 million for the ten months endedDecember 31, 2019 versus cash flows used in operating activities of$9.6 million for the year endedDecember 31, 2020 . The decrease in cash flows provided by operating activities was mostly attributable to a decline in revenues as a result of the COVID-19 pandemic, increased interest expense when compared to the prior period, and the payment of working capital amounts due to Emmis during the year endedDecember 31, 2020 .
Investing Activities
Cash flows used in investing activities of
Cash flows used in investing activities of
Financing Activities
Cash provided by financing activities of
Cash provided by financing activities of$41.7 million for the ten months endedDecember 31, 2019 primarily consisted of proceeds of debt of$29.4 million and proceeds from the issuance of stock of$22.0 million . This was partially offset by net transactions with Emmis of$6.3 million and payments of debt related costs of$2.5 million .
As of
Additionally,MediaCo had$5.5 and$21.4 million of promissory notes outstanding atDecember 31, 2020 toEmmis and SG Broadcasting , respectively, all of which is classified as long term debt. The debt service requirements ofMediaCo over the next twelve-month period are expected to be$8.6 million related to our Senior Credit Facility ($1.8 million of principal repayments and$6.8 million of interest payments). These anticipated payments assume our lender does not accelerate the debt as a result of non-compliance with any debt covenant described above. The Senior Credit Facility bears interest at a variable rate. The Company estimates interest payments by using the amounts outstanding as ofDecember 31, 2020 and then-current interest rates. There are no debt service requirements over the next twelve months for either the Emmis Convertible Promissory Note or the SG Broadcasting Promissory Note. 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.
INTANGIBLES
As ofDecember 31, 2020 , approximately 43% of our total assets consisted ofFCC licenses. In the case of our radio stations, we would not be able to operate the properties without the relatedFCC license for each property.FCC licenses are renewed every eight years; consequently, we continually monitor the activities of our stations for compliance with regulatory requirements. Historically, all of ourFCC licenses have been renewed (or a waiver has been granted pending renewal) at the end of their respective eight-year periods, and we expect that all of ourFCC licenses will continue to be renewed in the future.
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.
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, particularly since our Senior
Credit Facility is comprised entirely of variable-rate debt.
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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 12 to the consolidated and combined 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 and controlled subsidiaries that are not included in the consolidated and combined financial statements, nor does the Company have any interests in or relationships with any "special-purpose entities" that are not reflected in the consolidated and combined financial statements or disclosed in the Notes to Consolidated and Combined Financial Statements.
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