Mediaco Holding Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 and 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 with SG 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 the FCC; • Pending U.S. regulatory requirements for paying royalties to performing artists; • Industry and economic trends within the U.S. radio industry, generally, and the New York City radio industry, in particular; • Our ability to finance our operations or to obtain financing on terms that are favorable to MediaCo; • 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 the Securities 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 the Securities and Exchange Commission on March 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 in New York City and outdoor advertising businesses geographically focused in the Southeast (Georgia, Alabama, South Carolina and Florida) and the Mid-Atlantic (Kentucky, West Virginia and Ohio) 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. - 19 - The following table summarizes the sources of our revenues for the three months end ed March 3 1 , 202 2 and 2021 . The category “Non t raditional” 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. For the Three Months Ended March 31, (dollars in thousands) 2022 % of Total 2021 % of Total Net revenues: Radio Advertising $ 6,177 53.6 % $ 4,955 50.9 % Outdoor Advertising (1) 3,124 27.1 % 2,972 30.5 % Nontraditional 168 1.5 % 137 1.4 % Digital 730 6.3 % 485 5.0 % Other 1,336 11.5 % 1,194 12.2 % Total net revenues $ 11,535 $ 9,743 (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 The U.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 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, 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 the New York market. Some of our competitors that operate larger station clusters in the New 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 in New York as measured by Miller Kaplan Arase LLP (“Miller Kaplan”), an independent public accounting firm used by the radio industry to compile revenue information, were up 25.4% for the three months ended March 31, 2022, but down 8.7% for the three months ended March 31, 2021, as compared to the same periods of the prior year. During these periods, revenues for our New York cluster were up 24.1% and down 21.0%, respectively. The increases in the three months ended March 31, 2022, as compared to the prior year were largely driven by overall advertising revenues rebounding from the COVID-19 pandemic, in particular sports betting and various state and local departments vaccination education and awareness campaigns. Our stations benefited more than stations 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. 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 or otherwise monetize assets when we believe it is appropriate to do so. Throughout 2021 and into 2022, with the increased availability of vaccines, the U.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 the spread of COVID-19 reaccelerates, or if supply chain disruptions persist, 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. - 20 - 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 ended December 31, 2021, filed with the Securities and Exchange Commission on March 24, 2022. RESULTS OF OPERATIONS Three-Month Periods Ended March 31, 2022 compared to March 31, 2021 Net revenues: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Net revenues: Radio $ 8,113 $ 6,502 $ 1,611 24.8 % Outdoor Advertising 3,422 3,241 181 5.6 % Total net revenues $ 11,535 $ 9,743 $ 1,792 18.4 % Net radio revenues increased for the three-month period ended March 31, 2022, as a result of overall advertising revenues rebounding from the COVID-19 pandemic, in particular various state and local departments vaccination education and awareness campaigns and sports betting. 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 the New York radio market increased 25.4% for the three-month period ended March 31, 2022, as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan were up 24.1% for the three-month period ended March 31, 2022, as compared to the same period of the prior year. Outdoor advertising revenues increased for the three-month period ended March 31, 2022, attributable to overall advertising revenues rebounding 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. Operating expenses excluding depreciation and amortization expense: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Operating expenses excluding depreciation and amortization expense Radio $ 6,623 $ 5,291 $ 1,332 25.2 % Outdoor Advertising 2,709 2,470 239 9.7 % Total operating expenses excluding depreciation and amortization expense $ 9,332 $ 7,761 $ 1,571 20.2 % Radio operating expenses excluding depreciation and amortization expense increased during the three-month period ended March 31, 2022 due to investment in our labor force with a higher focus on sales and digital as well as increases in costs that are commensurate with revenue. Outdoor advertising operating expenses excluding depreciation and amortization are largely fixed in nature; however, the increase in expenses primarily relates to two small acquisitions in the second quarter of 2021. - 21 - Corporate expenses For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Corporate expenses $ 2,487 $ 1,641 $ 846 51.6 % The increase in corporate expenses for the three-month period ended March 31, 2022 relates primarily to personnel costs associated with the build out of the corporate functions that were previously part of the management agreement between the Company and Emmis which ended in November 2021. Depreciation and amortization: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Depreciation and amortization Radio $ 101 $ 191 $ (90 ) (47.1 )% Outdoor Advertising 829 790 39 4.9 % Total depreciation and amortization $ 930 $ 981 $ (51 ) (5.2 )% Radio depreciation and amortization expense decreased due to certain assets becoming fully depreciated in the prior year. Outdoor advertising depreciation and amortization increased due to depreciation expense associated with two small asset acquisitions that closed in the second quarter of the prior year. Loss (gain) on sale of assets: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Loss (gain) on sale of assets Outdoor Advertising $ 18 $ (6 ) $ 24 (400.0 )% Total loss (gain) on sale of assets $ 18 $ (6 ) $ 24 (400.0 )% The loss (gain) on sale of assets relates to the disposal of certain outdoor advertising structures in the normal course of business. Operating (loss) income: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Operating (loss) income Radio $ 1,389 $ 1,020 $ 369 36.2 % Outdoor Advertising (134 ) (13 ) (121 ) 930.8 % All other $ (2,487 ) $ (1,641 ) $ (846 ) (51.6 )% Total operating (loss) income $ (1,232 ) $ (634 ) $ (598 ) (94.3 )% See “Net revenues,” “Operating expenses excluding depreciation and amortization,” and “Corporate expenses” above. Interest expense For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Interest expense $ (2,998 ) $ (2,538 ) $ (460 ) 18.1 % Interest expense increased due to (i) the additional funding from SG Broadcasting during 2021, which took the form of additional loans, (ii) accrued interest on the Emmis Promissory Note and SG Broadcasting Promissory Notes being paid in kind in the fourth quarter of 2021, and (iii) an additional 1% paid in kind interest rate applicable beginning May 19, 2021 as a result of Amendment No. 4 to the senior credit facility. - 22 - P rovision for income taxes: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Provision for income taxes $ 63 $ 81 $ (18 ) 100.0 % Our provision for income taxes tax is primarily due to the recognition of additional valuation allowance. Consolidated net loss: For the Three Months Ended March 31, (dollars in thousands) 2022 2021 $ Change % Change Consolidated net loss $ (4,293 ) $ (3,253 ) $ (1,040 ) 32.0 % See “Net revenues,” “Operating expenses excluding depreciation and amortization,”, “Corporate expenses,” and “Interest expense” above. LIQUIDITY AND CAPITAL RESOURCES Our primary sources of liquidity are cash provided by operations, cash available through 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 At March 31, 2022, we had cash and cash equivalents of $8.8 million and net working capital of $3.5 million . At December 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 is primarily due to an increase in accrued interest due to the timing of annual interest paid in kind on the Emmis Convertible Promissory Note and the promissory notes due to SG Broadcasting, an increase in the current portion of long-term debt, cash paid for capital expenditures, and cash paid for the settlement of tax withholding obligations. At March 31, 2022, we had $68.5 million of borrowings outstanding under the Senior Credit Facility, of which $3.7 million is current. The borrowing rate under our Senior Credit Facility was 9.5% at March 31, 2022. Additionally, at March 31, 2022, we had $6.2 million and $27.6 million of promissory notes outstanding to Emmis and SG Broadcasting, respectively, all of which is classified as long-term. The debt service requirements of MediaCo over the next twelve-month period are expected to be $10.4 million related to our Senior Credit Facility ($3.7 million of principal repayments and $6.7 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 of March 31, 2022 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. Cash flows provided by operating activities were $4.7 million and $0.6 million for the three months ended March 31, 2022, and 2021, respectively. The increase was mainly attributable to significant collections in accounts receivable and increased revenues as we recover from the COVID-19 pandemic. Cash flows used in investing activities were $0.8 million for the three months ended March 31, 2022, attributable to capital expenditures related to a new digital platform project. Cash flows used in investing activities were $0.1 million for the three months ended March 31, 2021, attributable to capital expenditures, net of proceeds from the sale of property and equipment. Cash flows used in financing activities were $1.2 million for the three months ended March 31, 2022, attributable to settlement of tax withholding obligations. Cash flows used in financing activities were $0.2 million for the three months ended March 31, 2021, attributable to settlement of tax withholding obligations.