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Item 7. Management’s Discussion and Analysis

2024-04-01 compared with 2023-03-31 · 67 added, 42 removed, 134 unchanged (45% of the section changed)

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and its subsidiaries (collectively, “MediaCo” or the “Company”).

On December 9, 2022, Fairway Outdoor LLC, FMG Kentucky, LLC and FMG Valdosta, LLC (collectively, "Fairway”), all of which are wholly owned direct and indirect subsidiaries of MediaCo, entered into an Asset Purchase Agreement (the “Purchase Agreement”), with The Lamar Company, L.L.C., a Louisiana limited liability company (the “Purchaser”).

On December 9, 2022, Fairway Outdoor LLC, FMG Kentucky, LLC and FMG Valdosta, LLC (collectively, “Fairway”), all of which are wholly owned direct and indirect subsidiaries of MediaCo, entered into an Asset Purchase Agreement (the “Purchase Agreement”), with The Lamar Company, L.L.C., a Louisiana limited liability company (the “Purchaser”), pursuant to which we sold our Fairway outdoor advertising business to 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 through December 9, 2022 as the sale represented a strategic shift in our business that had a major effect on our operations and financial results.

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 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.

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The following table summarizes the sources of our revenues for the years ended December 31, 2023, and 2022.

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.

The category “Other” includes barter revenue, network revenue, talent fee revenue and other revenue .

Year Ended December 31,

Net revenues:

Radio Advertising $ 25,790 66.8 % $ 30,012 71.9 %

Nontraditional 3,973 10.3 % 4,864 11.7 %

Spot Radio Advertising $ 18,650 57.6 % $ 25,790 66.8 %

Digital 3,677 11.4 % 4,713 12.2 %

Syndication 2,427 7.5 % 1,891 4.9 %

Events and Sponsorships 5,766 17.8 % 3,380 8.8 %

Other 1,871 5.7 % 2,821 7.3 %

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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.

We are participating 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.

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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 1.6% for the year ended December 31, 2022, and up 41.2% for the year ended December 31, 2021, as compared to the same periods of the prior year.

During these periods, revenues for our New 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.

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 down 3.3% for the year ended December 31, 2023, and up 1.6% for the year ended December 31, 2022, as compared to the same periods of the prior year.

During these periods, revenues for our New York cluster were down 18.3% and down 8.5%, 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 and lower casino/gambling spend as the regulatory environment in New York as made it less attractive in the state.

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, the U.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.

MediaCo has been impacted by the rising interest rate environment in the financial markets.

While no longer impacting our current borrowings, which are fixed rate, the cost of any potential future borrowings has been increasing.

At this time, we do not anticipate interest rates to decline.

CRITICAL ACCOUNTING ESTIMATES

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Net revenues $ 32,391 $ 38,595 $ (6,204) (16.1) %

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.

Net radio revenues decreased due to a substantial declines in healthcare spend as COVID-19 vaccination awareness campaigns slowed as well as online gambling, automotive and wireless advertising spend.

These decreases were partially offset by stronger ticket sales and broadcast sponsorships of our annual Summer Jam concert, as well as stronger tourism and live event advertising spend as the restrictions on travel, social gatherings, and business activities have continued to ease.

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 1.6% for the year ended December 31, 2022, as compared to the prior year.

Miller Kaplan reported gross revenues for the New York radio market decreased 3.3% for the year ended December 31, 2023, as compared to the prior year.

Our gross revenues reported to Miller Kaplan were down 18.3% for the year ended December 31, 2023, as compared to the prior year.

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(Dollars in thousands) 2023 2022 $ %

Operating expenses excluding depreciation and amortization expense:

Operating expenses excluding depreciation and amortization expenses:

$ 32,633 $ 32,847 $ (214) (0.7) %

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.

Radio operating expenses excluding depreciation and amortization expense decreased during the year ended December 31, 2023 as lower Summer Jam production costs, ratings costs, and music license fees were partially offset by higher noncash lease expense related to the new office lease that commenced in February 2023 and professional service fees, which were mainly incurred during the first quarter.

Corporate expenses:

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Corporate expenses $ 5,451 $ 6,463 $ (1,012) (15.7) %

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.

The decrease in corporate expenses for the year ended December 31, 2023 was primarily due lower stock based compensation expense driven by higher stock based bonuses awarded in the prior year, partially offset by higher professional service fees.

Depreciation and amortization:

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Depreciation and amortization $ 568 $ 666 $ (98) (14.7) %

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):

Radio depreciation and amortization expense decreased compared to the prior year due to certain assets becoming fully depreciated in the prior year, partially offset by intangible software costs related to our updated websites and mobile applications placed in service in the third quarter of 2022.

Loss on disposal of assets:

Year ended December 31, Change

(Dollars in thousands) 2023 2022 $ %

Loss on disposal of assets $ 526 $ 5 $ 521 10,420.0 %

Loss on disposal of assets increased compared to the prior year primarily due to the disposal of certain intangible assets related to our websites and a generator at our prior location upon the move to our new location for our radio operations and corporate offices in the current year.

Operating (loss) income:

See “Net revenues,” “Operating expenses excluding depreciation and amortization,” and “Corporate expenses” above.

Year ended December 31, Change

(Dollars in thousands) 2023 2022 $ %

Operating (loss) income $ (6,787) $ (1,386) $ (5,401) 389.7 %

See “Net revenues,” “Operating expenses excluding depreciation and amortization,” “Corporate expenses,” “Depreciation and amortization,” and “Loss on disposal of assets” above.

Interest expense:

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Interest expense $ (426) $ (6,980) $ 6,554 (93.9) %

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.

Interest expense decreased due to the pay down in December 2022 of the senior credit facility, the conversion in July 2022 of the outstanding principal and accrued but unpaid interest of the SG Broadcasting promissory notes into the Company’s Class A common stock, and the partial conversions in August and December 2022 of $0.9 million of the outstanding principal of the Emmis convertible promissory notes into shares of the Company’s Class A common stock, as well as a lower interest rate on the outstanding balance of the Emmis convertible promissory note after the pay down of the senior credit facility.

This was partially offset by accrued interest on the Emmis convertible promissory note being paid in kind in the fourth quarter of 2022, which increased the principal balance for the current year.

Other income:

Year ended December 31, Change

(Dollars in thousands) 2023 2022 $ %

Other income $ 100 $ 125 $ (25) (20.0) %

Other income decreased slightly compared to the prior year as income from the transaction services agreement (“TSA”) related to the Fairway sale recorded in the current year were more than offset by additional costs incurred to fulfill the TSA and various other expenses.

Loss on debt extinguishment:

Year ended December 31, Change

(Dollars in thousands) 2023 2022 $ %

Loss on debt extinguishment $ — $ (1,218) $ 1,218 (100.0) %

Loss on debt extinguishment in the prior year related to the pay down in December 2022 of the senior credit facility.

There were no such transactions in the current year.

Provision for income taxes:

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See Note 12 — Income Taxes in our consolidated financial statements included elsewhere in this report.

Consolidated net income (loss):

Consolidated net (loss) income:

Year ended December 31, Change

(Dollars in thousands) 2023 2022 $ %

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 in December 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.

Consolidated net (loss) income $ (7,631) $ 30,914 $ (38,545) (124.7) %

The decrease in consolidated net (loss) income was due to the gain on sale of Fairway in the prior year and increased operating loss from continuing operations.

See “Net revenues,” “Operating expenses excluding depreciation and amortization,”, “Corporate expenses,” “Interest expense,” “Loss on debt extinguishment,” 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

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Our primary uses of capital have been, and are expected to continue to be, capital expenditures, working capital, and acquisitions.

Going Concern

The accompanying consolidated 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 (April 1, 2024).

Management considered the Company’s ability to forecast future cash flows, current financial condition, sources of liquidity and debt service obligations due on or before April 1, 2025.

The Company has experienced downturns in revenues and profitability and expects these to continue 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.

At December 31, 2023, we had $6.5 million outstanding to Emmis under the Emmis Convertible Promissory Note (as defined in Note 13), all of which is classified as current and has debt service obligations of approximately $7.1 million due under its Emmis Convertible Promissory Note from April 1, 2024 (the date of issuance of these financial statements) through April 1, 2025.

As a result of this debt service obligation to Emmis, management anticipates the Company will be unable to meet its liquidity needs for the next twelve months with cash and cash equivalents on hand and projected cash flows from operations.

As a result, there is substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued.

Management is prepared to implement additional cost cutting measures, as necessary, and intends to seek additional borrowings to meet its debt service obligations, if needed.

While the Company has been successful in obtaining additional liquidity in the past, no assurances can be made that the Company will receive such liquidity in the future.

At December 31, 2023 we had cash, cash equivalents and restricted cash of $7.1 million and net working capital of $2.2 million.

At December 31, 2022, we had cash, cash equivalents and restricted cash of $15.3 million and net working capital of $13.3 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.

At December 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.

The decrease in net working capital was driven by payment of income taxes related to the gain on sale of Fairway and lower accounts receivable as sales declined in the current year.

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 ended December 31, 2022 compared to cash used in continuing operating activities of $0.6 million for the year ended December 31, 2021.

The increase in operating cash flows was mainly attributable to improved collections of accounts receivable.

Cash used in continuing operating activities was $5.6 million for the year ended December 31, 2023 compared to cash provided by continuing operating activities of $2.3 million for the year ended December 31, 2022.

The decrease was mainly attributable to payments of income taxes, lower collections of accounts receivable compared to the prior year, and lower accounts payable in the current year due to timing of payments.

Investing Activities

Cash provided by continuing investing activities was $77.6 million for the year ended December 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 ended December 31, 2021 was attributable to capital expenditures.

Cash used in continuing investing activities was $1.7 million for the year ended December 31, 2023, primarily attributable to capital expenditures related to a new digital platform project and the build out of our new space for radio operations and corporate offices.

Cash provided by investing activities of $77.6 million for the year ended December 31, 2022 was primarily attributable to the proceeds from the sale of Fairway, partially offset by capital expenditures.

Financing Activities

Cash used in continuing financing activities was $70.1 million for the year ended December 31, 2022, was due to the pay down of outstanding long-term debt of $68.6 million and settlement of tax withholding obligations of $1.3 million.

Cash provided by continuing financing activities was $0.3 million for the year ended December 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.

Cash used in continuing financing activities was $1.2 million for the year ended December 31, 2023, primarily attributable to repurchases of our Class A common stock of $0.8 million and settlement of tax withholding obligations of $0.4 million.

Cash used in continuing financing activities was $70.1 million for the year ended December 31, 2022, primarily attributable to the pay down of outstanding long-term debt of $68.6 million and settlement of tax withholding obligations of $1.3 million.

Our results of operations are usually subject to seasonal fluctuations, which result in higher second quarter revenues and operating income.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis