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 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 acquisitions, including the recent transactions with Estrella Broadcasting, Inc. and any future acquisitions; • 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 April 1, 2024 . 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, as well as the assets acquired in April 2024 in our transactions, with Estrella Broadcasting, Inc. These assets include Estrella Media’s network, content, digital, and commercial operations. Among the Estrella Media brands joining MediaCo are the EstrellaTV network and its influential linear and digital video content business, and Estrella Media’s expansive digital channels, including its four FAST channels – EstrellaTV, Estrella News, Cine EstrellaTV, and Estrella Games – and the EstrellaTV app. 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 stations’ ability to attract audiences in demographic groups targeted by their advertisers. The Nielsen Company generally measures station ratings weekly for markets measured by the Portable People Meter™. 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, 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. -17- Table of Contents The following table summarizes the sources of our revenues from continuing operations for the three months ended March 31, 2024 and 2023. The category “Other” includes, among other items, revenues related to network revenues and barter. (dollars in thousands) Three Months Ended March 31, 2024 % of Total 2023 % of Total Net revenues: Spot Radio Advertising $ 4,348 64.8 % $ 4,769 65.0 % Digital 862 12.9 % 974 13.3 % Syndication 598 8.9 % 605 8.2 % Events and Sponsorships 121 1.8 % 156 2.1 % Other 777 11.6 % 831 11.4 % Total net revenues $ 6,706 $ 7,335 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, ratings 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 The U.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 few years, particularly in new automobiles. It is unclear what impact HD Radio will have on the markets in which we operate. Our stations have also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by developing highly interactive websites with content that engages our listeners, deploying mobile applications and streaming our content, and harnessing the power of digital video on our websites and YouTube channels. 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 4.5% for the three months ended March 31, 2024, as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan were down 6.6%, as compared to the same period of the prior year. The decreases for our New York Cluster were largely driven by lower spend in the media and financial sectors. MediaCo relies on events to help bolster revenue and operating performance. One of the key events is Summer Jam that occurs in June of each year. Summer Jam is highly reliant on tickets sales and sponsorships to drive revenue. Tickets sales are dependent on the performers and the venue chosen, which also impacts sponsorship revenue. MediaCo is currently estimating risk around the year’s Summer Jam revenue with a potential revenue decline from 2023 in the range of $3.0 million to $3.6 million. While this is offset by lower estimated operating costs, we are currently estimating operating profit could decline from 2023 in the range of $1.5 million to $2.1 million. 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. 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. -18- Table of Contents CRITICAL ACCOUNTING ESTIMATES 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, 2023, filed with the Securities and Exchange Commission on April 1, 2024. RESULTS OF OPERATIONS Three-Month Periods Ended March 31, 2024 compared to March 31, 2023 The following discussion refers to the Company’s continuing operations. See Note 2 — Discontinued Operations in our condensed consolidated financial statements included elsewhere in this report for additional information. Net revenues: Three Months Ended March 31, 2024 (dollars in thousands) 2024 2023 $ Change % Change Net revenues $ 6,706 $ 7,335 $ (629) (8.6) % Net revenues decreased for the three months ended March 31, 2024 as lower spend in the media and financial sectors was offset by stronger telecommunications and healthcare spend. 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 4.5% for the three-month period ended March 31, 2024, as compared to the same period of the prior year. Our gross revenues reported to Miller Kaplan were down 6.6% for the three-month period ended March 31, 2024 , as compared to the same period of the prior year. Operating expenses excluding depreciation and amortization expense: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Operating expenses excluding depreciation and amortization expense $ 6,650 $ 7,237 $ (587) (8.1) % Operating expenses excluding depreciation and amortization expense decreased for the three months ended March 31, 2024 compared to the same period in the prior year due to lower salary costs, lease expense, music license fees, and professional service fees. Corporate expenses: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Corporate expenses $ 3,390 $ 1,884 $ 1,506 79.9 % Corporate expenses increased for the three months ended March 31, 2024 due to higher professional service fees driven by the Estrella transaction, partially offset by lower salary and stock based compensation expenses. Depreciation and amortization: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Depreciation and amortization $ 133 $ 159 $ (26) (16.4) % Depreciation and amortization expense decreased for the three months ended March 31, 2024 due to certain assets becoming fully depreciated in the prior year. -19- Table of Contents Gain on disposal of assets: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Gain on disposal of assets $ — $ (39) $ 39 — % The gain on disposal of assets for the three months ended March 31, 2023 related to the sale of vehicles in the first quarter of 2023. There were no such disposals in the current year. Operating loss: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Operating loss $ (3,467) $ (1,906) $ (1,561) 81.9 % See “Net revenues,” “Operating expenses excluding depreciation and amortization,” "Depreciation and amortization," "Gain on disposal of assets," and “Corporate expenses” above. Interest expense, net: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Interest expense, net $ (136) $ (103) $ (33) 32.0 % Interest expense, net increased for the three months ended March 31, 2024 due to accrued interest on the Emmis convertible promissory note being paid in kind in the fourth quarter of 2023, which increased the principal balance outstanding. Provision for income taxes: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Provision for income taxes $ 84 $ 75 $ 9 12.0 % Our provision for income taxes tax is primarily due to changes in deferred tax liabilities. Consolidated net loss: (dollars in thousands) Three Months Ended March 31, 2024 2024 2023 $ Change % Change Consolidated net loss $ (3,677) $ (2,107) $ (1,570) 74.5 % See “Net revenues,” “Operating expenses excluding depreciation and amortization,” "Depreciation and amortization," "Gain on disposal of assets," “Corporate expenses,” and “Interest expense” above. 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. At March 31, 2024 , we had cash, cash equivalents and restricted ca sh of $7.2 million and negative working capital of $(1.4) million . At December 31, 2023, we had cash, cash equivalents and restricted cash of $7.1 million and net working capital of $2.2 million. The decrease in net working capital was driven by accrued expenses related to the Estrella transaction. At March 31, 2024, we had $6.5 million of promissory notes outstanding to Emmis under the Emmis Convertible Promissory Note, all of which was classified as current and has debt service requirements of $7.3 million over the next twelve months. 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. Cash flows provided by continuing operating activities were $0.4 million compared to cash flows provided by $0.8 million for the three months ended March 31, 2024 and 2023, respectivel y. The decrease was mainly attributable to changes in working capital. -20- Table of Contents Cash flows used in continuing investing activities were $0.2 million for the three months ended March 31, 2024, attributable to capital expenditures related to a new digital platform project and our build out of our new space for radio operations and corporate offices. C ash flows used in continuing investing activities were $0.5 million for the three months ended March 31, 2023, attributable to purchases of internally-created software. Cash flows used in continuing financing activities were $0.1 million for the three months ended March 31, 2024, attributable to repurchases of our Class A common stock and settlement of tax withholding obligations. Cash flows used in continuing financing activities were $0.7 million for the three months ended March 31, 2023, attributable to repurchases of our Class A common stock and settlement of tax withholding obligations. In the 2023 Form 10-K filed on April 1, 2024, the Company stated that it had substantial doubt about its ability to continue as a going concern within one year after the date the financial statements were issued. As a result of the consummation of the transactions contemplated by the asset purchase agreement and related debt and equity issuances discussed in Note 10 to these condensed consolidated financial statements, the conditions described in the 2023 Form 10-K that raised substantial doubt about whether the Company would continue as a going concern no longer exist. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As an emerging growth company, we are not required to provide this information.