What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-03-16 compared with 2022-03-16 · 85 added, 73 removed, 241 unchanged (40% of the section changed)

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Station operating income is not a measure of liquidity or of performance in accordance with GAAP, and should be viewed as a supplement to, and not a substitute for, our results of operations presented on a GAAP basis.

COVID-19 Impact and Response

The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected business, economies and financial markets worldwide.

During 2021, the effects of the COVID-19 pandemic and related actions by governments to attempt to contain the spread of the virus have continued to impact our business.

Despite the development of vaccines and more effective treatments for the physical impacts of COVID-19, there are no reliable estimates of how long the COVID-19 pandemic, and its negative effect on our business, will last.

Therefore, the unpredictability of the current economic and public health conditions continues.

However, all of our markets are functioning at effectively full capacity, subject to ongoing health and safety protocols, which vary from state-to-state and we have continued to increase the number of our non-spot events again.

As we exit 2021, we remain optimistic about future advertising revenue.

We are a broadcast company primarily engaged in acquiring, developing and operating broadcast properties.

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Most advertising contracts are short-term and generally run for a few weeks only.

The majority of our revenue is generated from local advertising, which is sold primarily by each radio markets’ sales staff.

The majority of our revenue is generated from local advertising, which is sold primarily by each radio market’s sales staff.

For the years ended December 31, 2022, 2021 and 2020, approximately 89%, 89% and 84%, respectively, of our radio stations’ gross revenue was from local advertising.

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Advertising expenditures, our primary source of revenue, generally have been lowest during the winter months, which include the first quarter of each year.

Political revenue was significantly lower in 2021 and 2019 due to the decreased number of national, state, and local elections in most of our markets as compared to 2020.

Political revenue was significantly higher in 2022 and 2020 due to the increased number of national, state, and local elections in most of our markets as compared to 2021.

Our gross political revenue for the years ended December 31, 2022, 2021 and 2020 was $3,625,000, $1,780,000 and $6,890,000, respectively.

We expect political revenue in 2022 to increase over 2021 levels as a result of more elections in 2022 at the local, state and national levels.

We expect political revenue in 2023 to decrease from 2022 levels as a result of less elections in 2023 at the local, state and national levels.

Our net operating revenue, station operating expense and operating income vary from market to market based upon the market’s rank or size which is based upon population and the available radio advertising revenue in that particular market.

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Des Moines, Iowa;

Milwaukee, Wisconsin, Norfolk, Virginia and Portland, Maine markets, when combined, represented approximately 39%, 40%, and 39%, respectively, of our consolidated net operating revenue.

Milwaukee, Wisconsin;

Norfolk, Virginia and Portland, Maine markets, when combined, represented approximately 38%, 39%, and 40%, respectively, of our consolidated net operating revenue.

An adverse change in any of these radio markets or relative market position in those markets could have a significant impact on our operating results as a whole.

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Interest income

Income (loss) before income tax expense

Income (loss) before income tax expense (benefit)

Income tax provision

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For the year ended December 31, 2022, consolidated net operating revenue was $114,893,000 compared with $108,343,000 for the year ended December 31, 2021, an increase of $6,550,000 or 6.0%.

The increase in revenue in 2022 was due to increases in gross local revenue of $2,284,000, gross political revenue of $1,846,000, non-spot revenue of $1,689,000, gross interactive revenue of $1,577,000, and gross barter revenue of $302,000 partially offset by a decrease in gross national revenue of $697,000 and an increase in agency commissions of $598,000 from 2021.

The most significant increases in gross local revenue and in agency commissions occurred in our Asheville, North Carolina;

Charleston, South Carolina;

Ithaca, New York;

and Manchester, New Hampshire markets.

The gross political revenue increased due to an increase in the number of national, state and local elections.

The increase in non-spot revenue is primarily due to us hosting more events again in 2022.

The markets with the most significant increases in 2022 in non-spot events were Charleston, South Carolina;

Clarksville, Tennessee;

Hilton Head, South Carolina;

Jonesboro, Arkansas;

Milwaukee, Wisconsin;

Portland, Maine and Yankton, South Dakota.

The increase in gross interactive results is primarily due to an increase in our streaming and website content revenue.

The decrease in gross national revenue was attributable to decreases at the majority of markets due to the focus on local market advertisers offset by increases at our Columbus, Ohio;

Manchester, New Hampshire;

and Portland, Maine markets.

Station operating expense was $87,537,000 for the year ended December 31, 2022, compared with $83,245,000 for the year ended December 31, 2021, an increase of $4,292,000 or 5.2%.

The increase in operating expenses was primarily a result of increases in sales survey expenses, compensation related expenses, commission expense, bad debt expenses, barter expenses, music licensing fees, utilities, merchant account fees, and promotional expenses of $1,407,000, $965,000, $840,000, $352,000, $346,000, $311,000, $286,000, $153,000 and $113,000, respectively, partially offset by decreases in healthcare costs of $530,000 from 2021.

We had operating income for the year ended December 31, 2022 of $13,070,000 compared to $15,051,000 for the year ended December 31, 2021, a decrease of $1,981,000.

The decrease was a result of the increase in net operating revenue partially offset by the increase in station operating expense, described above, a decrease in other operating (income) expense of $21,000 offset by an increase in our corporate general and administrative expenses of $4,260,000 or 42.4%.

The increase in corporate general and administrative expenses was primarily attributable to expenses under the employment agreement we had with our founder and CEO, Mr.

Christian upon his death of which $3,900,000 was recorded in the third quarter of 2022.

In addition, we had an increase in legal expenses, and transportation related costs of $207,000, and $156,000, respectively, from 2021.

For our other operating (income) expense, net in 2022 we recorded a gain on the sale of fixed assets of $14,000 compared to a loss on the sale of fixed assets of $7,000 in 2021.

We generated net income of $9,202,000 ($1.52 per share on a fully diluted basis) during the year ended December 31, 2022, compared to $11,157,000 ($1.85 per share on a fully diluted basis) for the year ended December 31, 2021, a decrease of $1,955,000.

The decrease in net income is due to the decrease of operating income, described above, an increase income taxes of $540,000, offset by a decrease in interest expense of $154,000, an increase in interest income of $394,000 and an increase in other income of $18,000.

The decrease in interest expense is due to no longer having any debt outstanding, after paying off the remaining balance in the fourth quarter of 2021.

The increase in interest income is related to our short-term investments as described in footnote 1 (Summary of Significant Accounting Policies).

The increase in other income is primarily due to insurance proceeds for weather-related damages of $535,000 and reimbursements from the FCC related to their spectrum auction of $116,000 in 2022 versus insurance proceeds in 2021 of $589,000 and other gains of $45,000 in 2021 as described in footnote 16 (Other Income).

The increase in our income tax expense is due to the permanent difference between book and taxable income related to the compensation paid to our founder and CEO as described above and in footnote 6 (Income Taxes).

Year Ended December 31, 2021 Compared to Year Ended December 31, 2020

For the year ended December 31, 2021, consolidated net operating revenue was $108,343,000 compared with $95,813,000 for the year ended December 31, 2020, an increase of $12,530,000 or 13.1%.

The increase in revenue in 2021 was attributable to lower-than-normal revenue in 2020 due to the COVID-19 pandemic.

We had increases in gross local revenue of $12,209,000, gross interactive revenue of $2,921,000, non-spot gross revenue of $1,484,000, gross national revenue (excluding national political revenue) of $819,000, and gross barter revenue of $236,000 partially offset by a decrease in gross political revenue of $5,104,000 from 2020.

The increase in gross local, gross national and gross barter revenue occurred in the majority of our markets as a result of the impact of the COVID-19 pandemic and the disruption to our advertisers’ businesses in 2020, in contrast with the economic recovery that has begun to take place in 2021.

The increase in gross local, gross national and gross barter revenue occurred in the majority of our markets as a result of the impact of the COVID-19 pandemic and the disruption to our advertiser’s businesses in 2020, in contrast with the economic recovery that had begun to take place in 2021.

The increase in gross interactive revenue was primarily due to an increase in our streaming and website content revenue.

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The decrease in corporate general and administrative expenses was primarily attributable to decreases in non-cash compensation related expenses, legal expenses, and contribution expenses of $886,000, $323,000, and $158,000 respectively.

We generated net income of $11,157,000 ($1.85 per share on a fully diluted basis) during the year ended December 31, 2021, compared to a net loss of $1,913,000 ($ (0.32) per share on a fully diluted basis) for the year ended December 31, 2020, an increase of $13,070,000.

The increase in net income is due to the increase of operating income, described above, a decrease in interest expense of $56,000 and an increase in other income of $401,000, partially offset by an increase in income taxes of $3,555,000, and a decrease in interest income of $132,000.

The decrease in interest expense is due to the decrease in our debt outstanding partially offset by an increase in our interest rates.

The increase in other income is primarily due to insurance proceeds for weather-related damages.

The increase in our income tax expense is due to the increase in income before income taxes.

Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

For the year ended December 31, 2020, consolidated net operating revenue was $95,813,000 compared with $123,072,000 for the year ended December 31, 2019, a decrease of $27,259,000 or 22.1%.

The decrease in revenue was primarily due to the COVID-19 pandemic and various governmental shutdowns within the markets that we operate and the country as a whole.

We had decreases in gross local revenue of $27,048,000, gross national revenue (excluding national political revenue) of $4,197,000, non-spot gross revenue of $1,991,000, and gross barter revenue of $1,670,000 partially offset by an increase in gross political revenue of $5,996,000 and a decrease in agency commissions of $2,204,000 from 2019.

The decrease in gross local, national and barter revenue was at the majority of our markets.

The decrease in non-spot gross revenue was primarily due to the decreases in the number of events being held due to the COVID-19 pandemic.

The increase in gross political revenue was due to more national, state and local elections in 2020 versus 2019, specifically in our Charleston, South Carolina;

Des Moines, Iowa;

Milwaukee, Wisconsin and Portland, Maine markets.

The decrease in agency commissions was due the decrease in gross revenue.

Station operating expense was $81,586,000 for the year ended December 31, 2020, compared with $92,692,000 for the year ended December 31, 2019, a decrease of $11,106,000 or 12.0%.

The decrease in operating expenses was primarily a result of decreases in commission expense, sales ratings survey expenses, compensation related expenses, barter expenses, music licensing fees, advertising and promotional expenses, payroll tax related expenses, travel expenses and overall expense reduction of $2,727,000, $2,640,000, $2,283,000, $1,603,000, $575,000, $562,000, $463,000, $257,000 and $987,000, respectively, partially offset by an increase in healthcare costs of $991,000 from 2019.

We had an operating loss for the year ended December 31, 2020 of $1,249,000 compared to operating income of $18,808,000 for the year ended December 31, 2019, a decrease of $20,057,000.

The decrease was a result of the decrease in net operating revenue partially offset by the decrease in station operating expense, described above, and a non-cash impairment charge of $5,149,000, and an increase in our corporate general and administrative expenses of $114,000 or 1.0%, offset by an increase in other operating income of $1,359,000 due to a gain on the sale of land and a building at one of our tower sites in Bellingham, Washington for $1,400,000.

The increase in corporate general and administrative expenses was primarily attributable to increases in legal expenses, contribution expenses, non-cash compensation related expenses, and insurance expenses of $364,000, $151,000, $91,000, $72,000, respectively, partially offset by decreases in franchise tax expenses and travel-related expenses of $321,000 and $199,000, respectively.

We generated a net loss of $1,913,000 ($(0.32) per share on a fully diluted basis) during the year ended December 31, 2020, compared to net income of $13,279,000 ($2.23 per share on a fully diluted basis) for the year ended December 31, 2019, a decrease of $15,192,000.

The decrease in net income is due to the decrease of operating income, described above, a decrease in interest income of $462,000, partially offset by a decrease in income taxes of $4,715,000, a decrease in interest expense of $395,000 and an increase in other income of $217,000 due to insurance proceeds for weather-related damages.

The decrease in interest expense is due to the decrease in our debt outstanding partially offset by an increase in our interest rates.

The decrease in our income tax expense is due to the decrease in income before income taxes.

We generated net income of $11,157,000 ($1.85 per share on a fully diluted basis) during the year ended

December 31, 2021, compared to a net loss of $1,913,000 ($ (0.32) per share on a fully diluted basis) for the year ended December 31, 2020, an increase of $13,070,000.

The increase in net income was due to the increase of operating income, described above, a decrease in interest expense of $56,000 and an increase in other income of $401,000, partially offset by an increase in income taxes of $3,555,000, and a decrease in interest income of $132,000.

The decrease in interest expense was due to the decrease in our debt outstanding partially offset by an increase in our interest rates.

The increase in other income was primarily due to insurance proceeds for weather-related damages.

The increase in our income tax expense was due to the increase in income before income taxes.

Liquidity and Capital Resources

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On November 1, 2021, we elected to further reduce our Revolving Credit Facility to $50 million.

On December 19, 2022, we entered into a Third Amendment to our Credit Facility, (the “Third Amendment”), which extended the maturity date to December 19, 2027, reduced the lenders to JPMorgan Chase Bank, N.A., and the Huntington National Bank, established an interest rate equal to the secured overnight financing rate (“SOFR”) as administered by the SOFR Administrator (currently established as the Federal Reserve Bank of New York) as the interest base and increased the basis points.

We have pledged substantially all of our assets (excluding our FCC licenses and certain other assets) in support of the Credit Facility and each of our subsidiaries has guaranteed the Credit Facility and has pledged substantially all of their assets (excluding their FCC licenses and certain other assets) in support of the Credit Facility.

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As a result of the Second Amendment, the Company incurred an additional $120,000 of transaction fees related to the Credit Facility that were capitalized.

As a result of the Third Amendment, the Company incurred an additional $161,000 of transaction fees related to the Credit Facility that were capitalized.

The cumulative transaction fees are being amortized over the remaining life of the Credit Facility.

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to LIBOR (0.101% at December 31, 2021), plus 1% to 2% or the base rate plus 0% to 1%.

The spread over LIBOR and the base rate vary from time to time, depending upon our financial leverage.

As previously noted, the May 11, 2020 amendment to the Credit Facility includes an alternative to LIBOR in the event LIBOR is no longer available.

Interest rates under the Credit Facility are payable, at our option, at alternatives equal to SOFR (4.3% at December 31, 2022), plus 1% to 2% or the base rate plus 0% to 1%.

The spread over SOFR and the base rate vary from time to time, depending upon our financial leverage.

Letters of credit issued under the Credit Facility will be subject to a participation fee (which is equal to the interest rate applicable to Eurocurrency Loans, as defined in the Credit Agreement) payable to each of the Lenders and a fronting fee equal to 0.25% per annum payable to the issuing bank.

We also pay quarterly commitment fees of 0.2% to 0.3% per annum on the unused portion of the Revolving Credit Facility.

Under the Third Amendment, we now pay quarterly commitment fees of 0.25% per annum on the used portion of the Credit Facility.

We previously paid quarterly commitment fees of 0.2% to 0.3% per annum on the unused portion of the Credit Facility.

The Credit Facility contains a number of financial covenants (all of which we were in compliance with at December 31, 2022) which, among other things, require us to maintain specified financial ratios and impose certain limitations on us with respect to investments, additional indebtedness, dividends, distributions, guarantees, liens and encumbrances.

On October 27, 2021, we used $10 million from funds generated by operations to voluntarily pay down the remaining amount on our Revolving Credit Facility.

On June 7, 2019, we used $5,000,000 from funds generated by operations to voluntarily pay down a portion of our Revolving Credit Facility.

On February 4, 2019, we used $5,000,000 from funds generated by operations to voluntarily pay down a portion of our Revolving Credit Facility, which was presented in the current portion of long-term debt in our balance sheet at December 31, 2018.

After we paid down our debt and reduced our Revolving Credit Facility as noted above, we had approximately $50 million of unused borrowing capacity under the Revolving Credit Facility at December 31, 2022.

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During the year ended December 31, 2022, approximately 6,000 shares were retained for payment of withholding taxes for $147,000 related to the vesting of restricted stock.

Given the unprecedented uncertainty surrounding the COVID-19 virus and the resulting economic issues we have halted the directions for any additional buybacks under our plan.

Given the unprecedented uncertainty surrounding the COVID-19 virus and the resulting economic issues we halted the directions for any additional buybacks under our plan in 2020.

We continue to monitor economic conditions to determine if and when it makes sense to make additional buybacks under our plan.

Our capital expenditures, exclusive of acquisitions, for the year ended December 31, 2022 were $5,994,000 ($3,969,000 in 2021).

We anticipate capital expenditures in 2023 to be approximately $5.0 million to $5.5 million, which we expect to finance through funds generated from operations.

On July 12, 2021, we entered into an agreement to acquire WIZZ-AM and a translator from P.

Radio for $61,800 of which $5,000 was paid in 2021 and the remainder was paid on April 6, 2022 when we closed on the transaction.

Management attributes the goodwill recognized in the acquisition to the power of the existing brands in the Greenfield, Massachusetts market as well as synergies and growth opportunities expected through the combination with the Company’s existing stations.

The translators are start-up stations and therefore, have no pro forma revenue and expenses.

On January 8, 2021, we closed on an agreement to purchase WBQL and W288DQ from Consolidated Media, LLC, for an aggregate purchase price of $175,000, of which $25,000 was paid in 2020 and the remaining $150,000 paid in 2021.

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The gain is recorded in the other operating (income) expense, net in the Company’s Consolidated Statements of Income.

On January 9, 2019, we closed on an agreement to purchase WPVQ-AM and W222CH from County Broadcasting Company, LLC for an aggregate purchase price of $210,000 using funds generated from operations.

On December 7, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share and a special cash dividend of $2.00 per share on its Classes A Common Stock.

This dividend, totaling approximately $13,800,000, was paid on January 13, 2023 to shareholders of record on December 21, 2022 and is recorded in dividends payable in our Consolidated Balance Sheet at December 31, 2022.

On September 20, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share and a special cash dividend of $2.00 per share on its Classes A Common Stock.

This dividend, totaling approximately $13,600,000, was paid on October 21, 2022 to shareholders of record on October 3, 2022.

On June 6, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.20 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $1,200,000, was paid to our transfer agent on June 29, 2022.

The dividend was paid by our transfer agent on July 1, 2022 to shareholders of record on June 13, 2022.

On March 1, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.16 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $970,000, was paid on April 8, 2022 to shareholders of record on March 21, 2022.

On December 14, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.16 per share and special cash dividend of $0.50 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $3,988,000, was paid on January 14, 2022 to shareholders of record on December 27, 2021 and was recorded in dividends payable on the Company’s Condensed Consolidated Balance sheet at December 31, 2021.

On September 28, 2021, the Company’s Board of Directors declared a quarterly cash dividend of $0.16 per share on its Classes A and B Common Stock.

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This dividend totaling approximately $1.8 million was paid on January 17, 2020 to shareholders of record on December 27, 2019 and funded by cash on the Company’s balance sheet.

On September 12, 2019, our Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $1.8 million, was paid on October 11, 2019 to shareholders of record on September 23, 2019 and funded by cash on the Company’s balance sheet.

On May 30, 2019, our Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $1.8 million, was paid on July 5, 2019 to shareholders of record on June 14, 2019 and funded by cash on the Company’s balance sheet.

On February 26, 2019, our Board of Directors declared a regular cash dividend of $0.30 per share on its Classes A and B Common Stock.

This dividend, totaling approximately $1.8 million, was paid on March 29, 2019 to shareholders of record on March 12, 2019 and funded by cash on the Company’s balance sheet.

On October 27, 2021, we used $10 million from funds generated by operations to voluntarily pay down the remaining amount on our Revolving Credit Facility.

On June 7, 2019, we used $5,000,000 from funds generated by operations to voluntarily pay down a portion of its Revolving Credit Facility.

On February 4, 2019, we used $5,000,000 from funds generated by operations to voluntarily pay down a portion of its Revolving Credit Facility.

On May 3, 2022, we used $10 million in cash to purchase U.S.

Treasury Bills to be held to maturity with maturity dates between July 2022 and February 2023.

During the year $8 million of those $10 million were redeemed and we used the proceeds to purchase an additional $8 million of U.S.

Treasury Bills to be held to maturity.

At December 31, 2022, we have recorded $10.1 million of held-to-maturity U.S.

Treasury Bills at amortized cost basis that have a fair market value of $10 million.

Our held-to-maturity U.S.

Treasury Bills all have original maturity dates ranging from February 2023 to June 2023.

We continue to actively seek and explore opportunities for expansion through the acquisitions of additional broadcast properties.

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(1) Interest payments on our Credit Facility are based on unused commitment of the credit facility and scheduled debt maturities, if we were to borrow in the future and the interest rates are held constant over the remaining terms.

(2) Includes $12,818,000 in obligations under employment agreements and contracts with on-air personalities, other employees, and our President, CEO, and Chairman, Edward K.

(2) Includes $15,317,000 in obligations under employment agreements and contracts with on-air personalities, other employees, and our President, and CEO, Christopher S.

We anticipate that the above contractual cash obligations will be financed through funds generated from operations or additional borrowings under our Credit Facility, or a combination thereof.

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We conduct the impairment testing of broadcast licenses and goodwill annually or more frequently if events or changes in circumstances indicate that the asset might be impaired.

There was no impairment of broadcast licenses in 2021.

There was no impairment of broadcast licenses in 2021 or 2022.

During 2020, we recognized a $5,149,000 impairment charge ($1,392,000 in the third quarter of 2020 and $3,757,000 in the second quarter of 2020) for broadcast license due to a decrease in projected revenue in the markets listed below due to the impact of the COVID-19 pandemic, an increase in the discount rate used in the discounted cash flow analyses to estimate the fair value of our FCC licenses due to certain risks specifically associated with the Company and the radio broadcasting industry, and a decrease in mature operating margins in small markets due to the cost of operations in a small market.

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Please refer to Note 3 — Broadcast Licenses, Goodwill and Other Intangible Assets, in the accompanying notes to the consolidated financial statements for a discussion of several key assumptions used in the fair value estimate of our broadcast licenses during 2020 impairment tests.

There was no impairment of broadcast licenses in 2019.

We believe our estimate of the value of our broadcast licenses is a critical accounting estimate as the value is significant in relation to our total assets, and our estimate of the value uses assumptions that incorporate variables based on past experiences and judgments about future operating performance of our stations.

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Changes in our estimates of the fair value of these assets could result in material future period write-downs in the carrying value of our broadcast licenses.

For illustrative purposes only, during our 2021 impairment test had the fair values of each of our broadcasting licenses been lower by 10%, we would have recorded an additional broadcast license impairment of approximately $284,000;

had the fair values of each of our broadcasting licenses been lower by 20%, we would have recorded an additional broadcast license impairment of approximately $4.9 million;

and had the fair value of our broadcasting licenses been lower by 30%, we would have recorded an additional broadcast license impairment of approximately $12.6 million.

Stock Based Compensation:

We use a Black-Scholes valuation model to estimate the fair value of stock option awards.

Under the fair value method, stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the vesting period.

Determining the fair value of share-based awards at grant date requires assumptions and judgments about expected volatility and forfeiture rates, among other factors.

If actual results differ significantly from these assumptions, then stock-based compensation expense may differ materially in the future from that previously recorded.

The fair value of restricted stock awards is determined based on the closing market price of the Company’s Class A Common Stock on the grant date and is adjusted at each reporting date based on the amount of shares ultimately expected to vest.

We had no stock options outstanding at December 31, 2021 or 2020.

For illustrative purposes only, during our 2022 impairment test had the fair values of each of our broadcasting licenses been lower by 10%-30%, we would not have had to record any additional broadcast license impairment.

Tax Provisions:

Our estimates of income taxes and the significant items giving rise to the deferred tax assets and liabilities are shown in the notes to our consolidated financial statements and reflect our assessment of actual future taxes to be paid on items reflected in the financial statements, giving consideration to both timing and probability of these estimates.

Actual income taxes could vary from these estimates due to future changes in income tax law or results from the final review of our tax returns by federal, state or foreign tax authorities.

We use our judgment to determine whether it is more likely than not that our deferred tax assets will be realized.

Deferred tax assets are reduced by valuation allowances if the Company believes it is more than likely than not that some portion or the entire asset will not be realized.

Litigation and Contingencies:

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Our earnings are affected by changes in short-term interest rates as a result of our long-term debt arrangements.

If market interest rates averaged 1% more in 2021 than they did during 2021, our interest expense would increase, and income before taxes would decrease by $82,000.

These amounts are determined by considering the impact of the hypothetical interest rates on our borrowing cost.

This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment.

Further, in the event of a change of such magnitude, management would likely take actions to further mitigate its exposure to the change.

However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis assumes no changes in our financial structure.

If we had borrowings against our long-term debt arrangements, in the event of an adverse change in interest rates, management may take actions to mitigate our exposure.

The impact of inflation on our operations has not been significant to date.

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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