The following discussion is about
We own and operate two radio stations located in
New York Cityand outdoor advertising businesses geographically focused in the Southeast ( Georgia, Alabama, South Carolinaand Florida) and the Mid-Atlantic ( Kentucky, West Virginiaand 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 Companygenerally 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. The following table summarizes the sources of our revenues for the years ended December 31, 2021, and 2020. 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, production of billboard advertisements and barter. Year Ended Year Ended (Dollars in thousands) December 31, 2021 December 31, 2020 Net revenues: Radio Advertising $ 30,01254.1 % $ 19,12948.8 % Outdoor Advertising 12,725 22.9 % 12,459 31.7 % Nontraditional 4,864 8.8 % 761 1.9 % Digital 2,864 5.2 % 2,256 5.7 % Other 5,028 9.0 % 4,656 11.9 % Total net revenues $ 55,493 $ 39,261Roughly 20% of our expenses varies in connection with changes in revenue. These variable expenses primarily relate to costs in our sales department, such as salaries, commissions and bad debt. Our costs that do not vary as much in relation to revenue are mostly in our programming and general and administrative departments, such as talent costs, rating fees, rents, utilities and salaries. Lastly, our costs that are highly discretionary are costs in our marketing and promotions department, which we primarily incur to maintain and/or increase our audience and market share.
KNOWN TRENDS AND UNCERTAINTIES
U.S.radio industry is a mature industry and its growth rate has stalled. Management believes this is principally the result of two factors: (1) new media, such as various media distributed via the Internet, telecommunication companies and cable interconnects, as well as social networks, have gained advertising share against radio and other traditional media and created a proliferation of advertising inventory and (2) the fragmentation of the radio audience and time spent listening caused by satellite radio, audio streaming services and podcasts has led some investors and advertisers to conclude that the effectiveness of radio advertising has diminished. Along with the rest of the radio industry, our stations have deployed HD Radio®. HD Radio offers listeners advantages over standard analog broadcasts, including improved sound quality and additional digital channels. In addition to offering secondary channels, the HD Radio spectrum allows broadcasters to transmit other forms of data. We are participating in a joint venture with other broadcasters to provide the bandwidth that a third party uses to transmit location-based data to hand-held and in-car navigation devices. The number of radio receivers incorporating HD Radio has increased in the past year, particularly in new automobiles. It is unclear what impact HD Radio will have on the markets in which we operate. Our stations have also aggressively worked to harness the power of broadband and mobile media distribution in the development of emerging business opportunities by developing highly interactive websites with content that engages our listeners, deploying mobile applications and streaming our content, and harnessing the power of digital video on our websites and YouTube channels. 21
The results of our broadcast radio operations are solely dependent on the results of our stations in the
New Yorkmarket. Some of our competitors that operate larger station clusters in the New Yorkmarket 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 Yorkas measured by Miller Kaplan Arase LLP("Miller Kaplan"), an independent public accounting firm used by the radio industry to compile revenue information, were up 41.2% for the year ended December 31, 2021, but down 31.3% for the year ended December 31, 2020, as compared to the same periods of the prior year. During these periods, revenues for our New Yorkcluster were up 62.2% and down 42.1%, respectively. The increases in the year ended December 31, 2021, as compared to the prior year were largely driven by revenues generated by our largest outdoor concert, Summer Jam, which was held in August 2021, but was cancelled in 2020 due to the pandemic, which led to reduced revenues in the year ended December 31, 2020. 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'slong-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. The Company has been actively monitoring the COVID-19 situation and its impact globally, as well as domestically and in the markets we serve. Our priority has been the safety of our employees, as well as the informational needs of the communities that we serve. Through the first few months of calendar 2020, the disease became widespread around the world, and on March 11, 2020, the World Health Organizationdeclared a pandemic. In an effort to mitigate the continued spread of COVID-19, many federal, state and local governments mandated various restrictions, including travel restrictions, restrictions on non-essential businesses and services, restrictions on public gatherings and quarantining of people whomay have been exposed to the virus. These restrictions, in turn, caused the United Stateseconomy to decline and businesses to cancel or reduce amounts spent on advertising, negatively impacting our advertising-based businesses. While not a material amount, some of our advertisers experienced a material decline in their businesses and were not able to pay amounts owed to us when they came due. Throughout 2021, 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.
CRITICAL ACCOUNTING ESTIMATES
Critical accounting policies are defined as those that encompass significant judgments and uncertainties, and potentially derive materially different results under different assumptions and conditions. We believe that our critical accounting policies are those described below.
December 31, 2021, we have recorded approximately $63.3 millionfor FCClicenses, which represents approximately 43% of our total assets. We would not be able to operate our radio stations without the related FCClicense for each property. FCClicenses are renewed every eight years; consequently, we continually monitor our stations' compliance with the various regulatory requirements. Historically, each of our FCClicenses has been renewed at the end of its respective period, and we expect that each FCClicense will continue to be renewed in the future. We consider our FCClicenses to be indefinite-lived intangible. We do not amortize indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by Accounting Standards Codification ("ASC") Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting if they are not being operated under a Local Marketing Agreement by another broadcaster. Consequently, our two radio stations in New Yorkare considered a single unit of accounting.
For the years ended
Evaluation of indefinite broadcasting licenses
Fair value of our
FCClicenses is estimated to be the stick value that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCClicenses, the Company considers both income and market valuation methods when it performs its impairment tests. Under the income method, the Company projects cash flows that would be generated by its unit of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCClicense. The Company assumes the competitive situation that exists in the unit of accounting's market remains unchanged, with the exception that the unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCClicense. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. The projections incorporated into our license valuations take then current economic conditions into consideration. Under the market method, the Company uses recent sales of comparable radio stations for which the sales value appeared to be concentrated entirely in the value of the license, to arrive at an indication of fair value 22
Below are some of the key assumptions used in our annual income-based impairment assessments. The long-term growth rates of
October 1, 2021 October 1, 2020 Discount Rate 12.1% 12.4% Long-term Revenue Growth Rate 1.3% 1.0% Mature Market Share 9.2% 9.4% Operating Profit Margin 24.2-29.0% 26.6-29.5% Valuation of
GoodwillThe Company has recorded $13.1 millionof goodwill on the consolidated balance sheet as of December 31, 2021, of which all is part of the Outdoor Advertisingsegment. ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. Under ASC 350 we have the option to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis for determining whether it is necessary to perform an annual quantitative goodwill impairment test. We perform this assessment annually as of October 1. When performing a quantitative assessment for impairment, the Company uses a market approach to determine the fair value of the reporting unit. Management determines the fair value for the reporting unit by multiplying the cash flows of the reporting unit by an estimated market multiple. Management believes this methodology for valuing outdoor advertising businesses is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons, analyst reports, and market transactions. To corroborate the fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit. If the carrying value of a reporting unit's goodwill exceeds its fair value, the Company recognizes an impairment charge equal to the difference in the statement of operations.
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequence of events that have been recognized in the Company's financial statements or income tax returns. Income taxes are recognized during the year in which the underlying transactions are reflected in the consolidated statements of operations. Deferred taxes are provided for temporary differences between amounts of assets and liabilities recorded for financial reporting purposes as compared to amounts recorded for income tax purposes. After determining the total amount of deferred tax assets, the Company determines whether it is more likely than not that some portion of the deferred tax assets will not be realized.
RESULTS OF OPERATIONS
Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Net revenues: Radio
$ 41,727 $ 26,020 $ 15,70760.4 % Outdoor Advertising 13,766 13,241 525 4.0 % Total net revenues $ 55,493 $ 39,261 $ 16,23241.3 % Net radio revenues increased due to overall advertising revenues rebounding from the COVID-19 pandemic. In addition, various state and local departments of health increased their advertising to drive education and awareness surrounding vaccination efforts. Our stations benefited more than stations serving the general population due to the targeted nature of the awareness campaigns. Also, during the current year, we held our annual outdoor concert, Summer Jam, which was cancelled in the prior year due to the COVID-19 pandemic. 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 Yorkradio market increased 41.2% for the year ended December 31, 2021, as compared to the prior year. Our gross revenues reported to Miller Kaplan were up 62.2% for the year ended December 31, 2021, as compared to the prior year.
Outdoor advertising revenue increased due to the rebound in overall advertising revenue following the COVID-19 pandemic. Revenues from our outdoor advertising businesses have been less volatile than those from our radio businesses due to greater geographic diversification and longer advertising contracts with clients.
Operating expenses excluding depreciation and amortization:
Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Operating expenses excluding depreciation and amortization expense: Radio
$ 28,667 $ 22,827 $ 5,84025.6 % Outdoor Advertising 9,057 9,517 (460 ) (4.8 )% Total operating expenses excluding depreciation and amortization expense $ 37,724 $ 32,344 $ 5,38016.6 % Radio operating expenses excluding depreciation and amortization expense increased during the year ended December 31, 2021due to expenses associated with holding Summer Jam, partially offset by $1.1 millionof employee retention credits for the year ended December 31, 2021. Outdoor advertising operating expenses excluding depreciation and amortization are largely fixed in nature; however, we recorded approximately $0.6 millionof employee retention credits in the year ended December 31, 2021, which reduced operating expenses when compared to the prior year. Corporate expenses: Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Corporate expenses $ 8,434 $ 4,338 $ 4,09694.4 %
The increase in head office expenses is linked to the recruitment of staff, the management contract with Emmis having ended in
Depreciation and amortization:
(Dollars in thousands) 2021 2020 $ % Depreciation and amortization: Radio
$ 667 $ 893 $ (226 )(25.3 )% Outdoor Advertising 3,258 3,188
70 2.2% Total amortization and depreciation
Radio amortization expense decreased due to certain assets being fully depreciated in the prior year.
Outdoor advertising depreciation and amortization increased due to revisions to the preliminary purchase price allocation recorded during 2020 and associated adjustments to depreciation and amortization, coupled with depreciation expense associated with two small asset acquisitions that closed in the second quarter of the current year.
(Gain) loss on disposal of assets:
(Dollars in thousands) 2021 2020 $ % (Gain) loss on disposal of assets: Radio $ - $ - $ - N/A Outdoor Advertising (47 ) 197
(244) (123.9)% (Gain) loss on disposal of assets
Gain on sale of assets for the year ended
Operating income (loss): Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Operating income (loss): Radio
$ 12,393 $ 2,300 $ 10,093438.8 % Outdoor Advertising 1,498 339 1,159 341.9 % All Other (8,434 ) (4,338 ) (4,096 ) 94.4 % Total operating income (loss) $ 5,457 $ (1,699 ) $ 7,156
See “Net Income”, “Operating Expenses Excluding Depreciation” and “Head Office Expenses” above.
Table Of Contents Interest expense: Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Interest expense
$ (11,100 ) $ (9,493 ) $ (1,607 )16.9 % Interest expense increased due to (i) the additional funding from SG Broadcastingduring 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 2020, and (iii) an additional 1% paid in kind interest rate applicable beginning May 19, 2021as a result of Amendment No. 4 to the senior credit facility. Provision for income taxes: Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Provision for income taxes $ 358 $ 15,561 $ (15,203 )(97.7 )% As a result of a sharp deterioration of business activity related to the COVID-19 pandemic during 2020, the Company concluded that it was more likely than not that it would be unable to realize its deferred tax assets and recorded a valuation allowance against these assets. Consolidated net loss: Year ended December 31, Change (Dollars in thousands) 2021 2020 $ % Consolidated net loss $ (6,082 ) $ (26,753 ) $ 20,671(77.3 )%
See “Net Income”, “Operating Expenses Excluding Depreciation”, “Head Office Expenses”, “Interest Expenses” and “Provision for Income Taxes” above.
CASH 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, under which we had
$12.2 millionof availability as of March 16, 2022. Our primary uses of capital have been, and are expected to continue to be, capital expenditures, working capital, debt service requirements and acquisitions. At December 31, 2021we had cash and cash equivalents of $6.1 millionand net working capital of $7.7 million. At December 31, 2020, we had cash and cash equivalents of $4.2 millionand net working capital of $4.4 million. The increase in net working capital is due to an increase in cash and accounts receivable resulting from improved business operations, partially offset by an increase in accrued interest due to the timing of payments. During 2021, MediaCobenefitted from The Consolidated Appropriations Act, passed in December 2020, which expanded the employee retention credit program. The credits cover 70% of qualified wages, plus the cost to continue providing health benefits to our employees, subject to a $7 thousandcap per employee per quarter. Due to revenue declines, we qualified for approximately $1.9 millionof employee retention credits during 2021, of which $1.1 millionwas received in cash and $0.8 millionof employment tax withholdings were retained. At December 31, 2021, we had $68.3 millionof borrowings outstanding under the Senior Credit Facility, of which $2.8 millionis current. The borrowing rate under our Senior Credit Facility was 9.5% at December 31, 2021. Additionally, at December 31, 2021, we had $6.2 millionand $27.6 millionof promissory notes outstanding to Emmis and SG Broadcasting, respectively, all of which is classified as long-term. The debt service requirements of MediaCoover the next twelve-month period are expected to be $9.3 millionrelated to our Senior Credit Facility ( $2.8 millionof principal repayments and $6.5 millionof interest payments). These anticipated payments assume our lender does not accelerate the debt as a result of non-compliance with any debt covenant described above. The Senior Credit Facility bears interest at a variable rate. The Company estimates interest payments by using the amounts outstanding as of December 31, 2021and 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 provided by operating activities was
$2.9 millionfor the year ended December 31, 2021compared to cash used in operating activities of $9.6 millionfor the year ended December 31, 2020. The increase was mainly attributable to an increase in operating income as we recover from the COVID-19 pandemic.
Cash used in investing activities of
$1.3 millionand $0.4 millionfor the years ended December 31, 2021, and 2020, respectively, was attributable to capital expenditures. 25
Table Of Contents Financing Activities Cash provided by financing activities of
$0.3 millionfor the year ended December 31, 2021, was due to debt proceeds of $4.0 millionand 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 millionand settlement of tax withholding obligations of $0.7 million.
Cash provided by financing activities of
SEASONALITY Our results of operations are usually subject to seasonal fluctuations, which result in higher second quarter revenues and operating income. For our radio operations, this seasonality is largely due to the timing of our largest concert in June of each year. Results are typically lowest in the first calendar quarter.
The impact of inflation on operations has not been significant to date. However, there can be no assurance that a high rate of inflation in the future would not have an adverse effect on operating results, particularly since our Senior Credit Facility is comprised entirely of variable-rate debt.
OFF-BALANCE SHEET FINANCING AND LIABILITIES
Other than legal contingencies incurred in the normal course of business, and contractual commitments to purchase goods and services, all of which are discussed in Note 12 to the consolidated financial statements, which is incorporated by reference herein, the Company does not have any material off-balance sheet financings or liabilities. The Company does not have any majority-owned and controlled subsidiaries that are not included in the consolidated financial statements, nor does the Company have any interests in or relationships with any "special-purpose entities" that are not reflected in the consolidated financial statements or disclosed in the Notes to consolidated financial statements.
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