NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Thousands Unless Indicated Otherwise)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
MediaCo Holding Inc. (“MediaCo” or the “Company”) is an owned and operated multi-media company formed in Indiana in 2020, focused on radio and digital advertising, premium programming and events.
Our assets consist of two radio stations, WQHT(FM) and WBLS(FM) (the “Stations”), which serve the New York City demographic market area that primarily targets Black, Hispanic, and multi-cultural consumers. We derive our revenues primarily from radio and digital advertising sales, but we also generate revenues from events, including sponsorships and ticket sales, licensing, and syndication.
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”). 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. Unless otherwise noted, discussion in the notes to consolidated financial statements refers to the Company's continuing operations. See Note 2 — Discontinued Operations for additional information.
Unless the context otherwise requires, references to “we”, “us” and “our” refer to MediaCo and its subsidiaries.
Basis of Presentation and Consolidation
Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All significant intercompany balances and transactions have been eliminated. In the opinion of management, all adjustments necessary for fair presentation (including normal recurring adjustments) have been included.
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
Revenue Recognition
The Company generates revenue from the sale of services including, but not limited to: (i) on-air commercial broadcast time, (ii) non-traditional revenues including event-related revenues and event sponsorship revenues, and (iii) digital advertising. Payments received from advertisers before the performance obligation is satisfied are recorded as deferred revenue. Substantially all deferred revenue is recognized within twelve months of the payment date. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Advertising revenues presented in the financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is recorded based on management’s judgment of the collectability of receivables. When assessing the collectability of receivables, management considers, among other things, historical loss experience and existing economic conditions. Amounts are written off after all normal collection efforts have been exhausted. The activity in the allowance for doubtful accounts for the years ended December 31, 2022, and 2021, was as follows:
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| Balance At Beginning Of Period | | Provision | | Write-Offs | | Balance At End Of Period |
| Year ended December 31, 2021 | $ | 217 | | | 42 | | | (73) | | | $ | 186 | |
| Year ended December 31, 2022 | $ | 186 | | | 2 | | | (66) | | | $ | 122 | |
Cash and Cash Equivalents
MediaCo considers time deposits, money market fund shares and all highly liquid debt investment instruments with original maturities of three months or less to be cash equivalents. At times, such deposits may be in excess of FDIC insurance limits. Restricted cash at December 31, 2022 represents $2.5 million held in escrow related to the Company's disposition of the Fairway business and $1.8 million held as collateral for a letter of credit entered into in connection with the lease in New York City for our radio operations and corporate offices.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is generally computed using the straight-line method over the estimated useful lives of the related assets, which are 30 to 39 years for buildings, the shorter of economic life or expected lease term for leasehold improvements, five to seven years for broadcasting equipment, five years for automobiles, office equipment and computer equipment, and three to five years for software. Maintenance, repairs and minor renewals are expensed as incurred; improvements are capitalized. On a continuing basis, the Company reviews the carrying value of property and equipment for impairment. If events or changes in circumstances were to indicate that an asset carrying value may not be recoverable, a write-down of the asset would be recorded through a charge to operations. See below for more discussion of impairment policies related to our property and equipment. Depreciation expense for the years ended December 31, 2022, and 2021, was $0.6 million and $0.5 million, respectively.
Intangible Assets
Indefinite-lived Intangibles
In accordance with ASC Topic 350, “Intangibles—Goodwill and Other,” radio broadcasting licenses are not amortized, but are tested at least annually for impairment at the reporting unit level and unit of accounting level, respectively. We test for impairment annually, on October 1 of each year, or more frequently when events or changes in circumstances or other conditions suggest impairment may have occurred. Impairment exists when the asset carrying values exceed their respective fair values, and the excess is then recorded to operations as an impairment charge. See Note 10 — Intangible Assets, for more discussion of our annual impairment tests performed during the years ended December 31, 2022, and 2021.
Definite-lived Intangibles
The Company’s definite-lived intangible assets consist of software developed internally and programming agreements related to our radio business. These are amortized over the period of time the intangible assets are expected to contribute directly or indirectly to the Company’s future cash flows.
Advertising Costs
Advertising costs are expensed when incurred. Advertising expenses were $0.6 million and $0.2 million for the years ended December 31, 2022, and 2021, respectively.
Deferred Revenue and Barter Transactions
Deferred revenue includes deferred barter and other transactions in which payments are received prior to the performance of services (e.g., cash-in-advance advertising). Barter transactions are recorded at the estimated fair value of the product or service received. Revenue from barter transactions is recognized when commercials are broadcast. The appropriate expense or asset is recognized when merchandise or services are used or received. Barter revenues were $0.8 million for the years ended December 31, 2022, and 2021. Barter expenses were $0.8 million for the years ended December 31, 2022, and 2021.
Earnings Per Share
Our basic and diluted net loss per share is computed using the two-class method. The two-class method is an earnings allocation that determines net income per share for each class of common stock and participating securities according to their participation rights in dividends and undistributed earnings or losses. Shares of Series A preferred stock include rights to participate in dividends and distributions to common stockholders on an if-converted basis, and accordingly are considered participating securities. During periods of undistributed losses however, no effect is given to our participating securities since they are not contractually obligated to share in the losses. We have elected to determine the earnings allocation based on income (loss) from continuing operations. As there is a loss from continuing operations, all potentially dilutive items were anti-dilutive and thus basic and diluted weighted-average shares are the same.
The following is a reconciliation of basic and diluted net loss per share attributable to Class A and Class B common shareholders:
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| Year Ended December 31, |
| 2022 | | 2021 |
| Numerator: | | | |
| Loss from continuing operations | $ | (9,795) | | | $ | (4,198) | |
| Less: Preferred stock dividends | (3,330) | | | (2,752) | |
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| Loss from continuing operations available to common shareholders | (13,125) | | | (6,950) | |
| Income (loss) from discontinued operations, net of income taxes | 40,709 | | | (1,884) | |
| Net income (loss) available to common shareholders | 27,584 | | | (8,834) | |
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| Denominator: | | | |
| Weighted-average shares of common stock outstanding — basic and diluted | 13,380 | | | 7,217 | |
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| Earnings per share of common stock attributable to common shareholders: | | | |
| Net income (loss) per share attributable to common shareholders - basic and diluted: | | | |
| Continuing operations | $ | (0.98) | | | $ | (0.96) | |
| Discontinued operations | 3.04 | | | (0.26) | |
| Net income (loss) per share attributable to common shareholders - basic and diluted: | $ | 2.06 | | | $ | (1.22) | |
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The following convertible equity shares and restricted stock awards were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive.
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| Year Ended December 31, |
| (in thousands) | 2022 | | 2021 |
| Convertible Emmis promissory note | 1,400 | | | 2,269 | |
| Convertible Standard General promissory notes | 3,088 | | | 8,725 | |
| Series A convertible preferred stock | 6,105 | | | 9,845 | |
| Restricted stock awards | 331 | | | 515 | |
| Total | 10,924 | | | 21,354 | |
Income Taxes
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 as recorded for financial reporting purposes and 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. If the Company determines that a deferred tax asset is not likely to be realized, a valuation allowance will be established against that asset to record it at its expected realizable value.
Definite-Lived Long-Lived Tangible Assets
The Company periodically considers whether indicators of impairment of definite-lived long-lived tangible assets are present. If such indicators are present, the Company determines whether the sum of the estimated undiscounted cash flows attributable to the assets in question is less than their carrying value. If less, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. Fair value is determined by discounted future cash flows, appraisals and other methods. If the assets determined to be impaired are to be held and used, the Company recognizes an impairment charge to the extent the asset’s carrying value is greater than the fair value. The fair value of the asset then becomes the asset’s new carrying value, which the Company depreciates or amortizes over the remaining estimated useful life of the asset.
Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. Due to the COVID-19 pandemic, the global economy and financial markets have been disrupted and there is uncertainty about the length and severity of the consequences caused by the pandemic. The Company has considered information available to it as of the date of issuance of these financial statements and is not aware of any specific events or circumstances that would require an update to its estimates or judgments, or a revision to the carrying value of its assets or liabilities. These estimates may change as new events occur and additional information becomes available. Actual results could differ materially from these estimates.
Reclassifications
Certain amounts have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements Not Yet Implemented
In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, which introduces new guidance for an approach based on using expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities and net investments in leases as well as reinsurance and trade receivables. This standard will be effective for us as of January 1, 2023. We do not expect the adoption of the new standard to have a significant impact on our consolidated financial statements.
2. DISCONTINUED OPERATIONS
On December 9, 2022, Fairway entered into the Purchase Agreement with 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.
In accordance with ASC 205-20-S99-3, Allocation of Interest to Discontinued Operations, the Company elected to allocate interest expense to discontinued operations where the debt is not directly attributed to the Fairway business. Interest expense was allocated based on a ratio of net assets discontinued to the sum of consolidated net assets plus consolidated debt.
In addition, upon closing we entered into a transition service agreement with the Purchaser to support the operations after the divestiture for immaterial fees. This agreement commenced with the close of the transaction and was terminated at the end of the initial term in February 2023.
The financial results of Fairway are presented as income from discontinued operations on our consolidated statements of income through December 9, 2022, when the sale was completed. The following table presents the financial results of Fairway:
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| Year ended December 31, |
| 2022(a) | | 2021 |
| Net revenues | $ | 13,484 | | | $ | 13,766 | |
| OPERATING EXPENSES | | | |
| Operating expenses excluding depreciation and amortization expense | 10,368 | | | 9,057 | |
| Depreciation and amortization | 3,035 | | | 3,237 | |
| Loss (gain) on disposal of assets | 68 | | | (47) | |
| Total operating expenses | 13,471 | | | 12,247 | |
| Income from operations of discontinued operations | 13 | | | 1,519 | |
| Interest and other, net | (3,094) | | | (3,393) | |
| Loss from discontinued operations before income taxes and gain on sale | (3,081) | | | (1,874) | |
| Pre-tax gain on sale | 46,875 | | | — | |
| Income (loss) from discontinued operations, before income taxes | 43,794 | | | (1,874) | |
| Income tax provision | (3,085) | | | (10) | |
| Income (loss) from discontinued operations, net of income taxes | $ | 40,709 | | | $ | (1,884) | |
(a) Includes Fairway financial results through the transaction close on December 9, 2022 and the related gain on sale.
The following table presents the aggregate carrying amounts of assets and liabilities of discontinued operations for Fairway in the consolidated balance sheets:
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| December 31, 2022 | | December 31, 2021 |
| Assets: | | | |
| Accounts receivable, net | 1,026 | | | 1,560 | |
| Prepaid expenses | — | | | 74 | |
| Other | 40 | | | 117 | |
| Total current assets of discontinued operations | 1,066 | | | 1,751 | |
| Property and equipment, net | — | | | 25,358 | |
| Goodwill | — | | | 13,102 | |
| Other intangible assets, net | — | | | 1,661 | |
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| Operating lease right of use assets | — | | | 14,413 | |
| Deferred tax assets | — | | | 78 | |
| Total noncurrent assets of discontinued operations | — | | | 54,612 | |
| Total assets of discontinued operations | 1,066 | | | 56,363 | |
| Liabilities: | | | |
| Accounts payable and accrued expenses | 659 | | | 368 | |
| Accrued salaries and commissions | — | | | 149 | |
| Deferred revenue | — | | | 725 | |
| Operating lease liabilities | — | | | 1,526 | |
| Other current liabilities | — | | | 152 | |
| Total current liabilities of discontinued operations | 659 | | | 2,920 | |
| Operating lease liabilities, net of current | — | | | 11,242 | |
| Asset retirement obligations | — | | | 7,267 | |
| Total noncurrent liabilities of discontinued operations | — | | | 18,509 | |
| Total liabilities of discontinued operations | 659 | | | 21,429 | |
3. COMMON STOCK
MediaCo has authorized Class A common stock, Class B common stock, and Class C common stock. The rights of these three classes are essentially identical except that each share of Class A common stock has one vote with respect to substantially all matters, each share of Class B common stock has 10 votes with respect to substantially all matters, and each share of Class C common stock has no voting rights with respect to substantially all matters. All Class B common stock outstanding is owned by SG Broadcasting. At December 31, 2022 and December 31, 2021, no shares of Class C common stock were issued or outstanding.
On December 16, 2022, our Board approved a stock repurchase plan (the “Repurchase Plan”), to repurchase from time to time, in the open market or through privately negotiated transactions, shares, up to $2.0 million in the aggregate of shares of our Class A common stock. The timing of purchases and the exact number of shares to be purchased depends on market conditions. The Repurchase Plan does not include specific price targets or timetables and may be suspended or terminated at any time. During the fourth quarter of 2022, we repurchased under the Repurchase Plan 187,078 shares of Class A common stock for an aggregate of $0.2 million. Subsequent to December 31, 2022 through March 17, 2023 we repurchased under the Repurchase Plan an additional 382,137 shares of Class A common stock for an aggregate of $0.6 million.
On August 20, 2021, MediaCo Holding Inc. entered into an At Market Issuance Sales Agreement with B. Riley Securities, Inc.(“B. Riley”), pursuant to which the Company may offer and sell, from time to time through or to B. Riley, as agent or principal, shares of the Company’s Class A Common Stock, $0.01 par value per share, having an aggregate offering price of up to $12.5 million. During the year ended December 31, 2021, Class A stock totaling $0.3 million was sold under the agreement. During the year ended December 31, 2022, no stock was sold under this agreement.
4. CONVERTIBLE PREFERRED STOCK
The Company issued to SG Broadcasting 220,000 shares of MediaCo Series A Convertible Preferred Stock, par value $0.01 (the “MediaCo Series A Preferred Shares”) in exchange for a cash contribution of $22.0 million (the “SG Broadcasting Contribution”). This issuance of shares was issued in reliance upon an exemption from registration pursuant to Section 4(a)(2) under the Securities Act of 1933, as amended. This issuance was not a “public offering” because no more than 35 non-accredited investors received securities of the Company, the Company did not engage in general solicitation or advertising with regard to the issuance and sale of shares of MediaCo Series A Preferred Shares and the Company did not make a public offering in connection with the sale of shares of MediaCo Series A Preferred Shares.
MediaCo Series A Preferred Shares rank senior in preference to the MediaCo Class A common stock, MediaCo Class B common stock, and the MediaCo Class C common stock. Pursuant to the Articles of Amendment, the ability of the Company to make distributions with respect to, or make a liquidation payment on, any other class of capital stock in the Company designated to be junior to, or on parity with, the MediaCo Series A Preferred Shares, will be subject to certain restrictions, including that (i) the MediaCo Series A Preferred Shares shall be entitled to receive the amount of dividends per share that would be payable on the number of whole common shares of the Company into which each share of MediaCo Series A Preferred Share could be converted, and (ii) the MediaCo Series A Preferred Shares, upon any liquidation, dissolution or winding up of the Company, shall be entitled to a preference on the assets of the Company. Issued and outstanding shares of MediaCo Series A Preferred Shares shall accrue cumulative dividends, payable in kind, at an annual rate equal to the interest rate on any senior debt of the Company (see Note 7), or if no senior debt is outstanding, 6%, plus additional increases of 1% on December 12, 2020 and each anniversary thereof. On December 13, 2022, and 2021, dividends of $3.4 million and $2.7 million, respectively, were paid in kind. The payment in kind increased the accrued value of the preferred stock and 80,000 additional shares were issued as part of this payment.
MediaCo Series A Preferred Shares are redeemable for cash at the option of SG Broadcasting at any time on or after June 12, 2025, and so the shares are classified outside of permanent equity. The Series A Preferred Shares are also convertible into shares of Class A common stock at the option of SG Broadcasting at any time after May 25, 2020, with the number of shares of common stock determined by dividing the original contribution, plus accrued dividends, by the 30-day volume weighted average share price of Class A common shares. On and after May 25, 2020, when the conversion option became effective, the Series A Preferred Shares became participating securities and we began calculating earnings per share using the two-class method.
There were 300,000 shares designated as MediaCo Series A Preferred shares available to be issued as of December 31, 2022, and 2021. On March 23, 2023, the Company filed Articles of Amendment to its Articles of Amendment of Amended & Restated Articles of Incorporation to increase the number of designated shares of MediaCo Series A Preferred Shares from 300,000 to 500,000. The additional shares will only be issued in payment of the PIK dividend payable on outstanding shares of the Convertible Preferred Stock.
On December 28, 2022, SG Broadcasting exercised its right to partially convert $4.0 million of the outstanding balance on the MediaCo Series A Preferred Shares, for 3.3 million shares of the Company's Class A common stock.
5. SHARE BASED PAYMENTS
The amounts recorded as share based compensation expense consist of restricted stock awards issued to officers and employees that have vesting periods up to three years. Awards are typically made pursuant to employment agreements. Restricted stock awards are granted out of the Company’s 2022 and 2021 Equity Compensation Plans.
We determine the fair value of restricted stock awards based on the closing price of our stock on the date of grant. We generally recognize compensation expense related to restricted stock awards on a straight-line basis over the period during which the restriction lapses. Forfeitures are recognized in the period in which they occur. The following table presents a summary of the Company’s restricted stock grants outstanding at December 31, 2022, and restricted stock activity during the year ended December 31, 2022 (“Price” reflects the weighted average share price at the date of grant):
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| Awards | | Price |
| Grants outstanding, beginning of period | 1,084 | | | $ | 3.77 | |
| Granted | 940 | | | 3.16 | |
| Vested (restriction lapsed) | (1,138) | | | 3.60 | |
| Forfeited | (30) | | | 9.93 | |
| Grants outstanding, end of period | 856 | | | $ | 3.10 | |
Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense recognized by the Company for the years ended December 31, 2022, and 2021. The Company recognized tax benefits of $0.2 million related to stock-based compensation for the year ended December 31, 2021. Tax expense related to stock compensation for the year ended December 31, 2022 was not material.
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| Year Ended December 31, |
| 2022 | | 2021 |
| Operating expenses excluding depreciation and amortization | $ | 565 | | | $ | 1,216 | |
| Corporate expenses | 1,950 | | | 2,214 | |
| Income from discontinued operations before income taxes | 232 | | | 220 | |
| Stock-based compensation expense | $ | 2,747 | | | $ | 3,650 | |
As of December 31, 2022, there was $1.6 million of unrecognized compensation cost related to nonvested stock-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately 1.8 years.
6. REVENUE
The Company generates revenue from the sale of services including, but not limited to: (i) on-air commercial broadcast time, (ii) non-traditional revenues including event-related revenues and event sponsorship revenues, and (iii) digital advertising. Payments received from advertisers before the performance obligation is satisfied are recorded as deferred revenue. Substantially all deferred revenue is recognized within twelve months of the payment date. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Advertising revenues presented in the consolidated financial statements are reflected on a net basis, after the deduction of advertising agency fees, usually at a rate of 15% of gross revenues.
Radio Advertising
On-air broadcast revenue is recognized when or as performance obligations under the terms of a contract with a customer are satisfied. This typically occurs over the period of time that advertisements are provided, or as an event occurs. Revenues are reported at the amount the Company expects to be entitled to receive under the contract. Payments received from advertisers before the performance obligation is satisfied are recorded as deferred revenue in the consolidated balance sheets. Substantially all deferred revenue is recognized within twelve months of the payment date.
Nontraditional
Nontraditional revenues principally consist of ticket sales and sponsorship of events our stations conduct in their local market. These revenues are recognized when our performance obligations are fulfilled, which generally coincides with the occurrence of the related event.
Digital
Digital revenue relates to revenue generated from the sale of digital marketing services (including display advertisements and video sponsorships) to advertisers on Company-owned websites and from revenue generated from content distributed across other digital platforms. Digital revenues are generally recognized as the digital advertising is delivered.
Other
Other revenue includes barter revenue and network revenue. The Company provides advertising broadcast time in exchange for certain products and services, including on-air radio programming. These barter arrangements generally allow the Company to preempt such bartered broadcast time in favor of advertisers who purchase time for cash consideration. These barter arrangements are valued based upon the Company’s estimate of the fair value of the products and services received. Revenue is recognized on barter arrangements when we broadcast the advertisements. Advertisements delivered under barter arrangements are typically aired during the same period in which the products and services are consumed. The Company also sells certain remnant advertising inventory to third-parties for cash, and we refer to this as network revenue. The third-parties aggregate our remnant inventory with other broadcasters' remnant inventory for sale to third parties, generally to large national advertisers. This network revenue is recognized as we broadcast the advertisements.
Disaggregation of revenue
The following table presents the Company's revenues disaggregated by revenue source:
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| Year Ended December 31, |
| 2022 | | 2021 |
| Net revenues: | | | | | | | |
| Radio Advertising | $ | 25,790 | | | 66.8 | % | | $ | 30,012 | | | 71.9 | % |
| Nontraditional | 3,973 | | | 10.3 | % | | 4,864 | | | 11.7 | % |
| Digital | 4,713 | | | 12.2 | % | | 2,864 | | | 6.9 | % |
| Other | 4,119 | | | 10.7 | % | | 3,987 | | | 9.5 | % |
| Total net revenues | $ | 38,595 | | | | | $ | 41,727 | | | |
7. LONG-TERM DEBT
Long-term debt was comprised of the following at December 31, 2022, and December 31, 2021:
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| December 31, 2022 | | December 31, 2021 |
| Senior credit facility | $ | — | | | $ | 68,343 | |
| Notes payable to Emmis | 5,950 | | | 6,154 | |
| Notes payable to SG Broadcasting | — | | | 27,574 | |
| Less: Current maturities | — | | | (2,754) | |
| Less: Unamortized original discount | — | | | (1,790) | |
| Total long-term debt, net of current portion and debt discount | $ | 5,950 | | | $ | 97,527 | |
Senior secured term loan agreement
The Company had a five-year senior secured term loan agreement (the “Senior Credit Facility”) with GACP Finance Co., LLC, (“GACP”) a Delaware limited liability company, as administrative agent and collateral agent. The Senior Credit Facility bore interest at a rate equal to the London Interbank Offered Rate (“LIBOR”), plus 7.5%, with a 2.0% LIBOR floor and a 1.0% incremental interest rate paid in kind under certain circumstances (as discussed below). The Senior Credit Facility matured on November 25, 2024. Prior to subsequent amendments discussed below, the Senior Credit Facility required interest payments on the first business day of each calendar month, and quarterly payments on the principal in an amount equal to one and one quarter percent of the initial aggregate principal amount were due on the last day of each calendar quarter. At its inception, the Senior Credit Facility included covenants pertaining to, among other
things, the ability to incur indebtedness, restrictions on the payment of dividends, minimum liquidity requirements, collateral maintenance, minimum Consolidated Fixed Charge Coverage Ratio of 1.10:1.00, and other customary restrictions.
Several amendments were entered into by the Company and GACP to modify, among other things, certain provisions relating to the repayment of the Term Loan (as defined in the Senior Credit Facility). On May 19, 2021, the Company entered into Amendment No. 4 to its Senior Credit Facility. Under the terms of Amendment No. 4:
•SG Broadcasting agreed to contribute up to $7.0 million to the Company in the form of subordinated debt, with $3.0 million contributed at closing, $1.0 million contributed on June 1, 2021, and up to an additional $3.0 million to be contributed through June 30, 2022, if necessary, to satisfy certain conditions described in Amendment No. 4;
•the Company made a principal payment of $3.0 million to reduce borrowings outstanding under the Senior Credit Facility;
•no quarterly scheduled principal payments are required through and including the quarter ending March 31, 2022;
•the Minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) was reduced to 1.00:1.00 from April 1, 2020 through and including December 31, 2022, with it increasing to 1.10:1.00 on and after January 1, 2023;
•for purposes of calculating compliance with the Minimum Consolidated Fixed Charge Coverage Ratio, Consolidated EBITDA (as defined in the Senior Credit Facility) includes certain amounts contributed by SG Broadcasting in the form of subordinated debt or equity, including those described above;
•for purposes of calculating the Company’s borrowing base under the Senior Credit Facility, the multiple applied to Billboard Cash Flow (as defined in the Senior Credit Facility) increased from 3.5 to 5.0 and the advance rate applied to the radio stations’ FCC licenses increased from 60% to 70%;
•at any time the multiple applied to Billboard Cash Flow exceeds 3.5 or the advance rate applied to the radio stations’ FCC licenses exceeds 60%, an incremental annual interest rate of 1.0% applies and is paid-in-kind monthly;
•certain specified events of default were waived; and
•an amendment fee of $0.4 million was paid in cash.
As a result of the $3.0 million payment made under the amendment, the Company recorded a loss on debt extinguishment of $81 thousand during the year ended December 31, 2021.
For the period May 19, 2021 through March 31, 2022, the multiple applied to billboard cash flow was in excess of 3.5x and the advance rate applied to the Company's FCC Licenses exceeded 60% in order for the Company to achieve minimal compliance with its loan to value covenant. Therefore, the incremental annual interest rate of 1.0% applied during this period and additional interest payments of $0.2 million were paid in kind during the three-month period ended March 31, 2022, all of which was added to the principal balance outstanding. For the period from April 1, 2022 to December 9, 2022, the incremental annual interest rate of 1.0% did not apply as the principal balance outstanding was less than the minimum borrowing base.
On November 12, 2022, MediaCo entered into Amendment No. 5 to its Senior Credit Facility, which lowered the minimum liquidity requirement to $2.0 million through December 15, 2022 and $3.0 million thereafter and removed the testing requirement for the minimum consolidated fixed charge coverage ratio covenant on September 30, 2022.
On December 9, 2022, following the consummation of the transactions contemplated by the Purchase Agreement, the Company repaid in full, without penalty, all of its obligations under the Senior Credit Facility, which was terminated at that time.
Emmis Convertible Promissory Note
Our November 25, 2019 convertible promissory note payable to Emmis Communications Corporation (the “Emmis Convertible Promissory Note”) carries interest at a base rate equal to the interest on any senior credit facility, including any applicable paid in kind rate, or if no senior credit facility is outstanding, of 6.0%, plus an additional 1.0% on any payment of interest in kind and, without regard to whether the Company pays such interest in kind, an additional increase of 1.0% following the second anniversary of the date of issuance and additional increases of 1.0% following each successive anniversary thereafter. Because the Senior Credit Facility prohibited the Company from paying interest in cash on the Emmis Convertible Promissory Note, the Company has been accruing interest since inception using the rate applicable if the interest will be paid-in-kind. The Emmis Convertible Promissory Note is convertible, in whole or in part,
into MediaCo Class A common stock at the option of Emmis and at a strike price equal to the thirty-day volume weighted average price of the MediaCo Class A common stock on the date of conversion. The Emmis Convertible Promissory Note matures on November 25, 2024.
On December 21, 2022, Emmis exercised its right to partially convert the outstanding principal and accrued but unpaid interest on the Emmis Convertible Promissory Note of $0.9 million and $0.1 million, respectively, for 0.8 million of the Company's Class A common stock.
For the year ended December 31, 2022, interest of $0.8 million was paid-in-kind and added to the principal balance outstanding which was $6.0 million at December 31, 2022.
Second Amended and Restated SG Broadcasting Promissory Note, Additional SG Broadcasting Promissory Note and May 2021 SG Broadcasting Promissory Note
The 2019/2020 SG Broadcasting Promissory Notes (as defined below), which in July 2022 were converted in full into shares of MediaCo Class A common stock, carried interest at a base rate equal to the interest on any senior credit facility, including any applicable paid in kind rate, or if no senior credit facility is outstanding, of 6.0%, and an additional increase of 1.0% following the second anniversary of the date of issuance and additional increases of 1.0% following each successive anniversary thereafter. The 2019/2020 SG Broadcasting Promissory Notes were set to mature on May 25, 2025. Additionally, interest under the 2019/2020 SG Broadcasting Promissory Notes was payable in kind through maturity, and convertible into MediaCo Class A common stock at the option of SG Broadcasting at a strike price equal to the thirty day volume weighted average price of the MediaCo Class A common stock on the date of conversion.
On May 19, 2021, the Company issued to SG Broadcasting a subordinated convertible promissory note (the “May 2021 SG Broadcasting Promissory Note” and, collectively with the 2019/2020 SG Broadcasting Promissory Notes, the “SG Broadcasting Promissory Notes”), in return for which SG Broadcasting contributed $3.0 million to the Company to make the prepayment of Senior Credit Facility debt required under Amendment No. 4. Up to $7.0 million may be borrowed pursuant to the May 2021 SG Broadcasting Promissory Note. The May 2021 SG Broadcasting Promissory Note carries interest at a base rate equal to the interest on any senior credit facility, including any applicable paid-in-kind rate, or if no senior credit facility is outstanding, of 6.0%, and an additional increase of 1.0% on November 25, 2021 and additional annual increases of 1.0% following each successive anniversary thereafter. The May 2021 SG Broadcasting Promissory Note matures on May 25, 2025 and interest is payable in-kind through maturity. Subject to prior shareholder approval of the issuance of the shares, which was obtained on June 28, 2022, the May 2021 SG Broadcasting Promissory Note is convertible into MediaCo Class A common stock at the option of SG Broadcasting at a strike price equal to the thirty-day volume weighted average price of the MediaCo Class A common stock on the date of conversion.
On June 1, 2021, SG Broadcasting contributed $1.0 million to the Company under the May 2021 SG Broadcasting Promissory Note as required by Amendment No. 4 to the Senior Credit Facility.
On March 18, 2022, the Company and SG Broadcasting agreed to amend the May 2021 SG Broadcasting Promissory Note to extend the Company’s ability to draw the remaining $3.0 million on the May 2021 SG Broadcasting Promissory Note from June 30, 2022 to June 30, 2023.
On July 28, 2022, SG Broadcasting exercised its right to convert the outstanding principal and accrued but unpaid interest on the SG Broadcasting Promissory Notes of $28.0 million and $1.9 million, respectively, for 12.9 million of the Company's Class A common stock. The 2019/2020 SG Broadcasting Promissory Notes were terminated at that time, while the May 2021 SG Broadcasting Promissory Note remains outstanding, but with no amounts outstanding as of December 31, 2022.
Based on amounts outstanding at December 31, 2022, mandatory principal payments of long-term debt are $6.0 million in 2024 (all under the Emmis Convertible Promissory Note) and none thereafter.
8. FAIR VALUE MEASUREMENTS
Fair value is the exchange price to sell an asset or transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The Company uses market data or assumptions market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs may be readily observable, corroborated by market data, or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs.
Recurring Fair Value Measurements
The Company has no financial assets and liabilities that were accounted for at fair value on a recurring basis as of December 31, 2022 or 2021.
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis including those described in Note 10 —Intangible Assets, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 10 for more discussion).
Fair Value of Other Financial Instruments
Certain nonfinancial assets and liabilities are measured at fair value on a non-recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. The use of different market assumptions may have a material effect on the estimated fair value amounts. The following methods and assumptions were used to estimate the fair value of financial instruments:
•Cash and cash equivalents: The carrying amount of these assets approximates fair value because of the short maturity of these instruments.
•Other long-term debt: The Emmis Convertible Promissory Note is not actively traded and is considered a Level 3 instrument. The Company believes the current carrying value of this debt approximates its fair value.
9. LEASES
We determine if an arrangement is a lease at inception. We have operating leases for office space and tower space, expiring at various dates through August 2039. Some leases have options to extend and some have options to terminate. Operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and noncurrent operating lease liabilities in our consolidated balance sheets.
Operating lease assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate if it is readily determinable. Our lease terms may include options to extend or terminate the lease, which we treat as exercised when it is reasonably certain and there is a significant economic incentive to exercise that option.
Operating lease expense for operating lease assets is recognized on a straight-line basis over the lease term. Variable lease payments, which represent lease payments that vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time, are expensed in the period in which the obligation for these payments was incurred. None of our leases contain variable lease payments.
We elected not to apply the recognition requirements of ASC 842, “Leases”, to short-term leases, which are deemed to be leases with a lease term of twelve months or less. Instead, we recognized lease payments in the consolidated statements of operations on a straight-line basis over the lease term and variable payments in the period in which the obligation for these payments was incurred. We elected this policy for all classes of underlying assets. Short-term lease expense for the years ended December 31, 2022, and 2021, was not material.
The impact of operating leases to our consolidated financial statements was as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Lease Cost | | | |
| Operating lease cost | $ | 2,550 | | $ | 2,548 |
| Other Information | | | |
| Operating cash flows from operating leases | 2,996 | | 3,001 |
| | | |
| Weighted average remaining lease term - operating leases (in years) | 7.0 | | 6.5 |
| Weighted average discount rate - operating leases | 5.9 | % | | 5.7 | % |
As of December 31, 2022, the annual minimum lease payments of our operating lease liabilities were as follows:
| | | | | |
| Year ended December 31, | |
| 2023 | $ | 2,058 | |
| 2024 | 575 | |
| 2025 | 580 | |
| 2026 | 584 | |
| 2027 | 588 | |
| After 2027 | 2,532 | |
| Total lease payments | 6,917 | |
| Less: imputed interest | (1,293) | |
| Total recorded lease liabilities | $ | 5,624 | |
On November 18, 2022, the Company entered into a lease agreement in New York City for our radio operations and corporate offices. The lease commencement date was not until February 1, 2023 and as such, was not included in our consolidated balance sheets as of December 31, 2022. The noncancellable lease term extends through August 2039 and resulted in a right of use asset of $12.7 million and an operating lease liability of $12.7 million when recorded at lease commencement.
10. INTANGIBLE ASSETS
As of December 31, 2022 and 2021, intangible assets, net consisted of the following:
| | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Indefinite-lived intangible assets: | | | |
| FCC Licenses | $ | 63,266 | | | $ | 63,266 | |
| | | |
| | | |
| Definite-lived intangible assets: | | | |
| | | |
| Software | 1,437 | | | — | |
| | | |
| Total | $ | 64,703 | | | $ | 63,266 | |
In accordance with ASC Topic 350, Intangibles—Goodwill and Other, the Company reviews intangible assets at least annually for impairment. In connection with any such review, if the recorded value of intangible assets is greater than its fair value, they are written down and charged to results of operations. Our FCC licenses were successfully renewed in 2022 through June 2030. FCC licenses are renewed every eight years at a nominal cost, and historically both of our FCC licenses have been renewed at the end of their respective eight-year periods. Since we expect that both of our FCC licenses will continue to be renewed in the future, we believe they have indefinite lives. Given that our radio stations operate in the same geographic market they are considered a single unit of accounting.
Impairment Testing
The Company generally performs its annual impairment review of indefinite-lived intangibles as of October 1 each year. At the time of each impairment review, if the fair value of the indefinite-lived intangible is less than its carrying value, a charge is recorded to results of operations. When indicators of impairment are present, the Company will perform an interim impairment test. We will perform additional interim impairment assessments whenever triggering events suggest
such testing for the recoverability of these assets is warranted. During the years ended December 31, 2022, and 2021, the Company did not record any impairment losses.
Valuation of Indefinite-lived Broadcasting Licenses
Fair value of our FCC licenses is estimated to be the price 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 FCC licenses, 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 market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in its market remains unchanged, with the exception that its 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 FCC license.
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 into consideration the current economic conditions. 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. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by ASC Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting.
Below are some of the key assumptions used in our income method annual impairment assessments. The long-term growth rates in the New York market in which we operate are based on recent industry trends and our expectations for the market going forward.
| | | | | | | | | | | |
| October 1, 2022 | | October 1, 2021 |
| Discount Rate | 12.7% | | 12.1% |
| Long-term Revenue Growth Rate | 0.6% | | 1.3% |
| Mature Market Share | 9.8% | | 9.2% |
| Operating Profit Margin | 23.5-29.0% | | 24.2-29.0% |
As of both December 31, 2022 and 2021, the carrying amount of the Company’s FCC licenses was $63.3 million.
Definite-lived Intangibles
The following table presents the weighted-average remaining useful life at December 31, 2022 and gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at December 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2022 | | December 31, 2021 |
| Weighted Average Remaining Useful Life
(in years) | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Software | 5.5 | | $ | 1,495 | | | $ | 58 | | | $ | 1,437 | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
The software was developed internally by our radio operations and represents our updated websites and mobile applications, which offer increased functionality and opportunities to grow and interact with our audience. They cost $1.5 million to develop and useful lives of five years and seven years were assigned to the application and website, respectively.
Total amortization expense from definite-lived intangibles for the years ended December 31, 2022, and 2021, was $0.1 million and $0.2 million, related to an intangible asset that was fully amortized as of December 31, 2021, respectively. The Company estimates amortization expense each of the next five years as follows:
| | | | | | | | |
| Year ended December 31, | | Amortization Expense |
| 2023 | | $ | 270 | |
| 2024 | | 270 | |
| 2025 | | 270 | |
| 2026 | | 270 | |
| 2027 | | 227 | |
| After 2027 | | 130 | |
| Total | | $ | 1,437 | |
11. OTHER COMMITMENTS AND CONTINGENCIES
Commitments
In addition to the lease payments described in Note 9, the Company has various commitments under contracts that include purchase obligations, employment agreements and leases commencing in 2023 with annual commitments at December 31, 2022 as follows:
| | | | | | | | |
| Year ended December 31, | | Total Payments |
| 2023 | | $ | 1,064 | |
| 2024 | | 1,600 | |
| 2025 | | 1,560 | |
| 2026 | | 1,865 | |
| 2027 | | 1,891 | |
| Thereafter | | 26,383 | |
| Total | | $ | 34,363 | |
Litigation
From time to time, our stations are parties to various legal proceedings arising in the ordinary course of business. In the opinion of management of the Company, however, there are no legal proceedings pending against the Company that we believe are likely to have a material adverse effect on the Company.
On April 1, 2022, the Company received a deficiency letter (the “Nasdaq Letter”) from the Nasdaq Listing Qualifications Department, notifying the Company that the Company is not in compliance with Nasdaq Listing Rule 5550(b)(3), which requires the Company to maintain net income from continuing operations of $0.5 million in the most recently completed fiscal year, or in two of the three most recently completed fiscal years (the “Minimum Net Income Requirement”), nor is it in compliance with either of the alternative listing standards, market value of listed securities or stockholders’ equity. The Company’s failure to comply with the Minimum Net Income Requirement was based on the Company’s filing of its Annual Report on Form 10-K for the year ended December 31, 2021, reporting net loss from continuing operations of $6.1 million.
Pursuant to the Nasdaq Letter, the Company had 45 calendar days from the date of the Nasdaq Letter to submit a plan to regain compliance, and submitted such a plan during this period. The plan was accepted and Nasdaq granted an extension of up to 180 calendar days from the date of the Nasdaq Letter to evidence compliance.
On July 28, 2022, the holder exercised its right under the SG Broadcasting Promissory Notes to convert the outstanding principal and accrued but unpaid interest of $28.0 million and $1.9 million, respectively, for 12.9 million shares of the Company's Class A common stock. The Note Conversion increased the Company’s stockholders’ equity by approximately $29.9 million. As a result, the Company regained compliance with the stockholders’ equity requirement based upon the transactions and events described above.
On August 1, 2022, Nasdaq sent the Company a letter confirming conditional compliance with Listing Rule 5550(b)(1), reminding the Company that it must maintain compliance on a go forward basis (the “Nasdaq Compliance Letter”).
On November 15, 2022, the Company received a second deficiency letter (the “Second Nasdaq Letter”) from the staff of the Nasdaq Listing Qualifications Department (the “Staff”) stating that because the Company had reported stockholders’ equity of $2.0 million in its Quarterly Report on Form 10-Q for the period ended September 30, 2022, the Company no longer complies with Nasdaq Listing Rule 5550(b)(1), which requires a minimum $2.5 million stockholders’
equity and thus the Company's Class A common stock (listed on The Nasdaq Capital Market) would be subject to delisting unless the Company requests a hearing before a Nasdaq Hearings Panel (the “Panel”) on or before November 22, 2022.
Pursuant to the Nasdaq Letter, the Company promptly requested a hearing before the Panel, with the intention of presenting a plan to regain compliance with the Rule.
On December 14, 2022, the Company received a letter (the “Third Nasdaq Letter”) from the Nasdaq Office of General Counsel stating that it had been informed the Staff that the Company’s stockholders’ equity deficiency had been cured, and that the Company is now in compliance with all applicable listing standards. Consequently, the Third Nasdaq Letter informed the Company that the scheduled hearing to appeal the delisting proceedings had been cancelled, and the Company’s stock will continue to be listed on The Nasdaq Stock Market.
12. INCOME TAXES
The provision for income taxes for continuing operations for the years ended December 31, 2022, and 2021, consisted of the following:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Current: | | | |
| Federal | $ | — | | | $ | — | |
| State | — | | | — | |
| Total current | — | | | — | |
| Deferred: | | | |
| Federal | 90 | | | 91 | |
| State | 246 | | | 257 | |
| Total deferred | 336 | | | 348 | |
| Provision for income taxes | $ | 336 | | | $ | 348 | |
The provision for income taxes for continuing operations for the years ended December 31, 2022, and 2021, differs from that computed at the Federal statutory corporate tax rate as follows:
| | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 |
| Federal statutory income tax rate | 21 | % | | 21 | % |
| Computed income tax provision at federal statutory rate | $ | (1,986) | | | $ | (809) | |
| State income tax | (652) | | | (198) | |
| State tax rate change | (278) | | | — | |
| Equity based compensation | 32 | | | (205) | |
| | | |
| Valuation allowance | 3,188 | | | 1,544 | |
| Other | 32 | | | 16 | |
| Provision for income taxes | $ | 336 | | | $ | 348 | |
The final determination of our income tax liability may be materially different from our income tax provision. Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income taxes is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. In addition, our income tax returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities. As of December 31, 2022, the Company had no open income tax examinations.
The components of deferred tax assets and deferred tax liabilities at December 31, 2022, and 2021, were as follows:
| | | | | | | | | | | |
| | December 31, 2022 | | December 31, 2021 |
| Deferred tax assets: | | | |
| Intangible assets | $ | 12,197 | | | $ | 13,622 | |
| Lease liability | 1,749 | | | 6,230 | |
| Interest deduction carryforward | 5,915 | | | 4,311 | |
| Stock compensation | 340 | | | 726 | |
| Net operating losses | 450 | | | 8,674 | |
| Property and equipment | 812 | | | — | |
| Other | 112 | | | 412 | |
| Valuation allowance | (14,718) | | | (21,000) | |
| Total deferred tax assets | 6,857 | | | 12,975 | |
| Deferred tax liabilities | | | |
| Indefinite-lived intangible assets | (7,763) | | | (7,056) | |
| Right of use asset | (1,577) | | | (6,477) | |
| Property and equipment | — | | | (1,511) | |
| Total deferred tax liabilities | (9,340) | | | (15,044) | |
| Net deferred tax liabilities | $ | (2,483) | | | $ | (2,069) | |
A valuation allowance is provided when it is more likely than not that some portion of the deferred tax asset (“DTA”) will not be realized. The Company has considered future taxable income and ongoing prudent and feasible tax-planning strategies in assessing the need for the valuation allowance. As of December 31, 2022, and 2021, the Company recorded a valuation allowance against its deferred tax assets, because the Company's management determined that it was more likely than not that certain assets would not be fully realized, as a result of a sharp deterioration of business activity related to the COVID-19 pandemic.
The Company records certain deferred tax liabilities (“DTLs”) related to indefinite lived intangibles that are not expected to reverse during the carry-forward period. These DTLs can be considered a source of future taxable income to support realization of net operating losses (“NOLs”) that do not expire and DTAs that upon reversal would give rise to NOLs that do not expire. With this consideration, the total valuation allowance recorded at December 31, 2022, and 2021, was $14.7 million and $21.0 million, respectively, resulting in a net $2.5 million and $2.1 million DTL, respectively.
As of December 31, 2022, the Company has no federal net operating losses (“NOLs”) and state NOLs of $6.8 million available to offset future taxable income. Certain state NOL carryforwards begin expiring in the year ending December 2040.
Accounting Standards Codification paragraph 740-10 clarifies the accounting for uncertainty in income taxes by prescribing a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken within a tax return. For those benefits to be recognized, a tax position must be more-likely-than-not to be sustained upon examination by taxing authorities. The amount recognized is measured as the largest benefit that is greater than 50 percent likely of being realized upon ultimate settlement. As of December 31, 2022, the Company has no uncertain tax positions.
13. RELATED PARTY TRANSACTIONS
Transaction Agreement with Emmis and SG Broadcasting
On June 28, 2019, MediaCo entered into a Contribution and Distribution Agreement with Emmis and SG Broadcasting, pursuant to which (i) Emmis contributed the assets of its radio stations WQHT(FM) and WBLS(FM), in exchange for $91.5 million in cash, a $5.0 million note and 23.72% of the common stock of MediaCo, (ii) Standard General purchased 76.28% of the common stock of MediaCo, and (iii) the common stock of MediaCo received by Emmis was distributed pro rata in a taxable dividend to Emmis’ shareholders on January 17, 2020. The common stock of MediaCo acquired by Standard General is entitled to ten votes per share and the common stock acquired by Emmis and distributed to Emmis’ shareholders is entitled to one vote per share.
The sale closed on November 25, 2019, at which time MediaCo and Emmis also entered into a management agreement (the “Management Agreement”), an employee leasing agreement (the “Employee Leasing Agreement”) and certain other ancillary agreements. The Management Agreement with Emmis Operating Company was for an initial term of two years (cancellable by MediaCo after 18 months) under which Emmis provided various services to us, including accounting, human resources, information technology, legal, public reporting and tax. The Management Agreement was terminated in November 2021 at the expiration of the initial term. We paid Emmis an annual fee of $1.3 million in equal monthly installments for these services, plus reimbursement of certain expenses directly related to our operations. For the years ended December 31, 2021, MediaCo recorded $1.1 million of management fee expense which is included in corporate expenses in the accompanying consolidated statements of operations. The Employee Leasing Agreement was terminated in January 2021 at the expiration of the initial term.
Convertible Promissory Notes
As a result of the transaction described above, on November 25, 2019, we issued convertible promissory notes to both Emmis (the Emmis Convertible Promissory Note) and SG Broadcasting (the “November 2019 SG Broadcasting Promissory Note”) in the amounts of $5.0 million and $6.3 million, respectively. On February 28, 2020, the Company and SG Broadcasting amended and restated the November 2019 SG Broadcasting Promissory Note such that the maximum aggregate principal amount issuable under the note was increased from $6.3 million to $10.3 million. Also on February 28, 2020, SG Broadcasting loaned an additional $2.0 million to the Company pursuant to the amended note for working capital purposes.
On March 27, 2020, the Company and SG Broadcasting further amended and restated the November 2019 SG Broadcasting Promissory Note (as so amended and restated, the “Second Amended and Restated SG Broadcasting Promissory Note”) such that the maximum aggregate principal amount issuable under the note was increased from $10.3 million to $20.0 million. On March 27, 2020, SG Broadcasting loaned an additional $3.0 million to the Company pursuant to the Second Amended and Restated SG Promissory Note for working capital purposes.
On August 28, 2020, SG Broadcasting loaned an additional $8.7 million to the Company pursuant to the Second Amended and Restated SG Promissory Note for working capital purposes, bringing the total principal amount outstanding to $20.0 million.
On September 30, 2020, SG Broadcasting loaned an additional $0.3 million to the Company pursuant to an additional promissory note (the “Additional SG Broadcasting Promissory Note” and, together with the Second Amended and Restated SG Broadcasting Promissory Note, the “2019/2020 SG Broadcasting Promissory Notes”) for working capital purposes.
On November 25, 2020, annual interest of $0.5 million and $1.1 million was paid in kind and added to the principal balances of the Emmis Convertible Promissory Note and the 2019/2020 SG Broadcasting Promissory Notes, respectively.
On May 19, 2021, the Company issued to SG Broadcasting the May 2021 SG Broadcasting Promissory Note, in return for which SG Broadcasting loaned $3.0 million to the Company to make the prepayment of Senior Credit Facility debt required under Amendment No. 4. Up to $7.0 million may be borrowed pursuant to the May 2021 SG Broadcasting Promissory Note.
On June 1, 2021, SG Broadcasting loaned $1.0 million to the Company under the May 2021 SG Broadcasting Promissory Note as required by Amendment No. 4 to the Senior Credit Facility.
On September 30, 2021, annual interest of $25 thousand on the 2019/2020 SG Broadcasting Promissory Notes was paid in kind and added to the principal balance outstanding.
On November 25, 2021, annual interest of $0.6 million and $2.2 million was paid in kind and added to the principal balances of the Emmis Convertible Promissory Note and the SG Broadcasting Promissory Notes, respectively.
On May 19, 2022, annual interest of $0.4 million was paid in kind and added to the principal balance of the SG Broadcasting Promissory Notes.
On July 28, 2022, SG Broadcasting exercised its right under the SG Broadcasting Promissory Notes to fully convert the outstanding principal and accrued but unpaid interest into the Company's Class A common stock, and the 2019/2020 SG Broadcasting Promissory Notes were terminated at that time, while the May 2021 SG Broadcasting Promissory Note remains outstanding, but with no amounts outstanding as of December 31, 2022. See Note 7 and Note 11.
On August 19, 2022, Emmis exercised its right under the Emmis Convertible Promissory Note to convert $30 thousand of the outstanding principal for 11 thousand shares of the Company's Class A common stock.
On November 25, 2022, annual interest of $0.8 million was paid in kind and added to the principal balance of the Emmis Convertible Promissory Note.
On December 21, 2022, Emmis exercised its right under the Emmis Convertible Promissory Note to convert $0.9 million of the outstanding principal and $0.1 million of accrued but unpaid interest for 0.8 million shares of the Company's Class A common stock.
Consequently, the principal amount outstanding as of December 31, 2022 under the Emmis Convertible Promissory Note was $6.0 million.
The Company recognized interest expense of $0.8 million and $0.6 million related to the Emmis Convertible Promissory Note for the years ended December 31, 2022, and 2021, respectively. The Company recognized interest expense of $1.8 million and $2.5 million related to the SG Broadcasting Promissory Notes for the years ended December 31, 2022, and 2021, respectively.
The terms of these notes are described in Note 7.
Convertible Preferred Stock
On December 13, 2019, in connection with the purchase of Fairway, the Company issued to SG Broadcasting 220,000 shares of MediaCo Series A Convertible Preferred Stock.
Dividends on Series A Convertible Preferred Stock held by SG Broadcasting were $3.3 million and $2.8 million for the years ended December 31, 2022, and 2021. On December 13, 2022, and 2021, $3.4 million and $2.7 million, respectively, of dividends were paid in kind. These payments in kind increased the accrued value of the preferred stock and 80,000 additional shares were issued as part of this payment. As of December 31, 2022, and 2021, unpaid cumulative dividends were $0.1 million and $0.2 million, respectively, and included in the balance of preferred stock in the accompanying consolidated balance sheets. See Note 4 for a description of the Preferred Stock.
On December 28, 2022, SG Broadcasting exercised its right to partially convert $4.0 million of the outstanding balance on the MediaCo Series A Preferred Shares, for 3.3 million shares of the Company's Class A common stock.
Loan Proceeds Participation Agreement
On April 22, 2020, MediaCo and Emmis entered into a certain Loan Proceeds Participation Agreement (the “LPPA”) pursuant to which (i) Emmis agreed to use certain of the proceeds of the loan Emmis received pursuant to the Paycheck Protection Program (“PPP”) under Division A, Title I of the CARES Act to pay certain wages of employees leased to MediaCo pursuant to the Employee Leasing Agreement, between Emmis and MediaCo (ii) Emmis agreed to waive up to $1.5 million in reimbursement obligations of MediaCo to Emmis under the Employee Leasing Agreement to the extent that the PPP Loan is forgiven, and (iii) MediaCo agreed to promptly pay Emmis an amount equal to 31.56% of the amount of the PPP Loan, if any, that Emmis is required to repay, up to the amount of the reimbursement obligations forgiven under (ii) above. Standard General L.P., on behalf of all of the funds for which it serves as an investment advisor, agreed to guaranty MediaCo’s obligations under the LPPA. During 2021, Emmis received notification that the full amount of the loan was forgiven.
Management Agreement for Billboards LLC
On August 11, 2020, the board of directors of the Company unanimously authorized the entry into a certain Management Agreement (the “Billboard Agreement”) between Fairway Outdoor LLC (a subsidiary of the Company, “Fairway”) and Billboards LLC (an affiliate of Standard General, “Billboards”). Under the Billboard Agreement, Fairway will manage the billboard business of Billboards in exchange for payments of $25,000 per quarter and reimbursement of all out-of-pocket expenses incurred by Fairway in the performance of its duties under the Billboard Agreement. The Billboard Agreement has an effective date of August 1, 2020, has a term of three years, and has customary provisions on limitation of liability and indemnification. $0.1 million of income was recognized in the year ended December 31, 2022 in relation to the Billboard Agreement, none of which was outstanding as of December 31, 2022. Additionally, Fairway incurred $0.2 million of out-of-pocket expenses for the period, substantially all of which has been reimbursed as of December 31, 2022. On December 9, 2022, in connection with the sale of the assets held by Fairway, the Billboard Agreement was terminated pursuant to mutual agreement between Fairway and Billboards.
14. SUBSEQUENT EVENTS
MediaCo is in ongoing negotiations with the SAG-AFTRA union for the WBLS (FM) station. Currently, a term sheet has been agreed upon and we expect a definitive agreement to be signed in the second quarter.
In March 2023, a one-time bonus award of $0.4 million was approved and granted to select employees. These awards are to be paid partially in cash and partially in restricted stock awards, which vest immediately upon grant in March 2023.
There were no other subsequent events other than those discussed in Note 3, Note 4 and Note 9.