NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Basis of Presentation
Description of the Business
Townsquare is a community-focused digital media and digital marketing solutions company with market leading local radio stations, principally focused outside the top 50 markets in the U.S. Our integrated and diversified products and solutions enable local, regional and national advertisers to target audiences across multiple platforms, including digital, mobile, social, video, streaming, e-commerce, radio and events. Our assets include a subscription digital marketing services business (“Townsquare Interactive”), providing website design, creation and hosting, search engine optimization, social platforms and online reputation management for approximately 30,400 small to medium sized businesses; a robust digital advertising division (“Townsquare Ignite,” or “Ignite”), a powerful combination of a) an owned and operated portfolio of more than 400 local news and entertainment websites and mobile apps along with a network of leading national music and entertainment brands, collecting valuable first party data and b) a proprietary digital programmatic advertising technology stack with an in-house demand and data management platform; and a portfolio of 356 local terrestrial radio stations in 74 U.S. markets strategically situated outside the Top 50 markets in the United States. Our portfolio includes local media brands such as WYRK.com, WJON.com and NJ101.5.com, and premier national music brands such as XXLmag.com, TasteofCountry.com, UltimateClassicRock.com, and Loudwire.com.
Current economic challenges, including high and sustained inflation, rising interest rates, and supply chain disruptions have caused and could continue to cause economic uncertainty and volatility. These factors could result in advertising cancellations, declines in the purchase of new advertising by our clients and increases to our operating expenses. We monitor economic conditions closely, and in response to observed or anticipated reductions in revenue, we may institute precautionary measures to address the potential impact to our consolidated financial position, consolidated results of operations, and liquidity, including wage reduction efforts and controlling non-essential capital expenditures.
The extent of the impact of current economic conditions will depend on future actions and outcomes, all of which remain fluid and cannot be predicted with confidence (including effects on advertising activity, consumer discretionary spending and our employees in the markets in which we operate).
Basis of Presentation
The accompanying Unaudited Consolidated Financial Statements should be read in conjunction with the Company’s audited Consolidated Financial Statements and related notes thereto included in the Company's Annual Report on Form 10-K (the "2022 Annual Report on Form 10-K"). The accompanying unaudited interim Consolidated Financial Statements include the consolidated accounts of the Company and its wholly-owned subsidiaries, with all significant intercompany balances and transactions eliminated in consolidation. These financial statements have been prepared in accordance with Generally Accepted Accounting Principles in the United States ("U.S. GAAP") for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. All adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of results of operations and financial condition as of the end of the interim periods have been included. The results of operations for the three months ended March 31, 2023, cash flows for the three months ended March 31, 2023, and the Company’s financial condition as of such date are not necessarily indicative of the results of operations or cash flows that can be expected for, or the Company’s financial condition as of, any other interim period or for the fiscal year ending December 31, 2023. The Consolidated Balance Sheet as of December 31, 2022 is derived from the audited Consolidated Financial Statements at that date.
The presentation of $0.1 million of broadcast and digital advertising revenue previously reported in the Other category for the three months ended March 31, 2022 has been reclassified to conform with the current period's presentation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates its significant estimates, including those related to assumptions used in determining the fair value of assets and liabilities acquired in a business combination, impairment testing of intangible assets, valuation and impairment testing of long-lived tangible assets and investments, the present value of leasing arrangements, share-based payment expense and the calculation of allowance for credit losses and income taxes. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual amounts and results may differ materially from these estimates under different assumptions or conditions.
Note 2. Summary of Significant Accounting Policies
There have been no significant changes in the Company’s accounting policies since December 31, 2022. For the Company's detailed accounting policies please refer to the Consolidated Financial Statements and related notes thereto included in the Company's 2022 Annual Report on Form 10-K.
Recently Adopted Accounting Standards
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which adds a new Topic 326 to the Codification and removes the thresholds that companies apply to measure credit losses on financial instruments measured at amortized cost, such as loans, receivables, and held-to-maturity debt securities. The guidance will remove all recognition thresholds and will require companies to recognize an allowance for credit losses for the difference between the amortized cost basis of a financial instrument and the amount of amortized cost that the company expects to collect over the instrument's contractual life. The new guidance became effective for smaller reporting companies for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years.
The Company adopted the new guidance in the first quarter of 2023. In accordance with the guidance described above, the Company maintains an allowance for credit losses, which represents the portion of accounts receivable that is not expected to be collected over the duration of its contractual life. Credit losses are recorded when the Company believes a customer, or group of customers, may not be able to meet their financial obligations. A considerable amount of judgment is required in determining expected credit losses. Relevant factors include prior collection history with customers, the related aging of past due balances, projections of credit losses based on historical trends or past events, and the consideration of forecasts of future economic conditions. Allowances for credit losses are based on facts available and are re-evaluated and adjusted on a regular basis. Negative macroeconomic trends could result in an increase in credit losses if delays in the payment of outstanding receivables are observed or if future economic conditions differ from those considered in our forecasts. The adoption of this standard did not have a significant impact on the Consolidated Financial Statements.
The change in the allowance for credit losses for the three months ended March 31, 2023 was as follows (in thousands):
| | | | | | | | |
| Balance at December 31, 2022 | | $ | 5,946 | |
| Provision for credit losses | | 1,323 | |
| Amounts written off against allowance | | (1,800) | |
| Balance at March 31, 2023 | | $ | 5,469 | |
Recently Issued Standards That Have Not Yet Been Adopted
There were no new accounting pronouncements issued during the three months ended March 31, 2023 that are expected to have a material impact on the Consolidated Financial Statements.
Note 3. Revenue Recognition
The following tables present a disaggregation of our revenue by reporting segment and revenue from political sources and all other sources (in thousands) for the three months ended March 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended March 31, 2023 | | |
| Subscription Digital Marketing Solutions | | Digital Advertising | | Broadcast Advertising | | Other | | Total | | | | | | | | | | |
| Net Revenue (ex Political) | $ | 21,561 | | | $ | 33,692 | | | $ | 45,725 | | | $ | 1,919 | | | $ | 102,897 | | | | | | | | | | | |
| Political | — | | | 15 | | | 198 | | | — | | | 213 | | | | | | | | | | | |
| Net Revenue | $ | 21,561 | | | $ | 33,707 | | | $ | 45,923 | | | $ | 1,919 | | | $ | 103,110 | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, 2022 |
| | | | | | | | | | | Subscription Digital Marketing Solutions | | Digital Advertising | | Broadcast Advertising | | Other | | Total |
| Net Revenue (ex Political) | | | | | | | | | | | $ | 21,850 | | | $ | 29,172 | | | $ | 47,840 | | | $ | 948 | | | $ | 99,810 | |
| Political | | | | | | | | | | | — | | | 46 | | | 386 | | | — | | | 432 | |
| Net Revenue | | | | | | | | | | | $ | 21,850 | | | $ | 29,218 | | | $ | 48,226 | | | $ | 948 | | | $ | 100,242 | |
Revenue from contracts with customers is recognized as an obligation until the terms of a customer contract are satisfied; generally this occurs with the transfer of control as we satisfy contractual performance obligations over time. Our contractual performance obligations include the performance of digital marketing solutions, placement of internet-based advertising campaigns, broadcast of commercials on our owned and operated radio stations, and the operation of live events. Revenue is measured at contract inception as the amount of consideration we expect to receive in exchange for transferring goods or providing services. Our contracts are at a fixed price at inception and do not include any variable consideration or financing components by normal course of business practice. Sales, value add, and other taxes that are collected concurrently with revenue producing activities, are excluded from revenue.
The primary sources of net revenue are the sale of digital and broadcast advertising solutions on our owned and operated websites, radio stations’ online streams, and mobile applications, radio stations, and on third-party websites through our in-house digital programmatic advertising platform. Through our digital programmatic advertising platform, we are able to hyper-target audiences for our local, regional and national advertisers by combining first and third-party audience and geographic location data, providing them the ability to reach a high percentage of their online audience. We deliver these solutions across desktop, mobile, connected TV, email, paid search and social media platforms utilizing display, video and native executions. We also offer subscription digital marketing solutions under the brand name Townsquare Interactive to small and mid-sized local and regional businesses in markets outside the top 50 across the United States, including the markets in which we operate radio stations. Townsquare Interactive offers traditional and mobile-enabled website development and hosting services, e-commerce platforms, search engine and online directory optimization services, online reputation monitoring, social media management, and website retargeting.
Political net revenue includes the sale of advertising for political advertisers. Contracted performance obligations under political contracts consist of the broadcast and placement of digital advertisements. Management views political revenue separately based on the episodic nature of election cycles and local issues calendars.
Net revenue for digital and broadcast advertisements are recognized as the contractual performance obligations for Townsquare services are satisfied. We measure progress towards the satisfaction of our contractual performance obligations in accordance with the contractual arrangement. We recognize the associated contractual revenue as delivery takes place and the right to invoice for services performed is met.
Our advertising contracts are short-term (less than one year) and payment terms are generally net 30-60 days for traditional customer contracts and net 60-90 days for national agency customer contracts. Our billing practice is to invoice customers on a monthly basis for services delivered to date (representing the right to invoice). Our contractual arrangements do not include rights of return and do not include any significant judgments by nature of the products and services.
Net revenue from digital subscription-based contractual performance obligations is recognized ratably over time as our performance obligations are satisfied. Subscription-based service fees are typically billed in advance of the month of service at a fixed monthly fee that is contractually agreed upon at contract inception. The measure of progress in such arrangements is the number of days of successful delivery of the contracted service.
For all customer contracts, we evaluate whether we are the principal (i.e., report revenue on a gross basis) or the agent (i.e., report revenue on a net basis). Generally, we report revenue for advertising placed on Townsquare properties on a gross basis (the amount billed to our customers is recorded as revenue, and the amount paid to our publishers is recorded as a cost of revenue). We are the principal because we control the advertising inventory before it is transferred to our customers. Our control is evidenced by our sole ability to monetize the advertising inventory, being primarily responsible to our customers, having discretion in establishing pricing, or a combination of these factors. We also generate revenue through agency relationships in which revenue is reported net of agency commissions. Agency commissions are calculated based on a stated percentage applied to gross billing revenue for advertisers that use agencies.
The following tables provides information about receivables, contract assets and contract liabilities from contracts with customers (in thousands):
| | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31,
2022 |
| Accounts Receivable | | $ | 55,288 | | | $ | 61,234 | |
| Short-term contract liabilities (deferred revenue) | | $ | 11,933 | | | $ | 10,669 | |
| Contract Acquisition Costs | | $ | 6,489 | | | $ | 6,348 | |
We receive payments from customers based upon contractual billing schedules; contract receivables are recognized in the period the Company provides services when the Company’s right to consideration is unconditional. Payment terms vary by the type and location of our customer and the products or services offered. Payment terms for amounts invoiced are typically net 30-60 days.
Our contract liabilities include cash payments received or due in advance of satisfying our performance obligations and digital subscriptions in which payment is received in advance of the service and month. These contract liabilities are recognized as revenue as the related performance obligations are satisfied. As of March 31, 2023, and December 31, 2022, the balance in the contract liabilities was $11.9 million and $10.7 million, respectively. The increase in the contract liabilities balance at March 31, 2023 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, offset by $7.3 million of recognized revenue for the three months ended March 31, 2023. For the three months ended March 31, 2022, we recognized $6.4 million of revenue that was previously included in our deferred revenue balance. No significant changes in the time frame of the satisfaction of contract liabilities have occurred during the three months ended March 31, 2023.
Our capitalized contract acquisition costs include amounts related to sales commissions paid for signed contracts with perceived durations exceeding one year. We defer the related sales commission costs and amortize such costs to expense in a manner that is consistent with how the related revenue is recognized over the duration of the related contracts. We have evaluated the average customer contract duration (initial term and any renewals) to determine the appropriate amortization period for these contractual arrangements. Capitalized contract acquisition costs are recognized in prepaid expenses and other current assets in the accompanying consolidated balance sheets. As of March 31, 2023 and December 31, 2022, we had a balance of $6.5 million and $6.3 million, respectively, in capitalized contract acquisition costs and recognized $1.6 million and $1.2 million of amortization for the three months ended March 31, 2023 and 2022, respectively. No impairment losses have been recognized or changes made to the time frame for performance of the obligations related to deferred contract assets during the three months ended March 31, 2023 and 2022.
Arrangements with Multiple Performance Obligations
In contracts with multiple performance obligations, we identify each performance obligation and evaluate whether the performance obligations are distinct within the context of the contract at contract inception. When multiple performance obligations are identified, we identify how control transfers to the customer for each distinct contract obligation and determine the period when the obligations are satisfied. If obligations are satisfied in the same period, no allocation of revenue is deemed to be necessary. In the event performance obligations within a bundled contract do not run concurrently,
we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or by using expected cost-plus margins. Performance obligations that are not distinct at contract inception are combined.
Performance Obligations
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less and (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. Amounts related to performance obligations with expected durations of greater than one year are at a fixed price per unit and do not include any upfront or minimum payments requiring any estimation or allocation of revenue.
Note 4. Acquisitions and Divestitures
Acquisitions and Divestitures
On June 17, 2022, the Company acquired Cherry Creek Broadcasting LLC (“Cherry Creek”) for a cash purchase price of $18.5 million, net of closing adjustments. The purchase price was in excess of the fair value of net assets acquired, resulting in the recognition of goodwill. The Company finalized the allocation of the purchase price for Cherry Creek during the three months ended March 31, 2023. The table below summarizes the Cherry Creek purchase price allocation. The measurement period adjustments below reflect changes from the preliminary purchase acquisition date fair values of major classes of net assets acquired (in thousands):
| | | | | | | | | | | |
| Amounts recognized at June 17, 2022
(Provisional) | Measurement Period Adjustments | Amounts recognized at March 31, 2023
(Adjusted) |
| Net tangible assets acquired | $ | 1,366 | | $ | 4,694 | | $ | 6,060 | |
| Intangible assets, net | 8,676 | | 187 | | 8,863 | |
| Goodwill | 8,377 | | (4,843) | | 3,534 | |
| Total Purchase Price | $ | 18,419 | | $ | 38 | | $ | 18,457 | |
The intangible assets acquired based on the estimate of the fair values of the identifiable intangible assets are as follows:
| | | | | | | | |
| Amounts recognized at March 31, 2023 | Remaining Useful Life at June 17, 2022
(in years) |
| Customer relationships | $ | 5,007 | | 10 |
| FCC licenses | 2,889 | | Indefinite |
| Content Rights | 642 | | 7 |
| Other intangibles | 325 | | 3 |
| Total Acquired Intangible Assets | $ | 8,863 | | |
The estimate of the fair value of the customer relationships acquired in the Cherry Creek acquisition were determined using a risk-adjusted discounted cash flow model, specifically, the excess earnings method which considers the use of other assets in the generation of the projected cash flows of a specific asset to isolate the economic benefit generated by the customer relationships. The contribution of other assets, such as fixed assets, working capital and workforce, to overall cash flows was estimated through contributory asset capital charges. Therefore, the value of the acquired customer relationship is the present value of the attributed post-tax cash flows, net of the return on fair value attributed to tangible and other intangible assets.
The estimate of the fair value of the FCC licenses acquired in the Cherry Creek acquisition were determined utilizing observable market based transactions of similar broadcast licenses and their estimated replacement values.
Goodwill totaling $3.5 million represents the excess of the Cherry Creek purchase price over the fair value of net assets acquired, representing future economic benefits that are expected to be achieved as a result of the acquisition, and is included in the Broadcast Advertising and Digital Advertising segments. The Company believes the acquisition of Cherry Creek, which includes a portfolio of local media brands, will further its goal of becoming the number one local media company in markets outside of the Top 50 in the United States. In addition, the acquisition provides an opportunity to bring our digital assets and solutions to the Cherry Creek markets and accelerate their digital growth with our Digital First strategy.
Goodwill generated from the Cherry Creek acquisition is deductible for income tax purposes.
The results of Cherry Creek's operations have been included in our Consolidated Financial Statements, following the closing of the acquisition on June 17, 2022. Pro forma information has not been presented because the effect of the acquisition is not material.
Simultaneously, due to FCC ownership limitations, the Company sold six radio stations in Missoula, MT for an immaterial amount and has placed one radio station in Tri-Cities, WA in a divestiture trust. On July 19, 2022, the Company acquired a radio station in Tri-Cities, WA for an immaterial amount.
During the three months ended March 31, 2023, the Company sold assets associated with a radio broadcast station in Texarkana, TX for an immaterial amount.
Note 5. Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
| | | | | | | | | | | |
| March 31, 2023 | | December 31, 2022 |
Land and improvements | $ | 19,261 | | | $ | 19,966 | |
Buildings and leasehold improvements | 57,867 | | | 57,386 | |
Broadcast equipment | 108,623 | | | 108,057 | |
Computer and office equipment | 24,488 | | | 24,211 | |
Furniture and fixtures | 22,951 | | | 22,968 | |
Transportation equipment | 20,409 | | | 20,703 | |
Software development costs | 40,869 | | | 39,489 | |
Total property and equipment, gross | 294,468 | | | 292,780 | |
Less accumulated depreciation and amortization | (182,595) | | | (178,934) | |
Total property and equipment, net | $ | 111,873 | | | $ | 113,846 | |
Depreciation and amortization expense for property and equipment was $4.3 million and $4.5 million for the three months ended March 31, 2023 and 2022, respectively.
During the three months ended March 31, 2023, the Company recognized $0.3 million in impairment charges related to certain long-lived assets expected to be sold for immaterial amounts in 5 local markets. During the three months ended March 31, 2022 the Company sold land in Bismarck, ND, recognizing a $0.3 million gain on sale.
The Company had no material right of use assets related to its finance leases as of March 31, 2023 and December 31, 2022.
Note 6. Goodwill and Other Intangible Assets
Indefinite-lived intangible assets
Indefinite-lived assets consist of FCC broadcast licenses, goodwill and investment in digital assets.
FCC Broadcast Licenses
FCC licenses represent a substantial portion of the Company’s total assets. The FCC licenses are renewable in the ordinary course of business, generally for a maximum of eight years. The fair value of FCC licenses is primarily dependent on the future cash flows of the radio markets and other assumptions, including, but not limited to, forecasted revenue growth rates, profit margins and a risk-adjusted discount rate. The Company has selected December 31st as the annual testing date.
The Company evaluates its FCC licenses for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Due to changes in forecasted traditional broadcast revenue in the markets in which we operate and increases in the weighted average cost of capital, the Company quantitatively evaluated the fair value of its FCC licenses at March 31, 2023.
The key assumptions used in applying the direct valuation method are summarized as follows:
| | | | | | | | |
| March 31, 2023 |
| Discount Rate | 12.2% |
| Long-term Revenue Growth Rate | 0.0% |
| Low | High |
| Mature Market Share* | 21.7% | 75.0% |
| Operating Profit Margin | 20.0% | 47.0% |
* Market share assumption used when reliable third-party data is available. Otherwise, Company results and forecasts are utilized.
Based on the results of interim impairment assessments of our FCC licenses, as of March 31, 2023 we incurred impairment charges of $8.2 million for FCC licenses in 15 of our 74 local markets for the three months ended March 31, 2023. The impairment charges were primarily driven by decreases in forecasted broadcast revenues and increases in the discount rate applied in the valuation of our FCC licenses due to an increase in the weighted average cost of capital. The Company recorded no impairment charges on its FCC licenses for the three months ended March 31, 2022.
Unfavorable changes in key assumptions utilized in the impairment assessment of our FCC licenses may affect future testing results. For example, keeping all other assumptions constant, a 50-basis point increase in the weighted average cost of capital as of the date of our last quantitative assessment would cause the estimated fair values of our FCC licenses to decrease by $21.7 million which would have resulted in an additional impairment charge of $4.3 million as of March 31, 2023. Further, a 100-basis point decline in the long-term revenue growth rate would cause the estimated fair values of our FCC licenses to further decrease by $26.7 million which would have resulted in a further impairment charge of $9.6 million as of March 31, 2023. Assumptions used to estimate the fair value of our FCC licenses are also dependent upon the expected performance and growth of our traditional broadcast operations. In the event broadcast revenue experiences actual or anticipated declines, such declines will have a negative impact on the estimated fair value of our FCC licenses, and the Company could recognize additional impairment charges, which could be material.
Goodwill
For goodwill impairment testing, the Company has selected December 31st as the annual testing date. In addition to the annual impairment test, the Company regularly assesses whether a triggering event has occurred, which would require interim impairment testing. As of December 31, 2022, the fair values of our Local Markets, National Digital, Townsquare Ignite, Analytical Services, Townsquare Interactive and Live Events reporting units were in excess of their respective carrying values by approximately 18%, 243%, 90%, 211%, 252%, and 19%, respectively. The Amped reporting unit had no goodwill as of December 31, 2022.
The Company considered whether any events have occurred or circumstances have changed from the last quantitative analysis performed as of December 31, 2022 that would indicate that the fair value of the Company's reporting units may be below their carrying amounts. Based on such analysis, the Company determined that there have been no indicators that the fair value of its reporting units may be below their carrying amounts as of March 31, 2023.
The following table presents changes in goodwill by segment during the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subscription Digital Marketing Solutions | | Digital Advertising | | Broadcast Advertising | | Other | | Total |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Balance at December 31, 2022 | $ | 77,000 | | | $ | 77,687 | | | $ | 2,715 | | | $ | 3,983 | | | $ | 161,385 | |
| Cherry Creek measurement period adjustment | — | | | — | | | 96 | | | — | | | 96 | |
Balance at March 31, 2023 | $ | 77,000 | | | $ | 77,687 | | | $ | 2,811 | | | $ | 3,983 | | | $ | 161,481 | |
Digital Assets
During the first quarter of 2022, the Company invested an aggregate of $5.0 million in digital assets. They were accounted for as indefinite-lived intangible assets in accordance with ASC 350, Intangibles - Goodwill and Other, included as a component of intangible assets, net on the Consolidated Balance Sheet. Any decrease in the digital assets' fair values below our carrying values at any time subsequent to acquisition was recognized as an impairment charge. No upward revisions for any market price increases were recognized.
In early March 2023, the Company sold its digital assets with a carrying value of $2.1 million, recognizing a gain on the sale of $0.8 million during the three months ended March 31, 2023, included as a component of Other (income) expense, net on the Consolidated Statements of Operations. During the three months ended March 31, 2022, the Company recorded $0.4 million in impairment losses due to changes in the fair value of the Company's digital assets observed during the period.
Definite-lived intangible assets
The Company’s definite-lived intangible assets were acquired primarily in various acquisitions as well as in connection with the acquisition of software and music licenses.
The following tables present details of our intangible assets as of March 31, 2023 and December 31, 2022, respectively (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2023 |
| Weighted Average Useful Life (in Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangible Assets: | | | | | | | |
FCC licenses | Indefinite | | $ | 243,908 | | | $ | — | | | $ | 243,908 | |
| | | | | | | |
| Content rights and other intangible assets | 1 - 10 | | 37,186 | | | (16,465) | | | 20,721 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | | | $ | 281,094 | | | $ | (16,465) | | | $ | 264,629 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| Weighted Average Useful Life (in Years) | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Intangible Assets: | | | | | | | |
FCC licenses | Indefinite | | $ | 252,110 | | | $ | — | | | $ | 252,110 | |
| Digital assets | Indefinite | | 2,136 | | | — | | | $ | 2,136 | |
| Content rights and other intangible assets | 1 - 10 | | 37,092 | | | (14,500) | | | 22,592 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total | | | $ | 291,338 | | | $ | (14,500) | | | $ | 276,838 | |
Amortization of definite-lived intangible assets was $1.8 million and $1.1 million for the three months ended March 31, 2023 and 2022, respectively.
Estimated future amortization expense for each of the five succeeding fiscal years and thereafter as of March 31, 2023 is as follows (in thousands):
| | | | | |
| 2023 (remainder) | $ | 5,324 | |
| 2024 | 6,017 | |
| 2025 | 2,304 | |
| 2026 | 2,108 | |
| 2027 | 1,978 | |
| Thereafter | 2,990 | |
| $ | 20,721 | |
Note 7. Investments
Long-term investments consist of minority holdings in various companies. As management does not exercise significant influence over operating and financial policies of the investees, the investments are not consolidated or accounted for under the equity method of accounting. The initial valuation of equity securities is based upon an estimate of market value at the time of investment, or upon a combination of valuation analyses using both observable and unobservable inputs categorized as Level 2 and Level 3 within the ASC 820 framework.
In accordance with ASC 321, Investments - Equity Securities, the Company measures its equity securities at cost minus impairment, as their fair values are not readily determinable and the investments do not qualify for the net asset value per share practical expedient. The Company monitors its investments for any subsequent observable price changes in orderly transactions for the identical or a similar investment of the same investee, at which time the Company would adjust the then current carrying values of the related investment. Additionally, the Company evaluates its investments for any indicators of impairment.
Equity securities measured at cost minus impairment
During the three months ended March 31, 2023 and 2022, there were no impairment charges or observable price changes in orderly transactions for the Company's investees.
In April of 2023, one of the Company's investments was acquired as a result of a private transaction. The Company will recognize a $4.8 million gain upon the effective date of the transaction, based on total cash consideration received.
Equity securities measured at fair value
On July 2, 2021, one of the Company's investees completed its registration with the SEC and became a publicly traded company. Based on the market price of the investee's common stock as of March 31, 2023, the fair value of the Company's investment in the common stock of the investee was approximately $1.1 million. As a result, the Company recorded an unrealized loss of $0.1 million during the three months ended March 31, 2023. During the three months ended March 31, 2022, the Company recorded an unrealized loss of $1.5 million as a result of changes in the fair value of the investee's common stock during the period.
Unrealized gains and losses are included as a component of other expense (income) on the Unaudited Consolidated Financial Statements. The market price of the investee's common stock is categorized as Level 1 within the ASC 820 framework.
Note 8. Long-Term Debt
Total debt outstanding is summarized as follows (in thousands):
| | | | | | | | | | | |
| March 31,
2023 | | December 31,
2022 |
| 2026 Notes | $ | 518,605 | | | $ | 530,766 | |
| | | |
| | | |
| | | |
| Deferred financing costs | (5,761) | | | (6,324) | |
| | | |
| | | |
| Total long-term debt | $ | 512,844 | | | $ | 524,442 | |
During the three months ended March 31, 2023, the Company voluntarily repurchased an aggregate $12.2 million principal amount of its 2026 Notes below par, plus accrued interest. The Company wrote-off approximately $0.1 million of unamortized deferred financing costs, recognizing a total net gain of $0.8 million in connection with the voluntary repurchases of its 2026 Notes. The repurchased notes were canceled by the Company.
The 2026 Notes indenture contains certain covenants that may limit, among other things, our ability to; incur additional indebtedness, declare or pay dividends, redeem stock, transfer or sell assets, make investments or agree to certain restrictions on the ability of restricted subsidiaries to make payments to the Company. Certain of these covenants will be suspended if the 2026 Notes are assigned an investment grade rating by Standard & Poor’s Investors Ratings Services, Moody’s Investors Service, Inc. or Fitch Ratings, Inc. and no event of default has occurred and is continuing.
The Company was in compliance with its covenants under the 2026 Notes indenture as of March 31, 2023.
As of March 31, 2023, based on available market information, the estimated fair value of the 2026 Notes was $481.0 million. The Company used Level 2 measurements under the fair value measurement hierarchy established under Fair Value Measurement (Topic 820).
Annual maturities of the Company's long-term debt as of March 31, 2023 are as follows (in thousands):
| | | | | |
| 2023 (remainder) | $ | — | |
| 2024 | — | |
| 2025 | — | |
| 2026 | 518,605 | |
| 2027 | — | |
| Thereafter | — | |
| $ | 518,605 | |
Note 9. Income Taxes
The Company's effective tax rate for the three months ended March 31, 2023 and 2022 was approximately 44.8% and 34.7%, respectively. The increase in the effective tax rate for the three months ended March 31, 2023 is primarily driven by certain non-deductible expenses and increases in the valuation allowance for deferred tax assets.
The effective tax rate may vary significantly from period to period, and can be influenced by many factors. These factors include, but are not limited to, changes to the statutory rates in the jurisdictions where the Company has operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of 21% primarily relates to certain non-deductible items, state and local income taxes and the valuation allowance for deferred tax assets.
Note 10. Stockholders' Equity
Stock Options
During the three months ended March 31, 2023, the Company granted 217,547 and 750,000 options with grant date fair values of $2.47 to $3.07 and $2.05 to $2.14, respectively. The options contain market conditions whereby the options will vest and become exercisable subject to the achievement of a specified volume weighted average trading price ("VWAP") over a specified period and continued employment through the performance period each as observed and summarized below, respectively:
| | | | | | | | | | | | | | | | | | | | |
| VWAP over the last 20 trading days of the three-year performance period | | VWAP over 30 consecutive trading days of the seven-year performance period |
| VWAP | | Number of Shares that Vest | | VWAP | | Number of Shares that Vest |
| $8.74 | | 65,147 | | $11.00 | | 250,000 |
| $10.75 | | 71,429 | | $14.00 | | 250,000 |
| $13.05 | | 80,971 | | $17.00 | | 250,000 |
| | 217,547 | | | | 750,000 |
| | | | | | |
| | | | | | |
No portion of the grants will vest unless the VWAP targets are achieved during the respective performance periods.
The Company also granted 168,067 and 1,343,000 options with grant date fair values of $3.99 and $3.97, respectively. The options have three-year and four-year vesting periods, respectively, each with ten-year terms.
The grant date fair value of stock options with market conditions is estimated using the Monte Carlo option pricing model, while stock options containing only service conditions is estimated using the Black-Scholes option pricing model. Each model requires an estimate of the expected term of the option, the expected volatility of the Company’s common stock price, dividend yield and the risk-free interest rate. The below table summarizes the assumptions used to estimate the fair value of the equity options granted:
| | | | | | | | | | | | | |
| Monte Carlo Model | | Black-Scholes Model | | |
| | | | | |
| Expected volatility | 50.0 | % | | 51% - 52% | | |
| Expected term | 5 - 7 years | | 6.01 - 6.38 years | | |
| Risk free interest rate | 3.43% - 3.74% | | 3.42% - 4.02% | | |
| Expected dividend yield | 0% - 9.15% | | 0.0 | % | | |
For options only containing service conditions, the expected term was calculated using the simplified method, defined as the midpoint between the vesting period and the contractual term of each award, due to the lack of sufficient and meaningful historical exercise data. For options with market-based conditions, the expected term was estimated based on when the options are expected to be exercised. The expected volatility was based on market conditions of the Company. The risk-free interest rate was based on the U.S. Treasury yield curve in effect on the date of grant which most closely corresponds to the expected term of the option. We previously paid a quarterly dividend of $0.075 per share starting in 2018 which was ceased in 2020 as a result of uncertainty created by the COVID-19 pandemic. On March 6, 2023, the board of directors approved a quarterly dividend of $0.1875 per share for holders of record as of March 27, 2023. Thus, for options with grant dates prior to March 6, 2023, the expected dividend yield was 0%.
The following table summarizes option activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life (years) | | Aggregate Intrinsic Value (in thousands) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Outstanding at December 31, 2022 | 9,478,698 | | | $ | 7.80 | | | 4.62 | | $ | 2,798 | |
| Granted - service conditions | 1,511,067 | | | 7.30 | | | | | |
| Granted - market conditions | 967,547 | | | 7.93 | | | | | |
| Exercised | (5,000) | | | 6.25 | | | | | 7 | |
| Forfeited and expired | (3,257) | | | 9.63 | | | | | |
| Outstanding at March 31, 2023 | 11,949,055 | | | $ | 7.75 | | | 5.34 | | $ | 6,990 | |
| | | | | | | |
| Exercisable at March 31, 2023 | 7,110,292 | | | $ | 8.03 | | | 2.95 | | $ | 3,657 | |
The maximum contractual term of stock options is 10 years.
Restricted Stock Awards
During the three months ended March 31, 2023, the Company granted 68,876 shares to non-employee directors with a vesting period of one year, and 13,387 shares with a vesting period of three years. The grant date fair value of the grants were $7.55 and $7.47 per share, respectively. The fair value of the restricted stock awards is equal to the closing share price on the date of grant.
The following table summarizes restricted stock activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Fair Value | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-vested balance at January 1, 2023 | 93,181 | | 9.63 | | | | | | |
| Shares granted | 82,263 | | | 7.54 | | | | | | |
| Shares vested | (62,979) | | | 9.52 | | | | | | |
| | | | | | | | | |
| Non-vested balance at March 31, 2023 | 112,465 | | 8.16 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Restricted Stock Units
The following table summarizes restricted stock unit activity for the three months ended March 31, 2023:
| | | | | | | | | | | | | | | | | |
| Number of Shares | | Weighted Average Fair Value | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Non-vested balance at January 1, 2023 | — | | $ | — | | | | | | | |
| Shares granted - service conditions | 218,543 | | | 7.55 | | | | | | |
| Shares granted - market conditions | 218,543 | | | 4.21 | | | | | | |
| Shares vested | — | | | — | | | | | | | |
| | | | | | | | | |
| Non-vested balance at March 31, 2023 | 437,086 | | 5.88 | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
During the three months ended March 31, 2023, the Company granted 218,543 stock units with a vesting period of three years and a grant date fair value of $7.55 per share. The fair value of the restricted stock awards is equal to the closing share price on the date of grant.
During the three months ended March 31, 2023, the Company granted 218,543 restricted stock units with a vesting period of three-years and grant date fair values of $3.51 to $4.91. The stock units contain market conditions whereby the stock units will vest subject to the achievement of a specified volume weighted average trading price ("VWAP"), subject to continued employment or service through the end of the performance period as observed and summarized below:
| | | | | | | | | | | | |
| | VWAP over the last 20 trading days of the three-year performance period |
| | | | VWAP | | Number of Shares that Vest |
| | | | $8.74 | | 72,840 |
| | | | $10.75 | | 72,840 |
| | | | $13.05 | | 72,863 |
| | | | | | |
| | | | | | |
The grant date fair value of the restricted stock units with market conditions is estimated using the Monte Carlo option pricing model. The below table summarizes the assumptions used to estimate the fair value of the restricted stock units granted:
| | | | | | | |
| Monte Carlo Model | | |
| | | |
| Expected volatility | 50.0% | | |
| Risk free interest rate | 3.72% | | |
| Expected dividend yield | 0.0% | | |
The expected volatility was based on market conditions of the Company. The risk-free interest rate was based on the U.S. Treasury yield curve in effect on the date of grant which most closely corresponds to the vesting period of the restricted stock units.
Employee Stock Purchase Plan
During the three months ended March 31, 2023, a total of 65,732 shares of Class A common stock were issued under the 2021 Employee Stock Purchase Plan (the "ESPP").
For the three months ended March 31, 2023 and 2022, the Company recognized approximately $1.8 million and $0.9 million, respectively, of stock-based compensation expense with respect to options, restricted stock awards, restricted stock units and the ESPP. As of March 31, 2023, total unrecognized stock-based compensation expense related to our stock options and restricted stock was $14.0 million and $3.0 million, respectively, and is expected to be recognized over a weighted average period of 2.7 and 2.5 years respectively.
Dividends Declared
In May of 2023 the board of directors approved a dividend of $0.1875 per share. The dividend will be paid to holders of record as of June 30, 2023 on August 1, 2023.
Note 11. Net (Loss) Income Per Share
Basic earnings per common share (“EPS”) is generally calculated as income available to common shareholders divided by the weighted average number of common shares outstanding. Diluted EPS is generally calculated as income available to common shareholders divided by the weighted average number of common shares outstanding plus the dilutive effect of common share equivalents. Stock-based compensation awards that are out-of-the-money and stock options and restricted stock units in which the market-based performance criteria have not been met as of the end of the respective reporting period are omitted from the calculation of Diluted EPS.
The following table sets forth the computations of basic and diluted net (loss) income per share for the three months ended March 31, 2023 and 2022 (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| | | | | | | |
| Numerator: | | | | | | | |
| Net (loss) income | | | | | $ | (1,941) | | | $ | 2,741 | |
| Net income from non-controlling interest | | | | | 480 | | | 517 | |
| Net (loss) income attributable to controlling interest | | | | | $ | (2,421) | | | $ | 2,224 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Denominator: | | | | | | | |
| Weighted average shares of common stock outstanding | | | | | 17,204 | | | 16,796 | |
| Effect of dilutive common stock equivalents | | | | | — | | | 2,713 | |
| Weighted average diluted common shares outstanding | | | | | 17,204 | | | 19,509 | |
| | | | | | | |
| Basic (loss) income per share | | | | | $ | (0.14) | | | $ | 0.13 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Diluted (loss) income per share | | | | | $ | (0.14) | | | $ | 0.11 | |
| | | | | | | |
The Company had the following dilutive securities that were not included in the computation of diluted net (loss) income per share as they were considered anti-dilutive (in thousands):
| | | | | | | | | | | | | | | |
| | | Three Months Ended March 31, |
| | | | | 2023 | | 2022 |
| Stock options | | | | | 9,586 | | | 45 | |
| Stock options with unsatisfied market conditions | | | | | 1,008 | | | — | |
| Restricted stock units | | | | | 177 | | | — | |
| Restricted stock units with unsatisfied market conditions | | | | | 177 | | | — | |
| Restricted stock awards | | | | | 121 | | | — | |
| Shares expected to be issued under the 2021 Employee Stock Purchase Plan | | | | | 49 | | | 78 | |
Note 12. Segment Reporting
Operating segments are organized internally by type of products and services provided. Based on the information reviewed by the Company's CEO in his capacity as Chief Operating Decision Maker ("CODM"), the Company has identified three segments: Subscription Digital Marketing Solutions, Digital Advertising and Broadcast Advertising. The remainder of our business is reported in the Other category.
The Company operates in one geographic area. The Company's assets and liabilities are managed within markets outside the top 50 across the United States where the Company conducts its business and are reported internally in the same manner as the Consolidated Financial Statements; thus, no additional information regarding assets and liabilities of the Company’s reportable segments is produced for the Company's CEO or included in these Consolidated Financial Statements. Intangible assets consist principally of FCC broadcast licenses and other definite-lived intangible assets and primarily support the Company’s Broadcast Advertising segment. For further information see Note 6, Goodwill and Other Intangible Assets. The Company does not have any material inter-segment sales.
The Company's management evaluates segment operating income (loss), which excludes unallocated corporate expenses and the impact of certain items that are not directly attributable to the reportable segments' underlying operating performance, and primarily includes expenses related to corporate stewardship and administration activities, transaction related costs and non-cash impairment charges.
The following tables present the Company's reportable segment results for the three months ended March 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subscription Digital Marketing Solutions | | Digital Advertising | | Broadcast Advertising | | Other | | Corporate and Other Reconciling Items | | Total |
| Net revenue | $ | 21,561 | | | $ | 33,707 | | | $ | 45,923 | | | $ | 1,919 | | | $ | — | | | $ | 103,110 | |
| Direct operating expenses, excluding depreciation, amortization and stock-based compensation | 15,962 | | | 23,613 | | | 37,365 | | | 1,384 | | | — | | | 78,324 | |
| Depreciation and amortization | 328 | | | 164 | | | 3,600 | | | 36 | | | 816 | | | 4,944 | |
| Corporate expenses | — | | | — | | | — | | | — | | | 5,345 | | | 5,345 | |
| Stock-based compensation | 128 | | | 45 | | | 164 | | | 2 | | | 1,433 | | | 1,772 | |
| Transaction and business realignment costs | — | | | — | | | 193 | | | 11 | | | 88 | | | 292 | |
| | | | | | | | | | | |
Impairment of intangible and long-lived assets | — | | | — | | | 8,487 | | | — | | | — | | | 8,487 | |
| | | | | | | | | | | |
| Net gain on sale and retirement of assets | — | | | — | | | (292) | | | — | | | — | | | (292) | |
| Operating income (loss) | $ | 5,143 | | | $ | 9,885 | | | $ | (3,594) | | | $ | 486 | | | $ | (7,682) | | | $ | 4,238 | |
The following table presents the Company's reportable segment results for the three months ended March 31, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Subscription Digital Marketing Solutions | | Digital Advertising | | Broadcast Advertising | | Other | | Corporate and Other Reconciling Items | | Total |
| Net revenue | $ | 21,850 | | | $ | 29,218 | | | $ | 48,226 | | | $ | 948 | | | $ | — | | | $ | 100,242 | |
| Direct operating expenses, excluding depreciation, amortization and stock-based compensation | 15,476 | | | 21,007 | | | 36,442 | | | 838 | | | — | | | 73,763 | |
| Depreciation and amortization | 277 | | | 65 | | | 3,145 | | | 38 | | | 1,240 | | | 4,765 | |
| Corporate expenses | — | | | — | | | — | | | — | | | 4,409 | | | 4,409 | |
| Stock-based compensation | 132 | | | 15 | | | 87 | | | 3 | | | 632 | | | 869 | |
| Transaction and business realignment costs | — | | | — | | | — | | | 6 | | | 446 | | | 452 | |
| | | | | | | | | | | |
Impairment of intangible and long-lived assets | — | | | — | | | 7 | | | 120 | | | 351 | | | 478 | |
| Net gain on sale and retirement of assets | — | | | — | | | (272) | | | — | | | (36) | | | (308) | |
| Operating income (loss) | $ | 5,965 | | | $ | 8,131 | | | $ | 8,817 | | | $ | (57) | | | $ | (7,042) | | | $ | 15,814 | |