The accompanying notes to consolidated and combined financial statements are an integral part of these statements.
The accompanying notes to consolidated and combined financial statements are an integral part of these statements.
The accompanying notes to consolidated and combined financial statements are an integral part of these statements.
The accompanying notes to consolidated and combined financial statements are an integral part of these statements.
The accompanying notes to consolidated and combined financial statements are an integral part of these statements.
NOTES TO CONSOLIDATED AND COMBINED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
MediaCo Holding Inc. (“MediaCo” or the “Company”) is an Indiana corporation formed in 2019 by Emmis Communications Corporation (“Emmis”) to facilitate the sale of a controlling interest in Emmis’ radio stations WQHT-FM and WBLS-FM (the “Stations”) to SG Broadcasting LLC (“SG Broadcasting”), an affiliate of Standard General L.P. (“Standard General”) pursuant to an agreement entered into on June 28, 2019. The sale (the “Transaction”) closed on November 25, 2019. On November 26, 2019, the Company’s Form 10 was declared effective and the Company became subject to SEC periodic filing requirements. As of December 31, 2019, all of the Company’s Class A common stock was held by Emmis and all the Company’s Class B common stock was held by SG Broadcasting. On January 17, 2020, Emmis distributed the Class A common stock pro rata to Emmis’ shareholders, making MediaCo a publicly traded company listed on the Nasdaq Capital Market.
Unless the context otherwise requires, references to “we”, “us” and “our” refer to MediaCo after giving effect to the contribution of the Stations by Emmis, as well as to the Stations while they were wholly owned by Emmis. Prior to November 25, 2019, MediaCo had not conducted any business as a separate company and had no assets or liabilities. The operations of the Stations contributed to us by Emmis on November 25, 2019, are presented as if they were our operations for all historical periods described and at the carrying value of such assets and liabilities reflected in Emmis’ books and records.
On December 9, 2019, the Company’s Board approved the assumption from an affiliate of SG Broadcasting of an agreement to purchase FMG Valdosta, LLC and FMG Kentucky, LLC (“Fairway Outdoor”) from Fairway Outdoor Advertising Group, LLC (the “Fairway Acquisition”). Closing of the transaction occurred on December 13, 2019. FMG Valdosta, LLC and FMG Kentucky, LLC are outdoor advertising businesses that operate advertising displays principally across Kentucky, West Virginia, Florida and Georgia.
Our assets consist of two radio stations, WQHT-FM and WBLS-FM, which serve the New York City metropolitan area, as well as approximately 3,300 advertising structures in the Southeast (Valdosta) region and Mid-Atlantic (Kentucky) region of the United States. We derive our revenues primarily from radio and outdoor advertising sales, but we also generate revenues from events, including sponsorships and ticket sales.
On October 25, 2019, in order to more closely align our operations and internal controls with standard market practice, our Board of Directors approved the change in our fiscal year end from the last day in February to December 31. The result is that this transition report covers the ten-month period March 1, 2019 to December 31, 2019. A comparative, unaudited income statement for the ten-month period ended December 31, 2018 is presented below.
|
|
For the Ten Months Ended December 31, 2018
(unaudited)
|
|
|
NET REVENUES
|
$
|
38,057
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
Operating expenses excluding depreciation and amortization expense
|
|
29,445
|
|
|
Depreciation and amortization
|
|
1,045
|
|
|
Total operating expenses
|
|
30,490
|
|
|
OPERATING INCOME
|
|
7,567
|
|
|
INCOME BEFORE INCOME TAXES
|
|
7,567
|
|
|
PROVISION FOR INCOME TAXES
|
|
2,414
|
|
|
CONSOLIDATED NET INCOME
|
$
|
5,153
|
|
|
NET INCOME PER SHARE- BASIC AND DILUTED
|
$
|
3.09
|
|
|
WEIGHTED AVERAGE SHARES OUTSTANDING- BASIC AND DILUTED
|
|
1,666,667
|
|
Basis of Presentation and Combination
Our Consolidated and Combined 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.
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Table Of Contents
For the year-ended February 28, 2019 and until November 25, 2019 of the ten-month period ended December 31, 2019, MediaCo was 100% owned by Emmis. Our financial statements for these periods are derived from the books and records of Emmis and were carved-out from Emmis at a carrying value reflective of historical cost in Emmis’ records. Our historical combined financial results include an allocation of expense related to certain Emmis corporate functions, including executive oversight, legal, finance, human resources, and information technology. These expenses have been allocated to us based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of revenue, headcount and other measures. We consider this expense allocation methodology and results thereof to be reasonable for all periods presented. However, the allocations may not be indicative of the actual expense that would have been incurred had we operated as an independent, publicly traded company for all periods presented. It is impracticable to estimate what the standalone costs of MediaCo would have been in the historical periods.
The equity balance in the consolidated and combined financial statements prior to the Transaction represents the excess of total assets over total liabilities. All transactions between the Stations and Emmis were considered to be effectively settled in the consolidated and combined financial statements at the time the intercompany transaction was recorded. The total net effect of the settlement of these intercompany transactions is reflected in the consolidated and combined statements of cash flow as a financing activity and in the consolidated and combined statements of changes in equity as net parent company investment.
Upon consummation of the Transaction, the debt which the Company assumed in connection with transactions between shareholders was recorded to equity, and the total amount of net parent company investment was reclassified to additional paid in capital in the accompanying consolidated and combined financial statements.
In connection with the Transaction, the Company recorded deferred tax assets associated with the difference between the book basis and the tax basis of the Stations’ assets. The Company also eliminated certain tax accounts of the Stations from historical periods prior to the Transaction. These adjustments are included as transaction adjustments in the accompanying consolidated and combined statements of changes in equity and resulted in a net increase to equity of $8.4 million as of the Transaction date.
Allocation Policies
The following allocation policies were established by management of Emmis. Unless otherwise noted, these policies were consistently applied in the historical financial statements. In the opinion of management, the methods for allocating these costs were reasonable. It is not practicable to estimate the costs that would have been incurred by us if we had been operated on a stand‑alone basis.
(i) Specifically Identifiable Operating Expenses
Costs which related entirely to the operations of the Stations were attributed entirely to the Stations. These expenses consisted of costs of personnel who are 100% dedicated to the operations of the Stations, all costs associated with locations that conducted only the business of the Stations and amounts paid to third parties for services rendered to the Stations. In addition, any costs incurred by Emmis, which were specifically identifiable to the operations of the Stations, were attributed to the Stations.
(ii) Shared Operating Expenses
Emmis incurred the cost of certain corporate general and administrative services and shared services that benefited all of its entities, including the Stations. These shared services included radio executive management, legal, accounting, information services, telecommunications, human resources, insurance, and intellectual property compliance and maintenance. These costs were allocated to the Stations based on one of the following allocation methods: (1) percentage of Company revenues, (2) percentage of Company’s radio revenues, (3) headcount, and (4) pro rata portion based on the number of stations owned by Emmis. Management determined which allocation method was appropriate based on the nature of the shared service being provided.
(iii) Taxes
The Stations' allocated share of the consolidated Emmis federal tax provision was determined using the separate return method. Under the separate return method, tax expense or benefit was calculated as if the Stations were subject to their own tax returns. State income taxes generally were allocated in a similar manner. Deferred tax assets and liabilities were determined based on differences between the financial reporting and tax bases of assets and liabilities carried by the Stations, and were measured using the enacted tax rates that are expected to be in effect in the period in which these differences were expected to reverse. The principal components of deferred taxes related to tax amortization of indefinite-lived intangibles, namely FCC licenses, which are not amortized (but subject to impairment testing) for financial reporting purposes.
(iv) Allocated Charges
Allocations of Emmis’ costs were included in the combined condensed statements of operations of the Stations as follows:
|
|
For the Year Ended February 28, 2019
|
|
|
For the Ten Months Ended December 31, 2019
|
|
|
Station operating expenses, excluding depreciation and amortization expense
|
$
|
2,613
|
|
|
$
|
1,903
|
|
|
Noncash compensation
|
|
281
|
|
|
|
219
|
|
|
Allocated charges from Emmis
|
$
|
2,894
|
|
|
$
|
2,122
|
|
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Table Of Contents
Revenue Recognition
The Company generates revenue from the sale of services and products including, but not limited to: (i) on-air commercial broadcast time, (ii) non-traditional revenues including event-related revenues and event sponsorship revenues, (iii) digital advertising, and (iv) outdoor 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 year ended February 28, 2019 and the ten months ended December 31, 2019 was as follows:
|
|
|
Balance At
Beginning
Of Period
|
|
|
Provision
|
|
|
Write-Offs
|
|
|
Balance
At End
Of Period
|
|
|
Year ended February 28, 2019
|
|
$
|
170
|
|
|
|
329
|
|
|
|
(301
|
)
|
|
$
|
198
|
|
|
Ten months ended December 31, 2019
|
|
$
|
198
|
|
|
|
140
|
|
|
|
(181
|
)
|
|
$
|
157
|
|
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.
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, 15 years for advertising structures, 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 year ended February 28, 2019 and ten-month period ended December 31, 2019 was $1.0 million, and $0.8 million, respectively.
Intangible Assets and Goodwill
Indefinite-lived Intangibles and Goodwill
Goodwill consists of the excess of the purchase price over the fair value of tangible and identifiable intangible net assets acquired. In accordance with ASC Topic 350, “ Intangibles—Goodwill and Other,” goodwill, radio broadcasting licenses, and tradenames 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 9, Intangible Assets and Goodwill, for more discussion of our interim and annual impairment tests performed during the year ended February 28, 2019 and ten-month period ended December 31, 2019.
Definite-lived Intangibles
The Company’s definite-lived intangible assets consist of programming agreements related to our radio business and customer relationships relating to our outdoor advertising 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 for the year ended February 28, 2019, and ten months ended December 31, 2019 were $0.5 million, and $0.4 million, respectively.
Asset Retirement Obligations
We are required to estimate our obligations upon the termination or non-renewal of a lease to dismantle and remove its advertising structures from the leased land and to reclaim the site to its original condition. The Company records the present value of obligations associated with the retirement of its advertising structures in the period in which the obligation is incurred. When the liability is recorded the cost is capitalized as part of the related advertising structure’s carrying amount. Over time, accretion of the liability is recognized as an operating expense and the capitalized cost is depreciated over the expected useful life of the related asset.
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Table Of Contents
The significant assumptions used in estimating the asset retirement obligation include the third-party cost of removing the asset, the cost of remediating the leased property to its original condition where required and the timing and number of lease renewals, all of which are estimated based on historical experience. The interest rate used to calculate the present value of such costs over the estimated retirement period is based on an estimated risk adjusted credit rate for the same period.
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 for the year ended February 28, 2019 and the ten months ended December 31, 2019, were $1.0 million, and $0.8 million, respectively, and barter expenses were $1.0 million, and $0.9 million, respectively.
Earnings Per Share
ASC Topic 260, “Earnings Per Share,” requires presentation of basic income per share (“EPS”) on the face of the income statement for all entities with simple capital structures. Basic EPS is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. For entities with complex capital structures, diluted EPS is also required. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. The 1,666,667 Class A shares issued to Emmis have been assumed to have been outstanding for all periods through December 31, 2019. There were no potentially dilutive securities during the year ended February 28, 2019 and the ten-month period ended December 31, 2019, as neither the convertible promissory notes issued to Emmis and SG Broadcasting described in Note 5, nor the Series A convertible preferred stock described in Note 3, are convertible until May 25, 2020.
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.
Long-Lived Tangible Assets
The Company periodically considers whether indicators of impairment of 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, if applicable, the Company depreciates or amortizes over the remaining estimated useful life of the asset.
Estimates
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses in the financial statements and in disclosures of contingent assets and liabilities. Actual results could differ from those estimates.
Recent Accounting Standards Updates
On March 1, 2019, the stations adopted Accounting Standard Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording operating lease liabilities of approximately $14.9 million as of March 1, 2019, along with a corresponding right-of-use asset. The implementation of this standard did not have an impact on our consolidated and combined statements of operations. See Note 8 for more discussion of the Company’s leases.
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 are currently evaluating the impact that the adoption of the new standard will have on our consolidated and combined financial statements.
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Table Of Contents
2. 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. At December 31, 2019 all Class A common stock was owned by Emmis. Emmis distributed all shares of Class A common stock to its shareholders on January 17, 2020. All Class B common stock is owned by SG Broadcasting. At February 28, 2019 and December 31, 2019, no shares of Class C common stock were issued or outstanding.
3. CONVERTIBLE PREFERRED STOCK
In connection with the Fairway Acquisition, 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 5), or if no senior debt is outstanding, 6%, plus additional increases of 1% on December 12, 2020 and each anniversary thereof.
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 on or 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 becomes effective, the Series A Preferred Shares will be considered participating securities and earnings per share will be calculated using the two-class method.
4. 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, (iii) digital advertising and (iv) outdoor 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 combined condensed 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 and combined 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. Digital revenues are generally recognized as the digital advertising is delivered.
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Table Of Contents
Outdoor Advertising
Our outdoor advertising business has a total of 3,346 faces consisting of bulletins, posters and digital billboards. Bulletins are generally large, illuminated advertising structures that are located on major highways and target vehicular traffic. Posters are generally smaller advertising structures that are located on major traffic arteries and city streets and target vehicular and pedestrian traffic. Digital billboards are computer controlled LED displays where six to eight advertisers rotate continuously, each one having seven to ten seconds to display a static image. Digital billboards are generally located on major traffic arteries and streets.
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:
|
|
Year Ended
February 28, 2019
|
|
|
Ten Months Ended
December 31, 2019
|
|
|
Net revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Radio Advertising
|
$
|
28,897
|
|
|
|
67.1
|
%
|
|
$
|
24,826
|
|
|
|
60.8
|
%
|
|
Non Traditional
|
|
7,024
|
|
|
|
16.3
|
%
|
|
|
8,166
|
|
|
|
20.0
|
%
|
|
Digital
|
|
2,756
|
|
|
|
6.4
|
%
|
|
|
3,018
|
|
|
|
7.4
|
%
|
|
Outdoor Advertising(1)
|
|
—
|
|
|
|
0.0
|
%
|
|
|
759
|
|
|
|
1.9
|
%
|
|
Other
|
|
4,414
|
|
|
|
10.2
|
%
|
|
|
4,031
|
|
|
|
9.9
|
%
|
|
Total net revenues
|
$
|
43,091
|
|
|
|
|
|
|
$
|
40,800
|
|
|
|
|
|
(1) A substantial portion of this revenue from the Fairway Acquisition date of December 13, 2019 through December 31, 2019 is lessor revenue derived from operating leases accounted for under ASC 842, “Leases.”
5. LONG-TERM DEBT
Long-term debt was comprised of the following at February 28, 2019, and December 31, 2019:
|
|
|
As of
February 28, 2019
|
|
|
As of
December 31, 2019
|
|
|
Senior credit facility
|
|
$
|
—
|
|
|
$
|
72,527
|
|
|
Notes payable to Emmis
|
|
|
—
|
|
|
|
5,000
|
|
|
Notes payable to SG Broadcasting
|
|
|
—
|
|
|
|
6,250
|
|
|
Less: Current maturities
|
|
|
—
|
|
|
|
(3,672
|
)
|
|
Less: Unamortized original discount
|
|
|
—
|
|
|
|
(2,437
|
)
|
|
Total long-term debt, net of current portion and debt discount
|
|
$
|
—
|
|
|
$
|
77,668
|
|
On November 25, 2019, the Company entered into a $50.0 million, five-year senior secured term loan agreement (the “Senior Credit Facility”) with GACP Finance Co., LLC, a Delaware limited liability company, as administrative agent and collateral agent, which included one tranche of additional borrowings of $25.0 million. The Senior Credit Facility provides for initial borrowings of up to $50.0 million, of which net proceeds of $48.3 million after debt discount of $1.7 million, were paid concurrently to Emmis in connection with SG Broadcasting’s acquisition of a controlling interest in the Company. The Senior Credit Facility bears interest at a rate equal to the London Interbank Offered Rate ("LIBOR"), plus 7.5%, with a 2.0% LIBOR floor. The Senior Credit Facility requires 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 are due on the last day of each calendar quarter. The Senior Credit Facility includes covenants pertaining to, among other things, the ability to incur indebtedness, restrictions on the payment of dividends, minimum Liquidity (as defined in the Senior Credit Facility) of $2.0 million for the period from the effective date until November 25, 2020, $2.5 million for the period from November 26, 2020 until November 25, 2021, and $3.0 million for the period thereafter, collateral maintenance, minimum Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) of 1.10:1.00, and other customary restrictions. The Company borrowed $23.4 million of the remaining available borrowings to fund the Fairway Acquisition on December 13, 2019. Proceeds received were $22.6 million, net of a debt
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Table Of Contents
discount of $0.8 million. The Senior Credit Facility is carried net of a total unamortized discount of $2.4 million at December 31, 2019. Subsequent to December 31, 2019, the Company amended its Senior Credit Facility. See Note 15 for further discussion.
On November 25, 2019, as part of the consideration owed to Emmis in connection with SG Broadcasting’s acquisition of a controlling interest in the Company, the Company issued to Emmis the Emmis Convertible Promissory Note in the amount of $5.0 million. The Emmis Convertible Promissory Note carries interest at a base rate equal to the interest on any senior credit facility, 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 prohibits 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 beginning six months after issuance 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 November 25, 2019, the Company issued the SG Broadcasting Promissory Note, a subordinated convertible promissory note payable by the Company to SG Broadcasting, in return for which SG Broadcasting contributed to MediaCo $6.25 million for working capital and general corporate purposes. The SG Broadcasting Promissory Note carries interest at a base rate equal to the interest on any senior credit facility, 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 SG Broadcasting Promissory Note matures on May 25, 2025. Additionally, interest under the SG Broadcasting Promissory Note is payable in kind through maturity, and is convertible into MediaCo Class A common stock at the option of SG Broadcasting beginning six months after issuance 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. Subsequent to December 31, 2019, the Company and SG Broadcasting amended and restated the SG Broadcasting Promissory Note and the Company borrowed additional amounts thereunder. See Note 15 for further discussion.
Based on amounts outstanding at December 31, 2019, mandatory principal payments of long-term debt for the next five years and thereafter are summarized below:
|
Year ended December 31,
|
|
Senior Credit Facility
|
|
|
Emmis Notes
|
|
|
SG Broadcasting Notes
|
|
|
Total
|
|
|
2020
|
|
$
|
3,672
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,672
|
|
|
2021
|
|
|
3,672
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,672
|
|
|
2022
|
|
|
3,672
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,672
|
|
|
2023
|
|
|
3,672
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,672
|
|
|
2024
|
|
|
57,839
|
|
|
|
5,000
|
|
|
|
—
|
|
|
|
62,839
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
6,250
|
|
|
|
6,250
|
|
|
Total
|
|
$
|
72,527
|
|
|
$
|
5,000
|
|
|
$
|
6,250
|
|
|
$
|
83,777
|
|
6. FAIR VALUE MEASUREMENTS
As defined in ASC Topic 820, “Fair Value Measurement,” fair value is 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 (exit price). The Company utilizes market data or assumptions that 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 can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
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, 2019.
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events that include those described in Note 9, Intangible Assets and Goodwill, and Note 7, Acquisition, 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 9 for more discussion).
41
Table Of Contents
Fair Value of Other Financial Instruments
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring 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.
- Senior Credit Facility : As of December 31, 2019, the fair value and carrying value, excluding original issue discount, of the Company’s Senior Credit Facility debt was $72.5 million. This debt 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.
- Other long-term debt : The Emmis Promissory Note and SG Broadcasting Note are not actively traded and are considered Level 3 instruments. The Company believes the current carrying value of this debt approximates its fair value.
7. ACQUISITION
On December 9, 2019, the Company’s Board approved the assumption from an affiliate of SG Broadcasting of an agreement to purchase FMG Valdosta, LLC and FMG Kentucky, LLC from Fairway Outdoor Advertising Group, LLC for a purchase price of $43.1 million, subject to customary working capital adjustments. Closing of the transaction occurred on December 13, 2019. FMG Valdosta, LLC and FMG Kentucky, LLC are outdoor advertising businesses that operate advertising displays principally across Kentucky, West Virginia, Florida and Georgia. Fees and expenses associated with the transaction were $1.2 million, which are included in corporate expenses in the consolidated and combined statement of operations. The acquisition was funded through $23.4 million of additional borrowings under the Senior Credit Facility as described in Note 5, which were net of a debt discount of $0.8 million, resulting in $22.6 million of proceeds. The remainder was financed by SG Broadcasting through $22.0 million of newly-issued Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock pays an in-kind dividend equal to the rate on the existing SG Broadcasting Promissory Note described in Note 5, is convertible into MediaCo Class A common stock on the same terms as the SG Broadcasting Promissory Note, and is redeemable at the option of the holder five years and six months after issuance. The Company believes this is a highly-scalable business model with attractive operative leverage.
As of December 31, 2019, our fair value allocation of the assets acquired and liabilities assumed from Fairway is considered preliminary and is subject to revision, which may result in adjustments to this allocation. We continue to analyze inputs to the valuation models for all long term assets, including intangibles, as well as estimated asset retirement obligations. We expect to finalize these amounts during 2020. The allocations presented in the table below are based upon management’s estimate of the fair value using valuation techniques including income, cost and market approaches. The most significant asset acquired, property, plant and equipment, was valued using the cost approach. The preliminary purchase price allocation was as follows:
|
Cash consideration
|
$
|
43,108
|
|
|
Due from Seller
|
|
(106
|
)
|
|
Total Consideration
|
$
|
43,002
|
|
|
|
|
|
|
|
Accounts receivable
|
$
|
1,676
|
|
|
Other current assets
|
|
105
|
|
|
Property, plant and equipment
|
|
29,971
|
|
|
Operating lease, right-of-use assets
|
|
15,267
|
|
|
Goodwill
|
|
11,424
|
|
|
Intangibles (Note 9)
|
|
3,760
|
|
|
Deferred tax asset
|
|
1,040
|
|
|
Other assets
|
|
16
|
|
|
Assets Acquired
|
$
|
63,259
|
|
|
Accounts payable
|
$
|
73
|
|
|
Accrued expenses and other current liabilities
|
|
539
|
|
|
Current portion of operating lease liabilities
|
|
822
|
|
|
Operating lease liabilities, less current portion
|
|
12,320
|
|
|
Asset retirement obligations (Note 10)
|
|
5,590
|
|
|
Deferred revenue
|
|
760
|
|
|
Other noncurrent liabilities
|
|
153
|
|
|
Liabilities Assumed
|
$
|
20,257
|
|
|
Net Assets Acquired
|
$
|
43,002
|
|
42
Table Of Contents
The Fairway Acquisition was accounted for under the acquisition method of accounting, and, accordingly, the accompanying consolidated and combined financial statements include the results of operations of each acquired entity from the date of acquisition. The revenues and operating income contributed to MediaCo by the acquired businesses for the period December 13, 2019 to December 31, 2019 were $0.7 million and $0.2 million respectively. The operating income is exclusive of acquisition costs of $1.2 million that are included in “All Other” in Note 13.
The following unaudited pro forma financial information for the Company gives effect to the acquisitions as if they had occurred on March 1, 2018. These pro forma results do not purport to be indicative of the results of operations which actually would have resulted had the acquisitions occurred on such date or to project the Company’s results of operations for any future period.
|
|
|
Year Ended February 28, 2019
(unaudited)
|
|
|
Ten Months Ended December 31, 2019
(unaudited)
|
|
|
Net revenues
|
|
$
|
56,489
|
|
|
$
|
51,869
|
|
|
Net income attributable to common shareholders
|
|
|
1,831
|
|
|
|
1,042
|
|
Goodwill of $11.4 million was recognized as a result of the purchase which represented the excess of the purchase price over the identifiable acquired assets, $9.0 million of which is deductible for tax purposes. The goodwill acquired is assigned to the outdoor advertising segment.
8. LEASES
We determine if an arrangement is a lease at inception. We have operating leases for office space, tower space, the land on which some outdoor advertising structures are erected, equipment and automobiles expiring at various dates through October 2049. Some leases have options to extend and some have options to terminate. Beginning March 1, 2019, operating leases are included in operating lease right-of-use assets, current operating lease liabilities, and noncurrent operating lease liabilities in our consolidated and combined 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. Variable lease expense recognized in the ten months ended December 31, 2019, was not material.
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 and combined 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 recognized in the ten months ended December 31, 2019, was not material.
The impact of operating leases to our combined and consolidated financial statements was as follows:
|
|
|
Ten Months Ended December 31,
|
|
|
|
|
2019
|
|
|
Lease Cost
|
|
|
|
|
|
Operating lease cost
|
|
$
|
2,266
|
|
|
Other Information
|
|
|
|
|
|
Operating cash flows from operating leases
|
|
|
2,495
|
|
|
Right-of-use assets obtained in exchange for new operating lease liabilities
|
|
|
30,204
|
|
|
Weighted average remaining lease term - operating leases (in years)
|
|
|
9.5
|
|
|
Weighted average discount rate - operating leases
|
|
|
8.3
|
%
|
43
Table Of Contents
As of December 31, 2019, the annual minimum lease payments of our operating lease liabilities were as follows:
|
Year ending December 31,
|
|
|
|
|
2020
|
$
|
4,539
|
|
|
2021
|
|
5,211
|
|
|
2022
|
|
5,105
|
|
|
2023
|
|
4,123
|
|
|
2024
|
|
2,712
|
|
|
After 2024
|
|
18,970
|
|
|
Total lease payments
|
|
40,660
|
|
|
Less imputed interest
|
|
14,516
|
|
|
Total recorded lease liabilities
|
$
|
26,144
|
|
Our outdoor advertising business generates lessor revenue derived from operating leases accounted for under ASC 842, “Leases.” Minimum fixed lease consideration under non-cancelable operating leases for each of the next five years and thereafter, excluding variable lease consideration, as of December 31, 2019, is as follows:
|
Year ending December 31,
|
|
|
|
|
2020
|
$
|
7,138
|
|
|
2021
|
|
—
|
|
|
2022
|
|
—
|
|
|
2023
|
|
—
|
|
|
2024
|
|
—
|
|
|
After 2024
|
|
—
|
|
9. INTANGIBLE ASSETS AND GOODWILL
In accordance with ASC Topic 350, Intangibles—Goodwill and Other, the Company reviews goodwill and other intangibles at least annually for impairment. In connection with any such review, if the recorded value of goodwill and other intangibles is greater than its fair value, the intangibles are written down and charged to results of operations. 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. In the ten months ended December 31, 2019, the Company performed the analysis of the FCC licenses as of November 25, the date of the transfer of the stations from Emmis to MediaCo. 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 year ended February 28, 2019 and the ten-month period ended December 31, 2019 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 considered both income and market valuation methods when it performed its impairment tests. Under the income method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each 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 current economic conditions into consideration. Under the market method, the Company uses recent sales of comparable radio stations for which the sales value appeared to be concentrated entirely in the value of the license, to arrive at an indication of fair value.
44
Table Of Contents
Below are some of the key assumptions used in our income method annual impairment assessments. In recent years, we have reduced long-term growth rates in the New York market in which we operate based on recent industry trends and our expectations for the market going forward. The methodology used to value our FCC licenses has not changed during any of the periods presented.
|
|
|
December 1, 2018
|
|
|
November 25, 2019
|
|
|
Discount Rate
|
|
11.9%
|
|
|
11.9%
|
|
|
Long-term Revenue Growth Rate
|
|
0.3%
|
|
|
-0.6%
|
|
|
Mature Market Share
|
|
12.9%
|
|
|
9.0%
|
|
|
Operating Profit Margin
|
|
38.0%
|
|
|
22.7-26.7%
|
|
As of both February 28, 2019 and December 31 2019, the carrying amounts of the Company’s FCC licenses were $63.3 million.
Valuation of Goodwill
As a result of the acquisition of the Fairway Acquisition discussed in Note 7, goodwill of $11.4 million was recognized during the year. This accounts for all goodwill on the consolidated and combined balance sheets as of December 31, 2019. ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually. The acquisition closed on December 13, 2019 and all assets acquired and liabilities assumed were valued as of that date, resulting in a goodwill valuation of $11.4 million. There have been no indicators of impairment that have arisen since that date that would require us to assess the goodwill for impairment. The Company will conduct its impairment test on October 1 of each fiscal year, unless indications of impairment exist during an interim period. The purchase price allocation described in Note 7 is preliminary and subject to adjustment. Any adjustment to the purchase price allocation may directly impact the value of goodwill.
Valuation of Trade Name
As a result of the Fairway Acquisition, the Company acquired the trade name ‘Fairway’. The trade name is well known in the industry and is being retained for continued market use following the acquisition. This trade name favorably factors into customer purchasing decisions. For the purchase price allocation, the trade name was valued using the relief from royalty method. This method is based on what a company would be willing to pay for a royalty in order to exploit the related benefits of the trade name. The value of the trade name is determined by discounting the inherent after-tax royalty savings associated with ownership or possession of the trade name. The preliminary valuation assigned to the trade name as a result of the purchase price accounting is $0.7 million. The trade name is an indefinite-lived intangible asset based on our intention to renew it when legally required and to utilize it going forward. We will assess the trade name annually for impairment on October 1 of each year.
Definite-lived Intangibles
The following table presents the weighted-average remaining useful life at December 31, 2019 and gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at February 28, 2019, and December 31, 2019:
|
|
|
|
|
|
|
As of February 28, 2019
|
|
|
As of December 31, 2019
|
|
|
|
|
Weighted
Average
Remaining
Useful Life
(in years)
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Gross
Carrying
Amount
|
|
|
Accumulated
Amortization
|
|
|
Net
Carrying
Amount
|
|
|
Programming Contract
|
|
|
1.8
|
|
|
$
|
2,154
|
|
|
$
|
1,394
|
|
|
$
|
760
|
|
|
$
|
2,154
|
|
|
$
|
1,640
|
|
|
$
|
514
|
|
|
Customer List
|
|
|
3.0
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,030
|
|
|
|
14
|
|
|
|
3,016
|
|
The customer list was acquired as part of the Fairway Acquisition on December 13, 2019 and was valued as part of the purchase price allocation performed at closing. Customer relationships represent a source of repeat business. The information contained in such relationships usually includes the preferences of the customer, the buying patterns of the customer, and the history of purchases that have been made by the customer. In calculating the value of Fairway Outdoors’ customer relationships, we employed the multiperiod excess earnings method of the income approach, which estimates value based on the present value of future economic benefits. This methodology resulted in a preliminary valuation of $3.0 million. A useful life of three years has been assigned to the customer list.
Total amortization expense from definite-lived intangibles was $0.3 million for both the year ended February 28, 2019, and the ten-month period ended December 31, 2019. The following table presents the Company’s estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:
|
Year ended December 31,
|
|
Expected
Amortization
Expense
|
|
|
2020
|
|
$
|
1,332
|
|
|
2021
|
|
|
1,230
|
|
|
2022
|
|
|
968
|
|
|
2023
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
45
Table Of Contents
10. ASSET RETIREMENT OBLIGATIONS
The Company’s asset retirement obligation includes the costs associated with the removal of its structures, resurfacing of the land and retirement cost, if applicable, related to the Company’s outdoor advertising portfolio. The following table reflects information related to our asset retirement obligations.
|
Balance at February 28, 2019
|
|
|
$
|
—
|
|
|
Additions to asset retirement obligations
|
|
|
|
5,590
|
|
|
Accretion expense
|
|
|
|
33
|
|
|
Balance at December 31, 2019
|
|
|
$
|
5,623
|
|
11. OTHER COMMITMENTS AND CONTINGENCIES
a. Commitments
In addition to the lease payments described in Note 8, the Company has various commitments under the following types of material contracts: (i) Management Agreement with Emmis (Note 14) and (ii) other contracts with annual commitments (including payouts to former management of Fairway Outdoor) at December 31, 2019 as follows:
|
Year ending December 31,
|
|
Management Agreement
|
|
|
Other
Contracts
|
|
|
Total
|
|
|
2020
|
|
$
|
1,250
|
|
|
$
|
363
|
|
|
$
|
1,613
|
|
|
2021
|
|
|
500
|
|
|
|
81
|
|
|
|
581
|
|
|
2022
|
|
|
—
|
|
|
|
76
|
|
|
|
76
|
|
|
2023
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Total
|
|
$
|
1,750
|
|
|
$
|
520
|
|
|
$
|
2,270
|
|
As part of the acquisition of SG Broadcasting’s controlling interest in the Company from Emmis on November 25, 2019, MediaCo owed to Emmis the working capital of the stations, but the Company was permitted to collect and use, for a period of nine months, the first $5.0 million of net working capital attributable to the stations as of the closing date. This amount is due to Emmis on the nine month anniversary of the closing date, or August 25, 2020. This right to $5.0 million of retained net working capital was satisfied in January 2020 and used in the operations of the business. MediaCo does not believe it will generate $5.0 million of excess cash from operations by August 25, 2020 to repay this amount to Emmis, but Standard General has guaranteed this payment to Emmis in the event MediaCo is unable to make the payment when due.
b. 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.
12. INCOME TAXES
The provision for income taxes for the year ended February 28, 2019 and ten months ended December 31, 2019 consisted of the following:
|
|
|
|
For the year ended February 28, 2019
|
|
|
For the ten months ended December 31, 2019
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
$
|
—
|
|
|
$
|
187
|
|
|
State
|
|
|
|
—
|
|
|
|
124
|
|
|
Total current
|
|
|
|
—
|
|
|
|
311
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
|
1,644
|
|
|
|
522
|
|
|
State
|
|
|
|
874
|
|
|
|
689
|
|
|
Total deferred
|
|
|
|
2,518
|
|
|
|
1,211
|
|
|
Provision for income taxes
|
|
|
$
|
2,518
|
|
|
$
|
1,522
|
|
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The provision for income taxes for the year ended February 28, 2019 and the ten-month period ended December 31, 2019 differs from that computed at the Federal statutory corporate tax rate as follows:
|
|
|
|
For the year ended February 28, 2019
|
|
|
For the ten months ended December 31, 2019
|
|
|
Federal statutory income tax rate
|
|
|
|
21
|
%
|
|
|
21
|
%
|
|
Computed income tax provision at federal statutory rate
|
|
|
$
|
1,656
|
|
|
$
|
729
|
|
|
State income tax
|
|
|
|
874
|
|
|
|
265
|
|
|
State tax rate change
|
|
|
|
—
|
|
|
|
549
|
|
|
Entertainment disallowance
|
|
|
|
18
|
|
|
|
20
|
|
|
Other
|
|
|
|
(30
|
)
|
|
|
(41
|
)
|
|
(Benefit) provision for income taxes
|
|
|
$
|
2,518
|
|
|
$
|
1,522
|
|
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, 2019, the Company had no open income tax examinations. The Company’s federal and state income tax filing obligation will begin with the returns for the tax year ended December 31, 2019.
The components of deferred tax assets and deferred tax liabilities at February 28, 2019 and December 31, 2019 were as follows:
|
|
|
As of February 28, 2019
|
|
|
As of December 31, 2019
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
$
|
12,935
|
|
|
$
|
15,200
|
|
|
Lease liability
|
|
|
—
|
|
|
|
7,843
|
|
|
Compensation relating to stock options
|
|
|
101
|
|
|
|
—
|
|
|
Accrued rent
|
|
|
698
|
|
|
|
—
|
|
|
Net operating losses
|
|
|
86
|
|
|
|
6,013
|
|
|
Other
|
|
|
114
|
|
|
|
252
|
|
|
Total deferred tax assets
|
|
|
13,934
|
|
|
|
29,308
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
(6,854
|
)
|
|
|
(4,818
|
)
|
|
Right of use asset
|
|
|
—
|
|
|
|
(7,902
|
)
|
|
Property and equipment
|
|
|
(327
|
)
|
|
|
(2,725
|
)
|
|
Total deferred tax liabilities
|
|
|
(7,181
|
)
|
|
|
(15,445
|
)
|
|
Net deferred tax assets
|
|
$
|
6,753
|
|
|
$
|
13,863
|
|
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. The Company has performed an analysis and determined that a valuation allowance is not necessary at this time. The Company will assess quarterly whether it remains more likely than not that the deferred tax assets will be realized.
The Company has federal net operating losses (“NOLs”) of $28 million and state NOLs of $1.5 million available to offset future taxable income. The federal and certain state net operating loss carryforwards do not expire, and the remaining state net operating loss carryforwards expire in the year ending December 2039.
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, 2019, the Company has no uncertain tax positions.
13. SEGMENT INFORMATION
The Company’s operations are aligned into two business segments: (i) Radio, and (ii) Outdoor advertising. Radio includes the operations and results of WQHT-FM and WBLS-FM, and outdoor advertising includes the operations and results of the Fairway businesses acquired in December 2019. The Company groups activities that are not considered operating segments in the “All Other” category.
These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses, including transaction costs, are not allocated to reportable segments. The Company’s segments operate exclusively in the United States.
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The accounting policies as described in the summary of significant accounting policies included in Note 1 to these consolidated and combined financial statements, are applied consistently across segments.
|
Ten Months Ended December 31, 2019
|
|
Radio
|
|
|
Outdoor Advertising
|
|
|
All Other
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
40,041
|
|
|
$
|
759
|
|
|
$
|
—
|
|
|
$
|
40,800
|
|
|
Operating expenses excluding depreciation and amortization
expense
|
|
|
30,751
|
|
|
|
375
|
|
|
|
—
|
|
|
|
31,126
|
|
|
Corporate expenses excluding depreciation and amortization expense
|
|
|
—
|
|
|
|
—
|
|
|
|
4,303
|
|
|
|
4,303
|
|
|
Depreciation and amortization
|
|
|
980
|
|
|
|
100
|
|
|
|
—
|
|
|
|
1,080
|
|
|
Operating income (loss)
|
|
$
|
8,310
|
|
|
$
|
284
|
|
|
$
|
(4,303
|
)
|
|
$
|
4,291
|
|
|
Year Ended February 28, 2019
|
|
Radio
|
|
|
Outdoor Advertising
|
|
|
All Other
|
|
|
Consolidated
|
|
|
Net revenues
|
|
$
|
43,091
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43,091
|
|
|
Operating expenses excluding depreciation and amortization
expense
|
|
|
33,830
|
|
|
|
—
|
|
|
|
—
|
|
|
|
33,830
|
|
|
Depreciation and amortization
|
|
|
1,318
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,318
|
|
|
Loss on sale of fixed assets
|
|
|
56
|
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
|
Operating income (loss)
|
|
$
|
7,887
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,887
|
|
|
Total Assets
|
|
Radio
|
|
|
Outdoor Advertising
|
|
|
Consolidated
|
|
|
As of February 28, 2019
|
|
$
|
83,128
|
|
|
$
|
-
|
|
|
$
|
83,128
|
|
|
As of December 31, 2019
|
|
|
102,921
|
|
|
|
64,245
|
|
|
|
167,166
|
|
14. RELATED PARTY TRANSACTIONS
Corporate Overhead and Share-Based Compensation
For the year-ended February 28, 2019 and until November 25, 2019 of the ten-month period ended December 31, 2019, MediaCo was 100% owned by Emmis. Our financial statements for these periods are derived from the books and records of Emmis and were carved-out from Emmis at a carrying value reflective of historical cost in Emmis’ records. Our historical combined financial results include an allocation of expense related to certain Emmis corporate functions, including executive oversight, legal, finance, human resources, and information technology. These expenses have been allocated to us based on direct usage or benefit where specifically identifiable, with the remainder allocated primarily on a pro rata basis of revenue, headcount and other measures. We consider this expense allocation methodology and results thereof to be reasonable for all periods presented.
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. Emmis will continue to provide management services to the Stations under a management agreement, subject to the direction of the MediaCo board of directors which initially consists of four directors appointed by Standard General and three directors appointed by Emmis. MediaCo will pay Emmis an annual management fee of $1.3 million, plus reimbursement of certain expenses directly related to the operation of MediaCo’s business. 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 is for an initial term of two years (cancellable by MediaCo after 18 months) under which Emmis will provide various services to us, including accounting, human resources, information technology, legal, public reporting and tax. We will pay 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 ten months ended December 31, 2019, MediaCo recorded $0.1 million of management fee expense which is included in corporate expenses in the accompanying consolidated and combined statements of operations. This fee was unpaid as of December 31, 2019 and is included in accounts payable and accrued expenses in the accompanying consolidated and combined balance sheets. Under the Employee Leasing Agreement, the employees of the Stations will remain employees of Emmis and we will reimburse Emmis for the cost of these employees, including health and benefit costs. The initial term of the Employee Leasing Agreement will last through December 31, 2020, and will automatically renew for successive six-month periods, unless otherwise terminated upon the occurrence of certain events. Upon termination of the Employee Leasing Agreement, we will hire all of the leased employees and assume employment and collective bargaining agreements related to those employees. Expense related to the Employee Leasing Agreement was $1.2 million for the period November 25, 2019 to December 31, 2019. This expense is recognized in operating expenses
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excluding depreciation and amortization in the consolidated and combined statements of operations. $0.5 million is unpaid as of December 31, 2019 and is included in accounts payable and accrued expenses in the consolidated and combined balance sheets.
As part of the acquisition of SG Broadcasting’s controlling interest in the Company from Emmis on November 25, 2019, MediaCo owed to Emmis the working capital of the stations, but the Company was permitted to collect and retain, for a period of nine months, the first $5.0 million of net working capital attributable to the stations as of the closing date. This amount is due to Emmis on the nine month anniversary of the closing date, or August 25, 2020. This right to $5.0 million of retained net working capital was satisfied in January 2020 and used in the operations of the business. MediaCo does not believe it will generate $5.0 million of excess cash from operations by August 25, 2020 to repay this amount to Emmis, but Standard General has guaranteed this payment to Emmis in the event MediaCo is unable to make the payment when due. Total net working capital due to Emmis of $8.5 million (of which $5 million is guaranteed by Standard General) is recorded in accounts payable and accrued expenses in the December 31, 2019 consolidated and combined balance sheet.
Convertible Promissory Notes
As a result of the transaction described above, on November 25, 2019, we issued convertible promissory notes to both Emmis and SG Broadcasting in the amounts of $5.0 million and $6.3 million, respectively. The terms of these notes are described in Note 5. Subsequent to December 31, 2019, the Company and SG Broadcasting amended and restated the SG Broadcasting Promissory Note and the Company borrowed additional amounts thereunder. See Note 15 for further discussion.
Convertible Preferred Stock
On December 13, 2019, in connection with the Fairway Acquisition, the Company issued to SG Broadcasting 220,000 shares of MediaCo Series A Convertible Preferred Stock. See Note 3 for a description of the Preferred Stock.
15. SUBSEQUENT EVENTS
On February 28, 2020, the Company and SG Broadcasting amended and restated the 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 February 28, 2020, the Company entered into Amendment No. 1 to its Senior Credit Facility, in order to, among other things, increase the maximum aggregate principal amount issuable under the SG Broadcasting Promissory Note to $10.3 million.
On March 27, 2020, the Company entered into Amendment No. 2 (“Amendment No. 2”) to its amended and restated Senior Credit Facility, in order to, among other things, (i) reduce the required Consolidated Fixed Charge Coverage Ratio (as defined in the Senior Credit Facility) to 1.00x from June 30, 2020 to December 31, 2020, (ii) reduce the minimum Liquidity (as defined in the Senior Credit Facility) requirement to $1.0 million through September 30, 2020, (iii) permit equity contributions and loans during calendar year 2020 under the SG Broadcasting Promissory Note and any amendments thereto to count toward Consolidated EBITDA (as defined in the Senior Credit Facility) for purposes of the Consolidated Fixed Charge Coverage Ratio calculation, and (iv) increase the maximum aggregate principal amount issuable under the Second Amended and Restated SG Broadcasting Promissory Note (as defined below) from $10.3 million to $20.0 million. In connection with Amendment No. 2, the Company incurred an amendment fee of approximately $0.2 million, which was added to the principal amount of the Senior Credit Facility then outstanding.
On March 27, 2020, the Company and SG Broadcasting further amended and restated the SG Broadcasting Promissory Note (the “Second Amended and Restated SG 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. Consequently, the principal amount outstanding under the Second Amended and Restated SG Broadcasting Promissory Note as of March 27, 2020 was $11.3 million.
In March 2020 the World Health Organization declared the global novel coronavirus disease 2019 (COVID-19) outbreak a pandemic. As of the date these financial statements were filed, we are already starting to feel the impact of COVID-19 on the advertising and event-related revenues of our radio segment and, to a lesser degree, the revenues of our outdoor advertising segment. The Company’s operations are being adversely affected as a result of COVID-19, with certain advertisers cancelling their orders and an overall reduction in new advertising orders, but the full extent of the impact is not known at this point as the scale and severity of the outbreak is still unknown.
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