UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                   

Commission file number 000-27823

 

 

 

Spanish Broadcasting System, Inc.

(Exact name of registrant as specified in its charter)

 

 

Delaware

 

13-3827791

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

7007 NW 77th Ave.

Miami, Florida 33166

(Address of principal executive offices) (Zip Code)

 

(305) 441-6901

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001 per share

SBSAA

OTCQB Venture Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

  

Non-accelerated filer

 

 

  

Smaller reporting company

  

Emerging growth company

 

 

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

As of June 24, 2020, 4,241,991 shares of Class A common stock, par value $0.0001 per share, 2,340,353 shares of Class B common stock, par value $0.0001 per share and 380,000 shares of Series C convertible preferred stock, $0.01 par value per share, which are convertible into 760,000 shares of Class A common stock, were outstanding.

 

 

 

 


SPANISH BROADCASTING SYSTEM, INC.

INDEX

 

 

 

 

2


Explanatory Note

As disclosed in a Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”), on April 29, 2020, we delayed the filing of this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, because the novel coronavirus disease pandemic, known as COVID-19 (“COVID-19”), had a negative impact on the Company’s ability to complete the normal closing processes and internal reviews that are required to timely file the Form 10-Q.

Due to the impact of the COVID-19 pandemic, our key employees were limited in conducting normal business activities, including the preparation and review of this Quarterly Report on Form 10-Q.  In following the recommendations of governmental health authorities to minimize exposure risk for our employees, we had most employees work remotely.  We also had to furlough some employees.  As a result of our reduced workforce, the limited size of our accounting staff, limited access to our facilities and certain technology systems that our staff relies on to prepare our Form 10-Q, we experienced difficulties in completing the normal closing processes and internal reviews that are required to timely file the Form 10-Q.  In addition, these restrictive measures and the economic impacts of the COVID-19 pandemic required additional time for us to assess the impact of COVID-19 on our operations, financial position and cash flows.

On March 4, 2020, the Securities and Exchange Commission issued an order (Release No. 34-88318) under Section 36 of the Securities Exchange Act of 1934 (the “Exchange Act”) granting exemptions from specified provisions of the Exchange Act and certain rules thereunder, as superseded by a subsequent order (Release No. 34-88465) issued on March 25, 2020 (collectively, the “Order”). As previously disclosed in the Form 8-K, for the reasons discussed above, we relied on the Order to delay the filing of this Quarterly Report on Form 10-Q.

 

 

Special Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains both historical and forward-looking statements. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Exchange Act.

Spanish Broadcasting System, Inc. intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995, and includes this statement for purposes of such safe harbor provisions.

“Forward-looking” statements, as such term is defined by the Securities Exchange Commission (the “SEC”) in its rules, regulations and releases, represent our expectations or beliefs, including, but not limited to, statements concerning our operations, economic performance, financial condition, our recapitalization plan and restructuring efforts, growth and acquisition strategies, investments and future operational plans. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “forecast,” “seek,” “plan,” “predict,” “project,” “could,” “estimate,” “might,” “continue,” “seeking” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements.   These statements, by their nature, involve substantial risks and uncertainties, certain of which are beyond our control, and actual results may differ materially depending on a variety of important factors, including, but not limited to, the evolving and uncertain nature of the COVID-19 pandemic and its impact on the Company, the media industry, and the economy in general, and those described in Part I, “Item 1A. Risk Factors,” and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2019 as filed with the SEC on March 30, 2020 (the “Annual Report”), in Part II, “Item 1A. Risk Factors” elsewhere in this quarterly report on Form 10-Q, and those described from time to time in our future reports filed with the SEC. All forward-looking statements made herein are qualified by these cautionary statements and risk factors and there can be no assurance that the actual results, events or developments referenced herein will occur or be realized.

We do not have any obligation to publicly update any forward-looking statements to reflect subsequent events or circumstances.

 

 

 

3


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements—Unaudited

SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

 

March 31,

 

 

December 31,

 

Assets

2020

 

 

2019

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

36,600

 

 

$

20,856

 

Receivables:

 

 

 

 

 

 

 

Trade

 

35,615

 

 

 

40,394

 

Barter

 

141

 

 

 

197

 

 

 

35,756

 

 

 

40,591

 

Less allowance for doubtful accounts

 

1,277

 

 

 

1,122

 

Net receivables

 

34,479

 

 

 

39,469

 

Prepaid expenses and other current assets

 

7,848

 

 

 

7,475

 

Assets held for sale

 

 

 

 

12,474

 

Total current assets

 

78,927

 

 

 

80,274

 

Property and equipment, net of accumulated depreciation of $60,443 in 2020 and $60,004 in 2019

 

22,865

 

 

 

23,022

 

FCC broadcasting licenses

 

297,179

 

 

 

311,282

 

Goodwill

 

32,806

 

 

 

32,806

 

Operating lease right-of-use assets

 

17,159

 

 

 

17,978

 

Other assets

 

4,425

 

 

 

3,682

 

Total assets

$

453,361

 

 

$

469,044

 

Liabilities and Stockholders’ Deficit

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

$

19,719

 

 

$

20,333

 

Accrued interest

 

1,617

 

 

 

1,513

 

Unearned revenue

 

1,602

 

 

 

991

 

Operating lease liabilities

 

840

 

 

 

948

 

Liabilities held for sale

 

 

 

 

1,510

 

12.5% senior secured notes (note 9)

 

249,864

 

 

 

249,864

 

10 3/4% Series B cumulative exchangeable redeemable preferred stock outstanding and dividends

   outstanding, $0.01 par value, liquidation value $1,000 per share. Authorized 280,000 shares: 90,549

   shares issued and outstanding at March 31, 2020 and December 31, 2019 and $96,934 and $94,500

   of dividends payable as of March 31, 2020 and December 31, 2019, respectively (note 10)

 

187,483

 

 

 

185,049

 

Total current liabilities

 

461,125

 

 

 

460,208

 

Other liabilities, less current portion

 

2,808

 

 

 

2,877

 

Operating lease liabilities - net of current portion

 

17,350

 

 

 

17,538

 

Deferred tax liabilities

 

66,703

 

 

 

68,718

 

Total liabilities

 

547,986

 

 

 

549,341

 

Commitments and contingencies (note 7)

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Series C convertible preferred stock, $0.01 par value and liquidation value. Authorized 600,000 shares;

     380,000 shares issued and outstanding at March 31, 2020 and December 31, 2019

 

4

 

 

 

4

 

Class A common stock, $0.0001 par value. Authorized 100,000,000 shares; 4,241,991 shares

     issued and outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

Class B common stock, $0.0001 par value. Authorized 50,000,000 shares; 2,340,353 shares

     issued and outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

Additional paid-in capital

 

526,203

 

 

 

526,201

 

Accumulated deficit

 

(620,832

)

 

 

(606,502

)

Total stockholders’ deficit

 

(94,625

)

 

 

(80,297

)

Total liabilities and stockholders’ deficit

$

453,361

 

 

$

469,044

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

4


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Operations

(In thousands, except per share data)

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Net revenue

$

36,275

 

 

$

37,355

 

Operating expenses:

 

 

 

 

 

 

 

Engineering and programming

 

7,674

 

 

 

7,031

 

Selling, general and administrative

 

18,241

 

 

 

19,254

 

Corporate expenses

 

2,824

 

 

 

2,751

 

Depreciation and amortization

 

846

 

 

 

873

 

Total operating expenses

 

29,585

 

 

 

29,909

 

Gain on disposal of assets, net of disposal costs

 

(3,186

)

 

 

(36

)

Recapitalization costs

 

1,684

 

 

 

1,930

 

Impairment charges

 

14,103

 

 

 

 

Other operating income

 

 

 

 

(17

)

Operating (loss) income

 

(5,911

)

 

 

5,569

 

Other expense:

 

 

 

 

 

 

 

Interest expense, net

 

(7,916

)

 

 

(7,807

)

Dividends on Series B preferred stock classified as interest expense (note 10)

 

(2,434

)

 

 

(2,434

)

Loss before income tax

 

(16,261

)

 

 

(4,672

)

Income tax loss (benefit)

 

(1,931

)

 

 

(740

)

Net loss

$

(14,330

)

 

$

(3,932

)

Class A and B net loss per common share (note 3)

 

 

 

 

 

 

 

Basic

$

(1.95

)

 

$

(0.54

)

Diluted

$

(1.95

)

 

$

(0.54

)

 

See accompanying notes to the unaudited condensed consolidated financial statements.  

 

 

5


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

Unaudited Condensed Consolidated Statements of Cash Flows

(In thousands)

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

Net loss

$

(14,330

)

 

$

(3,932

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Dividends on Series B preferred stock classified as interest expense (note 10)

 

2,434

 

 

 

2,434

 

Gains on the disposal of assets (net of disposal costs) and from insurance

proceeds received for damaged equipment

 

(3,186

)

 

 

(36

)

Impairment charges

 

14,103

 

 

 

 

Stock-based compensation

 

2

 

 

 

 

Depreciation and amortization

 

846

 

 

 

873

 

Net barter (income) loss

 

(229

)

 

 

116

 

Provision for trade doubtful accounts

 

210

 

 

 

224

 

Deferred income taxes

 

(2,015

)

 

 

(1,060

)

Unearned revenue

 

767

 

 

 

(7

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Trade receivables

 

4,724

 

 

 

3,153

 

Prepaid expenses and other current assets

 

(337

)

 

 

278

 

Other assets

 

(743

)

 

 

(492

)

Accounts payable and accrued expenses

 

(830

)

 

 

(571

)

Accrued interest

 

104

 

 

 

 

Other liabilities

 

(69

)

 

 

(9

)

Net cash provided by operating activities

 

1,451

 

 

 

971

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Purchases of property and equipment

 

(869

)

 

 

(1,173

)

Net proceeds (payments) towards FCC repack assets

 

147

 

 

 

(98

)

Proceeds from the sale of property and equipment

 

15,004

 

 

 

 

Insurance proceeds received for damage to equipment

 

11

 

 

 

36

 

Net cash provided by (used in) investing activities

 

14,293

 

 

 

(1,235

)

Cash flows from financing activities:

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

15,744

 

 

 

(264

)

Cash and cash equivalents at beginning of period

 

20,856

 

 

 

22,468

 

Cash and cash equivalents at end of period

$

36,600

 

 

$

22,204

 

Supplemental cash flows information:

 

 

 

 

 

 

 

Interest paid

$

7,811

 

 

$

7,811

 

Income tax paid

$

37

 

 

$

97

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

6


SPANISH BROADCASTING SYSTEM, INC. AND SUBSIDIARIES

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

1. Basis of Presentation

The unaudited condensed consolidated financial statements include the accounts of Spanish Broadcasting System, Inc. and its subsidiaries (the Company, we, us, our or SBS). All intercompany balances and transactions have been eliminated in consolidation. The accompanying unaudited condensed consolidated financial statements as of March 31, 2020 and December 31, 2019 and for the three-month periods ended March 31, 2020 and 2019 have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8-03 of Regulation S-X. They do not include all information and notes required by U.S. GAAP for complete financial statements. These unaudited condensed consolidated financial statements should be read in conjunction with our consolidated financial statements as of, and for the fiscal year ended December 31, 2019, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed by the Company on March 30, 2020 (the “Annual Report”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, which are all of a normal and recurring nature, necessary for a fair presentation of the results of the interim periods. Additionally, we evaluated subsequent events after the balance sheet date of March 31, 2020 through the financial statements issuance date. The results of operations for the three-months ended March 31, 2020 are not necessarily indicative of the results for the entire year ending December 31, 2020, or for any other future interim or annual periods.

Our consolidated financial statements have been prepared assuming we will continue as a going-concern, and do not include any adjustments that might result if we were unable to do so, and contemplate the realization of assets and the satisfaction of liabilities in the normal course of business. As of March 31, 2020 and December 31, 2019, we had a working capital deficit due primarily to the classification of our 10¾% Series B Cumulative Exchangeable Redeemable Preferred Stock (the “Series B preferred stock”) as a current liability and the classification of our 12.5% Senior Secured Notes due 2017 (the “Notes”) as a current liability. Under Delaware law, our state of incorporation, the Series B preferred stock is deemed equity. Because the holders of the Series B preferred stock are not creditors, they do not have rights of or remedies available to creditors. Delaware law does not recognize a right of preferred stockholders to force redemptions or repurchases where the corporation does not have funds legally available. Currently, we do not have sufficient funds legally available to be able to redeem or repurchase the Series B preferred stock and its accumulated unpaid dividends. If we are successful in repaying or refinancing our Notes, and are able to generate legally available funds under Delaware law, we may be required to pay all or a portion of the accumulated preferred dividends and redeem all or a portion of the Series B preferred stock, to the extent of the funds legally available. The Company is currently involved in litigation with some holders of the Series B preferred stock. See Note 7 elsewhere in these Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail regarding the Series B preferred stock litigation.     

As discussed in Note 9, the Notes became due on April 15, 2017. Cash from operations and proceeds from the sale of assets and the FCC spectrum auction were not sufficient to repay the Notes when they became due. We have worked and continue to work with our advisors regarding a consensual recapitalization or restructuring of our balance sheet, including through the issuance of new debt or equity to raise the necessary funds to repay the Notes.  The Series B preferred stock litigation and the foreign ownership issue have complicated our efforts at a successful refinancing of the Notes, as discussed in Note 10.  The resolution of the recapitalization or restructuring of our balance sheet, the litigation with the purported holders of our Series B preferred stock and the foreign ownership issue are subject to several factors currently beyond our control.  Our efforts to effect a consensual refinancing of the Notes, the Series B preferred stock litigation and the foreign ownership issue will likely continue to have a material adverse effect on us if they are not successfully resolved.    

The Company has incurred $1.7 million for the three-months ended March 31, 2020 of recapitalization costs, primarily due to professional fees directly related to our recapitalization efforts. Also included in these amounts are the legal and financial advisory fees incurred by the holders of the Notes.    

The Company’s inability to obtain financing in adequate amounts and on acceptable terms necessary to repay our Notes and redeem or refinance our Series B preferred stock, obtain a favorable resolution to the Series B preferred stock litigation, finance future acquisitions, or unexpected crisis such as the recent outbreak of the novel coronavirus disease known as COVID-19 (“COVID-19”) negatively impacts our business, financial position, results of operations, liquidity and cash flows and raises substantial doubt about our ability to continue as a going concern. The financial statements do not include adjustments, if any, that might arise from the outcome of this uncertainty.

 

Impact of the COVID -19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant economic downturn. The COVID-19 pandemic has resulted in the temporary disruptions of

7


many of the Company’s advertisers’ businesses thereby impacting the Company’s core source of revenue, which has had a material impact on its operations and financial condition. The impact of COVID-19 on the capital markets could also impact the Company’s ability and cost to obtain necessary financing. Many advertisers have reduced or ceased their advertising spend due to the outbreak and stay at home orders which have temporarily shut many businesses down.

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. The Company is actively monitoring the COVID-19 situation and its impact on the markets it serves. The Company is taking reasonable precautionary measures as directed by health authorities and local, state and national governments. Due to continuing uncertainties regarding the COVID-19 pandemic, it is impossible to predict the total impact that the pandemic will have on the Company’s business. If public and private entities continue to implement restrictive measures, the material adverse effect on the Company’s business, results of operations, financial condition, liquidity and cash flows could continue.

The Company has initiated the following strategies to reduce expenses and preserve cash:

 

limiting capital expenditures;

 

reduced content production;

 

eliminated advertising and marketing;

 

reducing discretionary spending;

 

eliminated travel and entertainment except for essential business needs;

 

furloughing certain employees;

 

requesting discounts from vendors and/or payment plans.

To the extent the business disruption continues for an extended period, additional cost management actions will be considered to protect the Company’s long-term financial health and ensure its ability to continue serving its viewers, listeners and advertisers.

Since March, most of the Company’s employees have been working from home, with only certain essential employees working on site. For employees working at the Company’s facilities, it has instituted social distancing protocols, increased the level of cleaning and sanitizing and undertaken other actions to make its facilities safer. The Company is generally following the requirements and protocols published by the U.S. Centers for Disease Control and the World Health Organization, and state and local governments. As of the date of these financial statements, the Company does not believe its work from home protocol has adversely impacted its internal controls, financial reporting systems or its operations.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was signed into law. The CARES Act provides opportunities for additional liquidity, loan guarantees, and other government programs to support companies affected by the COVID-19 pandemic and their employees. The CARES Act allocated $349 billion to the Paycheck Protection Program (the “PPP”). An additional $310 billion was allocated to the PPP with the enactment of the Paycheck Protection Program and Healthcare Enhancement Act (“CARES 2.0”) on April 21, 2020. Subsequently, on June 5, 2020, the Paycheck Protection Flexibility Act of 2020 (“Flexibility Act”) was signed into law, amending the CARES Act. Based on the Company’s preliminary analysis of the CARES Act, the benefits it has already taken advantage of or expects to recognize include:

 

applying for and receiving an unsecured loan in the amount of approximately $6.5 million pursuant to and funded by the U.S. Payment Protection Program (the “PPP”) to cover certain payroll, benefit, rent and utility expenses during the second and third quarters of 2020. The Company intends to apply for forgiveness of the PPP amounts received although there can be no guarantee that the amounts will be forgiven. New guidance on the criteria for forgiveness continues to be released. See Note 13 elsewhere in these Notes to the Unaudited Condensed Consolidated Financial Statements for additional detail regarding the PPP.

 

relaxation of interest expense deduction limitation for income tax purposes. The limitation on interest increases from 30% to 50% for 2019 and 2020. This results in an expected benefit relating to 2019 in the amount of $2.8 million. The Company also expects to deduct additional interest in 2020 as a result of this legislation.

The Company continues to review and consider any available potential benefit under the CARES Act for which it may qualify. The Company cannot predict the manner in which such benefits or any of the other benefits described herein will be allocated or administered and it cannot assure you that it will be able to access such benefits in a timely manner or at all. If the U.S. government or any other governmental authority agrees to provide such aid under the CARES Act or any other crisis relief assistance it may impose certain requirements on the recipients of the aid, including restrictions on executive officer compensation, dividends, prepayment of debt, limitations on debt and other similar restrictions that will apply for a period of time after the aid is repaid or redeemed in full.

8


Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the allowance for doubtful accounts, the realization of deferred tax assets, the useful lives and future cash flows used for testing the recoverability of property and equipment, the recoverability of FCC broadcasting licenses, and goodwill, the recoverability of right-of-use assets, the fair value of Level 2 and Level 3 financial instruments which include the Series B preferred stock, production tax credits, the assessment as to whether it is reasonably certain that we will exercise our options to extend lease terms when available, the present value of lease payments used to calculate our lease liabilities and related right-of-use assets which includes the use of estimated incremental borrowing rate (“IBR”), contingencies and litigation. These estimates and assumptions are based on management’s best judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions as facts and circumstances dictate.

We assessed these aforementioned estimates and judgments utilizing information reasonably available to us and considering the unknown future impacts of the COVID-19 pandemic and the declining performance for total market revenues in our radio and television markets, we performed an interim impairment test as of March 31, 2020 of our goodwill and FCC broadcasting radio and television FCC broadcasting licenses. As a result of the interim impairment test, we determined that there was no impairment to goodwill, however, there was an impairment to our radio FCC broadcasting licenses, primarily due to the discount rate increase and lower industry advertising revenue growth projections in the subject markets. We recorded a non-cash impairment loss of approximately $14.1 million that reduced the carrying value of such FCC broadcasting licenses. Actual results could differ from these estimates.

The COVID-19 pandemic continues to create significant uncertainty and disruption in the global economy and financial markets. It is reasonably possible that these uncertainties could materially impact our estimates related to, but not limited to, revenue recognition, broadcast licenses, goodwill and income taxes. As a result, many of our estimates and assumptions require increased judgment and carry a higher degree of variability and volatility. Our estimates may change as new events occur and additional information emerges, and such changes are recognized or disclosed in our consolidated financial statements.

 

Recently Issued Accounting Pronouncements

In March 2019, the FASB issued ASU No. 2019-02, Entertainment—Films—Other Assets—Film Costs (Subtopic 926-20) and Entertainment—Broadcasters—Intangibles—Goodwill and Other (Subtopic 920-350): Improvements to Accounting for Costs of Films and License Agreements for Program Materials. ASU 2019-02 helps organizations align their accounting for production costs for films and episodic content produced for television and streaming services.  The standard addresses when an organization should assess films and license agreements for program material for impairment at the film-group level, revises presentation requirements; requires new disclosures about content that is either produced or licensed; and, addresses cash flow classification for license agreements. The standard is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We have adopted the new standard effective January 1, 2020 with no material impact on our financial statements.

In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) – Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which provides additional guidance on the accounting for costs of implementation activities performed in a cloud computing arrangement that is a service contract. The update is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license).  We have adopted the new standard effective January 1, 2020 with no material impact on our financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) – Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements to all entities required to make disclosures about recurring and nonrecurring fair value measurements. The update is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.  The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. Early adoption is permitted. The guidance eliminates the requirement to disclose the valuation process for Level 3 fair value measurements. The methodology used to arrive at the fair value of the Series B preferred stock results in a Level 3 classification.  The

9


Company has adopted this ASU, effective January 1, 2020 with no impact on our financial position or results of operations and has updated its disclosures in accordance with the requirements of this ASU.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718) - Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of share-based compensation guidance to include share-based payment transactions for acquiring goods and services from nonemployees. The update is effective for fiscal years beginning after December 15, 2019 and for interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than the adoption date for ASC 606 on revenue recognition. The update is effective through a cumulative-effect adjustment to retained earnings as of the beginning of the year of adoption. The Company adopted this ASU, effective January 1, 2020 with no impact on our financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326)—Measurement of Credit Losses on Financial Instruments which introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements and will be applied using the modified-retrospective approach. In February 2020, the FASB issued ASU No. 2020-02, Financial Instruments—Credit Losses (Topic 326), which delayed the effective date for smaller reporting public companies until fiscal years beginning after December 15, 2022. Early adoption is permitted as of the fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. The Company has not currently adopted this ASU. Based on our preliminary assessment, the Company does not expect the adoption of this update to have a material impact on our financial position, results of operations or cash flows.    

    

 

2. Revenue

 

In accordance with ASC 606, revenue is recognized when a customer obtains control of promised services. The amount of revenue recognized and reported reflects the consideration to which the Company expects to be entitled to receive in exchange for these services and entitled under the contract. Substantially all deferred revenue is recognized within twelve months of the payment date.  To achieve this core principle, the Company applies the following five steps:

 

1)  Identify the contract with a customer,

2)  Identify the performance obligations in the contract,

3)  Determine the transaction price,

4)  Allocate the transaction price to performance obligations in the contract, and

5)  Recognize revenue when or as the Company satisfies a performance obligation.

 

Disaggregation of Revenue

 

The following table summarizes revenue from contracts with customers for the three-months ended March 31, 2020 and 2019 (in thousands):

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Local, national, digital and network

$

31,547

 

 

$

31,457

 

Special events

 

6,429

 

 

 

7,093

 

Barter

 

1,645

 

 

 

1,838

 

Other

 

1,105

 

 

 

1,516

 

Gross revenue

 

40,726

 

 

 

41,904

 

Less: Agency commissions and other

 

4,451

 

 

 

4,549

 

Net revenue

$

36,275

 

 

$

37,355

 

 

10


Nature of Products and Services

(a)

Local, national, digital and network advertising

Local and digital revenues generally consist of advertising airtime sold in a station’s local market, the Company’s La Musica application or its websites either directly to the advertiser or through an advertiser’s agency. Local revenue includes local spot sales, integrated sales, sponsorship sales and paid-programming (or infomercials). National revenue generally consists of advertising airtime sold to agencies purchasing advertising for multiple markets. National sales are generally facilitated by an outside national representation firm, which serves as an agent in these transactions. Revenues from national advertisers are presented as net of agency commissions as this is the amount that the Company expects to be entitled to receive in exchange for these services and entitled to under the contract. Network revenue generally consists of advertising airtime sold on the AIRE Radio Networks platform by network sales staff.

A contract for local, national, digital and network advertising exists only at the time commercial substance is present. For each contract, the Company considers the promise to air or display advertisements, each of which is distinct, to be the identified performance obligation. The price as specified on a customer purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs as an advertisement airs or appears.

(b)

Special events

Special events revenue is generated from ticket sales, as well as through profit-sharing arrangements for producing or co-producing live concerts and events promoted by radio and television stations.

In addition to ticket sales, the Company enters into profit-sharing arrangements to produce or co-produce live concerts and events with partners which may also purchase various production services from the Company. These contracts include multiple promises that the Company evaluates to determine if the promises are separate performance obligations. Once the Company determines the performance obligations and the transaction price, including estimating the amount of variable consideration, the Company then allocates the transaction price to each performance obligation in the contract based on a relative stand-alone selling price method or using the variable consideration allocation exception if the required criteria are met. The corresponding revenues are recognized as the related performance obligations are satisfied, which may occur over time (i.e. term of agreement) or at a point in time (i.e. event completion).  In order to determine if revenue should be reported gross as principal or net as agent, the Company considers indicators such as if it is the party primarily responsible for fulfillment, has inventory risk, and has discretion in establishing price to determine control. When management determines it controls an event, it is acting as the principal and records revenue gross. When management determines it does not control an event, it is acting as an agent and records revenue net.

(c)

Barter advertising

Barter sales agreements are used to reduce cash paid for operating costs and expenses by exchanging advertising airtime for goods or services.

A contract for barter advertising exists only at the time commercial substance is present. For each contract, the Company considers the promise to air or display advertisements, each of which is distinct, to be the identified performance obligation. The price as specified on a counterparty’s purchase order is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control is transferred to the customer (i.e., when the Company’s performance obligation is satisfied), which typically occurs as an advertisement airs or displays.

For the three-months ended March 31, 2020 and 2019, barter revenue of $1.6 million and $1.8 million, respectively, was offset by barter expense of $1.5 million and $2.0 million, respectively.  

(d)

Other revenue

Other revenue consists of syndication revenue, subscriber revenue and other revenue. Syndication revenue is recognized from licensing various MegaTV content and is payable on a usage-based model. Subscriber revenue is payable in a per subscriber form from cable and satellite providers. Other revenue consists primarily of renting available tower space or sub-channels.

The Company considers signed license or subscriber agreements to be the contract with a customer for the sale of syndicated or subscriber related content. For each contract, the Company considers making content available to the customer to be the identified performance obligation. The price as specified on a counterparty’s agreement, which is generally stated on a per user basis, is considered the standalone selling price as it is an observable input which depicts the price as if sold to a similar customer in similar circumstances. Revenue is recognized when control is transferred to the customer (i.e., when the Company’s performance obligation is

11


satisfied), which typically occurs on a month-to-month basis. Other revenues related to renting tower space are recognized in accordance with ASC 842 - Leases.

Significant Judgments

As part of its consideration of the existence of contracts, the Company evaluates certain factors including the customer’s ability to pay (or credit risk). Advertising contracts are for one year or less. In determining the transaction price the Company evaluates whether the price is subject to refund or adjustment to determine the net consideration to which the Company expects to be entitled. In determining whether control has transferred, the Company considers if there is a present right to payment and legal title, along with risks and rewards of ownership having transferred to the customer.

Contract Balances

During the three-months ended March 31, 2020 there were $0.3 million of local, national, digital and network revenue recognized that were included in the unearned revenue balances at the beginning of the period. During the three-months ended March 31, 2020, there were $0.2 million of special events revenue recognized that were included in the unearned balances at the beginning of period. During the three-months ended March 31, 2020 barter revenue recognized that were included in the unearned revenue balances at the beginning of the period were $0.1 million. Other revenue recognized during the three-months ended March 31, 2020 that were included in unearned revenue balances at the beginning of the period were not significant. At March 31, 2020 there was $2.3 million of variable consideration in the form of agency based volume discounts accrued as contract liabilities within accrued expenses as compared to $2.0 million for the year-ended December 31, 2019. Variable consideration in the form of agency based volume discounts of $0.3 million were recognized and recorded as contract liabilities within accrued expenses during the three- months ended March 31, 2020.   

Transaction Price Allocated to the Remaining Performance Obligation

The Company has elected to use the optional exemption in ASC 606-10-50-14 with regard to disclosing balances associated with remaining performance obligations. Revenue expected to be recognized in any future year related to remaining performance obligations, excluding revenue pertaining to contracts that have an original expected duration of one year or less, contracts where revenue is recognized as invoiced and contracts with variable consideration related to undelivered performance obligations, is not material.

Assets Recognized from the Costs to Obtain a Contract with a Customer

ASC 606 requires that the Company capitalize incremental costs of obtaining a contract such as sales commissions. The guidance provides certain practical expedients that limit this requirement. The Company has elected to use the practical expedient in ASC 340-40-25-4 which allows us to recognize the incremental cost of obtaining a contract, such as sales commissions paid to our employees, as an expense when incurred if the amortization period of the asset that the entity otherwise would have recognized is one year or less.  

 

 

 

12


3. Basic and Diluted Net Loss Per Common Share

In calculating net loss per share, the Company follows the two-class method, which distinguishes between classes of securities based on the proportionate participation rights of each security type in the Company’s undistributed net loss.  The Company’s Class A common stock, Class B common stock and Series C convertible preferred stock share equally on an as-converted basis with respect to net loss.  

Basic net loss per share is computed by dividing net loss applicable to stockholders by the weighted average number of shares for each period on an as-converted basis. Diluted net loss income per common share is computed by giving effect to common stock equivalents as if they were outstanding for the entire period.

The following tables set forth the computation of basic and diluted net loss available to stockholders for the three-month periods ended March 31, 2020 and 2019 (in thousands):

 

 

Three-Months Ended March 31,

 

 

2020

 

 

2019

 

 

Class A

 

 

Class B

 

 

Series C

 

 

Class A

 

 

Class B

 

 

Series C

 

Basic net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of undistributed losses

$

(8,279

)

 

 

(4,568

)

 

 

(1,483

)

 

$

(2,272

)

 

 

(1,253

)

 

 

(407

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in per share computation (as converted)

 

4,242

 

 

 

2,340

 

 

 

760

 

 

 

4,242

 

 

 

2,340

 

 

 

760

 

Basic net loss per share

$

(1.95

)

 

 

(1.95

)

 

 

(1.95

)

 

$

(0.54

)

 

 

(0.54

)

 

 

(0.54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allocation of undistributed losses

$

(8,279

)

 

 

(4,568

)

 

 

(1,483

)

 

$

(2,272

)

 

 

(1,253

)

 

 

(407

)

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in basic computation

 

4,242

 

 

 

2,340

 

 

 

760

 

 

 

4,242

 

 

 

2,340

 

 

 

760

 

Weighted-average impact of dilutive equity instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of shares used in per share computation (as converted)

 

4,242

 

 

 

2,340

 

 

 

760

 

 

 

4,242

 

 

 

2,340

 

 

 

760

 

Diluted net loss per share

$

(1.95

)

 

 

(1.95

)

 

 

(1.95

)

 

$

(0.54

)

 

 

(0.54

)

 

 

(0.54

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock equivalents excluded from calculation of

   diluted net loss per share as the effect would

   have been anti-dilutive:

 

379

 

 

 

 

 

 

 

 

 

445

 

 

 

 

 

 

 

 

 

 

4. Stockholders’ Deficit

 

The changes in stockholders' deficit for the three-month periods ended March 31, 2020 and 2019 are as follows:  

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Beginning balance

$

(80,297

)

 

$

(79,379

)

Net loss

 

(14,330

)

 

 

(3,932

)

Stock-based compensation

 

2

 

 

 

 

Ending balance

$

(94,625

)

 

$

(83,311

)

 


13


 

5. Operating Segments

We have two reportable segments: radio and television.

The following summary table presents separate financial data for each of our operating segments (in thousands):  

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Net revenue:

 

 

 

 

 

 

 

Radio

$

32,533

 

 

$

34,079

 

Television

 

3,742

 

 

 

3,276

 

Consolidated

$

36,275

 

 

$

37,355

 

Engineering and programming expenses:

 

 

 

 

 

 

 

Radio

$

5,608

 

 

$

5,481

 

Television

 

2,066

 

 

 

1,550

 

Consolidated

$

7,674

 

 

$

7,031

 

Selling, general and administrative expenses:

 

 

 

 

 

 

 

Radio

$

16,668

 

 

$

17,666

 

Television

 

1,573

 

 

 

1,588

 

Consolidated

$

18,241

 

 

$

19,254

 

Corporate expenses:

$

2,824

 

 

$

2,751

 

Depreciation and amortization:

 

 

 

 

 

 

 

Radio

$

440

 

 

$

376

 

Television

 

349

 

 

 

444

 

Corporate

 

57

 

 

 

53

 

Consolidated

$

846

 

 

$

873

 

Gain on disposal of assets, net of disposal costs:

 

 

 

 

 

 

 

Radio

$

(8

)

 

$

(36

)

Television

 

(3,178

)

 

 

 

Corporate

 

 

 

 

 

Consolidated

$

(3,186

)

 

$

(36

)

Recapitalization costs:

 

 

 

 

 

 

 

Radio

$

 

 

$

 

Television

 

 

 

 

 

Corporate

 

1,684

 

 

 

1,930

 

Consolidated

$

1,684

 

 

$

1,930

 

Impairment charges:

 

 

 

 

 

 

 

Radio

$

14,103

 

 

$

 

Television

 

 

 

 

 

Corporate

 

 

 

 

 

Consolidated

$

14,103

 

 

$

 

Other operating income:

 

 

 

 

 

 

 

Radio

$

 

 

$

(17

)

Television

 

 

 

 

 

Corporate

 

 

 

 

 

Consolidated

$

 

 

$

(17

)

Operating (loss) income:

 

 

 

 

 

 

 

Radio

$

(4,278

)

 

$

10,609

 

Television

 

2,932

 

 

 

(306

)

Corporate

 

(4,565

)

 

 

(4,734

)

Consolidated

$

(5,911

)

 

$

5,569

 

14


 

 

 

Three-Months Ended

 

 

March 31,

 

 

2020

 

 

2019

 

Capital expenditures:

 

 

 

 

 

 

 

Radio

$

563

 

 

$

610

 

Television

 

173

 

 

 

405

 

Corporate

 

133

 

 

 

158

 

Consolidated

$

869

 

 

$

1,173

 

 

 

 

March 31,

 

 

December 31,

 

 

2020

 

 

2019

 

Total Assets:

 

 

 

 

 

 

 

Radio

$

405,220

 

 

$

407,633

 

Television

 

45,026

 

 

 

58,465

 

Corporate

 

3,115

 

 

 

2,946

 

Consolidated

$

453,361

 

 

$

469,044

 

 

 

6. Income Taxes

We are calculating our effective income tax rate using an estimated annual effective tax rate with the exception of jurisdictions where losses have a full valuation allowance against them and jurisdictions with indefinite lived deferred tax liabilities for which their deferred tax assets are also subject to a full valuation allowance.  In assessing the realizability of the deferred tax assets, management considers whether it is more likely than not that some portion or the entire deferred tax assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Due to the continued pre-tax operating losses reported through the first quarter of 2020, management has not changed its valuation allowance position as of March 31, 2020 from December 31, 2019.

Our income tax expense differs from the statutory federal tax rate of 21% and related statutory state tax rates primarily due to the winding down of tax amortization on certain indefinite-lived intangible assets that do not have any valuation allowance, offset by the deferred tax asset continued creation of disallowed interest as a result of tax laws changes from the Tax Legislation and the CARES ACT, and other changes in the valuation allowance. The CARES ACT interest limitation increased from 30% to 50% for 2019 and 2020. This results in an expected benefit relating to 2019 in the amount of $2.8 million. The Company is also expecting to deduct additional interest in 2020 as a result of this legislation.

U.S. Federal jurisdiction and the jurisdictions of Florida, New York, California, Illinois, Texas and Puerto Rico are the major tax jurisdictions where we file income tax returns. The tax years that remain subject to assessment of additional liabilities by the federal, state and local tax authorities are 2015 through 2018. The tax years that remain subject to assessment of additional liabilities by the Puerto Rico tax authority are 2012 through 2018.  

Based on our evaluation, we have concluded that there are no material uncertain tax positions requiring recognition in our consolidated financial statements as of March 31, 2020 and December 31, 2019.

 

7. Commitments and Contingencies

We are subject to certain legal proceedings and claims that have arisen in the ordinary course of business and have not been fully adjudicated. In our opinion, we do not have a potential liability related to any current legal proceedings and claims that would individually or in the aggregate have a material adverse effect on our financial condition or operating results. However, the results of legal proceedings cannot be predicted with certainty. Should we fail to prevail in any of these legal matters or should all of these legal matters be resolved against us in the same reporting period, the operating results of a particular reporting period could be materially adversely affected.

Series B Preferred Stock Litigation

Persons claiming to own 94.16% of our Series B preferred stock filed a complaint against us in the Delaware Court of Chancery, in Cedarview Opportunities Master Fund, L.P., et al. v. Spanish Broadcasting System, Inc. (Del.Ct.Ch. C.A. No. 2017-0785-AGB), on

15


November 2, 2017, which was subsequently amended. The amended complaint (the “Preferred Holder Complaint”) alleges counts for breach of contract, breach of the implied covenant of good faith and fair dealing and specific performance regarding the Certificate of Designations in connection with a forbearance agreement we entered into with certain Noteholders on May 8, 2017 (the “Forbearance Agreement”) and breach of our Charter and for a declaratory judgment regarding the validity of a provision of the Charter regarding the foreign ownership issues described below.  Specifically, it alleges that the Forbearance Agreement (which expired on May 31, 2017) and certain payments pursuant thereto were barred by the Certificate of Designations due to the existence of a “Voting Rights Triggering Event” under the Certificate of Designations because, among other things, the forbearance agreement allegedly constituted a “de facto” extension or refinancing of the Notes. The Preferred Holder Complaint alleges that SBS breached the Charter by suspending certain rights of the Series B preferred stockholders, and that Section 10.4 of the Charter is overbroad and thus invalid as a matter of Delaware law. The complaint requests relief including, among other things, an order interpreting and enforcing the Certificate of Designations, preventing us from making any additional payments on the Notes and requiring us to redeem the Series B preferred stock at face value plus accrued dividends (or approximately $187.5 million as of March 31, 2020, as well as unspecified money damages and a declaration that Section 10.4 of the Charter is invalid. This is the fourth lawsuit filed against us by holders or purported holders of our Series B preferred stock, the first three of which we successfully challenged and won. We believe these claims are without merit, and we intend to defend ourselves vigorously.  The Company filed a motion to dismiss these claims, for which oral argument was heard on April 12, 2018.  The Company received a ruling on the motion to dismiss on August 27, 2018. The ruling granted the Company’s motion to dismiss in part and denied it in part. The court dismissed the claim for breach of the implied covenant of good faith and fair dealing and dismissed the claim for specific performance (insofar as it sought a redemption of the Series B preferred stock) and dismissed the claim for a declaratory judgment regarding the Charter (insofar as it sought a declaration that Section 10.4 of the Charter is invalid on the face). The other claims in the Preferred Holder Complaint were not dismissed and remain pending before the court.  On September 24, 2019, we filed counterclaims in this matter claiming that certain of the plaintiffs are not valid holders of Series B Preferred stock because their purported purchases were attempted in violation of the Charter and were therefore void as a legal matter by operation of the Charter.  On December 18, 2019, we filed a motion for summary judgment against the affected plaintiffs with respect to this issue. On March 20, 2020, we filed a motion to dismiss the Preferred Holder Complaint for failure to prosecute. Our motions for summary judgment and to dismiss remain pending before the court.   

Local Tax Assessment

The Company received an audit assessment (the “Assessment”) wherein it was proposed that the Company underpaid a local tax for the tax periods between June 1, 2005 and May 31, 2015 totaling $1,993,624 in underpaid tax, applicable interest and penalties.  The Company disagrees with the assessment and related calculations but is developing a settlement strategy to discuss and pursue with the taxing jurisdiction with the hope of avoiding a lengthy litigation process. While we are uncertain as to whether the jurisdiction will accept this offer, an accrual of $535,000, based upon our current best estimate of probable loss, was charged to operations in the second quarter of 2016. However, if the settlement offer is not accepted by the jurisdiction, the amount of the ultimate loss to the Company, if any, may equal the entire amount of the Assessment sought by the taxing jurisdiction.  

 

8. Fair Value Measurement Disclosures

 

(a)

Fair Value of Financial Instruments

Cash and cash equivalents, receivables, as well as accounts payable and accrued expenses, and other current liabilities, as reflected in the consolidated financial statements, approximate fair value because of the short-term maturity of these instruments.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The fair value of the Notes is estimated using market quotes from a major financial institution taking into consideration the most recent activity and are considered Level 2 measurements within the fair value hierarchy.  The fair value of the Series B cumulative exchangeable redeemable preferred stock was based upon a weighted average analysis using the Black-Scholes method, an income approach, and the yield method resulting in a Level 3 classification.  The Black-Scholes method utilized an estimate of the fair value of the SBS equity, volatility, an estimate of the time to liquidity, and a risk free rate in the determination of the SBS preferred fair value.  Key assumptions for the income and yield methods included the expected yield on preferred stock, accrued dividends, the principal amount of the Series B preferred stock, and an estimate of the time to liquidity.  A discount for lack of marketability of the preferred stock was also utilized in the analysis. The outcome of the Series B preferred stock litigation may impact the fair value of the Series B preferred stock going forward.

16


The estimated fair values of our financial instruments are as follows (in millions):

 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

 

Fair Value

 

Carrying

 

 

Fair

 

 

Carrying

 

 

Fair

 

Description

Hierarchy

 

Amount

 

 

Value

 

 

Amount

 

 

Value

 

12.5% Senior Secured Notes due 2017 (note 9)

Level 2

 

$

249.9

 

 

 

263.5

 

 

$

249.9

 

 

 

263.5

 

10 3/4% Series B cumulative exchangeable

     redeemable preferred stock (note 10)

Level 3

 

 

187.5

 

 

 

44.6

 

 

 

185.0

 

 

 

66.0

 

 

 

(b)

Fair Value of FCC Broadcasting Licenses

As discussed in Note 12, our valuations of our indefinite-lived intangibles principally use the discounted cash flow methodology which includes significant unobservable inputs and assumptions by management resulting in certain assets being recorded on a non-reoccurring Level 3 fair value measure.  During the quarter ended March 31, 2020, several of our radio FCC broadcasting licenses with a carrying amount of $295.1 million were written down to their implied fair value of $281.0 million, resulting in an impairment charge of $14.1 million, which was included in earnings for the period. There was no impairment to the television FCC broadcasting licenses with a carrying value of approximately $16.2 million that make up the remaining FCC broadcasting licenses balance, as presented in the accompanying consolidated balance sheet.

 

 

9. 12.5% Senior Secured Notes due 2017

On February 7, 2012 we closed our offering of $275 million in aggregate principal amount of our Notes, at an issue price of 97% of the principal amount. The Notes were offered solely by means of a private placement either to qualified institutional buyers in the United States pursuant to Rule 144A under the Securities Act, or to certain persons outside the United States pursuant to Regulation S under the Securities Act. We used the net proceeds from the offering, together with some cash on hand, to repay and terminate the senior credit facility term loan, and to pay the transaction costs related to the offering. The Notes matured on April 15, 2017.  Because we did not have sufficient cash on hand and did not generate sufficient cash from operations or asset sales, we did not repay the Notes at their maturity, as a result of which there was an event of default under the Indenture on April 17, 2017 (being the payment date following the Saturday, April 15, 2017 maturity date).    

On May 8, 2017, the Company, and certain of its subsidiaries entered into a Forbearance Agreement with certain Noteholders, owning more than 75% of the principal amount of the outstanding Notes.  These Noteholders agreed to forbear from exercising any of their rights and remedies under the Indenture, with respect to certain defaults from the effective date of the Forbearance Agreement until the earliest to occur of (a) the occurrence of any event of termination and (b) May 31, 2017.  As part of the Forbearance Agreement, the Company agreed to make monthly interest payments of $2,864,583 on the Notes for the 30 day periods ending on May 15, 2017 and June 15, 2017, rather than on a semi-annual basis as required by the Indenture. The Company also agreed to pay a consent fee to these Noteholders equal to 0.35% of the principal amount of the Notes held by such parties and to pay the legal fees and financial advisor due diligence fees of these Noteholders.  The Forbearance Agreement expired and has not been extended.  As of the date of the filing of these financial statements, the Company had made all of the payments required to be made under the Forbearance Agreement and has continued to make monthly interest payments on the Notes on the 15th day of each month and continued to pay the monthly legal and financial advisor due diligence fees of these Noteholders.

At March 31, 2020, there is $249.9 million in principal amount of Notes outstanding.  As a result, there has been and remains an event of default under the Indenture which gives the holders of our Notes the right to demand repayment of the Notes and, subject to the terms of the Indenture, to foreclose on our assets that serve as collateral for the Notes.  The collateral constitutes substantially all of our assets.  We continue to pay interest on the Notes at their current rate of 12.5% per year on a monthly basis.  We sold our Los Angeles real estate for $14.7 million and a portion of our Puerto Rico television spectrum for $5.5 million, during 2017, and our New York real estate for $14.0 million in the third quarter of 2018, whose net proceeds, as defined by the Indenture, we used to repay a portion of the Notes.  See Note 1 elsewhere in these financial statements for additional detail regarding our recapitalization efforts and our failure to repay the Notes at maturity.

 

Interest

The Notes accrue interest at a rate of 12.5% per year. Since April 17, 2017, interest has been payable on demand. We have been paying interest monthly since that date. Additional interest will be payable at a rate of 2.00% per annum (the “Additional Interest”) on (i) the unpaid principal amount of the Notes plus (ii) any amount of Additional Interest payable but unpaid in any prior interest period, to be paid in cash, at our election, on any acceleration of the Notes and any redemption of the Notes; provided that no Additional Interest will be payable if, for the applicable fiscal period, either (a) we record positive consolidated station operating income for our television segment for the most recent twelve-month period ending either June 30 or December 31, or (b) our secured leverage ratio on a consolidated basis is less than 4.75 to 1.00.

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Although our secured leverage ratio was greater than 4.75 to 1.00, we recorded positive consolidated station operating income for our television segment for the most recent twelve-month period ending December 31, 2019.    

Collateral and Ranking

The Notes and the guarantees are secured on a first-priority basis by a security interest in certain of the Company’s and the guarantors’ existing and future tangible and intangible assets (other than Excluded Assets (as defined in the Indenture)), which constitutes substantially all of the Company’s assets. The Notes and the guarantees are structurally subordinated to the obligations of our non-guarantor subsidiaries. The Notes and guarantees are senior to all of the Company’s and the guarantors’ existing and future unsecured indebtedness to the extent of the value of the collateral.  

The Indenture permits us, under specified circumstances, to incur additional debt; however, the occurrence and continuance of the Voting Rights Triggering Event (as defined in Note 10 of the Notes to the Unaudited Condensed Consolidated Financial Statements) currently prevents us from incurring any such additional debt.

The Notes are senior secured obligations of the Company that rank equally with all of our existing and future senior indebtedness and senior to all of our existing and future subordinated indebtedness. Subject to certain exceptions, the Notes are fully and unconditionally guaranteed by each of our existing wholly owned domestic subsidiaries (which excludes (i) our existing and future subsidiaries formed in Puerto Rico (the “Puerto Rican Subsidiaries”), (ii) our future subsidiaries formed under the laws of foreign jurisdictions and (iii) our existing and future subsidiaries, whether domestic or foreign, of the Puerto Rican Subsidiaries or foreign subsidiaries) and our other domestic subsidiaries that guarantee certain of our other debt. The Notes and guarantees are structurally subordinated to all existing and future liabilities (including trade payables) of our non-guarantor subsidiaries.

Covenants and Other Matters

The Indenture contains covenants that, among other things, limit our ability and the ability of the guarantors to:

 

incur or guarantee additional indebtedness;

 

pay dividends or make other distributions, repurchase or redeem our capital stock and make certain restricted investments and make other restricted payments;

 

sell assets;

 

incur liens;

 

enter into transactions with affiliates;

 

enter into sale and leaseback transactions;

 

alter the businesses we conduct;

 

enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans and sell assets to the Company and other restricted subsidiaries;

 

enter into change of control transactions;

 

manage our FCC licenses and broadcast license subsidiaries; and

 

consolidate, merge or sell all or substantially all of our assets.  

As a result of our failure to pay the Notes at maturity, an event of default under the Indenture has occurred and is continuing.  

 

10. 10 3/4% Series B Cumulative Exchangeable Redeemable Preferred Stock

Voting Rights Triggering Event

On October 30, 2003, we partially financed the purchase of a radio station with proceeds from the sale, through a private placement, of 75,000 shares of our 10 3/4% Series A cumulative exchangeable redeemable preferred stock, par value $0.01 per share, with a liquidation preference of $1,000 per share (the “Series A preferred stock”), without a specified maturity date. The gross proceeds from the issuance of the Series A preferred stock amounted to $75.0 million.

On February 18, 2004, we commenced an offer to exchange registered shares of our 10 3/4% Series B cumulative exchangeable redeemable preferred stock, par value $0.01 per share and liquidation preference of $1,000 per share for any and all shares of our outstanding unregistered Series A preferred stock. On April 5, 2004, we completed the exchange offer and exchanged 76,702 shares of our Series B preferred stock for all of our then outstanding shares of Series A preferred stock.  

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Holders of the Series B preferred stock have customary protective provisions. The Certificate of Designations governing the Series B preferred stock (the “Certificate of Designations”) contains covenants that, among other things, limit our ability to:  (i) pay dividends, purchase junior securities and make restricted investments or other restricted payments; (ii) incur indebtedness, including refinancing indebtedness; (iii) merge or consolidate with other companies or transfer all or substantially all of our assets; and (iv) engage in transactions with affiliates. Upon a change of control, we will be required to make an offer to purchase these shares at a price of 101% of the aggregate liquidation preference of these shares plus accumulated and unpaid dividends to, but excluding the purchase date.

We had the option to redeem all or some of the registered Series B preferred stock for cash on or after October 15, 2009 at 103.583%, October 15, 2010 at 101.792% and October 15, 2011 and thereafter at 100%, plus accumulated and unpaid dividends to the redemption date. On October 15, 2013, each holder of Series B preferred stock had the right to request that we repurchase (subject to the legal availability of funds under Delaware General Corporate Law) all or a portion of such holder’s shares of Series B preferred stock at a purchase price equal to 100% of the liquidation preference of such shares, plus all accumulated and unpaid dividends (as described in more detail below) on those shares to the date of repurchase. Under the terms of our Series B preferred stock, we are required to pay dividends at a rate of 10 3/4% per year of the $1,000 liquidation preference per share of Series B preferred stock. From October 30, 2003 to October 15, 2008, we had the option to pay these dividends in either cash or additional shares of Series B preferred stock. During October 15, 2003 to October 30, 2008, we increased the carrying amount of the Series B preferred stock by approximately $17.3 million for stock dividends, which were accreted using the effective interest method. Since October 15, 2008, we have been required to pay the dividends on our Series B preferred stock in cash.

On October 15, 2013, holders of shares of our Series B preferred stock requested that we repurchase 92,223 shares of Series B preferred stock for an aggregate repurchase price of $126.9 million, which included accumulated and unpaid dividends on these shares as of October 15, 2013. We did not have sufficient funds legally available to repurchase all of the Series B preferred stock for which we received requests and instead used the limited funds legally available to us to repurchase 1,800 shares for a purchase price of approximately $2.5 million, which included accrued and unpaid dividends. Consequently, a “Voting Rights Triggering Event” occurred (the “Voting Rights Triggering Event”).

During the continuation of a Voting Rights Triggering Event, certain of the covenants summarized above become more restrictive by their terms including (i) a prohibition on our ability to incur additional indebtedness, (ii) restrictions on our ability to make restricted payments and (iii) restrictions on our ability to merge or consolidate with other companies or transfer all or substantially all of our assets. In addition, the holders of the Series B preferred stock have the right to elect two members to our Board of Directors. At our Annual Meeting of Stockholders in 2014, the holders of the Series B preferred stock nominated and elected Alan Miller and Gary Stone to serve as the Series B preferred stock directors who remained on the Board of Directors until their resignation on August 17, 2017.  The holders of the Series B Preferred Stock have the right to elect two new directors to the Board of Directors to fill the seats vacated by Messrs. Miller and Stone for their unexpired terms at a special meeting of the holders of the Series B preferred stock.  As of the date of these financial statements, the holders of the Series B preferred stock have not elected any new directors to fill the vacated seats.  The two vacancies on the Board of Directors will remain unfilled until such time as the holders of the Series B preferred stock appoint two new directors.  

The Voting Rights Triggering Event shall continue until (i) all dividends in arrears shall have been paid in full and (ii) all other failures, breaches or defaults giving rise to such Voting Rights Triggering Event are remedied or waived by the holders of at least a majority of the shares of the then outstanding Series B preferred stock. We do not currently have sufficient funds legally available to be able to satisfy the conditions for terminating the Voting Rights Triggering Event.  The terms of our Series B preferred stock require us, in the event of a change of control, to offer to repurchase all or a portion of a holder’s shares at an offer price in cash equal to 101% of the liquidation preference of the shares, plus an amount in cash equal to all accumulated and unpaid dividends on those shares up to but excluding the date of repurchase. We do not currently have sufficient funds legally available to be able to satisfy the conditions for terminating the Voting Rights Triggering Event or for repurchasing the shares in the event of a change of control. During the continuation of the Voting Rights Triggering Event, the Indenture governing our Notes prohibits us from paying dividends or from repurchasing the Series B preferred stock.  

We are currently in litigation with persons claiming to own 94.16% of our Series B preferred stock as described above in Note 7, Commitments and Contingencies.  

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Given the information that was disclosed to us in the Preferred Holder Complaint regarding the purported ownership of a majority of the Series B preferred stock by foreign persons, we were required to take immediate remedial action in order to ensure that any violations of the Communications Act and our Charter resulting from that ownership did not adversely affect our FCC broadcast licenses and ability to continue our business operations.  Accordingly, on November 28, 2017, consistent with our obligations and authority provided to us under the Communications Act and by Article X of our Charter, we notified holders of our Series B preferred stock that we were suspending all rights, effective immediately, of the holders of the Series B preferred stock, other than their right to transfer their shares to a citizen of the United States.  Such suspension of rights was meant from the outset to be a temporary and reasonable measure, intended to elicit the information necessary to determine which Series B preferred stock sales were proper under the Charter. The Company pledged to restore the suspended rights to each shareholder that demonstrated it was neither an alien nor a representative of an alien or upon a showing that its ownership of Series B preferred stock (including stakes held by any non-U.S. entities) complies with Section 310(b) of the Communications Act and the Charter.  

Additionally, on November 13, 2017, the Company filed a notification with the FCC to apprise the FCC of the possible non-compliance with the Communications Act’s limits on foreign ownership.  On December 4, 2017, the Company also filed a petition with the FCC for declaratory ruling (the “Petition”) with respect to the potential excess foreign ownership.  The Company filed the Petition not because it had concluded that an affirmative FCC public interest ruling regarding recognized foreign ownership was required, but at the suggestion of FCC staff to ensure the Company had prophylactically availed itself of the “safe harbor” protections of Section 1.5004(f)(4) of the FCC’s Rules, in the event such a declaratory ruling ultimately proved necessary. This suggestion came after the Company had previously notified the FCC of a possible Section 310(b) foreign ownership issue triggered by the filing of the Preferred Holder Complaint.  The FCC responded to the Petition by sending a letter to the Company detailing the information the FCC would need regarding the identities and nature of the purported foreign ownership of the Series B preferred stock to make a determination regarding the Petition and establishing a deadline for the disclosure of that information.  The purported Series B preferred stockholders were therefore required to provide to the Company sufficient information about the extent and nature of their foreign ownership to enable the Company to supplement Petition with this additional information.  On March 23, 2018, counsel for the purported holders of most of the Series B preferred stock filed a letter with the FCC supplying a significant portion of the information requested. The Company reviewed this information in order to determine whether it was complete, true and correct, as required by the FCC’s rules, and requested some additional information from the Series B preferred stockholders.  The purported Series B preferred stockholders did not provide any additional information regarding the timing of their alleged purchases of Series B preferred stock until December 5, 2018. On that date, such stockholders filed responses to the Company’s interrogatories in the Series B Preferred Stock Litigation. These responses contained a significant portion of the pending information that was originally solicited on November 2017 and January 2018, respectively. The new information mainly consisted of the trading information in the Series B preferred stock, including dates of acquisition, the number of shares purportedly acquired in each transaction and, to the extent available, seller information.  On December 6, 2018, the Company received a letter from the Enforcement Bureau of the Investigations and Hearings Division (the “Bureau”) of the FCC advising the Company that it was under investigation for potential violations of Section 310(b) of the Communications Act related to excess foreign ownership of broadcast stations.  As part of its investigation, the Bureau requested of the Company detailed information and supporting documentation about the identities of the Series B preferred stockholders, the potential for a foreign ownership violation, the dates that the Company became aware of the situation, and the steps it took to address the situation.  The Company timely filed our response to the Bureau’s letter of inquiry on February 8, 2019. On May 6, 2020, the Bureau informed the Company that it is no longer pursuing its investigation.

Previously, on April 27, 2018, the Company had announced publicly that the purported foreign ownership excess did not exist.  On this date, the Company issued Notices of Ineffective Purported Purchase of Series B Preferred Stock (the “Notices”) to each of West Face Long Term Opportunities Global Master L.P., Stornoway Recovery Fund LP, Stonehill Master Fund Ltd. and Ravensource Fund notifying these investors that their claimed purchases of Series B preferred stock would be treated as void and non-existent because these investors attempted to acquire these shares in transactions that, if given effect, would have violated the Charter. In the Notices, the Company invited these investors to demonstrate facts to the contrary supported by relevant documentation. However, these investors have not provided the Company with any facts or provided any documentation that would support a different legal conclusion.

As stated above, the Company takes the position that certain of the purported non-U.S. preferred stockholders do not currently hold valid equity interests in the Company, with the result that there is no foreign ownership excess. For this reason, the Company did not claim in its Petition or any supplement thereto that it would be in the public interest for the relevant entities to hold aggregate interests exceeding the 25 percent foreign ownership benchmark. As stated in the original Petition, the Company then recognized that its showing “is not yet complete with respect to the FCC’s ability to render a decision regarding the … public interest inquiry.”  Because the share transfers that gave rise to some or all of the Series B preferred stock ownership claims of several purported non-U.S. preferred stockholders are invalid, there would be no need for such a showing unless a court first determines that the suspect transactions must be honored. Accordingly, both the Company and the purported Series B preferred stockholders have suggested that the FCC should consider simply holding the Petition in abeyance until the Series B Preferred Stock Litigation is resolved. On May 7, 2020, the Company notified the FCC that it was withdrawing the Petition.

20


As of the date of these financial statements, the Company believes that there remain genuine questions regarding valid ownership, or good title, to the Series B preferred stock by these foreign investors.  As a result, we intend to remain vigilant regarding compliance with the Communications Act and our Charter and will continue to address these questions in the pending Chancery Court action.  

Quarterly Dividends

Under the terms of our Series B preferred stock, the holders of the outstanding shares of the Series B preferred stock are entitled to receive, when, as and if declared by the Board of Directors out of funds of the Company legally available therefor, dividends on the Series B preferred stock at a rate of 10 ¾% per year, of the $1,000 liquidation preference per share. All dividends are cumulative, whether or not earned or declared, and are payable quarterly in arrears on specified dividend payment dates. While the Voting Rights Triggering Event continues, we cannot pay dividends on the Series B preferred stock without causing a breach of covenants under the Indenture governing our Notes.  

As of March 31, 2020, the aggregate cumulative unpaid dividends on the outstanding shares of the Series B preferred stock was approximately $96.9 million, which is accrued on our condensed consolidated balance sheet as 10 ¾% Series B cumulative exchangeable redeemable preferred stock.

Accounting Treatment of the Preferred Stock

The Series B preferred stock will be measured at subsequent reporting dates at the amount of cash that would be paid under the conditions specified in the contract, as if the settlement occurred at the reporting date, recognizing the resulting change in that amount from the previous reporting date as interest expense. Therefore, the 10 ¾% accruing quarterly dividends will be recorded as interest expense (i.e. “Dividends on Series B preferred stock classified as interest expense”) as required by ASC 480.  For the three-months ended March 31, 2020 and 2019, we recorded $2.4 million as dividends on Series B preferred stock classified as interest expense.

 

 

 

11. Assets Held for Sale and Gain on Disposition of Assets

On January 21, 2020, the Company entered into an asset purchase agreement with KHOU-TV, Inc. to sell various assets related to our Houston, KTBU television operations for $15 million, exclusive of closing costs, and subsequently closed on the sale on March 23, 2020. The Company recognized a gain on the sale of the KTBU assets of $3.2 million. Although the Company has historically used net proceeds from the sale of assets, as described by the Indenture, to repay a portion of the Notes, as of July 6, 2020, the Company is in an ongoing discussion with the holders of our Notes regarding the uses and/or payment of these proceeds.  

Under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 205-20-45, Discontinued Operations, a disposal of a component of an entity shall be reported in discontinued operations if the disposal represents a strategic shift that will have a major effect on the entity’s operations and financial results. Management determined that the disposition did not represent a strategic shift that will have a major effect on the Company’s operations and financial results, therefore the operations in the Houston, TX, market were not reported as discontinued operations. Operating income for the Company’s Houston station was $0.3 million for the year ended December 31, 2019.

A summary of assets held for sale as of March 31, 2020 and December 31, 2019 is set forth below (in thousands):

 

 

March 31,

2020

 

December 31,

2019

 

FCC broadcasting licenses

$

 

$

10,432

 

Property and equipment, net

 

 

 

425

 

Operating lease right-of-use asset

 

 

 

1,617

 

Assets held for sale

 

 

 

12,474

 

 

 

 

 

 

 

 

Operating lease liabilities

 

 

 

54

 

Operating lease liabilities, net of current portion

 

 

 

1,456

 

Liabilities held for sale

$

 

$

1,510

 

 

 

 

12. Impairment of FCC Broadcasting Licenses

The Company generally performs its annual impairment test of its indefinite-lived intangibles during the fourth quarter of the fiscal year. However, given the recent outbreak of the COVID-19 pandemic and the declining performance for total market revenues

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in the Company’s radio and television markets, the Company determined that a triggering event had occurred. The Company performed an interim impairment test as of March 31, 2020 of its FCC broadcasting radio licenses in New York, Los Angeles, Miami, Chicago, San Francisco and Puerto Rico, as well as its Miami and Puerto Rico FCC television broadcasting license.

The Company performs valuations using the discounted cash flow methodology. This income approach consists of a quantitative model, which assumes the FCC broadcasting licenses are acquired and operated by a third-party. This valuation method is based on the premise that the only asset that an unbuilt start-up station possesses is the FCC broadcasting license. Such method isolates the income attributable to an FCC broadcasting license by modeling a hypothetical greenfield build-up to a normalized enterprise that, by design, lacks inherent goodwill and whose only other assets have essentially been paid for as part of the build-up process. Consequently, the resulting accretion in value is solely attributed to the FCC broadcasting license.

In the discounted cash flow projections, a ten years period is deemed an appropriate time period for the analysis. The yearly cash flow streams were adjusted to present value using an after-tax discount rate calculated for the radio and television broadcast industries as of March 31, 2020. Additionally, it is necessary to project the terminal value at the end of the ten-year projection period. The terminal value represents the hypothetical value of the licenses at the end of a ten-year period. An estimated amount of taxes are deducted from the assumed terminal value, which accordingly is discounted to net present value.

The key assumptions incorporated in the discounted cash flow model are market revenue projections, market revenue share projections, anticipated operating profit margins and risk adjusted discount rates. These assumptions vary based on the market size, type of broadcast signal, media competition and audience share. These assumptions primarily reflect industry norms for similar stations/broadcast signals, as well as historical performance and trends of the markets. In the preparation of the FCC broadcasting license appraisals, estimates and assumptions are made that affect the valuation of the intangible asset. These estimates and assumptions could differ from actual results and could have a material impact on our financial statements in the future.

The methodology used by the Company in determining its key estimates and assumptions was applied consistently to the subject markets. Below are some of the key assumptions used in the Company’s impairment assessment using significant unobservable inputs (Level 3 non-recurring fair value measure).

 

 

 

Radio FCC Licenses

 

Television FCC Licenses

 

 

March 31, 2020

 

March 31, 2020

Discount Rate

 

10.5%

 

11.0%

Long-term Revenue Growth Rate

 

0.1% - 0.8%

 

1.0%

Mature Market Share

 

3.0% - 18.0%

 

2.0% - 2.9%

Mature Operating Profit Margin

 

28.0% - 33.6%

 

24.0%

 

As a result of the interim impairment test, the Company determined that there was an impairment to its radio FCC broadcasting licenses in San Francisco, Chicago, Miami, New York and Puerto Rico, primarily due to the discount rate increase and lower industry advertising revenue growth projections in the subject markets due to COVID-19. The Company recorded a non-cash impairment loss of approximately $14.1 million that reduced the carrying value of such FCC broadcasting licenses.  

 


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13. Subsequent Events

Paycheck Protection Program

The PPP was established as part of the CARES Act, subsequently amended by CARES 2.0 and the Flexibility Act, to provide unsecured loans as a direct incentive to qualifying small businesses to keep their U.S. workers on the payroll during the COVID-19 pandemic. These unsecured loans will be forgiven as long as: (1) the loan proceeds are used to cover payroll costs, and most mortgage interest, rent, and utility costs over the 24 week period after the loan is made; and (2) employee and compensation levels are maintained.  Payroll costs are capped at $100,000 on an annualized basis for each employee.

Given the uncertainty in the duration of the COVID-19 pandemic, the Company applied for and on April 15, 2020 received $6,478,800 in an unsecured loan funded under the PPP (the “PPP Loan”). The PPP Loan is necessary to support the Company's ongoing operations and enables the Company to avoid further employee furloughs or layoffs in the near term. The Company intends to apply for forgiveness of the PPP Loan and is using the proceeds to maintain employment and compensation levels and pay benefits, rent and utilities. Although the Company intends to obtain forgiveness of the PPP Loan in whole or in part, there is no assurance that the Company will be successful.

If all or a portion of the PPP Loan is not forgiven, all or the remaining portion will be for a term of two years but can be prepaid at any time prior to maturity without any prepayment penalties. The annual interest rate on the PPP Loan is 1.0% and no payments of principal or interest are due until the date that the Small Business Administration remits the loan forgiveness amount to our lender, provided that the Company submits its loan forgiveness application to our lender within ten months following the last day of the applicable covered period.

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General Overview

We are a leading Spanish-language media and entertainment company with radio and television operations, together with live concerts and events, mobile, digital and interactive media platforms, which reach the growing U.S. Hispanic population, including Puerto Rico.  We produce and distribute original Spanish-language content, including radio programs, television shows, music and live entertainment through our multi-media platforms. We operate in two reportable segments: radio and television.  

We own and operate radio stations located in six of the most populous Hispanic markets in the United States: Los Angeles, New York, Puerto Rico, Chicago, Miami and San Francisco. The Los Angeles and New York markets have the largest and second largest Hispanic populations and are also the largest and second largest radio markets in the United States measured by advertising revenue, respectively. We format the programming of each of our radio stations to capture a substantial share of the Hispanic audience in their respective markets. The U.S. Hispanic population is diverse, consisting of numerous identifiable ethnic groups from many different countries of origin, and each ethnic group has its own musical and cultural heritage. Since the music, culture, customs and Spanish dialects vary from one radio market to another, we strive to maintain familiarity with the musical tastes and preferences of each of the various Hispanic ethnic groups. To accommodate and monetize such diversity, we customize our programming to match the local preferences of our target demographic audience in each market we serve. In addition to our owned and operated radio stations, we operate our AIRE Radio Networks with over 300 affiliate radio stations serving 88 of the top 100 U.S. Hispanic markets, including 50 of the top 50 Hispanic markets.  AIRE Radio Networks currently covers 95% of the coveted U.S. Hispanic market.  Our AIRE Radio Networks reach over 15 million listeners in an average week with our targeted networks.  For the three-months ended March 31, 2020 and 2019, our radio revenue was generated primarily from the sale of local, national, digital and network advertising, and our radio segment generated 90% and 91% of our consolidated net revenue, respectively.  

Our television stations and related affiliates operate under the “MegaTV” brand.  We broadcast via our owned and operated television stations in South Florida and Puerto Rico through programming and/or distribution agreements, including nationally on a subscriber basis, which allow us to serve markets representing over 3.1 million Hispanic households. We have created a unique television format which focuses on entertainment, current events and variety with high-quality content. Our programming is formatted to capture a larger share of the U.S. Hispanic audience by focusing on our core strengths as an “entertainment” company, thus offering a new alternative compared to the traditional Hispanic television channels. MegaTV’s programming is based on a strategy designed to showcase a combination of programs, ranging from televised radio-branded shows to general entertainment programs, such as music, celebrity, debate, interviews and personality based shows. As part of our strategy, we have incorporated certain of our radio on-air personalities into our television programming. In addition, we have included interactive elements in our programming to complement our Internet websites. We produce over 75 hours of original programming per week.  For the three-months ended March 31, 2020 and 2019, our television revenue was generated primarily from the sale of local and national advertising and paid programming, and our television segment generated 10% and 9% of our consolidated net revenues, respectively.

As part of our operating business, we also maintain multiple Spanish and bilingual websites, including www.lamusica.com, Mega.tv and various station websites that provide content related to Latin music, entertainment, news and culture, as well as the LaMusica mobile application.  The LaMusica mobile application is a music and entertainment video and audio application, that programs an extensive series of short form videos, simultaneously live streams our radio stations’, includes hundreds of curated playlists and has tools that enable users to personalize their mobile radio streaming experience.  The new video improvements to our mobile application significantly enhance the audience’s engagement level and increases the reach of our mobile offering.  In addition, we produce live concerts and events in the United States and Puerto Rico. Concerts generate revenue from ticket sales, sponsorship and promotions, raise awareness of our brands in the surrounding communities and provide our advertising partners additional opportunities to reach their target audience.

Our Continued Recapitalization and Restructuring Efforts

We have not repaid our outstanding Notes since they became due on April 17, 2017, and we continue to evaluate all options available to refinance the Notes.  While we assess how to best achieve a successful refinancing of the Notes, we have continued to pay interest on the Notes, payments that a group of investors purporting to own our Series B preferred stock have challenged through the institution of litigation in the Delaware Court of Chancery as described in Note 7, Commitments and Contingencies, of the Notes to the Unaudited Condensed Consolidated Financial Statements of this Quarterly Report on Form 10-Q.  The complaint filed by these investors revealed a purported foreign ownership of our Series B preferred stock, which we are actively addressing.  Our refinancing efforts have been made more difficult and complex by the Series B preferred stock litigation and foreign ownership issue. We provide more information about each of these items under the headings “Business—Our Continued Recapitalization and Restructuring Efforts” and “Item 7—Liquidity and Capital Resources” in our Annual Report.

 

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Impact of the COVID-19 Pandemic

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic. The responses by federal, state and local governments to restrict public gatherings and travel rapidly grew to include stay-at-home orders, school closures and mandatory restrictions on non-essential businesses and services that has adversely affected workforces, economies, and financial markets resulting in a significant economic downturn. The COVID-19 pandemic has resulted in the temporary disruptions of many of our advertisers’ businesses thereby impacting our core source of revenue, which has had a material impact on our operations and financial condition. COVID-19's impact on the capital markets could also impact our ability and cost to obtain necessary financing.

While this disruption is currently expected to be temporary, there is considerable uncertainty around the duration. We are actively monitoring the COVID-19 situation and its impact in the markets we serve. We are taking reasonable precautionary measures as directed by health authorities and local, state and national governments. Due to continuing uncertainties regarding the COVID-19 pandemic, it is impossible to predict the total impact that the pandemic will have on our business. If public and private entities continue to implement restrictive measures, the material adverse effect on our business, results of operations, financial condition and cash flows could continue.

The Company has initiated the following strategies to reduce expenses and preserve cash:

 

limiting capital expenditures;

 

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