SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2018March 31, 2019

 

Commission File No. 0-25969

 

 

URBAN ONE, INC.

(Exact name of registrant as specified in its charter)

 

Delaware52-1166660
(State or other jurisdiction of(I.R.S. Employer
incorporation or organization)Identification No.)

 

1010 Wayne Avenue,

14th Floor

Silver Spring, Maryland 20910

(Address of principal executive offices)

 

(301) 429-3200

Registrant’s telephone number, including area code

 

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   þ   No   ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).   Yes   þ   No   ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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  þ
Non-accelerated filer¨ (Do not check if a smaller reporting company)Smaller reporting companyþ
 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 check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.  Yes  ¨ No  þ

 

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

Title of each class:Trading Symbol(s)Name of each exchange on which registered:
Class A Common StockUONENASDAQ Stock Market
Class D Common StockUONEKNASDAQ Stock Market

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

  

Class Outstanding at July 27, 2018May 3, 2019 
Class A Common Stock, $.001 Par Value  1,641,4001,615,092 
Class B Common Stock, $.001 Par Value  2,861,843 
Class C Common Stock, $.001 Par Value  2,928,906 
Class D Common Stock, $.001 Par Value  40,161,29838,387,431 

  

 

 

 

 

TABLE OF CONTENTS

 

  Page
   
 PART I. FINANCIAL INFORMATION 
   
Item 1.Consolidated Statements of Operations for the Three and Six Months Ended June 30,March 31, 2019 and 2018 and 2017 (Unaudited)4
 Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30,March 31, 2019 and 2018 and 2017 (Unaudited)5
 Consolidated Balance Sheets as of June 30, 2018March 31, 2019 (Unaudited) and December 31, 201720186
 Consolidated Statement of Changes in Stockholders’ Equity for the SixThree Months Ended June 30,March 31, 2019 (Unaudited)7
Consolidated Statement of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2018 (Unaudited)78
 Consolidated Statements of Cash Flows for the SixThree Months Ended June 30,March 31, 2019 and 2018 and 2017 (Unaudited)89
 Notes to Consolidated Financial Statements (Unaudited)910
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations3132
Item 3.Quantitative and Qualitative Disclosures About Market Risk5045
Item 4.Controls and Procedures5045
   
 PART II. OTHER INFORMATION51
   
Item 1.Legal Proceedings5146
Item 1A.Risk Factors5146
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds5146
Item 3.Defaults Upon Senior Securities5146
Item 4.Mine Safety Disclosures5146
Item 5.Other Information5146
Item 6.Exhibits5247
 SIGNATURES5348

2

CERTAIN DEFINITIONS

 

Unless otherwise noted, throughout this report, the terms “Urban One,” “the Company,” “we,” “our” and “us” refer to Urban One, Inc. together with its subsidiaries.

 

Cautionary Note Regarding Forward-Looking Statements

 

This document contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements do not relay historical facts, but rather reflect our current expectations concerning future operations, results and events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. You can identify some of these forward-looking statements by our use of words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “likely,” “may,” “estimates” and similar expressions.  You can also identify a forward-looking statement in that such statements discuss matters in a way that anticipates operations, results or events that have not already occurred but rather will or may occur in future periods.  We cannot guarantee that we will achieve any forward-looking plans, intentions, results, operations or expectations.  Because these statements apply to future events, they are subject to risks and uncertainties, some of which are beyond our control that could cause actual results to differ materially from those forecasted or anticipated in the forward-looking statements.  These risks, uncertainties and factors include (in no particular order), but are not limited to:

 

·economic volatility, financial market unpredictability and fluctuations in the United States and other world economies that may affect our business and financial condition, and the business and financial conditions of our advertisers;

 

·our high degree of leverage, certain cash commitments related thereto and potential inability to finance strategic transactions given fluctuations in market conditions;

 

·fluctuations in the local economies of the markets in which we operate (particularly our largest markets, Atlanta; Baltimore; Houston; and Washington, DC) could negatively impact our ability to meet our cash needs and our ability to maintain compliance with our debt covenants;

 

·fluctuations in the demand for advertising across our various media;

 

·risks associated with the implementation and execution of our business diversification strategy;

 

·changes in media audience ratings and measurement technologies and methodologies;

·regulation by the Federal Communications Commission (“FCC”) relative to maintaining our broadcasting licenses, enacting media ownership rules and enforcing of indecency rules;

 

·changes in our key personnel and on-air talent;

 

·increases in competition for and in the costs of our programming and content, including on-air talent and content production or acquisitions costs;

 

·financial losses that may be incurred due to impairment charges against our broadcasting licenses, goodwill, and other intangible assets;

 

·increased competition for advertising revenues with other radio stations, broadcast and cable television, newspapers and magazines, outdoor advertising, direct mail, internet radio, satellite radio, smart phones, tablets, and other wireless media, the internet, social media, and other forms of adverting;

 

·the impact of our acquisitions, dispositions and similar transactions, as well as consolidation in industries in which we and our advertisers operate; and

 

·other factors mentioned in our filings with the Securities and Exchange Commission (“SEC”) including the factors discussed in detail in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K, for the year ended December 31, 2017.2018.

 

You should not place undue reliance on these forward-looking statements, which reflect our views as of the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements because of new information, future events or otherwise.

3

URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

   

  Three Months Ended June 30,  Six Months Ended June 30, 
  2018  2017  2018  2017 
  (Unaudited) 
  (In thousands, except share data) 
             
NET  REVENUE $115,206  $117,638  $214,827  $218,927 
OPERATING EXPENSES:                
Programming and technical  30,375   33,009   62,522   64,906 
Selling, general and administrative, including stock-based compensation of $158 and $63, and $416 and $127, respectively  40,648   42,910   75,883   77,429 
Corporate selling, general and administrative, including stock-based compensation of $967 and $95, and $2,085 and $164, respectively  11,122   8,423   21,202   18,531 
Depreciation and amortization  8,248   8,432   16,536   16,744 
Impairment of long-lived assets  —   12,756   6,556   12,756 
Total operating expenses  90,393   105,530   182,699   190,366 
Operating income  24,813   12,108   32,128   28,561 
INTEREST INCOME  17   45   161   148 
INTEREST EXPENSE  19,155   19,863   38,436   40,209 
(GAIN) LOSS ON RETIREMENT OF DEBT  (626)  7,083   (865)  7,083 
GAIN ON SALE-LEASEBACK  —   (14,411)  —   (14,411)
OTHER INCOME, net  (2,014)  (1,574)  (3,915)  (2,895)
Income (loss) before (benefit from) provision for income taxes and noncontrolling interests in income of subsidiaries  8,315   1,192   (1,367)   (1,277)
(BENEFIT FROM) PROVISION FOR INCOME TAXES  (15,581)  182   (2,741)  70 
CONSOLIDATED NET INCOME (LOSS)  23,896   1,010   1,374   (1,347)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS  306   208   339   164 
CONSOLIDATED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $23,590  $802  $1,035  $(1,511)
                 
BASIC NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS                
Net income (loss) attributable to common stockholders $0.51  $0.02  $0.02  $(0.03)
                 
DILUTED NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS                
Net income (loss) attributable to common stockholders $0.49  $0.02  $0.02  $(0.03)
                 
WEIGHTED AVERAGE SHARES OUTSTANDING:                
Basic  46,033,402   47,816,723   46,321,633   47,890,618 
Diluted  48,438,693   48,237,113   48,777,798   47,890,618 
  Three Months Ended March 31, 
  2019  2018 
  (Unaudited) 
  (In thousands, except share data) 
       
NET REVENUE $98,449  $99,621 
OPERATING EXPENSES:        
Programming and technical, including stock-based compensation of $20 and $0, respectively  30,950   32,147 
Selling, general and administrative, including stock-based compensation of $111 and $258, respectively  33,139   35,235 
Corporate selling, general and administrative, including stock-based compensation of $380 and $1,118, respectively  9,969   10,080 
Depreciation and amortization  8,274   8,288 
Impairment of long-lived assets  —   6,556 
Total operating expenses  82,332   92,306 
Operating income  16,117   7,315 
INTEREST INCOME  23   144 
INTEREST EXPENSE  22,151   19,281 
GAIN ON RETIREMENT OF DEBT  —   (239)
OTHER INCOME,net  (1,721)  (1,901)
Loss before provision for income taxes and noncontrolling interests in income of subsidiaries  (4,290)  (9,682)
PROVISION FOR INCOME TAXES  2,248   12,840 
CONSOLIDATED NET LOSS  (6,538)  (22,522)
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS  125   33 
CONSOLIDATED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(6,663) $(22,555)
         
BASIC AND DILUTED NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS        
Net loss attributable to common stockholders $(0.15) $(0.48)
         
WEIGHTED AVERAGE SHARES OUTSTANDING:        
Basic and diluted  45,001,767   46,757,386 

 

The accompanying notes are an integral part of these consolidated financial statements.

4

URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMELOSS

   

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  2018  2017  2018  2017 
  (Unaudited) 
  (In thousands) 
             
COMPREHENSIVE INCOME (LOSS) $23,896  $1,010  $1,374  $(1,347)
LESS:  COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS  306   208   339   164 
COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS $23,590  $802  $1,035  $(1,511)

  Three Months Ended March 31, 
  2019  2018 
  (Unaudited) 
  (In thousands) 
       
COMPREHENSIVE LOSS $(6,538) $(22,522)
LESS: COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS  125   33 
COMPREHENSIVE LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(6,663) $(22,555)

 

The accompanying notes are an integral part of these consolidated financial statements.

5

URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

  As of 
  June 30, 2018  December 31, 2017 
  (Unaudited)    
  (In thousands, except share data) 
ASSETS      
CURRENT ASSETS:        
Cash and cash equivalents $35,982  $37,009 
Restricted cash  937   802 
Trade accounts receivable, net of allowance for doubtful accounts of $8,183 and $8,071, respectively  100,983   111,596 
Prepaid expenses  7,522   9,013 
Current portion of content assets  33,974   37,549 
Other current assets  2,882   3,766 
Total current assets  182,280   199,735 
CONTENT ASSETS, net  85,568   74,508 
PROPERTY AND EQUIPMENT, net  23,718   25,181 
GOODWILL  260,182   262,894 
RADIO BROADCASTING LICENSES  598,097   614,535 
OTHER INTANGIBLE ASSETS, net  80,483   94,055 
OTHER ASSETS  60,088   45,847 
Total assets $1,290,416  $1,316,755 

LIABILITIES, REDEEMABLE NONCONTROLLING

INTERESTS AND STOCKHOLDERS’ EQUITY

        
CURRENT LIABILITIES:        
Accounts payable $7,896  $8,127 
Accrued interest  14,832   15,428 
Accrued compensation and related benefits  9,984   8,648 
Current portion of content payables  23,401   17,891 
Other current liabilities  24,637   27,236 
Current portion of long-term debt  15,372   3,500 
Total current liabilities  96,122   80,830 
LONG-TERM DEBT, net of current portion, original issue discount and issuance costs  929,998   967,166 
CONTENT PAYABLES, net of current portion  22,746   21,879 
OTHER LONG-TERM LIABILITIES  44,683   44,853 
DEFERRED TAX LIABILITIES, net  145,918   148,592 
Total liabilities  1,239,467   1,263,320 
         
REDEEMABLE NONCONTROLLING INTERESTS  10,940   10,780 
         
STOCKHOLDERS’ EQUITY:        
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at June 30, 2018 and December 31, 2017, respectively  —   — 
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 1,641,400 and 1,641,632 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively  2   2 
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively  3   3 
Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 2,928,906 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively  3   3 
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 40,491,734 and 41,014,121 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively  40   41 
Additional paid-in capital  979,902   983,582 
Accumulated deficit  (939,941)  (940,976)
Total stockholders’ equity  40,009   42,655 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity $1,290,416  $1,316,755 

  As of 
  March 31, 2019  December 31, 2018 
  (Unaudited)    
  (In thousands, except share
data)		 
ASSETS        
CURRENT ASSETS:        
Cash and cash equivalents $5,809  $15,255 
Restricted cash  636   635 
Trade accounts receivable, net of allowance for doubtful accounts of $8,592 and $8,249, respectively  101,099   110,354 
Prepaid expenses  13,235   9,775 
Current portion of content assets  37,857   33,951 
Other current assets  4,696   3,229 
Total current assets  163,332   173,199 
CONTENT ASSETS, net  79,885   77,266 
PROPERTY AND EQUIPMENT, net  25,589   26,088 
GOODWILL  245,572   245,572 
RIGHT OF USE ASSETS  47,910   — 
RADIO BROADCASTING LICENSES  600,134   600,134 
OTHER INTANGIBLE ASSETS, net  63,107   70,091 
OTHER ASSETS  46,060   45,059 
Total assets $1,271,589  $1,237,409 
LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND STOCKHOLDERS’ EQUITY        
CURRENT LIABILITIES:        
Accounts payable $7,561  $7,331 
Accrued interest  13,082   6,887 
Accrued compensation and related benefits  7,145   15,033 
Current portion of content payables  21,505   18,870 
Current portion of lease liabilities  7,682   — 
Other current liabilities  32,012   24,451 
Current portion of long-term debt  20,626   38,706 
Total current liabilities  109,613   111,278 
LONG-TERM DEBT, net of current portion, original issue discount and issuance costs  870,946   873,757 
CONTENT PAYABLES, net of current portion  19,218   18,381 
LONG-TERM LEASE LIABILITIES  44,835   — 
OTHER LONG-TERM LIABILITIES  26,748   35,716 
DEFERRED TAX LIABILITIES, net  12,331   9,345 
Total liabilities  1,083,691   1,048,477 
         
REDEEMABLE NONCONTROLLING INTERESTS  10,401   10,232 
         
STOCKHOLDERS’ EQUITY:        
Convertible preferred stock, $.001 par value, 1,000,000 shares authorized; no shares outstanding at March 31, 2019 and 2018  —   — 
Common stock — Class A, $.001 par value, 30,000,000 shares authorized; 1,615,092 and 1,637,472 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively  2   2 
Common stock — Class B, $.001 par value, 150,000,000 shares authorized; 2,861,843 shares issued and outstanding as of March 31, 2019 and December 31, 2018  3   3 
Common stock — Class C, $.001 par value, 150,000,000 shares authorized; 2,928,906 shares issued and outstanding as of March 31, 2019 and December 31, 2018  3   3 
Common stock — Class D, $.001 par value, 150,000,000 shares authorized; 38,420,499 and 38,845,917 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively  38   39 
Additional paid-in capital  978,286   978,628 
Accumulated deficit  (800,835)  (799,975)
Total stockholders’ equity  177,497   178,700 
Total liabilities, redeemable noncontrolling interests and stockholders’ equity $1,271,589  $1,237,409 

  

The accompanying notes are an integral part of these consolidated financial statements.

6


URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE SIXTHREE MONTHS ENDED JUNE 30, 2018MARCH 31, 2019 (UNAUDITED)

 

  Convertible
Preferred
Stock		  

Common
Stock

Class A

  

Common
Stock

Class B

  

Common

Stock

Class C

  

Common
Stock

Class D

  Additional
Paid-In
Capital		  Accumulated
Deficit		  Total
Stockholders’
Equity		 
  (In Thousands, except share data)
BALANCE, as of December 31, 2017 $—  $2  $3  $3  $41  $983,582  $(940,976) $42,655 
Consolidated net income  —   —   —   —   —   —   1,035   1,035 
Repurchase of 232 shares of Class A common stock and 2,339,005 shares  of Class D common stock  —   —   —   —   (2)  (4,566)  —   (4,568)

Repurchase of share-based equity awards

  —   —   —   —   —   (1,077)  —   (1,077)
Exercise of options for 58,190 shares of common stock  —   —   —   —   —   85   —   85 
Adjustment of redeemable noncontrolling interests to estimated redemption value  —   —   —   —   —   (622)  —   (622)
Stock-based compensation expense  —   —   —   —   1   2,500   —   2,501 
BALANCE, as of June 30, 2018 $—  $2  $3  $3  $40  $979,902  $(939,941) $40,009 

  Convertible
Preferred
Stock		  

Common
Stock

Class A

  

Common
Stock

Class B

  

Common

Stock

Class C

  

Common
Stock

Class D

  Additional
Paid-In
Capital		  Accumulated
Deficit		  Total
Stockholders’
Equity		 
  (In thousands, except share data) 
BALANCE, as of December 31, 2018 $—  $2  $3  $3  $39  $978,628  $(799,975) $178,700 
Consolidated net loss  —   —   —   —   —   —   (6,663)  (6,663)
Repurchase of 22,380 shares of Class A common stock and 1,220,657 shares of Class D common stock  —   —   —   —   (1)  (2,447)  —   (2,448)
Adoption of ASC 842  —   —   —   —   —   

—

   5,803   5,803 
Exercise of options for 15,000 shares of common stock  —   —   —   —   —   29   —   29 
Adjustment of redeemable noncontrolling interests to estimated redemption value  —   —   —   —   —   (44)  —   (44)
Issuance of 755,239 shares of Class D common stock  —   —   —   —   —   1,609   —   1,609 
Stock-based compensation expense  —   —   —   —   —   511   —   511 
BALANCE, as of March 31, 2019 $—  $2  $3  $3  $38  $978,286  $(800,835) $177,497 

 

The accompanying notes are an integral part of these consolidated financial statements.


URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

FOR THE THREE MONTHS ENDED MARCH 31, 2018 (UNAUDITED)

 

7
  Convertible
Preferred
Stock		  

Common
Stock

Class A

  

Common
Stock

Class B

  

Common

Stock

Class C

  

Common
Stock

Class D

  Additional
Paid-In
Capital		  Accumulated
Deficit		  Total
Stockholders’
Equity		 
  (In thousands, except share data) 
BALANCE, as of December  31, 2017 $—  $2  $3  $3  $41  $983,582  $(940,976) $42,655 
Consolidated net loss  —   —   —   —   —   —   (22,555)  (22,555)
Repurchase of 1,568,246 shares of Class D common stock  —   —   —   —   (1)  (2,950)  —   (2,951)
Adjustment of redeemable noncontrolling interests to estimated redemption value     —      —      —       —   —   (1,202)  —   (1,202)
Stock-based compensation expense  —   —   —   —   1   1,375   —   1,376 
BALANCE, as of March 31, 2018 $—  $2  $3  $3  $41  $980,805  $(963,531) $17,323 

 

The accompanying notes are an integral part of these consolidated financial statements. 


URBAN ONE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

  Six Months Ended June 30, 
  2018  2017 
  (Unaudited) 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Consolidated net income (loss) $1,374  $(1,347)
Adjustments to reconcile net income (loss) to net cash from operating activities:        
Depreciation and amortization  16,536   16,744 
Amortization of debt financing costs  1,433   2,182 
Amortization of content assets  21,841   22,062 
Amortization of launch assets  211   216 
Deferred income taxes  (2,674)   (17)
Impairment of long-lived assets  6,556   12,756 
Stock-based compensation  2,502   291 
(Gain) loss on retirement of debt  (865)  7,083 
Gain on sale-leaseback  —   (14,411)
Effect of change in operating assets and liabilities, net of assets acquired:        
Trade accounts receivable  10,613   (2,417)
Prepaid expenses and other current assets  1,585   2,123 
Other assets  (1,547)   3,715 
Accounts payable  (231)   (1,760)
Accrued interest  (596)   (15)
Accrued compensation and related benefits  1,336   (5,929)
Other liabilities  (1,293)   (485)
Payment of launch support  —   (1,848)
Payments for content assets  (22,949)   (27,199)
Net cash flows provided by operating activities  33,832   11,744 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment  (2,078)  (3,519)
Proceeds from sale-leaseback  —   25,000 
Acquisition of digital assets  —   (5,000)
Acquisition of station and broadcasting assets  —   (2,000)
Net cash flows (used in) provided by investing activities  (2,078)  14,481 
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from 2017 Credit Facility  —   350,000 
Repayment of 2017 Credit Facility  (1,750)  (875)
Repayment of 2015 Credit Facility  —   (344,750)
Distribution of contingent consideration  (506)  — 
Proceeds from exercise of stock options  85   — 
Repayment of 2020 Notes  (24,029)  — 
Debt refinancing costs and original issue discount  —   (8,860)

Repurchase of share-based equity awards 

  (1,077)   — 
Payment of dividends to noncontrolling interest members of Reach Media  (801)  — 
Repurchase of common stock  (4,568)  (3,033)
Net cash flows used in financing activities  (32,646)  (7,518)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  (892)  18,707 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period  37,811   46,781 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $36,919  $65,488 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for:        
Interest $37,599  $38,042 
Income taxes, net of refunds $1,241  $563 

  Three Months Ended March 31, 
  2019  2018 
  (Unaudited) 
  (In thousands) 
CASH FLOWS FROM OPERATING ACTIVITIES:        
Consolidated net loss $(6,538) $(22,522)
Adjustments to reconcile net loss to net cash from operating activities:        
Depreciation and amortization  8,274   8,288 
Amortization of debt financing costs  943   715 
Amortization of content assets  11,759   11,267 
Amortization of launch assets  257   105 
Deferred income taxes  2,986   12,857 
Non-cash interest expense  483   — 
Impairment of long-lived assets  —   6,556 
Stock-based compensation  511   1,376 
Gain on retirement of debt  —   (239)
Effect of change in operating assets and liabilities, net of assets acquired:        
Trade accounts receivable  9,255   13,415 
Prepaid expenses and other current assets  (3,702)  (1,781)
Other assets  (1,001)  8 
Accounts payable  230   (531)
Accrued interest  6,195   117 
Accrued compensation and related benefits  (7,888)  108 
Other liabilities  9,303   2,910 
Payments for content assets  (14,812)  (10,645)
Net cash flows provided by operating activities  16,255   22,004 
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchases of property and equipment  (707)  (914)
Net cash flows used in investing activities  (707)  (914)
CASH FLOWS FROM FINANCING ACTIVITIES:        
Repayment of 2017 credit facility  (824)  (875)
Distribution of contingent consideration  (279)  (195)
Repayment of Comcast Note  (11,872)  — 
Proceeds of Asset-backed credit facility  3,000   — 
Repayment of 2018 credit facility  (10,562)  — 
Proceeds from exercise of stock options  29   — 
Repayment of 2020 Notes  (2,037)  (10,788)
Repurchase of common stock  (2,448)  (2,951)
Net cash flows used in financing activities  (24,993)  (14,809)
(DECREASE) INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH  (9,445)  6,281 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period  15,890   37,811 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period $6,445  $44,092 
         
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:        
Cash paid for:        
Interest $13,200  $18,447 
Income taxes, net of refunds $91  $748 

  

NON-CASH FINANCING AND INVESTING ACTIVITIES:        
Issuance of common stock $1,609  $— 

The accompanying notes are an integral part of these consolidated financial statements.

8

URBAN ONE, INC. AND SUBSIDIARIES

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

1.ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

 

(a)Organization

 

Urban One, Inc. (a Delaware corporation referred to as “Urban One”) and its subsidiaries (collectively, the “Company”) is an urban-oriented, multi-media company that primarily targets African-American and urban consumers. Our core business is our radio broadcasting franchise which is the largest radio broadcasting operation that primarily targets African-American and urban listeners. As of June 30, 2018,March 31, 2019, we owned and/or operated 5660 broadcast stations (including all HD stations, translator stations and the low power television station we operate) located in 15 of the most populous African-American markets in the United States. While a core source of our revenue has historically been and remains the sale of local and national advertising for broadcast on our radio stations, our strategy is to operate the premier multi-media entertainment and information content provider targeting African-American and urban consumers. Thus, we have diversified our revenue streams by making acquisitions and investments in other complementary media properties. Our diverse media and entertainment interests include TV One, LLC (“TV One”), an African-American targeted cable television network; our 80.0% ownership interest in Reach Media, Inc. (“Reach Media”) which operates the Tom Joyner Morning Show and our other syndicated programming assets, including the Rickey Smiley Morning Show, the Russ Parr Morning Show and the DL Hughley Show; and Interactive One, LLC (“Interactive One”), our wholly owned digital platform serving the African-American community through social content, news, information, and entertainment websites, including its newly developed Cassius, and newly acquired Bossip, HipHopWired and MadameNoire digital platforms and brands. We also have invested in a minority ownership interest in MGM National Harbor, a gaming resort located in Prince George’s County, Maryland. Through our national multi-media operations, we provide advertisers with a unique and powerful delivery mechanism to the African-American and urban audiences.

On January 19, 2019, the Company launched CLEO TV, a lifestyle and entertainment network targeting Millennial and Gen X women of color. CLEO TV offers quality content that defies negative and cultural stereotypes of today’s modern women. The results of CLEO TV’s operations will be reflected in the Company’s cable television segment.

 

Our core radio broadcasting franchise operates under the brand “Radio One.”  We also operate our other brands, such as TV One, Reach Media and Interactive One, while developing additional branding reflective of our diverse media operations and targeting our African-American and urban audiences.

 

As part of our consolidated financial statements, consistent with our financial reporting structure and how the Company currently manages its businesses, we have provided selected financial information on the Company’s four reportable segments: (i) radio broadcasting; (ii) Reach Media; (iii) digital; and (iv) cable television. (See Note 7 –Segment InformationInformation.).)

 

(b)Interim Financial Statements

 

The interim consolidated financial statements included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). In management’s opinion, the interim financial data presented herein include all adjustments (which include only normal recurring adjustments) necessary for a fair presentation. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations.

 

Results for interim periods are not necessarily indicative of results to be expected for the full year. This Form 10-Q should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 20172018 Annual Report on Form 10-K.


(c)Financial Instruments

 

Financial instruments as of June 30, 2018,March 31, 2019 and December 31, 2017,2018, consisted of cash and cash equivalents, restricted cash, trade accounts receivable, asset-backed credit facility, long-term debt and redeemable noncontrolling interests. The carrying amounts approximated fair value for each of these financial instruments as of June 30, 2018,March 31, 2019 and December 31, 2017,2018, except for the Company’s outstanding senior subordinated notes and secured notes.long-term debt. The 9.25% Senior Subordinated Notes, which arewere due in February 2020 (the “2020 Notes”) had a carrying value of approximately $250.0$2.0 million and $275.0 million as of June 30, 2018, and December 31, 2017, respectively, and fair value of approximately $241.3 million and $257.8$2.0 million as of June 30, 2018, and December 31, 2017, respectively.2018. On January 17, 2019, the Company announced that it had given the required notice under the indenture governing its 2020 Notes to redeem for cash all outstanding aggregate principal amount of its Notes to the extent outstanding on February 15, 2019.  On February 15, 2019, the remaining 2020 Notes were redeemed. The fair values of the 2020 Notes, classified as Level 2 instruments, were determined based on the trading values of these instruments in an inactive market as of the reporting date. The 7.375% Senior Secured Notes that are due in March 2022 (the “2022 Notes”) had a carrying value of approximately $350.0 million as of each of June 30, 2018, and December 31, 2017, and fair value of approximately $339.5 million and $348.3$340.4 million as of June 30, 2018,March 31, 2019. The 2022 Notes had a carrying value of approximately $350.0 million and fair value of approximately $332.5 million as of December 31, 2017, respectively.2018. The fair values of the 2022 Notes, classified as Level 2 instruments, were determined based on the trading values of these instruments in an inactive market as of the reporting date. On April 18, 2017, the Company closed on thea $350.0 million senior secured credit facility (the “2017 Credit Facility”) which had a carrying value of approximately $345.6$323.1 million and fair value of approximately $339.1$307.6 million as of June 30, 2018. The 2017 Credit FacilityMarch 31, 2019, and had a carrying value of approximately $347.4$323.9 million and fair value of approximately $340.4$305.8 million as of December 31, 2017.2018. The fair value of the 2017 Credit Facility, classified as a Level 2 instrument, was determined based on the trading values of this instrument in an inactive market as of the reporting date. On December 20, 2018, the Company closed on a new $192.0 million unsecured credit facility (the “2018 Credit Facility”) which had a carrying value of approximately $181.4 million and fair value of approximately $185.1 million as of March 31, 2019, and had a carrying value of approximately $192.0 million and fair value of approximately $195.9 million as of December 31, 2018. The fair value of the 2018 Credit Facility, classified as a Level 2 instrument, was determined based on the trading values of this instrument in an inactive market as of the reporting date. On December 20, 2018, the Company also closed on a new $50.0 million secured credit loan (the “MGM National Harbor Loan”) which had a carrying value of approximately $50.5 million and fair value of approximately $56.6 million as of March 31, 2019, and had a carrying value of approximately $50.1 million and fair value of approximately $56.1 million as of December 31, 2018. The fair value of the 2018 MGM National Harbor Loan, classified as a Level 2 instrument, was determined based on the trading values of this instrument in an inactive market as of the reporting date. The senior unsecured promissory note in the aggregate principal amount of approximately $11.9 million (the “Comcast Note”) had a fair value and carrying value of approximately $11.9 million as of June 30, 2018, and as of December 31, 2017. The fair value of2018. On February 15, 2019, the Comcast Note was approximately $11.9 million as of June 30, 2018,paid in full and as of December 31, 2017.retired. The fair value of the Comcast Note, classified as a Level 3 instrument, was determined based on the fair value of a similar instrument as of the reporting date using updated interest rate information derived from changes in interest rates since inception to the reporting date. The Company’s asset-backed credit facility (the “ABL Facility”) had a carrying value of approximately $3.0 million and fair value of approximately $3.0 million as of March 31, 2019.  There was no balance outstanding on the ABL Facility as of December 31, 2018.

9

 

(d)Revenue Recognition

 

On January 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers” which requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company elected to use the modified retrospective method, but the adoption of the standard did not have a material impact to our financial statements. In general, our spot advertising (both radio and cable television) as well as our digital advertising continues to be recognized when aired and delivered. For our cable television affiliate revenue, the Company grants a license to the affiliate to access its television programming content through the license period, and the Company earns a usage based royalty when the usage occurs, consistent with our previous revenue recognition policy. Finally, for event advertising, the performance obligation is satisfied at a point in time when the activity associated with the event is completed.

 

Within our radio broadcasting and Reach Media segments, the Company recognizes revenue for broadcast advertising at a point in time when a commercial spot runs. The revenue is reported net of agency and outside sales representative commissions. Agency and outside sales representative commissions are calculated based on a stated percentage applied to gross billing. Generally, clients remit the gross billing amount to the agency or outside sales representative, and the agency or outside sales representative remits the gross billing, less their commission, to the Company. For our radio broadcasting and Reach Media segments, agency and outside sales representative commissions were approximately $6.4$4.8 million and $6.9$5.3 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Agency and outside sales representative commissions were approximately $11.7 million and $12.5 million for the six months ended June 30, 2018 and 2017, respectively.

 

Within our digital segment, including Interactive One, which generates the majority of the Company’s digital revenue, revenue is principally derived from advertising services on non-radio station branded but Company-owned websites. Advertising services include the sale of banner and sponsorship advertisements.  Advertising revenue is recognized at a point in time either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases are made, or ratably over the contract period, where applicable. In addition, Interactive One derives revenue from its studio operations, in which it provides third-party clients with publishing services including digital platforms and related expertise.  In the case of the studio operations, revenue is recognized primarily through fixed contractual monthly fees and/or as a share of the third party’s reported revenue.


TV OneOur cable television segment derives advertising revenue from the sale of television air time to advertisers and recognizes revenue when the advertisements are run. Advertising revenue is recognized at a point in time when the individual spots run. To the extent there is a shortfall in contracts where the ratings were guaranteed, a portion of the revenue is deferred until the shortfall is settled, typically by providing additional advertising units generally within one year of the original airing. TV OneOur cable television segment also derives revenue from affiliate fees under the terms of various multi-year affiliation agreements based on a per subscriber fee multiplied by the most recent subscriber counts reported by the applicable affiliate. The Company recognizes the affiliate fee revenue at a point in time as its performance obligation to provide the programming is met. The Company has a right of payment each month as the programming services and related obligations have been satisfied. For our cable television segment, agency and outside sales representative commissions were $3.5approximately $3.7 million and $3.7$3.5 million for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively. Agency and outside sales representative commissions were approximately $6.9 million and $7.6 million for the six months ended June 30, 2018 and 2017, respectively.

 

Revenue by Contract Type

 

The following chart shows our net revenue (and sources) for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:

 

 Three Months Ended
March 31,		 
 Three Months Ended June 30, Six Months Ended June 30,  2019  2018 
 2018 2017 2018 2017  

(Unaudited)

(In thousands)

 
 (In thousands, unaudited)      
Net Revenue:                 
Radio Advertising $48,880 $52,017 $93,502 $98,205  $42,439  $44,622 
Political Advertising 1,182 731 1,383 974   123   200 
Digital Advertising 6,559 6,740 14,705 12,246   7,437   8,146 
Cable Television Advertising 18,118 18,988 37,054 40,129   20,193   18,936 
Cable Television Affiliate Fees 28,020 26,140 55,269 53,463   27,475   27,250 
Event Revenues & Other  12,447  13,022  12,914  13,910   782   467 
Net Revenue (as reported) $115,206 $117,638 $214,827 $218,927  $98,449  $99,621 

 

If economic conditions change, or other adverse factors outside our control arise, our operations could be negatively impacted.

10

  

Contract assets and liabilities

 

Contract assets (unbilled receivables) and contract liabilities (customer advances and unearned income and unearned event income) that are not separately stated in our consolidated balance sheets at June 30, 2018,March 31, 2019, December 31, 20172018 and June 30, 2017March 31, 2018 were as follows:

 

 June 30, 2018 December 31, 2017 June 30, 2017  March 31, 2019 December 31, 2018  March 31, 2018 
 (Unaudited)   (Unaudited)  (Unaudited)    (Unaudited) 
   (In thousands)    (In thousands)
              
Contract assets:                   
Unbilled receivables $7,226 $4,850 $7,521  $

6,529

  $3,425  $6,284 
                   
Contract liabilities:                   
Customer advances and unearned income $4,681 $3,372 $3,414  $

3,836

  $3,766  $4,516 
Unearned event income 2,368 4,117 1,370   

8,201

   3,864   6,157 

 

Unbilled receivables consists of earned revenue on behalf of customers that have not yet been billed. Customer advances and unearned income represents advance payments by customers for future services under contract that are generally incurred in the near term. Unearned event income represents payments by customers for upcoming events.

 

For customer advances and unearned income as of January 1, 2019, approximately $1.4 million was recognized as revenue during the three months ended March 31, 2019. For unearned event income, no revenue was recognized during the three months ended March 31, 2019, as the event takes place during the second quarter of 2019. For customer advances and unearned income as of January 1, 2018, $288,000 and approximately $1.7$1.5 million was recognized as revenue during the three and six months ended June 30, 2018, respectively.March 31, 2018. For unearned event income, as of January 1, 2018, approximately $4.1 millionno revenue was recognized during the three and six months ended June 30,March 31, 2018, as the event tooktakes place during the second quarter of 2018. 


Practical expedients and exemptions

 

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling, general and administrative expenses.

 

We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed.

 

(e)Launch Support

 

TV OneThe cable television segment has entered into certain affiliate agreements requiring various payments by TV One for launch support.Launch support assets are used to initiate carriage under affiliation agreements and are amortized over the term of the respective contracts. Amortization is recorded as a reduction to revenue. For the three and six months ended June 30, 2018, TV OneThe Company did not pay any launch support for carriage initiation. Forinitiation during the three and six months ended June 30, 2017, TV One paid approximately $1.8 million for carriage initiation.March 31, 2019 and 2018. The weighted-average amortization period for launch support is approximately 9.67.8 years as of June 30, 2018,March 31, 2019, and 9.5approximately 7.8 years as of December 31, 2017.2018. The remaining weighted-average amortization period for launch support is 6.65.8 years and 7.16.1 years as of June 30, 2018,March 31, 2019 and December 31, 2017,2018, respectively. Amortization is recorded as a reduction to revenue to the extent that revenue is recognized from the vendor, and any excess amortization is recorded as launch support amortization expense. For the three and six months ended June 30,March 31, 2019 and 2018, launch support asset amortization of $106,000$105,000 and $211,000,$105,000, respectively, was recorded as a reduction to revenue. For the threeof revenue, and six months ended June 30, 2017, launch support asset amortization of $165,000$151,000 and $216,000,$0, respectively, was recorded as a reduction to revenue.an operating expense in selling, general and administrative expenses. Launch assets are included in other intangible assets on the consolidated balance sheets.sheets, except for the portion of the unamortized balance that is expected to be amortized within one year which is included in other current assets.

 

(f)Barter Transactions

 

For barter transactions, the Company provides broadcast advertising time in exchange for programming content and certain services. The Company includes the value of such exchanges in both broadcasting net revenue and station operating expenses. The valuation of barter time is based upon the fair value of the network advertising time provided for the programming content and services received. For the three months ended June 30,March 31, 2019 and 2018, and 2017, barter transaction revenues were $711,000$566,000 and $503,000,$749,000 respectively. Additionally, for the three months ended June 30,March 31, 2019 and 2018, and 2017, barter transaction costs were reflected in programming and technical expenses of $670,000$416,000 and $462,000,$708,000, respectively, and selling, general and administrative expenses of $41,000$150,000 and $41,000, respectively. For the six months ended June 30, 2018 and 2017, barter transaction revenues were approximately $1.5 million and $1.0 million, respectively. Additionally, for the six months ended June 30, 2018 and 2017, barter transaction costs were reflected in programming and technical expenses of $1.4 million and $923,000, respectively, and selling, general and administrative expenses of $81,000 and $81,000, respectively. The Company reached an agreement with a cable television provider related to an adjustment of previously estimated affiliate fees in the amount of approximately $1.7 million and $2.0 million for the three and six months ended June 30, 2018, respectively, as final reporting became available. As settlement of this agreement, the Company will receive approximately $2.0 million in marketing services that will be utilized in future periods.

11

 

(g)Earnings Per Share

 

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock (Classes A, B, C and D) outstanding during the period. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.  The Company’s potentially dilutive securities include stock options and unvested restricted stock. Diluted earnings per share considers the impact of potentially dilutive securities except in periods in which there is a net loss, as the inclusion of the potentially dilutive common shares would have an anti-dilutive effect.

 

The following table sets forth the calculation of basic and diluted earnings per share from continuing operations (in thousands, except share and per share data):

 

  

Three Months Ended

June 30,

  

Six Months Ended

June 30,

 
  2018  2017  2018  2017 
  (Unaudited) 
  (In Thousands) 
Numerator:                
Net income (loss) attributable to common stockholders $23,590  $802  $1,035  $(1,511)
Denominator:                
Denominator for basic net income (loss) per share - weighted average outstanding shares  46,033,402   47,816,723   46,321,633   47,890,618 
Effect of dilutive securities:                
Stock options and restricted stock  2,405,291   420,390   2,456,165   — 
Denominator for diluted net income (loss) per share - weighted-average outstanding shares  48,438,693   48,237,113   48,777,798   47,890,618 
                 
Net income (loss) attributable to common stockholders per share – basic $0.51  $0.02  $0.02  $(0.03)
Net income (loss) attributable to common stockholders per share –diluted $0.49  $0.02  $0.02  $(0.03)

  Three Months Ended March 31, 
  2019  2018 
  (Unaudited) 
  (In thousands) 
    
Numerator:        
Net loss attributable to common stockholders $(6,663) $(22,555)
Denominator:        
Denominator for basic net loss per share – weighted-average outstanding shares  45,001,767   46,757,386 
Effect of dilutive securities:        
Stock options and restricted stock  —   — 
Denominator for diluted net loss per share – weighted-average outstanding shares  45,001,767   46,757,386 
         
Net loss attributable to common stockholders per share – basic and diluted $(0.15) $(0.48)
         

 


All stock options and restricted stock awards were excluded from the diluted calculation for the sixthree months ended June 30, 2017,March 31, 2019 and 2018, as their inclusion would have been anti-dilutive.  The following table summarizes the potential common shares excluded from the diluted calculation.

 

Six Months Ended

June 30,

2017
(Unaudited)
(In thousands)
Stock options3,600
Restricted stock awards439
  Three Months Ended March 31, 
  2019  2018 
  (Unaudited) 
  (In thousands) 
       
Stock options  3,549   5,537 
Restricted stock awards  1,256   2,348 

 

(h)Fair Value Measurements

 

We report our financial and non-financial assets and liabilities measured at fair value on a recurring and non-recurring basis under the provisions of ASC 820,“Fair Value Measurements and Disclosures.” ASC 820 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

 

The fair value framework requires the categorization of assets and liabilities into three levels based upon the assumptions (inputs) used to price the assets or liabilities. Level 1 provides the most reliable measure of fair value, whereas Level 3 generally requires significant management judgment. The three levels are defined as follows:

12

 

Level 1: Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that can be accessed at the measurement date.

 

Level 2: Observable inputs other than those included in Level 1 (i.e., quoted prices for similar assets or liabilities in active markets or quoted prices for identical assets or liabilities in inactive markets).

 

Level 3: Unobservable inputs reflecting management’s own assumptions about the inputs used in pricing the asset or liability.

 

A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value instrument.

 

As of June 30, 2018,March 31, 2019, and December 31, 2017,2018, respectively, the fair values of our financial assets and liabilities measured at fair value on a recurring basis are categorized as follows:

  

  Total  Level 1  Level 2  Level 3 
  (Unaudited) 
  (In thousands) 
As of June 30, 2018                
Liabilities subject to fair value measurement:                
Contingent consideration (a) $2,524   —   —  $2,524 
Employment agreement award (b)  35,164   —   —   35,164 
Total $37,688  $—  $—  $37,688 
                 
Mezzanine equity subject to fair value measurement:                
Redeemable noncontrolling interests (c) $10,940  $—  $—  $10,940 
                 
As of December 31, 2017                
Liabilities subject to fair value measurement:                
Contingent consideration (a) $1,580   —   —  $1,580 
Employment agreement award (b)  32,323   —   —   32,323 
Total $33,903  $—  $—  $33,903 
                 
Mezzanine equity subject to fair value measurement:                
Redeemable noncontrolling interests (c) $10,780  $—  $—  $10,780 

  Total  Level 1  Level 2  Level 3 
  (Unaudited) 
  (In thousands) 
As of March 31, 2019                
Liabilities subject to fair value measurement:                
Contingent consideration (a) $2,628   —   —  $2,628 
Employment agreement award (b)  26,011   —   —   26,011 
Total $28,639  $—  $—  $28,639 
                 
Mezzanine equity subject to fair value measurement:                
Redeemable noncontrolling interests (c) $10,401  $—  $—  $10,401 
                 
As of December 31, 2018                
Liabilities subject to fair value measurement:                
Contingent consideration (a) $2,831   —   —  $2,831 
Employment agreement award (b)  25,660   —   —   25,660 
Total $28,491  $—  $—  $28,491 
                 
Mezzanine equity subject to fair value measurement:                
Redeemable noncontrolling interests (c) $10,232  $—  $—  $10,232 

(a)  This balance is measured based on the income approach to valuation in the form of a Monte Carlo simulation. The Monte Carlo simulation method is suited to instances such as this where there is non-diversifiable risk. It is also well-suited to multi-year, path dependent scenarios. Significant inputs to the Monte Carlo method include forecasted net revenues, discount rate and expected volatility. A third-party valuation firm assisted the Company in estimating the contingent consideration.

 

(b)  PursuantEach quarter, pursuant to an employment agreement (the “Employment Agreement”) executed in April 2008, the Chief Executive Officer (“CEO”) becameis eligible to receive an award (the “Employment Agreement Award”) amount equal to approximately 4% of any proceeds from distributions or other liquidity events in excess of the return of the Company’s aggregate investment in TV One. The Company reviews the factors underlying this award at the end of each quarter including the valuation of TV One (based on the estimated enterprise fair value of TV One as determined by a discounted cash flow analysis),and an assessment of the probability that the Employment Agreement will be renewed and contain this provision. There are probability factors included in the calculation of the award related to the likelihood that the award will be realized. The Company’s obligation to pay the award was triggered after the Company’s recovery ofCompany recovered the aggregate amount of certain pre-April 2015its capital contributionscontribution in TV One and payment is required only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to such invested amount.the Company’s aggregate investment in TV One. The CEO was fully vested in the award upon execution of the Employment Agreement, and the award lapses if the CEO voluntarily leaves the Company or is terminated for cause. A third-party valuation firm assisted the Company in estimating TV One’s fair value using a discounted cash flow analysis. Significant inputs to the discounted cash flow analysis include forecasted operating results, discount rate and a terminal value. TheIn September 2014, the Compensation Committee of the Board of Directors of the Company approved terms for a new employment agreement with the CEO, including a renewal of the Employment Agreement Award upon similar terms as in the prior Employment Agreement. While a new employment agreement has not been executed asPrior to the quarter ended September 30, 2018, there were probability factors included in the calculation of the dateaward related to the likelihood that the award will be realized. During the quarter ended September 30, 2018, management changed the methodology used in calculating the fair value of the Company's Employment Agreement Award liability to simplify the calculation. As part of the simplified calculation, the Company eliminated certain adjustments made to its aggregate investment in TV One, including the treatment of historical dividends paid and potential distribution of assets upon liquidation. The Compensation Committee of the Board of Directors approved the simplified method which eliminates certain assumptions that were historically used in the determination of the fair value of this report, the CEO is being compensated according to the new terms approved by the Compensation Committee.liability. 

13

 

(c)  The redeemable noncontrolling interest in Reach Media is measured at fair value using a discounted cash flow methodology. A third-party valuation firm assisted the Company in estimating the fair value. Significant inputs to the discounted cash flow analysis include forecasted operating results, discount rate and a terminal value.

 

There were no transfers in or out of Level 1, 2, or 3 during the sixthree months ended June 30, 2018.March 31, 2019. The following table presents the changes in Level 3 liabilities measured at fair value on a recurring basis for the sixthree months ended June 30, 2018:March 31, 2019:

 

  

Contingent

Consideration

  

Employment

Agreement

Award

  

Redeemable

Noncontrolling

Interests

 
    (In thousands) 
          
Balance at December 31, 2017 $1,580  $32,323  $10,780 
Net income attributable to noncontrolling interests  —   —   339 
Distribution  (506)  —   — 
Dividends paid to noncontrolling interests  —   —   (801)
Change in fair value  1,450   2,841   622 
Balance at June 30, 2018 $2,524  $35,164  $10,940 
             
The amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at the reporting date $(1,450) $(2,841) $— 

  

Contingent

Consideration

  

Employment

Agreement

Award

  

Redeemable

Noncontrolling

Interests

 
    (In thousands) 
          
Balance at December 31, 2018 $2,831  $25,660  $10,232 
Net income attributable to noncontrolling interests  —   —   125 
Distribution  (279)  (1,558)  — 
Change in fair value  76   1,909   44 
Balance at March 31, 2019 $2,628  $26,011  $10,401 
             
The amount of total (losses)/income for the period included in earnings attributable to the change in unrealized losses/income relating to assets and liabilities still held at the reporting date $(76) $(1,909)  $— 

 

Losses and income included in earnings were recorded in the consolidated statements of operations as corporate selling, general and administrative expenses for the employment agreement award for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. Losses included in earnings were recorded in the consolidated statements of operations as selling, general and administrative expenses for contingent consideration for the three and six months ended June 30, 2018March 31, 2019 and 2017.2018. 

   Significant 

As of

June 30,

2018

 

As of

December 31,

2017

    Significant 

As of

March 31, 2019

  

As of

December 31,

2018

 
Level 3 liabilities Valuation Technique 

Unobservable

Inputs

 

Significant Unobservable

Input Value

  Valuation Technique 

Unobservable

Inputs

 

Significant Unobservable

Input Value

 
                  
Contingent consideration Monte Carlo Simulation Expected volatility  38.0%  36.9% Monte Carlo Simulation Expected volatility  31.8%  34.6%
Contingent consideration Monte Carlo Simulation Discount Rate  16.0%  16.0% Monte Carlo Simulation Discount Rate  15.5%  15.0%
Employment agreement award Discounted Cash Flow Discount Rate  11.0%  11.0% Discounted Cash Flow Discount Rate  11.0%  11.0%
Employment agreement award Discounted Cash Flow Long-term Growth Rate  2.5%  2.5% Discounted Cash Flow Long-term Growth Rate  2.5%  2.5%
Redeemable noncontrolling interest Discounted Cash Flow Discount Rate  10.5%  10.5% Discounted Cash Flow Discount Rate  10.5%  10.5%
Redeemable noncontrolling interest Discounted Cash Flow Long-term Growth Rate  1.0%  1.0% Discounted Cash Flow Long-term Growth Rate  1.0%  1.0%

 

Any significant increases or decreases in discount rate or long-term growth rate inputs could result in significantly higher or lower fair value measurements.

 

Certain assets and liabilities are measured at fair value on a non-recurring basis using Level 3 inputs as defined in ASC 820.  These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances.  Included in this category are goodwill, radio broadcasting licenses and other intangible assets, net, that are written down to fair value when they are determined to be impaired, as well as content assets that are periodically written down to net realizable value. The Company concluded these assets were not impaired during the three months ended March 31, 2019. For the sixthree months ended June 30,March 31, 2018, the Company recorded an impairment charge of approximately $2.7 million related to its Charlotte market goodwill and a charge of approximately $3.8 million associated with our Detroit market radio broadcasting licenses. The Company concluded these assets were not impaired during the three months ended June 30, 2018 and during the six months ended June 30, 2017, and, therefore, were reported at carrying value.

14

 

(i)Leases

As of January 01, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842,Leases, using the modification retrospective transition method. Prior comparative periods will be not be restated under this new standard and therefore those amounts are not presented below. The Company adopted a package of practical expedients as allowed by the transition guidance which permits the Company to carry forward the historical assessment of whether contracts contain or are leases, classification of leases and the remaining lease terms. The Company has also made an accounting policy election to exclude leases with an initial term of twelve months or less from recognition on the consolidated balance sheet. Short-term leases will be expensed over the lease term. The Company also elected to separate the consideration in the lease contracts between the lease and non-lease components. All variable non-lease components are expensed as incurred.

ASC 842 results in significant changes to the balance sheets of lessees, most significantly by requiring the recognition of right of use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Upon adoption of ASC 842, deferred rent balances, which were historically presented separately, were combined and presented net within the ROU asset. The adoption of this standard resulted in the Company recording an increase in ROU assets of approximately $49.8 million and an increase in lease liabilities of approximately $54.1 million. Approximately $4.3 million in deferred rent was also reclassed from liabilities to offset the applicable ROU asset. The tax impact of ASC 842, which primarily consisted of deferred gains related to previous transactions that were historically accounted for as sale and operating leasebacks in accordance with ASC Topic 840 were recognized as part of the cumulative-effect adjustment to retained earnings, resulting in an increase to retained earnings, net of tax, of approximately $5.8 million.

Many of the Company's leases provide for renewal terms and escalation clauses, which are factored into calculating the lease liabilities when appropriate. The implicit rate within the Company's lease agreements is generally not determinable and as such the Company’s collateralized borrowing rate is used.

The following table sets forth the components of lease expense and the weighted average remaining lease term and the weighted average discount rate for the Company’s leases as of March 31, 2019, dollars in thousands:

Operating Lease Cost (Cost resulting from lease payments) $3,057 
Variable Lease Cost (Cost excluded from lease payments)  103 
Total Lease Cost $3,160 
     
Operating Lease - Operating Cash Flows (Fixed Payments) $3,268 
Operating Lease - Operating Cash Flows (Liability Reduction) $1,897 
     
Weighted Average Lease Term - Operating Leases      6.28 years 
Weighted Average Discount Rate - Operating Leases  11.00%


As of March 31, 2019, maturities of lease liabilities were as follows:

For the Year Ended December 31, (Dollars in thousands) 
For the remaining nine months ending December 31, 2019 $9,790 
2020  12,448 
2021  11,619 
2022  10,941 
2023  9,722 
Thereafter  18,472 
Total future lease payments  72,992 
Imputed interest  (20,475)
Total $52,517 

(j)Impact of Recently Issued Accounting Pronouncements

  

In May 2014,June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition” and most industry-specific guidance throughout the codification. The standard requires that an entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. On July 9, 2015, the FASB voted and approved a deferral of the effective date of ASU 2014-09 by one year. As a result, ASU 2014-09 will be effective for fiscal years beginning after December 15, 2017. The FASB issued several amendments subsequently that clarified several aspects of the new revenue standard, but did not modify its core principle. The Company has completed its evaluation of the impact from adopting the new standard on its financial reporting and disclosures, and adopted the amended accounting guidance as of January 1, 2018 using the modified retrospective method. As part of this process, the Company has completed the following steps: (1) reviewed and assessed its business operations and identified its major revenue streams, which are comprised of radio spot advertising revenue, cable television spot advertising revenue, cable television affiliate revenue, event revenue and digital advertising; (2) reviewed the related contractual terms for each of these significant revenue streams; and (3) developed an implementation plan to ascertain the required revenue recognition changes applicable to this new standard. The performance obligations associated with its spot and digital advertising streams are the obligation to air or deliver the spots; for cable television affiliate revenue, the performance obligation is the granting of a license to the affiliate to access the Company’s television programming content through the license period, for which the Company earns a usage based royalty when the usage occurs. For event advertising, the performance obligation is satisfied at a point in time when the activity associated with the event is completed. The changes necessitated include updating the Company’s accounting policies, determining the impact on financial reporting and disclosure and documenting the impact to internal financial and operation processes and related control environment. Based on its assessment, the Company has concluded that there will not be a material impact on our consolidated financial statements, but disclosures related to revenue recognition have been expanded.

In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which is a new lease standard that amends lease accounting. ASU 2016-02 will require lessees to recognize a lease asset and lease liability for leases classified as operating leases. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those fiscal years. Early adoption is permitted. We will adopt ASU 2016-02 on January 1, 2019. While the Company is not yet in a position to disclose the full impact of the application of the new standard, we expect that there will be an impact of recording the lease liabilities and the corresponding right-to-use assets on our total assets and liabilities.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”). ASU 2016-13 is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This standard will be effective for interim and annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for annual periods beginning after December 15, 2018. The Company has not yet completed its assessment of the impact of the new standard on its consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (A Consensus of the Emerging Issues Task Force)” (“ASU 2016-15”). ASU 2016-15 is intended to reduce differences in practice in how certain transactions are classified in the statement of cash flows. This standard will be effective for interim and annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the new standard during the first quarter of 2018 and its adoption did not have a material impact on its consolidated financial statements.


In January 2017, the FASB issued ASU 2017-04, “Intangibles – Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). ASU 2017-04 is intended to simplify the accounting for goodwill impairment. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. This standard will be effective for interim and annual goodwill impairment tests beginning after December 15, 2019, with early adoption permitted on testing dates after January 1, 2017. The Company adopted the new standard during the first quarter of 2018 and its adoption did not have a material impact on its consolidated financial statements.

 

(j)(k)Redeemable noncontrolling interest

 

Redeemable noncontrolling interests are interests in subsidiaries that are redeemable outside of the Company’s control either for cash or other assets. These interests are classified as mezzanine equity and measured at the greater of estimated redemption value at the end of each reporting period or the historical cost basis of the noncontrolling interests adjusted for cumulative earnings allocations.  The resulting increases or decreases in the estimated redemption amount are affected by corresponding charges against retained earnings, or in the absence of retained earnings, additional paid-in-capital.

 

15

 (k)(l)Investments – Cost Method

 

On April 10, 2015, the Company made a $5 million investment and invested in MGM’s world-class casino property, MGM National Harbor, located in Prince George’s County, Maryland, which has a predominately African-American demographic profile. On November 30, 2016, the Company contributed an additional $35 million to complete its investment. This investment further diversified our platform in the entertainment industry while still focusing on our core demographic. We accounted for this investment on a cost basis. Our MGM National Harbor investment entitles us to an annual cash distribution based on net gaming revenue. Our MGM investment is included in other assets on the consolidated balance sheets and its income in the amount of approximately $1.8$1.7 million and $1.5$1.6 million, for the three months ended June 30,March 31, 2019 and 2018, and 2017, respectively, and approximately $3.4 million and $3.0 million, for the six months ended June 30, 2018 and 2017, respectively, is recorded in other income on the consolidated statements of operations. The cost method investment is subject to a periodic impairment review in the normal course. The Company reviewed the investment and concluded that no impairment to the carrying value was required. As of December 4, 2018, the Company’s interest in the MGM National Harbor Casino secures the MGM National Harbor Loan.

 

 (l)(m)Content Assets

 

TV OneOur cable television segment has entered into contracts to acquire entertainment programming rights and programs from distributors and producers. The license periods granted in these contracts generally run from one year to ten years. Contract payments are made in installments over terms that are generally shorter than the contract period. Each contract is recorded as an asset and a liability at an amount equal to its gross contractual commitment when the license period begins and the program is available for its first airing. Acquired content is generally amortized on a straight-line basis over the term of the license which reflects the estimated usage. For certain content for which the pattern of usage is accelerated, amortization is based upon the actual usage. Amortization of content assets is recorded in the consolidated statementsstatement of operations as programming and technical expenses.

   

The Company also has programming for which the Company has engaged third parties to develop and produce, and it owns most or all rights (commissioned programming). In accordance with ASC 926, content amortization expense for each period is recognized based on the revenue forecast model, which approximates the proportion that estimated advertising and affiliate revenues for the current period represent in relation to the estimated remaining total lifetime revenues as of the beginning of the current period.  Management regularly reviews, and revises when necessary, its total revenue estimates, which may result in a change in the rate of amortization and/or a write-down of the asset to fair value.

  

Acquired program rights are recorded at the lower of unamortized cost or estimated net realizable value. Estimated net realizable values are based on the estimated revenues associated with the program materials and related expenses. The Company did not record any additional amortization expense as a result of evaluating its contracts for recoverability for the sixthree months ended June 30, 2018March 31, 2019 and 2017.2018. All produced and licensed content is classified as a long-term asset, except for the portion of the unamortized content balance that is expected to be amortized within one year which is classified as a current asset.

 

Tax incentives that state and local governments offer that are directly measured based on production activities are recorded as reductions in production costs.


 (m)(n)Derivatives

 

The Company recognizes all derivatives at fair value on the consolidated balance sheets as either an asset or liability. The accounting for changes in the fair value of a derivative, including certain derivative instruments embedded in other contracts, depends on the intended use of the derivative and the resulting designation.

 

The Company accounts for the Employment Agreement Award as a derivative instrument in accordance with ASC 815,“Derivatives and Hedging.”The Company estimated the fair value of the award at June 30, 2018,March 31, 2019, and December 31, 2017,2018, to be approximately $35.2$26.0 million and $32.3$25.7 million, respectively, and accordingly adjusted its liability to this amount. The long-term portion is recorded in other long-term liabilities and the current portion is recorded in other current liabilities in the consolidated balance sheets. The expense associated with the Employment Agreement Award was recorded in the consolidated statements of operations as corporate selling, general and administrative expenses and was approximately $1.6$1.9 million and $1.4$1.2 million for the three months ended June 30,March 31, 2019, and 2018, and 2017, respectively, and was approximately $2.8 million and $2.5 million for the six months ended June 30, 2018, and 2017, respectively.

 

The Company’s obligation to pay the Employment Agreement Award was triggered after the Company’s recovery ofCompany recovered the aggregate amount of its capital contribution in TV One and only upon actual receipt of distributions of cash or marketable securities or proceeds from a liquidity event with respect to the Company’s aggregate investment in TV One. The CEO was fully vested in the award upon execution of the employment agreement, and the award lapses if the CEO voluntarily leaves the Company, or is terminated for cause. TheIn September 2014, the Compensation Committee of the Board of Directors of the Company has approved terms for a new employment agreement with the CEO, including a renewal of the Employment Agreement Award upon similar terms as in the prior employment agreement. While a new employment agreement has not been executed asPrior to the quarter ended September 30, 2018, there were probability factors included in the calculation of the dateaward related to the likelihood that the award will be realized. During the quarter ended September 30, 2018, management changed the methodology used in calculating the fair value of the Company's Employment Agreement Award liability to simplify the calculation. As part of the simplified calculation, the Company eliminated certain adjustments made to its aggregate investment in TV One, including the treatment of historical dividends paid and potential distribution of assets upon liquidation. The Compensation Committee of the Board of Directors approved the simplified method which eliminates certain assumptions that were historically used in the determination of the fair value of this report, the CEO is being compensated according to the new terms approved by the Compensation Committee.liability.

16

 

 (n)(o)Related Party Transactions

 

Reach Media operates the Tom Joyner Foundation’s Fantastic Voyage® (the “Fantastic Voyage”Voyage®”), a fund raising event, foron behalf of the Tom Joyner Foundation, Inc. (the “Foundation”), a 501(c)(3) entity. The terms ofagreements under which the agreement areFantastic Voyage® operates provide that Reach Media providesprovide all necessary operations forof the Fantastic Voyage,cruise and that the Foundation reimburse Reach Media for all related expenses,will be reimbursed its expenditures and that the Foundation payreceive a fee plus a performance bonus to Reach Media. The fee isfor the cruise. Distributions from operating income or operating revenues, depending upon the year, are in the following order until the funds are depleted: up to the first $1.0 million after the Fantastic Voyage nets $250,000 to the Foundation. The balanceFoundation, reimbursement of any operating income is earned by the Foundation lessReach’s expenditures, up to $1.0 million fee to Reach, a performance bonus of up to 50% of remaining operating income to Reach, Media of any excess over $1.25 million.with the balance remaining with the Foundation. For years 2020 through 2022, $250,000 to the Foundation is guaranteed. Reach Media’s earnings for the Fantastic Voyage® may not exceed $1.7 million.million in 2018 and 2019, nor $1.75 million in 2020 and thereafter. The Foundation’s remittances to Reach Media under the agreementagreements are limited to its Fantastic Voyage-relatedVoyage®-related cash revenues. Reach Media bears the risk should the Fantastic Voyage® sustain a loss and bears all credit risk associated with the related customer cabin sales. The agreement between Reach and the Foundation automatically renews annually unless termination is mutually agreed or unless a party’s financial requirements are not met, in which case that party not in breach of their obligations has the right, but not the obligation, to terminate unilaterally. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the Foundation owed Reach Media approximately $1.4$2.1 million and $1.1 million,$208,000, respectively, under the agreementagreements for the operations on the cruises.

  

Reach Media provides office facilities (including office space, telecommunications facilities, and office equipment) to the Foundation, and to Tom Joyner, LTD. (“Limited”), Tom Joyner’s production company. Such services are provided to the Foundation and to Limited on a pass-through basis at cost. Additionally, from time to time, the Foundation and Limited reimburse Reach Media for expenditures paid on their behalf at Reach Media relatedMedia-related events. Under these arrangements, as of June 30, 2018,March 31, 2019, the Foundation and Limited owed $23,000$34,000 and $2,000$3,000 to Reach Media, respectively. As of December 31, 2017,2018, the Foundation and Limited owed $26,000$34,000 and $4,000$2,000 to Reach Media, respectively.

  

For the three and six months ended June 30, 2018, Reach Media’s revenues, expenses, and operating income for the Fantastic Voyage were approximately $9.4 million, $7.9 million, and $1.5 million, respectively, and for the three and six months ended June 30, 2017, approximately $9.4 million, $7.7 million, and $1.7 million, respectively. The Fantastic Voyage took place during the second quarters of both 2018 and 2017.

On October 2, 2017, Karen Wishart began employment with the Company as an Executive Vice President. Ms. Wishart has taken the place of Linda Vilardo as Chief Administrative Officer effective after Ms. Vilardo's last day of employment, which was December 31, 2017. Effective January 1, 2018, Ms. Wishart became a named executive officer of the Company for reporting purposes. Ms. Wishart is employed as an Executive Vice President, and, effective January 1, 2018, as Chief Administrative Officer of the Company and as a Vice President of each of the Company's subsidiaries. Ms. Wishart owns a controlling interest in a temporary staffing and recruiting services firm. ForDuring the three months ended June 30,March 31, 2019 and 2018, and 2017, the Company paid the staffing and recruiting services firm $3,000$0 and $131,000,$22,000, respectively. For the six months ended June 30, 2018 and 2017, the Company paid the staffing and recruiting services firm $25,000 and $216,000, respectively. During the year ended December 31, 2017, the Company paid the staffing and recruiting services firm $425,000. Subsequent to Ms. Wishart’s hiring on October 2, 2017, on a limited basis, the staffing firm can continue to provide new staffing and/or recruiting services to the Company. However, the staffing firm will only be reimbursed for direct expenses actually incurred.


2.ACQUISITIONS AND DISPOSITIONS:

 

On October 20, 2011, we entered into a time brokerage agreement (“TBA”) with WGPR, Inc. (“WGPR”). Pursuant to the TBA, beginning October 24, 2011, we began to broadcast programs produced, owned or acquired by the Company on WGPR’s Detroit radio station, WGPR-FM. We pay a monthly fee as well as certain operating costs of WGPR-FM, and in exchange we retain all revenues from the sale of the advertising within the programming we provide. The original term of the TBA was through December 31, 2014; however, in September 2014, we entered into an amendment to the TBA to extend the term of the TBA through December 31, 2019. Under the terms of the TBA, WGPR has also granted us certain rights of first negotiation and first refusal with respect to the sale of WGPR-FM by WGPR and with respect to any potential time brokerage agreement for WGPR-FM covering any time period subsequent to the term of the TBA.

  

On January 30, 2017, the Company entered into an asset purchase agreement to sell certain land, towers and equipment to a third party for $25 million. On May 2, 2017, the Company closed on its previously announced sale, and is leasing certain of the assets back from the buyer as a part of its normal operations. The Company received proceeds of approximately $25.0 million, resulting in an overall net gain on sale of approximately $22.5 million, of which approximately $14.4 million was recognized immediately during the second quarter of 2017, and approximately $8.1 million which was deferred and will bewas recognized into income ratably over the lease term of ten years. Upon adoption of ASC 842 on January 1, 2019, the unamortized portion of this deferred gain, net of tax, was recognized as a cumulative adjustment to equity.

  

On April 20, 2017, the Company announced it had entered into an agreement for the acquisition of Red Zebra Broadcasting’s WWXT-FM and WXGI-AM stations. With this acquisition, the Company expanded its Washington, DC market presence and diversified its Richmond market presence. DC’s WMMJ MAJIC 102.3 FM programming is simulcast on WWXT 92.7 FM which is expected to grow its listenership.  In Richmond, the Company diversified its all-music cluster and maintained the sports radio format of WXGI 950 AM and simulcast the new Richmond ESPN Radio on 1240 AM and 102.7 FM.  Local marketing agreements for both stations were effective as of May 1, 2017 until the Company completed the acquisition of the stations on June 23, 2017, and total consideration paid was approximately $2.0 million. The Company’s purchase accounting to reflect the fair value of assets acquired and liabilities assumed consisted of approximately $1.6 million to radio broadcasting licenses, $47,000 to goodwill, $206,000 to property and equipment and $114,000 to other intangible assets.

17

On April 28, 2017, the Company acquired certain assets constituting the websites and brands Bossip, HipHopWired and MadameNoire from Moguldom Media Group, LLC. The assets were integrated into the Company’s digital segment. The consideration for the assets was a $5 million payment at closing, with further potential earn-out payments of up to $5 million over the next 4 years contingent upon performance. Total cash consideration paid at closing was approximately $5.0 million. The Company’s purchase accounting to reflect the fair value of assets acquired and liabilities assumed consisted of $22,000 to property and equipment, approximately $1.2 million to brand and trade names, $4.6 million to goodwill, $1.4 million to customer relationships and $322,000 to other intangible assets, offset by estimated contingent consideration of approximately $2.2 million and other liabilities of $263,000.

On August 3, 2017, the Company sold the assets of its Detroit WCHB-AM station for $2.0 million and recognized an immaterial loss on the sale of the station during the year ended December 31, 2017.

On May 1,8, 2018, the Company closed on its previously announced it signed a definitive agreement to sellsale of the assets of one of its Detroit, Michigan radio stations, WPZR-FM (102.7 FM), to Educational Media Foundation, of California, for total consideration of approximately $12.7 million.million, of which approximately $12.2 million was received in cash. As part of the deal, the Company will receivereceived 3 FM translators that service the Detroit metropolitan area, and thesearea. These signals will bewere combined with itsthe existing FM translator to multicast the Detroit Praise Network. The closingCompany recognized an immaterial loss on the sale of WPZR-FM is subject to customary conditions, prorations and adjustments, including approval from the FCC. (See Note 9 –Subsequent Events.) The identified assets, with a combined carrying value of approximately $12.7 million, have been classified as held for sale and included in long-term other assets instation during the consolidated balance sheet at June 30,year ended December 31, 2018.

 

On May 21,August 9, 2018, the Company closed on its previously announced it signed a definitive agreement to acquireacquisition of the assets of the radio station The Team 980 (WTEM 980 AM) from Red Zebra Broadcasting for total consideration of approximately $4.2 million. In addition,Broadcasting. Upon closing, the Company has also entered into an agreement with the Washington Redskins to ensure that all Redskins games, as well as pregame and postgame programming, will remain on The Team 980.  The closing onCompany’s purchase accounting to reflect the acquisition is subjectfair value of assets acquired and liabilities assumed consisted of approximately $2.0 million to customary conditions, prorationsradio broadcasting licenses, $1.1 million to land and adjustments, including approval from the FCC.  (See Note 9 –Subsequent Events.)land improvements, $512,000 to towers, $91,000 to goodwill, $206,000 to advertiser agreements, and $254,000 to other property and equipment assets.

 

3.GOODWILL AND RADIO BROADCASTING LICENSES:

 

Impairment Testing

 

In accordance with ASC 350,“Intangibles - Goodwill and Other,” we do not amortize our indefinite-lived radio broadcasting licenses and goodwill. Instead, we perform a test for impairment annually across all reporting units, or on an interim basis when events or changes in circumstances or other conditions suggest impairment may have occurred in any given reporting unit. Other intangible assets continue to be amortized on a straight-line basis over their useful lives. We perform our annual impairment test as of October 1 of each year. We evaluate all events and circumstances on an interim basis to determine if an interim indicator is present.

 

Valuation of Broadcasting Licenses

DuringWe did not identify any impairment indicators for the second quarters of 2018 and 2017, the total market revenue growth for certain markets in which we operate was below that used in our annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain markets’ radio broadcasting licenses, which we performed as of June 30, 2017 and 2018. There was no impairment identified as part of the testing performed duringthree months ended March 31, 2019. During the quarter ended June 30, 2018. During the six months ended June 30,March 31, 2018, the Company recorded a non-cash impairment charge of approximately $3.8 million associated with our Detroit market radio broadcasting licenses. During the quarter ended June 30, 2017, the Company recorded an impairment charge of approximately $12.8 million related to our Houston radio broadcasting licenses. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for the interim impairment assessments for the quarters ended June 30, 2018 and 2017, respectively.

Radio Broadcasting June 30,  June 30, 
Licenses 2018 (a)  2017 (a) 
       
Pre-tax impairment charge (in millions) $—  $12.8 
         
Discount Rate  9.0%  9.0%
Year 1 Market Revenue Growth Rate Range  0.5%  1.0% – 2.0%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)  0.5% – 1.5%  0.5% – 1.5%
Mature Market Share Range  6.8% – 15.3%  6.9% – 15.3%
Operating Profit Margin Range  30.1% – 35.1%  31.6% – 47.0%

(a)Reflects changes only to the key assumptions used in the interim testing for certain units of accounting.

18

 

Valuation of Goodwill

During the second quarters of 2018 and 2017, we identified anWe did not identify any impairment indicatorindicators at certainany of our radio markets, and, as such, we performed an interim analysisreportable segments for certain radio market goodwill as of June 30, 2018 and 2017. No goodwill impairment was identified during the three months ended June 30, 2018 or during the six months ended June 30, 2017.March 31, 2019. During the six monthsquarter ended June 30,March 31, 2018, the Company recorded a non-cash impairment charge of approximately $2.7 million to reduce the carrying value of our Charlotte goodwill balance. Below are some of the key assumptions used in the income approach model for estimating reporting unit fair values for theinterim impairment assessments for the quarters ended June 30, 2018 and 2017.

Goodwill (Radio Market June 30,  June 30, 
Reporting Units) 2018 (a)  2017 (a) 
        
Pre-tax impairment charge (in millions) $–  $– 
         
Discount Rate  9.0%  9.0%
Year 1 Market Revenue Growth Rate Range  (8.6)% – 19.5%  (5.6)% – 9.2%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)  0.5% – 1.0%  1.0% – 1.5%
Mature Market Share Range  7.6% – 14.9%  9.1% – 10.4%
Operating Profit Margin Range  23.7% – 31.8%  33.2% – 53.2%

(a)Reflects changes only to the key assumptions used in the interim testing for certain units of accounting.

During the second quarter of 2017, the Company performed interim impairment testing on the valuation of goodwill associated with Reach Media. Reach Media’s net revenues and cash flows declined and internal projections were revised downward, which we deemed to be an impairment indicator. The Company reduced its operating cash flow projections and assumptions based on Reach Media’s actual results which did not meet budget. Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for the interim assessment at June 30, 2017. As a result of our interim assessment, the Company concluded no impairment for the Reach Media goodwill value had occurred. 

June 30,
Reach Media Segment Goodwill2017
Pre-tax impairment charge (in millions)$—
Discount Rate10.5%
Year 1 Revenue Growth Rate(8.4)%
Long-term Revenue Growth Rate1.0%
Operating Profit Margin Range13.5% – 16.5%

We did not identify any impairment indicators for the three months ended June 30, 2018 or 2017 at any of our other reportable segments except as described above.for the three months ended March 31, 2018.

 

Goodwill Valuation Results

 

The table below presents the changes in the Company’s goodwill carrying values for its four reportable segments.

  

Radio

Broadcasting

Segment

  

Reach

Media

Segment

  

Digital

Segment

  

Cable

Television

Segment

  Total 
  (In thousands) 
Gross goodwill $154,910  $30,468  $27,567  $165,044  $377,989 
Additions  —   —   —   —   — 
Impairments  (2,712)  —   —   —   (2,712)
Accumulated impairment losses  (84,436)  (16,114)  (14,545)  —   (115,095)
Net goodwill at June 30, 2018 $67,762  $14,354  $13,022  $165,044  $260,182 

19

  

Radio

Broadcasting

Segment

  

Reach

Media

Segment

  

Digital

Segment

  

Cable

Television

Segment

  Total 
  (In thousands) 
Gross goodwill $155,000  $30,468  $27,567  $165,044  $378,079 
Additions  —   —   —   —   — 
Impairments  —   —   —   —   — 
Accumulated impairment losses  (101,848)  (16,114)  (14,545)  —   (132,507)
Net goodwill at March 31, 2019 $53,152  $14,354  $13,022  $165,044  $245,572 

 

4.LONG-TERM DEBT:

 

Long-term debt consists of the following:

 

 June 30, 2018  December 31, 2017  March 31, 2019  December 31, 2018 
 (Unaudited)     (Unaudited)    
 (In thousands)  (In thousands) 
     
2018 Credit Facility $181,438  $192,000 
MGM National Harbor Loan  50,549   50,066 
2017 Credit Facility $345,625  $347,375   323,102   323,926 
9.25% Senior Subordinated Notes due February 2020  250,000   275,000   —   2,037 
7.375% Senior Secured Notes due April 2022  350,000   350,000   350,000   350,000 
Asset-backed credit facility  3,000   — 
Comcast Note due April 2019  11,872   11,872   —   11,872 
Total debt  957,497   984,247   908,089   929,901 
Less: current portion of long-term debt  15,372   3,500   20,626   38,706 
Less: original issue discount and issuance costs  12,127   13,581   16,517   17,438 
Long-term debt, net $929,998  $967,166  $870,946  $873,757 
        

2018 Credit Facility

On December 4, 2018, the Company and certain of its subsidiaries entered into a credit agreement ("2018 Credit Facility"), among the Company, the lenders party thereto from time to time, Wilmington Trust, National Association, as administrative agent, and TCG Senior Funding L.L.C, as sole lead arranger and sole bookrunner. The 2018 Credit Facility provided $192.0 million in term loan borrowings, which was funded on December 20, 2018. The net proceeds of term loan borrowings under the 2018 Credit Facility were used to refinance, repurchase, redeem or otherwise repay the Company's outstanding 9.25% Senior Subordinated Notes due 2020.

Borrowings under the 2018 Credit Facility are subject to customary conditions precedent, as well as a requirement under the 2018 Credit Facility that (i) the Company's total gross leverage ratio on a pro forma basis be not greater than 8:00 to 1:00 (this total gross leverage ratio test steps down as described below), (ii) neither of the administrative agents under the Company's existing credit facilities nor the trustee under the Company's existing senior secured notes due 2022 have objected to the terms of the new credit documents and (iii) certification by the Company that the terms and conditions of the 2018 Credit Facility satisfy the requirements of the definition of "Permitted Refinancing" (as defined in the agreements governing the Company's existing credit facilities) and neither of the administrative agents under the Company's existing credit facilities notifies the Company within five (5) business days prior to funding the borrowings under the 2018 Credit Facility that it disagrees with such determination (including a reasonable description of the basis upon which it disagrees).

The 2018 Credit Facility matures on December 31, 2022 (the "Maturity Date"). Interest rates on borrowings under the 2018 Credit Facility will be either (i) from the Funding Date to the Maturity Date, 12.875% per annum, (ii) 11.875% per annum, once 50% of the term loan borrowings have been repaid or (iii) 10.875% per annum, once 75% of the term loan borrowings have been repaid. Interest payments begin on the last day of the 3-month period commencing on the Funding Date.

The Company's obligations under the 2018 Credit Facility are not secured. The 2018 Credit Facility is guaranteed on an unsecured basis by each entity that guarantees the Company's outstanding $350.0 million 2017 Credit Facility (as defined below). 


The term loans may be voluntarily prepaid prior to February 15, 2020 subject to payment of a prepayment premium. The Company will be required to repay principal to the extent then outstanding on each quarterly interest payment date, commencing on the last business day in March 2019, equal to one quarter of 7.5% of the aggregate initial principal amount of all term loans incurred on the Funding Date to December 2019, commencing on the last business day in March 2020, one quarter of 10.0% of the aggregate initial principal amount of all term loans incurred on the Funding Date to December 2021, and, commencing on the last business day in March 2021, one quarter of 12.5% of the aggregate initial principal amount of all term loans incurred on the Funding Date to December 2022. The Company will also be required to use 75% of excess cash flow (as defined in the 2018 Credit Facility, which exclude any distributions to the Company or its restricted subsidiaries in respect of its interests in the MGM National Harbor) to repay outstanding term loans at par, paid semiannually and to use 100% of all distributions to the Company or its restricted subsidiaries received in respect of its interest in the MGM National Harbor to repay outstanding terms loans at par. During the three months March 31, 2019, the Company repaid approximately $10.6 million under the 2018 Credit Facility.

The 2018 Credit Facility contains customary representations and warranties and events of default, affirmative and negative covenants (in each case, subject to materiality exceptions and qualifications). The 2018 Credit Facility also contains certain financial covenants, including a maintenance covenant requiring the Company's total gross leverage ratio to be not greater than 8.0 to 1.00 in 2019, 7.5 to 1.00 in 2020, 7.25 to 1.00 in 2021 and 6.75 to 1.00 in 2022. As of March 31, 2019, the Company was in compliance with all of its financial covenants under the 2018 Credit Facility.

As of March 31, 2019, the Company had outstanding approximately $181.4 million on its 2018 Credit Facility. The original issue discount in the amount of approximately $3.8 million and associated debt issuance costs in the amount of $875,000 is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the credit facility using the effective interest rate method. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for all instruments, for the three months ended March 31, 2019 and 2018, was $943,000 and $715,000, respectively.

MGM National Harbor Loan

Concurrently, on December 4, 2018, Urban One Entertainment SPV, LLC ("UONESPV") and its immediate parent, Radio One Entertainment Holdings, LLC ("ROEH"), each of which is a wholly owned subsidiary of the Company, entered into a credit agreement, providing $50.0 million in term loan borrowings (the "MGM National Harbor Loan") which was funded on December 20, 2018.

The MGM National Harbor Loan matures on December 31, 2022 and bears interest at 7.0% per annum in cash plus 4.0% per annum paid-in kind. The loan has limited ability to be prepaid in the first two years. The loan is secured on a first priority basis by the assets of UONESPV and ROEH, including all of UONESPV's shares held by ROEH, all of UONESPV's interests in MGM National Harbor, its rights under the joint venture operating agreement governing the MGM National Harbor and UONESPV's obligation to exercise its put right under the joint venture operating agreement in the event of a UONESPV payment default or bankruptcy event, in each case, subject to applicable Maryland gaming laws and approvals. Exercise by UONESPV of its put right under the joint venture operating agreement is subject to required lender consent unless the proceeds are used to retire the MGM National Harbor Loan and any remaining excess is used to repay borrowings, if any, under the 2018 Credit Facility. The MGM National Harbor Loan also contains customary representations and warranties and events of default, affirmative and negative covenants (in each case, subject to materiality exceptions and qualifications).

As of March 31, 2019, the Company had outstanding approximately $50.5 million on its MGM National Harbor Loan. The original issue discount in the amount of approximately $1.0 million and associated debt issuance costs in the amount of approximately $1.7 million is being reflected as an adjustment to the carrying amount of the debt obligation and amortized to interest expense over the term of the obligation using the effective interest rate method. The amortization of deferred financing costs was charged to interest expense for all periods presented.

2017 Credit Facilities

 

On April 18, 2017, the Company closed on a senior secured credit facility (the “2017 Credit Facility”). The 2017 Credit Facility is governed by a credit agreement by and among the Company, the lenders party thereto from time to time and Guggenheim Securities Credit Partners, LLC, as administrative agent, The Bank of New York Mellon, as collateral agent, and Guggenheim Securities, LLC as sole lead arranger and sole book running manager. The 2017 Credit Facility provides for $350 million in term loan borrowings, all of which was advanced and outstanding on the date of the closing of the transaction.


The 2017 Credit Facility matures on the earlier of (i) April 18, 2023, or (ii) in the event such debt is not repaid or refinanced, 91 days prior to the maturity of either of the Company’s 2022 Notes or the Company’s 2020 Notes. At the Company’s election, the interest rate on borrowings under the 2017 Credit Facility are based on either (i) the then applicable base rate (as defined in the 2017 Credit Facility) as, for any day, a rate per annum (rounded upward, if necessary, to the next 1/100th of 1%) equal to the greater of (a) the prime rate published in the Wall Street Journal, (b) 1/2 of 1% in excess rate of the overnight Federal Funds Rate at any given time, (c) the one-month LIBOR rate commencing on such day plus 1.00%) and (d) 2%, or (ii) the then applicable LIBOR rate (as defined in the 2017 Credit Facility). The average interest rate was approximately 5.82%6.51% for 20182019 and was 5.31%5.71% for 2017.2018.

 

The 2017 Credit Facility is (i) guaranteed by each entity that guarantees the Company’s 2022 Notes on a pari passu basis with the guarantees of the Notes and (ii) secured on a pari passu basis with the Company’s 2022 Notes. The Company’s obligations under the 2017 Credit Facility are secured, subject to permitted liens and except for certain excluded assets (i) on a first priority basis by certain notes priority collateral, and (ii) on a second priority basis by collateral for the Company’s asset-backed line of credit.

 

In addition to any mandatory or optional prepayments, the Company is required to pay interest on the term loans (i) quarterly in arrears for the base rate loans, and (ii) on the last day of each interest period for LIBOR loans. Certain voluntary prepayments of the term loans during the first six months will require an additional prepayment premium. Beginning with the interest payment date occurring in June 2017 and ending in March 2023, the Company will be required to repay principal, to the extent then outstanding, equal to 1∕4 of 1% of the aggregate initial principal amount of all term loans incurred on the effective date of the 2017 Credit Facility. On December 19, 2018, upon drawing under the 2018 Credit Facility and MGM National Harbor Loan, the Company voluntarily prepaid approximately $20.0 million in principal on the 2017 Credit Facility. During the three months March 31, 2019 and 2018, the Company repaid $824,000 and $875,000, respectively, under the 2017 Credit Facility.

 

The 2017 Credit Facility contains customary representations and warranties and events of default, affirmative and negative covenants (in each case, subject to materiality exceptions and qualifications) which may be more restrictive than those governing the Notes. The 2017 Credit Facility also contains certain financial covenants, including a maintenance covenant requiring the Company’s interest expense coverage ratio (defined as the ratio of consolidated EBITDA to consolidated interest expense) to be greater than or equal to 1.25 to 1.00 and its total senior secured leverage ratio (defined as the ratio of consolidated net senior secured indebtedness to consolidated EBITDA) to be less than or equal to 5.85 to 1.00.

 

The net proceeds from the 2017 Credit Facility were used to prepay in full the Company’s previous senior secured credit facility and the agreement governing such credit facility (the “2015 Credit Facility”) was terminated on April 18, 2017. The Company recorded a loss on retirement of debt of approximately $7.1 million for the year ended December 31, 2017. This amount included a write-off of previously capitalized debt financing costs and original issue discount associated with the 2015 Credit Facility, and costs associated with the financing transactions.

During the three and six months ended June 30, 2018, the Company repaid $875,000 and approximately $1.8 million, respectively, under the 2017 Credit Facility. During the three months ended June 30, 2017, the Company repaid $875,000 under the 2017 Credit Facility.facility.

  

The 2017 Credit Facility contains affirmative and negative covenants that the Company is required to comply with, including:

 

(a)   maintaining an interest coverage ratio of no less than:

(a)maintaining an interest coverage ratio of no less than:
§1.25 to 1.00 on June 30, 2017 and the last day of each fiscal quarter thereafter.

 

(b)maintaining a senior leverage ratio of no greater than:
 20

(b)   maintaining a senior leverage ratio of no greater than:

§5.85 to 1.00 on June 30, 2017 and the last day of each fiscal quarter thereafter.

 

(c)   limitations on: 

(c)limitations on:
§liens;

§sale of assets;

§payment of dividends; and

§mergers.

   

As of June 30, 2018,March 31, 2019, the Company was in compliance with all of its financial covenants under the 2017 Credit Facility.

 

As of June 30, 2018,March 31, 2019, the Company had outstanding approximately $345.6$323.1 million on its 2017 Credit Facility. The original issue discount is being reflected as an adjustment to the carrying amount of the debt obligations and amortized to interest expense over the term of the credit facility using the effective interest rate method. The amortization of deferred financing costs was charged to interest expense for all periods presented. The amount of deferred financing costs included in interest expense for all instruments, for the three months ended June 30, 2018 and 2017, was approximately $718,000 and $816,000, respectively. The amount of deferred financing costs included in interest expense for all instruments, for the six months ended June 30, 2018 and 2017, was approximately $1.4 million and $2.2 million, respectively.

 

2022 Notes and 2015 Credit Facilities

 

On April 17, 2015, the Company closed a private offering of $350.0 million aggregate principal amount of 7.375% senior secured notes due 2022 (the “2022 Notes”). The 2022 Notes were offered at an original issue price of 100.0% plus accrued interest from April 17, 2015, and will mature on April 15, 2022. Interest on the 2022 Notes accrues at the rate of 7.375% per annum and is payable semiannually in arrears on April 15 and October 15, which commenced on October 15, 2015. The 2022 Notes are guaranteed, jointly and severally, on a senior secured basis by the Company’s existing and future domestic subsidiaries, including TV One.

Prior to its repayment with the 2017 Credit Facility, concurrently with the closing of the 2020 Notes, the Company had entered into the 2015 Credit Facility. The 2015 Credit Facility was scheduled to mature on December 31, 2018. At the Company’s election, the interest rate on borrowings under the 2015 Credit Facility was based on either (i) the then applicable base rate plus 3.5% (as defined in the 2015 Credit Facility) as, for any day, a rate per annum (rounded upward, if necessary, to the next 1/100th of 1%) equal to the greater of (a) the prime rate published in the Wall Street Journal, (b) a rate of 1/2 of 1% in excess rate of the overnight Federal Funds Rate at any given time, and (c) the one-month LIBOR commencing on such day plus 1.00%), or (ii) the then applicable LIBOR rate plus 4.5% (as defined in the 2015 Credit Facility). The average interest rate was approximately 5.32% for 2017 and 5.13% for 2016. Quarterly installments of 0.25%, or $875,000, of the principal balance on the term were are payable on the last day of each March, June, September and December beginning on September 30, 2015. During the six months ended June 30, 2017, the Company repaid $875,000 under the 2015 Credit Facility. The 2015 Credit Facility was terminated on April 18, 2017.


In connection with the closing of the 2022 Notes, and the 2015 Credit Facility, the Company and the guarantor parties thereto entered into a Fourth Supplemental Indenture to the indenture governing the 2020 Notes (as defined below). Pursuant to this Fourth Supplemental Indenture, TV One, which previously did not guarantee the 2020 Notes, became a guarantor under the 2020 Notes indentures. In addition, the transactions caused a “Triggering Event” (as defined in the 2020 Notes Indenture) and, as a result, the 2020 Notes became an unsecured obligation of the Company and the subsidiary guarantors and rank equal in right of payment with the Company’s other senior indebtedness.

 

The Company used the net proceeds from the 2022 Notes, along with term loan borrowings under the 2015 Credit Facility, to refinance a previous credit agreement, refinance certain TV One indebtedness, and finance the buyout of membership interests of Comcast in TV One and pay the related accrued interest, premiums, fees and expenses associated therewith.

 

The 2022 Notes are the Company’s senior secured obligations and rank equal in right of payment with all of the Company’s and the guarantors’ existing and future senior indebtedness, including obligations under the 2017 Credit Facility and the Company’s 2020 Notes (defined below).  The 2022 Notes and related guarantees are equally and ratably secured by the same collateral securing the 2017 Credit Facility and any other parity lien debt issued after the issue date of the 2022 Notes, including any additional notes issued under the Indenture, but are effectively subordinated to the Company’s and the guarantors’ secured indebtedness to the extent of the value of the collateral securing such indebtedness that does not also secure the 2022 Notes. Collateral includes substantially all of the Company’s and the guarantors’ current and future property and assets for accounts receivable, cash, deposit accounts, other bank accounts, securities accounts, inventory and related assets including the capital stock of each subsidiary guarantor. Finally, the Company also has the Comcast Note (defined below) which is a general but senior unsecured obligation of the Company.

 

21

On February 24, 2015, the Company entered into a letter of credit reimbursement and security agreement. As of June 30, 2018,March 31, 2019, the Company had letters of credit totaling $738,000$788,000 under the agreement for certain operating leases and certain insurance policies. Letters of credit issued under the agreement are required to be collateralized with cash.

 

Senior Subordinated Notes

 

On February 10, 2014, the Company closed a private placement offering of $335.0 million aggregate principal amount of 9.25% senior subordinated notes due 2020 (the “2020 Notes”). The 2020 Notes were offered at an original issue price of 100.0% plus accrued interest from February 10, 2014. The 2020 Notes mature on February 15, 2020. Interest accrues at the rate of 9.25% per annum and is payable semiannually in arrears on February 15 and August 15 in the initial amount of approximately $15.5 million, which commenced on August 15, 2014. Subsequent to the repurchase of portions of the 2020 Notes (as described below), the semiannual interest payment is approximately $11.6 million. The 2020 Notes are guaranteed by certain of the Company’s existing and future domestic subsidiaries and any other subsidiaries that guarantee the existing senior credit facility or any of the Company’s other syndicated bank indebtedness or capital markets securities. The Company used the net proceeds from the offering to repurchase or otherwise redeem all of the amounts then outstanding under its previous notes and to pay the related accrued interest, premiums, fees and expenses associated therewith. During the quarter ended December 31, 2018, in conjunction with entering into the 2018 Credit Facility and MGM National Harbor Loan, the Company repurchased approximately $243.0 million of its 2020 Notes at an average price of approximately 100.88% of par. During the quarter ended December 31, 2018, the Company recorded a loss on retirement of debt of approximately $2.8 million. This amount includes a write-off of previously capitalized debt financing costs and original issue discount associated with the 2020 Notes in the amount of $649,000 and also includes approximately $2.1 million associated with the premium paid to the bondholders. During the quarter ended September 30, 2018, the Company repurchased approximately $5.0 million of its 2020 Notes at an average price of approximately 97.25% of par. The Company recorded a net gain on retirement of debt of $120,000 for the quarter ended September 30, 2018. During the quarter ended June 30, 2018, the Company repurchased approximately $14.0 million of its 2020 Notes at an average price of approximately 95.125% of par. The Company recorded a net gain on retirement of debt of $626,000 for the quarter ended June 30, 2018. During the quarter ended March 31, 2018, the Company repurchased approximately $11 million of its 2020 Notes at an average price of approximately 97.375% of par. The Company recorded a net gain on retirement of debt of $239,000 for the quarter ended March 31, 2018. During the quarter ended December 31, 2017, the Company repurchased approximately $20 million of its 2020 Notes at an average price of approximately 93.625% of par. The Company recorded a net gain on retirement of debt of approximately $1.2 million for the quarter ended December 31, 2017. During the quarter ended September 30, 2017, the Company repurchased approximately $20 million of its 2020 Notes at an average price of approximately 96% of par. The Company recorded a net gain on retirement of debt of $690,000 for the quarter ended September 30, 2017. As of June 30, 2018March 31, 2019 and December 31, 2017,2018, the Company had approximately $250.0 million$0 and $275.0$2.0 million, respectively, of our 2020 Notes outstanding.

On January 17, 2019, the Company announced that it had given the required notice under the indenture governing its 2020 Notes to redeem for cash all outstanding aggregate principal amount of its Notes to the extent outstanding on February 15, 2019 (the "Redemption Date").  The redemption price for the Notes will be 100.0% of the principal amount of the Notes, plus accrued and unpaid interest to the Redemption Date. On February 15, 2019, the remaining 2020 Notes were redeemed in full.

 

The indenture that governs the 2020 Notes contains covenants that restrict, among other things, the ability of the Company to incur additional debt, purchase common stock, make capital expenditures, make investments or other restricted payments, swap or sell assets, engage in transactions with related parties, secure non-senior debt with assets, or merge, consolidate or sell all or substantially all of its assets.

The Company conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 2022 Notes, 2020 Notes and the Company’s obligations under the 2017 Credit Facility.


Comcast Note

 

The Company also hashad outstanding a senior unsecured promissory note in the aggregate principal amount of approximately $11.9 million due to Comcast (“Comcast Note”). The Comcast Note bears interest at 10.47%, is payable quarterly in arrears, and the entire principal amount is due on April 17, 2019. The Company is contractually required to retire the Comcast Note in February 2019 upon redemption of the remaining 2020 Notes. On February 15, 2019, upon redemption of the remaining 2020 Notes, the Comcast Note was paid in full and retired.

 

Asset-Backed Credit Facility

 

On April 21, 2016, the Company entered into a senior credit agreement governing an asset-backed credit facility (the “ABL Facility”) among the Company, the lenders party thereto from time to time and Wells Fargo Bank National Association, as administrative agent (the “Administrative Agent”). The ABL Facility provides for $25 million in revolving loan borrowings in order to provide for the working capital needs and general corporate requirements of the Company. As of June 30, 2018March 31, 2019, the Company had approximately $3.0 million in borrowings outstanding on its ABL Facility and as of December 31, 2017,2018, the Company did not have any borrowings outstanding on its ABL Facility.

 

At the Company’s election, the interest rate on borrowings under the ABL Facility are based on either (i) the then applicable margin relative to Base Rate Loans (as defined in the ABL Facility) or (ii) the then applicable margin relative to LIBOR Loans (as defined in the ABL Facility) corresponding to the average availability of the Company for the most recently completed fiscal quarter.

 

Advances under the ABL Facility are limited to (a) eighty-five percent (85%) of the amount of Eligible Accounts (as defined in the ABL Facility), less the amount, if any, of the Dilution Reserve (as defined in the ABL Facility), minus (b) the sum of (i) the Bank Product Reserve (as defined in the ABL Facility), plus (ii) the aggregate amount of all other reserves, if any, established by Administrative Agent.

 

All obligations under the ABL Facility are secured by first priority lien on all (i) deposit accounts (related to accounts receivable), (ii) accounts receivable, (iii) all other property which constitutes ABL Priority Collateral (as defined in the ABL Facility).  The obligations are also secured by all material subsidiaries of the Company.

 

22

The ABL Facility matures on the earlier to occur of: (a) the date that is five (5) years from the effective date of the ABL Facility and (b) the date that is thirty (30) days prior to the earlier to occur of (i) the "Term Loan Maturity Date" of the Company’s existing term loan, and (ii) the "Stated Maturity" of the Company’s existing notes.  As of the effective date of the ABL Facility, the "Term Loan Maturity Date" is December 31, 2018, and the "Stated Maturity" is April 15, 2022. The current ABL Facility maturity date is April 21, 2021.

 

Finally, the ABL Facility is subject to the terms of the Intercreditor Agreement (as defined in the ABL Facility) by and among the Administrative Agent, the administrative agent for the secured parties under the Company’s term loan and the trustee and collateral trustee under the senior secured notes indenture.

 

The Company conducts a portion of its business through its subsidiaries. Certain of the Company’s subsidiaries have fully and unconditionally guaranteed the Company’s 2022 Notes, the Company’s obligations under the 2017 Credit Facility, and the obligations under the 2018 Credit Facility. The Company’s interest in the MGM National Harbor Casino fully guarantees the MGM National Harbor Loan. 


Future Minimum Principal Payments

 

Future scheduled minimum principal payments of debt as of June 30, 2018,March 31, 2019, are as follows:

 

  

Comcast Note

due April 2019

  

2017

Credit Facility

  

9.25% Senior

Subordinated

Notes due

February 2020

  

7.375% Senior

Secured Notes due

April 2022

  Total 
  (In thousands) 
July – December 2018 $—  $1,750  $—  $—  $1,750 
2019  11,872   3,500   —   —   15,372 
2020  —   3,500   250,000   —   253,500 
2021  —   3,500   —   —   3,500 
2022  —   3,500   —   350,000   353,500 
2023 and thereafter  —   329,875   —   —   329,875 
Total Debt $11,872  $345,625  $250,000  $350,000  $957,497 

  2018
 Credit
Facility		  MGM
National
Harbor Loan		  Asset-backed
Credit Facility		  2017
 Credit
 Facility		  7.38%
Senior
Secured
Notes
 due April
2022		  Total 
  (In thousands) 
April - December 2019 $10,800   —   —  $2,473  $—  $13,273 
2020  20,929   —   —   3,297   —   24,226 
2021  19,200   —   3,000   3,297   —   25,497 
2022  130,509   50,549   —   3,297   350,000   534,355 
2023  —   —   —   310,738   —   310,738 
2024 and thereafter  —   —   —   —   —   — 
Total Debt $181,438  $50,549   3,000  $323,102  $350,000  $908,089 

The Company routinely monitors its long-term debt profile and upcoming debt maturities and may from time to time seek to opportunistically de-lever by retiring portions of its outstanding debt securities. This de-levering may take the form of debt repurchases or exchanges for other securities, in open-market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved in any such transactions may vary and such transaction, individually or in the aggregate may be material.

 

5.INCOME TAXES:

 

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “2017 Tax Act”). The 2017 Tax Act introduced significant changes to U.S. income tax law, most notably a reduction of the U.S. corporate income tax rate from 35 percent to 21 percent for tax years beginning after December 31, 2017. The 2017 Tax Act contains additional prospective changes beginning in 2018, which impose new limitations on the deductibility of executive compensation and interest expense.

The Company recognized the income tax effects of the 2017 Tax Act in the financial statements included in its 2017 Annual Report on Form 10-K in accordance with Staff Accounting Bulletin No. 118, which provides SEC staff guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the 2017 Tax Act was signed into law. During the three and six months ended June 30, 2018, the Company did not recognize any changes to the provisional amounts recorded in its 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act as the Company is continuing to collect the information necessary to complete those calculations. The accounting for the tax effects of the 2017 Tax Act will be completed later in 2018.

The Company uses the estimated annual effective tax rate method under ASC 740-270, “Interim Reporting” to calculate the provision for income taxes. The Company recorded a benefit fromprovision for income taxes of approximately $2.7$2.2 million on a pre-tax loss from continuing operations of approximately $1.4$4.3 million for the sixthree months ended June 30, 2018,March 31, 2019, which results in a tax rate of approximately 200.6%(52.4)%. This tax rate is based on an estimated annual effective rate of (95.0)%29.4%. The Company recorded discrete tax provision expense of approximately $3.5 million primarily attributabledue to the limitation of interest expense which results in a deferred tax benefit that is expected to be recognizable at the endan adjustment of the year, and discrete tax benefits of approximately $4.0 million relatedstate net operating losses estimated at December 31, 2018, for which the Company expects to statutory rate changes and state conformity to the 2017 Tax Act.recognize in future periods.

 

As of June 30, 2018, the Company continues to maintain a valuation allowance on certain of its deferred tax assets primarily related to net operating losses generated before January 1, 2018. In accordance with ASC 740, “Accounting“Accounting for Income Taxes”Taxes”, the Company continually assessescontinues to evaluate the adequacyrealizability of the valuation allowanceits net deferred tax assets by assessing the likely future tax consequences of events that have been realized in the Company’s financial statements or tax returns, tax planning strategies, and future profitability. As of June 30, 2018,March 31, 2019, the Company does not believebelieves it is more likely than not that these deferred tax assets will be realized. As part of the assessment, the Company has not included the deferred tax liability related to indefinite-lived intangible assets as a source of future taxable income to support realization of these deferred tax assets, which have a finite carryforward period.

23

 

The Company is subject to the continuous examination of our income tax returns by the IRS and other domestic tax authorities. We believe that an adequate provision has been made for any adjustments that may result from tax examinations. The Company does not currently anticipate that the total amounts of unrecognized tax benefits will significantly change within the next twelve months.

 

6.STOCKHOLDERS’ EQUITY:

 

Stock Repurchase Program

 

From time to time, the Company’s Board of Directors has authorized repurchases of shares of the Company’s Class A and Class D common stock. On May 5, 2018, the Company authorized repurchases of up to $5.0 million through December 31, 2018. In addition, on December 20, 2018, the Company authorized repurchases up to $1.0 million through December 31, 2019. As of March 31, 2019, the Company had $54,000 remaining under its most recent and open authorization with respect to its Class A and Class D common stock. Under open authorizations, repurchases may be made from time to time in the open market or in privately negotiated transactions in accordance with applicable laws and regulations. Shares are retired when repurchased. The timing and extent of any repurchases will depend upon prevailing market conditions, the trading price of the Company’s Class A and/or Class D common stock and other factors, and subject to restrictions under applicable law. When in effect, the Company executes upon stock repurchase programs in a manner consistent with market conditions and the interests of the stockholders, including maximizing stockholder value. During the three months ended June 30, 2018,March 31, 2019, the Company repurchased 23222,380 shares of Class A common stock in the amount of $50,000 at an average price of $2.26$2.24 per share and repurchased 760,113369,000 shares of Class D common stock in the amount of approximately $1.6 million$755,000 at an average price of $2.13 per share.  During the six months ended June 30, 2018, the Company repurchased 232 shares of Class A common stock at an average price of $2.26 per share and repurchased 1,760,568 shares of Class D common stock in the amount of approximately $3.5 million at an average price of $2.01$2.05 per share.  During the three and six months ended June 30, 2017,March 31, 2018, the Company did not repurchase any Class A common stock and repurchased 1,054,2901,000,455 shares of Class D common stock in the amount of approximately $2.1$1.9 million at an average price of $1.99$1.93 per share.


In addition, the Company has limited but ongoing authority to purchase shares of Class D common stock (in one or more transactions at any time there remain outstanding grants) under the Company’s 2009 Stock Plan (as defined below) to satisfy any employee or other recipient tax obligations in connection with the exercise of an option or a share grant under the 2009 Stock Plan, to the extent that the Company has capacity under its financing agreements (i.e., its current credit facilities and indentures) (each a “Stock Vest Tax Repurchase”). During the three months ended June 30,March 31, 2019, the Company executed a Stock Vest Tax Repurchase of 852,000 shares of Class D Common Stock in the amount of approximately $1.6 million at an average price of $1.94 per share. During the three months ended March 31, 2018, the Company executed a Stock Vest Tax Repurchase of 10,646 shares of Class D Common Stock in the amount of $22,000 at an average price of $2.02 per share. During the three months ended June 30, 2017, the Company executed a Stock Vest Tax Repurchase of 7,699 shares of Class D Common Stock in the amount of $23,000 at an average price of $3.00 per share. During the six months ended June 30, 2018, the Company executed a Stock Vest Tax Repurchase of 578,437567,791 shares of Class D Common Stock in the amount of approximately $1.0 million at an average price of $1.80 per share. During the six months ended June 30, 2017, the Company executed a Stock Vest Tax Repurchase of 317,103 shares of Class D Common Stock in the amount of $919,000 at an average price of $2.90 per share.

 

Stock Option and Restricted Stock Grant Plan

 

Our stock option and restricted stock plan currently in effect was originally approved by the stockholders at the Company’s annual meeting on December 16, 2009 (“the 2009 Stock Plan”).  The Company had the authority to issue up to 8,250,000 shares of Class D Common Stock under the 2009 Stock Plan.  Since its original approval, from time to time, the Board of Directors adopted and, as required, our stockholders approved certain amendments to and restatement of the 2009 Stock Plan (the “Amended and Restated 2009 Stock Plan”). The amendments under the Amended and Restated 2009 Stock Plan primarily affected (i) the number of shares with respect to which options and restricted stock grants may be granted under the 2009 Stock Plan and (ii) the maximum number of shares that can be awarded to any individual in any one calendar year.  Most recently, on April 13, 2015, the Board of Directors adopted, and our stockholders approved on June 2, 2015, an amendment that replenished the authorized plan shares, increasing the number of shares of Class D common stock available for grant back up to 8,250,000 shares.  As of June 30, 2018, 2,796,196March 31, 2019, 2,085,957 shares of Class D common stock were available for grant under the Amended and Restated 2009 Stock Plan.

On October 26, 2015, the Compensation Committee (“Compensation Committee”) of the Board of Directors of the Company awarded David Kantor, Chief Executive Officer, Radio Division, 100,000 restricted shares of the Company’s Class D common stock, and stock options to purchase 300,000 shares of the Company’s Class D common stock. The grants were effective November 5, 2015, and will vest in approximately equal 1/3 tranches on each of November 5, 2016, November 5, 2017, and November 5, 2018.

On August 7, 2017, the Compensation Committee awarded Catherine Hughes, Chairperson, 449,630 restricted shares of the Company’s Class D common stock, and stock options to purchase 199,836 shares of the Company’s Class D common stock. The grants were effective August 7, 2017, and vested on January 5, 2018.

24

 

On August 7, 2017, the Compensation Committee awarded Catherine Hughes, Chairperson, 474,609 restricted shares of the Company’s Class D common stock, and stock options to purchase 210,937 shares of the Company’s Class D common stock. The grants were effective January 5, 2018, and vestvested on January 5, 2019.

On August 7, 2017, the Compensation Committee awarded Alfred Liggins, Chief Executive Officer and President, 749,383 restricted shares of the Company’s Class D common stock, and stock options to purchase 333,059 shares of the Company’s Class D common stock. The grants were effective August 7, 2017, and vested on January 5, 2018.

 

On August 7, 2017, the Compensation Committee awarded Alfred Liggins, Chief Executive Officer and President, 791,015 restricted shares of the Company’s Class D common stock, and stock options to purchase 351,562 shares of the Company’s Class D common stock. The grants were effective January 5, 2018, and vestvested on January 5, 2019.

On August 7, 2017, the Compensation Committee awarded Peter Thompson, Chief Financial Officer, 256,579 restricted shares of the Company’s Class D common stock, and stock options to purchase 114,035 shares of the Company’s Class D common stock. The grants were effective August 7, 2017, and vested on January 5, 2018.

 

On August 7, 2017, the Compensation Committee awarded Peter Thompson, Chief Financial Officer, 270,833 restricted shares of the Company’s Class D common stock, and stock options to purchase 120,370 shares of the Company’s Class D common stock. The grants were effective January 5, 2018, and vestvested on January 5, 2019.

 

Also on August 7, 2017, the Compensation Committee awarded 575,262 shares of restricted stock and 470,000 stock options to certain employees pursuant to the Company’s long-term incentive plan. The grants were effective August 7, 2017. 470,000 shares of restricted stock and 470,000 stock options will vest in three installments, with the first installment of 33% vesting on January 5, 2018, and the second installment vesting on January 5, 2019, and the remaining installment vesting on January 5, 2020. 105,262 shares of restricted stock immediately vested on August 7, 2017.

 

Pursuant to the terms of the Amended and Restated 2009 Stock Plan, and subject to the Company’s insider trading policy, a portion of each recipient’s vested shares may be sold in the open market for tax purposes on or about the vesting dates.

On October 2, 2017, Karen Wishart, our current Chief Administrative Officer, as part of her employment agreement, received an equity grant of 37,500 shares of the Company's Class D common stock as well as a grant of options to purchase 37,500 shares of the Company's Class D common stock.  The grants vest in equal increments on each of October 2, 2018, October 2, 2019 and October 2, 2020.

 

Stock-based compensation expense for the three months ended June 30,March 31, 2019 and 2018, was $511,000 and 2017, was approximately $1.1$1.4 million, and $158,000, respectively and for the six months ended June 30, 2018 and 2017, was approximately $2.5 million and $291,000, respectively.

 

The Company did not grant stock options during the three months ended June 30, 2018March 31, 2019 and granted 732,869 stock options during the sixthree months ended June 30,March 31, 2018. The Companydid not grant stock options during the six months endedJune 30, 2017.


Transactions and other information relating to stock options for the sixthree months ended June 30, 2018,March 31, 2019, are summarized below:

 

  Number of
Options		  Weighted-Average
Exercise Price		  Weighted-Average
Remaining
Contractual Term (In
Years)		  Aggregate
Intrinsic
Value		 
Outstanding at December 31, 2017  4,804,000  $1.89   4.90  $795,000 
Grants  733,000  $1.81         
Exercised  58,000  $1.41         
Forfeited/cancelled/expired/settled  1,825,000   $1.41         
Balance as of June 30, 2018  3,654,000  $2.11   7.73  $708,000 
Vested and expected to vest at June 30, 2018  3,529,000  $2.12   7.68  $681,000 
Unvested at June 30, 2018  1,206,000  $1.86   9.21  $295,000 
Exercisable at June 30, 2018  2,448,000  $2.24   7.00  $412,000 
  Number of
Options		  Weighted-Average
Exercise Price		  Weighted-Average
Remaining
Contractual Term (In
Years)		  Aggregate
Intrinsic
Value		 
Outstanding at December 31, 2018  3,569,000  $2.12   7.19  $130,000 
Grants  —  $—         
Exercised  15,000  $1.90         
Forfeited/cancelled/expired/settled  5,000  $1.90         
Balance as of March 31, 2019  3,549,000  $2.12   6.94  $462,000 
Vested and expected to vest at March 31, 2019  3,518,000  $2.12   6.92  $458,000 
Unvested at March 31, 2019  187,000  $1.90   8.42  $19,000 
Exercisable at March 31, 2019  3,362,000  $2.13   6.85  $443,000 

 

The aggregate intrinsic value in the table above represents the difference between the Company’s stock closing price on the last day of trading during the sixthree months ended June 30, 2018,March 31, 2019, and the exercise price, multiplied by the number of shares that would have been received by the holders of in-the-money options had all the option holders exercised their options on June 30, 2018.March 31, 2019. This amount changes based on the fair market value of the Company’s stock.

 

There were 58,19015,000 options exercised during the three and six months ended June 30,March 31, 2019. There were no options exercised during the three months ended March 31, 2018. No839,530 options vested during the three months ended June 30, 2018March 31, 2019 and 717,902 options vested during the six months ended June 30, 2018. There were no options exercised and no831,937 options vested during the three and six months ended June 30, 2017.March 31, 2018.

25

 

As of June 30, 2018, $849,000March 31, 2019, $172,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of eight10 months. The weighted-average fair value per share of shares underlying stock options was $1.58$1.59 at June 30, 2018.March 31, 2019.

 

The Company granted 93,024 and 1,758,428780,239 shares of restricted stock during the three and six months ended June 30, 2018, respectively. The CompanyMarch 31, 2019 and granted 93,0241,665,404 shares of restricted stock during the three and six months ended June 30, 2017. Each of the four non-executive directors received 23,256 shares of restricted stock or $50,000 worth of restricted stock based upon the closing price of the Company’s Class D common stock on June 15,March 31, 2018.

 

Transactions and other information relating to restricted stock grants for the sixthree months ended June 30, 2018,March 31, 2019, are summarized below:

 

 Shares  

Average

Fair Value

at Grant

Date

  Shares  

Average

Fair Value

at Grant

Date

 
Unvested at December 31, 2017  2,303,000  $1.94 
Unvested at December 31, 2018  2,124,000  $1.85 
Grants  1,758,000  $1.83   780,000  $2.13 
Vested  (1,769,000) $1.92   (2,453,000) $1.91 
Forfeited/cancelled/expired  —  $—   (32,000) $2.41 
Unvested at June 30, 2018  2,292,000  $1.87 
Unvested at March 31, 2019  419,000  $2.01 

 

Restricted stock grants were and are included in the Company’s outstanding share numbers on the effective date of grant. As of June 30, 2018, approximately $2.7 millionMarch 31, 2019, $535,000 of total unrecognized compensation cost related to restricted stock grants is expected to be recognized over the weighted-average period of 89 months.

 

7.SEGMENT INFORMATION:

 

The Company has four reportable segments: (i) radio broadcasting; (ii) Reach Media; (iii) digital; and (iv) cable television. These segments operate in the United States and are consistently aligned with the Company’s management of its businesses and its financial reporting structure. Effective January 1, 2017, the Company changed its reportable segment disclosures. Along with the results of Interactive One, all digital components from our reportable segments are a part of a newly formed reportable segment called “Digital”. This new reportable segment better reflects the manner in which we manage our business and better reflects our operational structure.

 

The radio broadcasting segment consists of all broadcast results of operations. The Reach Media segment consists of the results of operations for the Tom Joyner Morning Show and related activities and operations of other syndicated shows. The digital segment includes the results of our online business, including the operations of Interactive One, as well as the digital components of our other reportable segments. The cable television segment consists of the Company’s cable TV operation, including TV One’s and CLEO TV’s results of operations. Corporate/Eliminations represents financial activity associated with our corporate staff and offices and intercompany activity among the four segments.


Operating loss or income represents total revenues less operating expenses, depreciation and amortization, and impairment of long-lived assets. Intercompany revenue earned and expenses charged between segments are recorded at estimated fair value and eliminated in consolidation.

 

The accounting policies described in the summary of significant accounting policies in Note 1 –Organization and Summary of Significant Accounting Policies are applied consistently across the segments.

 

26

Detailed segment data for the three months ended June 30,March 31, 2019 and 2018, and 2017, is presented in the following tables:

 

  

Three Months Ended

June 30,

 
  2018  2017 
  (Unaudited) 
  (In thousands) 
Net Revenue:        
Radio Broadcasting $46,452  $48,161 
Reach Media  16,380   17,528 
Digital  6,559   6,740 
Cable Television  46,828   45,369 
Corporate/Eliminations*  (1,013)  (160)
Consolidated $115,206  $117,638 
         
Operating Expenses (including stock-based compensation and excluding depreciation and amortization and impairment of long-lived assets):        
Radio Broadcasting $28,975  $29,177 
Reach Media  14,458   15,860 
Digital  9,023   8,217 
Cable Television  22,610   24,118 
Corporate/Eliminations  7,079   6,970 
Consolidated $82,145  $84,342 
         
Depreciation and Amortization:        
Radio Broadcasting $848  $939 
Reach Media  63   52 
Digital  477   463 
Cable Television  6,556   6,568 
Corporate/Eliminations  304   410 
Consolidated $8,248  $8,432 
         
Impairment of Long-Lived Assets:        
Radio Broadcasting $—  $12,756 
Reach Media  —   — 
Digital  —   — 
Cable Television  —   — 
Corporate/Eliminations  —   — 
Consolidated $—  $12,756 
         
Operating income (loss):        
Radio Broadcasting $16,629  $5,289 
Reach Media  1,859   1,616 
Digital  (2,941)  (1,940)
Cable Television  17,662   14,683 
Corporate/Eliminations  (8,396)  (7,540)
Consolidated $24,813  $12,108 
         
* Intercompany revenue included in net revenue above is as follows:        
         
Radio Broadcasting $(1,013) $(160)
         
Capital expenditures by segment are as follows:        
         
Radio Broadcasting $152  $645 
Reach Media  12   22 
Digital  380   359 
Cable Television  57   107 
Corporate/Eliminations  563   1,156 
Consolidated $1,164  $2,289 

  Three Months Ended
March 31,		 
  2019  2018 
  (Unaudited) 
  (In thousands) 
Net Revenue:        
Radio Broadcasting $36,749  $39,513 
Reach Media  6,973   6,520 
Digital  7,437   8,146 
Cable Television  47,823   46,186 
Corporate/Eliminations*  (533)  (744)
Consolidated $98,449  $99,621 
         
Operating Expenses (including stock-based compensation and excluding depreciation and amortization and impairment of long-lived assets):        
Radio Broadcasting $26,887  $27,241 
Reach Media  6,352   6,501 
Digital  7,545   10,445 
Cable Television  25,976   26,666 
Corporate/Eliminations  7,298   6,609 
Consolidated $74,058  $77,462 
         
Depreciation and Amortization:        
Radio Broadcasting $869  $870 
Reach Media  59   63 
Digital  461   476 
Cable Television  6,575   6,557 
Corporate/Eliminations  310   322 
Consolidated $8,274  $8,288 
         
Impairment of Long-Lived Assets:        
Radio Broadcasting $—  $6,556 
Reach Media  —   — 
Digital  —   — 
Cable Television  —   — 
Corporate/Eliminations  —   — 
Consolidated $—  $6,556 
         
Operating income (loss):        
Radio Broadcasting $8,993  $4,846 
Reach Media  562   (44)
Digital  (569)  (2,775)
Cable Television  15,272   12,963 
Corporate/Eliminations  (8,141)  (7,675)
Consolidated $16,117  $7,315 

27


* Intercompany revenue included in net revenue above is as follows:

  

Six Months Ended

June 30,

 
  2018  2017 
  (Unaudited) 
  (In thousands) 
Net Revenue:        
Radio Broadcasting $85,965  $87,898 
Reach Media  22,899   25,191 
Digital  14,705   12,246 
Cable Television  93,014   93,924 
Corporate/Eliminations*  (1,756)  (332)
Consolidated $214,827  $218,927 
         
Operating Expenses (including stock-based compensation and excluding depreciation and amortization and impairment of long-lived assets):        
Radio Broadcasting $56,216  $55,494 
Reach Media  20,959   23,774 
Digital  19,467   14,862 
Cable Television  49,276   53,305 
Corporate/Eliminations  13,689   13,431 
Consolidated $159,607  $160,866 
         
Depreciation and Amortization:        
Radio Broadcasting $1,718  $1,896 
Reach Media  126   106 
Digital  953   804 
Cable Television  13,113   13,129 
Corporate/Eliminations  626   809 
Consolidated $16,536  $16,744 
         
Impairment of Long-Lived Assets:        
Radio Broadcasting $6,556  $12,756 
Reach Media  —   — 
Digital  —   — 
Cable Television  —   — 
Corporate/Eliminations  —   — 
Consolidated $6,556  $12,756 
         
Operating income (loss):        
Radio Broadcasting $21,475  $17,752 
Reach Media  1,814   1,311 
Digital  (5,715)  (3,420)
Cable Television  30,625   27,490 
Corporate/Eliminations  (16,071)  (14,572)
Consolidated $32,128  $28,561 
         
* Intercompany revenue included in net revenue above is as follows:        
         
Radio Broadcasting $(1,756) $(332)
         
Capital expenditures by segment are as follows:        
         
Radio Broadcasting $569  $1,670 
Reach Media  46   68 
Digital  760   545 
Cable Television  99   203 
Corporate/Eliminations  604   1,262 
Consolidated $2,078  $3,748 

28

  June 30, 2018  December 31, 2017 
  (Unaudited)    
  (In thousands) 
Total Assets:        
Radio Broadcasting $735,797  $751,664 
Reach Media  37,152   39,928 
Digital  23,062   28,407 
Cable Television  427,071   435,031 
Corporate/Eliminations  67,334   61,725 
Consolidated $1,290,416  $1,316,755 

 

Radio Broadcasting8.$(533)$(744)

Capital expenditures by segment are as follows:

Radio Broadcasting $221  $417 
Reach Media  19   34 
Digital  318   380 
Cable Television  96   42 
Corporate/Eliminations  53   41 
Consolidated $707  $914 

  March 31, 2019  December 31, 2018 
  (Unaudited)    
  (In thousands) 
Total Assets:        
Radio Broadcasting $742,201  $717,400 
Reach Media  37,149   34,388 
Digital  27,182   24,389 
Cable Television  413,189   402,511 
Corporate/Eliminations  51,868   58,721 
Consolidated $1,271,589  $1,237,409 

8.COMMITMENTS AND CONTINGENCIES:

 

Royalty Agreements

 

The Company has historically entered into fixedMusical works rights holders, generally songwriters and variable fee music license agreements with performancepublishers, have been traditionally represented by performing rights organizations, including Broadcast Music, Inc. (“BMI”), the Society of European Stage Authors and Composers (“SESAC”) and,such as the American Society of Composers, Authors and Publishers (“ASCAP”).  Our BMI license expired December 31, 2016. The expiration was an industry wide issue. The Company has authorized the Radio, Broadcast Music, License Committee (the “RMLC”Inc. (“BMI”) to negotiate on its behalf with respect to its licenses with ASCAP, BMI and SESAC, includingInc. (“SESAC”).  The market for rights relating to musical works is changing rapidly. Songwriters and music publishers have withdrawn from the BMI license that expired December 31, 2016. While the RMLC continues to pursue resolution with BMI, the RMLC has advised operators to make payments to BMI as invoiced by BMI anticipating retroactive discount likely to be applied. In July 2017, the RMLC learned that the RMLC-Represented broadcasters were awarded a discount off of the SESAC license rate card. The fee reduction applies for the license period January 1, 2016 through December 31, 2018 and has retroactive application.  The RMLC negotiated a new 5 year agreement with ASCAP with a license term of January 1, 2017 through December 31, 2021.  In connection with all performancetraditional performing rights organization agreements, including SESAC,organizations, particularly ASCAP and BMI, the Company incurred expenses of approximately $2.0 million and $2.6 million during the three month periods ended June 30, 2018 and 2017, respectively, and incurred expenses of approximately $4.4 million and $4.2 million during the six month periods ended June 30, 2018 and 2017, respectively.  Finally, in 2016, a new performance rights organization,entities, such as Global Music Rights LLC (“GMR”), have been formed butto represent rights holders. These organizations negotiate fees with copyright users, collect royalties and distribute them to the scope of its repertory is not clearrights holders.  We have arrangements with ASCAP, SESAC and it is not clear that it licenses compositions that have not already been licensed by the other performance rights organizations.  To ensure licensing complianceGMR, and are in 2017,negotiations with BMI for a new agreement. If we have entered into a temporary license with GMR while the RMLC continuesare unable to pursuereach an agreement with BMI, a court will determine the royalty we will be required to pay BMI.  The changing market for a long term licensing solution.  This interim license continues through September 30, 2018.  GMR offered these interim license extensionsmusical works may have an adverse effect on us, including increasing our costs or limiting the same terms as each broadcaster’s prior interim license, except for the new end date. We anticipate further extensions of this temporary license until a permanent industry wide solution is put into effect.musical works available to us.

 

Other Contingencies

 

The Company has been named as a defendant in several legal actions arising in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.

 

Off-Balance Sheet Arrangements

 

On February 24, 2015, the Company entered into a letter of credit reimbursement and security agreement. As of June 30, 2018,March 31, 2019, the Company had letters of credit totaling $738,000$788,000 under the agreement for certain operating leases and certain insurance policies. Letters of credit issued under the agreement are required to be collateralized with cash.

 

Noncontrolling Interest Shareholders’ Put Rights

 

Beginning on January 1, 2018, the noncontrolling interest shareholders of Reach Media have had an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares (the “Put Right”).  Beginning in 2018, thisThis annual right is exercisable for a 30-day period beginning January 1 of each year. The purchase price for such shares may be paid in cash and/or registered Class D common stock of Urban One, at the discretion of Urban One. The noncontrolling interest shareholders of Reach Media did not exercise their Put Right for the 30-day period ending January 30, 2018.2019. Management, at this time, cannot reasonably determine the period when and if, the put right will be exercised by the noncontrolling interest shareholders.

29

9.SUBSEQUENT EVENTS:

 

Since JulyApril 1, 2018,2019 and through AugustMay 3, 2018,2019, the Company repurchased 418,027executed a Stock Vest Tax Repurchase of 6,368 shares of Class D common stock in the amount of $894,000$12,000 at an average price of $2.14$1.98 per shareshare. In addition, since April 1, 2019 and through May 3, 2019, the Company repurchased 3,63122,000 shares of Class AD common stock in the amount of $8,000$44,000 at an average price of $2.26$2.01 per share.

  

On July 3, 2018, the Company repurchased approximately $5 million of its 2020 Notes at an average price of approximately 97.25% of par. The Company routinely monitors its long-term debt profile and upcoming debt maturities and may from time to time seek to opportunistically de-lever by retiring portions of its outstanding debt securities. This de-levering may take the form of debt repurchases or exchanges for other securities, in open-market purchases, privately negotiated transactions or otherwise.  Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.  The amounts involved in any such transactions may vary and such transaction, individually or in the aggregate may be material.31 

On or about August 8, 2018, the Company will close on its previously announced sale of the assets of one of its Detroit, Michigan, radio stations, WPZR-FM (102.7 FM), to Educational Media Foundation, of California, for total consideration of approximately $12.7 million. As part of the deal, the Company will also receive 3 FM translators that service the Detroit metropolitan area, and these signals will be combined with its existing FM translator to multicast the Detroit Praise Network.

On or about August 9, 2018, the Company will close on its previously announced acquisition of the assets of the radio station The Team 980 (WTEM 980 AM) from Red Zebra Broadcasting. Upon closing, the Company will also enter into an agreement with the Washington Redskins to ensure that all Redskins games, as well as pregame and postgame programming, will remain on The Team 980.

30

 

 

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

 

The following information should be read in conjunction with “Selected Financial Data” and the Consolidated Financial Statements and Notes thereto included elsewhere in this report and the audited financial statements and Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

 

Introduction

 

Revenue

 

Within our core radio business, we primarily derive revenue from the sale of advertising time and program sponsorships to local and national advertisers on our radio stations. Advertising revenue is affected primarily by the advertising rates our radio stations are able to charge, as well as the overall demand for radio advertising time in a market. These rates are largely based upon a radio station’s audience share in the demographic groups targeted by advertisers, the number of radio stations in the related market, and the supply of, and demand for, radio advertising time. Advertising rates are generally highest during morning and afternoon commuting hours.

 

Net revenue consists of gross revenue, net of local and national agency and outside sales representative commissions. Agency and outside sales representative commissions are calculated based on a stated percentage applied to gross billing.

 

The following chart shows the percentage of consolidated net revenue generated by each reporting segment.

 

 

For The Three Months

Ended June 30,

 

For The Six Months

Ended June 30,

  For The Three Months
Ended March 31,		 
 2018 2017 2018 2017  2019  2018 
              
Radio broadcasting segment 40.3% 40.9% 40.0% 40.1%  37.3%  39.7%
                 
Reach Media segment 14.2% 14.9% 10.7% 11.5%  7.1%  6.5%
                 
Digital segment 5.7% 5.7% 6.8% 5.6%  7.5%  8.2%
                 
Cable television segment 40.6% 38.6% 43.3% 42.9%  48.6%  46.4%
                 
Corporate/eliminations (0.8)% (0.1)% (0.8)% (0.1)%  (0.5)%  (0.8)%

 

The following chart shows the percentages generated from local and national advertising as a subset of net revenue from our core radio business.

 

 

For The Three Months

Ended June 30,

 

For The Six Months Ended

June 30,

  For The Three Months
Ended March 31,		 
 2018 2017 2018 2017  2019  2018 
              
Percentage of core radio business generated from local advertising 59.4% 57.5% 60.3% 60.2%  62.7%  61.4%
             
Percentage of core radio business generated from national advertising, including network advertising 35.4% 35.8% 35.9% 35.3%  35.5%  36.5%

 

National and local advertising also includes advertising revenue generated from our digital segment. The balance of net revenue from our radio segment was generated from tower rental income, ticket sales and revenue related to our sponsored events, management fees and other revenue.

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The following charts show our net revenue (and sources) for the three and six months ended June 30, 2018March 31, 2019 and 2017:2018:

 

  

Three Months Ended

June 30,

       
  2018  2017  $ Change  % Change 
  

(Unaudited)

(In thousands)

       
             
Net Revenue:                
Radio Advertising $48,880  $52,017  $(3,137)  (6.0)%
Political Advertising  1,182   731   451   61.7 
Digital Advertising  6,559   6,740   (181)  (2.7)
Cable Television Advertising  18,118   18,988   (870)  (4.6)
Cable Television Affiliate Fees  28,020   26,140   1,880   7.2 
Event Revenues & Other  12,447   13,022   (575)  (4.4)
Net Revenue (as reported) $115,206  $117,638  $(2,432)   (2.1)%

 

Six Months Ended

June 30,

      Three Months Ended
March 31,		       
 2018 2017 $ Change % Change  2019  2018  $ Change  % Change 
 

(Unaudited)

(In thousands)

      

(Unaudited)

(In thousands)

      
                  
Net Revenue:                         
Radio Advertising $93,502 $98,205 $(4,703) (4.8)% $42,439  $44,622  $(2,183)  (4.9)%
Political Advertising 1,383 974 409 42.0   123   200   (77)  (38.5)
Digital Advertising 14,705 12,246 2,459 20.1   7,437   8,146   (709)  (8.7)
Cable Television Advertising 37,054 40,129 (3,075) (7.7)  20,193   18,936   1,257   6.6 
Cable Television Affiliate Fees 55,269 53,463 1,806 3.4   27,475   27,250   225   0.8 
Event Revenues & Other  12,914  13,910  (996)  (7.2)  782   467   315   67.5 
Net Revenue (as reported) $214,827 $218,927 $(4,100)  (1.9)% $98,449  $99,621  $(1,172)  (1.2)%

 

In the broadcasting industry, radio stations and television stations often utilize trade or barter agreements to reduce cash expenses by exchanging advertising time for goods or services. In order to maximize cash revenue for our spot inventory, we closely manage the use of trade and barter agreements.

 

Within our digital segment, including Interactive One which generates the majority of the Company’s digital revenue, revenue is principally derived from advertising services on non-radio station branded, but Company-owned websites. Advertising services include the sale of banner and sponsorship advertisements. Advertising revenue is recognized either as impressions (the number of times advertisements appear in viewed pages) are delivered, when “click through” purchases are made, or ratably over the contract period, where applicable. In addition, Interactive One derives revenue from its studio operations, in which it provides third-party clients with publishing services including digital platforms and related expertise.  In the case of the studio operations, revenue is recognized primarily through fixed contractual monthly fees and/or as a share of the third party’s reported revenue.

 

TV OneOur cable television segment generates the Company’s cable television revenue, and derives its revenue principally from advertising and affiliate revenue. Advertising revenue is derived from the sale of television air time to advertisers and is recognized when the advertisements are run. TV OneOur cable television segment also derives revenue from affiliate fees under the terms of various affiliation agreements based upon a per subscriber fee multiplied by most recent subscriber counts reported by the applicable affiliate.

 

Reach Media primarily derives its revenue from the sale of advertising in connection with its syndicated radio shows, including the Tom Joyner Morning Show and our other syndicated programming assets, including the Rickey Smiley Morning Show, the Russ Parr Morning Show and the DL Hughley Show. Reach Media also operates www.BlackAmericaWeb.com, an African-American targeted news and entertainment website.  Additionally, Reach Media operates various other event-related activities.

32

 

Expenses

 

Our significant expenses are: (i) employee salaries and commissions; (ii) programming expenses; (iii) marketing and promotional expenses; (iv) rental of premises for office facilities and studios; (v) rental of transmission tower space; (vi) music license royalty fees; and (vii) content amortization. We strive to control these expenses by centralizing certain functions such as finance, accounting, legal, human resources and management information systems and, in certain markets, the programming management function. We also use our multiple stations, market presence and purchasing power to negotiate favorable rates with certain vendors and national representative selling agencies. In addition to salaries and commissions, major expenses for our internet business include membership traffic acquisition costs, software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with internet service provider (“ISP”) hosting services and other internet content delivery expenses. Major expenses for our cable television business include content acquisition and amortization, sales and marketing.

 

We generally incur marketing and promotional expenses to increase and maintain our audiences. However, because Nielsen reports ratings either monthly or quarterly, depending on the particular market, any changed ratings and the effect on advertising revenue tends to lag behind both the reporting of the ratings and the incurrence of advertising and promotional expenditures.


Measurement of Performance

 

We monitor and evaluate the growth and operational performance of our business using net income and the following key metrics:

 

(a) Net revenue:  The performance of an individual radio station or group of radio stations in a particular market is customarily measured by its ability to generate net revenue. Net revenue consists of gross revenue, net of local and national agency and outside sales representative commissions consistent with industry practice. Net revenue is recognized in the period in which advertisements are broadcast. Net revenue also includes advertising aired in exchange for goods and services, which is recorded at fair value, revenue from sponsored events and other revenue. Net revenue is recognized for our online business as impressions are delivered, as “click throughs” are made or ratably over contract periods, where applicable. Net revenue is recognized for our cable television business as advertisements are run, and during the term of the affiliation agreements at levels appropriate for the most recent subscriber counts reported by the affiliate, net of launch support.

 

(b) Broadcast and digital operating income:  Net income (loss) before depreciation and amortization, income taxes, interest expense, interest income, noncontrolling interests in income of subsidiaries, other (income) expense, corporate selling, general and administrative expenses, stock-based compensation, impairment of long-lived assets, (gain) loss on retirement of debt and gain on sale-leaseback, is commonly referred to in the radio broadcasting industry as “station operating income.” However, given the diverse nature of our business, station operating income is not truly reflective of our multi-media operation and, therefore, we now use the term broadcast and digital operating income. Broadcast and digital operating income is not a measure of financial performance under accounting principles generally accepted in the United States of America (“GAAP”). Nevertheless, broadcast and digital operating income is a significant measure used by our management to evaluate the operating performance of our core operating segments. Broadcast and digital operating income provides helpful information about our results of operations, apart from expenses associated with our fixed and long-lived intangible assets, income taxes, investments, impairment charges, debt financings and retirements, corporate overhead and stock-based compensation. Our measure of broadcast and digital operating income is similar to industry use of station operating income; however, it reflects our more diverse business and therefore is not completely analogous to “station operating income” or other similarly titled measures as used by other companies. Broadcast and digital operating income does not represent operating loss or cash flow from operating activities, as those terms are defined under GAAP, and should not be considered as an alternative to those measurements as an indicator of our performance.

 

(c) Broadcast and digital operating income margin:  Broadcast and digital operating income margin represents broadcast and digital operating income as a percentage of net revenue. Broadcast and digital operating income margin is not a measure of financial performance under GAAP. Nevertheless, we believe that broadcast and digital operating income margin is a useful measure of our performance because it provides helpful information about our profitability as a percentage of our net revenue. Broadcast and digital operating margin includes results from all four segments (radio broadcasting, Reach Media, digital and cable television).

 

(d)Adjusted EBITDA: Adjusted EBITDA consists of net (loss) income plus (1) depreciation and amortization, income taxes, interest expense, noncontrolling interests in income of subsidiaries, impairment of long-lived assets, stock-based compensation, (gain) loss on retirement of debt, gain on sale-leaseback, employment agreement, incentive plan award expenses and other compensation, contingent consideration from acquisition, severance-related costs, cost method investment income, less (2) other income and interest income. Net income before interest income, interest expense, income taxes, depreciation and amortization is commonly referred to in our business as “EBITDA.” Adjusted EBITDA and EBITDA are not measures of financial performance under GAAP. We believe Adjusted EBITDA is often a useful measure of a company’s operating performance and is a significant measure used by our management to evaluate the operating performance of our business because Adjusted EBITDA excludes charges for depreciation, amortization and interest expense that have resulted from our acquisitions and debt financing, our taxes, impairment charges, and gain on retirements of debt. Accordingly, we believe that Adjusted EBITDA provides useful information about the operating performance of our business, apart from the expenses associated with our fixed assets and long-lived intangible assets, capital structure or the results of our affiliated company. Adjusted EBITDA is frequently used as one of the measures for comparing businesses in the broadcasting industry, although our measure of Adjusted EBITDA may not be comparable to similarly titled measures of other companies, including, but not limited to the fact that our definition includes the results of all four of our operating segments (radio broadcasting, Reach Media, digital and cable television). Adjusted EBITDA and EBITDA do not purport to represent operating income or cash flow from operating activities, as those terms are defined under GAAP, and should not be considered as alternatives to those measurements as an indicator of our performance.

 

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34 

 

Summary of Performance

 

The tables below provide a summary of our performance based on the metrics described above:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2018  2017  2018  2017 
  (In thousands, except margin data) 
  (Unaudited) 
             
Net revenue $115,206  $117,638  $214,827  $218,927 
Broadcast and digital operating income  44,341   41,782   76,838   76,719 
Broadcast and digital operating income margin  38.5%  35.5%  35.8%  35.0%
Consolidated net income (loss) attributable to common stockholders $23,590  $802  $1,035  $(1,511)

  Three Months Ended March 31, 
  2019  2018 
  (In thousands, except margin data) 
       
Net revenue $98,449  $99,621 
Broadcast and digital operating income  34,491   32,497 
Broadcast and digital operating income margin  35.0%  32.6%
Consolidated net loss attributable to common stockholders $(6,663) $(22,555)

 

The reconciliation of net income (loss)loss to broadcast and digital operating income is as follows:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2018  2017  2018  2017 
  (In thousands, unaudited) 
       
Consolidated net income (loss) attributable to common stockholders $23,590  $802  $1,035  $(1,511)
Add back non-broadcast and digital operating income items included in consolidated net income (loss):                
Interest income  (17)  (45)  (161)  (148)
Interest expense  19,155   19,863   38,436   40,209 
(Benefit from) provision for income taxes  (15,581)  182   (2,741)  70 
Corporate selling, general and administrative, excluding stock-based compensation  10,155   8,328   19,117   18,367 
Stock-based compensation  1,125   158   2,501   291 
(Gain) loss on retirement of debt  (626)  7,083   (865)  7,083 
Gain on sale-leaseback  —   (14,411)  —   (14,411)
Other income, net  (2,014)  (1,574)  (3,915)  (2,895)
Depreciation and amortization  8,248   8,432   16,536   16,744 
Impairment of long-lived assets  —   12,756   6,556   12,756 
Noncontrolling interests in income of subsidiaries  306   208   339   164 
Broadcast and digital operating income $44,341  $41,782  $76,838  $76,719 

  Three Months Ended
March 31,		 
  2019  2018 
  (In thousands) 
Consolidated net loss attributable to common stockholders $(6,663) $(22,555)
Add back non-broadcast and digital operating income items included in consolidated net loss:        
Interest income  (23)  (144)
Interest expense  22,151   19,281 
Provision for income taxes  

2,248

   12,840 
Corporate selling, general and administrative, excluding stock-based compensation  9,589   8,962 
Stock-based compensation  511   1,376 
Gain on retirement of debt  —   (239)
Other income, net  (1,721)  (1,901)
Depreciation and amortization  8,274   8,288 
Noncontrolling interests in income of subsidiaries  125   33 
Impairment of long-lived assets  —   6,556 
Broadcast and digital operating income $34,491  $32,497 

 

The reconciliation of net income (loss)loss to adjusted EBITDA is as follows:

 

  Three Months Ended June 30,  Six Months Ended June 30, 
  2017  2016  2017  2016 
  (In thousands, unaudited) 
Adjusted EBITDA reconciliation:                
Consolidated net income (loss) attributable to common stockholders, as reported $23,590  $802  $1,035  $(1,511)
Add back non-broadcast and digital operating income items included in consolidated net income (loss):                
Interest income  (17)  (45)  (161)  (148)
Interest expense  19,155   19,863   38,436   40,209 
(Benefit from) provision for income taxes  (15,581)  182   (2,741)  70 
Depreciation and amortization  8,248   8,432   16,536   16,744 
EBITDA $35,395  $29,234  $53,105  $55,364 
Stock-based compensation  1,125   158   2,501   291 
(Gain) loss on retirement of debt  (626)  7,083   (865)  7,083 
Gain on sale-leaseback  —   (14,411)  —   (14,411)
Other income, net  (2,014)  (1,574)  (3,915)  (2,895)
Noncontrolling interests in income of subsidiaries  306   208   339   164 
Employment Agreement Award, incentive plan award expenses and other compensation  2,285   1,443   3,873   2,484 
Contingent consideration from acquisition  (79)  —   1,451   — 
Severance-related costs  801   250   999   603 
Impairment of long-lived assets  —   12,756   6,556   12,756 
Cost method investment income  1,794   1,506   3,432   2,959 
Adjusted EBITDA $38,987  $36,653  $67,476  $64,398 

  Three Months Ended
March 31,		 
  2019  2018 
  (In thousands) 
Adjusted EBITDA reconciliation:        
Consolidated net loss attributable to common stockholders, as reported $(6,663) $(22,555)
Add back non-broadcast and digital operating income items included in consolidated net loss:        
Interest income  (23)  (144)
Interest expense  22,151   19,281 
Provision for income taxes  

2,248

   12,840 
Depreciation and amortization  8,274   8,288 
EBITDA $25,987  $17,710 
Stock-based compensation  511   1,376 
Gain on retirement of debt  —   (239)
Other income, net  (1,721)  (1,901)
Noncontrolling interests in income of subsidiaries  125   33 
Impairment of long-lived assets  —   6,556 
Employment Agreement Award, incentive plan award expenses and other compensation  1,909   1,588 
Contingent consideration from acquisition  77   1,530 
Severance-related costs  420   198 
Cost method investment income  1,729   1,638 
Adjusted EBITDA $29,037  $28,489 

34

URBAN ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

 

The following table summarizes our historical consolidated results of operations:

 

Three Months Ended June 30, 2018March 31, 2019 Compared to Three Months Ended June 30, 2017March 31, 2018(In thousands)

 

  Three Months Ended June 30,    
  2018  2017  Increase/(Decrease) 
    (Unaudited)       
             
Statements of Operations:                
Net revenue $115,206  $117,638  $(2,432)   (2.1)%
Operating expenses:                
Programming and technical, excluding stock-based compensation  30,375   33,009   (2,634)  (8.0)
Selling, general and administrative, excluding stock-based compensation  40,490   42,847   (2,357)  (5.5)
Corporate selling, general and administrative, excluding stock-based compensation  10,155   8,328   1,827   21.9 
Stock-based compensation  1,125   158   967   612.0 
Depreciation and amortization  8,248   8,432   (184)  (2.2)
Impairment of long-lived assets  —   12,756   (12,756)  (100.0)
Total operating expenses  90,393   105,530   (15,137)  (14.3)
Operating income  24,813   12,108   12,705   104.9 
Interest income  17   45   (28)  (62.2)
Interest expense  19,155   19,863   (708)  (3.6)
(Gain) loss on retirement of debt  (626)  7,083   7,709   108.8 
Gain on sale-leaseback  —   (14,411)  (14,411)  (100.0)
Other income, net  (2,014)  (1,574)  440   28.0 
Income before (benefit from) provision for income taxes and noncontrolling interests in income of subsidiaries  8,315   1,192   7,123   597.6 
(Benefit from) provision for income taxes  (15,581)  182   15,763   8,661.0 
Consolidated net income  23,896   1,010   22,886   2,265.9 
Net income attributable to noncontrolling interests  306   208   98   47.1 
Net income attributable to common stockholders $23,590  $802  $22,788   2,841.4%

  Three Months
Ended March 31,		    
  2019  2018  Increase/(Decrease) 
    (Unaudited)       
             
Statements of Operations:                
Net revenue $98,449  $99,621  $(1,172)  (1.2)%
Operating expenses:                
Programming and technical, excluding stock-based compensation  30,930   32,147   (1,217)  (3.8)
Selling, general and administrative, excluding stock-based compensation  33,028   34,977   (1,949)  (5.6)
Corporate selling, general and administrative, excluding stock-based compensation  9,589   8,962   627   7.0 
Stock-based compensation  511   1,376   (865)  (62.9)
Depreciation and amortization  8,274   8,288   (14)  (0.2)
Impairment of long-lived assets  —   6,556   (6,556)  (100.0)
   Total operating expenses  82,332   92,306   (9,974)  (10.8)
   Operating income  16,117   7,315   8,802   120.3 
Interest income  23   144   (121)  (84.0)
Interest expense  22,151   19,281   2,870   14.9 
Gain on retirement of debt  —   (239)  (239)  (100.0)
Other income, net  (1,721)  (1,901)  180   9.5 
Loss before provision for income taxes and noncontrolling interests in income of subsidiaries  (4,290)  (9,682)  (5,392)  (55.7)
Provision for income taxes  2,248   12,840   (10,592)  (82.5)
   Consolidated net loss  (6,538)  (22,522)  (15,984)  (71.0)
Net income attributable to noncontrolling interests  125   33   92   278.8 
Net loss attributable to common stockholders $(6,663) $(22,555) $(15,892)  (70.5)%

  

35

36 

 

 

Net revenue

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$115,206  $117,638  $(2,432)   (2.1)%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$98,449  $99,621  $(1,172)  (1.2)%
               

During the three months ended June 30, 2018,March 31, 2019, we recognized approximately $115.2$98.4 million in net revenue compared to approximately $117.6$99.6 million during the same period in 2017.2018. These amounts are net of agency and outside sales representative commissions. Net revenues from our radio broadcasting segment decreased 3.5%7.0% compared to the same period in 2017.2018. Based on reports prepared by the independent accounting firm Miller, Kaplan, Arase & Co., LLP (“Miller Kaplan”), the markets we operate in (excluding Richmond and Raleigh, both of which no longer participate in Miller Kaplan) decreased 3.3%increased 0.3% in total revenues. We experienced net revenue declines most significantly in our Atlanta,Baltimore, Charlotte, Cincinnati, Detroit, Houston, Indianapolis, Philadelphia Raleigh and St. LouisRichmond markets, with our Cleveland, DallasAtlanta and Washington DC markets experiencing growth for the quarter. We recognized approximately $46.8$47.8 million of revenue from our cable television segment during the three months ended June 30, 2018,March 31, 2019, compared to approximately $45.4$46.2 million for the same period in 2017,2018, with an increase primarily in affiliateadvertising sales. The increase is primarily driven by an adjustment of previously estimated affiliate fees in the amount of approximately $1.7 million, as final reporting became available. Net revenue from our Reach Media segment decreased approximately $1.1 millionincreased 6.9% for the quarter ended June 30, 2018,March 31, 2019, compared to the same period in 20172018 due primarily to downward pricing pressure. The “Tom Joyner Fantastic Voyage” took place during the second quarters of 2018 and 2017 and generated revenue of approximately $9.4 million and $9.4 million, respectively for Reach Media.better inventory utilization. Finally, net revenues for our digital segment decreased 2.7%8.7% for the three months ended June 30, 2018,March 31, 2019, compared to the same period in 2017,2018, primarily due to a decrease in direct revenues.revenues and timing of events.

 

Operating Expenses

 

Programming and technical, excluding stock-based compensation

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$30,375  $33,009  $(2,634)   (8.0)%

Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$30,930  $32,147  $(1,217)  (3.8)%
               

Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of programming content on our radio stations. Programming and technical expenses for the radio segment also include expenses associated with our programming research activities and music royalties. For our digital segment, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with technical, programming, production, and content management. The decrease in programming and technical expenses for the three months ended June 30, 2018,March 31, 2019, compared to the same period in 20172018 is due primarily to lower expenses in our Reach Media, and cable television segments. Our Reach Media segment generated a decrease of approximately $1.4 million for the three months ended June 30, 2018, compared to the same periodand digital segments, which was partially offset by an increase in 2017 due primarily to lower contractual costs. Our cableexpenses at our radio broadcasting segment generated a decrease of approximately $1.6 million for the three months ended June 30, 2018, compared to the same period in 2017 due primarily to lower program content expense driven by reduced amortization for original programing.segment.

 

Selling, general and administrative, excluding stock-based compensation

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$40,490  $42,847  $(2,357)   (5.5)%

Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$33,028  $34,977  $(1,949)  (5.6)%
               

Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for the radio broadcasting segment and digital segment include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. There was an increaseThe decrease in selling, general and administrative expenses for the three months ended June 30, 2018,March 31, 2019, compared to the same period in 20172018 is primarily from our digital segment which was offset by lower expenses at all other segments primarilydue to declines in revenue.variable compensation from a previous acquisition.

36

  

Corporate selling, general and administrative, excluding stock-based compensation

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$10,155  $8,328  $1,827   21.9%

Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$9,589  $8,962  $627   7.0%
               

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel as well as other corporate overhead functions. The increase in corporate selling, general and administrative expenses wasexpense for the three months ended March 31, 2019, compared to the same period in 2018 is primarily due primarily to higher incentive-based payroll costs at our cable television segment.an increase in compensation expense for the Chief Executive Officer in connection with the valuation of the Employment Agreement Award element in his employment agreement.

 

Stock-based compensation

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$1,125  $158  $967   612.0%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$511  $1,376  $(865)  (62.9)%
               

The increasedecrease in stock-based compensation for thethree months ended June 30, 2018,March 31, 2019, compared to the same period in 2017,2018, is primarily due to grants and vesting of stock awards for certain executive officers and other management personnel.

 

Depreciation and amortization

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$8,248  $8,432  $(184)  (2.2)%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$8,274  $8,288  $(14)  (0.2)%
               

The decrease in depreciation and amortization expense for the three monthsended June 30, 2018,March 31, 2019, was due to the mix of assets approaching or near the end of their useful lives.

 

Impairment of long-lived assets

 

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$—  $12,756  $(12,756)  (100.0)%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$—  $6,556  $(6,556)  (100.0)%
               

The impairment of long-lived assets for the three months ended June 30, 2017, was related to a non-cash impairment charge recorded to reduce the carrying value of our Houston radio broadcasting licenses.

Interest expense

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$19,155  $19,863  $(708)  (3.6)%

Interest expense decreased to approximately $19.2 million for the three months ended June 30, 2018, compared to approximately $19.9 million for the same period in 2017due to lower overall debt balances outstanding. On April 18, 2017, the Company closed on a new senior secured credit facility (the “2017 Credit Facility”). The proceeds from the 2017 Credit Facility were used to prepay in full the Company’s previously existing 2015 credit facility (the “2015 Credit Facility”) and the agreement governing such credit facility was terminated on April 18, 2017.

(Gain) loss on retirement of debt

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$(626) $7,083  $7,709   108.8%

There was a gain on retirement of debt of $626,000 for the three months ended June 30, 2018, due to the redemption of approximately $14.0 million of our 2020 Notes at a discount. The loss on retirement of debt of approximately $7.1 million for the three months ended June 30, 2017, was due to the retirement of the 2015 Credit Facility during the second quarter. This amount included a write-off of previously capitalized debt financing costs and original issue discount associated with the 2015 Credit Facility, and costs associated with the financing transactions.

37

Gain on sale-leaseback

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$—  $(14,411)  $(14,411)   (100.0%)

The gain on sale-leaseback for the three months ended June 30, 2017, was due to the Company closing on its sale of certain land, towers and equipment to a third party. The Company is leasing certain of the assets back from the buyer as a part of its normal operations.The Company received proceeds of approximately $25.0 million, resulting in an overall net gain on sale of approximately $22.5 million, of which approximately $14.4 million was recognized immediately during the second quarter of 2017, and approximately $8.1 million which was deferred and will be recognized into income over the lease term of ten years.

Other income, net

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$(2,014) $(1,574) $440   28.0%

Other income, net increased to approximately $2.0 million for the three months ended June 30, 2018, compared to approximately $1.6 million for the same period in 2017.We recognized other income in the amount of approximately $1.8 million and $1.5 million, for thethree months ended June 30, 2018and 2017, respectively, related to our MGM investment.

(Benefit from) provision for income taxes

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$(15,581)  $182  $15,763   8,661.0%

The Company is using the estimated annual effective tax rate method under ASC 740-270, “Interim Reporting” to calculate the (benefit from) provision for income taxes. For the three months ended June 30, 2018, we recorded a benefit from income taxes of approximately $15.6 million on pre-tax income from continuing operations of approximately $8.3 million, that results in a tax rate of (187.4)%, of which approximately $12.4 million is attributable to deferred tax benefits that are expected to be recognizable at the end of the year, and a discrete tax benefit of approximately $3.2 million related to state rate and legislative changes. For the three months ended June 30, 2017, we recorded a provision for income taxes of $182,000 on pre-tax income from continuing operations of approximately $1.2 million.

Noncontrolling interests in (loss) income of subsidiaries

Three Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$306  $208  $98   47.1%

The increase in noncontrolling interests in income of subsidiaries was due primarily to higher net income recognized by Reach Media during the three months ended June 30, 2018 compared to the three months ended June 30, 2017.

Other Data

Broadcast and digital operating income

Broadcast and digital operating income increased to approximately $44.3 million for the three months ended June 30, 2018, compared to approximately $41.8 million for the comparable period in 2017, an increase of approximately $2.6 million or 6.1%. The increase was primarily due to higher broadcast and digital operating income at our cable television and Reach Media segments, which was partially offset by lower broadcast and digital operating income at our radio broadcasting and digital segments. Our radio broadcasting segment generated approximately $17.6 million of broadcast and digital operating income during the quarter ended June 30, 2018, compared to approximately $19.0 million during the quarter ended June 30, 2017, a decrease of approximately $1.4 million, primarily due to revenue declines. Reach Media generated approximately $2.7 million of broadcast and digital operating income during the quarter ended June 30, 2018, compared to approximately $2.1 million during the quarter ended June 30, 2017. The increase in Reach Media’s broadcast and digital operating income is primarily due to lower contractual costs. Our digital segment generated approximately $2.4 million of broadcast and digital operating loss during the quarter ended June 30, 2018, compared to broadcast and digital operating loss of approximately $1.5 million during the quarter ended June 30, 2017. The increase in our digital segment’s broadcast and digital operating loss is primarily due to higher selling, general and administrative expenses. Finally,TV One generated approximately $26.4 million of broadcast and digital operating income during the quarter ended June 30, 2018, compared to approximately $22.1 million during the quarter ended June 30, 2017, with the increase primarily due to increased affiliate fees and lower content amortization expense.

38

Broadcast and digital operating income margin

Broadcast and digital operating income margin increased to 38.5% for the three months ended June 30, 2018, from 35.5% for the comparable period in 2017. The margin increase was primarily attributable to higher broadcast and digital operating income as noted above.

39

URBAN ONE, INC. AND SUBSIDIARIES

RESULTS OF OPERATIONS

The following table summarizes our historical consolidated results of operations:

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017(In thousands)

  Six Months Ended June 30,    
  2018  2017  Increase/(Decrease) 
    (Unaudited)       
             
Statements of Operations:                
Net revenue $214,827  $218,927  $(4,100)  (1.9)%
Operating expenses:                
Programming and technical, excluding stock-based compensation  62,522   64,906   (2,384)  (3.7)
Selling, general and administrative, excluding stock-based compensation  75,467   77,302   (1,835)  (2.4)
Corporate selling, general and administrative, excluding stock-based compensation  19,117   18,367   750   4.1 
Stock-based compensation  2,501   291   2,210   759.5 
Depreciation and amortization  16,536   16,744   (208)  (1.2)
Impairment of long-lived assets  6,556   12,756   (6,200)  (48.6)
Total operating expenses  182,699   190,366   (7,667)  (4.0)
Operating income  32,128   28,561   3,567   12.5 
Interest income  161   148   13   8.8 
Interest expense  38,436   40,209   (1,773)  (4.4)
(Gain) loss on retirement of debt  (865)  7,083   7,948   112.2 
Gain on sale-leaseback  —   (14,411)  (14,411)  (100.0)
Other income, net  (3,915)  (2,895)  1,020   35.2 
Loss before (benefit from) provision for income taxes and noncontrolling interests in income of subsidiaries  (1,367)   (1,277)  (90)   (7.0) 
(Benefit from) provision for income taxes  (2,741)  70   2,811   4,015.7 
Consolidated net income (loss)  1,374   (1,347)  2,721   202.0 
Net income attributable to noncontrolling interests  339   164   175   106.7 
Net income (loss) attributable to common stockholders $1,035  $(1,511) $2,546   168.5%

40

Net revenue

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$214,827  $218,927  $(4,100)   (1.9)%

During the six months ended June 30, 2018, we recognized approximately $214.8 million in net revenue compared to approximately $218.9 million during the same period in 2017. These amounts are net of agency and outside sales representative commissions. Net revenues from our radio broadcasting segment for the six months ended June 30, 2018, decreased 2.2% from the same period in 2017. Based on reports prepared by Miller Kaplan, the markets we operate in decreased 3.3% in total revenues.We experienced net revenue growth most significantly in our Cleveland, Dallas and Richmond markets; however, this growth was offset by declines most significantly in our Atlanta, Raleigh, and St. Louis markets.Reach Media’s net revenues decreased 9.1% for the six months ended June 30, 2018, compared to the same period in 2017, due primarily todownward pricing pressure. We recognized approximately $93.0 million and $93.9 million of revenue from our cable television segment during the six months ended June 30, 2018, and 2017, respectively, due primarily to higher affiliate sales which was partially offset by lower advertising sales. Net revenue for our digital segment increased approximately $2.5 million for the six months ended June 30, 2018, compared to the same period in 2017 due to an increase in direct revenue.

Operating Expenses

Programming and technical, excluding stock-based compensation

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$62,522  $64,906  $(2,384)   (3.7)%

Programming and technical expenses include expenses associated with on-air talent and the management and maintenance of the systems, tower facilities, and studios used in the creation, distribution and broadcast of programming content on our radio stations. Programming and technical expenses for the radio segment also include expenses associated with our programming research activities and music royalties. For our internet segment, programming and technical expenses include software product design, post-application software development and maintenance, database and server support costs, the help desk function, data center expenses connected with ISP hosting services and other internet content delivery expenses. For our cable television segment, programming and technical expenses include expenses associated with technical, programming, production, and content management. The decrease in programming and technical expenses for the six months ended June 30, 2018, compared to the same period in 2017 is primarily to lower expenses in our Reach Media and cable television segments, which was partially offset by an increase in expense at our radio broadcasting and digital segments. Our Reach Media segment generated a decrease of approximately $2.3 million for the six months ended June 30, 2018, compared to the same period in 2017 due primarily to lower contractual costs. Our cable broadcasting segment generated a decrease of approximately $3.0 million for the six months ended June 30, 2018, compared to the same period in 2017 due primarily to lower program content expense driven by reduced amortization for original programing. Our radio broadcasting segment generated an increase of approximately $2.4 million for the six months ended June 30, 2018, compared to the same period in 2017 due primarily to higher payroll costs, increased lease expense due to the sale-leaseback transaction, as well as an increase in certain music licensing costs.

Selling, general and administrative, excluding stock-based compensation

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$75,467  $77,302  $(1,835)   (2.4)%

Selling, general and administrative expenses include expenses associated with our sales departments, offices and facilities and personnel (outside of our corporate headquarters), marketing and promotional expenses, special events and sponsorships and back office expenses. Expenses to secure ratings data for our radio stations and visitors’ data for our websites are also included in selling, general and administrative expenses. In addition, selling, general and administrative expenses for the radio broadcasting segment and internet segment include expenses related to the advertising traffic (scheduling and insertion) functions. Selling, general and administrative expenses also include membership traffic acquisition costs for our online business. The decrease in expense for the six months ended June 30, 2018, compared to the same period in 2017, is primarily driven by lower expenses at our radio broadcasting, Reach Media, and cable television segments, partially offset by an increase in expenses at our digital segment.

41

Corporate selling, general and administrative, excluding stock-based compensation

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$19,117  $18,367  $750   4.1%

Corporate expenses consist of expenses associated with our corporate headquarters and facilities, including personnel as well as other corporate overhead functions.There was also an increase in corporate selling, general and administrative expenses at our cable television segment due to an increase in incentive-based payroll costs.

Stock-based compensation

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$2,501  $291  $2,210   759.5%

The increase in stock-based compensation for the six months ended June 30, 2018, compared to the same period in 2017, is primarily due to grants of stock awards for certain executive officers and other management personnel.

Depreciation and amortization

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$16,536  $16,744  $(208)  (1.2)%

The decrease in depreciation and amortization expense for the six months ended June 30, 2018, wasdue to the mix of assets approaching or near the end of their useful lives.

Impairment of long-lived assets

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$6,556  $12,756  $(6,200)  (48.6)%

The impairment of long-lived assets for the six months ended June 30,March 31, 2018, was related to a non-cash impairment charge of approximately $2.7 million recorded to reduce the carrying value of our Charlotte goodwill balance and a charge of approximately $3.8 million associated with our Detroit market radio broadcasting licenses.The impairment of long-lived assets for the six months ended June 30, 2017, was related to a non-cash impairment charge recorded to reduce the carrying value of our Houston radio broadcasting licenses.

Interest expense

 

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$38,436  $40,209  $(1,773)   (4.4)%

Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$22,151  $19,281  $2,870   14.9%
               

Interest expense decreasedincreased to approximately $38.4$22.2 million for the sixthree monthsendedJune 30, 2018, March 31, 2019, compared to approximately $40.2$19.3 million for the same period in 2017,2018, due to higher interest rates on lower overall debt balances outstanding.outstanding as well as the adoption of ASC 842. During the quarter ended March 31, 2019, upon adoption of ASC 842, the Company recorded interest expense of approximately $1.3 million on its operating leases. On April 18, 2017,December 20, 2018, the Company closed on a new senior secured$192.0 million unsecured credit facility (the “2017“2018 Credit Facility”) and a new $50.0 million loan secured by its interest in the MGM National Harbor Casino (the “MGM National Harbor Loan”). The proceeds fromDuring the 2017quarter ended December 31, 2018, in conjunction with entering into the 2018 Credit Facility were used to prepay in fulland MGM National Harbor Loan, the Company’s previously existing 2015 credit facility and the agreement governing such credit facility was terminated on April 18, 2017.Company repurchased approximately $243.0 million of its 2020 Notes at an average price of approximately 100.88% of par.

 

(Gain) lossGain on retirement of debt

 

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$(865)  $7,083  $7,948   112.2%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018       
$—  $(239) $(239)  (100.0)%
               

 

42

There was a gain on retirement of debt of $865,000$239,000 for the sixthree months ended June 30,March 31, 2018, due to the redemption of approximately $25$11 million of our 2020 Notes at a discount. The loss on retirement of debt of approximately $7.1 million for the six months ended June 30, 2017, was due to the retirement of the 2015 Credit Facility during the second quarter. This amount included a write-off of previously capitalized debt financing costs and original issue discount associated with the 2015 Credit Facility, and costs associated with the financing transactions.

Gain on sale-leaseback

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$—  $(14,411)  $(14,411)   (100.0)%

The gain on sale-leaseback for the six months ended June 30, 2017, was due to the Company closing on its sale of certain land, towers and equipment to a third party. The Company is leasing certain of the assets back from the buyer as a part of its normal operations.The Company received proceeds of approximately $25.0 million, resulting in an overall net gain on sale of approximately $22.5 million, of which approximately $14.4 million was recognized immediately during the second quarter, and approximately $8.1 million which was deferred and will be recognized into income over the lease term of ten years.


Other income, net

 

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$(3,915)  $(2,895)  $1,020   35.2%

Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$(1,721) $(1,901) $(180)  (9.5)%
               

Other income, net, increased towas approximately $3.9$1.7 million and $1.9 million for the three months ended June 30,March 31, 2019and 2018, compared to approximately $2.9 million for the same period in 2017.respectively.We recognized other income in the amount of approximately $3.4$1.7 million and $3.0$1.6 million, for thesixthree months ended June 30, 2018March 31, 2019and 2017,2018, respectively, related to our MGM investment.In addition, we recognized $405,000 and $135,000$202,000 in other income for the sixthree months ended June 30,March 31, 2018 and 2017, respectively, related to the deferred gain on sale lease-back transaction. Upon adoption of ASC 842 on January 1, 2019, the unamortized portion of this deferred gain, net of tax, was recognized as a cumulative adjustment to equity and will no longer be recognized ratably into income.

 

(Benefit from) provisionProvision for income taxes

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017    
$(2,741)  $70  $2,811   4,015.7%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$2,248  $12,840  $(10,592)  (82.5)%
               

The Company beganis using the estimated annual effective tax rate method under ASC 740-270, “Interim Reporting” to calculate the provision for income taxes attaxes. During the beginning of 2017. For the sixthree months ended June 30, 2018, we recorded a benefit fromMarch 31, 2019, the provision for income taxes ofdecreased to approximately $2.7$2.2 million on a pre-tax loss from continuing operations of approximately $1.4 million, which results in a tax rate of 200.6%. This tax rate is based on an estimated annual effective rate of (95.0)% and a discrete tax provision adjustment of approximately $4.0 million relatedcompared to state rate and legislative changes. For the six months ended June 30, 2017, we recorded a provision for income taxes of $70,000 on a pre-tax loss from continuing operationsapproximately $12.8 million for thethree months ended March 31, 2018. The decrease in the provision for income taxes was primarily due to discrete tax provision adjustments to state net operating losses estimated at December 31, 2018, for which the Company expects to recognize in future periods. For thethree months ended March 31, 2019, the income tax provision consisted of deferred tax expense of approximately $1.3$2.2 million. For thethree months ended March 31, 2018, the income tax provision consisted of deferred tax expense of approximately $12.8 million which resultsand current provision benefit of $17,000. The tax provision resulted in aan effective tax rate of (5.5)(52.4)%. This tax rate is based on an estimated annual effective rate of 23.1% and (132.6)% for thethree months ended March 31, 2019 and 2018, and a discrete tax provision adjustment for $346,000.respectively.

Noncontrolling interests in (loss) income of subsidiaries

  

Six Months Ended June 30,  Increase/(Decrease) 
2018  2017       
$339  $164  $175   106.7%
Three Months Ended March 31,  Increase/(Decrease) 
2019  2018    
$125  $33  $92   278.8%
               

The increase in noncontrolling interests in income of subsidiaries was due primarily to higher net income recognized by Reach Media during the sixthree months ended June 30, 2018, versusMarch 31, 2019 compared to the same period in 2017.three months ended March 31, 2018.

43

Other Data

 

Broadcast and digital operating income

 

Broadcast and digital operating income increased to approximately $76.8$34.5 million for the sixthree months ended June 30, 2018,March 31, 2019, compared to approximately $76.7$32.5 million for the comparable period in 2017,2018, an increase of $119,000approximately $2.0 or 0.2%6.1%. ThisThe increase was primarily due to higher broadcast and digital operating income at our cable television, digital and Reach Media segments, which was partially offset by lower broadcast and digital operating income at our radio broadcasting and digital segments.segment. Our radio broadcasting segment generated approximately $30.0$10.0 million of broadcast and digital operating income during the sixthree months ended June 30, 2018,March 31, 2019, compared to approximately $32.5$12.5 million during the sixthree months ended June 30, 2017,March 31, 2018, a decrease of approximately $2.5 million, primarily due to revenue declines and an increase in programming and technical expenses.lower net revenues. Reach Media generated approximately $3.5$1.4 million of broadcast and digital operating income during the sixthree months ended June 30, 2018,March 31, 2019, compared to approximately $3.1 million$794,000 during the sixthree months ended June 30, 2017.March 31, 2018. The increase in Reach Media’s broadcast and digital operating income is primarily due to increased net revenues. Our digital segment generated approximately $4.7 million$91,000 of broadcast and digital operating loss during the sixthree months ended June 30, 2018,March 31, 2019, compared to approximately $2.6 million of broadcast and digital operating loss of approximately $2.2 million during the sixthree months ended June 30, 2017.March 31, 2018. The increasedecrease in ourthe digital segment’s broadcast and digital operating loss is primarily due to increased investment in videofrom lower variable compensation associated with an acquisition.. Finally,TV One generated approximately $47.9$23.3 million of broadcast and digital operating income during the sixthree months ended June 30, 2018,March 31, 2019, compared to approximately $43.8$21.5 million during the sixthree months ended June 30, 2017,March 31, 2018, with the increase primarily due primarily to higher affiliate sales and lower content amortization expense.advertising sales.

 

Broadcast and digital operating income margin

 

Broadcast and digital operating income margin increased to 35.8%35.0% for the sixthree months ended June 30, 2018, compared to 35.0%March 31, 2019, from 32.6% for the comparable period in 2017.2018. The margin increase was primarily attributable to higher broadcast and digital operating income as noted above.

  

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39 

 

 

LIQUIDITY AND CAPITAL RESOURCES

 

Our primary source of liquidity is cash provided by operations and, to the extent necessary, borrowings available under our senior credit facility and other debt or equity financing.

 

See Note 4 to our consolidated financial statements –Long-Term Debt for further information on liquidity and capital resources.

 

As of June 30, 2018,March 31, 2019, ratios calculated in accordance with the 2017 Credit Facility were as follows:  

 

 

As of

June

30, 2018

 

Covenant

Limit

 

Excess

Coverage

  As of
March 31, 2019		 Covenant
Limit		 Excess
Coverage		 
              
Interest Coverage              
Covenant EBITDA / Interest Expense 1.99x 1.25x 0.74x 

1.96

x 1.25x 0.71x
              
Senior Secured Leverage              
Senior Secured Debt / Covenant EBITDA 4.78x 5.85x 1.07x 

4.80

x 5.85x 

1.05

x

 

Covenant EBITDA – Earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for certain other adjustments, as defined in the 2017 Credit Facility

 

As of March 31, 2019, ratios calculated in accordance with the 2018 Credit Facility were as follows:

  As of
March 31, 2019		 Covenant
Limit		  Excess
Coverage		 
         
Total Gross Leverage          
Consolidated Indebtedness / Covenant EBITDA 6.13x 8.00x  1.87x

Covenant EBITDA – Earnings before interest, taxes, depreciation and amortization (“EBITDA”) adjusted for certain other adjustments, as defined in the 2018 Credit Facility

The following table summarizes the interest rates in effect with respect to our debt as of June 30, 2018:March 31, 2019:

 

Type of Debt Amount Outstanding  

Applicable

Interest

Rate

 
  (In millions)    
       
Senior bank term debt, net of original issue discount and issuance costs (at variable rates)(1) $338.2   6.10%
9.25% Senior Subordinated Notes, net of original issue discount and issuance costs (fixed rate)  249.1   9.25%
7.375% Senior Secured Notes, net of original issue discount and issuance costs (fixed rate)  346.0   7.375%
Comcast Note due April 2019 (fixed rate)  11.9   10.47%
Type of Debt Amount Outstanding  Applicable
Interest
Rate		 
  (In millions)    
       
2017 Credit Facility, net of original issue discount and issuance costs (at variable rates)(1) $316.7   6.50%
7.375% Senior Secured Notes, net of original issue discount and issuance costs (fixed rate)  346.9   7.375%
2018 Credit Facility, net of original issue discount and issuance costs (fixed rate)  177.0   12.875%
MGM National Harbor Loan, net of original issue discount and issuance costs (fixed rate, including PIK)  48.0   11.0%
Asset-backed credit facility (variable rate)(1)  3.0   6.0%

 

(1)

Subject to variable LIBOR or Prime plus a spread that is incorporated into the applicable interest rate set forth above.

 

The following table provides a comparison of our statements of cash flows for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively:

 

  2018  2017 
  (In thousands) 
       
Net cash flows provided by operating activities $ 33,832  $11,744 
Net cash flows (used in) provided by investing activities $(2,078) $14,481 
Net cash flows used in financing activities $(32,646) $(7,518)

  2019  2018 
  (In thousands) 
       
Net cash flows provided by operating activities $

16,255

  $22,004 
Net cash flows used in investing activities $(707) $(914)
Net cash flows used in financing activities $(24,993) $(14,809)


Net cash flows provided by operating activities were approximately $33.8$16.3 million and $11.7$22.0 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively.Net cash flow from operating activities for the sixthree months ended June 30, 2018, increasedMarch 31, 2019, decreased from the prior year primarily due to timing of collections of accounts receivable, payments of accrued compensation and lowerhigher paymentsfor content assets. Cash flows from operations, cash and cash equivalents, and other sources of liquidity are expected to be available and sufficient to meet foreseeable cash requirements.

  

Net cash flows used in financing activities were approximately $2.1 million for the six months ended June 30, 2018 and net cash flows provided by investing activities were approximately $14.5 million$707,000 and $914,000 for the sixthree months ended June 30, 2017.March 31, 2019 and 2018, respectively. Capital expenditures, including digital tower and transmitter upgrades and deposits for station equipment and purchases were approximately $2.1 million$707,000 and $3.5 million$914,000 for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. During the six months ended June 30, 2017, the Company paid approximately $2.0 million to complete the acquisition of our new Richmond and Washington DC stations and during the six months ended June 30, 2017, the Company paid approximately $5.0 million to complete the acquisition of certain digital assets from Moguldom. During the six months ended June 30, 2017, the Company received proceeds of approximately $25.0 million to complete its sale of certain land, towers and equipment as part of a sale-leaseback transaction.

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Net cash flows used in financing activities were approximately $32.6$25.0 million and $7.5$14.8 million for the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, respectively. During the sixthree months ended June 30,March 31, 2019 and 2018, and 2017, the Companywe repaid approximately $1.8$25.3 million and $345.6 million, respectively,$875,000 in outstanding debt.debt, respectively. During the sixthree months ended June 30, 2017, we borrowed approximately $350.0 million in new 2017 Credit Facility. During the six months ended June 30, 2017, we capitalized approximately $8.9 million of costs associated with our indebtedness. The amounts capitalized in 2017 relate to our new 2017 Credit. During the six months ended June 30, 2018, the Company distributed $506,000 of contingent consideration related to the Moguldom acquisition. During the six months ended June 30,March 31, 2018, the Company repurchased approximately $24.0$10.8 million of our 2020 Notes. Finally, during the six months ended June 30, 2018 and 2017, respectively, we repurchased approximately $4.6$2.4 million and $3.0 million of our Class D Common Stock. Reach Media paid $801,000 in dividends to noncontrolling interest shareholdersStock during the sixthree months ended June 30, 2018.March 31, 2019 and March 31, 2018, respectively.

 

Credit Rating Agencies

 

Our corporate credit ratings by Standard & Poor's Rating Services and Moody's Investors Service are speculative-grade and have been downgraded and upgraded at various times during the last several years. Any reductions in our credit ratings could increase our borrowing costs, reduce the availability of financing to us or increase our cost of doing business or otherwise negatively impact our business operations.

 

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

 

Our significant accounting policies are described in Note 1 -Organization and Summary of Significant Accounting Policiesof the consolidated financial statements in our Annual Report on Form 10-K. We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the year. Actual results could differ from those estimates. In Management’s Discussion and Analysis contained in our Annual Report on Form 10-K for the year ended December 31, 2017,2018, we summarized the policies and estimates that we believe to be most critical in understanding the judgments involved in preparing our consolidated financial statements and the uncertainties that could affect our results of operations, financial condition and cash flows. ThereWith the exception of the adoption of ASC 842 on January 1, 2019, there have been no material changes to our existing accounting policies or estimates since we filed our Annual Report on Form 10-K for the year ended December 31, 2017.2018.

 

Goodwill and Radio Broadcasting Licenses

 

Impairment Testing

 

We have made several acquisitions in the past for which a significant portion of the purchase price was allocated to goodwill and radio broadcasting licenses.licenses and goodwill. Goodwill exists whenever the purchase price exceeds the fair value of tangible and identifiable intangible net assets acquired in business combinations. As of June 30, 2018,March 31, 2019, we had approximately $598.1$600.1 million in broadcast licenses and $260.2$245.6 million in goodwill, which totaled $858.3$845.7 million, and represented approximately 66.5% of our total assets. Therefore, we believe estimating the fair value of goodwill and radio broadcasting licenses is a critical accounting estimate because of the significance of their carrying values in relation to our total assets.

 

There was no impairment recorded during the three months ended March 31, 2019. For the sixthree months ended June 30,March 31, 2018, the Company recorded an impairment charge of approximately $2.7 million related to its Charlotte market goodwill and a charge of approximately $3.8 million associated with our Detroit market radio broadcasting licenses. There was no impairment recorded during the three months ended June 30, 2018.The Company recorded an impairment charge of approximately $12.8 million for the three and six months ended June 30, 2017, related to its Houston radio broadcasting licenses.

 

We test for impairment annually across all reporting units, or when events or changes in circumstances or other conditions suggest impairment may have occurred in any given reporting unit. Our annual impairment testing is performed as of October 1 of each year. Impairment exists when the carrying value of these assets exceeds its respective fair value. When the carrying value exceeds fair value, an impairment amount is charged to operations for the excess.


  

Valuation of Broadcasting Licenses

DuringWe did not identify any impairment indicators for the second quarters of 2018 and 2017, the total market revenue growth for certain markets in which we operate was below that used in our annual impairment testing. We deemed that to be an impairment indicator that warranted interim impairment testing of certain markets’ radio broadcasting licenses, which we performed as of June 30, 2017 and 2018. There was no impairment identified as part of the testing performed duringthree months ended March 31, 2019. During the quarter ended June 30, 2018. During the six months ended June 30,March 31, 2018, the Company recorded a non-cash impairment charge of approximately $3.8 million associated with our Detroit market radio broadcasting licenses. During the quarter ended June 30, 2017, the Company recorded an impairment charge of approximately $12.8 million related to our Houston radio broadcasting licenses. Below are some of the key assumptions used in the income approach model for estimating broadcasting licenses fair values for the interim impairment assessments for the quarters ended June 30, 2018 and 2017, respectively.

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Radio Broadcasting June 30,  June 30, 
Licenses 2018 (a)  2017 (a) 
       
Pre-tax impairment charge (in millions) $—  $12.8 
         
Discount Rate  9.0%  9.0%
Year 1 Market Revenue Growth Rate Range  0.5%  1.0% – 2.0%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)  0.5% – 1.5%  0.5% – 1.5%
Mature Market Share Range  6.8% – 15.3%  6.9% – 15.3%
Operating Profit Margin Range  30.1% – 35.1%  31.6% – 47.0%

(a)Reflects changes only to the key assumptions used in the interim testing for certain units of accounting.

 

Valuation of Goodwill

During the second quarters of 2018 and 2017, we identified anWe did not identify any impairment indicatorindicators at certainany of our radio markets, and, as such, we performed an interim analysisreportable segments for certain radio market goodwill as of June 30, 2018 and 2017. No goodwill impairment was identified during the three months ended June 30, 2018 or during the six months ended June 30, 2017.March 31, 2019. During the six monthsquarter ended June 30,March 31, 2018, the Company recorded a non-cash impairment charge of approximately $2.7 million to reduce the carrying value of our Charlotte goodwill balance. Below are some of the key assumptions used in the income approach model for estimating reporting unit fair values for theinterim impairment assessments for the quarters ended June 30, 2018 and 2017.

Goodwill (Radio Market   June 30,  June 30, 
Reporting Units)   2018 (a)  2017 (a) 
        
Pre-tax impairment charge (in millions)  $–  $– 
         
Discount Rate  9.0%  9.0%
Year 1 Market Revenue Growth Rate Range  (8.6)% – 19.5%  (5.6)% – 9.2%
Long-term Market Revenue Growth Rate Range (Years 6 – 10)  0.5% – 1.0%  1.0% – 1.5%
Mature Market Share Range  7.6% – 14.9%  9.1% – 10.4%
Operating Profit Margin Range  23.7% – 31.8%  33.2% – 53.2%

(a)Reflects changes only to the key assumptions used in the interim testing for certain units of accounting.

During the second quarter of 2017, the Company performed interim impairment testing on the valuation of goodwill associated with Reach Media. Reach Media’s net revenues and cash flows declined and internal projections were revised downward, which we deemed to be an impairment indicator. The Company reduced its operating cash flow projections and assumptions based on Reach Media’s actual results which did not meet budget. Below are some of the key assumptions used in the income approach model for estimating the fair value for Reach Media for the interim assessment at June 30, 2017. As a result of our interim assessment, the Company concluded no impairment for the Reach Media goodwill value had occurred. 

June 30,
Reach Media Segment Goodwill2017
Pre-tax impairment charge (in millions)$—
Discount Rate10.5%
Year 1 Revenue Growth Rate(8.4)%
Long-term Revenue Growth Rate1.0%
Operating Profit Margin Range13.5% – 16.5%

We did not identify any impairment indicators for the three months ended June 30, 2018 or 2017 at any of our other reportable segments except as described above.for the three months ended March 31, 2018.

 

As part of our annual testing, when arriving at the estimated fair values for radio broadcasting licenses and goodwill, we also performed an analysis by comparing our overall average implied multiple based on our cash flow projections and fair values to recently completed sales transactions, and by comparing our fair value estimates to the market capitalization of the Company. The results of these comparisons confirmed that the fair value estimates resulting from our annual assessment for 20172018 were reasonable.

47

 

Several of the licenses in our units of accounting have limited or no excess of fair values over their respective carrying values. Should our estimates, assumptions, or events or circumstances for any upcoming valuations worsen in the units with no or limited fair value cushion, additional license impairments may be needed in the future.

 

Realizability of Deferred Tax Assets

As of each reporting date, management considers new evidence, both positive and negative, that could affect its conclusions regarding the future realization of the Company’s deferred tax assets (“DTAs”). During the quarter ended March 31, 2019, management continues to weigh sufficient positive evidence to conclude that it is more likely than not the net DTAs are realizable. The assessment to determine the value of the DTAs to be realized under ASC 740 is highly judgmental and requires the consideration of all available positive and negative evidence in evaluating the likelihood of realizing the tax benefit of the DTAs in a future period. Circumstances may change over time such that previous negative evidence no longer exists, and new conditions should be evaluated as positive or negative evidence that could affect the realization of the DTAs. Since the evaluation requires consideration of events that may occur in some years in the future, significant judgment is required, and our conclusion could be materially different if certain expectations do not materialize.

In the assessment of all available evidence, an important piece of objective verifiable evidence is evaluating a cumulative pre-tax income or loss position over the most recent three year period. Historically, the Company has maintained a full valuation against the net DTAs, principally due to a cumulative pre-tax loss over the most recent three year period. During the year ended December 31, 2018, the Company achieved three years of cumulative pre-tax income, which removed the most heavily weighed piece of objective verifiable negative evidence from our evaluation of the realizability of deferred tax assets. The Company continues to maintain three years of rolling cumulative pre-tax income as of March 31, 2019.

Additionally, the Company is projecting forecasts of taxable income to utilize our federal and state NOLs as part of our evaluation of positive evidence. As part of the Tax Cuts and Jobs Act, IRC Section 163(j) limited the deduction of interest expense. In conjunction with evaluating and weighing our cumulative three year pre-tax income, we also evaluated the impact that interest expense has had on our cumulative three year pre-tax income. A material component of the Company’s expenses is interest, and has been the primary driver of historical pre-tax losses. Adjusting for the IRC Section 163(j) interest expense limitation on projected taxable income, we estimate utilization of federal and state net operating losses that are not subject to annual limitations as a result of the 2009 ownership shift as defined under IRC Section 382.


Realization of the Company’s federal and state net operating losses is dependent on generating sufficient taxable income in future periods, and although the Company believes it is more likely than not future taxable income will be sufficient to utilize the net operating losses, realization is not assured and future events may cause a change to the judgment of the realizability of these deferred tax assets. If a future event causes the Company to re-evaluate and conclude that it is not more likely than not, that all or a portion of the deferred tax assets are realizable, the Company would be required to establish a valuation allowance against the assets at that time which would result in a charge to income tax expense and a decrease to net income in the period which the change of judgment is concluded.

RECENT ACCOUNTING PRONOUNCEMENTS

 

See Note 1 of our consolidated financial statements –Organization and Summary of Significant Accounting Policies for a summary of recent accounting pronouncements.

 

As of January 01, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 842,Leases, using the modification retrospective transition method. Prior comparative periods will be not be restated under this new standard and therefore those amounts are not presented below. The Company adopted a package of practical expedients as allowed by the transition guidance which permits the Company to carry forward the historical assessment of whether contracts contain or are leases, classification of leases and the remaining lease terms. The Company has also made an accounting policy election to exclude leases with an initial term of twelve months or less from recognition on the consolidated balance sheet. Short-term leases will be expensed over the lease term. The Company also elected to separate the consideration in the lease contracts between the lease and non-lease components. All variable non-lease components are expensed as incurred.

ASC 842 results in significant changes to the balance sheets of lessees, most significantly by requiring the recognition of right of use (“ROU”) assets and lease liabilities by lessees for those leases classified as operating leases. Upon adoption of ASC 842, deferred rent balances, which were historically presented separately, were combined and presented net within the ROU asset. The adoption of this standard resulted in the Company recording an increase in ROU assets of approximately $49.8 million and an increase in lease liabilities of approximately $54.1 million. Approximately $4.3 million in deferred rent was also reclassed from liabilities to offset the applicable ROU asset. The tax impact of ASC 842, which primarily consisted of deferred gains related to previous transactions that were historically accounted for as sale and operating leasebacks in accordance with ASC Topic 840 were recognized as part of the cumulative-effect adjustment to retained earnings, resulting in an increase to retained earnings, net of tax, of approximately $5.8 million.

Many of the Company's leases provide for renewal terms and escalation clauses, which are factored into calculating the lease liabilities when appropriate. The implicit rate within the Company's lease agreements is generally not determinable and as such the Company’s collateralized borrowing rate is used.

CAPITAL AND COMMERCIAL COMMITMENTS:

 

Radio Broadcasting Licenses

 

Each of the Company’s radio stations operates pursuant to one or more licenses issued by the Federal Communications Commission that have a maximum term of eight years prior to renewal. The Company’s radio broadcasting licenses expire at various times beginning October 1, 2019 through August 1, 2022. Although the Company may apply to renew its radio broadcasting licenses, third parties may challenge the Company’s renewal applications. The Company is not aware of any facts or circumstances that would prevent the Company from having its current licenses renewed.

 

Indebtedness

 

We have several debt instruments outstanding within our corporate structure. We incurred senior bank debt as part of our 2017 Credit Facility in the amount of $350.0 million that matures on the earlier of (i) April 18, 2023, or (ii) in the event such debt is not repaid or refinanced, 91 days prior to the maturity of either of the Company’s 2022 Notes or the Company’s 2020 Notes. We also have $250.0 million outstanding in our 2020 Notes and we also haveapproximately $350.0 million outstanding in our 2022 Notes. Finally, weon December 20, 2018, the Company closed on a new $192.0 million unsecured credit facility (the “2018 Credit Facility”) and the Company also have outstandingclosed on a new $50.0 million loan secured by our senior unsecured promissory noteinterest in the aggregate principal amount of approximately $11.9 million under the Comcast Note.MGM National Harbor Casino (the “MGM National Harbor Loan”). See “Liquidity and Capital Resources.”

 

Royalty Agreements

 

The Company has historically entered into fixedMusical works rights holders, generally songwriters and variable fee music license agreements with performancepublishers, have been traditionally represented by performing rights organizations, including Broadcast Music, Inc. (“BMI”), the Society of European Stage Authors and Composers (“SESAC”) and,such as the American Society of Composers, Authors and Publishers (“ASCAP”).  Our BMI license expired December 31, 2016. The expiration was an industry wide issue. The Company has authorized the Radio, Broadcast Music, License Committee (the “RMLC”Inc. (“BMI”) to negotiate on its behalf with respect to its licenses with ASCAP, BMI and SESAC, includingInc. (“SESAC”).  The market for rights relating to musical works is changing rapidly. Songwriters and music publishers have withdrawn from the BMI license that expired December 31, 2016. While the RMLC continues to pursue resolution with BMI, the RMLC has advised operators to make payments to BMI as invoiced by BMI anticipating retroactive discount likely to be applied. In July 2017, the RMLC learned that the RMLC-Represented broadcasters were awarded a discount off of the SESAC license rate card. The fee reduction applies for the license period January 1, 2016 through December 31, 2018 and has retroactive application.  The RMLC negotiated a new 5 year agreement with ASCAP with a license term of January 1, 2017 through December 31, 2021.  In connection with all performancetraditional performing rights organization agreements, including SESAC,organizations, particularly ASCAP and BMI, the Company incurred expenses of approximately $2.0 million and $2.6 million during the three month periods ended June 30, 2018 and 2017, respectively, and incurred expenses of approximately $4.4 million and $4.2 million during the six month periods ended June 30, 2018 and 2017, respectively.  Finally, in 2016, a new performance rights organization,entities, such as Global Music Rights LLC (“GMR”), have been formed butto represent rights holders. These organizations negotiate fees with copyright users, collect royalties and distribute them to the scope of its repertory is not clearrights holders.  We have arrangements with ASCAP, SESAC and it is not clear that it licenses compositions that have not already been licensed by the other performance rights organizations.  To ensure licensing complianceGMR, and are in 2017,negotiations with BMI for a new agreement. If we have entered into a temporary license with GMR while the RMLC continuesare unable to pursuereach an agreement with BMI, a court will determine the royalty we will be required to pay BMI.  The changing market for a long term licensing solution.  This interim license continues through September 30, 2018.  GMR offered these interim license extensionsmusical works may have an adverse effect on us, including increasing our costs or limiting the same terms as each broadcaster’s prior interim license, except for the new end date. We anticipate further extensions of this temporary license until a permanent industry wide solution is put into effect.musical works available to us.

   

Lease obligations

 

We have non-cancelable operating leases for office space, studio space, broadcast towers and transmitter facilities that expire over the next 1312 years.

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Operating Contracts and Agreements

 

We have other operating contracts and agreements including employment contracts, on-air talent contracts, severance obligations, retention bonuses, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements that expire over the next seven years.


Reach Media Noncontrolling Interest Shareholders’ Put Rights

 

Beginning on January 1, 2018, the noncontrolling interest shareholders of Reach Media have had an annual right to require Reach Media to purchase all or a portion of their shares at the then current fair market value for such shares (the “Put Right”).  Beginning in 2018, thisThis annual right is exercisable for a 30-day period beginning January 1 of each year. The purchase price for such shares may be paid in cash and/or registered Class D common stock of Urban One, at the discretion of Urban One. The noncontrolling interest shareholders of Reach Media did not exercise their Put Right for the 30-day period ending January 30, 2018.2019. Management, at this time, cannot reasonably determine the period when and if, the put right will be exercised by the noncontrolling interest shareholders.

 

Contractual Obligations Schedule

 

The following table represents our scheduled contractual obligations as of June 30, 2018:March 31, 2019:

 

  Payments Due by Period 
Contractual Obligations 

Remainder

of 2018

  2019  2020  2021  2022  

2023 and

Beyond

  Total 
  (In thousands) 
                      
9.25% Senior Subordinated Notes(1) $11,563  $23,125  $252,569  $–  $–  $–  $287,257 
7.375% Senior Subordinated Notes(1)  12,906   25,813   25,813   25,813   357,529   –   447,874 
Credit facilities(2)  12,484   24,977   25,266   25,712   25,813   335,754   450,006 
Other operating contracts / agreements(3)  55,156   35,315   26,080   23,472   15,060   64,192   219,275 
Operating lease obligations  6,172   11,359   10,728   9,334   8,507   24,473   70,573 
Comcast Note  622   12,086   –   –   –   –   12,708 
Total $98,903  $132,675  $340,456  $84,331  $406,909  $424,419  $1,487,693 
  Payments Due by Period 
Contractual Obligations Remainder of 2019  2020  2021  2022  2023  2024 and
Beyond		  Total 
  (In thousands) 
7.375% Senior Secured Notes(1) $19,359  $25,813  $25,813  $357,529  $—  $—  $428,514 
2017 Credit facility(2)  18,768   24,762   24,857   24,633   316,363   —   409,383 
2018 Credit facility(2)  28,289   40,529   38,023   148,318   —   —   255,159 
Other operating contracts/agreements(3)  57,272   31,294   27,254   16,941   11,951   45,599   190,311 
Operating lease obligations  8,734   11,030   9,620   8,626   7,824   16,030   61,864 
MGM National Harbor Loan  4,204   5,866   6,104   65,026   —   —   81,200 
Total $136,626  $139,294  $131,671  $621,073  $336,138  $61,629  $1,426,431 

 

(1)Includes interest obligations based on current effective interest rates on senior subordinated notes and secured notes outstanding as of June 30, 2018.March 31, 2019.

 

(2)Includes interest obligations based on effective interest rate, and projected interest expense on credit facilities outstanding as of June 30, 2018.March 31, 2019.

 

(3)Includes employment contracts (including the Employment Agreement Award), severance obligations, on-air talent contracts, consulting agreements, equipment rental agreements, programming related agreements, and other general operating agreements. Also includes contracts that TV One has entered into to acquire entertainment programming rights and programs from distributors and producers.  These contracts relate to their content assets as well as prepaid programming related agreements.

 

Of the total amount of other operating contracts and agreements included in the table above, approximately $135.2$122.5 million has not been recorded on the balance sheet as of June 30, 2018,March 31, 2019, as it does not meet recognition criteria. Approximately $8.7$6.5 million relates to certain commitments for content agreements for our cable television segment, approximately $24.7$20.0 million relates to employment agreements, and the remainder relates to other agreements.

 

Other Contingencies

 

The Company has been named as a defendant in several legal actions arising in the ordinary course of business. It is management’s opinion, after consultation with its legal counsel, that the outcome of these claims will not have a material adverse effect on the Company’s financial position or results of operations.

 

Off-Balance Sheet Arrangements

 

On February 24, 2015, the Company entered into a letter of credit reimbursement and security agreement. As of June 30, 2018,March 31, 2019, the Company had letters of credit totaling $738,000$788,000 under the agreement for certain operating leases and certain insurance policies. Letters of credit issued under the agreement are required to be collateralized with cash.

 

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44 

 

 

Item 3:  Quantitative and Qualitative Disclosures About Market Risk

 

For quantitative and qualitative disclosures about market risk affecting Urban One, see Item 7A: “Quantitative and Qualitative Disclosures about Market Risk” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2017.2018.  Our exposure related to market risk has not changed materially since December 31, 2017.2018.

 

Item 4.  Controls and Procedures

 

Evaluation of disclosure controls and procedures

 

We have carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our CEO and CFO concluded that, as of such date, our disclosure controls and procedures are effective in timely alerting them to material information required to be included in our periodic SEC reports. Disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

 

In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our disclosure controls and procedures are designed to provide a reasonable level of assurance of reaching our desired disclosure controls objectives. Our management, including our CEO and CFO, has concluded that our disclosure controls and procedures are effective in reaching that level of reasonable assurance.

 

Changes in internal control over financial reporting

 

During the three months ended June 30, 2018,March 31, 2019, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

  

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PART II. OTHER INFORMATION

 

Item 1.  Legal Proceedings

 

Legal Proceedings

 

Urban One is involved from time to time in various routine legal and administrative proceedings and threatened legal and administrative proceedings incidental to the ordinary course of our business. Urban One believes the resolution of such matters will not have a material adverse effect on its business, financial condition or results of operations.

 

Item 1A.  Risk Factors

 

In addition to the other information set forth in this report, you should carefully consider the risk factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 20172018 (the “2017“2018 Annual Report”), which could materially affect our business, financial condition or future results. The risks described in our 20172018 Annual Report, as updated by our quarterly reports on Form 10-Q, are not the only risks facing our Company.  Additional risks and uncertainties not currently known to us, or that we currently deem to be immaterial, may also materially adversely affect our business, financial condition and/or operating results.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

None.

 

Item 3.  Defaults Upon Senior Securities

 

None.

 

Item 4.  Mine Safety Disclosures

 

Not applicable.

 

Item 5.  Other Information

 

None.

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Item 6.  Exhibits

 

Exhibit

Number

 Description
   
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101   Financial information from the Quarterly Report on Form 10-Q for the quarter ended June 30, 2018,March 31, 2019, formatted in XBRL.

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 URBAN ONE, INC.
  
 /s/ PETER D. THOMPSON
  
 Peter D. Thompson
 Executive Vice President and
 Chief Financial Officer
 (Principal Accounting Officer)

 

August 8, 2018May 10, 2019

 

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