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Summary of Significant Accounting Policies (Policies)

6 Months Ended

Aug. 31, 2019

Preparation of Interim Financial Statements

Pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”), the condensed consolidated interim financial statements included herein have been prepared, without audit, by Emmis Communications Corporation (“ECC”) and its subsidiaries (collectively, “our,” “us,” “we,” “Emmis” or the “Company”). As permitted under the applicable rules and regulations of the SEC, certain information and footnote disclosures normally included in financial statements prepared in conformity with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations; however, Emmis believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and the notes thereto included in the Annual Report for Emmis filed on Form 10-K for the year ended February 28, 2019. The Company’s results are subject to seasonal fluctuations. Therefore, results shown on an interim basis are not necessarily indicative of results for a full year.

In the opinion of Emmis, the accompanying condensed consolidated interim financial statements contain all material adjustments (consisting only of normal recurring adjustments, except as otherwise noted) necessary to present fairly the consolidated financial position of Emmis at August 31, 2019, the results of its operations for the three-month and six-month periods ended August 31, 2018 and 2019, and cash flows for the six-month periods ended August 31, 2018 and 2019.

There have been no changes to our significant accounting policies described in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 that have had a material impact on our condensed consolidated financial statements and related notes.

Basic and Diluted Net Income (Loss) Per Common Share

Basic and Diluted Net Income Per Common Share

Basic net income per common share is computed by dividing net income attributable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted net income per common share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted. Potentially dilutive securities at August 31, 2018 and 2019 consisted of stock options and restricted stock awards. The following table sets forth the calculation of basic and diluted net income per share:

	For the Three Months Ended August 31,
	2018								2019
	Net Loss			Shares		Net Loss Per Share			Net Income		Shares		Net Income Per Share
	(amounts in 000’s, except per share data)
Basic net income (loss) per common share:
Net income (loss) available to common shareholders	$	(373	)		12,522	$	(0.03	)	$	7,013		12,830	$	0.55
Impact of equity awards		—			—					—		—
Diluted net income (loss) per common share:
Net income (loss) available to common shareholders	$	(373	)		12,522	$	(0.03	)	$	7,013		12,830	$	0.55

	For the Six Months Ended August 31,
	2018						2019
	Net Income		Shares		Net Income Per Share		Net Income		Shares		Net Income Per Share
	(amounts in 000’s, except per share data)
Basic net income per common share:
Net income available to common shareholders	$	23,112		12,521	$	1.85	$	8,683		12,802	$	0.68
Impact of equity awards		—		974		—		—		—		—
Diluted net income per common share:
Net income available to common shareholders	$	23,112		13,495	$	1.71	$	8,683		12,802	$	0.68

Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:

	For the Three Months Ended August 31,				For the Six Months Ended August 31,
	2018		2019		2018		2019
	(shares in 000’s )
Equity awards		1,929		2,075		876		2,235
Antidilutive common share equivalents		1,929		2,075		876		2,235

Local Programming and Marketing Agreement Fees

The Company from time to time enters into local programming and marketing agreements (“LMAs”), often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses in connection with acquisitions or dispositions of radio stations. Under the terms of these agreements, the acquiring company makes specified periodic payments to the holder of the FCC license in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. The acquiring company records revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station.

On April 30, 2018, Emmis closed on the sale of substantially all of its radio station assets in St. Louis. The St. Louis stations were operated pursuant to LMAs from March 1, 2018 through April 30, 2018. The buyers of the stations paid LMA fees totaling $0.7 million during the period, which was recognized as a component of net revenues in the accompanying condensed consolidated statements of operations for the six-month period ending August 31, 2018.

On April 26, 2012, Emmis entered into an LMA with a subsidiary of Disney Enterprises, Inc. for 98.7FM in New York (formerly WRKS-FM and now WEPN-FM, hereinafter referred to as “98.7FM”). The LMA for this station started on April 30, 2012 and will continue until August 31, 2024. Emmis retains ownership and control of the station, including the related FCC license during the term of the LMA and is scheduled to receive an annual fee until the LMA’s termination. LMA fee revenue is recorded on a straight-line basis over the term of the LMA as a component of net revenues in our accompanying condensed consolidated statements of operations.

The following table summarizes certain operating results of 98.7FM for all periods presented. Net revenues for 98.7FM are solely related to LMA fees. 98.7FM is a part of our radio segment.

	For the Three Months Ended August 31,				For the Six Months Ended August 31,
	2018		2019		2018		2019
Net revenues	$	2,583	$	2,583	$	5,166	$	5,166
Station operating expenses, excluding depreciation and amortization expense		299		336		596		686
Interest expense		592		522		1,201		1,062

Assets and liabilities of 98.7FM as of February 28, 2019 and August 31, 2019 were as follows:

	As of February 28, 2019		As of August 31, 2019
Current assets:
Restricted cash	$	1,504	$	1,278
Prepaid expenses		394		372
Other current assets		340		526
Total current assets		2,238		2,176
Noncurrent assets:
Property and equipment, net		188		248
Indefinite lived intangibles		46,390		46,390
Operating lease right-of-use assets		—		7,541
Other assets		6,255		5,930
Total noncurrent assets		52,833		60,109
Total assets	$	55,071	$	62,285
Current liabilities:
Accounts payable and accrued expenses	$	15	$	15
Current maturities of long-term debt		7,150		7,448
Deferred revenue		864		894
Operating lease liabilities		—		356
Other current liabilities		162		150
Total current liabilities		8,191		8,863
Noncurrent liabilities:
Long-term debt, net of current portion and unamortized debt discount		38,747		35,076
Operating lease liabilities, net of current		—		8,221
Total noncurrent liabilities		38,747		43,297
Total liabilities	$	46,938	$	52,160

Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported within the condensed consolidated balance sheets to the same amounts shown in the condensed consolidated statements of cash flows.

	As of February 28, 2019		As of August 31, 2019
Cash and cash equivalents, excluding amounts classified as held for sale	$	4,343	$	1,574
Restricted cash:
98.7FM LMA restricted cash		1,504		1,278
Cash used to secure the Company's purchasing card and travel and expense program		1,000		225
Total cash, cash equivalents and restricted cash	$	6,847	$	3,077

As of February 28, 2019 and August 31, 2019, restricted cash relates to cash on deposit in trust accounts related to our 98.7FM LMA in New York City that services long-term debt and cash held by JPMorgan Chase as collateral to secure the Company’s corporate purchasing card and travel and expense program. Cash held by Emmis Austin Radio Broadcasting Company, L.P. is classified as held for sale as of February 28, 2019 and August 31, 2019. See the discussion of our discontinued operations on the subsequent page for more information related to assets held for sale.

Noncontrolling Interests

The Company follows Accounting Standards Codification paragraph 810-10-65-1 to report the noncontrolling interests related to our Austin radio partnership and Digonex Technologies Inc., a dynamic pricing business (hereinafter "Digonex"). We have a 50.1% controlling interest in our Austin radio partnership. We do not own any of the common equity of Digonex, but we consolidate the entity because we control its board of directors via rights granted in convertible preferred stock and convertible debt that we own. As of August 31, 2019, Emmis owns rights that are convertible into approximately 84% of Digonex's common equity.

Noncontrolling interests represent the noncontrolling interest holders' proportionate share of the equity of the Austin radio partnership and Digonex. Noncontrolling interests are adjusted for the noncontrolling interest holders' proportionate share of the earnings or losses of the applicable entity. The noncontrolling interest continues to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance. As discussed below, our Austin radio partnership is held for sale. Below is a summary of the noncontrolling interest activity for the six months ended August 31, 2018 and 2019:

	Austin radio partnership			Digonex			Total noncontrolling interests
Balance, February 28, 2018	$	47,424		$	(16,744	)	$	30,680
Net income (loss)		2,743			(1,184	)		1,559
Distributions to noncontrolling interests		(2,724	)		—			(2,724	)
Balance, August 31, 2018	$	47,443		$	(17,928	)	$	29,515
Balance, February 28, 2019	$	47,146		$	(18,993	)	$	28,153
Net income (loss)		2,679			(1,001	)		1,678
Distributions to noncontrolling interests		(1,945	)		—			(1,945	)
Balance, August 31, 2019	$	47,880		$	(19,994	)	$	27,886

Discontinued Operations

During the quarter ended August 31, 2019, the Company entered into agreements to sell its 50.1% ownership interest in Emmis Austin Radio Broadcasting Company, L.P. (the “Austin Partnership”), as well as WQHT-FM and WBLS-FM in New York. The Company concluded that each of these transactions is a disposal of a business that meets the criteria to be classified as held for sale and each is a strategic shift that will have a significant impact on the Company’s operations and financial results. As such, the assets and liabilities of these businesses included in the disposal transactions have been classified as held for sale, and the results of operations and cash flows of these businesses have been classified as discontinued operations for all periods presented in the accompanying condensed consolidated financial statements. See below for more discussion of each of these transactions.

Summary of Discontinued Operations Activity:

	For the Three Months Ended August 31,					For the Six Months Ended August 31,
	2018		2019			2018			2019
Income from discontinued operations:
Austin Radio Partnership	$	2,592	$	2,618		$	5,174		$	5,084
WQHT-FM and WBLS-FM		2,616		4,580			5,846			7,402
Total income before income taxes from discontinued operations		5,208		7,198			11,020			12,486
Less: provision (benefit) for income taxes		1,496		(6,753	)		(1,014	)		(5,806	)
Income from discontinued operations, net of tax	$	3,712	$	13,951		$	12,034		$	18,292

A discussion of each component of discontinued operations follows.

Austin Radio Partnership

On June 7, 2019, a subsidiary of Emmis entered into a Purchased Interest Agreement to sell its 50.1% ownership interest in the Austin Partnership to our minority partner, Sinclair Telecable, Inc., for $39.3 million, subject to customary prorations and adjustments. Closing of the transaction occurred on October 1, 2019 and Emmis recognized a gain on sale of approximately $36.8 million. Cash proceeds, net of transaction-related expenses and estimated tax liabilities, were approximately $29.5 million. Approximately $9.9 million of these proceeds were used to repay debt outstanding, with the balance held for general corporate purposes, including capital expenditures, working capital, and potential acquisitions and investments.

The Austin Partnership has historically been included in our Radio segment. The following table summarizes certain operating results of the Austin Partnership for all periods presented. A portion of Emmis’ mortgage debt is required to be repaid with proceeds of this transaction. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of this disposal transaction to the results of the Austin Radio Partnership.

	For the Three Months Ended August 31,				For the Six Months Ended August 31,
	2018		2019		2018		2019
Net revenues	$	8,456	$	8,592	$	16,465	$	16,879
Station operating expenses, excluding depreciation and amortization		5,593		5,889		10,742		11,416
Depreciation and amortization		130		—		271		120
Interest expense		141		85		278		259
Income before taxes	$	2,592	$	2,618	$	5,174	$	5,084

Major classes of assets and liabilities of the Austin Partnership that are classified as held for sale in the accompanying condensed consolidated balance sheets are as follows:

	As of February 28, 2019		As of August 31, 2019
Current assets:
Cash and cash equivalents	$	1,095	$	1,712
Accounts receivable, net		4,856		5,753
Prepaid expenses		357		313
Other current assets		121		108
Total current assets		6,429		7,886
Noncurrent assets:
Property and equipment, net		5,060		5,246
Indefinite lived intangibles		34,720		34,720
Goodwill		4,338		4,338
Operating lease right-of-use assets		—		2,354
Other assets		25		25
Total noncurrent assets		44,143		46,683
Total assets	$	50,572	$	54,569
Current liabilities:
Accounts payable and accrued expenses	$	291	$	411
Accrued salaries and commissions		651		643
Deferred revenue		591		513
Income taxes payable		18		18
Operating lease liabilities		—		516
Other current liabilities		23		80
Total current liabilities		1,574		2,181
Noncurrent liabilities:
Operating lease liabilities, net of current		—		2,137
Other noncurrent liabilities		332		2
Total noncurrent liabilities		332		2,139
Total liabilities	$	1,906	$	4,320
Equity:
Noncontrolling interests	$	47,146	$	47,880

WQHT-FM and WBLS-FM

On June 28, 2019, Emmis entered into a Contribution and Distribution Agreement (the “Contribution Agreement”) with MediaCo Holding Inc., an Indiana corporation (“MediaCo”) and SG Broadcasting LLC, an affiliate of Standard General L.P., a New York-based investment firm that manages event-driven opportunity funds (“Standard General”), pursuant to which (i) Emmis will contribute the assets of its radio stations WQHT-FM and WBLS-FM, both in New York, NY (the “Stations”), in exchange for $91.5 million in cash, a $5.0 million note and 23.72% of the common stock of MediaCo, (ii) Standard General will purchase 76.28% of the common stock of MediaCo, and (iii) the common stock of MediaCo received by Emmis will be distributed pro rata in a taxable dividend to Emmis’ shareholders, making MediaCo a public company expected to be listed on Nasdaq. The common stock of MediaCo acquired by Standard General (which will be MediaCo’s Class B common stock) will be entitled to ten votes per share and the common stock acquired by Emmis and distributed to Emmis’ shareholders (which will be MediaCo’s Class A common stock) will be entitled to one vote per share. After closing, Emmis will continue to provide management services to the Stations under a Management Agreement, subject to the direction of the MediaCo board of directors which will initially consist of four directors appointed by Standard General and three directors appointed by Emmis. Emmis will receive an annual management fee of $1.25 million, plus reimbursement of certain expenses directly related to the operation of MediaCo’s business. Closing of the transaction is subject to customary closing conditions, including the consent of the FCC to the transfer of control of the Stations’ FCC licenses, which was granted on September 20, 2019, and the completion by the Securities and Exchange Commission of a review of the Form 10, which has been filed for the distribution of the MediaCo Class A common stock to Emmis shareholders. The Contribution Agreement contains customary representations, warranties, covenants and indemnities.

Cash proceeds (excluding the $5.0 million note), net of transaction-related expenses and estimated tax liabilities, are expected to be approximately $90 million, and will be used by Emmis to repay debt outstanding and for general corporate purposes. Upon the closing of the transaction, Emmis expects to recognize a gain in excess of $40 million.

The Stations have historically been included in our Radio segment. The following table summarizes certain operating results of the Stations for all periods presented. In accordance with ASC 205-20-45-6, Emmis has allocated interest on the debt required to be repaid as a result of this disposal transaction to the results of the Stations.

	For the Three Months Ended August 31,				For the Six Months Ended August 31,
	2018		2019		2018		2019
Net revenues	$	14,196	$	16,314	$	23,511	$	26,152
Station operating expenses, excluding depreciation and amortization		11,197		11,585		16,902		18,166
Depreciation and amortization		292		94		584		417
Interest expense		91		55		179		167
Income before taxes	$	2,616	$	4,580	$	5,846	$	7,402

Major classes of assets and liabilities of the Stations that are classified as held for sale in the accompanying condensed consolidated balance sheets are as follows:

	As of February 28, 2019		As of August 31, 2019
Current assets:
Prepaid expenses	$	100	$	—
Other current assets		100		—
Total current assets		200		—
Noncurrent assets:
Property and equipment, net		2,356		2,102
Indefinite lived intangibles		63,265		63,265
Other intangibles, net		758		661
Operating lease right-of-use assets		—		11,817
Other assets		145		343
Total noncurrent assets		66,524		78,188
Total assets	$	66,724	$	78,188
Current liabilities:
Operating lease liabilities	$	—	$	2,302
Other current liabilities		498		26
Total current liabilities		498		2,328
Noncurrent liabilities:
Operating lease liabilities, net of current		—		11,466
Other noncurrent liabilities		1,778		78
Total noncurrent liabilities		1,778		11,544
Total liabilities	$	2,276	$	13,872

Implementation of Recent Accounting Pronouncements

On March 1, 2019, we adopted Accounting Standard Update 2016-02, Leases, using the modified retrospective approach, applied at the beginning of the period of adoption, and we elected the package of transitional practical expedients. The adoption of this standard resulted in recording operating lease liabilities of approximately $28.8 million as of March 1, 2019 along with a corresponding right-of-use asset. A significant portion of these amounts has been reclassified to held for sale. The implementation of this standard did not have an impact on our condensed consolidated statements of operations. See Note 11 for more discussion of the Company’s leases.

Recent Accounting Pronouncements Not Yet Implemented

In June 2016, the Financial Accounting Standards Board issued Accounting Standards Update 2016-13, Financial Instruments – Credit Losses, which introduces new guidance for an approach based on using expected losses to estimate credit losses on certain types of financial instruments. It also modifies the impairment model for available-for-sale debt securities and provides a simplified accounting model for purchased financial assets with credit deterioration since their origination. Instruments in scope include loans, held-to-maturity debt securities and net investments in leases as well as reinsurance and trade receivables. This standard will be effective for us as of March 1, 2020. We are currently evaluating the impact that the adoption of the new standard will have on our condensed consolidated financial statements.