NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS UNLESS INDICATED OTHERWISE, EXCEPT SHARE DATA)
May 31, 2016
(Unaudited)
Note 1.
Summary of Significant Accounting Policies
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 29, 2016
. 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
May 31, 2016
, and the results of its operations and cash flows for the
three
-month periods ended
May 31, 2015
and
2016
.
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 29, 2016
that have had a material impact on our condensed consolidated financial statements and related notes.
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
May 31, 2015
and
2016
consisted of stock options and restricted stock awards. Potentially dilutive securities at
May 31, 2015
also included Series A non-cumulative convertible preferred stock (the “Preferred Stock”). All shares of Preferred Stock were converted into Class A common stock during the three months ended May 31, 2016. See Note 10 for more discussion of the conversion of Preferred Stock. The following table sets forth the calculation of basic and diluted net income per share:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended
|
|
May 31, 2015
|
|
May 31, 2016
|
|
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
|
$
|
1,525
|
|
|
43,217
|
|
|
$
|
0.04
|
|
|
$
|
2,686
|
|
|
47,070
|
|
|
$
|
0.06
|
|
Impact of equity awards
|
—
|
|
|
1,890
|
|
|
—
|
|
|
—
|
|
|
225
|
|
|
—
|
|
Impact of conversion of preferred stock into common stock
|
—
|
|
|
2,266
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Diluted net income per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
$
|
1,525
|
|
|
47,373
|
|
|
$
|
0.03
|
|
|
$
|
2,686
|
|
|
47,295
|
|
|
$
|
0.06
|
|
Shares excluded from the calculation as the effect of their conversion into shares of our common stock would be antidilutive were as follows:
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|
|
|
|
|
|
For the three months ended
May 31,
|
|
2015
|
|
2016
|
|
(shares in 000’s )
|
Equity awards
|
3,592
|
|
|
8,208
|
|
Antidilutive common share equivalents
|
3,592
|
|
|
8,208
|
|
Local Programming and Marketing Agreement Fees
The Company from time to time enters into local programming and marketing agreements (“LMAs”) in connection with acquisitions or dispositions of radio stations, often pending regulatory approval of transfer of the Federal Communications Commission ("FCC") licenses. 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 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.
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|
|
For the three months
ended May 31,
|
|
2015
|
|
2016
|
|
(amounts in 000's)
|
Net revenues
|
$
|
2,583
|
|
|
$
|
2,583
|
|
Station operating expenses, excluding depreciation and amortization expense
|
257
|
|
|
251
|
|
Interest expense
|
780
|
|
|
728
|
|
Assets and liabilities of 98.7FM as of
February 29, 2016
and
May 31, 2016
were as follows:
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|
|
|
|
|
|
|
|
As of February 29,
|
|
As of May 31,
|
|
2016
|
|
2016
|
|
(amounts in 000's)
|
Current assets:
|
|
|
|
Restricted cash
|
$
|
1,464
|
|
|
$
|
1,022
|
|
Prepaid expenses
|
545
|
|
|
530
|
|
Total current assets
|
2,009
|
|
|
1,552
|
|
Noncurrent assets:
|
|
|
|
Property and equipment, net
|
253
|
|
|
244
|
|
Indefinite lived intangibles
|
49,297
|
|
|
49,297
|
|
Deposits and other
|
5,460
|
|
|
5,678
|
|
Total noncurrent assets
|
55,010
|
|
|
55,219
|
|
Total assets
|
$
|
57,019
|
|
|
$
|
56,771
|
|
Current liabilities:
|
|
|
|
Accounts payable and accrued expenses
|
$
|
14
|
|
|
$
|
17
|
|
Current maturities of long-term debt
|
5,453
|
|
|
5,582
|
|
Deferred revenue
|
779
|
|
|
807
|
|
Other current liabilities
|
223
|
|
|
219
|
|
Total current liabilities
|
6,469
|
|
|
6,625
|
|
Noncurrent liabilities:
|
|
|
|
Long-term debt, net of current portion and unamortized debt discount
|
57,728
|
|
|
56,359
|
|
Total noncurrent liabilities
|
57,728
|
|
|
56,359
|
|
Total liabilities
|
$
|
64,197
|
|
|
$
|
62,984
|
|
Restricted Cash
The Company's restricted cash, included in current assets in the accompanying condensed consolidated balance sheets, totaled
$1.5 million
and
$1.7 million
as of
February 29, 2016
and
May 31, 2016
, respectively.
The terms of our 98.7FM non-recourse notes and related agreements discussed in Note 4 restrict a portion of our cash on deposit for specific operating and financing purposes. Restricted cash related to the 98.7FM non-recourse notes and related agreements totaled
$1.5 million
and
$1.0 million
as of
February 29, 2016
and
May 31, 2016
, respectively.
In connection with the Company's agreement with Sprint/United Management Company (“Sprint”), the Company collects cash from other participating companies in the radio industry and remits cash collected to Sprint. The entirety of cash collected but not yet remitted to Sprint classified as restricted cash as of
May 31, 2016
was
$0.7 million
. The Company had remitted to Sprint all collected cash related to its agreement as of February 29, 2016.
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. 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.
Noncontrolling interests represents 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. Below is a summary of the noncontrolling interest activity for the three months ended May 31, 2015 and 2016:
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|
|
|
|
|
Austin radio partnership
|
|
Digonex
|
|
Total noncontrolling interests
|
Balance, February 28, 2015
|
|
$
|
47,883
|
|
|
$
|
(1,222
|
)
|
|
$
|
46,661
|
|
Net income (loss)
|
|
1,614
|
|
|
(981
|
)
|
|
633
|
|
Distributions to noncontrolling interests
|
|
(1,636
|
)
|
|
—
|
|
|
(1,636
|
)
|
Balance, May 31, 2015
|
|
$
|
47,861
|
|
|
$
|
(2,203
|
)
|
|
$
|
45,658
|
|
|
|
|
|
|
|
|
Balance, February 29, 2016
|
|
$
|
47,556
|
|
|
$
|
(9,159
|
)
|
|
$
|
38,397
|
|
Net income (loss)
|
|
1,527
|
|
|
(898
|
)
|
|
629
|
|
Distributions to noncontrolling interests
|
|
(1,187
|
)
|
|
—
|
|
|
(1,187
|
)
|
Balance, May 31, 2016
|
|
$
|
47,896
|
|
|
$
|
(10,057
|
)
|
|
$
|
37,839
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, to clarify the principles used to recognize revenue for all entities. The FASB deferred implementation of this guidance by one year with the issuance of Accounting Standards Update 2015-14. As such, this guidance will be effective for the Company in the first quarter of its fiscal year ending February 28, 2019. The Company is currently evaluating the method of adoption and impact, if any, the adoption of this guidance will have on its financial position and results of operations.
In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements - Going Concern - Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This update provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective for the fiscal year ending February 28, 2017, and for annual periods and interim periods thereafter. Early adoption is permitted. The adoption of this update is not expected to have an impact on the Company’s consolidated financial statements.
In April 2015, the FASB issued Accounting Standards Update 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This update provides guidance as to when a company using a cloud computing service that includes a software license should capitalize and depreciate the software license. This guidance was effective for the Company as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
In September 2015, the FASB issued Accounting Standards Update 2015-16, Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments. This update requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in the provisional amount as if the accounting had been completed at the acquisition date. This guidance was effective for the Company as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
In February 2016, the FASB issued Accounting Standards Update 2016-02, Leases (Topic 842). This update requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance will be effective for the Company as of March 1, 2019. A modified retrospective transition method is required. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.
In March 2016, the FASB issued Accounting Standards Update 2016-09, Compensation-Stock Compensation (Topic 718): Improvement to Employee Share-based Payment Accounting (ASU 2016-09) to simplify the accounting for share-based payment transactions, including the income tax consequences, and standardize certain classifications on the statement of cash flows. As permitted by ASU 2016-09, the Company chose to early adopt the provisions of this update as of March 1, 2016. The adoption of this guidance did not have any effect on the Company's financial position, results of operations, or cash flows.
Note 2.
Share Based Payments
The amounts recorded as share based compensation expense consist of stock option grants, restricted stock grants, and common stock issued to employees and directors in lieu of cash payments.
Stock Option Awards
The Company has granted options to purchase its common stock to employees and directors of the Company under various stock option plans at no less than the fair market value of the underlying stock on the date of grant. These options are granted for a term not exceeding
10 years
and are forfeited, except in certain circumstances, in the event the employee or director terminates his or her employment or relationship with the Company. Generally, these options either vest annually over
3 years
(
one-third
each year for
3 years
), or cliff vest at the end of
3 years
. The Company issues new shares upon the exercise of stock options.
The fair value of each option awarded is estimated on the date of grant using a Black-Scholes option-pricing model and expensed on a straight-line basis over the vesting period. Expected volatilities are based on historical volatility of the Company’s stock. The Company uses historical data to estimate option exercises and employee terminations within the valuation model. The Company includes estimated forfeitures in its compensation cost and updates the estimated forfeiture rate through the final vesting date of awards. The risk-free interest rate for periods within the life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. The following assumptions were used to calculate the fair value of the Company’s options on the date of grant during the
three
months ended
May 31, 2015
and
2016
:
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2015
|
|
2016
|
Risk-Free Interest Rate:
|
1.3% - 1.4%
|
|
1.2%
|
Expected Dividend Yield:
|
0%
|
|
0%
|
Expected Life (Years):
|
4.3
|
|
4.3
|
Expected Volatility:
|
63.6% - 64.6%
|
|
58.6% - 59.6%
|
The following table presents a summary of the Company’s stock options outstanding at
May 31, 2016
, and stock option activity during the
three
months ended
May 31, 2016
(“Price” reflects the weighted average exercise price per share; "Aggregate Intrinsic Value" dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
Outstanding, beginning of period
|
7,793,702
|
|
|
$
|
1.59
|
|
|
|
|
|
Granted
|
582,500
|
|
|
0.54
|
|
|
|
|
|
Expired
|
73,754
|
|
|
11.17
|
|
|
|
|
|
Outstanding, end of period
|
8,302,448
|
|
|
1.43
|
|
|
6.8
|
|
$
|
98
|
|
Exercisable, end of period
|
4,846,694
|
|
|
1.41
|
|
|
5.3
|
|
$
|
90
|
|
Cash received from option exercises for the three months ended
May 31, 2015
was
$0.1 million
. The Company did not record an income tax benefit relating to the options exercised during the
three
months ended
May 31, 2015
. No options were exercised during the three months ended May 31, 2016.
The weighted average per share grant date fair value of options granted during the
three
months ended
May 31, 2015
and
2016
, was
$1.05
and
$0.26
, respectively.
A summary of the Company’s nonvested options at
May 31, 2016
, and changes during the
three
months ended
May 31, 2016
, is presented below:
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted Average
Grant Date
Fair Value
|
Nonvested, beginning of period
|
3,323,253
|
|
|
$
|
0.93
|
|
Granted
|
582,500
|
|
|
0.26
|
|
Vested
|
449,999
|
|
|
1.25
|
|
Nonvested, end of period
|
3,455,754
|
|
|
0.77
|
|
There were
1.9 million
shares available for future grants under the Company’s various equity plans (
0.6 million
shares under the 2015 Equity Compensation Plan and
1.3 million
shares under other plans) at May 31, 2016, not including shares that may become available for future grants upon forfeiture, lapse or surrender for taxes. Additionally, the board of directors approved the 2016 Equity Compensation Plan on January 29, 2016. Under the 2016 Equity Compensation Plan, awards equivalent to
6.0 million
shares of common stock may be granted. The 2016 Equity Compensation Plan won't become effective until it is approved by Emmis' shareholders at the annual meeting in July 2016. However, Emmis' Chairman and Chief Executive Officer, Jeffrey H. Smulyan, controls more than
50%
of the vote on this matter and has informed the board of directors that he intends to vote in favor of approving the 2016 Plan.
The vesting dates of outstanding options at
May 31, 2016
range from July 2016 to March 2019, and expiration dates range from March 2017 to April 2026.
Restricted Stock Awards
The Company grants restricted stock awards to directors annually, and periodically grants restricted stock to employees in connection with employment agreements. Awards to directors are granted on the date of our annual meeting of shareholders and vest on the earlier of (i) the completion of the director’s
3
-year term or (ii) the third anniversary of the date of grant. Restricted stock award grants are granted out of the Company’s 2015 Equity Compensation Plan. The Company may also award, out of the Company’s 2015 Equity Compensation Plan, stock to settle certain bonuses and other compensation that otherwise would be paid in cash. Any restrictions on these shares may be immediately lapsed on the grant date.
The following table presents a summary of the Company’s restricted stock grants outstanding at
May 31, 2016
, and restricted stock activity during the
three
months ended
May 31, 2016
(“Price” reflects the weighted average share price at the date of grant):
|
|
|
|
|
|
|
|
|
Awards
|
|
Price
|
Grants outstanding, beginning of period
|
852,028
|
|
|
$
|
1.78
|
|
Granted
|
456,367
|
|
|
0.52
|
|
Vested (restriction lapsed)
|
718,867
|
|
|
1.05
|
|
Grants outstanding, end of period
|
589,528
|
|
|
1.69
|
|
The total grant date fair value of shares vested during the
three
months ended
May 31, 2015
and
2016
, was
$1.0 million
and
$0.8 million
, respectively.
Recognized Non-Cash Compensation Expense
The following table summarizes stock-based compensation expense recognized by the Company during the three months ended
May 31, 2015
and
2016
. The company did not recognize any tax benefits related to stock-based compensation during the periods presented below.
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
2015
|
|
2016
|
Station operating expenses
|
$
|
724
|
|
|
$
|
337
|
|
Corporate expenses
|
1,380
|
|
|
519
|
|
Stock-based compensation expense included in operating expenses
|
2,104
|
|
|
856
|
|
As of
May 31, 2016
, there was
$1.9 million
of unrecognized compensation cost, net of estimated forfeitures, related to nonvested share-based compensation arrangements. The cost is expected to be recognized over a weighted average period of approximately
1.6
years.
Note 3.
Intangible Assets and Goodwill
Valuation of Indefinite-lived Broadcasting Licenses
In accordance with ASC Topic 350,
Intangibles—Goodwill and Other,
the Company’s Federal Communications Commission (“FCC”) licenses are considered indefinite-lived intangibles. These assets, which the Company determined were its only indefinite-lived intangibles, are not subject to amortization, but are tested for impairment at least annually as discussed below.
The carrying amounts of the Company’s FCC licenses were
$205.1 million
as of
February 29, 2016
and
May 31, 2016
. Pursuant to Emmis’ accounting policy, stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA with another broadcaster. The Company generally performs its annual impairment test of indefinite-lived intangibles as of December 1 of each year. When indicators of impairment are present, the Company will perform an interim impairment test. During the quarter ended
May 31, 2016
, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. These impairment tests may result in impairment charges in future periods.
Fair value of our FCC licenses is estimated to be the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. To determine the fair value of our FCC licenses, the Company uses an income valuation method when it performs its impairment tests. Under this method, the Company projects cash flows that would be generated by each of its units of accounting assuming the unit of accounting was commencing operations in its respective market at the beginning of the valuation period. This cash flow stream is discounted to arrive at a value for the FCC license. The Company assumes the competitive situation that exists in each market remains unchanged, with the exception that its unit of accounting commenced operations at the beginning of the valuation period. In doing so, the Company extracts the value of going concern and any other assets acquired, and strictly values the FCC license. Major assumptions involved in this analysis include market revenue, market revenue growth rates, unit of accounting audience share, unit of accounting revenue share and discount rate. Each of these assumptions may change in the future based upon changes in general economic conditions, audience behavior, consummated transactions, and numerous other variables that may be beyond our control. When evaluating our radio broadcasting licenses for impairment, the testing is performed at the unit of accounting level as determined by ASC Topic 350-30-35. In our case, radio stations in a geographic market cluster are considered a single unit of accounting, provided that they are not being operated under an LMA.
Valuation of Goodwill
ASC Topic 350-20-35 requires the Company to test goodwill for impairment at least annually using a two-step process. The first step is a screen for potential impairment, while the second step measures the amount of impairment. The Company conducts the two-step impairment test on December 1 of each fiscal year, unless indications of impairment exist during an interim period. During the quarter ended
May 31, 2016
, no new or additional impairment indicators emerged; hence, no interim impairment testing was warranted. When assessing its goodwill for impairment, the Company uses an enterprise valuation approach to determine the fair value of each of the Company’s reporting units (radio stations grouped by market and magazines on an individual basis). Management determines enterprise value for each of its reporting units by multiplying the two-year average station operating income generated by each reporting unit (current year based on actual results and the next year based on budgeted results) by an estimated market multiple. The Company uses a blended station operating income trading multiple of publicly traded radio operators as a benchmark for the multiple it applies to its radio reporting units. There are no publicly traded publishing companies that are focused predominantly on city and regional magazines as is our publishing segment.
Therefore, the market multiple used as a benchmark for our publishing reporting units has been based on recently completed transactions within the city and regional magazine industry or analyst reports that include valuations of magazine divisions within publicly traded media conglomerates. Management believes this methodology for valuing radio and publishing properties is a common approach and believes that the multiples used in the valuation are reasonable given our peer comparisons and recent market transactions. To corroborate the step-one reporting unit fair values determined using the market approach described above, management also uses an income approach, which is a discounted cash flow method to determine the fair value of the reporting unit.
This enterprise valuation is compared to the carrying value of the reporting unit for the first step of the goodwill impairment test. If the reporting unit exhibits impairment, the Company proceeds to the second step of the goodwill impairment test. For its step-two testing, the enterprise value is allocated among the tangible assets, indefinite-lived intangible assets (FCC licenses valued using a direct-method valuation approach) and unrecognized intangible assets, such as customer lists, with the residual amount representing the implied fair value of the goodwill. To the extent the carrying amount of the goodwill exceeds the implied fair value of the goodwill, the difference is recorded as an impairment charge in the statement of operations.
The following table summarizes the Company's goodwill by segment as of
February 29, 2016
and
May 31, 2016
.
|
|
|
|
|
|
|
|
|
|
As of February 29,
|
|
As of May 31,
|
|
2016
|
|
2016
|
Radio
|
$
|
4,603
|
|
|
$
|
4,603
|
|
Publishing
|
8,036
|
|
|
8,036
|
|
Corporate & Emerging Technologies
|
2,058
|
|
|
2,058
|
|
Total Goodwill
|
$
|
14,697
|
|
|
$
|
14,697
|
|
Definite-lived intangibles
The Company’s definite-lived intangible assets consist of patents, customer lists, trademarks and a syndicated programming contract, all of which are amortized over the period of time the assets are expected to contribute directly or indirectly to the Company’s future cash flows. The following table presents the weighted-average useful life, gross carrying amount and accumulated amortization for each major class of definite-lived intangible assets at
February 29, 2016
and
May 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2016
|
|
As of May 31, 2016
|
|
|
|
|
(in 000's)
|
|
|
Weighted Average Remaining Useful Life (in years)
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
Accumulated Amortization
|
Net Carrying Amount
|
Trademarks
|
|
6.7
|
|
$
|
1,240
|
|
$
|
727
|
|
$
|
513
|
|
|
$
|
1,240
|
|
$
|
762
|
|
$
|
478
|
|
Patents
|
|
5.3
|
|
1,815
|
|
1,141
|
|
674
|
|
|
1,815
|
|
1,172
|
|
643
|
|
Customer lists
|
|
1.2
|
|
1,015
|
|
543
|
|
472
|
|
|
1,015
|
|
629
|
|
386
|
|
Programming agreement
|
|
5.3
|
|
2,154
|
|
514
|
|
1,640
|
|
|
2,154
|
|
587
|
|
1,567
|
|
TOTAL
|
|
|
|
$
|
6,224
|
|
$
|
2,925
|
|
$
|
3,299
|
|
|
$
|
6,224
|
|
$
|
3,150
|
|
$
|
3,074
|
|
Total amortization expense from definite-lived intangibles for the three-month periods ended
May 31, 2015
and
2016
was
$0.4 million
and
$0.2 million
, respectively. The following table presents the Company's estimate of amortization expense for each of the five succeeding fiscal years for definite-lived intangibles:
|
|
|
|
|
Year ended February 28 (29),
|
|
Expected Amortization Expense
|
|
|
(in 000's)
|
2017
|
|
896
|
|
2018
|
|
636
|
|
2019
|
|
457
|
|
2020
|
|
457
|
|
2021
|
|
457
|
|
Note 4.
Long-term Debt
Long-term debt was comprised of the following at
February 29, 2016
and
May 31, 2016
:
|
|
|
|
|
|
|
|
|
|
February 29,
2016
|
|
May 31,
2016
|
2014 Credit Agreement debt :
|
|
|
|
Revolver
|
$
|
3,000
|
|
|
$
|
9,000
|
|
Term Loan
|
181,762
|
|
|
176,580
|
|
Total 2014 Credit Agreement debt
|
184,762
|
|
|
185,580
|
|
|
|
|
|
98.7FM non-recourse debt
|
65,411
|
|
|
64,103
|
|
Digonex non-recourse debt
(1)
|
4,714
|
|
|
4,900
|
|
Less: Current maturities
|
(17,573
|
)
|
|
(14,832
|
)
|
Less: Unamortized original issue discount
|
(9,287
|
)
|
|
(8,860
|
)
|
Total long-term debt
|
$
|
228,027
|
|
|
$
|
230,891
|
|
(1)
The face value of Digonex non-recourse debt is
$6.2 million
2014 Credit Agreement
On June 10, 2014, Emmis entered into the 2014 Credit Agreement, by and among the Company, EOC, as borrower (the “Borrower”), certain other subsidiaries of the Company, as guarantors (the “Subsidiary Guarantors”), the lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent, and Fifth Third Bank, as syndication agent.
The 2014 Credit Agreement includes a senior secured term loan facility (the “Term Loan”) of $
185.0 million
and a senior secured revolving credit facility of
$20.0 million
, and contains provisions for an uncommitted increase of up to
$20.0 million
principal amount (plus additional amounts so long as a pro forma total net senior secured leverage ratio condition is met) of the revolving credit facility and/or the Term Loan subject to the satisfaction of certain conditions. The revolving credit facility includes a sub-facility for the issuance of up to
$5.0 million
of letters of credit. Pursuant to the 2014 Credit Agreement, the Borrower borrowed
$185.0 million
of the Term Loan on June 10, 2014;
$109.0 million
was disbursed to the Borrower (the “Initial Proceeds”) and the remaining
$76.0 million
was funded into escrow (the “Subsequent Acquisition Proceeds”).
The Initial Proceeds, coupled with
$13.0 million
of revolving credit facility borrowings, were used by the Borrower on June 10, 2014 to repay all amounts outstanding under the 2012 Credit Agreement, to make a
$55.0 million
initial payment associated with our acquisition of WBLS-FM and WLIB-AM, and to pay fees and expenses. The Subsequent Acquisition Proceeds were used to make the final
$76.0 million
payment related to the acquisition of WBLS-FM and WLIB-AM on February 13, 2015.
The Term Loan is due not later than June 10, 2021 and initially amortized in an amount equal to
1%
per annum (subsequently amended, see below) of the original principal amount of the Term Loan, payable in quarterly installments commencing April 1, 2015, with the balance payable on the maturity date. The revolving credit facility expires not later than June 10, 2019. An unused commitment fee of
50
basis points per annum will be payable quarterly on the average unused
amount of the revolving credit facility. Prior to the amendments to the 2014 Credit Agreement discussed below, the Term Loan and amounts borrowed under the revolving credit facility bore interest, at the Borrower’s option, at either (i) the Alternate Base Rate (as defined in the 2014 Credit Agreement) (but not less than
2.00%
) plus
3.75%
or (ii) the Adjusted LIBO Rate (as defined in the 2014 Credit Agreement) (but not less than
1.00%
) plus
4.75%
.
The 2014 Credit Agreement is carried on our condensed consolidated balance sheets net of an original issue discount. The original issue discount, which was
$9.3 million
and
$8.9 million
as of February 29, 2016 and
May 31, 2016
, respectively, is being amortized as additional interest expense over the life of the 2014 Credit Agreement.
The obligations under the 2014 Credit Agreement are secured by a perfected first priority security interest in substantially all of the assets of the Company, the Borrower and the Subsidiary Guarantors.
On November 7, 2014, Emmis entered into the First Amendment to the 2014 Credit Agreement. The First Amendment (i) increased the maximum Total Leverage Ratio to
6.00
:1.00 for the period February 28, 2015 through February 29, 2016, (ii) adjusted the definition of Consolidated EBITDA to exclude during the term of the 2014 Credit Agreement up to
$5 million
in severance and/or contract termination expenses and up to
$2.5 million
in losses attributable to the reformatting of the Company’s radio stations, (iii) extended the requirement for the Borrower to pay a
1.00%
fee on certain prepayments of the Term Loan to November 7, 2015, (iv) increased the Applicable Margin by
0.25%
for at least six months from the date of the First Amendment and until the Total Leverage Ratio is less than
5.00
:1.00, and (v) made certain technical adjustments to the definition of Consolidated Excess Cash Flow and to address the Foreign Account Tax Compliance Act. Emmis paid a total of approximately
$1.0 million
of transaction fees to the Lenders that consented to the First Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
On April 30, 2015, Emmis entered into the Second Amendment to the 2014 Credit Agreement. The Second Amendment (i) increases the maximum Total Leverage Ratio to (A)
6.75
:1.00 during the period from May 31, 2015 through February 29, 2016, (B)
6.50
:1.00 for the quarter ended May 31, 2016, (C)
6.25
:1.00 for the quarter ended August 31, 2016, (D)
6.00
:1.00 for the quarter ended November 30, 2016, and (E)
5.75
:1.00 for the quarter ended February 28, 2017, after which it reverts to the original ratio of
4.00
:1.00 for the quarters ended May 31, 2017 and thereafter, (ii) requires Emmis to pay a
2.00%
fee on certain prepayments of the Term Loan prior to the first anniversary of the Second Amendment and requires Emmis to pay a
1.00%
fee on certain prepayments of the Term Loan from the first anniversary of the Second Amendment until the second anniversary of the Second Amendment, (iii) increases the Applicable Margin throughout the remainder of the term of the Credit Agreement to
5.00%
for ABR Loans (as defined in the Credit Agreement) and
6.00%
for Eurodollar Loans (as defined in the 2014 Credit Agreement), and (iv) increases the amortization to
0.50%
per calendar quarter through January 1, 2016 and to
1.25%
per calendar quarter thereafter commencing April 1, 2016. Emmis paid a total of approximately
$1.1 million
of transaction fees to the Lenders that consented to the Second Amendment, which were recorded as original issue discount and are being amortized over the remaining life of the 2014 Credit Agreement.
We were in compliance with all financial and non-financial covenants as of
May 31, 2016
. Our Total Leverage Ratio and Interest Coverage Ratio (each as defined in the 2014 Credit Agreement) requirements and actual amounts as of
May 31, 2016
were as follows:
|
|
|
|
|
|
As of May 31, 2016
|
|
Covenant Requirement
|
|
Actual Results
|
Maximum Total Leverage Ratio
|
6.50 : 1.00
|
|
5.43 : 1.00
|
Minimum Interest Coverage Ratio
|
2.00 : 1.00
|
|
2.46 : 1.00
|
98.7FM Non-recourse Debt
On May 30, 2012, the Company, through wholly-owned, newly-created subsidiaries, issued
$82.2 million
of non-recourse notes. Teachers Insurance and Annuity Association of America, through a participation agreement with Wells Fargo Bank Northwest, National Association, is entitled to receive payments made on the notes. The notes are obligations only of the newly-created subsidiaries, are non-recourse to the rest of the Company and its subsidiaries, and are secured by the assets of the newly-created subsidiaries, including the payments made to the newly-created subsidiary related to the 98.7FM LMA, which are guaranteed by Disney Enterprises, Inc. The notes bear interest at
4.1%
.
Digonex Non-recourse Debt
Digonex non-recourse notes payable consist of notes payable issued by Digonex, which were recorded at fair value on June 16, 2014, the date that Emmis acquired a controlling interest in Digonex. The notes payable, some of which are secured by the assets of Digonex, are non-recourse to the rest of the Company and its subsidiaries. The notes payable mature on December 31, 2017 and accrue interest at
5.0%
per annum. Interest is due at maturity. The face value of the notes payable is
$6.2 million
. The Company is accreting the difference between this face value and the original
$3.6 million
fair value of the notes payable recorded in the acquisition of its controlling interest of the business as interest expense over the remaining term of the notes payable.
Based on amounts outstanding at
May 31, 2016
, mandatory principal payments of long-term debt for the next five
years and thereafter are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
2014 Credit Agreement
|
|
|
|
Digonex
|
|
Total
|
February 28 (29),
|
Revolver
|
|
Term Loan
|
|
98.7FM Debt
|
|
Notes payable
|
|
Payments
|
2017
|
$
|
—
|
|
|
$
|
6,938
|
|
|
$
|
4,146
|
|
|
$
|
—
|
|
|
$
|
11,084
|
|
2018
|
—
|
|
|
9,250
|
|
|
6,039
|
|
|
6,199
|
|
|
21,488
|
|
2019
|
—
|
|
|
9,250
|
|
|
6,587
|
|
|
—
|
|
|
15,837
|
|
2020
|
9,000
|
|
|
9,250
|
|
|
7,150
|
|
|
—
|
|
|
25,400
|
|
2021
|
—
|
|
|
9,250
|
|
|
7,756
|
|
|
—
|
|
|
17,006
|
|
Thereafter
|
—
|
|
|
132,642
|
|
|
32,425
|
|
|
—
|
|
|
165,067
|
|
Total
|
$
|
9,000
|
|
|
$
|
176,580
|
|
|
$
|
64,103
|
|
|
$
|
6,199
|
|
|
$
|
255,882
|
|
Note 5.
Liquidity
The Company continually projects its anticipated cash needs, which include its operating needs, capital needs, and principal and interest payments on its indebtedness. As of the filing of this Form 10-Q, management believes the Company can meet its liquidity needs through the end of fiscal year 2017 with cash and cash equivalents on hand and projected cash flows from operations. Based on these projections, management also believes the Company will be in compliance with its debt covenants through the end of fiscal year 2017.
Note 6.
Fair Value Measurements
As defined in ASC Topic 820, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable. The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurement) and the lowest priority to unobservable inputs (Level 3 measurement).
Recurring Fair Value Measurements
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of
February 29, 2016
and
May 31, 2016
. The financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of fair value assets and liabilities and their placement within the fair value hierarchy levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
(in 000's)
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
As of February 29, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
|
Quoted Prices
in Active
Markets for
Identical Assets
or Liabilities
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
Total
|
|
(in 000's)
|
Available for sale securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Total assets measured at fair value on a recurring basis
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
800
|
|
|
$
|
800
|
|
Available for sale securities
— Emmis’ available for sale securities are comprised of preferred stock of a private company that is not traded in active markets and is included in other assets, net in the accompanying condensed consolidated balance sheets. The investment is recorded at fair value, which was generally estimated using significant unobservable market parameters, resulting in a level 3 categorization. The carrying value of our preferred stock investment was determined by using implied valuations of recent rounds of financing and by other corroborating evidence, which may include the application of various valuation methodologies including option-pricing and discounted cash flow based models.
The following table shows a reconciliation of the beginning and ending balances for fair value measurements using significant unobservable inputs:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended May 31,
|
|
2015
|
|
2016
|
|
Available
For Sale
Securities
|
|
Available
For Sale
Securities
|
Beginning Balance
|
$
|
500
|
|
|
$
|
800
|
|
Purchases
|
—
|
|
|
—
|
|
Ending Balance
|
$
|
500
|
|
|
$
|
800
|
|
Non-Recurring Fair Value Measurements
The Company has certain assets that are measured at fair value on a non-recurring basis under circumstances and events that include those described in Note 3, Intangible Assets and Goodwill, and are adjusted to fair value only when the carrying values are more than the fair values. The categorization of the framework used to price the assets is considered a Level 3 measurement due to the subjective nature of the unobservable inputs used to determine the fair value (see Note 3 for more discussion).
Fair Value of Other Financial Instruments
Certain nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. Assets and liabilities acquired in business combinations are recorded at their fair value as of the date of acquisition.
The estimated fair value of financial instruments is determined using the best available market information and appropriate valuation methodologies. Considerable judgment is necessary, however, in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that the Company
could realize in a current market exchange, or the value that ultimately will be realized upon maturity or disposition. The use of different market assumptions may have a material effect on the estimated fair value amounts.
The following methods and assumptions were used to estimate the fair value of financial instruments:
-
Cash and cash equivalents
: The carrying amount of these assets approximates fair value because of the short maturity of these instruments.
-
2014 Credit Agreement debt
: As of
May 31, 2016
, the fair value and carrying value, excluding original issue discount, of the Company's 2014 Credit Agreement debt was
$160.5 million
and
$185.6 million
, respectively. The Company's estimate of fair value was based on quoted prices of this instrument and is considered a Level 2 measurement.
-
Other long-term debt
: The Company’s 98.7FM non-recourse debt and Digonex non-recourse debt is not actively traded and is considered a level 3 measurement. The Company believes the current carrying value of its other long-term debt approximates its fair value.
Note 7.
Segment Information
The Company’s operations are aligned into three business segments: (i) Radio, (ii) Publishing and (iii) Corporate & Emerging Technologies. Emerging Technologies includes our TagStation, NextRadio and Digonex businesses. These business segments are consistent with the Company’s management of these businesses and its financial reporting structure. Corporate expenses are not allocated to reportable segments. The Company’s segments operate exclusively in the United States.
The accounting policies as described in the summary of significant accounting policies included in the Company’s Annual Report filed on Form 10-K, for the year ended
February 29, 2016
, and in Note 1 to these condensed consolidated financial statements, are applied consistently across segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2016
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
42,699
|
|
|
13,092
|
|
|
211
|
|
|
$
|
56,002
|
|
Station operating expenses excluding depreciation and amortization expense
|
27,275
|
|
|
13,478
|
|
|
2,236
|
|
|
42,989
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
3,044
|
|
|
3,044
|
|
Depreciation and amortization
|
907
|
|
|
73
|
|
|
352
|
|
|
1,332
|
|
Operating income (loss)
|
$
|
14,517
|
|
|
$
|
(459
|
)
|
|
$
|
(5,421
|
)
|
|
$
|
8,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2015
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
Net revenues
|
42,593
|
|
|
15,525
|
|
|
335
|
|
|
$
|
58,453
|
|
Station operating expenses excluding depreciation and amortization expense
|
28,693
|
|
|
15,209
|
|
|
1,641
|
|
|
45,543
|
|
Corporate expenses excluding depreciation and amortization expense
|
—
|
|
|
—
|
|
|
3,819
|
|
|
3,819
|
|
Depreciation and amortization
|
798
|
|
|
61
|
|
|
591
|
|
|
1,450
|
|
Operating income (loss)
|
$
|
13,102
|
|
|
$
|
255
|
|
|
$
|
(5,716
|
)
|
|
$
|
7,641
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
Radio
|
|
Publishing
|
|
Corporate & Emerging Technologies
|
|
Consolidated
|
As of February 29, 2016
|
$
|
271,336
|
|
|
$
|
22,060
|
|
|
$
|
23,210
|
|
|
$
|
316,606
|
|
As of May 31, 2016
|
$
|
275,300
|
|
|
$
|
20,241
|
|
|
$
|
23,108
|
|
|
$
|
318,649
|
|
Note 8.
Regulatory, Legal and Other Matters
Emmis is a party to various legal proceedings arising in the ordinary course of business. In the opinion of management of the company, however, there are no legal proceedings pending against the company that we believe are likely to have a material adverse effect on the company.
On July 7, 2014, individuals who had been seeking to overturn the FCC’s approval of the transfer of the broadcast licenses for WBLS-FM and WLIB-AM from entities associated with Inner City Broadcasting to YMF (the entities that subsequently sold the two stations to Emmis) filed with the U.S. Court of Appeals for the District of Columbia Circuit a Notice of Appeal of the FCC’s approval of the transfer. The U.S. Court of Appeals for the District of Columbia upheld the license transfer. Additionally, in March 2015, an individual filed a lawsuit in the Federal District Court of New York challenging the transfer of the assets of WBLS-FM and WLIB-AM from Inner City to YMF, and claimed that Emmis had exerted undue influence in securing the FCC's consent to the transfer of the FCC licenses of WBLS-FM and WLIB-AM from YMF to Emmis. Based upon the facts alleged in the cases and the extensive precedent of courts not overturning FCC approvals of transfers of broadcast licenses except in exceedingly rare circumstances, Emmis believes the appeal and the claims in the lawsuit are without merit.
Note 9.
Income Taxes
Our effective income tax rate was
17%
for the three-month period ended May 31, 2016. The Company recorded a valuation allowance for its net deferred tax assets generated during the period, including its net operating loss carryforwards, but excluding deferred tax liabilities related to indefinite-lived intangibles. The provision associated with deferred tax liabilities related to indefinite-lived intangibles is estimated to be approximately
$2.5 million
for the year ending February 28, 2017.
Note 10.
Other Significant Events
On March 17, 2016, The Nasdaq Stock Market LLC ("Nasdaq") filed with the United States Securities and Exchange Commission Form 25-NSE to formally delist the Company's Preferred Stock from the Nasdaq Global Select Market (formerly listed under the symbol "EMMSP"). The delisting occurred on March 28, 2016. Pursuant to the Company's articles of incorporation, each outstanding share of Preferred Stock was automatically converted on April 4, 2016, into the Company's Class A common stock at a ratio of
2.80
shares of Class A common stock for each share of Preferred Stock.
On both March 1, 2016 and June 7, 2016, Emmis contributed an additional
$0.5 million
to Digonex in the form of convertible debt. Emmis currently owns rights that are convertible into at least
78%
of the common equity of Digonex.
Note 11.
Subsequent Event
On December 7, 2015, the Company received a notification from the Listing Qualifications Department of Nasdaq indicating that the Company's Class A common stock was not in compliance with Markeplace Rule 5450(a)(1) (the “Minimum Bid Price Rule”) because the minimum bid price of the Company's Class A common stock on the Nasdaq Global Select Market closed below $1.00 per share for 30 consecutive business days. In accordance with Marketplace Rules 5810(c)(3)(A), the Company had 180 calendar days, or until June 6, 2016, for our Class A common stock to regain compliance with the Minimum Bid Price Rule. During the 180 day period, the Company’s Class A common stock continued to trade on the Nasdaq Global Select Market. On June 7, 2016, the Company received a written notification (the "Staff Determination")from Nasdaq stating that because the Company had not regained compliance with the
$1.00
minimum bid price requirement for continued listing, the Company’s Class A common stock (listed on The Nasdaq Global Select Market under the symbol “EMMS”) would be subject to delisting unless the Company requested a hearing before a Nasdaq Hearings Panel (the "Panel") on or before June 14, 2016.
The Company requested a hearing before the Panel, which stayed any delisting action in connection with the Staff Determination and allowed the continued listing of the Company’s Class A common stock on The Nasdaq Global Select Market until the Panel renders a decision subsequent to the hearing. At the hearing, the Company intends to present a plan to regain compliance with Rule 5450(a)(1) and request that the Panel allow the Company additional time within which to regain compliance. The Company believes that it will be able to present a viable plan to regain compliance because our shareholders are scheduled to vote upon a proposed amendment to our articles of incorporation to permit a one-for-four reverse stock split at our annual meeting on July 7, 2016 and we have already received sufficient votes for the proposal’s adoption. Upon receipt of formal shareholder approval, the reverse stock split is expected to be implemented effective upon the commencement of trading on July 8, 2016. Thus, the Company expects that our Class A common stock will have been trading above $1.00 for ten consecutive trading days on July 21, 2016, the date of our Nasdaq hearing.