Beasley Broadcast Group Inc: Form 10-Q for the period ended Mar 31, 2019

General

We are a radio broadcasting company whose primary business is operating radio stations throughout the United States. We own and operate 64 radio stations in the following radio markets: Atlanta, GA, Augusta, GA, Boston, MA, Charlotte, NC, Detroit, MI, Fayetteville, NC, Fort Myers-Naples, FL, Las Vegas, NV, Middlesex, NJ, Monmouth, NJ, Morristown, NJ, Philadelphia, PA, Tampa-Saint Petersburg, FL, West Palm Beach-Boca Raton, FL, and Wilmington, DE. We refer to each group of radio stations in each radio market as a market cluster.

Cautionary Note Regarding Forward-Looking Statements

This report contains “forward-looking statements” about the Company within the meaning of the Private Securities Litigation Reform Act of 1995, which relate to future, not past, events. All statements other than statements of historical fact included in this document are forward-looking statements. These forward-looking statements are based on the current beliefs and expectations of the Company’s management and are subject to known and unknown risks and uncertainties. Forward-looking statements, which address the Company’s expected business and financial performance and financial condition, among other matters, contain words such as: “expects,” “anticipates,” “intends,” “plans,” “believes,” “estimates,” “may,” “will,” “plans,” “projects,” “could,” “should,” “would,” “seek,” “forecast,” or other similar expressions.

Forward-looking statements by their nature address matters that are, to different degrees, uncertain. Although the Company believes the expectations reflected in such forward-looking statements are based upon reasonable assumptions, it can give no assurance that the expectations will be attained or that any deviation will not be material. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date on which they are made. The Company undertakes no obligation to update or revise any forward-looking statements.

Forward-looking statements involve a number of risks and uncertainties, and actual results or events may differ materially from those projected or implied in those statements. Factors that could cause actual results or events to differ materially from these forward-looking statements include, but are not limited to:

• external economic forces that could have a material adverse impact on the Company’s advertising revenues and results of operations;
• the ability of the Company’s radio stations to compete effectively in their respective markets for advertising revenues;
• the ability of the Company to develop compelling and differentiated digital content, products and services;
• audience acceptance of the Company’s content, particularly its radio programs;
• the ability of the Company to respond to changes in technology, standards and services that affect the radio industry;
• the Company’s dependence on federally issued licenses subject to extensive federal regulation;
• actions by the FCC or new legislation affecting the radio industry;
• our dependence on selected market clusters of radio stations for a material portion of our net revenue;
• credit risk on our accounts receivable;
• the risk that the Company’s FCC broadcasting licenses and/or goodwill could become impaired;
• the Company’s substantial debt levels and the potential effect of restrictive debt covenants on the Company’s operational flexibility and ability to pay dividends;
• the failure or destruction of the internet, satellite systems and transmitter facilities that the Company depends upon to distribute its programming;
• disruptions or security breaches of the Company’s information technology infrastructure;
• the loss of key personnel;
• the fact that the Company is controlled by the Beasley family, which creates difficulties for any attempt to gain control of the Company;
• our ability to integrate acquired businesses and achieve fully the strategic and financial objectives related thereto and their impact on our financial condition and results of operations;
• other economic, business, competitive, and regulatory factors affecting the businesses of the Company, including those set forth in the Company’s filings with the SEC.

Although we believe that the expectations reflected in any of our forward-looking statements are reasonable, actual results could differ materially from those projected or assumed in any of our forward-looking statements. We do not intend, and undertake no obligation, to update any forward-looking statement.

Financial Statement Presentation

The following discussion provides a brief description of certain key items that appear in our financial statements and general factors that impact these items.

Net Revenue. Our net revenue is primarily derived from the sale of commercial spots to advertisers directly or through national, regional or local advertising agencies. Revenues are reported at the amount we expect to be entitled to receive under the contract. Local revenue generally consists of commercial advertising sales, digital advertising sales and other sales to advertisers in a radio station’s local market either directly to the advertiser or through the advertiser’s agency. National revenue generally consists of commercial advertising sales through advertiser agencies. National advertiser agencies generally purchase advertising for multiple markets. National sales are generally facilitated by our national representation firm, which serves as our agent in these transactions.

Our net revenue is generally determined by the advertising rates that we are able to charge and the number of advertisements that we can broadcast without jeopardizing listener levels. Advertising rates are primarily based on the following factors:

• a radio station’s audience share in the demographic groups targeted by advertisers as measured principally by periodic reports issued by Nielson Audio;
• the number of radio stations, as well as other forms of media, in the market competing for the attention of the same demographic groups;
• the supply of, and demand for, radio advertising time; and
• the size of the market.

Our net revenue is affected by general economic conditions, competition and our ability to improve operations at our market clusters. Seasonal revenue fluctuations are also common in the radio broadcasting industry and are primarily due to variations in advertising expenditures by local and national advertisers. Our revenues are typically lowest in the first calendar quarter of the year.

We use trade sales agreements to reduce cash paid for operating costs and expenses by exchanging advertising airtime for goods or services; however, we endeavor to minimize trade revenue in order to maximize cash revenue from our available airtime.

We also continue to invest in digital support services to develop and promote our radio station websites, applications, and other distribution platforms. We derive revenue from our websites through the sale of advertiser promotions and advertising on our websites and the sale of advertising airtime during audio streaming of our radio stations over the internet. We also generate revenue from selling other digital products.

Operating Expenses. Our operating expenses consist primarily of (i) programming, engineering, sales, advertising and promotion, and general and administrative expenses incurred at our radio stations, (ii) general and administrative expenses, including compensation and other expenses, incurred at our corporate offices, and (iii) depreciation and amortization. We strive to control our operating expenses by centralizing certain functions at our corporate offices and consolidating certain functions in each of our market clusters.

Critical Accounting Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

• it requires assumptions to be made that were uncertain at the time the estimate was made; and
• changes in the estimate or different estimates that could have been selected could have a material impact on our results of operations or financial condition.

Our critical accounting estimates are described in Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to our critical accounting estimates during the first quarter of 2019.

Recent Accounting Pronouncements

Recent accounting pronouncements are described in Note 2 to the accompanying financial statements.

Three Months Ended March 31, 2019 Compared to the Three Months Ended March 31, 2018

The following summary table presents a comparison of our results of operations for the three months ended March 31, 2018 and 2019 with respect to certain of our key financial measures. These changes illustrated in the table are discussed in greater detail below. This section should be read in conjunction with the financial statements and notes to financial statements included in Item 1 of this report.

Net Revenue. Net revenue increased $2.5 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Significant factors affecting net revenue included $2.2 million in additional revenue in the Philadelphia market cluster primarily from the acquisition of WXTU-FM on September 27, 2018 and a $0.9 million increase in revenue from our Tampa-Saint Petersburg market cluster. Net revenue for the three months ended March 31, 2019 was comparable to net revenue for the same period in 2018 at our remaining market clusters.

Station Operating Expenses. Station operating expenses increased $1.9 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Significant factors affecting station operating expenses included $1.0 million in additional expenses in the Philadelphia market cluster primarily from the acquisition of WXTU-FM, a $1.0 million increase in station operating expenses at our Boston market cluster, and a $0.6 million increase in station operating expenses at our Tampa-Saint Petersburg market cluster. Station operating expenses for the three months ended March 31, 2019 were comparable to station operating expenses for the same period in 2018 at our remaining market clusters.

Corporate General and Administrative Expenses. Corporate general and administrative expenses increased $1.7 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The primary factors affecting corporate general and administrative expenses included a $0.4 million increase in cash compensation expense in 2019 and a $1.0 million gain as a result of the Greater Media pension plan termination in 2018.

Change in Fair Value of Contingent Consideration. In connection with the acquisition of Greater Media, a certain number of shares of our Class A common stock placed in escrow on the acquisition date were forfeited based on a working capital adjustment. The fair value of the forfeited shares decreased $2.9 million due to a change in our stock price from January 1, 2018 to March 15, 2018, the date the forfeited shares were recorded in treasury stock. In addition, a number of shares of our Class A common stock were returned to us by the former stockholders of Greater Media based on certain proceeds from the sale of Greater Media’s tower assets. The fair value of the returned shares decreased $1.6 million due to a change in our stock price from January 1, 2018 to March 15, 2018, the date the returned shares were recorded in treasury stock.

Gain on Dispositions. On March 28, 2019, we completed the sale of certain land and improvements in Augusta, GA for $0.5 million. As a result of the sale we recorded a gain of $0.4 million in the quarter ended March 31, 2019. On March 15, 2019, we agreed to cancel a broadband radio service license in Chattanooga, TN in exchange for a fee of $3.3 million. As a result of the license cancelation we recorded a gain of $3.1 million in the quarter ended March 31, 2019.

Interest Expense. Interest expense increased $1.0 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. The primary factors affecting interest expense were the increase in long-term debt outstanding and the applicable interest rate.

Income Tax Expense. Our effective tax rate was (13.7)% and 31.9% for the three months ended March 31, 2018 and 2019, respectively. These rates differ from the federal statutory rate of 21% due to the effect of state income taxes and certain expenses that are not deductible for tax purposes. The effective tax rate for the three months ended March 31, 2018 also reflects a $1.2 million increase due to the change in fair value of contingent consideration during that time period.

Net Income (Loss). Net income during the three months ended March 31, 2019 was $1.4 million, an increase of $4.5 million compared to net loss of $3.2 million during the three months ended March 31, 2018 as a result of the factors described above.

Liquidity and Capital Resources

Overview. Our primary sources of liquidity are internally generated cash flow and our revolving credit facility. Our primary liquidity needs have been, and for the next twelve months and thereafter, are expected to continue to be, for working capital, debt service, and other general corporate purposes, including capital expenditures and radio station acquisitions. Historically, our capital expenditures have not been significant. In addition to property and equipment associated with radio station acquisitions, our capital expenditures have generally been, and are expected to continue to be, related to the maintenance of our office and studio space, maintenance of our radio towers and equipment, and digital products and information technology. We have also purchased or constructed office and studio space in some of our markets to facilitate the consolidation of our operations.

Credit Facility. On November 17, 2017 we and our wholly owned subsidiary, Beasley Mezzanine Holdings, LLC (the “Borrower”), entered into a credit agreement with U.S. Bank, National Association, as administrative agent and collateral agent, providing for a term loan B facility in the amount of $225.0 million (the “term loan facility”) and a revolving credit facility of $20.0 million (the “revolving credit facility,” and together with the term loan facility, the “credit facility”). On September 27, 2018, we borrowed an additional $35.0 million from the term loan facility. The proceeds were used for the acquisition of WXTU-FM in Philadelphia.

As of March 31, 2019, the credit facility consisted of a term loan with a remaining balance of $249.5 million and a revolving credit facility with a maximum commitment of $20.0 million. As of March 31, 2019, we had $20.0 million in available commitments under our revolving credit facility. At our option, the credit facility may bear interest at either (i) the London Interbank Offered Rate (“LIBOR”) plus a margin of 4.0% or (ii) the base rate plus a margin of 3.0%. The LIBOR interest rate for the term loan is subject to a 1% floor and the base rate is subject to a 2% floor. Interest payments are, for loans based on LIBOR, due at the end of each applicable interest period unless the interest period is longer than three months, in which case they are due at the end of each three month period. Interest payments for loans based on the base rate are due quarterly. The revolving credit facility carried interest, based on LIBOR, at 6.5% as of March 31, 2019 and matures on November 17, 2022. The term loan carried interest, based on LIBOR, at 6.5% as of March 31, 2019 and matures on November 1, 2023.

The credit agreement requires mandatory prepayments equal to 50% of Excess Cash Flow (as defined in the credit agreement) when our Total Leverage Ratio (as defined in the credit agreement) is greater than 3.5x; mandatory prepayments equal to 25% of Excess Cash Flow when our Total Leverage Ratio is less than or equal to 3.5x but greater than 3.0x; and no mandatory prepayments when our Total Leverage Ratio is less than or equal to 3.0x. Mandatory prepayments of Excess Cash Flow are due 95 days after year end. The credit agreement also requires mandatory prepayments for defined amounts from net proceeds of asset sales, net insurance proceeds, and net proceeds of debt issuances.

The credit agreement requires us to comply with certain financial covenants which are defined in the credit agreement. These financial covenants include a First Lien Leverage Ratio that will be tested at the end of each quarter. For the period from March 31, 2019 through December 31, 2019, the maximum First Lien Leverage Ratio is 5.75x. The maximum First Lien Leverage Ratio is 5.25x for March 31, 2020 and thereafter.

The credit facility is secured by substantially all assets of the Company and its subsidiaries and is guaranteed jointly and severally by the Company and its subsidiaries. If we default under the terms of the credit agreement, the Company and its subsidiaries may be required to perform under their guarantees. As of March 31, 2019, the maximum amount of undiscounted payments the Company and its applicable subsidiaries would have been required to make in the event of default was $249.5 million. The guarantees for the credit facility expire on November 17, 2022 for the revolving credit facility and on November 1, 2023 for the term loan facility.

Failure to comply with financial covenants, scheduled interest payments, scheduled principal repayments, or any other terms of our credit agreement could result in the acceleration of the maturity of our outstanding debt, which could have a material adverse effect on our business or results of operations. As of March 31, 2019, we were in compliance with all applicable financial covenants under our credit agreement.

The aggregate scheduled principal repayments of the credit facility for the remainder of 2019 and the next four years are as follows:

Our credit agreement permits us to repurchase sufficient shares of our common stock to fund withholding taxes in connection with the vesting of restricted stock units and shares of restricted stock, subject to compliance with financial covenants, up to an aggregate amount of $2.5 million per year. We paid approximately $20,000 to repurchase 4,979 shares during the three months ended March 31, 2019.

Our credit agreement restricts our ability to pay cash dividends and to repurchase additional shares of our common stock. The credit agreement does permit, however, (i) additional dividends of up to an aggregate amount of $7.5 million each year if our Total Leverage Ratio is greater than 3.5x and up to an aggregate amount of $10.0 million each year if our Total Leverage Ratio is less than or equal to 3.5x, (ii) an amount equal to our excess cash flow each year that is not required to prepay the credit agreement, subject to maintaining a Total Leverage Ratio of no greater than 3.75x and (iii) unlimited dividends each year if our Total Leverage Ratio is less than 3.5x and our First Lien Leverage Ratio (as defined in the credit agreement) is less than 2.5x. We paid cash dividends of $1.4 million during the three months ended March 31, 2019. Also, on March 5, 2019, our board of directors declared a cash dividend of $0.05 per share on our Class A and Class B common stock. The dividend of $1.4 million in the aggregate was paid on April 5, 2019, to stockholders of record on March 29, 2019.

We expect to provide for future liquidity needs through one or a combination of the following sources of liquidity:

• internally generated cash flow;
• our revolving credit facility;
• additional borrowings, other than under our revolving credit facility, to the extent permitted under our credit facility; and
• additional equity offerings.

We believe that we will have sufficient liquidity and capital resources to permit us to provide for our liquidity requirements and meet our financial obligations for the next twelve months. However, poor financial results or unanticipated expenses could give rise to defaults under our credit facility, additional debt servicing requirements or other additional financing or liquidity requirements sooner than we expect, and we may not secure financing when needed or on acceptable terms.

Our ability to reduce our Total Leverage Ratio, as defined by our credit agreement, by increasing operating cash flow and/or decreasing long-term debt will determine how much, if any, of the remaining commitments under our revolving credit facility will be available to us in the future. Poor financial results or unanticipated expenses could result in our failure to maintain or lower our total leverage ratio and we may not be permitted to make any additional borrowings under our revolving credit facility.

Cash Flows. The following summary table presents a comparison of our capital resources for the three months ended March 31, 2018 and 2019 with respect to certain of our key measures affecting our liquidity. The changes set forth in the table are discussed in greater detail below. This section should be read in conjunction with the financial statements and notes to financial statements included in Item 1 of this report.

Net Cash Provided By Operating Activities. Net cash provided by operating activities increased $2.6 million during the three months ended March 31, 2019 as compared to the three months ended March 31, 2018. Significant factors affecting this increase in net cash provided by operating activities included a $10.9 million increase in cash receipts from revenue, partially offset by a $4.6 million increase in cash paid for station operating expenses, a $1.1 million increase in interest payments, a $1.0 million increase in income tax payments, and a $0.7 million increase in cash paid for corporate general and administrative expenses.

Net Cash Used In Investing Activities. Net cash used in investing activities during the three months ended March 31, 2019 included payments of $2.5 million for investments and payments of $1.8 million for capital expenditures, partially offset by proceeds of $3.8 million from dispositions. Net cash used in investing activities for the same period in 2018 included payments of $1.2 million for capital expenditures.

Net Cash Used In Financing Activities. Net cash used in financing activities during the three months ended March 31, 2019 included repayments of $2.5 million under our credit facility and payments of $1.4 million for cash dividends. Net cash used in financing activities for the same period in 2018 included repayments of $3.0 million under our credit facility and payments of $1.3 million for cash dividends.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of the end of the period covered by this report.

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The risk factors affecting our Company are described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. There have been no material changes to the risks affecting our Company during the first quarter of 2019.