Townsquare Media, Inc. - Quarter Report: 2016 September (Form 10-Q)

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
	Washington, D.C. 20549 __________________
FORM 10-Q __________________
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2016 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to ______ Commission file number 333-197002 Townsquare Media, Inc. (Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization)	4832 (Primary Standard Industrial Classification Code Number)	27-1996555 (I.R.S. Employer Identification No.)
240 Greenwich Avenue Greenwich, Connecticut 06830 (203) 861-0900 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) __________________

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

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



Large accelerated filer	☐	Accelerated filer	x

Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐

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

As of November 7, 2016, the registrant had 18,394,515 outstanding shares of common stock consisting of: (i)13,735,690 shares of Class A common stock, par value $0.01 per share; (ii) 3,022,484 shares of Class B common stock, par value $0.01 per share; and (iii) 1,636,341 shares of Class C common stock, par value $0.01 per share. The registrant also had 8,977,676 warrants to purchase Class A common stock outstanding as of that date.

TOWNSQUARE MEDIA, INC.

INDEX



PART I FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of December 31, 2015 and September 30, 2016	1
	Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2016	2
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2015 and 2016	3
	Consolidated Statement of Stockholders' Equity for the nine months ended September 30, 2016	4
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2015 and 2016	5
	Notes to Unaudited Consolidated Financial Statements	7

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	35
Item 4.	Controls and Procedures	35

PART II OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3.	Defaults upon Senior Securities	36
Item 4.	Mine Safety Disclosures	36
Item 5.	Other Information	36
Item 6.	Exhibits	36
	Signatures	37

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

TOWNSQUARE MEDIA, INC.

CONSOLIDATED BALANCE SHEETS

(in Thousands, Except Share and Per Share Data)

(unaudited)



	December 31, 2015		September 30, 2016
ASSETS
Current assets:
Cash	$	33,298	$	38,413
Accounts receivable, net of allowance of $2,114 and $1,487, respectively	60,143		65,420
Prepaid expenses and other current assets	9,766		13,551
Total current assets	103,207		117,384
Property and equipment, net	133,943		139,329
Intangible assets, net	517,979		514,560
Goodwill	292,953		292,953
Investments	5,049		4,313
Other assets	7,580		7,343
Total assets	$	1,060,711	$	1,075,882
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	9,549	$	12,192
Current portion of long-term debt	171		658
Deferred revenue	17,496		14,498
Accrued expenses and other current liabilities	29,958		24,332
Accrued interest	4,910		9,203
Total current liabilities	62,084		60,883
Long-term debt, less current portion (net of deferred finance costs of $9,962 and $8,421, respectively)	588,657		572,187
Deferred tax liability	35,233		48,551
Other long-term liabilities	11,297		10,620
Total liabilities	697,271		692,241
Stockholders’ equity:
Class A common stock, par value $0.01 per share; 300,000,000 shares authorized; 9,946,354 and 13,735,690 shares issued and outstanding at December 31, 2015 and September 30, 2016, respectively	100		105
Class B common stock, par value $0.01 per share; 50,000,000 shares authorized; 3,022,484 shares issued and outstanding at December 31, 2015 and September 30, 2016, respectively	30		30
Class C common stock, par value $0.01 per share; 50,000,000 shares authorized; 4,894,480 and 1,636,341 shares issued and outstanding at December 31, 2015 and September 30, 2016, respectively	49		49
Total common stock	179		184
Additional paid-in capital	361,186		361,844
Retained earnings	1,391		21,214
Accumulated other comprehensive income (loss)	44		(410		)
Non-controlling interest	640		809
Total liabilities and stockholders’ equity	$	1,060,711	$	1,075,882

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in Thousands, Except Per Share Data)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2016			2015			2016

Net revenue	$	129,568		$	165,756		$	328,202		$	397,345

Operating costs and expenses:
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	89,728			114,646			233,331			297,144
Depreciation and amortization	4,784			5,686			12,068			17,812
Corporate expenses	6,119			6,450			17,985			18,320
Stock-based compensation	2,875			206			4,278			663
Transaction costs	1,125			256			1,297			606
Net (gain) loss on sale of assets	(11,909		)	(426		)	(11,895		)	287
Total operating costs and expenses	92,722			126,818			257,064			334,832
Operating income	36,846			38,938			71,138			62,513
Other expenses (income):
Interest expense, net	8,527			8,294			27,334			25,740
Impairment on investment	—			4,236			—			4,236
Cancellation and (repurchase) of debt	288			—			30,305			(461		)
Other expense (income), net	33			52			117			(351		)
Income before income taxes	27,998			26,356			13,382			33,349
Provision for income taxes	11,543			10,493			5,530			13,269
Net income	$	16,455		$	15,863		$	7,852		$	20,080

Net income attributable to:
Controlling interests	$	16,454		$	15,816		$	7,418		$	19,823
Non-controlling interests	1			47			434			257

Net income per share:
Basic	$	0.94		$	0.86		$	0.45		$	1.10
Diluted	$	0.60		$	0.58		$	0.28		$	0.74

Weighted average shares outstanding:
Basic	17,532			18,395			17,427			18,208
Diluted	27,610			27,372			27,841			27,280

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in Thousands)

(unaudited)



	Three Months Ended September 30,						Nine Months Ended September 30,
	2015			2016			2015			2016

Net income	$	16,455		$	15,863		$	7,852		$	20,080
Other comprehensive income:
Foreign currency translation adjustments	(74		)	(107		)	(74		)	(454		)
Other comprehensive income	16,381			15,756			7,778			19,626
Less: Comprehensive income attributable to noncontrolling interest	1			47			434			257
Comprehensive income attributable to controlling interest	$	16,380		$	15,709		$	7,344		$	19,369

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

(in Thousands, Except Share Data)

(unaudited)



	Shares of Common Stock
	Class A	Class B	Class C
	Shares	Shares	Shares		Warrants		Common Stock		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Non- Controlling Interest			Total
Balance at January 1, 2016	9,946,354	3,022,484	4,894,480		9,508,878		$	179	$	361,186		$	1,391	$	44		$	640		$	363,440
Net income	—	—	—		—		—		—			19,823		—			257			20,080
Exercise of warrants	531,197	—	—		(531,202	)	5		(5		)	—		—			—			—
GE Capital Equity Holdings, LLC conversion	3,258,139	—	(3,258,139	)	—		—		—			—		—			—			—
Proceeds from sale of minority interest in subsidiary	—	—	—		—		—		—			—		—			50			50
Stock-based compensation	—	—	—		—		—		663			—		—			—			663
Foreign currency exchange	—	—	—		—		—		—			—		(454		)	—			(454		)
Cash distributions to non-controlling interests	—	—	—		—		—		—			—		—			(138		)	(138		)
Balance at September 30, 2016	13,735,690	3,022,484	1,636,341		8,977,676		$	184	$	361,844		$	21,214	$	(410	)	$	809		$	383,641

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in Thousands)

(unaudited)



	Nine Months Ended September 30,
	2015			2016
Cash flows from operating activities:
Net income attributable to:
Controlling interests	$	7,418		$	19,823
Non-controlling interests	434			257
Net income	$	7,852		$	20,080
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization	12,068			17,812
Amortization of deferred financing costs	1,326			1,203
Deferred income tax expense	5,488			13,269
(Recovery) provision for doubtful accounts	(153		)	1,083
Stock-based compensation expense	4,278			663
Cancellation and (repurchase) of debt	—			(461		)
Amortization of bond premium	(424		)	—
Write-off of deferred financing costs	9,348			338
Write-off of bond premium	(6,779		)	—
Impairment on investment	—			4,236
Net (gain) loss on sale of assets	(11,895		)	287
Changes in assets and liabilities, net of acquisitions:
Accounts receivable	(4,838		)	(9,430		)
Prepaid expenses and other assets	(2,222		)	(2,828		)
Accounts payable	665			(887		)
Accrued expenses	(4,298		)	(8,821		)
Accrued interest	540			4,293
Other long-term liabilities	3,084			(677		)
Net cash provided by operating activities	14,040			40,160
Cash flows from investing activities:
Payments for acquisitions, net of cash received	(74,149		)	(1,941		)
Acquisition of intangibles	(332		)	—
Purchase of property and equipment	(9,935		)	(16,826		)
Proceeds from insurance settlement	450			451
Proceeds from sale of assets	18,953			1,626
Net cash used in investing activities	(65,013		)	(16,690		)
Cash flows from financing activities:
Proceeds from stock offering and option exercises	14			—
Offering costs	(92		)	—
Repayment of long-term debt	(553,552		)	(17,460		)
Proceeds from the issuance of long-term debt	620,000			—
Debt financing costs	(11,348		)	—
Proceeds from sale of minority interest in subsidiary	—			50
Cash distributions to non-controlling interests	(208		)	(138		)
Repayments of capitalized obligations	(118		)	(127		)
Net cash provided by (used in) financing activities	54,696			(17,675		)
Net effect of foreign currency exchange rate changes	(126		)	(680		)
Net increase in cash	3,597			5,115
Cash:
Beginning of period	24,462			33,298
End of period	$	28,059		$	38,413

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

(in Thousands)

(unaudited)



	Nine Months Ended September 30,
	2015		2016
Supplemental Disclosure of Cash Flow Information:
Cash payments:
Payments to redeem long-term debt prior to contractual maturity	$	27,735	$	—
Interest	25,863		19,881
Income taxes	573		1,910
Purchase obligations:
Capital lease	—		525
Barter transactions:
Barter revenue – included in net revenue	$	11,368	$	17,360
Barter expense – included in direct operating expenses	10,066		10,598

See Notes to Unaudited Consolidated Financial Statements

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TOWNSQUARE MEDIA, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Basis of Presentation

Description of the Business

Townsquare Media, Inc. (together with its consolidated subsidiaries, except as the context may otherwise require, "we," "us," "our," "Company," or "Townsquare") is a media, entertainment and digital marketing solutions company principally focused on small and mid-sized markets across the United States. As of September 30, 2016, our assets included 309 radio stations and more than 325 local websites in 66 U.S. markets, a digital marketing solutions company serving approximately 10,200 small to medium sized businesses, approximately 550 live events with nearly 18 million annual attendees in the U.S. and Canada and one of the largest digital advertising networks focused on music and entertainment reaching more than 60 million unique visitors each month. Our brands include local media assets such as WYRK, KLAQ, K2 and NJ101.5; music festivals such as Mountain Jam, WE Fest and Taste of Country Music Festival; touring lifestyle and entertainment events such as the America on Tap craft beer festival series, the Insane Inflatable 5K obstacle race series, and North American Midway Entertainment ("NAME"), North America’s largest mobile amusement company; and tastemaker music and entertainment owned and affiliated websites such as XXLmag.com, TasteofCountry.com, Loudwire.com, JustJared.com and BrooklynVegan.com. Funds managed by Oaktree Capital Management, L.P. ("Oaktree") are the Company’s largest equity holder.

2. Summary of Significant Accounting Policies

Except as stated below, there have been no significant changes in the Company’s accounting policies since December 31, 2015. For the Company's detailed accounting policies please refer to the consolidated financial statements and related notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2015 (the "2015 Annual Report on Form 10-K") filed with the Securities and Exchange Commission ("SEC") on February 26, 2016.

Foreign Currency

NAME, acquired by a subsidiary of the Company on September 1, 2015, conducts a portion of its business in Canada. Results of operations for our Canadian entity are translated into U.S. dollars using the average exchange rates during the period. The assets and liabilities of our Canadian entity are translated into U.S. dollars using the exchange rates at the balance sheet date. The related translation adjustments are recorded in a separate component of stockholders' equity, “Accumulated other comprehensive income”. Foreign currency transaction gains and losses are included in operations in other expense (income), net.

Recently Issued Accounting Standards

In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-02, Leases. ASU 2016-02 requires the lessee to recognize in the statement of financial position a liability to make lease payments, and a right-of-use asset representing its right to use the underlying asset for the lease term. The liability and asset are initially measured at the present value of the lease payments. The ASU applies to all leases, including those previously classified as operating leases under ASC Topic 842. The standard is effective for fiscal years beginning after December 15, 2018, and will require measurement of leases at the beginning of the earliest period presented, using a modified retrospective approach. The Company is currently assessing the potential impact ASU 2016-02 will have on its financial statements.

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The standard is effective for annual reporting

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periods beginning after December 15, 2016, including interim periods within those annual reporting periods. The Company is currently assessing the potential impact ASU 2016-09 will have on its financial statements.

In March 2016, the FASB issued ASU 2016-08, Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net), which amends the principal-versus agent implementation guidance and illustrations in the Board’s new revenue standard (ASU 2014-09, Revenue From Contracts With Customers). FASB issued the ASU in response to concerns identified by stakeholders, including those related to (i) determining the appropriate unit of account under the revenue standard’s principal-versus-agent guidance and (ii) applying the indicators of whether an entity is a principal or an agent in accordance with the revenue standard’s control principle. Among other things, the ASU clarifies that an entity should evaluate whether it is the principal or the agent for each specified good or service promised in a contract with a customer. As defined in the ASU, a specified good or service is "a distinct good or service (or a distinct bundle of goods or services) to be provided to the customer." Therefore, for contracts involving more than one specified good or service, the entity may be the principal for one or more specified goods or services and the agent for others. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is currently assessing the potential impact ASU 2016-08 will have on its financial statements.

In April 2016, the FASB issued ASU 2016-10, Identifying Performance Obligations and Licensing, which amends the guidance on identifying performance obligations and the licensing implementation in the Board’s new revenue standard (ASU 2014-09, Revenue From Contracts With Customers). The amendment adds the following guidance for identifying performance obligations (i) an entity is not required to assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer and (ii) an entity is permitted, as an accounting policy election, to account for shipping and handling activities that occur after the customer has obtained control of a good as an activity to fulfill the promise to transfer the good rather than as an additional promised service. The amendment also adds the following guidance on licensing implementation by clarifying (i) an entity's promise to grant a customer a license to intellectual property that has significant standalone functionality does not include supporting or maintaining that intellectual property during the license period , (ii) an entity’s promise to grant a customer a license to symbolic intellectual property includes supporting or maintaining that intellectual property during the license period and (iii) an entity considers the nature of its promise in granting a license, regardless of whether the license is distinct. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is currently assessing the potential impact ASU 2016-10 will have on its financial statements.

In May 2016, the FASB issued ASU 2016-12, Narrow-Scope Improvements and Practical Expedients, which amends only the narrow aspects in the Board’s new revenue standard (ASU 2014-09, Revenue From Contracts With Customers). The amendments in this update include (i) clarifying the objective of collectibility, (ii) allows an entity, as an accounting policy election, to exclude amounts collected from customers for all sales (and other similar) taxes from the transaction price, (iii) clarifies the variable consideration guidance applies only to variability resulting from reasons other than the form of the consideration, (iv) provides a practical expedient which permits an entity to reflect the aggregate effect of all modifications that occur before the beginning of the earliest period presented when identifying the satisfied and unsatisfied performance obligations, determining the transaction price, and allocating the transaction price to the satisfied and unsatisfied performance obligations, (v) clarifies that a completed contract for purposes of transition is a contract for which all (or substantially all) of the revenue was recognized under legacy Generally Accepted Accounting Principles ("GAAP") before the date of initial application and (vi) clarifies that an entity that retrospectively applies the guidance to each prior reporting period is not required to disclose the effect of the accounting change for the period of adoption. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those annual reporting periods. The Company is currently assessing the potential impact ASU 2016-12 will have on its financial statements.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 eliminates the diversity in practice related to the classification of certain cash receipts and payments for debt prepayment or extinguishment costs, the maturing of a zero coupon bond, the settlement of contingent liabilities arising from a business combination, proceeds from insurance settlements, distributions from certain equity method investees and beneficial interests obtained in a financial asset securitization. ASU 2016-15 designates the appropriate cash flow classification, including requirements to allocate certain components of these cash receipts and payments among operating, investing and financing activities. The retrospective transition method, requiring adjustment to all comparative periods presented, is required unless it is impracticable for some of the amendments, in which case those amendments would be prospectively as of the earliest date practicable. The standard is effective for annual reporting periods beginning after December 15, 2017, including interim periods within

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those annual reporting periods. The Company is currently assessing the potential impact ASU 2016-15 will have on its financial statements.

3. Interim Financial Data

The accompanying unaudited consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto included in the Company's 2015 Annual Report on Form 10-K. The accompanying unaudited interim consolidated financial statements include the consolidated accounts of the Company and its wholly-owned subsidiaries, with all significant intercompany balances and transactions eliminated in consolidation. These financial statements have been prepared in accordance with U.S. GAAP for interim financial information and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and notes required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of results of operations for and financial condition as of the end of the interim periods have been included. The results of operations and cash flows for the three and nine months ended September 30, 2016 and the Company’s financial condition as of such date are not necessarily indicative of the results of operations or cash flows that can be expected for, or the Company’s financial condition as of, any other interim period or for the fiscal year ending December 31, 2016. The consolidated balance sheet as of December 31, 2015 is derived from the audited financial statements at that date.

Our net revenue varies throughout the year. We expect that our first calendar quarter will produce the lowest net revenue for the year, as advertising expenditures generally decline following the winter holidays, and the second and third calendar quarters will generally produce the highest net revenue for the year. During even-numbered years, net revenue generally includes increased advertising expenditures by political candidates, political parties and special interest groups. Political spending is typically highest during the fourth quarter. In addition to advertising revenue seasonality, our Entertainment net revenue exhibits seasonality resulting in the third quarter being the highest revenue period, followed by the second, then fourth, then first quarter. Large drivers of this seasonality are our summertime multi-day music festivals and NAME's revenue which is concentrated in the third quarter. Our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on net revenue generation until future periods, if at all.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, the Company evaluates its significant estimates, including those related to bad debts, intangible assets, income taxes, contingencies and purchase price allocations. The Company bases its estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts and results may differ materially from these estimates under different assumptions or conditions.

4. Significant Acquisitions

NAME Acquisition: On September 1, 2015, the Company, through a subsidiary of Townsquare Live Events, LLC, purchased all of the issued and outstanding membership interests of Heartland Group, LLC and its wholly-owned subsidiary NAME for approximately $70.0 million in cash, 481,948 unregistered shares of the Company's Class A common stock valued at $4.9 million, and a working capital adjustment of $0.4 million. Cash consideration was satisfied from cash on hand, $45.0 million of incremental term loan borrowings and a working capital adjustment of approximately $0.4 million. The Company estimated the fair value of acquired intangibles using the discounted cash flow method. The purchase price was allocated to the tangible and intangible assets and liabilities at their fair value at the date of acquisition, with any excess of the purchase price over the net assets acquired being reported as goodwill. The Company expects none of this goodwill to be deductible for tax purposes. The Company has recognized an opening deferred tax liability in connection with the acquisition of NAME, as the initial tax basis of the acquired assets differ from their initial basis under GAAP, which reflects estimated fair market value.

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The NAME purchase price allocation is shown in the following table.



	(in thousands)
Current assets	$	5,148
Customer relationships	8,700
Trade name	4,600
Other intangibles	1,000
Property and equipment	42,894
Goodwill	39,866
Non-controlling interest	(225		)
Accounts payable and accrued expenses	(9,586		)
Deferred tax liabilities	(17,035		)
Total purchase price	$	75,362

5. Investments

Long-term investments consist of minority holdings in companies that management believes are synergistic with Townsquare. Management does not exercise significant control over operating and financial policies of the investees, accordingly the investments are reflected under the cost method of accounting. The initial equity valuations were based upon a discounted cash flows analysis, using unobservable inputs categorized as Level 3 within the Accounting Standards Codification Section 820 framework.

The Company determined there was objective evidence to indicate certain events have adversely impacted estimated future cash flows for one of its investments and as a result recorded a $4.2 million impairment charge for the three and nine months ended September 30, 2016.

During the three months ended September 30, 2016 the Company made a $3.5 million investment in an online services business. The investment represents a minority ownership position and is accounted for under the cost method of accounting and is recorded as an investment on the Company's Consolidated Balance Sheet as of September 30, 2016.

6. Property and Equipment

Property and equipment consisted of the following:



	(in thousands)
	December 31, 2015			September 30, 2016
Land and improvements	$	20,329		$	20,165
Buildings and leasehold improvements	32,997			35,239
Broadcast equipment	70,656			70,236
Rides and related equipment	40,369			45,017
Computer and office equipment	10,742			11,445
Furniture and fixtures	7,428			10,287
Transportation equipment	11,543			13,546
Software development costs	8,056			11,730
	202,120			217,665
Less: Accumulated depreciation and amortization	(68,177		)	(78,336		)
Property and equipment, net	$	133,943		$	139,329

Depreciation and amortization expense for property and equipment was $3.9 million and $4.8 million for the three months ended September 30, 2015 and 2016, respectively and $10.0 million and $14.6 million for the nine months ended September 30, 2015 and 2016, respectively.

In September 2015, the Company closed on the sale of 43 towers located on 41 sites in 28 markets to a subsidiary of Vertical Bridge, LLC ("Vertical Bridge") (the "Tower Sale"). The divested towers house antenna that broadcast certain of the Company’s radio stations. The Company also entered into an agreement with Vertical Bridge whereby Vertical Bridge will serve as the exclusive marketing agent for the 282 towers retained by the Company. The Company received total cash proceeds of $21.6 million, net of closing adjustments, in exchange for the sale of the towers and the exclusive marketing arrangement. In addition, the Company has leased a portion of the space on the sold towers that house certain of the Company's antenna. The lease is for a period of 35 years, including an initial term of twenty years and three optional five-year renewal periods. The Company will pay $41 of rent per annum ($1 per site per annum) to Vertical Bridge for the right to house its existing antenna on the divested towers.

The Company has determined that the relative fair value of the towers sold and the exclusive marketing arrangement were $25.8 million and $3.1 million, respectively. The following was recognized in the Company's consolidated balance sheet in connection with this transaction with Vertical Bridge:



($ in thousands)	Fair Value		Balance Sheet Location
Long-term prepaid rent asset	$	7,311	Other long term assets
Deferred gain on the sale of towers	$	7,311	Other long term liabilities
Exclusive marketing arrangement	$	3,111	Other long term liabilities

The Company realized an $11.5 million gain in connection with the sale of these towers during the third quarter of 2015, which was included in net gain on sale in the Company's consolidated statements of operations. In addition, the Company determined that the lease is an operating lease and is amortizing the long-term prepaid rent asset and deferred gain on the sale of towers as offsetting amounts over the lease term. The exclusive marketing arrangement is being amortized through net revenue over the five-year term of the arrangement in the Company's consolidated statements of operations.

7. Goodwill and Other Intangible Assets

Indefinite-lived assets consist of FCC broadcast licenses and goodwill. FCC licenses represent a substantial portion of the Company’s total assets. The FCC licenses are renewable in the ordinary course of business, generally for a maximum of eight years. The fair value of FCC licenses is primarily dependent on the future cash flows of the radio markets and other assumptions, including, but not limited to, forecasted revenue growth rates, profit margins and a risk-adjusted discount rate.

The Company has selected December 31st as the annual valuation date. Based on the results of the Company’s 2015 annual impairment evaluations, the Company recorded impairment charges aggregating $1.7 million pertaining to FCC licenses in our Quad Cities and Grand Junction markets. All other fair values of the Company’s intangibles exceeded their carrying value, therefore, no impairment of these assets had occurred as of the date of the annual tests. If market conditions and operational performance of the Company’s reporting units were to deteriorate and management had no expectation that the performance would improve within a reasonable period of time or if an event occurs or circumstances change that would reduce the fair value of its goodwill and intangible assets below the amounts reflected in the balance sheet, the Company may be required to recognize additional impairment charges in future periods.

There were no changes to goodwill for the three and nine months ended September 30, 2016.

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Intangible assets consist of the following:



		(in thousands)
	Estimated Useful Life	December 31, 2015		September 30, 2016
Intangible Assets:
FCC licenses	Indefinite	$	486,229	$	486,403
Trademarks and trade names	Indefinite	4,600		4,600
Customer and advertising relationships	10 years	14,317		14,317
Customer relationships	15 years	8,700		8,700
Leasehold interests	5 to 39 years	1,085		1,085
Tower space	3 to 9 years	454		454
Sports broadcast rights	1 to 2 years	665		665
Non-compete agreements	1 to 2 years	243		243
Trademark	15 years	11,258		10,695
Permits/licenses	1 year	1,000		1,000
Other intangibles	3 years	980		980
Total		529,531		529,142
Less: Accumulated amortization		(11,552)		(14,582		)
Net amount		$	517,979	$	514,560

Amortization expense for definite-lived intangible assets was $0.8 million and $0.9 million for the three months ended September 30, 2015 and 2016, respectively and $2.1 million and $3.2 million for the nine months ended September 30, 2015 and 2016, respectively.

Estimated future amortization expense for each of the five succeeding fiscal years and thereafter as of September 30, 2016 is as follows:



	(in thousands)
2016 (remainder)	$	766
2017	2,949
2018	2,100
2019	1,978
2020	1,972
Thereafter	13,792
	$	23,557

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8. Long-Term Debt

Long-term debt consisted of the following:



	(in thousands)
	December 31, 2015			September 30, 2016
2023 Notes	$	300,000		$	282,079
Term Loans	298,512			298,512
Capitalized obligations	278			675
Long-term debt before deferred financing costs	598,790			581,266
Deferred financing costs	(9,962		)	(8,421		)
	588,828			572,845
Less: current portion of long-term debt	(171		)	(658		)
	$	588,657		$	572,187

On April 1, 2015, the Company issued $300.0 million of 6.5% Unsecured Senior Notes due in 2023 (the "2023 Notes") and a Senior Secured Credit Facility, which includes a seven year, $275.0 million term loan facility (the "Term Loans") and a five year, $50.0 million revolving credit facility (the "Revolver"). Borrowings are guaranteed by each of the Company’s direct and indirect subsidiaries, and subject to certain exceptions, are secured by substantially all of the tangible and intangible assets of the Company and its subsidiaries. The proceeds from the 2023 Notes and Term Loans were used to redeem the 9% Unsecured Senior Notes due 2019 issued by the Company's wholly-owned, indirect subsidiary Townsquare Radio, LLC ("Townsquare Radio") together with Townsquare Radio, Inc., as co-borrowers (the "2019 Notes"), and repay all outstanding borrowings under Townsquare Radio's previously existing Senior Secured Credit Facility (the "Incremental Term Loans"), including a $10.0 million Revolving Credit Facility. The Company paid $27.7 million in redemption premiums to holders of the 2019 Notes in connection with the redemption. In addition, the Company had a loss of $9.1 million and a gain of $6.8 million on the write-off of unamortized deferred financing costs and bond premium, respectively in connection with these repayments. The payment to holders of the 2019 Notes and the write-off of the unamortized deferred financing costs and bond premium are included in cancellation and (repurchase) of debt in the Company’s Consolidated Statements of Operations for the three and nine months ended September 30, 2015.

On September 1, 2015, the Company issued incremental term loans of $45.0 million under the Senior Secured Credit Facility, the proceeds of which were used to partially fund the purchase price of NAME. Further, on September 30, 2015, the Company made a $20.0 million voluntary prepayment of borrowings under the Term Loans. The Company recognized a loss of $0.3 million on the write-off of unamortized deferred financing costs in connection with this voluntary prepayment in the third quarter of 2015.

On March 24, 2016, the Company voluntarily repurchased $0.7 million of its 2023 Notes at a market price below par, plus accrued interest. The repurchased notes were canceled by the Company. A gain of $34 thousand is included in other expense (income), net in the Company's consolidated statements of operations for the nine months ended September 30, 2016.

During the three months ended June 30, 2016, the Company voluntarily repurchased an aggregate of $17.2 million of the Company's 2023 Notes at market prices below par, plus accrued interest. The repurchased notes were canceled by the Company. A gain of $0.4 million is included in other expense (income), net in the Company's consolidated statements of operations for the nine months ended September 30, 2016.

During the nine months ended September 30, 2016 the Company recognized a loss of $0.3 million on the write-off of unamortized deferred financing costs in connection with the voluntary repurchases on its 2023 Notes, which is included in interest expense, net in the Company's consolidated statements of operations for the nine months ended September 30, 2016.

At September 30, 2016, the Term Loans continued to bear interest at an initial interest rate of 4.25% (based on current LIBOR levels, a 1.00% LIBOR floor and an applicable margin of 325 basis points). The Revolver has an interest rate based either on LIBOR and an applicable margin of 250 basis points, or an alternative base rate and an

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applicable margin of 150 basis points. As of September 30, 2016, the Company had no outstanding borrowings under the Revolver.

The 2023 Notes mature on April 1, 2023, with interest payable on April 1 and October 1 of each year. Prior to maturity, the Company may redeem all or part of the 2023 Notes at specified redemption premiums as set forth in the indenture, together with any accrued and unpaid interest thereon. Additionally, if the Company experiences certain change of control events, holders of the 2023 Notes may require the Company to repurchase all or part of their notes at 101% of the principal amount thereof.

The 2023 Notes rank equally with all of the Company's existing and future senior debt, are senior to all of the Company's existing and future subordinated debt, and are guaranteed on a senior basis by certain of the Company’s direct and indirect wholly-owned subsidiaries.

The 2023 Notes indenture contains restrictive covenants that limit the ability of the Company and its subsidiaries to, among other things, incur additional debt or issue preferred stock; create liens; create restrictions on the Company’s subsidiaries’ ability to make payments to the Company; pay dividends and make other distributions in respect of the Company’s and its subsidiaries’ capital stock; make certain investments or certain other restricted payments; guarantee indebtedness; designate unrestricted subsidiaries; sell certain kinds of assets; enter into certain types of transactions with affiliates; and effect mergers and consolidations.

The Term Loans mature on April 1, 2022, and the Revolver matures on April 1, 2020. Borrowings under the Senior Secured Credit Facility are subject to mandatory prepayments equal to the net proceeds to the Company of any additional debt issuances or asset sales, as well as half of annual excess cash flow as defined in the credit agreement (subject to certain reductions). Borrowings are guaranteed by each of the Company’s direct and indirect subsidiaries, and subject to certain exceptions, are secured by substantially all of the tangible and intangible assets of the Company and its subsidiaries.

The Senior Secured Credit Facility contains covenants that, among other things, limit or restrict the ability of the Company and its subsidiaries to incur additional indebtedness or liens; engage in mergers or other fundamental changes; sell certain property or assets; pay dividends or other distributions; make acquisitions, investments, loans and advances; prepay certain indebtedness including the 2023 Notes; change the nature of its business; engage in certain transactions with affiliates and incur restrictions on interactions between the Company and its subsidiaries, or limit actions in relation to the Senior Secured Credit Facility.

The Company is in compliance with its covenants under the 2023 Notes and Senior Secured Credit Facility as of September 30, 2016.

As of September 30, 2016, based on available market information, the estimated fair value of the 2023 Notes and the Term Loans were $287.8 million and $298.9 million, respectively.

Annual maturities of the Company's long-term debt as of September 30, 2016 are as follows:



	(in thousands)
2016 (remainder)	$	44
2017	616
2018	5
2019	5
2020	5
Thereafter	580,591
	$	581,266

9. Stockholders' Equity

The table below presents a summary, as of September 30, 2016, of our authorized and outstanding common stock, and securities convertible into common stock, excluding options issued under our 2014 Omnibus Incentive Plan.



Security¹	Par Value Per Share		Number Authorized	Number Outstanding	Description
Class A common stock	$	0.01	300,000,000	13,735,690	One vote per share.
Class B common stock	$	0.01	50,000,000	3,022,484	10 votes per share.²
Class C common stock	$	0.01	50,000,000	1,636,341	No votes.²
Warrants				8,977,676	Each warrant is exercisable for one share of Class A common stock, at an exercise price of $0.0001 per share. The aggregate exercise price for all warrants currently outstanding is $898.³
Total			400,000,000	27,372,191
¹ Each of the shares of common stock, including the shares of Class A common stock issuable upon exercise of the warrants, have equal economic rights.
² Each share converts into one share of Class A common stock upon transfer or at the option of the holder, subject to certain conditions, including compliance with FCC rules.
³ The warrants are fully vested and exercisable for shares of Class A common stock, subject to certain conditions, including compliance with FCC rules.

The foregoing share totals exclude 4,070,239 of Class A common stock and 4,511,236 of Class B common stock issuable upon exercise of stock options, which options have an exercise price of between $8.96 and $13.02 per share. Additionally, the Company is authorized to issue 50,000,000 shares of undesignated preferred stock.

On April 6, 2016, a warrant holder exercised 531,202 warrants in exchange for 531,197 shares of Class A common stock upon the holder exercising the warrants on a cashless basis.

On August 16, 2016, GE Capital Equity Holdings, LLC, GE Business Financial Services, Inc. and AN Capital Corporation (collectively, the “Selling Entities”), each existing stockholders of the Company, entered into a purchase agreement with Madison Square Garden Investments, LLC (“MSG”), pursuant to which MSG agreed to acquire a total of 3,208,139 shares of the Company’s Class C common stock from the Selling Entities, which, in accordance with the terms of the Class C common stock, converted into a like number of shares of the Company’s Class A common stock upon completion of the transaction (the “MSG Transaction”). In connection with the MSG Transaction, the Company entered into a registration agreement with MSG, dated as of August 16, 2016, which provides MSG, subject to certain customary limitations and other conditions, with the ability to cause the Company to register shares of Class A common stock held by MSG for resale under the Securities Act of 1933, as amended, and grants MSG the right to participate in certain registrations by the Company of its equity securities. In addition, pursuant to a letter agreement, dated as August 16, 2016 (the “Board Observer Letter”), the Company has granted MSG the right to send one representative to observe meetings of the Company’s Board of Directors and committees (the “Observer Rights”). MSG’s Observer Rights will expire at such time as MSG holds less than 75% of the number of shares of Class A common stock it held on the date of the Board Observer Letter.

Also on August 16, 2016, Steven Price, the Company’s Chief Executive Officer and the Chairman of the Company’s Board of Directors, entered into a purchase agreement with GE Capital Equity Holdings, LLC pursuant to which he agreed to acquire a total of 50,000 shares of Class C common stock from GE Capital Equity Holdings, LLC. In accordance with their terms, the shares of Class C common stock acquired by Mr. Price converted into shares of Class A common stock upon completion of the transaction.

The Company's common stock is not entitled to preemptive or other similar subscription rights to purchase any of our securities. Unless the Company's Board of Directors determines otherwise, we will issue all of our capital stock in uncertificated form.

Stock-based Compensation

The Company's 2014 Omnibus Incentive Plan (the "2014 Incentive Plan") provides grants of stock options, stock appreciation rights, restricted stock, other stock-based awards and other cash-based awards. Directors, officers and other employees of the Company and its subsidiaries, as well as others performing consulting or advisory services for the Company, are eligible for grants under the 2014 Incentive Plan. The purpose of the 2014 Incentive Plan is to provide incentives that will attract, retain and motivate high performing officers, directors, employees and consultants by providing them with appropriate incentives and rewards either through a proprietary interest in our long-term success or compensation based on their performance in fulfilling their personal responsibilities. The aggregate number of shares of common stock which may be issued or used for reference purposes under the 2014 Incentive Plan or with respect to which awards may be granted may not exceed 12,000,000 shares. As of September 30, 2016, 3,425,689 shares were available for grant.

The grant date fair value of the equity options granted is estimated using the Black-Scholes option pricing model, which requires estimates of the expected term of the option, the expected volatility of the Company's common stock price, dividend yield and the risk-free rate. The below table summarizes the assumptions used to estimate the fair value of the equity options granted for the nine months ended September 30, 2016.




Expected volatility	30.0	%
Expected term	4.25 - 6.33 years
Risk free interest rate	1.4% - 1.7%
Expected dividend yield	0.0	%

With the exception of the options that were granted to employees in the first quarter of 2016, the options provide for immediate vesting. The options have an exercise price of between $8.96 and $13.02 per share. The expected term was calculated using the simplified method, defined as the midpoint between the vesting period and the contractual term of each award. The expected volatility was based on market conditions of the Company and comparable companies. The risk free interest rate was based on the U.S. Treasury yield curve in effect on the date of grant which most closely corresponds to the expected term of the option. The Company historically has not paid dividends and therefore did not utilize a dividend yield in the calculations.

The following table summarizes stock option activity for the nine months ended September 30, 2015:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2014	6,924,903		$	11.00
Granted	1,021,000		12.41
Exercised	(1,953	)	11.00
Forfeited	(468,535	)	11.02
Outstanding at September 30, 2015	7,475,415		$	11.19	9.0	$	—

The following table summarizes stock option activity for the nine months ended September 30, 2016:



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (years)	Aggregate Intrinsic Value
Outstanding at December 31, 2015	7,329,334		$	11.20
Granted	1,600,000		8.96
Exercised	—		—
Forfeited	(347,859	)	11.07
Outstanding at September 30, 2016	8,581,475		$	10.79	7.3	$	598,500

Of the 1,600,000 options granted during the nine months ended September 30, 2016, 1,565,000 were granted to employees and 35,000 were granted to directors of the Company. The weighted average grant date fair value of stock options granted was $2.38 and $2.98 for options granted to employees and directors of the Company, respectively. The options granted to directors provide for immediate vesting, whereas the options granted to employees have a five-year term with 50% vesting in year three and 50% vesting in year four. For the three and nine months ended September 30, 2016, the Company recognized $0.2 million and $0.7 million, respectively, of stock-based compensation expense with respect to the options granted. As of September 30, 2016, total unrecognized stock-based compensation expense is $2.7 million to be recognized over four years.

There was no restricted stock activity during the nine months ended September 30, 2015 or 2016.

The Company has issued stock to employees and independent directors. The shares are subject to a Selldown Agreement, pursuant to which FiveWire Media Ventures LLC ("FiveWire") (an entity formed for the purpose of investing in the Company by certain members of management, (the "FiveWire Holders")) are subject to certain restrictions on sales of the Company's common stock held by them. Pursuant to the terms of the Selldown Agreement, the FiveWire Holders and certain other members of management are generally restricted from transferring a specified percentage (which is expected to range between 50% and 100%) of the shares of the Company's common stock held by them at the closing of the July 24, 2014 initial public offering (the "IPO"). If Oaktree sells a portion of the shares of common stock or warrants to purchase common stock that it holds (the percentage of shares and warrants, collectively, held by Oaktree at such time that it sells in such a transaction, referred to as the "Sale Percentage"), those subject to the Selldown Agreement will be permitted to sell a percentage of the shares of common stock and warrants held by them, up to an amount equal to the Sale Percentage. The Selldown Agreement will terminate on the earlier of (i) the date that Oaktree no longer holds at least 10% of the shares of common stock and warrants exercisable for common stock, collectively, held by Oaktree immediately following closing of the IPO, and (ii) the third anniversary of the closing of the IPO.

10. Income Taxes

The Company's effective tax rate for the nine months ended September 30, 2015 and 2016 was approximately 41.3% and 39.8%, respectively. The effective tax rate may vary significantly from period to period, and can be influenced by many factors. These factors include, but are not limited to, changes to the statutory rates in the jurisdictions where the Company has operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of 35% for the nine months ended September 30, 2016 primarily relates to state, local and foreign income taxes.

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11. Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities consist of the following:



	(in thousands)
	December 31, 2015		September 30, 2016
Accrued compensation and benefits	$	14,157	$	10,371
Accrued professional fees	935		870
Accrued commissions	2,252		2,181
Accrued taxes	2,786		2,401
Accrued music and FCC licensing	1,103		1,105
Accrued publisher fees	1,088		1,092
Accrued national representation fees	1,060		942
Due to sellers, business combinations	2,286		87
Deferred rent	1,295		1,359
Accrued other	2,996		3,924
	$	29,958	$	24,332

12. Lease and Other Commitments

Operating Leases: The Company leases certain facilities and equipment used in its operations. Certain of the Company’s operating leases contain renewal options through 2062, escalating rent provisions and/or cost of living adjustments. Total rental expense was approximately $5.9 million and $8.1 million for the three months ended September 30, 2015 and 2016, respectively, and $14.7 million and $18.6 million for the nine months ended September 30, 2015 and 2016, respectively. Total rental expense includes costs incurred for live events such as venue and equipment rentals.

At September 30, 2016, the total minimum annual rental commitments under non-cancelable operating leases are as follows:



	(in thousands)
2016 (remainder)	$	2,448
2017	9,485
2018	8,263
2019	7,286
2020	5,446
Thereafter	17,541
Total minimum payments	$	50,469

In January 2016, the Company signed a lease for office space in Charlotte, North Carolina, for use by its digital marketing solutions operation. The lease commenced on March 1, 2016, and has a ten year term. Initially 28,000 square feet has been leased, increasing to 51,288 square feet by year four. The annual minimum rental commitment aggregates $0.3 million at commencement of the lease, escalating to $1.3 million by year ten.

Other Commitments: The radio broadcast industry’s principal ratings service is Nielsen Holdings N.V. ("Nielsen"), which publishes surveys for domestic radio markets. The Company’s remaining aggregate obligation under the agreements with Nielsen as of September 30, 2016 is approximately $8.1 million and is expected to be paid in accordance with the agreements through April 2019.

We normally commit one or more years in advance to provide rides, games and concessions at certain fairs. These agreements include an obligation to pay event fees, which may be expressed as a flat fee or as a percentage of revenues. At September 30, 2016, our total minimum fee commitments for contracts with a remaining term in excess of one year are as follows:

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	(in thousands)
2016 (remainder)	$	1,118
2017	4,772
2018	4,456
2019	2,934
2020	2,035
Thereafter	4,608
Total minimum payments	$	19,923

13. Segment Reporting

The Company has two reportable segments, Local Marketing Solutions, which provides broadcast and digital products and solutions to advertisers and businesses within our local markets, and Entertainment, which provides live event experiences and music and lifestyle content directly to consumers, and promotion, advertising and product activations to local and national advertisers. Prior to the second quarter of 2016, the Company reported its results in two reportable segments, Local Advertising and Live Events, and reported the remainder of its business in its Other Media and Entertainment category. The prior Local Advertising segment, together with the Company’s digital marketing and e-commerce solutions, which were previously part of the Other Media and Entertainment category, are now reported within Local Marketing Solutions. The Live Events segment, together with the Company’s national digital assets which were previously part of the Other Media and Entertainment category, are now reported within Entertainment. The Company redefined its reportable segments to more closely align with how its businesses have evolved over time, allocating its locally-focused products and services to the Local Marketing Solutions segment and its events and related production products and services to the Entertainment segment. This reflects how management currently reviews the Company’s performance and assesses the allocation of resources. The new segment presentation has been applied retrospectively to the Company's segment financial information but did not impact the Company's consolidated financial statements.

The following table presents the Company’s reportable segment results for the three months ended September 30, 2015:



	(in thousands)
	Local Marketing Solutions		Entertainment		Corporate and other reconciling items			Consolidated
Three Months Ended September 30, 2015
Net revenue	$	85,949	$	43,619	$	—		$	129,568
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	53,534		36,194		—			89,728
Depreciation and amortization	3,326		949		509			4,784
Corporate expenses	—		—		6,119			6,119
Stock-based compensation	196		515		2,164			2,875
Transaction costs	—		—		1,125			1,125
Net (gain) on sale of assets	—		—		(11,909		)	(11,909		)
Operating income	$	28,893	$	5,961	$	1,992		$	36,846

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The following table presents the Company’s reportable segment results for the three months ended September 30, 2016:



	(in thousands)
	Local Marketing Solutions		Entertainment		Corporate and other reconciling items			Consolidated
Three Months Ended September 30, 2016
Net revenue	$	89,003	$	76,753	$	—		$	165,756
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	55,773		58,873		—			114,646
Depreciation and amortization	2,854		2,152		680			5,686
Corporate expenses	—		—		6,450			6,450
Stock-based compensation	37		31		138			206
Transaction costs	—		—		256			256
Net (gain) on sale of assets	—		—		(426		)	(426		)
Operating income (loss)	$	30,339	$	15,697	$	(7,098	)	$	38,938

The following table presents the Company’s reportable segment results for the nine months ended September 30, 2015:



	(in thousands)
	Local Marketing Solutions		Entertainment		Corporate and other reconciling items			Consolidated
Nine Months Ended September 30, 2015
Net revenue	$	239,773	$	88,429	$	—		$	328,202
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	155,846		77,485		—			233,331
Depreciation and amortization	9,161		1,493		1,414			12,068
Corporate expenses	—		—		17,985			17,985
Stock-based compensation	1,255		653		2,370			4,278
Transaction costs	—		—		1,297			1,297
Net (gain) on sale of assets	—		—		(11,895		)	(11,895		)
Operating income (loss)	$	73,511	$	8,798	$	(11,171	)	$	71,138
Capital expenditures	$	6,419	$	2,293	$	1,223		$	9,935

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The following table presents the Company’s reportable segment results for the nine months ended September 30, 2016:



	(in thousands)
	Local Marketing Solutions		Entertainment		Corporate and other reconciling items			Consolidated
Nine Months Ended September 30, 2016
Net revenue	$	250,914	$	146,431	—			$	397,345
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	164,826		132,318		—			297,144
Depreciation and amortization	8,513		6,460		2,839			17,812
Corporate expenses	—		—		18,320			18,320
Stock-based compensation	100		84		479			663
Transaction costs	—		—		606			606
Net loss on sale of assets	—		—		287			287
Operating income (loss)	$	77,475	$	7,569	$	(22,531	)	$	62,513
Capital expenditures	$	7,276	$	7,582	$	1,968		$	16,826

NAME, acquired by a subsidiary of the Company on September 1, 2015, conducts a portion of its business in Canada. Consolidated revenue for the three and nine months ended September 30, 2016 includes $22.2 million and $25.4 million of Canadian revenue, respectively and long-lived assets located in Canada aggregated $4.1 million as of September 30, 2016.

Note 14. Net Income Per Common Share

The following table sets forth the computations of basic and diluted net income per share for the three and nine months ended September 30, 2015 and 2016.



	(in thousands, except per share data)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2015		2016		2015		2016

Numerator:
Net income	$	16,455	$	15,863	$	7,852	$	20,080

Denominator:
Weighted average shares of common stock outstanding	17,532		18,395		17,427		18,208
Effect of dilutive common stock equivalents	10,078		8,977		10,414		9,072
Weighted average diluted common shares outstanding	27,610		27,372		27,841		27,280

Net income per share:
Basic	$	0.94	$	0.86	$	0.45	$	1.10
Diluted	$	0.60	$	0.58	$	0.28	$	0.74

For the three and nine months ended September 30, 2016, the calculation of weighted average shares for diluted net income per share does not include 8,581,475 and 7,006,475 options to purchase shares of common stock because their effects were antidilutive. For the three and nine months ended September 30, 2015, the calculation of weighted average shares for diluted net income per share does not include 961,000 and 311,000 options to purchase shares of common stock, respectively because their effects were antidilutive.

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

The following management’s discussion and analysis is intended to provide the reader with an overall understanding of our financial condition, results of operations, cash flows and sources and uses of cash. This section also includes general information about our business and a discussion of our management’s analysis of certain trends, risks and opportunities in our industry. In addition, we also provide a discussion of accounting policies that require critical judgments and estimates as well as discuss certain risks and uncertainties that could cause our actual future results to differ materially from our historical results or our current expectations. This discussion should be read in conjunction with our unaudited consolidated financial statements and related notes appearing elsewhere in this quarterly report. The following discussion contains forward-looking statements that involve numerous risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements as a result of these risks and uncertainties, including those set forth in this quarterly report.

Note About Forward-Looking Statements

This report includes estimates, projections, statements relating to our business plans, objectives and expected operating results that are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act. Forward-looking statements often discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. These statements may include words such as “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “outlook,” “potential,” “project,” “projection,” “plan,” “intend,” “seek,” “believe,” “may,” “could,” “would,” “will,” “should,” “can,” “can have,” “likely,” the negatives thereof and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operating or financial performance or other events. Actual events or results may differ materially from the results anticipated in these forward-looking statements as a result of a variety of factors. While it is impossible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include the impact of general economic conditions, industry conditions, including existing competition and future competitive technologies, the popularity of radio as a broadcasting and advertising medium, cancellations, disruptions or postponements of advertising schedules in response to national or world events, our dependence on key personnel, our capital expenditure requirements, our continued ability to identify suitable acquisition targets, and consummate and integrate any future acquisitions, legislative or regulatory requirements, and other factors mentioned in this section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this report and under “Risk Factors” in our 2015 Annual Report on Form 10-K, as well as other risks discussed from time to time in our filings with the SEC. Many of these factors are beyond our ability to predict or control. In addition, as a result of these and other factors, our past financial performance should not be relied on as an indication of future performance. The cautionary statements referred to in this section also should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by us or persons acting on our behalf. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

Format of Presentation

Townsquare is a media, entertainment and digital marketing solutions company, principally focused on small and mid-sized markets across the United States. Our assets include market leading radio stations, live events, and digital, mobile, video and social media properties. Our integrated and diversified product and service offerings, which we refer to as Townsquare Everywhere, enable local, regional and national advertisers to target audience engagement across multiple platforms, including on-air, online and at live events. We believe our Townsquare Everywhere capabilities, combined with our leading market position in small and mid-sized markets, enable us to generate higher total net revenue per audience member than radio station owners focused on larger markets.

Our discussion is presented on both a consolidated and segment basis. We have two reportable segments, Local Marketing Solutions, which provides broadcast and digital products and solutions to advertisers and businesses within our local markets, and Entertainment, which provides live event experiences and music and lifestyle content directly

to consumers, and promotion, advertising and product activations to local and national advertisers. Prior to the second quarter of 2016, we reported our results in two reportable segments, Local Advertising and Live Events, and reported the remainder of our business in our Other Media and Entertainment category. The prior Local Advertising segment, together with our digital marketing and e-commerce solutions, which were previously part of the Other Media and Entertainment category, are now reported within Local Marketing Solutions. The prior Live Events segment, together with the our national digital assets which were previously part of the Other Media and Entertainment category, are now reported within Entertainment. We redefined our reportable segments to more closely align with how our businesses have evolved over time, allocating our locally-focused products and services to our Local Marketing Solutions segment and our events and related production products and services to the Entertainment segment. This reflects how management currently reviews our performance and assesses the allocation of resources. The new segment presentation has been applied retrospectively to our segment financial information but did not impact our consolidated financial statements.

Local Marketing Solutions

Our Local Marketing Solutions segment is composed of 309 owned and operated radio stations and over 325 owned and operated local websites serving 66 small and mid-sized markets, a digital marketing solutions offering and an e-commerce offering. Almost all of our radio stations have local companion websites that utilize the station brands and are populated with proprietary, original content created or curated by our local media personalities.

Our primary source of Local Marketing Solutions net revenue is the sale of advertising and sponsorship on our radio stations, local companion websites, radio stations’ online streams and mobile applications. Our sales of advertisements and sponsorship are primarily affected by the demand for advertising from local, regional and national advertisers and the advertising rates we charge. Advertising demand and rates are based primarily on our ability to attract audiences to our various products in the demographic groups targeted by advertisers, as measured principally by various services on a periodic basis. We endeavor to develop strong audience loyalty and believe that the diversification of formats on our radio stations and websites helps to insulate our radio stations and websites from the effects of changes in musical tastes of the public with respect to any particular format. We believe that the sale of our online and mobile advertisements, which currently have rates per advertisement that are less than those of terrestrial radio advertisements, has not negatively impacted our terrestrial radio advertising net revenue. Should a significant and sudden shift in demand for these products toward online and mobile occur, there could be a material adverse impact on our financial condition and results of operations if we are unable to increase rates accordingly. We believe that as a result of our strong brands and quality online and mobile offerings we are well positioned to increase rates as demand increases for these products.

Within our Local Marketing Solutions segment we offer digital marketing solutions, on a subscription basis, to small and mid-sized local and regional businesses ("SMBs") in small and mid-sized markets across the United States, including the markets in which we operate radio stations. Our digital marketing solutions, offered under the brand name Townsquare Interactive, include traditional and mobile-enabled website development and hosting services, search engine and online directory optimization services, online reputation management and social media management.

We strive to maximize Local Marketing Solutions net revenue by managing our advertising inventory time and adjusting prices up or down based on supply and demand and by broadening our base of advertisers and subscribers. Our selling and pricing activity is based on demand for our advertising inventory and, in general, we respond to this demand by varying prices rather than by varying our target inventory levels. The optimal number of advertisements available for sale depends on the platform and in the case of our radio stations and their online streams, the programming format of a particular radio station. Each of our advertising products has a general target level of available inventory. We seek to broaden our base of advertisers in each of our markets by providing a wide array of audience demographic segments across our platforms, thereby providing each of our potential advertisers with an effective means of reaching a targeted demographic group.

Our Local Marketing Solutions contracts are generally short-term. In the media industry, companies sometimes utilize barter agreements that exchange advertising time for goods or services such as travel or lodging, instead of cash. Barter revenue was $4.4 million and $6.8 million and barter expense was $3.7 million and $3.8 million for the three

months ended September 30, 2015 and 2016, respectively. Barter revenue was $11.4 million and $17.4 million and barter expense was $10.1 million and $10.6 million for the nine months ended September 30, 2015 and 2016, respectively. The majority of barter revenue and expense falls within our Local Marketing Solutions segment.

Other sources of revenue within our Local Marketing Solutions segment include tower and other miscellaneous revenue. We generate revenue from leasing space on our own tower facilities sold generally to communications companies and local authorities, as well as from other miscellaneous revenue sources. As a result of the September 1, 2015 sale of 43 towers (see Note 6 of the Notes to unaudited Consolidated Financial Statements), tower lease revenue is no longer a significant contributor to other revenue.

Our most significant Local Marketing Solutions expenses are sales, programming, digital, marketing and promotional, engineering and general and administrative expenses. We strive to control these expenses by closely monitoring and managing each of our local markets and through efficiencies gained from the centralization of finance, accounting, legal and human resources functions and management information systems. We also use our scale and diversified geographic portfolio to negotiate favorable rates with vendors, where feasible.

A portion of our Local Marketing Solutions expenses are variable. These variable expenses primarily relate to sales costs, such as commissions as well as certain programming costs, such as music license fees. Other programming, digital, engineering and general and administrative expenses are primarily fixed costs. Marketing and promotions expenses are discretionary and are primarily incurred in an effort to maintain and/or increase our audience share.

Entertainment

Our Entertainment segment is composed of a diverse range of live events, which we create, promote and produce, including festivals, concerts, trade shows and other experiential events within and beyond our markets, and music and lifestyle content distributed through our owned, operated and affiliated national websites.

Our primary source of Entertainment net revenue is from ticket sales for our live events. Our live events also generate substantial net revenue through the sale of sponsorships, ride tickets, food and other concessions, merchandise and other ancillary products and services. Live event ticket pricing is based on consumer demand for each event and the geographic location and target audience demographic of each event. Unforeseen events such as inclement weather conditions can have an adverse impact on our Entertainment net revenue. In certain cases, we mitigate this risk with insurance policies, which cover a portion of lost revenue as a result of unforeseen events including inclement weather.

Another source of Entertainment net revenue is national digital advertising, primarily display advertisements on our network of owned, operated and affiliated music and entertainment websites. Our national digital sales team also sells product-activation sponsorship and advertising related to our live events. Our national digital assets are subject to general advertising trends as well as advertisers’ perception and demand for our products. A downturn in advertising spending or the economy could have an adverse effect on this net revenue.

Certain expenses in our Entertainment segment are variable, including sales commissions, certain costs related to production and certain revenue sharing agreements with partners. A portion of our revenue and expenses related to our North American Midway Entertainment, Inc. ("NAME") operations are denominated in Canadian dollars and expose us to translational foreign currency risk. We have not historically hedged our exposure to this risk.

Seasonality

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multi-day music festivals, and NAME's revenue which is concentrated in the third quarter. Our operating results in any period may be affected by the incurrence of advertising and promotion expenses that typically do not have an effect on net revenue generation until future periods, if at all.

Macroeconomic Indicators

Our advertising revenue for our businesses may be highly correlated to changes in gross domestic product (“GDP”), as advertising spending has historically trended in line with, and in our experience often lags, changes in GDP. According to the U.S. Department of Commerce estimate as of October 28, 2016, U.S. GDP grew at an annual rate of 2.9% in the third quarter of 2016.

Emerging Growth Company

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The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 ("JOBS Act"), and may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not "emerging growth companies" including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act, and exemptions from the requirements of Sections 14A(a) and (b) of the Securities Exchange Act to hold a nonbinding advisory vote of stockholders on executive compensation and any golden parachute payments not previously approved.

Executive Summary

The key developments in our business for the three months ended September 30, 2016, as compared to the same period in 2015 are summarized below:


•	Net revenue for the three months ended September 30, 2016 increased $36.2 million, or 27.9%. Organic growth accounts for $2.2 million of the increase, with $34.0 million relating to the acquisition of NAME.


•	Local Marketing Solutions net revenue increased $3.1 million, or 3.6%.


•	Entertainment net revenue increased $33.1 million, or 76.0%.


•	Pro forma consolidated net revenue decreased $0.3 million, or 0.2%.


•	Pro forma Local Marketing Solutions net revenue increased $3.3 million, or 3.8%.


•	Pro forma Entertainment net revenue decreased $3.6 million, or 4.5%.

The key developments in our business for the nine months ended September 30, 2016, as compared to the same period in 2015 are summarized below:


•	Net revenue for the nine months ended September 30, 2016 increased $69.1 million, or 21.1%. Organic growth accounts for $10.6 million of the increase, with $58.5 million relating to the acquisition of NAME.


•	Local Marketing Solutions net revenue increased $11.1 million, or 4.6%.


•	Entertainment net revenue increased $58.0 million, or 65.6%.


•	Pro forma consolidated net revenue increased $8.4 million, or 2.2%. Excluding the impact of political advertising revenue in 2016, an election year, pro forma net revenue increased $5.8 million, or 1.5%. The growth in non-political net revenue was primarily driven by growth from our digital products and solutions.


•	Pro forma Local Marketing Solutions net revenue increased $12.1 million, or 5.1%.


•	Pro forma Entertainment net revenue decreased $3.7 million, or 2.4%.

Consolidated Results of Operations

Three Months Ended September 30, 2015 compared to Three Months Ended September 30, 2016

The following table summarizes our historical consolidated results of operations:



($ in thousands)	Three Months Ended September 30,
	2015			2016			$ Change			% Change
Statement of Operations Data:
Local Marketing Solutions net revenue	$	85,949		$	89,003		$	3,054		3.6	%
Entertainment net revenue	43,619			76,753			33,134			76.0	%
Net revenue	129,568			165,756			36,188			27.9	%
Operating Costs and Expenses:
Local Marketing Solutions direct operating expenses	53,534			55,773			2,239			4.2	%
Entertainment direct operating expenses	36,194			58,873			22,679			62.7	%
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	89,728			114,646			24,918			27.8	%
Depreciation and amortization	4,784			5,686			902			18.9	%
Corporate expenses	6,119			6,450			331			5.4	%
Stock-based compensation	2,875			206			(2,669		)	(92.8	)%
Transaction costs	1,125			256			(869		)	(77.2	)%
Net (gain) on sale of assets	(11,909		)	(426		)	11,483			**
Total operating costs and expenses	92,722			126,818			34,096			36.8	%
Operating income	36,846			38,938			2,092			5.7	%
Other expense:
Interest expense, net	8,527			8,294			(233		)	(2.7	)%
Impairment on investment	—			4,236			4,236			**
Cancellation and (repurchase) of debt	288			—			(288		)	**
Other expense, net	33			52			19			57.6	%
Total other expense	8,848			12,582			3,734			42.2	%
Income before income taxes	27,998			26,356			(1,642		)	(5.9	)%
Provision for income taxes	11,543			10,493			(1,050		)	(9.1	)%
Net income	$	16,455		$	15,863		$	(592	)	(3.6	)%
**Percent change not meaningful.

Net Revenue

Net revenue for the three months ended September 30, 2016 increased by $36.2 million, or 27.9%, as compared to the same period in 2015. The increase was driven by increases in Local Marketing Solutions net revenue of $3.1 million and Entertainment net revenue of $33.1 million.

Local Marketing Solutions net revenue for the three months ended September 30, 2016 increased $3.1 million, or 3.6%, as compared to the same period in 2015. The increase was driven by an increase in political net revenue of $1.0 million and non-political net revenue of $2.1 million.

Entertainment net revenue for the three months ended September 30, 2016 increased $33.1 million, or 76.0%, as compared to the the same period in 2015. The increase was composed of $34.0 million of growth from the acquisition of NAME on September 1, 2015, offset by a decrease of $0.9 million from our existing business.

Direct Operating Expenses

Direct operating expenses for the three months ended September 30, 2016 increased by $24.9 million, or 27.8%, as compared to the same period in 2015. The increase was driven by increases in Local Marketing Solutions direct operating expenses of $2.2 million and Entertainment direct operating expenses of $22.7 million.

Local Marketing Solutions direct operating expenses for the three months ended September 30, 2016 increased $2.2 million, or 4.2%, as compared to the the same period in 2015. The increase was primarily a result of (i) increases in costs associated with a new product which launched in the second half of 2015 and (ii) higher costs in headcount-related expenses including salaries and benefits, to support the growth within our digital marketing solutions offering.

Entertainment direct operating expenses for the three months ended September 30, 2016 increased $22.7 million, or 62.7%, as compared to the the same period in 2015. The increase in Entertainment direct operating expenses was primarily related to NAME, which we acquired on September 1, 2015.

Depreciation and Amortization

Depreciation and amortization expense for the three months ended September 30, 2016 increased $0.9 million, or 18.9%, as compared to the same period in 2015 primarily related to depreciation on property and equipment acquired through the acquisition of NAME and amortization of capitalized software development costs.

Corporate Expenses

Corporate expense for the three months ended September 30, 2016 increased $0.3 million, or 5.4%, as compared to the same period in 2015. The increase was primarily a result of increased costs for a data management platform used to provide insight and maximize on sales opportunities.

Stock-based Compensation

Stock-based compensation expense for the three months ended September 30, 2016 decreased $2.7 million, or 92.8%, as compared to the same period in 2015. The stock-based compensation expense in 2016 was related to the grant of stock options in the first quarter of 2016 that vest over a period of four years. The stock-based compensation expense in 2015 was related to a stock option grant that provided for immediate vesting.

Net (Gain) on Sale of Assets

Net (gain) on sale of assets for the three months ended September 30, 2016, decreased $11.5 million, as compared to the same period in 2015. The net gain in the third quarter of 2015 primarily resulted from the sale of 43 towers on 41 sites in 28 markets to a subsidiary of Vertical Bridge, LLC (the "Tower Sale"). The net gain in the third quarter of 2016 primarily resulted from a $0.4 million gain from an earnout payment related to the Tower Sale.

Impairment on Investment

During the three months ended September 30, 2016, there was objective evidence to indicate certain events have adversely impacted estimated future cash flows for one of our investments and as a result we recorded a $4.2 million impairment charge for the three months ended September 30, 2016.

Other Expense

Interest expense, net is the major recurring component of other expense. Interest expense, net decreased $0.2 million, or 2.7%, in the three months ended September 30, 2016 as compared to the same period in 2015.

The following table illustrates the components of our interest expense, net for the periods indicated.



	Three Months Ended September 30,
	2015		2016
($ in thousands)
2023 Notes	$	4,874	$	4,584
Term Loans	3,229		3,306
Capital loans and other	15		10
Loan origination costs	409		394
Interest expense, net	$	8,527	$	8,294

Provision for income taxes

We recognized an expense for income taxes of $10.5 million for the three months ended September 30, 2016. Our effective tax rate for the period was approximately 39.8%. Our effective tax rate may vary significantly from period to period, and can be influenced by many factors. These factors include, but are not limited to, changes to statutory rates in the jurisdictions where we have operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of 35% for the three months ended September 30, 2016 primarily relates to state, local and foreign income taxes.

Nine Months Ended September 30, 2015 compared to Nine Months Ended September 30, 2016

The following table summarizes our historical consolidated results of operations:



($ in thousands)	Nine Months Ended September 30,
	2015			2016			$ Change			% Change
Statement of Operations Data:
Local Marketing Solutions net revenue	$	239,773		$	250,914		$	11,141		4.6	%
Entertainment net revenue	88,429			146,431			58,002			65.6	%
Net revenue	328,202			397,345			69,143			21.1	%
Operating Costs and Expenses:
Local Marketing Solutions direct operating expenses	155,846			164,826			8,980			5.8	%
Entertainment direct operating expenses	77,485			132,318			54,833			70.8	%
Direct operating expenses, excluding depreciation, amortization and stock-based compensation	233,331			297,144			63,813			27.3	%
Depreciation and amortization	12,068			17,812			5,744			47.6	%
Corporate expenses	17,985			18,320			335			1.9	%
Stock-based compensation	4,278			663			(3,615		)	(84.5	)%
Transaction costs	1,297			606			(691		)	(53.3	)%
Net (gain) loss on sale of assets	(11,895		)	287			12,182			**
Total operating costs and expenses	257,064			334,832			77,768			30.3	%
Operating income	71,138			62,513			(8,625		)	(12.1	)%
Other expense (income):
Interest expense, net	27,334			25,740			(1,594		)	(5.8	)%
Impairment on investment	—			4,236			4,236			**
Cancellation and (repurchase) of debt	30,305			(461		)	(30,766		)	**
Other expense (income), net	117			(351		)	(468		)	**
Total other expense	57,756			29,164			(28,592		)	(49.5	)%
Income before income taxes	13,382			33,349			19,967			149.2	%
Provision for income taxes	5,530			13,269			7,739			139.9	%
Net income	$	7,852		$	20,080		$	12,228		155.7	%
**Percent change not meaningful.

Net Revenue

Net revenue for the nine months ended September 30, 2016 increased by $69.1 million, or 21.1%, as compared to the same period in 2015. The increase was driven by increases in Local Marketing Solutions net revenue of $11.1 million and Entertainment net revenue of $58.0 million.

Local Marketing Solutions net revenue for the nine months ended September 30, 2016 increased $11.1 million, or 4.6%, as compared to the same period in 2015. The increase was driven by an increase in political net revenue of $2.7 million and non-political net revenue of $8.4 million.

Entertainment net revenue for the nine months ended September 30, 2016 increased $58.0 million, or 65.6%, as compared to the the same period in 2015. The increase was driven by $58.5 million of growth from the acquisition of NAME on September 1, 2015, offset by a decrease of $0.5 million from our existing business.

Direct Operating Expenses

Direct operating expenses for the nine months ended September 30, 2016 increased by $63.8 million, or 27.3%, as compared to the same period in 2015. The increase was driven by increases in Local Marketing Solutions direct operating expenses of $9.0 million and Entertainment direct operating expenses of $54.8 million.

Local Marketing Solutions direct operating expenses for the nine months ended September 30, 2016 increased $9.0 million, or 5.8%, as compared to the the same period in 2015. The increase was primarily a result of (i) increases in costs associated with a new product which launched in the second half of 2015 and (ii) higher costs in headcount-related expenses including salaries and benefits, to support the growth of our digital marketing solutions offering.

Entertainment direct operating expenses for the nine months ended September 30, 2016 increased $54.8 million, or 70.8%, as compared to the the same period in 2015. The increase in Entertainment direct operating expenses was primarily related to NAME, which we acquired on September 1, 2015.

Depreciation and Amortization

Depreciation and amortization expense for the nine months ended September 30, 2016 increased $5.7 million, or 47.6%, as compared to the same period in 2015 primarily related to depreciation on property and equipment acquired through the acquisition of NAME and amortization of capitalized software development costs.

Corporate Expenses

Corporate expense for the nine months ended September 30, 2016 increased $0.3 million, or 1.9%, as compared to the same period in 2015. The increase was primarily a result of increased costs for a data management platform used to provide insight and maximize on sales opportunities.

Stock-based Compensation

Stock-based compensation expense for the nine months ended September 30, 2016 decreased $3.6 million, or 84.5%, as compared to the same period in 2015. The stock-based compensation expense in 2016 was related to the grant of stock options in the first quarter of 2016 that vest over a period of four years. The stock-based compensation expense in 2015 was related to a stock option grant that provided for immediate vesting.

Net (Gain) Loss on Sale of Assets

Net (gain) loss on sale of assets for the nine months ended September 30, 2016, decreased $12.2 million, as compared to the same period in 2015. The net gain in 2015 primarily resulted from the Tower Sale. The net loss in 2016 was primarily composed of a $1.0 million loss on the sale of certain live events, which was partially offset by a $0.8 million gain from earnout payments related to the Tower Sale.

Impairment on Investment

During the nine months ended September 30, 2016, there was objective evidence to indicate certain events have adversely impacted estimated future cash flows for one of our investments and as a result we recorded a $4.2 million impairment charge for the nine months ended September 30, 2016.

Other Expense

Interest expense, net is the major recurring component of other expense. Interest expense, net decreased $1.6 million, or 5.8%, in the nine months ended September 30, 2016 as compared to the same period in 2015, primarily due to the refinancing of our outstanding indebtedness at more favorable rates on April 1, 2015.

On April 1, 2015, the Company issued $300.0 million of 6.5% Unsecured Senior Notes due in 2023 (the "2023 Notes") and entered into a Senior Secured Credit Facility, including a seven year, $275.0 million term loan facility (the "Term Loans") and a five year, $50.0 million revolving credit facility (the "Revolver" and together with the Term Loans, the "Senior Secured Credit Facility"). The proceeds from the 2023 Notes and Term Loans were used to repay substantially all of our previous long-term borrowings. We recognized a $30.0 million net loss on debt extinguishment in connection with these repayments.

The following table illustrates the components of our interest expense, net for the periods indicated.



	Nine Months Ended September 30,
	2015		2016
($ in thousands)
Unsecured Senior Notes	$	18,571	$	14,262
Term Loans	7,393		9,904
Capital loans and other	44		33
Loan origination costs	1,326		1,541
Interest expense, net	$	27,334	$	25,740

Provision for income taxes

We recognized an expense for income taxes of $13.3 million for the nine months ended September 30, 2016. Our effective tax rate for the period was approximately 39.8%. Our effective tax rate may vary significantly from period to period, and can be influenced by many factors. These factors include, but are not limited to, changes to statutory rates in the jurisdictions where we have operations and changes in the valuation of deferred tax assets and liabilities. The difference between the effective tax rate and the federal statutory rate of 35% for the nine months ended September 30, 2016 primarily relates to state, local and foreign income taxes.

Supplemental Pro Forma Net Revenue

For comparative purposes and to enable the reader to adequately compare prior year with current year results, the following discussion and tables present net revenue for Townsquare, pro forma for the acquisitions of NAME on September 1, 2015, as well as the Tower Sale on September 1, 2015 (collectively, the "Transactions"). The following tables present our pro forma results, which include the results of the Transactions prior to the transaction dates.

Three Months Ended September 30, 2015:



($ in thousands)	Townsquare		NAME		Tower Sale			Townsquare Pro Forma for the Transactions
Local Marketing Solutions net revenue	$	85,949	$	—	$	(242	)	$	85,707
Entertainment net revenue	43,619		36,722		—			80,341
Net revenue	$	129,568	$	36,722	$	(242	)	$	166,048

The following table summarizes our pro forma net revenue for the three months ended September 30, 2015 and 2016:



($ in thousands)	Three Months Ended September 30,				$			%
	2015		2016		Change			Change
Local Marketing Solutions net revenue	$	85,707	$	89,003	$	3,296		3.8	%
Entertainment net revenue	80,341		76,753		(3,588		)	(4.5	)%
Net revenue	$	166,048	$	165,756	$	(292	)	(0.2	)%

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On a pro forma consolidated basis, net revenue for the three months ended September 30, 2016 decreased by $0.3 million, or 0.2%, as compared to the same period in 2015. The decrease resulted from a $3.6 million decrease in Entertainment net revenue, which was partially offset by a $3.3 million increase in Local Marketing Solutions net revenue. The decrease in Entertainment net revenue was primarily the result of inclement weather, specifically for our NAME events. The increase in Local Marketing Solutions net revenue was driven by an increase in political net revenue of $1.0 million and non-political net revenue of $2.3 million.

Nine Months Ended September 30, 2015:



($ in thousands)	Townsquare		NAME		Tower Sale			Townsquare Pro Forma for the Transactions
Local Marketing Solutions net revenue	$	239,773	$	—	$	(961	)	$	238,812
Entertainment net revenue	88,429		61,661		—			150,090
Net revenue	$	328,202	$	61,661	$	(961	)	$	388,902

The following table summarizes our pro forma net revenue for the nine months ended September 30, 2015 and 2016:



($ in thousands)	Nine Months Ended September 30,				$			%
	2015		2016		Change			Change
Local Marketing Solutions net revenue	$	238,812	$	250,914	$	12,102		5.1	%
Entertainment net revenue	150,090		146,431		(3,659		)	(2.4	)%
Net revenue	$	388,902	$	397,345	$	8,443		2.2	%

On a pro forma consolidated basis, net revenue for the nine months ended September 30, 2016 increased by $8.4 million, or 2.2%, as compared to the same period in 2015. The increase resulted from a $12.1 million increase in Local Marketing Solutions net revenue, offset by a decrease in Entertainment net revenue of $3.7 million. The increase in Local Marketing Solutions net revenue was driven by an increase in political net revenue of $2.7 million and non-political net revenue of $9.4 million. The decrease in Entertainment net revenue was primarily the result of inclement weather, specifically for our NAME events.

Liquidity and Capital Resources



	Nine Months Ended September 30,
($ in thousands)	2015			2016
Cash provided by operating activities	$	14,040		$	40,160
Cash used in investing activities	(65,013		)	(16,690		)
Cash provided by (used in) financing activities	54,696			(17,675		)
Net effect of foreign currency exchange rate changes	(126		)	(680		)
Net increase in cash	$	3,597		$	5,115

We fund our working capital requirements through a combination of cash flows from our operating, investing and financing activities. Based on current and anticipated levels of operations and conditions in our markets and industry, we believe that our cash on hand and cash flows from our operating, investing and financing activities, together with funds available under our revolving credit facility, will enable us to meet our working capital, capital expenditures, debt service and other funding requirements for at least the next twelve months. As of September 30, 2016, we had $572.8 million of outstanding indebtedness, net of deferred financing costs of $8.4 million, and based on interest rates in effect as of that date, we expect our debt service requirements to be approximately $31.5 million over the next twelve

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months. In addition, as of September 30, 2016 we have $38.4 million of cash, $65.4 million of receivables from customers, which historically have had an average collection cycle of approximately 45 days, and $50.0 million of available borrowing capacity under our revolving credit facility.

Our anticipated uses of cash in the near term include working capital needs, debt payments, other obligations, and capital expenditures. However, our ability to fund our working capital needs, debt payments, other obligations, capital expenditures, and to comply with the financial covenants under our debt agreements, depends on our future operating performance and cash flow, which are in turn subject to prevailing economic conditions, increases or decreases in advertising spending, rapid changes in the highly competitive industry in which we operate and other factors, many of which are beyond our control.

Additionally, on a continual basis, we evaluate and consider strategic acquisitions and divestitures to enhance our strategic and competitive position as well as our financial performance. Any future acquisitions, joint ventures or other similar transactions will likely require additional capital and such capital may not be available to us on acceptable terms, if at all.

We closely monitor the impact of capital and credit market conditions on our liquidity as related to our floating rate debt. We also routinely monitor the changes in the financial condition of our customers and the potential impact on our results of operations.

Cash Flows from Operating Activities

Net cash provided by operating activities increased $26.1 million for the nine months ended September 30, 2016 to $40.2 million. During the nine months ended 2015 we made a one-time cash payment of $27.7 million on April 1, 2015 to lenders for the redemption of the Unsecured Senior Notes due 2019 issued by our indirect, wholly owned subsidiary. Excluding this non-recurring payment to lenders in 2015, cash flows provided by operating activities would have been $41.7 million for the nine months ended September 30, 2015, which would equate to a decrease of $1.5 million for the nine months ended September 30, 2016, as compared to the prior year period. This decrease, excluding the non-recurring payment to lenders, was due to $9.7 million more cash generated by our operations in 2016 than in 2015, offset by (i) an increase in accounts receivable of $4.6 million primarily relating to our live events and (ii) a decrease of $6.1 million in accounts payable and accrued expenses due to timing of payments.

Cash Flows from Investing Activities

Net cash used in investing activities decreased $48.3 million to $16.7 million for the nine months ended September 30, 2016 from $65.0 million for the same period in 2015. The decrease was primarily driven by a decrease in payments for acquisitions of $72.2 million and a decrease in proceeds from the sale of assets of $17.3 million. This was partially offset by increased spending for capital expenditures of $6.9 million, of which $5.1 million relates to NAME, which we acquired on September 1, 2015.

Cash Flows from Financing Activities

Net cash used in financing activities was $17.7 million for the nine months ended September 30, 2016, as compared to $54.7 million of net cash provided by financing activities for the same period in 2015. In 2015, net cash provided by financing activities was primarily composed of new borrowings, net of debt repayments and debt issuance fees, of $55.1 million as a result of our refinancing, which closed on April 1, 2015. In 2016, cash used in financing activities was primarily composed of voluntarily payments made to repurchase and cancel $17.9 million of our 2023 Notes outstanding at a market price below par, plus accrued interest. The gain of the repurchases of $0.5 million is included in other expense (income), net in our consolidated statements of operations for the nine months ended September 30, 2016.

Financing Arrangements

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On April 1, 2015, the Company issued $300.0 million of 6.5% Unsecured Senior Notes due in 2023 and a Senior Secured Credit Facility, which included a seven year, $275.0 million term loan facility and a five year, $50.0 million revolving credit facility. The Term Loans have an initial interest rate of 4.25% (based on current LIBOR levels, a 1.00% LIBOR floor and an applicable margin of 325 basis points). The Revolver has an interest rate based either on LIBOR and an applicable margin of 250 basis points, or an alternative base rate and an applicable margin of 150 basis points.

On March 24, 2016, we voluntarily repurchased $0.7 million of our 2023 Notes at a market price below par, plus accrued interest. We canceled the repurchased notes. A gain of $34 thousand is included in other expense (income), net in our consolidated statements of operations for the nine months ended September 30, 2016.

During the three months ended June 30, 2016, we voluntarily repurchased an aggregate of $17.2 million of our 2023 Notes at market prices below par, plus accrued interest. We canceled the repurchased notes. A gain of $0.4 million is included in other expense (income), net in our consolidated statements of operations for the nine months ended September 30, 2016.

During the nine months ended September 30, 2016 we recognized a loss of $0.3 million on the write-off of unamortized deferred financing costs in connection with the voluntary repurchases on our 2023 Notes, which is included in interest expense, net in our consolidated statements of operations for the nine months ended September 30, 2016.

As of September 30, 2016, the Company is in compliance with all terms and covenants of its borrowing arrangements, and has $50 million of revolving credit availability under the Senior Secured Credit Facility.

We have historically serviced our debt obligations from funds generated by operating activities. We believe that our cash balance, together with our remaining capacity under the Revolver and cash generated by operating activities, will be sufficient to fund our operations, service our debt obligations and pursue our strategy for the next twelve months.

Off-Balance Sheet Arrangements

We have no material off-balance sheet arrangements or transactions.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our significant estimates, including those related to bad debts, intangible assets, income taxes, contingencies and purchase price allocations. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual amounts and results may differ materially from these estimates under different assumptions or conditions.

We believe the accounting policies and estimates discussed within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2015 Annual Report on Form 10-K reflect our more significant judgments and estimates used in the preparation of the consolidated financial statements. There have been no material changes to the critical accounting policies and estimates as filed in such report.

Recent Accounting Standards

For a discussion of accounting standards updates that have been adopted or will be adopted in the future, please refer to Note 2 of the Notes to Unaudited Consolidated Financial Statements included under Item 1.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

The following discussion should be read together with our unaudited consolidated financial statements and related notes to unaudited consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q, as well as those discussed within our audited consolidated financial statements and related notes to audited consolidated financial statements included in our 2015 Annual Report on Form 10-K.

Interest Rate Risk

As of September 30, 2016 we were not subject to market risk from exposure to changes in interest rates with respect to borrowings under our existing 2023 Notes.

As of September 30, 2016 we were subject to market risk from exposure to changes in interest rates on borrowings under our Senior Secured Credit Facility, specifically the impact of LIBOR interest rates on our variable rate borrowings. Based upon our September 30, 2016 outstanding term loan borrowings of $298.5 million under the Senior Secured Credit Facility, an increase in the LIBOR interest rate of 1% would result in an increase in our annual interest expense of approximately $1.2 million. We anticipate such interest rate risk will remain a market risk exposure for the foreseeable future.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain "disclosure controls and procedures," as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act, that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In designing and evaluating the disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Furthermore, our controls and procedures can be circumvented by the individual acts of some persons, by collusion of two or more people or by management override of the control and misstatements due to error or fraud may occur and not be detected on a timely basis.

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of such date.

Changes in Internal Controls

There was no change in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are parties to various legal matters and claims arising in the ordinary course of business. We do not expect that the final resolution of these ordinary course matters will have a material adverse impact on our financial position, results of operations or cash flows.

Item 1A. Risk Factors

Please refer to Part I, Item 1A, “Risk Factors,” in our 2015 Annual Report on Form 10-K for information regarding known material risks that could affect our results of operations, financial condition and liquidity. In addition to these risks, other risks that we presently do not consider material, or other unknown risks, could materially adversely impact our business, financial condition and results of operations in a future period.

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

None

Item 3. Defaults upon Senior Securities

None

Item 4. Mine Safety Disclosures

None

Item 5. Other Information

None

Item 6. Exhibits

See Exhibit Index.

SIGNATURES

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




	TOWNSQUARE MEDIA, INC.

By:	/s/ Steven Price
	Name: Steven Price
	Title: Chairman & Chief Executive Officer

By:	/s/ Stuart Rosenstein
	Name: Stuart Rosenstein
	Title: Executive Vice President & Chief Financial Officer

Date: November 8, 2016

EXHIBIT INDEX



Exhibit		Description
10.1		Registration Agreement, dated as of August 16, 2016, by and between Townsquare Media, Inc. and Madison Square Garden Investments, LLC

31.1		Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. 1350

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. 1350

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document