In connection with the October 2014 acquisition of Cars.com by TEGNA, the Company entered into affiliate agreements with the former owners of Cars.com. Under the affiliate agreements, affiliates have the exclusive right to sell and price Cars.com’s products and services in their local territories, paying Cars.com a wholesale rate for the Cars.com product. The Company charges the affiliates 60% of the corresponding Cars.com retail rate for products sold to affiliate dealers and recognizes revenue generated from these agreements as Wholesale revenues in the Consolidated and Combined Statements of Income. The unfavorable contracts liability was established as a result of these unfavorable affiliate agreements that the Company entered into as part of TEGNA’s acquisition of the Company in 2014.

Prior to the affiliate conversions discussed below, over the annual contract period, the Company recognized $25.2 million of Wholesale revenues with a corresponding reduction of the Unfavorable contracts liability. As of December 31, 2018 and 2017, the Unfavorable contracts liability on the Consolidated and Combined Balance Sheets was $18.9 million and $44.1 million, respectively. Of the total Unfavorable contracts liability balances, $18.9 million and $25.2 million was recorded in Current liabilities on the Consolidated and Combined Balance Sheets as of December 31, 2018 and 2017, respectively.

In January 2018, the Company announced it amended its affiliate agreement with The McClatchy Company (“McClatchy”) to convert McClatchy’s 22 affiliate markets into the Company’s direct sales channel in phases, on or before October 2018, prior to the original October 2019 affiliate agreement expiration date. As of October 1, 2018, the Company has completed the McClatchy affiliate market conversions.

In January 2018, the Company amended its affiliate agreement with tronc, Inc. (“tronc”) to convert tronc’s eight affiliate markets into the Company’s direct sales channel, effective February 1, 2018.

In July 2018, the Company amended its affiliate agreement with the Washington Post and agreed to convert the Washington, DC market into the Company’s direct sales channel, effective August 1, 2018, which was prior to the October 2019 expiration of the original agreement.

The Company now has a direct relationship with the dealer customers and recognizes the revenue associated with converted markets as Retail revenues, rather than Wholesale revenues, in the Consolidated and Combined Statements of Income. In addition, as part of the recent changes in the structure of the affiliate agreements, the Company engaged McClatchy, tronc and the Washington Post to perform certain marketing support and transition services through December 31, 2019, March 31, 2020 and October 1, 2019, respectively. The fees associated with the amended affiliate agreements are recorded as Affiliate revenue share within Operating expenses in the Consolidated and Combined Statements of Income.

The Company no longer records the amortization of the Unfavorable contracts liability associated with the converted markets to revenues as the Company is recognizing this direct revenue at retail rates. The amortization of the Unfavorable contracts liability is now recorded as a reduction of Affiliate revenue share within Operating expenses in the Consolidated and Combined Statements of Income.

Therefore, during the year ended December 31, 2018, the Company recorded $18.7 million as a reduction to Affiliate revenue share, rather than Wholesale revenues, in the Consolidated and Combined Statements of Income. The reduction to Affiliate revenue share was partially offset by the fees associated with the marketing support and transition services.

The Company’s Unfavorable contracts liability activity for the year ended December 31, 2018 is as follows (in thousands):

December 31, 2017	$	44,085
Amortization into Wholesale revenues⁽¹⁾		(6,457	)
Amortization into Affiliate revenue share⁽²⁾		(18,743	)
December 31, 2018	$	18,885

(1)

Amount represents the amortization of the Unfavorable contracts liability related to the remaining affiliate agreements into Wholesale revenues in the Consolidated and Combined Statements of Income.

(2)

Amount represents the amortization of the Unfavorable contracts liability related to the converted McClatchy, tronc and Washington Post affiliate agreements into Affiliate revenue share within Operating expenses in the Consolidated and Combined Statements of Income.