NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Business
Global Eagle Entertainment Inc. is a Delaware corporation headquartered in Los Angeles, California. Global Eagle (together with its subsidiaries, “Global Eagle” or the “Company”, “we”, “us” or “our”) is a leading provider of media and satellite-based connectivity to fast-growing, global mobility markets across air, land and sea. Global Eagle offers a fully integrated suite of rich media content and seamless connectivity solutions that cover the globe. As of
June 30, 2018
, our business comprises
two
operating segments: Media & Content and Connectivity. See
Note 13. Segment Information
for further discussion of the Company’s reportable segments.
Media & Content
The Media & Content operating segment selects, manages, provides lab services and distributes wholly owned and licensed media content, video and music programming, advertising, applications and video games to the airline, maritime and other “away from home” non-theatrical markets.
Connectivity
The Connectivity operating segment provides its customers, including their passengers and crew, with (i) Wi-Fi connectivity via L, C, Ka and Ku-band satellite transmissions that enable access to the Internet, live television, on-demand content, shopping and travel-related information and (ii) operational solutions that allow customers to improve the management of their internal operations.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The following is a summary of the significant accounting policies consistently applied in the preparation of the accompanying condensed consolidated financial statements.
Basis of Presentation
In the opinion of the Company's management, the unaudited interim condensed consolidated financial statements have been prepared on the same basis as the Company's audited consolidated financial statements for the year ended
December 31, 2017
, and include all adjustments, which include only normal recurring adjustments, necessary for the fair presentation of the Company's interim unaudited condensed consolidated financial statements for the
three and six
months ended
June 30, 2018
. The results for the
three and six
months ended
June 30, 2018
are not necessarily indicative of the results expected for the full
2018
year. The consolidated balance sheet as of
December 31, 2017
has been derived from the Company's audited balance sheet included in the Company's Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the "SEC") on April 2, 2018 (the "2017 Form 10-K").
The interim unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to SEC Form 10-Q and Article 10 of SEC Regulation S-X. They do not include all of the information and footnotes required by GAAP for complete audited financial statements. Therefore, these interim unaudited condensed consolidated financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto included in the 2017 Form 10-K.
These interim unaudited condensed consolidated financial statements have been prepared on the basis of the Company having sufficient liquidity to fund its operations for at least the next twelve months from the issuance of these financial statements in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Topic 205-40 (“ASC Topic 205-40”),
Presentation of Financial Statements—Going Concern
. The Company’s principal sources of liquidity have historically been its debt and equity issuances and its cash and cash equivalents (which cash and cash equivalents amounted to
$37.4 million
as of
June 30, 2018
, and
$48.3 million
as of
December 31, 2017
, respectively). The Company’s internal plans
and forecasts indicate that it will have sufficient liquidity to continue to fund its business and operations for at least the next twelve months in accordance with ASC Topic 205-40.
The assessment by the Company’s management that the Company will have sufficient liquidity to continue as a going concern is based on its completion on March 27, 2018 of the issuance of its second lien notes due June 30, 2023 (the “Second Lien Notes”) (as discussed in
Note 8. Financing Arrangements
) which provided net cash proceeds of approximately
$143.0 million
(of which the Company subsequently used a portion thereof to pay down the then full outstanding principal amount, approximately
$78.0 million
, of its revolving credit facility) and on underlying estimates and assumptions, including that the Company: (i) timely files its periodic reports with the SEC; (ii) services its indebtedness and complies with the covenants (including the financial reporting covenants) in the agreements governing its indebtedness; and (iii) remains listed on The Nasdaq Stock Market (“Nasdaq”), including maintaining a minimum stock price pursuant to Nasdaq’s listing rules.
If the Company is unable to satisfy the covenants and obligations contained in its senior secured credit agreement dated January 6, 2017 (as amended, the “2017 Credit Agreement”), the securities purchase agreement governing its Second Lien Notes, or the indenture governing its
2.75%
convertible senior notes due 2035 (the “convertible notes”), in each case, or obtain waivers thereunder (if needed), then the debtholders and noteholders could have the option to immediately accelerate the outstanding indebtedness, which the Company may not be able to repay. In addition, if the Company is unable to remain in compliance with Nasdaq’s listing requirements, then Nasdaq could determine to delist the Company’s common stock from Nasdaq, which would in turn constitute a “fundamental change” under the terms of the indenture governing the convertible notes. This would give the convertible noteholders the option to require the Company to repurchase all or a portion of their convertible notes at a repurchase price equal to 100% of the principal amount thereof. In this event, the Company may not be able to repurchase the tendered notes.
The events in the foregoing paragraph, if they occurred, could materially and adversely affect the Company’s operating results, financial condition, liquidity and the carrying value of the Company’s assets and liabilities. The Company intends to satisfy its current and future debt service obligations with its existing cash and cash equivalents and through accessing its revolving credit facility. However, the Company may not have sufficient funds or may be unable to arrange for additional financing to pay the amounts due under its existing debt instruments in the event of an acceleration event or repurchase event (as applicable). In any such event, funds from external sources may not be available on acceptable terms, if at all.
Reclassifications
Certain reclassifications have been made to the condensed consolidated financial statements of the prior year and the accompanying notes to conform to the current year presentation. Effective January 1, 2018, we adopted ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
and as a result we reclassified the presentation of our statement of cash flows for the
six months ended June 30, 2017
to conform with the new restricted cash guidance. Refer to sub-section titled
Adoption of New Accounting Pronouncements
below in this Note.
Revenue Recognition
On January 1, 2018, we adopted ASU 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09” or “Topic 606”) and all related amendments and applied the concepts to all contracts which were not completed as of January 1, 2018 using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of accumulated deficit. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported in accordance with our historical accounting policies.
We recorded a net reduction to an opening accumulated deficit of
$0.9 million
as of January 1, 2018 due to the cumulative impact of adopting Topic 606, with the impact primarily related to the capitalization of contract costs previously expensed and the recognition of deferred revenue as of
December 31, 2017
through accumulated deficit relating to time-based software licenses offset by the deferral of revenues for usage-based licenses that were previously recognized upfront. Applying Topic 606 resulted in a net increase of
$0.3 million
and a net decrease of
$0.4 million
to revenue, for the three and six months ended
June 30, 2018
, respectively. The impact to cost of goods sold for the three and six months ended
June 30, 2018
was a net decrease of
$0.4 million
and
$0.8 million
, respectively, primarily relating to revenues in our Media & Content segment as a result of applying Topic 606.
The Company accounts for a contract with a customer when an approved contract exists, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and the collectability of substantially all of the
consideration is probable. Revenue is recognized as the Company satisfies performance obligations by transferring a promised good or service to a customer.
The Company’s revenue is principally derived from the following sources:
Media & Content
The Company curates and manages the licensing of content to the airline, maritime, and non-theatrical industries globally and provides associated services, such as technical services, delivery of digital media advertising, the encoding of video and music products, development of graphical interfaces and the provision of materials. Media & Content licensing and service revenue is principally generated through the sale or license of media content and the associated management services, video and audio programming, applications and video games to customers in the aviation, maritime and non-theatrical markets.
Licensing Revenues
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•
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Film, Audio, and Television licensing
- The Company selects, procures, manages, and distributes video and audio programming, and provides similar applications to the airline, maritime and other “away from home” non-theatrical markets. The Company delivers content compatible with Global Eagle systems as well as compatible with a multitude of third-party in-flight entertainment (“IFE”) systems. The Company acquires non-theatrical licenses from major Hollywood, independent and international film and television producers and distributors, and licenses the content to airlines, maritime companies, non-theatrical customers, and other content service providers. In addition to the
content licenses, the Company provides the content literature for seat-back inflight magazines, trailers for the website, and metadata for the Inflight Entertainment systems (“IFE systems”). Revenue recognition is dependent on the nature of the customer contract. Content
licenses to customers are typically categorized into usage-based or flat-fee based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures revenue is recognized upon the available date of the license, which is typically at the beginning of each cycle, or straight-line over the license period.
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|
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•
|
Games and applications licensing
- The Company produces games customized to suit the in-flight environment. The Company acquires multi-year licenses from game publishers to adapt third-party-branded games and concepts for in-flight use. The Company also licenses applications for use on airline customers’ IFE systems. These applications allow airlines the ability to present information and products to its customers (
i.e.
, passengers) such as their food and beverage menu offerings, magazine content, and flight locations. Games and applications licenses are operated under usage or flat-fee based fee structures.
Revenue recognition is dependent on the nature of the customer contract. Content
licenses to customers are typically categorized into usage-based or flat-fee based fee structures. For usage-based fee structures, revenue is recognized as the usage occurs. For flat-fee based structures revenue is recognized upon the available date of the license, which is typically at the beginning of each cycle, or straight-line over the license period.
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Services Revenues
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•
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Advertising Services
- The Company sells airline advertisement spots to customers through the use of insertion orders with terms typically ranging between one and six months. The Company typically prices advertisements based on a total guaranteed number of impressions within a predetermined play cycle for the advertisement. Pricing is also dependent on the type of advertisement (
e.g.
, pop-up, banner, etc.) and the type of media platform on which the advertisement will be displayed (
e.g.
, airport lounge or IFE system). The total number of impressions are estimated upfront, based on reported flight levels and passenger data supplied by airlines. The Company acquires these advertising distribution rights from airlines via supplier agreements. These supplier agreements with airlines are normally revenue-share arrangements which provide the Company with exclusive distribution rights for the airline advertising spots and can also include a minimum guarantee payment from the Company to the airline. These agreements with airlines are generally for one to three year terms. Revenue is recognized over time as the advertisements are played and/or when the committed advertisement impressions have been delivered, which is generally spread evenly throughout the term and often the Company continues to display the advertisement after the minimum number of impressions is met. When the Company enters into revenue-sharing arrangements with the airlines, the Company evaluates whether it is the principal or agent in the
|
arrangement with the airline. When the Company is considered the principal it reports the underlying revenue on a gross basis in its Consolidated Statements of Operations, and records these revenue-sharing payments to the airline in service costs. When the Company acts as an agent in the arrangement, the associated revenues are recorded net.
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•
|
Lab Services
-
The Company addresses a variety of technical customer needs relating to content regardless of the particular IFE system being used. Content acquired from studios and producers is normally provided to the Company in certain languages, aspect ratios, and file sizes, whereas the Company’s customers (
e.g
., airlines) have IFE systems requiring certain aspect ratios and file sizes, and they request content in various languages for their global passenger base. The Company’s technical services include encoding, editing and metadata services, as well as language subtitle and dubbing services, and are generally performed in-house in the Company’s technical facilities (collectively, “Lab Services”). Lab Services are typically priced on a flat fee per month, ad hoc basis, or included in the content pricing. Revenue is recognized when the Lab Services performance obligation is complete and the underlying content has been accepted by and made available to the customer, both of which typically occur on the license available date of the respective content.
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•
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Ad Hoc Services
- The Company may perform additional non-recurring implementation, configuration, interactive development or other ad hoc services connected with the games and applications delivery. These services include embedding of customer logo(s) and population of content within applications (
e.g
., food and beverage content within the Company’s eMealMenu application).
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Connectivity
Aviation Services Revenue -
Services revenue for Connectivity includes satellite-based Internet services and related technical and network operational support and management services and live television. The connectivity services provide airlines with the capability to provide its passengers’ wireless access to the Internet, enabling them to web-surf, email, text, and access live television. The connectivity experience also permits passengers to enjoy inflight entertainment, such as streaming for non-live television, and movies and video-on-demand, delivered through a web-based framework from an initial “landing page”. The revenue is recognized over time as control is transferred to the customer (
i.e.,
the airline), which occurs continuously as customers receive the bandwidth/connectivity services.
Aviation Equipment Revenue -
Equipment revenue is recognized when control passes to the customer, which occurs at the later of shipment of the equipment to the customer and obtaining the Supplemental Type Certificates (“STC”). In determining whether an arrangement exists, the Company ensures that a binding arrangement is in place, such as a purchase order or a fully executed customer-specific agreement. The Company generally believes the acceptance clauses in its contracts are perfunctory and will recognize revenue upon shipment provided that all other criteria have been met, including delivery of the STCs. In certain cases where the Company sells its equipment to an aviation customer on a stand-alone basis, it may charge a fee for obtaining STCs from the relevant aviation regulatory body, which permits the Company’s equipment to operate on certain model/type of aircraft. An STC is highly interrelated with the connectivity services as it is often required for new equipment and/or for new types of aircrafts prior to the airlines installing the equipment. When an STC is required it would not be sold separately as it has no value to the customer without the equipment and vice versa. As such, in such circumstances, the Company does not consider an STC separate from the equipment. To the extent that the Company contracts to charge STC fees in equipment-only sales, the Company will record these fees as revenue at the later of shipment of the equipment to the customer and obtaining the STC.
Maritime and Land Service Revenue -
The Maritime business provides satellite telecommunications services (“connectivity services”) through the Company’s private network that utilizes very small aperture terminal (“VSAT”) satellite technology for cruise ships and ferries, commercial shipping companies, yachts, and offshore drilling platforms. The technology enables voice and data capabilities to customers with ocean-going vessels or ocean-based environments. For certain cruise ship customers, the Company also offers maritime live television services (“TV services”). The service offerings cover a wide range of end-to-end network service combinations for customers’ point-to-point and point-to-multipoint telecommunications needs. These offerings range from simple connections to customized private network solutions through a network that uses “multiple channel per carrier” or “single channel per carrier” technology with bandwidth satellite capacity and fiber optic infrastructure. The business also offers teleport services through its proprietary teleports located in Germany and the US. In conjunction with its connectivity services, the Company also provides equipment to the customer, as part of the service, for which the Company retains ownership of the equipment throughout the term of the service. Revenue is recognized over time in accordance with the transfer of control, which is continuously as the customer receives the bandwidth/ connectivity services. Certain of the Company’s contracts involve a revenue sharing or
reseller arrangement to distribute the connectivity services. The Company assesses these services under the principal versus agent criteria and has determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.
Maritime and Land Installation Revenue -
To service its marine and land-based customers, the Company operates a network of global field-support centers for installation and repair services. The Company has field support centers in several locations worldwide, several of which offer a spare parts inventory, a network operations center that is open 24/7, certified technicians, system integration and project management. These field centers provide third-party antenna and ship-based system integration, global installation support, and repair services. Revenue is recognized in accordance with the transfer of control,
i.e.
, over-time as labor hours are incurred in the provision of installation services.
Maritime and Land Equipment Revenue -
Equipment revenue is recognized when control passes to the customer, which, depending on the contractual arrangement with the customer, is generally upon shipment or arrival/acceptance at destination. Maritime and land equipment is generally priced as a one-time upfront payment at its standalone selling price (“SSP”).
Significant Judgments
Judgment is required to determine the stand-alone selling price (“SSP”) for each distinct performance obligation under contracts where the Company provides multiple deliverables. In instances where SSP is not directly observable, such as when the Company does not sell the product or service separately, the Company determines the SSP using information that may include the adjusted market assessment approach, expected cost plus margin approach, or the residual approach. For the Media & Content segment, management sets prices for each performance obligation using an adjusted market assessment approach when entering into contracts. Contract prices reflect the standalone selling price. As such, the Company uses the stated contract price for SSP allocation of the transaction price.
Topic 606 requires the Company to estimate variable consideration. Service Level Agreement (“SLA”) or service issue/outage credits which are considered variable consideration (
i.e.
, customer credits), require estimation, including the use of historical credit levels. These credits have historically not been material in the context of the customer contracts for the non-aviation businesses within the Connectivity segment or for the Media & Content segment.
Valuation of Goodwill and Intangible Assets
The Company performs valuations of assets acquired and liabilities assumed on each acquisition accounted for as a business combination, and allocates the purchase price of each acquired business to its respective net tangible and intangible assets and liabilities. Acquired intangible assets principally consist of technology, customer relationships, backlog and trademarks. Liabilities related to intangibles principally consist of unfavorable vendor contracts. The Company determines the appropriate useful life by performing an analysis of expected cash flows based on projected financial information of the acquired businesses. Intangible assets are amortized over their estimated useful lives using the straight-line method, which approximates the pattern in which the majority of the economic benefits are expected to be consumed. Intangible liabilities are amortized into cost of sales ratably over their expected related revenue streams over their useful lives.
Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. The Company does not amortize goodwill but evaluates it for impairment at the reporting unit level annually during the fourth quarter of each fiscal year (as of October 1 of that quarter) or when an event occurs or circumstances change that indicates the carrying value may not be recoverable. During the first quarter of 2017, the Company adopted ASU 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.
Under the then newly adopted guidance, the optional qualitative assessment, referred to as “Step 0”, and the first step of the quantitative assessment (“Step 1”) remained unchanged versus the prior accounting standard. However, the requirement under the prior standard to complete the second step (“Step 2”), which involved determining the implied fair value of goodwill and comparing it to the carrying amount of that goodwill to measure the impairment loss, was eliminated. As a result, Step 1 will be used to determine both the existence and amount of goodwill impairment. An impairment loss will be recognized for the amount by which the reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill in that reporting unit.
The Company periodically analyzes whether any indicators of impairment have occurred. As part of these periodic analyses, the Company compares its estimated fair value, as determined based on its stock price, to its net book value.
Income Taxes
Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement carrying amounts of assets and liabilities and the amounts that are reported in the income tax returns. Deferred taxes are evaluated for realization on a jurisdictional basis. The Company records valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. In making this assessment, management analyzes future taxable income, reversing temporary differences and ongoing tax planning strategies. Should a change in circumstances lead to a change in judgment about the realizability of deferred tax assets in future years, the Company will adjust related valuation allowances in the period that the change in circumstances occurred, along with a corresponding increase or charge to income.
The Company recognizes the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained upon examination by the taxing authorities based on the technical merits of the Company’s position. The tax benefit recognized in the financial statements for a particular tax position is based on the largest benefit that is more likely than not to be realized. The amount of unrecognized tax benefits is adjusted as appropriate for changes in facts and circumstances, such as significant amendments to existing tax laws, new regulations or interpretations by the taxing authorities, new information obtained during a tax examination, or resolution of an examination. The Company recognizes both accrued interest and penalties associated with uncertain tax positions as a component of Income tax (benefit) expense in the condensed consolidated statements of operations.
In December 2017, the United States enacted new U.S. federal tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries.
The Tax Act also adds many new provisions including changes to bonus depreciation, the deduction for executive compensation and interest expense, a tax on global intangible low-taxed income (“GILTI”), the base erosion anti-abuse tax (“BEAT”) and a deduction for foreign-derived intangible income (“FDII”). Many of these provisions, including the tax on GILTI, the BEAT and the deduction for FDII will not begin to apply to the Company until taxes are assessed on its 2018 fiscal year. As such, the Company is continuing to assess the impact these provisions may have on the Company’s future earnings.
On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of generally accepted accounting principles in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act.
We have estimated the impacts of the Tax Act in accordance with SAB 118. As of
June 30, 2018
, we have estimated an income tax benefit impact of
$4.6 million
for the year ended
December 31, 2017
, reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, and are expecting
no
tax impact related to the estimated repatriation toll charge of
$18.5 million
, which was fully offset by the net operating loss generated in 2017. As of
June 30, 2018
, our management is continuing to evaluate the effects of the Tax Act provisions, but we do not expect a material positive or negative impact to our 2017 tax positions.
Fair Value Measurements
The accounting guidance for fair value establishes a framework for measuring fair value and establishes a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
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•
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Level 1: Observable quoted prices in active markets for identical assets and liabilities.
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•
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Level 2: Observable quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.
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•
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Level 3: Model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
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Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The assets and liabilities that are fair valued on a recurring basis are
described below and contained in the following tables. In addition, on a non-recurring basis, the Company may be required to record other assets and liabilities at fair value. These non-recurring fair value adjustments involve the lower of carrying value or fair value accounting and write-downs resulting from impairment of assets.
The following tables summarize our financial assets and liabilities measured at fair value on a recurring basis as of
June 30, 2018
, and
December 31, 2017
, respectively (dollar values in thousands, other than per-share values):
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June 30, 2018
|
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Quotes Prices in Active Markets
(Level 1)
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Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Earn-out liability
(1)
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
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Contingently issuable shares
(3)
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1,559
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|
|
—
|
|
|
—
|
|
|
1,559
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Total
|
$
|
1,673
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,673
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|
|
|
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|
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|
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December 31, 2017
|
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Quotes Prices in Active Markets
(Level 1)
|
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Significant Other Observable Inputs
(Level 2)
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Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
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Earn-out liability
(1)
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
|
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Liability Warrants
(2)
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
Contingently issuable shares
(3)
|
1,448
|
|
|
—
|
|
|
—
|
|
|
1,448
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Total
|
$
|
1,582
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|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,582
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(1)
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Represents aggregate earn-out liabilities assumed in business combinations for the year ended December 31, 2015.
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(2)
|
Includes
6,173,228
Public SPAC Warrants (as defined below) outstanding at
December 31, 2017
, which expired on January 31, 2018 and are no longer exercisable.
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(3)
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In connection with the Sound-Recording Settlements (as described below in
Note 9. Commitments and Contingencies
), the Company is obligated to issue to UMG (as defined in that Note)
500,000
shares of its common stock when and if the closing price of the Company's common stock exceeds
$10.00
per share and an additional
400,000
shares of common stock when and if the closing price of the Company’s common stock exceeds
$12.00
per share. Such contingently issuable shares are classified as liabilities and are re-measured to fair value each reporting period.
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Public SPAC Warrants
. The Company’s publicly-traded warrants (the “Public SPAC Warrants”) issued in the Company’s initial public offering in 2011 (which were recorded as derivative warrant liabilities) expired on January 31, 2018 and are no longer exercisable. For the six months ended
June 30, 2018
and
2017
the Company recorded income of less than
$0.1 million
and
$0.2 million
, respectively, due to the change in the fair value of these warrants. The change in value of these Public SPAC Warrants is included in the change in fair value of derivatives in the condensed consolidated statements of operations.
The following table presents the fair value roll-forward reconciliation of Level 3 assets and liabilities measured at fair value basis for the
six months ended June 30,
2018
(in thousands):
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Liability Warrants
|
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Contingently Issuable Shares
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Earn-Out Liabilities
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Balance as of December 31, 2017
|
$
|
20
|
|
|
$
|
1,448
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|
|
$
|
114
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Change in value
|
(20
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)
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|
111
|
|
|
—
|
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Balance as of June 30, 2018
|
$
|
—
|
|
|
$
|
1,559
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|
|
$
|
114
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The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at
June 30, 2018
and
December 31, 2017
, respectively (in thousands):
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June 30, 2018
|
|
December 31, 2017
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Carrying Amount
|
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Fair Value
|
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Carrying Amount
|
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Fair Value
|
Senior secured term loan facility, due January 2023
(+)(1)
|
484,375
|
|
|
491,641
|
|
|
490,625
|
|
|
486,945
|
|
Senior secured revolving credit facility, due January 2022
(+)(2)
|
—
|
|
|
—
|
|
|
78,000
|
|
|
78,000
|
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2.75% convertible senior notes due 2035
(1) (3)
|
82,500
|
|
|
60,380
|
|
|
82,500
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|
|
43,313
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Second Lien Notes, due June 2023
(4) (5)
|
150,000
|
|
|
132,948
|
|
|
—
|
|
|
—
|
|
Other debt
(6)
|
5,183
|
|
|
5,183
|
|
|
9,075
|
|
|
9,075
|
|
Unamortized bond discounts and issue costs
|
(68,936
|
)
|
|
—
|
|
|
(41,136
|
)
|
|
—
|
|
|
653,122
|
|
|
690,152
|
|
|
619,064
|
|
|
617,333
|
|
(+) This facility is a component of the 2017 Credit Agreement.
|
|
(1)
|
The estimated fair value is classified as Level 2 financial instrument and was determined based on the quoted prices of the instrument in a similar over-the-counter market.
|
|
|
(2)
|
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments. In the second quarter of 2018, we used a portion of the proceeds of the issuance of our Second Lien Notes to repay the then outstanding
$78 million
principal balance on our revolving credit facility. We expect to draw on the revolving credit facility from time to time to fund our working capital needs and for other general corporate purposes.
|
|
|
(3)
|
The fair value of the
2.75%
convertible senior notes due 2035 is exclusive of the conversion feature therein, which was originally allocated for reporting purposes at
$13.0 million
, and is included in the condensed consolidated balance sheets within “Additional paid-in capital” (see
Note 11. Common Stock, Stock-Based Awards and Warrants
). The principal amount outstanding of the
2.75%
convertible senior notes due 2035 was
$82.5 million
as of June 30, 2018, and the carrying amounts in the foregoing table reflect this outstanding principal amount net of debt issuance costs and discount associated with the equity component.
|
|
|
(4)
|
The principal amount outstanding of the Second Lien Notes, due 2023 as set forth in the foregoing table was
$150.0 million
as of
June 30, 2018
, and is not the carrying amount of the indebtedness (
i.e.
outstanding principal amount net of debt issuance costs and discount associated with the equity component). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was
$14.9 million
and
$9.3 million
, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital” (see
Note 8. Financing Arrangements
).
|
|
|
(5)
|
The fair value of the Second Lien Notes was determined based on a Black-Derman-Toy interest rate Lattice model. The key inputs of the valuation model contain certain Level 3 inputs.
|
|
|
(6)
|
The estimated fair value is considered to approximate carrying value given the short-term maturity and is classified as Level 3 financial instruments.
|
Adoption of New Accounting Pronouncements
On January 1, 2018, we adopted ASU 2014-09 and all related amendments and applied the concepts to all contracts using the modified retrospective method, recognizing the cumulative effect of applying the new standard as an adjustment to the opening balance of retained earnings. The 2017 comparative information has not been restated and continues to be reported under the accounting standards in effect for those prior periods. See
Note. 3 Revenue
.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Issues Task Force)
, which requires that a statement of cash flows explains the change during the period in cash, cash equivalents, and amounts generally described as restricted cash. Amounts generally described as restricted cash should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The standard is effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We adopted the standard effective January 1, 2018 and as a result we reclassified the presentation of our statement of cash flows for the
six months ended June 30, 2017
for restricted cash balances. For the
six
months ended
June 30, 2017
, adopting the standard resulted in an increase to our beginning-of-period and end-of-period cash, cash equivalents and restricted cash of
$18.0 million
and
$1.2 million
in the condensed consolidated statements of cash flows, respectively. In addition, removing the change in restricted cash from operating and investing activities in the condensed consolidated statements of cash flows resulted in a decrease of
$16.3 million
and
$0.6
million
in our cash used in operating activities and cash used in investing activities, respectively, for the
six
months ended
June 30, 2017
.
In October 2016, the FASB issued ASU 2016-16,
Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory
, which requires the recognition of income tax effects of intra-entity transfers of assets other than inventory when the transfer occurs. Prior GAAP standards prohibited the recognition of those tax effects until the asset had been sold to an outside party. We adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”)
, which amends Accounting Standards Codification 230, Statement of Cash Flows, the FASB’s standards for reporting cash flows in general-purpose financial statements. The amendments address the diversity in practice related to the classification of certain cash receipts and payments including contingent consideration payments made after a business combination and debt prepayment or debt extinguishment costs. ASU 2016-15 is effective for fiscal years, and interim periods within, beginning after December 15, 2017. We adopted the standard effective January 1, 2018. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). This update will require lease assets and lease liabilities to be recognized on the balance sheet and disclosure of key information about leasing arrangements. ASU 2016-02 must be adopted using a modified retrospective transition, and provides for certain practical expedients. We have decided to adopt ASU 2016-02 effective in the first quarter of 2019. We are currently evaluating the impact of this standard on our condensed consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02,
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
, which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded effects resulting from the Tax Act. The ASU is effective for the Company beginning January 1, 2019, with early adoption permitted. We intend to adopt the ASU effective January 1, 2019. Management is currently evaluating the impact of this standard on our condensed consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13,
Measurement of Credit Losses on Financial Instruments
, which introduces an approach based on expected losses to estimate credit losses on certain types of financial instruments rather than incurred losses. It also modifies the impairment model for available-for-sale debt securities and provides for a simplified accounting model for purchased financial assets with credit deterioration since their origination. The ASU is effective for the Company beginning January 1, 2020, with early adoption permitted. Management continues to evaluate the impact of this standard on our condensed consolidated financial statements.
Note 3. Revenue
On January 1, 2018, we adopted ASU 2014-09 using the modified retrospective method and applied it to contracts which were not completed as of January 1, 2018. The following table presents the effect of the adoption of ASU 2014-09 on our consolidated balance sheet as of
June 30, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Without ASC 606 Adoption
|
|
Effect of change Increase/ (Decrease)
|
|
As Reported
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
37,403
|
|
|
—
|
|
|
$
|
37,403
|
|
Restricted cash
|
5,390
|
|
|
—
|
|
|
5,390
|
|
Accounts receivable, net
|
105,054
|
|
|
(1,639
|
)
|
|
103,415
|
|
Inventories
|
32,719
|
|
|
—
|
|
|
32,719
|
|
Prepaid expenses
|
16,949
|
|
|
—
|
|
|
16,949
|
|
Other current assets
|
21,482
|
|
|
—
|
|
|
21,482
|
|
TOTAL CURRENT ASSETS
|
218,997
|
|
|
(1,639
|
)
|
|
217,358
|
|
Content library
|
8,101
|
|
|
—
|
|
|
8,101
|
|
Property, plant and equipment
|
190,716
|
|
|
—
|
|
|
190,716
|
|
Goodwill
|
159,610
|
|
|
—
|
|
|
159,610
|
|
Intangible assets, net
|
101,659
|
|
|
—
|
|
|
101,659
|
|
Equity method investments
|
135,430
|
|
|
—
|
|
|
135,430
|
|
Other non-current assets
|
8,284
|
|
|
3,319
|
|
|
11,603
|
|
TOTAL ASSETS
|
$
|
822,797
|
|
|
1,680
|
|
|
$
|
824,477
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
$
|
189,851
|
|
|
(1,620
|
)
|
|
$
|
188,231
|
|
Deferred revenue
|
8,347
|
|
|
125
|
|
|
8,472
|
|
Current portion of long-term debt
|
19,595
|
|
|
—
|
|
|
19,595
|
|
Other current liabilities
|
9,661
|
|
|
—
|
|
|
9,661
|
|
TOTAL CURRENT LIABILITIES
|
227,454
|
|
|
(1,495
|
)
|
|
225,959
|
|
Deferred revenue, non-current
|
1,089
|
|
|
—
|
|
|
1,089
|
|
Long-term debt
|
633,527
|
|
|
—
|
|
|
633,527
|
|
Deferred tax liabilities
|
8,590
|
|
|
—
|
|
|
8,590
|
|
Other non-current liabilities
|
34,455
|
|
|
—
|
|
|
34,455
|
|
TOTAL LIABILITIES
|
905,115
|
|
|
(1,495
|
)
|
|
903,620
|
|
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
—
|
|
Common stock
|
10
|
|
|
—
|
|
|
10
|
|
Treasury stock
|
(30,659
|
)
|
|
—
|
|
|
(30,659
|
)
|
Additional paid-in capital
|
809,369
|
|
|
—
|
|
|
809,369
|
|
Subscriptions receivable
|
(591
|
)
|
|
—
|
|
|
(591
|
)
|
Prior year accumulated deficit
|
(773,791
|
)
|
|
933
|
|
|
(772,858
|
)
|
Current year retained deficit
|
(86,435
|
)
|
|
2,242
|
|
|
(84,193
|
)
|
Accumulated other comprehensive loss
|
(221
|
)
|
|
—
|
|
|
(221
|
)
|
TOTAL STOCKHOLDERS' DEFICIT
|
(82,318
|
)
|
|
3,175
|
|
|
(79,143
|
)
|
TOTAL LIABILTIES & STOCKHOLDERS' DEFICIT
|
$
|
822,797
|
|
|
1,680
|
|
|
$
|
824,477
|
|
The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations for the three months ended
June 30, 2018
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2018
|
|
Without ASC 606 Adoption
|
|
Effect of change Increase/ (Decrease)
|
|
As Reported
|
Revenue:
|
|
|
|
|
|
Licensing and services
|
$
|
156,123
|
|
|
305
|
|
|
$
|
156,428
|
|
Equipment
|
9,534
|
|
|
—
|
|
|
9,534
|
|
Total revenue
|
165,657
|
|
|
305
|
|
|
165,962
|
|
Cost of Sales
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
Licensing and services
|
122,720
|
|
|
(416
|
)
|
|
122,304
|
|
Equipment
|
4,405
|
|
|
22
|
|
|
4,427
|
|
Total cost of sales
|
127,125
|
|
|
(394
|
)
|
|
126,731
|
|
Gross Margin
|
38,532
|
|
|
699
|
|
|
39,231
|
|
Operating expenses:
|
|
|
|
|
|
Sales and marketing
|
10,840
|
|
|
37
|
|
|
10,877
|
|
Product development
|
11,494
|
|
|
(1,622
|
)
|
|
9,872
|
|
General and administrative
|
29,799
|
|
|
—
|
|
|
29,799
|
|
Provision for legal settlements
|
(141
|
)
|
|
—
|
|
|
(141
|
)
|
Amortization of intangible assets
|
10,357
|
|
|
—
|
|
|
10,357
|
|
Total operating expenses
|
62,349
|
|
|
(1,585
|
)
|
|
60,764
|
|
Loss from operations
|
(23,817
|
)
|
|
2,284
|
|
|
(21,533
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Interest expense, net
|
(19,755
|
)
|
|
—
|
|
|
(19,755
|
)
|
Income from equity method investments
|
428
|
|
|
—
|
|
|
428
|
|
Change in fair value of derivatives
|
(655
|
)
|
|
—
|
|
|
(655
|
)
|
Other expense, net
|
(673
|
)
|
|
—
|
|
|
(673
|
)
|
Loss before income taxes
|
(44,472
|
)
|
|
2,284
|
|
|
(42,188
|
)
|
Income tax expense
|
3,722
|
|
|
—
|
|
|
3,722
|
|
Net loss
|
$
|
(48,194
|
)
|
|
2,284
|
|
|
$
|
(45,910
|
)
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
(0.53
|
)
|
|
|
|
(0.50
|
)
|
Weighted average shares outstanding – basic and diluted
|
$
|
91,057
|
|
|
|
|
$
|
91,057
|
|
The following table presents the effect of the adoption of ASU 2014-09 on our condensed consolidated statements of operations for the
six
months ended
June 30, 2018
(in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
Without ASC 606 Adoption
|
|
Effect of change Increase/ (Decrease)
|
|
As Reported
|
Revenue:
|
|
|
|
|
|
Licensing and services
|
$
|
303,306
|
|
|
(352
|
)
|
|
$
|
302,954
|
|
Equipment
|
19,505
|
|
|
—
|
|
|
19,505
|
|
Total revenue
|
322,811
|
|
|
(352
|
)
|
|
322,459
|
|
Cost of Sales
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
Licensing and services
|
235,653
|
|
|
(858
|
)
|
|
234,795
|
|
Equipment
|
10,371
|
|
|
44
|
|
|
10,415
|
|
Total cost of sales
|
246,024
|
|
|
(814
|
)
|
|
245,210
|
|
Gross Margin
|
76,787
|
|
|
462
|
|
|
77,249
|
|
Operating expenses:
|
|
|
|
|
|
|
Sales and marketing
|
20,477
|
|
|
15
|
|
|
20,492
|
|
Product development
|
20,001
|
|
|
(1,795
|
)
|
|
18,206
|
|
General and administrative
|
68,235
|
|
|
—
|
|
|
68,235
|
|
Provision for legal settlements
|
375
|
|
|
—
|
|
|
375
|
|
Amortization of intangible assets
|
20,920
|
|
|
—
|
|
|
20,920
|
|
Total operating expenses
|
130,008
|
|
|
(1,780
|
)
|
|
128,228
|
|
Loss from operations
|
(53,221
|
)
|
|
2,242
|
|
|
(50,979
|
)
|
Other income (expense):
|
|
|
|
|
|
|
Interest expense, net
|
(35,352
|
)
|
|
—
|
|
|
(35,352
|
)
|
Income from equity method investments
|
1,589
|
|
|
—
|
|
|
1,589
|
|
Change in fair value of derivatives
|
(91
|
)
|
|
—
|
|
|
(91
|
)
|
Other expense, net
|
(347
|
)
|
|
—
|
|
|
(347
|
)
|
Loss before income taxes
|
(87,422
|
)
|
|
2,242
|
|
|
(85,180
|
)
|
Income tax benefit
|
(987
|
)
|
|
—
|
|
|
(987
|
)
|
Net loss
|
$
|
(86,435
|
)
|
|
2,242
|
|
|
$
|
(84,193
|
)
|
|
|
|
|
|
|
Net loss per share – basic and diluted
|
$
|
(0.95
|
)
|
|
|
|
$
|
(0.93
|
)
|
Weighted average shares outstanding – basic and diluted
|
90,925
|
|
|
|
|
90,925
|
|
The following table represents a disaggregation of our revenue from contracts with customers for the
three and six
months ended
June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
Media & Content
|
|
|
|
|
|
|
|
Licensing & Services
|
$
|
83,455
|
|
|
$
|
74,566
|
|
|
$
|
158,369
|
|
|
$
|
150,945
|
|
Total Media & Content
|
83,455
|
|
|
74,566
|
|
|
158,369
|
|
|
150,945
|
|
|
|
|
|
|
|
|
|
Connectivity
|
|
|
|
|
|
|
|
Aviation Services
|
$
|
29,423
|
|
|
$
|
29,439
|
|
|
$
|
58,749
|
|
|
$
|
57,634
|
|
Aviation Equipment
|
6,712
|
|
|
7,154
|
|
|
14,310
|
|
|
13,718
|
|
Maritime & Land Services
|
43,550
|
|
|
42,143
|
|
|
85,836
|
|
|
81,211
|
|
Maritime & Land Equipment
|
2,822
|
|
|
2,440
|
|
|
5,195
|
|
|
4,826
|
|
Total Connectivity
|
82,507
|
|
|
81,176
|
|
|
164,090
|
|
|
157,389
|
|
|
|
|
|
|
|
|
|
Total revenue
|
$
|
165,962
|
|
|
155,742
|
|
|
$
|
322,459
|
|
|
$
|
308,334
|
|
Contract Assets and Liabilities
Aviation connectivity contracts involve performance obligations primarily relating to the delivery of connectivity equipment and connectivity services. The connectivity equipment can be provided at a discount and is delivered upfront while the connectivity services are rendered and paid over time. Revenue is allocated based upon the SSP methodology. Where the SSP exceeds the revenue allocation, the revenue to which the Company is entitled is contingent on performing the ongoing connectivity services and the Company records a contract asset accordingly. The balance as of
June 30, 2018
and December 31, 2017 of contract contingent revenue was not material.
For some customer contracts we may invoice upfront for services recognized over time or for contracts in which we have unsatisfied performance obligations. Payment terms and conditions vary by contract type, although terms generally include payment terms of 30 to 45 days. In the above circumstances where the timing of invoicing differs from the timing of revenue recognition, we have determined our contracts do not include a significant financing component.
The following table summarizes the significant changes in the contract liabilities balances during the period to
June 30, 2018
(in thousands);
|
|
|
|
|
|
|
|
|
|
Contract Liabilities
|
Balance as of December 31, 2017
|
|
$
|
7,587
|
|
Adjustments as a result of cumulative catch-up adjustment
|
|
(118
|
)
|
Revenue recognized that was included in the contract liability balance at the beginning of the period
|
|
(5,535
|
)
|
Increase due to cash received, excluding amounts recognized as revenue during the period
|
|
7,627
|
|
Balance as of June 30, 2018
|
|
$
|
9,561
|
|
|
|
|
Deferred revenue, current
|
|
$
|
8,472
|
|
Deferred revenue, non-current
|
|
1,089
|
|
|
|
$
|
9,561
|
|
As of
June 30, 2018
, we had
$1.1 billion
of remaining performance obligations, which we also refer to as total backlog. We expect to recognize approximately
16%
of our remaining performance obligations as revenue in 2018, an additional
33%
by 2020 and the balance thereafter.
Accounts Receivable, net
We extend credit to our customers from time to time. We maintain an allowance for doubtful accounts for estimated losses resulting from our customers’ inability to make required payments. Management analyzes the age of customer balances, historical bad debt experience, customer creditworthiness and changes in customer payment terms when making estimates of the collectability of our accounts receivable balances. If we determine that the financial condition of any of our customers has deteriorated, whether due to customer specific or general economic issues, an increase in the allowance may be made. After all attempts to collect a receivable have failed, the receivable is written off.
Accounts receivable consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
2018
|
|
2017
|
Accounts receivable, gross
|
$
|
107,570
|
|
|
$
|
122,225
|
|
Less: Allowance for doubtful accounts
|
(4,155
|
)
|
|
(8,680
|
)
|
Accounts receivable, net
|
$
|
103,415
|
|
|
$
|
113,545
|
|
Movements in the balance for bad debt reserve and sales allowance for the
six
months ended
June 30, 2018
and
2017
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2018
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
8,680
|
|
|
$
|
10,091
|
|
(Recovery) additions charged to statements of operations
|
(802
|
)
|
|
2,372
|
|
Less: Bad debt write offs
|
(3,723
|
)
|
|
1,858
|
|
Ending balance
|
$
|
4,155
|
|
|
$
|
14,321
|
|
Capitalized Contract Costs
Certain of our sales incentive programs meet the requirements to be capitalized as incremental costs of obtaining a contract. We recognize an asset for the incremental costs if we expect the benefit of those costs to be longer than one year and amortize those costs over the expected customer life. We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less.
Additionally, we capitalize assets associated with costs incurred to fulfill a contract with a customer. For example, we capitalize the costs incurred to obtain necessary STC or other customer-specific certifications for our aviation, maritime and land customers.
The following table summarizes the significant changes in the contract assets balances during the period ended
June 30, 2018
(in thousands);
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Assets
|
|
Costs to Obtain
|
|
Costs to Fulfill
|
|
Total
|
Balance as of December 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Increases as a result of cumulative catch-up adjustment
|
120
|
|
|
810
|
|
|
930
|
|
Capitalization during period
|
—
|
|
|
2,448
|
|
|
2,448
|
|
Amortization
|
(15
|
)
|
|
(44
|
)
|
|
(59
|
)
|
Balance as of June 30, 2018
|
$
|
105
|
|
|
$
|
3,214
|
|
|
$
|
3,319
|
|
Contract assets are included within Other current assets on our condensed consolidated balance sheet.
Practical Expedients, Policy Elections and Exemptions
In circumstances where shipping and handling activities occur subsequent to the transfer of control, we have elected to treat shipping and handling as a fulfillment activity rather than a service to the customer.
We have made a policy election to exclude from the measurement of the transaction price all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-producing transaction and collected by the entity from a customer (
e.g
., sales, use, value added, and some excise taxes).
We apply a practical expedient to expense costs as incurred for incremental costs to obtain a contract when the amortization period would have been one year or less and did not evaluate contracts of one year or less for variable consideration.
Note 4. Property, Plant and Equipment, net
Property, plant and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Leasehold improvements
|
$
|
6,756
|
|
|
$
|
6,869
|
|
Furniture and fixtures
|
2,147
|
|
|
2,187
|
|
Equipment
|
147,673
|
|
|
128,046
|
|
Computer equipment
|
15,193
|
|
|
10,661
|
|
Computer software
|
33,147
|
|
|
31,518
|
|
Automobiles
|
304
|
|
|
311
|
|
Buildings
|
7,951
|
|
|
6,744
|
|
Albatross (Company-owned aircraft)
|
447
|
|
|
447
|
|
Satellite transponder
|
65,671
|
|
|
79,097
|
|
Construction in-progress
|
9,955
|
|
|
3,370
|
|
Total property, plant and equipment
|
289,244
|
|
|
269,250
|
|
Accumulated depreciation
|
(98,528
|
)
|
|
(74,221
|
)
|
Property, plant and equipment, net
|
$
|
190,716
|
|
|
$
|
195,029
|
|
Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of sales
|
$
|
11,475
|
|
|
$
|
7,378
|
|
|
$
|
19,557
|
|
|
$
|
13,592
|
|
Sales and marketing
|
1,065
|
|
|
622
|
|
|
1,830
|
|
|
1,453
|
|
Product development
|
967
|
|
|
607
|
|
|
1,629
|
|
|
1,184
|
|
General and administrative
|
2,925
|
|
|
2,582
|
|
|
6,099
|
|
|
5,283
|
|
Total depreciation expense
|
$
|
16,432
|
|
|
$
|
11,189
|
|
|
$
|
29,115
|
|
|
$
|
21,512
|
|
Note 5. Goodwill
Prior to the Company’s acquisition of Emerging Markets Communications (“EMC”) on July 27, 2016 (the “EMC Acquisition”), the Company’s business consisted of two operating segments: Content and Connectivity. Following the EMC Acquisition, the acquired EMC business became our then third operating segment called Maritime & Land Connectivity, and we renamed our other two segments to be Media & Content and Aviation Connectivity. However, in the second quarter of 2017, our chief executive officer, who is our chief operating decision maker (our “CODM”), determined to reorganize our business
from three operating segments back into two operating segments—Media & Content and Connectivity. However, we continue to have three separate reporting units for purposes of our goodwill impairment testing.
The changes in the carrying amount of goodwill by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation Connectivity Reporting Unit
|
|
Maritime & Land Connectivity Reporting Unit
|
|
Media & Content
|
|
Total
|
Balance as of December 31, 2017
|
|
|
|
|
|
|
|
Gross carrying amount
|
$
|
98,037
|
|
|
$
|
209,130
|
|
|
$
|
83,529
|
|
|
$
|
390,696
|
|
Accumulated impairment loss
|
(44,000
|
)
|
|
(187,000
|
)
|
|
—
|
|
|
(231,000
|
)
|
Balance at December 31, 2017, net
|
54,037
|
|
|
22,130
|
|
|
83,529
|
|
|
159,696
|
|
Impairment loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustments
|
(15
|
)
|
|
—
|
|
|
(71
|
)
|
|
(86
|
)
|
Balance as of June 30, 2018
|
$
|
54,022
|
|
|
$
|
22,130
|
|
|
$
|
83,458
|
|
|
$
|
159,610
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2018
|
|
|
|
|
|
|
|
Gross carrying amount
|
98,022
|
|
|
209,130
|
|
|
83,458
|
|
|
390,610
|
|
Accumulated impairment loss
|
(44,000
|
)
|
|
(187,000
|
)
|
|
—
|
|
|
(231,000
|
)
|
Balance at June 30, 2018, net
|
$
|
54,022
|
|
|
$
|
22,130
|
|
|
$
|
83,458
|
|
|
$
|
159,610
|
|
Goodwill Impairments
For the quarter ended
March 31, 2017
, the Company identified a triggering event due to a significant decline in the market capitalization of the Company. Accordingly, the Company assessed the fair value of its three reporting units as of
March 31, 2017
and recorded a goodwill impairment charge of
$78.0 million
related to its Maritime & Land Connectivity reporting unit. This impairment was primarily due to lower than expected financial results of the reporting unit during the three months ended
March 31, 2017
due to delays in new maritime installations, slower than originally estimated execution of EMC Acquisition-related synergies and other events that occurred in the first quarter of 2017. Given these indicators, the Company then determined that there was a higher degree of uncertainty in achieving its financial projections for this unit and as such, increased its discount rate, which reduced the fair value of the unit.
For the quarter ended
December 31, 2017
, we again identified a triggering event due to a further decline in our market capitalization, which we believe was driven by investor uncertainty around our liquidity position and our then delinquent SEC filing status. Consequently, we performed another assessment of the fair value of our three reporting units as of December 31, 2017. In performing that reassessment, we adjusted the assumptions used in the impairment analysis and increased the discount rate used in the impairment model, which negatively impacted the fair value of the Maritime & Land Connectivity and Aviation Connectivity reporting units. Following this analysis, we determined that the fair value of the Media & Content reporting unit exceeded its carrying value, while the fair values of the Maritime & Land Connectivity and Aviation Connectivity reporting units were below their carrying values. As such, we recorded impairment charges of
$45.0 million
and
$44.0 million
in our Maritime & Land Connectivity and Aviation Connectivity reporting units, respectively, during the fourth quarter of 2017. The key assumptions underlying our valuation model used for accounting purposes, as described above, were updated to reflect the delays in realizing anticipated EMC Acquisition-related synergies that impacted both the Maritime & Land Connectivity and Aviation Connectivity reporting units. Additionally, network expansion to meet current and anticipated new customer demand caused a step-up in bandwidth costs in our Maritime & Land and Aviation Connectivity reporting units.
Our total goodwill impairment recorded for the full year ended
December 31, 2017
was
$167.0 million
.
As of
June 30, 2018
we completed a qualitative goodwill impairment assessment in accordance with ASC 350 and concluded that no impairment trigger existed and no impairment to our goodwill balance was required as of
June 30, 2018
. Our Maritime &
Land Connectivity reporting unit, which is included in our Connectivity segment, had negative carrying amounts of assets. As of
June 30, 2018
, remaining goodwill allocated to this reporting unit was
$22.1 million
.
Note 6. Intangible Assets, net
As a result of historical business combinations, the Company acquired finite-lived intangible assets that are primarily amortized on a straight-line basis and the values of which approximate their expected cash flow patterns. The Company’s finite-lived intangible assets have assigned useful lives ranging from
2.0
to
10.0 years
(weighted average of
7.1 years
).
Intangible assets, net consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
Weighted Average Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Existing technology -- software
|
4.8
|
|
$
|
42,299
|
|
|
$
|
24,693
|
|
|
$
|
17,606
|
|
Developed technology
|
8.0
|
|
7,317
|
|
|
4,344
|
|
|
2,973
|
|
Customer relationships
|
8.1
|
|
166,616
|
|
|
92,848
|
|
|
73,768
|
|
Backlog
|
3.0
|
|
18,300
|
|
|
11,692
|
|
|
6,608
|
|
Other
|
5.0
|
|
2,391
|
|
|
1,687
|
|
|
704
|
|
Total
|
|
|
$
|
236,923
|
|
|
$
|
135,264
|
|
|
$
|
101,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Weighted Average Useful Lives (Years)
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Existing technology -- software
|
4.8
|
|
$
|
42,999
|
|
|
$
|
20,209
|
|
|
$
|
22,790
|
|
Existing technology -- games
|
5.0
|
|
12,331
|
|
|
12,125
|
|
|
206
|
|
Developed technology
|
8.0
|
|
7,317
|
|
|
3,887
|
|
|
3,430
|
|
Customer relationships
|
7.9
|
|
170,716
|
|
|
85,160
|
|
|
85,556
|
|
Backlog
|
3.0
|
|
18,300
|
|
|
8,642
|
|
|
9,658
|
|
Other
|
4.5
|
|
2,746
|
|
|
1,804
|
|
|
942
|
|
Total
|
|
|
$
|
254,409
|
|
|
$
|
131,827
|
|
|
$
|
122,582
|
|
We expect to record amortization of intangible assets as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
17,521
|
|
2019
|
28,647
|
|
2020
|
22,263
|
|
2021
|
13,824
|
|
2022
|
7,907
|
|
Thereafter
|
11,497
|
|
Total
|
$
|
101,659
|
|
We recorded amortization expense of
$10.4 million
and
$10.9 million
for the
three months ended June 30, 2018
and
2017
, respectively, and
$20.9 million
and
$21.9 million
for the
six months ended June 30, 2018
and
2017
, respectively.
Note 7. Equity Method Investments
In connection with the EMC Acquisition, the Company acquired
49%
equity interests in each of its WMS and Santander joint ventures (which equity-interests EMC owned at the time of the EMC Acquisition). These investments are accounted for using the equity method of accounting, under which our results of operations include our share of the income of WMS and Santander in Income from equity method investments in our condensed consolidated statements of operations.
Following is the summarized balance sheet information for these equity method investments on an aggregated basis as of
June 30, 2018
and
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Current assets
|
$
|
37,257
|
|
|
$
|
35,859
|
|
Non-current assets
|
23,247
|
|
|
21,009
|
|
Current liabilities
|
16,626
|
|
|
15,151
|
|
Non-current liabilities
|
2,930
|
|
|
1,056
|
|
Following is the summarized results of operations information for these equity method investments on an aggregated basis for the three and
six months ended June 30,
2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue
|
$
|
29,068
|
|
|
$
|
32,986
|
|
|
$
|
64,905
|
|
|
$
|
67,419
|
|
Net income
|
4,200
|
|
|
4,527
|
|
|
10,098
|
|
|
10,975
|
|
The carrying values of the Company’s equity interests in WMS and Santander as of
June 30, 2018
and
December 31, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Carrying value in our equity method investments
|
$
|
135,430
|
|
|
$
|
137,299
|
|
As of
June 30, 2018
there was an aggregate difference of
$114.8 million
between the carrying amounts of these investments and the amounts of underlying equity in net assets in these investments. The difference was determined by applying the acquisition method of accounting in connection with the EMC Acquisition and is being amortized ratably over the life of the related acquired intangible assets. The weighted-average life of the intangible assets at the time of the EMC Acquisition in total was
14.9
years.
Note 8. Financing Arrangements
A summary of our outstanding indebtedness as of
June 30, 2018
and
December 31, 2017
is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Senior secured term loan facility, due January 2023
(+)
|
484,375
|
|
|
490,625
|
|
Senior secured revolving credit facility, due January 2022
(+)(1)
|
—
|
|
|
78,000
|
|
2.75% convertible senior notes due 2035
(2)
|
82,500
|
|
|
82,500
|
|
Second Lien Notes, due 2023
(3)
|
150,000
|
|
|
—
|
|
Other debt
|
5,183
|
|
|
9,075
|
|
Unamortized bond discounts, fair value adjustments and issue costs, net
|
(68,936
|
)
|
|
(41,136
|
)
|
Total carrying value of debt
|
653,122
|
|
|
619,064
|
|
Less: current portion, net
|
(19,595
|
)
|
|
(20,106
|
)
|
Total non-current
|
$
|
633,527
|
|
|
$
|
598,958
|
|
(+)
This facility is a component of the 2017 Credit Agreement.
(1)
In the second quarter of 2018, we used a portion of the proceeds of the issuance of our Second Lien Notes to repay the then outstanding
$78 million
principal balance on our revolving credit facility. We expect to draw on the revolving credit facility from time to time to fund our working capital needs and for other general corporate purposes.
(2)
The principal amount outstanding of the
2.75%
convertible senior notes due 2035 as set forth in the foregoing table was
$82.5 million
as of
June 30, 2018
, and is not the carrying amounts of this indebtedness (
i.e.
, outstanding principal amount net of debt issuance costs and discount associated with the equity component). The carrying amount was
$70.1 million
and
$69.7 million
as of
June 30, 2018
and
December 31, 2017
, respectively.
(3)
The principal amount outstanding of the Second Lien Notes due 2023 as set forth in the foregoing table was
$150.0 million
as of
June 30, 2018
, and is not the carrying amount of the indebtedness (
i.e.
outstanding principal amount net of debt issuance costs and discount associated with the equity component). The value allocated to the attached penny warrants and market warrants for financial reporting purposes was
$14.9 million
and
$9.3 million
, respectively. These qualify for classification in stockholders’ equity and are included in the condensed consolidated balance sheets within “Additional paid-in capital”.
Senior Secured Credit Agreement (2017 Credit Agreement)
On
January 6, 2017
, we entered into a senior secured credit agreement (“2017 Credit Agreement”) that provides for aggregate principal borrowings of up to
$585 million
, consisting of a
$500 million
term-loan facility (the “2017 Term Loans”) maturing
January 6, 2023
and a
$85 million
revolving credit facility (the “2017 Revolving Loans”) maturing
January 6, 2022
. We used the proceeds of borrowings under the 2017 Credit Agreement to repay the then outstanding balance under a former EMC credit facility assumed in the EMC Acquisition and terminated the former credit facility assumed from EMC. In connection with this January 2017 refinancing, we recorded a loss on extinguishment of debt in the amount of
$14.5 million
during the first quarter of 2017.
The 2017 Term Loans initially bore interest on the outstanding principal amount thereof at a rate per annum equal to (i) the Eurocurrency Rate (as defined in the 2017 Credit Agreement) plus
6.00%
or (ii) the Base Rate (as defined in the 2017 Credit Agreement) plus
5.00%
. Pursuant to various amendments with our lenders in 2017, the 2017 Term Loans now bear interest on the outstanding amount thereof at a rate per annum equal to (i) the Eurocurrency Rate plus
7.50%
or (ii) the Base Rate plus
6.50%
.
The 2017 Revolving Loans initially bore interest at a rate per annum equal to (i) the Base Rate plus
5.00%
or (ii) the Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus
6.00%
until the delivery of financial statements for the first full fiscal quarter ending after January 6, 2017, which was the closing date of the 2017 Credit Agreement. Following delivery of those financial statements, the 2017 Revolving Loans were to bear interest at a rate based on the Base Rate, Eurocurrency Rate or EURIBOR (as defined in the 2017 Credit Agreement) plus an interest-rate spread thereon that varied based on the Consolidated First Lien Net Leverage Ratio (as defined in the 2017 Credit Agreement) that ranged from
4.50%
to
5.00%
for the Base Rate and
5.50%
to
6.00%
for the Eurocurrency Rate and EURIBOR. Pursuant to various amendments with our lenders in 2017, the 2017 Revolving Loans then bore interest at a rate per annum equal to (i) the Base Rate plus
6.50%
or (ii) the Eurocurrency Rate or EURIBOR plus
7.50%
until the delivery of financial statements for the fiscal quarter ending March 31, 2018. We have delivered those financial statements and the spread now varies based on the Consolidated First Lien Net Leverage Ratio ranging from
6.00%
to
6.50%
for the Base Rate and
7.00%
to
7.50%
for the Eurocurrency Rate and EURIBOR.
The 2017 Credit Agreement initially required quarterly principal payments equal to
0.25%
of the original aggregate principal amount of the 2017 Term Loans. Following a May 2017 amendment to the 2017 Credit Agreement, the 2017 Credit Agreement required the next eight quarterly principal payments following that amendment to equal
0.625%
of the original aggregate principal
amount of the 2017 Term Loans. Thereafter, all quarterly principal payments will equal
1.25%
of the original aggregate principal amount of the 2017 Term Loans.
The 2017 Credit Agreement also provides for the issuance of letters of credit in the amount equal to the lesser of
$15.0 million
and the aggregate amount of the then-remaining revolving loan commitment. As of
June 30, 2018
, we had outstanding letters of credit of
$6.2 million
under the 2017 Credit Agreement.
Certain of our subsidiaries are guarantors of our obligations under the 2017 Credit Agreement. In addition, the 2017 Credit Agreement is secured by substantially all of our tangible and intangible assets, including a pledge of all of the outstanding capital stock of substantially all of our domestic subsidiaries and
65%
of the shares or equity interests of foreign subsidiaries, subject to certain exceptions.
The 2017 Credit Agreement contains various customary restrictive covenants that limit our ability to, among other things: create or incur liens on assets; make any investments, loans or advances; incur additional indebtedness, engage in mergers, dissolutions, liquidations or consolidations; engage in transactions with affiliates; make dispositions; and declare or make dividend payments. The 2017 Credit Agreement requires us to maintain compliance with a maximum consolidated first lien net leverage ratio defined in the 2017 Credit Agreement. Under the maximum leverage ratio covenant, we are required to maintain as of the last day of each fiscal quarter a ratio of Consolidated First Lien Net Debt (as defined in the 2017 Credit Agreement) to Consolidated EBITDA (as defined in the 2017 Credit Agreement) for the trailing four quarters that is no greater than
4.5
to 1 through the fiscal quarter ending June 30, 2019, after which period the permitted Leverage Ratio steps down through the maturity date of the 2017 Credit Agreement as set forth therein.
Under the 2017 Credit Agreement, the “non-call” period (during which a premium will apply to any prepayments of the 2017 Term Loans) ends on June 30, 2020.
One of the conditions to drawing on the revolving credit facility is confirmation that the representations and warranties in the 2017 Credit Agreement are true on the date of borrowing, and if we are unable to make that confirmation, including that no material adverse effect on our business has occurred, we will be unable to draw down further on the revolver.
2.75% Convertible Senior Notes due 2035
In February 2015, we issued an aggregate principal amount of
$82.5 million
of convertible senior notes due 2035 (the “Convertible Notes”) in a private placement. The Convertible Notes were issued at par, pay interest semi-annually in arrears at an annual rate of
2.75%
and mature on February 15, 2035, unless earlier repurchased, redeemed or converted pursuant to the terms of the Convertible Notes. In certain circumstances and subject to certain conditions, the Convertible Notes are convertible at an initial conversion rate of
53.9084
shares of common stock per
$1,000
principal amount of notes (which represents an initial conversion price of approximately
$18.55
per share), subject to adjustment. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to the close of business on the business day immediately preceding November 15, 2034, only if one or more of the following conditions has been satisfied: (1) during any calendar quarter beginning after March 31, 2015 if the closing price of our common stock equals or exceeds
130%
of the respective conversion price per share during a defined period at the end of the previous quarter, (2) during the
five
consecutive business day period immediately following any five consecutive trading day period in which the trading price per
$1,000
principal amount of Convertible Notes for each trading day was less than
98%
of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; (3) if specified corporate transactions occur, or (4) if we call any or all of the Convertible Notes for redemption, at any time prior to the close of business on the second business day immediately preceding the redemption date. On or after November 15, 2034, until the close of business on the second scheduled trading day immediately preceding the maturity date, a holder may convert all or a portion of its Convertible Notes at any time, regardless of the foregoing circumstances.
On February 20, 2022, February 20, 2025 and February 20, 2030 and if we undergo a “fundamental change” (as defined in the indenture governing the Convertible Notes (the “Indenture”)), subject to certain conditions, a holder will have the option to require us to repurchase all or a portion of its Convertible Notes for cash at a repurchase price equal to
100%
of the principal amount of the Convertible Notes to be repurchased, plus any accrued and unpaid interest, if any, to, but excluding, the relevant repurchase date. If our common stock ceases to be listed or quoted on Nasdaq, this would constitute a “fundamental change,” as defined in the Indenture, and the holders of the Convertible Notes would have the right to require us to repurchase all or a portion of their convertible notes at a repurchase price equal to 100% of the principal amount of our convertible notes to be repurchased.
In addition, upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture) or if we deliver a redemption notice prior to February 20, 2022, we will, in certain circumstances, increase the conversion rate for a holder that converts its Convertible Notes in connection with such make-whole fundamental change or redemption notice, as the case may be.
The Company may not redeem the Convertible Notes prior to February 20, 2019. The Company may, at its option, redeem all or part of the Convertible Notes at any time (i) on or after February 20, 2019 if the last reported sale price per share of our common stock has been at least
130%
of the conversion price then in effect for at least
20
trading days during any
30
consecutive trading day period ending on, and including, the trading day immediately preceding the date on which we provide written notice of redemption and (ii) on or after February 20, 2022 regardless of the sale price condition described in clause (i), in each case, at a redemption price equal to
100%
of the principal amount of the Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. Upon conversion of any Convertible Note, we shall pay or deliver to the converting noteholder cash, shares of common stock or a combination of cash and shares of our common stock, at our election.
The Company separated the Convertible Notes into liability and equity components. The carrying amount of the liability component of
$69.5 million
was calculated by measuring the fair value of similar liabilities that do not have an associated convertible feature. The carrying amount of the equity component was calculated to be
$13.0 million
, and represents the conversion option which was determined by deducting the fair value of the liability component from the principal amount of the notes. This difference represents a debt discount that is amortized to interest expense over the term of the Convertible Notes. The equity component is not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the direct transaction costs (the “issuance costs”) related to the Convertible Notes, we allocated the total amount of issuance costs incurred to the liability and equity components based on their relative values. We recorded issuance costs of
$1.8 million
and
$0.3 million
to the liability and equity components, respectively. Issuance costs, including fees paid to the initial purchasers who acted as intermediaries in the placement of the Convertible Notes, attributable to the liability component are presented in the condensed consolidated balance sheets as a direct deduction from the carrying amount of the debt instrument and are amortized to interest expense over the term of the Convertible Notes in the condensed consolidated statements of operations. The issuance costs attributable to the equity component are netted with the equity component and included within Additional paid-in capital in the condensed consolidated balance sheets. Interest expense related to the amortization expense of the issuance costs associated with the liability component was not material during the
three and six
months ended
June 30, 2018
.
As of
June 30, 2018
and
December 31, 2017
, the outstanding principal on the Convertible Notes was
$82.5 million
, and the outstanding Convertible Notes balance, net of debt issuance costs and discount associated with the equity component, was
$70.1 million
and
$69.7 million
, respectively. As of
June 30, 2018
, the equity component of the Convertible Notes was
$13.0 million
. Subsequent to March 31, 2017, we became non-compliant with our obligations under the Indenture relating to the delivery to the Indenture trustee of our 2016 annual financial statements and interim financial statements for the quarters ended March 31, June 30 and September 30, 2017, and such non-compliance constituted an Event of Default (as defined in the Indenture) under the Indenture. As a result, immediately after the occurrence of the Event of Default and through such time as the noncompliance was continuing, we incurred additional interest on the Convertible Notes at a rate equal to (i)
0.25%
per annum of the principal amount of the Convertible Notes outstanding for each day during the first 90 days after the occurrence of each Event of Default and (ii)
0.50%
per annum of the principal amount of the Convertible Notes outstanding from the 91st day until the 180th day following the occurrence of each such Event of Default. (The Company cured its non-compliance relating to the delivery of the 2016 annual financial statements by filing its 2016 Annual Report on Form 10-K on November 17, 2017 and relating to the delivery of its 2017 interim financial statements by filing its Quarterly Reports on Form 10-Q for the first three quarters of 2017 on January 31, 2018.) The maximum additional interest was capped at
0.50%
per annum irrespective of how many Events of Default were in existence at any time for our failure to deliver any required financial statements. The aggregate penalty interest incurred during this period of non-compliance was approximately
$0.2 million
.
Searchlight Investment
Second Lien Notes due 2023 and Warrants
On March 27, 2018 (the “Closing Date”) the Company issued to Searchlight II TBO, L.P. (“Searchlight”)
$150.0 million
in aggregate principal amount of its Second Lien Notes, and to Searchlight II TBO-W L.P. warrants to acquire an aggregate of
18,065,775
shares of the Company’s common stock, par value
$0.0001
per share (the “Common Stock”), at an exercise price of
$0.01
per share (the “Penny Warrants”), and warrants to acquire an aggregate of
13,000,000
shares of Common Stock at an exercise
price of
$1.57
per share (the “Market Warrants” and, together with the Penny Warrants, the “Warrants”), for an aggregate price of
$150.0 million
.
The Second Lien Notes mature on June 30, 2023. Interest on the Second Lien Notes will initially be payable in kind (compounded semi-annually) at a rate of
12.0%
per annum. Interest will automatically convert to accruing cash pay interest at a rate of
10.0%
per annum upon the earlier of (i) March 15, 2021 and (ii) the last day of the most recently ended fiscal quarter of the Company for which financial statements have been delivered for which the Company’s “total net leverage ratio” has decreased to
3.39
to 1.0. Our “total net leverage ratio” is as defined in the purchase agreement relating to the Second Lien Notes (the “Purchase Agreement”), and uses a “Consolidated EBITDA” definition from the Purchase Agreement that is different than the “Adjusted EBITDA” figure that we publicly report to our investors.
Each of the Company’s subsidiaries that guarantees the Company’s obligations under its 2017 Credit Agreement guarantee the Second Lien Notes (the “Guarantors”) pursuant to a guaranty agreement (the “Guaranty”). The Second Lien Notes and the guarantees thereof are subordinated in right of payment to the obligations of the Company and the Guarantors under the 2017 Credit Agreement and are secured by the same assets securing the obligations of the Company and the Guarantors under the 2017 Credit Agreement on a second lien basis, subject to the terms of an intercreditor and subordination agreement (the “Intercreditor Agreement”) among the Company, the Guarantors, the Administrative Agent and the collateral agent.
Prior to the third anniversary of the Closing Date, the Company may redeem the Second Lien Notes at a price equal to
100.0%
of the principal amount of the Second Lien Notes to be redeemed, plus a “make-whole” premium and accrued and unpaid interest, if any, to (but excluding) the date of redemption. Thereafter, each Note will be redeemable at
105.0%
of the principal amount thereof from the third anniversary of the Closing Date until (and excluding) the fourth anniversary of the Closing Date, at
102.5%
of the principal amount thereof from the fourth anniversary of the Closing Date until (and excluding) the fifth anniversary of the Closing Date, and thereafter at
100.0%
of the principal amount thereof, plus, in each case, accrued and unpaid interest thereon, if any, to (but excluding) the redemption date. Upon a “change of control” (as defined in the Purchase Agreement), the Company must offer to purchase the Second Lien Notes at a price in cash equal to
101%
of the principal amount of such Second Lien Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of purchase.
The Purchase Agreement contains affirmative and negative covenants of the Company and its subsidiaries consistent with those in the 2017 Credit Agreement (including limitations on the amount of first lien indebtedness that may be incurred) and contains customary events of default, upon the occurrence and during the continuance of which the majority holders of the Second Lien Notes may declare all obligations under the Second Lien Notes to become immediately due and payable. There are no financial “maintenance covenants” in the purchase agreement for the Second Lien Notes.
On the Closing Date, the Company and the Guarantors entered into a security agreement with the Collateral Agent (the “Security Agreement”). Under the Security Agreement, each of the Company and the Guarantors granted and pledged to the Collateral Agent, to secure the payment and performance in full of all of the obligations under the Notes, a security interest in substantially all of its respective assets, and all proceeds and products and supporting obligations in respect thereof, subject to customary limitations, exceptions, exclusions and qualifications, and the Security Agreement is subject to the terms of the Intercreditor Agreement.
Searchlight is not permitted to transfer its Second Lien Notes before January 1, 2021, except to its controlled affiliates.
The Warrants
The Warrants vest and are exercisable at any time and from time to time after the Vesting Date (as defined below) until on or prior to the close of business on the tenth anniversary of the Closing Date. The Warrants vest and become exercisable on January 1, 2021 (the “Vesting Date”), if the 45-day volume-weighted average price (“VWAP”) of our common stock (as reported by Nasdaq) is at or above (i)
$4.00
, in the case of the Penny Warrants, and (ii)
$2.40
, in the case of the Market Warrants, in each case at any time following the Closing Date. The VWAP condition in respect of the Market Warrants was satisfied in July 2018.
The holders of the Warrants cannot exercise the Warrants if and to the extent, as a result of such exercise, either (i) such holder’s (together with its affiliates) aggregate voting power on any matter that could be voted on by holders of the Common Stock would exceed
19.9%
of the maximum voting power outstanding or (ii) such holder (together with its affiliates) would beneficially
own more than
19.9%
of our then outstanding common stock, subject to customary exceptions in connection with public sales or the consummation of a specified liquidity event described in the Warrants.
The Warrants also include customary anti-dilution adjustments.
Pursuant to the terms of a Warrantholders Agreement between us and Searchlight II TBO-W L.P., entered into on the Closing Date, the Company increased the size of its board of directors (the “Board”) by two members, and appointed each of Eric Zinterhofer and Eric Sondag as Class III directors (as such term is used in the Company’s certificate of incorporation) of the Board, with a term expiring in 2020. For so long as Searchlight and its controlled affiliates beneficially own at least
25%
of the number of Penny Warrants issued on the Closing Date (and/or the respective shares of our common stock issued in connection with the exercise of the Penny Warrants), Searchlight shall have the right to nominate a number (rounded up to the nearest whole number) of individuals for election to the Board equal to the product of the following (such individuals, the “Searchlight Nominees”):
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|
•
|
the number of directors then serving on the Board, multiplied by
|
|
|
•
|
a fraction, the numerator of which is the total number of outstanding shares of our common stock underlying the Penny Warrants beneficially owned by Searchlight (after giving effect to the exercise of the Penny Warrants) and the denominator of which is the sum of (A) the total number of outstanding shares of our common stock plus (B) the number of shares of our common stock underlying the Penny Warrants that have not yet been exercised;
|
Searchlight will not be entitled to nominate more than one individual to the Board if it beneficially owns less than
50%
of the Penny Warrants (or the underlying shares of common stock) issued or issuable on the Closing Date. In no event will Searchlight be entitled to nominate more than two individuals to the Board.
Searchlight’s rights to Board representation terminate if Searchlight and its affiliates have an employee, member or partner (other than a limited partner who is an investor in Searchlight) who is a director or executive officer of a competitor of the Company, or if Searchlight has a portfolio company that is a competitor of the Company.
Stock Buy-back Restriction
Until the earlier of (i) the date on which Searchlight no longer beneficially owns at least
25%
of the number of Market Warrants issued on the Closing Date (and/or the respective shares of Common Stock issued in connection with the exercise of the Market Warrants) and (ii) January 1, 2021, without the prior consent of Searchlight, the Company will not directly or indirectly redeem, purchase or otherwise acquire any equity securities of the Company for a consideration per share (plus, in the case of any options, rights, or securities, the additional consideration required to be paid to the Company upon exercise, conversion or exchange) greater than the market price (as defined in the Warrants) per share of common stock immediately prior to the earlier of (x) the announcement of such acquisition or (y) such acquisition.
Warrant Transfer Restrictions
Searchlight is not permitted to transfer its Warrants prior to January 1, 2021, except to its controlled affiliates or in connection with certain tender offers, exchange offers, mergers or similar transactions. The Warrants and the underlying shares of common stock are freely transferable by Searchlight on and after January 1, 2021.
Registration Rights
Searchlight has customary shelf, demand and piggyback registration rights with respect to the common stock (including shares of common stock underlying the Warrants) that it holds, including demand registrations and underwritten “shelf takedowns,” subject to specified restrictions, thresholds and the Company’s eligibility to use a registration statement on Form S-3.
Participation Rights
Until the earlier of (i) the fifth anniversary of the Closing Date and (ii) the date Searchlight no longer holds at least
50%
of the Penny Warrants (or the respective shares of common stock underlying such Penny Warrants), Searchlight has participation rights with respect to issuances of common equity securities by the Company, subject to exceptions. These rights entitle Searchlight
to opt to participate in future issuances by the Company of common equity or common equity-linked securities, subject to customary exceptions.
Standstill
Until the earlier of (i) the 18-month anniversary of the Closing Date and (ii) the date on which Searchlight owns less than
10% of the outstanding common stock (directly or on an as-exercised basis), neither Searchlight nor its affiliates may (unless invited by the Company’s Board) (a) acquire any voting equity securities or material assets of the Company if Searchlight (together with its affiliates) would beneficially hold in the aggregate more than
9.9%
of the Company’s
2.75%
convertible senior notes due 2035 or
9.9%
of the Company’s common stock, (b) acquire all or a material part of the Company or its subsidiaries, (c) make, or in any way participate in any “proxy contest” or other solicitation of proxies, (d) form, join or in any way participate in a “group” (within the meaning of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended) with respect to any voting securities of the Company or any of its subsidiaries, (e) seek to influence or control the Company’s management or policies, (f) directly or indirectly enter into any discussions, negotiations, arrangements or understandings with any other person with respect to any of the foregoing activities, (g) advise, assist, encourage, act as a financing source for or otherwise invest in any other person in connection any of the foregoing activities or (h) publicly disclose any intention, plan or arrangement inconsistent with any of the foregoing.
The aggregate contractual maturities of all borrowings due subsequent to
June 30, 2018
are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
9,811
|
|
2019
|
22,567
|
|
2020
|
25,376
|
|
2021
|
25,043
|
|
2022
|
25,044
|
|
Thereafter
|
614,217
|
|
Total
|
$
|
722,058
|
|
Note 9. Commitments and Contingencies
Movie License and Internet Protocol Television (“IPTV”) Commitments
In the ordinary course of business, we have long-term commitments, such as license fees and guaranteed minimum payments owed to content providers. In addition, we have long-term arrangements with service and television providers to license and provide content and IPTV services that are subject to future guaranteed minimum payments from us to the licensor.
The following is a schedule of future minimum commitments under movie and IPTV arrangements as of
June 30, 2018
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
30,592
|
|
2019
|
23,753
|
|
2020
|
12,036
|
|
2021
|
750
|
|
2022
|
750
|
|
Thereafter
|
—
|
|
Total
|
$
|
67,881
|
|
Operating Lease Commitments
The Company leases its operating facilities under non-cancelable operating leases that expire on various dates through
2025
. Some of our operating leases provide us with the option to renew for additional periods. Where operating leases contain escalation clauses, rent abatements, and/or concessions, such as rent holidays and landlord or tenant incentives or allowances, we apply them in the determination of straight-line rent expense over the lease term. Some of our operating leases require the payment of real estate taxes or other occupancy costs, which may be subject to escalation. The Company also leases some facilities and vehicles under month-to-month arrangements.
The following is a schedule of future minimum lease payments under operating leases as of
June 30, 2018
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
3,006
|
|
2019
|
4,872
|
|
2020
|
3,455
|
|
2021
|
3,359
|
|
2022
|
2,927
|
|
Thereafter
|
4,950
|
|
Total
|
$
|
22,569
|
|
Total rent expense for the
three months ended June 30, 2018
and
2017
was
$2.2 million
and
$1.8 million
, respectively. Total rent expense for the
six months ended June 30, 2018
and
2017
was
$4.4 million
and
$3.6 million
, respectively.
Capital Leases
The Company leases certain computer software and equipment under capital leases that expire on various dates through 2020. The current portion and non-current portion of capital lease obligations are included in Current portion of long-term debt and Long-term debt, respectively, on the condensed consolidated balance sheets. As of
June 30, 2018
, future minimum lease payments under these capital leases were as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
593
|
|
2019
|
731
|
|
2020
|
371
|
|
Total minimum lease payments
|
1,694
|
|
Less: amount representing interest
|
(196
|
)
|
Present value of net minimum lease payments
|
1,498
|
|
Less: current portion
|
(552
|
)
|
Capital lease obligation, non-current
|
$
|
946
|
|
Satellite Capacity Commitments
The Company maintains agreements with satellite service providers to provide for satellite capacity. The Company expenses these satellite fees in the month the service is provided as a charge to licensing and services cost of sales.
The following is a schedule of future minimum satellite costs as of
June 30, 2018
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2018 (remaining six months)
|
$
|
58,752
|
|
2019
|
99,053
|
|
2020
|
71,322
|
|
2021
|
39,241
|
|
2022
|
35,788
|
|
Thereafter
|
125,240
|
|
Total
|
$
|
429,396
|
|
Other Commitments
In the normal course of business, we enter into future purchase commitments with some of our connectivity vendors to secure future inventory for our customers and engineering and antenna project developments. As of
June 30, 2018
, we also had outstanding letters of credit in the amount of
$7.4 million
, of which
$6.2 million
were issued under the letter of credit facility under the 2017 Credit Agreement. See
Note 8. Financing Arrangements
.
Contingencies
We are subject to various legal proceedings and claims that have arisen in the ordinary course of business and that have not been fully and finally adjudicated. We record accruals for loss contingencies when our management concludes it is probable that a liability has been incurred and the amount of the related loss can be reasonably estimated. On a regular basis, our management evaluates developments in legal proceedings and other matters that could cause an increase or decrease in the amount of the liability that has been accrued previously. While it is not possible to accurately predict or determine the eventual outcomes of these matters, an adverse determination in one or more of these matters could have a material adverse effect on our consolidated financial position, results of operations or cash flows. Some of our legal proceedings as well as other matters that our management believes could become significant are discussed below:
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•
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Music Infringement and Related Claims
. On May 6, 2014, UMG Recordings, Inc., Capitol Records, Universal Music Corp. and entities affiliated with the foregoing (collectively, “UMG”) filed suit in the United States District Court for the Central District of California against us and Inflight Productions Ltd. (“IFP”) for copyright infringement and related claims and unspecified money damages. IFP is a direct subsidiary of Global Entertainment AG (formally AIA) and as such is our indirect subsidiary. In August 2016, we entered into settlement agreements with major record labels and publishers, including UMG, to settle music copyright infringement and related claims
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(the “Sound Recording Settlements”). As a result of the Sound Recording Settlements, we paid approximately
$18.0 million
in cash and issued approximately
1.8 million
shares of our common stock to settle lawsuits and other claims. Under the settlement agreement with UMG, we paid UMG an additional
$5.0 million
in cash in March 2017 and agreed to issue
500,000
additional shares of our common stock when and if our closing price of our common stock exceeds
$10.00
per share and
400,000
additional shares of our common stock when and if the closing price of our common stock exceeds
$12.00
per share.
In 2016, we received notices from several other music rights holders and associations acting on their behalf regarding potential claims that we infringed their music rights and the rights of artists that they represent. To date, none of these rights holders or associations has initiated litigation against us, except for BMG Rights Management (US) LLC (“BMG”) as described in the following paragraph.
Other than in respect of the BMG litigation (the loss probability and liability estimate of which we discuss in the following paragraph), w
e believe that a loss relating to these matters is probable, but we believe that it is unlikely to be material and therefore have accrued an immaterial amount for these loss contingencies. If initiated however, we intend to vigorously defend ourselves against these claims.
On
May 3, 2018
, BMG filed suit in the United States District Court for the Central District of California against us and IFP for copyright infringement and related claims and unspecified money damages. The Court has not yet set a trial date. We do not believe that a material loss relating to this matter is probable, and we are currently unable to estimate the amount of the potential loss at this time due to the lack of specificity in the complaint; the fact that we have not yet completed our internal investigation; the speculative nature of the claimed damages; and the varying theories and wide range of statutory damages under which damages could be measured. As such, we have not accrued any amount for this loss contingency. We intend to vigorously defend ourselves against this claim.
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•
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SwiftAir Litigation
.
On August 14, 2014, SwiftAir, LLC filed suit against our wholly owned subsidiary Row 44 and against Southwest Airlines for breach of contract,
quantum meruit
, unjust enrichment and similar claims and money damages in the Superior Court of California for the County of Los Angeles. SwiftAir and Row 44 had a contractual relationship whereby Row 44 agreed to give SwiftAir access to Row 44’s Southwest Airlines portal so that SwiftAir could market its destination deal product to Southwest Airlines’ passengers. In 2013, after Southwest Airlines decided not to proceed with the destination deal product, Row 44 terminated its contract with SwiftAir. In its lawsuit, SwiftAir seeks approximately
$9 million
in monetary damages against Row 44 and Southwest Airlines. In January 2018, the court granted Row 44’s motions
in limine
and thereby limited SwiftAir’s damages claims against Row 44 to nominal damages. Southwest Airlines however remains exposed to SwiftAir’s damages claims. If Southwest Airlines is not successful in its defense against those claims, then Southwest Airlines may seek indemnification from Row 44 for its loss. The trial in this lawsuit is currently scheduled to commence in September 2018. We intend to vigorously defend ourselves against SwiftAir’s claims as well as against any indemnification claim that Southwest Airlines may later assert against us. We do not believe that a material loss relating to this matter is probable, and due to the speculative nature of SwiftAir’s damages claims, we are currently unable to estimate the amount of any potential loss; as such, we have not accrued any amount for this loss contingency.
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•
|
Securities Class Action Litigation
. On February 23, 2017 and on March 17, 2017, following our announcement that we anticipated a delay in filing our Annual Report for the year ended December 31, 2016 (or “2016 Form 10-K”) and that our former CEO and former CFO would separate from us, three putative securities class action lawsuits were filed in United States District Court for the Central District of California. These lawsuits alleged violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against us, our former CEO and two of our former CFOs. The plaintiffs voluntarily dismissed two of these lawsuits. The third lawsuit, brought by putative stockholder M&M Hart Living Trust and Randi Williams (the “Hart complaint”), alleged that we and the other defendants made misrepresentations and/or omitted material information about the EMC Acquisition, our projected financial performance and synergies following that acquisition, and the impact of that acquisition on our internal controls over financial reporting. The plaintiffs sought unspecified damages, attorneys’ fees and costs. On November 2, 2017, the Court granted our and the other defendants’ motion to dismiss the Hart complaint, and dismissed the action with prejudice. On November 30, 2017, the plaintiffs filed a motion to alter or amend the Court’s previous judgment of dismissal to permit them to file a further amended complaint. On January 8, 2018 the Court denied the plaintiffs’ motion to alter or amend the previous judgment. On January 29, 2018, the plaintiffs appealed to the United States Court of Appeals for the Ninth Circuit from the Court’s denial of the plaintiffs’ motion to alter or amend the judgment. We expect the Ninth Circuit to hear the appeal in late 2018 or early 2019. We believe that a loss relating to this matter is probable, but we believe that it is unlikely to be
|
material and therefore have accrued an immaterial amount related to this loss contingency. We intend to vigorously defend ourselves against this claim.
In addition, from time to time, we are or may be party to various additional legal matters incidental to the conduct of our business. Some of the outstanding legal matters include speculative claims for indeterminate amounts of damages, for which we have not recorded any contingency accrual. Additionally, we have determined that other legal matters are likely not material to our financial statements, and as such have not discussed those matters above. Although we cannot predict with certainty the ultimate resolution of these speculative and immaterial matters, based on our current knowledge, we do not believe that the outcome of any of these matters will have a material adverse effect on our financial statements.
Note 10. Related Party Transactions
Due from WMS
In connection with the EMC Acquisition, the Company acquired a
49%
equity interest in WMS. The Company accounts for its interest in WMS using the equity method and includes the Company’s share of WMS’s profits or losses in Income from equity method investments in the condensed consolidated statements of operations. During the
three and six
months ended
June 30, 2018
, sales to WMS (for the Company’s services provided to WMS for WMS’s onboard cellular equipment) were approximately
$0.2 million
and
$0.5 million
, respectively, under the terms of the WMS operating agreement and an associated master services agreement with WMS. During the
three and six
months ended
June 30, 2017
, sales to WMS were approximately
$0.3 million
and
$0.7 million
, respectively. These sales are included in Revenue in the condensed consolidated statements of operations. As of
June 30, 2018
and
December 31, 2017
, we had a balance due from WMS of
$0.1 million
and
$0.1 million
, respectively, included in Accounts receivable, net in the condensed consolidated balance sheets.
Note Payable to WMS
In December 2017, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately
$6.4 million
and concurrently signed an agreement to waive future dividends or other such distributions by WMS to the Company until such time as the outstanding principal on the demand promissory note has been repaid in full. The outstanding demand promissory note will be reduced dollar-for-dollar by any such dividend or distribution amounts waived. The Company may prepay the demand promissory note at any time without prepayment penalty. The unpaid principal of the demand promissory note bears interest at
2.64%
per annum from and after the date of the demand promissory note
. Interest under the demand promissory note is due and payable only upon the occurrence of an “event of default,” which includes, for example, the Company’s breach of the demand promissory note or the WMS operating agreement, Company insolvency events and material judgments against the Company. The entire principal balance of the demand promissory note together with all accrued but unpaid interest shall be due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2019 and (iii) the date of acceleration of the demand promissory note as a result of the occurrence of an event of default. During the six months ended
June 30, 2018
, WMS declared dividends of
$7.0 million
in the aggregate, of which our
49%
proportion (equal to
$3.4 million
) has been applied against the outstanding principal amount of the demand promissory note. The principal amount of the outstanding demand promissory note was
$3.0 million
as of
June 30, 2018
and has been included within current portion of long-term debt in the condensed consolidated balance sheet as of
June 30, 2018
.
Due to Santander
Also in connection with the EMC Acquisition, the Company acquired a
49%
equity interest in Santander. The Company accounts for its interest in Santander using the equity method and includes our share of Santander’s profits or losses in Income from equity method investments in the condensed consolidated statements of operations. During the
three and six
months ended
June 30, 2018
the Company purchased approximately
$2.4 million
and
$3.8 million
, respectively, from Santander for their Teleport services and related network operations support services. During the
three and six
months ended
June 30, 2017
the Company purchased approximately
$0.8 million
and
$1.4 million
, respectively, of network operations support services from Santander. As of
June 30, 2018
and
December 31, 2017
the Company owed Santander approximately
$1.3 million
and
$0.9 million
, respectively, as remaining payments for these services, which is included in Accounts payable and accrued liabilities in the condensed consolidated balance sheets for their teleport services and related network operations support services.
Subscription Receivable with Former Employee
A former employee is party to a Secured Promissory Note dated July 15, 2011, pursuant to which the former employee agreed to pay the Company (as successor to Row 44, Inc., which is a Company subsidiary) a principal sum of approximately
$0.4 million
, plus interest thereon at a rate of
6%
per annum. The former employee granted the Company a security interest in shares of Row 44 held by him (which Row 44 shares were subsequently converted into
223,893
shares of the Company’s common stock) to secure his obligations to repay the loan. As of
June 30, 2018
and
December 31, 2017
, the balance of the note (with interest) was approximately
$0.6 million
, which is presented as a subscription receivable. We recognize interest income on the note when earned (using the simple interest method) but have not collected any interest payments since the origination of the note. Interest income recognized by the Company during the
six
months ended
June 30, 2018
and
June 30, 2017
was not material. The Company makes ongoing assessments regarding the collectability of this note and the subscription receivable balance, and is currently in litigation with the former employee to recover the loan.
Registration Rights Agreement
When we consummated our business combination in January 2013 with Row 44 and Advanced Inflight Alliance AG, we entered into an amended and restated registration rights agreement with PAR, entities affiliated with Putnam Investments, Global Eagle Acquisition LLC (the “Sponsor”) and our then and current Board members Harry E. Sloan and Jeff Sagansky, who were affiliated with the Sponsor. Under that agreement, we agreed to register the resale of securities held by them (the “registrable securities”) and to sell those registrable securities pursuant to an effective registration statement in a variety of manners, including in underwritten offerings. We also agreed to pay the securityholders’ expenses in connection with their exercise of their registration rights.
During 2017, Putnam Investments was a beneficial owner of more than
5%
of our outstanding common stock. According to a Schedule 13G/A filed on February 7, 2018, Putnam Investments no longer holds more than
5%
of our outstanding common stock, and as such has ceased to be a related party. PAR and Messrs. Sloan and Sagansky continue to be related parties.
The amended and restated registration rights agreement restricts our ability to grant registration rights to a third party on parity with or senior to those held by the “holders” (as defined under that agreement) without the consent of holders of at least a majority of the “registrable securities” under that agreement. In April 2018, we entered into a consent to the amended and restated registration rights agreement with PAR whereby PAR (as a holder of a majority of registrable securities thereunder) consented to the registration rights that we provided to Searchlight as part of its investment in us.
Note 11. Common Stock, Share-Based Awards and Warrants
Common Stock
Issuance of Common Stock
The Company issued approximately
5.5 million
shares of its common stock to the EMC seller on July 27, 2016 in connection with the EMC Acquisition. On the first anniversary of the EMC Acquisition, on July 27, 2017, the Company issued to the EMC seller an additional approximately
5.0 million
shares of the Company’s common stock. Pursuant to the EMC purchase agreement, 50% of the newly issued shares was valued at
$8.40
per share, and 50% was valued at the volume-weighted average price of a share of Company common stock measured two days prior the first anniversary date.
Furthermore, in August 2016, the Company issued approximately
1.8 million
shares of its common stock as partial consideration for the Sound-Recording Settlements discussed in
Note 9. Commitments and Contingencies
. The Company is obligated to issue an additional
500,000
shares of its common stock to UMG in connection with the litigation when and if the share price of the Company’s common stock exceeds
$10.00
per share and an additional
400,000
shares of its common stock when and if the closing price exceeds
$12.00
per share (together, the “Supplemental Shares”) at any time in the future if the share price reaches these price thresholds. In lieu of issuing the Supplemental Shares of the Company’s common stock upon exceeding the respective share price thresholds, the Company may pay the equivalent in cash at its sole discretion. If the Company were to experience a liquidation event, as defined in the settlement documentation, and if the equivalent liquidation price per share at that time exceeds one or both of the share price thresholds, the Company is obligated to pay the equivalent liquidation price per share in cash in lieu of issuing the Supplemental Shares. See
Note 9. Commitments and Contingencies
for a further description of the Sound-Recording Settlements.
2013 Equity Plan
Under our 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of our Board, was able to grant up to
11,000,000
shares (through stock options, restricted stock, restricted stock units (“RSUs”)) (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants. We ceased using the 2013 Equity Plan for new equity issuances in December 2017 upon receiving stockholder approval of our 2017 Omnibus Long-Term Incentive Plan, although we continue to have outstanding previously granted equity awards issued under the 2013 Equity Plan. See “2017 Equity Plan” immediately below.
2017 Equity Plan
On December 21, 2017, our stockholders approved a 2017 Omnibus Long-Term Incentive Plan (the “2017 Equity Plan”). We transferred the
2,097,846
shares remaining available for grant under the 2013 Equity Plan at that time into the 2017 Equity Plan and those shares are now available for grant under the 2017 Equity Plan. The 2017 Equity Plan separately made available
6,500,000
shares of our common stock for new issuance thereunder, in addition to the shares transferred from the 2013 Equity Plan. The Compensation Committee of our Board (as administrator of the 2017 Equity Plan) may grant share awards thereunder (through stock options, restricted stock, RSUs (including both time-vesting and performance-based RSUs) and other incentive awards) to employees, officers, non-employee directors, and consultants.
On June 25, 2018, our stockholders approved an amendment and restatement of the 2017 Equity Plan that increased by
2,000,000
the number of shares of our common stock authorized for issuance thereunder.
Stock Repurchase Program
In March 2016, the Board authorized a stock repurchase program under which we may repurchase up to
$50.0 million
of our common stock. Under the stock repurchase program, we may repurchase shares from time to time using a variety of methods, which may include open-market purchases and privately negotiated transactions. The extent to which we repurchase our shares, and the timing and manner of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by management. We measure all potential buybacks against other potential uses of capital that may arise from time to time. The repurchase program does not obligate us to repurchase any specific number of shares, and may be suspended or discontinued at any time. We expect to finance any purchases with existing cash on hand, cash from operations and potential additional borrowings. We did not repurchase any shares of its common stock during the
six
months ended
June 30, 2018
and
2017
. As of
June 30, 2018
the remaining authorization under the stock repurchase plan was
$44.8 million
.
Stock-Based Compensation Expense
Stock-based compensation expense related to our directors and other personnel for the
three and six
months ended
June 30, 2018
and
2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Cost of services
|
$
|
80
|
|
|
$
|
66
|
|
|
$
|
260
|
|
|
$
|
153
|
|
Sales and marketing
|
98
|
|
|
131
|
|
|
291
|
|
|
306
|
|
Product development
|
139
|
|
|
165
|
|
|
450
|
|
|
336
|
|
General and administrative
|
1,913
|
|
|
630
|
|
|
4,867
|
|
|
2,048
|
|
Total
|
$
|
2,230
|
|
|
$
|
992
|
|
|
$
|
5,868
|
|
|
$
|
2,843
|
|
Warrants Issued in Connection with Second Lien Notes
The Company’s penny warrants and market warrants issued in connection with the Searchlight investment qualify for classification in stockholders’ equity, as they are indexed to the Company’s own stock and meet all additional criteria to be classified in stockholders’ equity. They are considered freestanding, equity-classified instruments that are initially measured at fair value and recorded at their allocated value, with no remeasurement required as long as the contract continues to be classified in equity.
The following is a summary of the penny and market warrants outstanding as of
June 30, 2018
:
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants (in thousands)
|
|
Weighted Average Exercise price
|
|
Weighted Average Remaining Contractual Term (in years)
|
Penny Warrants
|
18,065,775
|
|
|
$
|
0.01
|
|
|
9.70
|
Market Warrants
|
13,000,000
|
|
|
$
|
1.57
|
|
|
9.70
|
Public SPAC Warrants
The following is a summary of Public SPAC Warrants (which were exercisable for shares of our common stock) for the six months ended
June 30, 2018
, with the “Number of Warrants” in the table below indicating the shares of our common stock underlying the Public SPAC Warrants:
|
|
|
|
|
|
|
|
|
|
|
Number of Warrants (in thousands)
|
|
Weighted Average Exercise price
|
|
Weighted Average Remaining Contractual Term (in years)
|
Outstanding at January 1, 2018
|
6,173
|
|
|
$
|
11.50
|
|
|
|
Expired
|
(6,173
|
)
|
|
—
|
|
|
|
Outstanding and exercisable at June 30, 2018
|
—
|
|
|
$
|
—
|
|
|
0.0
|
The Public SPAC Warrants had a five-year term that expired on January 31, 2018, and are no longer exercisable. Prior to their expiration, the Company accounted for its
6,173,228
Public SPAC Warrants as derivative liabilities. During the three months ended
June 30, 2017
, the Company recorded income of
$0.2 million
in the condensed consolidated statement of operations as a result of the marked to fair value adjustment of these warrants at each balance sheet date. No income or expense was recorded during the three months ended
June 30, 2018
. During the
six
months ended
June 30, 2018
and
2017
, the Company recorded income of less than
$0.1 million
and expense of
$0.2 million
, respectively. The fair value of Public SPAC Warrants issued by the Company was estimated using the Black-Scholes option pricing model.
Note 12. Income Taxes
The Company recorded an income tax provision of
$3.7 million
and
$4.0 million
for the three months ended
June 30, 2018
and
2017
, respectively, and a benefit of
$1.0 million
and a provision of
$6.8 million
for the
six months ended
June 30, 2018
and
2017
, respectively. In general, our effective tax rate differs from the federal income tax rate due to the effects of foreign tax rate differences, foreign withholding taxes, changes in unrecognized tax benefits, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets.
Due to uncertainty as to the realization of benefits from the Company's U.S. and certain international net deferred tax assets, including net operating loss carryforwards, the Company has a full valuation allowance reserved against such net deferred tax assets. The Company intends to continue to maintain a full valuation allowance on certain jurisdictions’ net deferred tax assets until there is sufficient evidence to support the reversal of all or some portion of these allowances.
As of
June 30, 2018
and
December 31, 2017
, the liability for income taxes associated with uncertain tax positions was
$8.5 million
and
$8.7 million
, respectively. As of
June 30, 2018
and
December 31, 2017
, the Company had accrued
$7.0 million
and
$6.5 million
, respectively, of interest and penalties related to uncertain tax positions. It is reasonably possible that the amount of the unrecognized benefit with respect to certain of the Company’s unrecognized tax positions may significantly decrease within the next 12 months. This change may be the result of settlement of ongoing foreign audits.
In December, 2017, the United States enacted new U.S. federal tax legislation known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the U.S. corporate income tax regime by, among other things, lowering corporate income tax rates, in general limiting interest expense to 30% of taxable income, implementing a territorial tax system and imposing a repatriation tax on deemed repatriated earnings of foreign subsidiaries. As of June 30, 2018, we do not expect a material tax impact as a result of the Tax Act due to a current year loss and a full valuation allowance against our deferred tax assets.
We have estimated the impacts of the Tax Act in accordance with SAB 118. As of
June 30, 2018
, we have estimated an income tax benefit impact of
$4.6 million
for the year ended
December 31, 2017
, reflecting the revaluation of our net deferred tax liability based on a U.S. federal tax rate of 21 percent, and are expecting
no
tax impact related to the estimated repatriation toll charge of
$18.5 million
, which was fully offset by the net operating loss generated in 2017. As of
June 30, 2018
, our management is continuing to evaluate the effects of the Tax Act provisions, but we do not expect a material positive or negative impact to our 2017 tax positions.
Note 13. Segment Information
As of
June 30, 2018
, the Company’s business was comprised of
two
operating segments: Media & Content and Connectivity. Our CODM evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our
two
segments. Total segment gross margin provides the CODM a measure to analyze operating performance of each of the Company’s operating segments and its enterprise value against historical data and competitors’ data. However, historical results may not be indicative of future results because operating performance is highly contingent on many factors, including customer tastes and preferences. All other financial information is reviewed by the CODM on a consolidated basis.
The following table summarizes revenue and gross margin by our reportable segments for the
three and six
months ended
June 30, 2018
and
2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Revenue:
|
|
|
|
|
|
|
|
Media & Content
|
|
|
|
|
|
|
|
Licensing and services
|
$
|
83,455
|
|
|
$
|
74,566
|
|
|
$
|
158,369
|
|
|
$
|
150,945
|
|
Connectivity
|
|
|
|
|
|
|
|
Services
|
72,973
|
|
|
71,582
|
|
|
144,585
|
|
|
138,845
|
|
Equipment
|
9,534
|
|
|
9,594
|
|
|
19,505
|
|
|
18,544
|
|
Total
|
82,507
|
|
|
81,176
|
|
|
164,090
|
|
|
157,389
|
|
Total revenue
|
$
|
165,962
|
|
|
$
|
155,742
|
|
|
$
|
322,459
|
|
|
$
|
308,334
|
|
Cost of sales:
|
|
|
|
|
|
|
|
Media & Content
|
|
|
|
|
|
|
|
Licensing and services
|
$
|
58,456
|
|
|
$
|
56,693
|
|
|
$
|
112,910
|
|
|
$
|
110,949
|
|
Connectivity
|
|
|
|
|
|
|
|
Services
|
63,848
|
|
|
52,230
|
|
|
121,885
|
|
|
100,846
|
|
Equipment
|
4,427
|
|
|
9,167
|
|
|
10,415
|
|
|
16,835
|
|
Total
|
68,275
|
|
|
61,397
|
|
|
132,300
|
|
|
117,681
|
|
Total cost of sales
|
$
|
126,731
|
|
|
$
|
118,090
|
|
|
$
|
245,210
|
|
|
$
|
228,630
|
|
Gross Margin:
|
|
|
|
|
|
|
|
Media & Content
|
$
|
24,999
|
|
|
$
|
17,873
|
|
|
$
|
45,459
|
|
|
$
|
39,996
|
|
Connectivity
|
14,232
|
|
|
19,779
|
|
|
31,790
|
|
|
39,708
|
|
Total Gross Margin
|
39,231
|
|
|
37,652
|
|
|
77,249
|
|
|
79,704
|
|
Other operating expenses
|
60,764
|
|
|
63,760
|
|
|
128,228
|
|
|
207,225
|
|
Loss from operations
|
$
|
(21,533
|
)
|
|
$
|
(26,108
|
)
|
|
$
|
(50,979
|
)
|
|
$
|
(127,521
|
)
|
The Company’s total assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2018
|
|
December 31, 2017
|
Media & Content
|
|
$
|
351,462
|
|
|
$
|
362,216
|
|
Connectivity
|
|
456,507
|
|
|
479,714
|
|
Total segment assets
|
|
807,969
|
|
|
841,930
|
|
Corporate assets
|
|
16,508
|
|
|
18,654
|
|
Total assets
|
|
$
|
824,477
|
|
|
$
|
860,584
|
|
Note 14. Concentrations
Concentrations of Credit and Business Risk
Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents and accounts receivable.
As of
June 30, 2018
and
2017
, we maintain our cash and cash equivalents primarily with major U.S. financial institutions and foreign banks. Deposits with these institutions at times exceed the federally insured limits, which potentially subjects us to concentration of credit risk. We have not historically experienced any losses related to these balances and believe that there is minimal risk of any such losses.
As of
June 30, 2018
, approximately
$26.2 million
of our total cash and cash equivalents of
$37.4 million
was held by our foreign subsidiaries. If we repatriate these funds for use in our U.S. operations, we may be required to pay income taxes in the U.S. on the repatriated amount at the tax rates then in effect, reducing the net cash proceeds to us after repatriation. In the event we elect to repatriate any of these funds, we believe we have sufficient net operating losses for the foreseeable future to offset any repatriated income. As a result, we do not expect that any such repatriation would create a tax liability in the U.S. or have a material impact on our effective tax rate.
Customer Concentration
A substantial portion of our revenue is generated through arrangements with Southwest Airlines, Inc. (“Southwest Airlines”). As of
June 30, 2018
and
2017
, the percentage of revenue generated through this customer was as follows:
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2018
|
|
2017
|
Southwest Airlines as a percentage of total revenue
|
18
|
%
|
|
19
|
%
|
Southwest Airlines as a percentage of Connectivity revenue
|
35
|
%
|
|
37
|
%
|
No other customer accounted for greater than
10%
of total revenue for the periods presented. Accounts receivable from Southwest Airlines represented
13%
and
10%
of the total accounts receivable as of
June 30, 2018
and
December 31, 2017
, respectively.
Note 15. Net Loss Per Share
Basic loss per share (“EPS”) is computed using the weighted-average number of common shares outstanding during the applicable period. Diluted loss per share is computed using the weighted-average number of common shares and the dilutive effect of contingent shares outstanding during the applicable period. Potentially dilutive contingent shares, which consist of stock options, restricted stock units (including performance stock units), liability warrants, warrants issued to third parties and accounted for as equity instruments, convertible senior notes and contingently issuable shares, have been excluded from the diluted loss per share calculation when the effect of including such shares is anti-dilutive.
The following table sets forth the computation of basic and diluted net loss per share of common stock (in thousands, except per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Net loss (numerator):
|
|
|
|
|
|
|
|
Net loss – basic and diluted
|
$
|
(45,910
|
)
|
|
$
|
(44,130
|
)
|
|
$
|
(84,193
|
)
|
|
$
|
(169,741
|
)
|
|
|
|
|
|
|
|
|
Shares (denominator):
|
|
|
|
|
|
|
|
Weighted-average shares – basic and diluted
|
91,057
|
|
|
85,496
|
|
|
90,925
|
|
|
85,468
|
|
|
|
|
|
|
|
|
|
Loss per share - basic and diluted
|
$
|
(0.50
|
)
|
|
$
|
(0.52
|
)
|
|
$
|
(0.93
|
)
|
|
$
|
(1.99
|
)
|
The following weighted average common equivalent shares are excluded from the calculation of the Company’s net loss per share as their inclusion would have been anti-dilutive (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended
June 30,
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Employee stock options
|
5,436
|
|
|
5,525
|
|
|
5,880
|
|
|
6,060
|
|
Restricted stock units (including performance stock units)
|
2,379
|
|
|
1,474
|
|
|
2,304
|
|
|
1,625
|
|
Equity warrants
(1)
|
—
|
|
|
351
|
|
|
—
|
|
|
711
|
|
Public SPAC Warrants
(2)
|
—
|
|
|
6,173
|
|
|
1,066
|
|
|
6,173
|
|
2.75% convertible senior notes due 2035
|
4,447
|
|
|
4,447
|
|
|
4,447
|
|
|
4,447
|
|
EMC deferred consideration
(3)
|
—
|
|
|
5,536
|
|
|
—
|
|
|
5,536
|
|
Contingently issuable shares
(4)
|
900
|
|
|
900
|
|
|
900
|
|
|
900
|
|
Searchlight Penny Warrants
(5)
|
18,066
|
|
|
—
|
|
|
9,482
|
|
|
—
|
|
Searchlight Market Warrants
(5)
|
13,000
|
|
|
—
|
|
|
6,823
|
|
|
—
|
|
|
|
(1)
|
These are Legacy Row 44 warrants originally issuable for Row 44 common stock and Row 44 Series C preferred stock, which later became issuable for our Common Stock. During the six months ended June 30, 2017, these Legacy Row 44 warrants expired.
|
|
|
(3)
|
In connection with the EMC Acquisition on July 27, 2016 (the “EMC Acquisition Date”), we were obligated to pay
$25.0 million
in cash or stock, at our option, on July 27, 2017, which we elected to settle in
5,080,049
newly issued shares of our common stock on that date. No remaining obligation remains outstanding as of
June 30, 2018
.
|
|
|
(4)
|
In connection with the Sound Recording Settlement, we are obligated to issue
500,000
shares of our common stock to UMG when and if the closing price of our common stock exceeds
$10.00
per share, and
400,000
shares of our common stock to UMG when and if the closing price of our common stock exceeds
$12.00
per share. See
Note 9. Commitments and Contingencies
.
|
|
|
(5)
|
On March 27, 2018 we sold to Searchlight (and associated entities)
$150.0 million
in aggregate principal amount of our Second Lien Notes as well as warrants to acquire an aggregate of
18,065,775
shares of the Company’s common stock at an exercise price of
$0.01
per share (the “Penny Warrants”) and warrants to acquire an aggregate of
13,000,000
shares of Common Stock at an exercise price of
$1.57
per share (the “Market Warrants”). See
Note 11. Common Stock, Share-Based Awards and Warrants.
|