NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Overview
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.
Our Chief Executive Officer, the Company’s chief operating decision-maker (“CODM”), evaluates financial performance and allocates resources by reviewing revenue, costs of sales and contribution profit separately for our
two
operating segments: (i) Media & Content, and (ii) Connectivity.
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, 2018
, 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
months ended
March 31, 2019
. The results for the
three
months ended
March 31, 2019
are not necessarily indicative of the results expected for the full
2019
fiscal year. The consolidated balance sheet as of
December 31, 2018
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 March 18, 2019 (the "2018 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 2018 Form 10-K.
These 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 (“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 as of March 31, 2019 included cash and cash equivalents of approximately
$20.8 million
, and available borrowing capacity under our 2017 Revolving Loans (as defined below) of approximately
$29.9 million
, for a total available liquidity of approximately
$50.7 million
. 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. Please refer to Note 2. Basis of Preparation and Summary of Accounting Policies in our 2018 Form 10-K for additional details.
Revenue Recognition
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.
Our assessments regarding the timing of transfer of control and revenue recognition for each business segment are summarized below and further detailed in Note 2. Basis of Preparation and Summary of Accounting Policies — Revenue Recognition in our 2018 Form 10-K:
|
|
•
|
Media & Content
– specific to the sale and/or licensing of media content and the related technical services, such as digital delivery of media advertising, encoding of video & music products, development of graphical interfaces and provision of materials, we consider control to have transferred when: (i) the content has been delivered, and (ii) the services required under the contract have been performed. 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, typically at the beginning of each cycle, or straight-line over the license period.
|
|
|
•
|
Connectivity
– we provide satellite-based Internet services and related technical and network support services, as well as the physical equipment to enable connectivity. For Aviation, 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. Equipment revenue is recognized when control passes to the customer, which is at the later of shipment of the equipment to the customer or obtaining regulatory certification for the operation of such equipment, as applicable. For Maritime and Land, revenue is recognized over time 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 determined that the Company acts in the role of an agent and accordingly records such revenues on a net basis.
|
The following table presents the disaggregation of the Company’s revenue from contracts with customers for the three months ended March 31, 2019 and 2018:
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Media & Content -- Licensing and Services
|
$
|
80,010
|
|
|
$
|
74,915
|
|
Connectivity -- Aviation Services
|
31,241
|
|
|
29,325
|
|
Connectivity -- Aviation Equipment
|
14,060
|
|
|
7,598
|
|
Connectivity -- Maritime & Land Services
|
39,227
|
|
|
42,286
|
|
Connectivity -- Maritime & Land Equipment
|
2,081
|
|
|
2,373
|
|
Total Revenues
|
$
|
166,619
|
|
|
$
|
156,497
|
|
Contract 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 March 31, 2019 and December 31, 2018 of contract contingent revenue was not material.
For some customer contracts, the Company may invoice upfront for services recognized over time or for contracts in which it has 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, the Company has determined its contracts do not include a significant financing component.
The following table summarizes the significant changes in the contract liabilities balances during the quarter ended March 31, 2019 (in thousands):
|
|
|
|
|
|
Contract Liabilities
|
Balance as of December 31, 2018
|
$
|
8,546
|
|
Revenue recognized that was included in the contract liability balance at the beginning of the period
|
(3,497
|
)
|
Increase due to cash received, excluding amounts recognized as revenue during the period
|
4,224
|
|
Balance as of March 31, 2019
|
$
|
9,273
|
|
|
|
Deferred revenue, current
|
$
|
9,018
|
|
Deferred revenue, non-current
|
255
|
|
|
$
|
9,273
|
|
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 December 31 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 that 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.
Adoption of New Accounting Pronouncements
On January 1, 2019, the Company adopted ASC 842 using the modified retrospective method. The Company has presented financial results and applied its accounting policies for the period beginning January 1, 2019 under ASC 842, while prior period results and accounting policies have not been adjusted and are reflected under legacy GAAP pursuant to ASC 840. In connection with the adoption of ASC 842, the Company performed an analysis of contracts under ASC 840 to ensure proper assessment of leases (or embedded leases) in existence as of January 1, 2019. The Company elected the package of practical expedients permitted under ASC 842, which allows the Company not to reassess 1) whether any expired or existing contracts as of the adoption date are or contain a lease, 2) lease classification for any expired or existing leases as of the adoption date and 3) initial direct costs for any existing leases as of the adoption date. The most significant impact of applying ASC 842 was the recognition of right-of-use assets and lease liabilities for operating leases in its condensed consolidated balance sheet. On January 1, 2019, the Company recognized an initial operating right-of-use asset of
$24.8 million
and associated operating lease liabilities of
$24.4 million
. See
Note 3. Leases
for further information regarding the impact of the adoption of ASU 2016-02 on the Company's financial statements.
In June 2018, the FASB issued ASU 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting
(“ASU 2018-07”), which expands the scope of ASC 718 to include share-based payments granted to non-employees in exchange for goods and services. The guidance largely aligns the accounting for share-based payments to non-employees with the accounting for share-based payments to employees, with certain exceptions. We adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact 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. We adopted this standard effective January 1, 2019. The adoption of this standard did not have a material impact on our condensed consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2019, the FASB issued ASU No. 2019-01,
Leases (Topic 842): Codification Improvements
, to provide clarifications on ASC 842 and to correct unintended application of the guidance. The amendments in this Update include the following items brought to FASB’s attention through those interactions with stakeholders: (i) determining the fair value of the underlying asset by lessors that are not manufacturers or dealers; (ii) presentation on the statement of cash flows—sales-type and direct financing leases; and (iii) transition disclosures related to Topic 250, Accounting Changes and Error Corrections. 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.
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. The new model is applicable to all financial instruments that are not accounted for at fair value through net income, thereby bringing consistency in accounting treatment across different types of financial instruments and requiring consideration of a broader range of variables when forming loss estimates. 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. Leases
Our leasing operations consist of various arrangements, where we act either (i) as the lessee (mostly our corporate and regional offices on leased-facility model), or (ii) as the lessor (for our owned equipment rented to connectivity customers). Described below are the nature of these arrangements and financial statement impact:
Real Estate Leases (as a Lessee)
The Company has operating leases for office facilities throughout the United States and around the world. Upon inception of a contract, the Company evaluates if the contract, or part of the contract, contains a lease. A lease conveys the right to control the use of an identified asset for a period of time in exchange for consideration. Leases include both a right-of-use asset and a lease liability. The right-of-use asset represents the Company’s right to use the underlying asset in the lease. The right-of-use asset also includes prepaid lease payments. The lease liability represents the present value of the remaining lease payments discounted using the incremental borrowing rate (“IBR”). Maintenance and property tax expenses are accounted for on an accrual basis as variable lease costs. The Company has elected to combine lease and nonlease components, if applicable.
The Company records lease expense on a straight-line basis over the lease term in general and administrative expense. Total rent expense for the
three months ended March 31, 2019
was
$1.6 million
.
The Company’s leases have remaining lease terms of
1
year to
12
years. Lease terms include renewal or termination options that the Company is reasonably certain to exercise. For leases with a term of twelve months or less, the Company does not record a right-of-use asset and associated lease liability on its condensed consolidated balance sheet.
The Company reviews the carrying value of its right-of-use assets for impairment whenever events or changes in circumstances indicate that the recorded value may not be recoverable. Recoverability of assets is measured by comparing the carrying amounts of the assets to the estimated future undiscounted cash flows, excluding financing costs. If the Company determines that an impairment exists, any related impairment loss is estimated based on fair values.
Equipment Held by Customers (as a Lessor)
The Company either sells or leases certain equipment (including antennas, modems and routers, among others) as part of the bandwidth service to our maritime and land connectivity customers. To the extent there are no changes to existing customer lease arrangements, we account for equipment transactions as operating leases and, hence, recorded the equipment cost as part of property and equipment. We recognize lease payments for operating leases as licensing & services revenue in our consolidated statement of operations on a straight-line basis over the lease term.
We assess any new arrangements or modifications to existing arrangements and determine the impact of the economic circumstances (and any changes thereto) to the lease classification of these equipment held by our connectivity customers. We recognize investments in leases for sales-type leases when the risk and rewards of ownership are not fully transferred to the customer due to our continued involvement with the equipment.
The income on operating leases and sales-type lease for the three-months ended March 31, 2019 is presented in the foregoing table (in thousands):
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Lease income from operating leases
(1)
|
$
|
32,724
|
|
Earned income on sales-type leases
(2)
|
185
|
|
Total Licensing & Service Revenues -- Maritime & Land Connectivity
|
$
|
32,909
|
|
(1)
This is classified as Licensing and services revenue.
(2)
This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019.
Other Arrangements (as a Lessee)
The Company leases certain computer software and equipment under finance leases that expire on various dates through 2020, for which the outstanding lease liability balance is assessed as insignificant as of March 31, 2019.
The Company also evaluates its satellite bandwidth arrangements for embedded leases when the Company has the right to control the use of a significant portion of the asset. The Company has entered into a lease arrangement for bandwidth capacity that will commence during the quarter ended June 30, 2019.
Impact on Financial Statements
The following table summarizes the impact of the adoption of ASC 842 on the Company’s condensed consolidated balance sheet and consolidated statement of operations, including both our real estate leases and a customer equipment arrangement meeting the sales-type lease classification (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Impact of Change in Accounting Policy --
as of and for the quarter ended March 31, 2019
|
|
As reported
|
ASC 842 Impact
|
Legacy GAAP
|
Right-of-use assets, net
|
$
|
21,939
|
|
$
|
(21,939
|
)
|
$
|
—
|
|
Other non-current assets
(net lease investment)
(1)
|
333
|
|
(333
|
)
|
—
|
|
Property and equipment, net
(2)
|
—
|
|
(148
|
)
|
(148
|
)
|
Lease liabilities
-- Other current liabilities
|
4,197
|
|
(4,197
|
)
|
—
|
|
-- Other non-current liabilities
|
20,818
|
|
(20,818
|
)
|
—
|
|
Revenue - equipment
(1)
|
333
|
|
(333
|
)
|
—
|
|
Cost of sales - equipment
(1)
|
148
|
|
(148
|
)
|
—
|
|
(1)
This includes the customer equipment arrangement classified as sales-type lease as of March 31, 2019, with net impact to our gross margin of $185,000.
(2)
Since we elected to adopt the package of practical expedients with the ASC 842 implementation as of January 1, 2019, all existing customer equipment arrangements continue to be classified as operating leases, except as described in preceding footnote. Any new arrangements or changes/modifications to existing contracts after January 1, 2019 adoption date are subject to lease classification assessment in accordance with ASC 842’s new lease accounting model.
Supplemental Cash Flow Information, Weighted-Average Remaining Lease Term and Discount Rate
Because the rate implicit in each lease is not readily determinable, the Company uses its IBR to determine the present value of the lease payments. The following table discloses the weighted-average remaining lease term and IBR for our operating real estate leases, as well as supplemental cash flow information (in thousands):
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
Supplemental cash flow information
|
|
Cash paid for amounts included in measurement of operating lease liabilities
|
$
|
1,436
|
|
Right-of-use-assets obtained in exchange for operating lease obligations
|
$
|
—
|
|
Weighted average remaining lease term
-- operating leases
|
7.87 years
|
|
Weighted average IBR
-- operating leases
|
9.68
|
%
|
Maturity Analysis
As Lessee -- Real Estate Operating Leases
The following table reflects undiscounted cash flows on an annual basis for the Company’s lease liabilities as of
March 31, 2019
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining nine months)
|
$
|
3,643
|
|
2020
|
4,781
|
|
2021
|
4,727
|
|
2022
|
4,428
|
|
2023
|
4,023
|
|
Thereafter
|
15,106
|
|
Total Future Lease Payments
|
$
|
36,708
|
|
Less: Imputed interest
|
(11,693
|
)
|
Present value of Lease Liabilities
|
$
|
25,015
|
|
The following is a schedule of future minimum lease payments under operating leases as of December 31, 2018 (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019
|
$
|
4,941
|
|
2020
|
4,593
|
|
2021
|
4,359
|
|
2022
|
3,818
|
|
2023
|
3,541
|
|
Thereafter
|
13,115
|
|
Total minimum lease payments
|
$
|
34,367
|
|
As Lessor -- Maritime & Land Monthly Recurring Charges
The following is a schedule of future monthly recurring charges (“MRCs”) arising from our contractual arrangements with Maritime & Land Connectivity customers as of March 31, 2019 (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining 9 months)
|
$
|
80,814
|
|
2020
|
51,332
|
|
2021
|
27,603
|
|
2022
|
4,497
|
|
2023
|
1,935
|
|
Total M&L Monthly Recurring Charges
|
$
|
166,181
|
|
The following is a schedule of future MRCs arising from our contractual arrangements with Maritime & Land Connectivity customers as of December 31, 2018 (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019
|
$
|
89,111
|
|
2020
|
34,885
|
|
2021
|
20,594
|
|
2022
|
4,864
|
|
2023
|
2,396
|
|
Total M&L Monthly Recurring Charges
|
$
|
151,850
|
|
The book value of the equipment held by customers under operating leases, which are classified as “Equipment” in
Note 4 - Property & Equipment
, follows:
|
|
|
|
|
|
|
|
|
March 31, 2019
|
December 31, 2018
|
Equipment
|
|
|
Gross balance
|
$
|
58,465
|
|
62,012
|
|
Accumulated depreciation
|
(24,511
|
)
|
(25,232
|
)
|
Net Book Value
|
$
|
33,954
|
|
$
|
36,780
|
|
Note 4. Property and Equipment, net
Property and equipment, net consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Leasehold improvements
|
$
|
7,267
|
|
|
$
|
6,579
|
|
Furniture and fixtures
|
2,149
|
|
|
2,147
|
|
Equipment
|
156,283
|
|
|
156,029
|
|
Computer equipment
|
16,993
|
|
|
18,561
|
|
Computer software
|
42,917
|
|
|
38,475
|
|
Automobiles
|
303
|
|
|
293
|
|
Buildings
|
7,051
|
|
|
8,005
|
|
Albatross (Company-owned aircraft)
|
456
|
|
|
447
|
|
Satellite transponders
|
70,806
|
|
|
62,306
|
|
Construction in-progress
|
10,610
|
|
|
7,771
|
|
Total property and equipment
|
$
|
314,835
|
|
|
$
|
300,613
|
|
Accumulated depreciation
|
(134,280
|
)
|
|
$
|
(124,036
|
)
|
Property and equipment, net
|
$
|
180,555
|
|
|
$
|
176,577
|
|
Depreciation expense, including software amortization expense, by classification consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Cost of sales
|
$
|
8,934
|
|
|
$
|
8,067
|
|
Sales and marketing
|
1,002
|
|
|
788
|
|
Product development
|
835
|
|
|
686
|
|
General and administrative
|
3,382
|
|
|
3,127
|
|
Total depreciation expense
|
$
|
14,153
|
|
|
$
|
12,668
|
|
Note 5. Goodwill
We have
three
separate reporting units for purposes of our goodwill impairment testing. The changes in the carrying amount of goodwill by reporting unit were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aviation Connectivity
|
|
Maritime & Land Connectivity
|
|
Media & Content
|
|
Total
|
Balance as of December 31, 2018, net
|
54,022
|
|
|
22,130
|
|
|
83,410
|
|
|
159,562
|
|
Foreign currency translation adjustments
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
Balance at March 31, 2019, net
|
$
|
54,022
|
|
|
$
|
22,130
|
|
|
$
|
83,435
|
|
|
$
|
159,587
|
|
As of March 31, 2019, the cumulative impairment write-offs relating to our Aviation Connectivity and our Maritime & Land Connectivity reporting units were
$44.0 million
and
$187.0 million
, respectively.
The Company evaluates the recoverability of its long-lived assets with finite useful lives for impairment when events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. During the first quarter of 2019, due to a significant decline in our market capitalization, which we consider to be a triggering event, we conducted an initial test of impairment for our Goodwill based on qualitative factors. Among our considerations, we noted that actual results for our three reporting units aligned with the historical projections used in our most recent quantitative impairment analysis performed as of December 31, 2018. After assessing the totality of events or circumstances, we determined that it is not more likely than not that the fair value of any of our reporting units are less than their respective carrying amounts as of March 31, 2019.
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
7.5 years
).
Intangible assets, net consisted of the following (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Intangible assets:
|
|
|
|
|
|
|
|
Definite life:
|
|
|
|
|
|
|
|
Existing technology -- software
|
5.2 years
|
|
$
|
36,799
|
|
|
$
|
24,960
|
|
|
$
|
11,839
|
|
Developed technology
|
8.0 years
|
|
7,317
|
|
|
5,030
|
|
|
2,287
|
|
Customer relationships
|
8.7 years
|
|
138,358
|
|
|
78,699
|
|
|
59,659
|
|
Backlog
|
3.0 years
|
|
18,300
|
|
|
16,268
|
|
|
2,032
|
|
Other
|
5.1 years
|
|
1,249
|
|
|
731
|
|
|
518
|
|
Total
|
|
|
$
|
202,023
|
|
|
$
|
125,688
|
|
|
$
|
76,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Weighted Average Useful Lives
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Intangible assets:
|
|
|
|
|
|
|
|
Definite life:
|
|
|
|
|
|
|
|
Existing technology -- software
|
5.2 years
|
|
$
|
36,799
|
|
|
$
|
23,114
|
|
|
$
|
13,685
|
|
Developed technology
|
8.0 years
|
|
7,317
|
|
|
4,802
|
|
|
2,515
|
|
Customer relationships
|
8.7 years
|
|
138,358
|
|
|
74,558
|
|
|
63,800
|
|
Backlog
|
3.0 years
|
|
18,300
|
|
|
14,742
|
|
|
3,558
|
|
Other
|
5.1 years
|
|
1,249
|
|
|
671
|
|
|
578
|
|
Total
|
|
|
$
|
202,023
|
|
|
$
|
117,887
|
|
|
$
|
84,136
|
|
We expect to record amortization of intangible assets as follows (in thousands):
|
|
|
|
|
Year ending December 31,
|
Amount
|
2019 (remaining nine months)
|
$
|
20,844
|
|
2020
|
22,263
|
|
2021
|
13,824
|
|
2022
|
7,907
|
|
2023
|
6,890
|
|
Thereafter
|
4,607
|
|
Total
|
$
|
76,335
|
|
We recorded amortization expense of
$7.8 million
and
$10.7 million
for the
three months ended March 31, 2019
and
2018
, respectively.
Note 7. Equity Method Investments
In connection with the EMC Acquisition, the Company acquired
49%
equity interests in each of its Wireless Maritime Services, LLC (“WMS”) and Santander Teleport S.L. (“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
March 31, 2019
and
December 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Current assets
|
$
|
37,439
|
|
|
$
|
40,224
|
|
Non-current assets
|
27,162
|
|
|
26,115
|
|
Current liabilities
|
14,824
|
|
|
15,880
|
|
Non-current liabilities
|
2,449
|
|
|
2,581
|
|
Following is the summarized results of operations information for these equity method investments on an aggregated basis for the
three months ended March 31,
2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Revenue
|
$
|
32,100
|
|
|
$
|
36,211
|
|
Net income
|
6,887
|
|
|
5,899
|
|
The carrying values of the Company’s equity interests in WMS and Santander as of
March 31, 2019
and
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Carrying value in our equity method investments
|
$
|
85,230
|
|
|
$
|
83,135
|
|
As of
March 31, 2019
, there was an aggregate difference of
$58.6 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 borrowings as of
March 31, 2019
and
December 31, 2018
is set forth below (in thousands):
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Senior secured term loan facility, due January 2023
(+)
|
$
|
475,000
|
|
|
$
|
478,125
|
|
Senior secured revolving credit facility, due January 2022
(+)(1)
|
50,915
|
|
|
54,015
|
|
2.75% convertible senior notes due 2035
(2)
|
82,500
|
|
|
82,500
|
|
Second Lien Notes, due June 2023
(3)
|
167,957
|
|
|
158,450
|
|
Other debts
(4)
|
17,380
|
|
|
1,707
|
|
Unamortized bond discounts, fair value adjustments and issue costs, net
|
(63,234
|
)
|
|
(65,186
|
)
|
Total carrying value of debt
|
730,518
|
|
|
709,611
|
|
Less: current portion, net
|
(38,190
|
)
|
|
(22,673
|
)
|
Total non-current
|
$
|
692,328
|
|
|
$
|
686,938
|
|
(+)
This facility is a component of the 2017 Credit Agreement (as defined below).
(1)
As of March 31, 2019, the available balance under our
$85.0 million
revolving credit facility is
$29.9 million
(net of outstanding letters of credit). The 2017 Credit Agreement 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 March 31, 2019, we had outstanding letters of credit of
$4.2 million
under the 2017 Credit Agreement. We expect to draw on the 2017 Revolving Loans 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 (the “Convertible Notes”) as set forth in the foregoing table was
$82.5 million
as of
March 31, 2019
, and is not the carrying amount (i.e. outstanding principal amount is net of debt issuance costs and discount associated with the equity component). The carrying amount was
$70.6 million
and
$70.4 million
as of
March 31, 2019
and
December 31, 2018
, respectively.
(3)
The principal amount outstanding of the Second Lien Notes as set forth in the foregoing table was
$168.0 million
as of
March 31, 2019
, and is not the carrying amount (i.e. outstanding principal amount is net of debt issuance costs and discount associated with the equity component, and includes approximately
$9.5 million
of PIK interest converted to principal during the three months ended
March 31, 2019
). 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”.
(4)
As of March 31, 2019, Other debts primarily consisted of (i)
$8.5 million
financing for transponder purchases (payable in staggered dates until April 2020); and (ii)
$7.4 million
advance against future dividends from a related party (refer to
Note 9. Related Party Transactions
for further details).
The aggregate contractual maturities of all borrowings subsequent to March 31, 2019 are as follows (in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining nine months)
|
$
|
31,939
|
|
2020
|
28,644
|
|
2021
|
25,043
|
|
2022
|
75,958
|
|
2023
|
549,251
|
|
Thereafter
|
82,917
|
|
Total
|
$
|
793,752
|
|
Note 9. Related Party Transactions
Loan Advances in lieu of Future Payouts from WMS
In February 2019, the Company entered into a demand promissory note with WMS (as an advance against future dividends that WMS may pay the Company) for approximately
$7.4 million
, bearing interest at
6.5%
per annum, 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 would be reduced dollar-for-dollar by any such distribution amounts waived. The Company may prepay the promissory note at any time without prepayment penalty. The entire principal balance of this promissory note together with all accrued but unpaid interest is due on the earliest to occur of (i) demand by the holder, (ii) December 31, 2020 and (iii) the date of acceleration of the promissory note as a result of the occurrence of an event of default.
Due to Santander
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
months ended
March 31, 2019
and 2018, the Company purchased approximately
$1.1 million
and
$1.4 million
, respectively, from Santander for their Teleport services and related network operations support services. As of
March 31, 2019
and
December 31, 2018
the Company owed Santander approximately
$1.8 million
and
$1.3 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
March 31, 2019
and
December 31, 2018
, 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
three
months ended
March 31, 2019
and
March 31, 2018
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 and to address the former employee’s allegations that we breached related settlement agreements with him in 2014 and 2015.
Amended and Restated Registration Rights Agreement
When we consummated our business combination in January 2013 with Row 44 and AIA, we entered into an amended and restated registration rights agreement with Par Investment Partners, L.P. (“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 security holders’ 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.
In addition, 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 Capital Partners, L.P. (“Searchlight”) as part of its investment in us.
Note 10. 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
March 31, 2019
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining nine months)
|
$
|
36,745
|
|
2020
|
13,210
|
|
2021
|
4,807
|
|
2022
|
800
|
|
Total
|
$
|
55,562
|
|
Satellite Bandwidth Capacity
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, across all connectivity end-markets, as of
March 31, 2019
(in thousands):
|
|
|
|
|
Years Ending December 31,
|
Amount
|
2019 (remaining nine months)
|
$
|
78,653
|
|
2020
|
73,754
|
|
2021
|
45,188
|
|
2022
|
32,849
|
|
2023
|
31,389
|
|
Thereafter
|
87,942
|
|
Total Future Payments
|
$
|
349,775
|
|
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
March 31, 2019
, we also had outstanding letters of credit in the amount of
$4.7 million
, of which
$4.2 million
were issued under the letter of credit facility under the senior secured credit agreement that the Company entered into on January 6, 2017 (the “2017 Credit Agreement”).
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:
|
|
•
|
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”), our indirect subsidiary, for copyright infringement and related claims and unspecified money damages. In August 2016, we entered into settlement agreements with major record labels and publishers, including UMG, to settle music copyright infringement and related claims (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), we 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 set the trial date for September 2019. We believe that a loss relating to this matter is probable, and therefore, we have reserved for this loss contingency in the amount of
$1.0 million
as of March 31, 2019. We intend to vigorously defend ourselves against this claim.
|
|
•
|
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 June 2019. 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 (and, therefore, Southwest Airlines’ potential indemnification claim), we are currently unable to estimate the amount of any potential loss; as such, we have not accrued any amount for this loss contingency.
|
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 11. Equity Transactions
2013 Equity Plan
Under the Company’s 2013 Amended and Restated Equity Incentive Plan (as amended, the “2013 Equity Plan”), the Administrator of the Plan, which is the Compensation Committee of the Company’s Board of Directors, 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. The Company ceased using the 2013 Equity Plan for new equity issuances in December 2017, upon receiving stockholder approval of the Company’s new 2017 Omnibus Long-Term Incentive Plan, although the Company continues to have outstanding previously granted equity awards issued under the 2013 Equity Plan. These previously granted awards represent the right to receive
7,070,298
shares of the Company’s common stock (as of January 18, 2018) if and when they later vest and/or are exercised. See “2017 Equity Plan” immediately below.
2017 Equity Plan
On December 21, 2017, the Company’s stockholders approved a new 2017 Omnibus Long-Term Incentive Plan (the “2017 Omnibus Plan”). The Company had
2,097,846
shares remaining shares available for issuance under the 2013 Equity Plan (as of that date) and those shares rolled into the 2017 Omnibus Plan became available for grant thereunder. The 2017 Omnibus Plan separately made available
6,500,000
shares of the Company’s common stock for new issuance thereunder, in addition to those rolled over
from the 2013 Equity Plan. The Administrator of the 2017 Omnibus Plan, which is the Compensation Committee of the Company’s Board of Directors, may grant share awards (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, the Company’s stockholders approved an amendment and restatement of the 2017 Equity Plan that increased by
2,000,000
the number of shares of the Company’s common stock authorized for issuance thereunder.
Stock Repurchase Program
In March 2016, our Board of Directors 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 our common stock during the
three
months ended
March 31, 2019
and
2018
. As of
March 31, 2019
, 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
months ended
March 31, 2019
and
2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Cost of services
|
$
|
27
|
|
|
$
|
179
|
|
Sales and marketing
|
53
|
|
|
194
|
|
Product development
|
68
|
|
|
311
|
|
General and administrative
|
1,141
|
|
|
2,960
|
|
Total
|
$
|
1,289
|
|
|
$
|
3,644
|
|
The compensation expense for the
three
months ended
March 31, 2019
is reduced by
$1.1 million
revaluation adjustment related to the Company’s cash-settled phantom stock options. These awards are accounted for as liability awards and are re-measured at fair value each reporting period. Compensation expense is recognized over the requisite service period.
Note 12. Income Taxes
The Company recorded an income tax provision expense of
$0.1 million
and an income tax benefit of
$4.7 million
for the three months ended
March 31, 2019
and
2018
, respectively. In general, the effective tax rate for the three months ended March 31, 2019 differs from the federal income tax rate due to foreign withholding taxes, changes in valuation allowance, basis difference in convertible debt and effects of permanent differences. In general, the effective tax rate for the three months ended March 31, 2018 differs from the federal income tax rate due to the effects of foreign tax rate differences, foreign withholding taxes, changes in valuation allowance, and deferred tax expense on amortization of indefinite-lived intangible assets.
During the quarter ended March 31, 2019, the Company recorded a
$2.7 million
adjustment to reduce additional paid-in capital with a corresponding reduction to income tax expense. The adjustment pertains to a difference between the book basis and tax basis of the Second Lien Notes and equity warrants with Searchlight. The initial value assigned to the equity warrants was recorded as an increase to additional paid-in capital, and a corresponding tax implication for the basis difference should have be recorded as an offsetting decrease to additional paid-in capital. This basis difference originated in 2018 and the adjustment was recorded in 2019 to correct an immaterial prior period error.
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
March 31, 2019
, and
December 31, 2018
, the liability for income taxes associated with uncertain tax positions was
$7.8 million
and
$7.9 million
, respectively. As of
March 31, 2019
, and
December 31, 2018
, the Company had accrued
$6.2 million
and
$6.3 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.
Note 13. Segment Information
Our business comprises
two
operating segments:
|
|
•
|
Media & Content:
selects, manages, provides lab services and distributes wholly owned and licensed media content, video and music programming, advertising, applications and interactive games to the airline, maritime and other “away from home” non-theatrical markets.
|
|
|
•
|
Connectivity:
provides customers, including their passengers, crew, remote workers and soldiers, as applicable, 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.
|
Our Chief Executive Officer, the Company’s chief operating decision-maker (“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
months ended
March 31, 2019
and
2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Revenue:
|
|
|
|
Media & Content -- Licensing and Services
|
$
|
80,010
|
|
|
$
|
74,915
|
|
Connectivity -- Services
|
70,468
|
|
|
71,611
|
|
Connectivity -- Equipment
|
16,141
|
|
|
9,971
|
|
Total revenue
|
$
|
166,619
|
|
|
$
|
156,497
|
|
Cost of sales:
|
|
|
|
Media & Content -- Licensing and Services
|
$
|
57,669
|
|
|
$
|
54,471
|
|
Connectivity -- Services
|
65,600
|
|
|
57,943
|
|
Connectivity -- Equipment
|
10,925
|
|
|
6,082
|
|
Total
|
76,525
|
|
|
64,025
|
|
Total cost of sales
|
$
|
134,194
|
|
|
$
|
118,496
|
|
Gross Margin:
|
|
|
|
Media & Content
|
$
|
22,341
|
|
|
$
|
20,444
|
|
Connectivity
|
10,084
|
|
|
17,557
|
|
Total Gross Margin
|
32,425
|
|
|
38,001
|
|
Other operating expenses
|
51,515
|
|
|
67,560
|
|
Loss from operations
|
$
|
(19,090
|
)
|
|
$
|
(29,559
|
)
|
The Company’s total assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
Media & Content
|
|
$
|
335,828
|
|
|
$
|
346,280
|
|
Connectivity
|
|
370,665
|
|
|
355,144
|
|
Total segment assets
|
|
706,493
|
|
|
701,424
|
|
Corporate assets
|
|
28,363
|
|
|
15,663
|
|
Total assets
|
|
$
|
734,856
|
|
|
$
|
717,087
|
|
Note 14. 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:
|
|
•
|
Level 1
: Observable quoted prices in active markets for identical assets and liabilities.
|
|
|
•
|
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.
|
|
|
•
|
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.
|
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
March 31, 2019
, and
December 31, 2018
, respectively (dollar values in thousands, other than per-share values):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
Quotes Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Earn-out liability
(1)
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
|
|
Contingently issuable shares
(2)
|
432
|
|
|
—
|
|
|
—
|
|
|
432
|
|
Phantom stock options
(3)
|
348
|
|
|
—
|
|
|
—
|
|
|
348
|
|
Total
|
$
|
894
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
Quotes Prices in Active Markets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Other Unobservable Inputs
(Level 3)
|
Liabilities:
|
|
|
|
|
|
|
|
Earn-out liability
(1)
|
$
|
114
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
114
|
|
Contingently issuable shares
(2)
|
1,371
|
|
|
—
|
|
|
—
|
|
|
1,371
|
|
Phantom stock options
(3)
|
1,564
|
|
|
—
|
|
|
—
|
|
|
1,564
|
|
Total
|
$
|
3,049
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,049
|
|
|
|
(1)
|
Represents aggregate earn-out liabilities assumed in business combinations for the year ended December 31, 2015.
|
|
|
(2)
|
In connection with the Sound-Recording Settlements (as described in Note 10. Commitments and Contingencies to our 2018 Form 10-K), 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.
|
|
|
(3)
|
Our cash-settled phantom stock options are accounted for as liability awards and are re-measured at fair value each reporting period with changes flowing through statement of operations. As of
March 31, 2019
, the aggregate estimated fair value of our cash-settled phantom stock options was
$1.1 million
for which the amortized portion recognized as a liability in our condensed consolidated balance sheet was
$348,000
.
|
The following table shows the carrying amounts and the fair values of our long-term debt in the condensed consolidated financial statements at
March 31, 2019
and
December 31, 2018
, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2019
|
|
December 31, 2018
|
|
Carrying Amount
(7)
|
|
Fair Value
|
|
Carrying Amount
(7)
|
|
Fair Value
|
Senior secured term loan facility, due January 2023
(+)(1)
|
$
|
475,000
|
|
|
$
|
467,875
|
|
|
$
|
478,125
|
|
|
$
|
473,344
|
|
Senior secured revolving credit facility, due January 2022
(+)(2)
|
50,915
|
|
|
50,915
|
|
|
54,015
|
|
|
54,015
|
|
2.75% convertible senior notes due 2035
(1)(3)
|
82,500
|
|
|
33,413
|
|
|
82,500
|
|
|
49,064
|
|
Second Lien Notes, due June 2023
(4)(5)
|
167,957
|
|
|
90,307
|
|
|
158,450
|
|
|
112,230
|
|
Other debt
(6)
|
17,380
|
|
|
17,380
|
|
|
1,707
|
|
|
1,707
|
|
|
$
|
793,752
|
|
|
$
|
659,890
|
|
|
$
|
774,797
|
|
|
$
|
690,360
|
|
|
|
(+)
|
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 quoted prices of the instrument in a similar over-the-counter market.
|
|
|
(2)
|
The estimated fair value is considered to approximate carrying value and is classified as Level 3 financial instruments. We expect to draw on the 2017 Revolving Loans 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 Notes 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”. The principal amount outstanding of the Convertible Notes was
$82.5 million
as of
March 31, 2019
, 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 June 2023 as set forth in the foregoing table was
$168.0 million
as of
March 31, 2019
, 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 and includes approximately
$9.5 million
of payment-in-kind (“PIK”) interest converted to principal during the three months ended
March 31, 2019
). 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. For March 31, 2019, Other debts primarily consisted of (i)
$8.5 million
financing for transponder purchases; and (ii)
$7.4 million
advance against future dividends from relate party (refer to
Note 9. Related Party Transactions
for further details).
|
|
|
(7)
|
The carrying amounts presented above at
March 31, 2019
and
December 31, 2018
exclude
$63.2 million
and
$65.2 million
of unamortized bond discounts and issuance costs, respectively.
|
Note 15. Concentrations
Financial instruments that potentially subject us to a concentration of credit risk consist of cash and cash equivalents and accounts receivable.
As of
March 31, 2019
, and
2018
, 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
March 31, 2019
, approximately
$11.8 million
of our total cash and cash equivalents of
$20.8 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
March 31, 2019
and
2018
, the percentage of revenue generated through this customer was as follows:
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2019
|
|
2018
|
Southwest Airlines as a percentage of total revenue
|
21
|
%
|
|
18
|
%
|
Southwest Airlines as a percentage of Connectivity revenue
|
39
|
%
|
|
33
|
%
|
No other customer accounted for greater than
10%
of total revenue for the periods presented. Accounts receivable from Southwest Airlines represented
16%
of the total accounts receivable as of each of
March 31, 2019
and
December 31, 2018
, respectively.
Note 16. Net Results Per Share
Basic loss per share 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 March 31,
|
|
2019
|
|
2018
|
Net loss (numerator):
|
|
|
|
Net loss – basic and diluted
|
$
|
(37,609
|
)
|
|
$
|
(38,284
|
)
|
Shares (denominator):
|
|
|
|
Weighted-average shares – basic and diluted
|
91,831
|
|
|
90,792
|
|
Loss per share -- basic and diluted
|
$
|
(0.41
|
)
|
|
$
|
(0.42
|
)
|
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 March 31,
|
|
2019
|
|
2018
|
Employee stock options
|
5,123
|
|
|
6,240
|
|
Restricted stock units (including performance stock units)
|
2,182
|
|
|
2,194
|
|
Public SPAC Warrants
(1)
|
—
|
|
|
2,143
|
|
2.75% convertible senior notes due 2035
|
4,447
|
|
|
4,447
|
|
Contingently issuable shares
(2)
|
900
|
|
|
900
|
|
Searchlight Penny Warrants
(3)
|
18,066
|
|
|
803
|
|
Searchlight Market Warrants
(3)
|
13,000
|
|
|
578
|
|
|
|
(1)
|
6,173,228
of our publicly traded warrants (the “Public SPAC Warrants”) expired on January 31, 2018 and are no longer exercisable.
|
|
|
(2)
|
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.
|
|
|
(3)
|
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 9. Financing Arrangements to our 2018 Form 10-K.
|
Note 17. Subsequent Event
Potential Sales of Certain Businesses or Assets
In connection with our strategic initiatives, we are considering the divestiture of various businesses and assets, including the potential sale of elements of our Maritime, Enterprise and Government business unit. Based on inbound interest, we retained a financial advisor in April 2019 to evaluate offers for non-aviation components of our Connectivity business. We expect to conclude our evaluation during the second quarter. We are also considering the sale of certain joint venture interests, consistent with our strategy to reduce leverage and focus our resources.